US Sanctions On Lukoil More To Do With Forced US Acquisition Of Russian Overseas Assets

The recent sanctions imposed by the United States on Russia’s Lukoil appear to be more about the forced acquisition of Russian overseas energy assets by US companies, with Ukraine used just as an excuse. The Russia-Iraq joint venture at Iraq’s West Qurna-2 field, which was producing 460,000 barrels per day, appears to be illustrative.

The West Qurna-2 project, one of the world’s largest oil fields, is being developed under a service contract signed by Lukoil in January 2010, which it holds in a venture with the Iraqi state-owned North Oil Company, which holds a 25% stake in the project. The contract term is for 25 years, meaning it should extend to 2035. Its recoverable reserves are estimated at around 14 billion barrels.

The first oil at the project was obtained in March 2014. Lukoil has fully financed the costs of the project and, following the completion of the historical cost recovery stage, began receiving full reimbursement of current costs in the form of a share in the produced oil. Lukoil also receives a fee amounting to its share (75%) of the US$1.15 per barrel of oil produced due to the project participants and pays profit tax to Iraq.

After the introduction of UK and U.S. sanctions against Lukoil in October, the company declared force majeure on the West Qurna-2 contract. The sanctions forced the company to announce the sale of its foreign assets. A key detail in the process is that the Trump administration would ‘prefer’ that Lukoil’s global assets be taken over by a U.S. entity, which dramatically limits the pool of potential buyers.

Iraq’s government is discussing seeking a six-month sanctions waiver from the U.S. Treasury Department for Russia’s Lukoil to have more time to sell its stake in the West Qurna-2 oilfield. However, the longer the time that elapses, the lower this price will be, as Lukoil needs to divest.

Exxon Mobil Corp. and Chevron are among the U.S. oil companies expected to acquire the Lukoil assets.

On Monday (December 8), the U.S. State Department stated that it supports Lukoil’s intention to transfer its stake in West Qurna-2 to an American company. The key reason given for the US sanctions on Lukoil was to target Russia’s energy sector and deprive the Kremlin of revenue used to finance its war against Ukraine. The move was encouraged by Ukrainian President Zelensky and other European leaders. It is not known if they possess shareholders in US oil companies.