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Oil Major Exodus In Iraq Creates Opportunity For China

When the Bush Administration invaded Iraq in the spring of 2003, allegations that the US’ core interest is Iraq’s immense oil bounty were plentiful. Whilst US-based oil services companies certainly profited greatly from Iraq opening up to international investment, upstream-focused companies failed to find themselves in the oil bonanza they were purported to be in. After less than 20 years there seems to be an almost complete exodus of US oil companies in Iraq – demotivated and eager to exploit other opportunities, they all have sought to let go of the Iraqi dream. Rumoured to be at loggerheads for quite some time already, the last of the Mohicans, i.e. ExxonMobil, is reported to be on its way out of Iraq, unable to agree on a future course that would accommodate both the interests of the US major and those of Iraqi authorities. ExxonMobil owns 32.7% of the field that has a nameplate capacity of 500kbpd, retaining operatorship rights. 

The reasons underpinning Exxon’s willingness to leave seem to be plentiful so let’s try and reiterate them here. First and foremost, the US major seemingly does not believe the long-term service contract provided by Iraq is lucrative enough to deserve hefty financing – repeated halts in payments and the inability to renegotiate production terms despite ever-changing global circumstances most probably fastened the idea even more. Second, ExxonMobil’s entry into Iraqi Kurdistan has led the US firm to be partially blacklisted from bidding into major investment projects, souring the relationship even more. Third, the likelihood of Exxon employees becoming targets of retaliation, especially on the heels of the 2020 Qasem Soleimani killing, soared to an extent that ensuring long-term security bordered on the impossible. 

The poster child of post-Hussein Iraqi oil production, the West Qurna field was off-limits for Western majors despite being one of the largest oilfields in the world, with a recoverable reserve estimate of some 43 Bbbls. In 2009, the Iraqi Oil Ministry launched the 10 Bbbls Phase One development stage of West Qurna, it granted development rights to the tandem of ExxonMobil and Royal Dutch Shell.
The first big omen was the departure of Shell from West Qurna-1 in 2018, having sold its stake to Itochu. But with the impending departure of ExxonMobil, the Iraqi Oil Ministry is confronting an even bigger challenge. It has several scenarios to consider:

  • West Qurna is Transferred to Another US Company

Reportedly, selling ExxonMobil’s participation in West Qurna to an American company, presumably Chevron, was amongst the first things suggested by the Iraqi authorities. Of course, there are problems with it – Chevron has also invested in Kurdistan and has been blacklisted by the Oil Ministry for doing so, hence politically this might be a really tough sell. Media reports indicate that Baghdad did in fact reach out to Chevron, however the US major rejected the idea of it buying out ExxonMobil’s stake, probably fearing that it would be met with the same rigidity as its predecessor did. Occidental is already out of Iraq, having sold its stake in the Zubair oil field to the Iraqi South Oil Company back in 2015. Thus, there are no real alternatives on the American front. 

  • Sell it to a Chinese buyer

Selling ExxonMobil’s stake to a Chinese company might be the easiest solution, considering that ExxonMobil initially suggested the same thing, namely, to sell its stake to the other project partners. This would leave CNPC becoming the main stakeholder of the project, landing more than 45% with CNOOC garnering another 20%. Despite its relative ease, it is also one of the least-preferred variants for Baghdad, considering how many of past contracts have gone to Chinese companies (to name just one, in late April the state-owned Sinopec landed a 25-year gas production contract on the giant Mansuriyah field). Seemingly, the Iraqi Oil Ministry is poised not to sign another emergency-dictated contract with Chinese state firms, despite having stated it had no objections to a Chinese company buying out ExxonMobil. Recent media reports seem to indicate that BOC went even as far as to veto two Chinese companies as potential stake buyers. 

  • Buy it out

Hypothetically, the ExxonMobil stake could be bought by one of Iraq’s upstream companies, in this case upstream-oriented Basrah Oil Company (BOC) might seem to be the relevant counterpart. The federal government cannot buy the field because under Iraqi law the state owns the field and only grants it to companies on the basis of service contracts, thus come the regional upstream companies into the picture. Whilst BOC might seem interested, its lack of available finances and the short deadline set by the Iraqi authorities to handle ExxonMobil’s departure (it promised to have a new investor by end-June) would render its involvement somewhat awkward at this stage, still, the lack of viable choice might trigger exactly this scenario. 

  • Go for a European Buyer

Whilst the BOC buyout remains the most-likely option as of now, one cannot fully rule out a sudden twist of events that would see West Qurna-1 going to a European major with Iraqi assets. The Russian LUKOIL might pop up amongst the first, especially on the back of Baghdad demonstrating its traditional rigidity in renegotiating the Yamama contract (a side-project of West Qurna-2) as the Russian firm is indicating the field’s Yamama formation has too high hydrogen sulphide content to be launched under the current upstream terms. Including West Qurna-1 into a larger dispute could in fact help the two sides find a mutually acceptable solution. Alternatively, the French TotalEnergies might emerge as a last-minute saviour, having substantially increased its Iraq exposure thanks to a $7 billion contract signed this April that would see it build associated natural gas treatment facilities (including on West Qurna-2), solar plants and seawater reprocessing objects. 

By Gerald Jansen for Oilprice.com

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