Legal hurdles may trip up Russian firms in Iraqi oil deals

Feb 21, 2003 01:00 AM

In their rush to secure a place in the future development of Iraq's giant oil reserves, second only in size to Saudi Arabia's, Russian oil companies may find legal wrangles scuttling their ambitions, industry sources and legal analysts say.
UN sanctions against Iraq will make it difficult for Russian companies to legally enforce some $ 8 bn of oil deals struck with the country if the embargo is removed after a war, legal analysts told. And that could be the perfect excuse for a new Iraqi government that would want to punish companies that dealt with Saddam Hussein's regime.

At stake are several Russian contracts to develop Iraqi oil fields with proven and probable reserves in excess of 10 bn barrels. Preliminary agreements with France's TotalFinaElf and a contract with China's National Petroleum Corp. are also at risk.
"Any new government in Iraq could say that the contracts were illegal under UN sanctions and therefore they are void ab initio, or from the beginning, and therefore unenforceable," says Robert Volterra, a partner at Herbert Smith law firm and a specialist in public and international law. UN Resolution 661 that imposed sanctions on Iraq in 1990 required member states to prohibit their nationals from entering into any contract that gave the Iraqi government economic benefit.
"A new Iraqi regime would have a strong argument if they were to say the contracts should be annulled because they were in breach of UN sanctions," a second international lawyer said.

But the legal implications of the UN sanctions haven't deterred several Russian companies from securing oil agreements in Iraq, including oil major LUKoil. "We hold rights to our contract in Iraq regardless of who's in power because our contract is with the state, not with an individual," said a source at LUKoil about its on-again, off-again oil deal for the second phase of the giant al-Qurna field, which the company signed in 1997.
So far, LUKoil is the only big Russian company involved with Iraq. Other Russian majors have been wary of making any significant overtures to Saddam's regime at a time when some of the companies are seeking a listing on the US stock exchange, analysts say.

But Russian oil and gas minnows have been darting about in search of contracts in recent months. In mid-January, Iraq signed exploration and production agreements with Stroitransgaz, a pipeline construction company with links to Russia's gas giant Gazprom, and Soyuzneftegaz - a small company run by former Energy Minister Yury Shafranik.
The deals were for Block 4 in Iraq's largely unexplored western desert and the Rafidain field south of Baghdad with proven reserves of 1 bn barrels and already producing oil. Iraqi Deputy Oil Minister Hussein Al-Hadithi has also said that talks had begun with Russia's state-owned ZarubezhNeft on the giant Bin Umar oil field, where reserves are estimated at 3.5 bn barrels.
And a source at Tatneft said it was proceeding with its negotiations for Block 9 in the western desert.

The Russian oil companies fear they could lose the chance to develop some of Iraq's prize oil fields if a US-sponsored regime takes power in Baghdad. Ahmed Chalabi, the most prominent leader of the Iraqi National Congress -- the biggest recipient of US funding among the opposition, has said that oil companies from the US would be favoured when the oil fields get parcelled out in the future. He has already met "in a personal capacity" with top executives from US oil companies, his office says.
Other Iraqi opposition groups have said existing contracts could be renegotiated from scratch, but that every potential player would have the same opportunities and the best proposals will win the deal.

So what can Russia do about these deals? Legally, probably not very much.
However, it might be able to gain leverage through some $ 8 bn of Iraqi foreign debt owed to the Soviet Union that Russia has taken over, along with a further $ 8 bn in interest. "This adds up to a substantial claim and a potentially valuableasset," says Stephen O'Sullivan, head of research at Moscow-based United Financial Group.
The massive debt could be used as a way of guaranteeing participation in consortia to develop the fields and maintain existing agreements in some form. "It's quite likely that Russia will engage in some horse trading to get their debt paid and their contracts preserved," one source says.

Either way, the contacts developed by years of close links between Russia and Iraq might not be entirely wasted if a US plan to change the top layers of Saddam's regime but keep the same technocrats and civil servants to run the country is implemented.
"There may be some reorganization, but the relationships that these companies have developed and the expertise they have in Iraq will count for something," says Martin Purvis, author of an upcoming report on Iraq's oil industry at the UK energy consultancy Wood Mackenzie.

And the enormous investment -- estimated at more than $ 30 bn -- that will be needed in export and other infrastructure from the landlocked country before the fields can be developed, will necessitate the formation of consortia. So LUKoil and the other companies could still play a role.
LUKoil’s head, Vagit Alekperov, seems confident that his company's interests are safe. Late last year, he said he had been assured that Russian interests in Iraq would be protected. "He's obviously counting on the special relationship between the US and Russia and more importantly the power that Russia wields in the UN Security Council and the trade-offs that will be made there," one source says.

Source: Dow Jones
Market Research

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