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18 Nov 2011 20:06 GMT
London, 18 November (Argus) — The Iraqi government is weighing up how to penalise ExxonMobil for signing an exploration contract with the Kurdistan regional government (KRG) without Baghdad's approval.
“The government categorically rejects ExxonMobil's contract with the KRG,” the office of deputy prime minister for energy Hussein al-Shahristani tells Argus. Baghdad says it will react to ExxonMobil's exploration contract with the KRG in the same way it has dealt with other foreign firms signing deals with the KRG. It has disqualified them from bidding for any contracts elsewhere in Iraq. This will exclude it from Baghdad's exploration bidding round in March next year.
And the Iraqi oil ministry says ExxonMobil's role as lead operator at the 370,000 b/d West Qurna 1 project is at risk. But, a week after ExxonMobil's exploration deal with the KRG was announced, Baghdad was still weighing its options and had not terminated ExxonMobil's participation in West Qurna 1. The company holds a 60pc stake in a 20-year service contract, along with Shell (15pc) and state-owned Iraqi Drilling (25pc).
West Qurna 1, where the majors have pledged to boost capacity from a 2009 baseline of 258,000 b/d to 2.825mn b/d by 2017, will provide Iraq's single largest capacity increase. Dismissing the project's lead operator would be a high-risk strategy for Iraq, but it could try to mitigate this by unifying the West Qurna 1 and West Qurna 2 projects. The West Qurna 2 lead operator, Russia's Lukoil, has a long-standing ambition to operate the entire 43bn bl West Qurna field.
The commercial lure offered by production-sharing agreements in the Kurdish region trump the 20-year service contracts on offer by Baghdad. ExxonMobil earns $1.90/bl for new output added at West Qurna 1, plus cost recovery, and is paid in crude, for an estimated rate of return of 20pc.
Analysts' estimates of project economics in Kurdistan vary widely, but point to far higher rates of return. Low exploration and production costs could provide rates of return of 40-50pc if a big find is made in the Kurdish region, where the breakeven price for projects is $20/bl, Wood Mackenzie consultant Alex Munton estimates. US bank Citigroup sees a rate of return of 35pc, and a breakeven price of around $36/bl.
Foreign firms are wary of the production constraints that Baghdad is considering for exploration blocks in its upcoming round. The KRG claims recoverable oil deposits at 35bn bl, while reserves from early exploration are put at 5bn-6bn bl of crude and 10 trillion-15 trillion ft³ (283bn-425bn m³) of gas.
Three of the six blocks included in ExxonMobil's contract with the KRG — Baeshiqa, al-Qush and Qara-Hanjeer — extend outside the area administered by the KRG into territory disputed with Baghdad. This is likely to strain relations as the two sides seek to negotiate a draft oil and gas law for submission to parliament this year. The other three blocks are Betwata, Pirmam and an unnamed block northeast of Arbat.
New dynamic
But independents active in Kurdistan see a big boost for their own positions through ExxonMobil's entry. “We have been heavily discounted on political risk,” Gulf Keystone chief operating officer John Gerstenlauer says. But “there is no way Exxon a player the size of Exxon can do what they have done and it not change the dynamic,” he says.
Chevron, Italy's Eni and Total are thought to be negotiating deals with the KRG, but none will comment. These discussions, along with the ExxonMobil deal, may have prompted the Iraqi cabinet finally to approve on 15 November the much-delayed $12bn-17bn Basrah Gas (BGC) joint venture that groups Shell (44pc), state-owned South Gas (51pc) and Japan's Mitsubishi (5pc).
The BGC venture will gather and process 700mn ft³/d (7.2bn m³/yr) of gas flared at the Rumaila, Zubair and West Qurna 1 fields, as well as additional gas as Iraqi crude output rises. Shell's lead role in BGC, and being lead operator at the 12bn bl Majnoon field, leaves it unlikely to pursue a Kurdish deal that would jeopardise its position in Iraq.[b]
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London, 18 November (Argus) — The Iraqi government is weighing up how to penalise ExxonMobil for signing an exploration contract with the Kurdistan regional government (KRG) without Baghdad's approval.
“The government categorically rejects ExxonMobil's contract with the KRG,” the office of deputy prime minister for energy Hussein al-Shahristani tells Argus. Baghdad says it will react to ExxonMobil's exploration contract with the KRG in the same way it has dealt with other foreign firms signing deals with the KRG. It has disqualified them from bidding for any contracts elsewhere in Iraq. This will exclude it from Baghdad's exploration bidding round in March next year.
And the Iraqi oil ministry says ExxonMobil's role as lead operator at the 370,000 b/d West Qurna 1 project is at risk. But, a week after ExxonMobil's exploration deal with the KRG was announced, Baghdad was still weighing its options and had not terminated ExxonMobil's participation in West Qurna 1. The company holds a 60pc stake in a 20-year service contract, along with Shell (15pc) and state-owned Iraqi Drilling (25pc).
West Qurna 1, where the majors have pledged to boost capacity from a 2009 baseline of 258,000 b/d to 2.825mn b/d by 2017, will provide Iraq's single largest capacity increase. Dismissing the project's lead operator would be a high-risk strategy for Iraq, but it could try to mitigate this by unifying the West Qurna 1 and West Qurna 2 projects. The West Qurna 2 lead operator, Russia's Lukoil, has a long-standing ambition to operate the entire 43bn bl West Qurna field.
The commercial lure offered by production-sharing agreements in the Kurdish region trump the 20-year service contracts on offer by Baghdad. ExxonMobil earns $1.90/bl for new output added at West Qurna 1, plus cost recovery, and is paid in crude, for an estimated rate of return of 20pc.
Analysts' estimates of project economics in Kurdistan vary widely, but point to far higher rates of return. Low exploration and production costs could provide rates of return of 40-50pc if a big find is made in the Kurdish region, where the breakeven price for projects is $20/bl, Wood Mackenzie consultant Alex Munton estimates. US bank Citigroup sees a rate of return of 35pc, and a breakeven price of around $36/bl.
Foreign firms are wary of the production constraints that Baghdad is considering for exploration blocks in its upcoming round. The KRG claims recoverable oil deposits at 35bn bl, while reserves from early exploration are put at 5bn-6bn bl of crude and 10 trillion-15 trillion ft³ (283bn-425bn m³) of gas.
Three of the six blocks included in ExxonMobil's contract with the KRG — Baeshiqa, al-Qush and Qara-Hanjeer — extend outside the area administered by the KRG into territory disputed with Baghdad. This is likely to strain relations as the two sides seek to negotiate a draft oil and gas law for submission to parliament this year. The other three blocks are Betwata, Pirmam and an unnamed block northeast of Arbat.
New dynamic
But independents active in Kurdistan see a big boost for their own positions through ExxonMobil's entry. “We have been heavily discounted on political risk,” Gulf Keystone chief operating officer John Gerstenlauer says. But “there is no way Exxon a player the size of Exxon can do what they have done and it not change the dynamic,” he says.
Chevron, Italy's Eni and Total are thought to be negotiating deals with the KRG, but none will comment. These discussions, along with the ExxonMobil deal, may have prompted the Iraqi cabinet finally to approve on 15 November the much-delayed $12bn-17bn Basrah Gas (BGC) joint venture that groups Shell (44pc), state-owned South Gas (51pc) and Japan's Mitsubishi (5pc).
The BGC venture will gather and process 700mn ft³/d (7.2bn m³/yr) of gas flared at the Rumaila, Zubair and West Qurna 1 fields, as well as additional gas as Iraqi crude output rises. Shell's lead role in BGC, and being lead operator at the 12bn bl Majnoon field, leaves it unlikely to pursue a Kurdish deal that would jeopardise its position in Iraq.[b]
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