Chevron Moves to Take Over Russia's Most Prized Iraqi Oil Field

Back in February, U.S. oil and gas giant Chevron signed four preliminary agreements with Iraq’s Oil Ministry, which underscored that from that point onwards, Washington was determined to regain its influence across a country that it sees as being at least as important as any other of the leading Middle Eastern states for three key reasons. One of the deals was to develop the supergiant Nasiriyah oil field, another was to develop four other exploration blocks in Dhi Qar province, and the third was to develop the Balad oil field in Salahaddin province. The final agreement -- and perhaps broadly the most important to Washington -- was to transfer the management of the supergiant West Qurna 2 oil field from Russia’s Lukoil following an earlier ratcheting up of U.S. sanctions directly on Russian firms. Last week saw Chevron secure one year of exclusive negotiation rights to finalise the commercial and operational terms for taking over operatorship of this field. It was done through an advance of USD200 million on a prospective signing bonus, according to local media sources, subsequently confirmed to OilPrice.com by a senior source who works very closely with Iraq’s Oil Ministry. So, how significant is all this and why?The three-fold significance of Iraq to the U.S. and its allies, and to China and its partners, extends far beyond its current official oil riches, very conservatively estimated at 145 billion barrels of proven crude oil reserves. Unofficially, the Oil Ministry said back in 2015 that its undiscovered resources amounted to around 215 billion barrels and a full analysis conducted in 2012 by the International Energy Agency (IEA) put the level of Iraq’s ultimately recoverable resources at around 246 billion barrels (crude and natural gas liquids). Iraq also has official gas reserves of about 3.5 trillion cubic metres (Tcm), with around three-quarters comprising associated gas. Unofficially again though, in its 2012 analysis the IEA estimated a truer figure at above 8 Tcm, with non-associated gas estimated to be at least 30 percent of this number. In short, it is an unmissable energy trove to West and East alike, particularly as, along with Iran and Saudi Arabia, Iraqi oil is the cheapest to extract anywhere in the world, with an average lifting cost of just USD1-2 per barrel. The second factor that makes Iraq so alluring to both sides is its vital geographical positioning in the heart of the Middle East. It borders Iran to the East, Kuwait and Saudi Arabia to the South, Jordan and Syria to the West, and Turkey to the North. This makes it the gateway into the long Mediterranean coastline of Syria and into the southern European markets through Turkey. It also holds a potentially threatening presence to the north of Saudi Arabia. The final major element in its appeal to the West and East is that it is an integral part of a Shia Islam counterpoint to the Sunni Islam credo of Saudi Arabia. Together with Iran, this gives it influence over the ‘Shia Crescent of Power’ that runs through the Middle East, as detailed fully in my latest book on the new global oil market order. For a relatively long time after the U.S. military removed longtime Iraqi leader Saddam Hussein from power in 2003, Washington was able to benefit from its presence on the ground across the country, until that became seen by the Iraqis as an unwelcome overstay. Following this, and the unilateral withdrawal of the U.S. from the Joint Comprehensive Plan of Action (colloquially, ‘the nuclear deal’) with Iran, China and Russia were able to dramatically expand their presence across north and south Iraq through a variety of methods also fully analysed in my latest book. Suffice it to say here, the upshot was that over this period to now Beijing’s companies have managed to acquire control over around 34% of Iraq’s proven reserves and two-thirds of its full-capacity production, mainly in Iraq’s southern region. Russia had managed to effectively take control over northern Iraq’s main oil infrastructure in the meantime, until the process began to be reversed after the U.S. Treasury introduced a new range of blocking sanctions. These focused not just on the two corporate entities of Lukoil and Rosneft -- Russia’s number two and number one oil firms, respectively -- being added to the Specially Designated Nationals and Blocked Persons List, but also on key individuals connected to the firms as well. Between them, Lukoil and Rosneft were exporting approximately 3.1 million bpd, which the West sees as vital to Russia’s ability to keep funding its war in Ukraine. With sanctions applied to all entities in which these two firms held a stake of 50 percent or more, Lukoil left West Qurna 2, and Rosneft downgraded its presence in northern Iraq too.The only complicating factor for Western firms looking to take advantage of this to return to Iraq has been to ensure that the contracts under which they are operating do not reflect the endemic culture of corruption that was prevalent in key parts of Iraq’s governmental oversight structure of the oil sector before. This was underlined for years by independent non-governmental organisation, Transparency International (TI), in its ‘Corruption Perceptions Index’, during which time Iraq regularly featured in the worst 10 out of 180 countries for its scale and scope of corruption. It was described as: “Among the worst countries on corruption and governance indicators, with corruption risks exacerbated by lack of experience in the public administration, weak capacity to absorb the influx of aid money, sectarian issues and lack of political will for anti-corruption efforts.” TI added: “Massive embezzlement, procurement scams, money laundering, oil smuggling and widespread bureaucratic bribery that have led the country to the bottom of international corruption rankings, fuelled political violence and hampered effective state-building and service delivery.” It concluded: “Political interference in anti-corruption bodies and politicisation of corruption issues, weak civil society, insecurity, lack of resources and incomplete legal provisions severely limit the government’s capacity to efficiently curb soaring corruption.” Clearly, the legal and political ramifications for Western firms of being involved in such operations were disastrous, and many had left the country, including the U.S.’s ExxonMobil from the country’s key infrastructure project that would support massive oil production increases -- the Common Seawater Supply Project, also examined in full in my latest book. Consequently, it is little wonder that Chevron is making sure that all the ‘i’s are dotted and the ‘t’s crossed in the final deal that it signs with the Oil Ministry.Having said that, West Qurna 2 remains a crown jewel in Iraq’s dazzling array of oil fields, located just 65 kilometres northwest of the southern port of Basra and with roughly 14 billion barrels of reserves in place. Whilst Lukoil had been running it, the field had steadily been producing around 400,000 barrels per day (bpd) -- about nine per cent of Iraq’s total oil production at that time. Nonetheless, as exclusively revealed by OilPrice.com at the time, Lukoil had in fact hit 650,000 bpd production over extended periods in August and September 2017 but had not told the Oil Ministry, as it hoped to use this foreknowledge as a means of negotiating a better per-barrel rate for a contract upgrade with little further effort from itself. Given this, as it stands, a senior source close to Iraq’s Oil Ministry exclusively confirmed to OilPrice.com last week that the government expects the U.S. firm to be able to double West Qurna 2’s output within a relatively short time. By comparison, under Lukoil’s original contract, it was 1.2 million bpd, after being scaled down from 1.8 million bpd. OilPrice.com understands from the Oil Ministry source that the working figure for the field’s peak production now is 0.8 million bpd. According to a comment from Chevron CEO Mike Wirth just prior to the signing of last week’s one-year exclusive negotiation rights, the company remains ‘months’ away from finalising the definitive, long-term contract.By Simon Watkins for Oilprice.comMore Top Reads From Oilprice.comCopper Needs $332 Billion in New Mines to Avoid DeficitAsia’s Coal Prices To Stay High as Supply Drops and Demand FirmsHSBC Sees Hormuz Becoming Redundant in Five Years