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Russian oil pact gives Iraqi economy a shot in the arm

By SINAN SALAHEDDIN Associated Press

Dec. 29, 2009, 9:42PM

Lukoil had partnered with Norway's Statoil to bid to develop the 12.88-billion-barrel West Qurna Phase 2 field, the crown jewel of the 15 fields offered during Iraq's second postwar oil licensing round held this month.

Under the 20-year deal which is slated to be presented Thursday to Iraq's Cabinet, the companies plan to produce 1.8 million barrels per day in 13 years and will be paid $1.15 per barrel of crude they produce.

Lukoil's vice president of strategy and business development, Dmitry Timoshenko, hailed the signing as a key step forward in its work with the Iraqi government.

Oil fields in bad shape

For Iraq, the deal marks a crucial step forward in the country's so-far faltering bid to raise oil output.

Although it sits atop the world's third largest proven reserves of conventional crude oil, Iraq produces about 2.5 million barrels per day, of which about 1.9 million barrels a day are exported.

Decades of neglect of the fields have been compounded by the effects of the fighting and sabotage in the wake of the 2003 U.S.-led war to oust Saddam. That violence has meant that Iraq has been unable to even reach its prewar output levels of oil. Crude oil sales account for roughly 90 percent of the government's budget.

The oil auction held earlier this month was crucial for Iraq, during which seven deals were awarded. At the first round of bidding in June, only one deal was signed on the spot.

At that auction, six oil and two gas fields were offered, but interest was only on the safest and cheapest fields to develop, with companies shrinking away from fields in restive regions where violence is a key concern as U.S. troops prepare to withdraw from Iraq. Two other deals were subsequently struck.

The second auction saw most of the interest was again focused on fields in the relatively calm and stable Shiite heartland in the south and the U.S. supermajors like Exxon Mobil failed to even bid, on any of the fields.

Oil Minister Hussain al-Shahristani ambitiously projected that with these fields, along with others Iraq will develop independently, output could climb to 12 million barrels per day within six years. Analysts say those expectations will fall far short of the reality.

Saddam canceled deal

The deal was a coup for Lukoil, which had been granted the rights to develop the field in 1997 by Saddam Hussein only to see the dictator rescind the $3.7 billion contract five years later.

Lukoil had been trying to revive the deal since 2003 after Moscow wrote off most of Iraq's $12.9 billion in debts. Iraqi officials, however, eager to make sure that the reopening of the country's oil sector to the world was as transparent as possible, shrugged off the Russian calls and insisted on putting the field up for bids.

Lukoil and Statoil beat out three other consortiums led by Britain's BP, France's Total and Malaysia's state-run Petronas to nab the rights to develop the mammoth field. Although discovered in August 1973, it has been only partially developed, with a total of 13 wells drilled, so far.

The field lies next to the West Qurna Phase 1 field, which has 8.6 billion barrels and was part of three deals awarded in Iraq's first bidding round.

A consortium grouping U.S. and European oil giants Exxon Mobil and Royal Dutch Shell won the rights to develop West Qurna Phase 1 field for $1.90 per barrel produced and signed an initial deal. It is waiting the Cabinet's final approval.

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