Why Iraq Still sells its oil à la cartel

Why Iraq Still sells its oil à la cartel
Twilight of the neocon gods
Harper's
Monday, October 24, 2005

By Greg Palast

By special arrangement with Harper's magazine, we are reproducing here
for the first time the entire updated article on the US government's
secret schemes for seizing control of the oil fields of Iraq.

On Saturday, October 22, the Greg Palast investigative team received a
Project Censored award, the "alternative Pulitzer Prize," for
uncovering the State Department's confidential pre-war plans for the
economic conquest of Iraq.


*****

...For months, the State Department denied the existence of this
323-page document ...

*****

...The switch to an OPEC-friendly policy for Iraq was driven by Dick
Cheney himself. "The person who is most influential in running
American energy policy is the Vice President," who, said the insider,
"thinks that security begins by . . . letting prices follow wherever
they may."

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Two and a half years and $202 billion into the war in Iraq, the United
States has at least one significant new asset to show for it:
effective membership, through our control of Iraq's energy policy, in
the Organization of the Petroleum Exporting Countries (OPEC), the
Arab-dominated oil cartel.

Just what to do with this proxy power has been, almost since President
Bush's first inaugural, the cause of a pitched battle between
neoconservatives at the Pentagon, on the one hand, and the State
Department and the oil industry, on the other. At issue is whether
Iraq will remain a member in good standing of OPEC, upholding
production limits and thereby high prices, or a mutinous spoiler that
could topple the Arab oligopoly.

According to insiders and to documents obtained from the State
Department, the neocons, once in command, are now in full retreat.
Iraq's system of oil production, after a year of failed free-market
experimentation, is being re-created almost entirely on the lines
originally laid out by Saddam Hussein.

Under the quiet direction of U.S. oil company executives working with
the State Department, the Iraqis have discarded the neocon vision of a
laissez faire, privatized oil operation in favor of one shackled to
quotas set by OPEC, which have been key to the 148% rise in oil prices
since the beginning of 2002. This rise is estimated to have cost the
U.S. economy 1.5% of its GDP, or a third of its total growth during
the period.

Given this economic blow, and given that OPEC states account for 46%
of America's oil imports, it may seem odd that the United States'
"remaking" of Iraq would allow for a national oil company that props
up OPEC's price gouging. And in fact the original scheme for
reconstruction, at least the one favored by neoconservatives, was to
privatize Iraq's oil entirely and thereby undermine the oil cartel.
One intellectual godfather of this strategy was Ariel Cohen of the
Heritage Foundation, who in September 2002 published (with Gerald P.
O'Driscoll, Jr.) a post-invasion plan, "The Road to Economic
Prosperity for a Post-Saddam Iraq," that put forward the idea of using
Iraq to smash OPEC.

Cohen explained to me how such an extraordinary geopolitical feat
might be accomplished. OPEC maintains high oil prices by suppressing
production through a quota system effectively imposed on each member
by Saudi Arabia, which reigns by dint of its overwhelming reserves.
The Saudis, to maintain their control on pricing, must keep a lid on
production from other members-particularly Iraq, which has the second
greatest proven reserves.

Under Saddam Hussein, Iraq adhered to the OPEC quota limit
(historically set to equal Iran's, now 3.96 million barrels a day) via
state ownership of all fields. Cohen reasoned that if Iraq's fields
were broken up and sold off, a dozen competing operators would quickly
crank up production from their individual patches to the maximum
possible, swiftly raising Iraq's total output to 6 million barrels a
day. This extra crude would flood world petroleum markets, OPEC would
devolve into mass cheating and overproduction, oil prices would fall
over a cliff, and Saudi Arabia-both economically and politically -
would fall to its knees.

By February 2003, Cohen's position had been enshrined as official
policy, in the form of a hundred-page blueprint for the occupied
nation titled, "Moving the Iraqi Economy from Recovery to Sustainable
Growth"-a plan that generally embodied the principles for postwar Iraq
favored by Defense Secretary Donald Rumsfeld, Deputy Secretary Paul
Wolfowitz, and the Iran-Contra figure Elliott Abrams, now Deputy
National Security Adviser. Nominally written by a committee of
Defense, State, and Treasury officials, the blueprint was in fact the
brainchild of a platoon of corporate lobbyists, chief among them the
flattax fanatic Grover Norquist. From overhauling tax rates to
rewriting copyright law, the document mapped out a radical makeover of
Iraq as a free-market Xanadu-a sort of Chile on the Tigris-including,
on page 73, the sell-off of the nation's crown jewels:
"privatization... [of] the oil and supporting industries."


Following the U.S. military's swift advance to Baghdad, those
skeptical of the neocon plan were summarily brushed aside. Chief among
the castoffs was General Jay Garner, the shortlived occupation viceroy
who on the very night he arrived in Baghdad from Kuwait received a
call from Rumsfeld informing him of his dismissal. When I met with
Garner last March at the Washington offices of L3 Corporation's giant
security subsidiary he now heads, the general told me that he had
resisted imposing on Iraqis the plan's sell-off of assets, especially
the oil. "That's just one fight you don't have to take on right now,"
he said. "You don't want to end the day with more enemies than you
started with."

In plotting the destruction of OPEC, the neocons failed to predict the
virulent resistance of insurgent forces: the U.S. oil industry itself.
From the outset of the planning for war, U.S. oil executives had
thrown in their lot with the pragmatists at the State Department and
the National Security Council. Within weeks of the first inaugural,
prominent Iraqi expatriates-many with ties to U.S. industry-were
invited to secret discussions directed by Pamela Quanrud, an NSC
economics expert now employed at State. "It quickly became an oil
group," one participant, Falah Aljibury, told me. Aljibury, an adviser
to Amerada Hess's oil trading arm and to investment banking giant
Goldman Sachs, who once served as a back channel between the United
States and Iraq during the Reagan and George H. W. Bush
administrations, cut ties to the Hussein regime following the invasion
of Kuwait.

The working group's ideas about the war had been far less starry-eyed
than those of the neocons. "The petroleum industry, the chemical
industry, the banking industry-they'd hoped that Iraq would go for a
revolution like in the past and government was shut down for two or
three days," Aljibury told me. "You have a martial law . . . and say
Iraq is being liberated and everybody stay where they are . . .
Everything as is." On this plan, Hussein would simply have been
replaced by some former Baathist general. One candidate was General
Nizar Khazraji, Saddam's former army chief of staff, who at the time
was under house arrest in Denmark pending charges for war crimes.
(Khazraji was seen in Iraq a month after the U.S. invasion, but he
soon disappeared and has not been heard from since.)

Roughly six months before the invasion, the Bush Administration
designated Philip Carroll to advise the Iraqi Oil Ministry once U.S.
tanks entered Baghdad. Carroll had been CEO of both Fluor Corporation,
now a major contractor in Iraq, and, earlier, of Royal Dutch/Shell's
U.S. division. In May 2003, a month after his arrival in Iraq, Carroll
made headlines when he told the Washington Post that Iraq might break
with OPEC: "[Iraqis] have from time to time, because of compelling
national interest, elected to opt out of the quota system and pursue
their own path. . . . They may elect to do that same thing. To me,
it's a very important national question." Carroll later told me,
though, that he personally would not have been supportive of
privatizing oil fields. "Nobody in their right mind would have thought
of doing that," he said.

Soon after Carroll resigned his post in September 2003, the new
provisional government appointed an oil minister, Ibrahim Bahr
al-Uloum. Uloum (who had been maneuvered into the job by then-neocon
favorite Ahmad Chalabi) quickly fired Muhammad al-Jiburi, chief of
Iraq's State Oil Marketing Organization, and Thamer Ghadhban, the
expert in charge of the southern oil fields, both of whom had been
trusted by the Western oil industry. Production faltered from a
combination of incompetence, wholesale theft (Iraq's oil was
unmetered), sabotage, and corruption that one oilman told me was
"rampant," with "direct payoffs to government officials by commercial
operators."

With pipelines exploding daily, the fantasy of remaking Iraq's oil
industry also went up in flames. Carroll was replaced by another
Houston oil chieftain, Rob McKee, a former executive vice-president of
ConocoPhillips and currently the chairman-even during his tenure in
Baghdad-of Enventure, an oil-drilling supply subsidiary of the
Halliburton Corporation. McKee had little tolerance for the neocons'
threat to privatize the oil fields. A close associate of McKee's and
the executive adviser to Hess's trading arm, Ed Morse, told me that
"Rob was very promotive of putting in place a really strong national
oil company," even if he had to act over the objections of the Iraqi
Governing Council.

Morse, who says he takes as many as six calls a day from the Bush
Administration regarding Iraq, is one of the men to whom Washington
turns to obtain the views of Big Oil. Like Carroll and McKee, Morse
sneers at what he calls "the obsession of neo-conservative writers on
ways to undermine OPEC." Iraqis, says Morse, know that if they pump 6
million barrels a day, i.e., 2 million above their expected OPEC
quota, "they will crash the oil market" and bring down their own economy.

In November 2003, McKee quietly ordered up a new plan for Iraq's oil.
The drafting would be overseen by a "senior adviser," Amy Jaffe, who
had worked for Morse when he held the formidable title of Chairman of
the Council on Foreign Relations-James Baker III Institute Joint
Committee on Petroleum Security. Jaffe now works for Baker, the former
Secretary of State, whose law firm serves as counsel to both
ExxonMobil and the defense minister of Saudi Arabia. The plan,
nominally written by State Department contractor BearingPoint, was
guided, says Jaffe, by a handful of oil industry consultants and
executives.

For months, the State Department officially denied the existence of
this 323-page plan for Iraq's oil, but when I identified the
document's title from my sources and threatened legal action, I was
able to obtain the complete report, dated December 2003 and entitled
"Options for Developing a Long Term Sustainable Iraqi Oil Industry."
The multi-volume document describes seven possible models of oil
production for Iraq, each one merely a different flavor of a single
option: the creation of a state-owned oil company. The seven options
ranged from the Saudi Aramco model, in which the government owns the
whole operation from reserves to pipelines, to the Azerbaijan model,
in which the state-owned assets are operated almost entirely by "IOCs"
(International Oil Companies).

The drafters had little regard for the "self-financing" system, such
as Saudi Arabia's, which bars IOCs from the fields; they prefer the
production-sharing agreement (PSA) model, under which the state
maintains official title to the reserves but operation and control are
given to foreign oil companies. These companies then manage, fund, and
equip crude extraction in exchange for a percentage of sales receipts.

While promoting IOC control of the fields, the authors take care to
warn the Iraqi government against attempting to squeeze IOC profits:
"Countries that do not offer risk-adjusted rates of return equal to or
above other nations will be unlikely to achieve significant levels of
investment, regardless of the richness of their geology." Indeed, to
outbid other nations for Big Oil's favor will require Iraq to turn
over quite a large share of profits, especially when competing against
countries such as Azerbaijan that have given away the store.

The Azeri government, notes the report, has "been able to partially
overcome their risk profile and attract billions of dollars of
investment by offering a contractual balance of commercial interests
within the risk contract." This refers to the fact that Azerbaijan,
despite its poor oil quality and poor location, drew in the IOCs via
scandalous splits of revenue allowed by the nation's corrupt government.

Given how easily the interests of OPEC and those of the IOCs can be
aligned, it is certainly understandable why smashing the oil cartel
would not strike oilmen as a good idea. In 2004, with oil approaching
the $50-a-barrel mark all year, the major U.S. oil companies posted
record or near record profits. ConocoPhillips, Rob McKee's company,
this February reported a doubling of its quarterly profits from the
previous year, which itself had been a company record; Carroll's
former employer, Shell, posted a record-breaking $4.48 billion in
fourth-quarter earnings. ExxonMobil last year reported the largest
one-year operating profit of any corporation in U.S. history.

When I talked to Ariel Cohen at Heritage, his dream of smashing OPEC
in shambles, he blamed the State Department for acquiescing to the
Saudis and to Russia, which also benefit s from selling oil at high
OPEC prices. The poisonous policies were influenced, he said, by "Arab
economists hired by the State Department who are basically supporting
the witches' brew of the Saudi royal family and the Soviet ostblock .
. . because the Saudis are interested in maximizing their market share
and they're not interested in fast growth of the Iraqi output."

According to Morse, the switch to an OPEC-friendly policy for Iraq was
driven by Dick Cheney himself. "The person who is most influential in
running American energy policy is the Vice President," who, says
Morse, "thinks that security begins by . . . letting prices follow
wherever they may."

Even, I asked, if those are artificially high prices, set by OPEC?
"The VP's office [has] not pursued a policy in Iraq that would lead to
a rapid opening of the Iraqi energy sector . . . so they have not done
anything, either with producers or energy policy, that would put us on
a track to say, 'We're going to put a squeeze on OPEC.'"

Opposition to Iraq's membership in OPEC was handled in a style that
would have made Saddam proud. On May 20, 2004, Iraqi police raided
Ahmad Chalabi's home in Baghdad and carted away his computers and
files. Chalabi was hunted by his own government: the charge was
espionage, no less, for Iran. Chalabi's Governing Council was soon
shut down and, crucially, Bahr al-Uloum was yanked from the Oil
Ministry and replaced by the very men he had removed: Thamer Ghadhban
took al-Uloum's job at the oil ministry and Chalabi rival Muhammad
al-Jiburi was made minister of trade.

But just when you thought the fat lady sang for the neo-cons, who
should rise from his crypt eight months later but Ahmad Chalabi. In
January 2005, Chalabi cut a deal with his former oil minister
al-Uloum's father, a Shia power broker, and rode that religious ethnic
vote back into office. Chalabi landed himself the post of Second
Deputy Prime Minister and, in addition, the tantalizing title of
Interim Oil Minister. The espionage investigation was dropped; the
King of Jordan offered to pardon Chalabi for the $72 million missing
from Chalabi's former bank; and Chalabi once again turned over his oil
ministry to al-Uloum, the sheik's son. The Texans' pro-OPEC man
Ghadhban was again kicked downstairs.

But Chalabi had learned his lesson: don't mess with Texas, or the
Texan's favorite cartel. A chastened Chalabi now endorses Iraq's
cooperation with OPEC's fleecing of the planet's oil consumers.

And Dick Cheney, far from "putting the squeeze on OPEC," has taken his
de facto seat there, assenting by silence to the oil monopoly's
piratical price gouging. But hasn't OPEC's stratospheric crude prices
choked the life out of America's auto industry and bankrupted half a
dozen airlines? In the Vice-President's bunker the elimination of jobs
of Democratic-leaning union members is likely seen as a bonus for the
good deed of boosting oil industry profits far above the ozone layer.


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Greg Palast is the author of the New York Times bestseller, The Best
Democracy Money Can Buy. This is his fourth investigative report for
Harper's Magazine. Leni von Eckardt was chief researcher with Palast
on this investigation. This is the Palast team's sixth Project
Censored award from California State University's school of journalism.

The BBC Television Newsnight broadcast of this story was produced by
Meirion Jones. View the BBC television report and sign up for Palast's
updates at www.GregPalast.com