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Halliburton ends Iraq contract one-year early amid surging violence
22 April 2005

WASHINGTON, April 22 (HalliburtonWatch.org) -- Halliburton announced today the "completion" of its contract with the Pentagon to restore Iraq's dilapidated oil infrastructure. The announcement came as a surprise since the U.S. State Department reported last week that Iraq's oil infrastructure is far from restored. The report said guerrilla attacks, the decrepit state of oil facilities and delays in repairs have reduced Iraq's oil exports since last fall.

The contract completed by Halliburton is known as Restore Iraqi Oil (RIO), which was awarded to the KBR subsidiary in March 2003 without competitive bidding. A follow-on RIO contract was awarded in January 2004 and had been expected to run for up to two years, according to the company's filing with the Securities and Exchange Commission. (Scroll down to page 6 of the filing for more information.) However, in a conference call with investors today, the company said the contract ended during the first quarter of 2005, one year earlier than expected.

A January 2004 press release available on Halliburton's website disclosed the follow-on RIO contract would run for up to two years, but the two-year reference has since been deleted.

The sudden completion of the contract comes amid threats from the U.S. embassy in Iraq to terminate all of KBR's contracts because of "poor performance and excess spending," the State Department said. For example, Pentagon auditors found $212 million in overcharges on Halliburton's RIO contract. At one point last year, the Pentagon said Halliburton failed to account for 43 percent of its expenses in the Middle East.

One of KBR's competitors, Parsons Corp., has been asked "to execute some of the remaining work" on Iraq's southern oil fields that was originally intended for KBR, the State Department said. In addition, the Bush administration has begun shifting oil work to local Iraqi companies "that are somewhat less susceptible to insurgency attacks and are not burdened by the same heavy overhead expenses of foreign firms."

Shifting reconstruction work to competitors and local Iraqis helped reduce Halliburton's revenues for the January through March period by 26 percent, the company reported today. KBR's operating income from the military decreased by 15 percent.

Iraq-related work contributed approximately $1.5 billion in revenue and $38 million in operating income during the January through March period, or a 2.6 percent margin.

Halliburton's other infrastructure contract, awarded by the Iraq Project Contracting Office (PCO), is being hampered by ongoing attacks. As a result, "We are evaluating the scope -- and all of our options -- on this contract," Andy Lane, Halliburton's Chief Operating Officer & Executive Vice President, said in the conference call. Asked when significant oil development in Iraq will take place, Lane said, "It's gonna be a while, I'm afraid." "It's just not an environment, either legally or risk-wise" to do business, he said.

As Halliburton draws down its work in Iraq, it is also considering the sale of KBR. "We are not setting out a timeline for KBR separation," said CEO David Lesar in response to questions about selling the subsidiary. "We want to make the value more clear through earnings performance" before making any decision to sell, he said.

More Information:

Halliburton's earnings statement

NY Times: Halliburton Unit's Work in Iraq Is Called 'Poor'

NY Times: Rethinking Reconstruction: Grand U.S. Plan Fractures Again