What Cheney's Energy
Task Force Talked About

Terrell E. Arnold

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 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 <>



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