Western oil companies face a delicate balancing act as industry booms in Iraq

Stanley Reed / New York Times News Service /

LONDON — The re-emergence of Iraq as an oil-producing powerhouse is sending inevitable ripples through the Middle East and the industry as a whole.

The country has surpassed Iran as the second-largest member of the Organization of the Petroleum Exporting Countries, after Saudi Arabia, raising questions about whether other oil-producing countries will need to trim their production to accommodate a rising Iraq.

But more immediate tensions are evident between the federal government in Baghdad and the semi-autonomous Kurdistan Regional Government, which is based in the northern Iraqi city of Erbil.

The Kurds, who suffered terribly under Saddam Hussein, are determined to maintain their autonomy from Baghdad — not least by developing their own oil resources. Baghdad insists that only the federal government has the authority to grant access to the country’s natural resources. But the Kurds are succeeding in attracting some of the world’s top oil companies.

Strains between the regional and federal governments were on display Wednesday at the Oil and Money Conference convened in London by the International Herald Tribune and Energy Intelligence Group, a provider of independent analysis and data to the global energy industry.

Hussain al-Shahristani, the Iraqi deputy prime minister, who has been instrumental in drafting contracts to rehabilitate Iraqi oil fields, said Tuesday that Exxon Mobil was in the advanced stages of organizing a sale of its 60 percent stake in a premier Iraqi project, the West Qurna 1 field, to buyers approved by the Iraqi government. Exxon and Iraq have been at loggerheads since the oil company signed an exploration deal with the Kurdistan government last year. Shahristani said Baghdad does not recognize the validity of Kurdish contracts with the oil companies.

An Exxon Mobil spokesman, Patrick McGinn, declined to comment.

Shahristani warned the French oil giant Total and other companies that they faced the prospect of being forced out of their Iraqi projects if they have their feet in both camps.

“They must either decide to present their contract to the federal government for approval or they are in breach of their contract” with Iraq, he said.

But Shahristani is losing the battle to persuade the large Western oil companies. Exxon Mobil, Total, Chevron and Gazprom have all decided that Kurdish oil deals have sufficient potential for profit to be worth risking the ire of Baghdad.

Philip Lambert, head of the London-based advisory firm Lambert Energy, said at the conference that the surge in deals in Kurdistan, compared to a relatively moribund environment in Iraq proper, was a sign that the environment in Kurdistan is healthier.

One reason: As Shahristani acknowledged, Baghdad’s contracts are among the toughest in the world. They offer such low returns that — along with continued security risks and infrastructure problems — Western companies are deciding that they would be better off making deals with the Kurds.

Under Kurdistan contracts, oil companies can earn $3 to $5 per barrel, compared with about $1 per barrel under contracts with the Iraqi federal government, according to Wood Mackenzie, a consulting firm in Edinburgh, Scotland.

So far the large companies have been signing exploration deals with Kurdistan, not production contracts. That leaves several years for the governments in Baghdad and Erbil to reach an accommodation before the fields in the north start producing.

A promising future

Southern Iraq is far more important to the global oil picture today, with more than 3 million barrels a day of production, while Kurdistan is struggling to export 200,000 barrels per day. But exploration in Kurdistan is still at a relatively early stage, having started only after Saddam’s ouster in 2003. Companies looking for oil in the north have enjoyed a high success rate.

Despite Shahristani’s prickliness, there are signs that Baghdad and the Kurdistan government could soon reach an understanding. Under an agreement last summer, Kurdistan has been putting oil into the main Iraq-Turkey pipeline. These exports had been suspended over payment disputes between Baghdad and Erbil, leaving companies like Genel Energy, now led by the former BP chief, Tony Hayward, with no other option than to sell their oil cheaply in the Kurdish market or truck it to Turkey.

Kurdistan’s success in attracting the big oil companies does seem to have influenced thinking in Baghdad. Shahristani said there was nothing in Iraqi law that prevented the award of contracts that give companies a slice of the output of fields for exploration. Companies prefer these contracts to the service deals that Baghdad has offered so far, which give companies a per-barrel fee for renovating old fields like West Qurna.

At the conference, Shahristani dismissed suggestions that Iraq would have trouble replacing Exxon Mobil, saying that serious international companies were interested. He indicated that he had dialed back his expectations for Iraqi oil production over the next few years to about 9 million barrels per day from the 12 million that Iraq would achieve if the oil companies delivered on all the contracts they have signed. Iraq’s approach could jeopardize Baghdad’s ambitions to triple its current level of output on oil, a herculean task.

Iraq, although it is an OPEC member, does not have a quota, in recognition of its need for revenue to rebuild. Shahristani said that once Iraq had reached 4 million to 5 million barrels per day, it could start discussing its production with other OPEC members.

“We don’t think that Iraq is going to be squeezing any country out of the market,” he said.