It seems that after the Iraq war is finished and a new resolution for the rebuilding of the destroyed country is in place, the fight for its 112 billion barrels of proven oil reserves, the largest in the world after Saudi Arabia's, hast just began.
Philip Carroll, the former head of Royal Dutch/Shell, who now chairs a commission, advising Iraqi?s oil industry stated that he considers the contracts signed by the old Iraqi leadership with Russian, French and Chinese companies potentially void. The Russian Foreign Minister, Igor Ivanov, on the other side mentioned that all contracts with Russian companies were completed on a perfectly legal basis and are therefore to be fulfilled.
The US appointed de facto Iraqi oil minister, Thamir Ghadhban, increased the stakes of the whole issue by canceling three oil contracts with Russian and Chinese companies. He announced that pre-war contracts would be re-evaluated and new deals could be announced soon. The biggest contract at stake is the agreement, Saddam Hussein signed with the Russian oil mayor Lukoil.
The reactions of Russian companies were different.
The head of Zarubezhneft, Nikolai Tokarev, concluded that he does not believe to be able to win new contracts in Iraq, as the Americans will not share with anybody. He estimated the loss for his company to mount to $150 to $180 million, due to cancelled agreements.
Lukoil took a more active stance in threatening that it would sue any rival, developing the 8 billion barrel West Qurna field, for at least $20 billion. In 1997 Lukoil signed a contract with the Iraqi government for a 23-year development of the field. The project could produce 600?000 barrels of oil per day. Lukoil is dedicated to appeal in the Geneva arbitration court if it is to lose the project. The court will be likely to arrest the field and any production will be blocked for the next 8-10 years. Furthermore, Iraqi oil tankers could be halted to compensate Lukoil for its $3.7 billion which it has already invested. The companies legal position is however slightly complicated as its contract was cancelled last December by the regime in Baghdad. Lukoil was accused of not meeting its investment obligations. But it is assumed that Hussein just wanted to pressure Moscow to show stronger opposition against the upcoming war.
Another potential victim of the new political order is the French oil giant TotalFinaElf. The company has been interested in the Majnoon and Bin Umar field and has also carried out quite some work in the country. However, as Total has never signed any contract or agreement it can not pursue any legal action. Therefore it insists on a transparent open bidding process for the new contracts.
It is recognized that the treatment of the contracts, oil mayors signed with Saddam Hussein, could have fare reaching implications for the oil and gas industry as a whole. How can the US request the sanctity of contracts in Russia for US investors if it is not willing to uphold sanctity for Russian investors in Iraq? Assuming the Lukoil contract is legal, it has to outlive Hussein as it was an agreement between a recognized government and a private company. If this arrangement is not valid, what happens to other long term contracts in countries whit political instability where they normally stay in place when the government changes.
However, industry experts point out that this struggle is premature. At the moments, there is need of companies which are able to repair and upgrade existing pipelines and facilities. Iraq has a potential to produce 5 million barrels per day within 5 years. At some point, it could even overtake the world biggest producer, Saudi Arabia. But the infrastructure is in such a bad state, that there will be no oil bonanza in the near future.
Author: Andreas Wild
