Carving Up Iraq

by Simon Pirani

Russia appears close to striking a bargain under which its oil companies would retain lucrative projects in a post-Saddam, US-controlled Iraq. In return, Russia could smooth the path for the UN to back George Bush’s war effort.

At the first-ever US-Russia Commercial Energy Summit in Houston, Texas, on 1-2 October, the public emphasis was on Russia raising oil exports to the US, which is desperate to reduce its dependence on the Middle East. The Russian oil magnates turned on their PR charm and wowed American industry leaders at a rodeo.

But behind the scenes, discussions were in progress about a series of contracts held by Russian oil companies (see table below), including a $20 billion deal signed in 1997 by Lukoil, Russia’s largest oil company, to develop the West Qurna field, and state-controlled Zarubezhneft’s possible $90 billion concession at the bin Umar field.

Russia wants to make sure that, whatever deals the US cuts with anti-Saddam Iraqi politicians or Kurdish nationalists, these contracts remain valid. And this, more than the repayment of Iraq’s Soviet-era debt, is the crucial factor in deciding how Russia casts its vote on the UN Security Council.

Lukoil chairman Vagit Alekperov last week said he had had “guarantees” from the Russian government that the West Qurna investment would be protected. Such promises could help secure Russian support for, or at least abstention on, aggressive new US-backed UN resolutions – just as assurances that Russia would have a free hand in Chechnya ensured that the Kremlin and its Central Asian allies eased the US war machine’s path to Afghanistan.

The Russian government has secured an agreement that, if or when Saddam falls, “the [Iraqi] law is the law, the state is still there”, Alekperov told the Financial Times on 3 October. Mikhail Margelov, head of the international affairs committee of the Russian federation council (upper house of parliament), told Reuters that Russia expected “equal, fruitful, cooperation” with the US “especially in the privatisation of the Iraqi oil sector”.

That same day, Russian energy minister Igor Yusufov and economy minister German Greg travelled from the Houston summit with US commerce secretary Donald Evans and energy secretary Spenser Abraham to meet Bush’s vice president Dick Cheney and national security advisor Condoleeza Rice.

Proposals to safeguard Russia’s investments in Iraq have been under discussion for months in Washington. Shortly before the Bush-Putin summit in May, analyst Ariel Cohen of the Heritage Foundation suggested an offer to “support the Russian companies’ contractual rights”; he argues that Lukoil strongly influences Russian foreign policy, and that a deal can be made to work to both Washington’s and Moscow’s advantage. Mikhail Khodorkovsky, boss of Russia’s no.2 oil producer Yukos, said in a Washington Post interview that “if there were sufficient political will”, one possibility was to form Russian-American oil consortia to exploit Iraqi fields.

The Houston summit provided the backdrop for the details of a deal on Iraq to be hammered out – and also accelerated enthusiasm for Russia as a supplier to the world’s biggest oil customer. In his address to the summit, Alekperov said that by 2010 Russia could supply 10% of the gargantuan 20 million barrels per day (bpd) consumed by the US, and that 1 million bpd could be on its way as soon as the Caspian, Baku-Tbilisi-Ceyhan and proposed Yaroslavl-Murmansk pipelines are completed.

Alekperov’s fellow oil barons are falling over themselves to get in on the act and Russian exports to the US have risen from zero last year to 18.4 million barrels this year. Mikhail Brudno, vice president of Yukos – Russia’s second-biggest oil company, which delivered the first tanker full of Russian oil to the US in June – said during the summit that the company is considering joining Lukoil to build an oil tanker terminal at Murmansk, and building a pipeline to the northern port from its main producing field in Khanty-Mansiisk.

Meanwhile the largest state-owned oil company, Rosneft, announced the formation of a joint venture with Marathon Oil, named Urals North American Marketing, which hopes to import 100,000bpd to the US. And Simon Kukes, chief executive of TNK, the oil company controlled by the Alfa Bank group, told the Houston summit that a tanker full of the company’s oil will arrive in the US next week for storage in the US strategic reserve. Kukes has also been a vocal supporter of proposals to establish a separate Russian or US-Russian strategic reserve.

The American enthusiasm for buying Russian oil made up for the US companies’ continuing reticence about investing in the Russian industry. The big US oil companies presented a list of conditions for investing in Russian projects: Archie Dunham, chairman of Conoco, said none would be forthcoming until a solution was found to outstanding arguments over proposed Production Sharing Agreement (PSA) legislation, under which foreign investments are legally ring-fenced; while ChevronTexaco vice president Peter Robertson said that the possibility of changes in legal and investment conditions were “intolerable”.

But times have changed, the Russian companies are financially far stronger than they were a year or two ago – and don’t feel they have to beg for outside help. Yukos boss Khodorkovsky retorted that Russian companies were investing outside PSA; why couldn’t others do so?

Analyst Stephen O’Sullivan of United Financial Group in Moscow said: “The message that came over loud and clear in Houston was that America wants to buy Russian oil. The new-found friendship between the two sides was much trumpeted, and it’s clear that the US companies now see Russia as very much ‘on their side’ – but the American companies remain cautious about investing in Russia without PSA legislation.

The Russians, however, are no longer beholden to the west for investment, and can negotiate from a position of relative commercial strength that was unimaginable only a few years ago. Russia has come of age.”

Just how much so we may well discover in the carve-up of the world’s largest oil reserves in a post-Saddam Iraq.

What’s at stake: Russian oil interests in Iraq

Lukoil, Russia’s largest oil company — Holds 68% of the $20 billion+ Western Qurna project, entitling it to extract 667 million tonnes of oil over 23 years. Lukoil hopes to start by installing equipment to produce 100,000 barrels per day (bpd) from the Mishrif formation

Zarubezhneft, a state-controlled company specialising in overseas projects — Is negotiating for rights to the 3.3 billion barrel Bin Umar oil field, which were withdrawn from TotalFinaElf. Also has a 15% interest in the Western Qurna project (see Lukoil, above) — Together with Tatneft, has won UN-approved upstream contracts at the Bai Hassan, Saddam and Kirkuk fields, and has started drilling 45 wells at the latter. — Has a contract to drill about 100 wells in the North Rumaila field Slavneft, a joint Russo-Byelarussian state-controlled company — In October last year signed a contract to develop the 490 million barrel Luhais field in southern Iraq. Work will begin with the drilling of 25 wells in the Nakh Umr and Zubeir deposits

Tatneft, a company based in Tatarstan with private and Tatarstan government ownership — Together with Zarubezhneft, has won UN-approved upstream contracts at the Bai Hassan, Saddam and Kirkuk fields. — Has an agreement, jointly with Zarubezhneft and Rosneft, to develop another field at West Qurna after sanctions are lifted

Rosneft, the largest state-owned oil company — Has an agreement, jointly with Zarubezhneft and Tatneft, to develop another field at West Qurna after sanctions are lifted

Traders — Under the oil-for-food scheme, most Iraqi oil is sold initially to Russian firms including Emerkom, Kalymneftegaz, Machinoimport, Rosnefteimpex, Sidanco, Slavneft, Soyuzneftegaz, Tatneft and Zarabuzhneft. In the six months to May, Russia purchased 90 million barrels of oil out of 226 million sold by Iraq. There is currently a heated international dispute in progress about the way in which prices of these exports are determined

Source: companies, EIA, Washington Post


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