ConocoPhillips’s nearly $2 billion strategic investment in Russia may have been marked by an American flag flying over the headquarters of Lukoil, the country’s second largest oil producer. But both companies hope their partnership will reap profits thousands of miles away – in Iraq.
ConocoPhillips won Thursday’s auction for a 7.59 percent stake in Lukoil held by the Russian government, spending $1.988 billion for access to Russian production and fields considered key to expanding the company’s booked reserves. ConocoPhillips joins other western oil giants like BP and France’s Total seeking to stem dwindling production and diversify assets away from the volatile Middle East.
But the investment in Russia also underscores the high-stakes maneuvering by oil companies posturing for political and financial advantage in Iraq.
Before the U.S. war in Iraq, Lukoil signed lucrative contracts with Saddam Hussein’s government, only to see the agreements suspended -- first by Saddam and then by the U.S. interim government. The largest contract, to develop the massive West Qurna field, could yield 500,000 million barrels a day.
While the West Qurna deal was not a decisive factor in the ConocoPhillips-Lukoil partnership, Iraq plays significantly into both companies’ strategies, analysts say.
“This was like the icing on the cake for both companies,” said Chris Waefer, chief strategist for Moscow’s Alfa Bank.
After seeing its fortunes in decline due to Russia’s opposition to the war, Lukoil has improved its image by taking on an American partner.
ConocoPhillips has walked away from the deal with a 17.5 percent share of the joint venture both companies are presenting to the Iraqi government. Lukoil’s chief executive, Vagit Alekperof, said they will “start active negotiations with the Iraqi government as soon as the elections are held in Iraq early next year.”
“The risk of Lukoil losing West Qurna has certainly declined,” analyst Waefer said. “The partnership makes it difficult for the U.S. administration to go and take the rights away from Lukoil if ConocoPhillips is with it.”
Currying favor with Iraq’s new leaders, Lukoil has already invited Iraqi oil technicians to train at is facilities in Siberia.
Russian oil expertise has a long history in Iraq. Before the first gulf war, the Soviet Union supplied equipment and technology to the sector. Many Iraqi engineers received training in the former Soviet Union and speak Russian fluently.
Crude and the Kremlin
For ConocoPhillips, the alliance with a company with close ties to the Kremlin helps to protect its investment. In July, Lukoil’s Alekperof and ConocoPhillips CEO James Mulva met with President Vladimir Putin in the southern Russian resort of Sochi. Putin assured Mulva that ConocoPhillips could “count on his support.”
Although the sale was presented as an auction, its outcome was widely expected, and the company executives sounded more like statesmen than managers.
“Our strategic alliance helps us accelerate the development of reserves in Russia and also helps us develop bilateral relations in energy between Russia and the United States,” Mulva said after the auction.
Support of the Kremlin is seen as key to any oil alliance, in light of the fate of Mikhail Khodorkovsky, the former CEO of Russia’s largest oil company, Yukos.
Khodorkovsky is being tried on fraud charges and Yukos faces billions of dollars in tax fines the company says are politically motivated by Khodorkovsky’s support for politicians opposed to Putin’s rule.