Exxon, PetroChina, and West Qurna -1
Exxon Mobil Corporation (NYSE:XOM) is the operator at West Qurna -1 in northern Iraq and there have been speculations about Exxon Mobil Corporation (NYSE:XOM) selling some or part of its 60% stake in the $60 billion project. The business is one of those firms that has largely stayed away from Iraq’s central government and has preferred to work with the semiautonomous Kurdistan Region in southern Iraq, much to the anger of the central government.
Exxon Mobil Corporation (NYSE:XOM) and a Turkish state-owned firm have recently entered into an agreement with the Kurds, by-passing the central government, to develop fields in the region. Since the deal is rife with political tension therefore, I believe it is a risky venture by Exxon Mobil Corporation (NYSE:XOM).
PetroChina on the other hand, has avoided the politics but has shown its interest in joining ExxonMobil to develop West Qurna -1. PetroChina currently operates at Halfaya and is partnering with BP plc (ADR) (NYSE:BP) over the massive Rumaila field. The Chinese oil companies in general have been investing in oil and gas resources around the world, particularly in the relatively less regulated developing countries. In fact, PetroChina was the first foreign oil company to sign an oil service deal following the fall of Saddam Hussein.
However, as far as West Qurna-1 is concerned, PetroChina might not be getting any investment chance in the near future as Exxon has upped its annual expenditure in the giant field by $50 million to $1.65 billion. For PetroChina’s investors, I believe, contrary to some of the media reports, that the company is not going to play a dominant role in Iraq.
Despite the disputes with the central government, Exxon is still committed to the project in which Royal Dutch Shell plc (ADR) (NYSE:RDS.A) is the minority partner. As much as 39 new wells on the field are expected to start production this year as output will likely increase by 25% from the current levels to 600,000 barrels per day by the end of the current year and 900,000 barrels per day by 2015.
Iraq’s Future
The biggest challenge for Iraq at the moment is the security situation following the fall of Saddam Hussein’s regime. This was followed by intense sectarian violence and the conflict with the Kurds. The civil war in its neighbor Syria has now opened doors to more problems. The world was expecting greater things from Iraq as the downfall of Saddam should have caused a flood of foreign investment in the country’s oil sector but this still remains a distant objective.
Moreover, rampant corruption, lack of infrastructure and the inability of the local administration to award lucrative contracts to foreigners have made Iraq less attractive for big oil. This was also evident in the licensing auction held twelve months ago in which none of the leading oil firms showed any interest while Exxon, due to its relationships with Kurdistan’s government, was barred from the action.
However, Royal Dutch Shell plc (ADR) (NYSE:RDS.A)’s decision to start the massive gas project could herald a change of fortune for Iraq. Guy Chazan, the Financial Times Iraq specialist is optimistic. I believe that current steps are a modest move in the right direction; Iraq is still far off from its target. Currently, Iraq’s production stands at 3.15 million barrels per day, which it intends to increase by 135,000 barrels by the end of H1-2013. This shows an improvement from 2 million barrels per day nearly four years ago. It initially set an unrealistic target of 12 million barrels a day by 2017 which was later revised downwards to 8 million – 9 million barrels between 2017 and 2020, which I think, given the political uncertainty, is still very ambitious.
Conclusion
Exxon’s future is a little more uncertain and it is difficult to see a future where the company is getting considerable output from Iraq. The company is playing a central role over the dispute of oil reserves between Baghdad and Kurdistan region. While on one hand, it is showing interest in West Qurna-1, on the other hand, with the new deal, it has gone against the wishes of the central government. From this perspective, I believe Exxon is a risky investment.
However, the developments work particularly well for Royal Dutch Shell plc (ADR) (NYSE:RDS.A)’s investors and is in line with the company’s growth strategy — to gain greater foothold in the Middle East and Russia. The company is going to significantly increase its output from Iraq in the coming quarters. Moreover, once Iraq’s own fuel needs are covered, Royal Dutch Shell plc (ADR) (NYSE:RDS.A) is going to start exporting the fuel at higher prices which makes the project even more lucrative in the long run. For instance, the Basrah Gas project is going to meet the country’s LPG requirements by the end of 2014; after this, as output increases, Shell will start selling the fuel at higher prices in the international market.
Besides Basrah gas, another field called ‘Majnoon,’ in which Shell is the biggest operator with a 45% stake, could also start production “within two to three months” with a target of 175,000 barrels per day by the end of the current year. For Shell, while drilling in Arctic remains challenging, Iraq certainly looks more promising.
The article Shell Outpaces Exxon in Iraq originally appeared on Fool.com.
Sarfaraz Khan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Sarfaraz is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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