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Lukoil wants a cut
Russian oil giant lays claim to huge field based on contract canceled by Saddam.
April 14, 2003: 2:31 PM EDT
By Bill Tucker, CNNfn correspondent

Russia's largest private oil company, Lukoil is pushing to the front of the line for post-war Iraq awards.

Lukoil, better known as Getty in the United States, is using a contract signed with Saddam Hussein as the basis for a claim for a monster of an oil field known as the West Qurna Field.

The field is estimated to hold somewhere between 7-8 billion barrells of oil. In dollar terms, at today's prices, that is roughly $190 billion.

Clearly, a lot is at stake for Lukoil. But the claim is not cut and dry, however.

The contract Lukoil is agressively pursuing was revoked in December of last year, by the Saddam's government. The Iraqis cancelled the contract for performance reasons.

Oil industry sources call that excuse a red herring because no company with a contract for any of Iraq's fields can meet performance goals until the United Nations lifts its sanctions against Iraq.

The real reason it was revoked, they say, was that the Iraqi government was angry with the Russians for meeting with the Americans as the United States was pushing for military action against Iraq.

Contract lawyers believe Lukoil has a valid claim because the reasons for it being revoked are questionable.

However, Robert Freedman, professor at Johns Hopkins, thinks there could be a precedent for cancelling the contract. Freedman notes that Russia, after the Revolution of 1917 canceled all existing contracts with the prior government.

Lukoil is hardly in this alone. It has the strong backing of the Russian government, as Russia has a large stake in Iraq and a long history of working with Iraq. Iraq owes the Russian government $8 billion and Russia wants to make sure it maintains a stake in Iraq's future so those debts will be repayed. Russia is concerned that because it opposed military action to overthrow Saddam Hussein that the long open door of business with Iraq is about to be shut.

Florence Flee, an independent oil consultant based in London, once ran Mobil's Russian operations and she believes the Iraq aliance is simply too important for Russia to sacrifice.

"The symbolism of Russia and its role ... its involvement in Iraq and the Middle East make it too important for them to walk away from," she said.

Lukoil clearly won't walk away. The company is threatening to sue and take its case to the International Court in Geneva.

Lukoil executives saying they will tie up exports from the field for up to eight years, if that is what it takes.

Why would they be so willing to do that? Well, less oil on the market means potentially higher prices.

But then there is the tricky question of just who does Russia sue. There is no government authority in Iraq, but the moment there is, they can be sure Lukoil will be the Russian wolf at their door.  Top of page




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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.