Tuesday, June 30, 2009

Fun For Oil

You might recall that, during the Bush administration, much was made about the invasion of Iraq (and to an extent, Afghanistan) and the connection to the oil reserves, how secret plans had been drawn up by Cheney's energy task force before the war to divvy up the fields, and how the oil fields would pay for the war.

What we hadn't considered was that a free and independent Iraq, sans Saddam Hussein, might feel a little differently about it's main natural resource:
Only one of the bidders for the eight contracts to run oil and gas fields in Iraq has accepted oil ministry terms.

Six oil fields and two gas fields were available in a televised auction that was the first big oil tender in Iraq since the invasion of 2003.

Iraq has asked the rest of the companies to consider resubmitting bids for the other seven contracts.

How this worked was, Iraq set a minimum output for each of the fields (current production levels, which are minimal, were generally used). Output up to that level was free. After all, the government could do that now without help.

Beyond that level, companies were free to submit bids per barrel based on the amount of oil they predicted they could extract and sell to Iraq. Iraq would then sell to the lowest bidder.


The catch was, Iraq also had a secret ceiling figure in mind of what it would pay for each field, effectively putting a cap on how much oil each contract could produce.

If the bid exceeded that figure, either due to too high a per barrel price or too many barrels predicted, Iraq would then offer it to other bidders.

As you can imagine, this knocked out of the pack any of the more rapacious...pardon me...*koffkoffkapitalistkoffkoff*...sorry, the more rapacious oil companies.

In lieu of this, what you now have is a few oil companies who would treat the Iraq fields as a hedge. Since the per barrel fee is fixed and not subject to the vagaries of the market, oil companies have both a guaranteed income stream from it, and can ramp up or reduce production as they see fit, to ameliorate their corporate income flows.

Making them a little less subject to the crazy pricing that we saw in 2007-2008, when oil was all over the map. The Iraq government is the one picking up all the risk on the commodity exchanges.

But note that the oil people of the Bush administration can still make out on the deal. After all, Iraq owes America a big debt of gratitude and so would not be in a position to march lockstep with OPEC on price increases and could even sell to us at a discount.

The greedy oil barons will still be greedy, but their greed will now be at the mercy of the Iraqi parliament.