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U.S. May Tap Oil for Iraqi Loans
The
White House weighs a plan to pledge future revenue to finance postwar
reconstruction. Critics question the effort's legitimacy.
By
Warren Vieth
The Los Angeles Times
Friday 11 July 2003
WASHINGTON - The Bush administration is considering a provocative
idea to pledge some of Iraq's future oil and gas revenue to secure long-term
reconstruction loans before a new Iraqi government is in place to sign off on
the proposal.
The plan, endorsed by the Export-Import Bank of the United States
and some of America's biggest companies, would help avert a looming cash crunch
that has the potential to stall the postwar rebuilding effort. One U.S. official
rated the proposal's prospects at 50-50.
But the plan is drawing fire from some administration officials,
lawmakers, policy analysts and prominent Iraqis who say it would mortgage the
Persian Gulf nation's most treasured resource, prevent future leaders from
deciding how to spend their oil money and put U.S. taxpayers at risk.
"Iraqis believe their oil should not be touched by foreigners,
that it should remain in the hands of the Iraqi government and that no one has a
right to do anything before an elected government is in place," said Fadhil
Chalabi, executive director of the Center for Global Energy Studies in London
and a former Iraqi Oil Ministry official.
"As an economist, I believe in what they are proposing. You
couldn't come up with a better formula," Chalabi said. "But Iraqi politics and
the way they look at these things are not encouraging. It could create problems
later on. Better to wait until a government is formed."
That may be too late, in the view of the plan's supporters. The
Export-Import Bank and an industry coalition that includes Halliburton Co.,
Bechtel Group Inc. and other major companies that are interested in winning
contracts in Iraq are warning that unless steps are taken soon to secure new
funds, the reconstruction well could run dry.
"Common sense says get Iraq running. How do you get the country
running? By using its own oil revenue 100% for the benefit of the Iraqi people,"
said Export-Import Bank Chairman Philip Merrill. "If you want to wait three or
four years, be my guest. But that means the country is going to be running on
the dole of the United States."
Many experts agree that Iraq is headed for a possible cash flow
crisis as reconstruction costs escalate, initial funds are depleted and the
resumption of oil exports is delayed due to damage caused by looting and
sabotage.
But they part company over whether the U.S.-led occupation
administration in Baghdad has the legal or moral authority to pledge future oil
revenue as loan collateral before the issue can be debated by elected
Iraqis.
"Unless a reconstituted Iraqi government or the U.N. Security
Council authorizes the plan, it appears to violate international law," said Rep.
Henry A. Waxman (D-Los Angeles). "We do not have the right, without additional
authority, to impose financial obligations on the future government of
Iraq."
Waxman, the ranking Democrat on the House Government Reform
Committee, has asked the Export-Import Bank, the Pentagon and the U.S. Army
Corps of Engineers to disclose more information about the proposal and the role
played by Halliburton and other companies in crafting it.
Opponents of the plan warn that if a future Iraqi government
chose to stop making payments on the obligations, U.S. taxpayers could wind up
holding the bag.
"We're going to be on the hook, just like U.S. banks were on the
hook to Mexico in the early 1980s and U.S. lenders were on the hook to South
America in 1990," said independent energy economist Philip K. Verleger Jr.
Although the proposal is under consideration in Washington and
Baghdad, the State Department has expressed concern about the preemption of
Iraqi decision-making authority and the possibility that a future government
might choose to default on the debt.
The Treasury Department has voiced similar reservations, warning
that the creation of a new class of debt could complicate U.S. efforts to
persuade other countries to write off or restructure Iraq's massive prewar debt
burden.
Still, a Treasury official who requested anonymity said the plan
has merit and might well win approval. "It's a 50-50 proposition right now," the
official said.
Experts estimate that rebuilding Iraq could cost anywhere from
$20 billion to $100 billion over several years. Oil exports are expected to net
about $3.5 billion this year and $14 billion in 2004. But some of that money
will be needed for other purposes, and coalition officials continue to scale
back their export targets as pipeline explosions and power outages constrain
production.
The administration has been financing reconstruction from a
$7-billion pool of congressional appropriations, international contributions and
seized Iraqi assets. But concern is growing that the rising costs could consume
all of the money set aside so far and that initial oil sales will not make up
the difference.
"Existing revenues for reconstruction are not adequate to sustain
the effort much beyond the end of this year," said Edmund Rice, president of a
business group called the Coalition for Employment Through Exports. "The crunch
could come in late autumn or after the first of the year. But roughly six months
is when they're going to hit the wall on resources."
The oil loan proposal is designed to bridge the funding gap.
Under the plan, a portion of Iraq's future oil and gas revenue would be pledged
as collateral to repay loans or bonds issued to finance infrastructure
improvements. An Iraq Reconstruction Finance Authority would be established to
review projects and arrange the financing.
The industry coalition has proposed using the financing mechanism
to raise $3 billion to $4 billion a year for reconstruction work on a
project-by-project basis. The Ex-Im Bank envisions raising $25 billion to $30
billion to boost Iraq's oil production to as much as 5 million barrels a day
from its current level of less than 1 million barrels.
Depending on how much money was raised, the plan could wind up
claiming anywhere from a small fraction to the lion's share of Iraq's oil
revenue over a decade or longer.
The Iraqi reconstruction authority would use the borrowed money
to pay contractors for large-scale improvements such as renovating oil wells or
building power plants. The loans would be guaranteed by a consortium of export
credit agencies, including the Ex-Im Bank and its foreign counterparts. The
financing would be reserved for new projects and would be subject to competitive
bidding open to companies from all countries.
"Bechtel and Halliburton would have to rebid on a level playing
field with everybody else," said Rice, whose coalition represents 28 companies
and two trade groups. Members include such California-based giants as
ChevronTexaco Corp., Fluor Corp., Hewlett-Packard Co., Northrop Grumman Corp.
and Oracle Corp.
Ex-Im Bank officials believe the U.S.-led occupation already has
adequate legal authority to launch the oil loan program. In May, the U.N.
Security Council authorized allied officials to disburse Iraqi oil revenue for
humanitarian purposes, economic reconstruction, disarmament and "other purposes
benefiting the Iraqi people." It did not address the use of future revenue.
Bank officials say there is a precedent for such a plan in the
region. In 1948, a similar money-raising authority was established in behalf of
the new state of Israel before an elected government was in place to endorse
taking on the financial obligation.
Supporters of the oil loan idea insist that Iraqis should be
included in the decision-making process from the start. But until some form of
elected government is in place, the only Iraqi officials in a position to
participate are those appointed by allied authorities to staff the various
government ministries.
"We're better off to have the Iraqis involved," said Merrill of
the Ex-Im Bank. "Should they have control from Day 1? Probably not. Will they
have control at the end of the decade? For certain. Where on the curve do they
get control? I don't know.
"But they're likely to get there a lot quicker if they've got the
money than if they don't."
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Editor's Note | The letter is available for download in .pdf
format by clicking the above link. This requires the use of Adobe Acrobat
Reader, which is avaible for downlad below.
Tuesday 24 June 2003
Lt. Gen. Robert B. Flowers
ATTN:
Directorate of Military Programs
U.S. Army Corps of
Engineers
441 G Street, NW
Washington, DC
20314
Dear General Flowers:
I am writing to inquire about U.S. plans to mortgage Iraq's oil
to pay for contracts with private companies like Halliburton and Bechtel.
For many months, opponents of the war in Iraq have been arguing
that the real purpose of the war was to obtain control for the United States
over the vast oil fields in Iraq. In response, the Administration has
consistently said that Iraqi oil belongs to the Iraqi people. Recently, for
example you wrote me:
Iraqis will make all decisions about how much oil and refined
products to produce, when and where to produce for the domestic market and how
to distribute the product...Iraqis will decide for themselves all matters
relating to development, production, sale and distribution of Iraqi petroleum
products.
The Wall Street Journal has reported, however, that the United
States is considering a plan to mortgage Iraq's oil to pay for the costs of
reconstruction. Such an arrangement would commit future oil revenue from Iraqi
wells to paying the expenses of major U.S. contractors operating in Iraq. This
policy would appear to conflict fundamentally with the claim that Iraq's oil
belongs to the Iraqi people. In effect, the country's oil revenues would belong
to Halliburton, Bechtel and the other large U.S. corporations operating in
Iraq.
Not suprisingly, the Wall Street Journal reports that this
proposal "has the enthusiastic backing" of Halliburton and Bechtel. According to
the Wall Street Journal, this plan has been advocated by the Coalition for
Employment Through Exports, a U.S. business group whose members include
Halliburton, Bechtel and other large contractors in Iraq. This group has been
"knocking on doors throughout the Bush Administration" to promote the mortgage
proposal.
I am writing to request information about this plan to mortgage
Iraq's oil. In particular, I am interested in the role, if any, that Halliburton
and other companies working in Iraq may have played in shaping this plan.
Specifically, I request that you:
1. Describe the plan being considered to securitize Iraq's oil,
including details such as the duration of the plan and the amount of Iraqi oil
involved;
2. Identify all contacts concerning this plan between the Corps
and any nongovernmental party or its representative(s);
3. Provide copies of all records (including telephone records,
notes and any other form of written or electronic communication) related to item
2 above.
Thank you for your prompt attention to this important matter.
Sincerely
Henry A. Waxman
Ranking Minority Member
(In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.)
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