Exxon's $53 billion Iraq deal hit by contract snags, Iran tensions
Just weeks ago, US energy giant Exxon Mobil looked poised to
move ahead with a $53 billion project to boost Iraq’s oil output at its
southern fields, a milestone in the company’s ambitions to expand in the
country.
But now a combination of contractual wrangling and security
concerns, heightened by escalating tensions between Iraq’s bigger neighbor Iran
and the United States, has conspired to hold back a deal, according to Iraqi
government officials.
The negotiations have been stymied by terms of the contract
that Baghdad objects to, said four Iraqi officials involved in the discussions
who spoke to Reuters on condition of anonymity due to the sensitivity of the
matter.
The main sticking point, they said, was the means by which
Exxon proposed to recoup its development costs, with the company aiming to
share the oil produced by two fields - something Iraq opposes, saying it
encroaches on state ownership of production.
One of the Iraqi negotiators said Baghdad would not sign
anything with the current terms proposed by Exxon.
Exxon Mobil declined to comment on the terms of the contract
or the negotiations, with a spokeswoman in Texas saying: “As a matter of
practice, we don’t comment on commercial discussions.”
The deputy oil minister for upstream affairs, Fayadh Nema,
said on Wednesday that talks were ongoing and he expected a deal soon.
The negotiations have also been held up by two separate
evacuations of Exxon staff from Iraq, a result of escalating regional tension
between the United States and Iran.
The first was in May after hundreds of US embassy staff were
sent home over unspecified security threats from Iran, which backs a number of
Shiite armed groups in Iraq. The second was this week following a rocket attack
thought to have targeted the company which local officials blamed on
Iran-backed militias.
Tehran has not commented on the attacks, but the evacuations
highlighted the persistent instability in Iraq that is hindering business,
fueled by the US-Iran tensions.
Iraq one of the only nations in the world to have friendly
relations with both Washington and Tehran; the arch-enemies are its two biggest
allies and Baghdad is caught in the middle as they vie for influence in the
country.
Many Iraqi officials say the stalling of talks with Exxon
and disruptions to its staffing point to the limits of American power in Iran’s
smaller neighbor, and that US-Iran tensions have led to a series of security
incidents including unclaimed attacks on oil tankers in the Gulf.
“Exxon pulled its staff from Iraq in response to regional
unrest. The question is how they will run a $53 billion project with constant
regional instability,” said an Iraqi oil official who oversees foreign
companies’ operations in the south. “They might abandon work again and that
will hurt our energy sector.”
CONTRACT WRANGLES
Iraq is the second-largest oil exporter in OPEC and has
long-term aims to boost output curtailed by decades of war and sanctions. Such
projects are among the most valuable prizes in the world for international oil
companies.
An initial agreement would be a boost for Exxon’s plans to
expand in Iraq. Under the deal, it would build a water treatment facility and
pipelines needed to boost oil output capacity. It would also get the rights to
develop at least two southern oilfields – Nahr Bin Umar and Artawi.
In May, US Secretary of State Mike Pompeo discussed the deal
with Iraqi Prime Minister Adil Abd al-Mahdi twice in three days, during a
telephone call and a surprise visit to Baghdad, a separate Iraqi government
official told Reuters.
Abd al-Mahdi said last month that Iraq was close to signing
the $53 billion, 30-year energy agreement with project leader Exxon and its
partner for the deal, PetroChina.
But the officials who shared details with Reuters over the
proposals from the American oil major said there were differences between the
two parties that could prevent even a preliminary agreement anytime soon.
Exxon has proposed a production-sharing agreement whereby it
recoups its development costs by sharing the output of the Nahr Bin Umar and
Artawi fields with the government.
However Iraq has largely opposed such contracts and over the
past decade has favored so-called service contracts where companies are paid at
a fixed dollar-per-barrel rate.
“We told them that we totally reject any production-sharing
mechanism as it contradicts government energy policy,” said an official who is
part of the negotiating team.
The official added it was too early to say what kind of
contract Iraq would favor. The country has also in the past struck
infrastructure deals with investment contracts where companies take a slice of
profits.
Another official involved in the talks said Exxon’s
production-sharing model included a proposal to sell some Iraqi crude itself,
rather then through the state oil marketer SOMO, a plan the government strongly
rejected.
POLARIZING OIL DEAL
Relations between Washington and Tehran have deteriorated
since US President Donald Trump withdrew last year from a 2015 nuclear deal
between Iran and world powers agreed by his predecessor Barack Obama, and
reimposed and extended sanctions.
The complications facing the Exxon deal have come against
the backdrop of a rapid escalation in recent weeks, with Tehran rejecting
accusations by Washington it was behind attacks on oil tankers and facilities
in the Gulf.
Tensions reached further heights this week when Iran shot
down a US military drone that it said was on a spy mission over its territory,
an incident that fanned fears of wider military conflict in the Middle East.
Trump said on Thursday that Iran had made “a very big mistake”.
In a sign of the frustrations felt by Baghdad, Iraqi Oil
Minister Thamer Ghadhban said in May that Exxon’s decision to evacuate all its
foreign staff from the country then was “unacceptable and unjustified”.
He said it was a political move rather than a genuine
security precaution, without elaborating, and that it had hampered the
dealmaking.
“Now they are out of the country, why should I run after
them?” he said at the time.
Exxon did not comment on Ghadhban’s characterization of its
temporary evacuation of Basra staff as “political”.
The US State Department did not immediately respond to a
request for comment on whether US Iran policy might have affected the deal.
The tussle for influence in Iraq between Washington and
Tehran is reflected in Iraqi politics, with the proposed $53 billion deal a
polarizing issue.
Basma Baseem, an Iraqi lawmaker and a member of the
parliament energy committee said Iraq should push forward with the deal with
Exxon to help Iraq develop its energy sector.
“It’s a major company with billions of dollar of assets and
investments across the world and a cutting edge expertise in the oil industry,”
she added. “Iraq can benefit significantly from this large deal.”
However politicians from Iran-aligned Shiite Muslim parties
portray the deal as extortion, calling it “a new occupation” by the United
States.
“The government is under a lot of pressure from the
Americans to sign long-term energy and power deals,” said lawmaker Kareem Alewi
of the Iranian-backed Badr Organization, one of the Iraqi parliament’s two
biggest groupings.
“This is a trick to control our economy.”