UN, US hold talks on future Iraq oil revenue control

May 5, 2003
The US and the United Nations remain locked in a fierce political struggle last week over who will oversee Iraq's oil revenue until a freely elected government can begin calling the shots.

The US and the United Nations remain locked in a fierce political struggle last week over who will oversee Iraq's oil revenue until a freely elected government can begin calling the shots.

White House officials Apr. 29 refused to divulge the US's bargaining position. A spokesman offered no specific timetable on when the US will formally propose a change to the oil-for-aid program.

"The timing is a little early still," a White House spokesman told reporters at a regularly scheduled briefing. "The oil-for-food program has been extended to June 3, and so the timing of any action that we would offer a resolution still remains some time into the future. We're talking to allies, we're talking to people at the United Nations about timing, about language. And the fundamental goal remains the total lifting of sanctions," he said.

Moving forward on oil authority

While the US may label its discussions with the UN as "consultative," analysts say a more accurate term is "combative."

As the larger political debate continues, the US this week is expected to install a new temporary oil authority to oversee the beginning stages of a rejuvenated petroleum sector.

The UN and some of the US's closest allies, including the UK, are not happy with the decision. There is concern that such an arrangement means the US government will give an unfair advantage to US-based companies for oil contracts and longer-term investment opportunities.

Nevertheless US officials were expected to announce, at presstime last week, that Phillip Carroll, a former Shell Oil Co. and Fluor Corp. executive, will be heading to Baghdad. He is expected to act in a capacity similar to the chairman of an integrated multinational oil company. Iraqi exiles with oil backgrounds are expected to serve as advisors that would be similar to a board of directors; US officials have not yet released any of these advisors' names.

US officials from the Pentagon also want to include in this interim "corporation" both Iraqi exiles and career oil technocrats with no political connection to former Iraqi president Saddam Hussein.

Bush administration officials from both the Pentagon and the Department of State insist that they see Carroll's role as primarily one of a caretaker overseeing infrastructure repairs. Key questions such as whether to privatize the state-run oil company or future participation in the Organization of Petroleum Exporting Countries will be decided by the Iraqi people when a new government is in place, US officials said.

Road ahead

Estimates within the US government on when free elections will take place vary at 1-5 years. There also are differences of opinion within the administration on the US's role in revamping the oil sector. There are concerns from some policymakers within DOS that giving most of the control of the oil sector to a team of outside oil experts, even temporarily, could stall the reconstruction process.

UN officials and US-based integrated oil companies have privately urged the Pentagon to be mindful that professionals within the state oil company are a valuable resource. Career employees largely defied dire predictions by industry experts that the country could not sustain production because of international sanctions that limited investment and maintenance. But the state-run company proved resourceful, maintaining 2 million b/d of oil exports even under hostile work conditions. Saddam Hussein's top managers, for example, often failed to supply spare parts to field operators even though international sanctions were later adjusted to allow infrastructure improvements under the oil-for-aid plan.

Pentagon officials acknowledge that the rank and file from the state-run oil company are key to any rebuilding effort. Nevertheless, US officials say they need to be careful about who is allowed to remain, given that many of the higher management positions were patronage jobs.

International role

So far, US officials have resisted seeking international consensus on how Iraq's oil sector should be restructured. But if the US wants reconstruction to run smoothly, it should consider some kind of international consultation, analysts suggest.

"If I were the Iraqis I would be concerned about something that looks like empire-building," said Ed Chow, an analyst with the Carnegie Endowment for International Peace. "Any large restorative effort will need an international consensus to reduce legal uncertainties connected with developing new fields there. Long-term projects need political stability with a stable government to honor agreements."

US interim administrators say they want to quickly restore the country's production to a prewar level of 2.8 million b/d, but they face formidable political and technical challenges. It may be months before an Iraqi-led interim government begins to take shape, for example. Meanwhile, US contractors hired by the Pentagon to repair war-related field damage say refineries and infrastructure are badly in need of modernizing because of safety and environmental concerns.

Who will pay?

But no one knows yet who will be footing the bill.

The US for now appears to be maintaining the position that the UN oil program, which is now the only legal mechanism the Iraqi people have to get revenue, should be phased out completely. The White House also is still exploring the possibility that under international law, the US as an occupying power has the sole authority to sell 9.3 million bbl of Iraqi oil reported now in storage at the Turkish port of Ceyhan. The UN objects to that interpretation and wants to oversee the sale of that oil and any short-term production that may be exported, possibly by the summer.

New exports may not happen for at least a couple of months for both political and technical reasons. Export facilities largely survived intact but contractors are focusing a lot of their effort on refurbishing infrastructures that supply domestic fuels for climate control and transportation.

One compromise solution for short-term exports may be to give another international institution, such as the World Bank or the International Finance Corp., short-term oversight over oil revenues.

"The UN program was too political and subject to manipulation," said Chow, who endorses the idea of IFC stepping in to manage oil revenues until a freely elected Iraqi government is installed. Chow said the UN program's administrative costs make it vulnerable to criticism by the White House and the US Congress.

Other analysts say, "If it ain't broke, don't fix it."

There certainly are flaws with the UN process but the system did work and may be more efficient in the short term than building a whole new system, said another geopolitical analyst familiar with the UN program.

"When you are talking about billions of dollars in a program, there will always be sticky fingers," noted Robert Ebel of the Center for Strategic & International Studies, a Washington, DC-based think tank.