The Race For Iraqi Oil

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Later this month in London, Iraq will play host to more than three dozen major oil companies seeking to bid on developing some of Iraq's best oil reserves. Five years after a U.S.-led invasion that critics said was all about gaining control of Iraqi oil, Iraq awarded its first long-term oil contract to China. NPR's Peter Kenyon reports from Baghdad.

PETER KENYON: The head of the oil meeting in London, Iraqi Oil Minister Hussein al-Shahristani, announced that an agreement in principle had been reached with Royal Dutch Shell to produce natural gas from Iraq's southern gas fields.

Minister HUSSEIN AL-SHAHRISTANI (Minister of Oil, Iraq): (Arabic spoken)

KENYON: Shahristani said the still-to-be-finalized joint venture, 51 percent owned by Iraq and 49 percent by Shell and its as yet unnamed partners, would process gas now being flared off and wasted into fuel for electricity generation and a number of other petrochemical products. After watching the Kurdish regional government plow ahead with more than 20 oil contracts, the government in Baghdad has lurched into action with the encouragement of the Americans. Ambassador Marc Wall is the economic transition coordinator in Baghdad.

Ambassador MARC WALL (U.S. Economic Transition Coordinator, Baghdad): It would be desirable to see rapid movement on signing contracts and getting the technology and the investment in place, so Iraq could take advantage of the significant oil resources it has.

KENYON: Iraq's U.S.-backed government has already surprised some critics by canceling no bid short term contracts with five western oil companies, including Exxon Mobil, BP, and Shell. At about the same time, the first long-term oil contract was awarded, not to the west, but to the China National Petroleum Company. It's a restructuring of a deal originally struck during Saddam's regime. Under the new version, China will work for a flat service fee, not a share of production.

Petroleum analysts say the government is under pressure to develop its oil resources, but it's also sensitive to the Iraqi suspicion that big oil companies will take huge profits through unfair production sharing agreements. Another benefit of the service contracts, according to some Iraqi officials, is that they don't run afoul of the legislative deadlocks surrounding Iraq's long-awaited oil law.

Iraqi Arabs and Kurds have been unable to agree on how much control the central government should have over oil development and how the revenue should be shared. As the Kurds pushed ahead with development contracts in the north, the Baghdad government essentially black-listed the firms that signed with the Kurds. Iraqi oil analyst Kamil Mahdi says the oil law is unlikely to move ahead as long as the issue of federalism, the enhancement of local powers that is so important to the Kurds and others, remains unresolved.

Mr. KAMIL MAHDI (Iraqi Oil Analyst): The Kurds are really not in a hurry to have this law because the law (unintelligible) - because the law calls for an oil and gas overlord in the center through which all agreements should pass.

KENYON: Mideast oil analyst Leila Benali at the Paris office of Cambridge Energy Research Associates says the Kurdish contracts, while controversial, probably did prod the Baghdad government to move ahead with agreements of its own. She also says, while the Kurds see room to maneuver at the moment, down the road, they and their oil company partners will find that there are limits to what they can do without the federal government.

Ms. LEILA BENALI (Director, Middle East and Africa Department, Cambridge Energy Research Associates): What all these companies know is that they will have to rely on the central government for exports, to be able to access infrastructure, and stuff like that. So I think, at the end of the day, you will find an equilibrium between all these forces because every stakeholder in this equation needs the other.

KENYON: Former Iraqi oil minister Issam Chalabi says a case could be made that almost all the current deals are illegal, certainly all those signed since the new Iraqi constitution was approved. But what really bothers Chalabi is the secrecy surrounding the agreements. He wonders what the government has to hide and says the lack of transparency is fueling conspiracy theories that aren't helping Iraq's image.

But for the moment, all those concerns are dwarfed by two overriding factors, Iraq's need for increased revenue and the current international financial crisis. Everyone here sees oil as Iraq's ticket to a rebuilt economy, and it may soon become even more critical as Americans begin to take a closer look at the estimated $10 billion a month they're now spending on the Iraq effort. Peter Kenyon, NPR News, Baghdad.

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