Here is the NY Times Article that found that so far there have been, quote
"minimal profits" for Haliburton.
JDG
December 29, 2003
Halliburton Contracts in Iraq: The Struggle to Manage Costs
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.
-------------------------------------------------------
John D. Giorgis
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Washington, DC 20212
Phone: 202-691-7854
Fax: 202-691-7753
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