11.04.2014 Author: Viktor Mikhin

Iraq: the success of Russian oilmen

876543тAt the end of March, the Russian oil company, Lukoil, began extracting oil from one of the world’s largest oilfields, ‘West Qurna Phase II’ in Iraq. The Vice Premier of the Russian Federation, Arkady Drovkovich, the Vice Premier of Iraq responsible for energy, Hussain al-Shahristani, Abdul Karim Luaibi, the Oil Minister of Iraq, and Vagit Alekperov, CEO of Lukoil, participated in the ceremony to mark the commencement of extraction at the oilfield.

It is important to remember that ‘West Qurna Phase II’, which has accessible deposits in the region of 14 billion barrels of oil, is located in Southern Iraq, 65 km to the north-west of Basra. The agreement regarding the production and extraction of oil from the field was signed on 31 January 2010 and ratified by the cabinet of ministers of Iraq. This agreement is a hybrid between a service contract and a production sharing agreement. It permits, potentially, a portion of both the deposits and the extracted oil to be incorporated into the balance sheet of Lukoil. The parties to the agreement are the Iraqi state oil company, South Oil Company, (acting on behalf of the state) and the consortium of contractors, consisting of Lukoil (75%) and the Iraqi state company, North Oil Company (25%).

The first phase of production at the oil field, the ‘early oil’, was realized in a record breaking short space of time. In the period from April 2012 onwards the fundamental production facilities for the deposit have been constructed at the site covered by the agreement. In particular, an oil production facility (OPF), with a capacity of over 400,000 barrels per day, has been erected. Forty-eight operational oil wells have been drilled in five sections of the field, and a Gas Turbine Power Station (GTPS) with a capacity of 126 MW has been built. Along with the oil at the site of the deposit, there is a substantial volume of petroleum associated gas and there are plans to construct a further group of facilities for its utilization, including some petrochemical structures. The level of oil extracted from the field has now reached 120,000 barrels per day, which allows Lukoil to receive income in compensation for the expenses incurred in producing the oil.

The Russian company anticipates reaching the fundamental level of extraction of 1,200,000 barrels per day by 2017, and hopes to maintain that level for a further 19.5 years. Incidentally, 1,200,000 barrels per day is equivalent to one-tenth of the oil extracted daily in Russia. The Russian Vice Premier noted that, “Lukoil has successfully mastered its largest project.” He also passed on a message from the Russian President, Vladimir Putin, in which the president outlined a readiness for the expansion of cooperation between the two countries.

Vagit Alekperov, the company’s president, reports that the investment by Lukoil in production at the ‘West Qurna Phase II’ oil field has surpassed $4bn. He goes on to say, “Our investment has exceeded $4bn and we were able, in the past two years, to travel the path from the signature of a contract to the beginning of commercial extraction.” Under the terms of the agreement, Lukoil will receive $1.15 for every barrel of oil extracted. However, this account will not be realized via currency but by means of payment in oil that the company can dispose of at its own discretion.

“The commencement of extraction at ‘West Qurna Phase II’ is an essential element on the global gas market and this project is a guarantee of the development of Iraq,” said the head of Lukoil. He also added that Lukoil is currently working on a proposal to establish a consortium for the construction of a processing plant for the gas produced at ‘West Qurna Phase II’. It is planned that the plant will produce 6,000,000,000 m3 of gas in 2017.

During the period when the project for production at the ‘West Qurna Phase II’ oilfield is being fully realized, Lukoil will sell oil to the value of $90bn. The Russian company’s share of the oil extracted will amount to approximately 10,000,000 tons. Lukoil has already reached agreement with its subsidiary company, the oil trading firm LITASCO, regarding oil exports during the period when the project was developed. “75 % of the oil will be sold under long term contracts, and the total value of sales for the entirety of the time period is estimated, in current prices, as $90bn,” said the head of the operational arm of for Lukoil’s foreign projects, Lukoil Oversea, Andrey Kuziaev.

“The Iraqi government is prepared to assist the Russian company Lukoil in regard to implementing large scale projects in the country,” said the Iraqi Deputy Prime Minister for Energy, Hussain al -Shahristani. “We are prepared to take advantage of every opportunities to resolve any issue that will assist Lukoil’s Iraqi operations,” the minister underlined. “One of the most promising projects is the creation of a joint venture with the Ministry of Oil of the Republic, which will undertake exploration for oil and gas deposits. We welcome this initiative and support it at the highest level.”

According to the Vice Premier’s administration, the two sides discussed the investment projects of Russian companies at the petrochemical areas in Basra province and the construction of a refinery at Nasiriyah. Lukoil’s plans to organize the production of petroleum associated gas from the ‘West Qurna Phase II’ field were also endorsed by the Iraqi party to the discussions.

CEO Vagit Alekperov, stated that in connection with this, Lukoil has to prepare a preliminary study on the petrochemical production at ‘West Qurna Phase II’. “We will prepare the study and submit it to the government of Iraq within two months. We expect that after it has been considered, we will receive a mandate to create a consortium because we will not go it alone on this project.” Mr Alekperov clarified that, within the framework of the project, the utilization of petroleum associated gas for the production of polyethylene and other products would be examined.

Another Russian company, Gazprom Neft, is also working successfully in Iraq now. Iraq anticipates that production at the Badra field, which is being run by Gazprom Neft, will be launched in May, Deputy Prime Minister, Hussain al -Shahristani, informed journalists. “We hope and pray that extraction at Badra will be launched in the fifth month of the year, that is in May,” he said.

The oil field at Badra is situated in the province of Vassit in the east of the Republic. According to preliminary estimates of the geological reserves there are 3,000,000,000 barrels of oil in the Badra deposits. The contract with the government of Iraq for the development of the field was signed in January 2010 with a consortium of companies entered into by Gazprom Neft (30%), the Korean firm, Kogas (22.5%), the Malaysian company, Petrogas, (15%) and the Turkish firm, TPAO. A further 25% of the project belongs to the Iraqi government. Gazprom Neft is the operational arm of the project.

The project for the development of the Badra field is designated to last for 20 years with the possibility of a five year extension. The estimated level of investment in the project is $2bn. Investors will be reimbursed for their outlay in the project and remunerated. During 2017, the volume of oil produced is projected to reach 170,000 barrels per day (in the order of 8,500,000 tons annually).

In addition, the Russian oil firm, Rosneft, is interested in several projects in Iraq, according the Vice Premier of the Russian Federation, Arkady Drovkovich. “Within Rosneft there is an interest in projects, in fact several projects, in Iraq. Our companies respect the laws of the countries in which they work and will operate according to the rules laid out by the government of Iraq,” he said in reply to a question regarding whether Rosneft is interested in projects in Kurdistan. Mr Drovkovich also noted that other Russian companies, including the energy firm Inter RAO were interested in working in Iraq.

“Everything is relative and we can compare what the USA did to our country with what Russia is doing now,” wrote the Iraqi newspaper al-Furat. “America, this bastion of democracy, completely destroyed Iraqi statehood, annihilated its infrastructure and industry and is now attempting to interfere in the affairs of a sovereign state. Russia, by way of contrast, is attempting to help us emerge from the difficult condition which we were driven into by America. The commencement of work at the ‘West Qurna Phase II’ oilfield is a striking example of this. This operation will create new jobs, reduce unemployment, and the revenues from the exploitation of the oilfield will, we hope, be directed towards the revival of our industry and the creation of new infrastructure.”

Viktor Mikhin, corresponding member of the Russian Academy of Natural Sciences, exclusively for the online magazine New Eastern Outlook”

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