Private Empire: ExxonMobil and American Power

by Steve Coll

  Initially, after the war began, ExxonMobil and other major American oil companies pushed the Bush administration to persuade Iraq’s government to adopt production-sharing agreements or other contract terms that would allow private oil companies to book Iraqi reserves for Wall Street. An early study of Iraq’s oil industry carried out for the Coalition Provisional Authority by the consulting firm BearingPoint, Inc., suggested to Iraqi oil officials the benefits of production-sharing deals; the study cited nations such as Azerbaijan as examples.

  In Baghdad and Washington, Bush administration officials told their Iraqi counterparts that contract matters were up to them, said a State Department official involved, but they also made clear to the Iraqis, as the official put it, “You lack capital, you lack technology, and your workforce needs to be reeducated. You have to offer some incentives to allow the companies to come in. Of course, the whole issue is booked reserves.”8

  What hope ExxonMobil had to own a share of Iraq’s oil rested on the long, costly efforts of the Bush administration to remake Iraq’s oil policies after the invasion. From the beginning, executives from the American oil industry, almost all of them from Texas, had led the Bush administration’s efforts; they volunteered for the mission, uncompensated. Philip Carroll, the former Shell U.S.A. executive and friend of George H. W. Bush, who had been recruited before the 2003 invasion to advise Iraqi and American officials about Iraq’s oil sector, had resisted the Bush administration’s most ardent free-market ideologists, particularly those who advocated outright privatization of Iraq’s state-owned oil companies. When analysts at the conservative Heritage Foundation called the privatization of Iraq’s oil “a no-brainer,” Carroll quipped, “It’s a no-brainer: Only someone with no brains would think of that.”9

  After Carroll left the Coalition Provisional Authority, a succession of other American oil industry veterans arrived in Baghdad one after another to serve as senior advisers on oil restoration and policy: Rob McKee, who had run upstream operations at Conoco, and Mike Stinson, another former Conoco executive. They slept in trailers in the Green Zone, worked in dusty sections of the Republican Palace, endured nightly mortar rounds, and braved ambushes when they rolled in armored sport-utility vehicles across town to the oil ministry for meetings. Robert Morgan, a British oil industry veteran, died in one such insurgent ambush. Diaries the American oilmen kept during their deployments as advisers depict a dizzying atmosphere in which a few patriotic, talented Iraqi oil technocrats struggled in an environment of political dysfunction, rumors of corruption, and constant violence. On the American side, McKee and Stinson, who considered themselves conservative patriots called to public duty, and who carried firearms outside the Green Zone to protect themselves, found their idealism sapped by petty bureaucratic infighting in Washington and reams of federal government paperwork.

  The American oil advisers in Baghdad after 2003 knew well what their colleagues in the international oil business wanted from Iraq: legal and financial clarity, and contract terms that allowed bookable reserves. If they had any doubts about that, oil executives arrived regularly in Baghdad to lobby them. Sam Laidlaw, a Chevron executive, turned up in Baghdad early on “to see if he could represent a consortium of American companies to put possible [production-sharing contract] terms in front of the Iraqis” and to “find the right kind of financial vehicle that would get around the U.N.” controls on Kuwaiti claims.

  When Iraqi political leaders heard that sort of talk about foreign ownership of the country’s oil, it only inflamed the “politics or kind of the grassroots emotional issues of ownership of a national resource,” recalled Norm Szydlowski, a Chevron veteran who worked with McKee and Stinson as an adviser in Baghdad. “Many people [were] convinced that the U.S. presence and the coalition [was] here to ‘take their oil.’”10

  The American oil advisers were wealthy men at the ends of their careers; they were not in Baghdad to make money, but rather to have an adventure and serve the Bush administration. Their outlook about the bookable reserve question was that, first, it was up to the Iraqis to decide, but second, in the long run, what was good for Iraq probably would also be good for Western oil companies. It seemed to the American advisers that Iraq’s democratic government should first establish a strong national oil company, comparable to the ones in Saudi Arabia, Kuwait, and many other Middle Eastern nations. A unified, integrated Iraqi national oil company and its political masters could provide Baghdad’s politicians with a sounder footing to decide whether, as in Africa and some parts of Southeast Asia and Central Asia, the government wanted to invite foreign companies in and allow them to book some of Iraq’s oil, in exchange for capital and up-to-date technology, or try to go it alone, perhaps with service companies such as Halliburton and Schlumberger. “Although I’m a free-marketer and a capitalist,” Rob McKee observed, “it was very apparent to me and everybody else that Iraq needed a central energy policy.”11 That had to precede decisions about sharing reserves with international companies.

  The invasion had shattered the old Iraqi state, effectively breaking its politics into sectarian and regional pieces tied together by a weak, continually renegotiated, inexperienced regime in Baghdad, one lobbied heavily not only by the United States, but also by Iran. Year after year, the country’s new leaders talked about oil policy reform, but they could not agree on a national oil law.

  During this interregnum, while ExxonMobil and the other international majors hunkered down in Amman and Dubai, small-time operators and freelance wildcatters—Israelis working through Turkish front companies, Russians, and American and British adventurers—turned up in the Green Zone looking for fast deals. Some individual wildcatters drove themselves by car from Jordan to Baghdad, barreling down insurgent-controlled highways, “dumb and courageous at the same time,” as McKee put it.

  The adventurers were aided by splits in Iraqi decision making about how to sell oil. Coalition Provisional Authority Order Number 39 banned new contracts that would exploit Iraq’s natural resources until an elected government in Baghdad could be seated under a new democratic constitution. Iraq’s northern Kurdistan minority, however, which had organized itself under an entity it called the Kurdish Regional Government, ignored this edict.

  The best Iraqi oil fields lay in the Shiite-dominated south of the country and employed export pipelines leading to the Persian Gulf. The northern Kurdish regions contained large fields of heavier oil and natural gas, but options for overland export were limited. After 2005, Kurdish leaders interpreted Iraq’s new constitution to mean that oil production would be “locally managed by the people living in the regions,” as the Kurdish Regional Government’s minister of natural resources, Ashti Hawrami, put it.12 The Shiite-dominated government in Baghdad declared that Kurdish decision to be illegal and unconstitutional, but it found itself powerless to stop the K.R.G. from letting contracts. To attract risk takers to its legally disputed fields, the Kurds let production-sharing contracts with fully bookable reserves on terms designed to excite Western capitalists. Early takers included a small Norwegian producer, D.N.O., and a firm called Hunt Oil, headquartered in Dallas, which had multiple personal ties to the Bush White House.

  Shahristani and other oil ministry officials in Baghdad warned ExxonMobil, Chevron, Shell, BP, and other major international firms that if they tasted Kurdish crude, they would never, ever see a drop of Iraq’s bigger oil fields in the south. They also declared the production-sharing contracts let to D.N.O. and Hunt to be illegal under Iraqi law.

  Oliver Zandona and other industry lobbyists pushed the Bush administration in Washington after 2005 to sort out the Kurdish mess. “The policy question before us was, ‘What do you do with these contracts?’” recalled a Bush administration official involved in the discussions. “I have to say, I think we really screwed that one up.”13 By failing to make absolutely clear that Western oil companies should not cut independent deals with the Kurds, and by winking at the Kurdish contracts that had already been negot
iated, the administration sent mixed signals to companies and Iraqi political leaders alike, and may have prolonged the country’s debilitating stalemate over oil sharing.

  The Kurds were the most pro-American faction in Iraq, however. There was a natural bias inside the Bush administration to cut the Kurdish Regional Government slack because of all the ways Kurds cooperated with Bush’s state-building project.

  During 2005 and 2006, Meghan O’Sullivan, the influential National Security Council official overseeing Iraq policy for the Bush administration, shepherded through a formal, classified, interagency policy review on Iraq strategy, including a subsection on Iraq’s oil. The aim was to promote oil as a means of finance and political unity for the struggling Iraqi state. That policy was formalized in 2006, briefed to President Bush, and dispatched to embassies worldwide by State Department cable. The Bush administration urged Iraq to negotiate a single national oil law that would account for Kurdish autonomy, clarify the legality of the Kurdish wildcatter contracts, and provide a basis for large-scale investment in the future by the likes of ExxonMobil.

  As a practical matter, however, because there was no sanction placed on companies such as D.N.O. and Hunt Oil that were cutting side deals to pump Kurdish crude, the Bush administration effectively signaled neutrality on the matter—as if what was at issue in the Kurdish sidebar contracts was just a business dispute, not a potential fault line through Iraq’s ethnic and sectarian fabric. A firmer policy would have sanctioned D.N.O. and Hunt for jeopardizing Iraqi unity or banned their dealings outright under American law.

  The Hunts were colorful adventurers whose private, family-run firm had chased oil dreams in hard places since 1934. The Hunt brothers famously cornered the world’s silver market at one stage, precipitating a crash. Ray L. Hunt, a conservative maverick, became chief executive in 1974; later, he turned operations over to his son, Hunter L. Hunt, though the father remained an active player. By the time of George W. Bush’s Iraq War, Hunt Oil described itself as a firm that specialized in “unconventional” resource deals; it owned and produced oil in the tribal hinterlands of Yemen, among other places. Risky Kurdish production-sharing contracts appealed to the firm’s traditions and instincts.

  The Hunts also enjoyed deep ties to the Bush White House. Ray L. Hunt served on the president’s Foreign Intelligence Advisory Board, which reviewed intelligence issues and operations. Through the board, Hunt had access to classified assessments about Iraq’s politics and economy. In addition, Jeanne Phillips, a Bush fund-raiser whom the president rewarded in 2001 with an appointment as U.S. ambassador to the Organization for Economic Cooperation and Development in Paris, France, had moved from the administration to become a senior vice president at Hunt Oil. Eric Otto, a young Republican campaign activist who worked on oil industry issues in Baghdad at the Coalition Provisional Authority, made his way from the Green Zone to Hunt Oil’s Dubai office, where he helped Hunt put together the Kurdish deals. Given the political pedigree and backgrounds of these Hunt executives, it would be entirely reasonable for the Kurdish Regional Government to assume that Hunt had some sort of sanction from Washington, even as State Department spokesmen clucked that Hunt’s search for Kurdish oil deals wasn’t “particularly helpful” because it undermined efforts to negotiate a national oil law, as urged by ExxonMobil and other larger corporations.

  Ray Hunt flew into Erbil, the seat of the Kurdish Regional Government, in September 2007 to meet with K.R.G. president Masoud Barzani; Hunt thereafter emerged as the first U.S.-headquartered oil company to win a share of Iraqi crude, through a production-sharing contract that would allow booked reserves and provided Hunt with lucrative profit margins.

  David McDonald, a Hunt executive, said the company hadn’t asked permission from the Bush administration to make this deal: “We do not seek advice as to whether or not Hunt should proceed with an exploration contract and we were never advised not to do so.” President Bush said publicly, “I know nothing about the deal.” A subsequent State Department investigation did not contradict Bush, but it found that administration policy about the Kurdish oil contracts was “ambiguously articulated” and lacked the force of law. Hunt had exploited the Bush administration’s foggy policies and benefited from its divided attitudes.14

  The lure of quick oil profits in Kurdistan attracted liberal opportunists, too. Peter Galbraith, a son of the economist John Kenneth Galbraith, was a longtime Democratic foreign policy aide who served as ambassador to Croatia under President Bill Clinton. Galbraith had long campaigned for Kurdish rights and autonomy. After the 2003 invasion, he quietly became a shareholder and partner in D.N.O.’s Kurdish oil deals; his stake grew to tens of millions of dollars. As he profited from Kurdish oil, Galbraith advised Kurdish officials during constitutional negotiations with Baghdad that concerned the disposition of Kurdish oil fields, wrote essays in the New York Review of Books, and delivered speeches promoting Kurdish autonomy without disclosing his own financial interests. Galbraith subsequently apologized to editors and readers of the New York Review; he wrote that while his business arrangements were subject to confidentiality agreements, “I should have stated that I had business interests in Kurdistan. I regret not having done so.”15

  Meghan O’Sullivan left the Bush administration before the Hunt deals, in September 2007. She became a professor at Harvard University. Late in 2008, she accepted a consulting agreement with Hess Corporation to provide political risk assessments about regions worldwide. These included briefings on the Middle East and Iraq, where she also provided introductions for Hess executives. O’Sullivan taught at Harvard about the geopolitics of oil, and she was interested in high-level strategic consulting, but she did not want to profit from particular oil deals in the country where she had overseen war policy, although Hess offered her that opportunity. She recused herself from Kurdish contract negotiations and declined compensation linked to specific transactions in Iraq. Hess eventually announced an agreement to produce oil in Kurdistan.16

  The tan envelope Richard Vierbuchen dropped into the glass box at the Al-Rashid did not win a prize. For a moment, it seemed as if it might. There was “a buzz the room,” as a U.S. embassy cable put it, because ExxonMobil proposed a large increase in output at Iraq’s prized Rumaila field—the third largest oil field in the world—and said it would accept only $4.80 per barrel in what Iraq referred to as the “remuneration fee” that would be paid to international companies for their work, once certain criteria were met. Some oil pros in the audience said they were shocked that ExxonMobil would accept such a low per-barrel fee; according to one calculation, the bid would allow Exxon only a 9 percent rate of return, far below its normal global targets, and a profit margin normally accepted only in highly stable, low-risk political environments.

  A staff member from the Ministry of Oil soon appeared with a red envelope, “which turned out to be the key envelope in this venture,” as an ExxonMobil executive put it later. The red one contained a maximum per-barrel price—the maximum remuneration fee, or MRF—to be paid by Iraq’s government to any international bidder. This turned out to be only $2 per barrel. “There was stunned silence,” the American cable reported. “Giggles were heard. . . . Minister Shahristani grimaced on several occasions as he opened the bid envelopes and saw how far apart most bids were from his MRFs.”17 It became clear that ExxonMobil and virtually all of the international companies that had turned up at the Al-Rashid auction had asked for more money per barrel than Iraq’s government was willing to pay, even though ExxonMobil and many of the others had reduced their target profit rates in order to get an initial share of Iraq’s oil bounty. The auction, therefore, failed—except, perhaps, as reality television for entertainment-starved Iraqi audiences.

  The event soon triggered a new round of direct negotiations between international companies and the Iraqi government designed to bridge the price gaps, however. The auction had been so transparent and regimented, in the opinion of ExxonMobil executives, that it left out s
ubtler issues such as the potential benefits to Iraq of technology transfers, job training, and the like. The inability to negotiate and talk about these other issues at the Al-Rashid auction was the “dark side of transparency,” as ExxonMobil’s executives told their Iraqi counterparts, jokingly.18 An ExxonMobil executive complained to the U.S. embassy in Baghdad that many aspects of Iraq’s contract plans had not been finalized or made clear, and that in any event, “transparency and discretion should not be mutually exclusive.” The executive declared that ExxonMobil would seek to “close” contracts outside of the public auction system. The corporation revived the ideas first presented in its 2006, $100 billion “transformative” plan for Iraq. The Bush administration’s diplomat feared that ExxonMobil’s private negotiations would “harm the perception that oil and gas contracts will be transparently awarded,” a linchpin of Bush’s oil policy in Iraq.

  ExxonMobil complained to the Baghdad embassy that the Iraqi government had rejected a bid for the West Qurnah oil field “even though it would have generated up to $50 billion in investment, up to $600 billion in revenue to the [government of Iraq], and up to 200,000 direct and indirect jobs.” The corporation’s terms would have given Iraq “a 98 percent share of gross revenue,” compared to a global average in the 70 percent range for such contracts. “The bid failed,” an ExxonMobil executive said, because the Ministry of Oil “demanded a 99 percent share.” He added that the corporation would seek to “educate” Iraq’s government about global standards.19

  Iraq’s government had taken advice from sophisticated oil consultants and bankers to protect its interests and achieve its production objectives. The provisional, proposed contracts it offered in private talks during the months after the Al-Rashid auction would pay out only after ExxonMobil reached a production target—the corporation would be paid only on barrels it produced above that threshold.