Exxon Plays Balancing Act As Kurd-Iraq Divide On Oil Control Widens
Differences between the Kurdish Regional Government (KRG) and the central government of Iraq over the vast oil wealth in the northern regions of the country continue to widen despite growing interest from oil majors to begin operations in the area. Earlier this week, the central government reported that Exxon Mobil (NYSE:XOM) had communicated to it through letters that it was suspending its deals in Kurdistan while the KRG has denied any such moves by Exxon and challenged Baghdad to publish the letters. [1] Multiple oil majors such as Exxon and Chevron (NYSE:CVX) have shown interest in developing the country’s oil reserves, but their efforts have been impeded by the political uncertainty and security issues plaguing Iraq.
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Government action
After Exxon’s contract with the KRG to explore 6 blocks in the semi-autonomous region was made public towards the end of last year, the central government banned the oil major from participating in future rounds of bidding to develop new oil fields and removed it from the lead role in developing a multi-billion dollar water injection facility in southern Iraq. Voices within the government also threatened that Exxon could also lose its contract to develop the massive West Qurna I field unless it relinquished its plans to explore Kurdistan.
Exploration companies have been lured to sign contracts with the KRG as it has offered attractive production sharing contracts while the central government has given out service contracts that compensate players based on a production linked fee. [1] The better security environment in Kurdistan also makes the region more lucrative to companies intending to set up local operations. However, despite these advantages, most oil majors have stayed clear of pursuing deals with the KRG to avoid antagonizing the central government, which does not recognize the validity of such regional contracts.
Exxon has not publicly commented on the situation, although it acknowledged exploration efforts in the Kurdish region in its latest annual report. Kurdistan is estimated to hold more than 30 billion barrels of undiscovered oil and can add significantly to Exxon’s reserves and production levels if the company’s efforts in the region are successful. Overall, Exxon had around 24.9 Billion Barrels of Energy Equivalent (BOEE) in reserves at the end of last year. A major portion of its reserves addition last year came from oil sands projects, which have lower profitability. (See: Exxon Mobil Reports Higher Reserves in 2011 on Tar Sands Growth) Exploration in Kurdistan could help the company add low cost, high quality reserves to its portfolio. However, the considerable political uncertainty associated with the project could add future complications.
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Notes:- Analysis: In Iraq, oil majors play north versus south, Reuters [↩] [↩]