IMPLICATIONS OF THE RECENT IRAQI-SOVIET OIL AGREEMENTS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP08S01350R000100270001-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 14
• Document Creation Date: December 21, 2016
• Document Release Date: September 9, 2008
• Sequence Number: 1
• Publication Date: October 1, 1969
• Content Type: MEMO

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Secret
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
'Implications of the Recent Iraqi-Soviet Oil Agreements
Secret
ER IM 69-139
October 1969
Copy No. L U j
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
October 1969
INTELLIGENCE MEMORANDUM
Implications of the Recent Iraqi-Soviet
oil Agreements
In June and July 1969, Iraq and the USSR signed
two agreements to assist in developing a national
oil industry in Iraq. The agreements are not unique
for either party, but they are of special interest
because Soviet participation introduces a new ele-
ment in Iraq's longstanding dispute with the Western-
owned Iraq Petroleum Company (IPC). Moreover, the
involvement of the USSR again raises the specter of
Soviet access to, or control of, Middle East oil.
This memorandum analyzes the probable aims of
the agreements, the prospects for success, the gains
that might accrue to Iraq and, the USSR, and the
possible effects on the IPC.
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The June Agreement
1. The first of the two agreements with the
USSR is designed to aid Iraq in oil exploration
activities. The agreement was signed in Baghdad on
21 June 1969 between the government-owned Iraq
National Oil Company (INOC) and the Soviet state
trading organization, Mashinoeksport. Mashinoeksport
will provide oilfield equipment and related techni-
cal assistance for installing and operating the
equipment and will arrange for training Iraqi
personnel in Iraq and in the USSR. The total value
of the goods and services authorized under the agree-
ment is $72.million. The agreement,-effective for
seven years, will be implemented through a series
of contracts to be negotiated as required. INOC will
pay 10 percent of the value of each contract at the
time of signing and 15 percent upon submission of
shipping documents. 'die USSR will provide a trade,
credit for the remaining 75 percent to be repaid over
five years in equa annua installments with interest
at 3 percent per annum. Payments are to be made in
accordance with the Iraqi-Soviet trade agreement of
1958, which provides for periodi se t.1_ement of
accounts in convertible currPn~ies.
2. The June agreement appears to be Iraq's
first step in obtaining equipment and acquiring
skills for developing oil resources in acreage
previously held by the IPC a a now s n dto TTNOC.
h see the map), the only area mentioned
specifica-ly in the agreement, has not been explored,
There is nothing in
the text of the agreement to indicate that the USSR
will participate in the INOC operation or in the
disposal of any oil that might be discovered.
3. The first contract signed under the June
agreement has an estimated value of $9.5 million
and covers the supply of geological and geophysical
drilling equipment and related materials sufficient
for two years' activities, presumably at Al
Halfayah. A related agreement of unspecified value
provides for "technical assistance" for a period
of three years.
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The July Agreement
4. The second agreement provides for Soviet
assistance both for the exploitation of the North
Rumaila field and for the survey of unexplored
arPa~,~*- It was signed in Moscow on 4 July 1969 by
the two governments, rather than by state agencies
as in the June agreement. Under the July agreement
the USSR extends credit amounting to $67 million,
with interest at 2.5 ercent per year, for Soviet
tec nica an economic assistance for development
of Iraqi oil resources. The agreement will be
imp emente through separate contracts. The portion
of credit used before 1 Januar 1973 is to be paid
-
in seven equal annual installments at
date. The part use a ter 1 January 1973 is to be.
Yepaid in seven equal annual installments beginning
one year a ter t at date. Both principal and interest
are re a a le in Ira i oil valued at prices prevailing
in e open market, but settlement will be made in
convertible currencies i ragi of is not avai = le
for repay . The provision for repayment in oil
is consistent with the new types of contractual ar-
rangements made between national oil companies in
the Middle East and foreign oil companies. It
differs, however, from Soviet assistance agreements
with other countries, which do not specifically
mention repayment in oil.
5. The USSR will restore existing "shut-in"
wells and construct oil-gathering facilities at the
North Rumaila oilfield and will lay an 80-mile i q-
line to the port of Al Faw on t e Persian u f and
build storage facilities there. Development work
is to be comp ete an opera ion of North Rumaila
* The North Rumaila deposit was part of the original
concession granted to the IPC, the foreign-owned
consortium that developed Iraq's oil economy. The
deposit was included in the area reclaimed by Iraq
under Law 80 of 1961,,but IPC has never agreed to 25X1-
reZin ish the
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IRAQ: Oil Industry Operations and Locations of Future Iraqi-Soviet Activities
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at an initial oil production rate of 100,000 barrels
per day (bpd) is to begin in the first quarter of
1972. The possibility of increasing production to
about 360,000 bpd at an unspecified future date also
was mentioned in the-agreement.* The agreement does
not describe the nature of Soviet responsibilities
for the production and disposal of North Rumaila oil
or indicate whether or not the USSR will be an
exclusive contractor on the project.
6. The USSR also will prepare a program for
the survey of acreage in southern Iraq at Nahr
Umar, Qalib al Luhays, Ar Raki, and Ad Dujaylah
where the presence of oil is suspected. If the
survey at these locations and at Al Halfayah (men-
tioned in the June agreement) justifies development,
the USSR will "examine the possibility of providing
technical assistance in implementing- a eve opment
7TH pro ram oreover, e USSR wi 1 prbviae cal
assistance in preparing for operation of the Ar
Ratawi oilfield, which is contiguous to Rumaila.
Other Agreements
7. The Iraqi-Soviet agreements are not unique
for either country. Iraq currently has agreements
outside the framework of its concessionary arrange-
ment with the IPC. Since November 1967, Entre prise
de Recherches et d'Activites Petrolieres (ERAP), a
French state-owned enterprise., has conducted ex-
ploratory work under a service, contract in areas
of southern Iraq that previously were held by IPC.
ERAP will recover its exploration costs in oil, if
any is found, and would assure a market for most
of the oil produced. Late in 1968, ERAP announced
an oil discovery.
* These production goals seem realistic. Proved
oil reserves in North RumaiZa probably exceed 10
billion barrels, representing between 25 and 50 per-
cent of Iraq's total proved reserves.
the deposit could
ve ope to produce: between 400,000 and 500,000 bpd
in two or three years.
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8. Two other agreements involve Yugoslavia and
East Germany. In mid-1969, INOC and INA (the
Yugoslav oil monopoly) signed a technical cooperation
agreement to assist INOC in oil exploration and pro-
duction activities and the training of Iraqi personnel.
(The details of this agreement were not published.)
The East German agreement, also signed in mid-1969,
extended a credit of about $84 million to be used
over the period 1969-74 for the construction of un-
specified plants for various Iraqi ministries, in-
cluding the Ministry of Oil. This credit is re-
payable over 12 years at an interest rate of 2.5 per-
cent per annum beginning one year after the first
project is operational. Seventy pe-r--cent-o~f-the._re-
payment is to be in crude of and the remainder in
goods produced by the plants to be constructed.
9. For its part, the USSR has agreements with
the Arab states of Algeria, Egypt, and Syria.in-
volving economic and technical assistance for their
oil industries. The value of the agreements with
each of these states, however, is substantially less
than the value of either of the Soviet agreements
with Iraq.
Implications of the Agreements for Iraq
10. The Iraqi-Soviet agreements may help Iraq
to gain experience in oilfield operations and to
fulfill its plans to develop directly acreage formerly
held by the IPC. The agreements will not change
Iraq's oil economy or significantly reduce its heavy
dependence on the IPC.* It is not possible to pre-
dict the degree of success that might be achieved
in the areas of southern Iraq where exploratory
activities are planned. North Rumaila, however,
probably could be developed without difficulty to
* In 1968 the IPC produced oil at a rate of about
1.5 million bpd and its exports earned $487 million
in hard currencies for Iraq. Almost all of this
oil was exported to markets controlled by the share-
owners of the IPC. Moreover, over 1 million bpd
of the IPC production originates in the north, where
Kurdish dissidents are most active and where the
current government's control is least effective.
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produce at the planned initial rate of 100,000 bpd
in 1972 and the subsequent level of 360,000 bpd,
perhaps three to five years later. At the initial
rate of production, Iraq could expect gross revenues
of about $34 million; debt servicing would reduce
this by about $12 million.*
11. Iraq probably would have no trouble marketing
the quantities of North Rumaila oil planned for the
first phase of production either to the USSR (for
its own use or for resale to, other Communist countries)
or to small, independent refiners in the Free World
for hard currencies. Under either circumstance the
proceeds could be applied to meet the scheduled
financial obligations of the agreements.
12. The quantity of oil to be produced at the
end of the second stage may be more difficult to
market because it may be greater than the Communist
countries would be able to accept on a continuing
basis. It is unlikely that the Communist countries
would use their scarce hard currencies for purchase
of Iraqi oil after Iraq had repaid the outstanding
credits. They might be willing to buy part of the
oil on a barter basis. Iraq, however, would prefer
to sell its oil to Free World countries for hard
currency. The amount it would be willing to barter
thus depends on its success in hard currency sales.
13. The worldwide oil surplus that is now de-
veloping probably will continue beyond the mid-1970's,
and Iraq could have trouble finding markets for INOC
If Iraq were to settle the dispute with the IPC,
the government
could expect additional revenues of $890 million,.
in the period 1970-74. 'This estimate includes a
lump sum payment of $168 million in 1970 in settle-
ment of all outstanding financial issues, changes
in accounting procedures which would increase
revenues by $33.6 million annually, and additional
revenues from an overall increase in total oil
exports of 7 percent annually.
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oil in the Free World. The prospects for disposing
of this new oil are complicated further by the new
oil that ERAP may produce in Iraq. The government
could, however, defer the second stage of North
Rumaila development until markets were assured.
Possible Gains for the USSR from the Agreements
14. The two agreements offer the USSR an opportuni-
ty to further its influence in Iraq and to gain access
to some Middle East oil. The June agreement will
provide the USSR with a new, though small, source
of hard currency, and the July agreement will provide
it with a volume of oil that it can use profitably.
The rate of growth of Soviet oil production is ex-
pected to decline until the mid-1970's, when sizable
quantities of domestic oil should become available
from resources now being developed in Western Siberia.
This decline, in the face of increasing demand at
home and in Eastern Europe, will probably prevent
the growth of, or may even reduce, Soviet hard
currency oil exports to the Free World. Oil from
Iraq could be supplied, however, to the oil-deficient
Soviet Far East, to North Korea when a new refinery
is completed there, and even to the countries of
Eastern Europe.* This would free corresponding
quantities of the USSR's oil for export to its Free
World markets.
15. Implementation of the agreements has some
potential drawbacks for Iraq as well as, for the
USSR. Much of the Soviet work in foreign oil activi-
ties has been below the standards of Western oil
companies. Equipment generally has been inferior
to that available from the West, technology has been
criticized as outdated, and the work rarely has been
completed on schedule.** Moreover, the traditional
* In spite of higher transport costs resulting
from the closure of the Suez Canal, Bulgaria and
Cuba imported crude oil from Egyptian sources in
the Red Sea in 1969.
** The Iraqi Director of Industrial Design is
critical of the July agreement, citing previous
difficulties with Soviet deals, high costs, and
failure to deliver material and equipment on time.
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Soviet stubbornness in negotiating contracts may
delay or even preclude the full implementation of
the agreements with Iraq. There is evidence that
contract negotiations pursuant to these agreements
already have created problems. Although the USSR
should be able to develop successfully the North
Rumaila field, where the IPC had already done ex-
tensive work, failure there or elsewhere in Iraq
would damage seriously the Soviet image as an al-
ternative to Western oil companies in Iraq and else-
where in the Middle East.
Possible Effects on the Iraq Petroleum Company
16. The effects of the Iraqi-Soviet agreements
on the relationship between Iraq and the IPC are
difficult to judge. In mid-July 1969 an IPC working
group concluded that the Soviet-Iraqi agreement did
not completely eliminate the possibility of an
Iraq-IPC deal on North Rumaila. This judgment
followed reports that IPC personnel in Iraq were be-
ing treated with a deference and cordiality not
evident in recent years; it followed also the settle-
ment of the potentially serious Basra cargo/port dues
dispute on terms readily acceptable to the IPC. The
extent to which these incidents influenced the IPC
conclusion is not known, but available evidence and
the widespread publicity attending the signing of
the Iraqi-Soviet agreements do not support IPC's
apparent optimism. It is unlikely that North Rumaila
would revert to IPC under any new agreement with the
Iraqi government. IPC might, however, retreat to
the role of a contractor to the Iraqi government.
17. The IPC probably will resort to legal
pressures if it is excluded permanently from North
Rumaila. The company rejects as illegal the pro-
visions of Iraqi Law 80, and it has previously
threatened legal action against any party purchasing
or transporting oil from North Rumaila. So long as
North Rumaila remained inactive and the possibility
existed that the IPC could retain or recover its
interest there, no action was taken. If the July
agreement now closes the door on a settlement, the
IPC may decide to act to protect its claim to North
Rumaila and to discourage other oil-producing states
from following Iraq's example. Legal action against
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the USSR, other Communist countries, or Free World
oil companies that might traffic in oil from North
Rumaila is unlikely to be successful. Moreover,
IPC operations elsewhere in Iraq are vulnerable,.to
government harassment if the IPC pursues its -threats
of legal action.
18. The mutual benefits of maintaining current
relations, however strained, probably will preclude
a complete break. between the government and the IPC
during the next few years. The capability to deliver
one million bpd of oil from northern Iraq to the
eastern Mediterranean for markets in Western.Europe
gives the IPC an important competitive advantage,
particularly while the Suez Canal is closed. At
the same time, the sale of this oil is the principal
source of Iraq's earnings of hard currency, and Iraq
would have difficulty marketing the quantity of oil
that the IPC is producing there.
19. The Iraqi-Soviet agreements do not represent
a serious new threat to normal world oil commerce
or to the IPC. Nor do they represent any significant
change in either Soviet or Iraqi policies regarding
oil; the USSR has assistance agreements with other
Middle East states and Iraq has agreements with
countries other than the USSR. Although a small
segment of Iraq's oil economy will become oriented
to the Communist world, Iraq will not abandon its
profitable commercial relationship with the Free
World oil industry. Iraq will continue to depend
on the IPC for the bulk of its revenues and will
not jeopardize the potentially rewarding arrange-
ments with France's ERAP. Conversely, IPC probably
will seriously consider granting further concessions
in order to preserve its valuable assets in Iraq.
20. The USSR, in addition to expanding its politi-
cal and economic presence in a radical Arab state on
the Persian Gulf, could have access to oil on a
barter basis that would be sold in Free World markets
for hard currency or would release a similar quantity
of Soviet oil for those markets. Successful imple-
mentation of the agreements might further encourage
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other Arab states to develop sources of oil inde-
pendent of Western oil interests. Iraq itself would
have access to small quantities of oil without
having to share profits with foreign oil firms.
Also, the agreements may help to develop skills and
know-how within Iraq for further growth of INOC.
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