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An ocean of reserves waiting to be tapped MON, 10 DEC 2012 11:10  | The Financial Times  By Guy Chazan, the Financial Times Richard Lowe faces a dilemma most oilmen can only dream about: what on earth is he to do with 14 billion barrels of crude? Mr Lowe’s company, a small London-listed explorer called Gulf Keystone, found the oil in question in Shaikan, in Iraqi Kurdistan, in 2009. It was one of the world’s largest onshore discoveries in more than 20 years. Stretching for miles under a ridge of brown, rugged hills near the Turkish border, Shaikan is huge. Yet its sheer size is problematic. “The big question is – where do you start?” says Mr Lowe, Gulf Keystone’s drilling manager. “The field is almost too big.” Oil finds such as Shaikan have made Kurdistan, an autonomous region in the north of Iraq, one of the biggest draws in the global oil industry. It has attracted $10bn in investment from foreign oil companies – a vast amount for a country of only 4.9m people. “It is almost the only place in the Middle East where the private sector can explore virgin territory,” says Tony Hayward, the former chief executive of BP who runs the Kurdistan-focused oil explorer Genel Energy. Initially, the region was the playground of wildcatters – small buccaneers with a big appetite for risk. But now the big boys are moving in. Over the past year, ExxonMobil, Chevron and Total have been grabbing some of the 45bn barrels of oil thought to lie underneath Kurdistan. Ashti Hawrami, Kurdistan’s minister of natural resources, forecasts a wave of consolidation as the majors swoop in. The number of operators in the region will, he says, soon shrink from 50 to 20 or less. “We’re moving from the small and the beautiful to the large and the magnificent,” he told the Financial Times. The big oil companies are coming despite a somewhat precarious legal environment. For years, Kurdistan has been embroiled in a bitter dispute with Iraq’s central government over who owns the region’s oil. Baghdad says the Kurdistan Regional Government, or KRG, lacks the authority to sign contracts with western energy groups and has declared them illegal. In April 2012, the KRG suspended crude shipments from the region in protest at Baghdad’s delays in disbursing $1.5bn owed to operators in Kurdistan. Since then circumstances have improved. In August, the KRG restarted exports as a goodwill gesture and, a month later, the central government agreed to pay foreign companies what they were owed for their oil. The Kurdish authorities reciprocated by agreeing to increase exports. The deal enabled Gulf Keystone to resume production at Shaikan after a near five-month hiatus. “It’s a huge relief that we’re able to start again,” says Mr Lowe. Some 30 tankers a day are loading up at Shaikan and taking its crude to local refineries. The September agreement was extraordinary in that it seemed to acknowledge the legitimacy of KRG contracts. Mr Hawrami says Baghdad realised that the most important priority was to make sure oil flows were resumed in full – regardless of which companies were producing it under what contracts. The view was “now Kurdistan must export the oil and we need the revenue,” he says. “Any stranded oil is not to the benefit of Iraq.” He called the deal “a win-win”. It is not hard to tell that Kurdistan is sitting on a bountiful resource. On the northern side of Gulf Keystone’s Shaikan field, Mr Lowe points visitors to crude oil oozing out of the limestone rock and dribbling down in dense black seeps. Iraqi geologists knew about the area’s potential. “These fields should have been discovered 30 or 40 years ago,” says Mr Lowe. Leaving them untapped was, he says, part of a policy of neglect designed to keep the Kurdish population down. Instead, Iraq focused on the huge fields around Basra and Kirkuk. That has redounded to the Kurds’ advantage. “If these oil reserves had been developed 30 years ago, all the benefit would have gone to Saddam Hussein and his family,” says an Erbil-based diplomat. “It’s the only time the Kurds have been thankful to Saddam for something.” It was only after 2006, when Mr Hawrami was appointed minister, that Kurdistan’s oil industry really took off. He has been credited with creating Kurdistan’s oil sector – with its complex contractual and regulatory framework – from scratch. “It’s an amazing achievement in difficult circumstances,” says one diplomat. Unlike the oilfields of southern Iraq, which had export pipelines linked to the Gulf, Kurdistan’s were stranded, with no outlet to wider markets. The area was largely unexplored and there was confusion over whether they had the right to sign their own contracts. But according to Mr Hawrami’s view of Iraq’s 2005 constitution, under which the country’s oil and gas was “owned by the people of Iraq in all the regions and governates”, they did. He started allocating blocks of exploration acreage in production-sharing agreements – contracts that offer oil companies the potential for handsome profits. Initially, small companies took the bait but their success encouraged larger competitors. Mr Lowe says seven out of 10 exploration wells drilled in Kurdistan are commercially successful – a “strike rate” with few parallels. As the oil companies’ presence expanded, Kurdistan changed – fast. In the early days, Erbil was a provincial backwater and, as in all of Iraq, power came on for only a couple of hours a day. The city had one decent hotel, the Sheraton, built in the late 1970s. It felt like a “Wild West frontier town”, recalls one oil engineer who lived there then. Now it is booming. Planes full of businessmen fly into Erbil’s new international airport from Dubai, Vienna and Istanbul. Five-star hotels tower over a cityscape dotted with cranes and vast construction sites. The pace of development will increase. In 2008, there were only three drilling rigs in Kurdistan. This year there are 24 and next year there will be 40. Production, at about 200,000 barrels a day, will reach 250,000 b/d next year. By 2015, Kurdistan hopes to be exporting 1m b/d. To achieve that will need a major reconfiguration of the region’s export infrastructure. The current Baghdad-controlled pipeline is plagued by bottlenecks. Many believe that Kurdistan will build its own pipeline into Turkey, giving it full control over exports. If that happens, the KRG will receive oil revenues directly from Turkey, rather than via Baghdad. This will give the KRG the economic independence many Kurds have long craved and build on the close relationship evolving between Kurdistan and its neighbour, Turkey. “Kurdistan is going to emerge as a major contributor to global oil supplies by the end of this decade – possibly sooner,” says Mr Hayward.
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