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Iraq Opens Oil Fields to Foreign Firms for Output Boost

June 30, 2008 at 6:20 PM EST
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The Iraqi government announced Monday it was accepting international bids for contracts to operate six of its oil fields. An economics expert discusses the prospect of Western oil companies working in Iraq.
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JUDY WOODRUFF: Since the invasion of Iraq five years ago, the U.S. has faced charges that it was driven by a desire to control Iraq’s estimated 115 billion barrels of oil.

Questions about those vast resources and who should control them were brought back into focus today when Iraq’s oil minister invited 41 foreign firms to bid on long-term oil development contracts.

The announcement comes amid reports in the New York Times that major oil companies were negotiating short-term, no-bid contracts with the Iraqi government with the help of U.S. advisers.

To help explain today’s announcement, we are joined by Yahia Said. He’s the director for Middle East and North Africa at the Revenue Watch Institute, a New York think-tank. He’s also a research fellow at the London School of Economics and has advised members of the Iraqi government on economic issues.

Mr. Said, thank you very much for being with us. First of all, what exactly did Iraq’s oil minister do today? Because there has been some confusion about it.

YAHIA SAID, Iraq Revenue Watch Institute: The main purpose of the press conference today was to announce a bidding round for the long-term contracts to develop five — actually, six major oil fields and two major gas fields, including the main breadwinners for Iraq, the oil fields that produce most of Iraq’s output in exports. That was the main purpose of the announcement.

He also spoke about the ongoing negotiations for smaller contracts to develop some of these same fields, to increase their capacity marginally, until the long-term contracts come into force.

JUDY WOODRUFF: But in terms of the long-term contracts, what is he actually asking these companies to do?

YAHIA SAID: Actually, in both cases, the minister is talking about technical service contracts. He’s not talking about contracts that would give the companies equity ownership in Iraq’s oil. He stressed that fact.

So in both cases, Iraq will remain in control over the oil resources. And oil companies will act as service providers to presumably either the Ministry of Oil or the national oil companies that will be established for that purpose.

Tapping Iraq's oil reserves

JUDY WOODRUFF: Well, what is so attractive for these companies to be interested in bidding if they're not going to have ownership? And we're talking about a country, of course, that's still at war.

YAHIA SAID: That's a good question. Of course, Iraq is the last repository -- the largest, last largest reserve of oil almost left on the planet. This is a hundred billion, maybe even more barrels of oil that is easily accessible, that is easy to extract and easy to produce. And so no major oil company can stay away from this.

But the terms that the minister announced today are not extremely or particularly lucrative for the companies. These are terms similar to those used in the region, in Saudi Arabia and Kuwait, where the companies, the foreign companies are only invited as service providers, and ownership remains with the state or its national oil company.

JUDY WOODRUFF: Now, we know that the northern part of Iraq, the Kurdish-controlled part of the country, has separately had its own negotiations with oil companies. Will that remain separate? And will those contracts still stand?

YAHIA SAID: Indeed, the Kurdish region is offering contracts -- has offered by now almost 30 contracts on completely different terms, where an equity ownership is being offered to the international oil companies.

None of the oil majors have participated in the Kurdish contracts as of yet, but there are many midlevel oil companies involved.

Indeed, there is a big difference between the model that is being presented by the central government in Baghdad and the one offered by Kurdistan. And this is going to be a conflict at some point, but they are both insisting that they're acting in a way consistent with the constitution and in a legal way.

But these are entirely different models that -- it will be hard to coexist on an ongoing basis.

JUDY WOODRUFF: So an unresolved conflict about that. We know, obviously, war has been going on, but what has taken so long for these -- for this bidding process to begin?

YAHIA SAID: Well, the conflict, of course, and the violence has been a major impediment, both for the Iraqis to be able to organize investments, whether it's their own or foreign investment in the industry.

But, also, declining Iraqi capacity to engage -- whether by itself or in cooperation with oil companies -- to engage in the development of the oil sector.

The Iraqis state machinery has lost lots of people, has been starved of resources for many years, including the past five years of conflict. And so there is just a declining capacity to deliver services and to carry out investment.

Also, Iraq is making a lot of money out of its current level of output and there is not so much an urgency. There's no such sense of urgency to develop it further.

Iraq this year is expected to make about $100 billion worth of revenues, which few expect Iraq to be able to spend. And, therefore, there is a reduced sense of urgency to develop those. And this may explain the hardening of the conditions that the Iraqi government is putting on those contracts.

Stalled national oil law

JUDY WOODRUFF: And we also know that the parliament has not yet passed the laws necessary to set up a legal structure around the ownership, the management of these oil and gas resources. How does that affect this whole process?

YAHIA SAID: Yes, the absence of a clear legal framework, legal environment is one of the main obstacles for further development of the Iraqi oil industry.

The Iraqis haven't agreed yet on two major issues. One is the division of power and responsibilities between the central government and the regions and the province over the industry, who controls the industry, who signs contracts, who manages the fields.

The other area of disagreement is the level of engagement of the private sector, particularly the international oil companies, and the way -- and the form through which they are engaged. So disagreement on those two main issues have prevented Iraqi politicians from reaching agreement on the oil law.

This agreement will require an open and inclusive dialogue. These are issues that are very important and touch at the core of what Iraq is and what Iraq will be.

And this dialogue, unfortunately, hasn't taken place yet, in part because of the violence, in part because of inadequacies of the political process. But this is a process that is very hard to short-circuit or to complete in a short time period.

JUDY WOODRUFF: Well, it's obviously taken a while to get here, and it certainly appears many steps left to go. Yahia Said with the Revenue Watch Institute, thank you very much.

YAHIA SAID: Thank you.