Iraq Blocks Exxon License Bid

Wall Street Journal – February 13th 2012

U.S. energy giant Exxon Mobil Corp. will be barred from Iraq’s fourth oil- and gas-licensing auction because of the deals it struck with the country’s semi-autonomous Kurdistan region, a spokesman for Iraqi Deputy Prime Minister for Energy Hussein al-Shahristani said Monday.

The move comes as Iraq’s central government struggles to assert its authority over energy deals struck within its borders amid a continued lack of legislation for the sector.

The Iraqi government considers as invalid any deals signed with the Kurdistan Regional Government, or KRG, which in turn states that all and any deals it has signed comply with the country’s new constitution.

“The Iraqi government has decided that Exxon won’t be allowed to participate in the next oil- and gas-bidding round,” spokesman Faisal Abdullah told The Wall Street Journal.

Iraq is planning to auction 12 promising exploration blocks, seven of which are believed to contain natural gas, and five thought to contain crude.

The new bid round, scheduled for May, is expected to add some 10 billion barrels of crude oil and some 29 trillion cubic feet of gas to Iraq’s reserves.

However, it has already been delayed twice amid arguments on whether the contracts offered should be of the production-sharing type wanted by the explorers or the fixed-fee service contracts wanted by the government.

For the next licensing auction, Baghdad has refused to offer industry-standard production-sharing contracts, where the oil company owns a portion of the oil in the ground and can profit from its sale.

It is instead insisting on service contracts that pay companies a fixed fee for the amount of oil they produce.

The fixed-fee service contracts have worked for the redevelopment of existing oil fields in Iraq—albeit with very slim margins for the companies involved—but are unappealing for many companies facing the gamble of oil exploration, said KBC Energy Economics analyst Samuel Ciszuk.

“You don’t know what you’re going to find,” said Mr. Ciszuk. “You have all these uncertainties, the most rigid contract framework…and delays building up because of slow state decision-making.”

Mr. al-Shahristani has previously said Exxon would have to choose between its deal to explore six areas in Kurdistan and its central-government contract to develop the 370,000 barrel-a-day West Qurna Phase 1, Iraq’s second-biggest field. It has proven reserves of more than 8.7 billion barrels.

“We are still waiting for Exxon to answer our letters in which we warned that it has to choose between contracts in Kurdistan and those in southern Iraq,” the spokesman said, adding that depending on Exxon’s reply the government would make a decision about its existing contract in the south.

An Exxon media officer in the U.S. declined to comment.

In December, Iraqi Prime Minister Nouri al-Maliki met with senior Exxon executives during a visit to the U.S. and said afterward that the Irving, Texas, company had promised to reconsider its dealings with the KRG.

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