Global Policy Forum

By Richard Balmforth

Iraq has scrapped a $3.7-billion oilfield deal with Russia's LUKOIL, the company said on Thursday, dealing a blow to Moscow's hopes of keeping a strong economic foothold there after U.S. military action.

And the decision seemed sure to rebound on Baghdad's political ties with Russia, Iraq's closest ally on the United Nations Security Council.

A LUKOIL spokesman said an Iraqi deputy oil minister had told company president Vagit Alekperov by letter that the contract to develop Iraq's huge West Qurna oilfield had been canceled on December 9.

In an angry reaction, spokesman Alexander Vasilenko said LUKOIL would challenge the cancellation of the deal -- regarded as the jewel in the crown of Russian contracts in Iraq -- in the courts.

"We do not understand how a petty bureaucrat from the Oil Ministry of Iraq can cancel a law which has been passed by Iraq's parliament," he said, reacting sharply to what appeared to be a significant political snub.

Iraqi Oil Minister Amir Muhammad Rasheed, attending an OPEC meeting in Vienna, would say only that contracts were liable to cancellation if companies did not fulfil their drilling obligations.

"Any company that does not fulfil their obligation over a long time, then we will be free to cancel their contract. This is the policy," he said.

Russia, with a long-standing partnership with Iraq going back to Soviet times, has fought hard to protect its economic contracts and interests there as the prospects of U.S. military action aimed at toppling Iraqi leader Saddam Hussein have grown.

Apart from the West Qurna deal, its oil firms won the lion's share of the 2001 contracts to lift Iraqi crude under the U.N. "oil-for-food" program.

Moscow also wants to recover $8 billion-$12 billion in old Soviet debt from Baghdad.

The Iraqi decision to scrap the 1997 West Qurna agreement and the implications for Baghdad's relations with Moscow could now introduce a new element into the international maneuvering in the Iraqi crisis.

DIPLOMATIC TUG-OF-WAR

The future of Iraq's crude reserves, the world's second largest after Saudi Arabia's, are at the center of a diplomatic tug-of-war between countries hoping to grab a share of Baghdad's oil wealth once U.N. sanctions are lifted.

The deal gave a consortium led by LUKOIL, Russia's largest oil firm, the right to tap the massive Qurna oilfield and pump up to 600,000 barrels per day within three years of it being launched.

Energy Intelligence Briefing newsletter said reported comments by Alekperov that LUKOIL had received assurances from Moscow that it would not lose the field if Iraq's Saddam Hussein was ousted had been the last straw for Baghdad.

"We are carefully studying the letter but so far it seems to be a direct violation of a production-sharing agreement signed between Russian companies and Iraq in 1997," Vasilenko said.

Early in the crisis over Iraq's alleged development of weapons of mass destruction, Moscow appeared to be at pains to restrain President Bush's administration from hasty action.

Anxious that its economic interests could be imperiled by unilateral U.S. military action, Russia pressed hard for changes before backing the U.S.-sponsored U.N. Security Council resolution giving Iraq a last chance to disarm or face a U.S. threat of war. Iraq denies having weapons of mass destruction.

Moscow also fears a U.S.-led war ousting Saddam could see western oil firms surge into Iraq, resulting in a collapse of world crude prices. That would smash a huge hole in Russia's budget and severely jolt its oil-dependent economy.

BUSH ALLAYS RUSSIAN FEARS

Late last month Bush went out of his way publicly to allay Russian President Vladimir Putin's fears.

He told Russia's NTV television that if there was a change of regime in Baghdad "we fully realize that Russia has economic interests in Iraq as do other countries. Of course these interests will be taken into account."

Earlier this month Putin and Chinese President Jiang Zemin during talks in Beijing looked at ways of safeguarding their oil interests in Iraq in the event of a U.S. invasion, oil industry sources said.

Some political analysts said Iraq seemed now to have given up hope that Russia would be able to stop U.S. threats of military action.

"Iraq has now probably arrived at the point where it understood it was hopeless to wait for any political support from Moscow," said Vladislav Metnyov, senior oil analyst at Russia's trust and Investment Bank (TIB).