The signing of heads of agreement last week between U.S. energy supermajor ExxonMobil and Iraq’s Oil Ministry is perhaps the most significant of the recent deals between firms from the West and Baghdad. It is true that several others have been with similarly-high-powered global energy giants – including Chevron, BP, and TotalEnergies – and have involved multi-billion-dollar deals. But it is also the case that ExxonMobil’s exit from Iraq a few years ago was the most high-profile exit of any Western firm during that era for two reasons. First, it involved the withdrawal from two of Iraq’s most crucial developments: its cornerstone oil infrastructure development project (the ‘Common Seawater Supply Project’, CSSP) and its supergiant West Qurna 1 oil field. Second, the real reasons behind the withdrawal – analysed in full in my latest book on the new global oil market order – were symptomatic of the broader malaise in Iraq’s oil and gas sector that had stymied the realisation of its true potential for decades. As these were also the fundamental reasons for the subsequent withdrawal from Iraq of all other Western firms at that time, the fact that ExxonMobil is back is a clear signal that the West is moving to reassert its influence over Iraq, and the rest of the Middle East too. The key question for the West and the global oil markets, is how long can this rapprochement last?

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The real reason why it broke down last time for ExxonMobil (and for every other Western firm that followed the U.S. oil giant out of the door) was alluded to in the official comments from the firm that it was over a dispute over the tendering process connected to the CSSP. However, a senior source who worked very closely with Iraq’s Oil Ministry at the time exclusively told OilPrice.com at that point that it resulted from a critical breakdown in trust between the U.S. firm and Iraq’s Oil Ministry over the risk/reward balance of the project, as highlighted in the tendering process, among many others. Specifically, this was to do with the widespread practice of ‘commission’ payments in the country, which could well be characterised in Western countries as bribery and corruption, and these payments pertained to the gamut of large and small contracts connected to the project. The same elements at play prompted ExxonMobil’s withdrawal from the West Qurna 1 oil field later, according to the Iraq source. “There were three key elements that formed the basis of these negotiations [between ExxonMobil and Iraq’s Oil Ministry for the U.S.’s continuation in other projects in the country] — ‘cohesion’, ‘security’ and ‘streamlining’,” said the Baghdad-based source. Cohesion related to ensuring that building the facilities connected to projects were completed in full and in order. Security related to the on-the-ground security of personnel and to the soundness of the basic business and legal practices involved in the agreement. Streamlining meant that any deal should continue as had been laid out in the agreement, regardless of any future changes to the government of Iraq. Given the questionable commission practices and extreme legal opacity involved in these projects, the potential damage to the reputation of ExxonMobil (and of the U.S.) was considered simply too great. Subsequent to this, a senior legal source in Washington exclusively told OilPrice.com, it was decided by U.S. firms (with governmental input) that any major agreements signed by big U.S. oil and gas companies in Iraq would have to be agreed in full by U.S. lawyers, all accounts will have to be checked by U.S. accounting firms, working processes will have to be checked by U.S. project consultancy firms, and security issues of any nature will have to be worked through and then monitored on an ongoing basis with U.S. security organisations.

These concerns were not without foundation, as they had been meticulously observed and reported on for years by the highly-respected independent non-governmental organisation Transparency International (TI) in its ‘Corruption Perceptions Index’. The publication produced around the time that ExxonMobil was in Iraq described Iraq as being: “Among the worst countries on corruption and governance indicators, with corruption risks exacerbated by lack of experience in the public administration, weak capacity to absorb the influx of aid money, sectarian issues and lack of political will for anti-corruption efforts.” TI added: “Massive embezzlement, procurement scams, money laundering, oil smuggling and widespread bureaucratic bribery that have led the country to the bottom of international corruption rankings, fuelled political violence and hampered effective state-building and service delivery.” It concluded: “Political interference in anti-corruption bodies and politicization of corruption issues, weak civil society, insecurity, lack of resources and incomplete legal provisions severely limit the government’s capacity to efficiently curb soaring corruption.”

It is safe to say three things at this point. First, ExxonMobil will have received high-level assurances – not just from the most senior people in Iraq’s Oil Ministry, but from those holding the highest positions in government – that all three elements that the U.S. firm wanted to see during its first period in Iraq are now in place. Second, every element of these assurances will have been thoroughly checked by the best U.S. lawyers and accountants that money can buy, to make sure they are legally and computationally watertight. And third, elements of the U.S. government will have communicated to their counterparts in Iraq that they do not expect to see any rowing back on any of these conditions for participation, and if they do then there will be broader political and economic ramifications for Iraq than just the withdrawal of U.S. firms from Iraq again in the future. It is apposite to recall at this point that prior to this sudden influx of U.S. companies in Iraq, U.S. President Donald Trump had ordered the significant ramping up of sanctions against Iraq as an accomplice of neighbouring Iran, as also detailed in my latest book on the new global oil market order.

As it stands, the CSSP is now one part of the US$27 billion four-pronged deal being run by France’s TotalEnergies (which also made it clear to Iraq that it will tolerate no nonsense), so there is no opportunity there for the time being for ExxonMobil. However, its new starting point in Iraq will be the development of the supergiant Majnoon oil field. This choice of field is interesting from three perspectives. First, it is one of the five southern oil fields involved in the gas capture project of TotalEnergies’ four-pronged deal, along with West Qurna 2, Tuba, Luhais, and Ratawi. This means there would be further collaborative opportunities between the two Western energy giants here, and elsewhere across the south. Second, Majnoon is one of Iraq’s ‘Big Four’ oilfields – the others being West Qurna (1 and 2), Rumaila, and Zubair – which have been prioritised for development to enable Iraq to hit its longer-term 7 million barrels per day oil output target, but with a view to conserving the longevity of production from them.  Third, it is one of Iraq’s biggest ‘shared fields’ with Iran – Tehran’s part being the huge Azadegan field — which means that it has long featured as part of Iran’s ability to keep avoiding international sanctions by passing its oil off as Iraqi oil instead. ExxonMobil’s presence as developer on the site would clearly deter such supplies from this field.

The Majnoon site (‘Majnoon’ means ‘insane’ in Arabic, although the field acquired the name from its possessing an insanely large amount of oil) itself is located around 60 kilometres to the northeast of the main southern export terminal of Basra and remains one of the largest in the world, with an estimated 38 billion barrels of oil in place. Since its discovery in 1975 by Brazil’s Braspetro (now part of Petrobras), it has been subject to a microcosm of the troubles that have affected the Iraq oil industry as a whole, with two U.S.-led wars, the war against Iran, ongoing domestic security issues, and endemic corruption leading to the cancellation of various deals with international oil companies over the past 30 years or so. The initial development licence was awarded by the Oil Ministry on 11 December 2009 to Shell Iraq Petroleum Development (SIPD) – in conjunction with its Malaysian partner, Petronas — fixed under the terms of a Technical Service Contract at a relatively tight per barrel fee of US$1.39. Nonetheless, within a very short timeframe, the consortium had managed to boost output to the 175,000 barrels per day (bpd) first commercial production target (the threshold for cost-recovery payments for Shell). By the end of Q1 2014, the field was churning out an average of 210,000 bpd. Production has not increased much since then, with the current output hovering around the 245,000-bpd level, according to the Iraq source. However, there is plenty of scope for a massive increase, as the original plateau production commitment for the field by Shell’s consortium was 1.8 million bpd.

By Simon Watkins for Oilprice.com

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