LUKOIL declared force majeure at the West Qurna-2 field in Iraq.

LUKOIL declared force majeure at the West Qurna-2 oil field in Iraq.

Last week, Iraq was forced to stop all cash and oil payments to LUKOIL due to US sanctions, despite the fact that financial transactions could continue until November 21, Reuters reported, citing sources.

The allocation of 4 million barrels of oil to LUKOIL in November as profitable production from West Qurna-2 was cancelled.

The company's cash flow from its operations in Iraq remains frozen until a payment mechanism is developed, an Iraqi Oil Ministry spokesman said.

In response, LUKOIL sent an official letter to the Iraqi Ministry of Oil, declaring force majeure and admitting that it could not continue normal operations at West Qurna-2.

If the causes of force majeure are not eliminated within six months, the company will cease production and completely withdraw from the project.

The possibility of declaring force majeure is provided for in the contract terms. This will allow LUKOIL to seek legal protection against penalties for failure to fulfill contractual obligations.

LUKOIL has already terminated contracts with all foreign employees who are not Russian citizens. Only Russian and Iraqi employees remain at West Qurna-2.

West Qurna-2, with initial recoverable reserves of 14 billion barrels of oil, is being developed on the basis of a service contract signed by LUKOIL in January 2010 for 25 years.

The Iraqi state-owned North Oil Company owns a 25% stake in the project. LUKOIL is fully funding the entire project. After completing the historical cost compensation phase, the company began receiving full reimbursement for current costs in the form of a share of the oil produced. LUKOIL also receives a royalty equal to its 75% share of the project participants' profits of $1.15 per barrel of oil produced, and pays profit taxes.