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New Iraqi oil law: some facts on PSAs
Posted by Jerome a Paris on January 8, 2007 - 1:00pm
The lefty blogosphere is all a-flutter after the article in the Independent about the new Iraqi oil law, which will allow foreign companies to invest in the oil sector via PSAs (production sharing agreements).
These are presented as unfair contracts, which will give the majority of the profits to the Western oil majors, and highly unusual. This is all untrue, and it obfuscates the wider truth that no major Western company will invest in Iraq (under these contracts or under any other scheme) as long as American troops are there and that a civil war is under way.
I've written about this as comments in various diaries, but it's time to have a full diary on this. So here goes.
(Quotes from the article in The Independent)
The US government has been involved in drawing up the law, a draft of which has been seen by The Independent on Sunday. It would give big oil companies such as BP, Shell and Exxon 30-year contracts to extract Iraqi crude and allow the first large-scale operation of foreign oil interests in the country since the industry was nationalised in 1972.
- That the US government is involved is no big surprise, considering that it is occupying the country and de facto running it - or the bits that can be run by the central power in Baghdad anyway (i.e. not much). While this is indeed the biggest scandal, and the biggest breach of Iraqi sovereignty, it is essentially irrelevant as that power does not apply to anything within Iraq. It applies to whatever US forces directly control, but will not apply to even that as soon as US forces leave. And, I'll get back to this later, that current power may apply to existing oil production, but it will not apply to future investments.
- Similarly, it is true that this would be the first involvement of Western companies in Iraq since 1972. This, in itself, is not necessarily a bad thing. A number of countries have nationalised their oil production, but others do authorise foreign investment, and it is not obvious which ones do better, and which ones have the most actual control over thie industry. The important thing is that investment today will not be done in the conditions prevailing before 1972, which were indeed a lot more favorable to Western oil majors. So reminding us that we exploited these countries in the past is true, but not necessarily relevant. What matters are the actual terms of the agreements today.
- The fact that contracts are meant to last 30 years is nothing surprising. In fact, it is a requirement of the industry, which simply reflects the fact that a lot of money needs to be spent upfront and that it can take time to get a return. An oil project, typically, from the date of signature of a contract, will need a few years of exploration (i.e. ascertaining if there is actually enough oil in the designated area to make production commerically viable), then, once decision to go ahead is taken, a few more years to build the facilities, and then only actual production. So out of thirty years, you will have 5 to 10 years (and sometimes more - check the ACG project in Azerbaijan: the contract, a PSA, was signed in 1994 and large scale exports started only this year) where you only SPEND money, with no income, and then only 20 years to recoup that investment cost, plus the massive financing costs of carrying that cost over many years. And this is the oil business - we're talking billions of dollars that need to be spent upfront. These are massive amounts at risk for a long time, even for wealthy companies like the oil majors. So 30 years contracts are not scandalous - they are a feature of the business (and as a banker that has financed these kinds of projects, I can tell you that we would not put a cent without such long term contracts in place).
So the only bit a significant news here is the fact that Iraq may be open to Western investment in the oil sector - a significant bit of news for oil companies that are shut out of an increasing number of countries and desperate to get their hands on projects, and a decision that might not be taken by a sovereign Iraq, but the fact that a soveriegn Iraq does not exist also means that this law is meaningless (see below). It also does not mean that the terms would necessarily be bad for Iraq.
Oil industry executives and analysts say the law, which would permit Western companies to pocket up to three-quarters of profits in the early years, is the only way to get Iraq's oil industry back on its feet after years of sanctions, war and loss of expertise. But it will operate through "production-sharing agreements" (or PSAs) which are highly unusual in the Middle East, where the oil industry in Saudi Arabia and Iran, the world's two largest producers, is state controlled.
The first sentence, on which many focused, is meaningless. I am going to explain below, in a lot of detail, how PSAs work and thus why that assertion tells us nothing about the underlying profit arrangements. What is true is that PSAs are rare in the Middle East - for the simple reason that most Middle Eastern oil produers simply do not allow any kind of private involvement in their oil industry, national or foreign. So PSAs are just as rare as concessions, licenses or any other kind of contractual arrangement with private companies in the region - because there are none.
But PSAs are actually one of the most common form of investment and production contracts around the world these days - for the simple reason that they are usually more favorable to host countries than other contract forms.
Let me explain how PSAs work.
PSAs - production sharing arrangements are contracts between investors (oil companies) and host countries to set the rules on thedevelopment of an oil field. They determine who pays for the investment and, as their name suggests, how the revenues, once generated, are shared between the investor and the host country.
The main principle of PSAs is that oil production is split into "cost oil" and "profit oil". "Cost oil" is the oil that is used to repay the initial investment. "Profit oil", as its name suggests, is the surplus, which is pure profit from the oil production. "Cost oil" goes to the investors, but may include a slice of taxes payable to the host country. "Profit oil" is split between the investors and the host country. An important feature of PSAs is that the early production will go, for the most part, to "cost oil", to repay the investors and, as time goes by and the investment (and the agreed cost of its financing over these years) is repaid, more amounts will be available as "profit oil".
In the early days of production, most, but not necessarily all oil is "cost oil", and as time goes by, an icnreasing fraction will be "profit oil". Investors will be interested in as high a fraction of "profit oil" as they can get in the beginning, but will be willing to concede more of it in the more distant future, as it impacts their profitability today very little. Host countries, which can take a longer perspective, can benefit more form such an arrangement, and thus, the split of profit oil typically increases in their favor as time goes by (and will usually reach 90% in the end).
As the above suggests, there are many parameters that can influence what kind of income each party gets over the years. The most obvious ones are linked to the actual investment schedule: is the project on budget, and on schedule, will it produce as much as announced, and for as long. Depending on the expected technical complexity of a project, different revenue splits may be reasonable to reflect the risks taken by each side. But, very naturally, another, completely uncontrollable factor will influence the revenue split: the oil price. Higher oil prices will allow a project's costs to be reimbursed faster, and profit oil to kick in earlier (and vice versa). In the early days, prices of goods like metal and other commodities may also influence the cost of the project and the amount of "cost oil" required. In some cases, there will be mechanisms to modify project costs; in others, the numbers will be more tightly set and controlled, with less leaway for the investors, who then take risk on how much they need to spend to get the project online.
Depending on technical parameters, expected production profile (and the ability to adapt it to market circumstances, or not), price hypotheses for a number of goods, there can be a bewildering array of outcomes for the split in revenues, and it is hard to say in theory which one is better.
- for instance, the host country can insist that a fraction of early oil production be allocated to "profit oil", irrespective of where the reimbursement of cost stands, in order to get some revenues early. That will entail more financing costs for the investments not yet repaid, and a longer requirement for "cost oil", and thus less "profit oil" in the future (the split of that profit oil being still another question);
- a host country can decide to authorise very few circumstances under which costs can be updated (i.e. the investors must take the risk of cost overruns on their own) - thus ensuring that profit oil comes on the expected date. But in return, it will probably have to give up a bigger fraction of that profit oil, to reflect the higher risk taken by sponsors, and its own higher certainty of getting revenues at a given date. Conversely, it can decide to keep a bigger chunk of profit oil, but allow more flexibility on cost overruns - at the risk of delaying its income if the project runs into unexpected difficulties. A country with a lot of oil experience and the ability to supervise closely works (and expenses) during the investment phase will be more likely to choose such a path.
- a host country may decide to focus on medium term scenarios with lowish oil prices, so as not to budget more money than it can reasonably expect to get. In that case, with less revenues, "cost oil" is likely to dominate for quite a while, and the country wil want to make sure that there is profit oil right from the start, and that enough of it goes to itself. In return, it may give better terms on the financial cost of rolling over unpaid costs
- of course, in all these scenarios, we've been talking only about the "base case", i.e. the most likely outcome. But rules to split the gain, or the pain, as the case may be, if cirucmstances are more, or less, favorable, need to be defined as well. Again, many different options can be chosen, some parties focusing on certainty of revenues, others wanting to minimize potential worst cases, and others trying to grab the most in the optimistic scenarios.
- Parties have different priorities, and they also may have access to different information: the most competent host countries will understand the oil field just as well as the oil major, while others will need to rely more on information provided by such oil major (with less ability to check it independently).
- To add to complexity, some host countries will set requirements in terms of employment of local workers, or use of local contractors. That will influence the cost of the project, or its timetable, or the likelihood of work being done as required (and thus the importance of downside scenario planning), but it also changes the amount of money that stays in the country;
I've only touched the surface of these contracts (if you are interested to see the content of one of these, the PSA for the ACG project in Azerbaijan is public and available on BP's website here), but they are extremely complex documents, that usually set all the parameters for a project, including the whole tax package applicable, the specific environmental, labor and security standards applicable, and many other things. If relevant, they need to be compatible with the requirements of banks or multinational institutions (like the World Bank) that may finance all or part of the project, and they will need to reflect the conflicting priorities of the various investors (it is extremely rare to see one single oil company signing such contracts - most of the time, it's a consortium of oil companies, with one taking a leading role (the "operator"), and the others a slightly more passive role).
What I mean to convey here is that PSAs, per se, or even a given profit split, are not necessarily disadvantageous for the host country. If the sharing is well negotiated, and the project well supervised, they can be extremely profitable for the host country.
Countries will a long experience of oil production have a stronger hand: they know their assets, they may have enough qualified people to understand the intricate details of any project, and they may even have experience handling the subcontractors (companies like Halliburton or Schlumberger that do a lot of the actual engineering work). On the other hand, countries with little oil experience will be a lot more dependent on outsiders bringing in expetise. They can hire experts to help them, however. Similarly, countries with sufficient financial resources will require less of the investment burden to be borne by outsiders, and thus can make "cost oil" a lot smaller. Conversely, poor countries that need full external financing of the project will, per force, see revenues come to them later in the project (unless they manage to procure financing independently, which, again, is possible). Some projects (in particular those that require transport infrastructure to be built at the same time as the upstream facilities) require more complex contractual structures - and an entity able to make commitments to all third parties on the whole chain. The most complex projects, like LNG facilities (which require simultaneous investment in a gas field, gas pipelines, the LNG plant, the LNG tankers, and a regazification plant) cannot be managed by the host country and require the presence of one of the top oil majors - so far the only entities able to put in place the full chain of commitment by credibly shouldering the tens of billions of dollars of commitments that need to be made to all parties in the chain so that they do their bit of the project.
All these projects require contractual arrangements with third parties, often very long time commitments to cover the likely repayment period of the investments and reflect the fact that big multi-billion projects cannot be implemented with a minimum of oconfidence on their outcome.
Which brings us back to Iraq.
One thing that should be obvious from the above is that oil companies will invest in oil project only if they have reasonable confidence to make money in the medium term - which means, naturally, that they have acceptable contractual conditions, but also that such contractual conditions have a very high chance of being respected and/or enforced. That means dealing with stable government with a modicum of interest in seeing these conditions fulfilled.
In the bad old days, that could mean a dictator, appropriately interested, on a personal level, in the project. Today, it still means a willingness to deal with unpleasant regimes, provided that they are reasonably stable, because you have to go find the oil where it is, and not all places with oil are democracies, nor friendly (the discussion about how much linkage between oil and dictatorship or corruption will be left to another diary). But it means that oil companies will only invest in countries that are stable enough - and, more to the point, where the entity in charge of oil resources is likely to remain so, either because it is a legitimate bureaucracy or because it is, say, in control of the armed forces that protect the oil fields.
In Iraq, these conditions are not fulfilled. There is no legitimate government, and what government there is controls little of the country, including not enough of the oil infrastructure. And THERE WILL BE NO LEGITIMATE GOVERNMENT AS LONG AS US FORCES REMAIN IN IRAQ - and, in all likelihood, not until the civil war has run its course,and some form of new power structure is put in place by consensus or by force. And that new power structure will certainly not be bound by contracts, nor even by laws, put in place at the time of the US occupation. So today's law is unlikely to have any practical application.
In summary:
- PSAs are not an evil plot by Western companies - they are a normal tool of business;
- bringing foreign investment in a country's oil sector is not necessarily a bad thing, it all depends on the industry experience of the country and its ability to fiannce investment on its own;
- the current law is unlikely to ever be implemented and thus is mostly irrelevant, except perhaps as another demonstration of the short-sightedness of the Bush administration.
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The devil, as they say, is in the details. And obviously, there are lots of details.
Western companies are not "evil." I propose to strike that word from usual, ordinary language and limit it to theological discussions.
Western companies, like Eastern companies, or Arab companies, are only in business to make money. Theologically, it is the "love" of money, not money itself, which is "evil", and it is silly to argue that a company could "love" anything. Companies just do deals.
The "lefty" press often forgets that any moral dimension to a business deal has to be imposed from the outside -- and is essentially a political act. The "righty" press seems to forget sometimes that there is any value at all to moral discussion.
Never: You will have to define "lefty". We are talking about a situation where the American taxpayer has been (and will continue to be) billed a literal fortune so that vested interests can make money (which they have no intention of sharing with JohnQ. American shmuck).
"Lefty" wasn't (and isn't) my word. I was responding to the post (above) in which the word occurs. And my major point is just the one you seem to be making -- we have to be careful about assuming that we all mean the same things by the use of common words.
I see you did mention the phrase "civil war". I just want to emphasize it:
Who among us can say where Iraq will be 30 years from now? This is old stuff -- The Origins of the Sunni/Shia split in Islam
I agree-as the article stated, these agreements are unlikely to amount to anything until the small issue of the civil war is taken care of.
At this point if a major oil company moved in under these terms they would be a very appealing target.
does it cross anyones mind that the civil war (provoked?) is "eliminating the opposition" with fewer causualties to occuping troops. Once the fighting population has been reduced we can then "instill order" and go about our merry way of taking the oil.
does it cross anyones mind ...
Yes, this is about the same that what I suggested earlier,
the only problem is that even with a reduced fighting population "instilling order" isn't likely to be very successful.
Thus taking the oil will happen along the fighting and from Cornucopia latest post this is what seems to be planned.
Exactly, they have been fighting for more than 1000 years. According to the book the "The Turks Today" the Ottomon Empire had tremendous problems with Arab tribes in modern day Iraq -- in one example, Istambul sent representatives to REFUND Arabic tribes taxes for their benefit, but the Turkish representatives were killed and tortured "in the customary way." Istambul ruled Baghdad from a distance. Based on history it isn't reasonable to think things will quiet down in Iraq any time soon.
The US is building 14 permanent military bases and the largest US 'embassy' in the world in Iraq and shows every sign of intending to stay for a long time. The US is currently spending 3-5 times as much per year occupying Iraq as it spends for all biomedical research.
It helps to see the bias in this piece by imagining the situation reversed. Say, for example, that the US (or more appropriately for this author, France) had been bombed, invaded, and occupied by a foreign power, and that this foreign power was building permanent military bases with a giant headquarters in Paris. The French population rises up in resistance but is unable to throw the invaders out. Then the invaders start to 'negotiate' profit sharing agreements with the Vichy government about the exploitation of France's natural resources. For example, France has a lot of farmland, but the invader knows that current French farming techniques are inefficient because they refuse to use enough pesticides and allow genetically altered organisms.
It's just a normal tool of business. It's not a bad thing because the economy of occupied France is having trouble raising money to exploit its own farmland. And besides, the agreement will probably never be implemented because of the short-sightedness of the invaders.
Bien sur!
Marty: You left out the part about all the incredible expenses of the invasion being paid for by the taxpayers of the invading country, with little of the profits returned to these same funders of the entire enterprise.
There are three separate points:
- one is about whether it is sensible for the US to take over Iraqi oil
- one is whether PSAs are bad or not
- the last one is whether any law today has any chance of being applied
1. Of course not - and the Iraqis are right to be outraged
2. Not necessarily. PSAs are not necessarily a bad thing - that's what annoyed me about tht article, in that it flagged PSAs as the evil item there, and not the fact that the USA is deciding what Iraq should do with its oil
3. Not a chance in hell (amongst other reasons, because of item 1 above), which makes the discussion under 2 irrelevant anyway.
But one point I do insist on is that PSAs are not a bad thing per se. How they are put (forced) in place, and what terms are used (issues related to the sovereignty of Iraq, not to the oil industry) are what matters.
Hey there, Jerome, saw that post on DailyKos, but had never set up an account...
Anyways, I think you're focused in entirely the wrong direction. What you *should* analyze is the correlation of the structure of Columbia's oil production and the mercenaries used to guard the pipeline network, as well as the means the US uses to keep the Columbian gov't weak, the correlation to Bush's actions in iraq. I'm pretty sure that the intent, after the initial collaspe into disorder in 2004, was to institute a Columbian situation. However, this is failing due to the sheer relevancy of Iraq to its immediate neighbors in the way Colubia isn't.
Of course, the Columbian situation isn't stable. One of the major impacts of having Hugo Chavez next door is the eventual destabilization of Columbia's gov't in favor of a more populist gov't that reverses Occidental Oil's setup...
Pet peeve - it's ColOmbia, not ColUmbia.
I respect your concern for Colombia's problems, but your consistent mis-spelling of the country name makes me suspect that you don't really know what you're talking about.
The situation in Colombia may or may not be "stable" (in what way, and compared with which other country in the region?), but the conservative technocrat who was re-elected president by a landslide last year will be in power until late 2010. Alvaro Uribe is no American stooge (repeatedly refusing to roll over on trade terms). He's facing a very well organized political opposition, but a new term in office means he isn't afraid to risk short-term unpopularity with his core middle class constituency in the pursuit of long-term sustainability (case in point: last year's new tax code). Violent crime and secuestro is down for another year, and his clear'n'holdTM program seems to be working better than what Uncle Sam is trying in Iraq.
And what do you mean by "Occidental Oil's setup"? Are you referring to their declining operation at Cano Limon (no accents on this keyboard dammit), discovered a quarter of a century ago? The largest owner of Colombian oil production is the State oil company, ECOPETROL, and the largest foreign owner is BP, though Petrobras are snapping at their heels.
Hydrocarbon production and transport facilities in Colombia are protected by the army and police, who just don't involve themselves in politics, and whose years of experience in rural counterinsurgency make them well able to deal with Chavez' meddling.
While the contracts might not 'be legal' under the present political situation....If one 'accepts' that the people are soverign and express their collective will via an election procress, what is to stop a nation from..later on...saying "Nope, we want the resources on on land to be used for our citizens" and walking away from any contract anyway?
It doesn't seem to be a willingness for OTHER capitalists joining the ousted batch and as a unified front say "no, we shall not trade with you for your black, oily crude."
Jerome, 1) The occupier, according to Int’l law, does not have the right to ‘write laws’, or not of that type anyway, (this raises the question of puppet Gvmts. etc. as well), you rightly call it the ‘biggest scandal’ and ‘the biggest breach of Iraqi sovereignity’. The US had no right, for ex. to re-write the Iraqi constitution under the CPA, care of Booted Lord Bremer. The reason for those Int’l rules are obvious - one of the reasons is to prevent civil war, which protects the occupier as well. Secondly, perhaps not directly in your piece, but certainly in the Int’l press, as far as I can gather, it is implied, that Iraqis themselves would not agree to this law. Or at least a large faction would not. (They might be misguided, that is another topic.) If put to a popular vote, the answer would be NO, with a good score, more than 60 % I am guessing. In short, legally speaking, insofar as such a murky situation can be figured, the law is more than shaky; pragmatically speaking, it isn’t popular enough to override officialdom. This matters greatly, as many Iraqis are already fighting both the occupier and their ‘own’ Gvmt, whom they see together as illegitimate puppets, foreignors, profiteers, collaborators, etc.
2) You make the point that conditions of stability at present in Iraq are not fulfilled for long term investment, right - because, you say, there is no legitimate Gvmt. Presumably if there was one, they could enforce and uphold the law. There will be no legit. Gvmt. while US forces are in Iraq, you state, and that might very well be so.
Clearly, points 1 and 2 are related. If the Gvmt. was legit, it could vote laws, and there would be no (or less, or different) civil strife...but it isn’t so it can’t but does anyway....
Where is the conclusion? What is the point of the law if it useless on the ground to oil companies and Iraqis and the occupiers and the Iraqi Gvmt.? Is one to say it is incompetent meddling, poor strategy, folly, or whatever, on the part of the US, as you seem to say? That in the best of worlds this law would be reasonable but unfortunately reason has flown out the window? Your post about Russia and Putin was really great, this one seems to lack an ending to me, I’m curious and not being gratiously critical.
It's a rational question. I have no idea what they are trying to achieve. Surely the US occupation authority knows full well that no oil major will take advantage of this "opportunity", and that it's a PR disaster, but we know that facts have never stopped this administration before. Maybe they actually believe it will work.
Or maybe they are just throwing oil on the fire, for some unknown reasons (justification to escalate?). I don't know. I am sorry for the unsatisfactory ending of my post, it only reflects my own inability to understand what rational goal this "law" achieves.
Surely the US occupation authority knows full well that no oil major will take advantage of this "opportunity"
Worst case hypothesis: a fly-by-night "western" oil company will be used to plunder Iraqui oil to exhaustion while the whole country will be kept "struggling for democracy".
> plunder Iraqui (sic) oil to exhaustion
Are you aware of the timescale involved? As a multiple of, say, the US electoral cycle? Clearly not...
Jerome: Your lead comment (the "lefty" blogosphere) is hilarious. Who is paying for this boondoggle? Wall Street? The free market? Large oil companies? No. The taxpayer. The whole Iraq adventure is socialism at its worst, the transfer of incredible wealth from the taxpayer to vested interests.
Yes Jerome it is very opaque - as you imply maybe wish fulfillment, just tramping on with what is considered reasonable and advantageous for many (not just oil Cos.) or just 'right', whatever that may be. Maybe they think of it as a kind of stab at pre-emption, it won't work now, but sets the tone or the goals for the future, lays a plan that others must follow.
It ain't realistic that is for sure. Anyway I haven't a clue obviously. But 'pacification' is, and always has been, a US aim - one can imagine, looking back to 2003, a happy Iraq with MacDos, a free art/tv scene, women in power, children going to cheerful clinics, cured of horrid ills, electricity all over Baghdad, and exports...now there... what? Dates? Pistachios? But certainly an efficient oil industry, bringing in revenues for 'all' Iraqis.
I guess Black Gold is a curse.
I've also been confused by the contradictory nature of the Bush administration - and lately found some light on this - by reading Irving Kristol (the intellectual father of neo-conservatism) Kristol's ideas are contradictory.
http://amnation.com/vfr/archives/001679.htm
Politicians will use theories of the intellectual community as the basis for their decisions and policy. The theory-to-politics follows "GIGO" garbage in garbage out.
It seems to me that the current law is indeed going to be difficult to implement. However, given the way that the US Military is digging in in Iraq, I have no doubt that the US government fully intends to occupy Iraq and to oversee the extraction and disbursement of its oil.
I do want to note that the Bush administration has been more open than previous administrations about one thing: it is closed to "we the people."
The Bush administration develops and executes policy no matter what others believe or desire. No one else has plans or dreams. The political system is merely a tool with which to manipulate "we the people" at home and abroad into compliance.
Compliant people are cheaper to rule than are non-compliant people.
I wish to suggest also that the administration would carry out a policy of genocide in the Middle East if that were possible. Because that is not quite possible given the responses of Europe, Russia, China, and various others, the USa is making the Iraqi people weak enough "to drown in a bathtub" as the old saying goes.
The game for this administration is simply about controlling the key resources. While CEO of Halliburton (1999) Cheney called oil "the key building block of the global economy" as I recall. So whatever it takes. The "prize" is ours and like a monkey with its hand in a trap, we will not let go of the bait.
The way out? Use drastically less petroleum and call the Resource War for what it is at every step.
The change we need is radical and immediate. But we 'muricans with bellies full of fast food and lives full of cheap disinfotainment are unlikely to make much of a fuss.
The "prize" is ours and like a monkey with its hand in a trap, we will not let go of the bait.
You know how that story ends, don't you?
The way out? Use drastically less petroleum and call the Resource War for what it is at every step.
Neither can be done, not "drastically less" because the american way of life is non-negotiable, nor "call the Resource War for what it is" because that will scare the sheeple enough to make them unmanageable, panic in the herd!
Good points.....Hmmmmm....
Personal respones are possible. Some collective responses as well.
I do think that as Jerome a Paris and many, many others talk and blog and write about this it can help us to consider more personal and group changes.
Groups of people can develop strategies to build "arks" in various ways.
The chance of causing the USA to change course to powerdown protocol or some such strategy is nearly nil.
I would like to have seen what was written about the contracts let out to the German companies that built the concentration camps, the gas chambers, the crematoria in the invaded and occupied territories. Naturally, the contracts would have had to be favorable otherwise who would do this risky yet necessary work in the occupied territories. There were also companies involved in auctioning off the possessions of the gas chamber victims. Contracts had to have been signed.
Perhaps an historical injustice was committed -- perhaps these contracts were quite fair, quite reasonable given the conditions? Why doesn't someone go back and take a look? And there is only one legitimate approach in considering these things: business is business. No?
Hi davebygolly,
"I would like to have seen what was written about the contracts let out to the German companies that built the concentration camps, the gas chambers, the crematoria in the invaded and occupied territories."
I've just been looking in the "Archives" section of the LA Times, for an article I came across (some time ago)...no luck, so far, but thought I'd let you know in case you want to try. It was in the LA Times (date -? prior to 2000, anyway)- (Perhaps a library-type database would be a better search tool)...on the story of "gas chamber" manufacturers. The gist of it was about how the contracts went to a family firm who had specialized in regular oven manufacture. (My guess is the subject has been written about elsewhere, as well.)
Jerome, thanks for the enlightening primer on PSAs.
The only observation I have about this has to do with the amounts of profits expected by the oil companies. Oil companies, like any other endeavor, expect profits concurrent with 'what the market will bear.' This is the same for, say, a medical doctor who charges 'the going rate' as a fee.
The problem is that it just might be that 'the going rate' is rather usurious, especially to a relatively impoverished country.
I remember reading about contracts between authors and publishers where the author unwisely agrees to a cut of the 'net' profit. Guess what? The 'net' profit never materializes because of the clever bookkeeping of the publisher. Everything is booked as expenses. I could easily see an oil company doing this as I have no trust whatsoever in the integrity of most corporations in terms of them literally getting away with murder.
All this is simply to say that while, on the surface, a PSA agreement might seem fair and equitable, it could very well be a very bad deal for the host country, especially one in dire straits like Iraq. I can also understand why oil companies would avoid getting involved in such an unstable situation. A tremendous irony, in a way, that things just haven't worked out for Bush family oil company cronies as far as Iraq is concerned, although Halliburton has skimmed quite a lot of cream in the military logistics area.
Yes, how dare the "lefties" get angry at such plans! I think people can be forgiven for not knowing the technical details of oil contracts. Guess what - in a moral sense it doesn't matter. It is wrong to occupy a soveriegn country, and it is wrong to "open up" that country to greedy corporations. I don't care if the occupiers are SO KIND as to give the Iraqi people "a fair deal." The point is OCCUPIERS HAVE NO RIGHT WHATSOEVER to make contracts, let alone 30 year contracts!
thats exactly the point.
the oil there belongs to the iraqi's and the iraqi's alone. if they want to sell it fine, if they don't thats fine too. no other country has the right ocupier or not to say otherwise.
Hi TK,
Thanks for bringing up some ideas of "what's right". Just a couple of thoughts. In a way, my first one is (very) "Devil's Advocate". (Caveat: Although I'm thinking twice about going out on this limb, as I also take as a "given" the unethical nature of the US invasion...)
"If they want to sell it fine, if they don't that's fine too."
Would we say the same thing about Gazprom and NG sales? for example.
I often wonder, in light of what we discuss here: is it possibly the case, that for a country, (occupier or not), oil company, or any other "stakeholder" for that matter...there is really only one (primary) ethical stance? It involves: announcing the reality of "peak", a committment to support the Oil Depletion Protocol and/or things along these lines, a call for an international "energy summit" (and all this entails)?
There are other articles in this series, which give further light to PSA's and Iraq.
http://news.independent.co.uk/world/middle_east/article2132574.ece
"Production sharing agreements of more than 30 years are unusual, and more commonly used for challenging regions like the Amazon where it can take up to a decade to start production. Iraq, in contrast, is one of the cheapest and easiest places in the world to drill for and produce oil. Many fields have already been discovered, and are waiting to be developed."
"Iraq has 115 billion barrels of known oil reserves - 10 per cent of the world total. There are 71 discovered oilfields, of which only 24 have been developed. Oil accounts for 70 per cent of Iraq's GDP and 95 per cent of government revenue. Iraq's oil would be recovered under a production sharing agreement (PSA) with the private sector. These are used in only 12 per cent of world oil reserves and apply in none of the other major Middle Eastern oil-producing countries. In some countries such as Russia, where they were signed at a time of political upheaval, politicians are now regretting them."
"In the present state, it would be crazy to pump in more money, just to be stolen," said Greg Muttitt. "It's another reason not to bring in $20bn of foreign money now."
Yes, PSAs can be good or bad (from various perspcetives) depending upon their terms.
What strikes me as odd about the proposed law is that so many of the financial terms are being written (apparently) into the law itself rather than negotiated in the contracts.
There is a relationship remember between risk and return. The more chaotic and bloody a country is, the higher a rate of return one would need to offer investors. I wouldn't invest in Iraq without a guarantee that I would get my money back quickly with a large return (as chances are good I'm going to lose my shirt rather).
In other words, one can argue that BP and ExxonMobil, to the extent that they are happy with these arrangements, are seeking normal commercial terms.
But wait. Aren't we all supposed to be joining together to help stabilize Iraq and assist the long-suffering Iraqis? U.S. taxpayers have contributed $400 billion and 3,000-plus soldiers' lives.
Both BP and ExxonMobil have benefited greatly over the years from the support provided by their respective governments. Isn't it time they gave something back by offering to develop Iraq's oil fields on terms beneficial to the people of Iraq?
How about it guys? Give a little. To help your country and the people of Iraq.
Stop thinking of oil companies as if they were personalities that can respond to a moral appeal. They're not human. They have cultures, often derived from the culture of their nation of origin. But that's a different thing.
Do you really think that those $55/bbl (as of today) go straight into the companies' pockets? More like $1-$2 per barrel. BP, Exxon and most other oil companies are heavily and efficiently taxed at multiple points along the hydrocarbon delivery chain. So they're giving a lot, not a little, already. Profits and shareholders' dividend incomes are taxed further. What the host governments choose to do with the revenue is outside the companies' control. And quite rightly so.
The largest owners of stock in stable, slow-growing but dividend-paying companies like the supermajors are retirement (pension) funds. So you could argue that those dividend payments are reducing the need for state support of the elderly retired - a positive social good. Salaries (in the companies themselves, and in subcontractors - all taxed as appropriate) keep the economy ticking over. Giving a lot, indeed.
Jerome, didn't the French have some interest in the Iraqi oil fields under Sadaam? I vaguely remember something about an exchange of nuclear technology for oil concessions.
Total signed an agreement with Saddam's regime, which was on hold for as long as the sanctions were in place. That deal is dead today, but Total still has a (small) headstart in that they had access to field data.
Nuclear cooperation was, AFAIK, ended when Israel bombed the Osirak reactor in the early 80s.
France has a long history of cooperation with Saddam Hussein, as you can read in a recent diary I wrote. This is not something to be proud of...
Has anybody considered the possibility that Iraq oil production is understated and that the U.S. is secretly hauling it away faster than they say? I don't trust them one bit. The price of oil sure has been falling lately. I'm not saying this is happening, I'm just saying it could be happening.
I too have seen the very interesting gyrations in price, and it reminds me of a particular manipulation strategy that might be occurring. It is possible in the US financial markets to "fail to deliver" the asset sold and happens mostly in the shorting of stocks and options, although it could happen for commodities too. So, it would be possible for a future's contract to be sold short with the underlying asset never delivered to the buyer, with the shortfall being covered up by the "clearing system." The folks at NCANS.org have done much research into this aspect of minting counterfit shares in US equities markets, and I'm now off to ask a few of them about the possibility that this is being done to oil.
This strategy may backfire in the long run as oil producers will just cut back production until they get the price they want. This is happening right now. If that is what they are doing it is a stupid move.
I somehow get the feeling it is a combination of things driving prices lower. What you mention is one possibility. There may, however, be extra undocumented oil coming into the pipeline, so to speak. It could be coming from Iraq or they are drawing down the SPR while simultaneously talking about expanding it. There may be some decline in domestic consumption as well.
A cnnmoney article about Iraq oil. What if the "insurgents" that are stealing oil from the refinery outside Baghdad are actually agents for the government or Halliburton? Wouldn't that be a hoot?
karlof1,
I hope you don't mind but I posted your comment over at my blog along with mine. You are welcome to visit and if you do object to it being used again there leave a comment to that effect and I will take it down. Thanks. Mort.
Excellent point (sorry to have omitted it, BrianT).
It is an interesting commentary on The Oil Drum that the critical issue of the control of Iraqi oil has elicited only a handful of comments. A powerful, oil-importing country invades a small basically defenseless country possessing one of the largest remaining deposits of oil on the Earth on the basis of a pack of lies, and then stays for 4 years and counting. Why so few comments? Isn't this perhaps the most critical issue for a site on the depletion of finite oil resources?
We are spending a comparable amount of (tax!) money in Iraq to what we spend to import oil! Roughly 5 billion barrels/year of imports at $60/barrel is $300 billion/year. The Iraq bill is $130+ billion/year of supplementary appropriations plus additional billions from the $400+ billion/year non-supplementary military budget, plus lost wages, plus permanent care for the maimed (however inadequate).
With respect to Jerome's puzzlement about what the US was/is planning to do in Iraq, I doubt that the architects of this war expected things to work out exactly as they have. The 'death squad' approach was probably a reaction to the failure of the occupation. The 'Salvador option for Iraq' was explicitly announced about two years ago by John "death squad" Negroponte, who helped to engineer the US-supported Contra death squads in El Salvador in the 1980's. For those old enough to remember, ever wonder why the El Salvador death squads seemed to suddenly dry up when the US finally tired of interfering there? (well, actually, some of them came to LA...).
I sometimes wonder what is currently happening to Iraq's oil. But I don't know how 'knowable' that is. There are essentially zero independent, non-embedded Western reporters outside of the fortified compounds in the center of Baghdad.
However, from a 'strictly business' point of view, the huge fire hose of tax dollars attached to the mouths of US military contractors and mercenary services (the number of mercenaries is comparable to the number of fighting US troops) is very unlikely to be regarded as a 'loss' by them. It is still unclear how things will work out in Iraq. Bush is on the ropes in the polls. That second-biggest uptick was the invasion of Iraq, the third biggest, the capture of Saddam, and the biggest uptick, of course, 9-11 (his low was after Katrina, and we are almost back there now). But Congress typically polls even lower than the Preznit.
There is a roughly equal amount of oil to that in Iraq next door, in Iran. There was a recent report in the Times (UK) that a nuclear attack on Iran is being planned (to stop them from acquiring nukes, natch). Personally, I'm not looking forward to the next year or two.
Yeah, I saw this article much earlier today, and was wondering the same thing. You would figure that with all the effort and brainpower usually spent on the Mideast and Iraq here that there would be a bit more. Jerome gets a ton of responses on Dkos. I guess the focus was on Jesus and Tainter today.
I probably disagree with you on some other things, but I'm glad you said this. What is that commentary? I don't think you want mine.
To Jerome, I would say, excellent article. However, this law may be irrelevant but I think its advent, historically, is important. Was there bigger news that happened yesterday?
Nice job on that oil price-pick last year, by the way. $240? What were you thinking? or was it $280? Did you mail those guys their champagne yet? I think for next year you should use an average price for the whole year, rather than where it ends up. Just seems kind of random.
was wondering the same thing. You would figure that with all the effort and brainpower usually spent on the Mideast and Iraq here that there would be a bit more.
Perhaps because the technology exists to solve the problems, but the messy politics will keep the solution from happening....*wink*
Why is this a critical issue in your opinion? Those with eyes to see and ears to hear knew this was coming a decade ago. Jerome's article is less about the invasion and more about the PSAs so why the interest in the invasion itself? From where I sit this validates the views of those that made this prediction. Homo sapiens is already behaving in the manner expected.
"Why is this a critical issue in your opinion? Those with eyes to see and ears to hear knew this was coming a decade ago. Jerome's article is less about the invasion and more about the PSAs so why the interest in the invasion itself? From where I sit this validates the views of those that made this prediction. Homo sapiens is already behaving in the manner expected."
Hi GreyZone,
I would say it's a critical issue because...
1) People are killing and being killed...
2) Despite the largest, worldwide protest prior to invasion in history (was it not?)...and
3) Your conclusion, shared by many, namely, "Homo sapiens is already behaving in the manner expected." - is significant.
Why?
Because it lumps everyone together, when there are differences.
There are designers and planners of killing and then there are anti-war protestors.
There are designers and planners of war, and then there are men who reflect and change.
(www.combatantsforpeace.org)
There are distinctions and differences.
What is the difference?
How to effect change?
How to speak when one's voice and one's very being is silenced?
Is there a change that works from one level to another?
I say "Yes." Is it possible? What are the conditions? Who can effect this change?
Norwegian oil company DNO has been drilling in Iraq for almost two years, and will go into production this spring, having found at least a couple of hundred million barrels of oil.
Although no reserves have been reported so far, there has also been a drillhole with a 800 meter oil pillar, which could mean quite a lot of oil.
But I guess you don't consider Norway a Western country and norwegian companies western companies, in spite of being a NATO member and all.
PSA's may or may not be attractive for the producing countries, always depending on the terms. Ultimately, it is a matter of Internal Rate of Return (IRR).
As for Iraq, at present it is certain that PSA's would specify very high IRR's in order to compensate companies for the elevated risk. With the US apparently committed to securing the country (surge?) I would not be at all surprised to see major oil cos. signing PSA's in Iraq as cost-free "options" on future oil revenues.
To explain: if the offered IRR right now was, say, 20% why not sign a PSA and have everything to gain if the situation improves? If it does not, what have you lost other than a few thousand billed investment banker and legal expert hours? You invoke force majeure and you are out. In any case, there is no way any eventual presumably hostile regime would want to enforce "colonialist" PSA's. And since you have your foot in the door already you would be in a favourable position to re-negotiate with the "new" managers. Business is business, no matter who runs the show.
Bottom line, if you get an option on the cheap why not buy it? I predict you will see several PSA's signed soon.
Regards
Yes, but the local people are likely to resent it if foreign companies exploit the weakness and vulnerability of their government to sign long-term contracts with unchanging, unfavorable terms.
This is what happened in Russia. The foreign companies came in a signed deals with a corrupt government and a drunk for a president (Boris). Not surprisingly, Putin's efforts to re-write the terms of those agreements are quite popular (in Russia, not on Wall Street).
We're setting ourselves up for the same in Iraq. Any politician who signs such an agreement will immediately come under attack for selling out the nation. It will become a rallying cry for the Sunni's and Moktada.
Perhaps the "surge" is intended to create the right conditions for negotiations.
Very useful post. Thank you.
Could the Bushies really be that stupid as to push for a law that would never be honored because the country is occupied? Some thoughts:
1. Greg Palast has written in Armed Madhouse about the Iraqi oil issue. He seems to have good sources. He says that Big Oil sent an VIP to Iraq to guarantee that neocon plans would not be implemented. They wanted to use plentiful Iraqi oil to drive down the price of oil and rescue the world economy. BUT - there was and is constant push and pull on this. He succeeded after about a month of sticking around the Oil ministry. But I saw later indications that the issue was far from resolvedd - with the neocons trying to undo what the VIP had done. My point is not only that the issue of how to manage the oil is probably quite fluid, but that it's not just the Bushies who are calling the shots.
2. If the Bushies are in fact in charge, yes, of course, they could be that stupid. First, they are quite accustomed to ignoring laws they don't like. Second, I heard a while back that they were so interested in holding the elections so they could make the case that the gov is legitimate. Much of what we hear these days about Malarky (sic.) being in charge might be providing a cover for the legitimacy issue.
Frankly, knowing how difficult it is to separate the issues of incompetency and actual intention in this administration, it might be some chaotic combination of the above.