- Reports from Baghdad indicate that the US-backed Iraqi
cabinet has finalized a new oil law that would (a) turn the development
of 2/3rds of Iraqi oil reserves over to foreign firms, (b) give multinationals
15 to 20 year contracts, and (c) exempt foreign firms from the application
of Iraqi law. Reportedly a committee of three Shi'a and Kurdish cabinet
members, plus representatives of 9 foreign energy companies, British and
US government officials, and a representative of the International Monetary
Fund developed the new law.
-
- The new oil law, construction of the gigantic US Embassy
in Baghdad, and development of at least four US military bases in Iraq
portend a fundamentally altered US posture in the Middle East and Central
Asian regions.
-
- The British and American oil companies involved might
well regard this new Iraqi law as payback for the fact that the Iraqis
nationalized the oil industry in 1971 and took it away from the foreign
operators. That would be truly a sour grapes attitude, however, because
the oil companies never paid the Iraqis for their concessions in the first
place. The colonial operators worked that out without consulting the Iraqis.
That is one reason why what is going on now sounds so familiar. Once again
the Iraqis have been handed a petroleum regime that they had minimal part
in crafting. In the present case, the Iraqis surely will raise cane if
their payments are not equal to the share they would enjoy in OPEC. Prices
recently have averaged $60-65 per barrel, and OPEC member shares (profits,
costs, and taxes) tend to run more than half the market price for a given
crude oil.
-
- Acing out the competition
-
- The US and British companies reportedly were anxious
to see that the contracts Saddam Hussein had entered into with the French,
Russians and Chinese before the 2003 invasion of Iraq would never be implemented,
or, if implemented, would be scaled back materially to accommodate the
plans of American and British majors. Other small players who have entered
the field, such as the Canadian Heritage group and the Norwegians, probably
won't affect major operations.
-
- Since the now defunct government of Saddam Hussein entered
into those earlier contracts, the new Iraqi government, qua the new law
development group, conceivably could claim that those contracts are now
null and void. Whether those contracts ever enter into play, therefore,
could depend on the amount of diplomatic noise that erupts among the oil-seeking
players. That discussion is unlikely to involve the Iraqis except possibly
to learn to live with the resultant deals.
-
- It is not known where the American and British majors
and possibly the French, Chinese, and Russian, players will start to exploit
their reported 2/3rds of Iraqi oil resources. However, a good map of oil
occurrences shows that many possibilities lie along the Iraq/Iran border
and under the Shatt al Arab (that politically prickly 120 mile long stretch
of the Tigris/Euphrates river that flows to the Persian Gulf), as well
as in productive zones that may impinge on/arouse Kuwaiti and Syrian interests.
-
- Why is the IMF involved?
-
- As a side note, the involvement of the International
Monetary Fund may sound like an odd wrinkle in the procedure, but it is
actually quite sensible, albeit mostly supportive of outside interests.
The IMF and the World Bank both take an interest in such laws and related
agreements because they bear materially on the ability of governments such
as Iraq to meet contract obligations, especially loans and guarantees extended
to companies that undertake and finance oilfield, pipeline, refinery, and
other industry infrastructure development.
-
- What about that colossal new Embassy?
-
- Coping with such political sensitivities commends a strong
and readily available diplomatic support mission as well as some military
clout. Those potential needs account for the fact that the US is now building
the largest Embassy it will have anywhere in the world in Baghdad. Meanwhile,
the Pentagon is busy fleshing out at least four major US military bases
in Iraq.
-
- Both processes started from the first day after the March
2003 invasion. Virtually on arrival US administrator L. Paul Bremer began
work on long-term arrangements for the US to stay in Iraq. He imposed constitution-like
decisions on the Iraqis, even dictating what kind of seeds Iraqi farmers
should plant. Among those laws was the reservation of Iraq's as yet undeveloped
oil resources (said to be larger than those already in production) for
foreign private exploitation. The Pentagon started immediately on military
bases, and was busily paving over much of the site of ancient Babylon until
archaeologists objected.
-
- All of that taken into account, the scale of the planned
American presence in Iraq does not make sense, diplomatically or militarily,
if the only goal is to safeguard US interests in that country. The plan
begins to make some sense, however, as one looks to the northeast and the
Caspian region where a mad scramble is now underway for control over exploitation
and movement of Central Asian and Caspian region oil and gas resources.
This competition involves all the "stans" in that region (Kyrgyz,
Kazakh, Turkmeni, Uzbeki, Tadjiki) as well as Azerbaijan and Georgia that
have been part of the Russian outback and Afghanistan. Of course, one has
to look across Iran, with its sizeable oil reserves-and a presence on both
the Caspian Sea and the Persian Gulf-to get there.
-
- US activities in the region
-
- Without a lot of publicity at home, the US has been very
active in the Central Asian/Caspian region ever since the collapse of the
Soviet Union. The reasons are increasingly compelling. At the time of the
Soviet collapse, Kazakhstan hosted more than a thousand nuclear warheads
loaded on ICBMs at launch points around the country. They were Russian
controlled, but getting them back in Russian hands was an urgent matter
that fortunately has been accomplished. In addition, according to the Congressional
Research Service (Central Asia: Regional Developments and Implications
for US Interests, November 2006), there are "nuclear reactors, uranium
mines, milling facilities, and nuclear waste dumps" variously located
in four of the Central Asian republics. Kazakhstan alone is said to have
a quarter of the world's uranium reserves, while with Uzbekistan the Kazakhs
are among the largest producers of low enriched uranium. These facts make
the region an important nuclear security focus for the United States and
everybody else.
-
- At the same time, the US Department of Energy (cited
in the foregoing CRS report) sees the Caspian and Central Asia as "a
significant source of oil and gas for world markets." Right now the
regions oil and gas exports largely are exiting over Russian routes and
pipelines, and annual exports appear a great deal less than would be possible
with future development. The big exception to Russian controlled exports
is a 600-mile pipeline from Kazakhstan to western China that started deliveries
in 2006. At estimated overall 1.3 million barrels per day of exports, today
Kazakhstan is moving about as much oil as Iraq. Gas reserves in Kazakhstan
and Turkmenistan are among the largest in the world.
-
- Future promise and present problems
-
- The regional prizes however are even larger. Much of
the Caspian Sea evidently resides on pools of oil. Numbers for those potential
resources are not available, but the Caspian Sea bordering countries, Russia,
Kazakhstan, Turkmenistan, Iran, and Azerbaijan have yet to work out agreements
on who is entitled to whatever is there. Meanwhile, the Caspian represents
the Central Asian energy producers most likely gateway to the major markets
other than China. A US financed pipeline now being built from Baku, Azerbaijan
via Tbilisi, Georgia and across Turkey to the port of Ceyhan on the Mediterranean
will carry a million barrels of oil per day. That will represent a start
on a Western effort to bypass Russia with energy shipments to major markets
from greater Central Asia, which includes the whole Caspian region.
-
- While promising, the Central Asian region also appears
frustrating to Western energy firms. Not only are developed energy resources
entangled in Russian-owned and operated delivery systems, the political
players with whom energy companies must deal are largely still holdovers
from a Soviet era system of elites. Moreover, those governments have been
handed a first rate opportunity to play off the West and Russia against
each other. Western governments and energy companies seek to enhance energy
security by diversifying sources of supply, and the Central Asian region
can play a vital role in that strategy, but the region's Russia-allied
history, the autocratic character of its ruling elites, and local profit
expectations that run to greed make implementing that strategy time consuming
and difficult. The situation poses a heavy duty diplomatic and energy company
bargaining challenge.
-
- The need for a larger US presence
-
- In effect, with oil concessions and the protection of
companies in Iraq, along with the pursuit of sizeable regional energy/political/military
interests arising in Central Asia, the US needs a revised presence. An
overall appraisal of the stability and receptivity of Central Asian governments/societies
does not (for now at least) commend placing the center in that region.
While stability remains a major challenge in Iraq, it looks as if the center
of Middle East regional and perhaps Central Asian diplomatic and military
interest is moving to Baghdad. That would explain the bases as well as
the 104-acre diplomatic enclosure that is growing on the banks of the Euphrates
River. That facility is now scheduled to house a thousand or more American
officials plus families.
-
- US moves will surely not occur in a vacuum. Whether or
not the "peak" of world oil or gas output has occurred, growing
global demand is raising the pressure on supplies from all sources. No
matter whether oil is a fossil of natural vegetative processes or a product
of basic earth forming chemistry, the expert view is that most of it has
been found. Either way the costs of the next barrel to be produced are
going up at the same time that predictable demand for that barrel is also
rising. The need for greater diversity of sourcing to assure energy security
is growing.
-
- Bringing Iran into the picture
-
- A particular enigma, in part created by long standing
US policy and exacerbated by current administration posture, is how to
figure Iran into the Central Asian regional equation. With port facilities
on both the Caspian Sea and the Persian Gulf, Iran could become a major
transit country for Central Asian regional energy, both oil and gas, and
that capability could become a boon to many Asian and Pacific basin customers.
The shortest pipeline from the Caspian would be across Iran to the Persian
Gulf. To avoid the Hormuz Strait bottleneck, a pipeline could be run from
the Caspian to the Gulf of Oman. Either would be shorter that any alternative
route toward the Indian Ocean and the Pacific. What this suggests is that
somehow Iran must be dealt with in an even handed manner with all the rest
of the countries of the Middle East and Central Asia, and the urgency of
fitting Iran positively into a comprehensive regional calculus grows with
every passing day.
-
- The race is to the swift
-
- Those challenges are accumulating in an increasingly
complex global economy that has no organized system other than market forces
for allocating resources, most notably energy. The major oil organization
today, the 26-member International Energy Agency associated with the OECD,
is strong on environmental and energy security (that means avoidance of
1973-type market disruption) issues, but advocates free and open markets
for all energy materials. "Free and open" markets in their nature
eschew any system for allocating scarce resources except possibly in emergencies.
That means the race is to the swift, and all key global players are behaving
as if they recite that like a catechism.
-
- Some skeptics would argue that the race is not merely
about assuring energy supply security. Globally oil and gas are totally
fungible, while demand is typically inelastic, and if only a few majors
own most of the sources or access to them, they can manipulate supplies
and pricing on the demand side of the equation. They can then declare obscene
profits while blaming the high cost of energy products on the oil and gas
exporting countries. In effect, only a few major international companies,
mostly American, will end up dominating world energy supplies and prices.
Capturing the flows from the Caspian and Central Asia is one of the keys
to that outcome.
-
- Where to from here?
-
- How then will the exploitation of sources and the competing
demand for products be mediated? That is the most urgent question raised
by the emerging US posture for dealing with Iraqi oil. This is not a new
question, but the most likely answers to it are in the process of taking
a sharp turn. The US is setting the tone by making a military force supported
move to preempt access to Middle Eastern, Caspian and Central Asian energy
sources. At the same time, every major oil-using country is making independent
moves to meet its present and future needs, and all of them are showing
up in all the same places with a mix of frock-coated diplomats, oil experts,
and uniformed standard bearers.
-
- These developments suggest the answers to two long unanswered
questions about the energy policy of the George W. Bush administration:
Who attended Dick Cheney's Energy Task Force discussions, and what did
they talk about? Without too much risk of being wrong, you can now answer
both questions. The participants in the group mostly represented the US
energy companies that took part in designing the new Iraqi oil law and
that are now working on deals in Central Asia. What they discussed was
the plan we now see unfolding in Baghdad and in various Caspian and Central
Asian capitals.
-
- The name of the game is to enhance US and allied control
over global energy resources by adding important long-term new sources
of oil and gas. That sounds only prudent in a situation where the key resources
cannot readily be replaced by substitutes. However, the game presently
is being played by zero sum rules. Those rules mean that sooner or later
there will be defined winners and losers. But the global economy is moving
toward an urgent need for cooperative principles for allocating resources.
If the game is played properly, there should only be winners who share
the available pool of resources, the marginal consequences of scarcity,
and the costs of adjustment. In the present and prospective global economy
the free market approach, meaning sales to the highest bidders, is a distortion.
Even in a less advanced global system it has led to conflicts, some of
them wars. In the nuclear era such wars can be terminal. Cooperative solutions
to this problem so far only have been discussed. We need to implement them
now.
-
- **********
-
- The writer is the author of the recently published work,
A World Less Safe, now available on Amazon, and he is a regular columnist
on rense.com. He is a retired Senior Foreign Service Officer of the US
Department of State whose immediate pre-retirement positions were as Chairman
of the Department of International Studies of the National War College
and as Deputy Director of the State Office of Counter-Terrorism and Emergency
Planning. He will welcome comment at <mailto:wecanstopit@charter.net>wecanstopit@charter.net
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