* Shahristani says sanctions on Exxon possible by year-end
* US urged companies not to cut deals before national law
* Industry insiders say Exxon gambled, had poor advice
(Adds fresh U.S. State Department quotes, background,
By Simon Falush and Carolyn Cohn
LONDON, Nov 22 Iraq said it could slap
sanctions on U.S. oil major Exxon Mobil (XOM.N) before the end
of the year for signing a deal with its semi-autonomous Kurdish
region without approval from Baghdad or blessing from
At risk for Exxon is its contract to develop a huge
oilfield in southern Iraq after it agreed to six exploration
deals with the northern Iraqi Kurds, who are in dispute with
the Baghdad government over oil and land rights.
"The Iraqi government is considering sanctions, and will
inform the company before they make a public announcement,"
Deputy Prime Minister for Energy Hussain al-Shahristani told an
industry conference in London on Tuesday.
Baghdad has said any oil deals signed with the Kurdish
Regional Government (KRG) are illegal. Exxon is the first oil
major to test that.
"The position of the U.S. government has been that they
were unaware of it and if they had been asked, they would have
obliged (Exxon) to get approval of the Iraqi government,"
Shahristani told an audience of hundreds of Western executives
The U.S. State Department, in its first comment on the
deal, said it had warned Exxon and other firms of the risks of
signing contracts in Iraq without nationwide approval. But it
did not say whether it specifically talked with Exxon about the
"We have had conversations with Exxon, as we have with all
of our firms, advising them to wait for national legislation,"
State Department spokeswoman Victoria Nuland told reporters.
Nuland said she could not "speak to" whether the U.S.
government has had subsequent conversations with the company or
the Iraqi government to try to resolve the matter.
Iraq's Arab-dominated central government and the Kurdish
region have for years disputed control of Kurdish fields.
Iraq has yet to agree on a national oil law to decide such
vital issues the role of federal and regional authorities in
regulating oil and gas development as well as how to share the
revenues from the energy sector.
"Washington must be furious. What can you say when your
own company goes and destroys stability in Iraq?," said one
industry consultant with clients in Iraq who asked not to be
Exxon has yet to comment on the deal, which appears to have
been a miscalculation of political risk in Iraq by the world's
largest publicly traded oil company.
"They had some poor political advice," said another
industry source. "They were told that Iraq is moving toward a
resolution with the Kurds but they were also told from a senior
level that, down the road, Iraq could split apart."
The stakes look higher for Baghdad than Exxon. If Kurdistan
were able to establish fully autonomous oil deals then other
Iraqi regions including Basrah in the south, home to most of
Iraq's oil, could push to go the same way.
"Both sides would still prefer to find a resolution but for
Baghdad its either us or them. You can't have both," said an
Other industry sources said Exxon's gamble might yet pay
"It's now become impossible to dissociate Exxon with Iraqi
politics. If the deal goes sour, critics could say Exxon helped
ferment divisions in Iraq. If it goes well, they will say Exxon
helped bridge the differences between Erbil (Kurdistan capital
Erbil) and Baghdad," said Jaafar Altaie, managing director at
Manar Energy consulting, specialising on the Iraqi oil sector.
Altaie and others predicted a messy process if Baghdad
cancelled contracts with Exxon, which has an army of lawyers.
"Maybe Exxon is just playing the long game. Shahristani is
the most hawkish in the cabinet, so perhaps Exxon is taking the
long view, hoping that he will leave, and that it will get
other contracts later. They see that they can get better terms
in Kurdistan for now," said an industry executive.
Iraq holds the world's second largest oil reserves and a
presence in the country is key for global majors at a time when
their resources are getting depleted.
But Exxon's West Qurna deal has a reputation in the oil
industry for a poor rate of a return, which may have
contributed to its decision to sign the Kurdish deal.
"They don't want to lose West Qurna but they're frustrated
and they gambled," said an industry insider.
Iraq plans to more that double its output over the next
decade, which could make it the world's No.3 producer after
Russia and Saudi Arabia.
Exxon, with Royal Dutch Shell, has a multi-billion dollar
contract with Iraq's oil ministry to develop the 8.7 billion
barrel West Qurna Phase One oilfield in the south, one of many
large contracts Iraq hopes will rebuild its oil sector.
OPEC member Iraq has signed scores of deals with foreign
oil explorers to develop its oilfields as it recovers from
years of war and sanctions more than eight years after the U.S.
invasion that toppled Saddam Hussein.
Industry sources have said Anglo-Dutch Shell, Chevron and
Italy's Eni all decided against deals with Kurdistan for fear
of sanction from Baghdad.
(Additional reporting by Emma Farge, Dmitry Zhdannikov and
Richard Mably, and Arshad Mohammed in Washington; Writing by
Dmitry Zhdannikov,Richard Mably)