IRAQ: Oil

February 2, 2005

Backgrounder
Current political and economic issues succinctly explained.

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Who controls Iraqi oil?

The United States and Britain have some rights to use the oil to fund their occupation, international lawyers say, but Iraq’s oil legally belongs to the Iraqi people. Long-term plans to develop or privatize Iraqi oil fields would have shaky legal justifications under an occupation government. Many experts say an internationally recognized Iraqi government should be in place before such decisions are made.

Who is actually making decisions for the Iraqi oil industry?

Many industry experts say they believe day-to-day decisions in recent months have mainly been made by Iraqis; in particular, by Iraqi Interim Oil Minister Thamir al-Ghadhban and authorities at the State Oil Marketing Organization (SOMO), the state-run monopoly that controlled Iraqi oil exports under Saddam Hussein’s government. But the occupation government has the power to veto Iraqi oil plans, and decisions have presumably been made in cooperation with U.S. officials. Philip Carroll, the former president and chief executive officer of Shell Oil, has been serving as an adviser to the Iraqi oil ministry.

Is Ghadhban still the oil minister?

No. On September 1, the Iraqi Governing Council removed Ghadhban, an oil ministry technocrat under Saddam’s regime, and replaced him with Ibrahim Bahr al-Uloum. Uloum is a little-known, London-educated petroleum engineer who has never worked in the Iraqi oil industry. He is also the son of a prominent Shiite cleric who, until recently, sat on the Governing Council. It is unclear how his appointment, designed to place a Shiite in control of the oil ministry, will affect policy. His father, Sayyed Muhammed Bahr al-Uloum, 80, suspended his membership on the Council after the August 29 Najaf bombing that killed one of Iraq’s leading Shiite clerics, Ayatollah Mohammed Baqir al-Hakim.

What international law governs issues surrounding Iraqi oil?

International humanitarian law (IHL), the same branch of law that defines the rules of war and describes the obligations of occupying powers. The issue of using an occupied nation’s natural resources is addressed specifically in the 1907 Hague Regulations and in the 1949 Fourth Geneva Convention. In addition, United Nations Security CouncilResolution 1483, approved in May 2003, recognized the U.S. and British-led occupation and set out specific regulations regarding Iraqi oil sales.

Can occupiers just take and use whatever property they like in an occupied state?

No. In general, private property cannot be confiscated or destroyed without compensation, nor can the property of religious, charitable, or educational institutions. Public property, such as Iraq’s state-owned oil fields, falls under different guidelines. "Movable" government properties that can be used for military purposes --such as weapons and trucks--are considered "spoils of war" and may be seized without compensation, according to a Human Rights Watch dossier. "Immovable" government property, such as public buildings, real estate, and natural resources, cannot be appropriated or destroyed, but can be used by the occupying power, in a kind of trust, to defray the cost of the occupation.

Can occupiers use oil revenues to fund their own military expenses?

Many international lawyers, quoting Article 49 of the Hague Regulations, say that the law of occupation does allow occupying powers to use a state’s resources--and even tax its people--to pay for "the needs of the [occupying] army or of the administration of the territory in question." But the United States and Britain, in agreeing to U.N. Resolution 1483, appear to have foregone this option in exchange for international recognition of their occupation.

What does Resolution 1483 say about how Iraqi oil proceeds can be used?

It says that all oil proceeds will be deposited in a special account, the Development Fund for Iraq, to be administered by the authorities from the U.S.-led occupation government in consultation with the Iraqi interim administration. For now, the Iraqi interim administration consists of the 25-member Iraqi Governing Council. These proceeds are "to be used in a transparent manner" and limited to:

  • humanitarian needs of the Iraqi people
  • economic reconstruction and repair of Iraq’s infrastructure
  • continued disarmament of Iraq
  • costs of Iraqi civilian administration
  • "other purposes benefiting the people of Iraq."

Is the U.N. Oil for Food Program still selling Iraqi oil?

No. Under U.N. sanctions imposed after the Gulf War in 1991, all legal Iraqi oil sales were managed by the Oil for Food Program, which allowed Iraq to sell a limited amount of oil to pay for food, medicine, and other civilian needs. The program stopped handling oil sales when the United Nations pulled out of Iraq last March before the U.S.-led invasion, says Ian Steele, a U.N. spokesman. Under the terms of Resolution 1483, Oil for Food is continuing to spend down the approximately $10 billion in its accounts from before the start of the war. Purchases are focusing on food and other emergency items for Iraqi people. After November 21, 2003, the program will be closed completely, and any leftover funds will pass to the coalition-managed Development Fund for Iraq.

How much oil does Iraq have?

Iraq has the world’s second-largest proven oil reserves, totaling some 110 to 115 billion barrels. Iraq may have much more oil, however, as the country is largely unexplored due to years of war and sanctions. According to the U.S. Department of Energy, only 15 of the 73 discovered oil fields have been developed, and few deep wells have been drilled compared to Iraq’s neighbors.

How much oil was Iraq pumping before the war?

In January and February of 2003, Iraq produced approximately 2.5 million barrels of oil a day. Before the 1991 Gulf War, Iraq was producing some 2.8 million barrels per day. Heavy damage to Iraq’s oil fields in the 1991 war, combined with the effects of U.N. sanctions, which limited Iraq’s ability to repair and modernize the fields, stunted oil production in the 1990s.

How much oil is Iraq pumping now?

Somewhere between 1.2 million and 1.5 million barrels a day: about 1.5 percent of world output, Iraqi oil officials say. However, the amount can vary widely due to continuing acts of sabotage, looting, and technical problems that beset the fields. Among the worst setbacks was an explosion August 15 that shut down the 600-mile oil pipeline from the northern city of Kirkuk to the Turkish port of Ceyhan on the Mediterranean coast: repairs are continuing. In addition, Lt. Gen. Ricardo Sanchez, commander of coalition troops in Iraq, said in mid-August that smugglers were tapping oil lines and stealing up to 2,500 tons of fuel each day.

What’s the target?

U.S. and Iraqi officials say the goal is to pump 2.5 million barrels a day by early next year. But industry analysts who have recently visited Iraq say they think such forecasts are optimistic, given the industry’s dire straits. To bring production up to prewar levels, the Army Corps of Engineers is currently taking bids on contracts worth up to $1.14 billion to improve the oil fields by March 31, 2004. These contracts will replace the controversial, non-competitive contract for emergency oil service work that was secretly awarded to Kellogg Brown & Root Services (KBR) by the Corps prior to the start of the war in Iraq.

What has Brown and Root done so far in Iraq?

The company has been extinguishing oil fires and repairing Iraq’s oil wells and pipelines. They are also running laundry services and a hair salon at U.S. occupation headquarters and doing a variety of other tasks, leading some critics to charge that they may be taking advantage of their flexible contract, which is worth up to $7 billion, according to the Corps. KBR’s parent company, Halliburton, was headed by U.S. Vice President Dick Cheney between 1995 and 2000. It showed $324 million of second-quarter revenue from work in Iraq.

Have the Iraqis begun to sell oil?

Yes. Since the end of the war, SOMO has drawn up contracts for the sale of approximately 34 million barrels of oil to some of the world’s largest oil companies, including British Petroleum, Royal Dutch/Shell Group, ChevronTexaco, Petrobras of Brazil, China’s Sinochem International, and French concern TotalFinaElf. Most of this oil is coming from Iraq’s southern oil fields and being transported to tankers at Iraq’s Persian Gulf export terminal at Mina al-Bakr.

Are buyers of Iraqi oil getting a discount on the world oil price?

The exact terms of the deals are not publicly disclosed, but industry experts say they believe the Iraqi oil is being sold at standard prices-and not only to U.S. firms. "SOMO says the contracts are being awarded on a strictly commercial basis, and it certainly does look that way," says Karen Matusic, a senior editor at Energy Intelligence, an information company covering the energy industry. There have been few reported complaints worldwide about the transparency of recent oil sales, except from some Russian oil firms, who have not yet won any contracts. Under Oil for Food, a considerable amount of Iraqi oil went to Russian middlemen known as resellers- now, SOMO is trying to sell directly to refiners, says Ronald Gold, vice president of the Petroleum Industry Research Foundation.

How much will the reintroduction of Iraqi crude affect the world oil market?

Initially, not much, industry analysts say. Even if Iraq starts pumping 2 million barrels a day, that’s still only 2.5 percent of world production-enough to lower world oil prices by a few dollars a barrel, but not much else, says John Lichtblau, chairman of the Petroleum Industry Research Foundation. Iraq is a member of the Organization of Petroleum Exporting Countries (OPEC), but it hasn’t participated in the cartel’s quota system for crude since the 1991 Gulf War, and its current capacity is so low that the organization’s quotas may not be a problem for the near future. Newly-appointed Iraqi Oil Minister Bahr al-Uloum will reportedly also serve as the Iraqi delegate to OPEC. Deciding whether or not to remain in OPEC in the long-term "will be the decision of the people of Iraq," U.S. Energy Secretary Spencer Abraham said August 7.

What are Iraq’s long-term plans for its oil industry?

They have not yet been decided. Many experts expect some future private investment in Iraq’s state-run oil fields, perhaps in the area of developing new fields or working in partnership with Iraqi companies. But some caution against making any long-term moves until an internationally recognized government is in place. Completely privatizing Iraq’s oil industry is also unlikely, given the history of state-owned oil in the Persian Gulf and widespread suspicions surrounding U.S. involvement in Iraq. "I don’t think there will be any takeover by foreign companies— the U.S. government is very sensitive to the impression that would create," Lichtblau says.

Could the Iraqi people be given a direct share of Iraq’s oil revenue in the future?

L. Paul Bremer III, the head of the occupation government in Iraq, has repeatedly mentioned his desire to create some kind of trust or fund that would distribute Iraq’s oil profits among its people. The basis for this model could be Alaska, which distributes a percentage of its oil revenues in the form of checks directly to its 630,000 residents: last year, each received $1,540. But some oil experts warn that this model is not feasible for Iraq’s 24 million citizens, at least for the short-term. In Iraq, the political situation remains chaotic and there are many demands on the limited revenue from Iraqi oil sales. Even if oil production meets the coalition’s most optimistic projections of $14 billion in 2004, that still falls far short of the overall reconstruction price tag, estimated by Bremer to be up to $100 billion.

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