Future of Iraq: The sp<i>oil</i>s of war

How the West will make a killing on Iraqi oil riches

Iraq's massive oil reserves, the third-largest in the world, are about to be thrown open for large-scale exploitation by Western oil companies under a controversial law which is expected to come before the Iraqi parliament within days.

The US government has been involved in drawing up the law, a draft of which has been seen by The Independent on Sunday. It would give big oil companies such as BP, Shell and Exxon 30-year contracts to extract Iraqi crude and allow the first large-scale operation of foreign oil interests in the country since the industry was nationalised in 1972.

The huge potential prizes for Western firms will give ammunition to critics who say the Iraq war was fought for oil. They point to statements such as one from Vice-President Dick Cheney, who said in 1999, while he was still chief executive of the oil services company Halliburton, that the world would need an additional 50 million barrels of oil a day by 2010. "So where is the oil going to come from?... The Middle East, with two-thirds of the world's oil and the lowest cost, is still where the prize ultimately lies," he said.

Oil industry executives and analysts say the law, which would permit Western companies to pocket up to three-quarters of profits in the early years, is the only way to get Iraq's oil industry back on its feet after years of sanctions, war and loss of expertise. But it will operate through "production-sharing agreements" (or PSAs) which are highly unusual in the Middle East, where the oil industry in Saudi Arabia and Iran, the world's two largest producers, is state controlled.

Opponents say Iraq, where oil accounts for 95 per cent of the economy, is being forced to surrender an unacceptable degree of sovereignty.

Proposing the parliamentary motion for war in 2003, Tony Blair denied the "false claim" that "we want to seize" Iraq's oil revenues. He said the money should be put into a trust fund, run by the UN, for the Iraqis, but the idea came to nothing. The same year Colin Powell, then Secretary of State, said: "It cost a great deal of money to prosecute this war. But the oil of the Iraqi people belongs to the Iraqi people; it is their wealth, it will be used for their benefit. So we did not do it for oil."

Supporters say the provision allowing oil companies to take up to 75 per cent of the profits will last until they have recouped initial drilling costs. After that, they would collect about 20 per cent of all profits, according to industry sources in Iraq. But that is twice the industry average for such deals.

Greg Muttitt, a researcher for Platform, a human rights and environmental group which monitors the oil industry, said Iraq was being asked to pay an enormous price over the next 30 years for its present instability. "They would lose out massively," he said, "because they don't have the capacity at the moment to strike a good deal."

Iraq's Deputy Prime Minister, Barham Salih, who chairs the country's oil committee, is expected to unveil the legislation as early as today. "It is a redrawing of the whole Iraqi oil industry [to] a modern standard," said Khaled Salih, spokesman for the Kurdish Regional Government, a party to the negotiations. The Iraqi government hopes to have the law on the books by March.

Several major oil companies are said to have sent teams into the country in recent months to lobby for deals ahead of the law, though the big names are considered unlikely to invest until the violence in Iraq abates.

James Paul, executive director at the Global Policy Forum, the international government watchdog, said: "It is not an exaggeration to say that the overwhelming majority of the population would be opposed to this. To do it anyway, with minimal discussion within the [Iraqi] parliament is really just pouring more oil on the fire."

Vince Cable, the Liberal Democrat Treasury spokesman and a former chief economist at Shell, said it was crucial that any deal would guarantee funds for rebuilding Iraq. "It is absolutely vital that the revenue from the oil industry goes into Iraqi development and is seen to do so," he said. "Although it does make sense to collaborate with foreign investors, it is very important the terms are seen to be fair."