Exxon Mobil works two fronts in bid for Iraqi oil

Exxon Mobil Corp. sent its top man to Baghdad this week amid a strained relationship with Iraq’s government, illustrating how important the company views its continued presence there to increasing its oil production and profits.

Despite Exxon Mobil’s investments in new oil developments in Canada, Angola, Kazakhstan and elsewhere around the globe, Iraq is by far its largest source of projected growth in the foreseeable future.

But it is exactly those plans to produce in Iraq that have beenat risk since late 2011, when Exxon Mobil went around Iraqi federal officials to strike a deal with the Kurdistan Regional Government to explore six fields in the semi-autonomous region, analysts say.

That move angered national leaders and is widely presumed to have figured in a meeting Monday between Exxon Mobil CEO Rex Tillerson and Iraqi Prime Minister Nouri al-Maliki. Tillerson later met with leaders of the Kurdistan Regional Government.

Officials in Baghdad have said any company that arranges a contract to explore for oil in the Kurdistan region will not be allowed to operate in areas under federal control.

That has left most companies, including Shell, BP, Marathon Oil, Occidental Petroleum, Murphy Oil, Talisman Energy and others dealing with either Kurdistan or the Baghdad government.

“Exxon has been trying to have it both ways and that, of course, creates some sensitivity,” said Pavel Molchanov, an analyst for Raymond James.

Plans for West Qurna

Irving-based Exxon Mobil declined to comment on its activities in Iraq.

The world’s largest non-state oil company plans to increase its production in Iraq’s West Qurna field to 2.8 million barrels a day in coming years, nearly double its anticipated production growth in any other country, according to company figures. Shell and an Iraqi company hold minority interests in the West Qurna venture.

Iraq’s government has set strict terms that limit oil profit to around $2 a barrel for Exxon Mobil and other producers in Baghdad-controlled regions, analysts said. But those close margins have not dissuaded many of the world’s largest oil companies from involvement there.

And the arrangements apparently have been alluring enough for Exxon Mobil to attempt to stay active in Baghdad-controlled areas, even as it pursues resources in Kurdistan.

World oil production

That may indicate the company’s long-term view on establishing a presence throughout Iraq, suggested Phil Weiss, senior energy analyst for Argus Research Group.

“Really, they see an entry into the country with the hope that it could lead to other projects down the road that are more lucrative,” Weiss said.

Iraq is expected to lead the world in oil production growth until 2035, according to the International Energy Agency.

It is projected to account for 45 percent of the world’s oil production growth in this decade, and to surpass Russia by 2030 as the world’s second-largest oil exporter behind Saudi Arabia, according to a recent agency report.

“Contracts already in place with international companies imply an extraordinary increase in oil production capacity, to a level almost five times higher than today’s 3 million barrels per day over the current decade,” the report says in its Iraq Energy Outlook.

Whether Exxon Mobil keeps a foothold in areas controlled by the two governments remains to be seen, but Tillerson likely met with al-Maliki to stress the company’s continued interest in the Baghdad-controlled areas, said Allen Good, an analyst for investment research firm Morningstar in Chicago.

“The fact that he went over there probably indicates they are a bit more interested in holding onto it than previously thought,” Good said.

But Molchanov, the Raymond James analyst, said Exxon Mobil isn’t likely to get a concession from Baghdad, where officials repeatedly have stressed their opposition to companies dealing with the Kurdistan government.

“I don’t think Baghdad is going to be open to that,” he said. “It’s sort of a take-it-or-leave-it. And there are plenty of very large, prominent companies that have agreed to those terms, so if Exxon walks then someone’s going to be willing to step into those shoes.”

Little earnings impact

Some companies, however, have balked at the terms set out by the Baghdad government. Norwegian oil giant Statoil is in the process of selling its interests in a separate West Qurna project to Russian company Lukoil, which is the other investor in the development.

And Iraq may have an interest in keeping Exxon Mobil engaged in the country, giving Iraq access to the expertise and technology of one of the world’s leading producers, Weiss said.

Regardless, the fate of the company’s stake in Iraq likely won’t have much influence on Exxon Mobil’s earnings, considering the low profits expected from operations under current terms there, Molchanov said.

“It’s a $420 billion company,” he said, referring to the combined value of Exxon Mobil’s outstanding shares. “Even a project as big as West Qurna, it’s not the end-all and be-all for a company like Exxon – or a company like Shell, for that matter.”