Mr. Hepburn has spent 40 years working in the petroleum industry, including as CEO of the Bahrain Petroleum Company (1981-96). He is currently a consultant for U.S. clients wishing to do business in the Persian Gulf.
Despite the claims of anti-war activists worldwide, there is no validity in the allegation that oil is the prime U.S. motivation, or even a major factor, in a U.S. decision to invade Iraq. Of course, oil will continue to be Iraq’s primary source of revenue and thus central to the enormous task of rebuilding the country in the decade following a war. Urgently needed restoration and expansion of Iraq’s ailing oil industry to overcome the desperate state of their economy will require input of state-of-the-art international oil-field technology.
This will open substantial post-invasion commercial opportunities for international oil companies.1 The cost of the post-war decade of humanitarian aid, Iraq’s reconstruction, payment of Gulf War I reparations and the servicing of existing pre-war foreign debt could be on the order of $400 billion. This assumes a 4-6 week war, with a moderate level of collateral damage and a limited level of Iraqi sabotage of the oil fields. Total revenue from oil exports over the same ten year period is estimated to be on the order of $300 billion, leaving a shortfall of a $100 billion.2 The estimated cost to the United States of the war and five years of peacekeeping is $350 billion. These costs clearly cannot be plundered from Iraq’s post-war oil revenues. And unlike the case for Desert Storm in 1991, few, if any, of the costs of the war will be met in cash or in kind by Saudi Arabia, other Gulf states and Japan.
The Bush administration has so far failed make it clear to America that this will not be a “free” war. $350 billion is the staggering price tag that U.S. tax payers will be called upon to pay for the elimination of Iraq’s WMD and the removal of Saddam’s regime from President Bush’s “axis of evil.” And the president has yet to offer convincing proof that it’s worth it.
World oil consumption is at present around 78 million barrels per day (mb/d), of which Iraq currently contributes 2 to 2.5 million.3 Regardless of who “controls” Iraq’s post-invasion production, the volume of additional oil that Iraq could place on the world market would, in the short term, be insignificant. During the five years immediately following the invasion, Iraq’s additional oil production would have little impact on international oil trade or on total world supply. It is, therefore, cynical to suggest that the U.S. military leadership in the Pentagon would be so irresponsible as to put at risk the lives of thousands of U.S. service personnel (not to mention hundreds of thousands of Iraqis) for the sake of what would clearly be only a tiny percentage of world oil, even if that oil was somehow of direct benefit to major U.S. oil companies.
Compounded by current supply problems out of Venezuela, world oil prices will escalate sharply if an invasion of Iraq occurs. However, prices would most likely drop back quickly if Saudi production were ramped up to replace any lost Iraqi exports (as happened in 1990). The 600-millionbarrel U.S. strategic oil reserve provides an additional safety net for the United States (by far the world’s largest oil importer) and could be released by Congress to meet any short-term demand.
Iraq’s proven oil reserves are second in the world only to those of Saudi Arabia (currently producing around 8 mb/d, with an additional installed spare production capacity of 3 million available for export on short notice).4 After significant modernization and investment on the order of $40 billion, along with the introduction of state-of-the-art oil technology, Iraq’s overall oil production could be increased over the next decade to provide an estimated net export of 6 mb/d.5 The development program could be expected to proceed in three phases:
Phase 1: Restoration of existing production areas by well workovers, oil gathering pipework system repairs, replacement of malfunctioning equipment, and repair of marine export facilities to achieve a firm production of 3.5 mb/d – a two-year joint effort by the Iraq National Oil Company (INOC) and foreign oil-service companies under direct Iraqi control. The U.S. Energy Information Agency reported a statement by Iraq’s oil minister that only 24 out of 75 Iraqi oil fields are producing.
Phase 2: Development of known but undeveloped fields – joint ventures of foreign oil companies with INOC in production-sharing agreements (along the lines of 80/20 profit sharing after deduction of operating costs and amortization of exploration and development capital expenditures).
Phase 3: Exploration and development of undiscovered fields, by international companies in joint ventures with INOC – bringing export capacity to 6 mb/d in 10 years.
Given this time frame, Iraq’s increased post-invasion production could be absorbed by the market due to the annual increase of around 1.25 percent in world oil demand in response to a consensus estimate of 3.5 percent annual growth in the world economy as measured by the IMF. Increased production by Iraq need not, therefore, drive oil prices below $20 per barrel by creating a market surplus, nor supplant exports by other OPEC producers. The actual impact of Iraq’s production on world oil supply and crude-oil prices would, of course, depend on the increase in production by other exporters, both OPEC and non-OPEC such as Russia, West Africa and the Caspian.
An interim post-Saddam government would no doubt seek to maximize Iraq’s oil export revenues in order to achieve the invasion’s underlying long-term objectives: elimination of WMD, regime change in Baghdad and, over time, the evolution of the new Iraq into a free-market economy functioning within a democratic state. The new Iraq envisioned would provide no support to international terrorists nor be a military threat to the rest of the world.
Given strong leadership, Iraq could in a relatively short time actively contribute to the stability of the region as a whole, ensuring the reliability of Persian Gulf crude-oil exports to world markets.
To allay any suspicion of foreign oil imperialism, the direction of Iraq’s oil and gas industry should remain in the hands of INOC.6 However, competent staffing is a serious problem at all levels of operations, and a vigorous training program supported by foreigners expert in state-of-the-art oilfield technology will be essential. The interim government should also supervise the oil-revenue cash flow under U.N. auspices in a manner similar to the present oil-for-food program.
A number of substantial oil-field exploration and production contracts with foreign companies – mainly Russian, French and Chinese (all with veto power in the Security Council) – have already been signed with Saddam Hussein’s regime, reportedly not with the INOC, but are dormant pending the lifting of U.N. sanctions.7 It is believed that some of these contracts have very generous terms, designed to induce foreign companies to circumvent the U.N. sanctions. These contracts should be reviewed by the interim government in light of the new economic and political circumstances that will emerge after the invasion. Existing contract holders will no doubt expect to retain their contracts or at least receive preferential consideration. Equally, U.S. and British companies currently excluded from bidding will expect to be given equal, if not preferential, access in the development of Iraq’s oil industry over the next 10 years.
Before military action begins, it would be prudent for the U.S. administration to consult with U.N. legal experts on the legality of the post-invasion interim government’s voiding these pre-war contracts signed by Saddam’s regime.
Some form of pre-invasion agreement may be reached on contractual matters between the United States and Russia, France and China to gain the acquiescence of these three on military action against Iraq. However, having borne the brunt of the military role and costs for liberating Iraq, the United States and Britain will at a minimum expect to be given the opportunity to participate in a new round of bidding on Iraq’s oil-related projects under the supervision of the interim government.
New exploration and production contracts for the development of both existing and new oil fields will presumably be competitive profit and production-sharing agreements similar to those elsewhere in the international oil industry.
Most important, regardless of the contracting procedures adopted by the interim government, prompt implementation of new contracts will be imperative for the urgent restoration and upgrading of existing oil fields and the development of new production. This will generate the revenue flow urgently required to fund the anticipated wide variety of humanitarian and other nation-building projects. Iraqi management will not have the luxury of the protracted haggling that has traditionally characterized oil-contract negotiations in the region, but it will be in everyone’s best interest that these agreements not appear to be over-generous concessions negotiated at gun point by the liberating powers.
In the negotiation with international oil companies for major gas projects in Saudi Arabia, for example, Aramco reportedly pressed initially for rates of return of 10-12 percent and then later offered 15 percent, whereas Exxon was seeking 20 percent.
After three years of negotiations, no agreement has been reached. To expedite contract finalization, foreign participation in Iraq’s oil projects should be made financially attractive, but this does not mean that foreign companies can expect a corporate bonanza. In return, foreign participants will need to provide the latest oil-field technology, modern operating know-how and the associated investment funds. They will also need to work cooperatively with other oil producers and consumers to stabilize and de-politicize the production and export of Iraqi crude to world markets.
Post-invasion oil revenues will be absolutely critical to the funding of Iraq’s 10-year broad-ranging domestic national rebuilding program.8 Major components of post-invasion expenditures are expected to be the following:
- Rebuilding of key public services damaged in the war.
- Re-settlement of over 3 million Iraqi refugees returning from Iran, Jordan and elsewhere.
- Restructuring, re-equipping and retraining military, security and police forces to maintain law and order and prevent illicit export of cached WMD to terrorist organizations. Iraq’s military will be downsized to a defense force. This new force will require modern hardware, but, after the initial expenditure, the military budget will be substantially less than the pre-invasion level.
- Settlement through the U.N. Claims Court of reparations claims against Iraq arising from its 1990 invasion of Kuwait. Some $48 billion has already been paid out, and it is reasonable to assume that the outstanding amount will be substantially reduced in order to avoid imposing a crippling long-term burden on the fledgling post-war economy.
- Some level of compensation to Turkey for loss of oil-transfer fees resulting from the U.N.-mandated reduction in transfers since the Gulf War (estimated at around $30 billion).
- Upgrading of medical, educational and social services.
- Construction of a national infrastructure and transportation system to enhance quality of life and facilitate economic progress.
- Funding of oil-exploration and well workover programs and upgrading production facilities, pipelines and tanker-loading ports, raising firm export-production capacity to 3.5 mb/d over the next two years and 6 mb/d by the end of the decade.
- Re-education/retraining of all levels of civil-service personnel. The aim will be to eradicate the Baathist legacy of corruption and patronage and to facilitate acceptance and implementation of the wide range of political, legal, fiscal, economic, educational and social reforms that will be necessary to achieve a free-market-based, democratic, modern society.
- Reconciliation of the long-outstanding foreign debts, and in particular those owed to Russia and China, which may possibly involve the combination of debt-reduction negotiations and an extended repayment schedule, and perhaps some form of preferential treatment in the awarding of future oil-field contracts.
The equitable allocation of oil revenues by the interim military government to meet the competing demands of dominant ethnic groups in various sections of the country – Kurds and Turkmen in the north, Sunni Arabs in the central regions and the Shia in the south – will be made considerably more complicated by the inevitable pressure from northern and southern oil-rich regions (Kirkuk and Basrah). They will no doubt demand the right to exercise greater control over the revenues derived from their respective local oil production.
While it is obviously difficult to forecast in advance the funds required to achieve the above post-invasion objectives, it is estimated that the total cost will be on the order of $400 billion, most of which will have to be financed by Iraqi national oil revenues. It must be emphasized that this estimate is for Iraq’s internal programs and excludes the following:
- Reimbursement of invasion and occupation costs incurred by the United States of around $350 billion over five years or for costs incurred by Britain and any other countries that may eventually participate in the liberation of Iraq.
- Financial inducements (aid packages, etc.) offered by the United States to Turkey, Jordan and others to provide basing facilities for the launching of invasion forces, overflight rights, transiting territorial waters, and operations from airports, seaports, etc.
- The impact of an economic downturn in the United States resulting from the short-term peaking of world crude-oil prices or other unintended consequences that adversely affect U.S. and British business enterprises worldwide.
The estimated total revenue from Iraqi oil exports over the next decade will be on the order of $300 billion. This is based on the assumption of an average price per barrel of $28 (minus production costs and pipeline transfer fees) and an estimated average production of 4.5 mb/d. The world economy can readily accommodate an oil price range of $22-$28 per barrel, and the interests of the United States and its Mideast allies would be best served if oil prices were held close to that level. The economies of major oil exporters such as Russia, Saudi Arabia and Venezuela would be devastated by a drop of oil prices to less than $20 per barrel. It would also discourage investment in exploration and development of oil-industry in new sources of production, improved fuel efficiency, alternative energy sources and cleaner emissions.
Funds in excess of oil revenues required for Iraq’s reconstruction will have to be obtained from other sources, such as
U.S. humanitarian aid (on the order of $20 billion). The rest will have to come from foreign direct investment by oil companies and through international bank loans. A well-managed development program for Iraq, overseen by the interim government, will very likely be attractive to international financial institutions. As a side benefit, two key U.S. allies, Saudi Arabia and Turkey, will be substantial long-term beneficiaries from increased pipeline transit fees for Iraq’s enhanced oil exports.
Post-invasion membership of Iraq in OPEC may well become a sensitive issue. It may appear attractive to the anti- OPEC members of the U.S. administration to weaken the organization by removing Iraq from membership or, in the long run, to “control” Iraqi production to lessen reliance on Saudi Arabia. Neither strategy makes any sense.9 Saudi Arabia has always been a steadying, fiscally pragmatic influence in OPEC production and price-setting decisions, to the benefit of the United States as the world’s major oil consumer. In addition, there is no reason to suppose that a newly emergent free and democratic Iraq would act other than in its own best interest as a participant in OPEC production and pricing decisions. For example, Iraq would be well aware that if, under pressure from an occupying power, they seek to gain market share at the expense of Saudi Arabia, Aramco could well flood the world oil market, driving down prices and crippling Iraq’s post-invasion humanitarian and economic-recovery program.10
In conclusion, despite the “it’s the oil, stupid” allegations of anti-war protesters, it is abundantly clear that there would be no room in Iraq’s post-invasion economy for an unrestrained bonanza of oil revenues for the international oil companies. Oil-company profits from post-invasion Iraq would be limited to those generated by conventional commercial agreements. More important, it is essential for the American people to be aware of the inevitable and enormously adverse fiscal implications of a U.S. invasion of Iraq – for an already struggling U.S. economy and for the individual U.S. taxpayer.
1 “Some things are right to do, even if Big Oil benefits.” Thomas L. Friedman, “Thinking About Iraq (I),” The New York Times, January 22, 2003.
2 “Rice’s Baker Institute and the Council on Foreign Relations Make Recommendations for U.S. Post-Conflict Policy in Iraq,” Rice News Release: The Rice University Weekly Online, December 18, 2002, http://www.rice.edu/projects/reno/Newsrel/2003/20021218_postiraq.shtml.
3 Energy Wire: IEA, Venezuela, U.S. Inventories, email, January 24, 2003.
4 Associated Press report of remarks by Saudi Arabia’s oil minister, Ali Naimi, at the World Economic Forum in Davos, Switzerland. “Saudi Says OPEC Could Fill Output Gap,” Saudi Times, January 25, 2003.
5 Rice News Release, op. cit. See also discussion with Raad Alkadiri of PFC Energy reported by David Ivanovich, “New Iraq Could Be Bonanza for U.S. Oilfield Service Companies,” Alaska Oil and Gas Reporter, December 26, 2002, http://www.oilandgasreporter.com/stories/122602/ind_20021226009.shtml.
6 “Who Should Manage Iraq’s Oil?” Guiding Principles for U.S. Post-Conflict Policy in Iraq, Working Paper, Rice University’s Baker Institute, December 2002.
7 Ibid.; and The Oil and Gas Journal as quoted in “Oil in Iraq,” Global Policy Forum, U.N. Security Council, http://www.globalpolicy.org/security/oil/irqindx.htm.
8 Rice News Release, op. cit.
9 Ivanovich, op. cit.
10 “Who Should Manage Iraq’s Oil?” op. cit.