Did Exxon Mobil Find Opportunity In Northern Iraq?

Mar. 5.12 | About: Exxon Mobil (XOM)

ExxonMobil (NYSE:XOM) is typically known to be a conservative company. While the company engages in certain risky ventures due to the nature of its business, it usually stays away from investments that might result in a huge loss, or even worse, cause an international conflict.

In 2011, ExxonMobil got into negotiations with the government of Kurdistan (the semi-autonomous state in Northern Iraq) for oil exploration and drilling in the land. The local government of Kurdistan even went as far as to say that a deal was signed between the two parties. Here is the problem: the central Iraqi government is upset with ExxonMobil because it says that the company had to ask for permission from the central government before conducting business with the semi-autonomous state. While Kurdistan is part of Iraq, it has its own flag, police and military force, and it even prints money and issues passports even though the last two are yet to get recognized outside of Iraq.

The central government of Iraq has absolutely no control in Kurdistan. In fact, the central government doesn't even have a soldier there and it lacks public support who are mainly of Kurdish and Turkish nationalities. If the Iraqi government chose to send troops and take over Exxon's facilities, it wouldn't be able to do so without risking a new civil war in the country. Because the US got rid of Saddam, locals feel thankful to the USA, and American troops receive the highest level of local support there within Iraq. As a result, in order to keep things the way they were, even the US military decided to stay out of Northern Iraq for the most part.

So there is no way the central Iraqi government can actually stop an agreement between Northern Iraq's local government and ExxonMobil unless it wants to create another civil war in the country, which it doesn't. However, there is more to the story. ExxonMobil also has agreements with the central Iraqi government for the oil fields south of Iraq. If Exxon signs a contract with the Kurdish government, the Iraqi government can cancel the agreements regarding the oil fields in Southern Iraq. In this case, Exxon would have to pick between one of the two opportunities, either Southern Iraq or Northern Iraq.

If ExxonMobil enters onto the Iraqi government's blacklist, it might not receive any deals in the country anymore. This might result in a big blow for the company. Then how come Exxon is taking such a risk? Is it too desperate for oil reserves, or does the company know something others don't know? I would think that oil reserves in Northern Iraq must be rich in both quality and quantity. Otherwise Exxon wouldn't take such a high risk, and the Iraqi government wouldn't be so outraged about the whole thing either.

And this is not the complete story either. If ExxonMobil chooses to let go of the deal in Northern Iraq and focus on the south, it will have to join a consortium of multiple oil companies and share revenues with them all. However, in Northern Iraq, the company will be all alone to take all revenue (except for the government's share) as no other large company has been brave enough to go for the oil reserves in Northern Iraq. The interesting thing is that Northern Iraq is far more stable, both politically and militarily, than Southern Iraq.

The Iraqi Ministry of Oil already started to take action against Exxon and declared that Exxon was no longer the project leader for an ongoing oil project in Southern Iraq. ExxonMobil spent $900 million for the projects in this part of Iraq already and expects to help increase Iraq's overall oil production from 2.9 million barrels per day to 12.5 million barrels per day. About 40% of the country's oil reserves are thought to be in Northern Iraq.

Mr. al-Shahristani (spokesman for the Iraqi government) has previously said Exxon would have to choose between its deal to explore six areas in Kurdistan and its central-government contract to develop the 370,000 barrel-a-day West Qurna Phase 1, Iraq's second-biggest field. It has proven reserves of more than 8.7 billion barrels.

So there are multiple main questions about the issue which we will not have answers to for a while:

1) What is ExxonMobil thinking when it risks losing projects in Southern Iraq for the sake of projects in Northern Iraq?

2) Will the Iraqi government really kick ExxonMobil out of projects in Southern Iraq?

Exxon is good about staying quiet about what it's doing. There were several cases where the country discovered large quantities of oil reserves but kept it as a secret from everyone else for a long time. For example, last year the company discovered 1 billion barrels of oil in Gulf of Mexico and kept quiet about it for more than a year. This was the largest oil discovery ever in Gulf of Mexico.

Now there is a very high chance that Exxon already found some great opportunities in Northern Iraq. We will have to wait and see. I still rate the company as buy for long term investors.

Sources:

1. http://www.reuters.com/article/2012/02/27/us-exxon-kurdistan-idUSTRE81Q11820120227

2. http://blogs.wsj.com/source/2012/02/13/exxon-mobil-can-shrug-off-iraq-punishment/

3. http://online.wsj.com/article/SB10001424052970204795304577220572807271132.html

4. http://www.bloomberg.com/news/2012-02-13/iraq-may-bar-exxon-from-oil-auction-if-it-pursues-kurdistan-deal.html

Disclosure: I am long XOM.