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International Oil Exploration Juniors Pile into Kurdistan

Investors with an appetite for wildcat oil exploration plays can now thank - of all people - former Iraqi dictator Saddam Hussein.

Because of his decades-long suppression of Kurds in northern Iraq, the region’s extensive petroleum reserves have gone untapped.

Now this highly prospective acreage has become available and exploration companies are piling in.

So far, authorities in the autonomous Kurdish region have signed production sharing agreements with some 30 companies from a wide range of countries, including the US.

(See the controversy from the Bush Administration’s help to Texas-based Hunt Oil.)

Most companies are still in the exploration phase but initial drilling results for those further along have been encouraging enough to make the goal of exporting 1 million barrels a day within five years, as Kurdish officials would like, a realistic possibility.

At today’s prices that would bring in $50 billion a year, which Kurdish authorities committed to share with Baghdad in an 83/17 percent split – a ratio based on the Kurd’s portion of the overall Iraqi population.

“In our minds, that is possible,” says Craig Kelly, finance manager of Addax Petroleum, an early entrant to area. The Canadian/Swiss exploration company has drilled six appraisal wells in the Taq Taq field, where the flow has been as high as 38,000 barrels a day.

“That’s hugely productive,” says Malcolm Shaw, a petroleum industry analyst and geologist with Toronto's Wellington West Capital Markets, who's been following events in the region. (Neither Shaw nor Wellington own shares in Addax.)

To put in context, you would have to cobble together, say, 50 very good wells in Western Canada to get the same kind of rates …and they are getting those with a single well.”

Kelly of Addax says he expects first production to being later this year while exploration in another nearby field will start next month. The company, which has a 40-percent stake in its concession area, is committing $74 million in both exploration and development this year.

Kelly says full production of the current Taq Taq field could run to 150,000 barrels a day, assuming one of two planned pipelines begins operation.

There are others active in Kurdistan, where less than 10 percent of the region has been explored but which is bracketed by large producing fields.

Nearby Kirkuk, the second largest oil field in the country, is thought to have 16 billion barrels.

Heritage Oil, which is already producing oil in Russia and Oman, signed a production sharing agreement last October for a 1,01-square-kilometer block.

In the course of investing $7 million in exploration, the company has tripled its reserve estimate in the Miran Structure to 3 billion barrels in multi-reservoir targets, where it says it holdings “constitute an attractive opportunity for low-cost development of a major resource.”

BMO Capital Markets, which recently initiated coverage of Heritage, says the company's exploration forays into Kurdistan – as well as Malta, Mali, Pakistan and Democratic Republic of the Congo - “could over the next four years potentially add a combined $25-40 per share ….to our target.” (BMO has done investment banking and other business with Heritage in the past 12 months.)

WesternZagros, a spin-off of Marathon, is already drilling its 2,120-square- kilometer Kalar-Bawanoor Block, where it retains a 40 percent stake.

The first well is expected to be finished by September, according to Shaw. “There has never been a well drilled on the block that they are on – so it is true wildcat exploration.”

In this concession area, like many others the Kurdish Regional Government retains a stake - 20 percent here - while the other 40 percent was recently taken over by Talisman Energy , which has committed to spent $80 million on the block.

Though most of the firms active in Kurdish region are international juniors, an affiliate of TNK-BP, Norbest Ltd., and the Korean-state-owned oil company KNOC have both signed deals.

Addax is considering building a 60-kilometer pipeline that would connect to the existing Iraqi oil grid at Kirkuk but the industry’ future lies in $1 billion, 250-kilometer pipeline that would bring oil to a port city on the Turkish Mediterranean.

Addax’s main partner is General Energji, a subsidiary of Cukurova, the Turkish conglomerate, which owns Turkcell.

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Kurdistan accounts for about 18 percent of Addax’s worldwide reserves but it could become roughly a third of the company’s business if production proceeds as planned.

There are also plans to build refineries in the Kurdish area, for the relatively simple processing of the very light, sweet crude the area produces

Retail investors looking to play the Kurdistan oil race may need to do some drilling of their own. Turkcell and Heritage trade directly on US markets through ADRs but Addax, Heritage, Talisman and WesternZagros -- which Marathon acquired through its Western Oil Sands deal last year -- trade in London, Toronto or both exchanges, which have traditionally been more receptive to international plays such as small exploration firms. They're likely to wind up in the holdings of mutual funds or ETFs.

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