US buys up Iraqi oil to stave off crisis

Seizing reserves will be an allied priority if forces go in

The Observer
January 26, 2003
By Faisal Islam and Nick Paton Walsh in Moscow

Facing its most chronic shortage in oil stocks for 27 years, the US has this month turned to an unlikely source of help - Iraq.

Weeks before a prospective invasion of Iraq, the oil-rich state has doubled its exports of oil to America, helping US refineries cope with a debilitating strike in Venezuela.

After the loss of 1.5 million barrels per day of Venezuelan production in December the oil price rocketed, and the scarcity of reserves threatened to do permanent damage to the US oil refinery and transport infrastructure. To keep the pipelines flowing, President Bush stopped adding to the 700m barrel strategic reserve.

But ultimately oil giants such as Chevron, Exxon, BP and Shell saved the day by doubling imports from Iraq from 0.5m barrels in November to over 1m barrels per day to solve the problem. Essentially, US importers diverted 0.5m barrels of Iraqi oil per day heading for Europe and Asia to save the American oil infrastructure.

The trade, though bizarre given current Pentagon plans to launch around 300 cruise missiles a day on Iraq, is legal under the terms of UN's oil for food programme.

But for opponents of war, it shows the unspoken aim of military action in Iraq, which has the world's second largest proven reserves - some 112 billion barrels, and at least another 100bn of unproven reserves, according to the US Department of Energy. Iraqi oil is comparatively simple to extract - less than $1 per barrel, compared with $6 a barrel in Russia. Soon, US and British forces could be securing the source of that oil as a priority in the war strategy. The Iraqi fields south of Basra produce prized 'sweet crudes' that are simpler to refine.

On Friday, Pentagon sources said US military planners 'have crafted strategies that will allow us to secure and protect those fields as rapidly as possible in order to then preserve those prior to destruction'.

The US military says this is a security issue rather than a grab for oil, after a 'variety of intelligence sources' indicated that Saddam planned to damage or destroy his oil fields - which would inflict up to $30bn damage on the US economy and cause irreparable environmental damage.

But the prospect of British and US commandos claiming key oil installations around Basra by force has pushed global oil diplomacy into overdrive. International oil companies have been jockeying position to secure concessions before 'regime change'.

Last weekend a Russian delegation flew to Baghdad to patch up relations after Iraq's cancellation of its five-year-old contract to develop the huge West Qurna oil field - worth up to $600bn at today's oil price. Lukoil was punished by Baghdad for negotiating with the US and Iraqi exiles on keeping its concession in a post-Saddam Iraq.

The delegation of Ministers and oil executives returned to Moscow with three signed contracts. Oil is the state budget's lifeblood, and Russia requires an oil price of at least $18. Russians fear a US grip on a large reserve of cheap oil could send prices tumbling.

But Saddam has offered lucrative contracts to companies from France, China, India and Indonesia as well as Russia.

It is only the oil majors based in Britain and America - now the leading military hawks - that don't have current access to Iraqi contracts.

Richard Lugar, the hawkish chair of the Senate Foreign Relations Committee, suggests reluctant Europeans risk losing out on oil contracts. 'The case he had made is that the Russians and the French, if they want to have a share in the oil operations or concessions or whatever afterward, they need to be involved in the effort to depose Saddam as well,' said Lugar's spokesman.

A delegation of senior US Republicans was in Moscow last Tuesday trying to persuade Kremlin officials and oil companies that a war in Iraq would not compromise their concessions. A leaked oil analyst report from Deutsche Bank said ExxonMobil was in 'pole position in a changed-regime Iraq'.

Washington is split along hawk-dove lines about the role of oil in a post-Saddam Iraq. Two sets of meetings sponsored by the State Department and Vice-President Dick Cheney's staff have been attended by representatives of ExxonMobil, ChevronTexaco, ConocoPhilips and Halliburton, the company that Cheney ran before his election.

The dovish line, led by Colin Powell, places the emphasis on 'protection' of Iraq's oil for Iraq's people. His State Department has pointed to a precedent in the US interpretation of international law set in the 1970s. Then, when Israel occupied Egypt's Sinai desert, the US did not support attempts to transfer oil resources.

While the State Department is mindful of cynical world opinion about US war aims, officials do not always stick to the script. Grant Aldonas, Under Secretary at the US Department of Commerce, said war 'would open up this spigot on Iraqi oil which certainly would have a profound effect in terms of the performance of the world economy for those countries that are manufacturers and oil consumers'.

The US economy will announce zero growth this week, prolonging three years of sluggish performance. Cheap oil would boost an economy importing half of its daily consumption of 20m barrels.

But a cheaper oil price could have been reached more easily by lifting sanctions and giving the US oil majors access to Iraq's untapped reserves.

Instead, war stands to give control over the oil price to 'new Iraq' and its sponsors, with Saudi Arabia losing its capacity to control prices by altering productive capacity.

Paul Wolfowitz, Assistant Defence Secretary, and Richard Perle, a key Pentagon adviser, see military action as part of a grand plan to reshape the Middle East.

To this end, control of Iraqi oil needs to bypass the twin tyrannies of UN control and regional fragmentation into Sunni, Shia and Kurdish supplies. The neo-conservatives plan a market structure based on bypassing the state-owned Iraqi National Oil Company and backing new free-market Iraqi companies.

But, in the run-up to war, the US oil majors will this week report a big leap in profits. ChevronTexaco is to report a 300 per cent rise. Chevron used to employ the hawkish Condoleezza Rice, Bush's National Security Adviser, as a member of its board.

Five years ago the then Chevron chief executive Kenneth Derr, a colleague of Rice, said: 'Iraq possesses huge reserves of oil and gas - reserves I'd love Chevron to have access to.'

If US and UK forces have victory in Iraq, the battle for its oil will have only begun.

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