Global Policy Forum

By Pratap Chatterjee

The line of ships at the Al Basra Oil Terminal (ABOT) stretches south to the horizon, patiently waiting in the searing heat of the Northern Arabian Gulf as four giant supertankers load up. Close by, two more tankers fill up at the smaller Khawr Al Amaya Oil Terminal (KAAOT). Guarding both terminals are dozens of heavily-armed U.S. Navy troops and Iraqi Marines who live on the platforms.

These two offshore terminals, a maze of pipes and precarious metal walkways, deliver some 1.6 million barrels of crude oil, at least 85 percent of Iraq's output, to buyers from all over the world. If the southern oil fields are the heart of Iraq's economy, its main arteries are three 40-plus inch pipelines that stretch some 52 miles from Iraq's wells to the ports.

Heavily armed soldiers spend their days at the oil terminals scanning the horizon looking for suicide bombers and stray fishing dhows (boats). Meanwhile, right under their noses, smugglers are suspected to be diverting an estimated billions of dollars worth of crude onto tankers because the oil metering system that is supposed monitor how much crude flows into and out of ABOT and KAAOT - has not worked since the March 2003 U.S. invasion of Iraq.

Officials blame the four-year delay in repairing the relatively simple system on "security problems." Others point to the failed efforts of the two U.S. companies hired to repair the southern oil fields, fix the two terminals, and the meters: Halliburton of Houston, Texas, and Parsons of Pasadena, California. The Special Inspector General for Iraq Reconstruction (SIGIR) is scheduled to publish a report this spring that is expected criticize the companies' failure to complete the work.

Rumors are rife among suspicious Iraqis about the failure to measure the oil flow. "Iraq is the victim of the biggest robbery of its oil production in modern history," blazed a March 2006 headline in Azzaman, Iraq's most widely read newspaper. A May 2006 study of oil production and export figures by Platt's Oilgram News, an industry magazine, showed that up to $3 billion a year is unaccounted for.

"Iraqi oil is regularly smuggled out of the country in many different ways," an oil merchant in Amman told the Nation (U.S.) magazine last month. "Emir al-Hakim [the head of the Supreme Council of the Islamic Revolution in Iraq] is spending all his time in Basra selling oil as if it were his own. People there call him Uday al-Hakim, meaning he is behaving the same way Uday Saddam Hussein was acting. Other merchants like myself have to work through him with the big deals or smuggle small quantities on our own. The petroleum is now divided among political parties in power."

The Resource Curse

The smuggling and black market operations bear striking parallels to Saddam Hussein's tactics for circumventing the UN embargo. Saddam was accused of selling some $5.7 billion worth of petroleum products on the black market over the six years of the Oil-for-Food program while United Nations inspectors turned a blind eye. Today, his successors stand accused of similar abuses.

Iraq sits on 115 billion barrels of proven oil reserves, the third largest in the world (behind Saudi Arabia and Canada). From a society that once used its oil revenue to create a social welfare state that provided education, health care and social services, the country has plummeted into the ranks of the poorest countries of the world.

Economists call this the "resource curse." Those blessed with non-renewable resources often benefit the least, because a few wealthy people control the resources, or war prevents almost anyone from the benefiting.

Iraq's main revenue source - earnings from the export sales of petroleum, petroleum products and natural gas - is currently managed by the Development Fund for Iraq. DFI's May 21, 2003 document, United Nations Security Council Resolution 1483, assigns this money to benefit the Iraqi people. The resolution replaces the previous United Nations-run Oil-for-Food scheme that lasted from 1997 until the March 2003 invasion.

Almost four years after the DFI was created, officially logged crude sales have generated more than $80 billion. The U.S.-led Coalition Provisional Authority (CPA) managed the DFI from the immediate aftermath of Saddam's removal until June 28, 2004, when the CPA was disbanded. During those 14 months, the CPA spent $19.6 billion of Iraq's DFI funds. The three succeeding governments have been officially in charge of the DFI revenues, although the influence of the U.S. military and political advisors has remained significant throughout. In the 32 months after the CPA left, the three governments spent $47 billion more.

Halliburton & Parsons

U.S. contractors have played a key role in the repair and upgrading of Iraq's oil infrastructure and expected the industry to pay for reconstruction. In January 2004, under project Restore Iraqi Oil II (RIO II), the Bush administration contracted with Halliburton to fix southern Iraq's oil fields and with Parsons to handle the northern fields. The two companies were supposed to be supervised by yet another contractor, New Jersey-based Foster Wheeler. (The first RIO contract was the infamous, secret no-bid contract issued to Halliburton before the invasion of Iraq. Although RIO II was competitively bid, Sheryl Tappan, a former Bechtel employee wrote a book criticizing the award as unfair.)

Halliburton and Parsons have long histories in Iraq, going back more than 40 years. Brown & Root, which is now part of Halliburton , began work in Iraq in 1961, while Parsons dipped into Iraq's oil sector in the 1950s. Foster Wheeler dates its work in Iraq to the 1930s.

These companies have a lot of experience at the terminals where the black market now thrives. Indeed, Halliburton built the ABOT terminal, then known as Mina al-Bakr, in the early1970s. After it was damaged during the Iran-Iraq war in the 1980s, Halliburton repaired the terminal, before it was bombed yet again during the 1991 Persian Gulf War.

The Khor al-Amaya oil terminal also saw a similar cycle of destruction and rebuilding. Built with Halliburton 's help in 1973, it was heavily damaged by Iranian commandos during the Iran-Iraq war, then again during Operation Desert Storm in 1991, and most recently in May 2006 by a major fire that destroyed 70 percent of its facilities. During the sanctions, Ingersoll Dresser Pump Company, a Halliburton subsidiary, had a secret contract to sell Iraq spare parts, compressors, and firefighting equipment for the refurbishment.

( Halliburton also a long history near the Turkish port of Ceyhan, from where Iraq sells oil produced at Kirkuk in northern Iraq. Halliburton runs the nearby U.S. military base at Incirlik, which was the staging ground for Operation Northern Watch that provided air protection for the Kurds during the 1990s.)

Measuring the Oil

With billions of dollars to spend and extensive experience with oil infrastructure and Iraqi ports, Haliburton and Parsons seem unable to deal with the routine problem of broken meters at the Southern Iraq terminals.

The kinds of meters they were supposed to repair or replace at ABOT are commonly found at hundreds of similar sites around the world. Because they are custom-built, shipped, then assembled and calibrated on site, the process can take up to a year. But the problem has persisted for four years.

After the 2003 invasion, the meters appear to have been turned off and there have since been no reliable estimates of how much crude has been shipped from the southern oil fields. (The northern oil fields in Kirkuk, which supply the Beiji refinery in Iraq and export crude to the Turkish port of Adana, has reliable metering but little oil to measure since insurgent attacks largely shut down the facility.)

Lieutenant Aaron Bergman, the U.S. Navy officer in charge of Mobile Security Squadron 7 at ABOT, says export authorities have "guesstimated" how much is being sold, with a back-of-the-envelope formula: Every centimeter a tanker lowers into the water equals 6,000 barrels of oil cargo. "So you can imagine," he said earlier this month to Stars & Stripes, a newspaper serving the U.S. military, the numbers could be off, "A couple of inches could equal 180,000 barrels of fuel." "I would say probably between 200,000 and 500,000 barrels a day is probably unaccounted for in Iraq," Mikel Morris, who worked for the Iraq Reconstruction Management Organization (IRMO) at the U.S. embassy in Baghdad, told KTVT, a Texas television station.

Neither US officials nor contractors have provided good reasons why, four years into the US occupation, the meters have not been calibrated, repaired, or replaced. One excuse is that the job of calibration requires special devices to assess the current meters and security issues make importing these devises problematic. Yet that and other security-related explanations fall apart given that the oil terminals are under 24 hour high security guard, lie more than 50 miles off-shore, and are accessible only by helicopter or ship. There are two possible explanations: that the project has been delayed by bureaucracy or that vested interests benefiting from the lack of oil metering (such as smugglers or corrupt officials) have prevented the project from moving forward.

Skyrocketing Costs

The RIO II project, which includes the meter repair work, has come under much criticism, although specific details are scarce. For example, the Bush administration issued Halliburton the RIO II order in January 2004 and gave detailed task orders in June. But despite not starting work until November 2004, the company charged the government millions of dollars for engineers who sat idle. Halliburton 's $296 million bill included at least 55 percent overhead. (In an estimate due later this month, SIGIR may predicts even higher overhead costs.)

A Parsons joint venture (with Worley of Australia), was also issued a contract in January 2004, given detailed task orders in June, and started work in July 2004. It has also been accused of charging high overhead costs while idle, although not as much as Halliburton . SIGIR estimate pegs its overhead at 43 percent.

In addition, in a series of scathing internal reports uncovered by Congressman Henry Waxman, supervisors Foster Wheeler criticized Halliburton 's cost. The U.S. Army Corps of Engineers issued a "cure" notice on January 29, 2005, ordering Halliburton to do a better job or else. After Halliburton did improve its cost controls, the military turned over the southern oil work to Parsons in mid 2005.

When Parsons took over the contracts, two years after the invasion, it hired a Saudi Arabian sub-contractor, Alaa for Industry, to help repair or replace the meters. The turbine meters were shipped to Kuwait for repairs but do not appear to have been fixed in a timely manner, although some have been fixed and re-installed earlier this year. Unofficial sources suggest that the Kuwaiti bureaucracy delayed the repair work: "The real reason for the hindrance to work at the ABOT is because Kuwait has a vested interest in minimizing Iraqi oil exports," an anonymous source who worked on the project told CorpWatch. His claim could not be verified. In mid-September 2006, the Iraqi oil ministry abruptly announced that it would pull the plug on the oil metering project, making future monitoring even less certain.

Asim Jihad, the oil ministry spokesman, told Al Hayat: "The American company had failed in keeping its promise to finish installing these meters; also, refusing to reveal the exact cost, except for saying that it is executing it within the American grant to Iraq and the sum of that grant is unknown to us too. This relieves the ministry from its obligation to it. Besides, many international companies presented good offers to implement the project in a record time due to its importance."

The oil ministry then invited British Petroleum and Shell to plan a comprehensive national metering project that would cover not only the oil terminals, but also the productions wells and the even the refineries. A SIGIR team traveled to ABOT in November 2006 to check on progress. Its unpublished report suggests that the work was less than half complete.

Suddenly, in December 2006, a high-level U.S. team traveled out to ABOT to inspect the meters. In a little-noticed announcement issued on a Saturday just before Christmas, John Sickman, the resident oil expert at the U.S. Embassy in Baghdad, said the meters had been fixed and were working fine.

"The measurement using the existing turbine meters and displacement meters at the offshore terminal at ABOT is transparent and the measurement devices are more than adequate," Sickman was quoted in the press release. "Furthermore, the crude oil vessels have measurement and quality samplers."

Indeed this is how the Dutch company Saybolt measured oil export under the United Nations Oil for Food program. The problem even today, according to experts consulted by CorpWatch, is that the meters have yet to be calibrated, so the data are basically useless.

Even if the meters are working properly, smuggling could still occur. "It's easy to steal crude if you knew what you were doing," Don Deaver, a petroleum metering expert who worked for Exxon for 33 years, told CorpWatch. "If you meaure too low or too high, someone will lose and some will one gain. It's why you need professionals who understand how the meters work to make sure that nothing is being lost or stolen."

U.S. government officials claim that little is being stolen. SGS (a British consultancy) "is providing independent third party loading certifications onsite for the customers. This, coupled with the recent installation of ultrasonic meter provides more than redundant measurement capability," said Sickman in December.

Days after the press release, in early January 2007, Parsons began work on the meters under a $57.8 million U.S. government-funded contract supervised by Major Dale Winger of the Joint Contracting Command in Basra. Almost as soon as work started, Winger was replaced by Lieutenant Commander Brian Schorn. When CorpWatch reached Schorn, he said he was not up to speed on what work had been done, and referred questions to his "front-office" in Baghdad at the U.S. Army Corps of Engineers.

Parsons Iraq Joint Venture spokesman Don Lassus also refused to comment to CorpWatch. The contract with the military does not permit the release of "any unclassified information," he said, without prior approval of the military.

Today no government officials have been able to establish conclusively whether oil is being smuggled or not. Even the future of the oil metering remains unclear. The latest report issued by SIGIR in January 2007 notes that repair and rehabilitation work at ABOT is scheduled to be finished by May 2007, but "it is unclear whether this project will be completed because of de-obligation requirements" that is to say that the funding could be cut.