Battle looms between US oil giant and Iraq

Baghdad threatens to throw ExxonMobil out after Kurdistan deal

A high-stakes battle over Iraq's oil commenced yesterday after Baghdad threatened to throw ExxonMobil, one of America's most powerful companies, out of the country eight years after the US army toppled Saddam Hussein.

Baghdad was retaliating after the world's biggest company signed a landmark deal to explore for oil and gas in six blocks of the semi-autonomous Kurdistan region in northern Iraq.

The deal will see Exxon become the first "supermajor" to set up in the region as well as the first oil company to operate in both Iraq and the portion of Kurdistan that is situated in Iraq.

Abdul-Mahdy al-Ameedi, director of the Iraqi oil ministry's contracts and licensing director, said yesterday he had warned Exxon of "dire consequences" last month if it signed these exploration deals with the Kurdistan Regional Government (KRG).

"Exxon Mobil could face disqualification and the termination of its contract with the oil ministry," to develop the West Qurna field in oil-rich southern Iraq, Mr Ameedi added.

A source at one of the supermajors said: "Baghdad has always said very vociferously that if anybody in Iraq signs a deal with Kurdistan they will get kicked out. We got quite a surprise when we found out that Exxon had gone ahead and done that and it will be interesting to see what happens."

Yesterday's threat dented hopes that Baghdad was close to formalising existing contracts in Iraqi Kurdistan as part of a broader agreement on oil revenues across the whole country. The move is likely to further discourage BP and Shell which both have operations in southern Iraq but no plans to move into Kurdistan.

Analysts said that both Exxon and the Iraq government were playing a high-stakes game, as Baghdad attempts to balance the need to grow its own oil industry with the desire to rein in the power of Kurdistan.

Samuel Ciszuk, an oil analyst at IHS Global Insight, said: "This deal is the worst possible headache for the Iraq government."

Mr Ciszuk added: "Exxon is developing one of the biggest oil projects in the south and is the lead on a huge water injection system that will be used by oil companies across the region. To kick Exxon out would be a very powerful statement because it would be would effectively derail most of its production boosting programme for a good year or two."

Phil Corbett, at Royal Bank of Scotland, said: "The temptation has become too great for Exxon to resist – in effect Exxon is calling Baghdad's bluff, presumably believing that it won't lose its West Qurna project interest with a move into Kurdistan."

Iraq is presently producing about 2.8 million barrels a day but hopes to boost this to 12 million by 2017 – a level which experts believe to be hugely ambitious, even with Exxon's contribution.

However, although Iraq is keen to tap the huge revenues that would flow from a surge in oil production, it is wary of Kurdistan making too much money from its oil industry because that would increase the region's power and, in turn, its claim for autonomy, Mr Ciszuk said.

Kurdistan is estimated to hold about 45 billion barrels of oil and up to 200,000 cubic feet of gas and a number of oil explorers – including the latest venture of the former BP chief executive Tony Hayward – have piled in to the region recently.