Exxon Nears Sale of South Iraq Stak
Exxon Mobil Corp. XOM +0.10% is in talks to sell its stake in a contract to develop a multibillion-dollar oil project in southern Iraq while gearing up to start a controversial drilling effort in the Kurdistan region, people familiar with the matter said on Thursday.
The U.S. energy giant's move to exit southern Iraq and push forward with its plans in Kurdistan, in northern Iraq, suggests the central government's efforts to keep it operating solely in southern Iraq are likely to fail. This comes as talks between the Kurdistan regional government, or KRG, and the federal government in Baghdad aimed at resolving differences over oil rights appear to have stalled again after a brief period of progress.
"Exxon has informed top Iraqi government officials that it is intending to leave," a person familiar with the Iraqi oil ministry said.
Exxon Mobil is in talks with international oil companies about selling its 60% stake in a service agreement to develop the massive West Qurna-1 oil field in southern Iraq, one person familiar with the Iraqi Oil Ministryand another person familiar with Exxon Mobil's operations in Kurdistan said on Thursday. Exxon's 2010 deal with the Iraqi central government to improve production in the West Qurna-1 field was never expected to be lucrative under the best of circumstances, the person said.
The government had agreed to pay Exxon Mobil and its partners $1.90 for each additional barrel of oil they pumped after refurbishing the already producing field. The fees would barely be enough to cover the companies' costs. Other deals in southern Iraq between Baghdad and foreign oil companies had similar terms.
Anglo-Dutch oil-and-gas company Royal Dutch Shell RDSB.LN -1.37% PLC has a 15% stake in the West Qurna-1 development contract, while the remaining 25% is owned by the Iraqi state oil company.
Shell declined to comment when asked whether it is interested to buy Exxon Mobil's stake in West Qurna-1 field.
Meanwhile, Exxon Mobil s planning to start exploratory drilling in Kurdistan as soon as early 2013, people with knowledge of Exxon Mobil and the KRG said, after delaying such plans for months in order to resolve a dispute with Baghdad over deals signed with the KRG.
Exxon Mobil declined to comment about the talks on exiting southern Iraq and plans to begin drilling in Kurdistan.
The U.S. company has already ordered the purchase of oil-well casing heads and is negotiating a contract with an oil-services firm to start drilling in Kurdistan, said another person familiar with Exxon Mobil's operations in the region. "They have opened an office in Erbil," the KRG capital, he said.
"We know they have been active," an executive at a Western oil company in Kurdistan said about Exxon Mobil.
Two of the people familiar with the situation said Exxon Mobil would start drilling operations near Mosul in one of the disputed areas that have inflamed tensions between Baghdad and Erbil.
In November last year, Exxon Mobil provoked protest from Baghdad when it became the first major international oil company to sign petroleum contracts with the KRG despite Baghdad's threats to expel it from a contract in southern Iraq. Exxon Mobil signed a deal to develop six blocks with the KRG, which is locked in a feud with the Arab-dominated central government over land and oil rights.
Three of the blocks are in areas disputed by Erbil and Baghdad.
Earlier this year, U.S. oil giant Chevron Corp., CVX -0.46% France's Total SA FP.FR -0.40% and the oil-producing arm of Russia's OAO Gazprom OGZPY -0.69% followed Exxon Mobil's lead by striking their own deals in Kurdistan.
The Iraqi central government has excluded companies that signed deals with the KRG from participating in auctions for future oil-exploration rights in southern Iraq.
The central government's reaction suggests Kurdish oil developments still face huge political hurdles. Leaders in Baghdad and Erbil disagree on the appropriate distribution of power between the regional and central governments. The Kurds have signed at least 30 oil deals despite the central government's objections, and the oil ministry in Baghdad has considered those contracts null and void.
This week, a high-level committee failed to convene a planned meeting aimed at resolving the oil dispute between Baghdad and Erbil, casting doubt on recent progress with the dispute. Iraq's federal oil minister Abdul Kareem Luaiby and Kurdish oil minister Ashti Hawrami, both members of the committee, met in Baghdad three weeks ago to discuss a draft hydrocarbon law that would regulate the oil industry and to try to agree on a version that would be acceptable to both sides. The country's parliament hasn't been able to advance toward enacting the legislation for years, as Baghdad and Erbil have been at loggerheads over oil rights.
Last month, the central government decided to pay international oil companies working in Kurdistan some 1 trillion Iraqi dinars [$850 million] and said the KRG should increase exports to 200,000 barrels a day from this month until the end of the year via Iraq's federally controlled pipelines, but that settled only part of the dispute between them.
"So far there is no agreement," said Firhad al-Atroshi, a Kurdish parliamentarian, and a member of the high-level committee set up to try to reach an agreement on the draft oil law.
The hydrocarbon law will be important in settling a long-standing dispute between Baghdad and the regional government in Kurdistan. Baghdad doesn't recognize scores of deals signed by the Kurds with foreign companies. The central government wants to review these deals and bring them in line with oil laws valid in Baghdad.
Kurds are opposing a new version of the law that assigns powers of the highest hydrocarbon authority, the Federal Oil and Gas Council, to the federal prime minister, while the Kurds want powers to rest with a collective authority whose members are to be nominated by the parliament.
Baghdad and the Kurds are most divided over the extent of decentralization and federalism in the oil sector.
"We are opposing a provision of the current draft law that forbids regions within Iraq from having the right to negotiate and sign contracts," said Mr. al-Atroshi.
Some experts on the region say that both sides need to make some concessions to reach agreement on the draft law, while others say the Kurds wouldn't accept Baghdad controlling the region's oil resources and changing deals already signed with international oil companies.
"Compromise on the oil and gas issue has always been important because of a fundamental contradiction between Baghdad's and Erbil's vision of power and sovereignty in Iraq," said Raad Alkadiri, director for country strategies and partner at PFC Energy, the Washington, D.C.-based strategic-advisory firm.
"I do not expect the Kurds to be willing to compromise away their own oil law [which gives them exclusive right to govern their own resources] and the control over their natural resources, as this is the economic fundament for their retention of their far-reaching autonomy over the long term," said Samuel Ciszuk, an analyst at U.K.-based consultancy KBC Energy Economics.
The Kurds also disagree with the current draft of the Iraq hydrocarbon law because it gives the federal oil ministry exclusive powers that overwhelm those of the proposed Federal Oil and Gas Council, Mr. al-Atroshi said.