Northern Iraq's reserves put oil majors in a quandary

Kurdistan is eager for the world's biggest oil companies to develop reserves that are estimated to be as large as Libya's. It hopes oil can deliver it from the shadow of Saddam Hussein.

Mehmet Sepil: The Turkish president of Genel Energy made his reputation building infrastructure in Kosovo and Afghanistan. Courtesy General Energy

"One more," says Eric Ailland, as he flicks a stone into the gleaming black pool.

It is sucked in without a splash, which is enough to reassure the French engineer that the dark stuff seeping to the surface in this field in Iraqi Kurdistan is oil.

For years Kurdish villagers have brought their sheep here to graze, sometimes also filling a jerrycan or two with oil. But this picturesque land of soft green and yellow hills edged by slate-blue mountains has now become the centre of a race for resources between the world's oil majors, which believe Iraqi Kurdistan could hold as much as Libya's 45 billion barrels of reserves in massive reservoirs like the Tawke field.

And this Kurdish region - politically and economically sidelined for decades by the Saddam Hussein government in Baghdad - is using its oil potential to assert its independence from the rest of Iraq.

"This type of field - it's once in a lifetime that you will see it," says Mr Ailland, who once drilled for Total in Yemen and Indonesia. "We thought it was a shallow reservoir. And then one year later … this one turned out to be a giant."

Satisfied with a final rock toss, he turns towards a work camp. It is a stroll through the grass and a short drive back to the complex of prefabricated trailers where he and 120 workers live. They wear neat blue jumpsuits and white hard hats, whether it is minus 8°C or 54°C.

Mr Ailland, the local production manager for DNO, a Norwegian explorer that is 42.8 per cent owned by the UAE's RAK Petroleum, is at the forefront of his company's push to double production to 200,000 barrels per day (bpd) and drill farther down into the Tawke field to layers dating from the Jurassic and Triassic periods.

Such work in Kurdistan was inconceivable a decade ago. Saddam Hussein was in power, the US was trying to determine whether Iraq had weapons of mass destruction, and the Kurdish region, crippled by the international sanctions against Iraq and attacks by Hussein's military forces, had only a handful of hospitals and a per capita GDP of US$375 (Dh1,377).

"This was a devastated wasteland," recalled Barham Salih, the prime minister of the Kurdistan Regional Government, in a speech last year.

In 2002, a year before the US invasion of Iraq, Kurdistan signed its first oil deal. More than 45 contracts with companies from 17 nations have followed.

The prospect of virgin fields in a relatively safe environment has attracted a steady stream of big-name players in spite of the threat of their being blacklisted from operating in the rest of Iraq by the federal government in Baghdad.

"There's been a huge amount of interest from the big majors," says an official with the Kurdistan government, asking not to be named. "This year we expect to see a number of significant new entrants to the market."

In September, Tony Hayward, the former chief executive of BP, bought into a Kurdish explorer through his investment vehicle, Vallares.

Two months later, ExxonMobil, the world's biggest international oil company, signed drilling deals for six areas. And this month, Christophe de Margerie, the chief executive of Total, which operates in southern Iraq, said the French major was looking at entering Kurdistan. Oil companies operating in Kurdistan earn an average $6.50 for every barrel they pump compared with the usual $1 elsewhere in the Middle East, according to Morgan Stanley research.

Kurdistan's welcoming of foreign partners has raised tensions between the semi-autonomous region's seat of power in Erbil and Baghdad. This month, the Iraqi oil ministry warned Total against signing any agreements with Kurdistan and barred ExxonMobil from a forthcoming auction of exploration licences.

Baghdad says the Kurdish contracts violate the 2005 constitution. Erbil cites what it sees as its history of persecution at the hands of Baghdad when justifying acting alone.

"The challenge is to turn oil from the curse it has been to the blessing we should have," says Mr Salih. "From the devastation and the destruction of the agonies of genocides, we can eye a future that is democratic and is prosperous - a future where Kurdistan will not be the case of genocide and the victim of ethnic cleansing, but where Kurdistan is a hub of stability."

The dispute between Erbil and Baghdad has also affected smaller independents such as DNO. In May 2009, the company completed a 42-kilometre pipeline from the Tawke field to Fishkabour, Kurdistan's juncture with Syria and Turkey. There, the pipeline feeds into another owned by the Iraqi government that funnels oil from the Kirkuk field in Iraq to Ceyhan on Turkey's Mediterranean coast. But five months into the pipeline's flow, Erbil stopped exports, saying Baghdad had not been paying the companies for the oil.

"The pipeline was ready, the oil was in the pipeline, everything was ready," recalls Mr Ailland.

Only last year, after more than a year during which DNO had to constrain production and mostly sell to the local market, did a compromise between the regional and federal governments allow exports to resume.

Now DNO is taking precautions, including building 140,000 barrels of storage capacity in case of another pipeline shutdown.

It is just across the street from the U-shaped pipe where Kurdish oil meets Kirkuk crude, and around the corner from the station where truckers unload cargoes from Kurdistan fields that have not yet been connected by pipe.

"They are always shutting down the facilities, so we need to adapt ourselves to the situation," says Mr Ailland, his voice barely audible above the machines sanding the sides of the massive oil storage tanks.

The entry of the supermajors into Kurdistan could transform a landscape that has long been the domain of small independents - a fact of which DNO is keenly aware.

"DNO is not a mega company, not at all," says Magne Normann,its chief operating officer. "But to do what we are doing, you don't need to be a very large Exxon company. It can, as a matter of fact, be a disadvantage if we are talking about something to move fast."

Like many other oil companies, DNO points to its practice of training local talent. Ninety per cent of its staff at Tawke come from the region, many of them brought on as trainees with the understanding that they will eventually leave DNO to serve Kurdistan in other roles.

"I see that as a benefit to the region," says Mr Normann. "We need to train more people."

Drive through Kurdistan today, and patriotism is not hard to find. Enormous busts of musicians known for singing separatist ballads anchor a major traffic circle in Zakho, the biggest town on the way to Tawke. At the entrance to DNO's facilities, the Kurdish flag - a golden sun in the middle of red, white and green bands - flies at the gate monitored by armed guards.

Ahmad Abdulkader Nuraddin, DNO's deputy general manager, recalls being recruited from the UNoil-for-food programme that bought Iraqi oil from Hussein's government under strict conditions. He says that before joining the company he was surprised to learn that DNO was in the oil business. "It was not even a dream to have oil companies," he says. "We never thought that one day we would control ourselves and have our own government, the Kurdistan government. I am optimistic. I think there will be something here. I think we'll continue developing, and we'll have a country one day."

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