Iraq The Halliburton Connection: The Master Builder

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It's a big one. Work in Iraq is parceled out among a handful of companies, but Halliburton has by far the largest share--$17 billion from the U.S. and British governments, several times as much as its closest competitor, Bechtel. Halliburton and the other large contractors work on a cost-plus basis--the cost of its work (negotiated in advance) plus a defined profit of up to 3%. The entire 2004 budget for the Coalition Provisional Authority is $13 billion and pays for about 2,300 much smaller reconstruction projects, separate from Halliburton's, none of which are subject to competitive bidding rules. Halliburton's initial no-bid contract to restore Iraq's oil supply came under intense criticism last year from Democratic lawmakers, but it did have to submit a bid for the second phase of the work, which it won in January.

Officials at the company bristle at the suggestion that Halliburton has had an easy ride in Iraq. Thirty-five of its employees have been killed there so far, and work on some projects has been stalled for months because of repeated insurgent attacks. Despite all this, Halliburton pushed Iraq's oil production back to prewar levels of 2 million bbl. a day in December, three months ahead of schedule, and delivered 1.8 billion liters of fuel via 700 trucks on the road daily in Iraq and Kuwait.

Yet Halliburton faces continuing accusations of overcharging and poor management. In May, the Army decided to suspend (for the second time) $159.5 million it owed KBR for running 64 dining halls across Iraq--the latest in a series of disputed bills and erroneous cost estimates. Representative Henry Waxman, a senior Democratic member of the House Government Reform Committee, says military contractors in Iraq don't have enough competition or oversight to keep them honest. "This is a great deal for Halliburton and Bechtel, but it's an absolutely horrendous arrangement for the taxpayer," says Waxman, who calls it "a recipe for waste, fraud and abuse." The bad news has been worrying enough that the credit-rating agency Standard & Poor's said last week it would keep a close eye on Halliburton.

Why would a company like Halliburton, which, after all, runs a successful oil-field-services business far removed from Iraq, agree to stay there? Profits. Iraq contracts have added $5.7 billion to Halliburton's revenues since January 2003, accounting for almost all the company's growth at a time when it was struggling with $4 billion in asbestos claims. The fact is, war is one of Halliburton's specialties. The firm's comprehensive troop-support contract, called LOGCAP, and its southern Iraq oil-field-rehabilitation contract, known as Restore Iraqi Oil (RIO), require Halliburton to supply whatever the military needs, determined by a constantly shifting set of priorities.

Halliburton's CEO, Dave Lesar, points out that "there are very few companies in the world that could or would adapt this quickly while, at the same time, [financing] an operation of this magnitude." He's right: only two other U.S. companies, DynCorp and Raytheon, bid for this kind of massive logistical responsibility in the last bidding round. Under the terms of its LOGCAP contract, KBR had less than three weeks to provide 27 dining facilities throughout Iraq for 120,000 troops.