The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™

‘The oil curse’ – published by Prospect

By Daniel Litvin – This article was originally published by Prospect magazine – Click here to view

The history of oil investment in the developing world hints at trouble ahead for the multinationals in Iraq.

In the west’s plans for the rebuilding of Iraq and in particular the likely involvement of western oil companies it is possible to detect the seeds of some familiar tensions.

Once the American and British soldiers have departed, and once the post-war administration of Iraq is handed over to a new, presumably democratic, local regime, investment by the likes of ExxonMobil, Shell, BP, and (if the French are allowed a share) TotalFinaElf, is likely to be the principal form of western involvement in the country.

America has promised that Iraq’s oil will be utilised for the benefit of the Iraqi people, but that does not preclude foreign oil companies from moving in to help them to extract it. And in the optimistic scenarios of political strategists in Washington and London, the economic benefits brought by the oil companies will help usher in a period of prosperity and stability in Iraq, with local suspicion about the west’s motives being replaced in the long run by peaceful economic co-operation.

This is not wholly fanciful. Initially, a postwar Iraqi regime may well accept the involvement of the oil giants, and not just because of pressure to do so from the US and Britain. The Iraqi oil industry is in serious disrepair after years of sanctions and isolation under Saddam: output before the war started was around 2m barrels a day, some 30 per cent less than its pre-1991 level. Western capital and technology, to which the multinationals hold the key, will allow Iraq to expand its production swiftly and effectively.

For US and British governments, the revival of Iraq’s output will help reduce the country’s dependence on aid, generate cash for the oil companies and increase the security of the west’s energy supplies in particular, by reducing dependence on oil from Saudi Arabia, whose regime’s alleged links with terrorist groups has made it suspect in American eyes.

For the oil companies themselves, Iraq’s known reserves 112 billion barrels in 2001, the second largest after Saudi Arabia represent a big opportunity. For the past few decades, the western oil industry has been excluded from direct investment in most of the middle east, where the world’s oil is found in its largest quantities and where it is generally cheapest to exploit. The companies have had to turn instead to more technologically challenging and less bountiful places such as Alaska and the North Sea, many of whose fields are approaching the end of their lives. Recent deals to exploit fields in Russian Siberia, the Caspian region, and off the coast of west African countries such as Angola are promising. But in terms of volume and cost it is still the middle east that entices oilmen the most. And the region’s principal commercial disadvantage political risk should now be more manageable, or so they hope.

As global oil demand increases over the next few decades, the middle east will become even more important as a supply base. It now provides only around 30 per cent of annual oil consumption, but its share of the world’s known reserves is twice that. Other middle eastern countries as well as Iraq now appear to be on the verge of reopening themselves to western companies. But it is in Iraq that the reopening is expected to be swiftest. Also, the government, under pressure to generate cash quickly, may be persuaded to grant western companies the sort of contracts that they prefer: “production-sharing” agreements, which give them a direct share in the output (rather than, for example, just a technical service contract to extract the oil), and also provide them with some protection from changing local regulations.

So why the warning from history? The record of oil investment in the middle east, and of multinational investment in poor parts of the world in general, is littered with examples of relationships between companies and societies which have turned sour, and of conflicts, misunderstandings and unexpected crises. It is possible to trace the pattern as far back as the East India Company’s encounter with the Mughal rulers of India in the 18th century. Iraq may prove an exception to this rule, but it would be unwise to bank on it.

Two strands of history provide an unsettling reminder of what may take place after Saddam’s overthrow. First, there is the overall, turbulent pattern of oil investment in the middle east over the last century; then there is the particular history of western oil companies in Saudi Arabia and Nigeria. Both places provide vivid case studies of the difficulties faced by multinationals attempting to manage local politics. Iraq is not Saudi Arabia or Nigeria, of course, but the potential similarities should not be ignored.

Oil companies today proclaim their respect for their host countries’ sovereignty. None the less, in the eyes of populations throughout the Arab world, they are historically tainted. Indeed, viewed over the long term, the pattern of western oil involvement in the middle east now appears to be coming full circle. In the first half of the 20th century, British, American, and to a lesser extent continental European, oil companies acted in concert with their governments to secure lucrative concessions often by co-opting, bribing, or toppling local regimes.

Then, from the 1950s to the 1970s, Arab governments, many having recently secured full political independence from the colonial powers, asserted their economic independence too, by nationalising the assets of the western oil companies. The “seven sisters,” as the largest US and British oil companies had come to be known, were often abruptly turfed out with little compensation. It is true that some countries, including Saudi Arabia, Iran, and of course Iraq, now appear to be ready to put this history behind them and open themselves up again to the oil giants, such as Shell and ExxonMobil. But it is still an uncertain political process.

Iran illustrates this overall pattern and provides clues as to potential problems in Iraq. Imperial Russia and Britain vied for influence in Persia in the 19th century, manipulating local politics and carving out trade concessions for themselves. In 1901, a wealthy Englishman persuaded the then Shah, Muzaffar al-Din, to grant him an oil concession covering most of the country. This was operated by a company called Anglo-Persian, renamed British Petroleum in 1954.

Imperial meddling for oil continued into the 1950s, although local nationalism became increasingly difficult to control. The then Shah Mohammad Reza Pahlavi was friendly to the west. But the country’s then prime minister Mohammed Mossadeq, a popular, if eccentric, 70-year-old nationalist (he issued many of his political instructions from bed in his pyjamas) proclaimed the nationalisation of Anglo-Iranian (as it came to be called).

The west’s response was only temporarily successful. The CIA and MI6 supported a coup against Mossadeq in 1953. This restored the Shah’s political dominance in the country, as well as western control over Iran’s oil industry (it was carved up between several big western companies). From that point on, however, the tide began to turn against the oil companies. The Shah, under pressure from Iran’s anti-western Muslim clerics, began to tighten the financial terms of their concessions. And when the clerics removed him from power in 1979, they chose complete nationalisation. “The oil industry of our country after 80 years is liberated from the claims of imperialism,” proclaimed the Iranian oil ministry in 1981.

Given this legacy, it is little surprise that Iran’s current reopening of its energy sector to foreign investment is a tentative, tortuous process. Liberalisation has been slowed by tensions in the country between modernisers and conservatives. Many Iranians still regard Mossadeq’s nationalisation of oil as a national triumph.

The history of Iraq’s oil is similar. Like Iran, it once fell within Britain’s sphere of influence; in fact, Britain was responsible for carving Iraq out of the Ottoman empire at the end of the first world war. London maintained indirect control by sponsoring the local ruling dynasty, the Hashemites, while the oil was left in the hands of the Iraq Petroleum Company, a consortium dominated by British, US, and French companies.

Popular resentment against the British mounted over time and the Hashemites were overthrown in a bloody uprising in 1958. In the following years, Iraq’s nationalist rulers revoked much of the Iraq Petroleum Company’s concession. It was within the context of this backlash against colonialism in the 1960s that Saddam began his rise to power. Four decades later, Saddam’s removal is unlikely to extinguish the underlying suspicions of western oil companies. Amongst some Iraqis it will have reawakened them. For that reason, any post-Saddam regime will want to bolster its credibility in the eyes of the local population by demanding tough terms from the oil companies. This may not happen in the first few months or years, but it is likely to come eventually.

There are certain other general problems which the oil companies in Iraq can expect to face. One is the political hazard of operating in an ethnically-divided country. In recent decades, oil and mining companies have been embroiled in a series of violent internal conflicts in countries such as the Congo, Indonesia, and Papua New Guinea, as different local groups each seek to maximise their share of revenues from the resources which the companies extract. Iraq’s Sunni and Shi’a Arabs, Kurds and Christians may find it hard to agree on the distribution of the oil money.

Then there is the difficulty for the companies of ensuring that the oil wealth leads to genuine economic development without which the stability of their investments may be undermined. The recent history of many African and middle eastern countries shows that natural resources can retard broad-based development, allowing undemocratic elites which control the oil to maintain their grip on power, stifling the growth of other industrial sectors. Iraq under Saddam is a classic case of the “oil curse.” Removing him may not remove the problem.

Finally, the companies will need to contend with the inevitable suspicions of western pressure groups too. From the time of the East India Company, home-based activists have sought to reform the behaviour of their multinationals abroad. The pressure will be especially intense in Iraq. Anti-corporate campaigning has reached a crescendo in recent years. Oil companies have been encouraged to sign up to an array of initiatives, from protecting human rights in the countries in which they operate, to encouraging regimes to spend their oil revenues more transparently. Organisations like Friends of the Earth, having thrown their weight behind the anti-war coalition and the theory that the war is all about oil, will pounce on any evidence that the oil multinationals in post-Saddam Iraq are behaving badly.

Surely oil giants, with their long experience of diplomacy, can manage these concerns? Perhaps corporate social responsibility (CSR) is the answer to most of the above problems. By behaving ethically, consulting closely with Iraqis, and pouring money into local schools and hospitals, such tensions may be overcome. Even now, big oil companies such as BP and Shell are likely to be planning their CSR strategy for Iraq. However, a closer look at Saudi Arabia and Nigeria suggests that a more generous CSR policy will not resolve some of the underlying problems.

The US companies which dominated Saudi Arabia’s oil industry from the 1930s to the 1970s devoted as much effort to diplomacy and local philanthropy as the oil giants are likely to do in post-Saddam Iraq. Four main companies were involved in Saudi Arabia-Standard Oil of New Jersey (later Exxon), Standard Oil of California (later Chevron), the Texas Company (later Texaco), and Socony-Vacuum (later Mobil)-and they together controlled Aramco, the company which held the monopoly concession in the country. King Ibn Saud had granted the Americans the original contract to explore and produce oil in 1933, hoping that it might help to modestly supplement his revenues from pilgrimages to Mecca, which was then one of the main sources of income. At that stage, neither he nor the companies knew the extent of oil wealth under his territory.

During its lifespan, US-owned Aramco built over 50 schools and numerous hospitals and clinics. It awarded scholarships to hundreds of Saudis to study in the US, and hired hundreds of experts to guide interactions with Ibn Saud’s court.

Even in the 1930s and 1940s, the company’s managers tried to differentiate themselves from the old-style British oil companies in the middle east. New American recruits to Aramco were given briefing sessions on Saudi customs and how to avoid misunderstandings. Aramco also produced a bulky handbook for US employees providing information on the history and culture of the middle east that proclaimed the company as “a great proving ground for the ability of people of widely different cultures and backgrounds… to work together harmoniously in projects of great mutual advantage.”

Those words were written in 1960. By 1980, the Saudi government had fully nationalised Aramco, providing little compensation for its shareholders around $1.5 billion was paid out for “crude oil assets.” What went wrong? The Saudi regime was caught up in the wave of nationalism which swept the middle east in the 1960s and 1970s. Moreover, the Saudi royal family threatened to cancel Aramco’s concession partly as a means of exerting pressure on Washington over Israel. Adopting a tough stance towards the US companies gave the Saudi regime an opportunity to establish its anti-Zionist credentials in the eyes of its own suspicious population.

Even before nationalisation, Aramco found misunderstandings could not be avoided. Thanks to the initial lack of technical and management skills amongst the Saudi population, for example, Aramco’s senior ranks were dominated at first by Americans. A form of apartheid emerged in the oil towns, in which Americans lived in more luxurious accommodation than the Saudis. This inevitably bred resentment. A similar problem is today encountered by western oil and mining companies throughout the developing world.

Such was the underlying suspicion of some Saudis that even Aramco’s philanthropic efforts were often misinterpreted. At one point, the company produced a film to raise awareness among local people about insect-borne diseases and the importance of sanitation. But it was banned by a Saudi provincial governor who according to an Aramco manager “took one look at the preview and gave the thumbs down. He did not, he said, see why we chose to go to such lengths to portray the Saudis as filthy people.”

More importantly, no amount of CSR or diplomacy by Aramco could control the dramatic process of social change in Saudi Arabia which the wealth brought by its oil revenues had unleashed. Over the space of several decades, oil money had transformed Saudi Arabia from a traditional society of subsistence farmers and nomads to one accustomed to western standards of living and at least for the elite lavish palaces, expensive cars, and so on. While welcomed by some Saudis, such changes also created social tensions which eventually rebounded against Aramco. In particular, devout Muslims among the population argued that exposure to western ideas and materialism was corrupting Saudi society. Such criticisms could not be ignored by the royal family, itself followers of the puritanical Wahhabi branch of Islam. Adopting a tough approach towards the US companies presented the Saudi rulers with an opportunity to assert their anti-western credentials.

This tension within the Saudi regime between pro and anti-western forces unleashed by the oil investment, also lies at the heart of America’s current problems with the country. While Saudi Arabia professes support for America’s war on terror, wealthy Saudis are accused of bankrolling suspect groups. Can Saudi Arabia continue to be considered a secure oil supplier to the west? Whatever the answer, the story of Aramco illustrates the limitations of CSR in managing strategic foreign investments.

The second example is Shell’s experience in Nigeria. Although far from the middle east, Nigeria has some important similarities with Iraq: it is an oil-rich, ethnically-divided state, with its borders arbitrarily drawn during the colonial era. As in Iraq, it was the British empire which tried, with limited success, to impose a sense of nationhood on a set of distinct ethnic and religious groups. In Nigeria’s case, the main tribes are the Hausa-Fulanis in the north, the Yorubas in the southwest, and the Ibos in the southeast. Within the main oil-producing region of Nigeria the Niger Delta there are also dozens of smaller ethnic and religious groups.

Shell became famously embroiled in an international controversy in 1995 when the Nigerian government executed Ken Saro-Wiwa, a leader of the movement for the survival of the Ogoni people (one of these small Niger Delta groups), and western campaigners accused the company of guilt by association. Posters of Shell’s logo dripping with blood sprang up in many western countries. Following that episode, the company invested more in its CSR and environmental programmes in the Delta region. But violent local unrest persists: in March, for example, Shell was forced to shut down much of its Nigerian oil production, as fighting erupted between Ijaws, Itsekiris and government troops in the Delta region. As in 1995, disagreements over the distribution of oil revenues drove much of the violence.

Indeed, Shell’s experience in Nigeria is more than just another illustration of the limitations of CSR. It shows how the politics of revenue distribution could be a particularly hazardous issue for the oil companies in Iraq. The companies will face two broad options. One is to side with the government in Baghdad. The other is to pay most attention to the demands of local groups in the various oil-producing areas, whether these be Kurds, Sunnis, or Marsh Arabs.

An attraction of the Baghdad option which is likely to weigh heavily in the case of Iraq is that it allows companies to avoid accusations of imperial meddling. This was why Shell, in the decades after Nigeria’s independence from Britain in 1960, left the issue of revenue distribution to the central government and was reluctant to lobby openly for other groups. The threat of nationalisation was real at the time BP lost its stake in Nigeria’s main oil concession in 1979.

However, ignoring the demands of the communities in the Niger Delta sowed the seeds for the public uproar against Shell in 1995. When local groups began to protest, federal troops were dispatched to the region to quash dissent often brutally. The situation was compounded by deep corruption at both the local and federal level. And Shell, for much of the time, stood by, refusing to get “involved in politics.”

The Ogoni, one of the aggrieved local groups, brought the issue to international attention with some shrewd marketing. Ken Saro-Wiwa, a journalist and former writer of television soap operas, appreciated the potency of images of environmental destruction for western audiences. He helped frame the Ogoni cause as a green, anti-corporate movement, and thereby directed the wrath of western protestors against Shell.

Since 1995, Shell has changed course. It has pumped more money into local welfare projects, such as schools and small-business schemes (its community development budget has roughly trebled to over $60m a year). It has also begun to exert more explicit political pressure on the federal government to assist the development of the Niger Delta. For several years now, the government has been returning 13 per cent of the oil revenues to the Delta region, compared with 3 per cent previously. Shell lobbying was one factor behind this rise.

The recent fighting involving Ijaws and Itsekiris is one indication that this strategy has not yet brought peace to the area. More generally, Shell’s new approach of trying to balance federal and local interests risks opening the company precisely to the accusation that it is meddling in domestic politics especially from those ethnic groups which are now receiving a diminished proportion of the oil wealth.

Conflicting demands over oil revenues have already driven one secessionist movement in Nigeria the Biafran war in the late 1960s in which over 1m people are thought to have lost their lives to violence and to famine. In that case, it was the Ibos who tried (and failed) to split from the rest of the country and take the oil provinces with them. Today, many of the tribes in the Delta, although less populous than the Ibos, also feel little political attachment to Nigeria. “Nigeria is a shaky, even temporary, phenomenon,” says one Ijaw activist ominously.

Even if Iraq holds together as a nation in the immediate wake of the war, in the long run the demands of various ethnic groups for a greater share of the oil money could accelerate a process of internal fragmentation. In such a situation, the position adopted by the oil companies will be key, and misjudgement on their part could exacerbate conflict.

It is ironic, perhaps, that the giant oil companies, for all their power and wealth, often find it difficult to manage local politics effectively. But keeping local people happy and maintaining a stable climate for investment over the long term, can be a highly complex business, requiring a deep understanding of local traditions and a delicate balancing of conflicting pressures. And if the multinationals do get it wrong in the case of Iraq, US and British soldiers may find themselves back on the ground, charged with sorting out another oil-fuelled mess.