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International Oil Exploration Juniors Pile into Kurdistan

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

Oil fields in Kirkuk.
Oil fields in Kirkuk.

Because of his decades-long suppression of the Kurds, their northern Iraqi region’s extensive petroleum reserves have stayed underground, unexploited.

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 a few American companies.

(See the controversy kicked up by 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 region is committed to share with Baghdad in an 83/17 percent split – based on the Kurd’s portion of the overall Iraqi population.

“In our minds, that is possible,” said Craig Kelly, finance manager of Addax Petroleum, a Canadian/Swiss exploration company that has been 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 with Wellington West Capital Markets in Toronto. “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 said he expected first production to begin later this year while exploration in another nearby field will start next month. The firm, which has 40 percent stake in its concession area, is committing $74 million in both exploration and development this year.

Full production of the current Taq Taq field could run to 150,000 bpd but this will depend on either of two planned pipelines becoming operational.

American investors may already be tapping into this new oil center, most likely through mutual funds. Roughly one third of Addax’s institutional investors are American, roughly one-third are British and a third are Canadian.

Addax has dual listing in London (LSE: AXC) and on the Toronto Stock Exchange (TSX: AXC), which have traditionally been more receptive to plays such as small international exploration firms.

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, thought to contain 16 billion barrels is now producing roughly a million bpd, about half the country's current total.

Heritage Oil, whose shares also trade in London (HOIL), and secondarily on TSX, signed a production sharing agreement last October for a 1,015 square kilometer block.

In the course of $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.”

WesternZagros, a spin-off from Marathon Oil , after its acquisition last year of Western Oil Sands, is already drilling its 2,120 square kilometer Kalar-Bawanoor Block, where it retains a 40 percent stake.

Their 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 wild cat 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.

The production sharing contracts follow international standards, said Kelly, reflecting the competency brought to the petroleum sector by the regional natural resources minister, Dr. Ashti Hawrami, who had been in exile in the UK where he ran an oil services company.

Most of the firms active in Kurdish region are international juniors - although an affiliate of TNK-BP, Norbest Ltd., and the Korea National Oil Corporation (KNOC) has signed deals – but there is no shortage of experienced personnel.

WesternZagros’s exploration is being directed by Dr. George Pinckey, a 32-year career veteran of Mobil and ExxonMobil ; CEO, Simon Hatfield, is also a 30-year industry veteran.

Heritage’s CEO, and founder Anthony Buckingham, helped introduced Premier Oil to Pakistan.

Heritage, which is already producing oil in Russia and Oman, boasts that its moves into Uganda and Kurdistan “has demonstrated its first-mover advantage acquiring assets.”

BMO Capital Markets, which recently initiated coverage of Heritage said because of its exploration forays into Kurdistan – but also 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.”

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 a $1 billion, 250-kilometer pipeline that would bring oil to a port city on the Turkish Mediterrean.

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

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.

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

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