Exxon deal beckons Kurdistan’s advent

By Shwan Zulal:

In a game-changing oil deal in the Kurdistan region, Exxon Mobil has signed a contract for six blocks with Kurdistan Regional Government, reported the FT. There were rumours about a major US oil company circling in the Kurdistan region, but experts dismissed any deals because of the danger of being blacklisted by Baghdad.

What Exxon has done is of immense importance to the KRG’s authority and its influence in the region. However, by entering the deal, Exxon will be risking the West Qurna contract, which is the jewel in the crown of Iraqi oil fields. Iraqi officials have told Reuters today that they were aware of the deal, but so far Exxon has not made any comment and senior Iraqi politicians have told Reuters that Exxon has been warned of the consequences. Abdul-Mahdy al-Ameedi, director of the Iraqi oil ministry’s contracts and licensing directorate, told Reuters that “the government had sent three letters to Exxon Mobil last month warning of dire consequences”.

It is not clear if the Exxon deal will exacerbate the existing problems between Baghdad and the KRG. Gauging early reactions and efforts to stop the deals by Iraqi officials, the deal could lead to further confrontation between the central government and the KRG in the coming days. However, challenging Exxon mobile will be a risky strategy for Al Maliki. Moreover the presence of Exxon in Kurdistan Region (KR) could mean a balance of power between the two sides and a possible breakthrough in dealing with differences.

The move by Exxon could be part of a deal to harmonise relations between the two sides, but so far there is no deviance of such deals.

Earlier this year Wikileaks files have revealed that the State Department has advised against US companies investing in the Kurdistan region. It emerged that Marathon entered the region despite contrary advice from the US government and the move has given them the advantage of being there early. Nevertheless, the latest Exxon move and the entrance of Hess into the region is an indicator that the advice might have changed, which has its political significances.

It is not yet clear who has instigated the deal, but needless to say the announcement has come less than a week before the CWC oil and gas conference in Erbil and while PM Barham Salih has met Iraqi leaders and then US officials in Washington. Salih has been meeting US diplomats for a week now in Washington and it may be that his team and the US office can take some credit for facilitating the deal. Moreover, attracting the largest oil company in the world will also vindicate Ashti Hawrami, the Kurdish natural resources minister’s aggressive oil policy in the region, which has attracted much criticism.

While exploration contracts in Iraq are still not finalised for next year’s auction and the terms are yet to be finalised, it appears that oil majors are turning their attention to the more attractive Kurdish PSCs on offer. Baghdad’s exploration contracts are not hugely different from its Kurdish PSC counterpart, however the Kurdish contract risk and reward ratio is more balanced and some would say it is in the favour of explorers. The KRG contract gives the operators a higher rate of return and the windfall will be significantly higher from Baghdad contracts if the oil prices stay at the current levels.

Kurdistan has signed over 40 contracts since the fall of Saddam and Exxon is the largest of those companies. The right signals were coming out of Kurdistan when Tony Hayward, ex-BP boss, made his move to the region backed by Nathanial Rothschild through the Vallares investment vehicle. The deal with Genel Energy made Hayward one of the biggest operators in the region.

The Exxon deal comes at a time when interest from investors in the Kurdistan region has never been greater. Last week Citi published a report detailing the opportunities in the Kurdistan region and it said that, based on the US geological survey, the region could hold over 50 billion barrels of oil. Furthermore, Gulf Keystone Petroleum has revised up its gross oil in place volume, P90, from 4.9 to 8 billion barrels of oil. With this amount of reserves, Kurdistan would make it to the top 10 list of world oil reserves.

The main sticking points for contracts signed with the KRG is the oil and gas law, the recognition of the contracts by Baghdad and resolving the payment mechanism. Although there are many reports that a deal has been reached on the outstanding issues, nothing concrete has emerged. The differences between Baghdad and KR are still significant and it boils down to the point of who controls oil policy and where. The KRG has made it clear that it won’t budge and a beleaguered Iraqi government finds it more difficult by the day to exert influence.

The other major issue which faces operators in Kurdistan is the infrastructure limitations. Saraqala block – WesternZagros, Atrush and three other blocks will soon be coming online with a respective production of at least 5000 bopd each. The delivery will have to be carried out overland by vehicles in the absence of pipelines. For the time being, the method of delivery will give the companies the cash flow they require in the short term but it is not sustainable for larger production.

DNO has diverted a large chunk of its oil production into the local market as oil production from Kurdistan dropped from 180000 to only 50000. The drop was reportedly due to technical problems with northern oil company pipelines but more likely because of non-payment by the central government. If the disputes with Baghdad are not resolved soon, others will follow suit and more and more of the Kurdish oil will be trucked and not contribute to the overall Iraqi production.

This article first appeared on Kurdish Views