ISG Report: a step in the right direction...but what about the oil?

Our country deserves a debate that prizes substance over rhetoric, and a policy that is adequately funded and sustainable. The President and Congress must work together. Our leaders must be candid and forthright with the American people in order to win their support. Iraq Study Group: Letter from the Co-Chairs

"What a novel idea," I thought to myself while reading the above excerpt, "using honesty to win support." And there is quite a bit of forthright discussion about the military situation in Iraq contained in the report, and some of the consequences of failure.

Credit where credit is due, this report seems to me to be a big step in the right direction. Of course, considering the starting point, it didn't take much to move forward.

The "major news" sound bite from Robert Gates' confirmation hearing as Secretary of Defense- We're not winning in Iraq- pretty much sums up the pre-ISG sentiment.

Whoa...we're not winning?

If that sound bite was a surprise to you, you might find the military assessment in the report fairly chilling.

The situation in Iraq is grave and deteriorating
Attacks against U.S., Coalition, and Iraqi security forces are persistent and growing. October 2006 was the deadliest month for U.S. forces since January 2005, with 102 Americans killed. Total attacks in October 2006 averaged 180 per day, up from 70 per day in January 2006. Daily attacks against Iraqi security forces in October were more than double the level in January. Attacks against civilians in October were four times higher than in January. Some 3,000 Iraqi civilians are killed every month.

And the assessment of the oil sector is not much brighter.

Iraq produces around 2.2 million barrels per day, and exports about 1.5 million barrels per day. This is below both prewar production levels and the Iraqi government’s target of 2.5 million barrels per day, and far short of the vast potential of the Iraqi oil sector.

Pleasantly surprised at this turn towards honesty, I took a look at the recommendations and almost fell off my chair.

To put it simply, all key issues in the Middle East—the Arab- Israeli conflict, Iraq, Iran, the need for political and economic reforms, and extremism and terrorism—are inextricably linked.

This view, if adopted, would be a huge shift in US policy. Previous attempts by Middle Eastern governments to link resolution of the several facets of Arab-Israeli discord to other negotiating items have been flatly refused.

Here's the first President Bush on linkage:

On the other question, I simply want to see us avoid what is known as linkage. And I think the American people more clearly see now what I mean by linkage because they watched the `Aziz press conference where the whole question was shifting -- trying to shift the onus away from the aggression and brutality against Kuwait and move it over and try to put the blame on Israel or try to shift the onus to the Palestinian question.

Again, it remains to be seen whether this view will be adopted, but it would be a significant carrot to offer at the negotiating table.

Of course, the Israelis would have to go along, and I wouldn't put my money on that development.

The willingness to discuss linkage and the rather candid assessment of the military situation were the positive aspects of the report, in my view.

On the less than candid, and thus, in my view, negative side, lies the discussion of oil.

The executive summary barely mentions oil, except to note that recommendations have been made. One has to go beyond the summary to discover them.

So I did.

The United States can begin to shape a positive climate for its diplomatic efforts, internationally and within Iraq, through public statements by President Bush that reject the notion that the United States seeks to control Iraq’s oil, or seeks permanent military bases within Iraq. However, the United States could consider a request from Iraq for temporary bases.

Hmmm, this sounds reasonable. The US doesn't want to control Iraq's oil or want permanent military bases.

But wait, earlier in the report I find this statement: Along with this military presence, the United States is building its largest embassy in Baghdad. USAToday described this "massive" embassy: The 104-acre complex — the size of about 80 football fields — will include two office buildings, one of them designed for future use as a school, six apartment buildings, a gym, a pool, a food court and its own power generation and water-treatment plants.

Seems like a permanent base to me. And I'm sure the Iraqi government will be persuaded to ask for a few more temporary bases.

Turning to oil, maybe the US doesn't want to "control" Iraq's oil.

What the US wants is to profit handsomely from oil exports, while a centralized Iraqi Oil company does the work.

The fear expressed in the report is: The politics of oil has the potential to further damage the country’s already fragile efforts to create a unified central government. The Iraqi Constitution leaves the door open for regions to take the lead in developing new oil resources. Article 108 states that “oil and gas are the ownership of all the peoples of Iraq in all the regions and governorates,” while Article 109 tasks the federal government with “the management of oil and gas extracted from current fields.” This language has led to contention over what constitutes a “new” or an “existing” resource, a question that has profound ramifications for the ultimate control of future oil revenue.

Apparently the use of euphemism and misleading language is not under US monopoly.

Senior members of Iraq’s oil industry argue that a national oil company could reduce political tensions by centralizing revenues and reducing regional or local claims to a percentage of the revenue derived from production. However, regional leaders are suspicious and resist this proposal, affirming the rights of local communities to have direct access to the inflow of oil revenue. Kurdish leaders have been particularly aggressive in asserting independent control of their oil assets, signing and implementing investment deals with foreign oil companies in northern Iraq. Shia politicians are also reported to be negotiating oil investment contracts with foreign companies.

Whoa, the natives are going to sign their own oil deals, sidestepping the central government, and by virtue thereof, us. This aggression, to quote the elder President Bush, cannot stand.

Thus Recommendations 28 and 63:

RECOMMENDATION 28: Oil revenue sharing. Oil revenues should accrue to the central government and be shared on the basis of population. No formula that gives control over revenues from future fields to the regions or gives control of oil fields to the regions is compatible with national reconciliation.

RECOMMENDATION 63:
• The United States should encourage investment in Iraq’s oil sector by the international community and by international energy companies.
• The United States should assist Iraqi leaders to reorganize the national oil industry as a commercial enterprise, in order to enhance efficiency, transparency, and accountability.
• To combat corruption, the U.S. government should urge the Iraqi government to post all oil contracts, volumes, and prices on the Web so that Iraqis and outside observers can track exports and export revenues.
• The United States should support the World Bank’s efforts to ensure that best practices are used in contracting. This support involves providing Iraqi officials with contracting templates and training them in contracting, auditing, and reviewing audits.
• The United States should provide technical assistance to the Ministry of Oil for enhancing maintenance, improving the payments process, managing cash flows, contracting and auditing, and updating professional training programs for management and technical personnel.

Here's a conundrum. If regional leaders in Iraq are already signing deals to develop oil fields, why does the US have to encourage investment in Iraq's oil sector?

I'm also wondering about the meaning of "control" because recommendation 63 seems to me an awful lot like what I would consider to be "control." If providing technical assistance to the Ministry of Oil for enhancing maintenance, improving the payments process, managing cash flows, contracting and auditing, and updating professional training programs for management and technical personnel isn't control, what is?

A few revealing omissions from the ISG report are:discussion of Production Sharing Agreements or the details of the Paris Club and IMF agreements with Iraq. The need to reach the euphemistic "milestones" was mentioned quite a bit but just what they were was not.

And this is the heart of the matter.

While there were other considerations, the US went into Iraq to gain some degree of control and profit from Iraq's Oil sector. And thus far, this aspect of the adventure has been a failure.

The only group who wanted central control of Iraqi oil were the Sunni, who were overthrown. If the Shia and/or the Kurds start signing contracts and exporting "new discovery" oil while the US imposed Central Government in Iraq is stuck doling out revenues from "existing" oil fields, this war will indeed, be, as Ret. General Odom has opined, the greatest strategic disaster in US history.

Some might wonder what I think the market impact of this will be.

I don't know, is my best guess.

But if pressed I think any relief over steps in the right direction will be short lived.

Having thrown out the issue of linkage, the Israelis will have to get on board or the plan will look as stillborn as Sec. of State Rice's New Middle East.

Moreover, it looks to me that the US is negotiating from a position of weakness, and that is a tough position in the great game. Additionally, the lack of forthrightness on the oil issue suggests to me that the prize is still desired.

The only way I can see the United States emerging from this fiasco without its tail between its legs is to give up on squeezing profits from the oil sector. If we can reproduce the sensabilities that led to the formation of Saudi Aramco, we just might be able to stay and play. If we try to impose and steal I think we are doomed in the region for a few generations.

All of which reminds me of the wisdom of the Powell Doctrine, which, paraphrased, means, don't start a fight unless you KNOW you can win and win big.