US Set to Back State Control of Iraqi Oil

Officials are likely to recommend the creation of a state-run company to own and manage the Iraqi oil industry, shutting out foreign investment and countering, in part, allegations that the US-led invasion of the country was merely an oil grab.

But as one door closed on foreign investment another opened yesterday when the Pentagon invited bids for contracts worth $5bn (£2.75bn) to rebuild Iraq, the first in a string of deals funded by $18.6bn allocated for the reconstruction effort.

Both American and Iraqi oil officials are proposing a state-owned business model based on similar arrangements in neighbouring Saudi Arabia and Kuwait.

This approach differs markedly from America's desire to liberalise other parts of the Iraqi economy, where policy makers are investigating wide-scale privatisation of state-owned enterprises.

Advisers believe the politically charged oil industry, where there are fears of inflaming nationalist anger, is a special case.

They suggest a professional management team be installed to run the national oil company, which should be protected from political interference on a day-to-day basis but answer to a government oil minister.

In an interview with the Wall Street Journal, Robert McKee, the senior oil adviser to the occupying coalition provisional authority, said: "Our preference is definitely in that direction. It is just pragmatism." A report being prepared for the interim oil minister would be highlighting "best practice" from other state-run oil firms, he said.

Both the Americans and the Iraqis say a state-run oil company could still attract massive foreign investment. In practice, however, the Saudi Arabian and Kuwaiti examples suggest there is unlikely to be much opportunity for US, British and other international oil companies.

One British oil industry executive said: "There is no indication that the Iraqis will behave any differently from the rest of the Middle East, which steadfastly refuses to offer any investment opportunities with a real return to foreign investors."

But the gas-guzzling Americans know the creation of a stable state-run oil industry would still be in their best interests. Iraq has proven oil reserves of 112bn barrels, second only to Saudi Arabia. With the Saudi kingdom displaying signs ofincreasing instability, the US needs an effective replacement on hand.

Meanwhile, the Pentagon invited tenders for 17 construction projects yesterday, promising an open and transparent bidding process. There are 63 eligible countries, excluding those that did not support the US invasion of Iraq such as France, Russia, Germany and Canada.

The expected flood of western companies entering the Iraqi market began yesterday when PepsiCo signed a deal to bottle and distribute its products. The move is expected to create 2,000 local jobs.