Oil minister accused of mother of all sellouts

Furious protests threaten to undermine the Iraqi Government's plan to give international oil companies a stake in its giant oilfields in a desperate effort to reverse a steady decline in oil production and revenue.

In less than two weeks, on June 29 and 30, Oil Minister Hussain Shahristani will award service contracts to the world's largest oil companies to develop six of Iraq's largest oil-producing fields over 20 to 25 years.

Senior figures in the Iraqi oil industry have denounced the deal.

Fayad al-Nema, the director of the South Oil Company, which comes under the Oil Ministry and produces most of Iraq's crude, said: "The service contracts will put the Iraqi economy in chains and shackle its independence for the next 20 years. They squander Iraq's revenue."

Nema is reported to have since been fired because of his opposition to the contracts, which he says is shared by many other officials in Iraq's state-owned oil industry.

The Government says it is not compromising ownership of Iraq's oil reserves - the third largest in the world - on which the country relies to finance its recovery from 30 years of war, sanctions and occupation.

But the fall in oil prices over the past year has left the Government facing a financial crisis, as 80 per cent of its revenue goes to pay for salaries, food rations and recurring costs. Little is left for reconstruction, and the Government is finding it hard to pay even for much-needed items such as an electrical plant from GE and Siemens.

The development of Iraq's oil reserves is of great importance to the world's energy supply. They may be even larger than Saudi Arabia's, as there was little exploration while Iraq was ruled by Saddam Hussein. International oil companies are desperate to get their foot in the door.

"Everyone wants to be in Iraq," says Ruba Husari, an expert on Iraqi oil. "Together with Iran, this is the only oil province in the world that has great potential. It is a great opportunity for oil companies because nobody knows the size of Iraq's reserves. Iraq itself needs to know what is under its soil."

But Iraqis are wary of the involvement of foreign oil companies in raising production in super giant fields such as Kirkuk and Bai Hassan in the north and Rumaila, Zubair and West Qurna in the south.

They suspect the 2003 US invasion was ultimately aimed at securing Western control of their oil wealth. The nationalisation of the Iraqi oil industry by Saddam Hussein in 1972 remains popular and the rebellion against the service contracts has been gathering pace all this week.

Parliament is demanding that bidding be delayed. MPs summoned Shahristani, a nuclear scientist imprisoned and tortured under Saddam Hussein, to answer questions about the service contracts and the fall in Iraq's oil production and exports.

The secretary of Parliament's oil and gas committee, Jabir Khalifa Kabir, says the contracts will "chain the Government with complex contractual terms" and will abort South Oil Company's own plans to raise production. The Government says the bidding must go ahead.

The contracts are not particularly favourable to the international oil companies. They are, rather, the outcome of the companies' extreme eagerness to get into Iraq and the Government's attempt to obtain expertise and investment without ceding control. The companies will be paid a fee linked to restoring then increasing oil output.

But they will have greater control when there is a second round of bidding for oilfields which have been discovered but not yet developed. Separate again is the question of exploration of undiscovered oil reserves.

Critics of the deal in Parliament say Iraq has already invested US$8 billion ($12.6 billion) in developing its super fields.

But Shahristani needs US$50 billion over the next five or six years to raise current production levels from 2.5 million barrels a day of crude and knows the money and expertise can only come from outside Iraq.

The Government may be nearly broke but Iraqis ask whose fault that is. The Oil Ministry, like much of the Government, is dysfunctional when it comes to carrying out long-term projects. Shahristani is blamed for poor management skills, though he defends himself by saying that when he took over the ministry in 2006, he had to cope with attacks by guerrillas who at one stage were blowing up a pipeline every day.

This explains Shahristani's problems in northern Iraq, where the Sunni Arab insurgency of 2003-08 was strong, but not in the far south, where the Shiite community is dominant and there was no uprising.

Jabbar al-Luaibi, the former head of the South Oil Company, who battled to maintain oil production in these years, gave a devastating interview detailing the Oil Ministry's failure to provide the most basic equipment needed to monitor the oil reservoirs.

"It's like driving your car without any indicators on the dashboard," he said.

If if mismanagement continued in the same way as in the past "who knows, we might have to start importing crude oil".

The Iraqi Government made two other mistakes for which it is now paying.

It optimistically believed the price of oil would stay high at US$140 a barrel. Instead of investing extra revenue in paying for outside expertise and equipment to increase production in the oilfields, it spent the money on raising the pay of government employees and increasing their number.

This increased Prime Minister Nouri Maliki's popularity in the provincial elections in January, but left the Government short of cash when oil prices collapsed. Prices have risen since then, but not nearly enough to solve the Government's problems.

In June last year, the Iraqi oil industry seemed about to receive foreign help by signing two-year technical support contracts with oil companies. Control would have remained with Iraq.

But at the last minute, the contracts were cancelled despite being supported by Shahristani and the council of ministers. The reason this happened explains much about the state machine's inability to carry out long-term policies.

Jobs are allocated to members of political parties regardless of their abilities. After 2003 the Oil Ministry was the fief of the Fadhila, a Shiite Islamic party strong in Basra, and, though it left the Government, it never wholly accepted Shahristani as minister.

Showing a certain cheek, Fadhila members - having sabotaged the plan to acquire foreign expertise when money was available to buy it last year - now criticise the Government for being forced to accept worse terms because it cannot invest itself.

Many Iraqis will be angered to see their historic oilfields being partially run by foreign companies. But the Government believes it has no choice.

- INDEPENDENT