ExxonMobil, the Irving, Texas-based supermajor which operates the West Qurna 1 field in Basra, has tested the Iraqi government’s resolve by signing six production sharing contracts (PSCs) in Iraqi Kurdistan.
Exxon has remained silent on the deal, with the news leaking via a communications official in the Kurdish Regional Government (KRG) to the Financial Times.
“The KRG has for the last few months been in discussions with a number of major oil companies. This resulted in the recent signing by ExxonMobil of contracts to explore in six blocks,” Michael Howard, an adviser to the KRG, told the FT.
The revelations prompted a stinging rebuke from Hussain al-Sharistani, Iraqi’s deputy prime minister responsible for energy.
“The Iraqi government will treat any company breaching its laws in the same way it has treated similar companies in the past,” said Sharistani’s press spokesman. “The ministry of oil has informed ExxonMobil of this position.”
However, recent political developments may mean Baghdad takes things no further.
According to a Bloomberg report on Friday, has reached a tentative agreement on crude exploration and revenue with the semi-autonomous Kurdish region, according to an adviser to Prime Minister Nouri Kamil al-Maliki. Adal Barwari, al-Maliki’s adviser on Kurdish affairs, said in a Radio Free Europe/Radio Liberty interview published on Saturday on the U.S. government-funded news outlet’s website.
The Iraq government has previously blacklisted oil companies that have signed deals in Erbil, on the basis that contracts which give private companies a proprietary interest in Iraq’s oil are illegal under the country’s hastily adopted constitution.
In September, the large US independent Hess was booted out of the fourth round field auction for taking on the Dinarta and Shakrok blocks in the north of the region. The situation is hoped to be resolved with the passage of a set of oil laws regularising existing contracts, but the laws’ passage has been held up amid political wrangling.
Exxon may be technically risking its technical service contract for the development of the supergiant West Qurna 1 field in making such a large endorsement of the Kurdish oil industry. However, the supermajor is slated to spend $50 billion developing West Qurna 1, and it’s progress is as important to Baghdad as it is to the company.
The company has not respondent to requests for comment and it is not known whether it had word of the tentative accord between Baghdad and Erbil before signing the Kurdish deals.
The six blocks were reportedly offered to Shell and ExxonMobil three each, but Shell declined the offer, and KRG gave ExxonMobil a 48 hours ultimatum before the deal was finally signed in London.
Shell, in addition to operating a fee-per-barrel development contract for the Majnoon field and a 15% minority stake in the West Qurna 1 development operated by Exxon, is on the cusp of finalizing a $17 billion gas capture deal to utilise the 700 million cu ft of gas from the Basra oil fields currently being flared every day, wasting potential revenue and damaging the health of local residents.
Of Iraq’s 143 billion barrels in proven reserves, the Kurdish Region is estimated to hold 45 billion.
Whether Baghdad’s blacklisting is at an end, or whether Exxon is simply able to flout the rules because of its size and strategic importance to Iraq’s oil industry, is not yet clear. The KRG can be pleased at this latest development, however, having launched a sustained campaign to prove the legality and competitiveness of the PSCs they have signed with foreign oil firms.
The KRG obtained a categorical legal opinion via international law firm Clifford Chance in 2008 and published the PSCs it has signed online in August.
Securing the participation of a ‘too big to bail’ IOC in its profit-sharing model could be seen as the latest tactical coup for the KRG. It forces Baghdad to either derail its field development program by expelling Exxon, concede that PSCs are constitutional, or make an exception for Exxon, undermining the capital’s claims of transparency and objectivity.
UPDATE 1: A previous version of this article stated Shell has an interest in the Zubair oil field. It does not, and instead has a minority interest in West Qurna 1 technical services contract (15%) and a lead interest (45%) in the Majnoon field TSC, whcih it operates. (h/t @RobinEnergy)
