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Russia keeps its eye on the Middle East
oil prize
By Sergei Blagov
MOSCOW - An unprecedented energy deal between
Russia, the biggest exporter of oil outside the
Organization of Petroleum Exporting Countries (OPEC),
and Saudi Arabia, owner of roughly a quarter of the
world's known oil reserves, marks a strategic
rapprochement between two countries controlling a
sizable share of the world's hydrocarbon resources. This
enhances Russia's economic muscle and together the two
nations may become a major influence on global oil
markets.
LUKoil - notably Russia's biggest oil
firm by sales - has just become the first Russian oil
company to gain the opportunity to work in the Saudi
kingdom. On January 26, LUKoil announced that it had
been granted the right to conclude an agreement with the
government in Riyadh to develop natural gas deposits in
Block A, a 30,000 square-kilometer area located in the
center of the country. The project is to be implemented
by a joint company with the Saudi Aramco and will be
established in February, with LUKoil holding an 80
percent stake.
Meanwhile, a 40-year concession
agreement between the government of Saudi Arabia and the
joint company on the exploration and development of
natural gas and gas condensate deposits of Block A will
be signed in March 2004. LUKoil reportedly plans to
invest up to US$200 million in the project.
During its long communist years, the Soviet
Union was not warmly welcomed in deeply religious Saudi
Arabia and some Muslim states - and its invasion of
Afghanistan in 1979 didn't help. But this is a new era.
The deal reflects Russia's growing role on the
global energy market and also indicates possible wider
cooperation between the world's two biggest oil
producers and exporters. Relations between Russia and
Saudi Arabia were given a major boost in September 2003
when Saudi Arabia's de facto ruler, Crown Prince
Abdullah bin Abdul Aziz, paid a historic visit to
Russia. In a joint statement, Russian President Vladimir
Putin and the Saudi leader agreed on "the need to
interact in oil policy to achieve stability and
predictability" in the global market, keeping prices
within "an acceptable corridor". This would be achieved
both on a bilateral basis and in a multilateral format,
working with other oil-producing countries, they said.
Last September, Russian and Saudi officials
signed a five-year agreement on cooperation in the oil
and gas sector. According to Russian Energy Minister
Igor Yusufov, the framework accord could lead to deals
worth up to $25 billion.
Meanwhile, although
LUKoil pursues other Middle Eastern projects like Anaran
in Iran and Gheisum in Egypt, it is understood that the
biggest bounty lies in Iraq. LUKoil still wants to
develop the oil-rich West Qurna, believed to contain
some of the world's largest deposits. A 23-year, $20
billion deal to develop the West Qurna field was signed
in 1997 between Iraq and a LUKoil-led consortium. Under
that deal, the Russian group would develop reserves
estimated at 7 billion to 8 billion barrels.
But
United Nations sanctions against Saddam Hussein's regime
prevented LUKoil from tapping the field after it carried
out preparatory work in Iraq and therefore the Iraqi
government canceled the contract in February 2003,
shortly before the US-led war. LUKoil insists that the
contract is still valid and has made clear it would
challenge attempts to annul the West Qurna contract in
international courts.
Apart from corporate
interests, a quest for Iraqi oil has become an important
factor in Moscow's economic and commercial policies.
Last December, Russia indicated its intention to write
off more than a half of Iraq's $8 billion debt to
Moscow, in exchange for possible contracts in rebuilding
Iraq. Also in December, Putin told the head of the
Iraq's governing council, Abdul Aziz al-Hakim, that
Russian investments there could reach $4 billion.
Al-Hakim reportedly told LUKoil that Iraq "isn't averse"
to the company's role in West Qurna.
This week,
Putin confirmed that Russia was ready to discuss Iraqi
debt write-off through the Paris Club, an informal group
of official creditors whose role is to find co-ordinated
and sustainable solutions to the payment difficulties of
debtor nations.
LUKoil is not alone in Russia's
drive for Middle Eastern oil. Earlier this month,
Russia's Tatneft, the country's sixth largest oil
producer, won a privatization tender for a majority
stake in Tupras, Turkish Petroleum Refineries Inc. The
Tatneft-led consortium has offered $1.3 billion for a 66
percent stake in Tupras, with sales of $11 billion.
Tatneft is understood to view the Tupras
acquisition as a move towards reviving its operations in
Iraq. Earlier this year, Tupras announced plans to buy
11-14.7 million barrels (1.5-2 million tons) of Iraqi
crude in 2004, and eventually between 29.4 to 36.7
million barrels (four to five million tons) a year from
the Kirkuk pipeline to Turkey as soon as it re-opens.
Tupras had been taking 29.4 to 44.1 million barrels
(four to six million tons) of Iraqi crude a year before
the war in Iraq.
Before the war, Tatneft was
working in Iraq under the UN oil-for-food humanitarian
program. Tatneft had contracts to drill 33 wells in the
Kirkuk fields and 45 wells in the Bai Hassan fields,
both in northern Iraq. Last fall, Tatneft indicated it
intended to revive its Iraq operations.
Meanwhile, Washington warned Moscow against
excessive optimism over Iraq oil prospects. Russian oil
producers will have to wait until Iraq elects its own
government in order to negotiate oil contracts, US
Secretary of State Colin Powell announced on a visit to
Moscow this week. The new Iraqi government will make
"its own decision" about who will get the rights to pump
oil although the US may "give advice" to the Iraqis,
Powell told the Ekho Moskvy radio.
Despite its
growing importance as a producer and exporter, Russia
has been reluctant to join OPEC. Moreover, Russian
companies, notably LUKoil, have been forging economic
ties with the US, persumably in an effort to balance
their campaign to develop Middle East oil.
Notably, LUKoil this week announced it had
agreed to acquire 795 gas stations for $266 million from
ConocoPhillips in the US. This retail network in the
states of New Jersey and Pennsylvania will allow LUKoil
to double its market share in the US northeast, LUKoil
said in a statement.
The deal is LUKoil's second
acquisition in the US, following the purchase of Getty
Petroleum Marketing Inc gas stations in 2000. Now LUKoil
owns more than 4,700 stations worldwide with about 2,000
stations in the US.
LUKoil is a significant
player on the global oil market. In 2003, LUKoil pumped
some 600 million barrels (81.5 million tons) of crude,
while exports reached 275.7 million barrels (37.5
million tons) of crude, up nearly 10 percent year on
year. LUKoil seeks to increase its annual oil output to
808 million barrels (110 million tons) by 2008-2012.
According to LUKoil, the acquisition and
expansion in new markets would intensify the development
of LUKoil's oil projects in Teman-Pechora, north western
Russia. Supplying LUKoil's own retail network of gas
stations in the US would also increase the efficiency of
its Vysotsk oil terminal in north western Russia as
LUKoil says it will "significantly increase shipments of
its own products to the US and Europe".
Russia's
increasing overall crude output lends weight to its
ambitions in the Middle East, with output and exports
increasing in 2003. Russia pumped 8.4 million barrels a
day (421.4 million metric tons) of crude last year or 11
percent more than in 2002. In 2003, Russia's oil exports
to the former Soviet republics reached 1.375 billion
barrels (187 million tons) of crude, or about 10 percent
higher than in 2002. Russia plans to raise crude output
to 430-450 million tons in 2004.
Subsequently,
with crude output growing, the influence of Russia over
the world's oil market has risen dramatically over the
past two years. Therefore, the Russian drive for Middle
East oil riches, although cautious, may well signal the
country's quest for a new, more muscular role in
international oil politics.
(Copyright 2004 Asia
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