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FINANCIAL TIMES SPECIAL REPORT | Thursday December 8 2011 www.ft.com/reports/kurdistan­2011www.ft.com/xxxxxxx | twitter.com/ftreports

Inside this issue DNO’s Politics casts future Javier Blas explains why the Tawke 10 oil well shadow over epitomises the promises and pitfalls of the Kurdish oil industry Page 2 Refining Domestic energy processing capacity is rising quickly Page 2 Guest column Iraq should take the opportunity to develop a petroleum regime wealth to ensure that its extensive resources will benefit its people, writes J. Jay Park Page 3 Sylvia Pfeifer and about as much the North Sea Big oil has so far produced in the UK – Exxon’s Javier Blas say the and roughly 60 trillion cubic move to region’s natural feet of gas. The region’s history explore the means that these reserves have north has resources create both remained relatively untouched, angered alliances and strife offering industry one of the last Baghdad great frontiers of conventional Page 3 onshore oil and gas. he hills to the north- The Kurdistan Regional Gov- Natural gas North looks to west of Erbil, Kurdis- ernment (KRG) has not been tap into long­term export tan’s capital city, have idle, astutely using its hydrocar- potential of vast reserves witnessed some signifi- bon wealth to attract billions of Page 3 Tcant events. In 331 BC, Alexan- dollars of investment from inter- Final frontier Genel der the Great defeated Darius III national companies. From a Energy, headed by former of Persia here. standing start just four years BP chief executive Tony More than 2,000 years later, ago, the region’s industry has Hayward, is enthusiastic the forces of Saddam Hussein, developed to the point where it about the long­term yield of the former Iraqi dictator, now produces 175,000 b/d. the region’s resources launched their attack on the More than 40 companies have Page 3 city from the hillside. committed to investing in the Today, the same hillside is in energy sector in Kurdistan, Guest column Ethnic the line of sight of the Erbil from small independents such rivalries could trump refinery, a recent addition to the as Genel Energy (see page 3) and The US Geological Survey estimates that Iraqi Kurdistan holds about 40bn barrels of oil Dreamstime economic interest, writes area but potentially just as sig- DNO, an Oslo-listed oil com- Joost Hiltermann Page 4 nificant. pany, to Spain’s Repsol and, as serious attack was more than Mr Salih said his government oil. According to Baghdad, the was an economic backwater are The 40,000 barrels a day refin- of October, even ExxonMobil of six years ago. Erbil itself is a sought co-operation with Bagh- KRG’s production sharing con- over,” Prime Minister Barham Erbil ery is a symbol of the sweeping the US, the world’s largest vibrant, bustling city, a boom- dad and talked of achieving tracts are illegal. Erbil, how- Salih told delegates at the Growth changes that have taken place quoted international oil com- ing construction site that has “common goals”. ever, considers that the Iraqi region’s first ever oil and gas in the in Iraq’s semi-autonomous pany. attracted some of the world’s He condemned what he constitution approved after the conference in Erbil last month. capital is northern region over the past In the process, the region, in leading international hotels, described as “dissenting voices fall of Saddam Hussein’s regime Compared with other oil uneven as decade – changes driven by the particular Erbil, has been trans- including Kempinski. The in a few circles in Baghdad”, gives it the power to manage its regions, executives say that construction thrives but wealth that lies underneath its formed. Electricity supply has region’s expected growth rate stressing that “there is no way own contracts. The split means security is not a problem. services desolate landscape. gone from about four hours a next year is 12 per cent. we will let ourselves be held that, for several years, compa- Iain Wright, associate director falter Page 4 The US Geological Survey day, as in the rest of Iraq, to Yet Erbil’s energy success has hostage by some bureaucrats”. nies such as DNO were unable at Afren, a London-listed Africa- estimates that Iraqi Kurdistan about 22 hours. Security put it at odds with Iraq’s federal The dispute focuses on the to export oil. holds about 40bn barrels of oil – remains an issue, but the last government. At the conference, thorny issue of who owns Iraq’s “The days when Kurdistan Continued on Page 2 2 ★ FINANCIAL TIMES THURSDAY DECEMBER 8 2011 Kurdistan: Oil & Gas Domestic processing capacity is rising quickly

seen its oil demand rise to more Refining than 700,000 b/d in 2011, up from just 450,000 b/d in 2003, as eco- Sylvia Pfeifer and nomic activity improves, accord- Javier Blas find that ing to estimates by the US Department of Energy. the region’s industry Power shortages have contrib- is diversifying uted to the rise in demand, as some areas of Iraq only have a beyond extraction few hours of electricity a day, relying on diesel-powered gener- ators the rest of the time. Immaculately dressed with Although the region has enough neatly cropped hair, Baz Karim refining capacity to meet its ris- gestures to the rows of vehicles ing consumption, years of lining up in the loading bay out- neglect mean that most plants side the Erbil refinery. More are only able to run at about than 200 trucks pass through half their capacity, forcing Iraq every day, picking up oil prod- to import refined products from ucts such as fuel oil and ben- neighbouring countries. zene, before delivering them to The US Department of Energy cement and steel factories, and estimates that Iraq relies on distribution networks around imports for a third of its petrol the region. consumption and nearly a fifth The Erbil refinery, the fourth of its liquefied petroleum gas, largest in Iraq and the largest including butane and propane. private sector one, is a shiny The lack of capacity has cre- new symbol of private, local ated an opportunity in Kurdis- investment in Kurdistan – and tan to build refineries to meet of the region’s ambitions. the region’s demand, but cru- It is part of the Kar Group cially also to export south that Mr Karim founded in 1999, towards Baghdad, and beyond. a services company for the oil DNO, the Oslo-listed oil com- and gas industry. The company pany and one of the first to started in fuel trading during enter Kurdistan, has built a the period of United Nations small refinery at its Tawke oil- sanctions on Iraq, before the US- field. The 6,000b/d installation led invasion in 2003, supplying was meant to provide the oil- fuels funded by non-governmen- field’s power generators with tal organisations to the rural diesel, but since then it has poor in Kurdistan. become part of DNO’s strategy Mr Karim’s team moved on to to market its production, execu- help rebuild the country – gov- tives say. ernment ministries needed eve- The company cannot export rything from desks to comput- as much oil as it would like, ers after the war, he recalls. because of the disagreements Locked in a stalemate: DNO has been unable to make any headway with exports from the Tawke oil well because of the politics between Erbil and Baghdad Getty Unlike international oil and between Erbil and Baghdad, and gas companies that have come neither can it sell all its crude to Kurdistan to explore, which oil output into the local market. are blacklisted by Baghdad, Thus the small refinery pro- local service contractors have vides DNO with naphtha, diesel managed to bridge the divide. and fuel oil, which are in strong The intrepid early prospector The company’s first contract, demand in Kurdistan. in 2004, was with Baghdad for Other explorers, such as the engineering and supply of Genel Energy, which recently equipment to the Khurmala listed on the London Stock Dome oilfield. In 2008, a rare Exchange and is headed by joint decision by the federal and Tony Hayward, the former chief gets the government contract regional governments deter- executive of BP, the UK oil mined that the Khurmala Dome group, also argue that even if would be developed and oper- exports remain limited, the production-sharing agreement As their executives point out, was ready to export in mid-2007. For months, both DNO and ated to supply oil for the Erbil domestic opportunity for their DNO with the KRG in June 2004, well they struck oil at the first But then the problems really Genel have fuelled rumours refinery. The Kar Group gets a product is large. before the formation of Iraq’s attempt, signalling good geology started, because of the lack of a about a possible merger. “DNO set fee from the regional govern- Baghdad’s own plan to expand Javier Blas reports national government. The com- in the area, and were able to petroleum law to allow exports is our natural partner, so it ment for processing the crude – the refining capacity has so far on the benefits and pany found oil shortly after- build their processing facilities of oil from Kurdistan. makes a lot of sense if we can a model introduced to help kick- been delayed. In 2008, the fed- wards. and pipeline in record time. Yet, DNO – together with take them into Genel,” Mehmet start the refining industry. eral government announced a problems of being a Since then, DNO has spent Michael Alsford, oil analyst at other pioneering companies in Sepil, president of Genel The refinery processes 40,000 10-year plan to build four refin- pioneer in this region $600m developing the Tawke oil- Citigroup, the US bank, says in the region such as Genel, now Energy, said on the sidelines of barrels a day, but under an eries with a capacity of 740,000 field and another $200m explor- a recent report that the com- merged with Vallares, and West- a recent conference. DNO execu- expansion plan its capacity is b/d, at a cost of $20bn. ing for oil nearby, making it one pany is “well placed to benefit” ern Zagros – has benefited from tives have made similar com- expected to nearly triple to At the Kar Group, ambitious he Tawke 10 oil well of the biggest investors in the from any improvement in the its early arrival, as its produc- ments in the past. 110,000b/d by the second half of expansion plans are afoot. Mr epitomises the promises region. situation in Kurdistan, particu- tion-sharing contract was rati- DNO itself is already trying to next year. Mr Karim reckons Karim wants to develop the and pitfalls of the Kurd- Yet its bet on Kurdistan has larly if a deal between Erbil and fied in the Iraqi constitution of grow in size through merger that once the expansion is com- business into an integrated oil ish oil industry. delivered a mixed return. Even Baghdad opens the door to large 2005. and acquisitions. The company plete, the refinery will be able to and gas player. Over the next TThe red-painted well, in a as its executives paint a rela- exports from the region. “In regard to the legality of its is taking over assets from RAK cover close to 80 per cent of five years, he plans to focus on remote area of rolling hills in tively rosy picture, analysts DNO’s start was not easy, contracts, we believe that DNO Petroleum, a Middle East-based local needs. investing in the downstream northern Iraq near the borders point to one problem after is better positioned that many of oil company with assets in In addition to Erbil and the and midstream sectors – includ- with Syria and Turkey, lies only another. its peers,” says Mr Alsford. Oman and the United Arab refineries at Baiji, central Iraq, ing power plants and petro- 50 metres from a large natural Nearly five years after the In spite of all the As such, DNO is seen as the Emirates. Baghdad and Basra, there are chemical plants – followed by oil seepage, a powerful indica- company built a 44-kilometre pitfalls, the Tawke most obvious candidate to drive The shareholders of both com- dozens of backyard, so-called developing exploration and pro- tion of the natural riches of the pipeline linking Tawke with the a first round of consolidation in panies approved the merger in “teapot”, refineries. Together duction capacity. region. Iraq-Turkey pipeline to export oilfield and DNO are the region. Kurdish officials say September and the transaction they are capable of processing a One of the biggest challenges, But DNO, the company that its oil, it continues to sell the the best examples of they would like to see the 40 or is expected to close in January total of about 790,000b/d of Mr Karim says, is the “20-30 successfully drilled it, has left bulk of the field’s output in the so companies operating in the 2012. The combined company crude, according to the US Spe- year management and skills the well idle because a political local Kurdish market, where the promises of the region reduced to about 10-15 would be listed on the London cial Inspector General for Iraq gap” in the country. Iraq, he disagreement between Erbil, the artisanal refineries buy it at less large businesses. Stock Exchange’s Alternative Reconstruction. The teapot says, needs to “fast-track” to fill capital of the semi-autonomous than half the international Kurdistan region Industry executives and ana- Investment Market in addition refineries can only pro- it. Kurdistan region, and Baghdad price. lysts say DNO could be taken to the current listing in Oslo. duce low-grade diesel, Overall, he is optimistic. means that the Oslo-listed com- Moreover, DNO has so far with security a big concern. It over by a major seeking quick DNO is also in a better finan- fuel oil and, in some “International investors pany can only export a fraction received two payments for the faced an uphill battle to per- access to the region, for exam- cial shape today than when it cases, kerosene. In want to see what the of the production of the Tawke fraction of its production that it suade contractors to work in ple, Total of France, Chevron of ventured into Kurdistan. northern Kurdistan, country can do. Now field. is able to export through the Iraq. When it tendered the seis- the US, or Eni of Italy. The company made profits of some of them are that they see the mar- The politics between the international pipeline, although mic work, in which geologists “In the coming months, we $150m in the first half of the able to process fewer ket is stable, the risk is Kurdistan Regional Government Kurdish officials believe more hunt for oil in the subsoil, expect to see a surge in investor year, compared with losses of than 1,000 b/d of very manageable,” he says. and Baghdad has haunted DNO money is on its way. The diffi- instead of the usual list of 25-30 interest in Kurdistan,” says Al $106m in the same period of low-grade products. since the company arrived in culties have forced the company companies, only two showed Stanton, an oil analyst in Lon- 2010. Revenues surged to $1.1bn, The surge in Kurdis- New Erbil in 2004, only months after to put on hold a plan to nearly interest. The first choice don at RBC Capital Markets, the more than double the $543m of tan’s oil consump- ventures: the US-led invasion of Iraq, look- treble the oilfield’s maximum declined the job, so DNO had investment banking arm of 2010. tion is part of Baz Karim ing for an oil exploration con- production capacity to 200,000 only one option. Royal Bank of Canada, in a But with most of its assets in a broader tract in the region. barrels a day. Even so, the company weath- recent report. unrest-hit Yemen and politically t r e n d Together with privately Yet, in spite of all the pitfalls, ered all the challenges and But the company could also troubled Kurdistan, DNO w i t h i n owned Genel Energy of Turkey, the Tawke oilfield and DNO are found a large reservoir soon merge with a rival already remains a difficult investment Iraq. The DNO was among the first to also the best examples of the afterwards. It fast-tracked the established in the region to form choice, according to most country arrive in Kurdistan. It signed its promise of the Kurdistan region. development of the field and a super-Kurdistan oil company. analysts. h a s

Contributors Javier Blas Commodities Editor Politics casts a shadow over petroleum wealth Sylvia Pfeifer Energy Editor Continued from Page 1 standing – have led to between Baghdad and Erbil about ideology, not about hydrocarbons. “Kurdistan’s The region is also facing money, there is little Jearelle Wolhuter much-improved relations. allowed the Kurdish gov- Arabs and Kurds. Are you large discoveries coupled challenges on the domestic domestic manufacturing. Commissioning Editor focused oil explorer, told At a recent energy confer- ernment to pay oil compa- pro private sector, pro with the low-cost opera- front. Among these is a “Everything is imported, Steven Bird the same forum: “For those ence, Aydin Selcen, Turkish nies for the first time in investment or pro state con- tional environment have bloated civil service – more mostly from Turkey. We Designer of you who have worked in general consul in Erbil, more than two years. trol,” says Majid Jafar, chief allowed operators to pro- than 1m people of an esti- may have five-star hotels Nigeria, Kurdistan is a walk summarised Ankara’s Exports have resumed via executive of Crescent Petro- ceed with the fast-track mated population of 4.8m being built, but we don’t Andy Mears in the park.” attraction for the region: the Kirkuk pipeline to Cey- leum and a board member development of some of the are on the government pay- have a proper hospital.” Picture Editor Using energy as its call- “We need to diversify our han in Turkey. The two of Dana Gas. “Exxon enter- discoveries made in the roll – and no institutional These are issues the gov- ing card, the KRG has also supply of oil and gas.” sides have agreed to raise past decade,” says Michael capability. ernment is well aware of, For advertising contact: managed to establish strong The presence of Mr Selcen exports to 175,000 b/d from Alsford, oil analyst at Citi- “A wall of money is going says Bayan Sami Abdul Mark Carwardine links with Turkey. Only and other senior Turkish next year, from 100,000 b/d ‘We may have group, the US bank. to hit them and they still Rahman, high representa- +44 020 7873 4880 four years ago, Ankara’s officials was, according to today. But the deal is provi- five­star hotels Ashti Hawrami, KRG nat- don’t have the financial tive to the UK on behalf of [email protected] diplomats referred to the oil executives, the clearest sional and a permanent ural resources minister, infrastructure to deal with the KRG. It is government or your usual senior leadership of the sign that the relationship solution depends on both being built, but believes the string of oil dis- it, the breadth and experi- policy to reduce the number representative KRG as “terrorists”, blam- between Ankara and the sides agreeing a petroleum we don’t have a coveries will allow the ence are not there yet,” said of people on its payroll, but ing the region for the KRG was on the right track. law, delayed since 2007. region to boost its produc- one western diplomat. with “no other safety net All FT Reports are attacks of the PKK party, “Simply, the presence of a An agreement was proper hospital’ tion to 1m b/d by 2015. Yet Corruption remains an available, we need to do it available on FT.com. which is seeking to unite deputy energy minister and expected in early 2012. The some oil analysts believe issue, according to execu- carefully,” she says. www.ft.com/reports the minority ethnic Kurds a consul would had been arrival of ExxonMobil in the target is overly ambi- tives in the region, particu- Kurdistan has attracted a Follow us on twitter at in Syria, Iran, Iraq and Tur- impossible only four years Kurdistan could play both ing the market in Kurdistan tious, particularly with the larly lower down the supply huge investment but the www.twitter.com/ key in one, independent ago,” an oil executive with ways: sour relations further is the market telling you petroleum law still pending chain. next few years will be criti- ftreports country. large interests in Iraqi or act as a catalyst. what the correct model is,” approval. Hiwa Osman, a writer cal. “We do have an impor- Our advertisers have no But the large deposits of Kurdistan says, noting that The political problems are he adds. And without an increase and former adviser to Iraqi tant guarantor in the shape influence over, or prior natural gas of Iraqi Kurdis- both sides had been talking huge, but for those compa- Companies face little in production, other president Jalal Talabani, of elections every four sight of, articles tan and a booming bilateral openly since 2010. nies active in the region, exploratory risk: over the projects, including a new and now setting up a news years. We are eight years trade – together with a bet- There has been some the geological and business past two years, eight of pipeline through Turkey, network, points out that ahead of other Middle East ter mutual security under- progress. This year, a deal attractions are clear. “It’s each 10 wells have found may fail to materialise. while there is a lot of oil countries,” says Mr Osman. FINANCIAL TIMES THURSDAY DECEMBER 8 2011 ★ 3 Kurdistan: Oil & Gas Exxon move shocks the sector Former BP

Big oil chief explores It is the first of the supermajors to sign a deal with the north, the final writes Sylvia Pfeifer

s a sales pitch it takes oil frontier some beating. Hussain al-Sharistani, Iraq’s attribute at a time of change in deputy prime minister Case study the region”. Afor energy, told an audience in Genel has an interest in two Genel Energy London last month that his producing fields, Taq Taq and nation has 143bn barrels of Cash, international Tawke. Recovery rates are proven oil reserves – about 10 high, says Mr Sepil, adding per cent of the world’s total. expertise and local that the total cost per barrel is The country boasts further contacts set it apart, a cheap $3-$4. probable and possible reserves Taq Taq produces 75,000 of about 200bn, he said. says Sylvia Pfeifer barrels of oil a day. The crude They are numbers that every is either trucked to Fishkabur, oil industry executive will where it is metered and know. They are also the reason Kurdistan’s new national oil pumped into Iraq’s export why, when Iraq in 2009 offered champion stepped on to the pipeline to Turkey’s access to its oil for the first time world stage in the plush Mediterranean port of Ceyhan, since nationalisation more than surroundings of the or sent to a local refinery for 30 years ago, the world’s biggest Lanesborough Hotel in London. the domestic market. companies came knocking at On a Friday morning in June Genel also plans to build a the door. this year, Tony Hayward, the $400m oil pipeline to link the First BP, and then eventually former chief executive of BP field with the Kirkuk-Ceyhan its peers, ExxonMobil, Royal who resigned in the wake of pipeline. It hopes to start Dutch Shell and Eni of Italy, all the oil group’s devastating Gulf construction on the 400,000 b/d secured contracts to develop of Mexico spill, arrived for an pipeline in the spring. The plan some of Iraq’s biggest fields appointment. His guest was is to more than double despite the tough terms being Mehmet Sepil, chief executive production capacity at the field offered by the federal govern- of Genel Energy, a small to 200,000 b/d by 2014. ment. Instead of production Turkish-backed explorer with Despite Mr Hayward’s sharing contracts, the compa- assets in the region. enthusiasm, Genel’s prospectus nies agreed to less lucrative The two men made unlikely lists no less than 53 separate service contracts. breakfast companions, but each risk factors for investors. Top Two years later, Exxon has had something to offer: Mr of the list is political risk, shocked the industry – and offi- Hayward, who had just listed specifically the possibility that cials in Baghdad – by signing an investment vehicle, the Iraqi oil ministry, which contracts to explore in Kurdis- Vallares, with financier Nat has historically disputed the tan, Iraq’s semi-autonomous Rothschild, offered a fast route validity of Kurdistan’s northern region. The move, the to the London market and production-sharing contracts, first by one of the world’s super- close to $2bn of cash. Mr Sepil may dispute Genel’s rights to majors which had until then brought an opportunity in the its assets. This has held up the kept away from the north for shape of Kurdistan’s largest oil agreement on a long-disputed fear of antagonising Mr Shari- producer. hydrocarbon law and has also stani and his colleagues, has The meeting had a happy hampered exports. sparked a heated reaction. Let there be light: in contrast to southern Iraq, electricity supplies in Erbil, above, and the surrounding area are almost continuous Alamy outcome and a merger was If it worries Mr Hayward, he Baghdad has always main- agreed. Last month, Genel does not show it. Investors, he tained that any contracts signed Natural gas North looks to tap into long­term export potential of vast reserves Energy listed on the London says, should not forget the for oil and gas exploration with Stock Exchange. It joined other domestic market, which may the Kurdistan Regional Govern- At night, a reddish glare surrounds Basra in Kurdistan] to the world’s market,” he says. While plans for exports mature, in Kurdistan-focused explorers ment (KRG) are illegal. hydrocarbon­rich southern Iraq. Yet the city Turkey is particularly keen to import Kurdistan the domestic natural gas industry listed in London, including At the time of writing, the fed- has electricity for just four hours a day; none natural gas for power generation, and is growing rapidly. The biggest companies Gulf Keystone Petroleum and The Iraqi oil ministry, eral government is still consid- at the night. The glare is the effect of perhaps build a gas pipeline from the fields are Crescent Petroleum and its affiliate, Petroceltic. which has queried ering “its actions” against “flaring”, or burning off, vast quantities of near Sulaimaniya, the second­largest city in Dana Gas, which signed an agreement in Genel has been one of the Exxon and whether to cancel its natural gas from the huge Rumaila, Zubair Kurdistan, to the Turkish Mediterranean port April 2007 with the KRG to developed pioneers in Kurdistan’s oil and some production­ contract as operator to develop and West Qurna oil and natural gasfields. of Ceyhan. Kurdish and Turkish officials talk several gasfields. Two years later, the gas industry, thanks in large sharing contracts, the huge West Qurna field in Erbil, the capital of the semi­autonomous about building an export facility to supercool companies signed a deal with OMV of part to the efforts of Mr Sepil, the south of the country. region of northern Iraq, is alight too, natural gas so it can be transported by ship, Austria and MOL of Hungary to develop who first arrived in the region may dispute Genel’s So what prompted Exxon, the though not from the glare of natural gas although industry executives say such a two key fields. in 2002. Two years later, Genel, world’s largest international oil burning, but because it has electricity 22 facility is years, if not decades, away. The companies started production in which was backed by Turkish rights to its assets company by market capitalisa- hours a day. This is no small matter but is Aydin Selcen, Turkish general consul in October 2008, with the gas supplying local investors, agreed a production tion, to risk turning its back on a sign of the different fortunes of the Erbil, says his country depends on Russian power stations that produced about 1,620 sharing contract with the pay a lower price for the crude, the vast reserves held in the natural gas industries in northern and natural gas for 70 per cent of its imports. megawatts of electricity – about the same as Kurdistan Regional but is in need of supplies. south and take a bet on Kurdis- southern Iraq, with significant implications “The most commercial alternative seems to a nuclear power plant. Government to develop a “Iraq is importing 50 per cent tan’s relatively more modest, for the Kurdistan region. be the Kurdistan Regional Government “This has ensured an almost continuous licence area called Taq Taq, of its products for domestic 40bn barrels of oil reserves? The US Geological Survey estimates Iraqi (KRG). We have a long shared border.” power supply for 4m people in the Kurdistan about an hour from the use,” he said, describing it as While executives from other Kurdistan has 60,000bn cubic feet, more Turkey is even talking about connecting an region, in contrast to the electricity crisis in regional capital Erbil. “a significant insurance majors have talked to the KRG, than the estimate for gas reserves in Libya. export pipeline from Kurdistan to the other parts of Iraq, and has provided savings Today, two things make it policy”, if payments for exports none of them has so far agreed While crude oil attracts most attention projected Nabucco pipeline, which would link of over $2bn annually in fuel costs for the stand out: its cash pile and the are not forthcoming. an actual contract. Indeed, from industry executives, diplomats are the gas­rich Caucasus and Central Asia to government,” says Majid Jafar, chief presence of Mr Hayward, the There are other challenges. Shell, the Anglo-Dutch group, is particularly interested in natural gas, because energy­hungry European nations. executive of Crescent Petroleum. chief executive, and his While Mr Sepil, now president understood to have been negoti- Turkey is short of supplies and Ankara has A second option suggested by officials But analysts believe the export market will lieutenants. They include of Genel, is a star in Turkish ating in parallel with Exxon to signalled it is ready to import and serve as a in Baghdad, and with less support in be the most important over the medium Rodney Chase, former deputy business circles and will be secure acreage in the north, but corridor for exports. Erbil, is the so­called Arab Gas Pipeline term. “In the absence of local demand, gas group chief executive at BP invaluable in helping manage decided at the last minute not to Selahattin Cimen, deputy undersecretary at (AGP) project. exports remain the only option of monetising and now Genel’s chairman, and the operations of the company, proceed as it sought to protect Turkey’s Ministry of Energy and Natural According to the US Department of these large discoveries [of natural gas],” Julian Metherell, a former he is not without baggage. its investments in the south of Resources, says Kurdistan could supply the Energy, the AGP would deliver gas to Syria Citigroup wrote on a recent report about the Goldman Sachs banker and the He was fined just under £1m the country. country with gas for power generation. and then to Lebanon and the Turkish border. oil and gas sector in Kurdistan. company’s chief financial ($1.6m) last year by the Even the US State Department “Turkey is the natural direction for exports But the recent violence in Syria means the officer. Financial Services Authority, revealed it has repeatedly of hydrocarbons from the region [of Iraqi project faces an uncertain future. Javier Blas Genel plans to use its cash after admitting insider dealing warned American companies and the new management’s in fellow Kurdistan explorer “that they run significant politi- expertise to consolidate Heritage Oil. cal and legal risks if they sign Kurdistan’s explorers, and Mr Hayward, however, is contracts with any parties in target other companies in the adamant that when it comes to Iraq before there has been a but had been hindered by potential, it is something many stake. The company is also lead- Middle East. Aspect Energy corporate governance, the national agreement to work out bureaucracy. companies continue to accept. ing a multibillion-dollar water and Longford Energy, two structure of the group is the complex issues having to do “We have had difficulties get- Despite Exxon’s silence, what injection plan that is critical to small players with Kurdish impeccable, noting that unlike with oil revenue distribution ting decisions out of ministers, is clear is that the government bolstering the output from the operations, are the latest many resource stocks that within Iraq”. and there is a shortage of avail- of Prime Minister Nouri al-Ma- southern oilfields and several companies being screened, listed in London recently, For its part, Exxon has so far able financing for companies,” liki now faces a difficult balanc- industry executives said they according to industry bankers. Genel offered 50 per cent of its kept resolutely silent on its Mr Shipster said. ing act. Taking too hard a line thought this might help shield Informal talks have also been shares to the market. Nor can move but industry executives “It can look daunting from against the US company might Exxon from being completely held with DNO, the Oslo-listed investors expect public spats believe the slow rate of progress afar,” admitted one senior oil sour future investments in the ejected by Baghdad. producer and a joint-venture such as that in Mr Rothschild’s in the south, hampered by secu- industry executive operating in south at a time when the coun- Speaking at Kurdistan’s first partner of Genel. Genel, Mr other venture, Vallar, now rity concerns, bureaucracy and the south. “There are issues try is anxious to boost its pro- oil and gas conference in Erbil Hayward told reporters in Erbil called Bumi. logistical bottlenecks, must with visas, the import proce- duction after years of conflict. last month, Sir Jeremy Green- last month, has some special The relationship between Mr have played a part. Iraq’s daily dures need modernising and the Being seen to be too lenient stock, former UK ambassador to assets in one of “the last great Hayward and Mr Sepil is production has only recently port facilities need improving.” on Kurdistan may give greater the UN and a director at Lam- oil and gas frontiers still crucial. Industry executives in returned to 2.8m barrels a day – There is also a level of incentive to the other regions bert Energy Advisory, told dele- accessible to private investors”. Erbil noted Mr Hayward had the level it was at before the Being seen to be too bureaucracy around invoicing looking for more autonomy gates “a crunch moment” was He continued to list “a strong yet to adjust to running an US-led invasion in 2003. The lenient on Kurdistan that means every receipt is from Mr Maliki’s central govern- coming as US troops withdraw. asset base … that would independent explorer. Mr country has an ambitious target checked in detail – leading to ment authority. Next year, he added, “will be a normally belong in the hands Hayward argues running Genel of 12m barrels a day by 2017. may give more delays in payment to interna- Optimists believe that Exxon’s genuine test for a united Iraq”. of a supermajor; a balance is “analogous to running a Michael Shipster, a director at incentive to the tional companies. move into Kurdistan could Executives from Exxon, who sheet of about $2bn; a business unit within BP”. Rolls-Royce, told the same con- Nevertheless, the view at least prove to be a catalyst for the had been due to attend the con- management team that is a bit He will be hands-on, insists ference in London that the com- other regions looking from this executive, is that none country at a time when US ference but withdrew after news bigger than the company we his new partner. If there is a pany had spent the past two of this has come as a surprise. troops prepare to withdraw. Nor of its agreement broke, will have today; and a Turkish problem, says Mr Sepil, “it will years looking at entering Iraq, for more autonomy Given Iraq’s huge exploration is it only Exxon’s interests at surely have been listening. brand, a very interesting be Tony who gets the call”. Federal or regional is question for Iraq’s petroleum

The combination of rules Authority for petroleum does government shall manage oil The 2007 version has been country, have offered Guest Column that govern petroleum not appear in the list of and gas from current fields. modified by more recent oil generous terms. J. JAY PARK development in a state are exclusive federal powers or The federal government must and gas law drafts, which are The next key step that Iraq referred to as the petroleum shared powers. Regional apportion fairly the resulting now before Iraq’s Council needs to take to complete its regime. It comprises the governments are given revenues throughout the of Representatives (the petroleum regime is to enact The Republic of Iraq is blessed constitution of the state, its jurisdiction over all other country, proportionate to the country’s main elected body) the petroleum laws and with one of the world’s greatest petroleum laws and matters which are not population distribution. The for review and approval. regulations that will lock in treasures of petroleum. It is regulations, and the contracts exclusive federal powers or constitution requires that these In the absence of the the development benefits that now creating the laws and that the host government uses shared powers. It follows matters be regulated by a law. petroleum law that the Iraqi citizens are demanding. contracts that will govern how to award the right to conduct that petroleum is a matter These constitutional constitution demands, the These rules will ensure that it develops and uses those oil and gas operations. where the regional provisions provide some federal government has the discovered resources will resources to benefit its people. Iraq’s constitution is the first governments have authority. direction, but they also create awarded more than a dozen in fact be produced and These laws and contracts and most important piece of its However, the constitution has questions. service contracts to develop monetised. When Iraq’s federal will define how well the emerging petroleum regime. some special provisions that What is a current field? discovered fields, and the and regional legislatures have country’s petroleum assets The constitution, adopted in govern petroleum matters. How will the federal Kurdistan regional completed this task, Iraq will will be converted into 2005, establishes that the This alters the suggestion government award contracts to government has awarded be poised to realise the rewards prosperity for Iraqis. Republic of Iraq is a federal that petroleum is solely a develop current fields? And more than 40 contracts to of its oil and gas treasure. The history of petroleum state. It has a federal regional power. how will regional governments explore for new fields. development in Iraq, as in government, as well as It is expressly stated that award contracts to explore for These governments appear to J. Jay Park QC is a partner many other countries, is not a governments within the “oil and gas are owned by all other fields? have been acting within their with Macleod Dixon, a law firm happy one. The country now regions and governorates. the people of Iraq in all the These questions were Authority for constitutional jurisdiction in based in Calgary, Canada, has an unparalleled Similar to the constitutions regions and governorates”, answered in a draft federal oil petroleum does not doing so, notwithstanding which will join the opportunity to do things better. of other federal states, the confirming the right and title and gas law that was prepared claims to the contrary. Norton Rose Group on Its oil and gas potential is so federal government and the of the Iraqi people to the in 2007, but despite the fact appear in the list of The terms of these contracts January 1 2012. Mr Park large that it can benefit not regional governments are ownership and benefit of that this document includes the exclusive federal or have been very attractive to provides advice and training for just Iraqis but all energy users, allocated certain exclusive petroleum. most advanced principles of Iraq, because international oil oil & gas companies, the federal so it is useful to observe Iraq’s jurisdictional powers, and some Also, the constitution petroleum regulation, it has shared powers companies, excited by the Ministry of Oil and the progress. that are shared. provides that the federal not yet been enacted. excellent geology in the Kurdistan Regional Government 4 ★ FINANCIAL TIMES THURSDAY DECEMBER 8 2011 Kurdistan: Oil & Gas Pace of growth straining capital’s infrastructure

looks likely to continue, as both Erbil Baghdad and Erbil plan a big increase in oil production. The economic boom is Kurdistan itself is aiming to boost oil output from 175,000 b/d uneven as construction currently to about 1m b/d by thrives but services 2015. Although oil executives say the target is ambitious and falter, say Javier Blas may take a couple more years to and Sylvia Pfeifer achieve, it would transform Iraqi Kurdistan into one of the leading oil producers in the he view from the 23rd world, on par with Opec cartel floor of the Divan, members such as Qatar and Erbil’s newest five-star Ecuador. hotel, which opens In the meantime, Baghdad is Tearly next year, provides the aiming to boost production in perfect vantage point from the oil-rich south of the country which to survey the construc- to 12m b/d by 2017 with the help tion boom that is gripping the of international oil companies capital of Kurdistan, northern such as BP, Royal Dutch Shell Iraq’s semi-autonomous region. and ExxonMobil, although ana- In blocks immediately sur- lysts believe a target of about rounding the Divan, some of the 6m b/d by the same date is more world’s leading international realistic. hotel groups are busy erecting The proposed rapid increase new towers, including the Mar- in production means the oil riott Group and Kempinski. boom should continue. But Next to the hotels are two res- observers worry that Kurdistan, idential blocks, the Italian Vil- like many other countries rich lage and the English Village, in natural resources, could fall where expatriates – most of victim to the oil curse. them working in the oil indus- Erbil exhibits worrying signs try and also for Turkish compa- already: Turkish exports, in par- nies – and wealthy locals live in ticular, are flooding the market neat, almost identical two-storey as a strong currency, sustained houses. by oil revenues, encourages Cem Saffari, business develop- overseas buying. Costs and sala- ment manager at the Divan who ries are also increasing rapidly. has been in Kurdistan since Sep- So too, therefore, is inflation. tember, says there are not Oil executives say that a local “enough five-star hotel rooms” qualified employee with three available to meet demand. The years’ experience could take room shortage is one of the home about $2,500 a month, up most striking examples of the more than 50 per cent from five oil boom. years ago. Housing costs, partic- The economy of the small ter- ularly for expatriates, have dou- ritory, sandwiched between the bled also over the past five rest of Iraq to the south, Turkey years. Small villas are rented for to the north, Iran to the east between $3,500 and $6,000 a and Syria to the west is growing month. so fast – local officials venture a Besides oil, security is the 12 per cent year-on-year rise – other great economic engine of that it is straining the infra- Kurdistan. While terror attacks structure. in the Shia-Sunni conflict con- Barham Salih, prime minister In demand: new hotels are springing up on the Erbil skyline as pressure grows to supply accommodation for the influx of oil workers Reuters tinue to be a daily routine in the of the Kurdistan Regional Gov- rest of Iraq, the northern region, ernment (KRG), says that per four hours a day. The city has conference in Erbil that he is rently, but only exports about all production – from the south with its ethnically homogenous capita income has risen from also opened an airport, with planning to tackle some of those 100,000 b/d. Oil export revenues and from Kurdistan – increases, population and increased pros- $375 in 2002, the year before the flights to European cities such problems with a huge expansion do not go directly to the region, the region’s budget has bal- perity, has seen little violence US-led invasion, to an estimated as Vienna and Frankfurt, daily of the budget next year. Govern- ‘I was worried because but to the federal government’s looned. The International over the past few years. $5,500 in 2011. The region has services to Istanbul, and links to ment expenditure is set to jump of the violence in Iraq treasury. Since 2004, the Energy Agency, the western Mr Saffari, who previously seen a big improvement in liv- Dubai and Amman, among oth- 30 per cent to $13bn, up from regional government has countries’ oil watchdog, esti- worked in London where his ing conditions, observers say. ers. Yet, the economic boom has $10bn this year. Back in 2002, but in Erbil I feel safer received about 17 per cent of the mates Iraq’s oil production has family still resides, says: “I was Electricity, for example, runs been uneven. Health services, before the US-led invasion, the than in London’ federal budget of Iraq, although recovered to the prewar level, worried because of the bomb- 22 hours a day; in the rest of for example, cannot keep pace region’s embryonic government Baghdad deducts “administra- reaching 2.8m barrels a day, up ings and violence in Iraq, but in Iraq, and particularly in the with people’s needs and truck had a budget of just $100m. Cem Saffari, tive costs” from that amount. from 2.5m b/d in 2009 and less Erbil I feel safer than in Lon- south, shortages are so acute traffic clogs the roads. Kurdistan produces about Hotel manager As oil prices surge above $100 than 2.0m b/d in 2006. don. When I tell my family they that most cities only receive Mr Salih told a recent energy 175,000 barrels a day of oil cur- a barrel and the country’s over- The budgetary expansion think I am joking.” Ethnic interests could trump economic sense

to itself – and perhaps also increasingly obscure – and their federal arrangement. Guest Column to secure the region’s whose riches constitute a Baghdad is accusing Erbil protection, should the need potential casus belli for of seeking to tear up the JOOST HILTERMANN arise, or support for an both Baghdad and Erbil. country, and has incurred eventual bid for statehood. When ExxonMobil the reciprocal Kurdish These days, Erbil has the Underlying this strategy entered the disputed- charge that Iraq’s rulers feel of one of those gold is Kurdish leaders’ drive to territories fray in October, are unreconstructed Arab prospecting towns of the maximise the territory by signing exploration nationalists using old US west. they control and the blocks across the Green outmoded systems of Investors of all stripes autonomous powers they Line – the Kurdistan governance. descend on the Iraqi exercise within it. region’s constitutional A third constraint is the Kurdish capital to spend Hence their expansive boundary – it further fact that Kurdistan is their dollars, lured by high interpretation of an Iraqi increased the area’s landlocked and therefore – indeed inflated – figures constitution they were strategic importance. must depend on its for suspected oil and gas instrumental in drafting, neighbours for access to reserves and promises of and their unrelenting world markets. The most commensurate returns. struggle to incorporate It has been the likely candidate, Turkey, Some need little “disputed territories” they Kurdistan regional has indicated that, while it encouragement, but with claim were part of a is eager to serve as the each new contract signed, historic – albeit undefined government’s principal export channel and as exports climb, even and undelineated – genius to sell itself for oil and gas, the relatively conservative Kurdistan. Kurdish government will companies are taking the Several factors will as the last frontier have to co-ordinate its plunge, fearing they might probably constrain the sales through Iraq’s state lose out if Kurdistan Kurdish leadership in its in oil exploration marketing board. This proves the bonanza its attempt to free the region throws the Kurds back on leaders make it out to be. from the chains binding it to Baghdad and its ExxonMobil was the latest, to Iraq, a profoundly A second constraint is centralising tendencies. and the biggest, to dip a unhappy relationship of the unresolved relationship A final constraint is the toe in the water. duelling nationalisms. with the rest of Iraq. eventual ceiling on Iraqi It has been the One is precisely those Negotiations have oil exports. For now, Kurdistan regional disputed territories. When dragged on for years over Baghdad is content to have government’s genius to sell Kurdish leaders say they draft federal hydrocarbon Kurdish exports contribute itself as the last frontier in hold reserves of 45bn legislation that would to national revenues. oil exploration and as barrels of oil and upward define Erbil’s powers, However, if and when Iraq virgin territory receptive to of 100,000bn cubic feet of especially in signing succeeds in producing the private enterprise, holding gas, they neglect to contracts, as well as its volumes currently bandied out development contracts mention that most of these right to export the region’s about – even at the with terms far more reserves lie outside the oil and gas through the estimates’ lower end – its favourable than those Kurdistan region in areas national pipeline network. neighbours are bound to Baghdad offers for Iraq’s whose status is yet to be The two sides have been weigh in and, through huge southern fields. determined – through a far apart on an issue that Opec or otherwise, seek to Few seem to understand, process that has become goes to the very heart of limit Iraqi exports in order or care, what Kurdistan’s to keep control over world strategy is, and appear prices and protect their content to be part of the own status as producers. game if it generates huge Once that limit is profits. Yet, that strategy, reached in the next few and its success or failure, years, and if Iraq’s will determine how much southern fields can satisfy oil and gas will be demand by themselves, exported and how much would Baghdad still money stands to be made. consider giving a share to The Kurdish government those pesky Kurds? has long seen its attempt Baghdad and Erbil would to attract international oil be well served by a companies as a strategic fundamental deal to settle imperative, building up these concerns, but their from small wildcatters conflict would not be the such as Norway’s DNO via first in which ethno- bigger companies such as national interests have Houston-based Marathon been allowed to trump Oil to supermajors such as sound economic and ExxonMobil. commercial sense. It has made every effort to diversify the countries Joost Hiltermann is the of provenance, signing deputy programme director, contracts with outfits from Middle East and north the US, UK, France, Africa for the International Germany, China and others Crisis Group, a non- to bring international government conflict recognition and legitimacy Joost Hiltermann: Kurdistan is still tightly tied to Iraq Getty resolution organisation