Jack Serle

Talk of the town

In Kurdistan on November 18, 2011 at 3:23 PM

The news broke last weekend in the Financial Times: Exxon Mobil Corp., the Texan based oil company, is coming to Kurdistan. Exxon Mobil is the biggest of the so-called supermajors. It is the biggest oil company in the world by market share and one of the biggest companies in the US.

This monster of the corporate world is being lured north to the Kurdish region by the staggeringly vast quantities of oil and gas up here. The US Geological Society in September estimated there to be somewhere in the region of 45bn barrels of oil here. That is about the same as there is in Libya.

The oil companies based up in Kurdistan Region like Hunt and Marathon are minnows by comparison to Exxon Mobil. This an entity on a scale the Kurdistan Regional Government (KRG) has dreamt of signing up to drill in its semi-autonomous region.

They were so pleased to have signed drilling contracts with the supermajor they put the Exon Mobil logo up on the KRG website, right next to the government’s crest.

Exxon is not alone among the supermajors in investing in Iraq. Royal Dutch Shell and BP are here too. The Texan corporation is the first to make moves north of the border into Kurdistan because there is a serious spat ongoing between the KRG in Erbil and the Iraqi federal government in Baghdad. A battle other oil supermajors have steered clear of.

In one recent case, veered clear of.

Shell is hoping to sign an extremely lucrative contract tying itself in with the state-owned Southern Oil Company and Mitsubishi to create the public-private partnership, the Basra Gas Company. The Iraqi cabinet has approved the deal and the parties hope to sign this coming week after years of negotiations.

On November 16 the FT reported Shell was pulling out of talks with the Kurdistan government. Rather than risk its latest southern venture, the Anglo-Dutch company pulled back its feelers from the north.

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The Exxon Mobil deal has the potential to gum up a deal the KRG and the Iraqi federal Government have been trying to sign for years. They have been struggling to agree on the terms of an Oil and Gas Law since 2007.

This legislation is vital to assuage any doubts oil companies have about investing their money in the country. The hydrocarbon law would give them a sounder legal footing to pour in the cash. When ratified the law would set down who in Iraqi politics can sign contracts with foreign companies, where the money goes, where the oil goes and so on.

Baghdad wants to centralise control of oil production at the federal oil ministry. The KRG wants to retain a degree of autonomy, handing out oil drilling contracts and keeping a hold of much of the money made.

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This now is a game of chicken which neither the Iraqis nor Exxon can afford to lose. Baghdad wants to keep a central grip on the oil resources. They also want to deprive the Kurds of the wealth and prestige that would come from major oil companies heading north. It would be a fillip to independence calls and boost the Kurdish coffers.

However Baghdad cannot afford to lose Exxon. They are the leading force in developing a water injection system that pumps water deep underground to increase the pressure on the oil, forcing it upwards, increasing the productivity of wells.

This will be used by oil companies across Iraq. It is pretty much key to realising Iraq’s goal of producing 12 million barrels of oil per day (bopd) by 2016. A pretty ambitious target given they are churning out 2.9 million bopd right now.

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While Kurdistan is the last great oil and gas frontier with vast basically untapped reserves, Exxon are risking much by moving up here. They won the jewel in the crown of Iraqi oil contracts. They are the major partner in a consortium developing the humungous West Qurma oil field near Basra. It is classified as a “supergiant” oil field because alone it contains more than 5bn barrels of oil.

The reason for Exxon’s gamble is that the contracts signed up in the south by the likes of Exxon and BP are not so lucrative for these companies. They are developing the oil fields rather than merely pumping out gloopy black money. Operations in the south are gateways, bridges to further riches. Losing this toe hold would be a nightmare for Exxon but to make the big bucks they need to consolidate and add to their West Qurma operation.

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The consequences of Exxon’s move north are not yet clear. Some are saying this will force Baghdad to come around to Erbil’s way of thinking. This is a view shared by Osman Shahenshah, CEO of Asfen an oil firm operating in Kurdistan. “The way I interpret it is, the dispute between north and south will be resolved. I am very bullish about this,” he told Reuters.

However there are doubters. Javier Blas of the FT’s Commodities section wrote today that Exxon’s move could sour relations between Erbil and Baghdad potentially stalling the Oil and Gas Law indefinitely.

The truth will out soon enough, till then the town still chatters with the excited buzz that great or terrible things could be afoot.

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