Halliburton Contracts in Iraq: The Struggle to Manage Costs
The New York Times
December 29, 2003
By JEFF GERTH and DON VAN NATTA Jr.
W ASHINGTON, Dec. 28 - The Qarmat Ali water treatment
plant in southern Iraq is crucial to keeping the oil flowing from the region's
petroleum-rich fields. So when American engineers found the antiquated
plant barely operating earlier this year, there was no
question that repairing it was important to the rebuilding of Iraq.
Setting the price for the repairs was another matter.
In July, the Halliburton Company estimated that the overhaul would cost
$75.7 million, according to confidential documents that the
company submitted to the Army Corps of Engineers. But in
early September, the Bush administration asked Congress for $125 million to do
the job - a 40 percent price increase in just six weeks.
The initial price was based on "drive-by estimating," said Richard V. Dowling,
a spokesman for the corps, which oversees the contract. The
second was a result of a more complete assessment. "The best
I can lamely fall back on is to say that estimates change," said Mr. Dowling,
who is based in Baghdad. "This is not business as usual."
The rebuilding of Iraq's oil industry has been characterized
in the months since by increasing costs and scant public explanation. An
examination of what has grown into a multibillion-dollar contract
to restore Iraq's oil infrastructure shows no evidence of profiteering by
Halliburton, the Houston-based oil services company, but it does
demonstrate a struggle between price controls and the uncertainties of
war, with price controls frequently losing.
The Pentagon's contract with a Halliburton subsidiary,
Kellogg Brown & Root, conceived in secrecy before the war and signed in March, was
meant as a stopgap deal to last no more than a few months.
But it has been in effect since then and has grown to more than $2 billion.
The scope of the contract includes myriad tasks from importing fuels
to repairing pipelines, and the costs have increased through task
orders and subcontracts, some of which are carried out with limited documentation or disclosure.
The reconstruction of Iraq has taken on "a Wild West atmosphere,"
said Gordon Adams, a military procurement expert at George Washington
University. "Wartime creates an urgent need, and under an urgent need,
contractors will deliver and take a price. There's a premium for
getting it done fast."
Earlier this month, Pentagon auditors questioned the $2.64 per gallon
that Halliburton was charging to truck fuel from Kuwait to Iraq, and
sought to recover $61 million. In response, company officials said
they had actually saved the government money and had put the fuel
supply subcontract up for competitive bidding. But there was little
paperwork to show that any bidding had taken place, according to
government officials familiar with the audit.
"Most of it was done on an emergency basis, very quickly, over the phone,
and Halliburton has struggled to prove this was competitively bid,"
said one government official.
Wendy Hall, a spokeswoman for Halliburton, said bids were solicited
by telephone in May because the corps needed fuel imported into Iraq
within 24 hours. But she said a more formal bidding process was done
several days later, and that KBR has provided Pentagon auditors with
documentation on the bids.
"KBR followed government-approved procedures in responding
to this significant, challenging and dangerous mission," she said.
Minimal Halliburton Profits
The estimated price of another KBR project, the replacement
of damaged pipelines over the Tigris River, also grew significantly over the
course of a few weeks. In July, KBR estimated that the cost would be $29.8 million for the job,
included in a list of 220 tasks to be completed
in Iraq. But by fall, the cost had more than doubled, to $70 million.
Both Mr. Dowling, the spokesman for the corps, and Ms. Hall said the price
grew because the scope of the project and the method of repair
had changed. Ms. Hall said the company had tried to get the lowest price
from its subcontractors. In addition, Halliburton and government
officials note that the violence in Iraq increases the cost of security
and adds to the cost of all reconstruction contracts.
So far this year, Halliburton's profits from Iraq have been minimal.
The company's latest report to the Securities and Exchange Commission
shows $1.3 billion in revenues from work in Iraq and $46 million in pretax
profits for the first nine months of 2003. But its profit may grow
once the Pentagon completes a formal evaluation of the work.
If the government is satisfied, Halliburton is entitled to a performance fee of up
to 5 percent of the contract's entire value, which could mean additional payments
of $100 million or more.
The nonpublic way in which KBR was selected for the job in Iraq
remains a political flashpoint, especially among Democratic presidential
contenders, in part because Vice President Dick Cheney served
as Halliburton's chief executive officer from 1995 to 2000.
The contract to fix Iraq's oil industry was granted to KBR by
a secret Bush administration task force formed in September 2002 to plan for
Iraq's oil industry in the event of war. The task force, led by an aide to Douglas J. Feith,
the under secretary of defense for policy, quickly
concluded that the government alone could not meet the oil needs,
members of the group said. "There were only a handful of companies,
and KBR was always one of those mentioned," said one Pentagon official.
Almost immediately, an alarm went off among members of the group.
"I immediately understood there would be an issue raised about the
vice president's former relationship with KBR," the official said,
so we took it up to the highest levels of the administration, and the answer
we got was, `Do what was best for the mission and we'll worry about the political' " fallout.
An Absence of Competition
Halliburton, a large energy services, engineering and construction
firm, works for governments all over the world. A crucial factor in KBR's
selection, members of the planning group said, was an existing
Army contract it secured to provide logistical support around the world. It
won that contract in a bidding process in December 2001.
The Pentagon has cited that competition to deflect criticism about KBR's no-bid
contract in Iraq.
In awarding the logistics contract, the Army acknowledged last year,
it failed to consider that the company was under criminal investigation
for a previous Pentagon contract, even though that inquiry was disclosed
in Halliburton's annual report.
The absence of competition in the selection of KBR for Iraqi oil work
was meant to be remedied shortly after the war ended. "Everyone
realized the selection of KBR was going to look bad, so the idea
was to compete it out as quickly as possible," said another task force
member.
But those competitively bid contracts have yet to be awarded,
and the amount of Halliburton's work in Iraq has grown steadily.
The process began in November 2002 with a request for the
company - then operating under the Army logistical contract - to plan the
management of Iraq's postwar oil industry. "In the worst case scenario,"
said Lt. Gen. Robert B. Flowers, the commander of the Army Corps
of Engineers, "there would be massive international oil spills and pollution
resulting from the fires, extensive damage to associated
infrastructure, including gas-oil separators, pipelines, pumping stations,
refineries and import facilities."
KBR designed a plan for such an eventuality, and on March 8,
as war loomed, the corps awarded Halliburton a no-bid contract to carry out
the plan, officials said.
The contract is labeled IDIQ, meaning indefinite delivery, indefinite quantity.
On March 24, a few days after the American-led invasion,
the Pentagon and Halliburton announced the new contract. The Pentagon press
release was titled, "Army Named Executive Agent for Combating Iraq Oil Fires."
Halliburton's own press release carried this headline: "KBR
Implements Plan for Extinguishing Oil Well Fires in Iraq."
Inviting Other Bids
Representative Henry A. Waxman, the California Democrat who
is a vocal critic of the Halliburton contract, wrote to Bush administration
officials on March 26 asking why the contract was awarded without competition.
Administration officials responded that the contract could
be worth as much as $7 billion to Halliburton, but General Flowers
said the bulk of the work would be open to competition from other
contractors "at the earliest opportunity."
In April, Brig. Gen. Robert Crear of the Army Corps of Engineers
described it as a "bridging contract, which would tide us over until we could
have a fair competition."
"This contract is not going to be the kind of megabillion-dollar deal
many have been thinking," General Crear told Bloomberg News.
During the war's first days, soldiers discovered only a few oil fires,
but as the war wound down, more work came KBR's way, mostly because
of acts of sabotage on pipelines and Iraq's oil facilities.
When security problems made the production of fuel inside Iraq even more difficult -
leading to shortages - the government asked Halliburton to import fuel.
It bought the fuel from Turkey and Kuwait.
Halliburton's subcontractor in Kuwait was paid $2.27 a gallon to import fuel,
almost twice what it cost to bring in fuel from Turkey.
Halliburton charged an additional 36 cents a gallon.
Pentagon auditors have said the price for the fuel from Kuwait was excessive.
Government officials have said the Kuwaiti subcontractor
was called Altanmia Commercial Marketing Company, but Halliburton has refused
to identify its subcontractors, which is a point of contention with critics of the contract.
Ms. Hall, the Halliburton spokeswoman, said subcontractors
were kept confidential "in order to ensure subcontractor safety" in Iraq. By
contrast, Bechtel, the other large government contractor involved
in the reconstruction effort, lists its subcontractors on its Web site.
Little Public Disclosure
There has been little public disclosure of how prices are set.
Mr. Dowling, the spokesman for the Army Corps of Engineers, said it is difficult
to figure estimates in Iraq. A KBR task list of 220 reconstruction projects
obtained by The New York Times gives some indication of the early
estimates and how they quickly increased.
The most expensive project on the list was the repair of the Qarmat
Ali water treatment plant, which pumps water into underground oil
reservoirs, allowing oil to be extracted. By the time the Bush
administration had submitted its budget request for Iraqi reconstruction in
early September, the water-plant repair job had grown to $125 million from 75.7 million.
The higher amount was what Congress eventually
appropriated.
Mr. Dowling said that the first estimate was based on
a "rough matrix" of pricing and that the final price was the product of "more refined
data."
"There is nothing sinister or underhanded about construction
estimates that change as the work is planned," he said. "It's the quality of the
work that counts." Halliburton officials referred questions about estimates to corps officials.
Criticism that the contracting is kept secret and favors Halliburton
has been leveled not just by Democrats, but also by some business
executives. Although the Pentagon and KBR deny any favoritism,
some executives cited a closed Pentagon workshop on Iraq's oil
infrastructure that was held in August at MacDill Air Force Base near Tampa, Fla.
The three-day conference included officials from the Coalition Provisional Authority,
the corps and other government agencies as well as
executives from KBR. The companies that attended,
according to David C. Farlow, a spokesman for the United States Central Command,
included only "commercial contractors currently working in Iraq."
Jeff Gerth reported from Washington for this article and Don Van Natta Jr. from London.
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