Exxon May Reconsider Plans to Start Exploration in Kurdistan

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Exxon Mobil

Oil major Exxon Mobil (NYSE:XOM) is expected to respond to the Iraqi government over its plans to explore the country’s semi-autonomous Kurdish region.  [1] The response is expected to come after the Iraqi government decides whether it should allow the company to bid in the upcoming round to grant exploration licenses.

Exxon entered into an agreement with the Kurdish Regional Government (KRG) to explore its territory for oil. The contracts are not recognized by the Iraqi government, which does not accept the KRG’s authority to grant exploration licenses. Some voices in the Iraqi government have been pushing for strict action against Exxon in order to curb other oil majors like Chevron (NYSE:CVX) from pursuing similar negotiations with the KRG.

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Resource conflict

Exxon’s contract with the KRG rekindled a long-standing dispute between the Iraqi government and the region’s local government over oil rights. Kurdistan is estimated to hold over 40 billion barrels of oil and has been attracting increasing interest from large as well as small exploration firms. The Iraqi government has usually blocked any player that has agreed to explore Kurdistan from bidding for its oil fields located in the south.

In an attempt to attract investments in the disputed territories, the KRG is negotiating a compelling production sharing agreements with oil companies, which are more lucrative than the operations and maintenance contracts offered by the Iraqi government. Exxon became the first major oil company to get into an agreement with the KRG toward the end of last year.

Exxon is already involved in Iraq’s giant West Qurna II oil field upgrades. The Iraqi government has hesitated in imposing any penalties on Exxon in efforts to avoid jeopardizing future investments to develop the country’s substantial oil resources.

The production from Iraq can help Exxon increase its liquids production, which has seen a slight decline over the past couple of years. The production from Iraq’s low-cost fields can help the company improve its output levels as well as its operating margins.

You can check the sensitivity of Exxon’s stock to its crude oil & NGL sales price as well as liquids EBITDA margin by tweaking the trend-lines in the charts above. We are in the process of revising our $94 estimate for Exxon, which is at a 10% premium to the current market price.

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  1. Iraq Expects Exxon Response Soon on Possible Kurdistan Exit, Bloomberg []