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Halliburton Contracts in Iraq: The Struggle to Manage Costs

December 29, 2003
 By JEFF GERTH and DON VAN NATTA Jr. 



 

WASHINGTON, Dec. 28 - The Qarmat Ali water treatment plant
in southern Iraq is crucial to keeping the oil flowing from
the region's petroleum-rich fields. So when American
engineers found the antiquated plant barely operating
earlier this year, there was no question that repairing it
was important to the rebuilding of Iraq. Setting the price
for the repairs was another matter. 

In July, the Halliburton Company estimated that the
overhaul would cost $75.7 million, according to
confidential documents that the company submitted to the
Army Corps of Engineers. But in early September, the Bush
administration asked Congress for $125 million to do the
job - a 40 percent price increase in just six weeks. 

The initial price was based on "drive-by estimating," said
Richard V. Dowling, a spokesman for the corps, which
oversees the contract. The second was a result of a more
complete assessment. "The best I can lamely fall back on is
to say that estimates change," said Mr. Dowling, who is
based in Baghdad. "This is not business as usual." 

The rebuilding of Iraq's oil industry has been
characterized in the months since by increasing costs and
scant public explanation. An examination of what has grown
into a multibillion-dollar contract to restore Iraq's oil
infrastructure shows no evidence of profiteering by
Halliburton, the Houston-based oil services company, but it
does demonstrate a struggle between price controls and the
uncertainties of war, with price controls frequently
losing. 

The Pentagon's contract with a Halliburton subsidiary,
Kellogg Brown & Root, conceived in secrecy before the war
and signed in March, was meant as a stopgap deal to last no
more than a few months. But it has been in effect since
then and has grown to more than $2 billion. 

The scope of the contract includes myriad tasks from
importing fuels to repairing pipelines, and the costs have
increased through task orders and subcontracts, some of
which are carried out with limited documentation or
disclosure. 

The reconstruction of Iraq has taken on "a Wild West
atmosphere," said Gordon Adams, a military procurement
expert at George Washington University. "Wartime creates an
urgent need, and under an urgent need, contractors will
deliver and take a price. There's a premium for getting it
done fast." 

Earlier this month, Pentagon auditors questioned the $2.64
per gallon that Halliburton was charging to truck fuel from
Kuwait to Iraq, and sought to recover $61 million. In
response, company officials said they had actually saved
the government money and had put the fuel supply
subcontract up for competitive bidding. But there was
little paperwork to show that any bidding had taken place,
according to government officials familiar with the audit. 

"Most of it was done on an emergency basis, very quickly,
over the phone, and Halliburton has struggled to prove this
was competitively bid," said one government official. 

Wendy Hall, a spokeswoman for Halliburton, said bids were
solicited by telephone in May because the corps needed fuel
imported into Iraq within 24 hours. But she said a more
formal bidding process was done several days later, and
that KBR has provided Pentagon auditors with documentation
on the bids. 

"KBR followed government-approved procedures in responding
to this significant, challenging and dangerous mission,"
she said. 

Minimal Halliburton Profits 

The estimated price of another KBR project, the replacement
of damaged pipelines over the Tigris River, also grew
significantly over the course of a few weeks. In July, KBR
estimated that the cost would be $29.8 million for the job,
included in a list of 220 tasks to be completed in Iraq.
But by fall, the cost had more than doubled, to $70
million. 

Both Mr. Dowling, the spokesman for the corps, and Ms. Hall
said the price grew because the scope of the project and
the method of repair had changed. Ms. Hall said the company
had tried to get the lowest price from its subcontractors.
In addition, Halliburton and government officials note that
the violence in Iraq increases the cost of security and
adds to the cost of all reconstruction contracts. 

So far this year, Halliburton's profits from Iraq have been
minimal. The company's latest report to the Securities and
Exchange Commission shows $1.3 billion in revenues from
work in Iraq and $46 million in pretax profits for the
first nine months of 2003. But its profit may grow once the
Pentagon completes a formal evaluation of the work. If the
government is satisfied, Halliburton is entitled to a
performance fee of up to 5 percent of the contract's entire
value, which could mean additional payments of $100 million
or more. 

The nonpublic way in which KBR was selected for the job in
Iraq remains a political flashpoint, especially among
Democratic presidential contenders, in part because Vice
President Dick Cheney served as Halliburton's chief
executive officer from 1995 to 2000. 

The contract to fix Iraq's oil industry was granted to KBR
by a secret Bush administration task force formed in
September 2002 to plan for Iraq's oil industry in the event
of war. The task force, led by an aide to Douglas J. Feith,
the under secretary of defense for policy, quickly
concluded that the government alone could not meet the oil
needs, members of the group said. "There were only a
handful of companies, and KBR was always one of those
mentioned," said one Pentagon official. 

Almost immediately, an alarm went off among members of the
group. "I immediately understood there would be an issue
raised about the vice president's former relationship with
KBR," the official said, "so we took it up to the highest
levels of the administration, and the answer we got was,
`Do what was best for the mission and we'll worry about the
political' " fallout. 

An Absence of Competition 

Halliburton, a large energy services, engineering and
construction firm, works for governments all over the
world. A crucial factor in KBR's selection, members of the
planning group said, was an existing Army contract it
secured to provide logistical support around the world. It
won that contract in a bidding process in December 2001.
The Pentagon has cited that competition to deflect
criticism about KBR's no-bid contract in Iraq. 

In awarding the logistics contract, the Army acknowledged
last year, it failed to consider that the company was under
criminal investigation for a previous Pentagon contract,
even though that inquiry was disclosed in Halliburton's
annual report. 

The absence of competition in the selection of KBR for
Iraqi oil work was meant to be remedied shortly after the
war ended. "Everyone realized the selection of KBR was
going to look bad, so the idea was to compete it out as
quickly as possible," said another task force member. 

But those competitively bid contracts have yet to be
awarded, and the amount of Halliburton's work in Iraq has
grown steadily. 

The process began in November 2002 with a request for the
company - then operating under the Army logistical contract
- to plan the management of Iraq's postwar oil industry.
"In the worst case scenario," said Lt. Gen. Robert B.
Flowers, the commander of the Army Corps of Engineers,
"there would be massive international oil spills and
pollution resulting from the fires, extensive damage to
associated infrastructure, including gas-oil separators,
pipelines, pumping stations, refineries and import
facilities." 

KBR designed a plan for such an eventuality, and on March
8, as war loomed, the corps awarded Halliburton a no-bid
contract to carry out the plan, officials said. 

The contract is labeled IDIQ, meaning indefinite delivery,
indefinite quantity. 

On March 24, a few days after the American-led invasion,
the Pentagon and Halliburton announced the new contract.
The Pentagon press release was titled, "Army Named
Executive Agent for Combating Iraq Oil Fires."
Halliburton's own press release carried this headline: "KBR
Implements Plan for Extinguishing Oil Well Fires in Iraq." 

Inviting Other Bids 

Representative Henry A. Waxman, the
California Democrat who is a vocal critic of the
Halliburton contract, wrote to Bush administration
officials on March 26 asking why the contract was awarded
without competition. Administration officials responded
that the contract could be worth as much as $7 billion to
Halliburton, but General Flowers said the bulk of the work
would be open to competition from other contractors "at the
earliest opportunity." 

In April, Brig. Gen. Robert Crear of the Army Corps of
Engineers described it as a "bridging contract, which would
tide us over until we could have a fair competition." 

"This contract is not going to be the kind of
megabillion-dollar deal many have been thinking," General
Crear told Bloomberg News. 

During the war's first days, soldiers discovered only a few
oil fires, but as the war wound down, more work came KBR's
way, mostly because of acts of sabotage on pipelines and
Iraq's oil facilities. When security problems made the
production of fuel inside Iraq even more difficult -
leading to shortages - the government asked Halliburton to
import fuel. It bought the fuel from Turkey and Kuwait. 

Halliburton's subcontractor in Kuwait was paid $2.27 a
gallon to import fuel, almost twice what it cost to bring
in fuel from Turkey. Halliburton charged an additional 36
cents a gallon. Pentagon auditors have said the price for
the fuel from Kuwait was excessive. 

Government officials have said the Kuwaiti subcontractor
was called Altanmia Commercial Marketing Company, but
Halliburton has refused to identify its subcontractors,
which is a point of contention with critics of the
contract. 

Ms. Hall, the Halliburton spokeswoman, said subcontractors
were kept confidential "in order to ensure subcontractor
safety" in Iraq. By contrast, Bechtel, the other large
government contractor involved in the reconstruction
effort, lists its subcontractors on its Web site. 

Little Public Disclosure 

There has been little public
disclosure of how prices are set. Mr. Dowling, the
spokesman for the Army Corps of Engineers, said it is
difficult to figure estimates in Iraq. A KBR task list of
220 reconstruction projects obtained by The New York Times
gives some indication of the early estimates and how they
quickly increased. 

The most expensive project on the list was the repair of
the Qarmat Ali water treatment plant, which pumps water
into underground oil reservoirs, allowing oil to be
extracted. By the time the Bush administration had
submitted its budget request for Iraqi reconstruction in
early September, the water-plant repair job had grown to
$125 million from 75.7 million. The higher amount was what
Congress eventually appropriated. 

Mr. Dowling said that the first estimate was based on a
"rough matrix" of pricing and that the final price was the
product of "more refined data." 

"There is nothing sinister or underhanded about
construction estimates that change as the work is planned,"
he said. "It's the quality of the work that counts."
Halliburton officials referred questions about estimates to
corps officials. 

Criticism that the contracting is kept secret and favors
Halliburton has been leveled not just by Democrats, but
also by some business executives. Although the Pentagon and
KBR deny any favoritism, some executives cited a closed
Pentagon workshop on Iraq's oil infrastructure that was
held in August at MacDill Air Force Base near Tampa, Fla. 

The three-day conference included officials from the
Coalition Provisional Authority, the corps and other
government agencies as well as executives from KBR. The
companies that attended, according to David C. Farlow, a
spokesman for the United States Central Command, included
only "commercial contractors currently working in Iraq." 

Jeff Gerth reported from Washington for this article and
Don Van Natta Jr. from London. 

http://www.nytimes.com/2003/12/29/international/middleeast/29CONT.html?ex=1073794100&ei=1&en=a52a8d733b0057e9


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