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Halliburton Under Scrutiny

December 19, 2003 at 12:00 AM EST
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RAY SUAREZ: The post-war reconstruction of Iraq has brought increased scrutiny to U.S. companies being awarded big contracts there. Among them is Houston-based Halliburton.

Its primary business is oil field services, with about 100,000 employees in 120 countries, with revenues of $12.5 billion in 2002.

It has won nearly $5 billion in Iraq contracts this year. Dick Cheney was Halliburton’s chief executive officer from 1995, until he was named Republican vice presidential nominee in the summer of 2000.

Congressional Democrats have alleged the company benefited from political connections.

Last week, Pentagon officials said they were investigating whether a Halliburton subsidiary, Kellogg, Brown and Root, or KBR, overcharged the Defense Department for fuel in Iraq. The company has denied overcharging. And today, the Wall Street Journal reported that Pentagon auditors are accusing the company of refusing to turn over key internal documents.

A closer look now, at this company and the allegations with two writers who have followed it. Neil King wrote today’s piece in the Wall Street Journal and is covering the Iraq reconstruction. Dan Briody is a business author whose work includes a forthcoming book on Halliburton.

Well, Neil King, take us to the beginning of Halliburton’s history in this latest Iraq conflict. When did they first get involved?

NEIL KING: There were really two particular contracts. One of them preceded the war, a logistics contract where the Army Corps of Engineers went to them and said we are going to need help provisioning troops, moving in food, the whole gamut of looking after the army, in particular, which is something that KBR, Brown and Root has done for decades.

So they moved in soon after the war ended and were doing that. There was also a contract just before the war, sort of emergency what are we going to do if Saddam torches the oil wells? This was a no-bid contract that KBR got to go in and put out oil fires this, sort of thing. This then morphed into reconstructing the oil wells, reconstructing Iraq’s battered oil infrastructure and then also morphed into bringing oil into Iraq — I’m sorry, gasoline into Iraq — because there was no gasoline.

There were the huge gas lines we saw on television and read about which continues to be a problem. And so this was the area that then has gotten them into the recent trouble because they were bringing gasoline into Kuwait at about $2.64 a gallon, when, for instance, the Pentagon’s own supplies were bringing in for about $1.08.

The Pentagon auditors in recent weeks, the information came out, were essentially accusing Halliburton of not intentionally overcharging but having relied on a supplier in Kuwait that was supplying gasoline at a way overinflated price, $1.08 per gallon more than should have been the market price. This amounted to a little less than $100 million. It was $61 million at the end of September, and that has continued at a right of about $20 million a month.

RAY SUAREZ: Dan Briody has Halliburton long been at work for the U.S. government in conflict zones doing this kind of business?

DAN BRIODY: The company has a long history of military support. It dates back to War World II. They were building ships for the war effort then. They worked in Vietnam as part of a very large conglomerate that did about 85 percent of all of the infrastructure building for the army in Vietnam.

And then they have been at work since 1992 under the contract that Neil mentioned, log cap contract which has brought them to everywhere from Somalia to Haiti to Bosnia, and now in Iraq and we have seen the same kinds of issues creep into the press at every stage of the way from World War II to Vietnam, to Bosnia and now in Iraq, the same overcharging, the structure of the contract. It’s, in many ways, an old story now.

RAY SUAREZ: Well, when you say we’ve been here before, is there normally not too much fuss made about how money is spent or counting every buck as long as the job gets done as we look over the several conflicts?

DAN BRIODY: That is often the case, especially during war time. You can’t imagine the Army combing through all the books all the time, every time they issue a task order to their outsourcer, to make sure that they’re getting the best deal. It’s just not a realistic scenario.

So whether it’s just a simple problem of a lack of oversight or whether Halliburton is in the practice of regularly overcharging the Army during these situations, it’s not clear right now.

RAY SUAREZ: Neil King, what has Halliburton said on its own behalf since these allegations first were laid?

NEIL KING: They have been extremely forceful and defensive in saying in particularly that overcharging that is going on with Kuwaiti oil or Kuwaiti gasoline, that this had nothing to do with — they were essentially forced with dealing with this particular supplier.

They also talked about it being difficult in a time of war like this, to bring this kind of gasoline in. A couple of KBR employees have actually been killed during the conflict and that they released a statement yesterday saying it was the best price for the best gasoline under the circumstances, et cetera. So they have been completely saying that they have that there is no guilt whatsoever.

The one thing that should be noted, as Dan was just pointing out, though, is that the defense auditors are saying the huge amount of work that has essentially been laid at KBR’s doorstep and they’re doing in Iraq now, at the moment they’re saying $3.7 billion worth of work, which is about 69 different task orders, as they’re called, has been done, is in the process of being paid for but that KBR has still has not presented the line item accounting for and that there is a gap between the work that they may be doing sufficiently well, and the accounting procedures on the other side to account for what it is they’re spending money on.

So there is a lot … they’re very disturbed about that particular gap and worried about a lot of cost overruns going on.

RAY SUAREZ: Dan Briody, let’s talk a little bit about war as a business. One of the stock in trade images of American war movies and war stories is KP, cooking duty, laundry duty, it’s sort of thought that soldiers and sailors and airmen do that kind of work. The idea that it is all done by private business now. Has it been that way for a long time?

DAN BRIODY: Not very long, actually. The real change took place in 1992, when the Pentagon constructed this log cap contract which essentially outsources all of the support and logistics for the U.S. Army to one single company, and that company is Kellogg, Brown and Root.

Now, in the past, we’ve seen private companies come in and build airways and build forts and things of that nature, but we’ve never seen a single company become so integral into the Army’s very life blood.

These guys are supplying everything from the food, the water, the housing, they’re cleaning latrines, they’re dealing with bringing oil in and gasoline for the troops. And that is something that is relatively new, since about 1992.

RAY SUAREZ: When Dick Cheney was secretary of defense?

DAN BRIODY: Yes, Dick Cheney was secretary of defense when the first umbrella log cap contract was created and awarded to Brown and Root.

RAY SUAREZ: How long after that, Neil King, did he become the CEO of Halliburton? And did Halliburton own Kellogg, Brown and Root at that point?

NEIL KING: Yes, they did. He became CEO, as I recall in 1995, I think. He was essentially for all of the latter half of the ’90s until 2000, as you said at the beginning, he was the CEO of Halliburton and oversaw a lot of their activities.

One of the ironic things about this in a way is that, you know, the stock analysts and other people who look at Halliburton say what are you doing with this Brown and Root function? It’s very low profitability and for all of the flack that they’re now receiving, they’re saying that despite the $2.60 per whatever cents per gallon coming in from Kuwait, they’re making a couple cents on the dollar.

KBR as a business unit is not terribly profitable and a lot of people that own Halliburton stock that would like to get rid of that portion of the business. Dan might be able to comment on that. It is a lot of work but not necessarily that profitable.

RAY SUAREZ: Very quickly because we have to wrap up, but isn’t the Department of Defense on the verge of phasing out various of these roles and giving them finally out to competitive bid, Dan Briody?

DAN BRIODY: Well, what they’re trying to do right now is to re-bid the parts of the contract that deal with reconstructing of the oil industry in Iraq, and that process has been delayed several times already, which has resulted in hundreds of millions more in contracts for Halliburton. But they are in the process of doing it. They’ve insisted that they’ll have it done by Jan. 15. But we’ll see what happens.

RAY SUAREZ: And this story about the gas overcharge, does this look likely to be wrapped up in any short order?

NEIL KING: The auditors of the defense audit agency are saying it will probably be the middle of next month when they will figure out — KBR just this week gave back a huge, lengthy response it will take a few weeks to sift through this. They’ll resolve this and maybe KBR will have to refund this money, otherwise there’s a lot more they’ll be looking into it over the next weeks and months for that matter.

RAY SUAREZ: Neil King and Dan Briody, thank you both.