Resolution of the long-running stand-off between the Kurdistan Regional Government (KRG) and Baghdad over oil development in the Kurdish north is being held up as talks over the formation of a new Iraqi government drag on into their fifth month. But activity in the KRG oil sector is hotting up, with new investors looking to enter the region and existing players seeking to strengthen their positions in expectation of a political deal that would allow full scale oil development in the KRG region.

With limited open acreage, activity is concentrated on buying into existing production sharing agreements, either as operator or by taking third party stakes which the KRG left open for award at its discretion. While Baghdads blacklisting of KRG oil investors has up to now deterred most of the bigger oil companies from the region, expectations of an oil settlement with the federal government and bidding failure in Baghdads own oil auctions last year are prompting a number of the larger companies to rethink their policy on the KRG.

Repsol, Maersk and Marathon all attended a KRG investment road show in London in June. The latter firm is widely expected to look to buy into Hunt Oils block as well as the Sarsang block, currently operated by Hillwood International, owned by former US presidential candidate Ross Perot. Turkeys Genel Enerji is seeking to sell all or part of its stake in its producing Taq Taq field and has hired JP Morgan for the purposes of finding a buyer, sources say.

There is also talk that Turkeys Calik Enerji is in discussions for KRG acreage. If a deal with Calik was struck this would be significant. Ankaras relations with the Kurds have historically been bad, with Turkey in the not-so-distant past refusing to acknowledge any moves towards a separate Kurdish identity, let alone political independence. But Iraqs Kurds, since obtaining autonomy in the wake of the 1991 Gulf war, have wooed Ankara, jettisoning support for Turkish Kurdish militant group the PKK and encouraging Turkish investment into the region. This process has accelerated since the 2003 US-led invasion of Iraq, and at present the KRG claims that some 60% of the foreign companies in the region are Turkish.

The KRG policy has paid dividends, with increasing recognition by Ankara of the region (MEES, 23 November 2009). In June, KRG President Masoud Barzani led a high level

delegation to Ankara, meeting with Turkish Prime Minister Recep Tayyip Erdogan. It was a good meeting. The Turks liked what Barzani had to say, Joost Hiltermann of the International Crisis Group (ICG) think tank tells MEES.

There is heavy Turkish involvement in the regions oil sector. But the main Turkish oil players, Genel Enerji and Dogan, are both politically associated with Turkeys secular establishment. The ruling Islamist AKP party has over the past year had high-profile clashes with media outlets owned by Mehmet Karamehmet, owner of Genel, and Aydin Dogan, owner of Dogan Energy. Caliks owner Ahmet Calik, on the other hand, is a close ally of the AKP and Mr Erdogan. Berat Albayrak, Mr Erdogans son-in-law, sits on the board of Calik Holdings. A deal with Calik, which is involved in a planned 1.2mn b/d crude pipeline project from the Black Sea to the Mediterranean port of Ceyhan, would for the first time give the powerful AKP-linked business community a direct stake in the KRGs economic future.

Arab Recognition

Arab countries have been wary of recognizing the KRG, but KRG claims Egypt is about to follow Jordan as the second Arab League member to open a consulate in the region. The closest relations have been with the UAE, which sent a major delegation in May, headed by its trade minister. UAE firms, such as Sharjah-based Crescent, have been keen to invest in the KRG sector. In March, the UAEs RAK Petroleum hiked its stake in KRG producer DNO to 30%, thus winning itself the right to appoint two members of its board to DNOs board. On 11 August DNO announced that one of these, former US ambassador to Iraq Zalmay Khalilzad, would not as previously announced be taking up his post. Regrettably, due to an increasingly heavy schedule and workload, I must decline the opportunity to serve on the board of directors of DNO International, DNO quoted Mr Khalilzad as saying. It is noteworthy that, as ambassador, Mr Khalilzad made himself unpopular with Irbils natural resources ministry by trying to push through agreement on a hydrocarbon law, sources tell MEES. Prior to its involvement in the 2009 federal upstream bidding rounds, Marathon had been in discussions for KRG acreage, MEES understands. But the US firm pulled out after Washington, allegedly advised by Mr Khalilzad, signaled that the legality of KRG oil contracts could be later disputed and that US oil investment in the KRG might retard resolution of Irbils oil dispute with Baghdad.

Block Hopping

Early in August the KRG signed off on a deal which gives Austrias OMV 20% third party stakes in Reliances Sarti and Rovi blocks. The first well at Sarta should reach target depth later this month, while it is hoped to spud at Rovi in September. OMV is also poised to take a 36% stake in the Bina Bawi block as operator, joining incumbents Turkeys Petoil and US independent Prime Natural Resources. Two wells have been drilled at Bina Bawi, with promising oil and gas shows, but high levels of hydrogen sulfide forced drilling to be abandoned both times. OMV, which is also in talks for an additional two blocks, has targeted the KRG as a major supply source for its planned 31 bcm/year Nabucco gas pipeline to Europe. It has had initial talks with a number of potential KRG gas producers exploration results so far indicate the KRG is an area rich in gas and condensate.

Success with the drill bit is also driving interest in the KRGs oil sector. Gulf Keystones Shaikan prospect is currently attracting the most attention, with recent tests on the Shaikan-1 well upgrading estimates of oil in place to 1.9bn barrels, with a 90% probability. Early production of up to 10,000 b/d is expected within months and with further discoveries anticipated with the drilling of new wells. The UK-based independent aims to drill three appraisal wells and one exploration well through to early 2011. Sources say Koreas state-owned KNOC has also discovered gas, but testing has not been completed. And UK independent Sterling Energy tested for gas at its first well, but had to stop drilling because of a problem with its rig, they add.

Vancouver-based ShaMaran Petroleum (previously Bayou Bend) is in talks to take an operating stake in Aspect Energys Atrush block, MEES understands. ShaMaran intends to drill its first well, on its Pulkhana block, in the fourth quarter. US firm Longford will drill its first well at Chia Surkh in the first quarter of 2011 while Vast, also owned by venture capitalists Forbes & Manhattan, will follow at its Kara Dagh block. While Chia Surkh is a relatively known quantity the first ever Iraqi oil discovery in the 1930s was here Kara Dagh is thought to have more potential for a large discovery. OMV continues to test its Shorish-1 well (MEES, 31 May). No decision has yet been taken as to whether its next well will be at Shorish or its Mala Omar block, considered the least prospective of the two blocks.

There have been drilling disappointments. Hunt Oils first well was dry, sources say, adding that Heritage Oils second Miran well has so far not added to the promise shown by the Miran-1 discovery. Canadas Western Zagros continues to wrestle with its Kurdamir-1 well, where high pressure hydrogen sulfide forced drilling to be stopped and nearby residents evacuated. Western Zagros is determined to persevere with Kurdamir-1, believing it could be part of a much bigger structure of over 150 sq km, reads a press release, quoting chief executive Simon Hatfield. As such, a structure of this size could contain a world class giant field, he said. Western Zagros is working closely with partner Talisman and reviewing all its procedures. But confidence in Kurdamirs prospectivity means a fresh attempt will be made here first, rather than at its next target Rujilian.

Khurmala Expansion

Kurdish oil firm Kar continues to expand output at the Kirkuk fields Khurmala Dome, the Iraqoilforum.com website reports. Kar started producing at Khurmala last year at around 20,000 b/d, supplying the Irbil refinery it operates (MEES, 27 July 2009). The KRG claims that Khurmala is emphatically within territory it should administer. According to an ICG report, Khurmala does indeed lie within the historical boundaries of Irbil governorate, but is outside the Green Line which is recognized as the de facto boundary between KRG and federal territory. The federal Ministry of Oil has always viewed Khurmala as an integral part of the Kirkuk field, one of the crown jewels of Iraqs oil industry and the countrys longest producing field. Now Khurmala output is set to increase within weeks to around 40,000 b/d, matching expansion at the refinery, the oil forum report said. A southern gathering station with 25 drilled wells is to be connected to the central processing facility at some point this year, with plans to eventually boost Khurmala output to 100,000 b/d. In the absence of the usual incendiary verbal exchanges between Baghdad and Irbil, one cant help wondering whether Baghdads acquiescence is a matter of accepting a fait accompli or is it a matter of reconciling itself with the inevitable, the oil forum report said.

Copyright MEES 2010.