Chevron will seek oil in Iraq’s Kurdish region

Chevron Corp. will hunt for oil in northern Iraq’s Kurdish region — the company’s first major effort in the volatile country since the 2003 invasion that toppled Saddam Hussein.

The deal, made public Thursday, lands Chevron squarely in the midst of post-war Iraq’s bitter oil politics, with rival regions and ethnic groups fighting over how to develop the country’s vast petroleum reserves. Chevron faces significant risk, and the potential of great reward.

The San Ramon company will buy the rights to explore 490 square miles of countryside north of the Kurdish regional capital of Irbil. The area has never been thoroughly examined by oil companies but could hold substantial reserves.

“We believe there’s considerable promise, and it aligns with our growth strategy,” said Chevron spokesman Kurt Glaubitz. “It’s still very early-phase, and that’s very important to recognize. First we need to drill the wells, analyze the results and see if there are commercial volumes to be developed.”

Chevron will buy the rights from Reliance Exploration & Production, an Indian company. Financial terms were not disclosed.

The deal marks a coup for the Kurdistan Regional Government, which has been wooing western oil companies since 2007. But the move is sure to anger Iraq’s central government in Baghdad, endangering Chevron’s ability to work in the rest of the country.

Baghdad and the Kurds have been locked in a years-long stalemate over oil.

The Kurds operate their region much like an independent country, to Baghdad’s constant irritation. Iraq’s central government insists that it alone has the right to hire foreign companies to work in the country’s oil fields. Still, the Kurds have signed roughly 50 contracts with foreign oil companies to develop fields within their region — contracts that Baghdad considers illegal.

For several years, Iraq’s central government successfully pressured the major international oil companies to stay out of Kurdistan. Any company that signed an agreement with Kurdish officials, they warned, would be excluded from bidding on oil-field contracts in Iraq’s south, where most of the country’s known petroleum reserves lie. But last year, ExxonMobil Corp. agreed to explore and develop six blocks of Kurdish territory, including some acreage that falls in an area that both Baghdad and Irbil claim to control.

“Unlike the Exxon contracts, the Chevron contract is not in the disputed territory, so that’s not as bad from Baghdad’s perspective,” said Joost Hiltermann, an Iraq analyst with the International Crisis Group. “But they don’t want the Kurds to sign contracts on their own, certainly not with powerful international companies.”

Both Chevron and Exxon were likely swayed by the type of contract Kurdish officials offered, analysts say.

Under these “production sharing contracts,” the companies keep a portion of the oil they pump. Iraq’s central government has repeatedly failed to pass legislation that would authorize such contracts, because many Iraqis oppose giving away any of the oil that they consider a national treasure.

Instead, Baghdad has offered contracts that pay fixed fees to boost production at existing fields. Those fees have been so low that many oil companies have decided not to participate. Chevron, for example, chose not to bid in any of the four contract auctions held by the central government.

“I can understand why a company would decide now that it’s a mistake to get involved in southern Iraq, and I think Chevron showed good judgment on that,” said Amy Myers Jaffe, an energy research fellow at Rice University’s Baker Institute.

She noted, however, that pumping oil in Kurdistan may pose its own problems. The landlocked region must ship its oil to market via pipelines controlled by Iraq’s central government.

“You’re not exiting any oil from Kurdistan without the goodwill of Turkey, or Baghdad, or both,” Jaffe said.

David R. Baker is a San Francisco Chronicle staff writer. E-mail: dbaker@sfchronicle.com