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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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The Real Reason Why ExxonMobil Won’t Go Ahead With $53 Billion Iraqi Megaproject

Last week a small news item went largely unnoticed by the international media but it hints at the real – and until now unpublished - reason why ExxonMobil has not so far gone ahead with the Common Seawater Supply Project (CSSP), as part of the broader US$53 billion Southern Iraq Integrated Project (SIIP). The CSSP – involving taking seawater from the Persian Gulf and transporting it to oil production facilities to boost pressure at key oil reservoirs - is absolutely critical for Iraq’s ambitions to reach its next oil output targets of 6.2 million barrels per day (bpd) by end-2020 and 9 million bpd by end-2023. It also hints at why Iraq was so in debt for so long to various international oil companies (IOCs).

The item in question was the legal ruling last week that oil services firm TechnipFMC (TFMC) – the product of a 2017 merger between Technip and FMC Technologies - has agreed to pay US$296 million to resolve allegations that the company paid bribes in Iraq and Brazil. The documents presented sufficiently established that running from at minimum 2008 to 2013, FMC conspired to violate the U.S.’s ‘Foreign Corrupt Practices Act (FCPA)’ by paying bribes to at least seven government officials in Iraq, including officials at the Oil Ministry, the South Oil Company, and the Missan Oil Company through a Monaco-based intermediary company ‘in order to secure improper business advantages and to influence those foreign officials to obtain and retain business for FMC Technologies in Iraq’.

For seasoned Iraq-watchers, this bears an uncanny similarity to the ongoing corruption case involving Unaoil, which only last year saw the U.K.’s Serious Fraud Office cite more evidence as the reasons for extra charges being brought against the Monaco-based oil consultancy. In terms of the Unaoil case itself, examination of tens of thousands of emails by various investigative authorities suggests that, over and above the scope of the current U.K. charges, Unaoil channeled huge bribes to government officials on behalf of its clients – which reads like a ‘Who’s Who’ of the oil global engineering, technology, and oil exploration and development sector - to help win billions of dollars worth of government contracts across a number of hydrocarbons-producing countries, including Iraq, Iran, and Libya. Just one of the Iraqi contracts was for US$733 million and some of the key projects around which bribery allegedly played a major part include the development of some of Iraq’s biggest oil fields, including Zubair and Garraf.

The problem of endemic corruption across Iraq’s oil industry is well-known by those with any experience in the sector and is acknowledged as a problem at all levels of the industry in the country in the annual reports on Iraq by the independent international non-governmental organisation, Transparency International. In its latest ‘Corruption Perceptions Index’, Iraq ranks 169th out of 180 countries, and is described as: “Among the worst countries on corruption and governance indicators, with corruption risks exacerbated by… lack of experience in the public administration, weak capacity to absorb the influx of aid money, sectarian issues and lack of political will for anti-corruption efforts.” Related: European Gas Prices Fall To One-Decade Low

ExxonMobil was brought into the as-then just CSSP initiative when it was first announced in 2010 to take the lead in co-ordinating initial studies for the plan at a time when Baghdad was looking to raise its oil production capacity to 12 million bpd by 2018, to overtake Saudi Arabia’s output. ILF Consulting Engineers, which did the front end engineering and design for the project in 2014, put the cost at US$12 billion, based on treating 12.5 million bpd of seawater transported to six oilfields. ExxonMobil was removed in 2012 when negotiations fell through – due to basic problems with the contract – and replaced by the state-run South Oil Company. The U.S. major then resumed talks with the Oil Ministry in 2015 in partnership with the China National Oil Corporation (CNPC). At that point, the CSSP had been folded into the broader ‘SIIP’ that, in addition to building the infrastructure related to maintaining pressure at reservoirs, also included corollary projects to construct oil pipelines, storage facilities, and pumping stations. As part of luring ExxonMobil back into the negotiations, the U.S. firm was assured that the new contract would not be of the straightforward – and deeply unpopular – Technical Service Contract (TSC) variety, and was also told that it would be given rights to develop at least two southern oilfields, Nahr Bin Umar and Artawi.

The central problem for ExxonMobil was always – and remains - that the risk/reward elements of the contract are profoundly unbalanced, a senior oil and gas industry source close to negotiations told OilPrice.com. “There are three key elements in the general risk/reward matrix that forms the basis of these negotiations, which are cohesion, security, and streamlining,” he said. “Cohesion relates to ensuring that building out facilities that are connected to the CSSP are completed in full and in order, security relates not just to the on the ground security of personnel – which has got much worse recently - but also to soundness of the basic business and legal practices involved in the agreement, and streamlining means that any deal should continue as is regardless of any change in government in Iraq,” he added.

On the first point, hurdles have arisen on a number of projects in southern Iraq relating to the approval of contracts for service work, such as building new pipelines and drilling wells, as well as for obtaining visas for workers and customs clearance for vital technical equipment. Concerns surrounding such issues are shared by ExxonMobil, according to the source. “A lot of what needs to happen in order make this project [CSSP] progress properly will be in the hands of people who are less concerned about it working than about what they can personally pocket to allow it to occur,” he said. “This can be seen in the TechnipFMC and Unaoil cases but that is the tip of the iceberg,” he underlined.

The second part of the risk/reward matrix is also complicated by the systemic corruption that still pervades virtually all elements of Iraq’s business environment, as underlined most publically by Transparency International, and is understandably most pronounced in the oil and gas sector as it is where 95% of all of the country’s revenues still come from. The lack of a meaningful structure by which law relating to the origination, monitoring, and administration of business agreements opens ExxonMobil up to a plethora of problems in the future, said the source, especially when the third part of the risk/reward matrix is factored in. “Many leading politicians on the opposite side of whoever is nominally in charge of Iraq at the time have clearly said that they will not stand by the decisions relating to the oil and gas industry made by their predecessors, which means that any agreement done now with ExxonMobil is meaningless,” he said. Related: ''Maximum Pressure'' Campaign Fails To Kill Off Iran's Oil Exports

“Even more dangerous for ExxonMobil is that the recent relative re-alignment of Iraq with the U.S. that we have seen and away from Iran may well be reversed again in the future, so any questionable practices that ExxonMobil might be forced into to move the CSSP forward could well be publicised across the world if Iran decided it wanted to embarrass the U.S. government, as ExxonMobil can be seen in many ways as a corporate proxy of the U.S. government,” he told OilPrice.com. “The only way for Exxon to mitigate this risk is to have a contract designed by Western risk experts, drawn up by Western lawyers, and administered by Western accountants, more along the lines of Iran’s more inclusive ‘Integrated Petroleum Contract’ that balances the risks and rewards for participating companies more fairly,” said the source.

Given the risks for ExxonMobil, he underlined, such an agreement would have to be more front-loaded in terms of increasing payments and therefore reducing the initial costs burden for the US company than could provided under the existing TSC model. “PetroChina came to a similar sort of arrangement on its Halfaya oil field development with the Oil Ministry, which effectively lowered its upfront costs liabilities by increasing the level of investment capital repaid to it earlier, so it could be done, although it would have to be done in some way on the incremental oil revenues being generated as a consequence of the CSSP and/or on ExxonMobil’s production agreement for the Nahr Bin Umar and Artawi fields,” he said.

Such widespread corruption was also a key reason why Iraq found itself owing around US$27 billion to IOCs by the end of 2015. In 2009, IOCs in many cases were asked to make large upfront payments as part of their bid to win field development contracts, which would be paid at a later date. Some of these sums related to ‘infrastructure support payments’ on a per barrel basis of output relating not just to general field maintenance but also incorporating the ‘development costs and security of the fields’. All of these were billed separately from the remuneration per barrel fee, all of them were liable for payment by the Iraqi government, and all of them were highly opaque in their terms of reference. In practical terms, the scale of these payments was often at least as great as the headline per barrel remuneration fee itself and - according to the Iraqi source – “just ended up being bribery payments.” In practice, an extremely large proportion of these fees were simply appropriated by figures in central and regional governments, with around US$4billion per year every year from at least 2011 to 2015 disappearing in such a fashion.

By Simon Watkins for Oilprice.com

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