LUKoil Snaps Up Coveted Iraqi Field

A consortium led by LUKoil won a tender to develop the supergiant West Qurna-2 oil field in Iraq on Saturday, in a strategic victory for the firm that has been over a decade in the making.

“Today we scored a deserved victory, and along with our Norwegian partners we intend to comply with all the obligations we took on to develop West Qurna-2 oil field in the interests of the Iraqi people and our shareholders,” LUKoil president Vagit Alekperov said in a statement Saturday. “This project is strategically important to our company.”

LUKoil will develop the field, which has an estimated 12.9 billion barrels of recoverable reserves, along with Norway’s Statoil.

The consortium won the tender with a bid to produce 1.8 million barrels a day for a modest fee of $1.15 per barrel. LUKoil’s share in the project will be 63.75 percent, while Statoil will get 11.25 percent, with the remaining 25 percent going to the Iraqi government.

Developing West Qurna-2, located 65 kilometers northwest of Basra, will require $4 billion to $5 billion in investment, and the company will break even once it starts pumping 300,000 to 400,000 barrels per day, a source close to LUKoil told the Oil Information Agency.

“After reaching this level, the project will break even,” the source said, adding that it will take the company between four and six years to reach this level of production. “Depending on the stages in which the project will be fulfilled, the volume of oil we will receive is likely to reach 10 million to 15 million metric tons a year in the next seven to eight years.”

LUKoil has long been desirous of the West Qurna field. The country’s second-largest oil firm signed a $4 billion contract to develop the West Qurna deposit with former Iraqi dictator Saddam Hussein back in 1997, but the Iraqi government scrapped the deal in 2002. The annulment was largely viewed as payback for LUKoil seeking guarantees from the U.S. government to retain the rights to the field once it became clear that a U.S. invasion was imminent.

At the time, Baghdad said it canceled LUKoil’s contract because the oil major had failed to develop the field during the five years that it had the rights to it. LUKoil said the going was so slow because it was unable to operate freely in the country because of UN sanctions.

On Thursday, John Sawers, former head of British intelligence service MI-6, said Russia had prevented a nonviolent resolution of the Iraq conflict because it opposed so-called “smart sanctions.” He said certain Russian officials opposed the sanctions because they affected their “commercial interests,” BBC Russian service reported.

After the U.S.-led coalition invaded Iraq in March 2003, LUKoil demanded that it keep its leading role in the West Qurna project and threatened to file a lawsuit in a Genevan arbitration court if that demand was not met.

“Nobody can develop this field without us over the next eight years. If somebody decides to squeeze LUKoil out, we are going to appeal in the Geneva arbitration court, which will immediately freeze the field,” LUKoil vice president Leonid Fedun told Kommersant in 2003.

LUKoil’s role in developing the field became unclear over the next few years.

In February, Finance Minister Alexei Kudrin agreed to write off Iraq’s $12 billion debt and restructure another $900 million, in what many viewed as a quid pro quo to revive the buried contract.

Senator Mikhail Margelov, head of the Federation Council’s Foreign Affairs Committee, praised the results of the tender on Saturday, saying they dispelled concerns that the United States would prevent other countries from working on Iraqi oil fields.

“At any rate, the current [U.S.] administration is beyond reproach in this respect,” he told Interfax.

In a separate tender, Gazprom Neft won a contract to develop Iraq’s Badra oil field, with estimated reserves of 2 billion barrels. The group pledged to raise production to 170,000 barrels a day for a fee of $5.50 per barrel, Oil Minister Hussain al-Shahristani said Saturday in Baghdad.

Earlier this year, LUKoil and Gazprom joined the list of 35 foreign companies that were granted the right to bid for the Iraqi oil depots in the first round of tenders in June. LUKoil and ConocoPhillips bid for West Qurna 1, while Gazprom, India’s ONGC and Turkish Petroleum sought a contract to develop the Zubeir oil field.

LUKoil and ConocoPhillips made a bid of $6.49 per barrel for the West Qurna-1 field, but the Iraqi government demanded a fee no higher than $1.90.

The only deal signed during the first round of bidding was a contract with BP and China’s CNPC to develop the Rumeila oil field, while the West Qurna-1 tender was left open.

LUKoil and ExxonMobil, unsatisfied with the low fee of $1.90 proposed by the Iraqi government, nevertheless agreed to lower their bid and prepared for the second round of tenders.

In November, however, LUKoil lost out to ExxonMobil and Royal Dutch Shell in their bid to develop the West Qurna-1 field. The Iraqi government quickly sweetened the pill by promising to help LUKoil in the tender for West Qurna-2.

“We would like LUKoil to take part in Iraq,” Ali al-Dabbagh, a spokesman for the Iraqi government, said last week, Bloomberg reported. He added that the Iraqi government would “rethink” the role that LUKoil could play in helping to develop its oil industry. “We welcome Russian companies.”

LUKoil’s winning bid of $1.15 per barrel, far below the $1.90 LUKoil bid for West Qurna-1, is a relatively small figure, but it may bring the company some strategic benefits in the future, said Dmitry Dzyuba, an oil analyst with Metropol.

“If LUKoil agreed to that figure, then it means that the company sees this project as economically justified,” he said. “For most companies, winning these tenders in Iraq is a question of staking a claim to gain share on the market and compete for benefits yet to come.”

Besides, if LUKoil wants to increase its oil extraction, it has few options but to increase its drilling abroad, he said.

“In western Siberia, LUKoil’s extraction has been declining 6 percent annually, while this region makes up for half of its domestic oil output,” he said. “Given the current tax environment in Russia and competition from state-controlled companies, LUKoil has very limited opportunities for new acquisitions inside Russia that would compensate for its decline in production.”

Oil fields in western Siberia are exhausted, and their development requires significant investment — as much as $100 per barrel in some of the worst cases, Fedun said earlier this month, adding that the company was cutting investment by 30 percent in its “traditional regions” of domestic operation.