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Halliburton contract could reach $7B
Emergency government contract to fix Iraqi oil fields lasts 2 years, offers 7% profit margin.
April 11, 2003: 2:45 PM EDT
By Mark Gongloff, CNN/Money Staff Writer

NEW YORK (CNN/Money) - Halliburton Co.'s U.S. government contract to make emergency repairs to Iraq's oil infrastructure extends for two years, could be worth as much as $7 billion, and could earn the company, formerly headed by Vice President Dick Cheney, a profit of $490 million.

These previously secret details about Halliburton's contract were revealed in a letter from the U.S. Army Corps of Engineers, which issued the contract, to Rep. Henry Waxman, D-Calif.

Waxman has complained that the Army issued the contract without taking other bids, that the details have not previously been made public, and that the contract was awarded on an open-ended, "cost-plus" basis -- meaning Halliburton gets reimbursed for its costs, plus a percentage of those costs as a fee.

The Army responded that the contract was awarded to Halliburton's Kellogg Brown & Root Services unit because, before the war, it had already developed a detailed, classified plan to help the Army put out fires and repair oil-field damage.

The contract to develop that plan was awarded after competitive bidding, the Army said, and it would have been "a wasteful duplication of effort" to open up the bidding process for the Army contract to put Halliburton's plan into effect.

The Army said that competitive bids would be taken for a broader effort to rebuild Iraq's long-neglected oil infrastructure "at the earliest opportunity consistent with mission needs." Such contracts would replace Halliburton's current contract.

"We in the United States Army Corps of Engineers take great pride in assuring that our procurements comply with all legal requirements," Lt. General Robert B. Flowers, the officer in charge of Corps contracting, wrote in an April 8 letter to Waxman.

Flowers said the contract's $7 billion ceiling represents the worst-case scenario of damage to Iraqi oil fields. In fact, Flowers wrote, as of April 4, only four orders for services, totaling $50.3 million, had been placed.

The full extent of the work needed to get Iraq's oil fields up to pre-war capacity is still unknown, however. The Army said Thursday it could take three months to get 200,000 to 800,000 barrels per day pumping, which would only be about 10 to 40 percent of Iraq's pre-war production capacity of 2 million bpd.

Halliburton's 7 percent fee -- which would earn the company $490 million if it incurred $7 billion in costs -- will be reduced if it doesn't meet certain cost-saving standards. The Army said it would monitor everything Halliburton does under the contract.

Details raise more questions

But the Army letter raised even more questions for Waxman, particularly the fact that a contract designed only for "emergency" repairs and fire-fighting was written to last for two years and seemed to give Halliburton an undefined role, saying only it will perform "those services necessary to support the mission in the near term."

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"It may be the case that the [Bush] Administration has valid reasons for granting a sole-source contract for emergency work during armed hostilities," Waxman said in an April 10 reply letter. "It is harder to understand, however, what the rationale would be for a sole-source contract that has a multi-year duration and a multi-billion-dollar price tag."

The Army Corps of Engineers did not respond to a request for comment.

Halliburton said it was only responsible for the "onset" of the work needed to repair Iraq's oil fields and that "additional contracts" would be issued, after competitive bidding, to complete the work in its contingency plan.

"It would be a misrepresentation of facts to report that KBR is responsible for the implementation of the contingency plan in its entirety," said Halliburton spokeswoman Wendy Hall.

Earlier in the week, Waxman and Rep. John Dingell (D-Mich.) asked the General Accounting Office, Congress' investigative arm, to look into "allegations that Halliburton has received special treatment from the administration."

Click here for more on the war with Iraq

Cheney was CEO of Halliburton until he left in 2000 to become the Republican vice presidential nominee. He sold his stock when he became a candidate, but still has stock options in a trust. He has promised to donate any profit from the sale of those options to charity. He still receives deferred compensation from Halliburton, but is guaranteed to get that money even if the company goes bankrupt.

Political concerns may have taken Halliburton out of the running for a $600 million State Department contract to perform general repairs to Iraq's roads, bridges, hospital and other critical infrastructure components, but the company still hopes to be a subcontractor for that work.

The job of rebuilding Iraq's oil production capacity to pre-1991 levels of about 3.5 million barrels per day could take 18 months and cost $5 billion, according to a recent study by the James A. Baker III Institute for Public Policy at Rice University. Maintaining that production could cost another $3 billion a year.

Halliburton and other U.S. oilfield services companies are in a prime position to get some of that work, according to many industry analysts, in contracts that could end up being administered by a new Iraqi government.

Most analysts point out that, regardless of Halliburton's political ties, it's probably the company with the best resources for doing much of the work in rebuilding post-war Iraq. It's the world's largest oilfield services company and also has long experience in general contracting work for the U.S. military, most recently in Kosovo and Guantanamo Bay, Cuba.

Shares of Halliburton (HAL: up $0.28 to $21.73, Research, Estimates) rose in midday trading Friday.  Top of page

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