Oil pits U.S. against other powers
Disputes loom in U.N. over contracts in Iraq
By DAVID IVANOVICH
Copyright 2003 Houston Chronicle Washington Bureau
April 8, 2003, 11:38AM
WASHINGTON -- Russia, France and China couldn't stop the American-led coalition from invading Iraq. But they could stall U.S. efforts to jump-start Iraq's oil economy after the war.
The Bush administration may soon find itself in another brawl at the U.N. Security Council, this time over billions of dollars worth of oil deals foreign companies have negotiated with Saddam Hussein.
At the same time, the United States could feel the bite of countries resentful of Washington's repeated interference with their efforts to do business with Saddam through the United Nations' oil-for-food program.
"It's payback time," noted Art Downey, vice president of government affairs with Houston-based Baker Hughes in Washington.
The White House has rejected calls for the U.N. to take control in Iraq after the war, insisting the international body's role be limited to providing humanitarian assistance.
The administration also has telegraphed its desire to use Iraq's oil revenues to help rebuild the country.
But all is not so simple. The U.N. Security Council controls Iraq's oil revenues -- and hence the country's purse strings -- with its oil-for-food program.
To free up Iraq's oil money, the United States and Britain will have to prod the other three permanent members of the Security Council -- Russia, France and China -- to lift the sanctions and revise, or eliminate, the oil-for-food program.
During Iraq's 12 years of political and economic isolation, Saddam's government reached agreements with a number of international oil companies -- Russia's Lukoil, France's TotalFinaElf, Italy's Eni and the Anglo-Dutch Royal Dutch/Shell, among others -- to develop the country's many untapped fields.
If all of those deals really had been consummated, the international oil companies would have poured $38 billion into Iraq's oil fields, Deutsche Bank analysts estimate.
Baghdad used these contracts in a less-than-subtle attempt to manipulate the Security Council, awarding a contract to Lukoil, for instance, and then yanking it again when the Russians appeared to be supporting the U.S. position on an invasion.
The allure was hard to resist. Iraq boasts the second-largest oil reserves in the world, and the terms Baghdad was offering were better than many other opportunities in the Middle East, noted Martin Purvis, an analyst with the consulting firm Wood Mackenzie in Edinburgh, Scotland.
Some of the companies signed deals. Others negotiated but did not sign full contracts. Whatever the negotiations, the U.N. sanctions kept the international oil companies from moving in.
A U.S.-backed government in Baghdad would have to decide whether to recognize these deals.
The agreements probably are not enforceable.
"The French and the Russians would have a weak position arguing for the validity," said Brian Newquist, a Washington attorney.
Some companies have acknowledged this. Paris-based Total, for instance, is not trying to claim its negotiations produced a binding contract. Instead, it will compete against other firms for contracts, touting its knowledge of the Iraqi fields.
Total's stance has some industry experts hopeful that Paris will not engage in another open confrontation with the Bush administration. But experts warn French President Jacques Chirac's foreign policy does not always align itself with Total's interests.
The Russians, and perhaps the Chinese, could be more problematic, using trouble in the Security Council as a club to force Washington to accept contracts negotiated with the Iraqi regime.
The issue could come to a head as early as next month, when the current phase of the oil-for-food program expires. The Security Council will have to decide whether to extend or alter it.
"The allied coalition would no doubt like to tear up Saddam-era deals," Deutsche Bank analysts Adam Sieminski and J.J. Traynor argued in a recent report. But "this could create legal challenges in the international court."
Instead, the Deutsche Bank analysts envision a compromise in which companies from the coalition countries enter into partnerships with the "incumbents."
Oil began flowing under the U.N.'s oil-for-food program in December 1996. Despite various attempts to blackmail the West by halting crude shipments, Iraq has exported more than 3.4 billion barrels of crude.
Nearly $27 billion worth of food, medicine and humanitarian aid has been brought into the country using the proceeds of those sales.
And, $10 billion worth of contracts are already in the pipeline, ready to be produced or delivered, U.N. officials say.
Before the outbreak of fighting last month, the United Nations halted the oil-for-food operations.
Despite all the bickering before the war, the Security Council voted to restart the program for another 45 days and granted U.N. Secretary-General Kofi Annan and the United Nations greater authority to ensure that humanitarian supplies arrive in Iraq.
Under the program, Iraq was allowed to purchased spare parts for its oil sector.
Russian firms dominated that market, winning 159 contracts, or about 21 percent, of all deals approved in a recent six-month period, U.N. records show. French firms picked up 6 percent. No U.S. or British firms were awarded any of those contracts.
Over the years, the United States has irked Russia and France by objecting to sales of equipment that officials feared could be put to military use.
An undisclosed French firm, for instance, recently was denied rights to sell laboratory equipment used in refineries, while a Russian company was blocked from shipping drilling and well-completion equipment.
"The United States would hold up billions of dollars of contracts by non-U.S. companies, allegedly because of security concerns," Baker Hughes' Downey noted.
Over the next few weeks, other nations may have a chance to return the favor.
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