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Printed Hearing The Committee on Energy and Commerce W.J. "Billy" Tauzin, Chairman United Nations Oil for Food Program <DOC>
[108th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:87486.wais]
THE UNITED NATIONS OIL FOR FOOD PROGRAM
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ENERGY AND AIR QUALITY
of the
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
MAY 14, 2003
__________
Serial No. 108-18
__________
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
__________
87-486 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2003
----------------------------------------------------------------------------
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COMMITTEE ON ENERGY AND COMMERCE
W.J. ``BILLY'' TAUZIN, Louisiana, Chairman
MICHAEL BILIRAKIS, Florida JOHN D. DINGELL, Michigan
JOE BARTON, Texas HENRY A. WAXMAN, California
FRED UPTON, Michigan EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia SHERROD BROWN, Ohio
RICHARD BURR, North Carolina BART GORDON, Tennessee
Vice Chairman PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky BOBBY L. RUSH, Illinois
CHARLIE NORWOOD, Georgia ANNA G. ESHOO, California
BARBARA CUBIN, Wyoming BART STUPAK, Michigan
JOHN SHIMKUS, Illinois ELIOT L. ENGEL, New York
HEATHER WILSON, New Mexico ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona GENE GREEN, Texas
CHARLES W. ``CHIP'' PICKERING, KAREN McCARTHY, Missouri
Mississippi TED STRICKLAND, Ohio
VITO FOSSELLA, New York DIANA DeGETTE, Colorado
ROY BLUNT, Missouri LOIS CAPPS, California
STEVE BUYER, Indiana MICHAEL F. DOYLE, Pennsylvania
GEORGE RADANOVICH, California CHRISTOPHER JOHN, Louisiana
CHARLES F. BASS, New Hampshire TOM ALLEN, Maine
JOSEPH R. PITTS, Pennsylvania JIM DAVIS, Florida
MARY BONO, California JAN SCHAKOWSKY, Illinois
GREG WALDEN, Oregon HILDA L. SOLIS, California
LEE TERRY, Nebraska
ERNIE FLETCHER, Kentucky
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
DARRELL E. ISSA, California
C.L. ``BUTCH'' OTTER, Idaho
David V. Marventano, Staff Director
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Energy and Air Quality
JOE BARTON, Texas, Chairman
CHRISTOPHER COX, California RICK BOUCHER, Virginia
RICHARD BURR, North Carolina (Ranking Member)
ED WHITFIELD, Kentucky ALBERT R. WYNN, Maryland
CHARLIE NORWOOD, Georgia THOMAS H. ALLEN, Maine
JOHN SHIMKUS, Illinois HENRY A. WAXMAN, California
Vice Chairman EDWARD J. MARKEY, Massachusetts
HEATHER WILSON, New Mexico RALPH M. HALL, Texas
JOHN SHADEGG, Arizona FRANK PALLONE, Jr., New Jersey
CHARLES W. ``CHIP'' PICKERING, SHERROD BROWN, Ohio
Mississippi BOBBY L. RUSH, Illinois
VITO FOSSELLA, New York KAREN McCARTHY, Missouri
STEVE BUYER, Indiana TED STRICKLAND, Ohio
GEORGE RADANOVICH, California LOIS CAPPS, California
MARY BONO, California MIKE DOYLE, Pennsylvania
GREG WALDEN, Oregon CHRIS JOHN, Louisiana
MIKE ROGERS, Michigan JOHN D. DINGELL, Michigan
DARRELL ISSA, California (Ex Officio)
C.L. ``BUTCH'' OTTER, Idaho
W.J. ``BILLY'' TAUZIN, Louisiana
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Barnes, James J., Research Fellow, James A. Baker III
Institute for Public Policy, Rice University............... 25
Caruso, Guy F., Administrator, Energy Information
Administration, U.S. Department of Energy.................. 12
Ebel, Robert E., Director, Energy Program, Center for
Strategic and International Studies........................ 18
(iii)
THE UNITED NATIONS OIL FOR FOOD PROGRAM
----------
WEDNESDAY, MAY 14, 2003
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Energy and Air Quality,
Washington, DC.
The subcommittee met, pursuant to notice, at 10:08 a.m., in
room 2322, Rayburn House Office Building, Hon. Joe Barton
(chairman) presiding.
Members present: Representatives Barton, Burr, Whitfield,
Shimkus, Walden, Rogers, Issa, Otter, Tauzin (ex officio),
Boucher, Wynn, Hall, and Brown.
Staff present: William Cooper, majority counsel; Andrew
Black, majority counsel; Peter Kielty, legislative clerk; Sue
Sheridan, minority counsel; and Bruce Harris, minority counsel.
Mr. Barton. The subcommittee will come to order.
Before we start our hearing, we are going to show a video
that appeared yesterday on Fox News about the subject of this
hearing. It's about 2 to 3 minutes in length. Let's move the
screen so the audience can see it as well as the members.
Unfortunately, our friends at the press table can't see it, but
if you want to get up and go out in the audience, you're not
going to be penalized for that.
[Video Presentation.]
Mr. Barton. We have to say on the record that the editorial
opinions are the opinions of that particular reporter and not
necessarily the opinions of the U.S. Government, or the U.S.
Congress, for that matter.
The subcommittee is now going to come to order. We are
going to proceed pursuant to Committee Rule 4(e) which governs
opening statements by members and the opportunity to defer them
for extra questioning. Is there any objection to continuing
under that particular rule? Hearing none, so ordered.
The Chair is going to recognize himself now for an opening
statement.
Four years ago, this subcommittee held a hearing on the
Iraqi Oil for Food Program, operated by the United Nations. On
March 26, 1999, we learned that the Government of Iraq was
smuggling oil outside of the program, with significant impacts
on the energy markets. Mr. Hall of Texas, who was then the
ranking member of this subcommittee, said that he was
suspicious of the program and that ``it could spawn a lot of
abuse''. That's a direct quote from Mr. Hall's written
statement.
Mr. Shimkus, who was a member of the subcommittee but at
that time not its vice chairman, said that legal and illegal
Iraqi oil exports were leading to the closure of domestic
marginal wells in his congressional district in Illinois and
elsewhere, and that this was decreasing our dependence upon
imported oil.
Mr. Largent, a recently retired Member of Congress, who was
then a member of the subcommittee, raised concerns that money
intended for humanitarian assistance was not being spent in a
proper manner. We've just seen an indication of that in the
video.
The concerns of those members at that time have been
consistently confirmed. The U.N. Oil for Food Program has been
shown to be a bad plan that has been implemented badly. The
various food and medicine accounts have often been under-
funded. Inspectors in many cases could not stem the flow of
illegal oil around the program. Saddam Hussein's regime has put
illegal surcharges on oil sales and required kickbacks, giving
funds to the regime and not to the Iraqi people, as was
intended by the program.
The General Accounting Offices estimates that, between 1997
and 2001, Saddam Hussein accumulated some $6.6 billion from
illegal oil smuggling and from illicit deals connected to the
Oil for Food Program. Shortly after touring a freed Baghdad,
General Tommie Franks said that it should have been called the
``Oil for Palace Program''. He appears to have been right.
We have since learned that the United Nations, or some of
it's members, anyway, have been gaming the system alongside
Saddam Hussein. In addition to underfunding humanitarian
assistance programs, a surprising number of questionable
contracts have gone to countries that were later conspicuous in
their opposition to our forcing a regime change.
Four years later, the government of Saddam Hussein has been
removed. Thank the Lord for that. The people of Iraq are free,
but they are not yet free from the U.N. sanctions imposed upon
Saddam Hussein. Because there is no need for sanctions, there
should be no need for that great exemption to sanctions that
was mistakenly named Oil for Food Program.
On June 3 of this year, the U.N. Oil for Food Program will
cease to be authorized. It deserves to die a natural death, in
my opinion.
The Oil for Food Program is riddled with problems. First,
oil sales in the program are not transparent. Buyers do not
know the price they are paying until after they receive the
oil. The money goes to the U.N. escrow account to be carved up
by bureaucrats before it comes back, therefore slowing the
process of reinvesting in the Iraqi oil sector. The necessary
upgrading of old and damaged energy infrastructure in Iraq has
been delayed and is continuing to be delayed, causing
environmental decay, reduced access to their oil, and
additional cost in recovery. I am told there are some $12
billion in the escrow accounts at this point in time.
The market price of oil is affected by developments all
over the world because is easily transported. It's called
``fungible''. A small amount of production at the margins has a
great impact on global prices. That is why production quotas in
the OPEC cartel, the frequent surpassing of them by member
countries, is of interest to market participants. Consumers,
producers and market participants in the U.S. and elsewhere
deserve an oil sales program to be transparent, and made
transparently so in international markets, where the full
effects can be measured.
Three percent of the Oil for Food Program proceeds are
taken off the top for the United Nations itself. Talk about a
sweet deal. Next, 25 percent goes to a U.N. Compensation
Commission for war reparations, which surely need to be
renegotiated now. Then there is a rigid set of supposed
humanitarian assistance requirements for different sections of
the country. Some of those have never been implemented. U.S.
officials, including the Clinton administration, were concerned
that Iraq was using revenues to buy prohibited military
equipment and often other item of largess for high-ranking
Iraqis. Again, our video has shown some of that.
I will be sending a letter to the United Nations at the end
of this hearing, asking that this Committee and the Congress
receive a full accounting, and a transparent accounting, of the
Oil for Food Program. Congress has no power to subpoena records
of the United Nations, but I am going to encourage the U.N. to
fully explain this program, not just to this Committee and this
Congress, but to the world, because it has never been
externally audited. Those who wish to continue the program
should come clean about who has benefited and where the moneys
have gone.
I am also going to suggest that the U.N. transfer the
uncommitted balance--and it's in the billions of dollars--to a
humanitarian assistance account of the coalition forces that
have actually liberated Iraq, so that account may attempt to
bring a better life much more quickly to the people of Iraq
today. I am told that it takes 6 months just to process the
paperwork for requests for funding under the current program.
I want to commend President Bush for saying that sanctions
should be lifted and that the oil wealth of Iraq should stay
with the Iraqi people, and its sales will not continue to go
through the Oil for Food Program. The newly freed people of
Iraq should not be saddled with a program designed for another
time, with contractual obligations made by a previous regime,
with a payment schedule that deprives them of the full fruit of
their own natural resources. Until a new Iraqi Government can
be formed, the United States and its coalition partners should
manage the sale of oil for the people of Iraq without diverting
money from sales, as the U.N. program has done in the past.
I want to thank the witnesses for their testimony today,
and I look forward to hearing it.
With that, I would recognize our ranking member, Mr.
Boucher of Virginia, for an opening statement.
Mr. Boucher. Thank you very much, Mr. Chairman.
The Oil for Food Program was established by the United
Nations in April 1995 as a means of alleviating human suffering
in Iraq, while seeking Iraqi compliance with a variety of
United Nations' resolutions. The implementation of the program
began in December 1996, and the first food shipments to Iraq
arrived in March 1997.
The program has undergone a number of changes in the
intervening years, including increases in the amount of oil
that Iraq has been permitted to export under its guidelines.
Under the program's guidelines, the revenues generated from the
sale of Iraqi oil are distributed based upon a formula that
allocates the largest portion of the revenues for reparations
of the victims of the invasion of Kuwait and for humanitarian
supplies and equipment. According to the United Nations, as of
May 7 of this year, $26.8 billion worth of humanitarian
supplies and equipment have been sent to Iraq under the
program, and another $10.1 billion of supplies are now in the
process of being approved and shipped.
The Oil for Food Program is set to expire on June 3, 2003.
Given the recent war and the numerous concerns that are
associated with the restoration of Iraq, and the numerous
concerns that have been voiced from a variety of sources
concerning the operation of this program, it seems to me that
this hearing is well-justified. I want to commend the Chairman
for bringing this matter before the subcommittee in a timely
way.
The administration and the United Nations are appropriately
considering at the present time whether there is a continuing
need for the Oil for Food Program in post-war Iraq. Today, we
have before the subcommittee three witnesses who can testify
regarding the program and the effect that continuing or ending
the program will have on Iraq and world energy markets. I very
much look forward to this testimony and I join with you, Mr.
Chairman, in welcoming these witnesses.
Thank you. I yield back.
Mr. Barton. We thank you.
We will now receive an opening statement from the full
Committee Chairman, Mr. Tauzin of Louisiana.
Chairman Tauzin. Thank you, Mr. Chairman.
First of all, I think it's important to identify the basis
upon which this hearing is, in fact, called and executed. It is
obviously one connected directly to this country's concerns
about not only its domestic but international oil policy. That
is obviously a subject before this Committee.
Second, this Committee continues to have jurisdiction over
foreign commerce, and obviously this is a huge interest to the
foreign commerce of the United States and its global trading
partners.
Let me first say, Mr. Chairman, that your timing couldn't
be better. I mean, as the U.N. is beginning to focus on and
face this issue, it is important that the Congress and the
United States have a full accounting of how this program has
worked and whether or not it should be allowed to expire a
natural death on June 3 of this year, when it is scheduled to
expire.
Let me lay the facts down as we see them and as we have
your written testimony before us today, and I want to thank all
the witnesses who have come today to help us understand this
issue.
First is that, just yesterday, crude oil prices closed up
$1.15 a barrel, to a high of $28.50 again. Natural gas prices
in America were $5 Mcf. We continue to see high oil and natural
gas prices in our U.S. economy struggling to recover. I can
tell you from the oil patch that those who want to make
investments in the oil patch look at these prices and
understand they're phony.
It is still based upon some real artificial disruptions in
the international oil markets. When oil prices are unnaturally
high, investors in the oil patch restrain from investing,
because they know they're going to come down when conditions
normalize again. So, for those two reasons, we have great
concerns. These continued high prices impact the desire of this
country to seek economic recovery and in some parts of the
country is threatening closure of some industries and
businesses because natural gas prices are so exceptionally
high.
Second, the people who ought to be investing in more
natural gas and oil production in this country are restraining
their investment until these markets normalize. So we have
great interest in normalizing international oil markets again.
Third, as I understand it, the Iraqi oil industry is in
terrible state of disrepair. It's in bad shape following this
war. The people of Iraq desperately need the sale of their own
oil in order to rebuild their country and to provide
humanitarian assistance to people who depend upon that
assistance in a country just wreaked with war.
And yet the U.N. still is defending this Oil for Food
Program, which was designed, as I understand it, to allow money
to go to humanitarian assistance, and we're seeing some real
problems in that administration. But it also was to fund the
inspectors. The question remains: should Iraq have any
sanctions on it today, should it be able to renew its oil
production and sale of oil to the world community so that it
can recover economically, and so that humanitarian aid can be
provided to its people with its own money, or should the U.N.
continue this Oil for Food Program that is now the subject of
so much criticism and was designed to try to get inspectors
into the country to find out what Saddam was up to in terms of
weapons of mass destruction.
It seems to me that this program is a program whose day has
come. We ought to let it expire a natural death, but more
importantly, we ought to get this country back on its feet as
quickly as we can in terms of oil production--for two reasons:
one for the sake of the Iraqis, who need their own assets to
rebuild their own country, and to provide, as I said,
humanitarian assistance for their own people, but second, to
normalize the conditions of the global oil markets again, so
that we can get back down to normal investments and normal
production, and hopefully normal prices again in the
marketplace.
Most of the people I talk to tell me that oil prices should
probably be in the low 20's right now, and that these high
prices are still a result of these uncertainties and the
diplomatic maneuvering going on at the U.N. The sooner we can
end that and get the normal marketplace again, the faster this
country can be back on the road to recovery.
Thank you, Mr. Chairman, for examining this, and thank you
for coming to help us understand it, because what happens in
this area is not only going to dramatically affect what happens
in Texas and Louisiana and the oil patch of this country; it's
going to dramatically affect the economic recovery of our
country and, frankly, parts of the world that are desperate
right now to see some economic recovery.
Thank you, Mr. Chairman.
Mr. Barton. Thank you, Chairman Tauzin.
Does Mr. Brown wish to make an opening statement?
Mr. Brown. I do, Mr. Chairman.
Mr. Barton. Okay. The gentleman is recognized for 3
minutes.
Mr. Brown. Thank you for putting this hearing together. I
thank the panel.
The Bush administration recently proposed that the U.S.
maintain control over Iraq's oil reserves until our country
determines it's safe to leave those resources in Iraqi hands.
This move is yet another reminder of the staggering influence
that energy companies have over this administration's policy.
We know that Vice President Cheney ran the oil conglomerate
Haliburton until Governor Bush tapped his fellow Texan to be
his running mate 3 years ago. Haliburton and its French
subsidiary had over $73 million in contracts with Saddam
Hussein's Iraq as recently as the year 2000. Most of us know
that the Bush administration abandoned the competitive bidding
process to ensure that Haliburton's subsidiary got a lucrative
Iraqi oil field reconstruction contract during the war. That
contract may be worth yet as much as $7 billion.
The most obvious example of the energy industry's influence
over the Bush administration is the almost total secrecy the
White House has imposed on the records of Vice President
Cheney's Energy Policy Task Force. Their obsession with secrecy
in this case is certainly understandable. If I were to allow
the American Petroleum Institute and the National Mining
Association and the Nuclear Energy Institute and the Edison
Electric Institute to write my energy plan, I wouldn't want the
word to get out, either. But you really have to wonder, if the
process is so embarrassing that you have to keep it secret, can
the resulting policy be much better?
As we look back on this record of favor for the energy
lobby, it's little surprise that the administration proposes to
assert more formal and direct control over Iraq's oil
infrastructure. It's good we're going to talk today about the
future of Iraq and her oil assets, but I think we're missing
the most important part of the conversation. The Bush
administration's influence over oil in Iraq is an important
issue, but for American taxpayers, the oil industry's influence
over the Bush administration, frankly, is a much more important
one.
Thank you, Mr. Chairman.
Mr. Barton. You still have a minute now.
Mr. Brown. I'm yielding it back.
Mr. Barton. Okay. I didn't hear much about the purpose of
the hearing in your opening statement, but it sure sounded
sincere.
Mr. Brown. Since when did the chairman begin to comment on
opening statements of other members?
Mr. Barton. I was just so overcome with affection for the
gentleman from Ohio, and his appearance here----
Mr. Brown. I appreciate that, my friend from Texas.
Mr. Barton. Who's next? Mr. Whitfield, do you wish to make
an opening statement?
Mr. Whitfield. Mr. Chairman, I feel speechless at this
point.
Mr. Barton. All right. So you'll get an extra 3 minutes on
your first round of questioning.
Does Mr. Wynn wish to make an opening statement?
Mr. Wynn. Yes, Mr. Chairman, briefly.
Mr. Barton. The gentleman is recognized for 3 minutes.
Mr. Wynn. Thank you, Mr. Chairman. I appreciate you calling
this hearing on what I think is a very important issue, given
what we've already accomplished in Iraq and the need to ensure
that our military accomplishment is not over-shadowed by
unsuccessful reconstruction, I guess is the best way I would
characterize it.
One of the premises, it seems to me, that was raised in
connection with the war in Iraq was that, yes, there will be
devastation, but we have a greater opportunity to rebuild
because Iraq has its own resources, namely, oil. It remains to
be seen whether we can efficiently put those resources to work
to rebuild Iraq.
Specifically, let me turn to the Oil for Food Program that
in the 1990's alleviated some of the worst effects of the 1991
Gulf War, the international sanctions regime. The program
basically allowed Iraq to export limited amounts of oil in
return for food, medical supplies, new construction and other
significant items.
I think that was a good idea. The goal of the program was
to prevent the oil revenue from being used to expand Iraq's
weapons of mass destruction program, but allow for food and
other necessities to be funneled into Iraq, again using its own
resources.
However, now that the country has been liberated, the
program may, in fact, not be necessary. However, should the
program continue for several months, as the U.S. has proposed
before the United Nations, we should examine--and this is where
I believe we have a true responsibility--we should examine ways
to ensure transparency with respect to the financial
transactions and the independent external audit program.
It seems to me that the World Bank and International
Monetary Fund, organizations which have experience in this
area, could play a role to oversee how these revenues are spent
to ensure they are spent for the good of the Iraqi people. In
addition, there should be a limited U.N. role to appoint
auditors to oversee some of these financial transactions, again
to ensure that the benefit goes to the Iraqi people.
Now, this is a fairly new resolution and we have not had a
lot of opportunity to examine it, but I think there are a lot
of questions that, hopefully, our witnesses and this committee
will consider. For example, should this resolution be adopted,
how will we ensure a smooth transition away from the Oil for
Food Program as administered by the United Nations without
compromising humanitarian assistance for Iraqis. I think it
goes without saying that our reconstruction efforts thus far
have not been a model of success. Hopefully, any transition
would be much more effective.
Second, how soon will Iraq be able to export significant
oil and generate revenue, given the poor oil-producing
infrastructure in place from years of sanctions and looting?
That's another consideration that I hope this committee will
consider.
Just to reflect on the humanitarian situation, I would
point out that the World Health Organization announced at
Basra, Iraq's second largest city, could experience an outbreak
of cholera from untreated sewage that is spewing into the
river, and there is still nightly violence in the streets of
Baghdad. It seems to me that rebuilding Iraq quickly and
effectively, using its own oil resources, is very important, so
that the average Iraqi is better off without Saddam, definitely
without Saddam.
It will help show the Arab streak, which I think is very
important in our overall foreign policy, and the rest of the
world, that we are not just interested in oil but we're
interested in the welfare of the Iraqi people.
Mr. Chairman, I appreciate your attention to this matter
and I look forward to today's witnesses.
Mr. Barton. We thank the gentleman from Maryland.
Does the gentleman from Oregon wish to make an opening
statement?
Mr. Walden. Mr. Chairman, I'm going to waive my opening
statement in lieu of questions.
Mr. Barton. The gentleman defers.
Does the distinguished gentleman from Texas wish to make an
opening statement?
Mr. Hall. Are you talking to me?
Mr. Barton. Yes, sir. You're the only distinguished
gentlemen from Texas that I know of in the room, at least at
the dias.
Mr. Hall. How about you?
Mr. Barton. Well, I'm not distinguished.
Mr. Hall. Well, I thank you, Mr. Chairman. I thank this
fine group for coming before us here with the great job that
they have done. I agree with a lot of the statements Sherrod
Brown made, and Mr. Wynn.
I would relegate the U.N. on the basis of reporting to them
what we did, because we have to have some international
organization, but with the total lack of support that they gave
us, I think we owe them very little. For the pseudo-leaders of
Iraq that are trying to make demands on us now, I think they
need to once again know that they supported a dictator for
many, many years, and also remind them that they lost this war,
they didn't win it, and they need to be careful with their
demands.
I noted on the television this morning that we had given
some instructions to shoot the looters. I think that's long
been delayed. As Congressman Brown said, and Mr. Wynn, we
absolutely have to win this peace now. The most important part
of this war is probably in front of us. I think it's
appropriate to hold this hearing this morning, to reassess the
Oil for Food Program, which I've been opposed to from the time
it was undertaken, as I think the Chairman has. We've had a
bill to try to stop it one time. I don't remember what happened
to it. I don't think we could ever get it out of subcommittee.
But with the demise of the regime over there, there is
clearly no further need to continue this program. It will be
continued in some way, but I guess melded in with our overall
thrust to try to get that country straightened out.
A lot of questions remain to be answered in the
transitional phase we're now in and about to ultimately deliver
the Iraqi oil assets to whatever successor government is
established. I wish and hope that we could deliver part of that
oil assets to the American people. That's what the world is
accusing us of, and that's exactly what every other conqueror
probably would do. We need to pay the American taxpayer back
for the cost of this war, with at least half of the energy that
we produce from Iraq, and take the other half to build them
back.
I don't know how possible that is, but I think that's what
all the people in my district are saying, that we think they
ought to pay for the war that they created, that they brought
on themselves, and they have the assets to do it with.
While we're looking for Saddam Hussein, and looking
everywhere for him, we ought to also look for one child that
that program probably helped. I doubt seriously if they're
going to find it. I think one child that benefited from what I
think is a diabolical deal that the U.S. carried out with an
international thug that they now look for. I want to find some
proof that that helped. I hope I find it there, because I hope
it did help youngsters and help people who were ill and needed
it, but I have real doubts about it.
We also need to be mindful of how closely our actions with
respect to Iraqi oil are being watched by the Arab world, and
might let them know there's not a hell of a lot of their
business as to what we do with it and how we handle it. They
need to know that we won the war without their help, we won the
war without the help of the United Nations, and while we have
to have some type of an international organization--I'm not
saying pull out of the United Nations, or that old saying of
let China in the U.N. and let's give them our spot, you know,
and all that that went on for a long, long time. But I think
that, as we're here today, many if not most of the Arab nations
believe that we're in Iraq for the oil, to take the oil for our
own use as spoils of war, because that's exactly what they
would do. Of course, it's not true, but perceptions are vitally
important to our long-term success in the government.
Mr. Barton. The gentleman needs to wrap up. He's about 2
minutes over.
Mr. Hall. Well, I could go on forever.
Mr. Barton. I know you could. That's why I'm asking that
you wrap up.
Mr. Hall. I'm surprised that you would even slow me down,
Mr. Chairman.
Mr. Barton. Mr. Brown gave you his extra minute. He just
did.
Mr. Hall. Just as this Nation pulled together behind the
troops when they went into Iraq, we need to stay together and
support this President during this transition. I have a lot of
support for the President and a lot of belief in the President,
not only that he's capable and honest, and he is our former
Governor and a friend of mine, and a godly man, and I hope the
transition is going to be short. But it's important that we
take the time to do it correctly, and if we're not successful
in bringing about the establishment of a stable Iraqi
government, then our efforts to topple Saddam Hussein's regime
may have been in vain.
Mr. Chairman, I yield back the balance of my time.
Mr. Barton. That's pretty good for a one paragraph staff
briefing, to talk for 5 minutes. That's a very good statement.
Mr. Hall. Thank you, Mr. Chairman.
Mr. Barton. The President also did a birthday party for
you, I'm told, in the Oval Office. So you and he must be pretty
good friends.
Mr. Hall. Well, we are very good friends, but I would have
to be truthful with you, as my fellow Texan and the chairman,
that I'm not 80 years old. It's embarrassing to tell that now
after they gave me parties all over this town. But I lied to
get in the Navy 55 years ago. I was flying for the Navy when I
was 13.
That's my story and, by golly, I'm going to stay with it.
Thank you, Mr. Chairman.
Mr. Barton. Thank you.
Mr. Otter, do you wish to make a statement?
Mr. Otter. I will defer.
Mr. Barton. He defers.
Mr. Hall. Mr. Chairman?
Mr. Barton. The gentleman from Texas.
Mr. Hall. I also want to thank Jim Barnes here from the
James A. Baker Institute. It's a great institute. It is named
after a great American that I thought should have been
Secretary of State under the new Bush here, and I'm
disappointed that he wasn't.
Thank you. I yield back.
Mr. Barton. Does Mr. Shimkus with to make an opening
statement?
Mr. Shimkus. No, sir.
Mr. Barton. Does Mr. Burr wish to make an opening
statement?
Mr. Burr. No, sir.
Mr. Hall. I can make another one if you would allow me----
Mr. Barton. No, no.
Seeing no other members present, all other members will
have their opening statements, if they wish, to have them put
into the record.
[Additional statements submitted for the record follow:]
Prepared Statement of Hon. Vito Fossella, a Representative in Congress
from the State of New York
Today's hearing examines a topic crucial to the development of
post-Hussein Iraq: the UN Oil for Food Program. Allowing for the free
flow of Iraqi oil into the world market, with profits directed towards
the people of Iraq, is arguably the single most important initiative
dictating the future of the Iraqi economy and the betterment of a
historically oppressed people. However, economic prosperity cannot
occur under a command and control framework formerly established to
prevent a brutal dictator from building weapons of mass destruction. In
a post Hussein Iraq, it is imperative we revisit and rescind antiquated
regulations so that a new Iraq can prosper.
As one of our witnesses accurately states, ``The Oil for Food
Program was created for the purpose of stopping the regime of Saddam
Hussein from acquiring funds to purchase weapons of mass destruction
and further expand its traditional military might. With the fall of
Saddam's regime, the purpose of this program no longer exists. It
should be phased out.'' Not only is the program outdated, it has
historically been abused through inept UN oversight. In addition to its
ridiculous appointments of terrorist nations to key international
committees, the UN has proven insolvent in administering a program that
was supposed to provide humanitarian relief to the people of Iraq.
In testimony before the House Financial Services Committee, the
Treasury Department highlighted Hussein's success in ``skimming and
kickbacks on oil legitimately sold through the Oil for Food Program.''
The Department also notes Saddam's equal victories in defrauding the
Program's humanitarian purchases. In addition, testimony from the
Center for Strategic and International Studies, Robert E. Ebel notes,
``from the beginning of the program--Iraq awarded contracts to
potentially sympathetic permanent members of the UN Security Council,
primarily France, Russia, and China.'' Mr. Ebel goes on: ``Because Iraq
primarily award(ed) contracts based on politics rather than the quality
of the goods, the Iraqi people have often received inferior goods,
including medicines.'' These grave abuses all happened on the UN's
watch. This alleged defender of the international community seemed more
intent on financing inactive weapons inspectors than purchasing food
for the Iraqi people--a cause receiving only 25% of Oil for Food funds.
It is an insult to human dignity and freedom to even consider
continuing the program under the auspices of an organization seemingly
indifferent to atrocities against humanity.
I look forward to hearing this panel's ideas on how to gradually
replace the Oil for Food Program with a stable model for Iraqi economic
development, overseen by viable international financial institutions.
Striving towards such a goal is a critical next step in rebuilding Iraq
and the liberation of a noble people.
______
Prepared Statement of Hon. Mike Rogers, a Representative in Congress
from the State of Michigan
Mr. Chairman, thank you for holding this important hearing as we
discuss the future of Iraq and the current Oil for Food Program that I
believe is harming the Iraqi people.
During my recent travel to Iraq, I learned first hand of the
difficulty the current United Nations' Oil for Food Program is having
on Iraqi citizens and to coalition efforts to rebuild the nation. From
this experience, I came away with two primary reasons, in addition to
those suggested at today's hearing, that the United Nations ought to
end the Oil for Food Program in Iraq.
First, there are thousands of barrels of Iraqi oil in full tankers
in the region ready to enter the market. However, due to the Oil for
Food Program, the Iraqi people are unable to benefit from the sale of
these resources, therefore this untapped source of revenue remains
locked in tankers due to a bureaucracy put in place to offer relief to
the Iraqi people from Saddam Hussein's cruelty, though his regime is no
longer in power in Iraq.
My second concern over this program is the effect it is having on
the lives of every-day Iraqi citizens. Propane, a derivative of
petroleum, is a primary source of residential fuel throughout Iraq.
Families use propane to cool their food, cook and heat water. In part
due to the existence of the Oil for Food Program, propane is not being
derived from Iraqi petroleum reserves and significant amounts of
propane are currently having to be imported into the nation simply to
avert a humanitarian crisis.
Mr. Chairman, thank you for again for convening this hearing. I
look forward to working with you as we aim to assist Iraq and her
people transition to a free state.
Mr. Barton. We now want to welcome our panel. We have Mr.
Guy Caruso, who is the Administrator for the Energy Information
Administration here in Washington, DC. We have Mr. Robert Ebel,
who is Director of Energy and National Security, Center for
Strategic and International Studies, also here in Washington,
DC. And as has just been pointed out, we have Mr. James Barnes,
who is a research fellow at the James A. Baker Institute for
Public Policy of Rice University in Houston, TX.
Gentleman, because we only have one panel, we're going to
start with Mr. Caruso, give you such time as you may consume,
but hopefully you can do it in around 7 minutes, 5 to 7
minutes, and Mr. Ebel and Mr. Barnes, but we're not going to
put the clock on you because, unlike some of our hearings where
we have two or three panels with five or six people, you're our
witness list today so we'll give you as much time as you need
to elaborate on your opening statement.
Welcome to the committee. You are now encouraged to tell us
about your testimony, Mr. Caruso.
STATEMENTS OF GUY F. CARUSO, ADMINISTRATOR, ENERGY INFORMATION
ADMINISTRATION, U.S. DEPARTMENT OF ENERGY; ROBERT E. EBEL,
DIRECTOR, ENERGY PROGRAM, CENTER FOR STRATEGIC AND
INTERNATIONAL STUDIES; AND JAMES J. BARNES, RESEARCH FELLOW,
JAMES A. BAKER III INSTITUTE FOR PUBLIC POLICY, RICE UNIVERSITY
Mr. Caruso. Thank you, Mr. Chairman, and members of the
committee. I am Guy Caruso, the Administrator of the Energy
Information Administration.
Mr. Barton. You really need to speak into that microphone
so we can hear you.
Mr. Caruso. Okay. I appreciate the opportunity to appear
today on this very important subject, as we have seen and
heard. My focus will be on the impact of Iraq and its return to
the oil market, and the outlook for the world oil market as
published in the EIA ``Short-Term Energy Outlook'' of this
month.
As you know, EIA is a policy-neutral, statistical arm, an
analytical arm of the Department of Energy. We do not take
policy stances, but our analysis and data is used by our
Department and others in making policy decisions.
Iraq is, of course, critical to the world oil market.
Following disruptions in supply over this past winter coming
from Venezuela, Nigeria, and then in the spring, Iraq, the
reductions in inventory is to low levels in the United States
and elsewhere. We now feel that the world supply prospects over
the next several months look quite good and we expect there
will be an increased supply from Iraq. The pace at which it
comes back, of course, is uncertain, but we are hearing very
positive things from those who are now in charge of the Iraqi
oil ministry.
We have seen already crude oil prices come down from the
high just prior to the war, and as Chairman Tauzin mentioned,
there was a great deal of uncertainty over the winter period
after the Venezuelan disruption and with the anticipation of
Iraq, and oil prices had reached nearly $40 a barrel on the
spot market. As Chairman Tauzin mentioned, it is $28.50 today,
so it's down quite a bit from the high, but clearly, still
there is uncertainty.
We think the improvement that's needed to bring inventories
back will take time, and crude oil prices still are anticipated
to average in the $27 to $28 range in the near term, according
to our latest short-term energy outlook.
OPEC producers with spare capacity, in particular Saudi
Arabia, have increased production above quotas in recent
months, and have made up substantially for the lost production
from these disrupted areas, starting with the Venezuelan
disruption through Iraq. Under our base case, we assume
production from Iraq is restored toward normal levels by the
end of the year, and that other oil producers, particularly
OPEC members, will accommodate this return to the market over
these coming months by lowering output; therefore, we do not
anticipate large downward pressure on prices over this short-
term period.
On April 24, OPEC ministers raised their official quotas
for their members, excluding Iraq, to bring their quota back
into line with what they believe their actual production should
be. Their production was running several million barrels a day
above the quotas they had set in January of this year. The OPEC
members are seeking a tighter compliance with their quotas and,
as I mentioned, bringing production back toward the new quotas.
In our base case, we expect these measures to result in an
average total OPEC crude oil production rate of about 26.7
million barrels a day over the next several quarters, and
individual OPEC member countries' shares of this output level
will depend upon the speed with which Iraqi production recovers
and returns to the market, through whichever means is
determined in the deliberations that are going on in the U.N.
and elsewhere right as we speak.
Reflecting the OPEC production cutback in 2002, and the
impact of the Venezuelan disruption late last year, oil
inventories remain at the lower end of the normal averages we
have seen now and have been tracking for the last 5 years, not
only in the United States but throughout the OECD countries. So
this is a global issue with respect to the oil market. Low
inventories, however, are expected to recover, but slowly, over
the next year.
Although low inventories remain a concern, there are
several points that I believe are relevant at this time. First,
the actual and projected stock levels are still higher than the
record lows, and they are above the minimum estimated by the
petroleum industry needed to maintain the logistical systems in
a smooth fashion.
Second, the stock figures I mentioned are commercial
inventories only. They exclude a substantial Strategic
Petroleum Reserve of 600 million barrels of crude, and another
2 million barrels in heating oil.
Third, the refineries and, indeed, the industry's
logistical system has proven once again the resiliency to deal
with the kinds of disruptions we've seen and the uncertainty
that we've seen. Refineries, as a result of upgrading and
debottlenecking, have displayed an increasing flexibility to
increase output during this time of uncertainty. Indeed, the
return of Iraq would increase that flexibility.
Finally, the product imports we have received not only from
Europe but from the Caribbean refineries also add to the
flexibility and ability to return inventories to normal levels.
Let me conclude with some remarks about oil prices. Crude
oil prices for April averaged $28 per barrel on a WTI or West
Texas Intermediate basis. That's about $5 lower than in March.
As the market reacts to prospects for greater supplies from
Iraq, and the return of Nigerian and Venezuela to full
production, we expect these prices will trend downward over the
following three quarters of this year.
As I mentioned, this price of $28 is nearly $12 lower than
the peak reached prior to the war. We expect stabilization and,
depending on the timing of that, of course, it will depend upon
the pace at which Iraq returns.
The interim head of the oil ministry of Iraq, Thamir
Ghadhban, has said this week that Iraqi oil production should
be about 1.5 million barrels a day by the end of June, which
would enable about a million barrels a day of exports, and
should return to its prewar levels of 2.5 million barrels a day
by the end of the year. We also anticipate returns, as I
mentioned, up to normal levels in Nigeria and in Venezuela.
So our base line estimate assumes OPEC members will cut
back and accommodate this return at these levels that I
mentioned, but that OPEC production will be sufficient to allow
these commercial inventories that have been drawn down over the
winter period to return to more normal levels. We expect over
the longer term, an 18-month period, that WTI prices will fall
between the $20 and $25 range that Chairman Tauzin mentioned in
his opening remarks.
In the very near term, what this means is that summer
gasoline prices will actually be a bit lower than we had been
anticipating just a month ago. We now expect them to average
about $1.46 a gallon, and that trend downward to continue.
So, with that brief overview of our short-term outlook, Mr.
Chairman, I would be happy at the appropriate time to answers
any questions you or the committee members may have.
[The prepared statement of Guy F. Caruso follows:]
Prepared Statement of Guy F. Caruso, Administrator, Energy Information
Administration, Department of Energy
Mr. Chairman and Members of the Committee: I appreciate the
opportunity to appear before you today to summarize the world oil
market outlook between now and the end of 2004. The source of these
projections is the most recent release of the Short-Term Energy
Outlook, published by the Energy Information Administration (EIA).
These releases are updated monthly.
The EIA is the statutorily chartered statistical and analytical
agency within the Department of Energy. We are charged with providing
objective, timely, and relevant data, analysis, and projections for the
use of the Department of Energy, other Government agencies, the U.S.
Congress, and the public. We do not take positions on policy issues. We
produce data and analysis reports that are meant to help policy makers
determine energy policy. Because we have an element of statutory
independence with respect to the analyses that we publish, our views
are strictly those of EIA. We do not speak for the Department or for
any particular point of view with respect to energy policy, and our
views should not be construed as representing those of the Department
or the Administration. EIA's baseline projections on energy trends are
widely used by Government agencies, the private sector, and academia
for their own energy analyses.
World Oil Markets. The April 24 meeting of the Organization of
Petroleum Exporting Countries (OPEC) raised official quotas for members
(excluding Iraq) by 0.9 million barrels per day from the previous
(suspended) quota to 25.4 million barrels per day. OPEC members also
sought tighter compliance with quotas, calling for production cuts of 2
million barrels per day from April levels. We expect these measures to
result in an average total OPEC (including Iraq) crude oil production
rate of about 26.7 million barrels per day in the second and third
quarters. Individual OPEC country shares of these output levels will
depend upon the speed with which Iraqi production recovers through 2003
and the extent to which Nigerian and Venezuelan production return to
more normal levels (Figure 1).
Crude Oil Prices. Average crude oil prices for April fell about $5
per barrel from March averages. The market reacted to prospects for
greater oil supplies from Iraq, Nigeria and Venezuela as well as OPEC's
surprise increases in production quotas. For example, West Texas
Intermediate (WTI) spot prices averaged about $28 per barrel in April,
$5 per barrel lower than the March average, and by end-April WTI prices
were $12 per barrel lower than levels reached just two months earlier
in anticipation of the start of the war in Iraq (Figure 2). Prices have
since stabilized as people realize that, while the war was quick, it
may take several months for Iraqi oil exports to resume in large
volumes. Oil markets will be watching how other OPEC members respond to
the return of supplies from Iraq, Nigeria and Venezuela. EIA's baseline
outlook assumes that OPEC production will be sufficient to allow
commercial oil inventories in the Organization for Economic Co-
operation and Development (OECD) countries to build from their current
very low levels (Figure 3), but that OPEC will cut back production to
accommodate the return of Iraqi oil exports. Until these inventories
are rebuilt above observed 5-year lows, WTI oil futures prices should
remain around current levels and then gradually slide toward about $24
per barrel by the end of 2004 as Iraqi oil exports return. These
projections always assume that OPEC members will completely accommodate
a return of Iraqi exports with no regard to the timing and the volumes
that are produced.
International Oil Supply. OPEC crude oil production (including
Iraq) fell by 0.9 million barrels per day in April to below 27 million
barrels per day, as further production increases from the OPEC 10 were
not sufficient to offset the loss of Iraqi production following the war
in that country. OPEC production is expected to remain at about the
same level in May before declining in response to OPEC's efforts to
adhere to the new production quotas in June. However, even with this
cutback, year-over-year increases of 1.1 million barrels per day for
OPEC crude oil production are still expected for the third quarter
(albeit from low 2002 levels). This trend, combined with an expected
aggregate increase in non-OPEC supply in 2003 of 1.1 million barrels
per day, indicate a total world oil supply increase in 2003 of 2.5
million barrels per day, which is expected to allow for a global stock
build this year.
Figure 4 depicts U.S. crude oil, motor gasoline and distillate
inventories. Although reflective of the international picture as
previously described, the figure shows that, for the next several
months, supplies are going to be tighter than normal. Projected stocks
are either at or below the lower ends of their respective 5-year
average ranges. In response to low prices at the beginning of 2002,
OPEC tightened production for much of that year. In addition, the
impact of the Venezuelan disruptions has been relatively larger in the
U.S. than elsewhere. These are likely to contribute to the tightness of
stocks during the next several months even though OPEC has been raising
its quotas and Venezuelan production has partially recovered from its
recent lows. Inventories are expected to recover only slowly during the
forecast interval. Although the low inventory levels are a source of
concern, the following points should be noted.
First, the actual and projected stock series are still higher than
their record lows and above the minimum estimated by the petroleum
industry to minimize the likelihood of interruptions in the
distribution of products to the retail level. Second, the stock figures
shown here are commercial inventories only: they exclude stocks in the
Strategic Petroleum Reserve, currently containing 600 million barrels,
and the Federally mandated Regional Petroleum Reserve of heating oil
stocks in the Northeast, currently standing at 2 million barrels.
Third, refineries, as a result of several years of upgrading, have
displayed increasing flexibility in increasing output during periods of
low inventories. Fourth, product imports are, and will continue to be,
readily available from both Caribbean and European refineries.
Thank you, Mr. Chairman and members of the Committee. I will be
happy to answer any questions that you might have. Attached to this
statement is a complete copy of the most recent Short-Term Energy
Outlook on which this testimony is based. The Outlook is also
accessible on the internet on the Energy Information Administration's
website http://www.eia.doe.gov.
[GRAPHIC] [TIFF OMITTED] T7486.001
[GRAPHIC] [TIFF OMITTED] T7486.002
Mr. Barton. Thank you.
Mr. Ebel, we will recognize you for such time as you may
consume.
STATEMENT OF ROBERT E. EBEL
Mr. Ebel. Thank you very much, Mr. Chairman.
Mr. Chairman, my name is Robert Ebel. I direct the Energy
Program for the Center for Strategic and International Studies.
I want to thank you for the opportunity to speak on the United
Nations Oil for Food Program, and to comment on its
effectiveness, its impact on oil markets, and whether it should
be continued.
Resolution 986 of the United Nations Security Council,
passed in 1995, authorized the export of Iraqi oil, with the
revenues earned to be spent to meet the humanitarian needs of
the Iraqi people. This approach became known as the Oil for
Food Program.
The program, in effect, did not limit Iraqi oil sales;
rather, the limitation was the Iraqi producing capacity, and I
would add that that producing capacity has been declining by
the equivalent of about 100 barrels per day every year.
According to a recent CSI report, since the program began
in December 1996, Iraq has exported 3.3 billion barrels of oil
valued at $62 billion. The report notes that over a quarter of
the oil revenue pays for compensation costs associated with the
Gulf War, the U.N. administrative costs, and the costs of U.N.
weapons inspectors. Of the funds provided to Iraq out of the
U.N. escrow account, only 25 percent have been allocated to
purchasing food. The remaining 75 percent were allocated across
23 different sectors and involved at least 13 different Iraqi
government ministries. The report also notes that the Sanctions
Committee had approved just $3.6 billion in oil industry spare
parts.
Again referencing the CSI report, from the beginning of the
program until mid-2000, Iraq awarded contracts to potentially
sympathetic permanent members of the U.N. Security Council,
primarily France, Russia and China. In that year of 2000, Iraq
began to focus on strengthening ties with its neighbors. As
public opinion against sanctions grew and oil revenue
increased, Iraq increasingly favored Egypt, the United Arab
Emirates and Jordan for supply contracts. But because Iraq
primarily awards contracts based on politics rather than the
quality of the goods, the Iraqi people have often received
inferior goods, including inferior medicines.
Mr. Chairman, assessing the Oil for Food Program is a
somewhat difficult task, complicated by the fact that the
United Nations does not publish contract or supplier data, but
other reports indicate, not surprisingly, that the two top
suppliers to Iraq under approved contracts in the program have
been France and Russia.
The Oil for Food Program was shut down by military
intervention by the coalition forces, but then resumed under
the supervision of the U.N. Secretary General, spending funds
already accumulated. Food and other aid are being provided by
funds earned from earlier oil sales, but deliveries have been
discouragingly slow, largely because of bureaucratic
entanglements.
The program is scheduled to end, as we have noted, on June
3, but a resolution just introduced by the United States, and
supported by Great Britain and Spain, proposes that the program
be phased out over a period of 4 months. The resolution
foresees continuation of the delivery of priority civilian
goods under contracts already approved.
While the volumes of oil exported from Iraq under the Oil
for Food Program may appear substantial, the role these volumes
have played in the world oil market have not been pivotal.
Taking into consideration the oil smuggled out of Iraq,
probably on the order of 400,000 barrels per day, equal to
Iraqi oil consumption itself, Iraqi oil was accounting for just
some 3 percent of total world oil supply.
The run up in the world oil price proceeding military
intervention should not be attributed solely to the prospect of
Iraqi oil being lost. Rather, the price run up may be traced to
the prospect that a worst case scenario might develop when
military intervention in Iraq came about a worst case scenario
under which we would have not only the loss of Iraqi oil, but
massive numbers of oil wells set afire, plus you would have
sabotage in Saudi Arabia and in Kuwait by supporters of Saddam,
in turn taking additional oil volumes off the market. Of
course, Venezuela oil exports had not yet returned to normal.
Mr. Chairman, my reading of the resolution submitted to the
Security Council gives me the strong impression that the
coalition is exercising its powers and responsibilities under
the Geneva Convention. Stated simply, an occupying power can
export Iraqi oil and use the income for humanitarian purposes
inside Iraq, and additionally, can use the income to pay for
the costs of occupation, but not the costs of the war. Under
the Oil for Food Program, legal title to the oil was guaranteed
by the United Nations, whereas the resolution offered, if
approved by the Security Council, gives the occupying powers
the legal title that can be transferred to potential buyers.
Mr. Chairman, I have a longer statement that examines the
position of Iraqi oil today and tomorrow, and I ask your
permission to submit that statement for the record.
Mr. Barton. Without objection.
Mr. Ebel. That concludes my oral statement, Mr. Chairman,
and I look forward to any questions you or your members may
have.
[The prepared statement of Robert E. Ebel follows:]
Prepared Statement of Robert E. Ebel, Director, Energy Program, Center
for Strategic and International Studies
IRAQI OIL: TODAY AND TOMORROW
Now that the United States can be characterized no longer as a
liberating force but instead an occupying force, how can the Iraqi oil
industry be characterized? The following summarizes where matters
currently stand.
The southern and northern oil fields are in the good hands of the
coalition forces. Both major oil fields, north and south, made it
through the fighting with limited damage. Iraqi forces had set afire 7
wells in the south, just one in the north, far less than had been
anticipated. Damage to other oil-related infrastructure, such as
pipelines, refineries, and storage tanks also appear minimal. In sum,
the coalition strategy to seize and isolate the oil fields in the very
stages of the conflict, to protect the infrastructure and prevent the
Iraqi military from repeating what had happened to the Kuwaiti oil
fields, proved very successful.
Unfortunately, destruction from continued looting has not been
contained. Facilities have been damaged or stolen and oil field
documentation destroyed. Much of the supporting systems are gone.
Equipment and machinery has been lost. Importantly, employees are
finding it difficult to get to their former place of work, either
gasoline is not available or the means of transportation have been
stolen.
Communications remain difficult. In many instances, a return to
normal will reflect the availability of electricity--not just to run
the oil pumps and pipelines, but as a way of reassuring the population
of a return to normal activities.
Shortly after the intervention, all oil wells were shut in. The
Southwestern Division of the Army Corps of Engineers took on that
responsibility, as well as responsibility for closing the oil and gas
separation plants and pipelines. Wellheads were found to be in
reasonably good shape, but other infrastructure requires attention. The
task of the Corps is to return the oil sector to its pre-crisis
position, ready to produce and to export.
Limited production has now begun at both the northern and southern
fields, with the crude to be refined for the domestic market. Petroleum
products continue in short supply and the distribution system is not
yet fully operational. LPG--liquefied petroleum gas--is a major source
of fuel for cooking and heating. LPG in turn is based on natural gas
produced in association with crude oil, but because only minimal
volumes of oil are being produced, shortages of LPG appear around the
country.
It is very obvious that much rehabilitation must be undertaken to
reverse the effect on the oil sector of three wars and years of
sanctions. For example, the Basra representative of the Iraqi Oil
Ministry has estimated that just 25 percent to 30 percent of the
Rumaila oil field is in good condition. Any industry, neglected and
underfunded for more than 20 years, bearing the impact of three wars
and 12 years of UN sanctions, would suffer greatly, and the oil sector
is no exception.
Clearly, those Iraqis who have been working in the oil fields for
the past years are asking that the United States recognize their
expertise and authority. After all, they argue, we know the oilfields
better by far than the Americans and are ready to work. At the same
time, locals are not apt to offer a particularly warm welcome to those
Iraqis who have been in exile the past years and who seek to return,
hopefully to senior positions. Where have you been, while we have been
suffering, they would ask.
UN ``Oil-for-Food'' Program
Resolution 986 of the United Nations Security Council, passed in
1995, authorized the export of Iraqi oil, with the revenues earned to
be spent to meet the humanitarian needs of the Iraqi people. This
approach became known as the ``Oil-for-Food'' program.
According to the CSIS report A Wiser Peace: An Action Strategy for
a Post-Conflict Iraq, Supplement II: An overview of the Oil-for-Food
Program, dated February 14, 2003, since the program began in December
1996 Iraq has exported 3.3 billion barrels of oil valued at $62
billion. The report notes that over a quarter of the oil revenue pays
for compensation costs associated with the Gulf War, UN administrative
costs, and the cost of UN weapons inspectors. Of the funds provided to
Iraq out of the UN escrow account, only 25 percent have been allocated
to purchasing food. The remaining 75 percent were allocated across 23
different sectors and involved at least 13 Iraqi government ministries.
The report also notes that the Sanctions Committee had approved $42
billion in humanitarian supply contracts, including $3.6 billion in oil
industry spare parts. Of these goods, $26 billion had been delivered
and a further $10.8 billion were in the production and delivery
pipeline.
Again referencing the CSIS report, from the beginning of the
program until mid-2000, Iraq awarded contracts to potentially
sympathetic permanent members of the UN Security Council, primarily
France, Russia, and China. In 2000, Iraq began to focus on
strengthening ties with its neighbors. As public opinion against
sanctions grew and oil revenue increased, Iraq increasingly favored
Egypt, the United Arab Emirates and Jordan for supply contracts.
Because Iraq primarily awards contracts based on politics rather than
the quality of the goods, the Iraqi people have often received inferior
goods, including medicines.
The UN ``Oil for Food'' program was shut down upon military
intervention by coalition forces but then resumed under the supervision
of the UN Secretary-General, spending funds already accumulated. Food
and other aid are being provided by funds earned from earlier oil sales
but deliveries have been discouragingly slow, largely because of
bureaucratic entanglements.
The program is scheduled to end on June 3, but a resolution just
introduced by the United States, and supported by Great Britain and
Spain, proposes instead that the program be phased out over a period of
four months.
The coalition had spoken of establishing an Interim Iraqi
Authority, but Iraqi delegates have chosen to term a new governing body
as a ``transitional government,'' reflecting their desire to move more
quickly than an interim authority might imply.
The referenced resolution gives the occupying powers (that is, the
United States and Britain) the power to sell Iraqi oil, with the income
to be placed in an administered trust, with appropriate oversight.
It appears that an advisory committee is to be set up, to be headed
by Philip Carroll, formerly of Shell Oil. This advisory committee,
where Iraqis are to hold at least a plurality, will relate to the Iraqi
Oil Ministry in much the same way as a board of directors functions in
a corporate structure. The senior person in the Ministry would report
in turn to the advisory committee.
But in all this, the United States must take great care in
conducting itself in a way that does not allow critics of the war to be
able to say, ``See, I told you so, it really was all about oil.''
Rebuilding the Oil Sector. What Will It Take?
Until experts have had the opportunity to closely inspect the oil
refineries, the pipelines, the oil and gas separation plants, storage
farms, ports of export, the general product distribution network, and
the oil fields themselves, including a well-by-well approach, only
guesses can be made as to what it will take, in terms of time and
money, to restore the Iraqi oil sector to a normal state.
Saybolt International, a Dutch firm, has visited Iraq on two
occasions--March 1998 and January 2000--at the request of the United
Nations, to evaluate the health of the Iraqi oil sector. Their
findings, in both instances, underscored the sector's lamentable state.
Observations from the report of the January 2000 visit noted a
continuing deterioration.
The group has to report that the previously noted lamentable state
of the Iraqi oil industry has not improved. It is apparent that the
decline in the condition of all sectors . . . continues, and is
accelerating in some cases. This trend will continue, and the ability .
. . to sustain the current reduced production levels will be seriously
compromised, until effective action is taken to reverse the situation.
Past shortages of spare parts, a need to maximize income that led
to overproduction of the major fields, the absence of modern
technology, closing then opening oil wells damages the producing
reservoir, and water encroachment define an oil producing sector whose
prospects of any early return to a leading role in the world oil market
are measurably dim. On average it appears that the oil producing
capacity of Iraq has been declining by 100,000 b/d annually. That
decline first has to be halted then reversed if growth is to be
resumed.
But what defines a ``normal state'' of the Iraqi oil sector? Was
1979 the last normal year for the industry, just preceding the war with
Iran, when production hit its all-time peak of 3.5 million b/d? Or was
it 1990, when crude oil output, having fallen because of the war with
Iran to barely one million b/d, had by then returned to 3 million b/d,
only to decline sharply once again following the Iraqi invasion of
Kuwait?
The initial effort will be focused on raising oil production to 3.2
to 3.5 million b/d and that may require 1.5 to 2 years and an
expenditure of at least $5 billion if not more. Then, attention can be
directed on plans for further expansion, to a stated 6 million b/d. To
accomplish that may require $35 to $40 billion, and at least 5 to 6
years, if not longer, reflecting what detailed assessments of the
individual segments of the oil industry find.
Who Owns the Oil? Who Can Sell It?
How soon might exports resume? Based on present field conditions,
exports might resume within several months, possibly a bit sooner from
the north, if not further delayed because of the damage inflicted by
looters.
But then, other considerations arise. Who owns the oil, who has
title to it? Who would buy the oil, absent, say, UN approval? No oil
tanker owner could be expected to load up, absent a title guarantee.
Can Iraqi oil be sold if the UN sanctions remain in place? Under
the UN ``Oil for Food'' program, it was the United Nations that gave
legal title to the oil. UN sanctions prohibit oil exports except under
this program. But, as noted, the ``Oil for Food'' program comes to an
end on June 3.
The referenced U.S. resolution addresses this question by * * *.
The UN has stated that no Iraqi oil can be exported unless there is a
new authority in Iraq to serve as the legal agent for the oil, and
until the UN Security Council recognizes that new authority. Presuming
a recognized interim authority is established and oil exports resume,
but then, what happens to the oil revenue? How can its distribution be
monitored?
As noted, production of crude oil has been resumed on a limited
basis, with the crude delivered to refineries to produce fuels needed
by the local economy. Are the refineries paying for the crude oil they
receive? If so, at what price, and what happens to that income? Where
does it go? Most probably the United States believes it controls the
industry and thus the revenues and will continue to do so until an
interim authority is in place. Once that happens, the funds could be
placed in trust with the Iraqi Central Bank, and a designated
international financial institution could monitor distribution of these
funds. But, does monitoring also provide an input into how the funds
are spent?
What About the Geneva Convention?
A number of interested observers make the interpretation that,
under the Geneva Convention, the occupying power has the right to sell
the oil and to use the income for the restoration of order and the
benefit of the Iraqi people. Not all would agree. Nonetheless, is the
United States today an occupying power, having shifted from that of a
liberating power? Apparently so, and that means the Geneva Convention
can apply.
I
Suzanne Nossel, a former senior advisor to U.N. Ambassador Richard
C. Holbrooke, writing in the May-June 2003 issue of Legal Affairs, asks
the question: can the law of occupation, long disputed and then largely
disregarded, be useful in Iraq? She then answers by noting that the law
of occupation could provide cover for more controversial maneuvers.
Taking over the oil fields, rebuilding them, and even upping production
could be justified if the proceeds were used to accomplish the United
States' purported aim, that is, channeling the reserves to meet the
people's needs. In her judgment, as long as the Administration sticks
to using the oil to foster reconstruction--and scrupulously avoids
favoring American oil interests above those of others--taking control
would be justified and even expected.
She concludes by stating that if in administering the oil fields
the United States were found to favor American oil companies over
existing concessions belonging to France or Russia, for example, the
American action would be judged an unwarranted departure from the
status quo, invalid under the Geneva conventions.
II
An analysis provided by IHL Research Initiative (under the Harvard
Program on Humanitarian Policy and Conflict Research) underscored that
the law of occupation is perhaps one of the oldest and today the most
developed branch of international humanitarian law (IHL). The law of
occupation applies whenever, during an armed conflict, a territory and
its population comes under control of the enemy of the State
authorities previously controlling that territory. In the case of Iraq,
obligations of the occupying power, among other things, extend to the
administration of the Iraqi resources for the benefit of its people.
The analysis concludes with the following:
``If Iraqi oil wells were government-owned, the U.S. may
administer them and sell the oil. According to some opinions,
it may use the proceeds not only for the benefits of the local
population, but also, similar to levies, to cover the cost of
the occupation (but not of the whole war).''
Importantly, the analysis underscores that occupation ends whenever
one of the conditions of occupation is no longer met. That is, when an
agreement has been signed between the parties at conflict bringing to
an end the armed conflict. Or, foreign military forces have withdrawn
from enemy territory or are no longer exerting control over the
population of that territory.
III
Prof. Mary Ellen O'Connell, Moritz School of Law, Ohio State
University, offering her opinion as a guest columnist in the Jurist (a
publication of the University of Pittsburgh School of Law), writes that
``occupants are required to manage resources under the law of
usufruct.HR, art. 55. That law calls for managing resources so as to
prevent waste. If profits accrued from such management, they may be
used to pay for the occupying power's costs for local administration.
An occupying power may not enrich itself from the occupied territory's
resources. With particular relevance to Iraq, the United States has
taken the position in the past that an occupant may not award new oil
development concessions.''
IV
R. Dobie Langenkamp, professor of law and director of the National
Energy-Environment Law & Policy Institute at the University of Tulsa,
in an interview with The Oil and Gas Journal (February 3, 2003),
offered the following observation.
``Under international laws governing warfare going back to the
Hague Convention of 1907 and the Geneva Conventions of 1929 and
1946, the U.S. and its allies would have the right to produce
Iraq's existing oil and gas wells and to use the proceeds to
pay the costs of occupation but not the costs of the war
itself.''
Professor Langenkamp added that:
<bullet> Prolonged use of troops or foreign contractors to replace
Iraqi workers is forbidden by international law;
<bullet> The law prohibits unnecessary damage to Iraq's wells, which
means they can't be produced so rapidly or carelessly as to
damage formations;
<bullet> The properties must be returned to the proper government
authority in reasonable condition;
<bullet> Iraq's current production likely can be increased through
workovers and by drilling existing wells deeper or through
extensions to new formations. (The U.S. Department of State is
on record as claiming that drilling new wells in a military-
occupied territory is unlawful.)
Contract Status
Accepting the role of an occupying power raises an associated
question. What is the status of those oil contracts that have been
signed with Russia and with China? Will they be honored? Under
international law, it would seem that these rights should be protected,
in that contract sanctity is maintained in the event of a change in
government.
Russia has been very vocal in its effort to preserve the contract
it has signed with Iraq to develop the West Qurna oil field. At its
peak this field should be able to produce 600,000 to 700,000 b/d, a
prize that will not be given up quietly. China, conversely, has been
quiet and has not yet taken a position publicly. But the field it would
develop is comparatively small, with a potential on the order of 60,000
b/d.
Several options are available. The interim Iraqi government could
just review the contract terms, to determine whether these terms were
acceptable, that they met the interests of the Iraqi people. Now, given
the course of events in Iraq, the Iraqi authority might not be so
charitable, and might be prepared to tear up all contracts, based on
the fact they were concluded with a regime that in no sense represented
the Iraqi people.
There most likely will be no contracts let to foreign oil companies
during the coming transition period. Simply because the investor runs
the risk that a contract signed during that period might be rejected by
whatever form of government is put in place at the end of the
transition period.
What Happens to the Oil Revenues?
What happens to the revenue when oil exports resume? How to
safeguard that revenue? Who will determine how these revenues are
spent? Will the ``Oil for Food'' program, slightly tweaked to reflect
changing circumstances, still be in play, or might some kind of
substitute take its place? After all, it is Iraqi oil, owned by the
Iraqi people. Shouldn't they have the final say in all this?
Can a means be devised whereby citizens of Iraq will be able to
share immediately in the oil wealth of the country? A cash dividend
perhaps, especially helpful to the economy at this time of stress, but
also giving the population a stake in the future of the oil sector, an
interest in seeing that it prospers, for, if it does, then they will
too.
Most oil exporting nations, despite good intentions, end up
catching the dreaded ``Dutch disease.'' That is, the economy becomes
overly dependent on the sale of a single commodity--oil. When oil
prices are high, the economy flourishes and there is little or no
effort to diversify away from oil. But at some point oil prices will
decline and when that occurs, the failure to diversify becomes apparent
as financial stresses emerge, often followed by civil unrest.
How to avoid such circumstances?
A variety of approaches are available for consideration. One
attractive approach would be the creation of a stabilization fund.
Designated oil-related income would be allocated to a stabilization
fund when the world oil price exceeded, say, $20 per barrel. If the per
barrel price declined below $20, then funds would be withdrawn in
amounts to offset losses to the national budget. Dividends deriving
from investments made by the fund would then be passed on to individual
Iraqis, comparable to corporate dividends payable to shareholders.
The Department of State appears to favor an oil revenue sharing
arrangement similar to that adopted by Alaska. Stated simply, a portion
of the state's oil royalty revenue is placed into a permanent fund, and
dividends from this account are paid out annually.
Transparency and adequate public oversight are essential for
whatever arrangement might be chosen. Would a ``new'' Iraqi government
be comfortable and accepting of the needed transparency and oversight?
Privatization
There really is no hope of rebuilding Iraq if foreign capital is
not forthcoming. Thus, a key objective is to secure the large, rapid
inflow of investment in all sectors. Reality, in turn, requires
privatization.
If the indicated production goal of 6 million b/d is to be attained
as quickly as possible, the requirement for new investment--estimated
to fall between $35 to $40 billion--will far exceed the capabilities of
the oil sector itself. Where might the investment be found? In the
pocketbooks of foreign oil companies. But that means privatization, and
a move to privatize might run counter to the nationalistic feelings of
the Iraqi people. Thus, if privatization is deemed necessary for the
future of the oil sector, then the matter will have to be handled very
carefully.
Looking Ahead
There are two objectives regarding the future of Iraqi oil. First,
to return production to a level between 3.2 to 3.5 million b/d. To do
so may require 1.5 to 2 years and an expenditure of between $5 to $7
billion, depending in part on what an assessment of the operating
fields at Rumaila and Kirkuk finds. It is generally thought that these
fields may not be in the best of shape, with little investment over the
years and facing a continuing lack of spare parts, plus probably having
been over-produced, with water encroachment now limiting recovery
levels.
There is a particular concern regarding the Kirkuk field, where the
quality of the crude oil has been somewhat degraded, as surplus fuel
oil has been re-injected into the producing horizons.
If production can be raised to 3.5 million b/d, that would match
the level of the last normal year for the industry, reached in 1979.
Since then, three wars and some 12 years of sanctions have gotten in
the way.
Then, to embark on an effort to expand production to not less than
6 million b/d. Proven reserves clearly would more than support this
higher level. But, will the market? At the moment, production sharing
agreements seem to be the acceptable approach to securing foreign
investment. But, given the attraction of Iraqi oil--good quality, low
production costs, easy access to ports of export--and with this
attraction known to both sides, the terms offered by Iraq likely will
be pretty tough.
Circumstances would seem to dictate that Iraqi oil production might
reach 4 to 4.5 million b/d by the end of this decade, clearly not the
flood that some have speculated.
OPEC: Stay or Leave?
Iraq was a founding member of OPEC. Indeed, the organizational
meeting was held in Baghdad. The question now asked is: Does Iraq keep
its membership in OPEC, or does it leave?
For the interim, Iraq will keep its membership, as nothing would be
gained by leaving. But it is quite possible that in the future, when
continued membership might be perceived as constraining plans for
growth in production and exports, then departure might be addressed.
When might that come about? Perhaps not this decade, but national
interests will be the ultimate decision-maker.
How Far Will $20 Billion Go?
When Iraq returns to its prewar level of production and exports,
and assuming a price per barrel of $25, how much might the country earn
from these exports? About $20 billion. Of that, a portion, possibly 20
percent, will have to be returned to the oil sector to cover costs of
production, pipeline transport to a port of export, and storage at the
port, leaving, say, $15 billion. That sum falls far short of covering
rebuilding not just the oil sector, but the entire infrastructure of
the country--roads, hospitals, schools, housing, and the like.
Moreover, how to address the debt that Iraq has accumulated, a debt
exceeding some $320 billion ($199 billion in Gulf War compensation
claims and a foreign debt of $127 billion)? Clearly, to the ``new''
Iraqis, taking on these obligations will be regarded as unacceptable,
and requests for cancellation and rescheduling likely will come forward
early on.
Mr. Barton. Thank you, sir.
We now would like to hear from Mr. Barnes.
STATEMENT OF JAMES J. BARNES
Mr. Barnes. My name is Joe Barnes. I'm a research fellow at
the Baker Institute for Public Policy at Rice University in
Houston.
Mr. Chairman and members of the subcommittee, ladies and
gentlemen, thank you very much for inviting me here today. I,
too, have a somewhat lengthier statement, but I will just make
a few points, if I might.
I will not specifically address the elements of the U.S.
draft resolution currently before the United Nations Security
Council, but my comments I think will make clear that I support
many of the drafts resolution's main features related to the
Oil for Food Program.
I would like to make the following points. Whatever
decisions are taken on the Oil for Food Program and the
resumption of Iraqi oil exports, the goal must be the prompt
and adequate supply of humanitarian and reconstruction aid to
the Iraqi people. Their interest must be paramount to their
current and future well-being that is at stake. Any proposal on
handling Iraq's oil exports must be judged by this light.
Second, the Oil for Food Program was created for the
purpose of providing vital humanitarian and other supplies to
the Iraqi people while restraining the regime of Saddam Hussein
from acquiring funds to purchase weapons of mass destruction or
other traditional military equipment. With the fall of Saddam's
regime, the fundamental purpose of the program no longer
exists. It should be phased out.
Iraq faces daunting security and structural challenges in
its efforts to resume uninterrupted oil exports. It seems
possible that an interim Iraqi government or authority could be
in place before or soon after oil starts to flow in significant
amounts. The United States should make it a priority to help
set up an interim government that would be able to handle the
resumption of oil sales, while encouraging an international
effort to provide relief until oil starts to flow in
significant amounts.
Financial oversight of oil revenue is best handled by
multinational agencies such as the IMF and the World Bank. The
Fund will presumably be involved with Iraq in such critical
matters as rescheduling debt in any case. The Bank will no
doubt be called upon to play an important part of Iraqi
reconstruction.
I note that the administration supports an oversight
function for the Fund and the Bank, as well as the United
Nations, in its proposal to create an Iraqi assistance fund to
serve as a repository for the country's oil revenues.
Significant funds remain in the escrow accounts under the
current U.N. Oil for Food Program. These funds need to be
disbursed to pay for emergency aid to Iraq. It might be passed
to permit the U.N. to continue managing these funds on an
expedited basis until the balance is liquidated. I note again
that the U.S. proposal at the U.N. suggests something along
these lines.
The Iraqi oil sector possesses a large number of highly
competent professionals and technicians, very few of whom are
tainted by direct association with human rights abuses under
Saddam's regime. These individuals can be relied upon to
conduct the sales and marketing of oil by the country and to
manage the operations, maintenance, repair and reconstruction
of Iraq's petroleum sector.
Comprehensive involvement of Iraq's oil technocracy is
extremely important for pragmatic and political reasons. Many
senior members of Iraq's oil elite are nationalistic in their
attitudes. They, like many other observers in Iraq and around
the world, will be extremely sensitive to any suggestion that
the United States or our coalition partners view Iraq's oil
resources as ``spoils of war.''
Last, the coalition has a vital short- to medium-term role
to play in providing security to Iraqi professionals and
technicians working in the oil sector, as well as protecting
the actual fields and key infrastructure. The lack of security
for these workers and their families apparently represents a
major impediment to resuming normal operations in the Iraqi oil
sector today.
Thank you.
[The prepared statement of James J. Barnes follows:]
Prepared Statement of James J. Barnes, Research Fellow, James A. Baker
III Institute for Public Policy, Rice University
Mr. Chairman, members of the subcommittee, ladies and gentlemen:
Let me begin by commending the subcommittee for holding hearings on the
UN's Oil for Food Program. It is a subject that is both important and--
particularly given the Administration's efforts to seek another UN
Security Council resolution dealing in large part with the program--
timely.
Out the outset let me stress that my views do not necessarily
reflect those of the Baker Institute for Public Policy; they are
entirely my own. I would, however, like to thank my colleague at the
institute, Amy Myers Jaffe, for her extensive and invaluable assistance
in preparing this testimony.
In my remarks today, I will outline the rationale for the creation
of the Oil for Food Program under UN auspices, explain how the program
functioned, discuss the impact the program had on the stability of
international oil markets, and conclude with some closing observations
on the proper course for handling the future sales of Iraqi oil. I will
not specifically address the elements of the US draft resolution
currently being discussed at the UN Security Council. But my comments
will make clear that I support many of the draft resolution's main
features related to the Oil for Food Program.
Before I turn to these details, I would like to first emphasize
several critical points that will, I hope, be useful at the
subcommittee considers this important issue.
Key Points
1) Whatever decisions are taken on the Oil for Food Program and the
resumption of Iraqi oil exports, the goal must be the prompt and
adequate supply of humanitarian and reconstruction aid to the Iraqi
people. Their interests must be paramount; it is the current and future
well-being of Iraqis, after all, which is at stake. Any proposal on
handling Iraq's oil exports must be judged in this light.
2) The Oil for Food Program was created for the purpose of stopping
the regime of Saddam Hussein from acquiring funds to purchase weapons
of mass destruction and further expand its traditional military might.
With the fall of Saddam's regime, the purpose to this program no longer
exists. It should be phased out.
3) Iraq faces daunting security and structural challenges in its
efforts to resume uninterrupted oil exports. It seems possible that an
interim Iraqi government or authority could be in place before oil
starts to flow in significant amounts. The United States should make it
a priority to help set up an interim government that would be able to
handle a resumption of oil sales, while encouraging an international
effort to provide relief until oil begins to flow.
4) Oversight of oil revenue is best handled by multinational
agencies such as the International Monetary Fund and World Bank. The
Fund will presumably be involved in such critical matters as
rescheduling Iraqi debt in any case; the Bank will no doubt be called
upon to play an important role in Iraqi reconstruction. I note that the
Administration supports an oversight function for the Fund and the Bank
(as well as the UN) in its proposal to create an ``Iraqi Assistance
Fund'' to serve as a repository for the country's oil revenues.
5) Significant funds remain in the escrow accounts under the
current UN Oil for Food Program. These funds need to be disbursed to
pay for emergency aid to Iraq. It might be best to permit the UN to
continue managing these funds, on an expedited and transparent basis,
until the balance is liquidated. I note again that the US proposal at
the UN suggests something along these lines.
6) The Iraqi oil sector possesses a large number of highly
competent professionals and technicians, almost all untainted by
association with human rights abuses under Saddam's regime. These
individuals can be relied upon to conduct the sales and marketing of
oil by the country and to manage the operations, maintenance, repair
and reconstruction of Iraq's petroleum sector. Comprehensive
involvement of Iraq's oil technocracy is extremely important for
practical and political reasons. Many senior members of Iraq's oil
elite are nationalistic in their attitudes. They--like many other
observers in Iraq and around the world--will be extremely sensitive to
any suggestion that the United States or our coalition partners view
Iraq's oil resources as ``the spoils of war.''
7) The coalition has a vital short- to medium-term role to play in
providing security to Iraqi professionals and technicians working in
the oil sector, as well as protecting the actual fields and key
infrastructure. The lack of security for these workers and their
families represents a major impediment to resuming normal operations in
the Iraqi oil sector today.
Background
UN Resolution No. 986, which was adopted by the Security Council in
April 1995 and finally implemented in December 1996, enabled Baghdad to
sell specified dollar amounts of crude oil over six-month periods, in
part for the purchase of humanitarian supplies for distribution in Iraq
under UN supervision. In December 1999, the Security Council voted to
remove limits on the amount of oil Iraq could export as Baghdad's
production capacity was enabling it to reach the previously established
sales ceiling of $5.2 billion per six-month period. Roughly 72% of the
total revenues from the Oil for Food program have been allocated toward
humanitarian needs. The remaining proceeds help pay compensation for
Gulf War victims (25% since December 2000), pipeline transit fees to
Turkey, spare parts and maintenance for the oil sector, funding for
UNMOVIC and administrative and operational costs for the United
Nations.
UN supervision included monitoring of Iraq's crude oil supply
contracts to ensure at-the-market pricing (to discourage side, kickback
payments); monitoring export shipping volumes at Iraq's main port of
Mina Al-Bakr and at the Turkish pipeline outlet at Ceyhan (to
discourage smuggling); management of the escrow account for oil revenue
receipts and humanitarian aid disbursements; and oversight of
contracting for the importation of goods to ensure that no banned
materials reached Iraq.
Oil sales activities under Oil for Food were handled directly by
members of the Iraqi government State Oil Marketing Organization (SOMO)
and had no UN involvement. Rights to sell the oil were retained by the
sovereign Iraqi state and not transferred to the United Nations. The
rights to exported oil were transferred directly from SOMO to the
purchaser. Iraqi government officials also selected the goods and
vendors for the importation of humanitarian assistance. The UN's role
was limited to monitoring these activities to ensure that no
transactions occurred that would allow Iraq to continue to fund and
develop its weapons program.
Since the Oil for Food Program first went into effect on December
10, 1996, Baghdad has exported around 3.4 billion barrels of oil under
UN supervision worth about $64 billion dollars. About $44 billion worth
of humanitarian supply contracts including $3.8 billion worth of oil
spare parts and equipment, have been approved by the 661 Sanctions
Committee and ``fast-tracked'' by the UN Office of the Iraq Programme.
In mid-2002, around $22.6 billion worth of humanitarian supplies and
equipment had actually been delivered to Iraq, including $1.4 billion
worth of oil industry equipment, while another $10.5 billion worth of
humanitarian supplies, including $1.7 billion worth of oil industry
equipment, were in the production and delivery process. The UN says
that about $10.1 billion worth of supplies are currently in the
pipeline.
Broadly speaking, the program was successful in depriving the
Hussein regime of large revenues to use to fund weapons and military
programs. However, government and industry estimates suggest that Iraq
earned over $8 billion in revenues since 1997 through illegal smuggling
and hidden surcharges.
It is ludicrous, given the US and coalition presence in Iraq, to
suggest that Iraqi oil revenues will now be used to acquire weapons of
mass destruction. In addition, there is no precedent for the United
Nations to monitor national oil sales to prevent ``corruption.'' It is
my opinion that issues of transparency and accountability in handling
Iraq's oil revenues would best be handled by multinational institutions
normally charged with financial matters and economic development--
notably the International Monetary Fund and the World Bank.
Over the course of its existence, the politics of the Oil for Food
program has served as a key driver of oil price volatility. Concerns
about the reliability of Iraq's UN-monitored oil exports were a major
factor causing swings in the market in recent years. Periods of program
evaluation and renewal debate prompted severe disturbances in
international oil prices as oil traders worried that unsettled UN
politics might result in a sudden--albeit temporary--cut-off of Iraqi
oil exports. Saddam Hussein also demonstrated a willingness to use the
``oil weapon,'' sporadically refusing to continue to participate in Oil
for Food for weeks or months in order to manipulate oil markets and
display his personal power. It is important that Iraq's new oil regime
be designed to create a transparent, predictable environment where
changes in the flow of exports do not disrupt markets and where a UN
process cannot influence the stability of those flows.
Ironically, Saddam Hussein's political use of Iraq's petroleum
sector did not result in the kind of damage to oil field capacity that
might have been expected. This was due in large part to the capability
and dedication of Iraq's oil professionals, who managed remarkably well
in an atmosphere marked by Saddam's Hussein's volatile interventions,
an almost complete lack of foreign investment, and a crippling shortage
of spare parts and maintenance equipment. This bodes well for the
future prospects of the Iraqi industry. Failure to utilize Iraq's oil
professionals in managing the production and marketing of the country's
petroleum could result in a serious backlash in Iraq and a public
relations problem around the world. Given suspicions (pervasive, if
unfounded) that the United States invaded Iraq to control its oil, our
actions in regard to the Iraqi oil sector must be above reproach.
Mr. Barton. Thank you.
The Chair is going to recognize Mr. Boucher first, because
he has another appointment, very quickly, 5 minutes for
questions.
Mr. Boucher. Thank you very much, Mr. Chairman.
I want to thank the witnesses for taking their time this
morning to inform us on this timely matter. My questions are
going to be very brief.
Mr. Ebel, in the course of your testimony, you alluded to
the potential necessity for the United Nations to pass some
kind of resolution that empowers the United States, the United
Kingdom, as occupying powers to dispose of oil, to produce oil
and to sell it on world markets. I guess the theory of that is
that any company that might want to buy the oil would be
reluctant to do so if it's not sure who has title, and a U.N.
resolution under international law could confer that title.
Mr. Ebel. That's correct.
Mr. Boucher. Does that appropriately state the
circumstance, and if so----
Mr. Ebel. Yes, it does.
Mr. Boucher. And if so, my question to you is, how
essential, therefore, is some action by the United Nations to
the ability of the United States to produce and sell oil from
Iraq?
Mr. Ebel. Oil could be exported from Iraq tomorrow. The
storage tanks at the port of Ceyhan on the Mediterranean are
full. Unfortunately, no buyer is going to take on that oil
until he can assure himself and his corporate lawyers back home
that he will have an uncontested legal title to the oil that he
would purchase.
There is no entity today to give legal title to the oil.
The United Nations did it under the Oil for Food Program, and
under the resolution, the way I read the resolution, the way I
read the powers of the Geneva Convention, the occupying powers,
which in this instance would be the United States and Great
Britain, could then transfer legal title to a potential buyer.
But until that resolution is passed, there is not going to be
any oil exported from the United States, in my judgment,
because----
Mr. Barton. From Iraq, you mean?
Mr. Ebel. I'm sorry, from Iraq, because----
Mr. Barton. We're not exporting for the United States,
either.
Mr. Ebel. No, we're not. I'm sorry. Because there is no
potential buyer, and no tanker owner would weigh in.
Mr. Boucher. So simply ending the Oil for Food Program, or
phasing it out over a 4-month period, by itself is not
sufficient?
Mr. Ebel. No.
Mr. Boucher. We require other action by the United Nations.
Mr. Ebel. Exactly.
Mr. Boucher. Now, who is proposing that that additional
necessary action be taken? Does the United States have a
resolution pending to that effect?
Mr. Ebel. It's contained in the resolution. It is contained
in the resolution, and there are several----
Mr. Boucher. It's contained in the resolution that phases
out Oil for Food over 4 months?
Mr. Ebel. Right. And there are several specific paragraphs
in there, ensuring the potential purchaser that he won't be hit
by any future legal claim.
Mr. Boucher. Mr. Barnes, do you want to comment on that?
Mr. Barnes. I was just going to say he's quite right. I
guess the draft resolution is rather comprehensive, covers a
number of subjects, including the Oil for Food Program, the
phasing out, but also very specifically the whole question of
title.
Mr. Boucher. So we do need U.N. action on this measure.
You are observers of what's happening at the U.N. How
likely are we to get approval of this resolution?
Mr. Ebel. Unfortunately, I'm not privy to whatever back
room dealings are going on these days, but I would hope that
something could be worked out wherein Russia and France would
have some reason to believe that their commercial interests
were going to be protected.
Mr. Boucher. That's the key to getting it passed, in your
opinion?
Mr. Ebel. That's my judgment.
Mr. Boucher. I only have one other question, Mr. Chairman.
Thank you, by the way, Mr. Ebel and Mr. Barnes for that answer.
Mr. Caruso, you mentioned that prewar Iraq was producing
2.5 million barrels of oil per day, and you believe--or your
projection is that Iraq can come back to that capacity by the
end of this year.
Was that an export level for oil that was capacity related,
or was that the limit that was allowed under the Oil for Food
Program?
Mr. Caruso. The 2.5 million barrels a day projection by the
end of the year was that of Thamir Ghadhban, who is now the new
interim head of the Oil Ministry. That is his----
Mr. Boucher. I'm not contesting the projection. I'm just
asking whether----
Mr. Caruso. No, I will just clarify that it wasn't an EIA
projection.
The second part is that the productive capacity of Iraq,
based on our best estimate, prior to the war was about 2.8
million barrels a day. They were producing 2.4, 2.5. It was
varying month to month, based on the sales process and various
shenanigans that the Iraqi government was occasionally
intervening. So it was not limited by their capacity, nor the
Oil for Food Program, because the Oil for Food Program had
expanded to the point where Iraq could have sold as much oil as
they could produce. It was more of what the market would bear,
given the contractual terms. As Chairman Tauzin pointed out,
some of those contracts were not so appealing, because
oftentimes you didn't know what the price would be until you
actually lifted the oil. So that was the prevailing problem
with that.
Mr. Boucher. Thank you.
The other question I have is, any projection that you or
the other gentleman to whom you referred may be making about
the capacity that Iraq will have for oil exports by the end of
next year, perhaps by the end of 3 or 4 years, do you have any
longer term projections on capacity?
Mr. Caruso. Iraq, before the invasion of Kuwait, Iraq had
been producing 3.5 million barrels a day, so there isn't any
question that the resource base is there and the infrastructure
at one time had been there. But, of course, it has deteriorated
after 12 years of lack of investment.
So I think in the medium term--let's say that's a year or
so--3 million barrels a day seems to be a reasonable target.
Again, the interim head of the Iraqi ministry has said that as
well. Over the much longer term, Iraqis at one time had a plan
to go to 6 million barrels a day. That, of course, is going to
take considerable investment and time, probably in the--
certainly, even among the optimists, 3 to 5 years.
Mr. Boucher. Okay. That's fine.
Mr. Ebel, do you want to comment, briefly? My time has
expired.
Mr. Ebel. I've had the privilege of working with the Iraqi
opposition since before Christmas, at the request of the
Department of State, in helping them better understand what
lies ahead in terms of the future of Iraqi oil the morning
after.
I would guess that to go from where they are today, in
terms of producing capacity, to get them back to normal--and
``normal'' would be 3.5 million barrels a day--it might take
1\1/2\, 2 years, and it might take $5-6 billion. And then where
do we go from there? We go to the 6 million barrels a day that
the Iraqis want to reach as quickly as possible because they
need the revenue.
What would that take in terms of time and in terms of
money? In their judgment, it would take at least 5 to 6 years,
and perhaps as much as $40 billion.
Mr. Boucher. Thank you very much.
Thank you, Mr. Chairman.
Mr. Barton. Thank you.
The chair recognizes himself for 5 minutes. We're almost
certainly going to have more than one round of questioning.
My first question--and I'm going to direct these to Mr.
Ebel and Mr. Barnes, but if Mr. Caruso knows the answer, feel
free to pitch in--who at the U.N. actually has administered the
so-called Oil for Food Program? Is there an administrator and,
if so, who is that individual?
Mr. Ebel. There is, but I'm sorry, Mr. Chairman, I do not
know his name.
Mr. Barnes. Isn't it the Office of the Iraq Program?
Mr. Ebel. Yes.
Mr. Barnes. I think it's called that, and I also don't know
the name of the administrator.
Mr. Barton. Okay. Do you know if the same individual has
been the administrator the entire time of the program?
Mr. Ebel. That I do not know.
Mr. Barton. When our staff has contacted the United
Nations, we've been told that they've been audited over 100
times, but we can't get any of the audit documents. Do either
of you gentlemen know if they've ever really had an real audit
of this program?
Mr. Ebel. I can only comment in this fashion, that the data
that were provided in the CSIS report that I referenced in my
testimony was found by accident. By accident, the U.N. posted
on their website certain statistics that had not been made
available previously. Of course, when they found out about it,
they took it off. But fortunately, our people had seen it and
took it off the website.
But as I mentioned, they don't publish the kinds of data
that we need.
Mr. Barton. Do either of you know if the United States,
through EIA or the State Department, or the Department of
Commerce, has ever formally requested a true audit of the
program?
Mr. Barnes. I know they've been worried about it, but
whether or not they've ever made a formal request, I do not
know.
Mr. Barton. Do you know, Mr. Caruso?
Mr. Caruso. Certainly EIA has not. I know that based on the
U.N. information here that available from the Office of Iraqi
program, that they have provided an assessment report.
According to this, the most recent one was toward the end of
2002, November 12, 2002.
Mr. Barton. As far as you gentlemen know--and obviously, we
don't expect you three individuals to be the universe of
knowledge on the program--but there has never truly been an
audit that's been publicly reported; is that a fair statement?
Mr. Barnes. Fair enough.
Mr. Ebel. Yes.
Mr. Barton. Is there, under U.N. regulations, or any other
international body, a mechanism that exists to get a real
audit? In other words, this subcommittee wants to know how the
program has been run and where the money has gone and what's
been purchased, and we get snippets from various investigative
reports. But is there a formal mechanism to actually get a true
audit of the program?
Mr. Ebel. I'm not aware that there is, Mr. Chairman.
Mr. Barton. Okay.
Mr. Barnes. Although I doubt--whether or not there is a
formal mechanism, clearly a major funder of the United Nations,
like the United States can certainly make, and I assume has
made, informal representations of that effect.
Mr. Barton. Well, we're certainly going to.
Mr. Barnes. That's what I suspect.
Mr. Barton. I can guarantee that, that we're going to.
Let me ask another question. One of my oil and gas
producers in Texas has told me, anecdotally, that right before
the latest war Iraq was selling oil to Syria for $9 a barrel
when the world price was over $30 a barrel. How could that be
if the U.N. is administering all the oil sales and at least
supposedly nothing is sold without U.N. permission? How in the
world could Iraq be selling oil to another country for $9 a
barrel, which was about $25 a barrel under the world price?
Mr. Ebel. It is my understanding, Mr. Chairman, it worked
this way: there was a pipeline carrying oil from Iraq to Syria,
handling about 200,000 barrels of oil a day, sold at a price
well below the world market price. Some of that money, the
difference between what the sale price was and what the oil
could be sold for on the world oil market, was returned to Mr.
Saddam Hussein.
Mr. Barton. Is the number that I just stated within the
boundaries of what you believe to have happened?
Mr. Ebel. I have only seen anecdotal evidence also, so I
don't----
Mr. Barton. Well, you're not under oath, so if you want to
put in anecdotal evidence in----
Mr. Barnes. Anecdotal evidence, that's a fancy word for
hearing stories. I have heard stories at $8 and $9.
Mr. Barton. Okay. So I'm in the ballpark.
Mr. Barnes. Yes.
Mr. Barton. If you wanted to speculate, would that be one
reason Saddam Hussein and his thugs might have found sanctuary
in Syria immediately after the war?
Mr. Ebel. That conclusion is an easy one to draw, Mr.
Chairman.
Mr. Barton. Mr. Caruso, do you have a comment on that?
Mr. Caruso. I just wanted to add that the oil sold through
Syria was outside of the--was not under any sanctions.
Mr. Barton. Well, that's the whole point. If the U.N. is
the paragon of efficiency and enforcement, there shouldn't be
anything like that happening. That was the whole point in going
through the illustrious United Nations, that they can manage
this program effectively.
Mr. Barnes. And it was not just Syria. I gather there was a
lot of smuggling going on. There was smuggling through small
lighters into Iran, there was smuggling into Jordan, our ally,
and smuggling into Turkey.
By the way, I do think our allies in the north, the Kurds,
also made a sizable sum of money off marketing smuggled Iraqi
oil.
Mr. Barton. My time for the first round has expired.
Mr. Barnes. So it was going out all the way, all around.
Mr. Barton. The gentleman from Texas, Mr. Hall, is
recognized for 5 minutes.
Mr. Hall. Thank you, Mr. Chairman.
I notice in Mr. Barnes testimony, he said oil sales
activities under Oil for Food were handled directly by members
of the Iraqi government State Oil Marketing Organization----
Mr. Barnes. Right.
Mr. Hall. SOMO, I think is the word you used for it--and
had no U.N. involvement.
Mr. Barnes. Except the verification of prices, if they were
in the ballpark. Is that correct, Mr. Caruso?
Mr. Caruso. Right.
Mr. Hall. You made the statement, and it's a correct
statement, is it not?
Mr. Barnes. Yes.
Mr. Hall. Mr. Ebel, you stated on page 3 of your statement
that the U.N. Oil for Food Program was shut down upon military
intervention by coalition forces, but then resumed under the
supervision of the U.N. Secretary General.
Mr. Ebel. That's correct.
Mr. Hall. It may be correct, but do you agree with that?
They had no part in it before and gave no support to us, and 16
times out of 16 they turned their back on the United States of
America.
Why should we turn it over to them now?
Mr. Ebel. The way that worked, Mr. Hall, was that they were
spending money that it accumulated from previous oil sales.
Mr. Hall. Yes. Well, they weren't there when it was
accumulating and they weren't handling it. Why would they
handle it now? Why turn to them now? Why on earth would we turn
to Turkey or France or Germany for any reconstruction program?
Mr. Ebel. It's still being handled by the United Nations.
Mr. Hall. Let me ask you, Mr. Ebel, what are the
opportunities in this transition in exercising some control
over the delivery of food or medicines to be sure from this
point forward, at least, that it gets to the target that we
intend it for?
Mr. Ebel. I think the difficulty will be that the
distribution inside Iraq of the humanitarian goods and services
are being handled by local Iraqis, and those local Iraqis have
dispersed, so that the distribution these days is in shambles.
Mr. Barnes. I might note that there was always a
distinction made in the distribution between--there was
actually stuff distributed in the Kurdish portions of the
north. That will probably be less disruptive. But in the
balance of the country, you're quite right. We should
anticipate disruption.
Mr. Hall. Mr. Caruso, do you have anything to add to that?
Mr. Caruso. No, Mr. Hall.
Mr. Hall. Let me just understand where the three of you
are. You all seem concerned about what the other Arab nations
think about any actions that the United States might take as a
conquering nation, fearful that they might think that we would
want their oil for our consumption, knowledgeable that we get
55 or 60 percent of our energy from that area.
Are you all three just totally opposed to the United States
recovering some of that gigantic cost that we expended, alone,
with no help from the United Nations, with no help from Turkey,
with no help from Germany, with no help from France, little
help, if any, from Russia or China, to recover for hard-pressed
American taxpayers, at this time when we have a deficit that's
unbelievable, of some of our outlay for having to go alone in
the conquering of as rogue nation? Is it just unthinkable that
we would expect some retribution from a conquered nation?
How about you three as taxpayers? You three men are
probably all big taxpayers--I hope you are. You should be. But
is that just repugnant to you?
Mr. Barnes. I would note first of all that it is not in
general concurrence with what we did in the past. After World
War II, we did not lift the industrial capacity of Germany or
Japan and ship it to the States. They were net recipients, huge
net recipients of U.S. largess, these two countries that made
world war, after World War II. So it would be a break with U.S.
tradition to exact from Iraq significant expenditures.
I also believe there may be a legal question under the
Geneva Convention that Mr. Ebel mentioned, which is that,
although under the Geneva Convention--are we a signatory to
this part of the Geneva Convention?
Mr. Ebel. We are under the Geneva Convention. We can use
the income to pay for the cost of occupation, but not the cost
of the war.
Mr. Barnes. Also, frankly, I find it really difficult to
imagine making cash transfers from a war-ravaged county, with a
per capita GDP of $1,500, to a country like the United States
with a GDP of $11 trillion and a per capita GDP of $27,000 a
year. That's an incredible transfer of income.
Mr. Hall. Do you find any problems with the drug companies
in this country selling to Mexico and China prescription drugs
at a fourth of what they sell to our people here? They base it
on the same assumption that you use.
Mr. Barnes. It's called--If it means that people in Mexico
are getting drugs, yes, I agree. I agree with that.
Mr. Hall. I think I probably asked you an unfair question.
I'll withdraw it.
Mr. Chairman, I think I will reread their testimony, and I
thank the gentlemen for giving us their time.
I yield back my time.
Mr. Shimkus. [Presiding.] Thank you, Mr. Hall.
The chair now recognizes the gentleman from Oregon, Mr.
Walden, for 5 minutes--for 8 minutes. I'm sorry.
Mr. Walden. Thank you very much, Mr. Chairman.
Mr. Shimkus. Five plus three.
Mr. Walden. That's eight, which is probably better auditing
and accounting than we're seeing in this program.
I want to go back to the issue of the audits. What would
you recommend we do here to be able to actually figure out how
this program has been audited, if it's been audited? How do we
justify what's happened there in the UN?
Mr. Ebel. The only way, Mr. Walden, that we can find out is
through a very thorough audit, and how can you force an audit
on the United Nations. It would seem to me an intervention by
the President of the United States, with a request made to the
Secretary General, I think that would put him in a position of
having to respond.
After all, the American taxpayer issue has already been
raised, and we should have a right to know how our money is
being spent at the U.N.
Mr. Barnes. I would note, by the way, that negotiations are
ongoing about this U.N. resolution right now. I assume there's
going to be some ``horse trading'' going on, and presumably
some request or some mandate for an audit could be part of the
final resolution. Frankly, it's ongoing in New York right now.
Mr. Walden. Are you aware of any countries that object to
an audit?
Mr. Barnes. I don't think people would object to an audit
in public.
Mr. Walden. Another reason why the United Nations needs to
live under some open meetings requirements.
Mr. Barnes. On the other hand, I am from Houston, which is
the city of Enron, so we're a little bit touchy down there
about transparency questions.
Mr. Walden. We are here in this committee as well.
The other issue I have is just in terms of making sure we
have not only an adequate supply of oil and access to it, but a
stable supply. These attacks 2 days ago, whenever it was, in
Saudi Arabia by the Al Qaeda seemed to be extra-ordinarily well
organized and executed.
My question is, what would have happened to oil supplies
and oil prices had they picked refineries rather than housing
compounds?
Mr. Ebel. The prices went up just because of the attack on
the housing. The perception that this is a step toward perhaps
an attack, just as you described, and the prices would
probably--if the next attack is directed to a refinery, you
would get a price jump of $3, $4, or $5 a barrel, and not that
other producing nations might not be able to make up for that
loss. But it's the traders operating in New York who anticipate
we're going to have a shortfall in supply and then anticipating
what the prices are going to be.
That was part of our worst case scenario that we developed
at CSIS last November, where under a worst case scenario, where
in addition to the loss of Iraqi oil you had an attack on
Israel, the use of weapons of mass destruction, and terrorist
activities inside of Saudi Arabia and Kuwait, taking more oil
off the market, we saw oil prices spiking at $80 a barrel.
Mr. Walden. Eighty dollars?
Mr. Ebel. Eighty dollars a barrel.
Mr. Walden. If you took Saudi Arabia and Kuwaiti oil off
the market----
Mr. Ebel. Right, and you didn't have to take it all off,
just part of it.
Mr. Walden. Just disrupt it.
Mr. Ebel. Yes.
Mr. Walden. What part, what percent?
Mr. Ebel. It's difficult to say.
Mr. Walden. So the actual percentage wasn't the issue, as
much as----
Mr. Ebel. As the perception, the psychological impact on
the marketplace, yes.
Mr. Walden. If I recall, one of you indicated that the
Iraqi oil production levels I guess the pre-Gulf War of 1991,
was somewhere in the area of 2-3 million barrels a day?
Mr. Ebel. Well, the last normal year, in my judgment, for
Iraqi oil was 1979, the year before the war with Iran. That was
3.5 million barrels of oil a day. Then it declined during that
war, and once that war was over, it started to go back up
again. Then they went after Kuwait. They had gotten up to about
2.8, and along came the invasion of Kuwait and it dropped down
to half-a-million barrels a day, until the sanctions came into
play.
So, in my judgment, the last normal year for the Iraqi oil
industry was 1979.
Mr. Barnes. And I think that Bob makes a good point, which
I think a lot of people forget, which is that the current
disrepair of the Iraqi oil industry dates back 20 years.
Mr. Walden. That was going to be my next question.
Mr. Barnes. Twenty years of chronic, looting and damage
aside, 20 years of chronic underinvestment and mismanagement.
Mr. Ebel. We have had----
Mr. Walden. And that's at the refinery level as well as
pipelines. It's across the whole spectrum?
Mr. Ebel. On two occasions we have had a Dutch firm go into
Iraq and make an inspection of the Iraqi oil industry. Saybolt
International is the name of the firm. They went in in 1998 and
again in 2000, and both times their report stressed the status
of the Iraqi oil industry as ``lamentable.'' That was well over
3 years ago.
Mr. Walden. Can you give an estimate of what the cost would
be to bring it up to modern standards, and the time-line?
Mr. Ebel. If we were to get it back to that normal level
that I mentioned, maybe 3.2 to 3.5 million barrels a day, you
have to look at it in terms of costs and in terms of time. A
year-and-a-half to 2 years, maybe $5- to $6- to $7 billion.
This is work that can be done by service companies. We're not
yet involved in granting rights for foreign oil companies to
come in and develop----
Mr. Walden. What kind of service companies have that
capability?
Mr. Ebel. The ones that you've been reading about in the
paper.
Mr. Walden. And are there others that do, or is that pretty
special----
Mr. Ebel. Almost any country--you know, France could do it,
Russia could do it, Germany could do it, Italy could do it.
It's not a unique expertise by any means.
Mr. Walden. Three out of four I have a problem with, but go
ahead.
Mr. Caruso. Could I add a couple of points to that? I agree
with the lack of proper maintenance and lack of investment, but
the glimmer of good news out of this is the Iraqi technical
competence is quite high.
Mr. Walden. Among the workers there who weren't part of the
regime?
Mr. Caruso. Yes. They've done wonders, given what they've
been working with.
Mr. Walden. Is that the same on the power grid? We heard
about how long it took Baghdad to get back on line, and part of
that was----
Mr. Caruso. I'm not sure about the electrical sector, but
the oil sector, certainly.
Mr. Ebel. The problem with the power grid is whether it's
the ``chicken or the egg''. The electric power stations in Iraq
run on fuel oil, and where does the fuel oil come from? The
refining of crude oil. If you don't have electricity, you can't
run the oil pumps or the oil wells; you can't move the oil in
the pipeline and you can't run the refinery. So it's----
Mr. Walden. How do you get it started. And isn't it a load
management issue, the grid?
Mr. Ebel. It is. It's a distribution problem, both in
electric power and in petroleum products.
Mr. Walden. Then as we look at not only the Iraq and Saudi
Arabia and Kuwait issues, in terms of potential disruption by
terrorists, refinery capacity and modernization or lack
thereof, it want to compare it somewhat to what the President
is proposing, to try and do a better job of developing domestic
supplies of energy.
How does what's projected as possible oil supply in ANWR
compared to what the Iraqi oil levels are, let's say?
Mr. Ebel. Let me answer that question this way.
The American consumer doesn't care where his oil comes
from. He's not bothered by any discussion of energy
independence. He only has two concerns: one is price, and the
other is availability. The fact that in the year 2001 we
imported 800,000 barrels of oil a day from Iraq was not a
matter of concern to the man on the street.
We refined that oil, what we took from Iraq. We made some
jet fuel, we put the jet fuel in certain of our military
aircraft, and we go bomb Iraq. We returned his oil to him in a
slightly different fashion. But no, he doesn't care where the
oil comes from. If we can develop ANWR in a satisfactory
environmentally accepted fashion, great. But in the end----
Mr. Walden. I should take you to some of my town meetings.
They do have a concern about where it comes from.
Mr. Ebel. Sure. Well----
Mr. Walden. My point is, put it in perspective here. Is the
volume estimated to be available in ANWR similar to that which
was Iraq's output in 1979?
Mr. Ebel. No. Iraq, in 1979, produced 3.5 million barrels
of oil and day, and none of the estimates that I have seen for
ANWR would put potential production levels that high.
Mr. Walden. What would they put it at? Can somebody address
that? I'm out of time.
Mr. Caruso. We did a paper for the Senate last year, for
actually then Chairman Murkowski, and the mean estimate using
the USGS resource estimates for ANWR was a peak production of
about 800,000 barrels a day. But at the high end of USGS, we
got it up to 1.5. So it was kind of a range there.
Mr. Walden. So it's about what we were getting from Iraq,
then, in recent years, the 800,000 barrel estimate that you
referenced.
I'm sorry. I'm----
Mr. Barnes. No, no. It's about half of what we--You mean
from importing into the United States or----
Mr. Walden. I thought I heard 800,000 barrels.
Mr. Barnes. That was imported into the United States. It
wasn't production. The price----
Mr. Walden. I was talking about imported into the United
States.
Mr. Barnes. I agree with Mr. Ebel. It doesn't matter where
it comes from.
Mr. Walden. Well, we may disagree on that, but I understand
what you're saying.
Mr. Barnes. It's a global price. It's set globally.
Mr. Walden. Price has some relationship to available
supply, doesn't it?
Mr. Barnes. Yeah, on a global basis.
Mr. Walden. So if the terrorists shut down the supply in
one of these countries, or the refineries don't get upgraded
like they should, and we've got an asset sitting on the north
slope that we, from a policy standpoint, say we're not going to
access, that's going to affect price because it affects
availability. That's the two things my consumers care about
most, as you said.
As I said, as we look at our own assets here domestically,
I have a greater sense of security about our ability to manage
them and access them than I do about what may or may not happen
in Kuwait or Iraq or Iran.
Mr. Barnes. But the main point is, it doesn't matter
whether it comes here. The question is whether it goes into the
world oil market, in terms of the disruption, not into the
United States.
Mr. Walden. No, but in terms of the overall amount
available on the world market, that's right. We're not
disagreeing.
Thank you.
Mr. Shimkus. Thank you. I recognize myself for 8 minutes,
and hopefully I won't take that long.
But let me start by saying that you've really got to love
Ralph Hall because he asks some tough questions that our
constituents want the answers to. And while I basically concur
with a lot of the assessments, isn't it true, though, that
there, in essence, can be--and I think we mentioned it at the
end, Mr. Ebel, and maybe Mr. Barnes, at the end of post-war
policing and really the cost of reconstruction in essence, if
we get through all the title issues and stuff, reconstruction
may greatly exceed the costs of the actual war; isn't that a
fair statement?
Mr. Ebel. Many people look to oil revenue as paying all the
bills. You cannot do that. If Iraq next year was exporting,
let's say, 2 million barrels a day, at a price of $25 a barrel,
that would give them an income of $20 billion. It sounds like
an awful lot. But it isn't when you look at the tremendous
financial need to get that country back on its feet, not just
the oil sector, but the entire country's infrastructure--
health, education, roads, housing. There is going to be so many
hands dipping into that pot that there's not going to be enough
for everybody.
Mr. Shimkus. But from our perspective, in the rebuilding of
Afghanistan, which we're involved in the process with no
natural resources, and the fact that Iraq has some, does tend a
lot of us to believe that there will be some ability by their
act, through their own natural resources, to help bear some of
the burden of the cost. I mean, wouldn't that----
Mr. Barnes. Yeah. But you know what? We will have to pay
part of the tab.
Mr. Shimkus. Well, we already have.
Mr. Barnes. It's not going to--As Mr. Ebel said, it is not
going to be enough, and there will be demands on the U.S.
taxpayer for years to come associated with the reconstruction
of Iraq.
Mr. Shimkus. But for us to make a statement that Iraqi oil,
their natural resources--I don't think we're disagreeing, but
in the reconstruction, those dollars, some of it will have to
focus on and pay for the rebuilding of Iraq. I mean----
Mr. Barnes. True.
Mr. Shimkus. Also, I have great respect for the ranking
member. It was an interesting discussion on the title thing.
Unfortunately, we play by the rules of law, you know, where if
we were an Iraqi regime and sell it to Syria, maybe we ought to
work with Syria to sell hundreds of barrels on the black market
and help finance it and address the title concerns. Obviously,
there wasn't a title concern to the end user of the black
marketed oil. But since we play by the rules, we'll get burned
with that.
Until there is a formal regime change and an official
government of Iraq, whenever that occurs, what we're saying is
the U.N. is the office of making the determination of how we
move to, in essence, production and sale and the receipt of
revenue for the Iraqi people; is that what we're saying?
Mr. Caruso. The proposed resolution would change that. It
would authorize the interim government to make sales, to convey
title.
Mr. Shimkus. But, in the absence of that, we're stuck with
the Oil for Food Program and----
Mr. Ebel. In the absence of that, you cannot export because
there is no body that can grant legal title to the oil to be
exported.
Mr. Shimkus. So the Oil for Food Program expires on June 3,
if not extended.
Mr. Ebel. That's correct.
Mr. Shimkus. And if the Oil for Food Program expires, that
does not mean that the sanctions imposed--you see, that's where
I'm having a problem, between the Oil for Food Program and then
the sanctions. They are really, in essence, a separate part of
the debate. So if the Oil for Food Program expires, that
doesn't mean that the sanctions imposed on Iraq by the United
Nations will expire, does it?
Mr. Ebel. No, not in itself.
Mr. Shimkus. So if the sanctions remain and the program
expires, the Oil for Food Program expires, Iraq could still not
legally export oil?
Mr. Ebel. That's correct.
Mr. Barton. Would the gentleman yield?
Mr. Shimkus. I would yield, Mr. Chairman.
Mr. Barton. If the United States and Great Britain
recognize an Iraqi oil ministry, or an Iraqi oil company, and
that company sells to a British or U.S. oil company, why would
that not be legal?
Mr. Ebel. I go back to my interpretation of what the
occupying power can and cannot do under the Geneva Convention.
My reading of the Geneva Convention is that the occupying
power--in this instance, the United States and Great Britain--
can sell, export the oil, and use the income inside Iraq for
humanitarian purposes and to pay for the cost of the
occupation. Therefore, they would be granting legal title to
the oil.
I think what we have in mind is, as quickly as feasible,
setting up an interim Iraqi government----
Mr. Barton. I understand that.
Mr. Ebel. [continuing] and then the U.N. recognizing that
government and then----
Mr. Barton. And I understand that.
Mr. Ebel. Right.
Mr. Barton. But if you've got an intransigent U.N. Security
Council because of proprietary commercial interests, there is
nothing to stop the U.S. Government and the British Government
from recognizing some entity within Iraq that's controlled by
the Iraqis to sell oil, and as long as the willing purchaser is
a British owned company or a U.S. owned company or, for that
matter, any other company that recognizes title, to heck with
the U.N.
I mean, they're not going to enforce it, and if you've got
a willing buyer and a willing seller, and you've got the
occupying powers, the liberating powers, sanctifying it,
sanctioning it, that's all you need.
I mean, I'm not an attorney, and I'm certainly not an
international attorney. But I believe, if I were an oil buyer,
and I called the State Department and said the Iraqi interim
oil ministry wants to sell me 100,000 barrels a day, and I'm
willing to buy it, will you guarantee the contract, and the
U.S. State Department says ``yes, as long as it's in U.S.
courts, you're okay,'' I believe I would do that.
Mr. Ebel. I think that the U.N. would have to recognize the
interim Iraqi government as representing----
Mr. Barton. What if they don't, though? What can the U.N.
do?
Mr. Hall. How many divisions do they have?
Mr. Barton. I mean, what can they do legally--forget
militarily. Mr. Hall's a hawk and I'm the dove on this.
Mr. Ebel. I think that's where the resolution comes in,
yeah.
Mr. Barton. I understand the nicety of it, but I'm not sure
of the necessity of it.
Mr. Barnes. Now, look. Once again, I am not a lawyer,
either. But I do know that there is--and it's something along
the lines you're talking about--there has been some talk of
basic U.S. Government guarantee of title; in other words, a
promise to indemnify in light of an adverse decision down the
line. I have seen it in passing, but I cannot speak to the
details of how you--I think that's close to what you're saying.
Mr. Barton. I understand the international protocol, and I
understand why it would be helpful to do exactly what we're
trying to do in the U.N. today. But my point is, if the French
and the Russians and the Germans, who have not exactly gone out
of their way to be helpful, continue to be recalcitrant, I
don't see any overcomeable, unovercomeable problem, as long as
the U.S. and the British guarantee the contracts for selling
the oil.
Mr. Ebel. If the resolution didn't pass and we wanted to
move forward, and we wanted to get the oil industry going, and
if the U.S. and Great Britain were prepared to grant
indemnification, the oil would flow.
Mr. Barton. There you go.
Mr. Shimkus. That was really the follow up. But let me,
just for my own purpose--and then I'll return the chair back to
the Chairman--who was the end user, the end purchaser, of the
black marketed Iraqi oil that went through Syria?
Mr. Ebel. It worked out in a very interesting way. Most of
that oil stayed inside Syria, and Syria exported it's own oil,
taking advantage of high world market prices.
Mr. Shimkus. And who are the major purchasers of that? Did
they just throw it on the open market?
Mr. Ebel. It just goes into the market.
Mr. Shimkus. I'm sure our European allies received----
Mr. Barnes. No, no. It's a----
Mr. Shimkus. Okay. Hold on, Mr. Barnes. I'm a free market
economic MBA guy, so I understand that, as you add to supply in
the world market, it affects it. But the reality is, as you add
the to the supply, prices come down and everyone will benefit
from that.
Mr. Barnes. Uh-huh.
Mr. Shimkus. Even our allies in Europe.
Mr. Ebel. So, in a way, that smuggled oil was added to the
world oil market, added to supply.
Mr. Shimkus. Right.
Mr. Ebel. Indirectly, but it was added to the supply.
Mr. Shimkus. And to the benefit of Iraq and Syria, major
terrorist states.
Mr. Barnes. And also oil consumers worldwide, as you just
pointed out.
Mr. Barton. But somebody pocketed the delta between $8 or
$9 and $35, and that was not a transparent transaction.
Mr. Ebel. Right. Most of that ended up back in the pockets
of Saddam Hussein.
Mr. Shimkus. My time has expired, and I will recognize the
gentleman from California, Mr. Issa, and return the chair to
the Chairman. Thank you.
Mr. Issa. I guess my first question is, if the U.N. doesn't
recognize a new entity, does it mean that the old entity still
exists for purposes of transactions and contracts?
Mr. Ebel. Well, if the Oil for Food Program comes to an
end----
Mr. Issa. No, no. I didn't ask that question. Forget about
that.
You had an entity that had contracts--and I'll be the
devil's advocate because I'm the person most recently in
Syria--if you, in fact, had a relationship between the old
government and Syria, oil was pumping and dollars were being
paid to the old government for the benefit of whatever----
Mr. Barton. [Presiding.] The old government in Syria or the
old government in Iraq?
Mr. Issa. The old government in Iraq. We still have the
same government in Syria, so far, as of this morning anyway.
Mr. Barton. You said Syria. That's why I wanted to give you
a chance to----
Mr. Issa. But the relationship was between the old
government of Iraq and the government of Syria. There was no
new government under U.N. law. Does that mean that the old one
still exists for purposes of contracts? Certainly the sanction
is against the old government. You know, you don't really
sanction a country. You really sanction a government.
So if the sanctions are still in place, the Oil for Food is
still in place, then the old government is still in place for
purposes of the United Nations, isn't that correct?
Mr. Ebel. I'll give that one to you.
Mr. Barnes. I was going to defer to you, Mr. Ebel. I don't
know. I'm not a lawyer, international lawyer. I don't know what
the status of previous contracts are.
Mr. Hall. Mr. Chairman.
Mr. Barton. If the gentleman wouldn't mind.
Mr. Issa. I would yield.
Mr. Hall. Am I the only lawyer in this whole dang room?
Mr. Barton. We hope, at the dias.
Mr. Hall. Well, I don't like lawyers, either, so I guess
that puts us all on a level----
Mr. Barton. You're even a judge. You've even been a judge.
Mr. Ebel. There is no functioning government in Iraq, but
contracts do convey, even though governments change.
Mr. Issa. Okay. So if there's a contract that does convey,
and if, in fact, Syria were to be willing to turn back on
under--because there was probably no written contract--under
terms which would be reasonable and ordinary for the purpose of
pumping oil through a pipeline that has existed since the
1950's, then, in fact, the oil pumping, the funds being
received, and those funds going to what is truly an interim
government--I mean, going to the oil ministry, at least for
purposes of rebuilding the internal oil wells--there is nothing
inherently wrong with that. At least, as non-lawyers, you know
of no reason that couldn't be done today?
Mr. Ebel. The pipeline was shut down immediately following
the military intervention. I am absolutely certain that Syria
could buy as much oil as it wanted, if they're willing to pay
the market price.
Mr. Issa. And they would do that, in a sense, around the
oil sanctions as the U.N. allowed----
Mr. Ebel. The pipeline is----
Mr. Issa. Hold on. The U.N. clearly allowed and knew that
Jordan, Turkey and Syria were transferring huge amounts of oil
into their country and paying for it for years. Now, knowing
that, looking at the U.N. dead in the eye and saying ``Wait a
second; it was okay for you to do it when Saddam was there. Is
there any reason that--''
Mr. Barton. Those were not sanctioned sales. Those were
these under-the-table illegal sales, isn't that correct?
Mr. Issa. Well, you know, the funny thing about illegal
sales, Mr. Chairman, is----
Mr. Barton. I'm asking. I don't know.
Mr. Issa. Yes, they were outside of it, but, in fact, the
whole world knew. It was said on these diases, it was said in
the United Nations, it was said everywhere. And Jordan and
Turkey and Syria moved billions of dollars in oil. It benefited
those countries, it benefited the world oil market, but more
importantly, it represented a potential revenue stream that
should have benefited the people of Iraq.
That continuity, that relationship of those three
contracts, is there any reason that you know of that those
three contracts couldn't start flowing again under reasonable
and ordinary terms? We didn't have transparency, so we'll
assume that a pipeline pays $2, $3, $4 a barrel for transfer
fees, whatever, based on the mile and so on, so somebody knows
what would be fair and reasonable, that that couldn't start
going again and the dollars flowing to the oil ministry today,
because there is no new government--clearly, there's an old
government, and under the old government, for the best part of
a decade, these oil transfers occurred and we all knew it in
the international community.
Mr. Barton. So what's your question?
Mr. Issa. I'm asking, do you know of any reason that they
couldn't do it today? I mean, I'm hearing about how you can't
suddenly have new oil, but you have three relationships that
could, in fact, do it today, as much as they could do it for
the intervening years, and France and Germany not only knew
about it but they purchased that oil.
Conoco did those transfers in Syria. The world was very
aware this was going on. Is there any reason that we couldn't
turn them back on with one, two, or all three of these
countries for the benefit of the Iraqi people today?
Mr. Ebel. First of all, you have to raise production.
Mr. Issa. Why would they have to raise production? They
were doing it under the old production.
Mr. Ebel. Current production today would not support
exports. You have to bring your production back up to meet
local demand and then, beyond that, those lines become
available for export. The pipeline was shut down and all
exports were cutoff the day of the military intervention.
Mr. Issa. No, actually they were shut off after the
military intervention was complete.
Mr. Ebel. Yeah.
Mr. Issa. There were vehicles at the Turkish border even
after Baghdad was under fire.
Mr. Ebel. Using oil, I believe, that had already been
produced.
These arrangements between Syria, Turkey and Jordan
certainly can continue, once legal title can be guaranteed, but
they would have to buy the oil at arm's length.
Mr. Issa. Actually, that wasn't the question. The sales
ultimately were made and, under whatever terms they were made,
if the oil ministry said today, for example--and I'll use Syria
because they're the easiest to figure--``Here's a pipeline,
here's a fee for the pipeline, and the balance comes to us.''
You know, Syria is not going to buy it at $28. They're going to
buy it at essentially what they get at their port. They take $4
and the balance goes to Iraq. That's the effective price that
would have normally occurred prior to the war, had there been a
pipeline fee being paid.
I guess my question is----
Mr. Barton. And this will have to be the last question of
this round, because you're about 2 minutes over.
Mr. Issa. I apologize.
Mr. Barton. But I did take some of your time.
Mr. Issa. I'll finish with an easier question.
What damage occurred to the oil wells that would cause the
400,000 barrels a day that were going out through these three
other countries to not be available today? What physical damage
occurred that I don't know about?
Mr. Ebel. Normally, you do take a chance when you shut in
oil wells, you take a chance that, when you bring it back into
production, they will have lost some pressure and you might not
get the yield that you got before.
But again, you have to take steps to raise production to
beyond what you need domestically before you have any surplus
available for export. Iraq has not yet reached that point.
Moving gradually toward it, step by step. But it's going to be
a while yet before they're able to export volumes in any
significant amount.
Mr. Issa. Mr. Chairman, for the record, that's not a
responsive answer, and I apologize for----
Mr. Barnes. I can answer. Extensively, people not turning
up for work is two of the major reasons that there's not been
production increases.
Mr. Issa. Thank you.
Mr. Barton. The chair is going to recognize himself for
questions, for such time as he may consume, until another
member comes in or until Mr. Issa decides that he wants to ask
some. And this is going to be very informal, unless we get more
members, in which we'll go back to the regular order.
I want to go back to something you said, Mr. Ebel, about
only 25 percent of the proceeds under the U.N. program actually
ended up going for food and the rest of the money was spent--I
believe you said in 23 different sectors. Was that legally
allowed, or was this another case, as Mr. Issa pointed out, of
just a wink and a nod?
Mr. Ebel. That was the approved approach under the U.N. Oil
for Food Program.
Mr. Barton. So this concept in the general public, that we
were allowing oil to be sold on the world market by the Iraqi
oil companies so that we could provide food and medicine, that
really wasn't the case. That was just kind of a cover.
Mr. Ebel. It gave the average person the implication that
virtually all the money would be going for food. Of course, the
numbers don't show that. The numbers support just as you had
stated, 25 percent.
Mr. Barton. So it really wasn't an Oil for Food Program.
Were any of the proceeds allowed under the sanctions to go to
Saddam Hussein's military?
Mr. Ebel. No.
Mr. Barton. So they didn't go quite that far?
Mr. Ebel. No.
Mr. Barton. But they could purchase in these 23 different
sectors and the Iraqi government could obviously purchase
things that could have a military purpose legally?
Mr. Ebel. Contracts were vetted very, very carefully to
make sure that no dual use items appeared.
Mr. Barton. Very, very carefully?
Mr. Ebel. Yes.
Mr. Barton. Just as carefully as the U.N. administered the
Syrian pipelines and things that Mr. Issa was talking about,
that same degree of carefulness?
Mr. Ebel. The oil that was moved by pipeline to Syria was
outside the U.N. Oil for Food Program.
Mr. Barton. Well, it wasn't.
Mr. Ebel. But the world knew about it----
Mr. Barton. None of the oil was supposed to be outside the
program.
Mr. Ebel. The world knew about it, and knew about the
arrangements with Turkey and Jordan, but a wink and a nod and
it continued.
Mr. Barton. In a legal, technical sense, was Saddam
Hussein's government allowed to sell off-sanctioned oil? Was
that part of the program? Were they allowed to do that? We know
they did, but they shouldn't have been allowed.
Obviously, the only oil that was supposed to go out under
the program was supposed to go in these sanctioned sales and
the proceeds used in these prescribed areas. Were they allowed
to kind of have ``bootleg'' oil? Was that part of the program?
Mr. Caruso. The only exception was to Jordan. That was
actually recognized as being a bilateral separate arrangement.
Mr. Barton. But the Syrian connection that Mr. Issa
mentioned, that was not? It just wasn't enforced.
Mr. Caruso. That's right.
Mr. Ebel. Correct.
Mr. Barton. I know you all aren't combative about this, but
excuse me if I'm not real impressed with the ability of the
U.N. oil administrator to enforce this program.
If we were under a UN-administered sanctioned program, why
did we allow Saddam Hussein to pick his contractors? Why was
that not done by the U.N. administrator?
Mr. Ebel. I can't answer that question, Mr. Chairman. I do
not know.
Mr. Barton. I mean, why would you let somebody who just
invaded another country, in which you organized an
international coalition of forces to liberate that country, and
then impose these sanctions to prevent the rebuilding of the
military of the invader, i.e., Saddam Hussein, why would you
then turn around under an international U.N. sanctioned
program, designed to help the Iraqi people, and let the
dictator who organized the invasion pick his contractors? Why
wouldn't the U.N. do it?
Mr. Barnes. I must note that the dual use--there was a
special dual use committee that examined all the tenders, okay?
Actually, it was a serious committee. There were U.S.
representatives on that committee.
Vis-a-vis the other matter, I guess the general concept is
we're talking about a country of 30 million people and
essentially their entire imports. I guess the idea is, if you
thought there was a lot of delay in issuing tenders under the
U.N. system, can you imagine the U.N. deciding, somebody at the
U.N. deciding every single bolt and light bulb that has to be
imported by Iraq?
Mr. Barton. How in the world could a U.S. representative
allow Saddam Hussein--One of you testified, either Mr. Barnes
or Mr. Ebel, that beginning around the year 2000 Saddam Hussein
began to pick contracts purely on political grounds to try to--
you didn't use the word ``buy off'', but to try to----
Mr. Barnes. It was the dual use thing, to ensure that there
were no imports of things that could be used for military
purposes, which was correctly our No. 1 priority, my
impression.
Mr. Barton. Say that again?
Mr. Barnes. The dual use committee were examining the
tenders to ensure that Iraq was not importing weaponry, or
civilian goods that could be used as weapons, okay? That was a
separate issue than both the ascertainment of prices on export
and the broader approval of tenders for light bulbs. In other
words, my impression is the U.S. took a great deal of care and
interest in the dual use question to ensure that Iraq was
denied technologies that had military use.
Mr. Barton. It really seems to me that this program has
never been audited, in a sense that we would understand an
audit to be, who had a U.N. administrator who has apparently
operated in the shadows, who allowed Saddam Hussein to pick his
contractors, and who winked and nodded at huge amounts of oil
that were used for purposes totally contrary to the reason the
sanctions were imposed in the first place, that there's any
reason for this program to continue to exist.
I have one more question. The number that I'm given that's
in the escrow account right now is in the neighborhood of $12
billion. Is that a good estimate?
Mr. Ebel. In reality, I've seen $10.8 billion.
Mr. Barton. Mr. Barnes?
Mr. Barnes. I've heard about $13 billion, which was closer
to your number, of which $10 billion is basically obligated. In
other words, they've identified contracts on things to buy, and
$3 billion that's not obligated. That's my general sense.
Mr. Barton. Mr. Caruso, do you have a----
Mr. Caruso. That's the range that we've been----
Mr. Barton. Does the EIA have the authority to find out
officially how much is in that account, and if so, would you do
so?
Mr. Caruso. Certainly we'll----
Mr. Barton. I'm going to try to find out through
congressional inquiries, but if you could find out, too, we
would appreciate it.
Mr. Barnes. But do recall--it's an important question, that
there are two sorts of funds, the funds they have already
identified, Russian widget manufacturers to export, and then
the funds of which there's been no obligation whatsoever. I do
know that there is some question, even in the U.S. resolution,
that there is some interest in the U.S. saying, ``Look, at
least turn over those nonobligated funds post-haste.'' Mr.
Barton. Now, I have another question. There has been reported
in the public press that Saddam Hussein had signed some
contracts with Russian companies and then had abrogated those
contracts. Now the Russians want the contracts that Saddam
himself or his agents had abrogated, that those contracts be
honored.
Does this panel have a position on those contracts?
Mr. Ebel. Back in 1997, Russia had signed a contract with
the government of Iraq to develop the West Kurna oil field,
down in the southern part of the country. It's a major, major
oil field that, at its peak, might be providing 700,000 barrels
of oil a day. So it's a prize that you do not give up very,
very quietly.
But, remember, the U.N. sanctions were in place and no
company could go in and develop an oil field, so Russia had
just sat quietly and took no action to develop the field. Iraq
said okay, because you're not responding to the terms of the
contract, we are abrogating the contract.
Russia then subsequently sent in a very high level
delegation, got the contract renewed, put back on track, but
soon thereafter Saddam Hussein said no, we're canceling it
again. Russia will argue that contract sanctity is preserved in
a change of government. I would think that, based on my
conversations with the Iraqi opposition, they would say let's
review the terms of all contracts that have been signed with
the past government of Saddam Hussein, to make certain that
they are in the interest of the Iraqi people.
Mr. Barton. Is there an international precedent when a
government, especially an unsavory government, is removed from
power, that the contracts that government signed are routinely
honored when there is a new government that's more
internationally recognized put in place? When Nazi Germany fell
in 1945, were their contracts honored by the occupying powers
and the international community, or were they just abrogated?
Mr. Ebel. There is a feeling among the Iraqi opposition
that, based on the success in Iraq, let's tear up all contracts
and start all over again.
Mr. Barton. Is that a generally a precedent that is
recognized?
Mr. Ebel. Generally speaking, no. Generally speaking, you
know, the world turns on contract sanctity.
Mr. Issa. Mr. Chairman?
Mr. Barton. The gentleman from California.
Mr. Issa. If you would yield for a second.
Mr. Barton. Surely.
Mr. Issa. Perhaps the appropriate question is, has the
Soviet Union ever paid the Russian Tsar's debts or honored
their contracts?
Mr. Barton. Or the Communist Chinese. I mean, there are any
number of----
Mr. Issa. The actual parties that are now asking for
contract sanctity have no such record of honoring their own
debt.
Mr. Barton. Or Imperial Japan at the end of the war. There
are all kinds of precedents, or when North Vietnam invaded
South Vietnam.
Mr. Barnes. It's a complicated--I mean, I'm not a lawyer,
but, for instance, there's the question of treaties. We do know
that, after discussion, we did determine, for instance, that
Russia did have to comply with treaties entered into by the
Soviet Union with the United States.
Mr. Issa. That's Soviet to Russia, not Russia to Soviet.
Mr. Barnes. Right. But I'm just pointing out that--I know
that there is a certain amount of conveyance that occurs in
things, and I'm not sure how much case law there is. But some
conveyance does occur.
Mr. Barton. Let me ask on the Russian contracts that are in
question in the media, were those sanctioned under the U.N.
sanctions? Did Saddam Hussein have the right, at that time, to
enter into that contract according to the U.N. sanctions in
place at that time?
Mr. Ebel. You can enter into a contract, but the
contracting company--in this case, the Russian company--could
not perform under the contract as long as sanctions were in
place, and Russia did not perform under the contract.
Mr. Barton. But Russia had the right to sign the contract?
Mr. Ebel. They signed the contract with the Iraqi
government.
Mr. Barton. I'm not sure I can one way or the other as a
person, but as a Member of Congress, I have to care.
Mr. Ebel. I'm sure that if the sanctions were taken off,
Russia would go in and start work under the contract.
Mr. Barton. But would that contract have been submitted to
the U.N. before it was signed?
Mr. Ebel. No.
Mr. Barnes. No.
Mr. Barton. Did Saddam Hussein have to submit--should he
have submitted it?
Mr. Ebel. No.
Mr. Barton. He did not have to?
Mr. Ebel. He did not.
Mr. Barton. My staff says he could have produced the oil,
but had he produced it, the oil would have gone through the
United Nations, which is why he didn't do it.
Mr. Ebel. That's right. He couldn't do it.
We had an interesting visitor at CSIS last Monday, George
Sorells. He was speaking at a luncheon meeting that we had. And
to broaden your question, he thought that all lending that the
international financial institutions had made to the Iraqi
government should be dissolved, wiped off the books, carrying
the message that international financial lending institutions
in the future should think twice before they loan money to a
terrorist regime.
Mr. Barton. I want to go back to this money in the escrow
account, somewhere between $10-13 billion, of which perhaps $10
billion has already been obligated.
Is there an alternative mechanism in place, a financial
institution, an economic institution, that could take
possession and administer those funds? Could you put it through
the World Bank? Could you put it through the International
Monetary Fund? Could you put it through USAID, or the
international energy agency that the U.S. is a part of?
Mr. Ebel. I think the resolution being submitted to the
United Nations provides for a role, not just for the United
Nations, but of several international financial institutions
for oversight.
Mr. Barnes. For financial oversight.
Mr. Barton. But we wouldn't have a problem finding a place
to put that money?
Mr. Barnes. I don't see the IMF issuing tenders for light
bulbs.
Mr. Ebel. No.
Mr. Barnes. Which is basically what a lot of this stuff is.
Mr. Barton. The answer I want to hear is the U.N. is not
the only place that we could administer the existing funds.
There is someplace else that could do it.
Mr. Ebel. Yes.
Mr. Barton. This is my last question, unless Mr. Issa has a
question. Mr. Issa, do you wish to ask any more questions
before we conclude?
Mr. Issa. No, I'm enjoying yours.
Mr. Barton. Is there any reason, given all the evidence in
the past and what has happened in the present, and what we
expect to happen in the future, that the U.S. Government and
the international community should continue to sanction the
existence of the U.N. so-called Oil for Food Program?
Mr. Ebel. No, not in my judgment.
Mr. Barton. Mr. Caruso?
Mr. Caruso. No. It's unnecessary.
Mr. Barton. Mr. Barnes?
Mr. Barnes. Phase it out and turn it over to the interim
government as soon as possible.
Mr. Barton. Well, my staff wants me to ask one more
question. I thought that was a great question to end on. We got
the answer we wanted.
Mr. Issa. Mr. Chairman, we can always reverse the order in
which it's published.
Mr. Barton. Oh, I don't mind.
What would be the consequences if oil sales to the
international community resumed, the Oil for Food Program
expired, but yet the sanctions remain in place?
Mr. Issa. They're telling you to end on the previous
question.
Mr. Ebel. The sanctions have to be off, period.
Mr. Barton. Mr. Barnes?
Mr. Barnes. I'm not a lawyer. We seem to be saying that a
lot today. I agree. You have to have the sanctions taken off,
or the Oil for Food Program continued. As we have all agreed,
there is no reason to continue the Oil for Food Program.
Mr. Barton. Mr. Caruso?
Mr. Caruso. I think the major companies would be unwilling
to take that kind of risk.
Mr. Barton. Unless the U.S. Government and the British
Government and other governments indemnified----
Mr. Barnes. Yes, offered to indemnify.
Mr. Barton. I just have to believe that British Petroleum
and Royal Dutch Shell, ExxonMobile and some of the Japanese
companies, as long as the military power is in control
guarantees that----
Mr. Barnes. And then Total would be willing to buy, too, if
it was guaranteed.
Mr. Barton. I beg your pardon?
Mr. Barnes. Total would be willing to buy it, too, if it
was guaranteed.
Mr. Barton. Yes. So in a real world sense, it's not a
necessity, and in an international political sense, it would be
helpful. That would be my answer to that.
I want to thank you gentlemen for coming. This has been an
excellent hearing. This is a major issue that's in play right
now. I am going to be officially asking the U.N. for some
answers to the same questions we have asked you gentlemen. I am
also going to be asking the Bush administration to help in
getting those answers. And, Mr. Caruso, if you could give us as
much information as you can obtain about the status of the
existing funds, I would appreciate that very much.
This hearing is adjourned.
[Whereupon, at 12:10 p.m., the subcommittee adjourned.]
The
Committee on Energy and Commerce |
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