Could Iraq accommodate Exxon’s Kurdish deal?

“The Ministry of Oil has decided to give them some time on the condition that they don’t start any work on the ground,” Sharistani told the AP.

“These differences have to be sorted out, and the sooner the better,” Sharistani said. “The federal government is willing to engage in serious discussions with the (Kurdish regional government) and review any contract that has been signed.”

Sharistani and Iraq’s Oil Minister Abdul Kareem al-Luaibi have repeatedly claimed they hold two letters from Exxon confirming they have ‘frozen’ their contracts with the KRG, though there has been scant indication of what this actually means. It is early days for Exxon in the KRG, and depending on how the company worded the letters, they may be able to define a ‘freeze’ in such a way that allows them to conduct substantial preparatory work in advance of conducting field appraisal work and shooting seismic. Kurdish officials insist Exxon is plowing ahead, backed up by reports on the ground.

Importantly, Sharistani’s latest stance does not actually mark a change in policy from Baghdad. He has previously said that Exxon can seek approval of its deals with the KRG, which would involve converting its production sharing contracts to technical service contracts akin to that Exxon has in the south. Sharistani ruled out the regularization of contracts covering the three fields in disputed territories between Kurdistan and southern Iraq. As much as anything, Sharistani may be keen simply to clap eyes on the contracts, to see what it took to get Exxon to embarrass the Oil Ministry.

However, it seems that the possibility of Exxon being sanctioned in any way by Baghdad is reducing. It was never made clear under what legal grounds the Oil Ministry could – as once hinted – eject Exxon from West Qurna 1, and Baghdad would likely be keen to avoid any international arbitration which would effectively require a judgment on the lawfulness of Kurdistan’s entire oil industry.

The KRG’s Natural Resources Ministry is unlikely to entertain any conversion of the contract under Baghdad’s authority, as they it want to maintain their position that the constitution devolved the ability to decide on contracts without reference to Baghdad. Amid claims and counterclaims of smuggling, a grand compromise over contracts seems unlikely.

Exxon may be tempted into a triangulation that gives Baghdad the form of contract they want while retaining much of the expected returns that large stakes in Kurdish oil is likely to give, especially if it provides the company with an export corridor. The company says it is “committed” to both North and South, an artful way of saying it wants it all. There would be little to stop Exxon if, after obtaining approval for its current oil deals, the company acquired other interests in Kurdistan and regularized them on similar terms.

Baghdad, however, will have an eye on managing expectations ahead of the fourth auction for oil concessions scheduled for the end of May. Giving Exxon special treatment could lead to accusations of special treatment from rival oil companies in the South, and the Maliki administration will not want to be seen to be under the kosh of America’s largest energy company. So far the Oil Ministry has shown few signs of being equal to the delicate task of drafting a contract that suits all parties. Maliki must also be wary of how his conduct looks with other provinces which have expressed an interested in greater independence.

Sharistani’s tone has become more emollient, after fierce rhetoric from Massoud Barzani and other KRG officials denouncing Prime Minister Nouri al-Maliki’s government as dictatorial and authoritarian, and making strong hints that a bid for independence is imminent. In a recent interview Barzani even mentioned war – if only by way of paralipsis – and compared Sharistani’s attitude towards the Kurds with those responsible for the Anfal genocide campaign, florid remarks that has left room for Baghdad to recast its position as reasonable.

Barzani’s approach was yesterday publicly undermined by Iraqi President Jalal Talabani, a Kurd, who told Al Jazeera “not only is independence not possible, but also now it is in the interests of Kurdish people to remain within the framework of Iraq.”

Meanwhile, Sharistani has been again pushing hard for Iraq’s parliament to pass an oil and gas law, reports Al Hayat, pressing the body to formally read a new draft which would retain much of the federal government’s control over Iraq’s oil industry.

Sharistani’s hand has been strengthened by the increasing volumes of oil exports from the south, as new mooring systems are coming on line and huge – and expensive – investments in the supergiant fields of the south is paying dividends in production rates. With oil prices remaining stubbornly high, Baghdad does not need the 175,000 bpd of Kurdish oil written into the current budget to balance the books.

However, the interests in its oil that the KRG is willing to give away in order to secure investment in its parallel oil industry from foreign oil companies gives the region disproportionate clout with Baghdad over Exxon.

Unlike previous PSCs, which the KRG has published in full online, the Exxon contracts remain confidential, but are thought by analysts to have been drafted on very attractive terms to the US supermajor, which is the only party keeping its mouth firmly shut.

With Baghdad and Erbil both keen to win the company’s affections, Exxon looks like the most powerful actor in this drama for the time being.

Sharistani also gave the clearest indication yet that Iraq will abandon its wildly optimistic production capacity target of 13.5 million barrels per day by 2017. Sharistani told the AP that the government is considering setting as lower and more sustainable target of 8 million bpd.