Kadhimi “wants US Firm to replace Exxon” at West Qurna 1

By John Lee.

According to a report from Reuters, the Iraqi Prime Minister Mustafa al-Kadhimi has told the press in Washington DC that he wants another American company to replace ExxonMobil when it exits the West Qurna 1 oilfield.

Meanwhile, S&P Global Platts reports that Exxon filed an arbitration case against the state-owned Basra Oil Company (BOC) related to its stalled attempt to sell its stake in the field.

More here and here.

Read also: The Demise of ExxonMobil in the Iraqi Petroleum Sector 

(Sources: Reuters, S&P Global Platts)

The post Kadhimi "wants US Firm to replace Exxon" at West Qurna 1 first appeared on Iraq Business News.

Iraq may Buy Exxon stake in West Qurna 1

By John Lee.

Press reports quote Iraq's oil minister as saying that Iraq could buy ExxonMobil's 32.7-percent stake in the West Qurna 1 oil field.

Ihssan Abdul-Jabbar Ismail told a news conference on Monday that the government might purchase the stake via the state-owned Basra Oil Company (BOC).

BOC previously took over the Majnoon field from Shell and Petronas at the end of June 2018.

It had previously been rumoured (see here and here) that China would take over Exxon's holding in West Qurna 1.

Earlier this year, ExxonMobil sold its share in the Baeshiqa license in the Kurdistan region of Iraq to DNO.

(Sources: Reuters, Bloomberg)

The post Iraq may Buy Exxon stake in West Qurna 1 first appeared on Iraq Business News.

The Demise of ExxonMobil in the Iraqi Petroleum Sector

By Ahmed Mousa Jiyad.

Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

The Demise of ExxonMobil in the Iraqi Petroleum Sector

A recent announcement by the Ministry of Oil (MoO) confirms months of speculation regarding ExxonMobil exiting one of the world's super-giant oilfields, i.e. West Qurna 1 (WQ1).

Ten years ago this highly recognized IOC had golden opportunity to operate three giant oilfields in the southern Iraq with a combined production plateau of 6.275 million barrels daily (mbd); an opportunity unavailable anywhere in the world, but now this company exiting the country empty-handed!!

Why was that? What went wrong? Who is to blame? Should any lessons be learned from this failed venture and what are the implications for Iraq as well as for ExxonMobil?

This article attempts to answer briefly the above questions and provide background review that could help in understand the complexity of the circumstances that contributed to and led to this eventuality.

ExxonMobil back in Iraq

IOCs comeback to Iraqi upstream petroleum began in earnest immediately after 2003 invasion.

ExxonMobil was one of too many IOCs that concluded Memorandum of Understanding/ Cooperation- MoU/C with MoO in 2004. That MoU/C was signed on 27 October 2004, renewed twice and remained valid until end of 2008; it comprises conducting seven joint studies and training. The joint studies includes: phases 1 &2 for the development of Zubair Oilfield; Seismic and evaluation study for exploration (old) block 12; Database; Model Tender Document  for exploration block 12; Rehabilitating Oil Training Center in Baghdad; Balad Oilfield; Deep drilling program for South Rumaila. Also, ExxonMobil committed to provide training for 129 MoO employees, totaling 1068 working days, during 2005 and 2006.

When MoO decided to hold the first bid round, ExxonMobil was one of seven American companies that were qualified, among 35 IOCs, for participating in the bid round that was held on 29 and 30 June 2009.

ExxonMobil formed three consortia and submitted bids for three oilfields but won nothing during the two days of the competition.

The first consortium with Petronas for Rumaila oilfield; eventually BP/CNPC won when they reduced their remuneration fee to the threshold stated by MoO;

The second consortium with Shell and Petronas for Zubair oilfield competing with three other consortia: Eni/Sinopec/Occidental/Kogas; CNPC/BP; Gazprom/ ONGC/ Turkish Petroleum. The third consortium with Shell for West Qurna1 oilfield competing with four other consortia: CNPC/Petronas/Japex; Lukoil/Conoco; Total; Repsol/StatoilHydro/Maersk.

None won during the biding event.

In October 2009, ENI accepted the MoO' maximum remuneration fee and agreed to expel Sinopec from its consortium, because Sinopec agreed, days after the biding event, to a C$8.3bn (US$7.2bn) takeover of Addax, which had a stake in the KR TaqTaq field. Hence, ENI consortium secured the Zubair contract.

As for WQ1 it was a totally different story.

Early October 2009 a BBC Monitoring report quoted Lukoil boss Vagit Alekperov had said, "We have let it be known to Iraq's Oil Ministry that the consortium of Lukoil and ConocoPhillips is ready to enter into direct talks concerning the West Qurna-1 project on the terms that were announced earlier by Iraq's Oil Ministry,"

Probably, ExxonMobil found itself left behind and empty-handed from the first bid round since BP/CNPC won Rumaila; ENI lead consortium secured Zubair and now Lukoil and ConocoPhillips conceding to MoO terms regarding WQ1. Moreover, ExxonMobil had no intention to participate in the second bid round to be held in December 2010.

All the above prompted ExxonMobil/Shell, four weeks after Lukoil and ConocoPhillips announcement, to present similar acceptance of MoO terms regarding the maximum remuneration fee.

The Ministry favoured ExxonMobil/Shell by not considering Lukoil/ConocoPhillips offer promptly, and when ExxonMobil/Shell made their offer it was selected; presumably due to suggested production plateau target-PPT differential that tilted towards ExxonMobil/Shell!!! The Cabinet approved the award of WQ1 to ExxonMobil/Shell on 25 January 2010.

But ExxonMobil negotiated secretly with KRG after the company secured WQ1 contract with the federal ministry and it had signed the second amendment to the contract on 18 August 2010 adding 500kbd to an already high PPT at a higher remuneration fee of $2/b.

ExxonMobil-KRG secret negotiation led to signing six production sharing agreements on 18 October 2011, though it knows of the blacklisting policy by the federal ministry of oil, i.e, ignoring and disregarding the federal government imposed policy.

Contracts with KRG add insult into injury since three of these contracts are related to exploration blocks and fields that fall within the "disputed territories"; these are Bashiqa, Al Qosh and Qara Hanjeer, the other three are Arbat East, Pirmam and Betwata.

That unwise and puzzling move by ExxonMobil led to excluding it from leading the Common Seawater Supply Project-CSSP; reducing its Participating Interest in WQ1 (through the Third Amendment of the contract dated 28 November 2013) and blacklisting it from any future upstream projects such as Nassiriya Integrated Project-NIP.

That unwise action was writing on the wall that had in fact commenced the demise of this giant IOC in the Iraqi upstream petroleum.

The position of ExxonMobil in WQ1 weekend further when Shell exited WQ1 after it had exited Majnoon oilfield in June 2018.

ExxonMobil attempted a comeback to Iraqi petroleum, by exploiting the naivety and narcissism of a former Minister of Oil, Jabbar Luaibi, through Southern Iraq Integrated Project- SIIP. He and ExxonMobil were close to trap Iraq in an Odious Contract. The Ministry of Oil was cautioned of the detrimental consequences of such a contract and luckily for Iraq that contract was dismissed.

The rise and fall of ExxonMobil in KRI was even more dramatic despite the fact that KRG offered lucrative production sharing agreements. Media sources' report that ExxonMobil had conducted geological studies that doubted the existence of enough reserves in most of these blocks. Such results prompted Exxon to relinquish three of its six blocks: Betwata in 2015, and Qara Hanjeer and Arbat East in 2016.

Of Exxon's six blocks, Bashiqa may be the most promising.  However, in 2017, it transferred half of its 80 percent interest in this block - along with operatorship - to DNO and early this year it agreed to sell 32 percent to DNO, which practically and effectively ends ExxonMobil involvement in this block. Finally, ten years on with no much progress in AlQosh and Primam.

ExxonMobil adventure in Kurdistan Iraq ended, mostly, miserably!

To sum up, in that first biding round the company had three valuable opportunities and, analytically and legally, it and its partners could have won all three super-giant oilfields (Rumaila, Zubair and WQ1) with a combined production plateau of 6.275 million barrels daily-mbd against a combined minimum PPT proposed by MoO of 2.758 mbd; it won nothing during the bidding event!!!!!!!!!.

Instead, ExxonMobil sought a divisive course of action in the domestic Iraqi politics by concluding ill-fated PSAs with KRG; was that due to lack of vision, or geopolitical nativity or arrogance that still reflects a "Seven Sisters" mentality, or a hidden political agenda aiming at disintegrating the country; who knows!!!!!

What went wrong with ExxonMobil and its economic model?

Many views argued that the fiscal terms of the Iraqi long term service contract-LTSC for WQ1 are tough enough that eradicate the Internal Rate of Returns-IRR of the economic model which the IOC premised its final investment decision-FID on it.

This might be partially true as the comparative analysis of LTSC with other types of contract, particularly the production sharing contracts-PSCs indicates the "Government take" are higher under the LTSC than the PSCs. This, from international energy political economy perspectives is good for Iraq and, moreover, that corresponds with the Iraqi constitutional provision that calls for "develop the oil and gas wealth in a way that achieves the highest benefit to the Iraqi people" (Article 112, Second)

Nevertheless, contractually and analytically LTSC for WQ1is identical in structure, contents and fiscal terms, except the particularities of WQ1 oilfield,  to all LTSCs for the brown fields offered under the first bid round, i.e, Rumaila, Zubair and the 3 Missan oilfields- Buzurgan, Abu Ghrab and Faqa. This leads one to question why ExxonMobil finds the fiscal terms unfavorable while other IOCs continue in the redevelopment of the oilfields.

It took almost one year to prepare for the first bid round and the final text of the LTSC was thoroughly examined by all qualified IOCs for that bid round. Logically and imperially, all IOCs should have formulated their economic model and bid on what the LTSC offers. It is rather surprising to claim, ten years later, that the offered fiscal terms do not match with the company economic model!!

The economic model of any IOC is its own making; reflecting its vision, its global profile, strategic positioning, strengths, and stakeholder/shareholder's interests among other things. Accordingly, the level of IRR is the fiscal measure upon which the FID premised. Majors or Big Oil usually have high IRR, due to their international profile , their integrated structure across the value chain of petroleum industry and the "opportunity cost" of a particular investment.

IRR under LTSC fiscal terms depends mostly and directly on: production level, capital cost-investment, cost recovery and remuneration fee; indirectly it depends on oil prices through the term of "deemed revenues" provision that impact the quarterly cost recovery and remuneration fee entitlement.

Oil price fluctuates, and nothing new about that at all; its fluctuation like a "Yu-Yu" is more normal and usual than otherwise. Iraqi oil export price averaged at $53.19 a barrel during the 12 months period November 2008-October 2009; the time that IOCs considered oil prices in their economic model. During the period from July 2008 to March 2021 Iraqi oil export price averaged at $69.55 a barrel; hence the argument that IRR eradication was attributed to oil prices and, accordingly on cost recovery and remuneration fee is not convincing.

What remains is the impact of oil production level on IRR value. Oil production levels have implications and direct impact on capital cost, cost recovery and remuneration fee, and hence on IRR.

For WQ1 the MoO requests a minimum plateau target of 600kbd during the first bid round. ExxonMobil presented 2.325mbd, i.e., nearly four folds what MoO had envisaged!! Moreover, soon after signing the contract ExxonMobil requested adding further 500kbd leading to higher plateau target at 2.825mbd.

ExxonMobil should have known that such unreasonable unattainable plateau target within the contracted timeframe weakens the logical premises of its economic model and the assumed IRR; it was a problem of its own making and shed much doubt about the validity and soundness of its model not the LTSC stringent fiscal terms.

However, Amendment 4, signed on 19 February 2014, to WQ1 contract, provides further relieves from the terms of the contract such as reducing the plateau target, performance factor and R-Factor among others that provide significant fiscal incentives to WQ1 consortium.

All the above refutes the argument that put the blame squarely on the terms of the contract in the deteriorating IRR and ExxonMobil economic model.

Even if one, for the sake of the argument, accepts for a while the tough terms of WQ1 contract, what about ExxonMobil economic model for KRG' PSCs!!

All commentators and oil experts agree that KRG' PSCs provide lucrative terms for the benefits of the IOCs. Why then ExxonMobil fails measurably there too?

Was that demise due to wrongly-premised economic model or "inside-misguidedness"!! Media sources revealed that Ali Khedery, a former American diplomatic advisor in Iraq who subsequently joined Exxon as director of public and government affairs for ExxonMobil Kurdistan Region of Iraq Limited (EMKRIL), Exxon's KRG-focused subsidiary, "had facilitated the negotiations that brought the company to Kurdistan." Was ExxonMobil victimized by its own staffer!!!!???

ExxonMobil Exit and MoO Options

Contractually, to exit WQ1, ExxonMobil should invoke the termination Article 8 in WQ1 service contract, particularly sub-article (8.2) and, therein, sub-article (8.1 (c)). If ExxonMobil wishes to assign its rights and obligations, as it seems doing so far, it should comply with the provisions of Article 28-Assignment.

Available information indicates that the company launched the contractually exiting process in January by sending a formal letter to notify MoO it had found prospective buyers; ExxonMobil and MoO had three months, until 28 April, to agree on a course of action.

The ministry has three options: the first is to accept the prospective buyers found by ExxonMobil; 20 percent to CNOOC and 12.7 percent to PetroChina-CNPC. This means increasing CNPC participating interest to 45.4% and increase China position in WQ1 to 65.4%.

The second option is to find another American company to acquire ExxonMobil share; this what the Ministry has publically announced and it seems to favour Chevron, but Chevron  was reportedly not hugely encouraged to invest in WQ1. (But again Chevron was blacklisted by the Ministry due to the company' involvement in KRG oilfields, though such blacklisting was revoked, unofficially, during the time of former minister Jabbar Luaibi. He paving the way for this company to enter the upstream petroleum through direct backdoor. By the way the Iraqi team in MoU/C with Chevron 2004-2008 was chaired by Jabbar Luaibi).

The third option is to acquire ExxonMobil share by the Ministry through Basra Oil Company-BOC or any other national companies affiliated under the Ministry. This option is similar to what was done when Occidental - Oxy relinquished its participating interest in Zubair oilfield

In any of these options, the Ministry should extract a "capital gain tax-CGT" from the total value of the sold share. The Iraqi tax authority decides the CGT rate, the estimation equation and the compounding rate to arrive at the present values taking into consideration three related variables: the value of the sold share (minus) the present value of the invested capital (plus) the present value of the recovered invested capital (cost recovery).

In my article written almost twelve years ago assessing the first bid round I wrote the following: "What is rather surprising is the somewhat weak contribution of the American oil companies. While they topped the 35 qualified IOCs with 7 companies, only three had participated in the bidding. Were they expected to capitalise on the American military presence and political pressure to have guaranteed access to the Iraqi oil? Or they simply have their own capacity, technical and financial limitations? Or Iraq is not on their strategic priority screen? Or they are trapped in a mind-set of own making that centred on production sharing agreements and "reserves booking"? Or they are not used to this type of open bidding and transparency, and they prefer behind closed doors deals? Only time would provide the satisfactory answer." (MEES 52:33 17 August 2009)

Any lessons learned, Ministry of Oil????????

Click here to download the full report in pdf format.

Mr Jiyad is an independent development consultant, scholar and Associate with the former Centre for Global Energy Studies (CGES), London. He was formerly a senior economist with the Iraq National Oil Company and Iraq's Ministry of Oil, Chief Expert for the Council of Ministers, Director at the Ministry of Trade, and International Specialist with UN organizations in Uganda, Sudan and Jordan. He is now based in Norway (Email: mou-jiya(at)online.no, Skype ID: Ahmed Mousa Jiyad). Read more of Mr Jiyad's biography here.

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Cabinet approves $480m Drilling Deal in Southern Iraq

By John Lee.

The Iraqi Cabinet held its weekly meeting on Tuesday under the chairmanship of Prime Minister Mustafa Al-Kadhimi.

Following discussions, the Cabinet approved a bid from Schlumberger to drill 96 wells for the Basra Oil Company (BOC) and ExxonMobil.

The company has previously worked at ExxonMobil's West Qurna 1 field in southern Iraq.

The deal is valued at more than $480 million.

(Source: Office of the Prime Minister)

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How China “Took Control” of Exxon’s Iraqi Oilfield

How China Took Control Of Exxon's Supergiant Iraqi Oilfield

Recent reports suggest that Chinese oil giants China National Petroleum Corporation (CNPC) and China National Offshore Oil Corporation (CNOOC) are "considering acquiring" U.S. oil titan ExxonMobil's 32.7 per cent stake in Iraq's supergiant West Qurna 1 oil and gas field.

Writing in Oil Price, Simon Watkins says these reports are missing the point.

Click here to read the full story.

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China to Buy of Exxon’s stake in West Qurna?

By John Lee.

The China National Petroleum Corporation (CNPC) and China National Offshore Oil Corporation (CNOOC) are reportedly considering acquiring Exxon Mobil's remaining stake in Iraq's West Qurna 1 oilfield.

According to sources cited by Bloomberg, the stake could fetch more than $500 million.

ExxonMobil originally had a 60% stake in the field, but sold 25% to PetroChina and 10% to Pertamina in November 2013. (Shell originally had a 15% stake, but sold it to CIECO West Qurna Limited, a subsidiary of Japan's Itochu Corporation, in 2018 for $406 million.)

Itochu's website lists the current interests as: ExxonMobil (US (Lead Contractor), 32.7%; Petrochina (China) 32.7%; Itochu (Japan) 19.6%; Pertamina (Indonesia) 10.0%; Oil Exploration Company (Iraqi state-owned company) 5.0%.

More here.

(Source: Bloomberg)

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Shamara to provide Power for Basra Gas Plant

By John Lee.

The Basrah Gas Company (BGC) and Shamara Holding have reportedly signed a contract under which Shamara will supply electricity to the Basra Natural Gas plant.

According to The National, the contract will enable the plant to process by-product gas that would other wise be flared from the Rumaila, Zubair and West Qurna-1 oilfields for use by Iraq power stations.

The Basra NGL facility will be built in Ar-Ratawi area in west of Basra and is scheduled to complete at the end of 2020.

More here.

(Source: The National)

Oil Ministry’s “Odious Contract’ Trap” with ExxonMobil

By Ahmed Mousa Jiyad.

Any opinions expressed are those of the authors, and do not necessarily reflect the views of Iraq Business News.

The Ministry of Oil and the “Odious Contract’ Trap” with ExxonMobil’ Consortium

Talks have intensified recently about the continuation of negotiations between the Ministry of Oil (MoO) and ExxonMobil/CNPC consortium that might lead to the signing of a contract for the “South Iraq Integrated Project (SIIP)” at an estimated cost of $53 billion and a duration of 30 years, but no official confirmation or indications on the fundamental contractual provisions that were agreed on and those still pending.

In the light of the available information, material evidence, actual examples, international geopolitical considerations and comparative analysis, a detailed evidence-based research and Report* was done on the project and related negotiation.

The report on SIIP’ possible contract comprises:

  • A necessary introduction and caveat;
  • Political and geopolitical implications of ExxonMobil behavior and its apparent link to the “deep state” based on many evidences that actually and factually had negative consequences on oil projects, for example, in Russia and in Iraq.

In Russia, ExxonMobil caused a delay of almost four years in the development of the Pobeda oil discovery in the Kara Sea when ExxonMobil withdrew, in late 2014, from its deal with Rosneft due to imposing US sanctions on Russia.

Iraq had three bad experiences with this company in recent years. The first, when ExxonMobil negotiated secretly and concluded, against declared government policy, deals with KRG in 2011 soon after the company secured West Qurna 1 contract through first bid round with the federal ministry.

That move led to excluding ExxonMobil from leading Common Seawater Supply Project (CSSP), reduce its Participating Interest in WQ1 and blacklisting it from any upstream project.

The second and third bad experience occurred this year when the company evacuated, unilaterally and without government consent, all its foreign staff from WQ1. All these three incidents caused tremendous damage to Iraqi economic interest.

  • Potential strategic risks, of an enormous scale, on SIIP that could be generate from the growing deterioration of the American-China relations as evidenced from the blacklisting of two major state oil companies, i.e. Zhuhai Zhenrong Corp and Sinopec. US escalating tension against Iran adds further geopolitical risks;
  • Analyses of what would be SIIP contract was premised on what was reported by national and international sources that are originally based on information given by unnamed Iraqi officials. That was due to the absence of clarity and lack of transparency of the ministry regarding essential contractual terms and conditions.

Based on the analyses and findings of the report, I am compelled to clearly alert and strongly, frankly and loudly warn both the Prime Minister and the Minister of Oil of the danger of pushing Iraq into a “trap of an odious contract” and by specifying ten of its most grave risks and disadvantages:

  1. ExxonMobil, as the consortium leader, is granted a monopoly position that allows the company directly controlling all vital oil projects in southern Iraq, and thus the entire national economy, for thirty years;
  2. It poses a multiplicity of major threats to national security and economic interest due to what can be called contractually-connected high strategic and geopolitical risks, since SIIP comprises many critical and vital projects such as Common Seawater Supply project-CSSP (for water injection), pipelines, storage tank-farms, export facilities, gas processing units and two oilfields;
  3. It contravenes the fundamental premises of the Iraqi Constitution because the contract requires “mortgaging/ reserving/ booking” two oilfields, with a combined plateau production of 500kbd, exclusively for the two foreign oil companies, i.e. ExxonMobil and CNPC, for the entire term of the contract- 30 years;
  4. It offers “Profit-Sharing Contract”, which, in reality, represents the monetary side of a “Production Sharing Contracts”, which, is impermissible by the Constitution;
  5. The announced astronomical cost (of $30bilion) increased already by $11billion in less than ten weeks while negotiating!;
  6. It offers all rent (windfall) resulting from oil price increases exclusively to the two foreign companies, nothing for Iraq!;
  7. It prevents SOMO (the only State Oil Marketing Company) from performing its role in marketing crude oil from the “mortgaged” two oilfields; this contravenes established policy, undermines annual state budget laws and weakens almost 50 years of SOMO’s function;
  8. It reduces the “national efforts” in the development of oilfields, thus, contradicting declared Ministry policy, weakens Iraq’s flexibility to comply with OPEC decisions through “swing fields”;
  9. Inconsistent with the regulations for tendering and contracting government projects;
  10. It lacks both transparency and competitiveness.

Therefore, I suggested to the Ministry of Oil not to continue on wasting time and causing further delays: it should officially declare that it is not in Iraq’s economic interest and national security to award SIIP to ExxonMobil-CNPC (and for this matter to any one consortium) and end, immediately, all and any related negotiations.

In the event that the Ministry of Oil and/or the Government insist on going ahead with this Odious Contract with ExxonMobil-CNPC, it becomes inevitable to refer the matter to the Federal Supreme Court to invalidate the contract on the bases of incompatibility with the Constitution; for eradicating the highest interest of the Iraqi people, including future generations (principle of inter-generational equity)  and for returning Iraq to what looks like abhorrent concessions of the, colonial, past.

*A brief of the original Arabic text of the entire report was circulated widely within many networks and was published by and posted on many websites, and accessible on the following links:

الحذر يا وزارة النفط من “فخ العقد البغيض” مع شركة اكسون موبل

https://www.akhbaar.org/home/2019/8/261291.html

http://www.tellskuf.com/index.php/mq/83987-as174.html

http://www.sahat-altahreer.com/?p=49115

Click here to download the full article in pdf format.

Mr Jiyad is an independent development consultant, scholar and Associate with the former Centre for Global Energy Studies (CGES), London. He was formerly a senior economist with the Iraq National Oil Company and Iraq’s Ministry of Oil, Chief Expert for the Council of Ministers, Director at the Ministry of Trade, and International Specialist with UN organizations in Uganda, Sudan and Jordan. He is now based in Norway (Email: mou-jiya(at)online.no, Skype ID: Ahmed Mousa Jiyad). Read more of Mr Jiyad’s biography here.

Exxon Increases Production at West Qurna 1

By John Lee.

Production at the West Qurna 1 oilfield has reportedly reached 465,000 barrels per day (bpd), following the completion of new crude processing facilities and oil storage tanks.

Officials told Reuters on Monday that the field was previously producing about 440,000 bpd.

Exxon‘s foreign staff were present at a ceremony to launch the new facilities, having returned to the oilfield on 2nd June.

(Source: Reuters)