Thursday, October 19, 2017

Inside Iraq’s Oil Sector Interview With Gary Vogler


Gary Vogler worked extensively in Iraq’s oil sector starting in 2002 when he was recruited by the Pentagon to plan for postwar situations. That group was then folded into the Office for Reconstruction and Humanitarian Assistance (ORHA) and then the Coalition Provisional Authority (CPA). Vogler would later work as a contractor and consultant in Iraq until 2015, and was involved in several major projects. He recently published a book about his experiences Iraq and the Politics of Oil, An Insider’s Perspective.

1. When people think about the 2003 invasion of Iraq many believe it had to do something with the country’s vast petroleum resources. Did the U.S. invade Iraq to privatize its oil and sell it off to foreign companies?

I did not see anything in 2003 to support such an oil agenda. Phil Carroll and I agreed that if we did experience an oil agenda by our government such as you describe that we would resign and depart Iraq immediately. We were the CPA oil leadership team and we were both products of the US oil industry and former army officers. We shared a disdain for the thought of US soldiers dying to enrich an oil company’s profits. Phil was the retired CEO of the Shell US affiliate. He was my boss from May to September 2003 in Iraq.

I was of the opinion that our government had no specific oil agenda until I started researching for my book a few years ago. To my surprise, I discovered an oil agenda, but it was not the one that many Americans thought. It was not until I read articles in the UK and Israeli press that I became convinced that an organized oil agenda did exist and it was perpetrated by the same individuals most responsible for selling the Iraq war to our country, the so-called neoconservatives. I could not find any mention of this agenda in the US mainstream press, only in Israel’s Haaretz and the UK’s Guardian in early 2003. The articles identified the oil agenda, motive and the players involved.

There were a few things that I experienced in 2002 and 2003 that did not make sense to me at the time. I mentally wrote them off as distractions to our mission. Political appointees at the Pentagon generated those distractions. It was only after reading about the oil agenda in Haaretz that my experiences of 2003 started to make sense – like pieces to a puzzle that came together once I saw the whole picture.

The agenda was to deliver Iraqi oil to Israel. The motive was that Israel had been paying a 25% premium for its oil imports since the mid 1990s and needed to fix that economic burden. From the early 1970s until the mid 1990s, Israel had enjoyed a special supply arrangement involving Iranian oil, a secret pipeline through Israel and a very successful and nefarious Middle East oil trader by the name of Marc Rich. This confidential supply arrangement ceased in the 1990s. The neoconservatives were going to help Israel fix their oil problem and enrich their friends and business colleagues at the same time.

Needless to say, the book contains many details to further support my change in position. I cannot adequately cover those details in a short interview. Let me just say that it was not easy for me to change my position a few years ago. I lost a lot of sleep when I realized that I had risked my life during seventy-five months in Iraq. I had wrongly believed that oil did not play a role in the decision for war and there was not an oil agenda. Our country incurred tremendous losses – to include 4,489 American military killed, over 32,000 seriously injured and a cost of more than $two trillion. The country of Iraq also incurred very serious costs of life and destruction to their nation. These things are very haunting.

2. Ahmed Chalabi of the Iraqi National Congress was one of the main lobbyists in the U.S. pushing for the invasion of Iraq. He tried to win over the Israeli lobby and the neoconservatives in Washington by promising that Iraq would sell oil to Israel after Saddam was deposed. How did that play out?

Ahmed Chalabi was the prewar anointed Iraqi leader by senior civilian decision makers at the Pentagon. Chalabi made many promises to the Israel Lobby in the 1990s to get their support. The CIA and State Department had tried working with Chalabi in the early 1990s, but quickly distanced themselves from him when they realized the type of person he was. What did Chalabi promise the Lobby and neoconservatives to get their support that was of little interest to CIA and the State Department? One promise was the supply of oil to Israel via the old Kirkuk to Haifa (Israel) pipeline – this was the first Iraqi oil export pipeline constructed in the early 1930s. It was closed in 1948 when Israel was created.  Chalabi promised that he would reopen and expand it.

During the summer of 2003, Chalabi and the neoconservatives must have recognized that Iraqis would never allow exports of oil to Israel through a known and visible pipeline, the Kirkuk to Haifa pipeline. I would learn years later that the Baghdad Arabic press carried articles about the US plans to open the Haifa pipeline and ship oil to Israel. The Iraqi reporters were reading the same articles in the Israeli and UK press that I would not see until 2014. These articles motivated Iraqis inside the oil ministry to attack their own pipelines in July 2003 – the first major attack on pipelines that supplied crude oil to the Baghdad refinery was an inside job. It shut down the refinery for several days, created gasoline shortages and had Iraqis in long gas lines during the hot summer.

Chalabi could not realistically rebuild the pipeline to Haifa. However, he needed to meet his commitments of delivering oil to Israel. In the fall of 2003, he ordered the firing of the Iraqi who managed the marketing of all of Iraq’s oil exports (director general of SOMO) for refusing to sell oil to Glencore – the company founded by Marc Rich in the 1970s and supplied most of Israel’s oil for two decades. To the surprise of the CPA oil group, the new oil minister and his new marketing manager started selling oil to Glencore in the fall of 2003. We had previously supported the policy to only sell oil to end users – oil companies with refining capacity. Phil Carroll and I were aware of the high risk of corruption by selling to third parties – traders and brokers such as Glencore. We did not want any corruption during our watch so we endorsed the policy of only selling to refiners. Chalabi and the new oil minister fired the SOMO director general just after Phil Carroll departed Iraq and while I was on a break outside of Iraq.

Iraq continued to sell oil to traders after 2003, including other oil traders besides Glencore. Today, Israel gets its oil from the traders who buy Iraqi oil from the Kurds at the Turkish port of Ceyhan.

3. You ran into some real hubris with U.S. officials. How did the Coalition Provisional Authority’s budget director for example, influence getting the oil industry back on track after the invasion?

Hubris is the best word to describe what I saw and experienced with some decision makers who were driven by either an ideology or another agenda. Most were physically located in Washington, but a few came out to Baghdad with the initial CPA team. The CPA budget director in 2003 was one such person. He provided the greatest obstacles to reconstructing the oil sector after the invasion. The lack of security provided the second greatest obstacle. That is not just my opinion, but it was the opinion of all the senior oil advisors during CPA.

The budget director created a payroll problem in July and August 2003 for the oil ministry and brought his wife out in September as a consultant to fix the payroll problem he created. He deemed the existing Iraqi payroll system unsuitable during July 2003, even though a US army colonel and I reviewed the system and found it acceptable. It was a “pay for performance” system not unlike what western oil companies used. ORHA had previously agreed to a plan for paying Iraqi employees under their existing payroll system once we performed our review. The budget director’s decision to ignore the ORHA plan and create a new civil service payroll system delayed proper pay to the Iraqi employees. This resulted in the first labor strike in the history of the oil ministry and stopped oil exports for a few days in South Oil Company. Other oil ministry operating company employees became hostile towards their Iraqi leaders because of his payroll decision. We literally had a revolt inside the oil ministry during the hot summer of 2003 because of his payroll decision.

His other decision was to stop providing funds to the oil sector reconstruction effort after agreeing to fund it earlier in 2003. The oil ministry, CPA and the US Army Corps of Engineers agreed to a plan in June 2003 of completing over 200 projects in order to meet the US government’s commitment of repairing any damage to the oil sector incurred during hostilities. The president’s cabinet had agreed to this policy during the prewar planning. The cost of the projects was about $1 billion and the CPA budget director had agreed to fund all the projects. He withdrew the funding in the fall of 2003 after only providing about 50% of the original estimate. The oil reconstruction effort came to a halt for several months because he refused to provide funds for the reconstruction contract.

4. During the Surge you worked on the Baiji refinery, which was operating at below capacity and had a serious problem with the Islamic State of Iraq. What happened to get that refinery back on track, and why wasn’t it sustainable after the Americans left?

The Baiji Oil Refinery story during the Surge is a great leadership story. The specific leaders included the Baiji director general Dr. Ali Obaidi, General David Petraeus and the US army officers who worked with Dr. Obaidi.

The refinery was operating at about 20% of capacity in early 2007 when Dr Obaidi was moved from Baghdad to Baiji as the new director general. The refinery was controlled by ISIS elements at the time. The previous director general had feared for his life and the lives of his family so he allowed ISIS to gain control of his refinery. ISIS used the refinery and product distribution to provide financial support for the growing Sunni insurgency.

General Petraeus had just been appointed to his new position in Iraq in early 2007.  His previous Iraq experience during 2003 as the Commander of the 101st Airborne Division taught him about the strategic importance of the Baiji refinery.  He moved a US infantry company to a location inside the refinery fence to work with Obaidi and his Iraqi oil security force. They eliminated the internal and external threats to the employees. They raided an ISIS weapons cache and detained those employees with loyalties to ISIS. The Corps of Engineers sent an experienced engineer to assist Obaidi with technical issues. The refinery quickly recovered to normal operating levels within months. The specific anecdotes I heard while interviewing Obaidi and the company commanders are included in my book. It provides several examples of how to win the hearts and minds of the local population by re-establishing security and enabling the locals to live and work in a normal environment.

The plan to withdraw US troops in 2011 created a very difficult personal security issue for Dr. Obaidi. He was a target of the insurgents and depended on the US army for his own security. He left Iraq and the US troops departed the Baiji Refinery in early 2011. The refinery experienced an attack in the spring of 2011 from a strong external force that overwhelmed the Iraqi security. Operations at the refinery never returned to the Obaidi levels after that attack and ISIS moved into the refinery in 2014. The Shia militia eventually replaced ISIS and looted every piece of equipment that was not bolted down.

5. In 2009, Iraq auctioned off some of its largest oil fields to foreign corporations. The process got off to a rough start but eventually re-introduced energy companies to the country one of which was ExxonMobil. They eventually grew disillusioned with the Oil Ministry and signed a deal with Kurdistan. What was its experience in Iraq both good and bad?

The Iraq oil auctions of 2009 were the largest oil auctions ever offered in the international oil industry. Contracts signed from those auctions would have taken Iraq’s production from about 2.5 million barrels a day to over 12 million barrels a day in seven years. Such a level would have placed Iraq as the number one producer in OPEC, higher than Saudi Arabia. None of us felt like such numbers would be achievable for many reasons – not the least of which was that the global market could not take such a quantity in just seven years. However, the contracts served an important role of re-introducing oil and oil service companies to Iraq from all over the world.

ExxonMobil and Occidental were the only two American oil companies who won contracts during the 2009 auctions. Other well known oil companies included: Shell, BP, ENI (Italy), Lukoil (Russia), CNPC and CNOOC of China. The contract terms signed by these companies in 2009 were 20-year service contracts. The contracts offered by the Kurds were production-sharing contracts, similar to contracts that western oil companies used in other parts of the world. Baghdad refused to offer such contracts that gave an equity position for oil still in the ground. Instead, Baghdad chose a service contract model that served them well during a period of high prices, but hurt when prices fell.

There were several issues that created problems for the western oil companies and I discuss those in the book. The one that seemed to offer the biggest challenge was delayed payments from Baghdad. Any delay to payments hurt the economics of the specific projects and Baghdad seldom met their payment terms. The delays only got worse after 2011 when oil prices decreased. Initial project economics for the 2009 contracts were barely acceptable to the oil companies. The western companies felt that they needed to have a presence in Iraq’s oil sector to take advantage of any future opportunities afforded the companies who signed 2009 contracts. As economics got worse and the security situation deteriorated, a few companies looked at their investments and decided to decrease their Iraq exposure. The American companies of Occidental and ExxonMobil made significant adjustments – Occidental opted out completely and ExxonMobil’s position was reduced significantly although they remain the operator of the West Qurna oilfield today.

All of the oil companies I talked to enjoyed working with the Iraqi engineers and managers. They found them eager to work and learn. They wanted to learn how western oil companies operated. Their work ethic was good and enabled much of the work to be done by locals.

6. The U.S. worked with the Oil Ministry to build several single point moorings (SPM) in Basra to expand the export capacity of Iraq. What were the successes and failures of that effort?

The SPM project was a very successful project and has enabled Iraq to export the record volumes out of the south over the last few years. The oil minister was quoted during the phase 1 commissioning of 2012 to say that it was not just an important oil project, but it was the most important infrastructure project in Iraq in decades. I devote a chapter in the book to a detailed description of the project. It started in 2007 with the US seeding the project with a $2 million investment that encouraged Iraq to invest $2 billion that would enable exports worth $hundreds of billions over the next twenty years.

The successes were numerous, but I considered the main success to be the partnership between Iraq and the Americans to push a project that General Petraeus had identified in 2007 as a national security project for Iraq and not just another oil project. Iraq had attempted SPM projects twice in the previous fifteen years. The first attempt failed in the early 1990s. The second attempt was with the Japanese government. The Japanese initiated an SPM project with the oil ministry in 2005, but it experienced significant problems. It has still not yet been completed.

Our SPM project included an off shore central metering and manifold platform (CMMP) and four large SPMs located along the deepest navigation channel in the northern gulf. The coalition navy was a huge help with the initial surveys and clearing of the construction area of the northern gulf. Their presence and security offered assurances for the foreign contractors that were needed to do the work. The Gulf Region Division of the US Army Corps of Engineers set up the initial contracts. The oil ministry took control and funded the remaining contracts needed for completion. I remained as the US advisor for the project until my departure in late 2011.

South Oil Company has done wonderful work with their on shore infrastructure to keep the SPMs operating at high export levels since 2012. The on shore storage and pumping investments required to support the four SPMs have experienced several delays. Iraq needed to invest about $4 billion in storage tanks, pumps, piping and other equipment on shore to operate the off shore SPMs at their maximum capacity. The oil ministry’s construction company managed the on shore construction work without any outside assistance. Their lack of experience with such large projects contributed to the extensive delays. Workarounds using existing pumps and storage by South Oil Company has helped to decrease the negative impact from the delays, but future export growth will reach a ceiling until completion of the on shore projects.


7 comments:

Anonymous said...

This is very interesting. Thanks for posting it.

I have added the book to my list of books to buy.

Don Cox

Joel Wing said...

Glad you liked it The book is a quick and good read

Anonymous said...

I believe that this book should be an excellent reference of oil industry condition in Iraq and the influence of politics during the last difficult 15 years. I will have this book for sure, glad to read the interview.Thanks.

Dr. Ali Obaidi

Joel Wing said...

Honored to have you read the interview Dr. Obaidi.

anan said...

Gary Vogler and Dr. Obaidi, thank you for your service to Iraq.

What are your forecasts for oil production in 2018, 2019 and 2020? Currently oil production is about 4 1/2 million barrels a day.

Would you be willing to work for the Iraqi Oil ministry again? If you were in charge of GoI policy, what would your natural resource strategy be for Iraq?

Anonymous said...

Tantalising revelations.. the book is a must read

Okieoil said...

Gary is an honest broker in his analysis. I bought the book when it went on sale. I can't wait for it to be delivered so I can read it. I worked with Gary on several occasions before, during and after the shooting phase in 2003. RBH, COL, USA(Ret)