Oil Fuels Kurdistan Economic Boom

Stephen DeAngelis

July 14, 2008

With oil prices adversely affecting almost every economic sector, many people are calling for more exploration, more drilling, and more production. All of the so-called “easy oil,” has been found — with the possible exception of Kurdistan region of Iraq [“Wildcatters Plunge Into North Iraq,” by Neil King, Jr., Wall Street Journal, 9 July 2008]. King writes:

“The Canadians are squeezing oil from sand. The Brazilians want to nurse it up through miles of seawater, sandstone and salt. But here in the far north of Iraq, oil is literally bubbling to the surface. Oil executives lament that the age of ‘easy oil’ is over. It isn’t over here. For companies that have stumbled into this corner of Iraq known as Kurdistan, it’s an era that has just begun.”

While the high price of oil may have downside for most of the global economy, it has a huge upside for a developing region like Kurdistan. The Kurdistan Regional Government (KRG) has big plans for the region and big ideas normally require big bucks to implement. Oil should provide that money. King continues:

“Iraq is well known as one of the planet’s last great oil repositories, with more than 115 billion barrels of reserves, by most estimates. The surprise is how much oil — and easily accessible oil — there appears to be in Iraq’s Kurdish region, a rugged, Switzerland-size area that has seen centuries of conflict but essentially no oil exploration, until now. One of the world’s most prolific oil fields, the Kirkuk field, sprawls for more than 70 miles just to the southwest of the Kurdish region’s border. After 74 years in production, it still churns out over 400,000 barrels a day. Dozens of similar geological structures extend far to the north in Kurdistan, undrilled and almost entirely unexamined.”

The Kurdistan oil “frontier” has generated a frenzy among oil companies of all sizes. King sums up the activity this way:

“Kurdistan is now among the world’s last playgrounds for the old-fashioned oil explorers known as wildcatters. More than 20 companies from around the world are prospecting here, making this one of the liveliest exploration zones in the oil-rich Middle East, particularly for risk-taking small fry like DNO. The hubbub is in sharp contrast to the rest of Iraq, where an exploratory well hasn’t been drilled in 15 years, thanks to neglect throughout the Iran-Iraq war, the period of international sanctions and then the war that began in 2003. Major oil companies have entered talks with Baghdad over ways to boost output in the huge fields in Iraq’s south. But the Iraqi government remains loath to grant outsiders the right to explore for new oil or to share in the profits. The freewheeling Kurdish area has no such compunctions. The Kurds have enjoyed near-complete autonomy within Iraq since the early 1990s, and now have their own regional government, complete with a Parliament and a prime minister. The 2005 Iraqi Constitution recognized that autonomy, and gave the Kurds a degree of control over their own resources that they were quick to exploit.”

The Wall Street Journal asserts that although the KRG has agreed to be part of a general oil revenue sharing agreement with the central Iraqi government, it feels that Baghdad has moved too slowly in passing acceptable legislation. It, therefore, has moved out on its own to negotiate oil deals with foreign companies. Not everyone is happy about that.

“By early 2007, the Kurds had awarded contracts to three exploration ventures. When negotiations over a national Iraqi oil law broke down in acrimony last summer, the Kurds decided to move ahead with their own oil legislation. Some two dozen other exploration deals were signed under the Kurdish law — causing Iraqi officials in Baghdad to regard them as invalid. Companies signing deals under the Kurds’ law have since been barred by Baghdad from doing business in the rest of Iraq, where the biggest of the country’s oil fields lie. That threat is keeping the major oil companies out of Kurdistan, despite their ardor for new terrain to drill. Meanwhile, until Iraqis can agree on a national oil law, the companies drilling in Kurdistan have no way to export oil they unearth.”

With the world hungry for more oil, most analysts believe that moving the oil out of Kurdistan and into the market won’t be an insurmountable problem. The most likely route for such oil will be through a Turkish pipeline. Such an arrangement would benefit both the KRG and the Turkish government. There are already strong economic ties between Turkey and the Kurdistan Autonomous Region, despite tensions over Kurdish rebels hiding in hills of northern Iraq. Despite the uncertainties about the future of the Kurdistan oil industry, KRG officials see mostly an upside.

“Kurdish officials look at the flurry of oil contracts they’re signing as a two-pronged insurance policy. By cutting deals with companies from countries as diverse as Australia, Britain, France, India, Russia, South Korea, Turkey and the U.S., the Kurds say they hope to win international political support in case things go awry with Baghdad. And in case Iraq were to break up, the Kurds would have their own abundant revenue stream. ‘Has this been deliberate? It certainly has,’ says a beaming Mr. Hawrami, the Kurdish natural-resources minister, who has crafted the bulk of the contracts awarded so far. ‘We want a balance. We want friends on all sides.’ Some good-sized companies have planted their flags here, including Austria’s OMV AG, Hungary’s MOL Group and India’s Reliance Industries Ltd. But they are far outnumbered by lesser-known ones that see Kurdistan as a once-in-a-generation opportunity. WesternZagros Resources Ltd., for example, is a Canadian company that has never drilled for oil. It now has the rights to a 2,000-acre patch about 60 miles southeast of the famed Kirkuk field. Then there’s Genel Enerji AS and Addax Petroleum Inc. Together, the Turkish and Swiss-Canadian concerns have sunk six wells in their Taqtaq field and are ready to pump more than 50,000 barrels a day. Estimated extractable oil in their field, the companies say: at least 550 million barrels.”

As I have noted in numerous past posts, the future of Kurdistan region of Iraq looks bright and the prospect of billions of dollars in oil revenue only highlights exactly how bright. King discusses the building activity in Erbil, where my company, Enterra Solutions®, maintains an office.

“Rumblings of a coming oil boom have triggered pell-mell construction in Erbil, the capital of the Kurdish region, a city that local officials tout as the next Dubai. It has a new airport. Cranes hover over the frame of a high-rise hotel being built for Kempinski, the German luxury hotelier. A United Arab Emirates company, Damac Properties, is planning a $4.5 billion retail and golf community on the outskirts.”

KRG officials have a plan. They want the economy to develop deliberately and broadly. They want to balance their economic portfolio so that they are not solely dependent on oil revenue in the long run. In other words, they want to build a diversified economy with their people operating Ministries and commercial ventures in an internationally competitive way. That is why the government contracted with Enterra Solutions to operate the Kurdistan Business Center and other strategic engagements that assist in developing the Kurdistan region’s economy and capacity. The Kurdistan Business center offers a full range of services to businesses wanting to invest in the Kurdish region’s future. The Center provides a single point of contact for investors and businesses desiring to operate in the autonomous Kurdistan region. Through a number of connected activities, the Business Center promotes economic development and foreign direct investment in the Kurdistan region. The establishment of the Kurdistan Business Center is an integral part of Enterra Solutions’ Development-in-a-Box™ offering to assist economic and social development in post-conflict and developing regions.

 

The Kurdistan Business Center marks a new era for business and economic development in Kurdistan. It identifies international companies, facilitates and expedites investment and joint-venture transactions in the Kurdistan Region, especially agreements in support of a number of strategic critical infrastructure projects identified by the KRG. In addition, the Center’s Erbil-based staff provides marketing, technical expertise and ombudsman services aimed at attracting investment activities in the region.

 

Some of the wildcatters in the Kurdistan region have already struck oil and the KRG expects that it will have arrangements in place to start exporting oil by the end of next year (perhaps as much as a quarter of a million barrels a day). Blessed with natural resources, a governmental leadership structure that is evolutionary and visionary, a stable security environment, and developing rule of law, I’m confident that region’s economy will become successful and diverse.