Houston, We Have a Country

How American oil companies have built their own fiefdom in northern Iraq.

Less than a year after the departure of U.S. troops from Iraq, Baghdad is losing a primary lever over independent-minded Kurdistan -- its grip on the northern region's revenue-earning oil industry. Kurdistan's secret weapon? Foreign oil companies are exasperated with Baghdad's stinginess and allured by the Kurds' more liberal terms for oil contracts.

These companies are becoming an unintentional fifth column in Kurdistan's march toward economic autonomy. On July 31, France's Total became the third big oil company to break with Baghdad by signing an unsanctioned oil deal with Kurdistan. Baghdad, intent on full mastery over the nation's massive petroleum revenue, forbids oil companies from dealing directly with Kurdistan and instead requires them to bid for projects through the Ministry of Oil and to ship their oil through Baghdad-controlled pipelines. However, ExxonMobil, Chevron, and Total have now flouted Baghdad's wishes, putting their oil deals in Iraq's south at risk in the process. Their calculus is that despite the relative inferiority of Kurdistan's oil reserves, the potential upside there outweighs the downside threat of possibly losing access to Iraq proper, according to oil company executives with whom I have spoken.

The pressure will now be on Baghdad to somehow stem what is looking like an oil-company rebellion. It's yet another challenge for the Iraqi government, which is already struggling with rising violence and dropping oil revenue because of sagging global prices.

History has seen numerous states taken over by companies -- one thinks, for instance, of the United Fruit Company's activities in Latin America. But should this trend continue in Kurdistan, it would mark, as far as I recall, the first time that oil companies have been principal actors in a nation becoming effectively autonomous. Of course, it will be up to the Kurdistan Regional Government (KRG) to ensure that it is not swallowed up by the companies, which was the fate of some Central and South American countries in the 19th and early 20th centuries.

On the surface, the companies' decision to spurn Baghdad seems foolish. Iraq is a huge prize in the oil business, with some 148 billion barrels of proven oil reserves -- the second-largest conventional volume in the world. By comparison, the KRG claims to have another 45 billion barrels of oil under its own soil.

After Saddam Hussein's overthrow in 2003, oil companies from around the world rushed in for the right to both rework old, debilitated fields, and to drill new ones. But Baghdad has exacted tight-fisted terms, signing only low-paying service contracts that effectively turn high-risk, high-return wildcatters into mere hired hands. Until recently, the world's oil companies have bristled at the terms, but gone along in hopes of conventional production sharing agreements down the road. Now, the grumbling in the ranks is growing to a roar.

A fourth-round auction of oil properties in May showed both that Baghdad seems to have no intention of greater generosity -- and also that the companies are fed up. Just three of 12 blocks on offer found successful takers.

In October, ordinarily ultraconservative Exxon uncharacteristically signaled the first sign of upheaval by signing an exploration deal with Kurdistan despite having an agreement to produce oil at Iraq's West Qurna field. That seemed quite a gamble: West Qurna, after all, holds some 8.7 billion barrels of oil, and there was a distinct possibility that Baghdad would revoke the deal as punishment for Exxon's opening to the Kurds. Now, Total's decision -- the purchase of a 35 percent stake in two exploration blocks in Kurdistan -- makes what had been a gingerly tip-toeing toward the KRG look more like a headlong rush. Total did not respond to an email requesting comment.

Punishment has been meted out for the companies' defiance: Exxon was barred from the latest auction, and Chevron, which has no current deal in the south, has been officially blacklisted from any future contracts. However, the companies don't seem fazed in the least.

"We understand completely that if we enter into a contract in the north, we're probably going to be blackballed in the south," an official from one of the companies told me on condition of anonymity. "So the question is, 'Have we exhausted all our options for getting a deal in the south on terms that we would find acceptable?'"

The answer for companies headed for the door is yes, the official said. "I think that's beginning to be borne out as a lot of companies are looking to renegotiate their terms," he told me.

"The terms in the north are much better. The government gets a stake, but the better you do, the more you get, and the terms are attractive," he said. Plus the overall conditions are "night and day better" in Kurdistan than in Baghdad, he said. "You fly into a very modern, efficient airport. There are good hotels, good infrastructure."

When combined with the Kurdish authorities' already-existing plans to build independent oil and natural gas export pipelines out of Kurdistan that avoid the Arab regions of Iraq entirely, the oil deals look increasingly like a robust, commercial-led carving out of the region as a stand-alone entity. Some might call it another substantial piece of the puzzle toward the creation of the Kurds' longstanding national dream -- a state of their own.

Robin Mills, a former Shell geologist and author of The Myth of the Oil Crisis who does private consulting on Iraq, said in a Twitter exchange that the Total news is a "big blow" for Baghdad. As for Total itself, the company seemed to be taking on sub-par fields in Kurdistan -- "not a crown jewel in return for risk they're taking with Baghdad" -- but that "perhaps Total just doesn't see any risk with Baghdad any more."

Can the embattled Iraqi central government get the rebellious oil companies back in line? Patrick Osgood, deputy editor of Oil & Gas Middle East magazine, suggested in a tweet that Baghdad could respond by making "a quick fire sale [of Total's fields] to Petrochina," the publicly traded arm of the state-controlled China National Petroleum Company. But even that may not solve Baghdad's basic problem: "Can't see it's smart for Baghdad to be so reliant on Shell, BP, Russians & Chinese," Mills said.

Some messages that run counter to conventional wisdom stand out from this showdown: Oil companies, it turns out, will not pay any price for access to the biggest fields in the world, but in fact will seek greener pastures. Oil cannot be bottled up -- it will find its market. And sometimes, a new state can take form without a shot fired or a single protester in the street.



It Ain't Just a River in Egypt

Egyptian liberals lost badly in the post-revolution scramble for power -- and now they're in deep denial as many embrace conspiracy theories about the United States.

When Defense Secretary Leon Panetta pulls up to the U.S. Embassy in Cairo this week, he will see a protest outside its walls. Just steps away from Tahrir Square, supporters of Omar Abdel Rahman have been staging a sit-in for nearly a year to protest the imprisonment of the man known as the "Blind Sheikh," who is serving a life sentence in a North Carolina prison for planning terrorist attacks on American soil.

Upon Secretary of State Hillary Clinton's visit just weeks before, these protesters were joined on the embassy's doorstep by a group often seen as more sympathetic to U.S. values and policies: Egypt's liberals. This time, they had lost some of that sympathy.

The protests, by themselves, weren't entirely unexpected -- after all, no one in Egypt these days seems to have much praise for President Barack Obama's administration. And liberals, due to their perceived closeness to the West, have often had to overcompensate to shore up their nationalist bona fides. After all, it wasn't the Muslim Brotherhood but, rather, liberal standard-bearer Amr Hamzawy who refused to meet in February with Sen. John McCain due to his "biased positions in favor of Israel and his support for invading Iraq and attacking Iran."

What is different about this most recent surge in anti-Americanism is its conspiratorial bent. Some of Egypt's most prominent liberal and leftist politicians are telling anyone who will listen that the United States is in bed with the Islamists. Such allegations would be concerning on their own, but they're even more troubling for what they represent -- Egyptian liberals' growing ambivalence and even opposition to democratic rule. The rise of what we might call "undemocratic liberals" is threatening Egypt's fledgling democracy.

The suspicion that the United States is secretly supporting the Muslim Brotherhood sounds far-fetched, in part because it is. I remember first hearing a variation on the theory from a top Egyptian official in January: He spoke at some length of a U.S. master plan to install a grand Islamist alliance in government, including not just the Brotherhood but also more radical Salafists. Initially, I thought he might be making a meta-commentary on the absurdity of conspiracy theories. He wasn't.

Over the course of Egypt's troubled transition, liberal resentment has only grown. This month, former presidential candidate Abul-Ezz el-Hariri claimed that the Obama administration was backing the Brotherhood so it could then use the establishment of Egyptian theocracy as a pretext for an Iraq-style invasion. Most of the allegations, however, have not aspired to the same level of creativity. Emad Gad of the Social Democratic Party, a leading liberal party, asserted that the United States was "working with purpose and diligence in order to enable the forces of political Islam to control the institutions of the Egyptian state."

It was Gad who would capture in a few choice words the newfound merger of anti-Americanism and anti-democratic sentiment. "It's an Egyptian issue. It's not for the secretary of state," he told the New York Times. "We are living in an unstable period. If the SCAF [Supreme Council of the Armed Forces] goes back to its barracks, the Brotherhood will control everything."

Liberals' fears have increasingly dovetailed with those of Egypt's Coptic Christian community, which makes up perhaps 10 percent of the population and is understandably suspicious of the Muslim Brotherhood, after decades of ambiguous statements on minority rights. On the first day of Clinton's visit, four of the country's leading Coptic figures released a statement saying, "Clinton's desire to meet Coptic politicians after having met with the Muslim Brotherhood and Salafi leaders is a kind of a sectarian provocation which the Egyptian people and Copts in particular reject." It has reached the point, they wrote, where the United States had backed one candidate -- referring to the Muslim Brotherhood's Mohamed Morsy -- in the presidential election.

The belief that the United States was behind Morsy's victory has spread among anti-Brotherhood groups. Before the final election results were announced on June 24, a coalition of leading liberal parties held a news conference condemning the Obama administration for backing Morsy's candidacy. "We refuse that the reason someone wins is because he is backed by the Americans," said the Democratic Front Party's Osama el-Ghazali Harb, who was an influential figure in former President Hosni Mubarak's ruling party before resigning in 2006.

In all these examples, no evidence was provided to substantiate the allegations, in part because no such evidence exists.

When asked to explain how they came to believe in a U.S.-Brotherhood "deal," Egyptians point to innocuous pro-democracy statements from U.S. officials, such as Clinton urging that the Egyptian military "turn power over to the legitimate winner" of presidential elections. One organizer of the anti-Clinton protests, the Free Front for Peaceful Change, accused the United States of attempting to "impose its hegemony" on Egypt because of a July 4 statement by U.S. Ambassador to Egypt Anne Patterson in which she said, "The return of a democratically elected parliament, following a process decided by Egyptians, will also be an important move forward."

A cui bono conspiratorial mindset has taken hold. The United States says it supports a "full transition" to democracy. The Brotherhood, being the largest, best-organized party in Egypt, naturally stands to benefit most from such a transition. This, in turn, must mean that the United States supports the Brotherhood. In other words, more democracy means more Islamism, so anyone who advocates the former is suspected of supporting the latter. The very notion of democracy is becoming politicized.

The Brotherhood, the closest thing Egypt has to a majority party, is, unsurprisingly, a rather staunch advocate of majority rule. On this point, Morsy and other leading Brothers have straddled the fine line between democracy and demagoguery. For many Egyptians, Morsy's dramatic, chant-like chorus of "there is no power above the people" during a June 29 speech in Tahrir Square was a stirring ode to popular sovereignty. For others, it was a sign that the Brotherhood -- having won 47 percent and 52 percent in parliamentary and presidential elections, respectively -- felt it had the right to implement its vision, regardless of what anyone else had to say about it.

Turkey's experience is instructive here, though less as a model than a cautionary tale. Upon assuming power in 2002, the Islamically oriented Justice and Development Party (AKP) understood that the best way to promote religion in public life was to promote democracy, which would allow it to wrest power away from Turkey's entrenched secular establishment. Despite the anti-Western orientation of its Islamist predecessors, the AKP latched on to the European Union accession process, which required Turkey to reduce the powers of the military and lift restrictions on freedom of expression, including on religious issues. It was odd that those three things went together -- better relations with the West, democracy, and Islamization -- but in Turkey's case they did.

But just like in Egypt, the backlash from Turkey's liberals was harsh. The opposition Republican People's Party and other secularists adopted an increasingly anti-American and anti-European posture, resisting many of the reforms the AKP was hoping to implement. The staunchly secular military, which had traditionally seen itself as a Europeanizing force in Turkish politics, also underwent a striking evolution. As Turkish scholar M. Hakan Yavuz noted in a 2002 article, "One of the newest characteristics of the Turkish military in the late 1990s is its willingness to employ anti-Western rhetoric and accuse opponents of being the 'tools of Europe' because of growing pressure from the European Union on human rights and the need for civilian control."

EU accession was no longer in the interests of the military, and perhaps it never really was. In Turkey, like in Egypt, more democracy meant, inevitably, more religion. Turkey's secular establishment turned out to be much more secular than it was democratic -- and Egypt is looking as if it may go down the same path.

The question is often posed: Do Islamists really believe in democracy? The more relevant matter for Egypt, at least for now, is to understand how would-be democrats like Gad and Harb have strayed from the very ideals they claimed to be fighting for.

Some blame, of course, must be laid at the feet of the Muslim Brotherhood. As Egypt's most powerful political force, the movement had a responsibility to rise above partisanship and do more to reassure its skeptics. But the Brotherhood thought it was strong enough to dismiss liberals, and liberals were too weak to put up a fight through the electoral process. What sometimes seems like a massive ideological divide is really about power.

So too is the increasingly bizarre speculation about America's hidden designs in Egypt. Roger Cohen, a New York Times columnist, writes that conspiracy theories are "the ultimate refuge of the powerless." So in failing to win -- and feeling like an embattled minority in the process -- liberals have looked to the United States and other unnamed "foreign hands" to explain the rise of their Islamist opponents.

The irony is that the Obama administration, while willing to engage the Brotherhood, has itself been wary of the Islamists' rise to power. For much of the transition, the United States stood by the SCAF, the ruling military junta and the Brotherhood's archrival. The Egyptian military was a known quantity, the linchpin of the 30-year U.S.-Egypt relationship and a force for regional stability. The generals, the thinking went, would ensure that vital American interests were protected. When SCAF waged an unprecedented crackdown on civil society and threatened several American NGO workers with jail time, the United States sought a face-saving compromise and kept the $1.3 billion in annual military aid flowing. Even in her recent visit, Clinton avoided any direct criticism of SCAF, despite the latter staging an effective coup -- dissolving the democratically elected parliament and stripping the presidency of its powers -- just weeks prior.

The hostility of Egypt's secular establishment presents the United States with something of a dilemma. If it ever does get serious about pressuring the military and promoting democracy in Egypt, the more liberals -- perhaps its most natural allies -- will cry foul. This no-win situation will likely persuade U.S. policymakers that it's better to stay away and do less rather than more. In this sense, liberal conspiracy theories, as absurd and creative as they might be, may be hitting their mark -- pushing the United States and other outside actors out of Egypt. That is probably good for Egypt's liberals, but not necessarily for Egypt.