Lukoil Is Out of W. Qurna Picture, Iraq Says

It's Final: Lukoil Is Out of W. Qurna Picture, Iraq Says

Monday, February 10, 2003, 19:25 GMT

BAGHDAD -- Russia's Lukoil has lost its battle with Baghdad to keep the West Qurna development contract, according to acting Iraqi Oil Minister Samir Abdul Aziz al-Najm. The deal was terminated last December after the government learned of the oil major's behind-the-scenes maneuvering to ensure it remained well-positioned to operate in Iraq -- even if Iraqi leader Saddam Hussein's regime were removed in the wake of a US-led military strike (EIB Dec.11).

"This issue is closed. Since the company did not fulfill its obligations, we consider this agreement terminated," al-Najm told reporters in Baghdad on Monday.

Al-Najm complained that Lukoil had failed to invest a single dollar in the project in the last three years. Under the terms of the 1997 production-sharing agreement (PSA), Lukoil was required to spend some $200 million over the period, but had not, he said. "This reason [alone] was enough to terminate the agreement -- of which Lukoil has failed to fulfill any single issue," al-Najm said. "There is no room for discussions."

Al-Najm, who was named last month to replace long-standing oil minister Amer Rashid, emphasized that Russian companies will be given special consideration in finding a replacement for Lukoil (EIB Jan.7). At the same time, he added, Iraq may cooperate with any country or company in the world.

Presumably, this includes France's Total Fina Elf. According to market rumors, Baghdad could offer West Qurna to Total as compensation for non-productive negotiations over the Nahr bin Umar oil field development project. Iraq and Russia's Zarubezhneft are now negotiating a contract to develop the Nahr bin Umar acreage, which has estimated production capacity of 440,000 barrels per day.

In addition, Syrian-registered firm Al-Bayan has indicated that it is ready to replace Lukoil and start work on West Qurna immediately.

The West Qurna acreage contains several billion barrels of recoverable reserves and could produce 800,000-1 million b/d, according to Iraq's state oil marketing arm Somo.

To further demonstrate that Russian companies had plenty to gain by courting Iraq, al-Najm listed the other oil fields that are to be developed by Russian energy companies (EIB Jan.21).These included not only the familiar Nahr bin Umar, Rafidain, and a few blocks in Iraq's West Desert, but also the Gharaf oil field in the south, which could produce 100,000 b/d.

Mashinoimport and Rosneftegasexport, constant lifters of the Iraqi crude under the United Nations oil-for-food program, are preparing the feasibility study for the Gharaf project, sources say.

The oil bonanza for Russian firms, however, depends on how their mother country votes on Iraq issues in the UN.

Saddam Hussein granted Russia priority status in a special resolution in 2001, when Russia -- one of five permanent members of the UN Security Council -- was actively resisting UN introduction of so-called 'smart sanctions' against Iraq that had been proposed by the US and UK. France, which supported the sanctions proposal, had its hands slapped when Iraq halted negotiations with Total over the Nahr bin Umar project, and immediately offered the acreage to Russia.

Russia and France, as well as the US, the UK, and China, have veto power at the Security Council. Russia remains Iraq's main trading partner, holding 15% -- which was worth more that $1 billion in 2002 -- of the country's trading turnover. France, with 7%, is in third place after Egypt, which has slightly more than 7%.

On Monday, Baghdad made clear what it expects from Moscow. "We hope that Russia will use its veto right to prevent military aggression. Russians are our friends, and we know they always take correct position to avoid military operation against Iraq," al-Najm said.

Contradicting statements made by Iraqi officials one day earlier, Al-Najm also declared that Iraq would not stop producing or exporting oil -- even if war begins. On Sunday, however, Iraqi Trade Minister Muhammed Mahdi Saleh told reporters that Iraq will stop its oil exports if aggression against the country begins.

Since the first oil began flowing under the UN oil-for-food program in December 1996, Iraq has officially exported some 3.3 billion bbl valued at $62 billion. Since the start of phase 13 of the program on Dec. 5, Iraq has exported just over 1.6 million b/d under UN control. Through smuggling, however, Iraq has exported another 320,000 b/d or so, of which 200,000 b/d go to Syria and 120,000 b/d to Jordan. Insignificant amounts reportedly make their way through the Mideast Gulf and over the Iranian border in the south.

Under the oil-for-food program, which allows Iraq to sell its oil for money to pay for humanitarian supplies for the Iraqi people, Russian companies have lifted a total 1.2 billion bbl of Iraqi crude and signed contracts worth $7.73 billion.

The UN has approved $42 billion worth of contracts for food, medicine, and goods, including contracts for $3.7 billion worth of oil industry parts and equipment. Only $26 billion worth has been delivered, $1.6 billion of that for spare parts.

By Nelli Sharushkina in Baghdad

This story is part of Energy Intelligence Group's special Eye on Iraq series, providing intensified coverage in Energy Intelligence Briefing and our other publications of the rising tensions in the Middle East and Iraq and their implications for the global petroleum business. For more about Eye on Iraq, visit our web site at www.energyintel.com.