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

Yves here. There’s a bit of a “dastardly Russia” undertone to this piece which undercuts the notion that the author, Simon Watkins, is engaged in reporting. But Watkins may regard this positioning as necessary.

Frankly, the US has made such a mess of Iraq, and in killing Iran’s Solemani, also knocked off Iraqi general al-Muhandis, that it should be no surprise that Russia is getting a receptive audience.

By Simon Watkins, a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for Credit Lyonnais, and later Director of Forex at Bank of Montreal. He was then Head of Weekly Publications and Chief Writer for Business Monitor International, Head of Fuel Oil Products for Platts, and Global Managing Editor of Research for Renaissance Capital in Moscow. He has written extensively on oil and gas, Forex, equities, bonds, economics and geopolitics for many leading publications, and has worked as a geopolitical risk consultant for a number of major hedge funds in London, Moscow, and Dubai and authored five books. Originally published at OilPrice

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 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.

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 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.

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 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.

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  1. VietnamVet

    This article is war porn that assumes controlling oil fields is power. Instead Russia is playing the White Knight saving nations from marauding hordes. NBC News is twisting itself into tighter knots over Syria retaking Idlib Province back from the rebels. Turkey is threatening to send in its Army.

    Strategically a full-blown war between a NATO member Turkey and Russian ally Syria would surpass the adverse effects of the quarantine of China or the rising temperatures that are sliding huge glaciers off of Western Antarctica into the sea (if the war engulfs Europe). The USA remains today in Syria and Iraq to control their oil fields since to Donald Trump it means more money for the USA. Actually, America’s position there is militarily untenable. Both countries want the US gone. Iran’s precision conventional ballistic missiles have mutually assured destruction with Israel and Saudi Arabia and can destroy US bases there at will.

    When the Wuhan coronavirus engulfs the West, killing the elderly and the ill, for-profit healthcare will be overwhelmed. With nothing to sell, the global economy stops dead. There will be a glut of oil and natural gas. If they still have money, the trip to the grocery store will be Russian Roulette for senior citizens hoping there will be food to live for another month and not get viral pneumonia. The Doomsday Clock will be at midnight. American troops will have to find their way home. The forever wars and neoliberalism died with globalism.

  2. Amy Fargochar

    The best way to defeat Vlad Putin, because Russia is Vlad Putin and his kleptocratic cronies, is to go full carbon free and render fossil duels obsolete. Russia is a rentier state who’s prosperity is predicated mostly if not entirely on fossil fuel sales guarded by an arsenal of nuclear weapons that can destroy the planet ten times over. If the West is seriously about the threat Vlad Putin poses, they will seriously address climate disruption. It will kill two birds with one stone. Anything short of this is pure feckless bluster.

    1. timbers

      At least you appear to realize Russia’s nukes are for guarding Russia.

      As opposed to American nukes that are not for self defense but to aggress and destroy Russia/Iran/Venezuela/Syria/Iraq/Libya and anyone else who insists on their sovereignty against the Evil American Empire.

    2. John A

      If the US and its NATO puppets were serious about combatting climate disruption, they would stop all their stupid and hugely environmentally damaging military exercises close to the Russian border, the Black Sea and the Pacific.
      The only threat Russia poses is to the rice bowls of the Military Industrial Complex were their bullying bluster to be properly reported on in mainstream media.

    3. rosemerry

      The likelihood of the USA going carbon-free is NIL, and your comments on kleptocracy/rentier follow the article itself, which is clearly full of envy. Russia under Pres. Putin is devoted to improving conditions for the population despite sanctions, blaming, economic targeting, and has developed defensive weapons NOT offensive, and tried to keep international treaties reducing risk of conflict, the opposite of the Western/US actions and words. What is “the threat Vlad poses?”
      The article mentions the “annexing’ of Crimea, which is of course the essential warmwater port that NATO wanted to take. Instead, a referendum allowed a bloodless takeover of a place which had been Russian for centuries. Ukraine has been supported by the “West” simply to go against Russian interests. It is hardly a working democracy!

  3. The Rev Kev

    This article sounds like the Russians have just started to go into Iraq but they were there before the invasion nearly twenty years ago. In fact, in 2007 the US tried to get the Iraqis to void a contract the Iraqis had with Russia for the massive West Qurna oil field but that failed as the Iraqis would have been on the hook for all $13 billion in debt they owed Russia and the US would not help. But there is a military aspect to being rich in resources – there always is – and for Iraq it is particularly acute.

    The Middle East is a rough neighbourhood and any country there has to be strong enough to defend itself or else be vulnerable. After the invasion the Coalition tried to organize Iraq so that they had no military but the Iraqi resistance put aid to that idea. But what would make the Iraqis think hard was when ISIS was marching on Baghdad. The US refused to use its air power to stop them and refused the Iraqis the use of pilots & paid-for aircraft training in Texas until the government would fulfill a laundry list of demands. It was the Russians – and the Iranians -that sent military equipment and specialists that helped stop ISIS before they got to Baghdad.

    More recently the Iraqis had to buy Russian tanks to fight ISIS as the American tanks they had purchased were being deliberately not being serviced until the Iraqis fulfilled an American demand. There is a shift now to buy Russian equipment because of American fickleness with military gear. If that was not enough, the US has never gotten Iraqi electricity production back to pre-war levles in spite of billions spent. To add insult to injury, Trump demanded recently that Iraq hand over half of Iraqi oil production to repair the electrical grid with of course no guarantees that they would ever do the work.

    So the long and the short is that there is no trust with the US and Russia is seen as a more reliable partner – as is China – and that there is no net benefit with going to the US. And you never know if a second-term Trump might not seize the Iraqi oil fields if he felt he could get away with it. It is a matter of being reliable-capable and it seems that the Russians are proving themselves that, hence their success here. Reliability is vital and cannot be replaced.

  4. Polar Socialist

    Russia has been using soft power in Middle East ever since Peter the Great started fighting the Ottomans. Ever since the western powers (read: great Britain) always came to the rescue of turks if Russia had military success, so they seriously used the other alternative: economical, diplomatic and cultural influence in arab countries.
    During the cold war they supported any regime in Middle East opposed to US-Israeli influence (or downright aggression).
    After the cold war the Russian foreign minister, later prime minister Primakov, was an Arabist by training and personally knew almost every principal actor in Middle East. He is presumed to be the architect of the current Russian policy (which is a continuation of the old Soviet policy, which was based on the old Russian Empire policy).
    It’s a long, long history of using culture, diplomacy, economical help and weapon sales to have influence in an area important to the Russian security in their southern sphere.

    1. steelyman

      Thanks for the mention of Primakov. I hope your comment re him being the architect of the current Russian ME policy is true.

      From Wiki:
      On 24 March 1999, Primakov was heading to Washington, D.C. for an official visit. Flying over the Atlantic Ocean, he learned that NATO had started to bomb Yugoslavia. Primakov decided to cancel the visit, ordered the plane to turn around over the ocean and returned to Moscow in a manoeuvre popularly dubbed “Primakov’s Loop”.[26]

  5. Harry

    I do some small amount of business in Iraq. The author should know better. There is a Russian presence in Kurdistan, but it is because US oil majors are pulling out. As a result a Gazprom subsidiary won a deal to develop a block. The main player in Kurdistan is now DNO. Thats cos DNO are utterly fearless(or totally mad). In Federal Iraq, its dangerous. Not ridiculously dangerous but you have to take more security precautions. Yes Russian oil companies will be prospecting for business. Thats cos most of them are now ex-growth in Russia. Look at Lukoil.

    The really interesting presence is China. Chinese construction and engineering companies win a lot of deals. Most never come to fruition but they undercut everyone else. Whether thats their cost structure or simply the Chinese Exim appetite for risk I couldnt tell you. But its often a Chinese contractor.

    1. Typing Chimp

      The fact that money is free (or cheaper) in China for many companies due to the real inflation rate being higher than interest rates certainly helps

  6. Norb

    The US pats itself on the back and always talks about being the worlds “policeman”. The American elite also want it both ways too- to bemoan having to do the police work in the first place, while also endlessly stressing that the world would go to pieces if her armed forces were not in foreign lands. Make up your mind please.

    It would be very ironic if Russia proves to truly be an effective world “policeman”- as seems more evidently to be the case.

    Propaganda aside, who brings more stability and peace.

    In one respect, the war profiteers are the least of the problem. If Space Force and Nuclear rearmament are just more money boondoggles, while tragic, still survivable. If there is a faction that actually believes in this stuff as a viable national policy for defense- and offense- then when reality hits the road as the saying goes, the American psyche might not survive the impact, let alone the rest of the world.

    Americans are shielded from the horrors of war to the nations detriment.

  7. Typing Chimp

    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

    Umm….No. The lifting costs for both countries are a lot higher.

    And that ignores the fact that lifting costs are not the primary costs involved in Iraq getting the oil out of the ground and to market.

    1. Yves Smith Post author

      He said “according to the IEA”. The IEA may be wrong, but he has a source.

      I’ve seen more like $3 to $5 for the Saudis but that may be dated.

  8. Kiers

    You guys are NOT thinking venally nor strategically enough. The US powers that be, love to put on this news story of foreign powers eating US cake. It’s simply not credible imho. Post Iraq war in 2003, “W” bush played the same “eating our cake” story out about China taking Iraq oil for example. There are definitely other arrangements in place beneath the surface we are never told. Iraq is now US piggbank. It can trade that asset as it desires, sadly. Stories like this are just smoke.

  9. John Wright

    I am struck by the size of the Russian investment ($20 billion) while the USA has “invested” nearly 6 trillion (300x) as much in war expenditure in the region.

    And this has the Russians bettering the USA in Iraq with their relatively small strategic investment.

    Maybe it is long overdue for the USA political class to reassess how it spends its citizens’ resources in the Middle East.

    But I’m not expecting that to occur.

    1. Synoia

      How much of the $6 Trillion was actually spend at home in the US, that is to US Companies and personnel? Money spent in that manner does little for the Iraq economy, but much for the US economy.

  10. JTMcPhee

    And nary a thought given to maybe just soft-boiling or sautéing the planet instead of cooking it up well-done.

    What kind of political economy do “we” want, again?

  11. RBHoughton

    The description of ‘incremental colonialism’ about Russian investment in Iraq sounds like what we Poms do in Nigeria and a few other places where we have a voice. Its what ‘you know who’ has been doing everywhere else since, so its hardly surprising that a tried and tested means of lulling the nationals into acceptance is occurring again. In the present shape of our world, having multiple investors is a wise course for Iraq to take.

    The article does not mention the recent Greek agreement to lease a new base to USA to overlook and monitor traffic through the Dardanelles. That looks rather more provocative than the Iraq oil.

  12. drumlin woodchuckles

    What is the longest-range consequence of this and every other form of petroleum game? Long, short or medium?

    More carbon skyflooding, more global hotting, more ocean acidising.

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