Bloomberg News

Exxon’s Tillerson Follows Ex-BP CEO Hayward Into Kurdish Bonanza

November 25, 2011

Nov. 14 (Bloomberg) -- Exxon Mobil Corp. Chief Executive Officer Rex Tillerson is playing catch-up with a former rival, ex-BP Plc CEO Tony Hayward, in a race to tap oil riches in Iraq’s Kurdish region that dwarf the deep-water Gulf of Mexico.

Exxon, the world’s largest company by market value, signed a contract to drill for crude in the Kurdish-controlled north of the country on Oct. 18, Ashti Hawrami, the natural resources minister for the Kurdistan Regional Government, said yesterday during an oil conference in Erbil, Iraq. Hayward’s Vallares Plc has a six-week head start with its $2.1 billion agreement in September to acquire Turkey-based Genel Energy Plc, the biggest oil producer in Kurdistan.

Home to about 40 percent of the Iraqi nation’s 115 billion barrels of reserves, Kurdistan has attracted keen interest from small- and mid-sized foreign explorers since the fall of Saddam Hussein in 2003 opened the region for the first time in decades. The biggest international producers such as Exxon had steered clear of Kurdistan to avoid getting in the middle of a long- standing dispute between Iraq and Kurdish leaders over how to divide oil revenue.

Iraq’s central government said it’s settled the dispute with an agreement that would open the door to international oil companies operating in the Kurdish region without penalty from Iraq, according to a Nov. 12 report by Radio Free Europe/Radio Liberty, the U.S. government-funded news outlet.

Expanding Production

Tillerson has been expanding Exxon’s holdings from the Russian Arctic to the Texas-Mexico border to reverse a production shortfall that saw third-quarter output drop the most in three years. The company’s willingness to sign a contract with Kurdish authorities may presage a flood of investment and acquisitions not only in the northern region but all over Iraq as perceptions of political and security risks diminish, said Gianna Bern, president of Brookshire Advisory & Research Inc., a Chicago-based risk-management adviser to the energy industry.

“Iraq is open for business,” Bern said. “If Exxon can advance its efforts in Iraq, then opportunities for all the major oil companies to invest are going to increase significantly over the next several years.”

Kurdish authorities have offered international oil producers more profitable terms than those given by Iraq’s central government. In Kurdistan, foreign explorers are granted a share of the oil pumped from each well. That’s a richer prospect than the service contracts with Iraq’s government for developing southern oilfields, which give foreign companies pre- set fees of as little as $1.90 a barrel.

Tensions with Iraq

Exxon riled some members of the Iraqi government by signing its exploration contract with Kurdish leaders before the oil- sharing agreement with Iraq had been finalized. After Exxon’s contract was reported Nov. 11, Abdul-Mahdy al-Ameedi, head of licensing at the Iraqi central government’s Oil Ministry, threatened to cancel the company’s existing contracts to extract oil in Iraq’s southern fields.

A day later, Adal Barwari, Prime Minister Nouri Kamil al- Maliki’s adviser on Kurdish affairs, told Radio Free Europe/Radio Liberty that the central government and the Kurds reached “mutually acceptable” solutions to long-standing disagreements over oil, territory and Kurdish armed forces.

Alan Jeffers, a spokesman for Irving, Texas-based Exxon, declined to comment yesterday in an e-mailed statement.

Hayward’s Kurdish Plan

Hayward, forced out of London-based BP last year after the Deepwater Horizon disaster that killed 11 rig workers and spilled more than 4 million barrels of crude in the Gulf, plans to spend about $725 million to develop Genel’s six Kurdish fields. An equal amount will be devoted to buying up some of the 41 companies drilling for crude and natural gas in the Kurdish region, Hayward said during a Sept. 8 meeting with reporters in Istanbul.

“We will be participating in the inevitable consolidation among the 41 companies in the Kurdish region,” he said. “We want to have the dominant position in the region by building a bigger company.”

Vallares, a so-called blank-check company founded by Hayward, financier Nathaniel Rothschild and banker Julian Metherell, said in a Nov. 3 statement that it plans to change its name to Genel Energy Plc, pending approval by shareholders.

Kurdistan holds as much as 45 billion barrels in crude reserves, Hawrami said in September. That’s more than double the 20.4 billion barrels of crude the U.S. Energy Department estimates lay beneath the sea floor in the deep-water Gulf of Mexico.

Unexploited ‘Vast’ Reserves

Iraqi oil production surged to a 9-year high of 2.73 million barrels a day in September, according to data compiled by Bloomberg. Output fell 2.7 percent to 2.655 million barrels a day last month after attacks on pipelines in the southern part of the country disrupted transport.

“Iraq may be one of the few places left where vast oil reserves have barely been exploited,” the U.S. Energy Department’s Energy Information Administration said in a 2010 report on its website.

Tillerson, a University of Texas-trained engineer, is spending $37 billion this year to drill wells, construct gas- export terminals and expand oil refineries as he seeks new sources of growth for Exxon. In the past year-and-a-half, Tillerson signed a $3.2 billion deal with Russia’s OAO Rosneft to explore the Black Sea and Kara Sea for crude, and devoted another $40 billion to acqusitions in gas-rich U.S. shale formations.

‘Binding Contract’

So far, Exxon has been mum about its plans for Kurdistan, refusing even to confirm the existence of an agreement.

“It’s a binding contract,” Hawrami told reporters yesterday at the Kurdistan-Iraq Oil and Gas Conference in the regional capital city Erbil.

The agreement entitles Exxon to explore six blocks, including Al Qush, Bashiqa, Tirman, Betwata, Qurna-Hanjeer and a sixth area along the border with Iran, he said. Hawrami didn’t disclose any details about how much Exxon has pledged to spend on seismic mapping, exploratory drilling or training local residents to work in the oilfields.

“Iraq is considered a frontier region in the oil industry,” said Brookshire Advisory’s Bern, a former BP crude trader and author of ‘Investing in Energy: A Primer on the Economics of the Energy Industry. (2011)’ “It’s still a risky place to operate but if Exxon can advance its efforts there, it’ll be a pretty significant feather in its cap.”

--Editors: Susan Warren, Andrew Hobbs

To contact the reporter on this story: Joe Carroll in Chicago at jcarroll8@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net


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