Exxon’s $53bn Iraq deal hit by contract snags

Published June 22, 2019
Flames emerge from the flare stacks at the West Qurna-1 oilfield, which is operated by ExxonMobil, near Basra, Iraq June 1, 2019.—Reuters file photo
Flames emerge from the flare stacks at the West Qurna-1 oilfield, which is operated by ExxonMobil, near Basra, Iraq June 1, 2019.—Reuters file photo

BASRA: Just weeks ago, US energy giant ExxonMobil looked poised to move ahead with a $53 billion project to boost Iraq’s oil output at its southern fields, a milestone in the company’s ambitions to expand in the country.

But now a combination of contractual wrangling and security concerns, heightened by escalating tensions between Iran and the US, has conspired to hold back the deal, according to Iraqi government officials.

The negotiations have been stymied by terms of the contract that Baghdad objects to, said four Iraqi officials involved in the discussions who spoke to Reuters on condition of anonymity due to the sensitivity of the matter.

The main sticking point, they said, was the means by which Exxon proposed to recoup its development costs, with the company aiming to share the oil produced by two fields — something Iraq opposes, saying it encroaches on state ownership of production.

One of the Iraqi negotiators said Baghdad would not sign anything with the current terms proposed by Exxon.

ExxonMobil declined to comment on the terms of the contract or the negotiations, with a spokeswoman in Texas saying: “As a matter of practice, we don’t comment on commercial discussions.” The deputy oil minister for upstream affairs, Fayadh Nema, said on Wednesday that talks were ongoing and he expected a deal soon.

The negotiations have also been held up by two separate evacuations of Exxon staff from Iraq, a result of escalating regional tension between the United States and Iran.

Iraq is one of the only nations in the world to have friendly relations with both Washington and Tehran; the arch-enemies are its two biggest allies and Baghdad is caught in the middle as they vie for influence in the country.

“Exxon pulled its staff from Iraq in response to regional unrest. The question is how they will run a $53bn project with constant regional instability,” said an Iraqi oil official who oversees foreign companies’ operations in the south.

Iraq has long-term aims to boost output curtailed by decades of war and sanctions.

An initial agreement would be a boost for Exxon’s plans to expand in Iraq. Under the deal, it would build a water treatment facility and pipelines needed to boost oil output capacity. It would also get the rights to develop at least two southern oilfields - Nahr Bin Umar and Artawi.

In May, US Secretary of State Mike Pompeo discussed the deal with Iraqi Prime Minister Adel Abdul Mahdi twice in three days, a separate Iraqi government official told Reuters.

Mahdi said last month that Iraq was close to signing the $53bn, 30-year energy agreement with project leader Exxon and its partner for the deal, PetroChina. Exxon has proposed a production-sharing agreement whereby it recoups its development costs by sharing the output of the Nahr Bin Umar and Artawi fields with the government.

However, Iraq has largely opposed such contracts and over the past decade has favoured so-called service contracts where companies are paid at a fixed dollar-per-barrel rate.

“We told them that we totally reject any production-sharing mechanism as it contradicts government energy policy,” said an official who is part of the negotiating team.

The official added it was too early to say what kind of contract Iraq would favour.

Published in Dawn, June 22nd, 2019

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