Lukoil’s Iraqi Oil Keeps Flowing as Baghdad Takes Over Sales

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(Bloomberg) — Oil from Lukoil PJSC’s share of a field in Iraq is continuing to flow to global markets, alleviating concerns about supply disruption in the wake of sanctions on the Russian energy giant. 

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It emerged this month that Lukoil was forced to declare force majeure on shipments from its share of the West Qurna 2 deposit — a step that allows the company to skip its contractual obligations. Payments to the company were also frozen.

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The decision, which came after US Treasury’s Office of Foreign Assets Control announced sanctions on the Russian giant in October, created a question about whether the oil would continue to flow.

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People familiar with the matter said the field’s oil continues to be shipped to customers and that state marketer SOMO has taken over sales and is keeping any proceeds in Iraq for the time being. They asked not to be identified discussing confidential matters.

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The continued operation of West Qurna 2, Lukoil’s biggest international upstream asset, is an example of how countries are working to avoid supply shocks after the US measures. OFAC last month imposed sanctions on Lukoil and Rosneft PJSC, two of Russia’s top producers — measures that were meant to begin on Nov. 21. Some of the restrictions on Lukoil were delayed until next month.

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Iraq has been in talks with the US Treasury about trying to shift ownership of the West Qurna 2 stake before sanctions kick in, or to extend the deadline further. 

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West Qurna 2 can produce about half a million barrels a day of crude that flows to refiners in Asia and Europe. Iraq’s marketer SOMO has been selling some of the oil from the deposit directly to refiners, while the rest is being distributed to other producers operating in Iraq, the people said.

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Businesses that work with US-sanctioned entities run the risk getting cut off from western financial system and transactions conducted in dollars. That’s a concern for producers given that oil is mostly sold in dollars and producers pay contractors in the currency for infrastructure investments.

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Iraq’s oil ministry didn’t respond to a request for comment outside normal business hours. Lukoil didn’t immediately respond to a request for comment.

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International oil companies in Iraq are paid in barrels rather than cash to compensate them for their work in the country. The companies also have access to a certain amount of so-called equity crude based on their stakes in the fields that they can sell on the open market or use in their own refineries.

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International firms like Exxon Mobil Corp. and Chevron Corp. are in talks about taking over the Iraqi fields. 

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Read: Lukoil’s Suitor List Expands to Exxon, Chevron, Abu Dhabi (1)

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Swiss energy trader Gunvor abandoned a bid for all of Lukoil’s international assets after the US Treasury called the trader “the Kremlin’s puppet” in a social media post, saying it would never get approval for a deal.

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