ExxonMobil-KRG deal: A puzzling move at a critical time / Ahmed Mousa Jiyad

The news of ExxonMobil’s venture by signing 6-locks PSCs with KRG could have very serious ramifications as the move is rather puzzling, it occurred and became known at critical time, and consequently cornered the Iraqi government off-guarded. The company has been negotiating with KRG, directly or through intermediaries, for many months leading to signing agreement(s) in October. International sources say the Iraqi government was notified on the matter, and the Ministry of Oil had issued three letters to the company stressing that, according to regulations of the central government, any company which signs deals with the KRG wouldn’t be allowed to work in the center and south of the country, meaning ExxonMobil would risk its (with Shell) Wes Qurna 1 giant oilfield. Also reliable source says, the six blocks were originally offered to Shell and ExxonMobil three each, but Shell declined the offer, and KRG gave ExxonMobil a 48 hours ultimatum before the deal was finally signed in London.

It is expected the Iraq council of Ministers meet urgently to discuss the matter and decide on the fate of the West Qurna 1 contract with ExxonMobil.

What motivated ExxonMobil to make this move despite the warning from the Ministry of Oil is a matter the company alone can answer, others could only speculate. But why a company that has the highest contract- in barrels-term, and has the leading position in a major water injection project would risk these two lucrative projects and, possibly any other future opportunities? Only time will tell!

The timing is also critical and unfavorable for the Iraqi government. American forces are, and would be fully, leaving the country by the end of the year. The government is obviously preoccupied with the implications and consequences of this withdrawal at least from security perspectives. Another factor of inconveniency is the recent call to declare Salahudin governorate as “region” with possible spillover to other governorates/ provinces. A third factor is the negotiation that has been going on between the government and KRG regarding the oil and gas law, would be impacted by this move. Fourthly, the domestic political climate among and between the main political factions and blocks within the government and the parliament are at its low. Finally, the PM, Mr. Nuri AlMaliki is about to embark on a crucial visit to the White House to usher new phase of relationship between the two countries. Surely this action by ExxonMobil would be a distracting item on the discussion table.

But what can the government do? It has limited options but none is easy or convenient, though the relationship with ExxonMobil might get sour, or even deteriorate rapidly.

At one extreme, the government keeps quiet, lets it go and ignores the three warning letters, which its ministry of oil sent to ExxonMobil.

This would be interpreted as tacit acquiescence of what ExxonMobil have done. Other companies could follow-suit rapidly. The implication is that government loses face with regards to its declared blacklisting policy, and practically put an end to such a policy. Two types of contracts (e.g., service contacts and production sharing contracts-PSCs) became reality. The oil and gas law would recognize this reality, and all KRG ‘s PSCs would be recognized and legalized easily. Other governorates would claim similar status for independently concluding their own petroleum upstream contracts, with big and small foreign oil companies occupying the driver’s seat.  The final outcomes would be no national petroleum policy, internal resource-conflicts, collapse of central authority and the beginning of disintegrated Iraq.

The other extreme is firm stand based on disqualify and terminate. The government could first disqualify ExxonMobil from the forthcoming fourth bid round, and immediately invoke the Termination clause under Article 8.1 (a) for committing “a breach of a material obligation of this Contract”. The material obligation in the contract is the adherence to “Law” as defined in item 46 of article one.

The disqualification and termination would lead to exclude ExxonMobil from any future business opportunity such as the participation in the exploration bid rounds, the common water injection project and any other activity. The termination clause would, according to sub article 37.4-.8, lead eventually to an international arbitration, which could take time to reach a verdict. Consequently, the development of WQ1 would suffer a blow (but not suspend production) until either an amicable solution with ExxonMobil is reached or the arbitration process ends. In both cases there would be lost time and revenues, and could be compensation if the arbitration case is lost.

On the diplomatic front, this option could sever the bilateral relation with the US, as it is inconceivable that ExxonMobil takes this action without States Department knowledge or even blessing. The US might retaliate by muddling through internal politics and destabilize the country even further. But this is a risky endeavor for the US to follow!

On the other hand this option would consolidate unified petroleum policy, bring to the fore of national attention the sovereignty issue, provide strong support for the governments in its negotiation with KRG, particularly with regards to oil and gas law and prevent IOCs from muddling in the internal politics. In other words the outcomes of this option could be the exact reverse of the first tacit acquiescence option.

Both options are difficult, risky and could have negative consequences. But the government has to act as representative of an independent sovereign state and protect the integrity and interests of the country.

Ahmed Mousa Jiyad,

Iraq/ Development Consultancy and Research,

Norway.

12 Nov 2011