Iraq’s goal of producing 5 to 6 million barrels of oil per day by 2015 may be undermined by political tension. After weeks of speculation, Exxon Mobil (NYSE:XOM) has decided to pull out of a $50 billion oil project in the West Qurna-1 field, and pursue a relationship with Kurdistan.
Trouble began when Exxon signed an exploration deal with Kurdish officials in 2011. The Iraqi government lays claim all oil rights in the country, including those in Kurdistan, which is an autonomous region. The Iraqi central government has barred companies that violate this claim and sign deals with Kurdistan from participating in auctions for oil-exploration rights.
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Oil companies that want to explore and develop production capacity in the region effectively have to choose one or the other. Exxon Mobil is not the first oil company to pick sides, with Marathon Oil (NYSE:MRO) choosing to develop in Kurdistan, as well as a major Turkish company.
Exxon Mobil is likely choosing Kurdistan over Iraq because it can get a better deal there. The West Qurna-1 field is already producing oil, but is in need of major development. The Iraq government wanted to pay the company and its partners in the Qurna project — oil majors like Royal Dutch Shell (NYSE:RDSA)(NYSE:RDSB) and Chevron (NYSE:CVX) — just $1.90 per barrel for each additional barrel they pumped. This would barely cover the costs associated with development and production.
There are reports that the cost of production in Kurdistan is as low as $10 per barrel, making business there very attractive. Kurdistan is also likely to adopt a profit-sharing scheme instead of paying a flat-rate for production.
Iraqi officials previously asked President Barack Obama to intervene, but there has been no government involvement so far. It’s unclear what the President could do, if he decided to step in. At the end of the day, Iraq may just be hurting itself by forcing oil companies to choose, and right now Kurdistan looks pretty attractive.