The Race to Tap The Next Gusher

For most of his life, Khadir has honed the occupation he learned as a child: fighting in the Kurdish militia against Saddam Hussein's forces. He has been jailed seven times since he was 14 and has seen a favorite uncle executed. Now, at 32, he is perfecting an entirely new skill, which could change this region as much as the wars in which he has fought have: drilling for oil. Since late November, he has toiled about 30 ft. aboveground on the first derrick erected in Kurdistan in decades, by a Norwegian outfit using a Chinese rig, of all things. From the top, there is a panoramic view of the hills around his tiny village of Tawke, where 30 families eke out a meager living herding sheep. It hardly looks like the location for a major economic boom. "We are poor," he says, sitting on his bunk during a break between shifts last month, when TIME was invited for a rare visit to the oil operation. "We have nothing."

But that could soon change--perhaps dramatically, according to oil engineers who have surveyed the region. Sheltered from the deadly mayhem around Baghdad, the economy of Kurdistan, the region that comprises the three northernmost provinces of Iraq, is already showing signs of vigorous growth. Turkish, British and Canadian oil companies have held talks with Kurdish officials in recent months to revive old oil fields and drill new ones. Oil has the potential to jolt Iraq's precarious ethnic balance by injecting sizable revenues and foreign investment into an area about twice the size of New Jersey. Much of the work is still exploratory, but Western engineers and Kurdistan's Regional Government believe that huge riches could lie underneath. Exploration had been dormant for decades--the region first languished under Saddam's oppressive rule and then was isolated from Baghdad for 12 years after the 1991 Gulf War. "There's a race on to get fields into production," says a Western consultant in Kurdistan, too fearful for his safety to be named. "People are very, very optimistic."

Ironically, the first winner isn't an oil giant from the "coalition of the willing" but DNO ASA, a small company traded on the Oslo Stock Exchange. DNO negotiated the rights in early 2004 to drill in about 1,500 sq. mi., inking the contract in the final week of the U.S.-run occupation of Iraq. DNO's managing director, Helge Eide, said he felt he "had to do it before the interim government came in," fearing Iraq's new rulers might strip the Kurds of rights to negotiate their own energy deals. It was a risky move, since politicians were bitterly divided over who would control Iraq's massive oil resources under a new constitution. Yet as that argument raged, DNO quietly hired the seismic company Terra Seis (Malta) Ltd. to survey its area. The results were stunningly clear. "We could tell very quickly that there was structure containing hydrocarbons," says Kevin Plintz, a Canadian geophysicist who owns Terra Seis and oversaw the work.

That wasn't all too surprising in Tawke, where generations have watched oil seep out on the surrounding hills and turn to a slick black film in the gnawing winter cold. Sitting cross-legged on his living-room carpet over a lunch of mutton, village chief Tahir Ezeer Omar remembers that when he was 10, a German visitor told his grandfather that the oil in the hills "was like gold, that it would someday create wealth for us." The locals were unimpressed. "All we knew is that the sheep and cows kept getting stuck in the stuff," Omar says.

The Norwegians' political gamble seems to have paid off. Last October Iraqis ratified a constitution giving each region the right to cut oil deals--the most bitterly fought-over item during months of wrangling--while allowing Baghdad to divide the revenues equitably between regions. Kurds will get 17%, their estimated portion of Iraq's population. As Iraqis voted, DNO had a 180-ft. rig driven across the Turkish border in about 100 trucks and then assembled it a few miles inside Iraq, near Tawke. The rig--owned and operated by the Great Wall Drilling Co., a subsidiary of China's state-owned National Petroleum Corp.--is expected to hit the pool of oil at about 10,000 ft. Since it will reach that level perhaps only next month, DNO has tried to tamp down soaring expectations. Eide says that although there is "movable oil, we still don't know how much."

Such measured comments have not stopped the excitement whipping across Kurdistan, maybe because the presence of a rig bespeaks a boom to come. "For us, new wells are very, very important," says Falah Mustafa Bakir, senior aide to Kurdish Prime Minister Nechirvan Barzani, over coffee in Kurdistan's capital, Arbil. "It is the future, our means of prosperity." Sarbez Hawrami, CEO of Kurdistan's government-run Oil & Gas Petrochemical Establishment, says "about seven British companies" have approached him to discuss deals. Terra Seis now has 12 seismic machines in Kurdistan working for five oil companies, with a list of others waiting for its services. In the 40-year-old Taq Taq oil field east of Arbil, two Turkish firms are producing oil, and one of them is drilling three new wells. Last September Canada's Heritage Oil signed an exploration deal. "There were always plans to produce oil in Kurdistan, but there were always objections" from Baghdad, says George Yacu, a Kurd who served in Saddam's Ministry of Oil for 30 years until 1999 and is now oil-and-gas adviser to Kurdistan's regional government.

Kurdish officials estimate their unexplored oil reserves at about 45 billion bbl. If that's accurate, Kurdistan's power will grow within Iraq, which depends almost completely on oil exports. Some researchers cast a wary eye on the Kurds' claims, but geologist Plintz says his research suggests that unexplored reserves "could be among the biggest in the world." An additional 40 billion bbl. of reserves are in the city of Kirkuk, which lies outside Kurdistan but whose political status is still disputed by Kurds. Kurdish oil would have huge advantages over Iraq's other fields: it could be piped a short distance to Turkish refineries without passing through war-torn areas.

Gusher or not, the region is booming. On the border with Turkey, about a half-hour drive from the DNO rig, Kurdistan has clearly become Europe's gateway to Iraq. Trucks from Turkey, Austria, Bulgaria, Germany and the Netherlands are backed up for miles and carry goods from across the continent. Sea cargo from Dubai is diverted through Jordan, Syria and Turkey before reaching Kurdistan, where it is transferred to Iraqi trucks before proceeding to Baghdad. That route is the only choice: driving north through Iraq from the Persian Gulf is too dangerous.

As one flies into Arbil, the sole sign of war is the airport's security. Kurdish soldiers--or peshmerga, as they are known--sit in tall watchtowers posted on the perimeter, and civilian vehicles are kept outside the airport gates, where baggage searchers wear ski masks to hide their faces. Flights from the new Kurdistan Airlines and other carriers arrive directly from Istanbul, Frankfurt, Dubai and Beirut. Austrian Airlines will add a Vienna flight next month.

That's just the start. A sprawling $200 million airport is being built on the existing grounds and is scheduled to open next year. Its three-mile runway will be wide enough to land the new Airbus 380--or, for that matter, the space shuttle, boasts Zaid Zwain, Kurdistan's director of civil aviation. "Imagine, people used to fear the sound of jets because of the bombing," he says, standing on the vast, still unpaved runway.

Indeed, the sensation of not being in Iraq is a key factor in Kurdistan's boom. Almost no Iraqi flag flies, and fewer than 1,000 U.S. soldiers are deployed in the territory. In the lobby of Arbil's only five-star hotel, which is filled with American and European businessmen discussing prospects, the buzz in the crowd has one persistent theme: in the world's most dangerous country, foreign businesses can work safely by basing their Iraq operations in Kurdistan rather than 200 miles south in Baghdad. "For anybody wanting to do anything in Iraq today, the entry point is Kurdistan," says Magne Normann, DNO's senior vice president and Iraq project director. "It's a stepping-stone for moving into the rest of Iraq when the time is right." Last November a television campaign funded by the Kurdistan Development Corp. was launched on U.S. networks with the slogan "The other Iraq" and languid rural scenes that contrasted sharply with the war-ravaged Iraq on the news. Still, that message has not translated for some. "People in the States think I'm living in the desert, one step ahead of someone who wants to put me in an orange jumpsuit," says Harry Schute, a consultant to Kurdistan's Interior Ministry who was deployed to Iraq in 2003 as an Army reservist.

Yet keeping Kurdistan calm requires a heavy military force. TIME traveled four hours north from Arbil to DNO's rig in an armored vehicle, on a road marked by several peshmerga checkpoints. DNO asked TIME not to publish its Kurdish employees' real names for fear they would be attacked for working for a foreign oil company. (Khadir is not the oil worker's real name.) Kurdistan's fragile peace could end quickly if Baghdad's government tries to rein in the Kurds' economic clout and political autonomy. Most Kurds don't seem to want any part of a greater Iraq. "Even when people talk about 'northern Iraq,' I feel provoked," says Bakir, the Kurdish Prime Minister's aide, who believes that many Baghdad officials are unhappy about Kurdistan's oil hunt. The majority of Kurds still hope that Kurdistan will be independent and that large oil finds in the territory "would bolster the sense on the street that they can survive on their own," says the Western consultant who did not want to be named.

These days there are more basic issues of survival at stake, however. Over the lunch of mutton in Tawke, Normann asks Omar, the chief, and the rig's star worker, Khadir, how the company can help the villagers. Omar says they need a water well and 50 desks for the tiny village school. Away from the chief, Normann says he knows that such goodwill can help secure the rig's safety from possible attack. Iraqi officials last year counted more than 3,000 insurgent attacks against the country's oil facilities and workers. But Khadir, who earns $500 a month as a roughneck--in a village of poor sheep farmers-- says an attack against DNO would surely fail. "Everyone in the village would protect the company, even the kids, because this oil is our future," he says. And while DNO waits for the oil to flow, it seems likely that Tawke's children may soon sit in class at desks.