Disputes flare anew over Iraqi E&D contracts

May 28, 2003
Disputes have flared anew over the viability of Iraqi exploration and development contracts signed during the regime of President Saddam Hussein.

Eric Watkins
Middle East Correspondent

NICOSIA, May 28 -- Disputes have flared anew over the viability of Iraqi exploration and development contracts signed during the regime of President Saddam Hussein.

Russia's OAO Lukoil has again threatened legal maneuvers over an oil E&D contract reportedly cancelled by the head of the new Iraqi oil ministry.

Meanwhile, China National Oil & Gas Exploration & Development Corp. (CNODC) claims to have received no official notification over the status of its E&D contract with the former regime.

Thamir Ghadhban, the US-appointed de facto Iraqi oil minister, while stating that he welcomes foreign investment in Iraq, nonetheless announced on Saturday that the contract with Lukoil for the Phase 2 development of giant West Qurna field had been terminated, while one with CNODC for Al-Ahdbad field had been frozen by "mutual agreement" (OGJ Online, May 27, 2003).

Lukoil, CNODC stances
Dmitry Dolgov, a spokesman for Lukoil repeated the company's earlier threats of legal action over any termination, saying that "if we are obstructed in implementing the agreement, the company will take the matter to the Geneva Court of Arbitration."
Dolgov told OGJ Online on Tuesday that referral to the court "is an option available to us by the terms of the contract we have agreed with the Iraqi authorities."

"We think our contract is still valid, and we will enter into negotiations over it only when an internationally recognized government is in place in Iraq," he said, adding that "right now, there is no internationally recognized government in the country."

Dolgov gave no timetable for any Lukoil decision over court action, saying the Russian firm preferred to allow the situation in Iraq to become more clear. "At the moment," he said, "there is still violence. Things are highly unsettled—both politically and militarily—and we prefer not to put our people at risk."

In April, Lukoil Vice-Pres, Leonid Fedun told Russia's Kommersant business daily newspaper the firm would sue any new contender for the field for at least $20 billion and ask international courts to arrest any tankers carrying Iraqi crude oil.

"Nobody can develop this field without us in the next 8 years. If somebody decides to squeeze Lukoil out, we are going to appeal in the Geneva arbitration court, which will immediately arrest this field," said Fedun. "This type of trial can last for about 6 or 8 years. . . . We are going to arrest tankers with crude produced in Iraq using the Geneva court," he added.

A consortium consisting of Lukoil (68.5%), OAO Zarubezhneft (3.25%), Mashinimport (3.25%) and the Iraqi Oil and Gas Ministry (25%) signed a $3.5 billion production sharing agreement in March 1997 to develop West Qurna-2 over 22 years.

United Nations sanctions imposed on Iraq after the 1990-91 Persian Gulf war, however, prevented Russian companies from implementing oil projects in the country. As a result, Iraq last year said the agreement on West Qurna-2 had been terminated because Lukoil had failed to honor its terms.

On Tuesday CNODC, the contractual arm of China National Petroleum Corp., said it had not been informed of any suspension of its contract with Iraq. That contract was signed in June 1997 to develop Al-Ahdab oil field, said to be a 23 year, $700 million project with an anticipated output of 90,000 b/d.
As with Lukoil, UN sanctions prevented CNODC from beginning any work on the field.

Government backing
Lukoil and CNODC both appear to have the backing of their respective governments, according to an official statement issued on Tuesday, following a meeting in Moscow between Russian President Vladimir Putin and Chinese Premier Chinese President Hu Jintao.

"The process of postwar settlement and restoration in Iraq must take into account the legal rights, interests, and concerns of neighboring countries and other interested parties," the statement said.
"The optimal way to achieve this goal is to strengthen the role of multilateral mechanisms—the UN first of all—in resolving problems that are common to the whole international community, to strengthen international antiterrorist cooperation, to oppose jointly new threats and challenges on the firm basis of international law," the two sides said.

China and Russia, traditional allies of Baghdad and two of the UN Security Council's veto-wielding permanent members, opposed unilateral US or joint US-British military action against Iraq.

Last December, following a meeting between Putin and former Chinese leader Jiang Zemin, the two sides issued a joint statement saying, "The Iraqi question can only be resolved through political-diplomatic means, as well as in firm keeping to UN Security Council resolutions."

Russia and China wanted to protect their substantial oil interests in Iraq if a US-led invasion toppled Iraqi leader Saddam Hussein, a top Russian oil industry official said during the visit. The official, who accompanied Putin to Beijing, also said the two states agreed that closer cooperation is needed to guarantee their interests under any new Iraqi government.

"It was agreed that closer economic and diplomatic coordination was needed to restrain unfettered US power in Iraq (if Saddam is removed from power)," the industry official said.