ExxonMobil May Lose Other Iraq Oil Contract On Kurdish Deal

LONDON (Dow Jones Newswires), Nov. 11, 2011

The Iraqi government said Friday Exxon Mobil Corp. (XOM) could lose its current contract to redevelop the giant West Qurna oil field if it proceeds with an agreement to explore for oil in the Kurdish region of the country.

The spat highlights the political challenges for foreign companies operating in Iraq and threatens to further inflame tensions between the Baghdad government and the semi-autonomous Kurdish region, who have long disputed the right to grant oil licenses.

It also represents a clear risk for Exxon Mobil, which is struggling, like other giant oil companies, to get access to new oilfields large enough to replace the vast amount of oil it produces from its reserves. Exxon's operations in Iraq are a critical toehold in a country that could soon become one of the world's largest producers of oil.

"Exxon should choose between either continuing with its deal with the Kurdistan Regional Government or lose its contract in southern Iraq," Abdul Mahdi al-Ameedi, head of petroleum contracts and licensing directorate at Iraq's Oil Ministry, said in an interview with Dow Jones Newswires.

ExxonMobil has signed agreements to explore for oil and gas in six blocks in the Kurdish region of Iraq, Michael Howard, communications adviser to the resources minister of the Kurdistan Regional Government, told Dow Jones Newswires. ExxonMobil declined to comment.

Exxon, the world's largest oil company, has a reputation of playing conservatively; that it seems to be in the middle of a big dispute endangering a key contract puzzled some analysts. "It does seem a bit out of the ordinary for Exxon," said Phil Weiss, an analyst with Argus Research.

A number of smaller foreign companies already produce oil in Iraq's Kurdish region, but ExxonMobil is the first of the major international oil companies to reach such an agreement.

The KRG is embroiled in a long and often contentious dispute with Iraq's central government over oil licenses issued to foreign companies. The dispute has periodically caused the disruption of oil exports from the Kurdish region.

Iraq's central government sent ExxonMobil three warning letters before it signed its deal to explore for oil and gas with the KRG, al-Ameedi said. "The letters stressed that, according to regulations of the central government, any company which signs deals with the KRG wouldn't be allowed to work in the center and south of the country," he said.

"We are not going to give Exxon a long time to decide," he said. "This is very sensitive issue and companies working in southern Iraq such as BP, Lukoil, Shell are watching the situation closely."

ExxonMobil is already producing about 370,000 barrels a day of oil from the West Qurna field in southern Iraq, under a service contract with the Baghdad government. Many other large oil companies, including BP PLC (BP, BP.LN), Royal Dutch Shell PLC (RDSB.LN, RDSA), Eni SpA (E, ENI.MI) and Lukoil Holdings (LKOH.RS, LUKOY) have similar contracts to redevelop aging oil fields.

These contracts have helped Iraq increase its oil output to around 2.7 million barrels a day in recent months, compared with 2.4 million barrels a day a year ago. They haven't been especially lucrative for the companies, who receive a nominal fee of a few dollars for each extra barrel of oil they can produce. But the contracts are seen as an entry point into one of the world's most promising oilfields, and leading to "bigger and better things," says Argus Research's Weiss.

Al-Ameedi said the KRG has approached other companies operating in southern Iraq, without naming the companies. KRG communications adviser Howard denied this.

A spokesman said BP isn't talking to the KRG about similar deals. "We're quite happy with what we've got in Iraq, namely our commitment to developing Rumaila, the fourth-largest oil field in the world," the spokesman said.

Shell declined to comment.

Iraq's council of ministers is expected to meet immediately after the Muslim Eid holiday to decide whether ExxonMobil's existing contract to develop the super giant West Qurna oil field remains valid, al-Ameedi said.

(Alexis Flynn in London and Angel Gonzalez in Houston contributed to this article.)

Copyright (c) 2011 Dow Jones & Company, Inc.


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Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.
Mike Farrell | Nov. 15, 2011
Exxon should spin off a separate company to deal with the Kurds and preserve the Iraqi contracts in the South.

Ali | Nov. 14, 2011
Business as usual, big oil company trying to dictate to a government what to do, blackmailing them with threats to steamroller over due process and try to get what they want at the expense of the Iraqi country which by the way includes Kurdistan.

Al Stein | Nov. 13, 2011
Good for Exxon! for attempting to earn more then a couple of dollars for each bbl. produced... perhaps, all the majors active in Southern Iraq should consider standing up with Exxon then what would the central Iraq government do? banish everyone from oil & gas contracts in Iraq? only Strength in numbers can make for positive change. I would suggest Exxon "get on" the local / regional government representatives, to encourage the local / regional government to contact --- all the other producers in the region to join & band together in making regional contracts a priority --- and emphasize the importance of the risk capital entering Iraq, for the much needed oil & gas exploration, production & development is worth much more then a couple of dollars for each bbl. produced! Al Stein.

Ali Iraq | Nov. 13, 2011
I think Iraqi government has the right to do this and stop Kurds who take advantage of issues in Baghdad and maybe KRG is one of the insurgents supporter to make Baghdad weak and take what they want. I think Mr. Maliki should think of that Kurds have no chance to be independent country because they are living on 17% of Iraqi balance and most of it came from Basra oil not from Kurdish "resources" and we have to keep our lands and our national resources from them. the other thing Arab leaders should united under the Perlaman so the 42 kurd in Baghdad have no power to tell us what to do.

David Ariel Prosor | Nov. 12, 2011
By all means Iraq should be led by the central government. Increase in oil output should be controlled carefully in order not to disturb OPEC supply and demand balance. Kurds in north think they are a separate country but they are still part of the IRAQ. If super majors or any IOC wants to get business in IRAQ, regardless of region, they must have a good relation with the government in Baghdad.

Hiwa Talabani | Nov. 11, 2011
Iraqi Federal government has no right to terminate the Exxon contract simply because they have. So far, no law governing oil and gas issues in Iraq. Therefore, the last thing Maliki government wants to do is pick a fight with the Kurds in the region because without their backing the government will fall in Baghdad and if this trend continues we may soon see a Bathist government back in power that is pragmatic and can deal with this region over oil and gas issues.

J Oatmon | Nov. 11, 2011
The Iraq government seems to be frozen with indecision and unable to move forward with ratification of the KRG PSC agreements - they have been unwilling to act for years now. I applaud ExxonMobils move, it will force Baghdad to take notice and take action and make a decision regarding the Kurdish Regional Governments PSC contracts. If Iraqs central government accepts the KRG contracts (perhaps with some tinkering) thats fine, if not then I think Baghdad will be sidelined and the KRG will forge ahead with its development and generally ignore the infighting mess that is Iraqs central government.


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