ExxonMobil expansion into Kurdistan closely watched

The first major oil company has moved into Iraqi Kurdistan, a sign that Baghdad may have relaxed its hard-line stance against producers there.

ExxonMobil, the Houston-based giant that operates a field in southern Iraq, has agreed to explore six blocks in the region, according to a communications adviser for the Kurdistan regional government in Erbil.

Kurdistan is dominated by smaller, risk-taking producers rather than majors such as ExxonMobil, who pump oil in Iraq's southern region in part because Baghdad claims the Kurdish contracts are illegitimate and threatens to blacklist companies.

Unless ExxonMobil has decided to sell its share in the 8.7 billion-barrel West Qurna field in southern Iraq, its move to Kurdistan means that Baghdad could be ready to soften its position.

"It is either the end of blacklisting, or the beginning of commercial discrimination allowing specific companies to enter in Kurdistan while operating in the rest of Iraq," said Luay Al Khateeb, the executive director of the Iraq Energy Institute in London.

An Iraqi official, however, told wire services last week that the American company ran the risk of losing its 20-year contract to develop the West Qurna field, where it pumps about 370,000 barrels per day (bpd).

"Exxon should choose between either continuing with its deal with the Kurdistan regional government or lose its contract in southern Iraq," Abdul Mahdi Al Ameedi, the head of petroleum contracts and licensing directorate at the Iraqi oil ministry, told Dow Jones Newswires. "We are not going to give Exxon a long time to decide. This is very sensitive issue and companies working in southern Iraq such as BP, Lukoil, Shell are watching the situation closely."

As recently as September, Baghdad barred Hess, an American producer, from bidding in its first auction for unexplored oilfields because it had signed contracts with Erbil.

The long-running disagreement over Kurdish contracts has extended to sharing oil revenues between the two governments. That has hurt producers, which only began receiving payments from the central government for drilling costs after the Erbil and Baghdad authorities reached a compromise in February.

"Exports are really constrained and thus investment will be constrained," said Samuel Ciszuk, an analyst at IHS Global Insight in London. "Many of these small companies are now starting to come to a position where they have to draw on their own funds, but it's hard for them to farm out or sell out at the good price."

At the centre of the dispute is whether Kurdistan has sovereignty over the vast petroleum resources there, which the regional government estimates could hold as much as 45 billion barrels in reserves.

It exports about 120,000 bpd through the central government in Iraq and hopes to bring overall production to 1 million bpd by 2014.

In September, Erbil published its oil contracts online in what it called a transparency initiative. The list of governments that have published oil contracts is short - Ghana, an emerging producer, is one of the others - in part because putting the terms in the public domain could put governments at a disadvantage in negotiating future contracts.

For Kurdistan, publishing the contracts was a bid to increase their legitimacy and dispel criticisms that the terms did not guarantee the best economic return, said Mr Ciszuk.

"It could be a disadvantage, but compared to the disadvantage of the region existing in a sort of legal limbo, it pales in comparison," he said. "It gives some ammunition to the Kurds and takes away some of the verbal ammunition Baghdad has been laying against the Kurds, saying they have usurped the power to award the contracts and saying they have awarded them in a noncompetitive way."

ayee@thenational.ae

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