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Kurdistan: Raising the Oil & Gas Stakes

Until Sunday, 29 September, Kurdistan (Northern Iraq) has not seen an attack of the kind that plagues the rest of Iraq on a daily basis since 2007.

Attacks in KurdistanA series of attacks in the capital Erbil most likely indicate that the conflict in Syria has now spread into Kurdistan. On 29 September, as yet unidentified militants launched a series of attacks in Erbil on the Kurdish security services (Asayish) headquarters. A suicide bomber detonated explosives at the entrance to the Asayish headquarters, which was followed by a shoot-out between Asayish forces and four militants. This scenario was then followed by the remote detonation of an ambulance by a fifth militant. All six militants were killed in the attacks and clashes, along with six Asayish forces. Some 60 other people were wounded throughout the course of the violence.

(The KRG’s security apparatus, the Asayish, operates with a similar mandate to the US FBI, with jurisdiction over economic and political crimes, but operates fairly strictly along party lines.)

For the Kurds of Syria, the conflict in Syria is extremely complex. A number of Kurdish fighting brigades had earlier joined under a single umbrella to fight alongside the rebels and the jihadists against the Assad regime—though they have since found themselves taking up arms against the jihadists. However, the most influential Kurdish group in Syria, the Kurdish Democratic Union Party (PYD), which has its own Asayish security forces, has remained staunchly opposed to the foreign fighters—most particularly the Iraqi offshoot of jihadists in the form of the al-Nusra front.

Many Syrian Kurds had hedged their bets that the Syrian rebels would deal with them on secession, but the uncertainty kept the Kurds non-committal. Over the past weeks, fighting between Syrian Kurds and radical Sunni forces has picked up momentum. Now even the Free Syrian Army (FSA) rebels have turned on the Kurds with an offensive to push them back. The Kurdish National Council, parts of which had earlier supported the FSA and even fought alongside it, is now favoring the Assad regime over the extremists, adhering to the PYD’s sentiment. Al-Nusra may now be taking its fight with the Kurds across the border into Northern Iraq, targeting Asayish there.

In August, Kurdish forces clashed with jihadists who were trying to open up a land corridor to connect them to Iraq. This fighting led to a flood of Syrian Kurdish refugees across the border into Iraqi Kurdistan. Kurdish Regional Government (KRG) President Masoud Barzani had also vowed to intervene with his security forces in Syria if need be (later toning this down somewhat).

However, we caution against a simple explanation for the attacks in Iraqi Kurdistan. It may not be coincidence that the attacks come with the initial results of parliamentary elections in Kurdistan, which took place on Saturday, 21 September. An opposition movement in the KRG has pushed Iraqi President Jalal Talabani’s Patriotic Union of Kurdistan (PUK) into third place.

Kurdish President Masoud Barzani and his Kurdistan Democratic Party (KDP) secured a major victory in these elections—a victory that will change the political playing field in Kurdistan for the first time in over two decades. (Preliminary figures show the KDP in first place with 37.4% of the vote, or one-third of seats in parliament; the opposition Movement for Change (Gorran) in second with 24.7%; and Talabani’s PUK in third with 16.6%; with 11 seats reserved for non-Kurdish minorities largely loyal to Barzani.)

This election victory will give Barzani much greater power in the KRG, and at the same time, Barzani has been attempting to set himself up as a wider Kurdish leader, encompassing Syrian “Kurdistan”.

In terms of domestic politics, the PUK now has to make a choice as to whether to form another government with the KDP in the lead, or whether to go to the opposition, which may help it repair its reputation among supporters who believe it has been taking orders from Barzani. For Barzani, the ideal would be the formation of a new government with the PUK and the Islamic Union, keeping the Movement for Change in the opposition. The PUK may refuse this scenario, as for the first time it would mean an unequal relationship between the KDP and the PUK, with the PUK playing a much less influential role in decision-making.  

These election results are highly significant for Kurdistan on a number of levels, not the least because it will likely mean that not only will the top posts in the KRG government go to the Barzani camp, but the Iraqi presidency (reserved for a Kurd) could also theoretically go to the Barzani camp—breaking a long-time power-sharing deal between the PUK and the KDP.

What Does it Mean for Investors?

For now, investor confidence is not likely to be shaken by this rare event. There is a great deal of faith in Kurdish security forces to withstand additional threats emanating from Syria and most investors will express confidence that Sunday’s carnage was a one-off—and not an indication that Iraqi Kurdistan will be drawn into the Syrian fold.

While this optimism rests on a strong foundation, investors should still be prepared for more potential spillover from Syria—if only because the relations between diverse groups of Kurds in Syria, Kurds in Iraq and Turkey are extremely complicated and alliances in Syria are changing by the day, making the situation highly unpredictable and volatile.

As far as elections are concerned, this is a game-changer, and is likely to work in favor of investors by solidifying the political playing field and narrowing the power brokers. The Barzani family already controlled the lion’s share of the oil and gas terrain in Kurdistan, now it could gain additional power over other sectors of business, though perhaps not without some scrabbles over turf, which could actually be played out in part within the Asayish (the security forces).

What investors will remain focused on in the immediate term—in part due to an inability to grasp the potential threat from Syria—is Iraqi Kurdistan’s progress towards oil and gas independence from Baghdad. Right now, this is all about a new pipeline coming on line that will transport Kurdish oil and gas directly to Turkey, bypassing Baghdad.

In a recent exclusive interview with Oilprice.com, Genel Energy’s Tony Hayward notes that we are on the cusp of one of the most successful oil stories in recent history.

“The impending completion of the pipeline is clearly a significant milestone for the oil industry in the Kurdistan Region of Iraq. The relationship between the KRI [Kurdish Region of Iraq] and Turkey is now very strong, and this has helped the Kurdistan Regional Government to take control of its own exports. The strength of this relationship has helped to give significant momentum to the Kurdistan oil and gas industry.

The signing of an Energy Framework Agreement between Turkey and the KRG in March 2013 was an important step, and we have seen clear evidence of its implementation - KRI crude oil is exported by truck to international markets via Turkey, and a Turkish state-backed energy company has also entered the upstream sector in the KRI, signing 6 PSCs with the KRG and partnering with Exxon in a number of licences. Finally, Turkey and the KRG have agreed a framework for the export of KRI gas to the Turkish gas market – we expect this Gas Sales Agreement to be signed by the end of the year.

Kurdistan has always had the resources, now it is building the infrastructure and has a significant market for its oil and gas. It is a good place to be.”

Where are we now? Very close, indeed. The pipeline from Taq Taq to Fishkabur is almost done and the entire system will be fully operational around the end of this year, with an initial capacity to pump 300,000 barrels a day into Turkey.

Short Path into Kurdistan

Given the progress made in Kurdistan over the past couple of years, and the near-completion of this key strategic pipeline to Turkey, the fact that Canada’s Talisman is looking to divest a stake in some of this prime acreage should catch the astute investor’s eye.

Talisman would not be selling stakes in this prime property if it had a choice. But it’s trying to cut costs by 20% this year and raise $3 billion and the assets it wanted to divest aren’t selling.

Talisman has a total of 119,000 acres of oil exploration property in Kurdistan, with those assets valued at between $750 million and $1.25 billion.

Talisman Assets in Kurdistan

Up for grabs will be a stake in two exploration projects in Kurdistan: Kurdamir and Topkhana.

•    In Kurdamir, Talisman has a 40% interest, along with Canada’s WesternZagros (40%) and the Kurdistan Regional Government (KRG, 20%). Talisman spudded the Kurdamir-2 exploration well in Q4 2011 and a rig was released in January 2013.
•    In Topkhana, Talisman has a 60% interest, with the KRG holding 40%.

For both blocks, 3D seismic operations began in the Q4 2012 and will continue through the end of this year. Talisman is planning to drill two appraisal wells this year—Kurdamir-3 and Topkhana-2. Investors are already interested, though Talisman is keeping quiet about with whom it is negotiating.

In Kurdistan, Talisman is shouldering too large a portion of the burden of developing significant finds, particularly in the block it owns solely with the Kurdish government. These are the deals to look for because the timing is hot right now—on the cusp of the completion of the new pipeline, though the situation with Syria should be very closely monitored as a precautionary measure.

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