THE RUSSIAN "OIL LANDING FORCE" IS INCREASINGLY LANDING ON THE ENERGY FIELD OF THIS ARAB STATE

E. O. KASAEV

MGIMO (U) student of the Russian Foreign Ministry

Key words: Iraq, oil, Russian business, LUKOIL Overseas, Gazprom Neft, Bashneft, Rosneft

After the overthrow of the regime of Saddam Hussein, four rounds of bidding for the licensing of national mineral resources were held in Iraq. According to the results of past auctions, international companies have obtained the right to conduct service work in the development of commercially discovered and potential fields. The main players in this constellation of foreign concerns remain Asian and Western participants. Nevertheless, Russian companies managed to win back their place in the sun and get the opportunity to participate in major projects in Iraq. What have domestic oil companies achieved and what position do they intend to take in the Iraqi oil market in the future?

Speaking about the investments of Russian companies in the oil industry of Iraq, as well as the prospects for participation in various projects for the development of black gold deposits, it should be emphasized that an important achievement in the bilateral political and economic dialogue was the working visit of Iraqi Prime Minister N. al-Maliki to Moscow (October 2012).

Speaking with Russian leaders Vladimir Putin and Dmitry Medvedev, Maliki noted the significant progress that has been made in various areas of bilateral cooperation and, above all, in such key areas for both countries as oil, gas, and investment.¹

During his visit, the Iraqi Prime Minister also delivered a keynote address at the Russian Foreign Ministry's mansion and took part in the 5th session of the round table "Russia and Iraq: Strategic Cooperation in the 21st Century, a New Vector", held under the auspices of the Russian Foreign Ministry and with the participation of the Business Council for Cooperation with Iraq.

Representatives of the Iraqi delegation emphasized that 10 new deposits of "black gold" have been explored in the country recently, the development of which requires substantial foreign investment, including from Russia.

LUKOIL OVERSEAS

In 2009, LUKOIL Overseas (a subsidiary of LUKOIL), as part of a consortium project, obtained the right to develop the West Qurna-2 field with recoverable reserves of approximately $ 14 billion. bbl.² This is one of the largest undeveloped deposits in the world.

The field (discovered in 1973) is located in southern Iraq, 65 km northwest of the major port city of Basra. In the 1970s and 1980s, Soviet geological and service organizations explored it3.

In January 2010, the Iraqi Southern Oil Company (on behalf of the state) and a consortium of contractors consisting of LUKOIL Overseas (the project operator with a 56.25% stake), Statoil of Norway (18.75%) and Northern Oil Company of Iraq (25%), as project participants, signed an agreement contract for the provision of mining and development services at West Qurna - 2 ⁴.

In May 2012, due to high risks, Statoil decided to withdraw from the project, selling its stake in LUKOIL Overseas, which now stands at 75%. The contract is valid for 20 years and can be extended for 5 years.⁵ The treaty was ratified by the Iraqi Cabinet of Ministers.

The Russian company expects a stable income tax, project profitability and low operating costs during the production process. The work will be financed in proportion to the investors ' shares in the project. According to preliminary estimates, LUKOIL Overseas's investment in the West Qurna-2 project will amount to about $4.5 billion by 2015. Total investments may reach $30 billion, of which $20 billion. will be sent directly to production ⁶.

Given such a solid investment and the high degree of risk associated with operating in Iraq, LUKOIL

Overseas has been negotiating with several potential project participants for a long time, discussing the terms of joining the project with them.

It is possible that the Russian company will be able to reach an agreement with the China National Petroleum Corporation, since an agreement was signed between them to expand strategic cooperation, which includes production projects in Russia, China and third countries, and also involves a possible asset exchange.

In addition, LUKOIL Overseas prefers Asian investors who will be able to help enter the strategically important energy markets of Asia. In this regard, taking into account the planned volumes of black gold production at West Qurna-2 and, as the main direction, the Asian vector of oil exports from this field, it becomes obvious that Russian-Chinese cooperation can become mutually beneficial and effective.

According to LUKOIL Overseas experts, starting in 2017, with almost 400 wells in operation, the field can produce about 95 million tons of oil per year for ¹³ years7. In the spring of 2012, production drilling and construction of a key production facility - an oil treatment unit-began on the contract territory. Commercial production is scheduled to start ^{in 2014.8}

However, it should be noted that today Iraq is trying to negotiate with foreign oil concerns to reduce oil production. In particular, LUKOIL and the Iraqi authorities have already agreed to reduce the planned production at West Qurna-2 from 1.8 million barrels to 1.2 million barrels. per day ⁹. In addition, in January of this year in Baghdad, LUKOIL President Vladimir Alekperov and authorized representatives of the Iraqi Northern Oil Company and Southern Oil Company signed an additional agreement to the contract for the development and production of oil under the West Qurna-2 project. In particular, it provides for the transfer to Lukoil of the share of the Norwegian company Statoil - 18.75%, which, as already noted, withdrew from the project.

It can be assumed that LUKOIL Overseas achieved success largely due to its support of the Iraqi Oil Ministry: the company put specialized equipment into operation for Arab oil workers and invited a large number of Iraqi specialists to train in Russia.

In May 2012, following the results of the 4th license round in Baghdad, LUKOIL Overseas (with a 60% stake in the project) won the Iraqi tender and, together with the Japanese Inpex Corporation (40%), obtained the right to explore the potential oil Block 10 located in the provinces of Dhi Qar and Muthanna. 120 km west of Basra ¹⁰.

The compensation scheme is similar to that proposed in previous Iraqi auctions. As before, Baghdad has entered into service contracts, according to which the contractor is reimbursed for expenses incurred in the course of work and remuneration is paid for the oil produced. Additional costs related to mine clearance, pipeline construction, and infrastructure improvements, which, unlike the costs of oil and gas operations, are paid with an uplift*, are also reimbursed.

A. R. Kuzyaev, President of LUKOIL Overseas, said that Block 10 is located just 100 km from the West Qurna-2 project, which will undoubtedly give a synergistic effect (increasing the efficiency of activities as a result of merging individual parts into a single system ) when using infrastructure, attracting equipment and specialists^..

It should be noted that the development of Block 10, which is accompanied by very high risks, may not seem quite appropriate. At the moment, the Russian company is already almost independently conducting the active phase of development of the West Qurna-2 field and assumes all risks and capital expenditures.

On the one hand, Block 10 is located in the immediate vicinity of West Qurna-2, which allows Lukoil to count on successful geological exploration. However, on the other hand, the new site has no proven deposits, and according to the terms of the service contract, even if exploration results in a positive result, Iraq has the right not to recognize the field as commercial if the recoverable reserves do not exceed 200 million barrels, and the contract ends after the exploration period.

If Baghdad recognizes the discovered field as commercial, the start of production may be postponed for 7 years**. Under such circumstances, the contractor may not wait for work to resume and withdraw from the project. All contract terms are negotiated in advance with the Iraqi side, and depending on the degree of participation in the development of the field, the contractor is reimbursed for all costs.-

* Uplift - the interest rate agreed between the state and the investor, by which the recoverable costs that were not repaid in the previous year are increased (approx. author's note).

** The right to the so-called holding period (deferred start of production).

bos compensate for additional costs and exploration costs.

In the future, such a development cannot be ruled out. Iraq may well refer to its obligations to the Organization of the Petroleum Exporting Countries (OPEC), lack of appropriate infrastructure within the country and "freeze" production for several years. In this case, LUKOIL Overseas will either remain patiently waiting, losing lost profits, or will leave the project, unwittingly inviting a new contractor, for example, a western one, to do everything ready.

It is noteworthy that, according to the results of the last round of trading, the American and European "oil heavyweights" remained in the shadows, and the "oil" pie of Iraq was divided mainly by Asian companies.¹² The rapidly developing economies of a number of Asian countries require constantly growing volumes of energy carriers, for which Asian companies are willing to take risks in various energy fields.

In turn, it is obvious that the oil and gas business of the United States and many other Western countries distributes forces very rationally and skilfully avoids sharp corners: why get involved in the complex vicissitudes of Baghdad when it is possible to effectively cooperate in the oil industry with the Iraqi Kurds in the north of the country (in particular, a soft tax regime is provided for foreign investors), with less effort and receiving large dividends for the extracted raw materials.

Nevertheless, it should not be assumed that the Iraqi Oil Ministry has now left out Western players: the West has had a serious hand in the current alignment of political forces in Iraq, and American and European lawyers have been advisers in the development of Iraqi tender legislation, which mainly takes into account the interests of the country. There is no guarantee that in the future, Baghdad will not lobby for the entry of American or Western oil concerns into the largest of them.

GAZPROM NEFT

Another Russian company, Gazprom Neft, which has also been operating in Iraq for several years, can easily compare with LUKOIL Overseas in terms of durability.

In the spring of 2012, drilling of the first appraisal well was completed at the Badra field in Iraq (Gazprom Neft, the project operator), which resulted in the formation of the most rational field development scheme and the drilling of a deep exploration well (6.2 thousand meters) to study the underlying horizons of this section.¹³

A three-year contract for drilling 11 wells was signed by the Russian side with the largest oilfield service company Schlumberger back in July 2011.

According to Gazprom Neft's management, the results of drilling the first wells will make it possible to prepare a final development plan and start commercial oil production in the amount of at least 15 thousand tons. bbl. per day already in August 2013. All work on the project is being carried out in accordance with the schedule stipulated in the agreement with the Iraqi side14.

The Badra field is located in the Wassit province in eastern Iraq. According to preliminary estimates, its geological reserves amount to 3 billion cubic meters. barrels of oil. Following the results of the tender held in December 2009, the consortium consisting of Gazprom Neft (30% share in the project), Kogas of South Korea (22.5%), Petronas of Malaysia (15%) and the National Oil Company of Turkey (7.5%)¹⁵ was recognized as the winner. service contract with the Government of Iraq, which is represented in the project by the Geological Exploration Company (25%).

The contract is designed for 20 years with a possible extension of 5 years. The estimated amount of capital investment is about $2 billion. Production at the field is scheduled to start in the second half of 2013, and by 2017 the production volume should reach 170 thousand barrels of oil per day (about 8.5 million tons per year) and remain at this level for 7 years. A total of ¹⁷ production wells and 5 injection wells are planned to be drilled at the site16.

One of the reasons why Gazprom Neft sought to lead the consortium was that the company's specialists had a significant amount of geological information about Badr, including data on the Iranian Azar field, which together with Badra makes up one large field. Gazprom Neft previously negotiated with Tehran on the development of the Azar ¹⁷.

In February 2012, a contractor was identified for the construction of a central oil collection and treatment center (CCP) at the Badra field. It became the world's leading manufacturer of equipment for the oil and gas industry - the British company Petrofac. As part of the work, detailed design, engineering, equipment procurement, construction, commissioning and commissioning of the control center are provided.

According to some reports, the Central processing Station includes three oil treatment lines with a capacity of 60 thousand barrels each. per day, the construction of each one will take about 18 months. The first line is expected to be commissioned with commercial oil production starting in the second half of 2013. At full capacity, 180 thousand barrels. The project is expected to be released in the second half of 2015. A pumping station, oil storage tanks, an oil metering station and other necessary technological equipment will also be built under the contract.¹⁸

Gazprom Neft is not limited to developing this project. Since the second quarter of 2012, the company has been actively conducting trading operations in Iraq ¹⁹. According to the company's Deputy General Director A. M. Cherner, the volume of transactions already concluded is 450 thousand tons of oil, but Gazprom Neft expects to increase this figure to 1 million tons.²⁰

It is noteworthy that Gazprom Neft initially planned to take part in the 4th round of licensing of Iraqi mineral resources (May 2012), as it studied two Iraqi blocks, but later refused.

However, in August, official information was received that Gazprom Neft had entered into new exploration and development projects through its subsidiary

oil and gas reserves in Iraq. The company has signed two production sharing agreements (PSAs) with the Kurdistan Regional Government (PKK) for the Garmian (1.78 thousand square kilometers) and Shakal (474 square kilometers) blocks located in southern Kurdistan region21.

Total payments for joining projects, including compensation for historical costs incurred, will amount to about $260 million. Gazprom Neft's investment in exploration activities under both projects through 2015 is estimated to be no less than $150 million.²²

Apparently, the official visit of Iraqi Kurdistan President Barzani to Russia in February 2013 will become a kind of catalyst for further strengthening of oil ties between Russia and Iraq.

During the trip, the Kurdish leader held a number of important meetings. In conversations with Russian politicians and businessmen, Barzani denied the information that Gazprom Neft had suspended operations in the territory of Iraqi Kurdistan in order not to spoil relations with Baghdad.²³

Baghdad, in turn, has repeatedly stated that sanctions will be applied to all international companies that cooperate with Iraqi Kurdistan without the permission of the federal government, and Russian companies are no exception.²⁴ Moreover, a similar precedent has already taken place in Iraqi practice.

However, there were no sanctions imposed on Gazprom Neft, and on the contrary, Iraq approved a large contract for the construction of a central oil collection point at the Badra ²⁵ field.

At the end of February this year, Gazprom Neft officially announced that it had received an 80% stake in another Kurdish block, Halabja, located 30 km from the Garmian section ²⁶.

Gazprom Neft's immediate plans include agreeing with the Kurdistan Regional Government (PKK) on a ⁷ - year exploration plan27, upon completion of which the company expects to receive a long-term development license.

The total reserves of the three sites that Gazprom Neft has acquired amount to 4.3 billion rubles. oil, which is 1.3 million barrels more than the Badra deposits.

BASHNEFT

Another Russian company, Bashneft, also intends to launch a pilot foreign project in Iraq.

After direct negotiations with the Iraqi Oil Ministry, Bashneft secured the right to operate in Block 12, located 80 km southwest of Samawah. The block covers an area of about 8,000 ^km2. Moreover, Baghdad has given it the opportunity to own a 100% stake and form a consortium itself from among the companies that participated in the 4th round of bidding.²⁸

The first partner was British Premier Oil, which received a 30% stake in project ²⁹.

In November 2012, a consortium consisting of Bashneft (70%) and Premier Oil (30%) and Southern Oil Company, representing the interests of the Republic of Iraq, signed a contract in Baghdad for exploration, development and production at Block 12. The contract stipulates a mandatory work program, which includes conducting 2B-seismics and drilling one exploration well. It provides for a total investment for exploration of $120 million over 5 years ³⁰.

Previously, it was not ruled out that another company would be added to the Russian-British tandem in order to minimize the possible risks of exploring a site that does not have proven reserves (as in the case of Block 10), between a large number of players.

Bashneft was quite capable of finding another co-investor, but there are certain nuances here.

First, being an operator, the company is interested, on the one hand, in minimizing risks, and on the other, in keeping the lion's share of the project in its hands.

Secondly, Block 12 is located far enough away from the oil pipelines, and there is a need to build infrastructure - an additional "burden" for a potential contractor. Given the investment in these transportation facilities, it is not necessary to expect a high profit, even relying on the expert opinion of Bashneft's geologists, who have sufficient information about the potential of Iraq's subsurface resources.

Third, the probability of another Russian company joining the project raised well-founded doubts. LUKOIL Overseas and Gazprom Neft would hardly have agreed to such a risky deal, especially on the sidelines, without the status of an operator.

* The PSA regime provides for compensation of costs incurred by the investor after the start of production of raw materials at the fields (author's note).

It is important to note that Bashneft had to reduce its remuneration almost twice - from $9.5 to $5 per barrel. produced oil. As a result, the profitability of the project has significantly decreased under the previous conditions of implementation.

Despite the fact that Block 12 consists of 5 sites with only forecast resources, Bashneft specialists believe that with a high degree of probability deposits of "black gold"will be discovered there. According to preliminary estimates, recoverable resources can reach up to 300 million tons ³¹.

Time will tell if the experts ' estimates are true. There is an opinion in expert circles that the Russian company needed to somehow gain a foothold in Iraq on any, even the most unattractive conditions.

Indeed, operating in this country is like a litmus test, which determines the viability of the company, its ability to take risks without any guarantees for the final positive outcome of the transaction. Perhaps, for some Russian players developing Iraqi projects, the main motivation is the desire to prove to the international oil community that their safety margin and potential are very significant.

ROSNEFT

The Russian company Rosneft qualified for participation in the 4th license tender in Iraq, but did not actually participate.

Today, the company has a real opportunity to start operating in the Iraqi market without waiting for the next auction. In 2012, LUKOIL Overseas offered Rosneft a stake in its exploration projects abroad, including West Qurna-2 and Iraq's Block ¹⁰³².

The offer is tempting, since there is no need to prove your right to develop a project in the tender struggle. In addition, it will not be difficult for Russian players to get the approval of the Iraqi Oil Ministry for this deal, because LUKOIL is in good standing in Baghdad, since it worked in the country under S. Putin. Hussein was able to "build bridges" to the new government after the regime change.

Iraq is a special country in terms of doing business, where you can not think in the usual European categories. Often, the winner is someone who can be trusted, even if their offer is not quite profitable. In the Arab world, reliability from a foreign business partner is the key to a thriving joint business.

The analysis of the realities and prospects of Russian companies in Iraq allows us to state that loud and long-term forecasts regarding the development of hydrocarbon projects are still hasty, since the situation and the alignment of players in the Iraqi oil field, for many reasons, can change in a short period of time. However, the Russian "oil landing force" continues to actively land on Iraqi territory at its own peril and risk, gradually gaining the confidence of the oil-rich state.

Despite the numerous risks, Russian oil companies need to establish close ties with Iraqi Kurdistan and with the governments of the Shiite provinces, which are sure to play a key role in managing the country's southern oil-bearing areas, in order to expand bilateral energy cooperation.

Baghdad, in turn, very openly supports the activities of domestic businesses. Given the intensification of Russian-Iraqi relations at the highest level after the visits of the two Iraqi leaders-N. al-Maliki and M. Barzani to Moscow, in the near future we can expect the development of oil projects in a direction that is beneficial for both sides.

¹ http://kremlin.ru/transcripts/16626

² http://www.lukoil-overseas.ru/press-centrc/3999.php

³ http://www.lukoil-overseas.ru/press-centre/3991.php

⁴ Data from the LUKOIL Overseas website - http://www.lukoil-overseas.ru/projects/irak/

⁵ http://www.lukoil-overseas.ru/press-centre/3999.php

⁶ http://www.lukoil-overseas.ru/projects/irak/

⁷ Ibid.

⁸ Ibid.

⁹ Military and political situation in Iraq (January 2013) - http://www.iimes.ru/?p=16798

¹⁰ http://www.lukoil-overseas.ru/projects/irak/4005.php

^{Melnikov K.} 11 LUKOIL rose up in Iraq as a block / / Kommersant, 01.06.2012.

¹² In the framework of the 4th licensing round of international bidding, Iraq put up for sale, in particular, 5 potential oil fields. A consortium consisting of Kuwait Energy (40%), Turkey's TPAO (30%) and Dragom Oil (30%) from the UAE has won the right to develop Block 9 in the southern province of Basra - http://neftegaz.ru/ news/view/102842

¹³ http://www.gazprom-neft.ru/press-center/news/5234/

¹⁴ Interview of the head of the Badra project of Gazprom Neft A. Kolomatsky / / Gazprom. 2011, N 11. P. 21.

¹⁵ http://www.gazprom-neft.ru/press-center/news/5234/

¹⁶ Ibid.

¹⁷ Interview with A. Kolomatsky, Head of the Badra Project Office at Gazprom Neft - http://www.gazprom-neft.com/press-center/lib/5078/

¹⁸ From a conversation between the author of the article and the head of one of Gazprom Neft's departments in October 2011.

¹⁹ Company's financial report - http://ir.gazpromneft.ru/ fileadmin/userupload/documents/financial_results/MDA_9m_2012_r u. pdf

²⁰ http://www.oilcapital.ru/company/162402.html

²¹ http://www.gazprom-neft.ru/press-center/news/407592/

²² Ibid.

²³ The Russian fuel and energy complex will continue to cooperate with the northern regions of Iraq - http://www.rg.ru/2013/02/24/neft-site-anons.html

²⁴ http://forbes.ua/news/1334775-irak-ugrozhaet-sankciyami-gaz-promu

²⁵ "Gazprom Neft" spreads across Kurdistan / / Kommersant, 27.02.2013.

²⁶ http://quote.rbc.ru/news/emitents/2013/02/26/33892942.html

²⁷ Ibid.

²⁸ The tender for Block 12 was held as part of the 4th licensing round, but was declared invalid. Vietnam's Petrovietnam and Britain's Premier Oil participated in the tender for work on the block together with Russia's Bashneft as part of a consortium - http://www.oilcapital.ru/upstream/165908.html

²⁹ http://www.bashneft.ru/press/releases/5302/

³⁰ http://www.bashneft.ru/press/releases/5585/

³¹ Interview of Bashneft President Alexander Corsic about the project in Iraq to Interfax - http://www.bashneft.ru/press/interviewing/detail.php?id=5211

^{Melnikov K.} 32 "Rosneft" chooses the road to Iraq / / Kommersant, 22.06.2012.

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