IRAQ: Big Oil Ready for Big Gamble in Iraq

Publisher Name: 
Wall Street Journal

Next week, Iraqi officials plan a welcome-back party for Big Oil.

The government intends to auction off oil contracts to foreign
companies for the first time since Iraq nationalized its oil industry
more than three decades ago. If all goes according to plan in the first
round, foreign oil companies will move in to help Iraq revive
production at six developed fields that have suffered from years of war
and neglect.

iraq oil

Hadi Mizban/Associated Press

Iraqi
oil minister Hussain al-Shahristani, left, and government spokesmen Ali
al-Dabbagh held a joint press conference in Baghdad on June 10. The
Iraqi government has hailed the start of oil exports from the
semi-autonomous Kurdish region as a move toward ending a dispute with
the Kurds.

But
Iraq's fractious politics have complicated the process. Some lawmakers
and oil officials have called for a delay of the auction. The man
behind the plan, Oil Minister Hussain al-Shahristani, appeared before
parliament on Tuesday, where some lawmakers questioned the legality of
the proposed contracts and what they called favorable terms for the
foreign companies. But the auction appears to have sufficient political
support to go ahead on schedule, and Mr. Shahristani and other
government officials vowed to plow ahead.

Mr. Shahristani's oil deals are crucial to this war-torn country's
economy. Iraq is thought to have one of the world's largest supplies of
crude oil, with 115 billion barrels in proven reserves. But foreign
know-how is key to its plans to boost oil output to four million
barrels a day within four to five years, from 2.4 million barrels
currently.

Despite security risks, Western oil companies are clamoring to get
in. Iraq is still relatively unexplored, offering big companies a
potentially easy-to-tap source of growth. Some are touting Iraq as the
most important opening of petroleum fields since the discovery in 2000
of the giant Kashagan field in the Caspian Sea.

Some 120 companies expressed interest in bidding for the contracts
at the June 29 and 30 auction, according to the oil ministry.
Thirty-five companies qualified to bid, including Exxon Mobil Corp., Royal Dutch Shell PLC, Italy's Eni SpA, Russia's Lukoil and China Petroleum & Chemical
Corp., or Sinopec. The six oil fields at stake are believed to hold
reserves of more than 43 billion barrels. Foreigners won't get the most
prized piece of the action -- ownership stakes in the reserves -- but
will be paid fees for ramping up output.

Just over 20 of Iraq's roughly 80 known oil fields have been fully
or partially developed, and most of its production comes from just
three giants, North and South Rumaila and Kirkuk. Because lots of the
black gold is considered relatively easy to extract, oil experts
estimate that exploration and development in Iraq costs $1.50 to $2.25
a barrel, compared with about $5 in Malaysia or $20 in Canada.

Courtesy of Mr. Shahristani

Mr.
Shahristani (center) in Abu Ghraib prison in 1990 after his release
from solitary confinement. He is with two other prisoners.

"We're
talking about a huge volume of crude flowing through their system for
the companies who win the bids," says Samuel Ciszuk, IHS Global
Insight's Middle East Energy analyst. "On the other side, Iraq
desperately needs technology, and these companies can bring it."

But Mr. Shahristani, architect of the plan, is under attack from
many quarters. Falling oil prices have triggered a budget crisis, and
he is being blamed for not boosting production enough to make up the
difference. Lawmakers and some oil officials, meanwhile, say the
auction will give foreigners too much access to Iraq's resources. Mr.
Shahristani also has been called to appear before parliament for
questioning about alleged corruption and mismanagement at the ministry.

"He should not continue," says Jabber Khalifa al-Jabber, secretary
of the parliament's powerful Oil and Gas Committee. "Let someone who is
qualified do the job....I can't name one accomplishment."

Prime Minister Nouri al-Maliki's spokesman, appearing earlier this
month with the oil minister, voiced confidence in him and reaffirmed
that the auction would take place as scheduled.

In a recent interview, Mr. Shahristani, 66 years old, says he has
done nothing wrong, and that lawmakers critical of him have a political
agenda. He says he looks forward to answering questions from parliament
about corruption and mismanagement.

"I'm not a political animal, and I don't enjoy politics," he says.
"The only reason I've accepted and continue with my responsibility is
to protect the Iraqi wealth from unclean hands."

Deals in Iraq often are reached over cups of tea late at night, but
Mr. Shahristani doesn't like schmoozing. In a capital built on
patronage, he has denied plum jobs to longtime friends. He's earned a
reputation as a stickler for rules, including cumbersome purchasing
regulations that other oil officials blame for slowing down Iraqi oil
development. He has refused even small gifts, such as neckties, from
visiting oil executives, he says.

In his three years as oil minister, Mr. Shahristani has emerged as a
key lieutenant to Mr. Maliki. After violence started to ebb in Iraq in
2008, Messrs. Maliki and Shahristani and a handful of other former
Iraqi exiles have pushed an ambitious set of economic reforms.

Western oil companies were kicked out of Iraq in 1972, part of a
wave of Mideast petroleum nationalization. Oil production hit at least
three million barrels a day before Iraq invaded Kuwait in 1990, then
fell sharply to 300,000 barrels after economic sanctions and trade
embargoes were imposed. Production rebounded to about 2.5 million
barrels before the U.S. invasion in 2003.

[Big Oil Ready for Big Gamble in Iraq]

Iraqi
lawmakers have squabbled for years over a draft petroleum law that
would set a legal framework for foreign companies to start drilling
again. Tired of waiting, Mr. Shahristani in 2008 unilaterally invited
oil companies to bid on contracts. Because global companies are
reluctant to explore undeveloped fields in Iraq without an oil law, Mr.
Shahristani has focused on getting foreign help pumping from existing
fields. "We have done what we can with our national resources, and now
we need outside help," he says.

He says the contracts don't need approval from parliament, though he
insisted they fit the conditions outlined in the draft oil law, which
is now being redrafted in the cabinet. Some of the terms, he says, are
particularly beneficial to Iraq: Winners of the auction must fork over
hundreds of millions of dollars of cash in upfront loans to the
government.

Mr. Shahristani, who grew up in Karbala in a prominent, religious
family, is a nuclear scientist by training. After studying in Moscow
and spending time in London, he earned masters and doctorate degrees in
nuclear chemistry at the University of Toronto. In 1978, he became
chief adviser to the Iraqi Atomic Energy Commission.

Saddam Hussein had consolidated power and become president.
According to Mr. Shahristani and others, he wanted a nuclear weapon. In
a face-to-face meeting with Mr. Hussein, Mr. Shahristani reminded him
that Iraq had signed a nonproliferation treaty and was bound by it. Mr.
Hussein told him to concentrate on science and leave politics to him,
according to Mr. Shahristani and two other scientists at the meeting.

A few days later, in December 1979, security officials took him to
Iraq's Internal Security facilities, where he was tortured for three
weeks, he says. Mr. Shahristani says his torturers offered him palaces
and riches if he would reconsider his refusal to work on nuclear
weapons. He declined and was put into solitary confinement, where he
remained for 10 years, he says. "But I never lost my will, I never lost
my faith," he says.

In 1990, he was released from solitary confinement. A year later,
the U.S. bombardment of Baghdad during the first Gulf War sowed chaos
at the prison. Another inmate stole some intelligence-corps uniforms
and arranged for a getaway car.

One evening, Mr. Shahristani and two others managed to evade guards,
duck into a storage room and put on the stolen uniforms. After hiding
for several hours, they snuck past some visiting intelligence officers
playing cards and hustled out the prison gate.

They met up with their families and snuck across the border into
Iran. For the next few years, Mr. Shahristani helped Iraqi dissidents
and refugees. In 1995, he and his wife, a Canadian, set up the Iraqi
Refugee Aid Council. He became an outspoken critic of Mr. Hussein's
regime and of nuclear proliferation.

iraq oil

AFP/Getty Images

An engineer walked past the chimneys at the Barjisiya oil fields in Zubair One, southwest of the city of Basra, on Feb. 3, 2009.

After U.S. troops poured into Baghdad in April 2003, he returned. He
was identified by American officials as a top contender for the prime
minister's job. He declined the position because it wasn't an elected
one, he says, instead becoming deputy speaker of Iraq's parliament.

Around that time, Mohammed Baqir, a family friend who had helped Mr.
Shahristani escape from prison, asked for his help in finding
government jobs for relatives. Mr. Shahristani refused. "Shahristani's
problem is he is too straight and clean," Mr. Baqir says. "As a
politician, you need to be flexible."

After a new government led by Mr. Maliki was formed in 2006, the
prime minister named him oil minister. His new ministry, like other
government agencies at the time, was overrun by militia members, and
corruption was rampant, according to Mr. Shahristani and other current
and former oil officials.

Over the next two years, hundreds of ministry employees were
murdered or kidnapped. By the end of 2007, many top technocrats had
fled the country, and various political parties had filled the ministry
with patronage employees, according to Mr. Shahristani and the other
officials.

Mr. Shahristani fired 250 members of the ministry's security staff
thought to be militia members, and replaced top security officials with
people he trusted. He turned over evidence of wrongdoing to the
ministry's inspector general, and fired or transferred those suspected
of malfeasance.

"Before, there was lots of interference in the ministry from
political blocs, but he got rid of all that," says Abdul Mahdy
al-Ameedi, head of the ministry's contracts department.

The purge stirred resentment. Some employees claimed they were
wrongly targeted. Others accused Mr. Shahristani of being too
by-the-book. He cracked down on absenteeism and introduced a card-scan
check-in system. He scaled back bonuses.

But boosting oil production significantly proved difficult.
Insurgents were attacking pipelines and refineries. Without a legal
framework in place, foreign companies were reluctant to come to Iraq.
The oil law stalled in parliament.

An impatient government in the semiautonomous Kurdish north decided
to move without Baghdad. In September 2007, Kurdish officials signed a
deal with Texas-based Hunt Oil Co.

Mr. Shahristani criticized the deal, saying it had no legal
standing. The Kurdish government accused him of moving too slowly, and
pressed ahead with its deal.

[Big Oil to Pounce on Iraq's Big Fields]

A
Western official in Baghdad who has dealt with Mr. Shahristani says he
and others advising the government agreed that Mr. Shahristani was
moving too slowly. Oil prices were sky-high, and foreign oil executives
were eager to get into Iraq. The country needed a "wheeler-dealer
type," this official says.

Recently, he dropped his longtime opposition and allowed the Kurdish
government to begin exporting oil. He yielded after the Kurds agreed to
have Baghdad's central government receive payments for the exports.

In this month's auction, Western firms also are competing to develop
two natural-gas fields. All these deals are so-called technical-service
contracts. Essentially, Iraq will pay companies a fee for boosting
output. The contracts will last 20 years. Oil executives would prefer
"production sharing" agreements, which give companies a share of
profits, and typically allow them to book new reserves. They are
nonetheless eager to get their feet in the door. Mr. Shahristani says
companies that offer the lowest costs and most profit for Iraq will
win. If the auction succeeds, the winners are expected to begin work in
November.

The Oil Ministry is planning a second round of bidding, to cover oil
fields that have been explored but not fully developed. Nine of the 38
companies that applied to participate have been chosen as bidders.
Those contracts will be awarded at the end of this year.

Mr. Shahristani's term ends when a new government is formed after
elections early next year. He plans to return to the Iraqi National
Academy of Science, which he established in 2003. "I am not a
politician," he says.

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