In Rebuilding Iraq’s Oil Industry, U.S. Subcontractors Hold Sway

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MOSCOW — When Iraq auctioned rights to rebuild and expand its oil industry two years ago, the Russian company Lukoil won a hefty portion — a field holding about 10 percent of Iraq’s known oil reserves.

 

It seemed a geopolitical victory for Lukoil. And because only one of the 11 fields that the Iraqis auctioned off  went to an American oil company — Exxon Mobil — it also seemed as if few petroleum benefits would flow to the country that took the lead role in the war, the United States.

The auction’s outcome helped defuse criticism in the Arab world that the United States had invaded Iraq for its oil. “No one, even the United States, can steal the oil,” the Iraqi government spokesman, Ali al-Dabbagh, said at the time.

 

But American companies can, apparently, drill for the oil.

 

In fact, American drilling companies stand to make tens of billions of dollars from the new petroleum activity in Iraq long before any of the oil producers start seeing any returns on their investments.

Lukoil and many of the other international oil companies that won fields in the auction are now subcontracting mostly with the four largely American oil services companies that are global leaders in their field: Halliburton, Baker Hughes, Weatherford International and Schlumberger. Those four have won the largest portion of the subcontracts to drill for oil, build wells and refurbish old equipment.

 

“Iraq is a huge opportunity for contractors,” Alex Munton, a Middle East analyst for Wood Mackenzie, a research and consulting firm based in Edinburgh, said by telephone.

Mr. Munton estimated that about half of the $150 billion the international majors are expected to invest at Iraqi oil fields over the next decade would go to drilling subcontractors — most of it to the big four operators, which all have ties to the Texas oil industry.

 

Halliburton and Baker Hughes are based in Houston, as is the drilling unit of Schlumberger, which is based in Paris. Weatherford, though now incorporated in Switzerland, was founded in Texas and still has big operations there.

 

Michael Klare, professor of peace and world security studies at Hampshire College and an authority on oil and conflict, said that American oil services companies were generally dominant both in the Middle East and globally because of their advanced drilling technology. So it is no surprise, he said, they came out on top in Iraq, too — whatever the initial diplomatic appearances.

 

United States officials have said that American experts who advised the Iraqi oil ministry about ways to restore and increase petroleum production did so without seeking any preferences for American companies.

 

And immediately after the 2009 auction round won by Lukoil, the United States Embassy spokesman in Baghdad, Philip Frayne, told Reuters that “the results of the bid round should lay to rest the old canard that the U.S. intervened in Iraq to secure Iraqi oil for American companies.”

But Professor Klare said that the American officials who had advised the Iraqi government on its contracting decisions almost certainly expected American oil services companies to win a good portion of the business there, regardless who won the primary contracts.

 

“There’s no question that they would assume as much,” he said.

 

The American oil services companies, which have been in Iraq for years on contract with the United States occupation authorities and military, are expanding their presence even as the American military prepares to pull out.

 

For example, Halliburton, once led by former Vice President Dick Cheney, has 600 employees in Iraq today and said in a statement that it intended to hire several hundred more before the end of the year. “We continue to win significant contracts in Iraq, and are investing heavily in our infrastructure,” Halliburton said.

 

The 11 contracts Iraq signed with oil majors, including the six for the largest fields, are intended to raise Iraqi output from about 2.5 million barrels of oil a day now to 12 million barrels daily in 2017. Some of the oil services contracts are for repairing currently productive fields, others to tap mostly unused sites.

 

Most outside experts, including those at the International Energy Agency in Paris, are skeptical of the production targets. The I.E.A. predicts that Iraq will not surpass six million barrels a day until 2030.

 

But there is little question that production is ramping up. On average in 2002, the year before the United States invasion, Iraq produced only 1.9 million barrels of oil a day.

 

Lukoil’s experience in Iraq shows how, while geopolitics steered the primary contracts largely away from United States oil companies, the process left the subcontracting wide open for American service providers.

 

Lukoil was originally granted rights by Saddam Hussein, in 1997, to develop a huge field called West Qurna 2 — rights that Mr. Hussein rescinded just before the war began in 2003.

After the invasion, Lukoil sensed that its best chances lay in working with the Americans. It formed a joint venture with the United States company ConocoPhillips, giving Conoco a small venture in the Russian Arctic and ceding it part of West Qurna 2.

 

By the time Lukoil was eventually compelled to bid again for the field at the 2009 auction, sentiment in both the United States and Iraqi governments seemed to have shifted to favoring non-American companies in awarding the main contracts. But one of Lukoil’s first steps after securing the West Qurna 2 deal was to subcontract the oil well refurbishment work to Baker Hughes.

 

While Baker and its American peers are poised to make significant profits from such work in Iraq, wafer-thin margins seem to await Lukoil and the other international oil producers — which include BP of Britain, CNPC of China, ENI of Italy and the Anglo-Dutch company Shell.

 

Lukoil’s contract, for example, is typical in paying a flat fee of $1.15 for each barrel produced, regardless of oil’s price.

 

That means even if Lukoil ramps up West Qurna 2 production from almost nothing now to 1.8 million barrels a day by 2017, as specified in the contract, it will require more than a decade of subsequent production just to recoup capital costs of about $13 billion. A good portion of those costs, meanwhile, will have gone to its drilling contractors. Lukoil says it intends to drill more than 500 wells over six years.

 

Lukoil and other winners of the 2009 auction are now quietly seeking to renegotiate the deals by slowing the upfront investment. On Wednesday, Lukoil executives met with Iraq’s oil minister in Moscow, the company said in a statement. A spokesman declined to provide more details.

 

Andrei Kuzyaev, the president of Lukoil Overseas, the company’s subsidiary for foreign operations, said in an interview that he was choosing oil services contractors in Iraq through open tenders, as required by the contract. But in fact, Lukoil officials say privately, only American companies have bid.

 

“The strategic interest of the United States is in new oil supplies arriving on the world market, to lower prices,” Mr. Kuzyaev said.

 

“It is not important that we did not take part in the coalition,” he said, referring to the military operations in Iraq. “For America, the important thing is open access to reserves. And that is what is happening in Iraq.”

 

http://www.nytimes.com/2011/06/17/business/energy-environment/17oil.html?pagewanted=all&_r=0