Global Policy Forum

Iraq, With US Support, Voids a Russian Oil Contract


By Andrew E Kramer

New York Times
November 4, 2007

Guided by American legal advisers, the Iraqi government has canceled a controversial development contract with the Russian company Lukoil for a vast oil field in Iraq's southern desert, freeing it up for potential international investment in the future. In response, Russian authorities have threatened to revoke a 2004 deal under the Paris Club of creditor nations to forgive $13 billion in Iraqi debt, a senior Iraqi official said. The field, West Qurna, has estimated reserves of 11 billion barrels, the equivalent of the worldwide proven oil reserves of Exxon Mobil, America's largest oil company. Hussain al-Shahristani, the Iraqi oil minister, said in an interview that the field would be opened to new bidders, perhaps as early as next year.

The contract, which had been signed and later canceled by the Saddam Hussein government, had been in legal limbo since the American invasion. But the Kremlin remained hopeful it could be salvaged until this September, when Mr. Shahristani traveled to Moscow to inform officials there that the decision to cancel it was final, he said. The Russian government, newly emboldened in international affairs by its expanding oil wealth, is still backing Lukoil's claim and protesting what it considers selective enforcement of contracts in Iraq. "We will defend our interests," Dmitri S. Peskov, the Kremlin spokesman, said in a telephone interview. "It is the government's obligation to defend the interests of our companies in foreign countries."

One Iraqi official, speaking on condition of anonymity because he was discussing a confidential diplomatic exchange, described Russia's response as, "If you do the deal, we can muster the political muscle to forgive the debt." West Qurna, mapped by Soviet geologists in the 1980s but mostly untapped, is one of a dozen or so supergiant oil fields in the world. They are known in the industry as "elephants," fields so large they can tip the fortunes of companies or countries. The field will produce one million barrels of oil a day after four to five years of development, according to both Iraqi oil officials and Lukoil; that is the approximate equivalent of the current output of the North Slope in Alaska.

In Lukoil's 1997 production-sharing agreement, Saddam Hussein's government awarded the company development rights to the 11 billion barrels of oil for a paltry signing bonus of $10 million. The deal, concluded when Iraq was seeking Russian support in a failed effort to lift United Nations sanctions, allotted 9.6 percent of the output to Lukoil. The contract presented a quandary for the United States, which has been accused by some critics of invading Iraq for its oil. There is little evidence to date that the war effort has given American oil companies an inside track to Iraq's reserves, and the Lukoil deal is the only one involving a major oil company to be reversed since the start of the war. But as a cornerstone of its foreign policy, the United States has argued vigorously for countries to honor petroleum contracts. In that light, condoning the cancellation of the Lukoil contract could be seen in some quarters as evidence of a double standard. "From the Russian government perspective, Iraq is seen as occupied and its administration directed by Washington, particularly when it comes to oil," Vladimir I. Tikhomirov, chief economist at the Russian bank UralSib, said in a telephone interview. "The Russians see the cancellation of their contract in Iraq as part of the U.S. drive to keep control over the major oil fields there," he said. The Russian president, Vladimir V. Putin, has raised the issue with President Bush several times since the 2003 invasion. In an interview with the BBC in June 2003, Mr. Putin said Mr. Bush had gone as far as offering assurances. "At our last meeting," Mr. Putin said, "Bush directly and clearly said, ‘We do not have any goals of pressuring Russian companies out of Iraq and we are ready to create the conditions for working together there.' I have no reason not to believe him."

The legality of the Lukoil contract remains murky. It is Iraq's stated policy, as laid out in a draft oil law now before Parliament, to honor contracts signed by the Saddam Hussein government. It is doing just that with contracts with Chinese, Vietnamese, Indonesian and Indian oil companies. But the Iraqis note that it was the Saddam Hussein government that canceled the Lukoil contract. The government's spokesman, Tariq Aziz, said at the time that the government believed the Russians were negotiating with the Americans to secure the contract in event of an invasion.

Early in the American occupation, the question arose whether the Hussein government's decision 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.

James Glanz contributed reporting.

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