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Exxon Mobil arrives in Kurdistan. A game changer?
by Paul Whitfield | Published November 28, 2011 at 12:00 PM
To a prospector, Kurdish petroleum is about as good as it gets. In the northern region of Iraq, the crude lies close to the surface, making it inexpensive to pump, and it is of high quality, meaning that it is also inexpensive to refine.
Yet among the test wells and nascent infrastructure that testifies to Kurdistan's future as a major oil exporter, there are no Exxon Mobil Corp., Royal Dutch Shell plc or BP plc operations. In Kurdistan, the supermajors, as the biggest oil companies are known, are conspicuous by their absence, blocked by a political impasse between the Kurdistan Regional Government and Iraq's central government over control of the region's wealth. The political impasse opened a rare opportunity for second-tier oil firms to gain access to first-tier assets, often at deep discounts to global oil asset prices, because the companies didn't care if they fell out with a central government that was in any event an unlikely source of future business.
Suddenly, the sand is shifting. On Nov. 11 a KRG spokesman said that the regional government had signed an agreement with Exxon Mobil "to explore six blocks." Exxon declined to comment on the existence of an agreement. But a pact could herald a new chapter in the fraught relationship between Kurdistan and Baghdad, opening up northern Iraq to both the expertise and investment firepower of Big Oil.
On Nov. 10, an adviser to Iraqi Prime Minister Nouri Kamal al-Maliki told Radio Free Europe/Radio Liberty that the central government and the KRG had reached a "tentative" agreement. Bahaa al-Din Ahmad, a member of the Council of Representatives' Oil and Energy Committee and an adviser to the prime minister, said that 90% of the contract had been agreed upon. The outstanding elements relate to the right of the KRG to establish its own contracts with foreign oil firms. Ominously for the industry, the issue of contracts largely explains why big oil companies have been nowhere to be seen in the Kurdish north of Iraq.
"There aren't many places in the world where small companies have been able to get their hands on reserves of this quality," says Laurence Harris, partner in charge of the London office of law firm Edwards Wildman Palmer UK LLP. "At some point, and I don't think it is too far away, this will sort itself out. There are a lot of people counting on that."
By any reckoning, Kurdistan has the potential to become one of the world's largest oil exporters. The predominance of smaller oil companies and the fragmented nature of their holdings suggest that once the political fog clears the market will be primed for a period of significant consolidation.
The Kurdish region of Iraq holds about 45 billion barrels of oil and between 3 trillion and 6 trillion cubic feet of gas, according to KRG Minister for Natural Resources Ashti Hawrami. If those oil reserve estimates are shifted into the proven reserves column, then the Kurdish region, if theoretically ring-fenced from the rest of Iraq, would rank among the top 10 oil countries, placing about ninth in the world just behind Libya and just ahead of Nigeria, according to figures drawn from the Organization of the Petroleum Exporting Countries' Annual Statistical Bulletin 2010-2011.
It is not only the size of the potential reserves in Iraq's Kurdish north that sets it apart. Development of Kurdish oil infrastructure was largely neglected by the Baathist regime of Saddam Hussein, which viewed the non-Arab region with hostility and often open aggression and did its best to suppress economic development. The upshot is that the oilfields remain largely undeveloped, a stark contrast to the larger fields in Iraq's south.
"You don't get oilfields like this anywhere, anymore," says a London-based executive at a listed oil company operating in the Kurdish region. "Given the per-barrel price on offer, investing there is a no-brainer."
Kurdistan hopes to be exporting about 200,000 barrels per day of oil by the end of the year, up from 100,000 at the end of 2008 and almost nothing at the start of 2007.
The oil conflict between the KRG and Baghdad has had two central elements. The first revolves around the right to dispense oil contracts, the second around the division of revenue from the oil that flows out of Iraq. The KRG believes that under existing law it can write its own contracts. It suspects that Baghdad's reluctance to grant it that autonomy is part of an ongoing agenda to funnel inward foreign investment in oil infrastructure to the south.
With regard to revenue, the Kurds claim an interim entitlement to a 50% share from its fields and look to ultimately receive 17% of net revenue generated by all Iraqi oil exports.
Tensions are high. The KRG claims that the federal Ministry of Finance has withheld payments from oil already exported. Hawrami said in September that Baghdad has paid just $450 million of the about $1.4 billion the KRG is due from past oil sales. The trickle of cash to the KRG means that payment to companies operating in its region has been haphazard. "Companies operating within the region have often been unable to collect full payment, if any, for their exports," says Tracy Mackenzie, a London-based oil analyst with Brewin Dolphin Ltd.
Confusion about the payments has created some unique accounting challenges. DNO International ASA, an Oslo-listed oil company that exports about 70,000 barrels a day from its Kurdish operations, received $104 million in June and $60 million in September, though by its own admission it remains unsure what the cash is for. "The payment has not been recognized as revenue but booked as a prepayment," DNO said in its third-quarter statement.
In September, highlighting the risks of dealing in Kurdistan, all oil exports from the Kurdish region were briefly halted. The KRG blamed problems with the pipeline network, which is owned and operated by the central government. Some Baghdad-based ministers claimed the stoppage was at the behest of the KRG, describing the halt as an aggressive negotiating tactic.
Lost revenue is a vexing problem for companies asked to make substantial up-front payments and investment. But ongoing uncertainty over contracts is a far greater concern. Iraq's central government had initially insisted that contracts signed with the KRG were invalid and would have to be rewritten. A few months ago, that stance appeared to have softened, though in the wake of Exxon's apparent deal, it seems to have hardened again.
"The signing of any contract with the Kurdistan Regional Government without the approval and the knowledge of the Iraqi central government and the oil ministry will be considered illegal," Abdul-Mahdy al-Ameedi, director of Iraqi Ministry of Oil contracts, told Reuters after news of Exxon's deal broke.
Questions over the fate of the contracts have kept lawyers busy, but they have also played into the hands of early investors in the Kurdish region. Many have secured cut-price deals, with prices driven down to reflect the political risk.
The soft prices also testify to the fact that the KRG, driven by a desire to quickly tap oil revenue and, perhaps more importantly, to back Baghdad into a corner by recruiting international oil companies to its side, has often been a less-than-fierce negotiator with oil companies. At least part of Baghdad's reluctance to honor the contracts reflects a judgment that the KRG has underpriced its oil.
In September, the KRG's Hawrami defended the deals. "These contracts have put the Kurdistan region of Iraq firmly on the global energy map, and have helped to internationalize the economy here after years of enforced isolation," he said.
The Kurdish region has signed contracts with about 40 companies from 18 countries, providing access to 42 different oil leases. Iraq's central government has signed 15 of its own contracts, which, according to opposition parties in Baghdad, may also be invalid, given that they were signed without the authority of a ratified oil law.
The KRG has issued product-sharing contracts, giving oil companies a share of revenue based on the amount of oil exported, while the central government prefers service contracts. Both versions are premised on the volume of oil taken out of the ground.
When the final numbers are compared, says Richard Quin, a Wood Mackenzie Ltd. analyst in Edinburgh, Scotland, "the fiscal terms of operation in Kurdistan are significantly more attractive than those you get in Iraq. In the Kurdish region, the government is claiming about 88% of the revenues, not the 99% that is being taken in the south."
Fear of lost revenue and concern about the legality of contracts might not have been enough to keep big oil companies out of Iraq's Kurdish region. But Baghdad's hardball politics has proved a final dealbreaker.
"The desire of the supermajors to gain traction with Baghdad has resulted in few [companies] attempting to gain positions within Kurdistan," says Brewin Dolphin's Mackenzie. "These companies don't want to align themselves with the KRG and risk competitive disadvantage [in Baghdad] as a result."
Exxon had been told that a deal with the KRG could cause it to be disqualified from an existing contract to develop West Qurna Phase 1, a field in southern Iraq that holds about 8.7 billion barrels. Hess Corp., a New York-based oil company, learned in September that it had been removed from a list of prequalified companies able to bid for Iraqi Ministry of Oil service contracts. Hess' sin was to team with Petroceltic International plc of Dublin and commit $72 million to develop two Kurdish oil blocks.
As oil-rich as Kurdistan may be, economic power rests with Baghdad. The south of Iraq has more than 100 billion barrels of proven reserves, according to OPEC. In a standoff, there is little doubt where Big Oil's loyalty would lie.
That makes Exxon's recent decision all the more intriguing. Some observers speculate that the company moved because it was tipped off that Baghdad was close to an agreement on oil-revenue sharing in Kurdistan.
"I don't think Exxon's contract for the southern fields will be ripped up," says Wood Mackenzie's Quin. "They are core to delivering the West Qurna project, and in a technical capacity they are critical beyond that project, too. Removing them would make a material difference to both the timing and the volume of oil coming from Iraq."
"Iraq still presents risks, and to some degree, uncertainty," says Gianna Bern, the president of Chicago-based Brookshire Advisory and Research Inc. "It appears those risks are being diminished,"
Deals in the Kurdish region have been accelerating for the past year. Acquisitions, many of which have been secondary transactions, have gotten bigger and more expensive, based on traditional cost metrics.
The biggest and by far the most high-profile deal to date was Vallares plc's all-share $2.1 billion reverse takeover of Genel Energy International Ltd., announced in early September. Vallares, an oil industry investment shell fronted by BP's former CEO Tony Hayward, had three months earlier raised $2.2 billion to invest wherever it chose. Announcing the Genel deal, Hayward described Kurdistan as "the last big onshore easy oil province available for exploration by private companies."
The transaction valued Genel's Kurdish oil at about $1.50 a barrel, cheap on a world scale but expensive when compared with other Kurdish deals. In July London-based Afren plc, an independent oil company that had previously focused on African oil exploration, agreed to pay $419 million for a 60% stake in the Barda Rash field and $169 million for a 20% stake in the Ain Sifni field. Afren claimed that its price equated to less than $1 a barrel, but even that is expensive by historical standards. Previous owner Komet Group GmbH, an obscure oil prospector registered in the British Virgin Islands, had paid something in the region of 4 cents per barrel in 2008.
For anyone interested in such details, the Kurdish Ministry of Natural Resources in September published every signed oil and gas production-sharing contract on its website -- providing a mine of information for future bidders.
Komet, Afren and Vallares are typical of the sort of companies that currently dominate the Kurdish oilfields. Small by oil company standards, they have both capital and technical expertise. They are also the kind of entrepreneurial companies that would make easy prey for Big Oil and probably wouldn't be averse to selling up.
When the political uncertainty is lifted, the value of existing Kurdish contracts, assuming they are valid, will quickly align itself to those of the global oil industry. Given the per-barrel prices paid by the smaller companies, a takeover offer that is priced according to global norms might prove extremely difficult to resist.
If a political settlement does kick off a wave of Kurdish M&A, it will provide ample work for international lawyers and bankers, especially in London, which has emerged as a proxy center for the Kurdish oil industry. Kurdish oil contracts are typically based on international law, and many, including Afren's contract, stipulate that "agreement shall be governed by English law."
Of course, the politics of oil in the Middle East are never simple. There are plenty of contentious, nonoil flash points that could derail negotiations, including dominion over military forces in the Kurdish region and negotiations over the fate of Kirkuk, a historically Kurdish city -- and capital of an oil-rich region -- that is currently outside the Kurdish autonomous region.
Considered in that wider context, an oil agreement would be a huge breakthrough in cooperation between the two governing bodies. Given the history of conflict and recent misery in both the Kurdish north and the Iraqi south, it would be a development deserving of cheer well beyond the oil sector.
Read more: Exxon Mobil arrives in Kurdistan. A game changer? - The Deal Pipeline (SAMPLE CONTENT: NEED AN ID?) [You must be registered and logged in to see this link.]
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Exxon Mobil arrives in Kurdistan. A game changer?
by Paul Whitfield | Published November 28, 2011 at 12:00 PM
To a prospector, Kurdish petroleum is about as good as it gets. In the northern region of Iraq, the crude lies close to the surface, making it inexpensive to pump, and it is of high quality, meaning that it is also inexpensive to refine.
Yet among the test wells and nascent infrastructure that testifies to Kurdistan's future as a major oil exporter, there are no Exxon Mobil Corp., Royal Dutch Shell plc or BP plc operations. In Kurdistan, the supermajors, as the biggest oil companies are known, are conspicuous by their absence, blocked by a political impasse between the Kurdistan Regional Government and Iraq's central government over control of the region's wealth. The political impasse opened a rare opportunity for second-tier oil firms to gain access to first-tier assets, often at deep discounts to global oil asset prices, because the companies didn't care if they fell out with a central government that was in any event an unlikely source of future business.
Suddenly, the sand is shifting. On Nov. 11 a KRG spokesman said that the regional government had signed an agreement with Exxon Mobil "to explore six blocks." Exxon declined to comment on the existence of an agreement. But a pact could herald a new chapter in the fraught relationship between Kurdistan and Baghdad, opening up northern Iraq to both the expertise and investment firepower of Big Oil.
On Nov. 10, an adviser to Iraqi Prime Minister Nouri Kamal al-Maliki told Radio Free Europe/Radio Liberty that the central government and the KRG had reached a "tentative" agreement. Bahaa al-Din Ahmad, a member of the Council of Representatives' Oil and Energy Committee and an adviser to the prime minister, said that 90% of the contract had been agreed upon. The outstanding elements relate to the right of the KRG to establish its own contracts with foreign oil firms. Ominously for the industry, the issue of contracts largely explains why big oil companies have been nowhere to be seen in the Kurdish north of Iraq.
"There aren't many places in the world where small companies have been able to get their hands on reserves of this quality," says Laurence Harris, partner in charge of the London office of law firm Edwards Wildman Palmer UK LLP. "At some point, and I don't think it is too far away, this will sort itself out. There are a lot of people counting on that."
By any reckoning, Kurdistan has the potential to become one of the world's largest oil exporters. The predominance of smaller oil companies and the fragmented nature of their holdings suggest that once the political fog clears the market will be primed for a period of significant consolidation.
The Kurdish region of Iraq holds about 45 billion barrels of oil and between 3 trillion and 6 trillion cubic feet of gas, according to KRG Minister for Natural Resources Ashti Hawrami. If those oil reserve estimates are shifted into the proven reserves column, then the Kurdish region, if theoretically ring-fenced from the rest of Iraq, would rank among the top 10 oil countries, placing about ninth in the world just behind Libya and just ahead of Nigeria, according to figures drawn from the Organization of the Petroleum Exporting Countries' Annual Statistical Bulletin 2010-2011.
It is not only the size of the potential reserves in Iraq's Kurdish north that sets it apart. Development of Kurdish oil infrastructure was largely neglected by the Baathist regime of Saddam Hussein, which viewed the non-Arab region with hostility and often open aggression and did its best to suppress economic development. The upshot is that the oilfields remain largely undeveloped, a stark contrast to the larger fields in Iraq's south.
"You don't get oilfields like this anywhere, anymore," says a London-based executive at a listed oil company operating in the Kurdish region. "Given the per-barrel price on offer, investing there is a no-brainer."
Kurdistan hopes to be exporting about 200,000 barrels per day of oil by the end of the year, up from 100,000 at the end of 2008 and almost nothing at the start of 2007.
The oil conflict between the KRG and Baghdad has had two central elements. The first revolves around the right to dispense oil contracts, the second around the division of revenue from the oil that flows out of Iraq. The KRG believes that under existing law it can write its own contracts. It suspects that Baghdad's reluctance to grant it that autonomy is part of an ongoing agenda to funnel inward foreign investment in oil infrastructure to the south.
With regard to revenue, the Kurds claim an interim entitlement to a 50% share from its fields and look to ultimately receive 17% of net revenue generated by all Iraqi oil exports.
Tensions are high. The KRG claims that the federal Ministry of Finance has withheld payments from oil already exported. Hawrami said in September that Baghdad has paid just $450 million of the about $1.4 billion the KRG is due from past oil sales. The trickle of cash to the KRG means that payment to companies operating in its region has been haphazard. "Companies operating within the region have often been unable to collect full payment, if any, for their exports," says Tracy Mackenzie, a London-based oil analyst with Brewin Dolphin Ltd.
Confusion about the payments has created some unique accounting challenges. DNO International ASA, an Oslo-listed oil company that exports about 70,000 barrels a day from its Kurdish operations, received $104 million in June and $60 million in September, though by its own admission it remains unsure what the cash is for. "The payment has not been recognized as revenue but booked as a prepayment," DNO said in its third-quarter statement.
In September, highlighting the risks of dealing in Kurdistan, all oil exports from the Kurdish region were briefly halted. The KRG blamed problems with the pipeline network, which is owned and operated by the central government. Some Baghdad-based ministers claimed the stoppage was at the behest of the KRG, describing the halt as an aggressive negotiating tactic.
Lost revenue is a vexing problem for companies asked to make substantial up-front payments and investment. But ongoing uncertainty over contracts is a far greater concern. Iraq's central government had initially insisted that contracts signed with the KRG were invalid and would have to be rewritten. A few months ago, that stance appeared to have softened, though in the wake of Exxon's apparent deal, it seems to have hardened again.
"The signing of any contract with the Kurdistan Regional Government without the approval and the knowledge of the Iraqi central government and the oil ministry will be considered illegal," Abdul-Mahdy al-Ameedi, director of Iraqi Ministry of Oil contracts, told Reuters after news of Exxon's deal broke.
Questions over the fate of the contracts have kept lawyers busy, but they have also played into the hands of early investors in the Kurdish region. Many have secured cut-price deals, with prices driven down to reflect the political risk.
The soft prices also testify to the fact that the KRG, driven by a desire to quickly tap oil revenue and, perhaps more importantly, to back Baghdad into a corner by recruiting international oil companies to its side, has often been a less-than-fierce negotiator with oil companies. At least part of Baghdad's reluctance to honor the contracts reflects a judgment that the KRG has underpriced its oil.
In September, the KRG's Hawrami defended the deals. "These contracts have put the Kurdistan region of Iraq firmly on the global energy map, and have helped to internationalize the economy here after years of enforced isolation," he said.
The Kurdish region has signed contracts with about 40 companies from 18 countries, providing access to 42 different oil leases. Iraq's central government has signed 15 of its own contracts, which, according to opposition parties in Baghdad, may also be invalid, given that they were signed without the authority of a ratified oil law.
The KRG has issued product-sharing contracts, giving oil companies a share of revenue based on the amount of oil exported, while the central government prefers service contracts. Both versions are premised on the volume of oil taken out of the ground.
When the final numbers are compared, says Richard Quin, a Wood Mackenzie Ltd. analyst in Edinburgh, Scotland, "the fiscal terms of operation in Kurdistan are significantly more attractive than those you get in Iraq. In the Kurdish region, the government is claiming about 88% of the revenues, not the 99% that is being taken in the south."
Fear of lost revenue and concern about the legality of contracts might not have been enough to keep big oil companies out of Iraq's Kurdish region. But Baghdad's hardball politics has proved a final dealbreaker.
"The desire of the supermajors to gain traction with Baghdad has resulted in few [companies] attempting to gain positions within Kurdistan," says Brewin Dolphin's Mackenzie. "These companies don't want to align themselves with the KRG and risk competitive disadvantage [in Baghdad] as a result."
Exxon had been told that a deal with the KRG could cause it to be disqualified from an existing contract to develop West Qurna Phase 1, a field in southern Iraq that holds about 8.7 billion barrels. Hess Corp., a New York-based oil company, learned in September that it had been removed from a list of prequalified companies able to bid for Iraqi Ministry of Oil service contracts. Hess' sin was to team with Petroceltic International plc of Dublin and commit $72 million to develop two Kurdish oil blocks.
As oil-rich as Kurdistan may be, economic power rests with Baghdad. The south of Iraq has more than 100 billion barrels of proven reserves, according to OPEC. In a standoff, there is little doubt where Big Oil's loyalty would lie.
That makes Exxon's recent decision all the more intriguing. Some observers speculate that the company moved because it was tipped off that Baghdad was close to an agreement on oil-revenue sharing in Kurdistan.
"I don't think Exxon's contract for the southern fields will be ripped up," says Wood Mackenzie's Quin. "They are core to delivering the West Qurna project, and in a technical capacity they are critical beyond that project, too. Removing them would make a material difference to both the timing and the volume of oil coming from Iraq."
"Iraq still presents risks, and to some degree, uncertainty," says Gianna Bern, the president of Chicago-based Brookshire Advisory and Research Inc. "It appears those risks are being diminished,"
Deals in the Kurdish region have been accelerating for the past year. Acquisitions, many of which have been secondary transactions, have gotten bigger and more expensive, based on traditional cost metrics.
The biggest and by far the most high-profile deal to date was Vallares plc's all-share $2.1 billion reverse takeover of Genel Energy International Ltd., announced in early September. Vallares, an oil industry investment shell fronted by BP's former CEO Tony Hayward, had three months earlier raised $2.2 billion to invest wherever it chose. Announcing the Genel deal, Hayward described Kurdistan as "the last big onshore easy oil province available for exploration by private companies."
The transaction valued Genel's Kurdish oil at about $1.50 a barrel, cheap on a world scale but expensive when compared with other Kurdish deals. In July London-based Afren plc, an independent oil company that had previously focused on African oil exploration, agreed to pay $419 million for a 60% stake in the Barda Rash field and $169 million for a 20% stake in the Ain Sifni field. Afren claimed that its price equated to less than $1 a barrel, but even that is expensive by historical standards. Previous owner Komet Group GmbH, an obscure oil prospector registered in the British Virgin Islands, had paid something in the region of 4 cents per barrel in 2008.
For anyone interested in such details, the Kurdish Ministry of Natural Resources in September published every signed oil and gas production-sharing contract on its website -- providing a mine of information for future bidders.
Komet, Afren and Vallares are typical of the sort of companies that currently dominate the Kurdish oilfields. Small by oil company standards, they have both capital and technical expertise. They are also the kind of entrepreneurial companies that would make easy prey for Big Oil and probably wouldn't be averse to selling up.
When the political uncertainty is lifted, the value of existing Kurdish contracts, assuming they are valid, will quickly align itself to those of the global oil industry. Given the per-barrel prices paid by the smaller companies, a takeover offer that is priced according to global norms might prove extremely difficult to resist.
If a political settlement does kick off a wave of Kurdish M&A, it will provide ample work for international lawyers and bankers, especially in London, which has emerged as a proxy center for the Kurdish oil industry. Kurdish oil contracts are typically based on international law, and many, including Afren's contract, stipulate that "agreement shall be governed by English law."
Of course, the politics of oil in the Middle East are never simple. There are plenty of contentious, nonoil flash points that could derail negotiations, including dominion over military forces in the Kurdish region and negotiations over the fate of Kirkuk, a historically Kurdish city -- and capital of an oil-rich region -- that is currently outside the Kurdish autonomous region.
Considered in that wider context, an oil agreement would be a huge breakthrough in cooperation between the two governing bodies. Given the history of conflict and recent misery in both the Kurdish north and the Iraqi south, it would be a development deserving of cheer well beyond the oil sector.
Read more: Exxon Mobil arrives in Kurdistan. A game changer? - The Deal Pipeline (SAMPLE CONTENT: NEED AN ID?) [You must be registered and logged in to see this link.]
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