Iraq Objects to Exxon Deal With Kurds

Exxon Mobil Corp. could lose its current contract to develop the West Qurna oil field in Iraq if it proceeds with an agreement to explore for oil in the Kurdistan region of the country, an Iraqi official said.

The spat highlights the political challenges for foreign companies operating in Iraq and threatens to further inflame tensions between the Baghdad government and the semi-autonomous Kurdish region. Iraq has long disputed the region’s right to grant oil licenses.

An Exxon consortium produces 370,000 barrels of oil a day in Iraq through service contracts set by the Iraqi Oil Ministry. Above, an oil worker walks a pipeline in the southern Iraq province of Basra in November 2010.

It also represents a clear risk for Exxon, which is struggling, like other giant oil companies, to get access to new oil fields large enough to replace the vast amount of oil it produces from its reserves. Exxon’s operations in Iraq are a critical toehold in a country that is on its way to becoming one of the world’s top oil producers.

“Exxon should choose between either continuing with its deal with the Kurdistan Regional Government or lose its contract in southern Iraq,” said Abdul Mahdi al-Ameedi, head of the petroleum contracts and licensing directorate at Iraq’s Oil Ministry.

Exxon has signed agreements to explore for oil and gas in six areas in the Kurdish region of Iraq, said Michael Howard, a communications adviser to the resources minister of the Kurdistan Regional Government.

Exxon declined to comment. That Exxon, the world’s largest oil company, appears to be in the middle of a dispute endangering a key contract puzzled some analysts. “It does seem a bit out of the ordinary for Exxon,” said Phil Weiss, an analyst with equity researcher Argus Research.

A number of smaller foreign companies already produce oil in Iraq’s Kurdish region, but Exxon is the first of the major international oil companies to reach such an agreement.

The KRG is embroiled in a long and often contentious dispute with Iraq’s central government over the right to issue oil exploration licenses in the region. The dispute has periodically caused the disruption of oil exports from the Kurdish region.

Iraq’s central government sent Exxon three warning letters before the Irving, Texas, company signed its deal to explore for oil and gas with the KRG, Mr. al-Ameedi said. “The letters stressed that, according to regulations of the central government, any company that signs deals with the KRG wouldn’t be allowed to work in the center and south of the country,” he said.

“We are not going to give Exxon a long time to decide,” he said. “This is a very sensitive issue and companies working in southern Iraq such as BP, Lukoil, Shell are watching the situation closely.”

Exxon is already producing around 370,000 barrels a day of oil from the West Qurna field, in southern Iraq, under a service contract with the Baghdad government. Many other large oil companies, including BP PLC, Royal Dutch Shell PLC, Eni SpA and Lukoil Holdings have similar contracts.

The contracts have helped increase Iraqi oil output to 2.9 million barrels a day in recent months, compared with 2.4 million barrels a year ago. But they haven’t been especially lucrative for the companies, which receive a modest fee for boosting production.

Still, the contracts are seen as an entry point into one of the world’s most promising oil fields, and as leading to “bigger and better things,” says Mr. Weiss.

Mr. al-Ameedi said the KRG has approached other companies working in southern Iraq over exploration deals, without naming the companies. The KRG communications adviser, Mr. Howard, denied any overtures.

A BP spokesman said the company isn’t talking to the KRG about similar deals. “We’re quite happy with what we’ve got in Iraq, namely our commitment to developing Rumaila, the fourth-largest oil field in the world,” the spokesman said. Shell declined to comment.

Iraq’s council of ministers is expected to meet after the Eid holiday, which ends Saturday, to decide whether Exxon’s existing contract to develop the super giant West Qurna oil field remains valid, Mr. al-Ameedi said.

Wall Street Journal

Another story on this very topic: The Independent