Exxon Mobil has signed oil and gas exploration deals with Iraq's Kurdistan, an adviser to the Kurdish government said on Friday, prompting warnings from Baghdad that the bold step could jeopardize the company's future in the country.
Exxon declined to comment, and experts speculated the move could indicate Baghdad and the Kurdish leaders are nearing agreement on new rules for oil companies seeking to tap into Iraq's vast oil reserves.
A senior Iraqi oil official said the central government knew that Exxon was in talks to explore in the region and had warned that any deal with the Kurdish Regional Government (KRG) could result in the termination of Exxon's deal to develop the giant West Qurna field.
Baghdad and the government of the semi-autonomous northern Kurdish region have long-standing disputes over oil-fields. Baghdad deems contracts between the KRG and foreign oil companies to be illegal.
"The KRG has for the last few months been in discussions with a number of major oil companies. This resulted in the recent signing by Exxon Mobil of contracts to explore in six blocks," KRG adviser Michael Howard said.
He did not disclose details of the contracts or the locations of the blocks.
Kurdish leaders are seeking to increase output in the region from its current level of about 120,000 barrels per day and say they have fields holding at least 45 billion barrels of oil.
Iraq's total oil production is expected to reach about 3 million bpd by year-end.
Abdul-Mahdy al-Ameedi, director of the Iraqi oil ministry's contracts and licensing directorate, said the government sent three letters to Exxon Mobil last month.
"All three letters were clear," Mr. Ameedi told Reuters. "The signing of any contract with the Kurdistan Regional Government without the approval and the knowledge of the Iraqi central government and the oil ministry will be considered illegal."
Mr. Ameedi said he could not confirm that Exxon had signed the contracts.
Exxon, with Royal Dutch Shell, clinched a 20-year deal in 2009 to develop West Qurna Phase One, an 8.7-billion-barrel field in southern Iraq, beating out Russian, French and Chinese rivals.
"The company, according to Iraqi law, could be disqualified from having any contracts or any work with the oil ministry and it could result in the cancellation of the West Qurna Phase One contract, (with Exxon) to bear all the legal consequences of their action," Mr. Ameedi said.
"West Qurna Phase One contract terms are very clear, and a clause in the service contract says if the company violates Iraqi laws then its contract could be terminated," he said. "Any deal between the Kurdish region and Exxon Mobil would be a clear violation of the West Qurna contract."
Despite Baghdad's immediate reaction, analysts said Exxon's move could indicate an agreement is close on a long-awaited hydrocarbons law, paving the way for more deals in the oil-rich north.
"It's possible they got some kind of special exemption, but what I think is more likely is that there has been some sort of significant movement on the hydrocarbons law … I think that someone must have quietly given the nod," said Saket Vemprala of Business Monitor International.
"They would be crazy to do this if they hadn't got assurances from Baghdad."
Other analysts said Exxon may have made a calculated decision to push Baghdad to set a national policy on oil development that helps open the Kurdish region.
"In our view, the temptation has become too great for Exxon to resist," said Phil Corbett, analyst with Royal Bank of Scotland. "Effectively, Exxon is calling Baghdad's bluff, presumably believing that it won't lose its West Qurna project interest with a move into Kurdistan."
The Iraqi government and the KRG have been unable to agree on a hydrocarbons law. The Iraqi cabinet in August approved a draft law that would have given the Arab-dominated central government more control over the nation's oil reserves. The decision was harshly criticized by Kurdish officials.
In late October, Iraqi Prime Minister Nuri al-Maliki and KRG Prime Minister Barham Salih agreed to work on amendments to a 2007 version of a draft hydrocarbons law agreed by all political blocs, or to adopt the 2007 bill as is, by year-end, potentially defusing a major row, Iraqi officials said.
In June, deputy prime minister Hussain al-Shahristani, who oversees Iraq's burgeoning oil sector, said West Qurna Phase One production had hit 350,000 barrels per day and was expected to reach 400,000 bpd by year-end.
Exxon is running six rigs and gross production was about 370,000 barrels per day from West Qurna, the company told analysts last month.
Exxon raised the production plateau target for West Qurna to 2.825 million bpd last November after adding new reserves to the area covered by their original development contract.
The original plateau target for Exxon when the contract was signed in January 2010 was 2.325 million bpd in six to seven years.
Guy Caruso, a senior adviser in the energy program at the Washington-based Center For Strategic and International Studies, said Exxon's move into Kurdistan was likely a play for reserves. Under its current contract with Baghdad, Exxon cannot book oil reserves from West Qurna.
"This is part of the access issue," Mr. Caruso said. "There aren't a lot of places that have such prospective reserve development."