Russia's LUKOIL banks on oil revolution in Iraq

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LUKOIL, the big Russian winner at Iraq's weekend oil auctions, expects a "revolution" in world oil markets when enough crude to add 20 percent to global supply starts to flow from the country's supergiant fields.

Billionaire LUKOIL shareholder Leonid Fedun told Reuters on Monday he expected a fivefold rise in Iraqi production to cap oil price growth, while also deterring investors from pursuing more difficult and costly projects in other parts of the world.

"A top manager at a leading Western firm said the modern history of the oil business will be split into the pre-Iraq and post-Iraq periods. I agree," Fedun said in an interview.

"We're witnessing a revolution in oil production."

Iraq, emerging from the shadows of war, has deals on the table to raise oil capacity to 12 million barrels per day from 2.5 million bpd today, a level that would eclipse second-ranked Russia and leave the country behind only Saudi Arabia.

LUKOIL, frustrated by the loss of a Saddam Hussein-era contract, finally realised its ambition of developing Iraqi oil when its partnership with StatoilHydro won the rights to develop the West Qurna Phase Two field.

"Investment will be in the billions of dollars. The project is colossal," said Fedun, a vice-president of LUKOIL whom Forbes magazine this year ranked Russia's eighth-richest businessman.

The LUKOIL-led consortium proposed a remuneration fee of $1.15 per barrel and output of 1.8 million barrels per day at West Qurna Phase Two, an eventual target roughly equal to the entire output of LUKOIL's fields in Russia.

The deal, which gives LUKOIL access to 12.9 billion barrels in oil reserves, was more than a service contract, Fedun said.

"It's a hybrid between a service contract and a production sharing agreement," he said. "There is a remuneration fee and we could potentially book a portion of the reserves, although we don't yet know how much.

"As soon as the contract comes into force, we will move quickly toward its realisation. Within three to four years we will launch the first phase, and then the second."

QUESTIONS OVER PRICE

Fedun said the ministry's target of reaching 12 million bpd was realistic and that, as these plans are realised, the effects on the world market would be widespread.

"World oil supplies will rise by a minimum 20 percent and demand won't increase at the same rate over the same period. This raises questions over the long-term oil price," he said.

It also raises questions over investment elsewhere, he said.

"A whole host of projects that were under consideration now seem uncompetitive," Fedun said.

"Does the industry need to invest in the development of difficult oil deposits, such as oil sands, or in deep drilling in the Gulf of Mexico, West Africa or the Brazilian shelf?

"Do we really need the second phase of the East Siberia-Pacific Ocean pipeline?" he said, referring to Russia's landmark project to deliver East Siberian oil to Asian markets.

LUKOIL is alone among Russia's top four oil producers in not having launched a major East Siberian oil deposit.

Fedun said the potential rewards in Iraq -- low production costs, low transport costs and the promise of access to other lucrative fields -- made the inherent risks worthwhile.

"Despite terrorist acts, the country is politically stable. Yes, there are risks, but the regions where the big companies are working are comparatively stable and located not far from the export infrastructure."

LUKOIL had no immediate plans to invite its 20 percent shareholder, ConocoPhillips, to join its Iraqi project. But Fedun denied U.S. majors had performed poorly in auctions dominated by Russian, Chinese and other firms.

"ExxonMobil were successful," he said. The U.S. major led a group including Royal Dutch Shell to win the West Qurna Phase One field in the first round of auctions.