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Iraqi Oil Laws

Thursday, 26th June 2008

I have to admit, I'm rather scratching my head here over what worries Seumas Milne:

That argument is going to be a good deal harder to make from next week, when four of the western world's largest oil corporations are due to sign contracts for the renewed exploitation of Iraq's vast reserves. Initially, these are to be two-year deals to boost production in Iraq's largest oilfields. But not only did the four energy giants - BP, Exxon Mobil, Shell and Total - write their own contracts with the Iraqi government, an unheard-of practice: they have also reportedly secured rights of first refusal on the far more lucrative 30-year production contracts expected once a new US-sponsored oil law is passed, allowing a wholesale western takeover. Big Oil is back with a vengeance.

I really don't see what's wrong with such arrangements. No one is suggesting that those oil companies get given the oil, no one is suggesting that taxes and royalties won't get paid....

There's essentially two models that a government can adopt in their attempts to exploit a natural resource. They can build a company and do it themselves or they can call in private companies to risk their capital and do it for them. Unless you've got an ideological attatchement to either State production or private sector the decision as to which to use should logically be made by asking which is more efficient?

Certainly the State model can indeed be efficient: Statoil of Norway is known as a very efficient producer. It's also possible for it to be very inefficient: the national oil companies of both Mexico and Venezuela seem to have so much drained from their treasuries by the demands from the countries' respective Treasuries that they're not able to reinvest enough simply to keep production stable, let alone expand it.

Yes, private oil companies can be inefficient: fortunately they go bust when they are, which rather keeps up the efficiency rates of those left behind.

But we do need to point out that there are two sets of income here. The first is the money that's made by prospecting for, finding, pumping, shipping and refining oil. Whether this is captured by one of those State companies or by private ones really depends upon who puts in all the investment to make all that work possible. As above, the Norwegians seem to do this well via the State, the Mexicans, Venezuelans and others badly. But in the grander scheme thse profits aren't the point. They're not what people mean when they talk of "oil wealth".

That's all to do with the original resource and its ownership. Who gets the money from the oil being there in the first place? The economic rent as some would call it? This is entirely separate from who pumps it up: this is the value of oil as it sits there in the resevoir.

The answer that just about everyone comes up with here is that that money belongs to the government of the land where the oil is. Those who pump it up (whether a State company or a private one) hand over that value in the form of royalties and or other taxes on the amount they pump. If it was being suggested that the oil companies in Iraq should not have to pay such royalties then this would indeed be simple theft from the national treasury: however, that absolutely isn't the case. They'll pay royalties, hefty ones: what these agreements are about (whether they're right or wrong on the efficiency point is another matter) is which is the more efficient method of getting the oil out and sold? A State company or private sector ones?

In theory (at least) the amount that the Iraqi Treasury gets from either method should be exactly the same, after we've adjusted for the cost of the extraction. The royalty should be the same whether it's a State or that private company.

OK, that's possibly a little boring as an exposition: but much more to the point is that the US backed government is not imposing some unheard of structure upon the Iraqi oil industry. In fact, the suggestion, the structure, is exactly what the US uses in dealing with oil in the US. The same as we UKians use in dealing with North Sea oil. Yes, please Mr. Private Company. Please come and use your capital and your expertise to get this oil up for us. Hope you make lots of money. Oh, and, umm, by the way, as you ship the oil out the door could you please give us, the government, eye-watering amounts of cash to pay for the fact that the oil is there on our territory in the first place?

It rather seems to me that those who oppose this structure for the Iraq oilfields need to do some hard explaining: if this is so wrong for Iraq, why is it the system that we ourselves use with our own natural resources? Iff their oilfields should only be exploited by a State company, why doesn't the same apply to us?