Spat with Exxon bad for Iraq, oil consumers
Dubai, October 19, 2012
By Christopher Swann and Una Galani
Iraq's spat with oil giant Exxon Mobil bodes ill for the Middle Eastern nation which hopes to be a major player in the oil market - and for oil consumers everywhere.
Diplomatic sources yesterday said Exxon Mobil has informed Hussain al-Shahristani, Iraq's deputy prime minister for energy, and the US State Department of its intentions to leave its flagship Iraqi oil project, the West Qurna-1 field.
Relations between Exxon and the Iraqi government have been strained after the oil company signed a deal last year with the autonomous northern Kurdish region to explore for hydrocarbons. The central government deemed the agreement illegal, and has since threatened to end the US oil major's West Qurna-1 contract.
The tangle undermines hopes for Iraq's future oil output. Falling short of the potential would cost the Iraqi economy and, eventually, raise oil prices.
In awarding contracts for fields including the flagship West Qurna-1 in southern Iraq, the central government in Baghdad squeezed Western giants like Exxon and Total into deals that offer wafer-thin profits of less than $2 a barrel of oil.
Meanwhile oil majors are reliant on the government to build the infrastructure needed to get the crude to export markets. If Baghdad continues to fall behind on this commitment, their returns could shrink further. Add in the security burden, and oil giants have little to lose if they pull out of these arrangements.
Deals signed with Kurdistan in the north of the country are more lucrative, but Baghdad sees them as illegal. Yet the Iraqi government may be overplaying its hand.
Exxon would not be easy to replace if it pulls out of southern Iraq. Gazprom and Total are equally tainted by agreements with Kurdistan, and Chevron is involved there too.
It's true that Petronas, BP and Royal Dutch Shell have stayed away, dealing only with the central government. Still, with more than $500 billion of investment needed over a couple of decades, according to the International Energy Agency, Baghdad can't afford to limit the field too much and still expect to extract decent terms.
Iraq's exports hit their highest level in 30 years this September. That's a good start. But the IEA reckons it can more than double current production of 3 million barrels a day to about 8 million by 2035 - close to half the forecast growth in world demand.
If those ambitious goals are not met it is Iraqis, reliant on oil for 70 percent of GDP, who would suffer first. But with less supply to meet rising global consumption, oil users would feel the pain. - Reuters Breakingviews
* The authors are Reuters Breakingviews columnists. The opinions expressed are their own.
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