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Iraq’s oil law impasse as ExxonMobil moves into KRG

Shahristani fumes over ExxonMobil’s KRG fait accompli: Iraqi government seems powerless to act over supermajor’s Kurdistan deal

EXXONMOBIL'S move into Kurdistan has upset Iraq’s central government, further complicating tortuous negotiations about a new oil law for the country. Yet for all the disquiet in Iraq, the federal authorities may find there is little they can do to punish the supermajor.

For now, the central government is adamant that ExxonMobil has broken the rules. On 22 November, Hussein Al-Shahristani, Iraq’s deputy prime minister for energy, reiterated his position that all upstream contracts – including those signed by the Kurdistan Regional Government (KRG) – must be approved by the central government in Baghdad, "otherwise they have no standing".

On the surface, this poses a problem for ExxonMobil, which was warned three times by Shahristani not to deal with the KRG. The services contract for West Qurna-1 "obliges ExxonMobil to respect all Iraqi rules, laws and regulations and this particular case there is a breach of these laws," Shahristani said. Reports have surfaced suggesting the government may ask Shell, ExxonMobil’s partner at West Qurna-1, to take over the contract.

The spirit of the law

To be sure, the supermajor and the KRG have acted against the spirit of federal Iraq. "They’ve been very naughty," said one advisor to a parliamentary body trying to agree a new oil law. "But what law have they broken? There isn’t one." If the central government tried to strip ExxonMobil of its contract, the company would have grounds to sue.

The main sanction available won’t trouble ExxonMobil much, either. In September, the Iraqi government blacklisted US independent Hess from the fourth licensing round after it signed deals in Kurdistan – so the threat to bar ExxonMobil from future auctions is genuine and legal. But the supermajor may simply shrug its shoulders.

The West Qurna-1 contract already gives ExxonMobil one of the jewels in Iraq’s upstream crown. Production from the field has beaten targets and will hit plateau of just under 3 million barrels a day (b/d) in the next five years. ExxonMobil is already a hub company in Iraq, even if the per-barrel fees paid to developers are less alluring than the production-sharing contracts on offer from the KRG.

But other supermajors may be wary of jumping in after ExxonMobil. Although Chevron is negotiating with the KRG about entering the Kurdish upstream, it has also bought data for blocks to be auctioned in Iraq’s fourth licensing round and won’t want to risk sacrificing its interest in the next bidding phase. Shell has also pulled out of talks with the KRG, according to a report from the Financial Times, to protect a $17 billion gas deal in the south.

Bullish KRG

But Ashti Hawrami, the KRG’s oil minister, remains bullish, saying he expects other majors to follow ExxonMobil as the province pushes ahead with its strategy to increase oil output from around 200,000 b/d to 1 million b/d over the next three years.

That’s another potential flashpoint between the KRG and the Iraqi government. Shahristani insists Iraq will increase production capacity to 12 million b/d by 2017, a fourfold jump that would defy most analysts’ expectations and have significant repercussions on the world oil market. All the new oil will come from the big contracts signed with international oil companies in the south. Kurdish production is not included in the figure, Shahristani said this week.

But could the oil market absorb so much oil? And would Iraq, a founding member of Opec, remain in the cartel? If the country observed a quota and restrained output, would cuts come from producers in the south – or in Kurdistan?

Shahristani said the 12 million b/d target referred only to capacity, not production: output would depend on market conditions. But that stance won’t please investors in the south, where the return on multi-billion-dollar projects will come through production bulk.

Policy confusion

Confusion on policy, meanwhile, doesn’t bode well for the swift passage of a new petroleum law, a problem that continues to bedevil relations between the KRG and federal government. Both sides say a deal may be near. And according to one theory, ExxonMobil’s Kurdish move was a gambit to force such an agreement through.

"The US is now on both sides of the fence," said an oil-law advisor. Keeping the world’s largest company on side should motivate the parties to end the impasse over how to develop oil deposits and share revenue from production in Kurdistan.

But the hurdles are immense, starting with the murky-as-mud wording of the country’s legal framework. Shahristani said on Tuesday that Iraq’s constitution was "very clear" and that ownership of oil and gas "is for all Iraqis".

But on the matter of upstream contracts in Kurdistan, "very clear" isn’t the phrase most analysts would use to describe Iraq’s constitution. Key ambiguities in the language continue to hamper progress towards an oil law and this legal vacuum leaves policy in limbo.

Two troublesome sections of the constitution still rankle. Clause two of article 112 states: "The federal government, with the producing regional and governorate governments, shall together formulate the necessary strategic policies to develop the oil and gas wealth." What the "with" means is still open to debate.

Article 111 says: "Oil and gas are owned by all the people of Iraq in all the regions and governorates." The language is blindingly simple – but laden with ambiguity. Does this give power over development to the people of each region, or their representatives, or to the federal government behalf of the regions?

Shahristani said proposals for a new law were sent to parliament a month ago. But the longer the impasse, the more difficult the problem becomes. There are now vested interests acting against any resolution, from the thriving Kurdish business of trucking oil to the Iranian border to the politicians in Baghdad who remain powerful for only as long as the issue is left unresolved.

Meanwhile, Iraq’s senior oil officials apparently can’t even agree on the country’s Opec position. In London this week, Shahristani said he expected a roll-over of production quotas when the cartel meets next month. Despite worries about the effect of the eurozone’s problems on global oil consumption, demand had not fallen, he said. But speaking in Japan, at the same time, Abdul Karim Luaibi, Iraq’s oil minister, had a different message. Falling demand means Opec will cut production, he told reporters.

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