Exxon feeling pressure in Kurdistan

The Iraqi government is unhappy with the independent deal Exxon struck with Kurdistan to explore for oil.

By Trefis Mar 8, 2012 4:04PM
Image: Oil derricks (© Comstock/Corbis)Exxon Mobil (XOM) wants to explore for oil in Iraq's Kurdistan region, and last year signed a deal with the Kurdistan government to begin the process. But the idea has infuriated Baghdad, creating a political wrinkle the company still hasn't ironed out.

The Iraqi government refuses to recognize deals that foreign oil majors strike with Kurdistan, and Iraq has pressured Exxon to drop the agreement it signed. It's now waiting for an answer, and then will decide whether Exxon should be allowed to bid in its next round of oil exploration licenses.

Some voices in the Iraqi government have been pushing for strict action against Exxon in order to curb other oil majors like Chevron (CVX) from pursuing similar negotiations with the Kurdistan Regional Government (KRG).


Resource conflict


Exxon's contract with the KRG rekindled a long-standing dispute between the Iraqi government and Kurdistan over oil rights. Kurdistan is estimated to hold over 40 billion barrels of oil and has been attracting increasing interest from exploration firms.


But partnering with Kurdistan raises the hackles of the Iraqi government. It usually blocks any player that has agreed to explore Kurdistan from bidding for its oil fields located in the south.


Kurdistan isn't rolling over. In an attempt to attract investments in the disputed territories, the KRG is negotiating production-sharing deals that are more lucrative than the contracts offered by the Iraqi government. Exxon became the first major oil company to get an agreement with the KRG toward the end of last year.


Exxon Avg Crude Oil and NGL Sales Price

Exxon is already involved in Iraq's giant West Qurna II oil field upgrades. The Iraqi government has hesitated in imposing penalties on Exxon, mostly to avoid jeopardizing future investments to develop the country's substantial oil resources.


The production from Iraq can help Exxon increase its liquids production, which has seen a slight decline over the past couple of years. The production from Iraq's low-cost fields can help the company improve its output levels as well as its operating margins.


Exxon Liquids EBITDA Margin

You can check the sensitivity of Exxon's stock to its crude oil & NGL sales price as well as liquids EBITDA margin by tweaking the trend-lines in the charts above. We are in the process of revising our $94 estimate for Exxon, which is at a 10% premium to the current market price.


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