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Baghdad Warns ExxonMobil While a Deal With Erbil is Gathering Momentum

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It has been almost a year since super-major oil company ExxonMobil ventured into Iraq's Kurdistan Region. Despite Baghdad's harsh words against the company, it has suffered little punishment other than exclusion from the 4th bid round, in which it showed little interest anyway.

Since then more large oil companies have joined ExxonMobil in the autonomous Kurdistan region, including Total, Chevron and Gazprom. While harsh language was used against ExxonMobil, Chevron and Total, Russia's Gazprom has not been on the receiving end of threats from Baghdad. Although sending the message it is plotting revenge, Baghdad has done little since its initial warnings.

Baghdad and Kurdish regional government (KRG) have been at loggerhead over oil policy and the rights to grant exploration licences. The KRG believes that the constitution allows it to control and manage its oil and gas industry but the Central Iraqi government disagrees and believes only the central government has the authority to do so. In the process the dispute has led to oil companies operation in Kurdistan region been blacklisted by Baghdad and crude export from Kurdistan Region halted.

A deal has emerged last week, between the two sides to resume production from Kurdistan region and Baghdad pay the cost for the oil companies in Kurdistan. However the deal would need to be ratified by both Kurdish and central government council of ministers. Moreover; a similar deal was brokered by Kurdistan region previous PM, Braham Salih, in 2011 but Baghdad did not make the payments and production was halted once again until last month, resuming as a gesture of good will by the KRG, to break the deadlock.

The deal will benefit both sides enabling Kurdistan region accelerate expanding its oil sector and Baghdad increase production to historical highs. Kurdistan Region has no independent pipeline and the only route is through Baghdad owned Kirkuk-Ceyhan pipeline. Therefore, the KRG feels that it has been left with no option but to truck oil to its neighbours and recently to Turkey, which has agitated Baghdad.

ExxonMobil's logistical preparation on the ground in Kurdistan is well underway. According to its contract, it is likely to have to start exploration which starts with the seismic survey soon. The standard Production Sharing Contract, stipulates that the IOC's is expected to start operation within the first sub period, which is three years. During which the first exploration well must be drilled with all the preparation that entails. Meanwhile, knowing a year has passed and not much work has been carried out and this deadline is nearing, Baghdad has upped the rhetoric and indirectly threatensed ExxonMobil with exclusion from its contract to develop the giant West Qurna-1 field in southern Iraq.

Most of the warnings have been coming from people close to the Iraqi oil ministry and the real power in Baghdad's oil sector, the Deputy PM for energy, Dr Hussain Shahristani. The strong language included " ...If they dig, they cannot take Iraqi oil", reported the specialist media group Iraq Oil Report , meaning if ExxonMobil start operation under their obligations, Exxon will risk its West Qurna-1 contract and at the same time they will not be able to sell their Kurdish oil through Iraqi pipelines.

Furthermore, the website quoted Baghdad officials saying that the way to retaliate and can take more subtle forms: "Do not give them permits to come, do not allow their people to work ... and they will find that they are not welcome here". These types of comments are worrying, though, more for Iraq than for ExxonMobil. If ExxonMobil's operations in the south are obstructed, the main loser will be Iraq as failure to increase production will cost Exxon less than $2 per barrel while Iraq and its people will lose over $100 per barrel. Needles to say that limiting ExxonMobil's operation may hurt the company somewhat financially if they lose what they have invested so far, but it will have far more reaching implication. Shell, which has been obedient to Baghdad and is ExxonMobil's partner in West Qurna-1 field, will also be affected if development hindered and lawsuits commences.

When ExxonMobil signed its deal with the Kurdistan region, Baghdad was completely taken by surprise. So far, Dr Shahristani has refused to accept that Dr Ashti Hawrami, KRG Oil minister, has outmanoeuvred him. Should Baghdad cancel the West Qurna-1 contract, ExxonMobil has made it clear that it will take legal action. Last week, information about the meeting ExxonMobil had with Baghdad officials has come to light; Dr Shahristani was reported to have been very frustrated and "hardly able to control his emotions" during the meeting.

Baghdad's options are limited when it comes to punishing ExxonMobil. Its strong language has been heard before, and it would need to demonstrate why, this time, it is capable of executing its warnings. As a sovereign government, Iraq can do as it wishes dealing with the IOCs. But if it does deliver on threats including cancelling contracts and making life difficult for ExxonMobil, it too will suffer.

June this year, in the Global Petroleum Survey carried out by Canadian research group the Frazer institute, Iraq was ranked at the bottom of countries for oil and gas investment, due to bureaucracy, poor security, lack of certainty and clarity about the law and regulation and the fiscal terms on offer. Although Iraq has amongst the world's largest conventional oil and gas reserves, official comments on making life difficult for international oil companies will not improve its rating.