The dispute over control of Iraq's postwar reconstruction—and by extension its oil wealth—has gotten nastier even as US-led coalition forces last week sought to wrap up the job of toppling Iraqi President Saddam Hussein's regime.
As US officials try to address growing international concerns about coalition control of oil fields in postwar Iraq, more doubts have arisen about the near-term potential for any projected boom in the Arab country's oil production.
Meanwhile, the United Nations Security Council looks to be the next battleground for control of Iraq, with the UN's oil-for-aid program at the epicenter of the looming battle.
Given that prospect, delays are likely for Iraqi oil exports resuming in the very near term, and the outlook for Iraq achieving its pre-1990 production level exceeding 3 million b/d may be more than 5 years away.
UN officials said Apr. 8 there is 8 million bbl of oil stored at the Turkish Mediterranean port of Ceyhan and about 100,000 b/d of oil from Kirkuk in northern Iraq is still coming to the terminal via pipeline, although no one is lifting the crude because of the war. UN officials say they have legal contracts that allow about 90 days of exports, assuming Iraq resumes its prewar production of 2.2 million b/d.
UN officials maintain that the UN, not the US or its coalition allies, will control those contracts postconflict unless the Security Council revises how the UN enforces its sanctions authority.
Opposition demands
Several European leaders have expressed concern that the US wants control of Iraq's postwar transition period, particularly over its oil industry, and they insisted on a postwar rebuilding plan that calls for greater control by the UN.
French President Jacques Chirac last week insisted the United Nations must take charge of rebuilding postwar Iraq, ahead of a weekend meeting of France, Russia, and Germany intended to push a plan of governments opposed to US and UK views.
Chirac dismissed the idea that the US and UK should lead the peace, saying, "We are no longer in an era where one or two countries can control the fate of another country."
Chancellor Gerhard Schroeder concurred, telling the German parliament, "After this war, the UN must play the central role as far as the future of Iraq and the new political order is concerned. I would warn against speculating at this point about the details of the necessary reconstruction of Iraq."
French Foreign Minister Dominique de Villepin, speaking after a meeting with his German and Russian counterparts, Joschka Fischer and Igor Ivanov, said UK and US forces would have a special role in securing Iraq but not beyond that.
"In the armed phase, in the securing phase, the primary responsibility obviously is that of the coalition forces on the ground," he told a news conference. "Beyond that, the UN must play a central role in solving the Iraqi crisis."
Earlier, Chirac, who threatened to use France's veto to block a UN Security Council resolution authorizing the use of force against Iraq, said that allowing the US and UK to oversee Iraq's postwar transition would be rewarding the "belligerents."
While Chirac also said the reconstruction of Iraq is "a matter for the United Nations and it alone," there are questions even within the UN over the role it is apparently expected to carry out.
No UN plan
In early March, UN Sec. Gen. Kofi Annan said there was no UN plan for administering postconflict Iraq and stressed that the world body had been focusing instead on dealing with the humanitarian side of a potential conflict.
"There is no UN plan for managing or administering Iraq," Annan said at that time. "There is some preliminary thinking, but there is no plan and no document."
At presstime last week, 3 weeks after the outbreak of hostilities, there still were no such plans or documents.
The leaders of France, Russia, and Germany—the chief European opponents of the US-led war in Iraq—were due in St. Petersburg late last week for meetings that are likely to focus on the postwar reconstruction.
Russian Deputy Foreign Minister Viktor Kalyuzhnyy said it is possible to settle Iraq's problems "only within the legal framework of the UN Security Council." Otherwise, he said, "those who started hostilities unilaterally ignoring the United Nations will start unilaterally dividing Iraqi resources tomorrow."
Meanwhile, countries of the Arab Gulf Cooperation Council (GCC), meeting on Apr. 7, said that the Iraqi people should decide their own future after the war is over, and they called for a leading UN role in Iraq.
"To avoid more human and material damage...it is important that Iraqis should run the affairs of their entire country," foreign ministers of the six-nation GCC said. They also called on the UN "to move swiftly and effectively to guarantee the future of Iraq, its sovereignty, territorial integrity, and the security of its people."
Oil-for-aid status
The UN's chief legal authority, Hans Corell, drew attention to the pending UN battle on Apr. 8, saying that sales of Iraq's oil will remain under the control of the UN's oil-for-aid program, established by Resolution 986 of the Security Council in 1995, until a new resolution is agreed.
Benon Sevan, the undersecretary general in charge of that program, said that Iraqi oil already under contract but not yet lifted and oil stored at Ceyhan would stay there until a competent authority is available.
"There is no SOMO," Sevan told reporters, referring to Iraqi's State Oil Marketing Organization, which not only signs the contracts but must certify them before any lifting can resume, either in Ceyhan or elsewhere.
Before the outbreak of war, funds generated from Iraqi oil sales were placed in an escrow account, comanaged by the UN Office of the Iraq Program and the Iraqi government. Under terms of Resolution 986, Iraqi officials select vendors to import the goods or complete work, subject to approval by the UN.
That changed on Mar. 28, when the Security Council unanimously approved a temporary resolution giving Annan more authority to administer the operation for a 45 day period (OGJ Online, Mar. 28, 2003).
Subject to renewal on May 12, the resolution authorizes Annan to carry out tasks to do with humanitarian aid but does not allow him to renegotiate oil contracts.
Absent any UN plan to administer Iraq, the US and UK are seeking a resolution that will enable organizations in the country to make submissions directly to Annan, saying it will speed up the aid disbursement process.
They are also seeking a resolution that would enable Annan to renegotiate oil contracts on behalf of the Iraqi state.
Opponents of the US-UK resolution, mainly France and Russia, are concerned that the changes will allow coalition forces—and later a coalition-backed government—to submit most requests for disbursing aid. For the same reasons, they are no less worried that US and UK firms may scoop up lucrative oil deals.
Russia's biggest oil company, OAO Lukoil, expressed that concern on Apr. 8, saying it would impound Iraqi oil tankers and initiate international arbitration against anyone who tries to abort a contract it signed with the government of Saddam Hussein.
"If anyone tries to squeeze us out of there, Lukoil will file an international arbitration suit in Geneva," Lukoil Vice-Pres. Leonid Fedoun told Russia's Kommersant newspaper.
US, UK initiatives
The insistence from several quarters on the UN dominating Iraqi control followed a week when the US and UK staked out their respective positions on the issue of who should control postwar Iraq.
US Sec. of State Colin Powell briefed European Union foreign ministers and North Atlantic Treaty Organization leaders in Brussels on the war Apr. 3 and considered their opinions on "the appropriate role" for the UN in rebuilding Iraq.
While acknowledging a role for other nations and organizations in rebuilding postwar Iraq, Powell nonetheless maintained Washington's position that coalition forces should be dominant once Saddam Hussein's government has fallen.
"I think the coalition has to play the leading role," he said. "But that does not mean we have to shut others out. There will definitely be a United Nations role, but what the exact nature of that role will be remains to be seen."
The prior week, he said, "We didn't take on this huge burden with our coalition partners and not (plan) to be able to have a significant, dominating control over how it unfolds in the future."
Blair and US President George W. Bush on Apr. 8 reaffirmed that view but coated it with language to assuage the proponents of UN control
The two coalition leaders endorsed a "vital role" for the UN in postwar Iraq, as both countries moved ahead with plans to implement an administration under coalition military command.
"We are of course agreedUthat there will be a vital role for the United Nations in the reconstruction of Iraq," Blair told a news conference at his summit meeting with Bush in Northern Ireland.
Bush agreed, adding that he wanted Iraq to move fast toward establishing an interim authority of Iraqis.
"Rebuilding of Iraq will require the support and expertise of the international community. We are committed to working with international institutions, including the United Nations, which will have a vital role to play in this task," Bush said.
"We will move as quickly as possible to place governmental responsibilities under the control of an interim authority composed of Iraqis from both inside and outside the country," Bush said. "The interim authority will serve until a permanent government can be chosen by the Iraqi people."
US postwar plans
US plans call for a postwar military administration under Gen. Tommy Franks, head of the US Central Command, or a deputy, and a civil administration directed by Jay Garner, a retired general who heads the Office of Reconstruction and Humanitarian Assistance. Garner is expected to oversee the civilian administration and to attach US officials to various Iraqi ministries, including oil. In time, control of Iraq's government will gradually pass to an Iraqi administration under a three-stage transition.
UK Foreign Office Minister Mike O'Brien outlined a British variation of the US plan Apr. 2. "What we are doing is establishing the basic administrative structure, security, and law and order after Saddam has gone," he explained. Under the UK proposals, Garner would lead a team, including six British officials, that would make decisions about running basic community services in the first "few weeks" after a war.
"Also, we want to set up an Iraqi interim authority whose job it will then be to take over from Jay Garner to run Iraq as quickly as possible as we can enable that to happen," O'Brien explained. The coalition team would serve temporarily in an advisory capacity to those Iraqi officials
But O'Brien declined to set a time limit on Garner's tenure, saying suggestions of an agreed 90 day period were "misplaced" and that "it could be a shorter period than that, it could be a slightly longer period than that. It depends on precisely what the circumstances are."
The UK prefers a stronger UN role, and this could cause problems between the two countries later when the time comes to refigure the UN's oil-for-aid program. Blair has said publicly he believes the differences between himself and the US over the role of the UN is less stark than reported. But he has made clear he does not want the Garner operation to be seen as a US occupying power handing out contracts solely to US firms. Under pressure from members of his own party, as well as other European leaders, Blair hopes the temporary administration of Iraq will last only 2-3 months, before an interim authority with Iraqi participation takes over.
US approaches
There is disagreement even within the Bush administration of how the interim government would take shape.
Sec. of Defense Donald Rumsfeld denied Apr. 7 at a press briefing that he wanted the White House to exclude indigenous Iraqis from an interim government.
"The US will not impose a government on Iraq," he said.
Pentagon officials and some key White House officials, including Vice-President Dick Cheney, reportedly want Iraqi exile group leader Ahmad Chalabi to play a prominent role in postwar Iraq. They also want an interim government set up before the war ends; this civilian authority would oversee parts of the country as they fall under the US military's control.
Meanwhile, Sec. of State Powell and White House National Security Advisor Condoleezza Rice are said to favor a longer military occupation with an interim government set up only after the entire country is secure. Their transitional civilian government also would give the UN and Iraqi residents a stronger voice.
Sources familiar with the White House's thinking predict, however, that the Pentagon's model will largely prevail. This means the start of a civilian authority will begin soon, at presstime a possibility late last week, with little or no UN involvement.
A key unanswered question is how long the interim authority will last.
Rumsfeld's deputy, Paul Wolfowitz, said Apr. 6 it may take more than 6 months for an Iraqi government to be established after Saddam Hussein's regime ends. DOD officials have called a postwar interim government a "bridge" between an imminent US-led civil administration and a new Iraqi sovereign government.
Rice told reporters Apr. 4 the US will coordinate with Iraqis, coalition partners, and the UN to rebuild Iraq, leaving the country "completely in the hands of Iraqis as quickly as possible." She further suggested that both exiles and local leaders within Iraq would contribute to the interim authority.
Oil sector control
Before the Blair-Bush summit, Iraqi exiles and senior US officials meeting in London agreed Apr. 5 that international oil companies should take a leading postwar role in reviving Iraq's oil industry.
Industry expects that in the coming weeks, an interim government will play a decisive role in determining how fast the country's oil assets can be tapped for future investment. In the short term, the interim government also will effectively control the country's existing production and exports.
Oil companies are worried that unless the US reaches some kind of compromise with the UN over how future oil contracts are administered via the oil-for-aid program, they may be violating international law. This in turn could delay resumption of exports, experts predict.
The US, which maintains that Iraq's oil revenue is essential to finance postwar reconstruction, is expected to install a senior American oil executive to oversee Iraq's petroleum industry.
The Pentagon is said to be favoring a US civilian "oil czar" that would oversee the sector, with some senior positions given to Iraqi exiles. Philip J. Carroll, former president and CEO of Shell Oil Co. and former chairman and CEO of California-based engineering and construction giant Fluor Corp., has confirmed in various press accounts that the US Department of Defense had asked him to oversee the rehabilitation of Iraq's oil sector.
Regarding the longer-term issue of investment, US companies for now have remained largely silent on what changes, if any, need to be made to Iraq's state-owned oil company. But several multinational companies, including those based in the US, are concerned that the Pentagon plan does not leverage the expertise of the country's existing oil professionals.
"There is a lot of respect for those (Iraqi) petroleum engineers," said American Petroleum Institute Pres. Red Cavaney, responding to a question about what role US officials should play in rebuilding Iraq's oil business at a recent press briefing. "People marvel at how much they got done," with limited resources. "It would be a mistake to go and overlay and superimpose. What we (US officials) need to do isUto help clear the way and remove obstacles."
London talks
US officials agree with the view of Iraqi exiles that Baghdad should stay in the Organization of Petroleum Exporting Countries, although there should not be limits on production, Iraqi exiles said following the London meeting. An interim government's early work will focus on the rehabilitation of existing facilities, but talks with foreign oil majors on long-term projects could start quickly, the exiles suggested.
"It is in Iraqis' interest for an interim period of government to be as short as possible," said Dara Attar, an oil consultant representing some Iraqi opposition groups. "It was also decided that revenues should be used to reconstruct and develop the country, paying special attention to the impoverished oil field regions, and that modern technology and domestic and foreign experts will be crucial to this development."
Foreign investment deals, most likely production-sharing contracts, with a fully fledged Iraqi government could come between 6 months and 2 years' time, he said.
"Yes, that is the idea, because there is no doubt the oil companies are needed," said Fadhil al-Chalabi, a former undersecretary at the Iraqi oil ministry.
Production potential doubts
Even as US officials sought to explain their plans for postwar Iraq, however, a UK think tank said Apr. 3 that uncertainty over any proposed postwar Iraqi government could cause considerable delay in bringing the country's oil production to its full potential.
Postulating an occupation period of 6-24 months, as well as 3-5 years of "controlled transition" to a civilian government in Iraq, the report by the Royal Institute of International Affairs (RIIA) said "a key message" is that "stable conditions for a long-term foreign investment in the Iraqi oil sector can only be created in the third phase when the new Iraqi regime is recognized as independent of the occupying powers."
Oil majors will want to wait for a legitimate new government to settle in Baghdad before risking full-blown investment in undeveloped oil fields, the report explained. "Although Iraq is sitting on massive oil reserves, it will be years before they are tapped," it said. "It is likely to take over 5 years for a legitimate regime to be fully established."
The report forecasts Iraqi oil production growth will be severely restricted after the fall of Hussein. In 5 years, it sees less than 1 million b/d of additional Iraqi oil production, on top of the 2.8 million b/d Iraq produced before the Mar. 19 outbreak of war.
The RIIA report predicts that oil companies will be nervous about long-term investment in the early post-Saddam years for fear of losing millions of dollars if a US-installed government fails. It said the 6 million b/d that Iraq is believed capable of producing would have to wait "the emergence of a truly independent Iraq" willing to engage major companies on stable terms. Earlier reports have pegged that 6 million b/d watershed as achievable by 2012 (see chart, p. 21, and article, OGJ, Mar. 31, 2003, p. 21).
The report said any transitional government within 2 years after an initial US occupation would find it "very difficult" to offer the stable fiscal or legal framework or political investment climate to attract long-term private investment.
