Recent industry news from Iraq has gone something like this: oil majors, spurred by weak returns on technical services contracts in the South and generous terms on offer from the Kurdish Regional Government, are fed up with the ‘red line’ drawn by Deputy Prime Minister for energy Hussain al-Sharistani – which proscribes involvement in Kurdistan for firms with contracts in the south – and are heading north, throwing Baghdad’s oil policy into crisis.
It’s true that recent developments are bad news for Baghdad, and for the Oil Ministry’s prospects of fitting commercial reality within contractual straitjacket given it by Sharistani.
ExxonMobil has taken a huge leap into Kurdistan, and is talking to no-one, including Abdul Kareem al-Luaibi, Iraq’s oil minister, a serious embarrassment.
Total’s CEO Christophe de Margerie, is talking up Kurdish production sharing contracts – under which foreign oil companies can draw profit oil – as “better” than the fee-per-barrel technical services deals on offer in the troubled fourth licensing round run by Baghdad.
Statoil, a Norwegian firm with a reputation for technical brilliance, is quitting Iraq.
It’s tempting to conclude that Baghdad’s oil policy towards the major oil companies is failing horribly, and that dramatic changes to the contracts under which the majors operate may be needed to avoid an exodus or disinvestment.
Such talk is premature. What is now happening in Iraq is a reshuffling of positions as the market enters a new stage.
Statoil, only an 18.75% minority stakeholder in the field development contract at the West Qurna 2 field, is at least a much fed up with Russian partner and operator Lukoil as it is with conditions in Iraq, either on paper or on the ground. The company’s marriage to Lukoil was a hasty one and the company is wisely pressing ahead with investment on home ground.
Total is also a minor player in the south, holding a minority 25% stake in the Halfaya field contract. The French major failed to win the right to operate a southern field, and there are no signs that it will pull out of its current commitments.
Recent comments from CEO Christophe de Margerie that the terms on offer in Kurdistan are “better” than those for the impending exploration auction in the south, which don’t “appear very attractive,” should be read in light of ongoing negotiations over the fourth round contracts. “The reward for investment doesn’t appear for the moment to be enough,” Margerie said. But then, he would.
Exxon wants it all, and is big enough to get it. After the Exxon deals with the KRG were announced, there was much talk of the largest oil company in the world being happy to wave good bye to its operatorship of the West Qurna 1 field and associated commitments to oil infrastructure. This is overhasty. Two years in to its development at West Qurna, Exxon has already realised cash payments of $470 million against its $911 million investment, a ratio that will improve significantly as export bottlenecks are cleared and drilling programs hit full stride. Exxon has never had to make either/or choices, and isn’t going to start now.
Eni and BP – operators at Zubair and Rumaila respectively – are staying put, despite the latter reaping just $70 million from its $2 billion investment so far. (The huge sums invested should be read in light of a grossly inflated services market where there has been no financial incentive on operators to properly invigilate costs.) BP can in any event be confident of reaping profit at the back end of its contract, having won concession from the oil ministry to ensure it gets paid for the field’s full capacity irrespective of the crude actually produced.
Shell has played the Baghdad/Kurdish divide the other way, pulling out of talks with the KRG to be rewarded with a delayed $17 billion gas capture project and perhaps the pick of the 12 exploration blocks from the fourth round. The Anglo-Dutch supermajor’s gas capture project will end a major and wasteful blight on the landscape of south Iraq, and help provide the power needed to end much of the power shortage that has hobbled the development of Iraq’s industrial sector and human development. Baghdad must now avoid over-reliance on the company.
That the exigencies of making money trump the policies of sovereign governments should surprise no-one. The movements of the supermajors were always going to trample whatever arbitrary restrictions politicians – particularly ones operating in as fractious and divided an environment as Sharistani et al – put in their way. Iraq’s government is weak, and weaker for its intransigence on oil policy.
This is not to claim that Baghdad is helpless, or should not act. De-bottlenecking is progressing well, and the difficult transition to a national oil police for security is defying pessimism. Violence in urban centres has increased since the US drawdown but there has been no surge in attacks on oil infrastructure. Realisation of the country’s huge gas assets is underway, with TPAO, Kogas and Kuwait Energy all working on plans to develop their respective fields. A massive water injection system for the south fields must now be kept on track. The recent announcement by Abdul Mahdi al-Ameedi, head of the licensing directorate, that Exxon will no longer lead the project, is no bad thing.
Renewed focus on the long game would be welcome. Kurdistan’s oil reserves are hard to get to and much smaller than those up for grabs in the south. The region’s business environment is much better, but also suffers from corruption, unrealistic expectations from local communities, and logistical and infrastructural problems. The KRG has had to offer lucrative terms to overcome these, which may have political implications in the longer term.
Changing existing contractual terms in favour of foreign oil companies is political anthrax, and does nothing to address the root cause of the Oil Ministry’s problems. Moreover, no oil major has said publicly that they want to renegotiate terms, and they signed the current contracts with their eyes open. The current contracts are unattractive because Iraq is a worse place to do business than the signatories expected. That can and must change.
From Baghdad, this must mean a renewed push on passing an oil law, and easing the myriad restrictions and obstacles to getting things done in the south. The government cannot afford to leave critical sectors – such as power generation – to fester any longer. The oil ministry has creative options to include production sharing agreement-type incentives in contracts that do not give foreign oil companies proprietary interests in Iraqi oil, which the oil ministry is inching toward. This is important of Baghdad wants to avoid an over-consolidated upstream sector.
From operators this should mean an end to blank cheques to service companies, security providers and logistics firms. A quid pro quo on visas and other prosaic issues in exchange for smarter spending and non-oil investment commitments would go a long way.
Instead of spending the last of his political clout defending any new backroom deals to patch up the status quo, Sharistani would do well to turn his attention to the facts on the ground, before events overtake him further.
With thanks to Robin Mills, Una Galani, Iraq Oil Report and Iraq Oil Forum.
