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Exxon Spars With Iraq Over Lack of Payment
By ANDREW E. KRAMER and JULIA WERDIGIER
Published: December 22, 2011
The turmoil in Iraq after the United States troop withdrawal is extending to its vital petroleum industry.
The American oil giant Exxon Mobil and its partners are embroiled in a $50 million payment dispute with the Iraqi government over an oil field in southeastern Iraq that the companies are upgrading and modernizing. The Shiite-led government of Prime Minister Nuri Kamal al-Maliki is also unhappy with Exxon over a separate development deal the company has struck with the leaders of the semiautonomous Kurdistan region in northern Iraq.
The Iraqi government’s failure to pay Exxon, the only American oil company operating in southern Iraq, for nearly two years of work underscores the perils for Western companies seeking to do business there. The government has not explained why it has withheld the payments.
Any perception that the Iraqi government will not honor its oil contracts could also send ripples beyond Iraq to international markets worried about disruptions in petroleum supplies. Iraq is expected to ramp up oil production faster than any other country in the next 25 years, with a capacity of five million barrels of oil a day by 2035, more than traditional leaders like Saudi Arabia, according to the International Energy Agency.
“The international oil companies are putting in the capital and expertise,” Alex Munton, a Middle East analyst for Wood Mackenzie, a research and consulting firm based in Edinburgh, said. “They need to recover their costs and get a profit margin on top. For it to work, they have to be paid what they are due.
“It would certainly serve Iraq’s interests well to have that contract working smoothly,” he added.
Exxon’s 2009 deal with the Iraqi government to improve production in the West Qurna 1 field was never expected to be lucrative under the best of circumstances. The government had agreed to pay Exxon and its partners $1.90 for each additional barrel of oil they pumped after refurbishing the already producing field. The fees would barely be enough to cover the companies’ costs. Other deals between Iraq and foreign oil companies had similar terms.
International oil contracts are more typically structured to compensate companies with a percentage from sales or a share of production that takes into account the fluctuating price of oil, so that they can be more profitable for the companies when prices rise.
Western oil companies, shut out of Iraq’s oil fields for decades under the government of Saddam Hussein, were willing to do the low-profit, technical service deals to get a foot in the door with the new government that was put in place after the American-led invasion in 2003. Only a few dozen of Iraq’s 80 or so discovered fields are in production, and the government has suggested that it would give more lucrative agreements later to companies that helped the country early on.
For most of the nearly nine-year war, American government advisers aided Iraqi ministries in negotiating and fulfilling contracts. That tapered off as Iraq assumed more sovereignty. President Obama, in a meeting this month with Mr. Maliki in Washington, said Iraq was now a country “sovereign, self-reliant and democratic.”
Exxon and its minority partners in the project — which include the Anglo-Dutch oil giant Shell — increased output in the West Qurna field by more than 10 percent by last March. That was the trigger point for the Iraqi government to begin paying the companies for their work.
But the payments have not been made, according to Hans Nijkamp, Shell’s country manager for Iraq.
“There are a lot of admin-type issues that we’re working through with the government,” Mr. Nijkamp said in an interview.
He said Shell did not believe the delays were deliberate and that the issues would eventually be resolved.
An Exxon Mobil spokesman declined to comment, saying the company has a policy of not discussing commercial matters.
The Iraqi government awarded 11 oil and natural gas contracts for fields at auctions beginning in 2008. Two other consortiums that won deals and have since raised output by more than 10 percent — those led by BP of Britain and Eni of Italy — have been compensated.
Western oil service companies, including the American giants Halliburton and Baker Hughes, have also made substantial profits working in Iraqi oil fields.
Mr. Nijkamp said that Shell was working to smooth over the flaws in its Iraqi technical service contracts before another field it was developing, Majnoon, entered commercial production by the end of next year.
“We’re working with South Oil Company and the Oil Ministry to get the invoicing process up to scratch until then,” he said.
Faisal Abdullah, a spokesman for Iraq’s deputy prime minister in charge of energy, Hussain al-Shahristani, confirmed in an interview in Baghdad in November that the government owed a payment to the Exxon-led consortium, but he did not characterize it as late.
“Exxon has increased output and a small amount of money has not been paid,” Mr. Abdullah said. He said the government had not paid Exxon about $50 million, a figure that roughly conforms with estimates by Western oil analysts.
Mr. Abdullah described the delay in paying America’s largest oil company as bureaucratic and unrelated to the dispute over exploration contracts in Kurdistan that Exxon signed in November.
However, that deal has caused great consternation. The central government considers deals in Kurdistan illegal. Without an oil law to split petroleum wealth, these agreements are worsening an already poisonous ethnic divide between Kurds and Arabs, officials in Baghdad say.
Mr. Abdullah said that Exxon executives had expressed concerns to officials in Baghdad about the profitability of the West Qurna 1 contract before striking the deal in Kurdistan, suggesting that the Texas-based company was dissatisfied with the deal.
“They said ‘We are not getting enough profit from West Qurna 1,’ ” Mr. Abdullah said. “But that is not true. It is a very big field.”
Iraqi officials say they cautioned Exxon not to sign the deal in Kurdistan, even as they were apparently withholding payment for the work in the south.
Ali al-Fayadh, the deputy chairman of the oil committee in the Iraqi Parliament, said in an interview in his Baghdad office that the government was considering banning Exxon from working in southern Iraq because the company had signed the deal in Kurdistan.
A decision has not yet been made, Mr. Fayadh said. The government could prohibit Exxon from participating in future auctions or end its contract for West Qurna 1, he said.
If that happened, it would mean the only major American oil company operating in Iraq would be expelled on the heels of the United States military’s departure.
Oil companies are expected to invest $150 billion in Iraq in the next decade. The payment delay to the Exxon coalition highlights the quandary they face.
Though eager to gain access to reserves estimated at 115 billion barrels, the fourth-largest in the world, companies are initially required to invest large sums with only tiny early returns and major risks.
Insurgents have not generally targeted their bombs at international oil companies, which are ensconced in well-guarded compounds. But the companies are worried that schisms within the fracturing government would cause the administration of contracts to grind to a halt, delaying payments and regulatory decisions.
“We’re entering a period of uncertainty,” said Mr. Munton, the Wood Mackenzie analyst. “The last few days do not bode well for political stability in the country.”
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By ANDREW E. KRAMER and JULIA WERDIGIER
Published: December 22, 2011
The turmoil in Iraq after the United States troop withdrawal is extending to its vital petroleum industry.
The American oil giant Exxon Mobil and its partners are embroiled in a $50 million payment dispute with the Iraqi government over an oil field in southeastern Iraq that the companies are upgrading and modernizing. The Shiite-led government of Prime Minister Nuri Kamal al-Maliki is also unhappy with Exxon over a separate development deal the company has struck with the leaders of the semiautonomous Kurdistan region in northern Iraq.
The Iraqi government’s failure to pay Exxon, the only American oil company operating in southern Iraq, for nearly two years of work underscores the perils for Western companies seeking to do business there. The government has not explained why it has withheld the payments.
Any perception that the Iraqi government will not honor its oil contracts could also send ripples beyond Iraq to international markets worried about disruptions in petroleum supplies. Iraq is expected to ramp up oil production faster than any other country in the next 25 years, with a capacity of five million barrels of oil a day by 2035, more than traditional leaders like Saudi Arabia, according to the International Energy Agency.
“The international oil companies are putting in the capital and expertise,” Alex Munton, a Middle East analyst for Wood Mackenzie, a research and consulting firm based in Edinburgh, said. “They need to recover their costs and get a profit margin on top. For it to work, they have to be paid what they are due.
“It would certainly serve Iraq’s interests well to have that contract working smoothly,” he added.
Exxon’s 2009 deal with the Iraqi government to improve production in the West Qurna 1 field was never expected to be lucrative under the best of circumstances. The government had agreed to pay Exxon and its partners $1.90 for each additional barrel of oil they pumped after refurbishing the already producing field. The fees would barely be enough to cover the companies’ costs. Other deals between Iraq and foreign oil companies had similar terms.
International oil contracts are more typically structured to compensate companies with a percentage from sales or a share of production that takes into account the fluctuating price of oil, so that they can be more profitable for the companies when prices rise.
Western oil companies, shut out of Iraq’s oil fields for decades under the government of Saddam Hussein, were willing to do the low-profit, technical service deals to get a foot in the door with the new government that was put in place after the American-led invasion in 2003. Only a few dozen of Iraq’s 80 or so discovered fields are in production, and the government has suggested that it would give more lucrative agreements later to companies that helped the country early on.
For most of the nearly nine-year war, American government advisers aided Iraqi ministries in negotiating and fulfilling contracts. That tapered off as Iraq assumed more sovereignty. President Obama, in a meeting this month with Mr. Maliki in Washington, said Iraq was now a country “sovereign, self-reliant and democratic.”
Exxon and its minority partners in the project — which include the Anglo-Dutch oil giant Shell — increased output in the West Qurna field by more than 10 percent by last March. That was the trigger point for the Iraqi government to begin paying the companies for their work.
But the payments have not been made, according to Hans Nijkamp, Shell’s country manager for Iraq.
“There are a lot of admin-type issues that we’re working through with the government,” Mr. Nijkamp said in an interview.
He said Shell did not believe the delays were deliberate and that the issues would eventually be resolved.
An Exxon Mobil spokesman declined to comment, saying the company has a policy of not discussing commercial matters.
The Iraqi government awarded 11 oil and natural gas contracts for fields at auctions beginning in 2008. Two other consortiums that won deals and have since raised output by more than 10 percent — those led by BP of Britain and Eni of Italy — have been compensated.
Western oil service companies, including the American giants Halliburton and Baker Hughes, have also made substantial profits working in Iraqi oil fields.
Mr. Nijkamp said that Shell was working to smooth over the flaws in its Iraqi technical service contracts before another field it was developing, Majnoon, entered commercial production by the end of next year.
“We’re working with South Oil Company and the Oil Ministry to get the invoicing process up to scratch until then,” he said.
Faisal Abdullah, a spokesman for Iraq’s deputy prime minister in charge of energy, Hussain al-Shahristani, confirmed in an interview in Baghdad in November that the government owed a payment to the Exxon-led consortium, but he did not characterize it as late.
“Exxon has increased output and a small amount of money has not been paid,” Mr. Abdullah said. He said the government had not paid Exxon about $50 million, a figure that roughly conforms with estimates by Western oil analysts.
Mr. Abdullah described the delay in paying America’s largest oil company as bureaucratic and unrelated to the dispute over exploration contracts in Kurdistan that Exxon signed in November.
However, that deal has caused great consternation. The central government considers deals in Kurdistan illegal. Without an oil law to split petroleum wealth, these agreements are worsening an already poisonous ethnic divide between Kurds and Arabs, officials in Baghdad say.
Mr. Abdullah said that Exxon executives had expressed concerns to officials in Baghdad about the profitability of the West Qurna 1 contract before striking the deal in Kurdistan, suggesting that the Texas-based company was dissatisfied with the deal.
“They said ‘We are not getting enough profit from West Qurna 1,’ ” Mr. Abdullah said. “But that is not true. It is a very big field.”
Iraqi officials say they cautioned Exxon not to sign the deal in Kurdistan, even as they were apparently withholding payment for the work in the south.
Ali al-Fayadh, the deputy chairman of the oil committee in the Iraqi Parliament, said in an interview in his Baghdad office that the government was considering banning Exxon from working in southern Iraq because the company had signed the deal in Kurdistan.
A decision has not yet been made, Mr. Fayadh said. The government could prohibit Exxon from participating in future auctions or end its contract for West Qurna 1, he said.
If that happened, it would mean the only major American oil company operating in Iraq would be expelled on the heels of the United States military’s departure.
Oil companies are expected to invest $150 billion in Iraq in the next decade. The payment delay to the Exxon coalition highlights the quandary they face.
Though eager to gain access to reserves estimated at 115 billion barrels, the fourth-largest in the world, companies are initially required to invest large sums with only tiny early returns and major risks.
Insurgents have not generally targeted their bombs at international oil companies, which are ensconced in well-guarded compounds. But the companies are worried that schisms within the fracturing government would cause the administration of contracts to grind to a halt, delaying payments and regulatory decisions.
“We’re entering a period of uncertainty,” said Mr. Munton, the Wood Mackenzie analyst. “The last few days do not bode well for political stability in the country.”
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