The Iraqi government Thursday signed a deal with a consortium led by U.S. oil giant Exxon Mobil Corp. to develop a major oil field in southern Iraq, marking the first entry by an American-dominated group into Iraq’s oil industry since it was nationalized in 1972.
The deal coincides with a flurry of activity this week that suggests major oil companies are finally poised to return to Iraq, more than six years after the U.S.-led military invasion raised firms’ hopes of gaining access to some of the world’s largest and most underdeveloped oil reserves.
This week, a group led by Italy’s Eni that includes the U.S. company Occidental Petroleum Corp. initialed a preliminary agreement, and China National Petroleum Corp. and Britain’s BP finalized an accord to develop oil fields in the south.
The deals are service contracts. That means the consortia will invest money to improve the yields of the fields and receive in return a fixed fee. The agreements came after the oil companies dramatically lowered their fees to match those offered by the Iraqi government at a public auction in June.
The Exxon Mobil-led consortium, which includes Royal Dutch Shell, will receive $1.90 per barrel of extra oil produced, down from the $4 it asked for in June.
The consortium, 80% controlled by Exxon Mobil, will invest $25 billion to improve the yield of the West Qurna 1 field from 290,000 barrels a day to 2.3 million barrels a day, Oil Minister Hussein Shahristani said at the signing ceremony.
Major oil companies have been eyeing Iraq since the U.S.-led invasion in 2003, but the Iraqi government has acted slowly to encourage them. That changed this year as falling oil prices and lagging exports put a squeeze on the national budget. But the June auction fizzled after it emerged that Iraq wasn’t willing to pay the fees demanded by the oil firms.
Getting the companies to accept lower fees is a major victory for the government, said Peter Kemp of New York-based Energy Intelligence.
“If the oil companies can deliver here, the Iraqis have struck a brilliant bargain: They will reap more than 95% of the reward,” he said. “Oil companies are not happy, but they feel they have to get in, whatever the costs and risks, because the potential of Iraq’s reserves is unmatched anywhere else.”
There are some doubts about the legality of these contracts, because the Iraqi parliament has still not passed new oil legislation. That’s a risk the companies appear willing to take to gain access to Iraqi oil, Kemp said.