In U.N.-Approved Deal, Iraqi Oil Flows

by Colin MacKinnon

After six years of sanctions, Iraq is back in the international oil business. In December, Iraq’s State Oil Marketing Organization (SOMO) signed its first legal oil export contract since Iraqi President Saddam Hussain’s forces invaded Kuwait in August 1990. Under the contract Iraq will deliver 75,000 barrels of crude a day to the Turkish refining company Tupras. U.N. clearance came on Dec. 9. The crude started flowing Dec. 11.

By mid-January SOMO had effectively sold the full amount of oil the U.N. will allow it to export over the December-to-May period. SOMO has contracted with a wide-range of firms including the majors—Chevron, Texaco, BP, Shell, Total and Mobil—and smaller companies like Coastal and Bayoil, with contracts totaling $2.07 billion. The question now is how to ensure that Iraq does not sell more than the approved quantity of oil.

Iraqi oil is still a wild card in the market

The oil-for-food deal was authorized under U.N. Resolution 986, passed in April 1995. Iraq and the U.S. had haggled over the terms for more than a year and a half, before reaching agreement in early December.

Under the resolution, Iraq may export up to $2 billion worth of oil over a 180-day period. At current prices this means Iraq will export something like 500,000 barrels a day. This is not an insignificant quantity, but it is not the 3.2 million barrels a day Iraq was pumping in its heyday. In constant dollars Iraq will be earning less than a tenth of what it was earning in the late 1980s.

Of the $2 billion, $700 million will be set aside for war reparations and the costs incurred by the U.N. in monitoring the program. Some funds also will go to administer the U.N.’s arms inspection program in Iraq. The remainder, $1.3 billion, may be spent on humanitarian items, and it is thought that about 80 percent will be spent on food, especially staples like wheat, lentils, salt, sugar and tea. The rest will go for medicines.

Most of the exported oil, some 350,000 barrels a day, will pass through Turkey’s Yumurtalik-Ceyhan pipeline to the Mediterranean, allowing Turkey to pick up transit fees from the trade. The agreement is renewable, so Iraq may end up exporting $4 billion worth of petroleum a year, indefinitely.

Once the oil has been legally sold and exported, there are no U.N. or U.S. restrictions on what may be done with it. Some undoubtedly will end up in American gas tanks.

Goods Flowing to Iraq

The U.N.’s oil sale and goods purchase plan is the size of a hefty telephone book, and there is a certain grandeur to the complexity of the thing. When it gets up and running at its peak, some 1,000 U.N. monitors will be supervising the operation. Over 150 monitors within Iraq will be overseeing the distribution of goods.

Ten inspectors from the Dutch company Saybolt are monitoring oil shipments within Iraq and another four are working in Ceyhan on Turkey’s Mediterranean coast to make sure only the permitted amount of oil is shipped.

Iraq’s purchases of goods will be conducted via a special account set up with a branch of the Banque Nationale de Paris in New York.

Here’s how the deals will work. A company first has to make its sale to an Iraqi state customer. The company then will have to get its own government to confirm that the goods and the method of delivery conform to the contract signed with the Iraqi customer. The company’s government then presents written confirmation to that effect to U.N. authorities in New York, who approve the deal and notify the New York branch of Banque Nationale de Paris.

When Iraqi authorities are told the deal has received U.N. approval, they apply to open a letter of credit with BNP. BNP tells the U.N. that it has received the Iraqi application and asks the U.N.’s permission to issue the letter. The U.N. approves and BNP issues and confirms the letter in favor of the exporting company’s bank. The company is told the letter of credit has been opened and it ships the goods along with documentation to Iraq. When the goods arrive at the Iraqi border, U.N. inspectors check them to make sure they conform to the documentation. Once the inspectors give their approval for the goods to enter Iraq, then and only then are the exporters paid.

It’s a lot of fuss, but as a means of insuring that only the $2 billion worth of oil is sold and that the money is spent only on humanitarian goods, the system looks relatively foolproof.

U.S. exporters will have to get a license for each sale from the Treasury Department. Americans still are forbidden to travel to Iraq or pay Iraqi nationals for their services, but can hire non-Iraqi commercial agents to travel to the country and represent them there.

Effect on Oil Market

When the agreement was announced in December, oil prices tumbled about $1.50 a barrel and there was more than the usual nervous twitching among oil traders. Since then prices have firmed, but Iraqi oil is still a wild card in the market.

The way the agreement is structured adds to the uncertainty. The agreement puts limits on the quantity of oil that Iraq may sell by dollar amount rather than by barrels of oil. So if the price of oil goes up, Iraq will have to export less, thus putting further upward pressure on prices and threatening, at least, a vicious circle upward.

On the other hand, if prices weaken, Iraq will have to export more barrels to earn its $2 billion. This increased flow will naturally put downward pressure on prices, requiring Iraq to export even moreand so on, thus threatening a vicious circle downward.

Most analysts see world demand rising in 1997, perhaps as much as 1.8 million barrels a day, a need the Iraqi oil will only partially meet.

The U.N.-administered sales are not the only way Iraq has of selling petroleum. Iraq has an arrangement, allowed by the U.N., to sell oil to Jordan and has been slipping refined products through Kurdish areas north to Turkey, an arrangement not approved by the U.N.

Iraq also reportedly has been selling refined products, particularly "gas oil," a mid-level distillate used for fuel, to foreign customers out of Umm Qasr, its oil port on the Persian Gulf. Small boats load up with the stuff at Umm Qasr. Then, hugging the Iranian shore, they move down the Gulf and put into Iranian ports. There, it is said, they acquire faked Iranian certificates of origin and head across the Gulf to Dubai’s Jebel Ali port (and possibly Ajman and Sharjah), where the oil is off-loaded and either sold locally or put onto dhows and sent out of the Gulf to the Indian subcontinent.

The amounts so earned are probably not comparable to the $2.6 billion a year that Iraq will be getting under Resolution 986. However, the U.N.-approved deals give Iraq more leeway to spend the dollars earned from illicit sources. Such uses might include shoring up the regime with favors to important constituencies such as the armed forces, the security services and a business class that knows how to take advantage of the sanctions.

The sanctions have caused horrific damage. Because of them, say reputable international agencies like the U.N.’s Children’s Relief Fund, some 4,500 or so children die every month in Iraq from hunger and disease. The sanctions also have hit the aged, the poor and the weak, as demonstrated by dramatically increased death rates among all of these groups, which don’t qualify as Saddam’s constituencies. Although their problems are far from solved, if properly administered the U.N. program may help alleviate some of their suffering.