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Iraq: After Hussein, How Will Iraqis Assert Control Over Their Oil?

Iraq has the world's second-largest oil reserves in the world, but its people are largely impoverished. Now that Saddam Hussein has been deposed, Iraqis have an opportunity to benefit from their country's oil wealth. But as RFE/RL correspondent Andrew F. Tully reports, the Iraqis must invite foreign investors who will help them cash in on this resource without cheating them.

Washington, 28 April 2003 (RFE/RL) -- For decades, Saddam Hussein used Iraq's great oil wealth to enhance his control over the country's people, to enlarge the strength of the country's military, and to enrich himself and his family.

Now that Hussein has been deposed, the United States and Britain say the country's oil reserves -- the second-largest in the world, after Saudi Arabia -- must now be used to enrich the Iraqi people themselves. But it is as yet unclear exactly how the oil will be used.

The oil in Iraq was controlled by Britain from the 1920s to the 1960s, then was nationalized and became the property of the Iraqi government, which took over complete control of exploration, production, refining, and marketing.

During the past three decades, while Hussein, his political allies, and his army flourished, the Iraqi people sank further into poverty, especially under the sanctions imposed by the United Nations after the Gulf War of 1991.

Now the Iraqis have an opportunity to share in that wealth, but it isn't clear yet how that will happen.

Because there is no private Iraqi oil company, most analysts say foreign investment will be essential to restore the country's oil production. One such analyst is Robert Ebel, the director of the energy program at the Center for Strategic and International Studies, a private-policy research institute in Washington.

Ebel tells RFE/RL that he has been in touch with some Iraqis about how they plan to organize their country's oil industry after Hussein's fall. At first, he says, they intended to limit foreign involvement to oil refinement and marketing.

But Ebel says these Iraqis eventually soon understood that they would need far more foreign investment.

"As they realized the tremendous needs for investments, if they wanted to move ahead to expand oil production, that's going to take $35 to $40 billion," Ebel says. "They don't have that kind of money. You have to then attract private investment, the foreign oil companies, which means you're going to have to open up the exploration and production end."

According to Ebel, such an arrangement would raise the specter of having foreigners completely in charge of Iraq's oil, just as Britain was for much of the 20th century. However, he says a new Iraqi government should be able to drive a hard bargain with foreign oil companies to ensure that Iraqis prosper from the arrangement: "Iraqi oil is very attractive. It's very good quality, it's cheap to produce, the reserves are there, [there's] easy access to foreign markets. So when the time comes to talk about foreign investment, I think the terms are going to be pretty tough."

Ebel says the standard deal between a foreign oil company and an oil state is called a "production-sharing agreement." This involves the company in all aspects of the industry, from exploration through marketing.

But he notes that Iraq has 17 untapped fields that are known to hold notable amounts of oil. As a result, Ebel says, the investing companies will not immediately have to spend on exploration, and Iraq can strike more lucrative deals.

"The general approach is through production-sharing agreements. That's the standard approach around the world. I know the Iraqis are looking at that very closely today. But since you're going to be opening up oil fields that have already been discovered, that exploration risk is gone. So you might want to come up with a slightly different approach that is more restrictive and more money ends up in the government pot."

But the question remains: Who will control Iraq's share of the oil profits? Some observers note that governments that control their country's oil revenues often face a strong likelihood of becoming corrupt and unrepresentative of their people.

These observers argue that for such governments, financial strength comes not from the taxes paid by citizens but from oil revenues. Therefore, they say, such governments -- like Saddam Hussein's regime -- have no vested interest in ensuring that their people are prosperous.

Nathan Brown is a professor of political science and international affairs at George Washington University in Washington. He acknowledges the risks of government ownership of oil, but he tells RFE/RL that there are examples of governments that share the oil wealth with their people.

Brown cites Norway, which owns its share of North Sea oil, and the U.S. state of Alaska, which owns the oil drilled off its Arctic Ocean coast. He says they compare favorably to the way oil earnings are controlled in some Arab states.

"In cases like [Alaska and Norway,] you had well-established democracies with very well-established procedures for how to handle public revenues," Brown said. "And the problem in the Arab world has been that, in a sense, oil revenues began to flow in before you really had any kinds of institutions or processes that were capable of dealing with them."

In fact, Brown says, Iraq enjoys a political advantage over states like Saudi Arabia and Kuwait simply because it does not have a royal family, although Hussein shared much of Iraq's oil wealth with his own extended family.

"In some ways, the Iraqis were in much better shape than the Gulf states [such as Saudi Arabia and Kuwait], where oil revenues were going directly to ruling families," Brown said. "In Iraq, [the revenues] definitely accrued to the state. It turned out over time to be a pretty awful state, but at least [the revenue] wasn't the personal property of a specific family."

According to Brown, the best way to ensure the Iraqi people share in their country's oil wealth is to make sure that any deals a government in Baghdad makes with foreign companies are overseen by a democratically elected parliament.

Brown recalls how Britain understood the value of legislative control over oil contracts when it sidestepped Iraq's parliament in gaining control of the country's oil eight decades ago.

"When the British had the mandate for Iraq -- this was back in the 1920s -- they negotiated the oil concession immediately before the first Iraqi parliament was called into session, because they didn't want the concession subject to oversight by the parliament," Brown said. "So in a sense, in the Iraqi case, this system of domination by the executive branch over the oil company with little parliamentary accountability was a British invention in order to circumvent popular pressures."

Brown says democratic institutions alone ought to be enough to prevent predatory foreign oil companies from cheating the Iraqis out of their most valuable natural resource. But he emphasized that this does not mean that establishing these institutions will be easy in Iraq.