Oil and reconstruction in Iraq

Rebuilding Iraq won't be easy, but the first thing to sort out is who pays. Then there's the matter of Iraq's debt

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By  Massoud Derhally Published  May 6, 2003

|~||~||~|There’s no doubt the war in Iraq has been the cause of a rift in US-European relations. It certainly isn’t a secret that US-Arab ties are undergoing a phase of their own. However, as politicians try to mend the fences, there is much talk about pragmatic decision-making and how the US can play a leading role in reconciling these differences.

Countries that were vocal in opposing the conflict in Iraq, such as Russia, France and Germany are now eager to safeguard existing contracts they had in the country while trying to get new business as well. Some businessmen in the Arab world believe that if Arab companies were given a piece of the reconstruction pie in Iraq, then this would play a role in healing wounds.

Such talk seems premature though. With victory still not declared by General Tommy Franks, many affluent businessmen that Arabian Business spoke to say they don’t want to talk about reconstruction at the moment, for fear of appearing insensitive. Others say rebuilding Iraq is a monumental task and they ask just how Iraq will be rebuilt and where will money to rebuild a shattered economy will come from? There are also the questions of how reconstruction contracts are awarded and who will manage Iraqi oil.

Nathaniel Hurd, a consultant on United Nations Iraq policy, told Arabian Business that who gets forthcoming deals depends on several factors: who will make contract award decisions? Will the UN have any decision making power? Will Jay Garner’s Pentagon Group or the US Agency for International Development (USAID) have primary decision-making power? Hurd also says that one needs to take into account “to what extent EU members will try to carry favour with the US by doing whatever is seen as politically necessary to gain contracts.” These are pivotal questions as many inside and outside Iraq try to piece together a plan to rebuild the war torn country.

On the eve of the war in Iraq, Arabian Business interviewed Adnan Pachachi, Iraq’s former foreign minister. Pachachi estimated that it would cost US $80 billion to rebuild Iraq in the first year after war. That figure hardly seems enough now. Richard Segal, a research analyst at London-based emerging market debt trading firm Exotix says that the $80 billion includes all capital needs, including reconstruction funds, but he also points out that “reconstruction should take priority over repaying past debt, although renegotiation of these debts will be the fastest route to accessing new loans.”

But that may be difficult. To begin with, the US, which has spent US $20 billion to finance the war, estimates reconstruction will cost in the neighbourhood of $100 billion. Iraq, which once had outstanding claims against it in the amount of US$ 330 billion, according to Segal, is estimated to have an external debt of $103.4 billion to $129.4 billion, in addition, to resolved but unreimbursed compensation claims of $26.4 billion from the first Gulf war.
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Added to this, there are 51,235 claims still outstanding against Iraq, which could account for another $14 billion. According to Segal, Iraq may be facing a total debt liability of $155-160 billion or higher. “This [figure] is based on the sum of resolved but unreimbursed compensation claims, an estimate of awards from unresolved compensation claims, plus our tally of contracted debt liabilities, within which we estimate that half the 1980s payments from Saudi Arabia, Kuwait and other Gulf countries is considered grants and the remainder loans,” says Segal.

Iraq, according to Segal, will need 12-24 months to renegotiate the majority of its external debt. “Debts may be above of our estimated range, but any uncounted debt is probably $10 billion or less,” he says.

As the country moves forward, “the economy is the most critical aspect in getting the country back on its feet,” says a prominent banker in Bahrain. “The country will need top bankers, economists, engineers, technocrats and capital,” he adds.

But where will the money come from? Aside from the fact that Iraq’s oil fields are run down, only 15 of the country’s 74 oil fields are developed, according to news reports. The US Council on Foreign Relations and the James Baker Institute for Public Policy, say, in a recent report entitled, ‘Guiding Principles for US Post-Conflict Policy in Iraq,’ that repairing existing oil export installations will require $5 billion, and an additional $3 billion for operating expenses.

Reviving the country’s electricity-power base to what it was 12 years ago will cost another $20 billion. “There has been a great deal of wishful thinking about Iraqi oil, including widespread belief that oil revenues will help defray war costs and the expense of rebuilding the Iraqi state and economy,” says the report. “Notwithstanding the value of Iraq’s vast oil reserves, there are severe limits on them both as a source of funding for post-conflict reconstruction efforts and as the key driver of future economic development. Put simply, we do not anticipate a bonanza,” added the report.

But surely a country like Iraq, with the world’s second largest oil reserves, can pump enough oil to kick start growth? Well, at least not right away, according to experts. The country, which has a theoretical capacity of 8.2 million barrels per day, (bpd), produces only 2.6 and 2.8 million (bpd) and will need, according to some assessments, between $30 billion and $40 billion to restore and develop new fields. “Returning to Iraq’s pre-1990 levels of 3.5 million bpd will require massive repairs and reconstruction of major export facilities, costing several billions of dollars and taking months, if not years,” says the report by the Council on Foreign Relations.

A few weeks after the demise of the regime in Iraq, the reconstruction process is moving at a slow pace. The question some are asking now is if oil can’t pay for reconstruction, who will? The IMF and World Bank have signalled an interest in helping. “Certainly we stand ready [to help] in any situation where reconstruction can be helpful. We have a lot of experience,” World Bank president, James Wolfensohn, told a news briefing in early April. But then Wolfensohn said the United Nations would have to recognise a legitimate government in Baghdad because, “We need somebody to repay the money.” The World Bank is currently unable to lend money to Iraq, which is in default on $83 million in World Bank loans.

As the world struggles with the difficult task of nation building and its financing, USAID has tendered eight civilian contracts for post-war reconstruction since January 31. So far, contracts have gone to Halliburton, Bechtel, Research Triangle Institute, and Stevedoring Services of America. Other contracts are pending.

The way the deals were awarded has infuriated Arabs, Europeans and even prominent Iraqi exile figures, who say cronyism and overt political favouritism are influencing negotiations between US administration officials and icons of American industry. The fact that US vice president Dick Cheney served as chief executive of Halliburton, US national security advisor Condeliza Rice was once on the board of ChevronTexaco and George Shultz, secretary of state under President Ronald Reagan, is now on the board of Bechtel, does little in easing suspicions about how the contracts are awarded.
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At present, the only consolation seems that while no foreign companies are being invited to tender for a lead role in the reconstruction process, participation at the subcontractor level will be permitted. If that is the case, then rapprochement between US and Arab countries would appear possible, if some contracts are granted to Arab companies.

“If Americans really want to normalise relations with Arab countries and in particular the Gulf, one way is to buy their allegiance through local contracts,” says a Saudi businessman from a leading merchant family. “Once the private sector feels the benefit, it will be contagious.”

The businessman says he’s already getting requests from the US army. “In the last week, we received more enquiries than we have ever seen in the past from Kuwait and the US Army, and the potential in contracts is US $54 million annually,” he says. But Iraq is not a consuming country, says the businessmen, adding, “If we are to play a role in Iraq we have to be there, manufacturing in Iraq, and in my opinion that is the successful way of entering the Iraqi market. Those guys need jobs and a highly qualified skilled workforce, and to serve the market correctly you need to be there.”

At the same time though, the businessman stresses that Iraqis themselves need to play a role in rebuilding their country. They will have to follow the path of economic reform, put in place a legal infrastructure, instill a culture of corporate governance and make sure the country has a stable currency, perhaps by pegging it to the US dollar, the Euro or a mix of the two. “It’s important that local [Iraqi] companies have a role in reconstructing their own country,” he says. “If you look at Saudi Arabia, what has happened in the last 25 years is reconstruction and this is what will happen in Iraq.”

In early April, a consortium of companies from Saudi Arabia, Jordan, the US, Egypt and the UAE seeking to rebuild Iraq after the war received official commitments from America that more than $50 million in contracts would be awarded to them, reported the Saudi daily Al Watan. The manager of one of the companies, according to the Arab News, said the group had received “verbal commitments from America to double the number of contracts to the companies if they can execute projects correctly within price guidelines. The consortium comprises twelve companies specialising in construction, hospital supplies, airport and seaport maintenance and operation.”

America will surely have to award some of the sub-contracts to Arab companies. It would be ineffective for American companies to lug products across the Atlantic, the Mediterranean and then the Arabian Gulf.

“What will happen eventually is that the likes of Halliburton will manage the projects, but when it comes to material supply, it has to be local Arab companies because it’s just not cost effective [to source from outside the region,” says the Saudi businessman. “We [Arab companies] will play a major subcontractor role but not project or purchase management.”

Will Iraq, in 50 years, have the type of economic maturity and multi-ethnic democracy that Malaysia has achieved in 30 years? “Absolutely. I tell people in Saudi Arabia, you should thank God that Iran and Iraq both have internal problems,” says the businessman. “Because if they didn’t, we would be dead in Saudi Arabia in terms of industry, we would have no chance. They have so much potential.”
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REBUILDING IRAQ: US FIRMS IN THE RUNNING FOR CONTRACTS AND OTHERS THAT COULD DO THE JOB

INDUSTRY

CONSTRUCTION

US COMPANIES

Halliburton & Subs., Washington Group
Perini Corp., Parsons Group
Flour Daniel Corp., Louis Berger Group
Ja Lones Construction, The Dick Corp.
Contrack Int’l, Caterpillar

ARAB COMPANIES

Consolidated Contracting Co., Al Kharafi Group
Zamil Group, RMC Jordan, Jordan Steel,
Jordan Cement Factories
Arab Centre for Comm. & Real Estate.
Al Babtain Group, SABIC

EUROPEAN / CIS COMPANIES

ABB, Bouygues

ASIAN COMPANIES

Hyundai Construction, LG Construction
Daelim Industrial

MEDICAL

US COMPANIES

Guidant, 3M, Abbott Labs
Baxter, Bristol-Myers, General Electric
Johnson & Johnson, Pfizer International Inc.
Procter & Gamble, Tyco Int’l
Kimberly-Clark, Kodak

ARAB COMPANIES

AL Hikma, Arab Pharm. Manufacturing
Al Hayat Pharmaceuticals, Metromed
Yahmaa Medical Company, Al Babtain Group

EUROPEAN / CIS COMPANIES

GlaxoSmithKline, Nutris
Bayer, Dupont Medical
Intersurgical

ASIAN COMPANIES

Olympus

WATER US COMPANIES

Black & Veatch

ARAB COMPANIES

ADWEC

EUROPEAN / CIS COMPANIES

Suez
Saint Gobain

ASIAN

Marubeni Corp., Taisei Corp
Tokyo Electric Power, Mitsui & Co.

FOOD STUFFS

US COMPANIES

Proctor & Gamble, Kraft Foods
Tyson Foods, ConAgra Foods
H.J. Heinz Company

ARAB COMPANIES

Savola Group, AJWA Group
Al Marai Dairy, Al Babtain Group
Bahrain Airport Services, Americana Group

EUROPEAN / CIS COMPANIES

Danone, Nestle
Unilever

OIL

US COMPANIES

Halliburton, Bechtel
Chevron Texaco, ExxonMobil
Schlumberger

ARAB COMPANIES

ARAMCO
SABIC

EUROPEAN / CIS COMPANIES

TotalFinaElf, Lukoil
Zarubezhneft, Shell
British petroleum

ASIAN COMPANIES

Petronas
PTT Expl. Production

INFRASTRUCTURE

US COMPANIES

Telecomms Kit Lucent, Motorola

EUROPEAN / CIS COMPANIES

Alcatel, Siemens, Ericsson

ASIAN COMPANIES

Huawei

LOGISTICS US COMPANIES

Federal Express
UPS

ARAB COMPANIES

ARAMEX, AL Babtain Group

EUROPEAN / CIS

DHL
TNT

FINANCE US COMPANIES

Citicorp

ARAB COMPANIES

Arab Bank, Dar Al Dawa, National Bank of Kuwait
Olayan Group, Bahrain Monetary Agency,
Arab Banking Corporation

EUROPEAN / CIS COMPANIES

ABN AMRO, HSBC

ASIAN COMPANIES

Standard Chartered

ELECTRICTY

US COMPANIES

General Electric

ARAB COMAPNIES

ADWEC, Saudi Electricity Company

EUROPEAN / CIS COMPANIES

Electricite de France
International Power, National Grid

ASIAN COMAPNIES

Tokyo Electric Power

LEGAL

US COMPANIES

White & Case
Allen & Overy
Fenwick & West
Dechert LLP
Cleary, Gottlieb, Steen & Hamilton
Chadbourne & Parke

EUROPEAN COMPANIES

Clifford & Chance
Trowers and Hamlin ||**||

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