Market Scan
Is Big Oil Losing The Race For Iraq?
Lionel Laurent, 10.08.07, 6:45 PM ET
LONDON -
If the war in Iraq was fought on behalf of major international oil companies, consider it lost. The race to gain access to the grand prize of Iraq’s vast energy reserves is actually being won by small risk-takers willing to carve out a profit at great risk, while the majors wait for firm legislation and improved security that may never come.
Iraq’s unproven reserves could top 200 billion barrels--second only to world leader Saudi Arabia’s 262 billion barrels--and there is no question that the country’s potential has oil companies very excited, despite the decades of under-investment and conflict under Saddam Hussein that kept production hovering around 3 million barrels per day before 2003, less than half Saudi Arabia’s daily output.
But while big oil companies like Shell and Total are biding their time, cultivating relationships with the Iraqi government and patiently awaiting privatization legislation that may never come, smaller wildcatters are beating them to the punch by signing production and exploration deals in Iraqi Kurdistan, a semiautonomous region in the north-east that is courting investment at the expense of national unity.
The Kurdistan Regional Government announced four new production sharing agreements on Oct. 2, naming France's Perenco and Canada's Heritage but keeping the identities of the other two "experienced international companies" under wraps.
"The Kurds are not only stealing a march on the Iraqi government, but also cementing their strong position relative to the central administration," said Global Insight energy analyst Samuel Ciszuk.
Although industry insiders say the Kurdistan Regional Government has tried to tempt the majors with production-sharing agreements that offer a generous 20%-25% cut of the profits, thus far no big player has proven willing to alienate Baghdad by signing a deal with the Kurds, who have enjoyed limited autonomy since the end of the first Gulf War in 1991.
"Like any other company, we would like to go into Iraq," said a spokesman for Norway’s Statoil, who confirmed that "a number" of meetings had been held with the Kurdistan Regional Government. "But we must have a national framework. Then, we could go into Kurdistan."
The Kurdish government passed its own legislation for foreign oil production in August, which the central Iraqi government does not recognize, and subsequently Oil Minister Hussein al-Shahristani has threatened to review all of the "illegal" agreements signed in Kurdistan once a national oil law is in place.
But smaller players are still willing to take the risk. Norway’s DNO, Switzerland’s Addax Petroleum and Turkey’s Genel Enerji are just three of the companies that have snubbed Baghdad and begun drilling for oil in Iraqi Kurdistan, while the larger international oil companies sit on the sidelines and wait for the passing of a draft oil law that shows no sign of getting the consensus support it needs.
“It is somewhat stalled at the moment largely because the law that has mainly been promulgated looks like it is much more centralizing than the Kurds are willing to accept,” said Colin Smith, analyst with Dresdner Kleinwort. Under the national framework, a central committee in Baghdad would have to approve all contracts.
Even if the law does get passed, the security situation in Iraq is another major barrier to operating safely across most of the country. Insurgents frequently target oil infrastructure, with the most recent attack on the Kirkuk-Bayji pipeline killing 26 and injuring 59 on Sept. 18. The big energy companies cannot establish permanent bases inside the country because it is simply too dangerous; they are currently having to fly Iraqis out of the country for training.
Even the memoranda of understanding that have been signed, such as Total and Chevron’s agreement to develop the oil field of Majnoon in southern Iraq, are wishful thinking rather than guaranteed business. Total and Chevron are not entitled to preferential treatment regarding Majnoon, and the field itself was temporarily closed last month after violence from locals demanding employment.
According to Credit Suisse analyst Mark Hume, it is still unclear just how long it will take before the majors can feasibly operate in Iraq. "Some companies think it is two years, some companies think it is seven to 10 years," he said. The Iraqi government has estimated it will take a decade to double the country’s output capacity, to 6 million barrels per day, from its prewar level of 3 million, which it has yet to reach since the U.S.-led invasion in 2003.
One rationale for playing Baghdad’s way is that 97% of Iraq’s proven reserves of 112 billion barrels lie outside Kurdish territory, including the oil fields of Kirkuk, currently part of a disputed area claimed by the Kurds and which is still awaiting a referendum. It would not be worth jeopardizing future business across the country for such a small gain.
But 3% is better than nothing, and the wildcatters in Kurdistan are taking advantage of accessible oil in relatively safer surroundings. And the more drilling goes on, the more percentages are likely to change: Addax Petroleum believes that its Taq Taq joint venture with Genel Enerji could yield 200,000 barrels a day by 2010, or four times what Majnoon is currently producing. The Kurdistan Regional Government says that total Kurdish output could hit 1 million barrels a day by 2012, or one-third of Iraq’s prewar levels.
"In Kurdistan is where it is happening," said Global Insight's Ciszuk. "Nothing is happening anywhere else."
Over the past two months, there have been signs that larger international companies are tempted by the lure of Kurdistan, whatever the political risk. DNO said on Aug. 22 that "a large international oil company" had offered $700 million for its Iraqi assets, an offer that the Norwegian firm decided not to pursue but one that indicates how valuable those assets are likely to become. (See "Somebody Wants DNO's Iraq Assets")
The announcement of U.S. firm Hunt Oil’s entry into Kurdistan on Sept. 8 has added further worry that even the Americans aren’t banking on Baghdad anymore. Not only is Hunt Oil the first American oil company to operate in Iraq since the 2003 war, but it could not have picked a more sensitive time to flout the central government’s wishes and further legitimize Kurdish separatism.
The move also raised some American hackles. Ohio Representative Dennis Kucinich said last month that the Hunt Oil deal could "lead to greater instability in Iraq," while a U.S. State Department spokesperson told Forbes.com that its policy was to support the central Iraqi government and the creation of a national oil law.
A U.S. State Department spokesperson told Forbes.com that its policy was to support the Iraqi government and the creation of a national oil law, though she would not comment on the Hunt Oil case.
Some commentators are adamant that no big player will follow in Hunt’s footsteps. "I don’t think the big boys will go into Kurdistan," said Sharif Ghalib, analyst with Energy Intelligence. "The potential is so enormous, I don’t think they want to annoy the central government.”
In the long run, there is a chance that the majors will be proven right. Despite the Kurdistan Regional Government’s hostile attitude towards Baghdad, which has fueled suspicion of its own ambitions for independence, it is in its long-term interest to eventually abide by central government’s wishes and share oil revenues with the rest of the country. The main export route from Kirkuk passes through Turkey, a country that only recognizes the government in Baghdad and would never countenance any independent Kurdish state.
Although the victorious powers after World War One outlined an independent Kurdistan in the 1920 Treaty of Sevres from the ashes of the Ottoman Empire, the subsequent military victory of Turkish nationalists under Mustafa Kemal led to a new Treaty of Lausanne in 1923 that divided Kurdish territory between Turkey, Syria, Iraq and Iran.
But there is also a chance that Baghdad will not make an example of the companies that knocked at the door of Kurdistan’s capital Erbil, especially if security remains a huge problem in the rest of Iraq. And if that is the case, Big Oil might be the last to join the party in the northeast.