(XOM) Exxon Faces Iraq Ire

ExxonMobil Corporation (XOM) will be banned from participating in Iraq’s fourth oil and gas licensing auction scheduled to take place in May. ExxonMobil’s exclusion from the auction is mainly due to the contracts that it signed with the country’s semi-autonomous region of Kurdistan.

ExxonMobil turned out to be the first among the oil giants to gain entry into Kurdistan, after it signed a deal in mid October 2011 to explore six areas. But the signing of this contract has angered the Baghdad government.

Iraq’s central government continues to assert its authority over the energy deals inked within its borders in the midst of continued lack of legislation for the sector. The Iraqi government also considers all deals signed with the Kurdistan Regional Government (KRG) as unacceptable. On the other hand, the KRG states that all deals it has signed conform to the country’s new constitution.

Controversies heated up and ExxonMobil was barred from taking part in the next oil and gas bidding round, in which Iraq intends to auction 12 prospective exploration blocks of which 7 are estimated to hold natural gas, while 5 are believed to contain crude. Baghdad has blacklisted all the companies that continue to have deals with Kurdistan and does not allow them to work elsewhere in Iraq.

Kurdistan believed that ExxonMobil’s presence would make the entry of other majors, such as France’s Total SA (TOT) easy in Iraq.

This new bid round is estimated to augment Iraq’s reserves by around 10 billion barrels of crude oil and another 29 trillion cubic feet of gas. The fourth auction has already been postponed twice due to the arguments between the explorers and the government who want contracts to be offered on a production-sharing type and fixed-fee service, respectively.

For the upcoming licensing auction, Baghdad is adamant in offering service contracts in which the companies pay a fixed fee for the amount of oil they generate. It has rejected to offer production sharing contracts, in which the oil company owns a portion of the oil in the ground and may profit from its sale.

Earlier, Iraq’s energy minister had said that ExxonMobil would have to choose from among its deals to explore six areas in Kurdistan and its central-government pact to develop barrels-per-day of the West Qurna Phase, Iraq’s second-largest field with proven reserves of more than 8.7 billion barrels.

ExxonMobil holds a Zacks #2 Rank, which is equivalent to a Buy rating for a period of one to three months. For the long term, we maintain a Neutral recommendation on the stock.

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