“We’re Confident You Can Book the Reserves”
Before 2003, the marble floor in the entrance lobby of Baghdad’s flagship Al-Rashid Hotel contained an inlaid tile mosaic of America’s forty-first president—not a convincing likeness, but a recognizable one. The mosaic rendered George Herbert Walker Bush in a suit, tie, and pocket chief, accompanied by a caption: “Bush Is Criminal.” After the invasion of Iraq led by America’s forty-third president, George W. Bush, the Al-Rashid’s ownership redecorated.
The hotel was a tall, rectangular building with concrete balconies, surrounded by green lawns and palm trees; it presented an inviting target to the mortar squads of the anti-American insurgents who embroiled Baghdad in violence after the invasion. The Al-Rashid lay within the walled Green Zone, where American and Iraqi authorities sought to govern and stabilize the country. Rocket attacks, parades of demanding international visitors on tight schedules, and repetitive conferences aimed at arresting Iraq’s downward spiral took a toll on the Al-Rashid’s staff and ambience.
On June 29, 2009, Richard Vierbuchen, an ExxonMobil vice president in charge of upstream operations in the Middle East, made his way to the Al-Rashid’s ballroom, which had been decorated emphatically in green, the color of Islam. Rows of green cloth chairs faced a stage backed by a green curtain; on the stage, officials from Iraq’s oil ministry sat at a long table draped with shiny green bunting. To one side, propped on a stand, stood an empty glass box about the size of an aquarium. Television lights saturated the room in brightness.
Vierbuchen was a tall, slim, athletic-looking man in his fifties. He held a doctoral degree in applied geophysics from Princeton University and had worked in the Arab world and Central Asia for the corporation for many years. After 2003, ExxonMobil’s Global Security and political risk analysts had advised Tillerson that the corporation’s executives should stay away from Iraq, as the threats of kidnapping and violence were too great. Vierbuchen and his colleagues had talked with Iraqi government officials about the possibility of ExxonMobil’s bidding for work in Iraqi oil and gas fields, but these meetings took place outside the country—in Jordan, Turkey, the United Arab Emirates, Europe, or the United States.
Now, at last, a somewhat calmer Iraq was on the verge of putting some of its immense reserves—the second- or third-largest combined oil and gas bounty on the planet, after Saudi Arabia and alongside Russia—up for bids by international oil companies. Iraqi politics and pride demanded that companies wishing to participate in the auction send executives in person to Baghdad. Vierbuchen could be assured, at least, that thousands of American soldiers still remained in the Iraqi capital, providing security to the Green Zone and other critical installations.
After the Second World War and before the rise of resource nationalism in the Middle East, ExxonMobil had shared in a lucrative oil concession in Iraq. The corporation had owned and produced some of the country’s richest, sweetest reserves, located near the head of the Persian Gulf. Saddam Hussein had thrown Exxon out in 1972.
The Al-Rashid auction had the trappings of a game show. Prime Minister Nouri Al-Maliki delivered a speech. The American ambassador, Christopher Hill, came to listen and watch. Live on national television, one by one, oil executives and Iraqi officials dropped envelopes of varying colors into the square glass box onstage. Screens in the ballroom tabulated certain scores for each bid, using guidelines issued by the Iraqi Ministry of Oil. The scores sought to measure which oil company offers would most benefit Iraq. The large, invited ballroom audience applauded when Iraqi officials opened some of the envelopes.
The day’s purpose was to provide Iraq a much greater reward from its oil wealth. Six years after the American invasion, despite the Bush administration’s investment of $4 billion of U.S. taxpayer funds to rehabilitate the country’s oil infrastructure, and the loss of countless lives, Iraqi crude production remained stuck at about 2.5 million barrels per day, below its peak during the Saddam years. Moreover, Iraq’s anti-American insurgency had evolved by 2006 into a vicious civil war along Iraq’s Sunni-Shia sectarian fault line. The war was one reason why the oil industry had underperformed. Decrepit pipelines dating to the Saddam era, inadequate electricity, and field production technologies that had barely been updated since the 1970s meant that even when violence gradually subsided, after the “surge” of U.S. forces President Bush ordered into Baghdad in 2007, Iraq still lacked the means, on its own, to raise oil production quickly. Outside estimates of the investments needed to bring Iraqi production up to 6 million barrels per day or more—a target easily within reach, if geology were the only factor—ranged from $25 billion to $75 billion. Iraq had organized the Al-Rashid auction to accept bids from potential foreign investment and technology partners—not only oil corporations from the free-market West, but state-owned companies from Russia, China, and India as well. The glass box and the television cameras were intended to assure the public that the outcome would be transparent and not subject to the sort of corruption and official theft that was otherwise prevalent in the country.
Richard Vierbuchen had been involved in the negotiations and paperwork to “prequalify” ExxonMobil for the auction. He regarded the reopening of Iraqi oil to outside investment as one of the world’s great oil opportunities—a unique prospect, given the undeveloped size and proximity to sea-lanes that Iraq’s big southern fields offered. The oil was of exceptionally high quality, “almost like engine oil,” as an American government official who worked with Iraq on its oil industry put it.
Vierbuchen rose from his chair when ExxonMobil’s turn arrived. He ascended the stage and walked toward the glass box. He carried a tan envelope. The bid inside contained, in accordance with rules set by the Iraqi oil ministry, just two numbers: a target for increased production in the particular oil field for which ExxonMobil was bidding, and the price per barrel, in U.S. dollars, that the corporation wanted to be paid. Vierbuchen smiled awkwardly for the cameras and dropped his envelope in the box.
ExxonMobil’s bid on that summer’s day in 2009 was the product of six years of patience, lobbying, and a willingness within the corporation’s leadership to work at times outside of the normal ExxonMobil playbook. The uniqueness of Iraq’s position as a war-scarred oil giant that had vast reserves and easy export routes demanded creativity. It also required a subtle understanding of the ways that Iraq’s oil future would run through Washington.
On July 26, 2006, a typically hot and muggy summer’s day in the American capital, Oliver Zandona, who followed Iraq oil issues in ExxonMobil’s K Street office, arrived at 1000 Independence Avenue, the headquarters of the United States Department of Energy. George W. Bush’s friend and secretary of energy, Sam Bodman, had arranged a meeting between Iraq’s visiting minister of oil, Hussain Al-Shahristani, a gray-bearded Shia politician, and representatives of major oil companies, both American and European.
Zandona and other oil company representatives peppered Shahristani with questions about when Iraq might finally pass a law specifying the legal rights of international companies and when it might be in a position to provide adequate security. They advocated production-sharing agreements and “stressed that certainty and consistency in laws and stable taxing regimes are important,” according to minutes of the session.
Shahristani said he was hopeful that partnerships with international oil giants might soon be possible. He had a message, however. The oil companies should not talk about contracts to anyone in the Iraqi government or in Iraq’s diverse political parties but him, the ministry official in charge. Companies should not attempt to cut side deals that were not directly negotiated by the oil ministry.
Shahristani raised his index finger in the air. “Clean games, gentlemen,” he told the company lobbyists and executives. “Clean games.”
It was an aspiration, at least.
Zandona helped to shape ExxonMobil’s basic strategy for Iraq after the 2003 invasion. Essentially, the strategy was to wait out the war and maintain a healthy public distance from the tainted Bush administration, while also remaining in close private contact with American officials to stay up to date and to push for policy that would lead to foreign investment in Iraq’s oil fields. “From Exxon’s perspective, Iraq is the last of the easy oil,” said a State Department official who interacted with the corporation frequently.
Immediately after the U.S.-led invasion, ExxonMobil and other international companies bought or “lifted” Iraqi crude at southern terminals, at the head of the Persian Gulf. These direct oil sales to well-known international oil companies were designed and authorized by the Bush administration’s occupation authority in Baghdad, the Coalition Provisional Authority. Saddam Hussein’s regime had sold oil legally under the United Nations Oil-for-Food Programme (although many of these deals were compromised by payoffs and corruption) and also off the books, by smuggling through middlemen. When the United States established power in Baghdad, its occupation leaders wanted to assure Iraqis that the days of Saddam Hussein’s shady oil smuggling and corruption were over, and that profits from Iraqi crude would not be skimmed off by fly-by-night traders and middlemen. Iraq did not have the capacity to ship its own oil to spot markets in Europe, where cargoes of oil were bought and sold for cash, or to refinery customers in Asia; its oil had to be sold to middlemen, for onward sale. The postwar oil sales to well-known Western oil companies benefited ExxonMobil’s downstream and oil-trading operations, but the margins on such trades were thin, and the deals were a far cry from the big and profitable prize of owning a piece of Iraq’s upstream oil production over the long run.
As it sold ExxonMobil Iraqi crude in 2003, the Bush administration also urged the corporation to open a Baghdad office to lend support and credibility to what its occupation leaders hoped, naively, would be a rapidly normalizing country. Lee Raymond declined. By October of that year, violence was spreading across Iraq. The Coalition Provisional Authority increasingly was not in a position to make international oil deals; it was struggling to provide Iraq with adequate supplies of gasoline and electricity. An Iraqi government that would be credible enough with the Iraqi people to bargain on a subject of such symbolic and material importance as oil production partnerships with foreign companies looked a long way off.
“If you don’t feel like you can protect your people, [if] you put them in a position where they are really vulnerable, then you don’t have any business being there,” recalled Lee Raymond. “It just seemed for a time, with everything going on in Iraq, [it would be] a long time before anybody could meet the threshold of putting people in there.”
The corporation ran a regional office in Amman, Jordan, where Iraqi businessmen and refugees gathered as the war darkened, and another in Dubai. ExxonMobil used this forward position to monitor events and meet with Iraqi officials and executives from its historically state-owned oil companies. The corporation hired a retired U.S. Army colonel who had run security for the oil policy section of the Coalition Provisional Authority to help advise on security decisions. In Houston, Scott Ingersol, who ran ExxonMobil’s Iraq program, assembled a team of experts, including former Bush administration officials who had learned about Iraq’s oil during the war—lawyers, business development specialists, and political risk analysts. If and when there was a way in, they would be ready to move quickly.
ExxonMobil had scant knowledge about the leading executives and managers in Iraq’s decaying oil industry. Aging technocrats—many trained in the United States, the United Kingdom, and Europe before Saddam Hussein’s coup—ran oil production, but they had been isolated and monitored by Saddam, who distrusted all but his most loyal clansmen. The corporation gradually rebuilt personal contacts within the Iraqi oil sector, particularly with senior technicians trained in the West and with promising younger engineers who wanted up-to-date training on technologies. In 2005, spurred by the Bush administration, Iraq signed memoranda of understanding with about thirty international oil companies, including ExxonMobil. The companies agreed to provide training to Iraqi oil technicians and to carry out studies.
“Basically,” said an American official involved in constructing these initial deals, ExxonMobil and its American and European peers told the Iraqis, “we’re going to spend $20 million on you guys over the next years. All you need to give us is people. What’s in it for us? Well, hopefully, we can develop a relationship with you, impress you with what we’ve got, and do business in the future.”
In Washington, Oliver Zandona, Robert Haines, and others in the K Street office met continuously with American officials working on Iraq economic and oil policy.
“Your job is to promote U.S. companies” was the essence of ExxonMobil’s message, recalled a State Department official who heard it regularly. “Do your best to create a level playing field. If you put us up against any state-run company” from Russia or China, “on a level playing field, we’ll win.” Beyond that, the corporation wanted the Bush administration to “stay as far away from the oil sector as possible,” the official recalled, because otherwise, the United States would be “perceived as meddling, and [would] be a P.R. problem.”
Then, too, fierce Iraqi nationalism after the American invasion ensured that no elected government in Baghdad could blithely trade away ownership of Iraqi oil to foreign companies, even if doing so might enrich the government’s coffers. Iraqis ratified a new constitution that declared that the country’s oil belonged solely to the Iraqi people.
Shahristani’s “clean games” visit to Washington in 2006 signaled, however, that the Iraqi oil ministry had gradually come to recognize it could not restore Iraqi oil production to acceptable levels on its own. After the talks with Energy secretary Bodman and the oil company lobbyists, Shahristrani soon negotiated what he called “technical service agreements” with ExxonMobil and other companies. Under its deal, ExxonMobil would evaluate how to raise the rate of oil production in particular Iraqi fields.
The corporation used its access to develop and present to Iraqi officials an ambitious, unpublicized plan for ExxonMobil’s reentry into the country: a $100 billion “transformative” program under which ExxonMobil would lead huge, staged investments in Iraq’s oil and gas fields. These upstream investments would be integrated with similarly ambitious downstream projects—refineries and petrochemical complexes. In essence, ExxonMobil proposed a strategic position in the Iraqi oil industry comparable to its dominant position in Qatar. The scale of the plan was bold—and also politically unrealistic. International oil investments in Iraq brought to the surface all of the ills and paralysis of Iraq’s postinvasion politics. ExxonMobil’s PowerPoint slides with photographs of shiny infrastructure, arrows showing the benefits of integration, and lots of big dollar numbers could not change that.
Whatever deals emerged, Shahristani’s oil ministry wanted to pay the companies in oil, not cash, so as to avoid the complications of negotiating in Baghdad with a separate political fiefdom at the Ministry of Finance. It wasn’t clear, however, that companies that received oil from the deals could sell it freely, as they had under authority of the now-defunct Coalition Provisional Authority. Kuwait’s government had won a war reparations award against Iraq’s government, to pay for losses caused by Saddam Hussein’s 1990 invasion. The enforcement of this award meant that cash from the sale of Iraqi oil normally ran through United Nations–authorized accounts in New York, where a portion was garnered to pay Kuwait. It was not clear whether ExxonMobil’s sales of Iraqi oil might be subject to the same garnishing. Zandona and other ExxonMobil lobbyists repeatedly pressed the Bush administration to sort out the issue at the United Nations and with Kuwait and Iraq, so that the corporation could lift Iraqi crude without any legal ambiguity.
If Iraq’s greatest sensitivity was sovereignty, ExxonMobil’s imperative was reserve replacement—the need to be able to continually book oil reserves in a manner approved by the Securities and Exchange Commission. If Iraq’s oil opening were to make a difference to the corporation, deals had to be structured so that ExxonMobil could book reserves.
Initially, after the war began, ExxonMobil and other major American oil companies pushed the Bush administration to persuade Iraq’s government to adopt production-sharing agreements or other contract terms that would allow private oil companies to book Iraqi reserves for Wall Street. An early study of Iraq’s oil industry carried out for the Coalition Provisional Authority by the consulting firm BearingPoint, Inc., suggested to Iraqi oil officials the benefits of production-sharing deals; the study cited nations such as Azerbaijan as examples.
In Baghdad and Washington, Bush administration officials told their Iraqi counterparts that contract matters were up to them, said a State Department official involved, but they also made clear to the Iraqis, as the official put it, “You lack capital, you lack technology, and your workforce needs to be reeducated. You have to offer some incentives to allow the companies to come in. Of course, the whole issue is booked reserves.”
What hope ExxonMobil had to own a share of Iraq’s oil rested on the long, costly efforts of the Bush administration to remake Iraq’s oil policies after the invasion. From the beginning, executives from the American oil industry, almost all of them from Texas, had led the Bush administration’s efforts; they volunteered for the mission, uncompensated. Philip Carroll, the former Shell U.S.A. executive and friend of George H. W. Bush, who had been recruited before the 2003 invasion to advise Iraqi and American officials about Iraq’s oil sector, had resisted the Bush administration’s most ardent free-market ideologists, particularly those who advocated outright privatization of Iraq’s state-owned oil companies. When analysts at the conservative Heritage Foundation called the privatization of Iraq’s oil “a no-brainer,” Carroll quipped, “It’s a no-brainer: Only someone with no brains would think of that.”
After Carroll left the Coalition Provisional Authority, a succession of other American oil industry veterans arrived in Baghdad one after another to serve as senior advisers on oil restoration and policy: Rob McKee, who had run upstream operations at Conoco, and Mike Stinson, another former Conoco executive. They slept in trailers in the Green Zone, worked in dusty sections of the Republican Palace, endured nightly mortar rounds, and braved ambushes when they rolled in armored sport-utility vehicles across town to the oil ministry for meetings. Robert Morgan, a British oil industry veteran, died in one such insurgent ambush. Diaries the American oilmen kept during their deployments as advisers depict a dizzying atmosphere in which a few patriotic, talented Iraqi oil technocrats struggled in an environment of political dysfunction, rumors of corruption, and constant violence. On the American side, McKee and Stinson, who considered themselves conservative patriots called to public duty, and who carried firearms outside the Green Zone to protect themselves, found their idealism sapped by petty bureaucratic infighting in Washington and reams of federal government paperwork.
The American oil advisers in Baghdad after 2003 knew well what their colleagues in the international oil business wanted from Iraq: legal and financial clarity, and contract terms that allowed bookable reserves. If they had any doubts about that, oil executives arrived regularly in Baghdad to lobby them. Sam Laidlaw, a Chevron executive, turned up in Baghdad early on “to see if he could represent a consortium of American companies to put possible [production-sharing contract] terms in front of the Iraqis” and to “find the right kind of financial vehicle that would get around the U.N.” controls on Kuwaiti claims.
When Iraqi political leaders heard that sort of talk about foreign ownership of the country’s oil, it only inflamed the “politics or kind of the grassroots emotional issues of ownership of a national resource,” recalled Norm Szydlowski, a Chevron veteran who worked with McKee and Stinson as an adviser in Baghdad. “Many people [were] convinced that the U.S. presence and the coalition [was] here to ‘take their oil.’”
The American oil advisers were wealthy men at the ends of their careers; they were not in Baghdad to make money, but rather to have an adventure and serve the Bush administration. Their outlook about the bookable reserve question was that, first, it was up to the Iraqis to decide, but second, in the long run, what was good for Iraq probably would also be good for Western oil companies. It seemed to the American advisers that Iraq’s democratic government should first establish a strong national oil company, comparable to the ones in Saudi Arabia, Kuwait, and many other Middle Eastern nations. A unified, integrated Iraqi national oil company and its political masters could provide Baghdad’s politicians with a sounder footing to decide whether, as in Africa and some parts of Southeast Asia and Central Asia, the government wanted to invite foreign companies in and allow them to book some of Iraq’s oil, in exchange for capital and up-to-date technology, or try to go it alone, perhaps with service companies such as Halliburton and Schlumberger. “Although I’m a free-marketer and a capitalist,” Rob McKee observed, “it was very apparent to me and everybody else that Iraq needed a central energy policy.” That had to precede decisions about sharing reserves with international companies.
The invasion had shattered the old Iraqi state, effectively breaking its politics into sectarian and regional pieces tied together by a weak, continually renegotiated, inexperienced regime in Baghdad, one lobbied heavily not only by the United States, but also by Iran. Year after year, the country’s new leaders talked about oil policy reform, but they could not agree on a national oil law.
During this interregnum, while ExxonMobil and the other international majors hunkered down in Amman and Dubai, small-time operators and freelance wildcatters—Israelis working through Turkish front companies, Russians, and American and British adventurers—turned up in the Green Zone looking for fast deals. Some individual wildcatters drove themselves by car from Jordan to Baghdad, barreling down insurgent-controlled highways, “dumb and courageous at the same time,” as McKee put it.
The adventurers were aided by splits in Iraqi decision making about how to sell oil. Coalition Provisional Authority Order Number 39 banned new contracts that would exploit Iraq’s natural resources until an elected government in Baghdad could be seated under a new democratic constitution. Iraq’s northern Kurdistan minority, however, which had organized itself under an entity it called the Kurdish Regional Government, ignored this edict.
The best Iraqi oil fields lay in the Shiite-dominated south of the country and employed export pipelines leading to the Persian Gulf. The northern Kurdish regions contained large fields of heavier oil and natural gas, but options for overland export were limited. After 2005, Kurdish leaders interpreted Iraq’s new constitution to mean that oil production would be “locally managed by the people living in the regions,” as the Kurdish Regional Government’s minister of natural resources, Ashti Hawrami, put it. The Shiite-dominated government in Baghdad declared that Kurdish decision to be illegal and unconstitutional, but it found itself powerless to stop the K.R.G. from letting contracts. To attract risk takers to its legally disputed fields, the Kurds let production-sharing contracts with fully bookable reserves on terms designed to excite Western capitalists. Early takers included a small Norwegian producer, D.N.O., and a firm called Hunt Oil, headquartered in Dallas, which had multiple personal ties to the Bush White House.
Shahristani and other oil ministry officials in Baghdad warned ExxonMobil, Chevron, Shell, BP, and other major international firms that if they tasted Kurdish crude, they would never, ever see a drop of Iraq’s bigger oil fields in the south. They also declared the production-sharing contracts let to D.N.O. and Hunt to be illegal under Iraqi law.
Oliver Zandona and other industry lobbyists pushed the Bush administration in Washington after 2005 to sort out the Kurdish mess. “The policy question before us was, ‘What do you do with these contracts?’” recalled a Bush administration official involved in the discussions. “I have to say, I think we really screwed that one up.” By failing to make absolutely clear that Western oil companies should not cut independent deals with the Kurds, and by winking at the Kurdish contracts that had already been negotiated, the administration sent mixed signals to companies and Iraqi political leaders alike, and may have prolonged the country’s debilitating stalemate over oil sharing.
The Kurds were the most pro-American faction in Iraq, however. There was a natural bias inside the Bush administration to cut the Kurdish Regional Government slack because of all the ways Kurds cooperated with Bush’s state-building project.
During 2005 and 2006, Meghan O’Sullivan, the influential National Security Council official overseeing Iraq policy for the Bush administration, shepherded through a formal, classified, interagency policy review on Iraq strategy, including a subsection on Iraq’s oil. The aim was to promote oil as a means of finance and political unity for the struggling Iraqi state. That policy was formalized in 2006, briefed to President Bush, and dispatched to embassies worldwide by State Department cable. The Bush administration urged Iraq to negotiate a single national oil law that would account for Kurdish autonomy, clarify the legality of the Kurdish wildcatter contracts, and provide a basis for large-scale investment in the future by the likes of ExxonMobil.
As a practical matter, however, because there was no sanction placed on companies such as D.N.O. and Hunt Oil that were cutting side deals to pump Kurdish crude, the Bush administration effectively signaled neutrality on the matter—as if what was at issue in the Kurdish sidebar contracts was just a business dispute, not a potential fault line through Iraq’s ethnic and sectarian fabric. A firmer policy would have sanctioned D.N.O. and Hunt for jeopardizing Iraqi unity or banned their dealings outright under American law.
The Hunts were colorful adventurers whose private, family-run firm had chased oil dreams in hard places since 1934. The Hunt brothers famously cornered the world’s silver market at one stage, precipitating a crash. Ray L. Hunt, a conservative maverick, became chief executive in 1974; later, he turned operations over to his son, Hunter L. Hunt, though the father remained an active player. By the time of George W. Bush’s Iraq War, Hunt Oil described itself as a firm that specialized in “unconventional” resource deals; it owned and produced oil in the tribal hinterlands of Yemen, among other places. Risky Kurdish production-sharing contracts appealed to the firm’s traditions and instincts.
The Hunts also enjoyed deep ties to the Bush White House. Ray L. Hunt served on the president’s Foreign Intelligence Advisory Board, which reviewed intelligence issues and operations. Through the board, Hunt had access to classified assessments about Iraq’s politics and economy. In addition, Jeanne Phillips, a Bush fund-raiser whom the president rewarded in 2001 with an appointment as U.S. ambassador to the Organization for Economic Cooperation and Development in Paris, France, had moved from the administration to become a senior vice president at Hunt Oil. Eric Otto, a young Republican campaign activist who worked on oil industry issues in Baghdad at the Coalition Provisional Authority, made his way from the Green Zone to Hunt Oil’s Dubai office, where he helped Hunt put together the Kurdish deals. Given the political pedigree and backgrounds of these Hunt executives, it would be entirely reasonable for the Kurdish Regional Government to assume that Hunt had some sort of sanction from Washington, even as State Department spokesmen clucked that Hunt’s search for Kurdish oil deals wasn’t “particularly helpful” because it undermined efforts to negotiate a national oil law, as urged by ExxonMobil and other larger corporations.
Ray Hunt flew into Erbil, the seat of the Kurdish Regional Government, in September 2007 to meet with K.R.G. president Masoud Barzani; Hunt thereafter emerged as the first U.S.-headquartered oil company to win a share of Iraqi crude, through a production-sharing contract that would allow booked reserves and provided Hunt with lucrative profit margins.
David McDonald, a Hunt executive, said the company hadn’t asked permission from the Bush administration to make this deal: “We do not seek advice as to whether or not Hunt should proceed with an exploration contract and we were never advised not to do so.” President Bush said publicly, “I know nothing about the deal.” A subsequent State Department investigation did not contradict Bush, but it found that administration policy about the Kurdish oil contracts was “ambiguously articulated” and lacked the force of law. Hunt had exploited the Bush administration’s foggy policies and benefited from its divided attitudes.
The lure of quick oil profits in Kurdistan attracted liberal opportunists, too. Peter Galbraith, a son of the economist John Kenneth Galbraith, was a longtime Democratic foreign policy aide who served as ambassador to Croatia under President Bill Clinton. Galbraith had long campaigned for Kurdish rights and autonomy. After the 2003 invasion, he quietly became a shareholder and partner in D.N.O.’s Kurdish oil deals; his stake grew to tens of millions of dollars. As he profited from Kurdish oil, Galbraith advised Kurdish officials during constitutional negotiations with Baghdad that concerned the disposition of Kurdish oil fields, wrote essays in the New York Review of Books, and delivered speeches promoting Kurdish autonomy without disclosing his own financial interests. Galbraith subsequently apologized to editors and readers of the New York Review; he wrote that while his business arrangements were subject to confidentiality agreements, “I should have stated that I had business interests in Kurdistan. I regret not having done so.”
Meghan O’Sullivan left the Bush administration before the Hunt deals, in September 2007. She became a professor at Harvard University. Late in 2008, she accepted a consulting agreement with Hess Corporation to provide political risk assessments about regions worldwide. These included briefings on the Middle East and Iraq, where she also provided introductions for Hess executives. O’Sullivan taught at Harvard about the geopolitics of oil, and she was interested in high-level strategic consulting, but she did not want to profit from particular oil deals in the country where she had overseen war policy, although Hess offered her that opportunity. She recused herself from Kurdish contract negotiations and declined compensation linked to specific transactions in Iraq. Hess eventually announced an agreement to produce oil in Kurdistan.
The tan envelope Richard Vierbuchen dropped into the glass box at the Al-Rashid did not win a prize. For a moment, it seemed as if it might. There was “a buzz the room,” as a U.S. embassy cable put it, because ExxonMobil proposed a large increase in output at Iraq’s prized Rumaila field—the third largest oil field in the world—and said it would accept only $4.80 per barrel in what Iraq referred to as the “remuneration fee” that would be paid to international companies for their work, once certain criteria were met. Some oil pros in the audience said they were shocked that ExxonMobil would accept such a low per-barrel fee; according to one calculation, the bid would allow Exxon only a 9 percent rate of return, far below its normal global targets, and a profit margin normally accepted only in highly stable, low-risk political environments.
A staff member from the Ministry of Oil soon appeared with a red envelope, “which turned out to be the key envelope in this venture,” as an ExxonMobil executive put it later. The red one contained a maximum per-barrel price—the maximum remuneration fee, or MRF—to be paid by Iraq’s government to any international bidder. This turned out to be only $2 per barrel. “There was stunned silence,” the American cable reported. “Giggles were heard. . . . Minister Shahristani grimaced on several occasions as he opened the bid envelopes and saw how far apart most bids were from his MRFs.” It became clear that ExxonMobil and virtually all of the international companies that had turned up at the Al-Rashid auction had asked for more money per barrel than Iraq’s government was willing to pay, even though ExxonMobil and many of the others had reduced their target profit rates in order to get an initial share of Iraq’s oil bounty. The auction, therefore, failed—except, perhaps, as reality television for entertainment-starved Iraqi audiences.
The event soon triggered a new round of direct negotiations between international companies and the Iraqi government designed to bridge the price gaps, however. The auction had been so transparent and regimented, in the opinion of ExxonMobil executives, that it left out subtler issues such as the potential benefits to Iraq of technology transfers, job training, and the like. The inability to negotiate and talk about these other issues at the Al-Rashid auction was the “dark side of transparency,” as ExxonMobil’s executives told their Iraqi counterparts, jokingly. An ExxonMobil executive complained to the U.S. embassy in Baghdad that many aspects of Iraq’s contract plans had not been finalized or made clear, and that in any event, “transparency and discretion should not be mutually exclusive.” The executive declared that ExxonMobil would seek to “close” contracts outside of the public auction system. The corporation revived the ideas first presented in its 2006, $100 billion “transformative” plan for Iraq. The Bush administration’s diplomat feared that ExxonMobil’s private negotiations would “harm the perception that oil and gas contracts will be transparently awarded,” a linchpin of Bush’s oil policy in Iraq.
ExxonMobil complained to the Baghdad embassy that the Iraqi government had rejected a bid for the West Qurnah oil field “even though it would have generated up to $50 billion in investment, up to $600 billion in revenue to the [government of Iraq], and up to 200,000 direct and indirect jobs.” The corporation’s terms would have given Iraq “a 98 percent share of gross revenue,” compared to a global average in the 70 percent range for such contracts. “The bid failed,” an ExxonMobil executive said, because the Ministry of Oil “demanded a 99 percent share.” He added that the corporation would seek to “educate” Iraq’s government about global standards.
Iraq’s government had taken advice from sophisticated oil consultants and bankers to protect its interests and achieve its production objectives. The provisional, proposed contracts it offered in private talks during the months after the Al-Rashid auction would pay out only after ExxonMobil reached a production target—the corporation would be paid only on barrels it produced above that threshold.
Vierbuchen and his supervisors in Houston and Irving accepted that principle. They had two issues to press in the weeks after the Al-Rashid auction, however. One was the price per barrel that ExxonMobil would be paid on oil produced after the threshold was crossed—in effect, the corporation’s profit margin. The second was whether the form of the agreement would allow ExxonMobil to record the barrels with which it expected to be paid in the future as proven reserves. Otherwise, ExxonMobil’s role in Iraq would look a lot like a service contractor such as Halliburton or Schlumberger, and Rex Tillerson made clear that that was not an acceptable contract model.
On price, because of the attractions of Iraqi oil and the enormous long-term potential of its reserves, Tillerson approved terms that would involve less gross profit than ExxonMobil normally sought—as little as $2 per barrel. He seemed to accept the judgment of analysts such as Nordine Ait-Laoussine, a former Algerian oil minister who had reopened his country to foreign investment before Iraq. In the Middle East, at least, Ait-Laoussine said, “The days of 12 percent to 18 percent returns are gone. Perhaps they should lower their expectations on earnings.” In ExxonMobil’s case, that would be something to consider only if it could add to the corporation’s resource base. On reserve booking, the corporation turned to its lawyers.
The question was whether ExxonMobil could develop contract terms that would allow it to book Iraqi oil as proved reserves without forcing Iraq’s government to accept production sharing or other contract forms typically rejected in the Arab world on nationalistic grounds. As far back as the 1980s, after Saudi Arabia nationalized its oil industry, Exxon lawyers had worked on contract formulations that might allow the kingdom to claim full ownership over its oil before its people, while structuring Exxon’s position so that, even short of outright ownership, the S.E.C. rules would nonetheless recognize the corporation’s right to book reserves for Wall Street. Now ExxonMobil and other international oil companies in final negotiations with Iraq’s oil ministry returned to some of these earlier contract ideas. They agreed, for example, to be paid for their technical work in the southern oil fields in the form of oil, rather than in cash. (By now they were confident that they could sort out the Kuwait reparations matter by having the United Nations issue an international legal opinion affirming that their oil should not be garnished.) ExxonMobil wrote up terms describing their rights to that oil in ways that they believed conformed to S.E.C. requirements and talked these through with Baghdad’s negotiators.
Late in 2009, Vierbuchen and the president of ExxonMobil Upstream Ventures, Rob Franklin, at last closed a deal—after months of private negotiations with Iraqi officials—for exclusive access to Iraq’s West Qurna Phase One oil project. The field contained at least 8.7 billion barrels—a behemoth by industry standards. ExxonMobil agreed to apply modern technology and techniques to raise the field’s production from its current 300,000 barrels per day to more than 2.3 million barrels per day within six years, taking a gross profit of only $1.90 per barrel—below the $2.00 per-barrel remuneration fee Iraq had specified at the first unsuccessful auction. The deal was structured so that ExxonMobil first had to increase the field’s production to 10,000 barrels per day higher than the peak production achieved under Saddam Hussein. After that, ExxonMobil was permitted to take its $1.90 premium as oil in kind. ExxonMobil kept secret the full terms of the deal, so it was difficult to judge how profitable it might ultimately become. Deutsche Bank predicted that ExxonMobil might earn a 19 percent rate of return from West Qurna when all factors were considered—comfortably within the corparation’s targets for profitability worldwide.
An initial agreement between ExxonMobil and Iraq stalled; the corporation “asked for advocacy” from the Obama administration’s Baghdad embassy to resolve the impasse. “ExxonMobil has again approached Post [the U.S. embassy], seeking renewed advocacy to Prime Minister Maliki,” the embassy reported to Washington. “Post will continue to press the issue at senior levels.”
The Obama administration’s lobbying helped; the deal went through. Eighteen months later, ExxonMobil had crossed the contract threshold and was loading Iraqi crude into supertankers in the Persian Gulf that could hold 2 million barrels at a time. The U.S. embassy in Baghdad estimated that the work of ExxonMobil’s partnership in West Qurna alone would raise Iraq’s oil production by 2 million barrels per day within six to eight years.
Royal Dutch Shell was ExxonMobil’s junior partner; BP worked nearby, under very similar terms, in the Zubair field. Iraq’s government hoped that the country’s long-promised potential as a 6-million-barrel-per-day power in global oil markets would soon be realized.
Just more than seven years after American soldiers and marines poured over the Kuwaiti border into Iraq, ExxonMobil shareholders owned, on paper at least, a small slice of the country’s oil reserves. Seven years was almost precisely the length of time Lee Raymond had predicted, when the war began, that it would take for Iraq to be calm enough for big oil companies to enter. “I wouldn’t say the profit margins have unlimited potential,” said the corporation’s Rob Franklin. On the other hand, he noted, “we’re confident you can book the reserves.”