They followed on the
threat by action in august this year by excluding
Hess when it became clear that it has acquired a
block in Kurdistan region.
The policy of banishing IOCs operating in Kurdistan
region from Iraq is only based on a decree form the
Iraqi Oil Ministry but attempt was never made by
Maliki to enshrine the policy into the law, mainly
because it will be unconstitutional to do so and
partly because his shaky coalition will struggle to
passed any such legislation through parliament.
Exxon is the first super-major to ignore Iraqi
government and go ahead with acquiring lucrative
Kurdish PSCs. The US giant is currently operating in
partnership with Shell in West Qurna-1 field which
produces nearly 400 bopd and production is on the
increase. Moreover, the company will be in charge of
a water desalination project, the largest of its
kind in Iraq. Meanwhile Exxon is lined up to take
part in the upstream auction due to be held in march
next year.
Why Now: Many analyst have said that Exxon has made
a mistake by entering Kurdistan region and the
decision was based on political miscalculation. But
looking at Exxon record, the company has never shied
away from taking on governments in the past. The
simple analysis could be that Exxon want to sell its
stake in West Qurna-1 and head for Kurdistan region.
Apart from the fact that the Kurdish deal could be
very rewarding and commercially viable, given
disputes with Baghdad is resolved, there are other
reasons Exxon might have considered;
Exxon is considered as an arm of the US state
department and by entering Kurdistan, it is making a
big political statement, while the US troops
withdrawing . Although the State Department is mute
about the deal and only repeats its official line,
there is a likelihood that they instigated the deal
thinking it will finally bring the disputes into the
forefront of the political agenda in Iraq and a
solution will be found for the oil policy and
revenue-sharing impasse.
Exxon’s contract in W Qurna 1 with the Iraqi
government is a service contract with very tight
margins. During the first round of auctions none of
the oil companies were happy with the deal on offer.
Only BP was successful which later became apparent
that they have renegotiated the original terms of
the contract. Exxon and Shell also managed to put in
a later offer which was accepted for West Qurna-1.
BP has renegotiated Rumaila contract and shifted
much of the risks associated with their operation to
the Iraqi government which made the small margins
more attractive. However, other companies operating
in the south like Shell,www.ekurd.net
Exxon and other IOCs were not given the same
favourable terms. After leaked BP renegotiation
document were released, it is certain that other
companies like Exxon were not happy that a
competitor has been given much better terms.
There are no evidence of any talks between Exxon and
Baghdad discussing the contract terms after the BP
deal, but if Baghdad has refused to enter talks on
renegotiation of the contacts, Exxon's move to
Kurdistan Region could have been designed to
pressurize Baghdad to treat it equally like BP-CNPC
partnership in Rumaila.
Exxon has so far kept quiet about Kurdistan deal and
the KRG Ministry of Natural Resources has been the
ones whom first broke the news to the FT. Therefore
it is likely that Exxon wanted to possibly use the
KRG as a bargaining chip, but the KRG acted by
publicizing the deal. It maybe pure speculation but
it is needless to say that Shell was involved in
similar talks with the KRG and by as soon as it
became clear that the gas deal with Baghdad was
about to be signed - a deal which has been in the
making for three years- it pulled out of talks with
the KRG and signed a $17.2 Billion deal on Sunday.
What next: Maliki and his deputy for energy affairs,
Hussian Shahristani, have been in a dilemma on how
to respond to the latest Kurdish deal. On one hand
they are using very strong language and threatening
to expel Exxon from the south and on the other they
realize the risk of confronting the largest company
in the world which its annual profits are larger
that the entire Iraqi budget.
Under the current Iraqi law, there are no
legislations which can be invoked to void Exxon
contract in the West Quran-1, because of their
involvement in Kurdistan Region.The contract signed
in 2009 does not contain a clause expressly giving
rise to the annulment of the contract and does not
expressly compel Exxon not to enter contracts with
the KRG. Baghdad can only rely on the Oil Ministry
directive, but according to the contract this could
only mount into a breach and could not possibly
allow the contract to be rescinded.
Baghdad has little option when it comes to handing
out punishment to Exxon. It has already announced on
Monday that it will exclude the company from the
fourth biding round and possibly take further
actions. It will be foolish for Iraqi government to
breach its contract with Exxon because the
reputation of the government and the issue of
contract sanctity would be on the line. Investors
and companies are already weary to inter Iraq, due
to security and political instability and if the
government is seen to be disregarding contract
obligation, it can only add to the uncertainty and
political risk associated with doing business in
Iraq. Such move will be more damaging for the oil
sector in particular which needs $100s of billions
of investments in the next decade.
Unless Exxon wants to get out of West Qurna and sell
its stake, the most obvious solution which keeps
everyone happy to a degree would be to exclude Exxon
from the next auction round -already announced-
because Exxon managed to get their hands on six
blocks in Kurdistan region. Baghdad has already
ratchet up their rhetoric for local consumption and
giving the impression that they are in control.
Furthermore; if Baghdad feels that it has to take
more actions, the option of demoting Exxon from
leading the water injection project could save the
face of Iraqi government and satisfy the
ultra-nationalists. However, if Exxon keeps to the
the Kurdish blocks and accept the sanctions dished
out from Baghdad, the six Kurdish PSC deal will have
far reaching political significance for the KRG and
the acrimonious dispute over oil policy. This simply
means Baghdad is recognising the Kurdish deals by
the back door.
Shwan Zulal is a
political risk analyst, specialising in Kurdish PSCs
and Hydrocarbon Law and advising investors in the
Kurdistan Region and Iraq with legal background.
Zulal is a regular contributing writer for ekurd.net.
He also runs a blog on to the same subject
http://kurdishviews.blogspot.com
Copyright © 2011 ekurd.net
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