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Bush’s Pipe Dreams for Reconstructing Iraq

January 16, 2004

by Guy Dinmore
Published on Friday, January 16, 2004 by the Financial Times

Nine months after the fall of Baghdad, as insurgents target oil installations and Iraqis queue for fuel, the Bush administration has abandoned its pre-war assertions that Iraq’s natural resources would largely fund reconstruction. While opinion polls still show a majority of Americans support the war, most do not think they should be paying so much for Iraq’s rebuilding. Before the war, US officials engaged in a delicate balancing act. They sought to counter the pervasive belief in the Middle East and Europe that the war was all about oil, while vaguely telling the US taxpayer not to worry about the cost.

Behind the scenes, however, senior figures in the administration – including Donald Rumsfeld, defense secretary, Douglas Feith, in charge of Pentagon postwar planning, Vice-President Richard Cheney, as well as the CIA’s George Tenet – were being advised by former officials, experts and corporate bosses that the badly dilapidated Iraqi oil industry in no way represented a financial lifeline.

“With all the information available, it seems that those in charge chose not to know,” commented James Placke, a senior associate at Cambridge Energy Research Associates who took part in “Iraq: The Day After”, a report produced by the Council on Foreign Relations (CFR), a prestigious think-tank, shortly before the war. “Like other aspects of Iraq, those making policy believed what they wanted to believe about oil, without reference to the facts,” Mr Placke told the Financial Times.

Mr Placke did not personally brief administration officials, but James Schlesinger, former secretary of defense and energy, was one who did. Mr Schlesinger, who co-chaired the independent “task-force” set up by the CFR, said “nobody” believed oil revenues would support reconstruction costs. But there was an expectation the industry could be revived more quickly than has proved the case.

“There was a great deal of optimism about likely expenditures. I don’t know if they didn’t want to face up to realities, or come clean with their gloomier forecasts,” he told the FT, referring to the administration’s own internal studies. He said his advice followed that of the CFR report: that after production costs, the oil industry would provide at most an annual $10bn (€8bn, £5.5bn) to $12bn (€9.5bn, £6.6bn), if captured intact with no further deterioration.

The CFR study also noted that by late February, the Pentagon had still not worked out its plans. Mr. Feith was quoted as saying: “We do not have final decisions . . . on exactly how we would organize the mechanism to produce and market the oil for the benefit of the people of Iraq.”

An industry expert who briefed Mr Feith said big oil companies had delivered a clear message that the US could not expect them to plough money into Iraq until the occupying forces had resolved the issues of sovereignty and ownership rights.

Nonetheless US officials acted as if companies would be hammering at the door, that it would be more of a question of keeping out the French and Russians, who had signed provisional oil deals with Saddam Hussein’s regime.

Analysts also pointed out that there had been no shortage of information on the state of the Iraqi oil industry. Regular updates came from the United Nations, which implemented the oil-for-food program.

“Lamentable” was how Kofi Annan, UN secretary-general, described the Iraqi oil industry in December 1998, citing a study completed for the UN by Saybolt, a Dutch company. Production was then estimated at 2.5m barrels per day (bpd), with about 1.8m available for export. At today’s prices that would be worth about $20bn annually.

Nonetheless, in the build-up to hostilities, Americans were given a different picture. “Iraq, unlike Afghanistan, is a rather wealthy country,” Ari Fleischer, then White House spokesman, said on February 18 last year. “Iraq has tremendous resources that belong to the Iraqi people . ..Iraq has to be able to shoulder much of the burden for their own reconstruction.”

Paul Wolfowitz, deputy defense secretary, was even more upbeat before a hearing of the House of Representatives appropriations committee on March 27. “There’s a lot of money to pay for this that doesn’t have to be US taxpayer money, and it starts with the assets of the Iraqi people,” he said. “On a rough recollection, the oil revenues of that country could bring between $50bn and $100bn over the course of the next two or three years.”

The same day, Mr Rumsfeld told a Senate hearing: “When it comes to reconstruction, before we turn to the American taxpayer, we will turn first to the resources of the Iraqi government and the international community.”

At a time of war, only a few in Congress dared question the administration’s wishes for emergency war funding. One was Senator Robert Byrd, a veteran Democrat, who said he would not sign a “blank check”.

Mr Placke described the figures projected by Mr Wolfowitz as “total fabrication . . . a colossal misrepresentation”.

Another oil analyst, who asked not to be named, said his company’s presentation to the Future of Iraq project, led by the State Department, warned that oil output would be stuck at around 2.5m bpd for two years. Under the most optimistic scenarios, through developing eight major fields with huge foreign investment, output could rise to 6m bpd by 2011. It warned that oil revenues would not be enough to run the government and cover reconstruction costs.

The reports submitted to Future of Iraq did not assume large-scale damage through sabotage or looting, but focused on the decrepit state of the industry.

“The same message was given to the CIA,” he said. “At the time we were accused by the administration of being too negative . . . They thought they could get to 6m barrels much earlier. That was the basis of Wolfowitz’s remarks.”

He recalled a meeting with Mr Cheney, a driving force behind the war. “What shocks me most was that these guys don’t want to deal with reality. You have an aggressive administration wanting to do all these things, but doesn’t plan for even the 5 per cent chance of all this going wrong. This really confirmed to me that this war was not about oil.”

On April 9, the day the statue of the Iraqi dictator came tumbling down in Baghdad, Mr Cheney delivered another upbeat assessment of Iraq’s oil prospects. Output could reach 2.5m to 3.0m barrels a day by end-2003, generating an annual income of $20bn, he said. “That revenue will then flow to the Iraqi government and give them a resource base to start to do those things they need to do,” Mr Cheney told the American Society of Newspaper Editors in New Orleans.

Production has just recently climbed back to around 2.2m bpd, the average output rate in 2002. The president’s Office of Management and Budget told Congress last week that oil revenues in 2003 were $3.9bn and were projected to reach $13bn this year, not enough even to cover the government’s operating costs for 2004, which it forecast to reach $15.6bn. Export revenues are uncertain because sabotage has prevented significant amounts of oil from being exported through the northern pipeline to Turkey.

Although Congress knew it had been misled, Mr Bush won approval for his $87bn supplemental budget for Iraq and Afghanistan, which he signed into law in November.

Iraq’s oil ministry aims to increase the country’s oil production to more than 2.8m b/d by the end of March, bringing exports to more than 2m b/d. Its ability to do this hinges on whether or not it can get the pipeline to Ceyhan working again. Keeping it out of trouble, and the northern transit route open, will be even more difficult and just as important. Like US officials, Iraqi oil authorities have been over-optimistic before.

Additional reporting by Carola Hoyos in London

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