Market Overview

Iraq Tells Exxon Mobil, "No Oil For You"

Exxon Mobil (NYSE: XOM) has been told by Iraq that it will not be able to bid on the next round of oil and gas exploration contracts in that country due to an exploration deal it signed with Kurdistan's regional government. The decision has been confirmed by Iraq's Deputy Prime Minister for Energy Hussein al-Shahristani.

According to CNN, the decision by Iraq is no surprise. The country is planning to increase its oil production capacity to approximately 12 million barrels each day by the end of 2017. The current capacity is just over 3 million barrels a day. Up to now, however, it has not been willing to share those profits with any western companies that are doing business in Iraq. Those companies' take has been limited to $2 per barrel, regardless of the market price, Oppenheimer oil analyst Fadel Gheit said.

Gheit also said that XOM's deal with Kurdistan is pretty much the same as walking away from the bidding, and can be seen as much as XOM sending a message to Iraq as it is Iraq taking a tough stance. However, it is only a couple of years ago that Iraq was handing out big contracts to some of the biggest oil companies in the world, from Total (NYSE: TOT) in France and BP (NYSE: BP) in the UK to Royal Dutch Shell and Marathon (NYSE: MRO).

"Nobody is making money there," Gheit said. "They all hope to make a lot of money, but so far they have seen only the appetizer, not the full meal." Other companies might follow Exxon's lead, he said.

The fact that Iraq is opposed to anyone striking a deal with Kurdistan was well known and, in truth, Exxon Mobil will have known the potential problems and pitfalls before putting pen to paper on any deal. There will have been numerous meetings and, presumably, XOM has a plan in place.

Still, the Iraqi central government has yet to finalize any sort of oil law establishing how the royalties will be cut and distributed.

“We really want to see Exxon works in Iraq , it's the largest oil company and they can do a lot to develop Iraqi fields," said al-Shahristani in that interview. "However, it is more important to abide by the Iraqi laws and they've been told that in a very clear terms and they are aware of our options."

Back on February 3, XOM VP David Rosenthal said at a conference that global economic recovery was slower in the fourth quarter largely due to weakness in Europe. GDP improvement in the United States and Japan was tempered by negative growth in the European Union. US real GDP growth was 2.8%, improving from 1.8% in the third quarter, while Japan delivered another quarter of positive growth as post-earthquake recovery continues. “Turning now to the fourth quarter financial results as shown on slide 4. Exxon Mobil's fourth quarter 2011 earnings excluding special items were $9.4 billion, an increase of $150 million from the fourth quarter of 2010. Our effective tax rate for the quarter was 47%. Earnings per share for the quarter excluding special items were $1.97, up $0.12 from a year ago. The Corporation distributed more than $7.2 billion to shareholders in the fourth quarter through dividends and share purchases to reduce shares outstanding. Of that total, $5 billion was utilized to purchase shares.”

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