A few weeks ago, Kurds in the North of Iraq released a statement that Exxon Mobil Corporation (NYSE:XOM) had begun exploring for oil in the Northern region of Iraq. Now, Royal Dutch Shell plc (Shell) (NYSE:RDS.A) is looking to get into the oil race that is beginning in Iraq. The problem lies where to begin exploring. Should they continue going north where it is safer and easier to work? Or do they go south where most of the Iraq War was fought.
In the end, Shell chose to just play it safe with the Iraqi government and continue with their projects in the southern region. As of right now they already have a $17 billion gas deal in the southern part of the country, so they aren’t hurting too bad.
Unfortunately, it is not just big oil companies battling each other for contracts but the Kurdish Regional Government is battling the Iraqi Government in Baghdad because some contracts that the Kurdish people want to award are considered illegal by the central government. There is also a dispute over export payments. We will see if Baghdad takes action and voids some contracts. This puts oil companies in an awkward spot because they do don’t want to anger either side because they would possibly loss contracts so keep an eye on how government interference could play a part in oil exploration.
The southern region currently is speculated to have the world’s largest new source of oil and it would be in every oil company’s best interest to stay on Baghdad’s good side because they control the contracts awarded in the south.
Keep in mind, the south is also where a lot of battles from the war took place so another risk to consider here is whether Al Qaeda will just stand by while Western oil companies come into the country and extract oil. If I was to speculate, I would say that this is not going to be a peaceful, easy time for oil in the south. Islamic freedom fighters have launched attacks since the US has left the country which makes me question whether this is a good idea investment wise. The Iraqi Government is still not that strong and the Iraqi Police aren’t either so relying on them to protect you from terror would be a mistake. Big oil could hire security personnel but that could get expensive real quick and hurt underlying numbers. Keep an eye on how big oil handles this issue.