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Analysis: Implications of the Chevron KRG deal

by Patrick Osgood on Jul 26, 2012

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Iraqi Prime Minister Nour Al-Maliki has been dealt a blow by Chevron's KRG entry. GETTY IMAGES
Iraqi Prime Minister Nour Al-Maliki has been dealt a blow by Chevron's KRG entry. GETTY IMAGES

In reaction to Chevron’s purchase of two oil blocks in the Kurdish region of Iraq, the central government’s Oil Ministry has disqualified the US supermajor from future contracts in the rest of the country.

"In accordance with Oil Ministry policy based on the constitution, the Oil Ministry announces the disqualification of Chevron company and bars it from signing any deals with the federal Oil Ministry and its companies," Iraq’s Oil Ministry said in a statement posted on its website on Tuesday.

Going further, the Ministry said Chevron should feel “ashamed” at having “totally failed the test” of its reputation and credibility.

Chevron announced on 19 July that it will buy Reliance Exploration & Production's 80% interest and operatorship of the production sharing contracts (PSCs) covering the Rovi and Sarta blocks. The blocks are located north of Erbil and cover a combined area of approximately 490 square miles (1,124 square kilometers).

Chevron will already have put an end to its ambition to develop the 4.4 billion barrel Nassiriya oil field – which would have been accompanied by the development of a 300,000 bpd export refinery – leaving fellow contenders Nippon Oil, Spain’s Repsol, Italy’s Eni to continue negotiations with Baghdad.

The confirmed entry of Chevron has also dealt Iraqi Prime Minister Nour Al-Maliki a blow in his campaign against Exxon’s Kurdish contracts, and further highlights the attractiveness of the terms on offer from the KRG relative to those from the central government after the Oil Ministry's fourth fidding round fiasco in late May.

Chevron had a long-standing relationship with the Iraqi government, having started a technical assistance program in Iraq in 2003. The company had pre-qualified to bid in the fourth round auction, but declined to bid.

It is, however, easy to overplay the significance of the Chevron move.

Unlike Exxon, Chevron has no prior interests in south Iraq, save for a commitment to take liftings of Iraqi crude, which the Oil Ministry did not mention. The blocks are not in disputed territory, unlike three of the six blocks awarded to Exxon, which have tied Rex Tillerson’s company to Kurdish territorial maximalism as well as the dispute over oil policy.

Reuters has reported an acquisition cost of $200 million. The price reflects that Kurdish oil assets still command a significant political risk penalty, a fact baked in to the share prices of many independents exploring in the region. Rovi and Sarta remain in the early stages of appraisal. Reliance has an announced policy of reducing its exploration exposure in favour of currently producing assets.

Overcoming Exxon’s concerns probably took a lot of concessions from the KRG. The Chevron deal is not a power play by a putative proxy for US foreign policy. Instead, it is a tentative toe in the water.

RISK

Another entrant may well be Total. The company’s expression of interest in the region, recently drew a thinly veiled rebuke from Maliki.

The French oil major is thought to have cast its eye over several blocks in the region, including Marathon Oil’s interests at the Harir, Safin, Sarsang and Atrush blocks. Total has also been connected with blocks currently operated by Canada’s WesternZagros. In either case, again an oil major is looking to take a modest initial interest.

This is because blocks have significant potential upside, but are also risky. Despite moves to have the Iraqi Parliament again vote on an oil law, the prospects of one passing are as dim as they ever have been. The irony for Baghdad is that this, and the difficulty of doing business in the South, is pulling large oil companies into the Kurdish region, perhaps more readily than if oil policy was regularized: it’s sometimes forgotten that the South’s oil deals also require eventual parliamentary approval.


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