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. Last Updated: 07/27/2016

Iraq Raids Threaten LUKoil Projects




Russia's biggest oil company, LUKoil, on Thursday expressed dismay and frustration at U.S. bombing raids on Iraq, which dashed the Russian company's hopes of quick returns from several potentially lucrative projects there.


Russian oil companies could have benefited from oil price rises on world markets following the bombings. Wednesday's initial rises, however, were followed by drops Thursday as soon as traders learned that Iraq was able to continue exporting oil to buy food and medical supplies under a UN-approved humanitarian deal.


LUKoil serves as one of Iraq's agents in the oil-for-food program, selling Iraqi oil on world markets and earning an unspecified commission. But the program is not LUKoil's main concern.


"It is only a drop in the bucket for us," said LUKoil spokesman Dmitry Dolgov.


He said his company considered it far more important that the U.S. bombings may delay the $3.5 billion project to work Iraq's Western Qurnah-2 field jointly with two other Russian companies, Zarubezhneft and Mashinoimport. LUKoil has a 68 percent share in the enterprise. Oil reserves at Western Qurnah-2 are estimated at 6 billion tons, Dolgov said. The deal on the project was signed last year but LUKoil can only start developing the field after international sanctions against Iraq are lifted.


The bombings, Dolgov said, made it unrealistic to expect an end to the sanctions anytime soon. Now LUKoil is evacuating a dozen employees stationed in Baghdad.


"LUKoil's official position is that we support the statement by the Russian Foreign Ministry criticizing the actions of the U.S. administration," Dolgov said.


Central Bank chief Viktor Gerashchenko was quoted by RIA news agency as saying Thursday that Russian oil exporters could benefit from oil price rises caused by the bombings. Russia gets 48 percent of its hard currency export revenues from the sale of oil and gas.


But analysts said any price rises that may yet result from the bombings will be short-lived. Indeed, while Brent crude prices rose 7 percent Wednesday, reaching $10.82 per barrel in Europe, on Thursday Brent rolled back to $10.35.


According to analysts, the drop was due to the fact that the military action had not harmed Iraqi pipelines and had no effect on the oil-for-food program, under which Iraq is allowed to export 1.8 million barrels of crude a day.


Abzal Nurgaziev, an oil analyst at Troika Dialog, was skeptical that the bombings would bring about serious price rises on the current oversupplied oil market.


"Whatever happens there, it is not going to solve the low demand problem," he said.


Nurgaziev added that even if Iraq were to stop its oil exports, which account for about 3 percent of the world market, OPEC countries, desperate for revenues, would quickly fill the gap.


It is highly unlikely, however, that Iraqi exports are going to cease, unless U.S. bombs accidentally damage pipelines. Jim Henderson, an oil analyst at MFK Renaissance, said the United States had no intention of stopping the humanitarian export program.


"The [military] action is aimed against Saddam Hussein," Henderson said. "Nobody would want to be seen harming the Iraqi people."


Henderson said, however, that after the bombings, Hussein himself might proudly reject the oil-for-food deal. Participating in the program has always seemed a painful compromise on the Iraqi dictator's part, the analyst said.