It was only a question of time before it became public. ExxonMobil’s move into Kurdistan region of Iraq was surrounded with lots of hush hush from the time it signed in October, until the moment the ministry of natural resources (MNR) in the KRG decided to score a fantastic public relations coup. Now that it is public, where does this leave the regional and the federal governments and what fate for the contracts, such as Exxon’s 6-blocks venture and many others before it, signed with the KRG?
From a Baghdad point of view, things just got worse, not better. For the first time, a company – and not just any company but a major – decided to break the red line of signing a contract that is not recognized by the federal government as legitimate AFTER it has obtained a major one from Baghdad. Until now, there were two camps of IOCs: one that has decided to stick to the bigger prize in the south and forfeit the uncertain north, and one that decided to go north because they were too small to compete with Big Oil in the south. Exxon has just blurred the lines between those two camps.
What’s more, Exxon decided to plunge in even though there is no agreement yet on the Hydrocarbon Law (or Oil & Gas Law) that would give the legal stamp to those contracts, and more importantly, create a recognized mechanism for exporting oil and for payments to be made. What the KRG and Baghdad have at the moment is only an “agreement to agree” between the two PMs, Nouri al-Maliki and Barham Salih. It’s only an agreement to agree by the end of the year on a draft Hydrocarbon Law, based on the Feb 2007 draft already approved by the council of ministers at the time, to submit to parliament for approval. There is also an interim agreement for the finance ministry to continue paying the KRG a lump sum on account of costs of oil produced in the Kurdistan region and exported by the central government via SOMO, until the law is adopted. A final agreement is more likely to be as elusive as all those that preceded it. So, if there was any chance of a compromise soon, that chance has just evaporated. As one Iraqi official in Baghdad always said to me, political agreements in Iraq are never made to last. This one not excluded.
The question is: why did Exxon decide to take the leap onto this shaky ground?
One, what it was offered was a production-sharing contract (PSC) that is a lot more lucrative than the service contract it signed for West Qurna-phase 1 in 2010, especially if it managed to squeeze something like 20% profit oil out of MNR, as some would have us believe. Two, Exxon –and partner Royal Dutch Shell – has been facing delays in payments by the central government in the West Qurna contract, which had a negative impact on the profit margin of the tight service contract. Third, they were most likely led to believe earlier in the year when they started negotiations on the six blocks, that issues will be settled soon between the KRG and the federal government, and that this contract will receive the stamp of approval from Baghdad. Fourth, KRG must have issued Exxon with an ultimatum: sign it or lose it. So they signed on the dotted line.
What happens next to West Qurna-phase one contract is probably a lot of damage control to try to preserve it. What is certain is that it is hanging in the balance at the moment. Watch this space…