Given the U.S.’s broad scaling-down of its on-the-ground operations in the Middle East over the past five years, a specific function of which is ExxonMobil’s intention to sell its stake in Iraq’s supergiant West Qurna 1 oil field, China and Russia have been busy in occupying the spaces left by the U.S., as OilPrice.com has been highlighting since the process began. Just a few days ago, Washington appeared finally to have caught up to what has been going on, with the Deputy Assistant Secretary of Defense, Dana Stroul, saying: “It’s… clear that certain countries and partners would want to hedge and test what more they might be able to get from the United States by testing the waters of deeper cooperation with the Chinese or the Russians, particularly in the security and military space.”
This could have been aimed equally at any and all of Iraq, Saudi Arabia, Jordan, Egypt, Oman, Qatar, or any of the other countries that OilPrice.com has highlighted as drifting into the Sino-Russian-Iranian sphere of influence. That said, such words from Washington will have absolutely no effect on either China’s or Russia’s continued drive to entirely push the U.S. out of the Middle East, with Russia last week announcing further oil field plans in Iraq as part of that process. Russia has long regarded Iraq – both north and south – just as Iran does: that is, as being an integral part of Iran, to all intents and purposes controlled where it counts by Tehran via its vast network of financial, political, and military proxies.
Even before China took former U.S. President Donald Trump’s statements about scaling down the U.S.’s military operations across the Middle East in order not to become involved in anymore “endless wars” in the region as a green light to dramatically expand its influence there, Russia had been doing this for years. The turning point in terms of direct on-the-ground action was the civil war in Syria that began in 2011 and which afforded Russia the ideal opportunity to grab a key Mediterranean-coasted country. With Syria under its control, Russia could build out massive strategic military bases, vouchsafe Iran’s decades-long attempts to secure a land bridge to Damascus, and use this to pivot its influence back across the existing Shia Crescent of countries most susceptible to Iran’s radical Islamic message.
Once Iran was in Russia’s debt, the Kremlin was quick to ensure that Tehran applied pressure on Iraq to allow Moscow to effectively gain complete control over the huge oil and gas assets in Iraq’s northern semi-autonomous region of Kurdistan. Russia achieved this in 2017 via the Kremlin’s corporate oil proxy, Rosneft, through three principal maneuvers. First, Russia provided the KRG with US$1.5 billion in financing through a three to five-year prepayment oil supply deal. Second, it took an 80 percent working interest in five potentially major oil blocks in the Kurdistan region together with corollary investment and technical, technology, and equipment assistance. And third, it established 60 percent ownership of the vital KRG oil pipeline into southern Europe’s port of Ceyhan in Turkey by dint of a commitment to invest US$1.8 billion to increase its capacity to one million barrels per day.
This influence was then expanded with later deals in the gas sector involving the Kremlin’s corporate gas proxy, Gazprom, and various of its subsidiaries. It is apposite to note that China used exactly this same Russian strategy to dramatically expand its own influence in Iraq in parallel with Moscow.
With its control over northern Iraq’s oil and gas sectors achieved, Russia has been focusing more on expanding its footprint in the south of the country. With the U.S.’s ExxonMobil looking to exit West Qurna-1, the Kremlin is looking to Lukoil to ramp up production from sister field West Qurna-2, so putting Russia (and its Middle East strategic partner, China) in an even stronger position to consolidate their power over all of Iraq’s oil and gas fields and also over the future of the Common Seawater Supply Project, which is vital to Iraq’s long-term future. As it stands, West Qurna 2, with roughly 14 billion barrels of reserves in place, has been steadily producing for some time around 400,000 barrels per day (bpd), or about 9 percent of Iraq’s total oil production.
Lukoil holds a 75 percent stake in the field, located 65 kilometers northwest of the southern port of Basra, with the remainder held by Iraq’s state-run North Oil Company. The original development plan for the field remains largely in place, which involved a Phase 2 increase in production to 480,000 bpd, followed by the implementation of Phase 3, which would focus on the deeper Yamama formation, to add another 650,000 bpd to the total. This would have brought the total crude production figure from West Qurna 2 up to 1.13 million bpd, which would not have been far off the original target of 1.2 million bpd.
The current plan is for Lukoil to increase production from the Yamama formation to at least 350,000 bpd, while improving production from elsewhere in the field, to a total of at least 800,000 bpd. “The figures may look high but they are perfectly reasonable, justified both by U.S. geologists when they were on the ground during the U.S. occupation and by various IOCs [international oil companies] as well,” a senior oil and gas industry source who works closely with Iraq’s Oil Ministry told OilPrice.com.
Not only are these output targets reasonable but as long ago as November 2017, Iraq’s Oil Ministry found out that Lukoil had already achieved 650,000 bpd production over various extended periods in the previous two months and also that it could sustain production of at least 635,000 barrels per day for the foreseeable future. Lukoil, it turned out, was simply choosing not to do so for financial reasons.
“At that point, the [Iraq] Oil Ministry agreed to extend the timeframe of the Lukoil contract to 25-30 years, effectively reducing the daily cost of capital per barrel of oil recovered and to allow Lukoil the option of increasing its stake from the present 75 percent to 80 percent,” the Iraq source said. “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 added.
In reality, then, the plan is for Lukoil not only to achieve the second phase production target of a further 350,000 bpd from the Yamama formation but also to outstrip it quickly, the Iraq source underlined. At the same time, Lukoil has also been granted favorable terms to allow it to finally push output increases aggressively at the nascent Eridu field, in which the Russian company has a 60 percent stake. Discovered in 2019, and part of Iraq’s Block 10, preliminary estimates suggest that Eridu could hold between 7 and 10 billion barrels of reserves, although Russian oil industry sources spoken to by OilPrice.com last week suggest the actual figure may well be 50 percent higher than the higher figure of the band.
By Simon Watkins for Oilprice.com
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