On December 24, Lukoil declined to buy a stake in the West Qurna-1 project in Iraq from ExxonMobil. The announcement was made on live television by Andrei Kuzyayev, the head of Lukoil Overseas, which is the holding company’s subsidiary for the development of oilfields outside of Russia.

According to Mr. Kuzyayev, exploration and development at West Qurna-1 will be a massive undertaking, and so Lukoil decided to limit its involvement in Iraq to West Qurna-2. The Russian oil producer presently owns 75 percent in the latter venture.

ExxonMobil offered its 60-percent stake in the USD50-billion West Qurna-1 project to Lukoil in November. West Qurna-1 is estimated to hold some nine billion barrels of oil. As originally proposed by ExxonMobil, the American company’s offer to sell out its stake in West Qurna-1 to Lukoil was to stay in effect until mid-January 2013.

Over the recent weeks, media reports surfaced that Lukoil planned to withdraw from Iraq after receiving an ultimatum from the Iraqi government. As such, in November 2012, the government of Iraq announced that international oil companies were bound to break their contracts made with the government of Kurdistan, or, in the alternative, to stop production in that region. The Iraqi government threatened to prohibit the foreign companies’ operations in Iraq altogether for failure to comply with the conditions on Kurdistan.

The critical distinction between the contracts made with the local authorities in Kurdistan and the contracts made with the government of Iraq is that the latter are service-type contracts. Compensation is provided under those agreements at USD5 for one barrel of oil produced. The contracts in Kurdistan are essentially production sharing agreements with the stipulation that the foreign producer also shares in the oil reserves themselves. As such, a foreign oil company can include Kurdish reserves on its balance sheets and then take ownership of the oil produced. Altogether, while the political risks are evident, the benefits that the Russian company can gain from working in the region are considerable. Previously, Lukoil’s executives did say that the development of West Qurna-1 and West Qurna-2 blocks should take place as part of the same project. However, the company lost its tender for West Qurna-1.