Southern Iraq Or Kurdistan: What Is Next For This Oil & Gas Major?
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The Iraqi government has asked ExxonMobil (NYSE: XOM) to choose between working in its Southern oilfields and Kurdistan, a choice that the company will have to make very soon. Below, I will discuss the benefits, risks, and possibilities associated with each option, and examine how Exxon's decision could impact its future revenues and profitability.
Iraq’s Resentment Against Exxon Mobil’s Relationship with Kurdistan
The Iraqi government has long opposed foreign oil companies from striking a deal with the autonomous Kurdistan Regional Government in the north. While Iraq possesses huge discovered and undiscovered natural gas and oil reserves in Kurdistan and Southern Iraq, foreign oil companies have tended to focus on Kurdistan because of its relatively Western-friendly environment. The Kurdistan Regional Government denies that it needs to seek the permission of Baghdad before signing oil contracts with foreign companies. And thus, companies like ExxonMobil, Total (NYSE: TOT) and Marathon Oil (NYSE: MRO) have all signed deals with the Kurdistan Regional Government, earning the wrath of Baghdad politicians. The latest fiasco forces Exxon to choose between a relatively stable Kurdistan and the more unstable southern Iraq. I believe Exxon will choose Kurdistan.
In November 2012, ExxonMobil announced that it would sell its stake of the 8.6 billion barrel West Qurna Phase 1 project. The idea was to wash its hands clean of southern Iraq and concentrate on exploring and drilling in Kurdistan, where the politicians have been less antagonizing than in Baghdad. ExxonMobil had been awarded the West Qurna-1 project in 2009 along with Royal Dutch Shell. Shell is a minority partner in the consortium, while Exxon holds the majority. If Exxon is forced to choose between West Qurna and its Kurdistan contracts, Exxon will certainly choose Kurdish contracts. This is not only because of security reasons, but also because of the sheer amount of natural gas and oil that is available in the Kurdish North.
CEO Rex Tillerson Does Damage Control
Exxon Chairman and CEO Rex Tillerson met with Kurdish regional President Massoud Barzani, but no information has been leaked out yet because of the potentially sensitive nature of the content. Also, Mr. Tillerson met with officials in Baghdad over the same issue, but it is still not clear whom Exxon Mobil choose at the end of the day. Considering how badly Exxon wanted to sell its West Qurna-1 project way back in November 2012, it leaves me with no doubt that Exxon will choose the Kurdish contracts. This will likely anger Baghdad further, but there is very little the country can do. The Kurdistan Regional Government had a target of exporting 200,000 barrels of oil per day in October 2012, and that number is expected to multiply over the next few years.
Exxon’s Competitors Have Been Reprimanded by Iraq’s Central Government As Well
Total was reprimanded way back in July 2012 by the Iraqi central government for striking a deal with the semi-autonomous Kurdistan Regional Government. Total acquired a 35% stake in two blocks north of Erbil, the capital of Kurdistan. The deal was struck with Marathon Oil, which has also been reprimanded by the Iraqi government for dealing with Kurdistan without the necessary permission. Marathon Oil has even gone ahead and built infrastructure in Kurdistan, which will help it to explore and drill in the coming years. The preference for Kurdistan is understandable. It does not have the militancy, security related issues, and strict Islamic codes which would not appeal to western employees of foreign companies. This alone has made Kurdistan more attractive than southern Iraq. Only Shell has been drilling and exploring in the south near Basra. Shell has had to bear the brunt of many militant attacks and security related issues in the south. However, Shell is in such a position that it will not be able to leave the south even if it wanted to.
To make matters worse for the Iraqi government, Chevron, Exxon's major competitor, has also acquired a new stake in Kurdish oil license. Chevron will now explore and drill at Qara Dagh. Baghdad quickly condemned the move just as it condemned ExxonMobil, Total, and Marathon Oil. What I am really trying to say here is it really doesn't matter how angry Baghdad gets--those who will forge contracts with Kurdistan will continue to reap profits. ExxonMobil will certainly see profits and will have to offer lip service to Baghdadi officials, but that is just about it. All this noise, tantrums, and teeth gnashing will not do ExxonMobil or its competitors any harm. Instead, newer oil wells and gas fields will be there in Kurdistan to discover and drill.
Investors have much to rejoice about and the empty threats of Iraqi officials should not be taken seriously, as they have often announced ultimatums such as these in the past. Even if Exxon chooses Kurdistan over southern Iraq, it can only gain. I anticipate the coming years will see ExxonMobil increasing its profits and revenue, with a major portion of that arriving from Kurdistan.
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