Privatization of Oil Suggested for Iraq

A State Department advisory panel of Iraqi petroleum experts has concluded that Iraq’s state-owned industry would benefit from privatization -- a provocative idea in a region that evicted foreign oil companies three decades ago.

But the group of about a dozen exiled petroleum professionals, advising the State Department on how to rebuild Iraq after any ouster of President Saddam Hussein, feels strongly that privatization should wait until an interim U.S. military administration has finished its work and a sovereign government has taken its place, according to participants.

The panel also recommends that a transitional Iraqi government not enter into long-term exploration and development deals with international oil companies.

Interim contracting activity should be limited mainly to repair and renovation of Iraq’s poorly maintained oil infrastructure during the first year or two following a military action to oust Hussein’s regime, with Iraqis making most of the decisions.

“It would be Iraqis, Iraqi technocrats, who would be doing that,” said one advisory group member. “I really don’t think the United States should dictate Iraq’s oil policy.... The U.S. would look very bad if it tried to exploit the situation in that regard.”

The panel is the oil and energy working group, part of the State Department’s Future of Iraq project, which includes more than 200 Iraqi exiles, most of whom are now living in the U.S.

The oil panel has not yet issued its final recommendations, and the Bush administration will not be bound by its findings. Even so, the working group’s thinking is considered likely to influence U.S. policy in postwar Iraq.

The group’s work will provide a clearer outline of the possibilities -- and the limits -- of outside involvement in the development of Iraq’s oil reserves, second only to Saudi Arabia’s. While a war might generate an immediate windfall for firms providing engineering, construction and oil field services, international oil companies looking for lucrative exploration deals would probably have to wait.

“The development of new fields is something that needs to take time, needs to be studied,” said another participant. “To try to rush into anything would not make engineering sense.... You’re not going to start any contracting during a transitional phase.”

The privatization of Iraq’s industry was one of several “alternative industry structures” discussed by members of the panel, one of 16 working groups convened by the State Department to involve “free Iraqis” in planning Iraq’s reconstruction.

But it is perhaps the most controversial because it would involve transferring ownership of a portion of Iraq’s oil resources from the state oil company to private hands.

The potential benefits of privatization were presented to the working group during a closed session by one of its members, Fadhil Chalabi, a former OPEC deputy secretary and Iraqi Petroleum Ministry official who now heads the Center for Global Energy Studies in London.

“Iraq has a lot of oil to develop, and the public sector cannot do it alone,” Chalabi said in an interview. “A new structure could provide more money, better technology, better efficiency, better management, and worldwide market outlets.”

Chalabi said a partial privatization would help attract the billions of dollars of outside investment needed to renovate and expand Iraq’s aging petroleum infrastructure, without necessarily relinquishing government control of the industry. He said he would favor a program similar to that undertaken two years ago by Norway, which sold 20% of the national oil company, Statoil, to private investors for $3 billion.

Chalabi said Iraq would need $5 billion to restore its oil production to the level that existed before Hussein’s 1990 invasion of Kuwait, about 3.5 million barrels per day. Iraq would need at least $30 billion more to expand capacity to an attainable level of 6 million barrels per day.

At the working group’s last meeting on Feb. 11, a majority of members said they thought privatization of Iraq’s oil industry would be beneficial, but not in the immediate aftermath of a war.

If it does occur, they said, it should proceed in stages. First would come the privatization of some of the industry’s “downstream” assets, such as retail gas stations. At some point after that, partial privatization of “upstream” activities, such as exploration and development, could be undertaken if authorized by an elected parliament.

The group acknowledged that upstream privatization would be far more sensitive politically because it involves ownership of Iraq’s principal natural resource: 112 billion barrels of proven oil reserves, and as much as 250 billion barrels of potential reserves waiting to be discovered.

Several outside experts said the concept of privatization has merit, but questioned whether it would be embraced by the people of Iraq.

“Privatization is a very sensitive word in that region of the world,” said Mehdi Varzi, a former National Iranian Oil Co. official who runs a petroleum consultancy in London. “Most OPEC members jealously guard their control over the oil sector.”

Sabah Al-Mukhtar, president of the Arab Lawyers Assn. in London and former legal advisor to the Iraqi National Oil Co., said the country might accept a privatization plan that transfers resources to firms owned by Iraqis, citing Russia’s privatization as an example. But the sentiment would be much different if Iraq’s reserves were sold off to foreign interests, he said.

“The idea that foreign companies -- the BPs and the Shells and the Exxons and the Mobils -- could come in and visibly be in control, that is unacceptable,” Al-Mukhtar said. “Iraqi society is ready for private enterprise and market forces, but for Iraqis, not for foreigners.”

Administration officials have promised that they would make sure Iraq’s oil riches were held in trust for the Iraqi people in the event of Hussein’s ouster.