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Iraq: Are Baghdad's Old Oil Contracts Valid?

Industry analysts say valid Russian contracts for Iraqi oil fields should be honored to avoid damaging the investment environment for the worldwide oil industry. But the issue remains cloudy because Iraq's prewar regime canceled Russia's biggest contract in anger, and other major deals may only have been in the preliminary stage.

Boston, 16 April 2003 (RFE/RL) -- International energy experts are urging the United States to honor Russian oil contracts signed with the former government of Iraq to keep confidence in the stability of investment.

Russian oil companies have reacted to the Iraq war with statements ranging from outrage to pessimism at their prospects for realizing contracts signed with the Saddam Hussein regime. Many believe that the coalition partners will invalidate the oil-field contracts in favor of their own national firms.

Last month, Nikolai Tokarev, the chief executive of Russia's state-owned Zarubezhneft oil company, told the daily "Vremya novostei," "We're clearly going to have to cut our losses on anything we have there and anything we could have had." Tokarev added, "The Americans haven't gone into this war intending to share with anyone." He estimated Zarubezhneft's losses at $150 million to $180 million in contracts already signed.

Last week, Leonid Fedoun, vice president of Russian giant LUKoil, turned the doubts into a threat, telling the daily "Kommersant" that his company would sue any rival for Iraq's huge West Qurna oil field for at least $20 billion. In 1997, LUKoil signed a 23-year contract for the field as the head of a consortium that included Zarubezhneft. The project could produce 600,000 barrels of oil per day, Reuters reported.

Fedoun said: "Nobody can develop this field without us in the next eight years. If somebody decides to squeeze LUKoil out, we are going to appeal in the Geneva arbitration court [the International Commercial and Industrial Arbitration Court], which will immediately arrest this field." The case could last up to eight years. Fedoun also threatened to have tankers of Iraqi crude halted to keep from losing the $3.7 billion investment in West Qurna.

The remarks are a measure of the suspicions about coalition motives for the war and the size of Russia's economic engagement with the former government of Iraq. Russia's fears fall into at least three categories, dealing with access to reconstruction contracts, Iraqi debt, and its oil contracts.

On the contract issue, Reuters reported this week that Russia negotiated the largest number of oil agreements with the prewar government, although it is unclear how many represent contracts or preliminary protocols.

The news agency counted at least four Russian deals, calling for investments of at least $7.8 billion and production of over 1.2 million barrels per day. None of the projects could be implemented as long as United Nations sanctions remained in force. In addition, Russia hoped for $40 billion worth of deals under a long-term cooperation accord.

But some analysts see Russia's worries as a matter that goes beyond its own financial interest. In an article for "The Middle East Economic Survey" last week, London-based energy consultant Florence Fee said: "One important issue that will confront the United States in these circumstances, should it not recognize these Russian agreements, will be: How can it argue for the sanctity of contracts in Russia for foreign (including U.S.) investors if it is not willing to uphold the sanctity of valid Russian agreements in Iraq, albeit signed during the Saddam Hussein regime. Foreign investors everywhere will be watching its decision with great interest."

Analysts note that the status of Russia's contracts remains far from clear. The Iraqi government said that it had rescinded the LUKoil contract for West Qurna on more than one occasion. It first blamed LUKoil for not honoring the agreement to develop the field, although to do so would have meant breaking sanctions. The government then apparently relented but canceled the contract again after Russia held talks with the United States on Iraq's future when and if the regime fell.

When or whether the contract was in force seems to be an open question. But Robert Ebel, director of the energy and national security program at the Center for Strategic and International Studies in Washington, agrees with Florence Fee on the issue of contract sanctity.

Assuming that the contract was valid, it should legally outlive Saddam Hussein, he said in an interview with RFE/RL. "If we have concluded that it was an agreement between a recognized government and a private oil company, how can you say that it has no validity?" To do so could have a chilling effect on oil investments elsewhere around the world, he said.

Ebel added that governments and regimes have often changed in countries where oil companies have long-term contracts, saying, "Even then, a signed contract is a signed contract and survives a change in governments."

Although the resentment of Russian oil executives has been aimed at the U.S.-led coalition, it is not clear that the United States will make oil-field-investment decisions that go beyond near-term reconstruction. Ebel said, "We have to be very careful of not being seen as making the call."

At a London meeting on 5 April, Iraqi exiles and U.S. officials agreed that international oil companies, including those from Russia and France, should play a leading role in reviving the Iraq's oil industry, according to Reuters. A statement after the meeting said, "The country should establish a conducive business environment to attract investment of oil and gas resources." It did not elaborate on the specific question of the Russian deals.

But some Iraqi opposition leaders apparently feel that Russia provided the Saddam Hussein regime with support and should not be rewarded. Last week, Yevgenii Primakov, president of the Russian Chamber of Commerce and Industry, blasted the threats of unspecified Iraqi opposition figures to cancel Russian contracts, the RIA-Novosti agency reported.

The former prime minister said that "these are self-proclaimed leaders who decide for the country in advance, take a long shot, and try to set down the rules. It is nonsense."