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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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Russia Is Defeating The U.S. In The Middle East Oil Game

Historically, Russia goes to great lengths to hide or disguise its strategic intentions but it clearly feels empowered enough in the Middle East to very obviously stake its claim in the region – excluding, for the time being only, Saudi Arabia – by stating that a slew of Russian companies are to spend up to US$20 billion on oil projects in Iraq in the near term. “Since [U.S. President Donald] Trump outlined the new U.S. foreign policy of not engaging in conflicts abroad unless they were directly aligned with U.S. interests [October 2019], and then effectively withdrawing from Syria and from supporting the Kurds, Russia and China have felt that they can bring forward their plans to bring Iraq within their geopolitical arc of influence,” a senior source who works closely with Iraq’s Oil Ministry told OilPrice.com last week. “They know that provided that they do not impinge on Saudi Arabia and, at a pinch the UAE and Kuwait, or launch attacks against U.S. personnel, then they can basically do whatever they want anywhere else, hence this announcement from Russia last week,” he added.

Before this announcement - which specifically mentioned Zarubezhneft, Tatneft, and Rosneftegaz as companies interested in pursuing specific but as yet unnamed projects, in addition to those Russia companies already active in the country (including Lukoil, Bashneft, and GazpromNeft) – Russia had adopted its usual stealth approach to building up its presence in Iraq. “It is incremental colonialism, beginning one day with one relatively small contract being taken up by some Russian company nobody has heard of, then more Russian companies turn up in the same place under ‘contractor’ terms having been engaged by the company you gave the original contact to, then security companies turn up to guard all of the personnel, and suddenly you have a major Russian occupation of part of your key oil and gas infrastructure,” the Iraq source underlined,

The oil and gas prize for the Russians in Iraq is, of course, huge, but many in the industry do not realise that it is still underestimated. The official figures for oil are that Iraq has around 149 billion barrels of reserves (18 per cent of the Middle East total and 9 per cent of the global total) and is currently the second-largest oil supplier in OPEC, after Saudi Arabia. All of this oil coming at a mean average ‘lifting cost’ per barrel in Iraq of US$2 to US$3 per barrel, according to the IEA, at least as competitive as Saudi Arabia. For gas, the official figures are slightly less impressive, but they are likely even more underestimated than the oil figures, with Iraq having about 135 trillion cubic feet of reserves (the 12th largest in the world), mostly associated at the moment with oil fields in the supergiant fields in the south of the country. However, despite the occasional increase in reserves estimates over the past few years – extremely modest by the standards of its neighbours, incidentally – much of Iraq still remains unexplored or under-explored compared with other major oil-producing countries. Related: A Middle East Financial Crisis Is In The Making

According to the International Energy Agency (IEA), and derived from the landmark United States Geological Survey (USGS) 2000 assessment and subsequent updates, the level of ultimately recoverable resources at that time was around 232 billion barrels of crude and natural gas liquids. Even this, though, might prove on the low side, added the IEA, as a detailed study by Petrolog around that time reached a similar figure but did not include the parts of northern Iraq in the KRG area or examination of the geological anomalies prevalent in the central and western regions of the country. Even using the much more conservative USGS number, Iraq had just a decade ago only produced around 15 per cent of its ultimately recoverable resources, compared with 23 per cent for the Middle East as a whole at that time. At that point, of the 530 potential hydrocarbon-bearing geological prospects identified by – only - geophysical means in Iraq only 113 had been drilled, with oil being found in 73 of them, a success rate of 65 per cent. Although more of these geophysically-identified sites have now been drilled many more new ones have arisen due to identification by more sophisticated analysis of seismic and historical data.

“The Russians have done their own testing of potential oil and gas reserves over the years and they think it is about double the current official estimates on both of those [oil and gas],” the Iraq source told OilPrice.com last week. This is one of two key reasons why Russia has exploited every opportunity to expand its footprint in the north and south of Iraq. In the north it has been extremely successful so far in using its corporate proxy, Rosneft, to gain control over key elements of the region’s oil and gas infrastructure while in the south it had been forced by the U.S.’s own former ambitions to tread more stealthily. Although it has always been able to rely on being able to use Iran’s political and military over Iraq for its own purposes, these had to be sidelined for a while, at least whilst the real power in Iraq – Moqtada al-Sadr – was getting settled in to his power-broking role. As this was initially founded on the ultra-nationalist message (‘Iraq for the Iraqis, with no undue foreign influence’, in essence) of his election-winning ‘Sairoon’ power bloc, Moscow was able to tinker only the edges. Related: Saudi Arabia’s Oil Exports Dropped 11% In 2019

In such strategies, though, Russia is a master, and the influence it can ultimately wield starting from such a tiny access point is absolutely extraordinary. The most recent example of this – and a template for such strategies for any aspiring superpower, frankly – was the ‘awarding’ of a hitherto unknown development block in the middle of a wasteland by a hitherto unknown Russian company at a time when no one else was aware that anything was due to be awarded. As highlighted in-depth by OilPrice.com at the time, Russia’s Stroytransgaz (an almost unknown Russian oil and gas company - except by the U.S. whose Office of Foreign Assets Control extensively sanctioned it in 2014) signed a preliminary contract with the oil ministry in Baghdad for oil and gas exploration in Anbar province (a wasteland as far as Iraq’s oil and gas sector development goes). On the face of it, there was – and is - no real prospect of any substantial amounts of oil or gas being recovered from its Block 17 and additionally stationing any normal oil and gas workers there would be perilous to say the least, as it is an area torn by warring tribal communities, which even Islamic State avoided where possible.

The key to this, though – and vital in understanding the purpose behind the announcement of a doubling (possibly tripling) of Russian overt investment into Iraq – is that the area is critical in Russia fortifying its presence in the central Middle East and being able to secure a warm water multi-layered military presence in the Mediterranean. “Russia risked full-on military confrontation with the U.S. to get a full-scale Black Sea port [Sevastopol] with access into the Mediterranean when it annexed Crimea in 2014, so there’s nothing it won’t do to build out its foothold in Syria and in the transit and supply route to Syria, which includes Iraq,” said the Iraq source. In this context, then, Block 17 in Anbar – and the US$20 billion investment announced last week – makes perfect sense for the Russians, as it intends to secure what the U.S. military used to call ‘the spine’ of Islamic State where the Euphrates flows westwards into Syria and eastwards into the Persian Gulf. Along the spine running from east to west are the historical ultra-nationalist and ultra-anti-West cities of Falluja, Ramadi, Hit and Haditha, and then there is Syria, with its key strategic ports of Banias and Tartus. By happy ‘coincidence’ both Banias and Tartus are also extremely close to the massive Russian Khmeimim Air Base and the S-400 Triumf missile system. Although the base only came in to operation in 2015 supposedly to help in the fight against Islamic State, Russia appears to have changed its tactical plans for it, having also signed a 49 year lease on it, with the option for another 25 year extension. A short flight away is Russia’s Latakia intelligence-gathering listening station.

By Simon Watkins for Oilprice.com

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Leave a comment
  • Lee James on February 18 2020 said:
    Oil is now widely recognized as ecologically dirty and a tool of geopolitical control. Oil also has many beneficial uses. Are the benefits keeping pace with the growing downsides? Is there a better way to do energy, and if so, how fast do we want to get there?
  • Mamdouh Salameh on February 19 2020 said:
    The author has dealt with this very same topic before. Still, there is no secret strategy the Russians are using to defeat the Americans in the Middle East oil game. The Americans are defeating themselves.

    Russia and China bring business and investments to the Middle East without interference and plans for regime change. In contrast, the United States brings wars, interference, threat of regime change and blackmail for money under the disguise of protecting the oil when the United States itself poses the biggest threat to Middle East oil. Just look at Syria’s oil. When a retired American General accuses his commander-in-chief of turning US troops in Syria into oil pirates, it speaks volumes of the immorality and perversion of US foreign policy. It is a foreign policy which has no higher objective than serving Israel's interests allowing it to annex Syrian and Palestinian occupied territories with impunity and unashamedly.

    The Middle East is deeply disenchanted with the United States for demonstrating the ugly face of capitalism and a more sinister form of imperialism, one that strangles you if you don’t do what you are told. Just look at Iran, Syria, Libya, Palestine,Lebanon and Venezuela just to name a few.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Anton from Russia on February 20 2020 said:
    I'm from Russia. My opinion is that this article is very primitive and Russophobic. I'll explain why I think so. When the Americans overthrew Saddam Hussein, a Sunni, Shiites gained huge influence in Iraq. And Iraq fell under the influence of Iran. It is the Iranians and Iraqi Shiites who will decide who will produce oil in Iraq, not Russia. They won't let us, we can't even do anything. The aggressive, constant, senseless pressure of the United States on Russia and Iran forces our countries to cooperate and unite, but our countries are competitors in the hydrocarbon market. Therefore, I would not be surprised if Russian companies were stripped of the rights to develop fields that Russian companies received under the Americans. And we will not worry, this is the right of the Iraqis.
  • Myron Gasiorowski on February 20 2020 said:
    Russia is just being wise in conducting legitimate business without starting wars and invading countries/deposing governments like the U.S. does all the time. As for Sevastopol, Russia has always since the 1780's had a naval base there as Crimea has been a part of Russia since that time. The population of Crimea has been up to the present overwhelmingly Russian and Russia supporting and desired to remain part of Russia. It was only nominally gifted to the Ukrainian SSR in the 1950's without the consent of the inhabitants and has had a special status within the Ukraine with local self government.

    The Russian people have long had a strong romantic affinity with Crimea involving Russian history and literature. Pushkin was exiled there for some time. I am a third generation American of Polish ancestry on both my mother's and father's side. My wife of 21 years has family in Sevastopol, and she is from eastern ukraine (Donbass) where her parents and some of her other relatives still live. I have been to Crimea and spent time in Sevastopol and know the mood of the people. They are much better off now in Russia than they ever were or would be in the Ukraine. Russia is doing marvelous things there and the people are safer.

    Because of our knowledge and first had experience we know very well what is going on in that region.

    Myron V. Gasiorowski
    Masters in Geology
    USA
  • Matthew Mala on February 20 2020 said:
    Anyone who doesn’t recognize Russia is entering a game that’s essentially over after the fact, while the US is now unconcerned as it rides its status as the world’s LARGEST oil producer just isn’t paying attention. Enjoy the game.And say all you want about how much cheaper it is to extract oil in the Middle East...I pay under $2/gallon. The reality is the US isn’t over there because the necessity is considerably less than it was just 10 years ago. Russia (as usual) is “winning” a game the US is no longer interested in playing.
  • Lee James on February 24 2020 said:
    By its nature, this article elicits comments of a geopolitical nature. Balance of power has shifted in the Middle East. I suspect that the U.S. has less interest over all, and Russia/Iran tend to back dictators who are quite ruthless. Further, Russia has conducted an air campaign that has for some time destroyed civilian infrastructure, like hospitals. Russia denies this, just like our President is fond of denying anything that is not favorable to him.

    The whole world needs to look at the sad state of our morals, especially in regard to the destruction and displacement of hundreds of thousands of civilians in the Middle East. Not one of us can be proud, except for maybe the white helmets who remain in place, picking up pieces.

    This is the context of the oil resource in the Middle East. Big picture, this resource is not promising!

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