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Exxon Mulls Exiting Iraq's West Qurna

XOM RDS.A

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ExxonMobil Corporation (XOM - Analyst Report) is deliberating upon an exit from southern Iraq’s giant oil field − West Qurna-1. The U.S. behemoth plans to sell its 60% stake in the West Qurna-1 project mainly due to anticipated narrow profits from the planned $50 billion venture.

Located in the south of Iraq, near the city of Basra, the West Qurna oil field has estimated reserves of 8.7 billion barrels. Earlier, in 2010, ExxonMobil, along with its minority partner Royal Dutch Shell Plc (RDS.A - Analyst Report), signed an agreement for the project with a targeted output of 2.825 million barrels per day by 2017.

By the end of 2011, the parties ended up investing just under $1 billion. Of Iraq's overall production of slightly over 3 million barrels per day, West Qurna-1 currently delivers about 400,000 BPD.

The slow pace of the project was mainly due to infrastructure bottlenecks, payment delays and the ongoing political issues. Other factors like tough terms and conditions accompanied with weak margins on the country’s service fee contracts are also causes of concern for the foreign operators.

Again, Exxon's participation in West Qurna remains contested as the Iraqi authority is concerned over the company’s venture to tap reserves in the country's semi-autonomous Kurdistan region. 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 annoyed the Baghdad government, which considers the pact as illegal.

The Iraqi government maintains its autocratic stand over all energy deals signed within its borders in spite of an utter lack of legislation within the sector. The Iraqi government also considers all deals signed with the Kurdistan Regional Government (KRG) as unacceptable. On the other hand, KRG states that all deals it has signed conform to the country’s new constitution.

Hence, ExxonMobil is interested in exiting the West Qurna field and instead head towards Kurdistan. The political imbroglio in the region has put off the oil major. The company is now focusing on expanding its footprint in Kurdistan. Drilling operations are scheduled to commence in a few months.

We maintain our long-term Neutral recommendation on the stock.

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