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™

‘Iraq’s crude quagmire’ – published by Prospect magazine

By Daniel Litvin – This article was published in Prospect magazine

But will the coalition get the oil?

Many think it was a war for oil, but US and British companies may end up getting none of it.

The Anglo-American invasion of Iraq has already provided rich lessons in unintended consequences or “blowback”, to use a CIA term, from foreign involvement in the country’s affairs. The Iraqi oil industry may be about to provide another.

The US has in recent months been exerting intense pressure on the Iraqi government to pass oil legislation swiftly which, it hopes, will set a framework for the revival of the industry, including opening it up to foreign investment and dividing oil revenues fairly between Iraq’s different ethnic and religious groups. Passage of this law has been defined by Washington as a key benchmark of progress in Iraq. The theory is that it will help reconcile the country’s warring factions. The US administration ideally wants passage of the oil law in time for General Petraeus’s progress report to congress in September on the accomplishments of the US’s Iraq strategy. At the time of writing, with Iraqi politicians bogged down in arguments both over the law’s detail and other broader issues, its immediate passage looked far from a given.

Revival of the oil sector is certainly a proper goal for Iraq itself: while over-dependence on oil may not be healthy for the Iraqi economy over the long term, its oil industry is sorely in need of investment, having been left to decline for many years. Iraq sits on the world’s third largest known oil reserves, and production – at round 2m barrels a day – could be raised to double that and more with enough investment, generating significant extra revenues for the government.

Revival in Iraqi oil production is also an important – and legitimate – international economic goal. World oil prices have recently reached near record high levels, posing risks to the global economy which could become particularly severe if another unstable producer nation (Iran, say) threatens to cut its oil exports. America, and other major importing nations, are hoping that revived Iraqi production will help reduce the oil price to less nail-biting levels. America is also suspected, fairly or not, of pushing for concessions for US oil firms in Iraq, a more narrowly self-interested goal. Public opinion in many countries holds this to be one of the reasons it invaded Iraq in the first place, of course, although hard evidence is lacking.

‘Blowback’ begins

Yet US pressure on Iraq to accelerate the oil legislation risks undermining all these goals, legitimate or not. Focusing first on the industry’s investment needs (and turning to Iraq’s sectarian divides later), the US stance is already helping to ignite a strand of popular feeling in Iraq also now common in other oil-rich countries: resource nationalism, or the desire to boot foreigners out of the business of resource extraction. Were the Iraqi government given the chance to develop an oil sector framework under its own steam, it would likely seek to maximise the role of Iraqi oil firms, including the Iraqi national oil company, rather than risking unpopularity by signing too many deals with foreign firms. Even so, at least some sort of role for foreign players would most likely be accepted given the scale of the investment needed.

The fact, however, that the US is widely known to be pushing the current oil legislation, and to favour major involvement by foreign firms, creates the ideal conditions for a domestic backlash against such investment at a later stage, in particular once America has quit the country. In whatever form the current oil legislation is eventually passed, any future Iraqi government looking to prove to its voters that it is no longer an American puppet would likely seek to rewrite this legislation as a symbolic first step, forcing any foreign firms granted access to renegotiate their contracts or even to surrender them. Such policy and investment instability could set back the revival of Iraqi oil production by years.

That this is a plausible scenario can be seen from the range of resource-rich countries which, buoyed by the confidence brought by high oil prices, have recently renegotiated, cancelled or nationalised big deals with foreign firms. These include Russia, Venezuela, Ecuador and Bolivia. In countries such as Saudi Arabia and Kuwait, meanwhile, political resistance to external involvement in energy has long been so strong that no major oil reserves have even been offered to foreigners for decades. Throughout the developing world, resource nationalism has long been the rallying cry of those opposed to western interference: a basic demand of anti-colonial independence movements in the 1950s and 1960s, for example, was the nationalisation of foreign-owned oil and mining assets for which western powers had often invaded their countries in the first place.

Predictably, such sentiments have already begun to feature in debates in Iraq over the oil law. In June, an Iraqi union leader condemned the proposed legislation for enforcing “US hegemony over Iraqi oil fields,” while followers of the Shia cleric Muqtada al-Sadr have said they would oppose granting oil deals to firms from countries with troops in Iraq. That would leave Iraq free presumably to strike deals with Chinese, Russian and other non-US oil firms, many of whom would certainly leap at the chance of getting a stake in Iraq’s reserves. In this way, US pressure for the oil legislation could at the least push Iraq further into the arms of non-US firms, even if it does not destabilise the overall process of foreign investment. That would be an ironic outcome of a war perceived, correctly or not, to have been partly waged on behalf of US oil firms.

Black glue?

As for the other issue underlying American pressure for the oil law – the desire to reconcile Iraq’s ethnic and religious groups – the theory behind this is sound: Iraq’s Sunnis, whose land sits on little oil, require reassurance that the Kurds and Shias, under whose lands Iraq’s oil is concentrated, will not exclude them from the resulting spoils. Devising a formula for sharing revenues which is seen to be fair and based on the population of different groups, rather than their luck in sitting on oil-bearing geology, is essential for any long-term political compact.

The risk is that if agreement on this and related issues is forced through prematurely, rather than being grounded in genuine political consensus, it could fuel fiercer arguments in the future. For once major new oil deals are struck, and the billions of dollars of extra revenue begin to flow, Iraq’s different groups will have something more tangible to fight about than clauses in the oil legislation.

Again, the experience of other countries holds lessons here: many ethnically divided states have found that mineral revenues can intensify conflict when there is a lack of real consensus (rather than just legal agreement) over how they should be divided, or when those groups which control the revenues use them to maintain their grip on power or fund their military campaigns. The ongoing violence in the oil-rich Niger delta region in Nigeria is driven partly by local people’s anger at receiving what they see as too few of the benefits from oil combined with the stealing of crude to fund arms purchases. In Sudan, meanwhile, the regime has sustained itself in power, and withstood international pressures over the ethnic violence in Darfur, partly through its grip over the country’s oil revenues. In recent decades, terrible civil wars in Angola and the Democratic Republic of Congo have been partly motivated and funded by oil or mineral revenues. In Indonesia and Papua New Guinea, various local conflicts have been driven by resource revenues too.

In Iraq, a fully worked-out agreement between the different groups about how the oil industry should be developed could reduce the risk of such outcomes. But a partially worked-out one could make matters worse. For example, if the Shias or Kurds feel hard done by for having to surrender control of oil under what they see as their land, they could strike out on their own at a later stage, signing more deals without consent from the federal government, and keeping more of the revenues for themselves. This would make the break-up of Iraq along religious and ethnic lines more likely. The Sunnis, in turn, could feel even more threatened under such a scenario than they do now, potentially adding fire to the insurgency.

In this respect, the heated arguments between the different groups over the details of the oil law has been telling. The Kurds, for example, have opposed granting too much power over the running of the industry to the federal government, and have also already pushed ahead on their own by granting some small oil contracts to foreign firms, without the status of these agreements being settled at the federal level. Other issues, such as the role of the national oil company, have also been the subject of intense debate. All this suggests that any agreement achieved by September is likely merely to paper over cracks, rather than represent a full accommodation between the myriad interests at stake.

There is no easy answer, but the best way for the US to ensure both that oil underpins national reconciliation and that the industry revives in a way compatible with western interests may be to allow time for domestic debate and negotiation. But that may not suit the timetable of those in Washington.

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