By Simon Watkins – Nov 12, 2020, 6:00 PM CST
With the announcement last week that the president of Russian state oil proxy Lukoil, Vagit Alekperov, met one-to-one with Iraq’s Prime Minister, Mustafa al-Kadhimi, and its Oil Minister, Ihsan Abdul Jabbar Ismail, to discuss further co-operation, it appears that Iraq’s long-standing game of playing the U.S. and Russia off against each other in return for economy-sustaining financing may finally be drawing to a close. “Russia wants a firm commitment and it’s tired of waiting,” a senior oil and gas industry source who works closely with Iraq’s Oil Ministry told OilPrice.com last week. Iraq’s game with the U.S. ever since the superpower toppled Saddam Hussein in 2003 has been to pretend that it would co-operate fully with the Washington’s plan to use Iraq not just for oil supplies but also as a base from which to further consolidate its power in the Middle East, as it was back then. Iraq, with a very conservatively-estimated 144 billion barrels of proved crude oil reserves (nearly 18 per cent of the Middle East’s total, and around 9 per cent of the world’s) would provide oil for decades for the U.S., and was intended to dovetail into the oil relationship that the U.S. has maintained since 1945 with Saudi Arabia (even allowing the U.S. to reduce its dependence on this Saudi relationship over time), and would act as a huge geopolitical check against Iraq’s neighbour, Iran. Further buoyed by Iraq’s promises of lucrative oil and gas projects for U.S. companies – and the perennially on/off involvement of U.S. corporate heavyweight ExxonMobil in the flagship ‘Common Seawater Supply Project’ (CSSP) – Washington poured in hundreds of billions of dollars of aid and investment into Iraq since 2003, with little or no accountability for Baghdad.
In recent months, though, the patience of the U.S. has worn wafer thin. In April, it was announced that the U.S. had granted the shortest-ever waiver for Iraq to continue to import gas and electricity from Iran, with which Iraq has continued to enjoy an extremely close relationship, financially, politically, and militarily. At the same press conference that Morgan Ortagus, a U.S. State Department spokeswoman, announced the new short waiver, she also pointedly announced new sanctions against 20 Iran- and Iraq-based entities that were cited as funnelling money to Iran’s Islamic Revolutionary Guards Corps’ (IRGC) elite Quds Force and smuggling Iranian petroleum through Iraqi ports.
All of this was going on at the same time as Iraq was doing little to prevent an increase in attacks against U.S. assets across the country that began in January when Iranian surface-to-surface missiles hit two Iraqi military bases housing U.S. troops. At that point, U.S. President Donald Trump said that he would impose sanctions directly on Iraq if the U.S. military was forced out of the country by further such incidents but, on March 30, 107-mm Russian-made Katyusha rockets were fired at the U.S. allied Camp Taji military base north of Baghdad, killing three service members. So far this year, there have in fact been at least 15 further significant attacks on U.S. military and neo-military personnel (and those of its allies) in Iraq by Iran proxies, according to U.S. military sources. Having seen both an extension followed by another reduction in the lengths of waivers granted for Iranian imports of gas and electricity since then, Iraq just last week announced another initiative designed to placate the U.S. in the shape of a preliminary agreement with Egypt to establish an oil-for-reconstruction mechanism. This agreement comprises 15 separate memoranda of understanding covering transport, water resources, health, the environment, justice, investment, housing, construction, industry, trade, finance, oil and gas, chemicals, and minerals that Egypt would back in return for oil supplies from Iraq. In broader terms, it can be seen as tying into the wider rapprochement that the U.S. has been seeking to build across the central Middle East, beginning with the U.S.-brokered Israel-UAE (and then Israel-Bahrain) normalisation of relations. After the conclusion of these deals, the U.S. had considerable room for optimism that further such deals could be made with the other GCC states, comprising Kuwait (already firmly in the U.S. sphere of influence), Saudi Arabia (Crown Prince Mohammed bin Salman is believed to have been in favour of the UAE-Israel accord), Oman (toying with moving into the China fold), and Qatar (quietly co-operating with Iran over the South Pars/North Dome gas field). The remaining GCC states – Jordan and Egypt itself – already have similar pacts with Israel.
At the same time as all of this was going on, though, Russia was pressing Iraq for definitive progress on the series of deals that had been agreed between the two countries in 2017. Just prior to this year’s spate of attacks against U.S. military sites in southern Iraq, Russia had made it clear to Iraq (and before that to Iran) that a number of its companies were ready to move on at least US$20 billion of oil and gas projects in Iraq in the near term, including Zarubezhneft, Tatneft, and Rosneft-related oil and gas entities. These companies and others had seen their already-agreed projects stalled by the effective seizure of power by the now de facto leader of Iraq, radical cleric, Moqtada al-Sadr, and his ultra-nationalist ‘Sairoon’ power bloc in the May 2018 Iraq elections and they remained slow-tracked as anti-American feeling in southern Iraq gathered momentum thereafter, particularly in the aftermath of the 2019 assassination by the U.S. of Iranian Major General Qasem Soleimani.
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Nonetheless, March 2018 had seen Russian state-owned energy firm Zarubezhneft (and private Iranian company, Dana Energy) sign a US$742 million deal to boost production at the Aban and Paydar oil fields in Iraq’s Ilam province near the border with Iran. At around the same time, preliminary deals had been agreed in Iran for Tatneft to develop Dehloran, for Lukoil to expand its oil operations into Ab Teymour and Mansouri, and for GazpromNeft to do the same in Changouleh and Cheshmeh-Khosh. In the latter two cases, both companies already had functioning operations in southern Iraq, with Lukoil active in the 14 billion barrel West Qurna 2 oil field, and Gazprom subsidiary GazpromNeft active in the 3 billion barrel Badra oil field (the Iran side of the shared field is Changouleh). Rosneft subsidiary Bashneft is also operational in southern Iraq’s Block 12.
In addition, Russia has again made it clear that it is extremely interested in taking over the development contract of Iraq’s Mansuriya gas field following the recent termination of the contract with a consortium led by Turkey’s state-owned TPAO. This will form one part of a skewed triangle of fields across southern Iraq, stretching from Mansuriya near the eastern border with Iran, down to Siba in the south (extremely close to the key Iraqi Basra export hub), and then all the way west across to Akkas (extremely close to the border with Syria). The 2019 contract between Russia’s Stroytransgaz and Iraq’s Oil Ministry to develop the hitherto virtually unknown Block 17 in Iraq’s lawless wasteland of Anbar province is a key part of this infrastructure plan.
Right now, then, Russia is pushing Iraq on allowing it to get on with what was agreed in 2017, with the focus being initially on upping Lukoil’s crude oil production from the supergiant West Qurna 2 oil field. For Russia, this would be taken as a reasonable sign of commitment from Iraq that its broader plan to take control of the south of the country – just as it effectively has the Kurdistan region in the north – can proceed, provided that Moscow makes short-term money available to Baghdad. This will not be a problem for Russia – or Lukoil – as back in November 2017 Iraq’s Oil Ministry agreed to extend the timeframe of the West Qurna 2 contract to 25-30 years (effectively reducing the daily cost of capital per barrel of oil recovered) and allowed Lukoil the option of increasing its stake from the present 75 per cent to 80 per cent, according to the Iraq source. “In return, Lukoil agreed to invest an extra US$1.4 billion in the short-term and a further US$3.6 billion down the line, depending on variables including OPEC quotas, Iran export levels, and the continued development of export capacity in the south,” he said.
In reality, then, the plan is for Lukoil not just to achieve the second phase production target of 480,000 bpd by 2020 – as was reiterated last week – but to outstrip it quickly, the Iraq source underlined. This, however, would also not be a problem for Lukoil as back in 2018 Iraq’s Oil Ministry found out that not only had the Russians hit 650,000 bpd production over various extended periods in the prior two months but also that it could sustain production of at least 635,000 bpd – it was just choosing not to do so because of the low per barrel remuneration rate at that time.
By Simon Watkins for Oilprice.com