Ebb and Flow: War. What is it good for?

Michael J Economides
Tuesday, February 16, 2010

It was, and still is, an unassailable dogma throughout the Middle East, among barely beneath-the-surface anti-American European intellectuals, and certainly, the American left: the United States went to war in Iraq in 2003 just for oil. For those people, including many in the Barack Obama administration and its supporters, the idea has been quite convincing. America’s intervention, augmented by the fiasco of the never found weapons of mass destruction had little to do with the war of ideologies and world views that precipitated the carnage of September 11, 2001, but was motivated by a George W Bush administration cynical and self-serving motive: oil. The notion was also very convenient to transfer blame and ignore very real problems in the Middle East, where there is virtually no democracy in the Arab world and where militant Islam has become a crutch for many disaffected youth, trying to cope with societies chronically unable to absorb modernity.

As usual, the reality, burdened by truisms, is quite different.

As early as 2005 I did a simple calculation and wrote about it. If America went to war in Iraq just for its oil it would be one of the stupidest decisions in geopolitical history. Based on the cost of the war, if the United States were to take all Iraqi oil, sell it to the open market and give no money back to the Iraqis, it would take 30 years to pay for the cost of the war. That number now has escalated to about 100, based on current Iraqi production and oil prices.

The most telling evidence of the disconnect between insinuations and reality are the results of the first two auctions for operating Iraqi oil fields, done by the Baghdad government. Of 16 awarded, only two were won by American companies, both in the first round.

Last December the second bidding of Iraqi oil fields was conducted and the two supergiant fields on the block went to Royal Dutch Shell (with Malaysia’s Petronas) and the second went to Russia’s largest oil company, Lukoil (with Norway’s StatoilHydro.) The fields, Majnoon and West Qurna Phase 2, are world class, each holding more than 12 billion barrels of oil.

A group headed by China’s CNPC won the Halfaya, the thirdlargest field, with over 4 billion barrels in reserves. Other smaller fields went to companies from Japan, Russia (Gazprom), Turkey and even Angola, some of which are not particularly friendly to the United States and, certainly, not to its Iraqi war effort.

Showing a marked independence from the expectations of the conspiracy and the war-for-oil theorists, the Iraqi government put enormous demands on the would-be-winners of the oil contracts and allowed very small margins for profits. The sizes of the projects and the risks that will be present, even in the best of cases, are so demanding that only Big Oil, namely ExxonMobil (already operating the West Qurna Phase 1), Chevron and ConocoPhillips could have realistically been interested. The very thin margins offered by the Iraqis made their oil bids not very attractive for the US supermajors.

Even so, the Iraqi oilfields, languishing for years, first because of the draconian sanctions during the Saddam Hussein years and the ravages of war since then, are perhaps the most potentially prolific in the world. Over the next decade Iraqi oil production is expected to top 11 million barrels per day, quadrupling the current production of 2.5 million barrels per day and vying to surpass Saudi Arabia as the world’s biggest oil producer. In the process it will make a mockery of constantly re-surfacing Peak Oil talk.

One should not count American companies out of Iraq yet. While foreign oil companies, such as Chinese and Russian are far lower-cost and risk-taking operators, American companies, and not just the big three, have clearly set the standard for difficult or technically challenging to produce fields. It is very likely that after the initial and cumbersome but less challenging steps are taken, American companies will enter the fray as minority operating partners and important stakeholders.

But the transparency of the post-war oil bid rounds and the resulting winners show quite an independent Iraqi government from the interests of its occupiers.

And if Iraq emerges as a relatively stable country and a reliable provider of the world’s most important commodity, the future historian may give the George W Bush Administration and its war effort some credit, no matter how conventional ideological orthodoxy has preached and almost assuredly will continue to do so in the future. OE

About the Author
Michael J Economides
is a professor at the Cullen College of Engineering, University of Houston, and editor-in-chief of the Energy Tribune. The views expressed in this column do not necessarily reflect OE’s position.

Categories: Middle East Oil Asia

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