How ExxonMobil Turned King-Maker in Iraq
ExxonMobil has surfaced as a critical player in Iraq’s sectarian strife, a risky position that nonetheless appears set to pay off handsomely, that is, as long as a new war doesn’t start, in which case everyone loses.
The Texas-based giant oil company was among the first in a wave of global oil majors seeking a foothold in Iraq, which will be the world’s single biggest contributor to oil production additions this decade on its way to more than tripling current production to as much as 9 million bpd. This growth, supported by highly attractive petroleum geology can be accomplished only if the political situation allows it.
Companies grudgingly accepted the unattractive service contracts as they looked forward to stability and a future exploration bonanza. ExxonMobil became the operator in a joint venture with Shell of a contract to develop the super major West Qurna-1 field, one that binds ExxonMobil to produce 2.825 million barrels per day by 2017, up from less than 400,000 bpd currently.
But Baghdad also demanded loyalty. A contract with the central government meant not investing in the Kurdish region, an acceptable compromise at first. Companies picked one or the other, assuming that one day the sectarian threat would subside and all contracts would be legalized by Baghdad, exports routes would flow, and so forth.
But the southern bonanza is not materializing, while the KRG has grown into stable investment magnet in all sectors. Kurdish production sharing contracts are looking increasingly attractive, especially as Iraq approaches a tipping point in sectarian strife that is raising expectations of a comprehensive national reconciliation effort or the likely semblance of civil war.
Last October ExxonMobil became the first to hedge investments in Iraq by trying to have it both ways when it signed a juicy deal with the KRG to explore six blocks in the de-facto autonomous region, half of them in territory claimed by more than one side.
Oil majors are not politically motivated, but just looking to maximize oil output and profit, as they are mandated to do. And their decisions to challenge Baghdad and to cozy up to Kurds expose a purely corporate reality that Baghdad is simply not offering enough in return to demand loyalty.
“I don’t think there is any politics from Exxon. They came hoping things would change,” said Manouchehr Takin, senior upstream analyst in the London-based Center for Global Energy Studies. “I think it’s more attraction of the Kurdish terms.”
ExxonMobil won’t be the last. Total from France, another of the big players in the south, is also reportedly negotiating with the KRG, and surely more will follow. Baghdad has repeatedly threatened companies tempted with the Kurdish allure that it will strip them of any contracts and bar them from participating in future exploration rounds.
And the KRG also intentionally included in its ExxonMobil contract three blocks in Kirkuk and Mosul that are contested by the central government with the obvious agenda of legitimizing its claims. ExxonMobil has more clout after all than dozens of small countries.
Of course Baghdad can’t budge to ExxonMobil, at least for now, if it is to prevent a stampede that would dangerously undermine its ability to assert control over Kurds. On the other hand, it doesn’t want to scare investment away either and has hinted at a compromise.
“The minimum requirement, if Exxon doesn”t want West Qurna to be terminated, would be to inform the Ministry of Oil in writing that it will freeze its contracts in Kurdistan until there is an agreement between the KRG and Baghdad or the Ministry of Oil approves the contracts,” Reuters quoted Abdul Mahdy al-Ameedi, head of Iraq”s contracts and licensing division, as saying last week.
That said, Baghdad controls export routes, even if Kurds likely sit on top of one of the best oil prizes in the world. And the central government also needs Exxon, not only to deny Kurds the legitimacy, but also for its expertise and investment.
Complicating things further, Iraq still lacks an oil law, and the 45 contracts the KRG has signed will still be “illegal,” as the government calls them. Accepting ExxonMobil’s deal -at least before a national reconciliation that addresses pending economic and territorial grievances- would seriously undermine the government’s hold on power.
The company is thus in the comfortable position where both Kurds and the central government depend on it for both economic and political reasons, allowing it to extricate legal guarantees from both. That is, ExxonMobil is set to have it both ways, as long as the sectarian strife doesn’t turn lethal again, in which case everyone loses.
ExxonMobil perhaps miscalculated just how much its hedge would become intertwined in Iraq’s sectarian strife, especially as the ghost of the last war that killed hundreds of thousands rekindles.
US troops have withdrawn (ExxonMobil reportedly signed the deal just days before the White House announced it was pulling out); the Shiite majority led by Prime Minister Nuri Al Maliki is increasingly in a collision course with their Sunni rival, and Kurds and Sunnis alike have raised the prospect of a three-way split.
And all this happens in the context of a much broader and complex covert war between Iran and its allies on one side and the US and Arabs on the other. No side wants Iraq to split up, but there is significant pressure from Turkey, the US, and Saudi Arabia to undermine Iran’s clout in the Shiite government. And the ExxonMobil contract is playing its part.
“The US is in uncomfortable situation,” said Reva Bhalla, head Middle East analysts with Stratfor, the geopolitical analysis firm. “The US is overstretched and Iran will retain the upper hand in Iraq, but that doesn’t mean its opponents don’t have other levers in the meantime.”
That’s where the ExxonMobil deal comes in, Reva said. “Sunnis don’t have good options. They don’t have the economic lever that Kurds have and militancy only gets them so far. But Kurds have the power of foreign investment. When it comes to capital and technology, Iranians can’t compete.”
That is not to say that ExxonMobil is taking policy decisions advice from Washington. Far from it. But the Kurdish ability to attract foreign investment is certainly putting geopolitical pressure on Baghdad to resolve its Kurdish quagmire, and that should bode well for all.
Both Shiites and Sunnis agree though that legalizing the Exxon deal in this juncture would be the equivalent to surrendering to Kurdish long-held claims of the oil rich regions, heightening fears of its independence aspirations. But they differ in just about everything else other than oil. Meanwhile Kurds are happy to prey on a Shiite leadership preoccupied and weakened by its Sunni rival to extract concessions, especially on the distribution of oil wealth and territorial claims.
And while the likely outcome, considering what’s at stake, is some kind of resolution, ExxonMobil has brought the sectarian strife closer to a tipping point. Iraq will have to finally deal the longstanding root causes of its endemic instability one way or another.