Exxon’s Kurdish Bet Results in a High Stakes Game with Iraqi Government

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Exxon Mobil’s (NYSE:XOM) decision to enter into contracts with the Kurdish Regional Government (KRG) has placed Iraq’s central government in a precarious position. [1] Deputy Prime Minister for energy Hussain al-Shahristani, who has in the past been one of the strongest voices against the Kurdish government’s independent moves to develop oil resources in the region, has indicated that sanctions may be possible against Exxon. This could put the company’s contract to develop the massive West Qurna fields in Southern Iraq at risk. [2] We believe that Exxon’s vast experience in handling international negotiations and its formidable position in the oil industry make it unlikely that the Iraqi government would consider banning the company from operating in the country. Other players such as Chevron (NYSE:KRG) are also rumored to be involved in talks with the KRG.

We have a $93 price estimate for Exxon Mobil which is at a 25% premium over its current market price.

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Other companies wait on the edge

Dealing with Exxon will be a tricky business for Baghdad as the Kurds are offering more lucrative production sharing agreements to attract investors to their region. Exxon, which has avoided commenting on the issue, leads the project to develop the giant West Qurna fields in Southern Iraq which hold around 8.7 billion barrels of oil but have historically not offered very good returns for investors. [2]

On one hand, if Baghdad allows the deals to go ahead, other oil majors may jump onto the bandwagon and invest in North Iraq, endangering the government’s plans to first develop southern fields. On the other hand, it faces an intense legal battle if it decides to penalize Exxon and analysts say that the company is willing to wait it out and see the exit of hardliners like Shahristani while continuing attempts to do business with both sides.

Iraq sits on the 3rd largest oil reserves in the world and plans to boost production volumes going forward. Production volumes from Iraq will be an important factor in deciding the overall output of players such as Exxon Mobil over the next few years.

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Notes:
  1. UPDATE 4-Iraq may penalize Exxon after Kurdistan gamble, Reuters []
  2. CRO Risk Forum Insights, September 2010, Reuters [] []