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An employee works at the Tawke oil field in the Iraqi region of Kurdistan. (Muhannad Fala'ah/Muhannad Fala'ah/Getty Images)
An employee works at the Tawke oil field in the Iraqi region of Kurdistan. (Muhannad Fala'ah/Muhannad Fala'ah/Getty Images)

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Exxon may face sanctions from Kurdistan deal Add to ...

Iraq said it could slap sanctions on U.S. oil major Exxon Mobil Corp. before the end of the year for signing a deal with its semi-autonomous Kurdish region without approval from Baghdad or blessing from Washington.

At risk for Exxon is its contract to develop a huge oil field in southern Iraq after it agreed to six exploration deals with the northern Iraqi Kurds, who are in dispute with the Baghdad government over oil and land rights.

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“The Iraqi government is considering sanctions, and will inform the company before they make a public announcement,” deputy prime minister for energy, Hussain al-Shahristani, told an industry conference in London on Tuesday.

Baghdad has said any oil deals signed with the Kurdish Regional Government (KRG) are illegal. Exxon is the first oil major to test that.

“The position of the U.S. government has been that they were unaware of it and if they had been asked, they would have obliged [Exxon]to get approval of the Iraqi government,” Mr. al-Shahristani told an audience of hundreds of Western executives and consultants.

The U.S. State Department, in its first comments on the deal, said it had warned Exxon and other firms of the risks of signing contracts in Iraq without nationwide approval. But it did not say whether it talked with Exxon about the Kurdish contract.

“Washington must be furious. What can you say when your own company goes and destroys stability in Iraq?,” said one industry consultant with clients in Iraq who asked not to be named.

Exxon has yet to comment on the deal, which appears to have been a miscalculation of political risk in Iraq by the world’s largest publicly traded oil company.

“They had some poor political advice,” said another industry source. “They were told that Iraq is moving toward a resolution with the Kurds but they were also told from a senior level that, down the road, Iraq could split apart.”

The stakes look higher for Baghdad than Exxon. If Kurdistan were able to establish fully autonomous oil deals, then other Iraqi regions including Basra in the south, home to most of Iraq’s oil, could push to go the same way.

“Both sides would still prefer to find a resolution but for Baghdad its either us or them. You can’t have both,” said an industry insider.

Other industry sources said Exxon’s gamble might yet pay off.

“It’s now become impossible to dissociate Exxon with Iraqi politics. If the deal goes sour, critics could say Exxon helped ferment divisions in Iraq. If it goes well, they will say Exxon helped bridge the differences between Erbil [the Kurdistan capital Erbil]and Baghdad,” said Jaafar Altaie, managing director at Manar Energy consulting, which specializes on the Iraqi oil sector.

Mr. Altaie and others predicted a messy process if Baghdad cancels contracts with Exxon, which has an army of lawyers.

“Maybe Exxon is just playing the long game. Shahristani is the most hawkish in the cabinet, so perhaps Exxon is taking the long view, hoping that he will leave, and that it will get other contracts later. They see that they can get better terms in Kurdistan for now,” said an industry executive.

Iraq holds the world’s second-largest oil reserves and a presence in the country is key for global majors at a time when their resources are getting depleted.

Iraq plans to more that double its output over the next decade, which could make it the world’s No. 3 producer after Russia and Saudi Arabia.

Exxon, with Royal Dutch Shell, has a multibillion-dollar contract with Iraq’s Oil Ministry to develop the 8.7-billion-barrel West Qurna Phase One oil field in the south, one of many large contracts Iraq hopes will rebuild its oil sector.

OPEC member Iraq has signed scores of deals with foreign oil explorers to develop its oil fields as it recovers from years of war and sanctions more than eight years after the U.S. invasion that toppled Saddam Hussein.

Industry sources have said Shell, Chevron and Italy’s Eni all decided against deals with Kurdistan for fear of sanction from Baghdad.

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