There are some contradictory stories emerging about whether
oil major Royal Dutch Shell is in negotiations with the Kurdistan Regional
Government (KRG). Twice before it was in talks with the Kurds, but withdrew to
protect its investments in southern Iraq. Now the equation has slightly
changed. It has secured all of the contracts it was interested in with the Oil
Ministry, while other large oil corporations have taken the leap to work in
Kurdistan. It could now very well follow their lead and move north as well.
That would seemingly break with the conservative mold it has forged so far,
while working in the country.
When it comes to oil companies deciding to defy Baghdad and
signing a deal with Kurdistan, all news reports have to be taken with a large
grain of salt. On September 21, 2012, Reuters had a story that Shell was considering working in Kurdistan. The article claimed that it was inspired
by the fact that other major oil companies such as Exxon Mobil and Total had
recently signed contracts with the KRG, and Baghdad had taken no serious action
against them. Deputy Premier Hussein Shahristani’s office denied that story, and the central government allegedly threatened to blacklist Shell if it went to the north. There was another piece that stated the company had
backed out of talks, because of those warnings. More importantly, a Shell
spokesman said that while the company would eventually like to work in all
parts of Iraq, at the time it was happy with its operations in the south. It
would not be surprising if Shell were considering working in Kurdistan, because its terms are much better than those offered by the Oil Ministry. At the
same time, many firms do not get paid, have to rely upon the hope that their
stock prices will go up with any discoveries they make there, and the region
relies upon short-term deals with Baghdad in order to export. The central
government has also threatened to sanction any company that moves north, but
its stories about majors dropping negotiations with the KRG or halting their
work have consistently been wrong. Right now it is impossible to tell which
direction Shell will take on the matter. However, one could look at their past
history.
Twice before Shell was in talks with Kurdish officials. That
occurred in 2007 and 2011. The first time, the Oil Ministry had not opened up
to foreign investment yet, but Kurdistan had. Details of the matter are not
clear, but it would appear Shell decided to wait until the central government
offered up the much larger southern petroleum fields. In 2011, the company was finalizing a natural gas deal in Basra province, and did not want to
jeopardize that. That showed a conservative streak within the company that
could point to its future actions. Shell may again be unwilling to go north if
it thinks its projects in the south are more important.
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| The Majnoon field is one of two that Shell has invested in (Wall Street Journal) |
Shell currently has three contracts with the central
government. One is for the Majnoon field in Basra, which it has a joint venture with Malaysia’s Petronas. Shell is expected to invest between $2.5-$3 billion into that project by the middle of next year, out of a total of $50
billion. It is also a junior partner with Exxon in Basra’s West Qurna 1.
Finally, it has a $17 billion deal with Mitsubishi to collect natural gas from several
fields in Basra, which took three years to finalize. As part of that
endeavor, it has signed a memorandum of understanding to build a petrochemical plant as well. The company’s work has not gone smoothly in the south. Its
natural gas project is still caught up in red tape. It claims that it is losing ¢60 per barrel on the Majnoon field, and won’t start getting paid until
the first half of 2013 when it will reach its first production target of
175,000 barrels per day. It is then supposed to start earning $1.39 per barrel,
but the actual amount will be less as it has to pay a ¢35 tax. Its payments for West Qurna 1 have been caught up in the bureaucracy as well. Shell
obviously has a huge amount of money invested in southern Iraq, and plans on
putting in a lot more. That includes the largest natural gas deal in the
country, which has huge potential. It’s for those reasons, that it was
unwilling to make the leap into Kurdistan in the past. That being said, it is
facing problems dealing with Baghdad. That’s because of the unwieldy government
that seems to make even the most mundane matters difficult. Working in the KRG
is much easier, and a major draw.
Shell could go either way when it comes to its talks with
the Kurdistan Regional Government. In the past, it has been weary of giving up
its endeavors with the central government. It has been willing to deal with
Baghdad, and even expand its operations in the south. At the same time, its
profits look to be slim, Kurdistan offers a much easier business environment,
and official threats of retaliation by the Oil Ministry appear to be feckless.
Shell has followed a conservative course in Iraq however. That would point to
it staying the course, and concentrating upon its three contracts in Basra rather
than taking the jump into the north. That doesn’t mean it won’t follow that
path in the future. Still, further details will have to emerge before Shell’s
ultimate decision can be determined.
SOURCES
AK News, “Facts and figures: oil and transparency in Iraq,”
5/27/12
Aswat al-Iraq, “Iraq signs deal with Shell to set up huge
petrochemical plant,” 4/6/12
Bertrand, Pierre, “ExxonMobil’s Iraq Oil Field Contract
Could go to Lukoil, Shell,” International Business Times, 11/30/11
Dow Jones, Reuters, “Shell to Replace Exxon at West Qurna
1?” Iraq Business News, 11/21/11
Hafidh, Hassan, “Iraq in Initial Gas Accord With Shell,”
Wall Street Journal, 7/12/11
International Crisis Group, “Iraq And The Kurds: The
High-Stakes Hydrocarbons Gambit,” 4/19/12
Kramer, Andrew and Werdigier, Julia, “Exxon Spars With Iraq
Over Lack of Payment,” New York Times, 12/22/11
Mackey, Peg, “Shell again weighs energy openings in Iraqi
Kurdistan,” Reuters, 9/21/12
Mackey, Peg and Callus, Andrew, “Insight: Oil’s big players raise
the stakes in Iraqi Kurdistan,” Reuters, 8/5/12
Markey, Patrick and Mackey, Peg, “Analysis: In Iraq, oil
majors play north versus south,” Reuters, 4/5/12
Pfeifer, Sylvia and Blas, Javier, “Shell pulls out of
Kurdistan oil talks,” Financial Times, 11/16/11
Rasheed, Ahmed, “Exclusive: Shell in talks to cut Iraq’s
Majnoon output target,” Reuters, 5/8/12
Razzouk, Nayla, “Iraq Approves $17 Billion Gas Deal With
Shell, Mitsubishi,” Bloomberg, 11/15/11
Reuters, “Iraq says Shell denies oil talks with Kurdistan,”
9/26/12
- “Shell to start pumping gas at southern Iraq project,”
7/11/12
Shafaq News, “Shell withdraw from Kurdistan negotiations
after hours of Baghdad threats,” 9/23/12
Yackley, Ayla Jean, “Shell sees Majnoon resuming oil output
in Q1,” Reuters, 9/18/12
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