Emerging Markets Focus


Kurdish exploration acreage, memorably emerged open-mouthed from a London data room whispering that he had seen “mountains full of oil”.


This prediction turned out to be pretty accurate, given that the success rate for exploration wells in Kurdistan currently stands at around 80% - an astonishing statistic.


So, if one can be fairly confident in Iraq about exploration risk, how will one ever be able to get comfortable with the various political, security, transportation, educational, environmental and other risks catalogued above? In other words, what could be the justification for BP’s extraordinary move in 2009 against a clear tide of contrary opinion and responsible eighteen months later for the rocketing upwards of an AIM-listed company’s market capitalization to £1.5bn from almost nowhere ?


The answer may recently have arrived in the form of Abdul Karim Al-Luaibi – the newly appointed Iraqi Oil Minister. Aged 51 and standing over six feet tall, he is a petroleum engineer who has spent his whole career with the Iraqi Oil Ministry – where he started out as an engineer’s assistant. A shrewd and capable politician, he is reported to be close to Hussain Al-Shahristani (the former Oil Minister and now Deputy Prime Minister) and Nouri al-Maliki (the recently appointed Prime Minister – who also happens to be from the same tribe). The closeness of these relationships underscores the critical importance of Iraqi’s oil industry to its leaders and also explains the unified position which now appears to be emerging in energy-related matters, notwithstanding the unstable and unpredictable political scene elsewhere in Iraq.


Within two weeks of his appointment, Mr. Al-Luaibi (who, as deputy minister of oil for upstream, managed the process for all three previous licensing rounds in southern Iraq) announced a fourth round of licensing – although importantly this will now be for exploration blocks rather than the development of existing fields. As a result, it is possible that southern Iraq will now move away from the current form of technical services agreement and more towards a traditional form of contract. Within that same two weeks, he announced a record increase in output from Iraqi oil fields (which included a ten per cent. increase in BP’s production over its budgeted targets at its Rumaila field). More recently, it has been announced that Iraq has agreed to build an oil pipeline to neighbouring Jordan and is now considering plans for a similar project into Syria. However, if one reads between the lines, the good news doesn’t seem to stop there.


Recognising the critical importance of upgrading Iraq’s oil infrastructure, Mr. Al-Luaibi has confirmed that another immediate focus will be on export routes to the south. There are therefore plans for new pipelines (in conjunction with storage expansion at Faw, Nasiriyah and Zubair in the south) in a clear move to increase the flow of oil to the wider global market.


As regards the thorny issue of relations with the KRG, there is now evidence that North Oil Company (the vehicle used by the KRG for oil investments in Kurdistan) is being offered participations in some key oil projects in southern Iraq – thereby further breaking down the barriers between Kurdistan and the south, and almost introducing an element of “cross-shareholding”.


Furthermore, Mr. Al-Luaibi (who has led negotiations for southern Iraq for the last year and therefore knows the KRG oil officials extremely well) recently announced that “Talks with the brothers in the KRG will continue in order to reach solutions which meet the public interests”. This was the best indication yet that a thawing was occurring in relations between Erbil and Baghdad.


Finally, at the end of January, officials from both sides confirmed that pipeline exports would recommence from two Kurdish fields with effect from 1 February – although other details about such a possible relaxation of the oil embargo were hazy at that stage. Then, on 2 February, news began to break that exports had recommenced from two fields in Kurdistan (including DNO’s Tawke oil field where offtake into the Turkish export pipeline is expected to increase to 50,000 bpd in the next few days). At that point, it became clear that the Iraqi Oil Ministry (under Mr. Al-Luaibi) not only has ambitious plans, but also appears to be able to deliver on them.


Inevitably, there will also be a number of external factors which will incentivize the Iraqis and the broader oil industry to tackle and overcome the obstacles to Iraqi investment listed above. In the same way that a steadily increasing oil price, rising global demand, desire for security of supply and the recognition of the risks inherent in other areas of the industry have driven the development of new products such as shale gas, the same market forces can be expected to encourage IOCs, NOCs and other oil industry participants to now come to the table in Iraq.


Combined with these external factors, it could be that the Iraqis have now found a magical mix of political will, industry expertise, personalities and global circumstances which can help to reduce or overcome some of the risk factors which have affected them in the past and herald a new “golden age” of investment in Iraq. If that proves to be true, one can expect the original wave of first movers into Iraq to now sit back and enjoy the parallel benefits of a rising oil price and reducing Iraqi risk. Likewise, those original prime-movers wishing to make further investments into Iraq (who by now will have experienced its oil industry at first hand over an adequate period of time) will be best placed to assess the new reduced risk levels and price them into their future investments.


Greg Hammond is a Partner in the London office of Akin Gump Strauss Hauer & Feld, the leading international energy law firm and a Member of The Oil Council Committee.


Note: The original version of this article appeared in the 31 January 2011 edition of The Lawyer, which The Lawyer entitled "Get Well Soon”


Drillers and Dealers :::


::: February 2011 Edition


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