Iraq’s uncertain oil future – ExxonMobil as harbinger

Sitting in Baghdad airport last week as the last American troops left was a filmic experience. Soldiers rattled around on the tarmac with their kit bags while Apaches hovered overhead – thrump, thrump, thrump. The airport base, even last year, home to perhaps 40,000 men, was almost empty and the Iraqi army hovered round the perimeter waiting to move in. Checkpoints on the way into and out of town had ominously had Ashura banners up, invocations of Hassan and Hussain, somehow proclaiming the Shia allegiance of at least some state forces.

Not enough is certain about Iraq’s future and the political analysis is profilic about coming power struggles between the Kurds and the Baghdad government, the Sunni and the Shia again, the centre and the regions, the regional interplay of Iranian and Saudi and rump American influence.

And in the weeks before the troop withdrawal a whole new dimension of uncertainty opened up – how committed international oil companies are to Iraq’s planned and relied on expansion of oil production. In October, ExxonMobil announced it had signed deals for six exploration deals with the Kurdish Regional Government, including two in areas that are disputed between the Kurds and the Baghdad government.

This means nothing less than that the entire commercial and fiscal regime put in place by Hussein Shahristani, the mastermind of Iraq’s contracts with international companies, is now in play.

The transparency of the technical service agreements Iraq signed in 2009 and 2010 was much touted: there were televised auctions where bids were opened, public criteria for weighting the bids, formal pre-qualification processes and so on. But it turns out the process was transparent in parts. Which, like the weapons inspections, means effectively they aren’t transparent at all.

Industry sources talk about ExxonMobil’s 60 lawyers, checking to see the move into Kurdistan was legally watertight. The stunning thing is that this most cautious, and litigious, of Big Oil companies must have factored in the risk of being thrown out of the south, and off lead operator status in the West Qurna concession, which is scheduled to produce over two million barrels of oil a day in the next few years, as well as a sector-wide project to bring seawater up from the Gulf to inject into the southern fields.

Arguments wax and wane. Baghdad has operated a black list of companies that sign deals with the Kurdish authorities and yet oil lawyers are pretty sure ExxonMobil is safe from punitive damages – because of a clever meta-argument, in fact, that the Kurdish and central government’s differing interpretations of the 2005 Constitution are as yet unresolved by Iraq’s Supreme Court and therefore the Iraqi government cannot prove the company is in breach of Iraqi law by signing with KRG.

Economists construct different models of revenue streams to ExxonMobil under the Kurds’ production sharing agreements compared to the Iraqi governments fee per barrel, and examine the minutiae of terms of cost recovery and R-factors.

But the bottom line is ExxonMobil is clearly ready to risk its involvement in the south – and the signs are they are not alone. Shahristani may simply have been too successful in his agreements, beating the companies down to the thinnest of margins, aggressive in controls on costs claimed back, showing mastery of the politics of bringing back the IOCs… at the expense of commercial returns which make the companies want to stay. In Baghdad, rumours abound of other companies – Shell, BP, Gazprom – who would like to leave if they could. An uptick in security incidents has led to companies withdrawin international staff for weeks at a time. How long and how often do those absences have to continue before it becomes clear that there’s simply not enough investment of all kinds – capital, human, reputational – in meeting the government’s plans to expand production.

At stake then is Iraq’s public spending – the government is planning to spend an incredible 100 billion dollars in 2012, absorbing the rise in oil rents as fast as they occur. Economic planning, jobs, patronage networks and ultimately the political stability of the government.

All on a surprise which need not have been news if all – all – rather than some of the terms of the TSAs were published a couple of years ago. But we’re locked in a vicious cycle. Those terms weren’t published because they would have shown a lot more ambiguity than the government was claiming – on what happens when the expansion plans butt up against Iraq’s OPEC quota, for example. And the ambiguity existed because the government needed to project triumphalism in its relations with the IOCs in order to appease Iraqi public opinion on the wisdom of bringing them back into a country they were expelled from in the 1970s.

Understandable given Iraq’s status as a province of the Big Oil cartel for decades. But counter-productive in the end. If the government had felt free to strike more “normal” terms with the IOCs, ExxonMobil probably wouldn’t be signing into Kurdistan – with all its accompanying fears of the beginning of the end of central control of the oil industry, the motor of the Iraqi economy.

 

 

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