Robert M. Cutler

The recent end of the ExxonMobil West Qurna 1 oil field involvement, a significant event in the industry, has captured widespread attention. West Qurna 1, situated onshore in Iraq, is a supergiant field and among the world’s largest, boasting around 43 billion barrels of oil that can potentially be extracted.

ExxonMobil’s departure from this field signifies a major shift, especially after relinquishing its last license in Iraqi Kurdistan in April 2022, specifically for the Pirmam gas block. The company’s historical presence in Iraq dates back to the early 1930s under its original name, Standard Oil of New Jersey, which later evolved into Esso, then Exxon, and today ExxonMobil.

The relationship between ExxonMobil and the Iraqi government has been strained since the company ventured into Iraqi Kurdistan in 2011. This move, led by then-CEO Rex Tillerson, faced opposition from both the US State Department and Baghdad. At that time, Baghdad viewed direct agreements with the Kurdistan Regional Government (KRG) as illegal. ExxonMobil’s gamble in this region proved to be unfruitful. The result is their complete withdrawal from Iraq, with minimal returns on their substantial investments.

The newly formed agreement regarding the ExxonMobil West Qurna 1 exit has garnered significant interest. Discussions about such a deal had been circulating in the financial media for over three, antedating the global economic and social lockdowns of the early 2020s. During these discussions, Chinese corporations like CNPC (parent company of PetroChina) and CNOOC were frequently mentioned as potential buyers of ExxonMobil’s stake.

Originally taking the lead contractor role in 2010, ExxonMobil faced challenging contractual terms amidst ongoing political instability in Iraq. The contract for their exit provides for their share to be transferred to the state-operated Basra Oil Company (BOC). Efforts to sell this stake by ExxonMobil had been ongoing since early 2021. Production levels at the field have fluctuated, but recent data suggests an output capacity of roughly 500,000 barrels per day.

In 2022, the Iraqi government authorized the sale of the ExxonMobil West Qurna 1 oilfield share to BOC for a sum of $350 million. The BOC, overseeing various oil fields and licensing matters, has yet to finalize tax-related issues with ExxonMobil following their exit. These tax matters may be resolved through direct negotiations or arbitration.

Following the exit of ExxonMobil, PetroChina, holding a 32.7 precent stake, will become the largest shareholder. BOC might redistribute a portion of the acquired stake from ExxonMobil to PetroChina, but this will not alter the core dynamics, with the Chinese firm already poised to assume operational control after the ExxonMobil West Qurna 1 departure.

China’s role in the development and operation of the field was already significant before this transition. PetroChina’s stake had been increasing over the years, and other Chinese companies had progressively taken on substantial contract-based tasks in the field. A key indicator of China’s growing influence was the awarding of a $121 million engineering contract to the China Power Engineering Consulting Group Corporation (CPECC), a China Energy Energy Corporation subsidiary, in the late 2010s.

The initial signs of the ExxonMobil West Qurna 1 exit became particularly apparent when the company opted not to invest in the Common Seawater Supply Project (CSSP). The CSSP, crucial for desalinating seawater to inject into aging oil fields in southern Iraq, aims to sustain and eventually boost production in these mature fields. However, ExxonMobil’s reluctance to engage with this project was a culmination of its prolonged disagreements with the Iraqi government mentioned agove.

Subsequently, contracts for the CSSP were awarded to Hyundai Engineering and Construction of South Korea, and later to TotalEnergies of France. While the CSSP was not directly linked to West Qurna 1, ExxonMobil’s hesitancy to proceed was a significant indicator of its strained relations with the Iraqi authorities.

For ExxonMobil, the withdrawal from West Qurna 1 signifies a strategic shift in its global energy portfolio. This move also cements the role of PetroChina, and by extension China, as influential players in Iraq’s energy sector. That development, in turn, aligns with China’s broader strategic goals of securing energy resources and bolstering its position in the international energy market.

This advancement is a notable achievement for PetroChina, showcasing its growing technological prowess and deepening involvement in the dynamic network of energy collaboration and competition in the Middle East. These changes in alliances and partnerships within the global energy landscape has profound implications for energy security and market dynamics, warranting thorough analysis, which I will address in a subscription-only article later this week.

It is important to clarify the relationship between the West Qurna 1 and West Qurna 2 oil fields. While they are part of the same geological structure, West Qurna 2 is not the second-phrase development of West Qurna 1. It is a distinct oil field with its own reserves, contracts, development team, and management structure. Each field presents unique challenges and operates independently.

West Qurna 2, which is believed to contain 13–14 billion barrels of recoverable reserves, is co-owned by Lukoil Mid-East of Russia and Iraq’s Ministry of Oil, with Lukoil overseeing its operations. The production from West Qurna 2 has surpassed initial expectations. Originally projected to reach a production rate of 400,000 barrels per day (bpd) later in the decade, it achieved this milestone earlier in the year and has since increased to 480,000 bpd.

Recently, Lukoil and the Basra Oil Company (BOC) agreed to expand the development of West Qurna 2 significantly, specifically regarding the Yamama formation, aiming to boost production further. It is now anticipated that peak production could double the current rate by the end of this decade, maintaining this level until 2040 before experiencing a rapid decline.

Iraq’s overall oil reserves are substantial, estimated at 144 billion barrels. In 2022, the country’s production of crude oil and natural gas liquids (NGLs) rose to 4.5 million bpd, marking a 9 percent increase from the previous year. This growth reflects Iraq’s strategic importance in the global oil market and underscores its potential to influence global oil supply dynamics.

The developments in both West Qurna 1 and 2 are reflect the evolving nature of the oil industry, where geopolitical factors and strategic partnerships shape outcomes. As Iraq continues to play a key role in the global energy landscape, the shifts in operational control and investment in its oil fields are indicative of broader trends in energy politics and market forces.

The evolving scenario in Iraq’s oil sector, particularly in the West Qurna fields, offers valuable insights into the complexities of managing vast energy resources in a politically sensitive environment. It also highlights the changing nature of international energy investments, where traditional Western dominance is increasingly challenged by emerging players from other regions, notably China and Russia.

I have written on these topics elsewhere, and will incorporate the key takeaways of that work into the two subscription-only articles later this week. One of these articles will directly address the share prices of ExxonMobil and PetroChina in the equity markets, including fundamentals and chart analysis as I have done previously for such companies as Marathon Oil and Brazil’s Petrobras.

In conclusion, the transitions occurring in Iraq’s oil sector, exemplified by the shifts in West Qurna 1 and 2, are more than mere corporate maneuvers. They are symptoms of a realignment of global energy strategies, reflecting the dynamic interplay of geopolitical, economic, and technological factors that continue to redefine the global energy landscape. ExxonMobil’s withdrawal and the rising influence of Chinese corporations underscores the fluid nature of global energy geoeconomics.

The situation illustrates the challenges multinational corporations face in politically volatile regions. Investors have to take account of these risks in placing their investments, whether in physical assets or in equities themselves. In conclusion, the ExxonMobil West Qurna 1 ownership and control transition, from a Western major into Chinese hands, is a microcosm of such broader implications for the international energy landscape. It has lessons not only for the industry but also for savvy investors.

As mentioned above, I will release two subscription-only articles will be later this week, one addressing exactly these issues, and the other focusing on the two companies concerned here.

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