Lukoil loses Iraq toehold

As was expected (and as I wrote about in August), the Iraqi government has voided Lukoil’s contract to develop the vast West Qurna oil field. The contract had been canceled by the Saddam government itself before the US-led invasion, so this final decision was relatively expected. However, the New York Times article makes an emphasis on the role of US advisers in the final decision:

Early in the American occupation, the question arose whether the Hussein government’s decision [to cancel the previously-awarded contract to Lukoil] was valid, said Michael Stinson, the former chief adviser to the Iraqi Oil Ministry. The answer was supplied by the principal American legal adviser to the ministry at the time, Robert Maguire, who Mr. Stinson said was then working for the Defense Department. Mr. Maguire drew on pre-Hussein-era law to justify the cancellation, Mr. Stinson said.

The article doesn’t mention US oil firm Conoco-Phillip’s 20% stake in Lukoil, which was thought to be a possible aid in bargaining to keep the Russian company’s hold on the oil field. Nor does it say that Lukoil may receive some form of preferential treatment in the field’s new tender given the firm’s pre-production work and experience in the area.

The article also ties in the Russian threat of reneging on Paris Club debt forgiveness to Iraq as a result of this move, but Russian officials had already made it clear that the two issues will not be directly linked. There may yet arise another issue surrounding the Iraq’s debt, but it is worth waiting until after the new tender and contracts for West Qurna are drawn up to make too many conclusions. Iraq seems to be attempting to reassert its own national oil company into future major projects.

While oil has been expected to be a major contributor to Iraq’s budget and economic recovery, the Times’ Sunday magazine has a lengthy article on the “Perils of Petrocracy” by Tina Rosenberg, which — covering Chavez’s “gospel greased by oil,” Terry Lynn Karl’s “paradox of plenty” — is a cautionary tale on too much state involvement within the oil sector.

In the future, though, state-run oil companies will be a driving force in the global energy market — a working rubric for their management will be essential for both the benefit of consumers as well as the producing countries themselves.

Note: My friend Sam raised a good point, that Iraq has a long path before entering the same level of “petrocracy” Chavez has created in Venezuela.  I just wanted to stress the importance of finding the best way to balance state oversight and private management in the current and future global oil market.  Iraq, given it’s relatively clean slate following the devastation and disruption caused by the US-led invasion, will be an interesting study as it further develops.

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Russia and the future of Iraq’s oil

Iraq’s oil minister, Hussain al-Shahristani, visited with Russian oil figures in Moscow on Thursday, discussing the role Russia might play in the development of Iraq’s vast oil reserves.

Al-Shahristani predicted that the Iraqi parliament will pass a long-awaited oil revenue law by September and stressed that Iraq’s national oil company (INOC) will take the lead on all major oil projects.

“As for the oil fields that are allocated to the Iraqi national oil company — and this includes West Qurna — it is up to the Iraqi national oil company to decide how best to develop that field,” he said. “They will decide what kind of contracts will provide the highest return for Iraq. That’s the criteria that has to be met by the law.”

(This policy sounds rather similar to the Kremlin’s own recent reassertion of primacy for national firms.) Lukoil had signed a PSA with Iraq in 1997 covering the development of the large West Qurna-2 field, but al-Shahristani made clear that Saddam-era agreements will not be carried over into this next round of development.

The oil minister did meet with Lukoil CEO Vagit Alekperov to discuss the potential role of the Russian oil company in pending developments. While not explicitly promising future cooperation, he did note that “Lukoil enjoys some advantages in winning tenders” due to its past involvement in Iraq. Some observers have also suggested that the Russian firm could benefit from its cooperation with the US-based Conoco-Phillips, which owns a 20% stake in Lukoil.

While it had been predicted that the issue of debt forgiveness could be leveraged to secure Russian involvement in Iraq’s oil industry — particularly with regards to Lukoil and Qurna-2 — it appears that Russia was unwilling to expressly cement the two issues together. Instead, the Kremlin has agreed to write off $8 billion of past loans to Iraq, in accordance to the 80% / %20 of framework developed by the Paris Club of lending nations, despite not receiving assurances of future Russian involvement.

Russia was a beneficiary of the UN’s corrupt “oil-for-food” program with Iraq, and it will be interesting to see if those past ties will re-assert themselves with the re-opening of Iraq’s oil industry. Yuri Shafaranik, now head of Russia’s Oil and Gas Worker’s Union, met with al-Shahristani as well on Thursday. Shafarnik is one of the Russian officials accused by the CIA of colluding on the plan that funneled $11 billion into Saddam’s government from 1997 to 2003, while amassing around $130 million for those Russian officials involved. Russian oil companies allegedly benefited through vouchers for cheap Iraqi oil, which was then sold at market prices, with a portion of the proceeds returned to the Iraqi government as a kickback. According to a listing in the “al Mada” paper, both Gazprom and Rosneft, among others, took part in this scheme (see Keith Smith’s “Russian Energy POlitics in the Baltics, Poland, and Ukraine” for more info).

Not to be outdone, Ukraine is also currently working on its own plans to utilize the renewed oil output from Iraq. Ukrainian PM Viktor Yanukovich has called for negotiations between Ukraine, Turkey and Iraq in order to develop a plan to send Iraqi oil up to the Black Sea and on up the Odessa-Brody pipeline. This would certainly add geopolitical significance to the long-debated pipeline, especially since it would represent a significant project that would not rely on Russian involvement — a key for a Ukraine that currently depends heavily on Russia for nearly all energy issues. Interest from the other two parties, however, is a bit tough to gage. We’ll see how things turn out.