Exxon stirs turmoil in Iraq's oil industry

BAGHDAD, Nov. 17 (UPI) -- Exxon Mobil's controversial oil exploration deal with Iraq's semiautonomous Kurdish enclave in the face of Baghdad's objections has intensified a smoldering feud between the central government and the independence-minded Kurds.

This is part of a wider issue that's one of Iraq's most intractable, and potentially divisive, problems: sharing oil revenue.

In recent weeks, as the U.S. military withdrawal nears its scheduled Dec. 31 deadline, there has been a growing sentiment by oil-rich provinces to break away from the federal system that gives Baghdad control of all oil wealth and insist it has the sole right to sign contracts.

The contract Exxon Mobil, the world's largest oil company, signed Oct. 18 with the Kurdish Regional Government for six exploration zones stepped all over Baghdad's efforts to keep that control.

Kurdistan, which spans three of Iraq's 18 provinces, contains an estimated 45 billion barrels of oil.

That's about 40 percent of Iraq's known reserves of 143.1 billion barrels, or more than double the 20.4 billion barrels in the Gulf of Mexico.

Baghdad announced Wednesday it would move to terminate the Exxon Mobil contract with the KRG.

It has little choice.

Failure to bring the oil giant to heel would open up Kurdistan, and other regions with separatist inclinations, to other major international companies who would like to grab a piece of the action in the Kurdish enclave.

"Exxon has violated the Oil Ministry's directions and instructions concerning companies working in Kurdistan," said Abdul-Mahdi al-Ameedi, director of the ministry's contracts and licensing directorate.

"As a consequence the Oil Ministry will take steps to end the contract."

That could be tricky. Exxon Mobil heads a consortium with Royal Dutch Shell developing the giant West Qurna Phase One field in southern Iraq.

It's committed to a $100 billion investment program to upgrade the field, which with other southern megafields is central to Baghdad's ambitious plans to quadruple production over the next few years.

Tearing up Exxon Mobil's 2009 contract could seriously jeopardize that program at a critical period in Iraq's postwar reconstruction plan. A protracted legal battle would likely drive off other foreign investors.

On the other hand, Exxon Mobil's entry into Kurdistan gives the region's oil plans an immense boost -- although it depends on pipelines owned by the government to export its oil, and these are currently blocked.

Even so, having Big Oil in Kurdistan is likely to attract other international oil majors, not just the 40 or so small companies and wildcatters that have moved in since 2006, and boost the enclave's political clout.

Chevron of the United States and Eni of Italy, who are also leading players in international consortiums with 20-year contracts to develop the big fields on which Iraq's future hinges, have also been in contact with the KRG.

"We know there's communication between them," said the Oil Ministry's Ameedi. "There are talks."

So there's a lot riding on what transpires on this thorny issue in the weeks ahead.

The fragmentation of the country, plagued by sectarian and ethnic divisions, would undermine the federal system put in place following the U.S.-led invasion of 2003 and the subsequent fall of Saddam Hussein's brutal dictatorship.

With no U.S. forces on the ground to ensure stability, the potential for another spasm of sectarian savagery is considerable. This time the oil industry would be at the center of the violence.

One of the principal bones of contention between the government of Prime Minister Nouri al-Maliki, a Shiite, and the KRG is the long-delayed oil law.

It's supposed to provide an essential framework to encourage badly needed foreign investment in Iraq's energy industry, its economic lifeline.

The oil law was first proposed in May 2007, but it got snarled in the political infighting in successive governments and the fractious Parliament.

The central government, dominated by the majority Shiites, and the KRG have been deadlocked from day one over who has the legal right to the Kurds' oil reserves and the right to award exploration and production contracts.

This has stymied foreign investment in Kurdistan, which suits Baghdad because it impedes any secessionist ambitions.

It may be that the furor over Exxon Mobil, and its potential consequences, will move the main protagonists toward a compromise -- if only because Maliki's shaky coalition depends on Kurdish support.