WSJ : Iraq's Oil Surge

Iraq's Oil Surge

July 5, 2008

Here's a thought experiment: Assume that Iraq's democratic government declared it was nationalizing its oil industry, a la Venezuela or Saudi Arabia, while excluding American companies from the country. How do you think U.S. politicians would react? With angry cries of "ingratitude" and "this is what Americans died for"?

Of course they would, led no doubt by that critic for all reasons, Senator Chuck Schumer of New York. So it is passing strange that Mr. Schumer and other Senators are now assailing Iraq precisely because it is opening up to foreign oil companies, especially to U.S. majors like Exxon Mobil and Chevron. For some American pols, everything that happens in Iraq is bad news, especially when it's good news for the U.S.

Iraq announced this week that it is inviting global competition to develop its major oil reserves, with 35 oil companies invited to bid. By tapping outside capital and expertise, Iraq hopes to increase production by 60%, providing a much-needed boost to its own coffers and the world's tight oil supply.

This is welcome news. With elections looming later this year and next, the temptation for Prime Minister Nouri al-Maliki's government must have been to play the nationalist card – the way that Mr. Schumer did against Dubai Ports World's proposed U.S. investment in 2006 (see, for instance, "Ports of Gall"). Many Iraqis remain suspicious of outside oil companies – the legacy of a colonial past in which Iraq felt exploited for its oil.

Instead, Iraq chose competitive bidding that will bring in the best expertise to exploit its national resource. Oil Minister Hussain al-Shahristani is predicting that, with outside help, Iraq could become the second or third largest oil-producing country in the world. Today it produces about 2.5 million barrels a day, compared to 11 million for the world-leading Saudis. Foreign companies will be required to have an Iraqi partner, and to hire Iraqis, while most oil revenues will still flow to the Iraqi people.

What seems to irk Mr. Schumer – and running mates John Kerry and Missouri's Claire McCaskill – is Iraq's decision to sign shorter-term, no-bid service contracts with Exxon Mobil, Royal Dutch Shell, BP, Total and Chevron. Most of these firms had extensive experience in Iraq prior to Saddam Hussein's nationalization, and were chosen because their knowledge will help Iraq boost near-term production. The contracts will run no more than two years, and all five firms have spent the past three years providing training, analysis and advice to Iraq – free of charge.

The Democrats nonetheless stomped their feet in a letter last week to Secretary of State Condoleezza Rice. They demanded that she intervene to stop the Iraqis "from signing contracts with multinational oil companies until a [national oil law] is in effect in Iraq." Their complaint is that a hydrocarbon law is one of the Bush Administration's "benchmarks for reconciliation" in Iraq, and that these oil contracts would only "further deepen political tension in Iraq and put our service members in even greater danger." They also griped that the five firms would get an "insider's advantage" to later oil bidding.

Also piling on is House baron Henry Waxman, who is upset with a separate contract that the Kurdistan Regional Government has signed with Texas's Hunt Oil. Mr. Waxman thinks the Bush Administration didn't do enough to stop the deal. Then again, this is old news, as the contract was signed last year. And while the Baghdad central government wasn't pleased the Kurds had moved on a contract without national approval, the deal hasn't impeded Iraq's broader progress.

We doubt French politicians are objecting to Total's contract, but American Democrats are so blinkered about Iraq that they now object even to U.S. companies getting business on the merits. The hydrocarbon law would help to clarify revenue-sharing between Baghdad and Iraq's outlying provinces. But even without that law, oil revenues are already flowing throughout the country, including to Sunni-majority areas.

The faster and more efficiently the oil deposits are developed, the more revenue there will be to distribute. And the faster Iraq will be able to rebuild on its own – which is what Democrats say they want. Meanwhile, by inviting foreign partners, Iraq is avoiding the trap of nationalization that has harmed so many countries. It concentrates political power, undermining democracy. National oil companies also tend to underinvest in technology, letting harder-to-exploit oil become a wasting asset.

What the U.S. should promote in Iraq is some kind of oil trust, or stock or revenue dispersal, that would give individual Iraqis a share of their oil wealth. This would be both a tool to build national unity and to prevent any one political group from dominating Iraq's main revenue source. If Mr. Schumer wants to help on that score, he might do some good.