Publication: Eurasia Daily Monitor Volume: 4 Issue: 156

On August 8-9, Iraqi Oil Minister Hussain al-Shahristani encouraged the Russian government and companies to return to Iraq’s oil industry. He conferred with Lukoil president Vagit Alekperov, whose company hopes to return to the West Qurna-2 project in Iraq. Shahristani also held talks in Moscow with Energy and Industry Minister Viktor Khristenko, Finance Ministry officials, and leading Russian business organizations such as Russian Oil and Gas Producers’ Union, whose chairman, Yuri Shafranik, is also president of the Iraq-Russia business cooperation council.

Predicting rather confidently that Iraq would adopt its much-awaited oil law by September, Shahristani encouraged Russian companies to participate in tenders for oil-extraction projects in the country. As a new element in Iraq’s pitch to Russia, Shahristani asked Lukoil and other companies to consider building refineries in Iraq. He stated that the security situation in Iraq’s southern provinces has stabilized, making possible the return of Russian and international oil companies there.

Lukoil had signed a production-sharing agreement (PSA) with Saddam Hussein’s government in 1997 for the West Qurna-2 oilfield in southern Iraq. Valid until 2020, the PSA gave Lukoil a 68.5% stake and the operating rights; the Russian firms Zarubezhneft and Mashinoimport, 3.25% each; and an organization under Iraq’s Oil Ministry the remaining 25%. Investment costs were projected at $4 billion, of which Lukoil was to have invested $495 million in the first three years. West Qurna-2 was estimated to hold 6 billion barrels (some 850 million tons) in proven reserves and 4.8 billion barrels in recoverable reserves.

However, international sanctions against Saddam’s Iraq stopped this project, and Saddam himself canceled the PSA in late 2002, citing Lukoil’s failure to meet the investment and other terms. From that point on, Moscow has repeatedly sought U.S. consent to Lukoil’s return at West Qurna-2. To help elicit such consent, Alekperov stated publicly in March of this year that Lukoil would cede a 17.5% stake in Qurna to Conoco-Phillips. That U.S. company itself holds a 20% stake in Lukoil. Alekperov also announced in March that Lukoil was negotiating with the Iraqi provincial authorities about re-launching this project (see EDM, March 8; Interfax, August 9).

Shahristani implausibly claimed in Moscow that West Qurna-2 reserves have been recalculated to 24 billion barrels (four times the recoverable quantity assumed by the original PSA) and may even be larger: “The more we are drilling, the more reserves we are discovering there.” On the legal aspects of the issue, he claimed that the old PSA had only been suspended, not canceled. But at the same time, he insisted that any resumption of Lukoil’s project must proceed on a new basis, “from scratch.” These two propositions, while mutually inconsistent, seem designed, first, to give Lukoil a continuity-based claim of priority against possible competitors for Qurna; and, second, to enable Iraq to obtain better terms by renegotiating the original PSA as if from scratch.

According to Shahristani, Iraq’s new oil and gas law will place all reserves in national ownership. Contracts signed with foreign companies by the previous regime shall be reviewed and brought into line with the new law. All licenses to operational fields are to be held by Iraq’s National Oil Company, which will call tenders for foreign companies. Lukoil would compete on equal terms with other foreign companies in such tenders, but would enjoy a “competitive edge,” thanks to its past experience of operating in Iraq, Shahristani claimed.

According to Moscow media reports, Russian officials reacted to Shahristani’s proposals rather cautiously. They wanted to see, first, the adoption of Iraq’s oil law, inquired with some skepticism about security conditions, and defended what they deem to be Lukoil’s rights in the project against any substantial renegotiation. In any case, Shahristani did not seem to carry an authorization from the Iraqi government to discuss terms for relaunching the Qurna project.

Some of Shahristani’s semi-official interlocutors, however, felt free to unveil medium-term goals in terms of competing strategically against the United States in Iraq. Thus the Vice President of Russia’s Union of Industrialists and Entrepreneurs, Igor Yurgens, declared, “Americans want to squeeze us out and bring their own [companies]. But we will resist, we have our friends and allies there. I would insist on very strongly defending the interests of Russia in Iraq. Russia will start winning in Iraq if we build our foreign policy and foreign economic policy correctly” (Ekho Moskvy, August 9).

The Russian government seems to be dragging its feet on writing off Iraq’s $ 10 billion debts as pressure for reinstating Lukoil’s Qurna contract. Russia has agreed in principle to write-off 80% and to reschedule 20% of those debts, in the framework of a collective decision by the Paris Club of creditor governments. However, Moscow conditions its implementation on a decision by Iraq regarding Lukoil’s project. Minister Khristenko and Deputy Finance Minister Sergei Storchak had almost openly referred to such a linkage earlier this year, and Storchak did so obliquely during Shahristani’s visit. The final debt-write-off agreement can be signed by the end of this year if some technicalities are resolved, said Storchak. Shahristani, however, insisted on signing the agreement without conditions.

(Interfax, RIA-Novosti, August 8, 9)