Russian-Iraqi relations in the field of energy / Российско-Иракские отношения в сфере энергетики

Russian-Iraqi relations

Russian-Iraqi relations have a long history. In the past, these relations have developed very effectively. Economic relations between Iraq and Russia began legally in 1958^[1], when the two sides agreed on trade and economic cooperation. Iraq has always been one of its main partners, Russia's trade with the Middle East reached nearly $2 billion in 1989^[2].

It was one of the largest importers of Soviet arms in 30 years, especially during the eight-year war with Iran, which made the Soviet budget $12 billion. The invasion of Kuwait in August 1990 and the coalition military operation against Iraq in early 1991 suspended cooperation with Russia because the UN Security Council adopted Resolution 686 in 1991, which condemned Iraq as an aggressor and imposed economic sanctions internationally imposed^[3] .The Soviet Union and Russia supported Security Council resolutions, voluntarily agreeing to suspend military cooperation with Iraq, which later extended to other areas. The Security Council resolution also severely restricted Iraq's foreign trade, and Iraq's failure to occupy Kuwait. The bombings by the international coalition forces significantly damaged the Iraqi economy, which made Iraq unable to repay its foreign debts, especially a large debt to Russia. Russia suffered significant losses due to the collapse of Iraq's economy First - Iraq owed more than $ 7 billion^[4],this amount increased annually to $10.5.5 billion in 2004 (after which Russia forgave some of the debts in the new Iraq). On the other hand, a number of economic cooperation agreements with Iraq that were very useful for Russia were canceled, so under these conditions the new Russia had to rebuild relations with Iraq, after the defeat of Iraq by international forces in 1991,it was rather complicatedly constructed. Indeed, the new Russian leadership, especially in the first years after the collapse of the Soviet Union, supported almost unconditionally any initiative proposed by the West and the United States because of internal problems. Russia has begun to insist on lifting economic sanctions against Iraq and has officially condemned any military action by the United States, Britain and its allies against Iraq. For example, in December 1998, when the US and British navies and air forces launched a massive military operation against Iraq, even the Russian ambassadors in London and Washington were summoned back to Moscow for consultations^[5].Thus , as many experts point out, during the new conflict in Iraq in 2003, Russia’s standing in the international arena became much more visible. Russian leadership has shown quite clearly that it intends to pursue and track its own interests in resolving the situation around Iraq-US foreign policy not to fall, in this regard, indicates that Russia, during the new Iraq war, chose to cooperate with Germany and France, which condemned the conduct of conflict in the Middle East, rather than with the United States^[6].

Russian-Iraqi oil cooperation

In 1995, The UN Security Council Resolution 986 was adopted, which allowed the UN humanitarian operation to send oil to Iraq in exchange for food. This program was of particular importance to Russia, as it contributed to the growth of Russian exports to Iraq. The benefits of Russia's cooperation with Iraq were as follows: Russia had a long and historical experience with Baghdad. A significant part of Iraq's oil fields were established and developed with the assistance of Russian experts. For all these and other reasons, Iraq gave priority to Russian companies under the UN oil-for-food program^[7].It includes about 70 projects in various fields, including Russian giants such as Rosneft, Yukos, Slavneft, TNK and others who helped develop oil production in Iraq and began to implement their projects. Lukoil, Zarubezhneft and Machinoimport Group have actively participated in the development of the western Qurna-2 oil field in Iraq, which has an estimated reserve of 2 billion^[8] tons^[9]. In fact, Iraq hoped that Russia would use its influence in the world and in the UN Security Council to facilitate the lifting of economic sanctions against it, so that it could return to the international community, but Russia's assistance did not yield anything. They could not invest in the Iraqi economy. Russia had some internal problems during the financial crisis which meant that they could not really participate in the rapid recovery of Iraq, so the Iraqi authorities often criticized Russia as not necessary^[10]. However, in addition to Russian companies, French companies (French Elf, Total Petrofina, Swiss and British Taurus Petroleum, Vital, Glenkoff) operated in the Iraqi market. This put Russia in serious competition with Western companies^[11]. Meanwhile, Iraqi President Saddam Hussein promised Lukoil and other Russian companies to help them develop the western Qurna oil fields, but the deal broke down in late 2002^[12] because Lukoil has not met the terms of the contract. Iraqi authorities said any other company, including a Russian company, that works first and meets the terms of the contract can now replace it. He stressed that this problem should not affect the development of relations between Russia and Iraq^[13] because at that time Iraq needed Russia internationally.

In 2001-2002, Iraq produced 2.4 million barrels of oil per day. By lifting sanctions, it increased production capacity to 5-6 million barrels, not only seriously competing with OPEC members, primarily Saudi Arabia, but also with Russia, in this case exporting countries had no choice but to reduce levels. Their production is intended to avoid a sharp fall in world oil prices and to adapt to the consequences of Iraq's return as a producing country to the oil market^[14].

In early 2003, the Iraqi leadership was negotiating several contracts worth $3-4 billion to implement major economic projects with Russian companies (Stroytransgas and Zarobezhneft)^[15]. Russia tried to develop its projects with Iraq in the same way as the Soviet Union did, so they reacted strongly to any situation to protect their economic interests especially in the close military context of US and allied operations in Iraq^[16]. According to Russian Foreign Minister S. Lavrov, by mid-2005, about a hundred experts from private Russian companies including giants such as Lukoil were working in Iraq^[17]. According to some experts, despite Russia's support for Saddam Hussein's regime, Russia was not more concerned about the livelihood of the dictatorial regime but more concerned about the continuation of contracts signed with the Iraqi side in the field of oil and industry. With the war in Iraq, it suffered great economic losses^[18].

The dominance of Russian and European companies in the Iraqi oil market was an obvious anger to the Americans. When, after the September 11, 2001 attacks, the Pentagon began planning a military operation in Iraq that resulted in the seizure of nearly 1000 oil wells near the Persian Gulf coast that produced up to two-thirds of Iraq's oil, from Kuwait's borders, for a long time. They used it for their own benefit without any supervision until Iraq regained its institutions^[19].

After the so-called liberation of Iraq, the Russian company Lukoil has been actively trying to return to the Iraqi oil production market since 2004, when several memoranda of understanding were signed between the Russian company and the Iraqi Oil Ministry. In particular, on March 10, 2004, a memorandum of understanding and cooperation was signed in Baghdad after talks between Lukoil President Vagit Alikperov and Iraqi Oil Minister Ibrahim Bahr al-Ulum, but the talks between Lukoil leaders and the new Iraqi authorities yielded no results^[20].

What further backfired on Russian companies was the arrest of Russian embassy staff in Baghdad and the subsequent killing of Russian citizens on June 3, 2006. The process of developing political and economic cooperation between Russia and Iraq came to a halt, which reflected the real security situation in Iraq, causing a negative reaction of the entire Russian society in particular and the world, which caused Russian companies to withdraw. Representatives of Russian companies operating in Iraq have also been ordered to leave the country due to increased security threats. Thus, the events of June 2006 in Iraq delayed the development of Russian-Iraqi relations. But despite the threat to the safety of its experts, Russia was objectively interested in Iraq and was looking for a way to do so, while Russian companies considered other possible options to return to the Iraqi oil market. In particular, the possibility of participating in the development of oil fields in northern Iraq, especially in the Kurdistan Region of Iraq as the Kurdish authorities themselves are asking foreign companies to participate in the implementation of economic projects. The opening of the consulate took place in November. This was another way for Russian companies to re-enter the conflict, especially in the oil and gas market^[21].

In August 2007, Iraqi Oil Minister Hussain al-Shahristani said during a visit to Moscow that Russian business participation in economic projects would not cause any objections from the Iraqi leadership and would be supported by oil ministry experts. He also called on Russian companies to participate in tenders to develop Iraq's oil and gas fields. Meanwhile, the Iraqi Oil Minister said that Lukoil lost the contract to develop the western Qurna-2 field because the contract was signed by the previous regime and canceled because according to the new Iraqi law, the Iraqi leadership clearly expressed its position on economic cooperation with Russia. They have been canceled for various reasons, but Russian companies are given the opportunity to participate in tenders to implement major economic projects in Iraq on equal terms with other companies....)) It is hardly worth expecting tenders to be the same for all participants on the basis of genuine equality, especially for representatives of countries with absolute loyalty to the United States^[22].

On December 12, 2009, Lukoil received the right to participate in the development of the Qurna-2 West field, which has initial reserves of approximately 14 billion barrels^[23]. This project is the largest project implemented by a Russian company. Following the purchase of the Norwegian share in 2012, Lokoil’s participation in the project is 75%. In January 2013, Lukoil signed another agreement with Iraq which set the target production level for the project - 1.2 million barrels per day for 19.5 years, extending the total contract period to 25 years with the possibility of a five-year extension^[24]. Lukoil has invested more than US$30 billion in the project. In 2018, the company began implementing the second phase of field development, increasing production^[25]. Lukoil's second project is hydrocarbon exploration (appraisal drilling) in the Eridu field, which has been carried out in partnership with Japanese company Inpex Corporation since 2012. Eridu is part of the understudied Salman region which has potential for oil production. Very promisingly, according to the contract, once the presence of oil is confirmed, the Russian company has the right to produce oil there for 20 years with the possibility of extending for five years compensation for oil produced at $ 5.99 per barrel. In early 2017, the parties announced the successful testing of the first exploration well in the project. More than 1000 barrels of oil have been received daily.

in January 2010, Russia's Gazprom Neft won the position of operator of the large Badra field by winning a tender in a consortium with Kogas (Korea), Petronas (Malaysia) and TRAO (Turkey). The second largest Russian company in terms of investment in the Iraqi oil and gas complex is Gazprom Neft PJSC. The company won a tender in 2009 to develop the Badra field, which has estimated reserves of 3 billion barrels of oil. Gazprom Neft's share of the project was 30%, Kogas - 22.5%, Petronas - 15%,and TPAO - 7.5%. The Iraqi government's share, represented by the state-owned Oil Exploration Company is 25 percent. The right to exploit the deposit is retained for 20 years with the possibility of contract extension. Investments in the project amount to US$2 billion. Commercial production at the farm began in September 2014^[26]. In January 2018, D. A. Sugaipov, head of Gazprom Neft’s Major Projects Directorate, announced that oil production from the Badra field had reached 85,000 barrels per day^[27]. However, Gazprom Neft also has fields in Iraqi Kurdistan and operates two projects in Iraqi Kurdistan (Shakel and Garmian). The Garmian block includes the development of the Sarkala field^[28].

After the acquisition of Bashneft's assets, Rosneft also gained a significant share of the Iraqi market. Bashneft was developing Block 12 in Musanna and Najaf provinces. However, as Russia’s political interest in the region has grown, the position of Russian energy companies including Rosneft has strengthened. In 2017, as part of the 21st St. Petersburg International Economic Forum, Rosneft signed an investment agreement with the Iraqi Kurdistan government (according to open sources, the agreement was $4 billion)^[29].

Russia and the Kurdistan Region

Russia opened its consulate general in the Kurdistan Region in 2007, hoping to invest in the Kurdistan Region, which is more secure than any other region in Iraq. Gazprom Neft entered the Kurdistan Regional Government's energy market and won a number of oil field development contracts, among other projects, which led President Massoud Barzani to visit Moscow in 2013 for the first time in a long time, which played an important role in developing economic relations especially in the field of energy^[30].

In 2014, Russia stepped up its operations in Iraqi Kurdistan, primarily after the oil-rich city of Kirkuk fell under the control of the Kurdistan Region. Moscow was aware that investing in Kurdistan Regional Government (KRG) oil is cheap^[31].On the other hand, it hopes to maintain its influence in the Middle East and have an indefinite impact on the Iraqi and Turkish Kurdish communities, while trying to maintain political and economic relations with Baghdad, Ankara and Tehran^[32], In particular, the purchase of the Kurdistan Regional Government (KRG) oil pipeline by Rosneft would have been successful because not only do Baghdad and Erbil accept its position considering it was more honest than the West, but also cause Western countries fear political risks Investments in Kurdistan. Moscow will take advantage of this opportunity to develop economic relations with the Kurdistan Region and Iraq^[33].

US companies such as Exxon Mobil and Chevron began to reduce their participation in the Kurdistan Region's oil and gas sector in 2015 due to security concerns about ISIS, geological problems and contracts to fill this gap and economics on them compared to Western companies. Russia has become the most important foreign investors in northern Iraq because of the importance and strategy of the Kurdistan Region. The two sides have signed a two-year contract to buy Kurdish oil, and then another agreement, according to which the Russian oil company will continue to buy Kurdistan's crude oil. He also announced his readiness to finance the gas pipeline, which will reach 30 billion cubic meters annually^[34] .

Risks of working Russian companies in Iraq

One of the main contradictions of Russian diplomacy in the Middle East was that in relation to the richest countries in the region, including Iraq, Russia was a strategic competitor in the energy market. In addition, Russia has sought to develop constructive cooperation with regional countries and to seek a peaceful solution to the situation around Iraq.

In 2011, the Kurdistan Regional Government (KRG) signed six contracts with Exxon Mobil without officially notifying the Baghdad government^[35], Since then, the Kurdistan Region of Iraq has begun to export oil independently and outside of Iraqi laws. In 2014, the Kurdistan Region took control of the oil-rich province of Kirkuk under the pretext of fighting the Islamic State of Iraq and the Levant Example of Exxon Mobil. On June 1-3, 2017, during the International Economic Forum in St. Petersburg, Russian Rosneft signed a 20-year agreement with the Kurdistan Regional Government (KRG) on behalf of Prime Minister Nechirvan Barzani Rosneft to have transferred $3 billion to the Kurdistan Regional Government (KRG) .The Russian company said in a statement^[36], The downside of this agreement is that it was made without the consent of the central government in Baghdad. According to the Iraqi constitution, Iraqi regions including Kurdistan, do not have the right to independence to export oil. All such agreements must go through Baghdad. At the same time, the Kurdistan Region receives 17% of export revenues (now reduced to 12%)^[37].

Meanwhile, the Kurdistan Region has been exporting oil independently for several years, taking advantage of its semi-independent position and Iraq's recent difficulties in the fight against ISIS. But in the autumn of 2017, the political situation in Iraq changed radically after a referendum. The Iraqi federal government, with the help of al-Hashd al-Shaabi militias, took control of the disputed areas of Kirkuk, which produces 30 percent of Iraqi oil and was an important source of revenue for the region. In November 2017, an oil ministry spokesman warned that “the Iraqi federal government controls all oil fields, even those in the Kurdistan Region, but then the Iraqi army was not allowed to advance further until it reached the Parde border^[38].” Iraq and the Kurdistan Region have not reached an agreement after several meetings, and the latest surprise of Iraq this year is to officially request the handover of the oil file to the Kurdistan Region.

The second threat is the Kurdistan Region's gas, which it wants to export independently. There is a similar threat to Russia's interests in the Kurdistan Regional Government's natural gas development projects ,Russia will dominate the country's gas market^[39]. The proximity of Ankara and Erbil, both geographically and politically, puts this issue on the agenda now or in the future. Such a scenario is already underway and could be implemented in the near future, especially considering that in 2013 ,the Kurds were able to build their own oil pipeline, Fishkhabur, to Turkey initially intended to export gas but later changed to transport oil, under the Russian-Turkish agreement on the construction of the Stream 11 gas pipeline, which ended in January 2015.Gas connections between Moscow and Erbil can be along two pipelines to grow. However, if Kurdistan develops its oil fields, Turkey will meet its needs in the Kurdistan Region. Turkey will only buy oil and gas exports from the Kurdistan Region. It will occupy the Turkish market, which is in Turkey's interest disrupts Erbil's plans to export gas and puts it in a situation of confrontation with Moscow.

The third threat is prolonged political instability and the associated security risks to oil facilities, not to mention ISIS terrorists (they did not only directly affect the interests of Russian companies), but also local protests in Iraq including Basra province, which lasted from mid-July to early July September 2018. Unrest led to the blockade of oil fields in the West Qurna region and the evacuation by helicopters of staff from Lukoil, ExxonMobil and PetroChina. and late August ,protesters torched the Iranian consulate in Basra. The reasons for the mass demonstrations were high unemployment in Basra province, lack of water and electricity and unemployment.

The result

Although Russia, with the help of other countries, could not prevent the military invasion of Iraq by the United States and its allies, it had to deal with a completely new Iraqi leadership and establish relations with a government that relies heavily on the United States. It has had extensive experience of cooperation with Iraq since ancient times with significant prospects for further development of trade and economic relations. Over the past few years, Russian foreign policy has nevertheless shown some positive trends. Russia often sought to expand its economic cooperation with Iraq through political means. Positive relations could be established with the country's new leadership while a number of bilateral issues were resolved, especially Iraq's debt to Russia. In order to further develop the process of strengthening relations between Russia and Iraq, Russia should participate more actively in resolving the issues of restoring peace, security and normal life in this country, stabilizing the political process in Iraq. Despite the political instability and weakness of the state institutions, Iraq has been able to regain its position in the world oil market in the past few years becoming one of the countries that matches up to the Saudi and Russian oil production. Iraqi Shiite authorities are more committed to Iranian authorities than they are to US decisions, so this is an opportunity to increase Russia's position in Iraq.