Council on Foreign Relations faults Iraq oil revenue accounting

March 9, 2004
A new report by the nonpartisan Council on Foreign Relations warns that the US government and its coalition allies are failing to protect Iraq oil revenues from being misused, both now and in the future.

By OGJ editors
WASHINGTON, DC, Mar. 9 -- A new report by the nonpartisan Council on Foreign Relations warns that the US government and its coalition allies are failing to protect Iraq oil revenues from being misused, both now and in the future.

Report authors said that a year after US and coalition forces went to war, progress has been made restoring prewar oil capacity toward 2.5 million b/d. But the situation remains fragile, and facilities remain vulnerable to attack, according to the report, which was endorsed by a 21-member task force. Oil experts on the panel included Ed Morse, a senior executive advisor at Amerada Hess Corp., James Placke, a senior associate at Cambridge Energy Research Associates, and James Schlesinger, a former secretary of energy and defense who cochaired the group.

The report urged that greater safeguards be put into place before the scheduled June 30 return to Iraqi sovereignty to ensure that oil revenues are not exploited and mishandled.

Specifically, the report calls on the US to work with international financial institutions, including the International Bank for Reconstruction and Development and the International Monetary Fund, to condition Iraq assistance to professional management structures and procedures.

"This would include financial controls on revenues, agreements to subject accounts and processes to independent auditing, and certification of Iraqi oil exports," the report said.

Past US policies hit
The report criticized US officials for delaying the approval of independent auditors to oversee the Development Fund for Iraq, established by the United Nations last year and sustained by oil exports.

Yet US officials, speaking on condition of anonymity, defend the way oil revenues have been spent in the past year. They blame the UN in part for the delays in setting up financial controls for the fund.

Further, US officials say, in deference to international considerations, they have stepped up the placement of controls to ensure transparency and accountability in the oil sector. They point to a meeting held in Washington last month by the Coalition Provisional Authority (CPA) as an example of progress being made toward protecting oil revenues. CPA briefed the United Nations-endorsed International Advisory and Monitoring Board (IAMB) on how the development fund will be operated. CPA also invited proposals for external audits, with IAMB approving qualified external auditors (OGJ Online, Feb. 23, 2004).

Nevertheless, report authors continued to fault current practices and warned that unless US officials put tighter controls on oil revenues, the opportunity for corruption will further increase as the nation's oil sector gets back on its feet.

The report said CPA has made insufficient progress in establishing mechanisms for transparency and financial control on revenues, for example. And in an oblique reference to fuel gouging charges against contractor Halliburton Co., the report said that existing procurement procedures should be changed to ensure that foreign fuel purchases are at market rates.

US officials have taken steps to mollify congressional criticism regarding procurement procedures, with the Pentagon recently transferring control over fuel contracts to the Defense Fuel Support Center from the US Army Corps of Engineers.

Other task force recommendations include urging CPA to ensure that senior oil ministry appointments be based on merit, not on political considerations. The report also wants CPA to make the salaries of Iraqi oil professionals a budget priority.