MONTREAL - The Iraqi government announced on Wednesday that it will respect existing contracts with ExxonMobil Corp in the south of the country after the company signed new oil deals with the Kurdish Regional Government (KRG) in the north. The political center in Baghdad considers such contracts with the KRG illegal.
The government has, however, excluded ExxonMobil from the next national round of licensing, according to reports by AK News, also known as Kurdistan News Agency. The next licensing round is due early next March.
ExxonMobil is producing crude with Royal Dutch Shell at the West Qurna field in southern Iraq, west of Basra, following a bid accepted by Baghdad in November 2009. However, it is involved only in the field’s first-phase development, as in December of that year Russia’s Lukoil and Norway's Statoil were awarded rights for second-phase development.
For Baghdad to breach its agreement with ExxonMobil at West Qurna over the KRG contracts would perhaps irreparably harm badly needed business confidence during the upcoming licensing round. There appears to be no legal basis that the central government could invoke in favor of such an annulment.
Because the central Baghdad government has never passed a law governing new oil and gas concessions, the agreement with ExxonMobil on West Qurna is in the form of a service contract with rather tight profit margins.
Observers speculate that the company would not have minded being excluded from West Qurna, or that it was negotiating with the KRG in an effort to obtain more favorable treatment from Baghdad. According to one industry rumor, Lukoil has already been in negotiations with ExxonMobil to purchase from the latter's 60% stake a 37.5% interest in West Qurna One, with Shell taking the rest.
ExxonMobil's West Qurna partner Shell was reportedly in talks with the KRG for a deal similar to ExxonMobil's, but exited those negotiations after receiving, earlier this month, a 25-year $17 billion contract from the Baghdad central government, to capture 7.2 billion cubic meters (bcm) of flared gas per year from fields in the south near Basra for domestic usage.
Shell is cooperating with Mitsubishi in this venture and will also construct a petrochemical plant that could give it a dominant role in the corresponding domestic Iraqi economic sector.
The Basra governate, meanwhile, is seeking to assert greater authority over the Shell deal. The Baghdad center's failure to pass a law governing new oil and gas ventures (the federal law was elaborated only in draft form and never adopted) tends, in the view of specialized international law experts, to give the "Oil and Gas Law of the Kurdistan Region" authority in the matter, insofar as its provisions mostly correspond with other pertinent articles of the federal constitution.
The absence of a central governing legal regime is also partly due to the failure to hold a referendum (provided for in Article 140 of the Iraqi constitution and overdue now by over four years) on the status of Kurdish regions within four Iraqi governates, specifically to decide whether they become part of the Iraqi Kurdistan region. The best known of these regions is the northern city of Kirkuk.
Part of the problem over the new ExxonMobil agreements with the KRG arises from the fact that, at least according to an Iraqi Oil Ministry official, two of the six areas that Exxon signed to explore (al-Qosh and Bardarash) are actually parts of Nineveh province.
Their status remains unresolved due to the referendum foreseen in Article 140 having never been held. KRG Natural Resources Minister Ashti Hawrami claims that the Kurdish region contains from 3 trillion to 6 trillion cubic meters of gas and 45 billion barrels of oil, with the potential to export 100,000 barrels of oil per day.
ExxonMobil is not the first company to sign deals with the KRG. In August 2010, German firm RWE signed a (non-binding) gas cooperation contract, probably targeting two gas fields not far from Kirkuk, with a view towards their integration as feeds into the Nabucco natural gas pipeline project to Europe.
Nabucco principals OMV and MOL had earlier acquired part ownership of a firm that had a license to explore and develop fields near Kirkuk. Earlier this year, however, it was made known that these fields would not contribute product to Nabucco, at least in the first instance, if it were built.
The ExxonMobil deal with the KRG comes six weeks after Vallares, led by ex-BP head Tony Hayward, purchased Kurdistan's largest oil producer, Turkey-based Genel Energy, for $2.1 billion. Literally dozens of other, much smaller companies are also seeking pieces of the action.
A small Canadian company, Western Zagros, which the Canadian press identifies as a potential takeover target in a year or two, holds two production-sharing contracts with the KRG for the Kurdamir and Garmian blocks south of the city of Kurdamir, as well as part ownership of the fields.