Friday, April 11, 2003

What should be done about Iraq's oil.

An alternative may be to persuade foreign oil firms to put up capital in exchange for the right to oil reserves, either through production-sharing agreements or full ownership. In such circumstances, the highest prices are likely to be obtained by having an auction open to all. Alas, any restriction of bidders to, say, firms from countries that supported the war, would clearly not be in the interests of the Iraqi people. Equally, contracts signed under Saddam were not in the best interests of the Iraqi people, both because firms from countries that abided by UN sanctions could not bid and because the deals were driven by Saddam's private interests. There are strong grounds for voiding those contracts and starting the bidding again.

Would that be legal? Some analysts argue it would be, given that Saddam Hussein was a dictator and that some of the contracts held by Russian, Chinese and Indian firms appear to have been granted to curry political favour at the UN and perhaps stave off an invasion. Other experts insist that any such move would represent a clear violation of property rights akin to Fidel Castro's expropriation of American assets four decades ago.

Vahan Zanoyan of PFC Energy, a consultancy, offers a real-world counterpoint. “In the oil business, sovereign governments can and sometimes do renege on oil contracts, which are always ultimately based on trust.” Russian or Chinese firms could perhaps challenge Iraq or an American interim authority at the international civil court at The Hague, but that would merely guarantee that the companies would not see any oil or money for many years and probably never be able to work in Iraq again. He thinks that firms such as Russia's Lukoil, despite its current sabre-rattling, may ultimately decide to negotiate a settlement with a new regime, in order to salvage some value from their contracts, or perhaps sell their rights to American or British rivals.

Any decision by an interim government to sell Iraq's oil reserves, particularly as it would probably be to foreigners, would be hugely controversial and vulnerable to accusations of bad faith. If some other way of raising cash for rebuilding could be found—an IMF/World Bank loan with oil reserves as collateral, perhaps—that would surely be better. But there is one reason to fear leaving the ownership of the oil reserves to a new Iraqi government—namely, that its members would face an enormous temptation to expropriate them for their own advantage. There are strikingly few examples of countries that, having become wealthy thanks to their oil resources, share this wealth broadly across the population.

What to do to prevent this, and to what extent any interim government should try to persuade a new Iraqi government to pursue a particular course of action, or even present it with a done deal, is sure to provoke a lively debate.

Some reformers are likely to view Iraq as another opportunity to try mass privatisation, with shares in Iraqi oil given to every Iraqi. Perhaps they can improve on the failure of past mass privatisations, notably in Russia, when recipients of shares tended to sell them quickly at well below their true value. Others familiar with the failure of mass privatisations such as Russia's will argue that Iraq should avoid it at all costs, pointing instead to the likes of Norway, Colombia and Alaska, which created funds that hold oil revenues in trust for the people. In Alaska, for example, the state oil fund disburses roughly $8,000 each year to every family. Similar payouts would certainly provide Iraqis with hard proof that the oil is now theirs, not America's, not their new government's—and certainly not Saddam's.

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