Thanks, But No Thanks!

Long before U.S. forces launched their invasion of Iraq to overthrow dictator Saddam Hussein, few second-doubted the underlying motive was oil.

The conspiracy theory was debated publically even in diplomatic circles as high up as the United Nations. Uncle Sam, led by oil hawks in the White House, starting with then President George W Bush, had mobilized the world’s most powerful military under false pretenses to secure the awesome reserves of crude and gas in Iraq, the argument went.

Years later, even the most benign observers still expected that the spoils of war would be handed out during the first two oil field auctions since the 2003 invasion, if nothing else to compensate for the billions in U.S. taxpayer money that have gone to nurturing the war-torn country.

But if Bush’s objective was to pave the way in for U.S. oil companies, it certainly didn’t pan out that way. From a list of 15 foreign companies, only two American ones were involved in the winning bids for the 10 fields that were awarded.

The reason: they were simply not interested. Only one U.S. company bothered to bid in the second round, the results of which were announced in December. And in the first round, only four.

Iraq’s Oil Ministry is still in the process of signing 20-year contracts with mostly European, Asian, Russian, and even African firms that made a strong showing. Iraq’s state oil company will take 25 percent stake in all fields. And there is no planned third round to look forward to.

What is at stake is nothing short of the biggest oil bounty within grasp in decades. Iraq expects its output to more than quadruple to a plateau production of 11.14 million barrels per day within years to rival the world’s biggest producer Saudi Arabia. And that is a shy estimate, considering the untapped resources.

The poor American showing was a strategic decision. Some account this merely to the higher risk appetite of Asian or state-owned companies. But a closer look reveals that the big winners were European and publically traded companies from throughout the world that are bound by the same market logic that American IOCs adhere to.

Take a look at the big four super giant fields that were awarded: Majnoon with 12.6 billion barrels in proven reserves went to Royal Dutch Shell, Europe’s biggest publically traded company, with a 45 percent stake and Malaysia’s state-owned Petronas with 30 percent; West Qurna Phase 2 with 12.9 billion barrels went to Russian publically traded giant Lukoil with a 64 percent of stake and Norway’s state-owned StatoilHydro with 11 percent; West Qurna Phase 1 with 8.7 billion barrels went to U.S.-based Exxon Mobil with a 60 percent stake and Shell with the remaining 15 percent, and Rumaila with 17 billion barrels in reserves went to BP with a 38 percent share and state-owned CNPC of China with 37 percent.

Of the other fields, Occidental, the only other American company aside from Exxon involved in a winning bid, took a minority stake in a consortium led by Italy’s Eni to develop the Zubair field, with 4.1 billion barrels. CNPC also took a 37.5 percent stake in Halfaya with 4.1 billion barrels in reserves, leading a consortium that also includes Petronas and French Total, each with 18.75 percent.

Other winners in smaller fields are Japex, Russia’s Gazprom, and Turkey’s TPAO. Petronas came out with four stakes in as many fields, including two big ones. Another surprise was Angola’s Sonangol, the winning loan-bidder in two fields.

Many have blamed American indifference to insecurity, instability, a shaky regulatory framework, corruption, and the unattractive terms offered by Baghdad in the form of service contract, rather than the preferred production sharing deals. But those factors applied to all, including all those publically-traded companies that came out winners.

Yes, American companies have higher risk aversion. But it is also true that they simply use classic exploration and production economic models. In Iraq’s case, low remuneration and instability together made the deals unattractive. BP, for example, will barely get a 20 percent return on investment from its deal, while American companies usually target at least a 25 percent return.

US companies are also wary of setting a precedent. That is, winning big in Iraq doesn’t justify risking a wave of contract renegotiations elsewhere in the world. Many U.S. IOCs already proved as much when Venezuela changed the rules, while Europeans accepted the new terms.

To be sure, European and Asian companies have already accepted the move, but Americans aren’t ready yet, if nothing else because service contracts don’t even count toward booking reserves, the most attractive incentive to shareholders.

And this is not necessarily bad. Share prices of U.S. IOCs were not punished by their managements' decision to stay away, signaling shareholders support for being hard bargainers. Fiscally speaking, U.S. companies would have also faces bigger liabilities, thus requiring better returns than its European and Asian peers.

It could be US companies prefer a backdoor entry, letting bid winners deal with all the initial headaches and upfront risks to later buy themselves into a minority stake. After all, service contracts allow companies to opt-out easily, as opposed to production sharing ones that require longer-term commitments.

American IOCs prefer waiting for the next presidential election and an oil law, not to mention for a resolution of the ever-dangerous Kurdish impasse with the central government. Doing so could pay out considering there are still seven fields of the ones offered in the first two rounds that didn’t even receive bids. Furthermore, Iraq remains vastly unexplored and there will surely be more opportunities in the future.

That doesn’t mean the economic terms will be better, but at least the risk will be lower.

Still, most U.S. IOC’s are foregoing the early entry advantage. If things go the way Iraqis plan, competition will only stiffen, along with the terms. However, if Iraqis are unable to consolidate their path toward stability, first-comers will come knocking on American doors seeking more money to meet their contracts.

In either case though, all the billions of dollars Uncle Sam spent and the thousands of American lives lost to secure Iraq will not translate into what many expected would be vast spoils of war. And that is best for all.

Andres Cala - Madrid-based freelance journalist and political scientist specialising in Middle Eastern and European policy, as well as global energy issues