Exxon May Drop Contract With Iraq’s Central Government To Concentrate On Kurdistan

Exxon Mobile may be taking a dramatic step in its operations in Iraq. In October 2012, it was reported that the corporation might sell its stake in southern Iraq to concentrate on its deal with the Kurdistan Regional Government (KRG). This would be a first where a major oil company has decided to give up on the huge oil fields in Basra to work in the north instead. At first, Exxon said it wanted to operate in all parts of the country. Now, it seems that it has grown tired of its dealings with Baghdad, and might just focus upon Kurdistan.

Exxon may sell its stake in the West Qurna 1 field in Basra to concentrate upon its investments in Kurdsitan (Arabia Oil and Gas)

Exxon seems willing to sell off its share in its Basra oil field in part, because it is unhappy with its contract and business environment there. The company owns 60% of a joint venture with Shell and a state-run company worth $50 billion in the West Qurna 1 field in Basra. Exxon has told the United States State Department of its intentions, and now appears to be looking for a buyer. West Qurna currently produces 400,000 barrels a day. Exxon has invested over $1 billion in the field since it won an auction for it in 2009. Since then, the firm has run into all kinds of problems, as have other petroleum businesses in southern Iraq. That includes the lack of infrastructure, red tape, small profits, and slow payments. By March 2011 for example, Exxon had increased production at the field by 10%, and could start getting paid by the government. It was owed $470 million by the end of the year, and wanted cash instead of oil as Baghdad had been using. It wasn’t until March 2012 that a payment agreement was worked out. Exxon also agreed to $1.90 per barrel remuneration fee once it hit its output mark, which would hardly meet its costs. That was the company’s own fault, because in the 2009 auction for West Qurna it put in a bid for the lowest possible fee to win the contract that had nothing to do with what was feasible. At the same time, the Iraqi bureaucracy is notorious for being slow and inefficient, because it lacks the capacity and trained staff to deal with oil contracts. It is also run top down, which slows all decisions, not to mention that it still has a state-run, command economy from the Baath period, which makes it hard for the private sector to operate and flourish.

Another possible reason for Exxon’s change of mind is the continuous threats it has faced from the central government for its deal with the Kurds. In October 2011, the company signed a contract with the KRG to work on six blocs. (1) Baghdad claims that all petroleum deals need to go through it, and therefore has called the Kurdish ones illegal. As a result, Baghdad was very upset that Exxon decided to agree to work in the KRG, not only because it already had a contract to work on West Qurna 1, but because it was the first major energy company to do so. In December 2011, Prime Minister Nouri al-Maliki claimed that if the corporation followed through with its deal it could lead to war, because three of the blocks are in the disputed territories, which the Kurdistan Region would like to annex. The next month, the central government demanded that Exxon freeze any plans to go north. Then in February, the Oil Ministry said that Exxon could continue working on the West Qurna 1 field only if it gave up its contract with the KRG. That same month, the government took away Exxon’s lead in a water injection project for the oil fields in Basra. In March, Deputy Premier Hussein al-Shahristani who is in charge of the country’s energy policy stated that Exxon had to choose between operating in Kurdistan and southern Iraq. By April, the Oil Ministry had excluded Exxon from a May oil and gas auction, and in June, Maliki asked the Obama administration to stop Exxon’s plans. The Ministry also threatened bureaucratic retaliation such as not providing permits for work or issuing visas for company staff and workers to enter the country. Finally, in October, the premier mentioned bringing in Russian companies to replace Exxon at the West Qurna field. While Baghdad has talked tough, it is actually making empty threats. Baghdad can’t end its contract with Exxon without being sued. The corporation is also one of the largest energy firms in the world, exactly the type that the government hopes to attract to develop its oil industry. It is simply too large for the government to take any real action against.

Since the beginning of the year, the company has moved ahead with its work in Kurdistan. It has scouted locations in northern Iraq, and met with the KRG’s Natural Resource Minister Ashti Hawarmi. CEO Rex Tillerson talked with Kurdish President Massoud Barzani in Washington, and reiterated the business’ commitment to the region. In June, it opened the bidding process for drilling work on its six fields with the Kurds. It and the regional government have also won over Governor Atheel Nujafi of Ninewa where two of the blocks in the disputed territories reside. That means Exxon can work in the province without local opposition. Finally, it has started seismic surveying, and has received drilling permits from the KRG, with work to begin in early 2013. Large energy companies like Exxon go where they see exploitable and profitable oil fields. That’s the reason why it signed a contract with Kurdistan. Despite all the warnings from Baghdad it was not going to pass up the opportunity to work there, especially when it ran into so many problems with the Oil Ministry, and the central government’s red tape.

If Exxon goes ahead with its plan to get out of southern Iraq it would be a major setback for Iraq’s oil plans. Baghdad hopes to become one of the largest petroleum producers in the world. It needs major energy corporations like Exxon to achieve that goal, because they not only bring large sums of money to invest in oil fields, but the technology and know how that the government sorely lacks from years of socialism, along with wars and sanctions that isolated the country for over a decade. The combination of Exxon’s low bid that offered little room for profits on the West Qurna field, the bureaucracy in Baghdad, and the Maliki government’s threatening posture have now soured the firm’s views of southern Iraq. It appears willing to give up on its work there, and focus just upon Kurdistan. It joins other big energy companies like Chevron, Total, and Gazprom that are seeing the potential of the KRG. That places Baghdad in a bind, because it opposes al of those contracts, and wants sole control over energy policy. This could force it to compromise with the Kurds, but given the Maliki regime’s past actions, it will most likely lead to continued opposition to the KRG’s independent oil plans.

FOOTNOTES

1. Hadi, Hemn, “Nineveh governor becomes powerful ally for Kurdistan Region and Exxon Mobile,” AK News, 6/16/12

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