Stuck in the Middle

An Iraqi worker adjusts a control valve at the Daura oil refinery on November 5, 2009, the day Iraq and a grouping of US and European oil companies, including Exxon Mobil, signed a  USD 50 billion contract to develop the West Qurna oilfield. Source: Muhannad Fala'ah/Getty Images

An Iraqi worker adjusts a control valve at the Daura oil refinery on November 5, 2009, the day Iraq and a grouping of US and European oil companies, including Exxon Mobil, signed a USD 50 billion contract to develop the West Qurna oilfield. Source: Muhannad Fala'ah/Getty Images

With a staggering USD 482.3 billion in total revenues for 2012, and a business presence in over two hundred countries, Exxon Mobil is the world’s second-largest oil and gas exploration company. Described in Steve Coll’s Private Empire as a “corporate state within the American state,” Exxon owns thirty-six oil refineries worldwide, with a capacity of some 6.2 million barrels per day, making it the world’s largest oil refiner.

Exxon is famous not only for its size, but also for its ‘my way or the highway’ approach when dealing with the governments of countries where its operations are located. The company has become known for ignoring decision-makers in the White House when official policies clash with the company’s interests. In Private Empire, Coll recounts that former US President George W. Bush had, in reference to the company, told former Indian Prime Minister Atal Bihari Vajpayee in 2001 that “nobody tells those guys what to do.”

Iraq has long caught Exxon’s eye, being one of the world’s top oil producers and with vast reserves waiting for exploration. A recent report by the International Energy Agency stated that Iraq could soon be responsible for nearly half of all anticipated growth in global oil output. Keily Miller, a research associate at the Baker Institute Center for Energy Studies told The Majalla that “Exxon’s investment strategy around the world has long been one of enhancing the option value of its portfolio. In other words, when one region becomes a relatively safe place to pour capital, it [Exxon] is positioned to do so.”

It is therefore possible that Exxon’s presence in Iraq may well alter the course of oil and gas expansion in the country, as well as globally. It may also deepen the dispute over agreements on power sharing, oil production and land control between Erbil and Baghdad, which has been ongoing for decades. For Exxon Mobile, oil exports and sales are likely to be exposed to the volatile relationship between the two sides.

Troubled relations

In January 2010, Exxon signed an agreement with Iraq’s national South Oil Company to rehabilitate the West Qurna I field in southern Iraq. Exxon then pursued more ambitious projects in 2011, which triggered a wave of disputes between the Kurdistan Regional Government (KRG) and the Iraqi central government.

Mistrust and disagreement between the Iraqi government and the KRG over petroleum deals have festered since 2003, with the two sides unable to reach agreements on oil revenues and export routes. The Iraqis are uneasy with Kurdish semi-autonomy, and the Kurds are resentful for not receiving what they see as their rightful share of the national budget, which is primarily generated through oil exports. At present, the Kurdish region receives 17% of the country’s net oil export earnings. It is estimated that the Kurdistan region holds over 28% of Iraq’s proven oil reserves.

Since the regional government passed its own law in 2007, the KRG has signed more than forty-two production-sharing agreements (PSAs) with international oil companies. Contracts signed directly with the KRG were deemed unenforceable by the Iraqi central government which has repeatedly threatened to expel companies that deal directly with the KRG.

Towards the end of 2011, Exxon entered into a deal with the KRG to explore six fields for oil and gas. Since news of Exxon’s actions became public, Baghdad has threatened to terminate its agreement with the company. According to the Iraqi constitution, all oil contracts in the Kurdistan region must be ratified by the Iraqi central government before they are implemented; in this case, Baghdad was not consulted. Yet Kurdish politician Tanya Gilly told The Majalla that “an agreement between the federal government and the KRG has been passed since 2007, which guarantees the right for Kurdistan to exploit its oil fields, so this unfortunate situation has been blown out of proportion.”

However, key legislation on the country’s oil sector has not yet been approved; the Iraqi government drafted a federal hydrocarbon law in 2007 that has yet to be ratified. Ongoing disagreements between various political parties have prevented the passing of this vital piece of legislation. Two competing drafts of the hydrocarbon law are on the table; one is supported by the KRG and the other by the federal government. The absence of a legal framework in the petroleum sector is sustaining the current feuds between the two sides. Keily Miller commented that “the Iraqi constitution does not clearly explain the allocation of contract sovereignty.” As a result, any new contract signed between foreign oil companies the KRG can be deemed legally valid depending on “which version of the draft hydrocarbon law they [the contracting parties] accept.”

At the heart of the row is the fact that three of the fields are in disputed regions. The reservoirs of Qush, Bashika and Qara-Hankeer are in regions not officially recognized as being part of the KRG’s territory. The KRG and the federal government both claim jurisdiction over these fields, as well as other areas including Kirkuk. In principle, the federal government has full control over these regions. In reality, the KRG guards these areas and has de facto sovereignty over them.

Taking a risk

Iraqi Prime Minister Nuri Al-Maliki is in an awkward position when trying to navigate Exxon’s moves. The central government has two options; the first is to allow Exxon to operate in both regions and therefore legitimize KRG contracts. This option is risky because it will enable other international oil companies to follow suit, which could undermine the authority of the federal government. The second option would be to expel Exxon from the West Qurna field, risking the possible damage claims that would be made against the government. Of Exxon’s motivations in Iraq, Gilly said that “Exxon’s moves are purely driven by economics; their final decision is based on which side they will profit from the most.” Baghdad may be sidelined for its devotion to so-called commercial nationalism, the notion that oil profits should go to Iraqis alone, making governmental deals less attractive to international oil companies.

Iraq’s future as a major oil exporter is also at stake in terms of viable export routes. The central government needs clear routes to the Strait of Hormuz and Ceyhan in Turkey, as well as alternative routes via Syria and Jordan, if it is to achieve its ambitions of becoming one of the world’s top oil producers. As tensions escalate between the Kurdish and Iraqi governments, access to the Mediterranean via Syria has become an even more pressing issue for Maliki’s government. Baghdad and Ankara are also falling out over what Iraq sees as Turkish meddling, in the form of Ankara’s direct oil and gas deals with the KRG. Turkey may be blocking any potential agreement between Baghdad and Erbil, as Kurdish oil production contracts with Exxon are not viable without first building huge pipelines to transport both light and heavy crude from the province’s oil fields to the Turkish port of Ceyhan.

Exxon will soon decide whether to defy or obey the central government. Although the KRG may offer more attractive terms than Baghdad, the wider implications of upsetting Baghdad will make the company think twice. Tensions between the Kurdistan region and the central government are directly affecting the development of the oil industry in Iraq, and therefore damaging the economy. It is in everyone’s best interests to resolve the stalemate on legislation and get Iraq on the road to recovery.