Published on Sunday, September 15, 2002 in the Washington Post

In Iraqi War Scenario, Oil Is Key Issue
U.S. Drillers Eye Huge Petroleum Pool

by Dan Morgan and David B. Ottaway

A U.S.-led ouster of Iraqi President Saddam Hussein could open a bonanza for American oil companies long banished from Iraq, scuttling oil deals between Baghdad and Russia, France and other countries, and reshuffling world petroleum markets, according to industry officials and leaders of the Iraqi opposition.

Although senior Bush administration officials say they have not begun to focus on the issues involving oil and Iraq, American and foreign oil companies have already begun maneuvering for a stake in the country's huge proven reserves of 112 billion barrels of crude oil, the largest in the world outside Saudi Arabia.

The importance of Iraq's oil has made it potentially one of the administration's biggest bargaining chips in negotiations to win backing from the U.N. Security Council and Western allies for President Bush's call for tough international action against Hussein. All five permanent members of the Security Council -- the United States, Britain, France, Russia and China -- have international oil companies with major stakes in a change of leadership in Baghdad.

"It's pretty straightforward," said former CIA director R. James Woolsey, who has been one of the leading advocates of forcing Hussein from power. "France and Russia have oil companies and interests in Iraq. They should be told that if they are of assistance in moving Iraq toward decent government, we'll do the best we can to ensure that the new government and American companies work closely with them."

But he added: "If they throw in their lot with Saddam, it will be difficult to the point of impossible to persuade the new Iraqi government to work with them."

Indeed, the mere prospect of a new Iraqi government has fanned concerns by non-American oil companies that they will be excluded by the United States, which almost certainly would be the dominant foreign power in Iraq in the aftermath of Hussein's fall. Representatives of many foreign oil concerns have been meeting with leaders of the Iraqi opposition to make their case for a future stake and to sound them out about their intentions.

Since the Persian Gulf War in 1991, companies from more than a dozen nations, including France, Russia, China, India, Italy, Vietnam and Algeria, have either reached or sought to reach agreements in principle to develop Iraqi oil fields, refurbish existing facilities or explore undeveloped tracts. Most of the deals are on hold until the lifting of U.N. sanctions.

But Iraqi opposition officials made clear in interviews last week that they will not be bound by any of the deals.

"We will review all these agreements, definitely," said Faisal Qaragholi, a petroleum engineer who directs the London office of the Iraqi National Congress (INC), an umbrella organization of opposition groups that is backed by the United States. "Our oil policies should be decided by a government in Iraq elected by the people."

Ahmed Chalabi, the INC leader, went even further, saying he favored the creation of a U.S.-led consortium to develop Iraq's oil fields, which have deteriorated under more than a decade of sanctions. "American companies will have a big shot at Iraqi oil," Chalabi said.

The INC, however, said it has not taken a formal position on the structure of Iraq's oil industry in event of a change of leadership.

While the Bush administration's campaign against Hussein is presenting vast possibilities for multinational oil giants, it poses major risks and uncertainties for the global oil market, according to industry analysts.

Access to Iraqi oil and profits will depend on the nature and intentions of a new government. Whether Iraq remains a member of the Organization of Petroleum Exporting Countries, for example, or seeks an independent role, free of the OPEC cartel's quotas, will have an impact on oil prices and the flow of investments to competitors such as Russia, Venezuela and Angola.

While Russian oil companies such as Lukoil have a major financial interest in developing Iraqi fields, the low prices that could result from a flood of Iraqi oil into world markets could set back Russian government efforts to attract foreign investment in its untapped domestic fields. That is because low world oil prices could make costly ventures to unlock Siberia's oil treasures far less appealing.

Bush and Vice President Cheney have worked in the oil business and have long-standing ties to the industry. But despite the buzz about the future of Iraqi oil among oil companies, the administration, preoccupied with military planning and making the case about Hussein's potential threat, has yet to take up the issue in a substantive way, according to U.S. officials.

The Future of Iraq Group, a task force set up at the State Department, does not have oil on its list of issues, a department spokesman said last week. An official with the National Security Council declined to say whether oil had been discussed during consultations on Iraq that Bush has had over the past several weeks with Russian President Vladimir Putin and Western leaders.

On Friday, a State Department delegation concluded a three-day visit to Moscow in connection with Iraq. In early October, U.S. and Russian officials are to hold an energy summit in Houston, at which more than 100 Russian and American energy companies are expected.

Rep. Curt Weldon (R-Pa.) said Bush is keenly aware of Russia's economic interests in Iraq, stemming from a $7 billion to $8 billion debt that Iraq ran up with Moscow before the Gulf War. Weldon, who has cultivated close ties to Putin and Russian parliamentarians, said he believed the Russian leader will support U.S. action in Iraq if he can get private assurances from Bush that Russia "will be made whole" financially.

Officials of the Iraqi National Congress said last week that the INC's Washington director, Entifadh K. Qanbar, met with Russian Embassy officials here last month and urged Moscow to begin a dialogue with opponents of Hussein's government.

But even with such groundwork, the chances of a tidy transition in the oil sector appear highly problematic. Rival ethnic groups in Iraq's north are already squabbling over the the giant Kirkuk oil field, which Arabs, Kurds and minority Turkmen tribesmen are eyeing in the event of Hussein's fall.

Although the volumes have dwindled in recent months, the United States was importing nearly 1 million barrels of Iraqi oil a day at the start of the year. Even so, American oil companies have been banished from direct involvement in Iraq since the late 1980s, when relations soured between Washington and Baghdad.

Hussein in the 1990s turned to non-American companies to repair fields damaged in the Gulf War and Iraq's earlier war against Iran, and to tap undeveloped reserves, but U.S. government studies say the results have been disappointing.

While Russia's Lukoil negotiated a $4 billion deal in 1997 to develop the 15-billion-barrel West Qurna field in southern Iraq, Lukoil had not commenced work because of U.N. sanctions. Iraq has threatened to void the agreement unless work began immediately.

Last October, the Russian oil services company Slavneft reportedly signed a $52 million service contract to drill at the Tuba field, also in southern Iraq. A proposed $40 billion Iraqi-Russian economic agreement also reportedly includes opportunities for Russian companies to explore for oil in Iraq's western desert.

The French company Total Fina Elf has negotiated for rights to develop the huge Majnoon field, near the Iranian border, which may contain up to 30 billion barrels of oil. But in July 2001, Iraq announced it would no longer give French firms priority in the award of such contracts because of its decision to abide by the sanctions.

Officials of several major firms said they were taking care to avoiding playing any role in the debate in Washington over how to proceed on Iraq. "There's no real upside for American oil companies to take a very aggressive stance at this stage. There'll be plenty of time in the future," said James Lucier, an oil analyst with Prudential Securities.

But with the end of sanctions that likely would come with Hussein's ouster, companies such as ExxonMobil and ChevronTexaco would almost assuredly play a role, industry officials said. "There's not an oil company out there that wouldn't be interested in Iraq," one analyst said.

Staff writer Ken Bredemeier contributed to this report.