Is Halliburton guilty of Iraqi gas gouging?

A study released Wednesday by two Democratic congressmen accuses the energy services company of "highway robbery."

Published October 16, 2003 11:08PM (EDT)

Iraq, you may have heard, has a lot of crude oil. Before the war, this was the one point that both the Bush administration and its fiercest critics seemed to agree on. Everyone had a different theory about what would happen to the oil in the event of war -- the administration promised that Iraq's resources would pay for its redevelopment, while the critics argued that the oil money would fill the coffers of Western corporations -- but at least people saw eye to eye on what seemed like an incontrovertible fact: A Saddam-free Iraq would be an endless source of cheap gas.

But, at least so far, gasoline in Iraq has not been cheap. And it might surprise you to learn that you've been paying for it. According to a study released on Wednesday by Democratic Reps. Henry Waxman and John Dingell, each gallon of gas sold in Iraq has cost American taxpayers $1.59, and possibly as much as $1.70. In the rest of the Middle East, gas costs about half that amount; even in Toledo, Ohio, gasoline's cheaper than it is in Baghdad.

Why is getting gasoline to oil-rich Iraq costing Americans so much money? The congressmen have a one-word, obvious answer: Halliburton.

Because Iraq's oil industry, battered by war and sanctions, can't yet handle the country's fuel demands, the U.S. Army Corps of Engineers has been paying Kellogg Brown & Root, a subsidiary of Halliburton, to buy gas in Kuwait and transport it about 400 miles to Baghdad. The Corps assigned KBR this duty under the "no-bid" contract it signed with the company in March; under that contract, KBR is responsible for repairing Iraq's oil infrastructure and some related work, and it has received about $1.4 billion for its work so far.

In a letter that Waxman and Dingell sent to the White House, the congressmen cite an e-mail message they received from the Corps in which the Army discloses how much of the money to Halliburton went for fuel imports. As of Sept. 18, Halliburton received $304,486,577 to bring 191,965,150 gallons of gas into Iraq. That's $1.59 per gallon. If you add to that Halliburton's share -- under the contract, it is entitled to charge the government between 2 and 7 percent on top of its costs -- the per-gallon price of gas in Iraq could be as high as $1.70. Oil experts who spoke to Waxman's staff called that amount "outrageous," a "rip-off" and "highway robbery."

In their letter, the Waxman and Dingell say that where Halliburton seems to be pushing up the prices is in the transportation of the fuel from Kuwait to Baghdad. In Kuwait, the wholesale price of gasoline -- the price Halliburton is likely paying -- is about 71 cents a gallon. According to Gordon Schremp, an oil expert at the California Energy Commission who spoke to Waxman's staff, it should cost between 10 and 20 cents to transport a gallon of gas over the distance between Kuwait and Baghdad; that's about what it cost American trucks (driven by expensive American drivers) to transport gas to Arizona from neighboring states during Arizona's gas shortage this summer, for example.

Halliburton, though, is charging about 91 cents to drive each gallon 400 miles, a price that Philip Verleger, one of the experts the congressmen consulted, said was preposterously high. In an interview with Salon, Verleger noted that it costs 20 cents a gallon to transport gas through some of the most expensive terrain in America -- the high-grade Rocky Mountains. The road to Baghdad is, by comparison, flat, and therefore cheap to drive. "For gasoline to cost as much in Baghdad as it costs in Aspen, Colo., is stunning," Verleger said. He added that Waxman and Dingell aren't the only ones worried about Halliburton's charges. "I have also heard from a couple of sources that the people [at the Defense Department] at CENTCOM are utterly appalled at the waste. I've been hearing about this for at least the last five months. This is just like the $600 hammer or the $1,000 toilet seat that we've seen in the military in the past."

Why does transporting gas between Kuwait and Baghdad cost so much? One obvious guess would be the high cost of security -- the road to Baghdad may be flat, but most of us would rather drive to Aspen. But here's the interesting thing: Halliburton is not paying to secure the routes for its trucks; the Pentagon is. According to Waxman and Dingell, the military provides security for fuel convoys traveling to Iraq. Some experts have suggested that Halliburton may still be paying high premiums to insure the passage to Iraq, but Verleger says that he finds it hard to believe that insurance would drive up transport costs by factors of three or four or more.

Waxman and Dingell also rule out the possibility that Halliburton's costs reflect the internal chaos in the Iraqi business world. "Distribution costs inside Iraq also appear unlikely to explain the magnitude of the fee that Halliburton is charging," they say. "It is our understanding that Halliburton delivers most of the gasoline to central depots in Baghdad, Mosul and other centralized locations. It is the Iraqi Oil Ministry -- not Halliburton -- that handles the delivery of gasoline to service stations and consumers."

Asked for comment, Wendy Hall, a spokeswoman for Halliburton, denied via e-mail that Halliburton was gouging the government on gas. "We used a sound procurement process which has been approved by the government for procurement activities. We awarded the fuel acquisition contract to the suppliers who could meet the requirements defined by our client. These Task Order requirements included the ability to acquire the necessary quantities of fuel and the ability to deliver it in a hostile environment. KBR continues to negotiate fair and competitive prices to provide fuel to the Iraqi people."

But Verleger says that Iraqis could still probably import the fuel for less money than Halliburton's doing it. "The Iraqis have a good oil company; they kept their whole petroleum sector going through sanctions," he says. "Everyone looks at this and scratches their heads and says, 'How did you do that?' The answer is that Iraq has a good pool of middle managers, well-educated people who ran this well. And evidently they are amazed at this [Hallibuton's costs]."

By Farhad Manjoo

Farhad Manjoo is a Salon staff writer and the author of True Enough: Learning to Live in a Post-Fact Society.

MORE FROM Farhad Manjoo

Related Topics ------------------------------------------

Iraq Middle East