France and Germany dealings with Iraq
Iraq sits on the second-largest proven reserves in the world. According to the U.S. Department of Energy, it has another 220 billion barrels of probable and possible resources. It may be much, much larger than even this sizable number...much of Iraq remains unexplored and undeveloped since the Gulf War ended in 1991.
It's not as if Iraq isn't producing any oil right now. Currently, it produces slightly less than 2 million barrels a day. And under the terms of U.N. resolution 986, Iraq is allowed to export around 2.2 million bpd to pay for food and critical domestic infrastructure plans.
Yet according to Iraqi Oil Minister Amir Rashid, as of early 2002, only 24 of Iraq's 73 developed oil fields were actually producing. Part of this is Iraq's own fault. Iraq destroyed much of the production capacity of its southern oil fields before advancing coalition ground forces could seize them in the Gulf War.
All that's about to change. In a free Iraq, billions more in reserves are likely to come online, increasing Iraqi oil production to somewhere in the neighborhood of 5 or 6 million bpd. But who gets rich off of this? Is it Iraq? Is it major integrated oil companies? Is it Bush and Cheney and their Texas Oil Mafia cronies? Is it France and Russia? The answer tells us how to profit as investors.
First off, contrary to popular belief, an increase in Iraqi oil production doesn't make big U.S. oil companies richer. Rising oil production in Iraq should lead to falling oil prices. And falling oil prices aren't generally good for big oil profits, even on increased volume. They will lower prices at the pump for sure. But they will not increase profits for Texaco. In fact, if oil prices don't fall after the war with Iraq - and I mean fall back down to around $15/barrel, the there really IS a conspiracy.
The only companies who will profit after the war - no matter who owns the fields - are the companies who will help make the fields productive. I'm talking about oil service companies. It doesn't matter if France, Russia, the U.S. Army or a new Iraqi government owns the fields. Whoever owns them will need the services and the equipment to make the profitable. Enter oil service stocks.
Oil service stocks - the companies who sell the equipment and services to make oil fields productive - were the biggest winners in the days between the beginning of the air war in Gulf War One and the end of the ground war. I'm forecasting a quick gain in this sector immediately after the bullets start to fly.
What's more, oil service stocks act a lot like traditional resource stocks. That is, their businesses improve when the integrated oils ramp up exploration and expansion of existing production capacity - something that's a lock to happen in post-Saddam Iraq.
In any case, an increase in Iraqi production seems almost inevitable. The only question is how it will come about. If Saddam chooses to lose gracefully, leaving oil fields intact - or if he simply runs out of time to destroy them - existing capacity will be expanded, and new reserves located and developed without much hassle. Otherwise, the United States and its allies will be faced with the black scenario of repairing the entire destroyed infrastructure of the Iraqi oil industry.
If Iraq does destroy its oil infrastructure preemptively - or even if Iraq becomes a 'free' state at all - certain people stand to lose an awful lot. These are the people for whom the war really IS about oil.
Under the terms of U.N. resolution 986, Iraq is allowed to export oil and use the proceeds to pay for food and critical infrastructure, as determined by the U.N. In order to produce its oil, Iraq is allowed to enter into contracts with foreign firms to sell parts and equipment for its oil industry. Those contracts must be approved by the U.N.
You can actually view the contracts on line at the U.N. website. The site reveals that France, Russia, and China have 798, 862, and 227 contracts in various states of approval with Iraq, respectively, although not all the contracts have yet been approved or executed. U.S. firms have a grand total of one contract with the Iraqi oil industry. The U.K has eight, two of which have been nullified and six of which have been approved.
Looking at dollar value, the picture becomes even more interesting. Since April of 1995, over 3.3 billion barrels of Iraqi oil valued at $62 billion have been exported under U.N. supervision. Since 1996, about $3.6 billion of this has gone to purchase spare parts for the Iraqi oil industry, a process in which the U.N. acts as a broker between the Iraqi government and foreign firms looking for business. The U.N. estimates there are $10.8 billion worth of additional oil industry contracts up for grabs or in the pipeline.
According to an article by Thomas W. Murphy at www.usainreview.com, "Russia has ranked first among nations doing business with Iraq under the oil-for-food program, with sales exceeding $4 billion." As for France, Mr. Murphy states that France sold $1.5 billion worth of goods to Iraq last year, the most of any nation for the year.
The "sales", by the way, are done by letters of credit that Iraq issues. These letters of credit draw on funds in an escrow account established by the U.N. - funds originally procured from Iraqi oil sales. In other words, French and Russian business profits in Iraq are coming from Iraqi oil money.
What's more, the potential for more French and Russian contracts in Iraq - at least under the Hussein regime - is staggering.
A report produced by the U.S. Department of Energy's Energy Information Administration spells it out. Russia has a lot to lose in a free Iraq. The DOE report states that "Russia, which is owed several billions of dollars by Iraq for past arms deliveries, has a strong interest in Iraqi oil development, including a $3.5-billion, 23-year deal to rehabilitate Iraqi oilfields, particularly the 11-15 billion barrel West Qurna field (located west of Basra near the Rumaila field)."
And then come the French, who've got a lot to lose too. The DOE report states: "The largest of Iraq's oilfields slated for post-sanctions development is Majnoon, with reserves of 12-20 billion barrels of 28o-35o API oil, and located 30 miles north of Basra on the Iranian border." French company TotalFinaElf reportedly has signed a deal with Iraq on development rights for Majnoon.
You can throw the Chinese and Germans on the pile, too. Dozens of countries, in fact. The black gold rush has been going on for twelve years, under the tight control of the U.N. A Deutsche Bank study estimates international oil companies have signed $50 billion in deals with Iraq. The deals cover the development of an estimated 50 billion barrels of reserves and an additional 4 million bbl/d of potential production.
There are only two major countries that don't seem to be getting in on the act...and significantly, these are the ones applying pressure for a regime change.
The truth is, we have no idea what will happen in the coming weeks. But using a little logic, it's not hard to figure out that in almost any scenario, Iraqi oil production is bound to go up. It could go up sooner, if Hussein goes quietly. Or it could go up later, if he doesn't.
In either scenario - the restoration of destroyed facilities or the increase in production of existing fields and the development of dormant Iraqi reserves - oil service companies have billions in business ahead of them. |
