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Deputy PM: Iraq to cut ties with America and other foreign oil firms over Kurdish deals

August 13, 2012 (TSR) – Iraqi deputy prime minister Hussein al-Shahristani said late Sunday that Baghdad was determined to cut ties with ExxonMobil and any other foreign oil company if they violate Iraqi law and proceed with upstream work in the semi-autonomous Kurdistan region.

“Our stand regarding these companies has been constant since the start of the bidding rounds and dealings with these companies. It has never changed,” Shahristani, who is in charge of energy affairs, told reporters.

ExxonMobil is the largest of the six oil supermajors. Baghdad was determined to cut ties with ExxonMobil and any other foreign oil company if they violate Iraqi law and proceed with upstream work in the semi-autonomous Kurdistan region. No action yet against Exxonmobil, but it is forthcoming.

A spokesman for Shahristani said Monday that Total, which has farmed into two Kurdish oil blocks in recent weeks, had been told by the Iraqi government to cancel its contract with the KRG or, failing that, sell its minority stake in the Halfaya oil field development consortium.

“Iraq has asked Total officially to cancel its contract with the Kurdish region and respect Iraqi law or sell its stake in the Halfaya oil field,” Shahristani spokesman Faisal Abdullah told Platts on Monday. Shahristani reiterated Sunday night that the authority to conclude any oil and gas deals in Iraq lies with the federal government represented by the oil ministry, which signs contracts and refers them to the cabinet for approval, he added.

ExxonMobil led the march of the oil majors into Iraqi Kurdistan late last year when it signed contracts with the Kurdistan Regional Government for six oil blocks. It was followed in recent weeks by Total, the US’ Chevron and Russia’s Gazprom Neft.

Baghdad considers illegal the production-sharing contracts awarded by the KRG and Shahristani has been the most vocal critic of the Kurdish policy of granting upstream contracts to foreign oil contractors without the central government’s blessing.

“Iraq will end dealings with any company of whatever nationality and size in the oil industry if they violate Iraqi law. All the companies have been informed about it,” Shahristani said. “I assure you that the Iraqi government will take measures against ExxonMobil or any other company in the same way.” (NOTE: NO ACTION YET AGAINST EXXONMOBI, but forthcoming).

He said Baghdad had not yet taken action against ExxonMobil because the US company had informed him that it was only conducting exploration work in Iraqi Kurdistan and had assured him that it would tell Baghdad if and when it were to proceed with any field development work.

Foreign oil companies which had already signed production-sharing deals with the KRG before Iraq’s first bidding round in 2009 were banned from that and subsequent auctions, the latest of which was a disappointing exploration round held in May. These companies have no assets in Iraq.

But that is not the case for ExxonMobil, Total and Gazprom Neft, which have stakes in Iraq’s West Qurna 1, Halfaya and Badra oil fields respectively and are at risk of expulsion if Shahristani carries out his threat.

The KRG’s production-sharing contracts have proved more of a lure to foreign oil contractors than the long-term service contracts devised when Shahristani was oil minister. Baghdad’s technical service contracts offer the majors a fixed per barrel fee, which many oil companies have complained is too low considering the huge investment required both for oil field development and infrastructure costs. (NOTE: EXPLORATION CONTRACTS ARE BEING MODIFIED)

Shahristani, while admitting that the returns for the oil companies were low, defended the policy of not allowing foreign oil majors a share of the nation’s oil wealth but said the model contracts offered in the exploration round were being modified to make them more attractive.

Iraq awarded only four of the 12 blocks that were offered in the May 30-31 exploration round, when none of the big oil companies took part.

However, the work being undertaken by foreign consortiums to develop or further develop major Iraqi oil fields has helped to boost Iraqi oil production to the highest levels since 1990. Shahristani said Iraqi production had risen above 3.2 million b/d, putting the country ahead of Iran as the second largest producer in OPEC after Saudi Arabia.

Iraq’s oil output has been rising steadily in recent months, partly because of development work on its major oil fields by foreign oil companies and the recent removal of export bottlenecks in the south with the addition of two new Persian Gulf loading berths.

The Iraqi oil ministry has set an ambitious target of raising capacity above 13 million b/d by 2017 although several officials have said that the figure is likely to be revised down.

Shahristani did not give recent export figures, but August export volumes are set to rise above July exports after the Kurdistan Regional Government said it had resumed oil exports at a rate of 100,000 b/d from August 7. The KRG agreed to restart exports in the hope that the move would help resolve outstanding disputes with Baghdad over payments to foreign contractors in the Kurdish province and other pending issues, including the stalled federal hydrocarbon law.

Shahristani said the KRG exported 116,000 b/d of crude oil on Sunday, adding that this was still less than the 175,000 b/d that the Kurdish authorities had agreed to ship through the federal export system as its contribution to the 2012 budget. The KRG, he said, should increase its production to compensate Baghdad for the loss of income.

Iraq exported 2.516 million b/d in July, when there were no exports from the KRG. It produced just over 3 million b/d, overtaking Iran as the second largest producer in OPEC after Saudi Arabia.

Iranian output and exports have fallen sharply in recent months because of international sanctions targeting Iran’s energy and financial sectors. The latest Platts estimate of OPEC’s production estimated Iran’s output at 2.9 million b/d and Iraq’s at 3.05 million b/d in July.

Iraq’s oil production “is now higher than that of Iran, Kuwait’s and the Emirates,” Shahristani said.

Kurdish oil minister Ashti Hawrami convinced companies operating the KRG’s main producing fields — Tawke, Taq Taq and Khormala Dome — to start exports as a show of goodwill to Baghdad. But he warned that exports would be halted at midnight on August 31 if the payments row was not resolved.

Under an interim agreement reached between Baghdad and Erbil, the Iraqi government agreed to pay the costs but not the profits of the foreign oil operators in Iraqi Kurdistan. Exports of Kurdish crude resumed in February this year but were halted again in April after the KRG accused the central government of failing to honor its commitment.

Shahristani said the KRG last year received a payment of $500 million from the finance ministry but noted that Erbil had not transferred any funds from billions of dollars earned in signature bonuses from companies that had signed 48 production-sharing contracts with the KRG at that time.

“Where did that money go? And why did they not use that money to pay the companies?” he asked.

The KRG has not yet supplied the finance ministry with any receipts for work undertaken or a full list of the costs incurred by the foreign operators to allow payments to be made, Shahristani said.

Source: Platts

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