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It’s no secret that U.S. and British oil companies have been eagerly anticipating setting up shop in a postwar Iraq. With 112 billion barrels of proven oil reserves � second in the world only to Saudi Arabia � and another 220 billion barrels estimated to be hidden below its untapped greenfields, Iraq is a natural destination for the oil industry heavyweights. And while lawyers for ExxonMobil Corporation, ChevronTexaco Corp., Royal Dutch/Shell Group, and BP p.l.c. will be busy in the months ahead as their companies jockey for position in the country, they’ll be able to fall back on established ways of divvying up oil fields in new markets. For the oil “majors,” as they’re known in the industry, the objectives are clear. Rebuilding, exploring, and extracting Iraqi oil will require an investment of tens of billions of dollars. The companies also need legal guarantees that their investments will be safe. They have reason to be wary: In the big oil-producing countries like Saudi Arabia and Kuwait, the oil majors haven’t been able to secure the kinds of sweeping, long-term contracts they prefer. Both of those countries maintain control over their oil industry and strictly limit foreign investment. But with a new, U.S. � supported government expected in Iraq, the majors should have more luck. The postwar Iraqi government will likely be eager for the technological and personnel resources that ExxonMobil, ChevronTexaco, or BP can bring. Additionally, the U.S. and British governments have promised that much of the new government’s take of the oil profits will be channeled into rebuilding Iraq. Oil industry sources say the U.S. government has already held talks with the majors about these issues. “After a war, once they have a reasonably stable government, [Iraq] will invite companies to make bids,” predicts Robert Mabro, director of the Oxford Energy Research Institute. In-house counsel for the major oil corporations all declined to comment for this article. Superseding Local Law As the war winds down, the majors, say industry experts, are likely to propose production-sharing agreements (PSAs), which are long-term contracts with the Iraqi government. Such agreements aren’t unknown in the country. Indeed, Iraqi dictator Saddam Hussein several years ago negotiated a PSA with Russia’s oil behemoth Lukoil, although it wasn’t signed and implemented, due to U.N. sanctions. There was also a similar memorandum of understanding with France’s energy giant TotalFinaElf to develop an Iraqi oil field. But Mabro says that, since the deals weren’t based on signed contracts, “a new government is not tied by anything.” Production-sharing agreements are the oil companies’ preferred contracts, because they freeze tax rates, environmental, and other regulatory restrictions and supersede most of the host country’s domestic laws, usually for the life of the project, which can be half a century. They also allow investors to completely circumvent the local court system, by providing for private arbitration of disputes thousands of miles away � often in London or Paris. What’s more, they allow the corporations to book the oil reserves as assets on their balance sheets, so that the investment is reflected in the business’s stock price. “That’s what the oil companies really want,” says Amy Myers Jaffe, senior energy adviser for the James A. Baker Institute for Public Policy at Rice University in Houston. Thad Grundy, Jr., managing director of the Houston-based oil and gas law firm Grundy & Associates and a former Energy Department official in the first Bush administration, says that PSAs were first established in Indonesia in the early seventies, and now are the most popular form of contract with foreign oil companies. They’re most prevalent outside the Middle East, in developing nations in Asia and Africa. “The Contract Of The Century” For a sense of how PSAs work, consider Azerbaijan, an oil-rich state bordering the Caspian Sea that gained its independence in 1991, after the fall of the Soviet Union. In 1994, ten major oil multinationals formed a consortium there, led by BP. That year they signed what has become known as “the contract of the century,” a PSA that grants the companies exclusive rights to the oil they pump from the country’s largest fields. The consortium is exempt from local taxes and many local laws. Still, some countries are balking at granting PSAs. In Russia, for example, government officials have proposed limiting these sorts of contracts to only the riskiest oil projects. And in Kazakstan last fall, the government threatened to unilaterally change key terms of its contract with a ChevronTexaco-led consortium, sending alarm bells out to foreign investors. With the United States and Britain likely to be calling the shots initially in a postwar Iraq, lawyers probably won’t confront those problems. The United States has already given the Anglo-American oil majors a head start. But with the war’s duration unclear, oil company lawyers may have abundant time to polish their PSA clauses.

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