Moscow Times "the peace is very much about oil"

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LUKoil and Iraq

By Stephen O'Sullivan To Our Readers

With the war on Iraq seemingly over, attention is turning to post-Hussein Iraq. Russian interests in the country include past and future trade, debt and oil. LUKoil is the major Russian company involved and the one most at risk of any backlash against non-U.S. companies benefiting from the rehabilitation of Iraq. The concern is real and the risks are genuine, but we believe that LUKoil will retain its place in Iraq's oil sector, although the impact on the company itself will as always take some time to become evident.

Now that the fighting in Iraq is winding down, the belief that if the war itself was not about oil, then the peace is very much about oil, means that one needs to assess Russia's role in a post-Hussein Iraq. For Russia read LUKoil, since the rest of the Russian oil and gas industry has but a small part to play in the early postwar world of the Iraqi oil industry. Those companies that went to Baghdad in the closing days of Hussein's administration will likely be viewed as carpetbaggers, seeking only to establish a position from which to trade out of when a new government takes over.

LUKoil is the longest-serving Russian company in Iraq, having signed its original contract to develop the West Qurna field in 1997. The field contains 7.8 billion barrels of recoverable reserves, making it one of the largest in Iraq. LUKoil and its partners Zarubezhneft and Mashinoimport have held the licence since the 1997 signing but have not carried out any development because to have done so would have breached the UN sanctions imposed on the country.

LUKoil's refusal to breach sanctions had been a perpetual irritant to the Iraqis but the necessity to maintain good relations with Russia meant that they never pressed the point to its logical conclusion. However, when Russia voted with the other Security Council members to support the return of weapons inspectors, Baghdad lost patience and LUKoil lost its contract. The Iraqi position was that LUKoil had been negotiating with the U.S. authorities about the retention of its contract in a future Iraq. Whatever the true reason, LUKoil lost the contract, at least in Saddam Hussein's eyes.

Is there some agreement between Russia and the United States over the protection of Russia's interests in Iraq? Statements by LUKoil's Vagit Alekperov that he had assurances from President Vladimir Putin that its interests would be protected certainly suggest that there is. Whether an interim or final Iraqi administration subscribes to that agreement is another matter.

Under international law, however, the position appears clear. A change of government is not an acceptable reason to void a contract and the West Qurna contract should remain valid. Regimes may come and go but the sovereign state of Iraq remains in existence. The alternative view is that the original contracts were not signed in the interests of the Iraqi people because companies from countries unwilling to deal with Hussein's regime were excluded from the bidding, thereby depressing the price. They should be voided and reauctioned, say the supporters of radical reform.

LUKoil appears to share the view that its contracts are legally valid, appointing a firm of UK-based lawyers to protect its interests and warning other companies that it will take any necessary steps to safeguard those interests, including going to arbitration and delaying the field development for six to eight years. The company is clearly willing to play hardball where Iraq is concerned.

To the victors the spoils? Possibly, although realpolitik will almost certainly play a role. Putin did not actually threaten to veto a second UN resolution, leaving Foreign Minister Igor Ivanov to make the running in this direction.

Despite relatively light damage to infrastructure, oil exports from Iraq are suspended and look unlikely to resume until July because only the Security Council has the legal authority to authorize a resumption of oil-for-food or lift the sanctions (although the latter will expire eventually anyway). With Russia and France both veto powers in the Security Council, the opportunities for deal-making exist, although there are those who would balk at any suggestion of a deal to the detriment of the nations that had fought the war. "The Iraqi people" may own the oil, but someone else will doubtless be managing it for them.

LUKoil will probably keep its stake in West Qurna, although perhaps in a consortium of oil companies, including one or two from the United States and Britain in order to share the benefits of victory more widely. However, with a 7.8 billion barrel field to develop, this outcome may not be too different from what would have happened anyway. Few companies would want to take on the challenge -- and risk -- of developing such a large field on their own and a consortium of oil companies is probably the right way forward. LUKoil, too, would probably welcome the opportunity to work as an equal partner with Western companies on the project, noting the stature it would then have in the global oil industry.

The impact on LUKoil itself will not be significant. When it lost the contract late last year, when it looked as if it might regain it and when it lost it definitively, the share price was unmoved. Iraq has been still too distant a prospect for investors, despite them being accustomed to the company's "jam tomorrow" approach to shareholder value.

Nevertheless, with Iraq set to return to the fold of the global oil industry, the prospects for LUKoil's interests in Iraq actually look brighter than at any stage in the last six years. Notwithstanding the debate over who gets what, the eventual lifting of sanctions means that finally West Qurna is a project that has a realistic future.


Stephen O'Sullivan, co-head of research at United Financial Group, contributed this comment to The Moscow Times.

http://www.moscowtimes.ru/stories/2003/04/16/006.html
 
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