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Implications of the Chevron KRG deal

In reaction to Chevron's purchase of two oil blocks in the Kurdish region of Iraq, the central government's Oil Ministry has disqualified the US supermajor from future contracts in the rest of the country.

Implications of the Chevron KRG deal

In reaction to Chevron's purchase of two oil blocks in the Kurdish region of Iraq, the central government's Oil Ministry has disqualified the US supermajor from future contracts in the rest of the country.

"In accordance with Oil Ministry policy based on the constitution, the Oil Ministry announces the disqualification of Chevron company and bars it from signing any deals with the federal Oil Ministry and its companies," Iraq's Oil Ministry said in a statement posted on its website on Tuesday.

Going further, the Ministry said Chevron should feel "ashamed" at having "totally failed the test" of its reputation and credibility.

Chevron announced on 19 July that it will buy Reliance Exploration & Production's 80% interest and operatorship of the production sharing contracts (PSCs) covering the Rovi and Sarta blocks. The blocks are located north of Erbil and cover a combined area of approximately 490 square miles (1,124 square kilometers).

Chevron will already have put an end to its ambition to develop the 4.4 billion barrel Nassiriya oil field - which would have been accompanied by the development of a 300,000 bpd export refinery - leaving fellow contenders Nippon Oil, Spain's Repsol, Italy's Eni to continue negotiations with Baghdad.

The confirmed entry of Chevron has also dealt Iraqi Prime Minister Nour Al-Maliki a blow in his campaign against Exxon's Kurdish contracts, and further highlights the attractiveness of the terms on offer from the KRG relative to those from the central government after the Oil Ministry's fourth fidding round fiasco in late May.

Chevron had a long-standing relationship with the Iraqi government, having started a technical assistance program in Iraq in 2003. The company had pre-qualified to bid in the fourth round auction, but declined to bid.

It is, however, easy to overplay the significance of the Chevron move.

Unlike Exxon, Chevron has no prior interests in south Iraq, save for a commitment to take liftings of Iraqi crude, which the Oil Ministry did not mention. The blocks are not in disputed territory, unlike three of the six blocks awarded to Exxon, which have tied Rex Tillerson's company to Kurdish territorial maximalism as well as the dispute over oil policy.

Reuters has reported an acquisition cost of $200 million. The price reflects that Kurdish oil assets still command a significant political risk penalty, a fact baked in to the share prices of many independents exploring in the region. Rovi and Sarta remain in the early stages of appraisal. Reliance has an announced policy of reducing its exploration exposure in favour of currently producing assets.

Overcoming Exxon's concerns probably took a lot of concessions from the KRG. The Chevron deal is not a power play by a putative proxy for US foreign policy. Instead, it is a tentative toe in the water.

RISK

Another entrant may well be Total. The company's expression of interest in the region, recently drew a thinly veiled rebuke from Maliki.

The French oil major is thought to have cast its eye over several blocks in the region, including Marathon Oil's interests at the Harir, Safin, Sarsang and Atrush blocks. Total has also been connected with blocks currently operated by Canada's WesternZagros. In either case, again an oil major is looking to take a modest initial interest.

This is because blocks have significant potential upside, but are also risky. Despite moves to have the Iraqi Parliament again vote on an oil law, the prospects of one passing are as dim as they ever have been. The irony for Baghdad is that this, and the difficulty of doing business in the South, is pulling large oil companies into the Kurdish region, perhaps more readily than if oil policy was regularized: it's sometimes forgotten that the South's oil deals also require eventual parliamentary approval.

Iraqi Prime Minister Nouri Al-Maliki has issued his most categorical vow yet that he will act to prevent ExxonMobil proceeding with developing of six oil blocks it was awarded by the Kurdish regional government late last year.

In a statement from his office, the prime minister said he will take "all necessary measures" to prevent Exxon "implementing these contracts" in Kurdistan.

Maliki says his position is bolstered by a "positive" letter he claims to have received from US President Barack Obama, having written to the White House requesting the US government pressure Exxon to stop exploring for oil in Kurdistan.

Maliki's interpretation of the letter is likely to be disingenuous and self-serving, an echo of the saga over the Oil Ministry's correspondence with Exxon, which oil officials claimed contained a commitment to halt progress in Kurdistan.

For its part, the KRG is keeping Exxon's PSCs under wraps, contrary to its policy of publishing them in a show of transparency. Until they do, speculation continues about the deal done to install the usually cautious supermajor at the heart of Iraq's oil-fuelled political maelstrom.

US POSITION

The White House has repeatedly signaled its preference for Iraqi national unity, and is unlikely to favour the secession of the Kurdish region while key political issues such as the destiny of Kirkuk are unresolved.

While the State Department is likely to be irritated by Exxon merely notifying, not discussing, it of the deals struck with the Kurdish regional government, Obama is unlikely to have told Maliki - albeit in diplomatic prose - that American governments are not in the habit of telling oil companies not to do things. That is not to say there is not a level of disgruntlement at oil companies seeming willingness to risk hard-won improvements security and political stability for the sake of private gain.

"We advise American energy companies doing business in Iraq to consider the legal risks involved in signing deals with a region, against Baghdad's wishes, and are concerned that such deals could be destabilizing," a senior Obama administration official, who declined to discuss the letter specifically, told Reuters last week. "That said, in our economic system, private companies make their own business decisions, largely beyond the reach of government control."

Exxon is understood to have quietly developed a sizeable presence in Erbil, and in addition to organizing office space and facilities has put preliminary seismic work out to tender. The firm is thought to be close to striking an exploration drilling deal.

While the world's largest supermajor plows on heedless as it has often done, the progress of the Kurdish region remains less assured.

ISSUES FOR KRG

Baghdad has claimed that the Kurdish region's oil export cut-off has cost the government $8.5 billion, which it will cut from the province's overall budget of $10.8 million. There is not yet an alternative outlet for Kurdish oil. Remarks by Gulf Keystone's CEO Todd Kozel at the company's recent AGM suggest a plan for a comprehensive pipeline network has not been formulated, though a single pipeline up to the Turkish border is reportedly being built.

Erbil gets 17% of the Iraqi budget on a gross annual basis (over 10.8% net of central deductions)*, and in return has committed to generate just 7% of its oil. The uncomfortable truth for the Kurdish region is that until recently it has received a large federal subsidy, and its swelling local GDP has been powered by oil from the fields of Basra, not the Zagros belt.

In time, if official targets of raising oil production are met, the proportions will change. The KRG is expecting production to reach 1 million barrels a day by the end of 2015 and 2 million barrels a day in 2019.

Moreover, a seceded Kurdistan will still be tied to a fragile alliance with a government over which they have scant influence. Turkey remains intent on playing both sides of the line. At this stage in the region's development, secession or aggressive moves in that direction would hitch the region's fortunes almost exclusively to Turkey. Separation from Iraq is not the same thing as independence.

Source : Neftegaz.RU