Halliburton Contracts in Iraq: The Struggle to Manage Costs

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.

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.

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.

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."

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.

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."

As the Army's sole provider of troop support services, Halliburton's Kellogg Brown & Root subsidiary has received work orders totaling $529.4 million related to the two wars under a 10-year contract that has no spending ceiling.

Rather than put the Iraq work up for bidding, the government has used the 2001 Halliburton contract to place the various work orders in Iraq, prompting criticism from some Democrats that Cheney's former company is receiving favored treatment.

"The amount Halliburton could receive in the future is virtually limitless," said Rep. Henry Waxman, D-Calif., who disclosed the troop support work orders Thursday. "It is simply remarkable that a single company could earn so much money from the war in Iraq."

Halliburton (search), a Houston-based oilfield-services and construction company, disputes those characterizations, noting it had to compete to win the original contract and that each of its work orders is covered by strict guidelines and costs controls.

"U.S. government contracts are awarded, not by politicians, but by government civil servants, under strict guidelines," company spokeswoman Wendy Hall said. "Government civil servants are well aware of and consistently abide by the requirements of the process. Privatizing this work allows the military to concentrate on its mission. "

"Any allegation that this contract is set up to encourage unwarranted spending is unfounded and untrue," she said. "The vice president has nothing to do with the awarding of contracts, the bidding process or task orders."

Cheney headed Halliburton from 1995 until George W. Bush picked him as his running mate in July 2000.

The Army Corps of Engineers (search), using a separate no-bid contract, has awarded Kellogg Brown & Root $71.3 million in work orders to repair and operate oil wells in Iraq. That contract has a two-year duration of a spending ceiling of $7 billion.

Kellogg Brown & Root competed with two other companies in 2001 to win the logistics contract that makes it the Army's only private supplier of troop support services such as housing, amenities and food over the next decade.

The initial logistics contract award carried no value. The Army negotiates each task order with the company and then verifies the costs as they are billed.

There is no ceiling on spending, because the contract is designed to provide rapid troop support wherever and whenever U.S. forces move into action overseas.

Under similar contracts, the Army paid Kellogg Brown & Root $1.2 billion from 1992 through 1999 to support U.S. troops, mainly in the Balkans. An extension of that contract from 1999 through 2004 is projected to cost $1.8 billion.

Since March 2002, the Army has issued 24 task orders totaling $425.5 million under the contract for work related to Operation Iraqi Freedom, according to Army records provided Waxman. Eleven more work orders totaling $103.9 million have been issued under the same contract for work related to the war in Afghanistan.

Dan Carlson, spokesman for the Army Field Support Command, said the Army has paid $42 million to Kellogg Brown & Root through April for work under the contract related to Iraq and Afghanistan.

Carlson said the more than $500 million in work orders under the logistics contract represents the Army's best estimate of the final costs of the projects. He said the company must justify its spending to Army contract officials before it can be paid.

"Costs are verified as they are billed," he said. "We may spend more or we may spend less."

Much of a $60 million obligation to Brown & Root to provide logistical supply line services and locations in Turkey was never spent because the Turkish government refused to allow U.S. troops to launch an invasion of Iraq from Turkey, Carlson said.

(I pulled this information from a Fox News article. Halliburton's Iraq, Afghanistan Contracts at $600 Million and Growing. Quite frankly, the dim dems are misleading Americans about this. Kellog, Brown, and Root got this contract and signed this contract with the Army. And now the Army should renege on the agreement? I don't think so.

You know what, if you check my posts you will see that, I was and I am a supporter of this war.... I cheered as my nephew landed on the first plane into Baghdad International Airport, (even though I didn't know he was on the plane at the time!) Don't be chewing me out. If this war was about oil, then it was a pretty stupid way to make oil profits. It was a poor way to "win" political points. I do not believe it was about oil.

But, I will not be the stupid trusting blind follower of any man! I will not be like bj clinton's followers and believe in spite of evidence to the contrary.

As it is now, it looks like this war was about work contracts. Halliburton signed on as a military supplier, and Cheney made sure they had a war to keep profits up.

I believe with all my heart that George Bush is doing his best to keep Americans safe. I believe that he believes that this war in Iraq was the way to do it. He is smoking the terrorists out, on their own land, and not on ours. With the information he is given, he believes this course is the safest plan. I do not believe that Bush would want to profit from war, in any way.

But, is his main advisor so trustworthy? Could Cheney be spinning threats and advising war for monetary reasons? Is he still looking out for his old company profits?

I hope to God that it is not so. I really do. But, it smells pretty bad.

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