Disagreements prompting the delay to ExxonMobil's exit from Iraq's West Qurna 1 field could have longer-term ramifications for Iraq's upstream oil and gas sector.
Baghdad's plan to ensure a sale this month of ExxonMobil's 32.7pc interest in the 500,000 b/d field appears to be in jeopardy. State-owned Basrah Oil (BOC) has rejected a planned sale to two Chinese firms, sources say, although it has publicly stated no objection to a Chinese buyer, after Chevron rejected an approach by Baghdad. Iraq had sought a US firm to try to diversify an upstream investor portfolio in which Chinese firms have recently grown their already extensive presence.
Price appears to be another issue. Iraq's long-term technical service contracts (TSCs) state that any firm wishing to sell its interest will need approval from BOC, which has rights to buy on the same terms and conditions. Baghdad says it is open to BOC or another state-run firm acquiring ExxonMobil's share, but it has declined to buy it at the agreed sale price. Iraq cannot buy the stake as it owns the ground and says current contracts fail to address pricing issues, oil ministry officials say.
These disagreements damage Iraq's opportunity to develop its energy sector, by discouraging other foreign oil firms from investing in new projects or prompting them to fully outline exit strategies before entering, an oil firm official says.
Foreign firms have long been disgruntled by Iraq's failure to stick to contracts, making already-low return rates uneconomical. They understood why it halted payments in the 2014-15 oil price downturn, but not the unwillingness to meet to find a resolution as stipulated in contracts. This delayed fields hitting production plateaus, but Iraq was reluctant to renegotiate plateaus or their timing, or compensate for any loss of contractual value. And it is yet to fully compensate international firms for lost revenue from output falls resulting from Opec+ cuts as stated in TSCs.
Crossing the TSCs
Iraq has struggled to attract new upstream investment from large firms in recent years and depends on a shrinking group to run its largest fields following the exit of Shell, US firm Occidental and Norway's state-controlled Equinor in the past decade. A renewed focus on TSCs will be key to retaining firms and attracting new ones.
Russia's Lukoil wants to renegotiate its contract for the Yamama formation at the 13bn bl West Qurna 2 — where it recently began trial production — as a result of high hydrogen sulphide content. And TotalEnergies is in talks with Baghdad for a $7bn contract involving four projects. The deal includes a water injection development similar to that in the multi-billion dollar Southern Iraq Integrated Project, in which ExxonMobil abandoned interest after years of disagreement over contract terms. TotalEnergies sees balancing the oil field and water injection plans with solar power and gas processing projects as a new contractual approach, mirroring its energy transition strategy, industry sources say. They add that the firm is likely to agree the full package or nothing, with a particular focus on the solar project, despite Iraq's preference for water injection and gas. The deal is likely to fall through if not reached in the next few months, ahead of Iraqi elections in October.
Iraq says it plans to review its oil and gas exploration and transportation contracts with foreign firms. But long-time Iraq watchers say this is a strategy repeated every year to placate TSC critics and will not necessarily go anywhere. Previous attempts have failed. And amendments to the terms for Iraq's fifth bidding round offered lower returns for contractors that discouraged large investors.
But foreign firms will be needed to sustain and grow crude capacity in the long term, with the aim of maximising oil revenues to rebuild and diversify a cash-strapped economy amid the energy transition. Adhering to contracts would be a simple first step for Iraq to combat rising discontent, one foreign oil operator says.
