Alexander’s Oil and Gas Connections / Business Week

Feb. 20, 2003

"It's not all about oil, but..."

30-01-03 Victory in Iraq would reshuffle the global players with big stakes in the country's oil fields. When tens of thousands of protesters opposed to a US war in Iraq descended on Washington on Jan. 18, you could see the placards everywhere: "No US blood for oil." Convinced that a war would be nothing more than a thinly veiled resource grab instigated by Big Oil, activists vow to follow up on Feb. 4 by staging protests at gas stations across the country.
Fringe thinking? Hardly. The suspicion that George W. Bush's showdown with Saddam Hussein is "all about oil" isn't just a fixation of the American left. It's gaining adherents among the European intelligentsia and in the Arab world.
"Washington says it wants to eliminate any threat of interruption of the flow of oil, to ensure that it will be accessible to US oil companies," said British Labour Party politician Alice Mahon on Jan. 22. "A different and more compliant government in Iraq would make that possible."

Naturally, the Bush Administration and US oil companies bristle at that charge. In his Jan. 28 State of the Union address, the President called Saddam "a brutal dictator" and insisted that the Iraqi leader and his weapons of mass destruction "will not be permitted to dominate a vital region and threaten the US."
Adds an American oil-industry source: "I would be shocked if any industry executive is wringing his hands in glee" over the impending conflict. In the short term, many oil companies and producers could in fact be hurt by a US victory. If the US gets more oil [from Iraq], that would drive the price down, says the industry executive.

Still, when Bush says "vital region," he's alluding to the obvious: While the war with Saddam is not driven by a US lust for Iraq's oil fields -- second only to Saudi Arabia's in terms of proven reserves -- he's not about to let a vicious strongman with ambitions to be another Nasser-style, pan-Arab nationalist control the crucial area, either. What's more, when US oil execs profess dismay over the drop in world crude prices that could follow American seizure of Iraqi fields, they're telling only part of the story.
In the long term, assuring a larger and more stable supply outside of Saudi Arabian domination could benefit both the US and world economy. And modernizing the decrepit Iraqi oil industry will be a huge opportunity. Just making Iraqi facilities capable of pumping oil at 1990 levels could cost $ 5 bn, says a study by the Council on Foreign Relations and James A. Baker III Institute for Public Policy. Doubling capacity from the current 2.8 mm bpd might cost $ 40 bn.

Since the US military would control Iraq's oil and gas deposits for some time, US companies could be in line for a lucrative slice of that business. They may snag some drilling rights, too. "The oil-service industry is pretty much American-dominated," says an executive at one US company. That means outfits such as Halliburton and Baker Hughes, as well as construction giant Bechtel Group, could feel just as victorious as the US Special Forces troops.
The mere prospect of a US presence in the region troubles the French and Russians -- both key to the UN drive to head off war. The French have long been a major player in developing Iraqi fields. And the Russians, via companies such as LUKoil, are angling for a piece of the action. They, too, are worried about anything that causes crude-oil prices to fall.

The war "is totally about oil," says a top executive at France's TotalFinaElf. Adds Simon G. Kukes, CEO of Russia's Tyumen Oil: "I don't see much room for Russian oil companies" in post-war Iraq.
The anxiety is high because Iraq's oil treasure is vast. Only 15 of its 74 discovered oil fields have been developed, and just 125 of the 526 known oil deposits have been drilled, according to CFR-Baker. Iraq is now bringing in only $ 16 bn annually from oil sales -- paltry by OPEC standards. And its deteriorating infrastructure means that output is dropping by about 100,000 barrels over each successive year.

That picture could change dramatically if the US military staves off Iraqi sabotage and puts in place a new regime committed to hurry-up modernization. If Iraq opens its oil taps, that would be a powerful psychological force for lower oil prices worldwide. "The whole market will flip from bullish to bearish," says Fareed Mohamedi, chief economist at PFC Energy in Washington.
What about tapping some of that oil to pay for the war? According to Secretary of State Colin L. Powell, the US won't fund its military campaign from Iraqi oil revenues, but it does reserves the right to use some of Iraq's black gold for reconstruction. "The oil of Iraq belongs to the Iraqi people," Powell said on Jan. 21. "It will not be exploited."

So who will reap the big bucks from getting Saddam's oil fields back on track?
At this point, Iraq is believed to have contracts worth about $ 38 bn pending with such companies as Italy's ENI, Shell, Australia's BHP (BHP), TotalFinaElf, and Russian giant LUKoil. Sanctions have precluded American companies from doing business in Iraq, and foreign concerns are likely to continue to exploit their long-standing links. Yet the sanctions have also stalled efforts by non-US companies to complete their deals and start development.

France is by far the biggest player. The giant TotalFinaElf now has development rights to roughly 25 % of total Iraqi reserves. In theory, the country's long relationship with Iraq's oil technocrats could put French outfits in good shape for more deals after any war.
But at the moment, many French industry officials remain convinced that the Americans will exact revenge if France fails to fully support the war effort. While Russian contracts may be honoured, "ours won't be," predicts a top executive of TotalFinaElf. That's why some French observers insist that when push comes to shove in the UN, France will march in step -- mainly to protect its oil stakes.

Russia is in a more delicate position. Iraq owes Moscow $ 8 bn in Soviet-era debt. In 1997, LUKoil signed a $ 3.5 bn, 23-year deal to revive Iraq's al-Qurnah field, which has 7.8 bn barrels of proven reserves. But the accord was put on ice since President Vladimir V. Putin's support for the US-led sanctions drive.
Now LUKoil is sending a high-level delegation in February to heal the breach -- the second such diplomatic overture in recent weeks. LUKoil President Vagit Alekperov claims to have Kremlin assurances that his interests will be protected in a post-Saddam regime. That has many industry observers convinced that an informal accord with Washington is in place, one that would restore LUKoil’s stake in Iraq.

For American energy companies, smarting from the charge that former oil execs George W. Bush and Vice-President Dick Cheney are spearheading their interests, the subject of economic gain from an Iraqi intervention is extremely sensitive. Privately, industry sources familiar with discussions with the Administration say the talks focused on nitty-gritty issues such as snuffing out oil fires Saddam's forces may set. And the industry remains torn on what impact war in Iraq will have on its fortunes.
In the short term, Iraqi infrastructure rebuilding projects might be sweet deals. Yet over the long haul, a flood of Iraqi oil could depress world prices. Bottom line in the Oil Patch: Keep your lip zipped, hope George W. is right, and go along for the ride.

Source: The McGraw-Hill Companies Inc