Energy Tribune

If the Second Iraq War was, in fact, about oil, then one thing is clear: we’ve lost.
In 1991, America won its first oil war in the Persian Gulf. It kicked the Iraqi military out of Kuwait and reinstalled the emir of Kuwait as the ruler of the New Jersey-sized emirate. But on my visit to Kuwait in late June, during which I interviewed numerous people in the U.S. military, the U.S. State Department, and the private sector, it became obvious that a key reason why America has lost the Second Iraq War is this: it never got control of the oil.

For all of the talk about American soldiers not dying for oil, the hard truth of the Second Iraq War is that the U.S. has never had enough troops in Iraq to secure the country. And securing the country means protecting and controlling Ira’s critical resources: the oil fields, pipelines, and refineries that provide nearly all of the country’s revenues. That didn’t happen. And it still hasn’t happened.

Insurgents began sabotaging key oil installations in early June of 2003. And they haven’t stopped. As of early July of this year, there have been more than 300 documented attacks on Iraqi oil personnel and infrastructure. (The total number is almost certainly higher.) In addition, insurgents have created chaos within the oil ministry itself through kidnappings and violence. On July 17, the head of Iraq’s North Oil Company, Adel Qazaz, was kidnapped at his north Baghdad home by unidentified gunmen. The North Oil Company manages the country’s northern oil fields. His kidnapping follows the June 8 abduction of Muthana al-Badri, director general of Iraq’s State Company for Oil Projects. He has not been seen since. Threats are common. Alan Waller, the head of Lloyd-Owen International, a private contractor that since 2004 has been providing security for trucks delivering motor fuel from Kuwaiti refineries to Iraq’s civilian sector, says that over the past few months, personnel within the oil ministry have been threatened with kidnapping and death if they continue working at the agency. Waller has also been threatened, as have many of his employees.

Add in the revolving door at the oil ministry: Since the U.S. invasion, the ministry has had eight different heads. One of them (he actually served two stints) was Ahmed Chalabi, the CIA-sponsored miscreant who also happens to be a convicted embezzler.

The U.S. government is putting a smiley face on the energy situation in Iraq. On July 18, Energy Secretary Samuel Bodman was in Baghdad, touting the fact that Iraq’s crude production has increased lately to about 2.5 million barrels per day, a level not seen since before the war. Bodman was also pushing the Iraqis to pass a law that would open up the oil sector to foreign investors. That same day, I talked to a U.S. government official in Baghdad who works on upstream oil issues and is in close contact with Iraq’s oil ministry. I asked him why foreigners would want to invest in Iraq, considering that the people within the oil ministry are being killed, kidnapped, and threatened on a regular basis and the overall death toll in Iraq hovers near 100 per day. His reply: the oil ministry officials “are suffering. But they still get the job done. They should be praised. It’s a tough situation here.”

In addition to the violence, corruption is rampant. And that corruption feeds Iraq’s fertile black market and the civil war/insurgency. On July 11, David Walker, head of the Government Accountability Office, testified before Congress and estimated that 40 percent of all the refined product in Iraq “ten percent of the domestically produced refined product and 30 percent of the imported refined product“ was being smuggled out of the country or sold on the black market. That black market is enabled, in part, by the price spread between the state-subsidized fuel price in Iraq and that same fuel’s price in neighboring countries. Iraqis currently pay about $0.44 per gallon for regular gasoline. That same fuel sells for about $0.90 in neighboring countries.

That 40 percent black-market estimate by the GAO may be too low by half. Waller of Lloyd-Owen regularly delivered motor fuel to a dozen storage depots in Iraq, including Najaf, Nasariyah, Karbala, and Al Kut. None of those depots had any metering equipment. And without metering equipment, whoever controls the depot has a free hand to sell that fuel however they like. When I asked for his estimate on how much of Iraq’s motor fuel is being sold on the black market, Waller responded without hesitation, “95 percent.”

Perhaps even more stunning than the lack of controls at the fuel depots is the lack of metering equipment in Iraq’s crude oil production — a problem that has been known for more than two years. In early 2004, the accounting firm KPMG began reviewing Iraq’s oil revenue accounting system. For the first six months of 2004, the review found that the Coalition Provisional Authority was “unable to reliably estimate the amounts of petroleum and petroleum products that were illegally exported.” Further, it said that “internal control systems over the Iraqi oil industry were insufficient to ensure that all petroleum and petroleum products were accounted for in the absence of a metering system.”

Little has changed since that report was published. By the summer of 2006 two years after the KPMG review, three years after the start of the war that has cost U.S. taxpayers a couple of hundred billion dollars the Iraqi oil ministry still didn’t have adequate metering on its crude export terminals. And it may not have that hardware in place until the end of this year. In late 2005, the U.S. Project Coordinating Office awarded a $30 million contract to a subsidiary of the Parsons Corporation to install metering equipment and other upgrades on the Basra (Mina al-Bakr) oil loading terminal. But the hardware won’t necessarily stop the cheating unless there is a software system connected to it that can provide an audit trail. The bottom line: in 2005, according to estimates done by Platts, Iraq may have lost 60 million barrels of crude due to corruption. At an average price of $50 per barrel, that’s a loss of $3 billion in revenue to the Iraqi central government.

Remember, the Iraqis perfected the smuggling game during the U.N. sanctions. The Oil-for-Food program was fraught with corruption among various oil traders and people acting on behalf of the Iraqi government. Between 1995, when the U.N. voted to create the program, and 2003, when the U.S. military invaded Iraq, Saddam Hussein’s government took in something on the order of $21 billion in illegal petrodollars.

And therein lies one of the most amazing facts about the Second Iraq War: the neoconservatives in the Bush Administration assumed that the American invasion would magically put an end to that corruption. They assumed that Iraq’s oil would allow them to fight the war on the cheap. In March of 2003, while testifying before Congress, then-Deputy Defense Secretary Paul Wolfowitz claimed that “the oil revenues of that country could bring between $50 and $100 billion over the course of the next two or three years.  We’re dealing with a country that can really finance its own reconstruction, and relatively soon.

That has not happened. Instead, in a different report (this one released on July 18, the same day that Bodman was in Baghdad), the GAO said that the rebuilding effort would cost American taxpayers another $50 billion.

The punch-line here is that authority and legitimacy are the key ingredients in fighting an insurgency. The Iraqi government and the U.S. military in Iraq have neither. And a key reason for that lack is that neither can provide security. Nor can they provide oil to the people. And those two commodities are interdependent. Without more crude, Iraq can’t afford security and infrastructure. Without security and infrastructure, it can’t produce more crude.

Like I said, it’s all about the oil.