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2016.10.006. E. KASAEV. OIL PROJECTS OF RUSSIA IN IRAQ // "Vestnik Analitiki", Moscow, 2016. P. 66-72.
Keywords: Iraq, oil projects, investments, oil and gas fields.
E. Kasaev,
Ph. D. (Economics)
E. Kasaev notes that despite the seizure of the Northern and Western territories of Iraq by militants, Russian oil companies increasingly assert themselves in the South of the country, implementing a number of major projects.
In 2012-2013 Moscow the Prime Minister of Iraq Nouri al-Maliki visited Moscow. After talks with Russian political leaders and representatives of big business, he noted significant progress in the oil and gas partnership. The Iraqi Minister of Oil Abdul Karim Luaibi stated that recently 10 new oil fields have been discovered in Iraq, and the development of these fields requires substantial foreign investment, including from Russia.
Last year Kurdish delegation headed by the President of Iraqi Kurdistan Massoud Barzani paid an official visit to Russia. The delegation made an attempt to shift Russian foreign policy towards Erbil (the capital of Iraqi Kurdistan), urging Moscow not to concentrate exclusively on the on the deals with Baghdad. Last winter the Minister of Foreign Affairs of Russia Sergey Lavrov visited Baghdad. In the course of talks with Nuri al-Maliki and the Minister of Foreign Affairs of Iraq Hoshyar Zebari it was pointed out that in recent times Russian players stepped up its activities on the oil filed of Iraq. In the spring of 2014 the President of "LUKOIL" Vagit Alekperov had a meeting in Baghdad with Iraq Deputy Prime Minister for Energy Hussein Shahristani. The parties discussed the progress of implementation of the projects of development of West Qurna-2 Deposit and exploration of Block-10 as well as other prospective projects in Iraq, where the Russian company could participate.
One of the most promising projects is the creation of a joint company with the Iraqi Ministry of Oil, which is going to undertake oil and gas fields exploration. The parties discussed the investment project of the Russian company in the field of petroleum chemistry in the province of Basra and the construction of a refinery in An Nasiriyah. The plans of LUKOIL to organize production of associated gas at the West Qurna-2 field were also approved by the Iraq party. Oil production in the field started in March of the current year. According to the assessments given by the company, the investment in West Qurna-2 up to 2014 inclusive amounted to about $ 4 billion. LUKOIL is now discussing the possibility of oil deliveries from West Qurna-2 with the Chinese companies Sinopec and CNPC. The contract for such deliveries may be concluded for a period of one year with subsequent prolongation.
The West Qurna-2 field, located 65 km north-west of the major port city of Basra, is one of the largest undeveloped oil fields in the world, its recoverable reserves amount to about 14 billion barrels of oil. The additional agreement to the contract signed in 2013 defines the project target level of production of 1.2 million barrels of oil per day (expected in 2017) for 19.5 years and extending the overall life of the contract to 25 years. In June this year another additional agreement to the contract was signed. According to this agreement the list of works should also include the construction of Tuba-Fao pipeline, as well as changing the order of reimbursement of the project costs. The project "Tuba-Fao" involves the construction of two pipeline legs, with a length of up to 120 km each, from the existing Tuba tank farm to Fao tank farm, the main export hub in Iraq, at the Persian Gulf coast. The new pipeline, according to Alekperov, will permit the export of Iraqi oil in the amount of 3 million barrels per day (comparable to the total current production of Iraq. - E. K.).
As for compensation pattern, the Iraq party is to reimburse the contractor for the expenses incurred and the remuneration for the produced oil. Additional costs, not directly associated with oil
and gas operations, but which Iraq may ask the contractor to make (for example, mine clearance, pipeline construction, improvement of infrastructure) are reimbursable as well. Under the terms of the service contract all the crude oil produced belongs to the government of Iraq, which is to pay the Russian company a service award in the amount of $ 1.15 per barrel and reimburse the cost price of the produced oil ($3 per barrel). After the certain level of production is achieved, the contractor will receive a portion of oil produced as remuneration.
The Russian company has another project in Iraq. The contract for Block 10 located 120 km west of Basra, was signed in November 2012, the block is operated by a consortium of "LUKOIL overseas" (60%) and Japan's INPEX Corporation (40%). The contract territory of the block is being cleared of mines. Development of Block 10 is associated with very high risks. Due to withdrawal of the Norwegian company Statoil from West Qurna-2 project, the Russian player refused to find a partner before starting oil production at this field, is independently implementing the active phase of its development and, consequently, assumes all risks and capital costs. On the one hand, Block 10 is in the vicinity of West Qurna-2, which permits LUKOIL to hope for successful exploration. However, the new site has no proven deposits, and in accordance with the provisions of the service contract, even if the exploration has a positive result, Iraq has the right not to recognize the field as a commercial one if recoverable reserves of the site do not exceed 200 million barrels. In this case the contract shall be terminated upon expiry of the exploration period. Should this happen Iraq compensates the contractor for additional costs only, and exploration is not paid for separately. Even if Baghdad recognizes commercial strike of Block 10, the start of production may be postponed for 7 years, according to the law. If the contractor does not want to wait for resumption of the work, it may receive reimbursement of its expenses, without any additional payments, and withdraw from the project. In future this scenario may be applied to "LUKOIL Overseas", because Iraq may come up
with its obligations to OPEC and the lack of appropriate infrastructure within the country as the reasons to "freeze" the work on the project for several years. In this context the Russian company has no choice but to wait patiently and miss lost profits. If the group deems it necessary to leave the project, its place may be taken by a new contractor showing up when everything is already running fine.
E. Kasaev stresses that American and European heavyweights still remain in the shadow of the Russian and Asian companies actively operating in Iraq. It is anything but coincidence. The rapidly developing economies of Asia require ever-growing volumes of energy. And the Asians are willing to take risks in various energy fields to obtain it. The oil and gas business in the US, in its turn, as well as many other Western countries, efficiently distributes forces, and skillfully avoids acute angles; it does not get involved in Baghdad complex twists and turns, but cooperates effectively with the Kurds in the North, spending less effort and getting more dividends. However, it should not be assumed that now Western players are left out for several reasons. The West was actively involved in the current political dispensation in Iraq. American and European lawyers were advisors in the course of development of the tender legislation which primarily takes in consideration the interests of Iraq. Consequently, in future Baghdad is quite capable to start lobbying for access of Western corporations to the local market. To avoid such a negative prospect, Russian oil companies and political players have to continue strengthening close contacts with the Iraqi authorities as well as to discuss with Baghdad the exact terms of the agreement for Block 10. In addition, says E. Kasaev, it is advisable to minimize high legal risks caused by the lack of a framework hydrocarbon law, which has not still been accepted in Iraq since 2007
Besides "LUKOIL overseas" another Russian company "Gazprom Neft" is successfully working in Iraq. It began industrial production of "black gold" at the Badra field in May 2014, in the
territory of Vasit province in Eastern Iraq. According to preliminary estimates, geological reserves of the field amount to 3 billion barrels of oil. The contract with the government of Iraq was signed in 2010 according to the results of the tender held in December 2009. The tender was won by the consortium of "Gazprom Neft", Kogas (Korea), Petronas (Malaysia), TPAO (Turkey).The share of "Gazprom oil" in the project is 30%, Kogas -22,5%, Petronas - 15%, TPAO - 7,5%. The share of the Iraqi government, which is represented in the project by Oil Exploration Company, OEC, is 25%. "Gazprom Neft" is the project operator. The field development project is designed for 20 years with possible prolongation for 5 years. Production start is planned for the current year, and by 2017 the volume of production should reach 170 thousand barrels of oil per day (about 8,5 million tons per year) and remain at this level for 7 years. "Gazprom Neft" is also implementing three projects in the territory of Iraqi Kurdistan. However, according to the information provided by company, the work is still on the preparatory stage. According to the statement of General Director of "Gazprom oil" Alexander Djukov, in future the company plans to deliver the oil produced in Iraq to European and Asian markets.
In his speech at the Russian-Iraqi business forum in Moscow in June 2014, the President of the Federation of Chambers of Commerce of Iraq Jaafar al-Hamdani highlighted the contribution of Russian companies to increase of oil production in Iraq. This statement permits to count on favorable prospects not only for the mentioned players, but also for other Russian companies that already have projects in Iraq and can start work in the oil fields of the country in future.
"Bashneft" obtained the right to develop oil projects in Iraq too. This year it plans to begin exploration at Block 12. This was announced by Vice-President of "Bashneft" Michael Stawski in the autumn last year. The company is engaged in development of Block 12 in consortium with Premier Oil. Its share in the consortium is 70%. The consortium has already signed a contract
on exploration, development and production with the Iraqi party. Investments in the exploration program at Block 12 amount to $ 120 million. for the next 5 years. "Bashneft" has already granted to its subsidiary Bashneft International a loan of $ 110 million for exploration in Iraq. The block is located in the provinces of Najaf and Muthanna, and is a part of the Western desert - an unexplored region with the greatest oil potential in Iraq.
Apart from "LUKOIL Overseas" and "Gazprom Neft", "Rosneft" and "Zarubezhneft" consider the prospect of joining the Iraqi projects. It the beginning of this year, Vagit Alekperov confirmed that LUKOIL thinks it possible to join the "Nasiriyah" project, including through creation of a consortium with both Russian and international companies.
The results of new deals with Iraq (if any) will not be obtained soon as Arab officials and businessmen, as a rule, wary of foreign investors seeking to get profit in the shortest possible time. The Iraqis are more willing to cooperate with those who are focused on long-term projects, with attraction of modern technologies and a large number of jobs for the local population.
Despite the many economic and political risks, said E. Kasaev, the Russian players continue to earn credibility in the Iraqi market. However, the extremely unstable situation in the country is able to make serious adjustments to the plans of domestic companies. The South of the country with the impressive hydrocarbon reserve is still under Federal control, and it may get in the hands of the Islamists.
The author of the abstract - V. Schensnovich
