Saturday, February 9, 2013

ExxonMobil Caught Between Erbil and Baghdad

February 9, 2013

BEIRUT, Lebanon — On January 21, the Iraqi prime minister, Nuri al-Maliki met in Baghdad with Rex Tillerson, ExxonMobil's chairman, president and C.E.O., for the first time since October 2011, when U.S. ExxonMobil and the semi-autonomous Iraqi Kurdistan signed an oil deal aimed at developing six Kurdish exploration blocks. During this meeting, one more time, Prime Minister al-Maliki  ruled out the possibility of implementing in Iraq production sharing agreements (P.S.A.s) similar to those currently signed by the Kurdistan Regional Government (K.R.G.). It seems that in occasion of the meeting the prime minister proposed to ExxonMobil some improved (still unknown) contractual terms in order to permit the U.S. company to continue its operations in southern Iraq.

In practice, Baghdad still wants to continue signing  technical service agreements (T.S.A.) with all the energy companies working in Iraq. The central government defines oil reserves as goods belonging to all Iraqi people — as it is written in the country's constitution. Mr. al-Maliki affirmed that all Iraqi people were partners in relation to the oil discovered in any parts of Iraq and that Iraqis could not, for instance, be partners in Basra but not in other areas of the country. According to some industry sources, the offered incentives have only one precondition: forfeiting the contract signed by ExxonMobil with the K.R.G. Two days after this meeting, in Switzerland, Mr. Tillerson met with the president of the K.R.G., Massoud Barzani to discuss about ExxonMobil's activities in Iraqi Kurdistan.

After the meeting in Baghdad, it seemed the U.S. energy company would take important decisions concerning its operations in southern Iraq. In fact, three years ago, in January 2010, ExxonMobil and Anglo-Dutch Shell signed a deal related to the development of the giant oil field West Qurna-1, which is located in southern Iraq. When in October 2011 the U.S. company struck a deal with the K.R.G. in order to develop the six Kurdish exploration blocks, ExxonMobil bypassed the central government, which is the only authority capable of approving energy deals with reference to all Iraq, the K.R.G. included. To make things worse, at least two of the six exploration blocks (the Qush and Bashiqa blocks) are within the territories disputed between Erbil and Baghdad. In specific, the two blocks are technically part of the Nineveh Governorate, but since 2003 this territory has been administered by the Kurds, who occupied these lands at the beginning of the war against the regime of Former President Saddam Hussein.

Immediately after the signature of the deal, started ExxonMobil's quarrel with Baghdad, with the latter threatening the cancellation of the U.S. company's 20-year T.S.A. related to the development of the giant West Qurna-1 oilfield. Later, last year, ExxonMobil announced that it wanted to sell its $50 billion stake in West Qurna-1, tilting its energy interests toward the K.R.G. The quarrel between ExxonMobil and Baghdad is only one of several possible disputes that have arisen as a consequence of other energy contracts between Erbil and other international oil companies (I.O.C.s). All these contracts have been signed by the K.R.G. without Baghdad's green light. But, with no doubt, the quarrel between ExxonMobil and the central government is the most important because ExxonMobil is the largest of the world's six oil supermajors and is easily a trendsetter with reference to energy diplomacy.

A week after the al-Maliki-Tillerson meeting in Baghdad, the Iraqi oil minister, Abdelkarim al-Luaybi restated one more time that ExxonMobil had to choose between working in southern Iraq or in the K.R.G. He went on expressly saying that there was no formal time-limit, but that now ExxonMobil had to take a final decision about how it intended to operate in the whole Iraqi territory, the K.R.G. included. "Of course, it cannot go on with the two contracts. Thus, it must choose either to cooperate in southern Iraq or in Kurdistan" said the minister.

And Baghdad is now quite positive about a possible ExxonMobil's about-face against the K.R.G. This about-face should be based on economic and political considerations as well. Economically speaking, the West Qurna-1 oilfield alone well exceeds the current the K.R.G. oil production. Consequently, Erbil is quite reasonably worried about the future developments in relation to the large oil fields in southern Iraq. Indeed, ExxonMobil's full support during almost all 2012 was an important game changer for Erbil. In practice, every oil company — the first one was ExxonMobil but later followed suit also Russia's Gazprom Neft, U.S. Chevron Corp. and France's Total — that decided to sign a deal with the K.R.G. (with better contractual terms and a safer environment than Baghdad's) was an additional step for Erbil toward at least an economic independence from Baghdad.

Were now ExxonMobil en route to Baghdad, it would be indeed a relevant setback for Erbil, which for more than a year used the American company in order to become a petro-player. A big problem, especially if the American company could get from Baghdad improved terms, which could then be a catalyst also for other companies which for the moment have forgone investing in proper Iraq. Politically speaking, the U.S. is discouraging Erbil from developing its own energy policy because the U.S. fears that this could be the first step toward the fragmentation of Iraq. In essence, Washington, desiring to avoid Iraq's fragmentation, is at least in political terms well in line with Baghdad. Some analysts point out that since its deal with Erbil, ExxonMobil would have negotiated with the K.R.G. in order just to force Baghdad to improve its contractual terms for the energy resources located in proper Iraq. In other words, the idea was to use Erbil for defying Baghdad to implement contractual improvements in the south. Time now is running out and probably ExxonMobil cannot continue to keep a foot in both camps. Recently, the U.S. company hired as a consultant Mr. James Jeffrey, a former U.S. ambassador to Iraq. Given Jeffrey's past experience, he could be closer to Baghdad than to Erbil. But it's too early to get to this conclusion.

To complicate an issue already well intricate, in mid-January British Petroleum (BP) signed a preliminary deal with Baghdad aimed at developing the Kirkuk field, which is located west of one of the blocks pertaining to ExxonMobil within the contested area. Kirkuk is an ethnically mixed city and it lies exactly at the center of the disputed area between Baghdad and Erbil. And of course, the latter is claiming oil rights with reference to the area assigned to BP. The British company up to now has developed its operations only in southern Iraq. A good reason for this behavior, without risking illegal (according to Baghdad) deals in the K.R.G., is linked to the fact that BP is the operator of the giant Rumaila oil field (17 billion barrels, i.e., around 12 percent of Iraq's oil reserves. This field, located in southern Iraq, approximately 20 miles from the Kuwaiti border, as of October 2012, produced around 1,330,000 barrels per day. BP's bond with Rumaila dates back to several decades ago and in specific it was the British company that discovered it in 1953. Rumaila is owned by the Iraqi government and it's subcontracted to BP and China National Petroleum Corporation (C.N.P.C.) under an Iraqi technical service contract. The field is operated by BP (38 percent), C.N.P.C. (37 percent) and Iraq's State Organization for Marketing of Oil (SOMO, 25 percent). Also ExxonMobil was interested into this field, but it was not successful during the bidding process.

It's obvious that a solution should be found very soon. It's not possible to have I.O.C.s supporting either the K.R.G. or proper Iraq in their Iraqi energy operations. This a condition — although it's not as dangerous as last December's deployment of the K.R.G.'s and Iraq's armies along the contested border — still adds insecurity. And in an area where politics is based on crude oil and crude oil is based on politics, I.O.C.s' commercial ventures have relevant geopolitical consequences especially when dealing with a country like Iraq, which has proven reserves of 143.1 billion barrels of crude oil and 3.2 trillion cubic meters of gas. A new legislation — if accepted by all the involved parties — could well define Iraq's energy sector, in this way partially de-escalating the current political crisis. But the problem is that this legislation has been caught up in political struggles between Sunnis, Shiites and Kurds.

The point that needs to be understood by the government of Iraq is that also losing the ExxonMobil's deal would not stop — although it would be a relevant setback for Erbil — the K.R.G. from getting more autonomy from Baghdad. The Kurdish region is now on a drive toward developing an energy sector in a much more autonomous way than just two years ago. In fact, other companies are interested in getting Kurdish acreage. This means that for a company that leaves the K.R.G. surely there will be some other valid replacements. This current situation surely presents Erbil a completely new political leverage, but at the same time risks bringing Iraq towards its political fragmentation.