Two Iraqs, one big mess – by Yadullah Hussain (National Post – March 22, 2013)

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I am really not sure what the endgame for all this is, to be perfectly honest

Trust an oil company to dive headfirst into a region where the asset resource is untested, political and security risks are elevated and the supply routes are controlled by a bitter rival that deems all contracts illegal. Moreover, some of the companies have not even been paid despite actively producing the asset.

Welcome to Kurdistan, a semi-autonomous part of the troubled country of Iraq, a nation divided politically, ethnically and now along oil interests 10 years after being invaded by the United States.

“When Talisman went into Kurdistan in 2008, they were mindful of the fact they were taking a certain amount of risk,” said Richard Herbert, executive vice-president of exploration at Calgary-based Talisman Energy Inc. Despite the challenging political and geological landscape, the company has found at least 115 million barrels of oil and 1.5 trillion cubic feet of natural gas from its two blocks in the region.

For many oil operators, Iraq has lived up to its expectation as one of the last remaining low-hanging fruits in the conventional oil sector, with operating costs of US$2 to US$3 per barrel, compared to US$25 to US$30 in Canada, according to the International Energy Agency.

Politically, however, it is one of the most complicated places in the world in which to operate.

For a start, oil companies see two Iraqs instead of one, and most can operate either in one or the other.

“From an oil investment perspective there are clearly two very different Iraqs,” said Julian Lee, analyst at London-based Centre For Global Energy Studies. “And those differences reflect the very different stages of development of the oil industry in southern Iraq and in Kurdistan.”

Iraq “proper” in the south offers oil companies supersized, geologically acquiescent oil basins, but is riddled with corruption, political strife, jihadists and stingy contracting terms.

The semi-autonomous northern area is governed by the Kurdistan regional government (KRG), which offers sweet production-sharing deals but is largely underexplored and in tough, mountainous terrain.

Last year Calgary-based Niko Resources Ltd. found that drilling in Kurdistan was a difficult proposition even as working its block showed no commercial viability and was thus abandoned.

The twist is that the central government forbids oil companies from signing independent deals with the KRG and bans any company that signs up with the other side.

Initially, major oil companies chose to side with Baghdad while smaller independents tried their luck in the promising Kurdistan plays of Zagros and Kurdamir.

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