ExxonMobil to quit West Qurna-1 services agreement
US supermajor shuns south in favour of Kurdistan contracts
ExxonMobil is poised to walk away from its technical services agreement for southern Iraq’s West Qurna-1 oilfield. Well-placed sources familiar with the US supermajor’s Iraq operations told Petroleum Economist that the US supermajor was preparing to focus its efforts on upstream projects in Kurdistan instead.
A source said an exit could be announced as early as this month, although it is understood that the company’s departure from Iraq’s south could take six months to a year.
“The decision has been taken. It has been communicated to the Iraqi oil ministry,” said the source. It is understood that ExxonMobil and Shell, its partner in the West Qurna-1 technical service agreement, had a meeting at the Ministry of Oil in Baghdad today.
A second Baghdad-based source, close to the Iraqi government, said ExxonMobil, under pressure from the central government, had requested some time to find a buyer for its stake. The company hoped to make a profit on its share in West Qurna-1, he said. The US firm has opened negotiations with Asian and Russian firms.
The move will end a dispute that has been rumbling since news surfaced last year that the supermajor, defying the central government’s rules, had agreed to develop six blocks in Kurdistan.
The Iraqi central government considers Kurdistan’s production-sharing contracts, judged by investors to be more generous than the technical service contracts on offer in the south, to be illegitimate, and has banned companies operating in the region from participating in future upstream licensing rounds in Iraq. It previously threatened to strip ExxonMobil of its West Qurna-1 contract in response the supermajor’s decision to invest in Kurdistan.
The Baghdad source said ExxonMobil may be walking from its West Qurna-1 contract before it is pushed.
Pressure has been building on the central government to punish ExxonMobil for its investment in Kurdistan, he said. The government knows it could not win a court case if it stripped the US firm of its contract, he said, but could make operations intolerably difficult.
“The government can give them a nightmare,” he said. ExxonMobil’s response was “OK we will leave but give us time.”
ExxonMobil refused to comment when contacted by Petroleum Economist. The Iraqi oil ministry also refused any official comment.
But ExxonMobil’s withdrawal, if confirmed, will throw renewed doubt on Iraq’s ability to maintain upstream momentum.
It also suggests life is growing more difficult for Western international oil companies in the south. Earlier this week, the UK government closed down its Basra consulate. A UK government source told Petroleum Economist that the move was a cost-cutting exercise, saying maintaining three diplomats at a price of £6.5 million ($10.49m) a year was too great. But sources in Baghdad said the move showed a retreat from the south, where BP and Shell, among other international oil companies (IOCs), have taken large stakes in the upstream.
Hussein Al-Shahristani, the country’s deputy prime minister with oversight of the energy sector, said earlier this week that output had reached 3.4m barrels a day (b/d), setting another three-decade high.
The International Energy Agency (IEA) has pinpointed Iraq’s four mega-projects – West Qurna is one of them – as critical to global production growth. Iraq will account for 45% of the rise in world output in the coming decades, the agency said.
The West Qurna oilfield, which with reserves of 43 billion barrels is the world’s second largest field, will be developed in two phases. The first phase, West Qurna-1, is operated by an ExxonMobil-Shell joint venture that is contracted to deliver output of 2.25m b/d. West Qurna-2 is under development by Lukoil, with a 75% stake, and the Iraqi government. It will eventually deliver 1.8m b/d.
In a briefing to diplomats and selected guests at the UK’s Foreign Office on 15 October, Fatih Birol, the IEA’s chief economist, reiterated that such production growth depended on “consensus” emerging between the Iraq central government and the Kurdistan Regional Government (KRG).
A recent agreement between the two, allowing for the central government to pay companies operating in Kurdistan for oil exports, were “encouraging signs” that agreement was possible, Birol said.
However, ExxonMobil’s withdrawal from southern Iraq may reignite the situation– raising questions about the central government’s willingness to compromise with the KRG and its ability to retain the blue-chip investors it needs to increase output significantly. The IEA predicts production will rise to more than 8m b/d by 2035. By 2015, it will rise to 4.2m b/d.
Earlier this week, a report in Nefte Compass, a Russia-focused oil-industry newsletter, said that Iraq was considering replacing ExxonMobil at the West Qurna-1 oilfield with Russian firms. Lukoil is already operating the West Qurna-2 project. It was unavailable for comment on 15 October, although a spokesman previously said the company had not been asked to take ExxonMobil’s stake in West Qurna-1.
Rosneft is also considered a potential buyer of ExxonMobil’s stake, according to sources. A deal in the works between BP and Rosneft could see the Russian firm buy all or part of TNK-BP, making it the world’s largest oil company.
Rumours of greater Russian oil involvement in Iraq’s south, home to the country’s largest oilfields, followed a trip to Moscow earlier this month by Iraq’s prime minister, Nuri Al-Maliki. His trip sealed a $4.2bn arms deal that will see Russia supply the country with attack helicopters and surface-to-air missile systems. Another agreement over the supply of MiG-29 is also in the works. GazpromNeft, another Russian company with a presence in Iraq, denied reports last week that it had frozen its assets in Kurdistan.
ExxonMobil’s departure from Iraq’s south, if confirmed, may also reinforce perceptions that Kurdistan is a more prospective play for IOCs, said the Baghdad source. Its six blocks in the autonomous region would likely be just the base for further expansion through takeovers of smaller operators in Kurdistan, he said.
The move will also have political ramifications, amid persistent divisions between independence-minded Kurds and the Iraqi central government.
A diplomatic source said ExxonMobil had sought to coordinate its departure from Iraq’s south with the US State Department. Last year, the company’s move into Kurdistan happened without such political due diligence, the source said. The US’ stance remains that it backs a united, federal Iraq. The State Department did not respond to questions from Petroleum Economist.
This story was first published on 16 October and updated throughout on 18 October.