x Abu Dhabi, UAESunday 23 July 2017

ExxonMobil stirs the pot by signing deal with Iraqi Kurdistan

ExxonMobil has never been one to shy away from a fight with governments. But its contracts with Iraqi Kurdistan could have started its largest tussle, Robin Mills writes.

ExxonMobil is not the first company to be awarded blocks in the Kurdish region, but it is by far the most prominent. Hadi Mizban / AP Photo
ExxonMobil is not the first company to be awarded blocks in the Kurdish region, but it is by far the most prominent. Hadi Mizban / AP Photo

ExxonMobil has never been one to be scared of governments.

It famously took Venezuela to arbitration rather than negotiate over nationalisation of its assets. It hung on to licences in Russia and Indonesia for so long without activity that the governments took them over.

But now, in the Kurdish region of Iraq, the oil company may have stirred up one of its most momentous tussles.

Last weekend, the Kurdistan Regional Government (KRG) confirmed it had signed contracts with the US giant to explore six blocks. This marks an important shift in the relationship between the Kurdish region and the central government in Baghdad.

The blocks themselves are contentious enough. Two of them, Baeshiqa and Qara-Hanjeer, at least partly overlap the Green Line (or the 140 line after the relevant article in the Iraqi constitution) that was the ceasefire line reached in 1991 after the First Gulf War.

Baeshiqa and Qara-Hanjeer are near the flashpoint cities of Mosul and Kirkuk respectively.

A third block, around the important Penjwin border crossing, lies along the Iranian frontier, which has seen recent attacks by Iran against PKK Kurdish guerrillas.

Kurdish armed forces crossed the Green Line during the 2003 US invasion. Parts of Nineveh, Kirkuk, Salahuddin and Diyala provinces are claimed as historically Kurdish, although many Kurds were driven out during Saddam Hussein's brutal campaign against them in 1988, and by his policies of displacement aimed at securing control over oil-rich areas.

ExxonMobil is not the first company to be awarded blocks in the disputed area, but it is by far the most prominent. Article 140 is intended to lay out steps for resolving the status of these areas, but the issue has so far proved too thorny.

The wider significance of the ExxonMobil deal, however, lies in its impact on the relationship between Erbil, capital of the Kurdish region, and Baghdad.

The central government, and in particular the formidable deputy prime minister (and former oil minister) Hussain Al Shahristani, have resolutely maintained that the oil exploration contracts signed by the KRG are illegal.

The central government has maintained that it should approve all deals, and that they should follow its "technical services" model. A comprehensive national hydrocarbon law has been in discussion since 2007, but has still not been passed.

With some short-lived exceptions, Baghdad has refused to allow companies to export oil from Iraqi Kurdistan, or to be paid their share of costs and profit. Companies operating in the Kurdish region have been blacklisted from work in the south, as befell the US oil company Hess recently, although it had already qualified to bid under Baghdad's rules.

But ExxonMobil has played the game in reverse. It is already the operator of the massive West Qurna-1 project in southern Iraq, which with reserves of 8.5 billion barrels is Iraq's second-largest field.

The widespread supposition has been that ExxonMobil had reached agreement with Baghdad. But it is notable that it is the only one of the largest oil majors to have taken the plunge in Kurdistan, although three of its blocks were reportedly first offered to a rival. ExxonMobil toured Baghdad before Eid, seeking approval, but Dr Shahristani denied on Saturday that any deal had been reached.

In the fractious world of Iraqi politics, different parts of the government may have different views. Nouri Al Maliki, the prime minister, is dependent on Kurdish votes to stay in power, but the Kurds are increasingly frustrated with failure to conclude the hydrocarbon law.

The Kurds may be using ExxonMobil, usually strongly backed by the US government, to send a signal to Mr Al Maliki that he is not indispensable.

This presents Baghdad with a difficult dilemma. It could set an example by expelling ExxonMobil from West Qurna-1, and appointing another company. But that risks delays to its ambitious production targets, even if it passed the project to Shell, which is already a minority partner in West Qurna-1.

However, if it does not act, any other large company present in southern Iraq will effectively have a green light to enter the Kurdish region.

Given that ExxonMobil has snapped up the most attractive remaining blocks, that would probably mean acquisitions of smaller players.

What is clear is that this deal greatly strengthens the KRG's hand.

Resolution of its disputed borders now has to take into account the interests of politically well-connected oil companies.

Following the adventurous wildcatters who entered after 2003 have come strong, credible investors, attracted by Kurdistan's possible 45 billion barrels of oil. This, with a resolution to the hydrocarbon law, offers Erbil the resources to continue its economic growth and keep its autonomy intact.

Robin Mills is an energy economist based in Dubai and is the author of The Myth of the Oil Crisis and Capturing Carbon