Profit and Power in Postwar Iraq
Apr 04, 2003

Stratfor Intelligence


The reconstruction of Iraq will be a long and, for some companies, highly profitable venture. The country initially will be led by a U.S-controlled government that likely will dole out the choicest contracts to American companies, with plenty of subcontract opportunities for coalition partners.


The reconstruction of Iraq will be an extensive and, for some companies, lucrative undertaking -- giving companies from coalition countries an extensive footprint in one of the most resource-rich countries in the region. Assuming that the Baath Party regime is ousted in Iraq, Washington plans to install an interim administration -- giving the U.S. administration complete control of decision making within the country for a time.

As a result, the U.S. Department of Defense and Agency for International Development likely will dole out the bulk of reconstruction contracts to U.S. companies.

The reconstruction period likely will have three phases. Immediately following the war, Washington's priority will be to return stability to Iraq and get oil production back online. Next, attention will focus on broader development initiatives, such as installing an interim Iraqi government and, perhaps later, an elected administration. During this second phase, more outside players -- including other Arab states and smaller companies -- will be involved, trying to build alliances with local groups in order to gain a foothold in the reconstruction market. In the third and final phase, which will be marked by more political independence in Baghdad, the gold rush will be over and the competition for market share and business contracts will level off.

In this piece, we will examine only the shape and implications of Phase 1 in detail.

Rebuilding Iraq after 22 years of wars and sanctions will be an enormous task. Very little of Iraq's infrastructure doesn't need to be rejuvinated, and the estimated cost of putting needed facilities in place runs as high as $100 billion. To avert a humanitarian crisis, water systems and electrical power plants will need to be built immediately. Later, thousands of miles of roads, dozens of bridges and hundreds of miles of irrigation ditches will have to be rebuilt or repaired -- not to mention numerous schools, hospitals and homes. Along with the basic necessities required by an industrialized, urban nation, the oil sector -- the mainstay of the Iraqi economy -- will have to be overhauled.

The U.S. Congress voted overwhelmingly on April 3 to give President George W. Bush almost $80 billion for initial costs of the war in Iraq -- much of which will be earmarked for U.S. companies in the rebuilding effort. Major U.S. infrastructure companies such as Halliburton, Bechtel Group Inc., Fluor Corp. and Parsons Corp. are lining up to bid on contracts -- many of which are being offered on a "cost-plus-fee basis" because of the high-risk nature of postwar projects.

U.S. plans for the initial reconstruction phase will revolve largely around two posts to be filled by appointment in Washington. The Pentagon has chosen retired Army Gen. Jay Garner to head an interim government that would coordinate U.S. relief activities in Iraq. And Philip Carroll, a former Royal Dutch/Shell executive, has been asked to oversee the resuscitation of Iraq's oil industry. However, Rodney Chase, a BP executive, also has been proposed as a candidate to manage the postwar oil sector. The choice of Chase likely would be a concession to officials in London, who have voiced concern over a U.S. monopoly on Iraqi reconstruction, especially in the energy sector.

The foreign-staffed interim administration is not meant to last long: Bush administration officials have said they will turn the government back over to the people of Iraq as soon as the country is stable and a viable Iraqi government is chosen. The government changeover will depend on the severity of friction between the Iraqi population and coalition forces, as well as the level of conflict between the country's ethnic and religious groups and the behavior of neighboring countries, such as Turkey or Iran.

At this point, no one knows how the Iraqi people will react to occupation. Elements loyal to Saddam Hussein -- or merely hostile to foreign occupation -- may keep up up an extensive resistance campaign that keeps Iraq unstable for years. If enough of the populace takes part in a resistance movement, it could become highly painful for coalition forces, and reconstruction activities will be hampered by insecurity.

Even if U.S. control is accepted, establishing an indigenous government that is acceptable to the different power groups within the country likely will require a power-sharing deal involving Sunni and Shiite Arabs and the Kurds. Otherwise, some group will be disenfranchised, creating a potential for conflict. In that event, the U.S.-led interim government could remain in place for several months.

Once an Iraqi regime is established, reconstruction will be accelerated. Iraq, of course, will not be rebuilt on U.S. funds alone; it has enough savings in the U.N. oil-for-food program as well as its own natural resources to pay for its own reconstruction.

The resurrection of the decaying oil sector will be crucial in postwar rebuilding efforts. Iraq has the world's second-largest oil reserves, but the industry has not seen significant infrastructure investment since 1979, before the Iran-Iraq war.

Most analyses conclude that Iraq's return to the energy markets will be slow and extremely expensive, but Stratfor takes a more bullish view. We believe that Iraq may be capable of shipping up to 2.8 million bpd of crude months after the war ends if Iraq runs its current facilities at maximum capacity. Iraq's average daily exports during Feburary were 1.4 million bpd. That capacity existed after more than 20 years of war and sanctions. Some maintenance and upgrades would quickly increase overall capacity and help fill Baghdad's coffers.

Financing the development should not be problematic. Stratfor's sources at the United Nations indicate Iraq still has $35 billion to $40 billion in its oil-for-food program escrow account. This money, combined with foreign investment and anticipated U.S. aid, should be enough to finance the oil sector's rehabilitation.

U.S. occupation of Iraq will last for years, even if a directly U.S.-controlled administration in Baghdad does not. However, since that administration will be in power during the initial phases of reconstruction, American corporations are likely to win the lion's share of contracts -- weighting their influence in Iraq for years to come.