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It started late last year with ExxonMobil, then a month ago Chevron joined in, followed this week by Total and now Gazprom. That’s four of the world’s biggest international oil and gas giants that have defied Baghdad to sign up for concessions to drill for oil in the Kurdistan region of northern Iraq.
Baghdad has blacklisted the oil giants from future bidding rounds for southern fields, and has condemned the sweet deals that the Kurds have been offering as in violation of the Iraqi constitution.
“We will punish companies who sign deals without the approval of the central government and the oil ministry,” said an oil ministry spokesman, according to Reuters. “Unless Total reviews the deals, it will face severe consequences… Total will be blacklisted for violating Iraqi law.”
Big talk, but so far no details on punitive measures. Don’t think for a second that the oil companies are worried. “It’s a chess game, that’s how I read it,” an international oil tycoon with investments in Kurdistan told me recently. For Big Oil, these moves are part of a chess game, played with the intention of forcing Baghdad to rationalize the laws governing Iraq’s oil industry.
The companies would like the entire Iraqi oilpatch to be governed like Kurdistan. The Kurds’ production sharing contracts give the oil giants a big cut of the upside in finding new oil. That’s in contrast with the service contracts that Baghdad has forced in the south, with pay out a set fee of as low as $1.15 per barrel recovered. Even though contracts allow for reimbursement of capital costs, that’s too little to make money or justify the political risk.
Yet the majors bid for the projects anyways. Exxon is partnered with Shell in the West Qurna 1 project in southern Iraq, which calls for an expansion of output in that field to 2.3 million bpd. While Total is partnered with PetroChina and Petronas in the 500,000 bpd Halfaya project. The contract terms call for payment of $1.90 and $1.40 per barrel, respectively. Chevron doesn’t have any deals in the south, but says in a statement that it has been working with the Iraqis since 2003, and that “new opportunities must offer a competitive return measured by various metrics relative to perceived risks and as compared to other investment alternatives in our portfolio.”
The reason Chevron’s peers agreed to crazy contract terms in the south was simple, explains our oil tycoon: “We enter into the cake, and once we’re in we see slowly what we can do to change the model.”
But change isn’t coming. Baghdad still has not approved a national oil law, and some companies have gotten fed up. Norway’s Statoil recently sold its interest in the West Qurna 2 project (which pays $1.15 per bbl) back to its partner Lukoil. Thomas Adolff, analyst with Deutsche Bank, writes in one of his regular reports on Iraqi oil that Exxon “is in advanced discussions with Rosneft” to sell all or part of its concession.
“Total has very little to lose in the south,” writes Adolff. “There’s not much the government can do other than banning Total from future licensing rounds.”
But why couldn’t the government yank those southern concessions from Exxon and Total? They could, and in this chess game the companies are challenging Baghdad to do just that. “If Baghdad takes the risk of taking back the concession, you think Exxon will not react? They will immediately go to court,” says our tycoon. The issue would be sent to an international arbitration tribunal, where Exxon would make the point that there is no official oil law in place and that the Kurdish deals do not violate the Iraqi constitution. The debate is not over whether the Kurdish region has the right to offer the concessions–it does–but over the model of the contract itself.
“Do you think Baghdad wants to have an international court to say what the law is? I don’t think so. The government in Baghdad does not want to fall into the trap,” says the tycoon. This is why Exxon and Total have little to worry about. “Everybody is making gesticulations, but nobody has taken anything from Exxon. They cannot. They won’t take the risk.” Checkmate Big Oil.
The result is that it’s game on in Kurdistan. Both Total and Chevron have indicated that they want to expand their positions there. Statoil is looking at opportunities. They’ll have to compete with a crowd of companies already there, like Sinopec, Marathon, Hess, Heritage Oil, DNO, Maersk Oil, and a passel of billionaire-backed ventures such as Ross Perot, Jr.’s Hillwood International, Ray Lee Hunt’s Hunt Oil, Jean Claude Gandur’s Oryx Petroleum as well as Genel Energy, which was bankrolled by Nat Rothschild and is run by former BP Chief Executive Tony Hayward. (Genel is the favored Iraq-leveraged investment of Deutsche Bank’s Adolff.)
A spokesman for Kurdistan Natural Resources Minister Ashti Hawrami recently said that with the help of all this firepower the region expects to boost oil output from 300,000 bpd now to 1 million bpd by 2015 and 2 million bpd by 2019. That would put Iraqi Kurdistan in same oil exporting league as Venezuela.
If Baghdad is serious about building a world-class oil industry in the south they should stop dreaming of building a Saudi Aramco redux and decide to do it the Kurdish way.
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Baghdad has blacklisted the oil giants from future bidding rounds for southern fields, and has condemned the sweet deals that the Kurds have been offering as in violation of the Iraqi constitution.
“We will punish companies who sign deals without the approval of the central government and the oil ministry,” said an oil ministry spokesman, according to Reuters. “Unless Total reviews the deals, it will face severe consequences… Total will be blacklisted for violating Iraqi law.”
Big talk, but so far no details on punitive measures. Don’t think for a second that the oil companies are worried. “It’s a chess game, that’s how I read it,” an international oil tycoon with investments in Kurdistan told me recently. For Big Oil, these moves are part of a chess game, played with the intention of forcing Baghdad to rationalize the laws governing Iraq’s oil industry.
The companies would like the entire Iraqi oilpatch to be governed like Kurdistan. The Kurds’ production sharing contracts give the oil giants a big cut of the upside in finding new oil. That’s in contrast with the service contracts that Baghdad has forced in the south, with pay out a set fee of as low as $1.15 per barrel recovered. Even though contracts allow for reimbursement of capital costs, that’s too little to make money or justify the political risk.
Yet the majors bid for the projects anyways. Exxon is partnered with Shell in the West Qurna 1 project in southern Iraq, which calls for an expansion of output in that field to 2.3 million bpd. While Total is partnered with PetroChina and Petronas in the 500,000 bpd Halfaya project. The contract terms call for payment of $1.90 and $1.40 per barrel, respectively. Chevron doesn’t have any deals in the south, but says in a statement that it has been working with the Iraqis since 2003, and that “new opportunities must offer a competitive return measured by various metrics relative to perceived risks and as compared to other investment alternatives in our portfolio.”
The reason Chevron’s peers agreed to crazy contract terms in the south was simple, explains our oil tycoon: “We enter into the cake, and once we’re in we see slowly what we can do to change the model.”
But change isn’t coming. Baghdad still has not approved a national oil law, and some companies have gotten fed up. Norway’s Statoil recently sold its interest in the West Qurna 2 project (which pays $1.15 per bbl) back to its partner Lukoil. Thomas Adolff, analyst with Deutsche Bank, writes in one of his regular reports on Iraqi oil that Exxon “is in advanced discussions with Rosneft” to sell all or part of its concession.
“Total has very little to lose in the south,” writes Adolff. “There’s not much the government can do other than banning Total from future licensing rounds.”
But why couldn’t the government yank those southern concessions from Exxon and Total? They could, and in this chess game the companies are challenging Baghdad to do just that. “If Baghdad takes the risk of taking back the concession, you think Exxon will not react? They will immediately go to court,” says our tycoon. The issue would be sent to an international arbitration tribunal, where Exxon would make the point that there is no official oil law in place and that the Kurdish deals do not violate the Iraqi constitution. The debate is not over whether the Kurdish region has the right to offer the concessions–it does–but over the model of the contract itself.
“Do you think Baghdad wants to have an international court to say what the law is? I don’t think so. The government in Baghdad does not want to fall into the trap,” says the tycoon. This is why Exxon and Total have little to worry about. “Everybody is making gesticulations, but nobody has taken anything from Exxon. They cannot. They won’t take the risk.” Checkmate Big Oil.
The result is that it’s game on in Kurdistan. Both Total and Chevron have indicated that they want to expand their positions there. Statoil is looking at opportunities. They’ll have to compete with a crowd of companies already there, like Sinopec, Marathon, Hess, Heritage Oil, DNO, Maersk Oil, and a passel of billionaire-backed ventures such as Ross Perot, Jr.’s Hillwood International, Ray Lee Hunt’s Hunt Oil, Jean Claude Gandur’s Oryx Petroleum as well as Genel Energy, which was bankrolled by Nat Rothschild and is run by former BP Chief Executive Tony Hayward. (Genel is the favored Iraq-leveraged investment of Deutsche Bank’s Adolff.)
A spokesman for Kurdistan Natural Resources Minister Ashti Hawrami recently said that with the help of all this firepower the region expects to boost oil output from 300,000 bpd now to 1 million bpd by 2015 and 2 million bpd by 2019. That would put Iraqi Kurdistan in same oil exporting league as Venezuela.
If Baghdad is serious about building a world-class oil industry in the south they should stop dreaming of building a Saudi Aramco redux and decide to do it the Kurdish way.
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