Into the Void: Iraq, White House nullify Russian Oil Contract

A Guest post by Ken Anderson from The Bonehead Compendium

Little noticed amid the wonk-frenzy generated by Musharraf's call to martial law is news that the Iraqi government -- helped in their decision with White House "advice" -- have cancelled a controversial and pre-existing Production Sharing Agreement (PSA) with Russian oil giant Lukoil. This is a complete reversal of the situation in May of this year, when Lukoil said that it was "optimistic" that the oil contract would be approved. This is a move that, while widely expected by this White House, was sure to bring acrimony to an already roiling situation in Iraq. Indeed, Moscow has already threatened to renege on its Paris Club promise to forgive some $13 billion of Iraqi debt owed Russia. Sweeping debt forgiveness by many foreign powers was something that Bush's special envoy, James Baker III, had engineered for post-Hussein Iraq, though Russia, among other countries, initially balked at blanket forgiveness and said that any such agreement would be dependent upon Iraq's treatment of Hussein era oil and gas contracts.

Originally, it was the White House that sought debt forgiveness for Iraq and now it is White House policy that is threatening to undo their own earlier efforts. Which is, sadly, something we have seen many times before. Despite the fact that it has also been White House policy to encourage the Iraqi government to honor Hussein-era contracts with foreign agents -- it is doing just that with companies from China, Vietnam, India and Indonesia -- this particular contract's disposition is shrouded in legal murk; Hussein reportedly canceled the contract just prior to the 2003 invasion. But it seems likely that this murk is being promoted by the White House for other reasons. Or, perhaps, one big reason.

The PSA in question involved development of the giant West Qurna oil field in southern Iraq, thought to contain some 11 billion bbls of light sweet crude oil, a field surely seen by western oil interests as a "high value target." Hussein-era PSAs that have been honored so far by the Iraqi government have not involved a petroleum resource anywhere near approaching the size of West Qurna. Hence the dilemma the White House faces in Iraq. The Bush administration knows full well that cooperation with Russia -- and China -- is vital in the Middle East and Central Asia. Unfortunately, radical forces within the administration do not see it that way, and, in spite of Russia's strategic positioning, growing influence and economic might, those forces appear to be choosing to set off further conflict in the region rather than act as an unbiased mediator. And for good reason. They are not unbiased mediators in Iraq, especially when it comes to oil resources there. One can imagine the howling in West Wing: "We ain't spending $1 trillion on the war so that Russia can move in and develop giant oil fields! No freaking way!"

As stated earlier, this move is exactly what was feared would transpire once these contracts were reviewed. While it appears that the White House is amenable to honoring PSAs for development of smaller and less strategic resources, the big ones are in danger of being canceled. Legality may be the foot the White House chooses to stand on in this case, but it surely is not co-operative move and only risks further hampering any solution to the problem of Iraq.