Iraq Threatens Sanctions After Exxon Deal

Iraq is threatening to sanction Exxon Mobil (NYSE:XOM) for signing a deal with the Kurdish region without the approval of either Baghdad or Washington.

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“The Iraqi government is considering sanctions, and will inform the company before they make a public announcement,” Deputy Prime Minister for Energy Hussain al-Shahristani told an industry conference in London on Tuesday.

“The position of the U.S. government has been that they were unaware of it and if they had been asked, they would have obliged [Exxon] to get the approval of the Iraqi government,” said Shahristani.

Exxon could lose its contracts to develop fields in southern Iraq after agreeing to six exploration deals with the northern Kurdish region, which is currently at odds with the central government in Baghdad over oil and land rights.

Both Exxon and the U.S. Department of State have yet to comment on the deal that may have been a rare miscalculation of the political risks in Iraq on behalf of the world’s largest publicly-traded oil company.

“Everyone was keen to see what Shahristani had to say. And he could not have agreed [with the deal] because fundamentally it would show Baghdad has lost. If he approved the Kurdish deal others would rush and sign similar deal and other regions such as Basrah would ask for more autonomy,” said one risk consultant with clients in Iraq, who spoke on condition of anonymity.

However, other industry outsiders believe the deal might still go through. “I don’t think that Iraq has the right to cancel the existing contract. They can blacklist Exxon from future contracts, but Exxon probably sees better opportunities in Kurdistan,” said one delegate at the conference.

Exxon may also be counting on Shahristani’s reign being short, he said, with his eventual exit reopening contract negotiations. For now, “they see that they can get better terms in Kurdistan.”

Iraq plans to more than double its oil output over the next decade — which would allow it to become the world’s number three oil producer after Russia and Saudi Arabia — at a time when many global majors are facing depleted resources.

Exxon, with Royal Dutch Shell (NYSE:RDS.A), has a multi-billion dollar contract with Iraq’s oil ministry to develop the 8.7 billion-barrel West Qurna Phase One oilfield in the south. But Exxon’s deal with the Kurdish Regional Government is against Iraqi law, and could threaten any existing contracts.

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While Iraq is relying on large contracts to rebuild its crude industry, Exxon is not its only partner in that venture. The OPEC member has signed scores of deals with foreign oil explorers since the U.S. invasion that toppled Saddam Hussein more than eight years ago. Exxon is the first of those partners to deal with the northern Kurdish region without Baghdad’s permission.

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