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U.S., Allies Clash Over Plan to Use Iraqi Oil Profits for Rebuilding

By Colum Lynch and Peter Behr
Washington Post Staff Writers
Thursday, April 3, 2003; Page A34

UNITED NATIONS, April 2 -- The Defense Department is pressing ahead with plans to temporarily manage Iraq's oil industry after the war and to use the proceeds to rebuild the country, creating a conflict with U.S. allies in Europe and the Middle East, according to diplomats and industry experts.

The White House maintains that Iraq's oil revenue is essential to financing the country's postwar reconstruction. The administration intends to install a senior American oil executive to oversee Iraq's exploration and production. Iraqi experts now outside the country would be recruited to handle future oil sales. Industry sources said former Shell Oil Co. chief executive Philip J. Carroll is the leading candidate to direct production.

But the postwar oil strategy is clouded by legal questions about the right of the United States to manage Iraq's oil fields. Administration officials are searching for a legal basis to justify the U.S. plan. If the war succeeds, the United States may claim a legal right as an occupying power to sell the oil for the benefit of Iraq, people close to the situation said.

U.N. and British officials said the United States lacks the legal authority to begin exporting oil even on an interim basis without a new Security Council mandate. Iraq's oil sales before the war were controlled by the United Nations under its oil-for-food program.

"We're moving into a legal realm that is not clear," said Jan Randolph, head of economic forecasting at the World Markets Research Center in London. "The impression we're getting is that because the Americans are largely bearing the [war] costs, they will want to determine what happens next."

David L. Goldwyn, president of Goldwyn International Strategies, said: "I don't believe that the U.S. has the legal power under international law to seize and sell Iraq's oil absent a new Security Council resolution." Goldwyn, who was assistant secretary of energy in the Clinton administration, added: "It is extremely doubtful any reputable oil company will purchase oil without clear title." But some industry officials said oil companies might be willing to buy Iraq oil if purchases were guaranteed by the United States.

Firefighters are battling blazes at two wells in Iraq's southern Rumaila oil fields, but more than 500 wells are believed to be undamaged. Some production could begin within a month, if war conditions permit and legal issues are resolved, some industry experts estimate. Iraq's major northern field around Kirkuk is still controlled by Iraqi forces.

A resumption of Iraq oil exports would have little effect on oil prices if Saudi Arabia were to curtail its output to stabilize prices. Crude oil for May delivery fell $1.22, or 4.1 percent, to $28.56 a barrel today on the New York Mercantile Exchange.

Russia, France, Germany and other key Security Council members are seeking to preserve U.N. management of the Iraqi oil industry. The Security Council president, Adolfo Aguilar Zinser of Mexico, told reporters today that the 15-nation council has voiced its commitment to the principle that "Iraq's oil belongs to the Iraqis" in intensive daily discussions on the fate of Iraq's oil industry. "The council must make an effort to preserve . . . Iraq's sovereignty over its oil," he said.

Iraq was exporting as much as 2 million barrels of oil a day before the conflict, about 3 percent of the world's supply. Production from the southern fields was cut off by the war, but some Iraqi oil still flows through a pipeline to Turkey. That oil has not been sold because of the uncertain legal situation.

The Bush administration insists that all Iraqi oil revenue will be used to benefit the Iraqi people. "Iraq is a wealthy nation," said White House spokesman Ari Fleischer. "Unlike Afghanistan, for example, Iraq will have a huge financial base from within upon which to draw. And that's because of their oil wealth."

U.N. Secretary General Kofi Annan suspended Iraqi oil exports on the eve of the military campaign. The Security Council decision Friday to use $13 billion in Iraqi oil revenue to finance relief efforts over the next six weeks has yet to be implemented because of red tape, and only a fraction is expected to provide immediate relief.

Seeking to prevent another acrimonious political battle in the council, Britain has begun pressing the Bush administration to organize a meeting of Iraqi representatives to make decisions on the fate of the country's oil industry.

U.N. control over Iraqi oil is firmly rooted in the sanctions imposed after the 1991 Gulf War, a British official said. "All these questions about the Iraqi oil industry are totally academic until the sanctions are suspended, and the sanctions are not going to be suspended at the request of Donald Rumsfeld," the official said. "There is a temptation to say why should we be subtle after we weren't supported in the Security Council. We certainly hope people will resist that temptation."

But industry sources say the administration fears that U.N. debates would block reconstruction funding from oil sales. "It has reached out to a very wide spectrum of oil experts over three months and given a lot of thought to what they would do. They've come up with a structure," said one industry executive close to the situation.

Carroll, the former Shell executive, who retired last year as chief executive of Fluor Corp., would report to retired Army lieutenant general Jay M. Garner, named by the Pentagon to direct postwar reconstruction as head of a new Office of Reconstruction and Humanitarian Assistance. Fluor, an engineering and construction firm, is one of the companies bidding for reconstruction contracts. Carroll declined to comment today.

"If it's correct, it's a splendid choice," said Thomas F. "Mack" McLarty III, the Clinton White House chief of staff who is now president of Kissinger McLarty & Associates. "I think he's particularly well suited. He's thoroughly knowledgeable in the industry. He's had a proven record of success."

Iraq is authorized to export oil to buy food, medicine and other humanitarian goods under the oil-for-food program. The program fed more than 80 percent of the Iraqi population before the current war.

The U.N. action to move humanitarian aid to Iraq is behind schedule, increasing pressure on the United States and Britain to shoulder the financial burden of providing food and medicine.

The prospect of the United States asserting control over Iraq's oil industry has hardened foreign opposition to Washington's postwar plans. Russia, which signed large oil development contracts with Saddam Hussein's government, is seeking a guarantee that it will continue to have a say in the United Nations on how Iraqi oil revenue is spent. France also is determined to protect its interests in development of Iraq's oil reserves.

"The Russians will have a problem," said one administration official. "They would like to see us pay for everything from the U.S. Treasury. But the reality is we are going to have to tap into the oil revenues for the reconstruction."

Robert E. Ebel, energy program director at the Center for Strategic and International Studies in Washington, said: "The French have a position to protect in Iraq and so do the Russians. They want to be sure they're not shunted aside. If we do too much of that people will say it really was about oil."

Staff writer Kenneth Bredemeier contributed to this report from Washington. Behr reported from Washington.

© 2003 The Washington Post Company