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Exxon, Rosneft in West Qurna Talks

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U.S. energy behemoth, ExxonMobil Corporation (XOM) and Russian State-owned company OAO Rosneft are in talks to jointly tap Iraq's widespread West Qurna-1 oilfield.

Russia's top crude oil producer, Rosneft, confirmed that both parties are only in the early stage of discussion over the Iraqi venture. As per Russian daily Kommersant, Rosneft may acquire a 20% stake in the ExxonMobil-operated project in southern Iraq within a month.

ExxonMobil seeks to boost its West Qurna-1 oilfield output by 100,000 barrels per day by this year-end from the current daily 406,000 barrels. Located in the south of Iraq near the city of Basra, the West Qurna oil field has estimated reserves of 8.7 billion barrels.

Iraq may witness increased production following a series of agreements with foreign companies as the country looks to double output over the next three years. This would give Iraq the much needed cash for renovation after decades of war, sanctions and ignorance. Earlier this year, Rosneft secured major deals with international energy companies such as ExxonMobil, Norwegian company Statoil ASA (STO) and Italian operator Eni SpA (E). Earlier, Rosneft had modest exposure to the international markets.

In April, ExxonMobil formed a joint venture with Rosneft allowing the latter to explore North American unconventional sources as well as gain access to the know-how for developing unreachable resources. Under the $3.2 billion deal, the groups will be engaged in the joint exploration in the Arctic offshore region and the tight oil reserves in Western Siberia.

However, Exxon's participation in West Qurna remains obscure 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 angered the Baghdad government, which considers the pact as illegal.

Iraq’s central government continues to assert its authority over the energy deals inked within its borders in the midst of continued lack of legislation for the sector. The Iraqi government also considers all deals signed with the Kurdistan Regional Government (KRG) as unacceptable. On the other hand, the KRG states that all deals it has signed conform to the country’s new constitution.

Meanwhile, Russia's second-largest oil producer, LUKOIL, also proposed Rosneft to participate in the Iraq’s West Qurna-2 oilfield. The oilfield — with recoverable oil reserves of around 14 billion barrels — is the world's second-largest undeveloped field.

ExxonMobil holds a Zacks #3 Rank, which is equivalent to a Hold rating for a period of one to three months. For the long term, we maintain a Neutral recommendation on the stock.

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