That old tune about Kurdistan, the oil province of tomorrow

Iraqi Kurdistan, a siren song of a place with its 40bn+ barrels of untapped oil, continues to push smart people away even as it pulls them closer. For oil investors there, the tune goes something like, “Forget all the licensing disputes and political mess of today and yesterday … It will be sorted out tomorrow … The market demands it, political necessity demands it … And then there will be 40 billion barrels of oil and everyone will get rich”. This tune is starting to sound pathetic.

Heritage Oil today confirmed it plans to sell its Ugandan oil stakes to Eni for $1.5bn – it was applauded as a smart move for one of the best E&Ps in the business. But Uganda was less a part of the equation than Kurdistan.

Heritage also announced today that it was dropping plans to merge with Turkey’s Genel Energy. This plan would have created a regional mini-major in Kurdistan combining Genel’s producing and near-producing fields and refinery with Heritage’s greenfield acreage nearby. It was clear that the so-called “HeritaGE” merger, roughly valued at $6bn, blew up because the Kurdistan Regional Government has still not worked out a mechanism for paying operators like Genel. What value did Genel bring to this merger it was getting no money for its oil exports, and was not told plausibly that it ever would? Better for Heritage to cut its losses and dismiss the failure of the HeritaGE powerplay by taking Eni’s cash and plotting its next move.

But its next move will be in Kurdistan it said yesterday. Much of the proceeds from the Eni deal will be reinvested in its Miran field there. Drilling results imply Miran is as promising as any of the nearby acreage in this region of whopping discoveries and fizzling optimism.

This sequence has appeared paradoxical to some media today. 1: Sell out of Uganda – the price was right. 2: Double up exploration in Kurdistan. Still looks great. 3: Kurdistan is a basketcase whose failure to pay operators is so serious that we have walked away from our own merger proposal premised on Kurdistan’s glowing future.

The explanation is simple. Heritage is still hearing that old tune about the mess of today and the promise of tomorrow. By the time fields like Miran are up and running, Iraqi Kurdistan’s licensing and payment issues will be sorted out. Surely. While operators like Genel, DNO, and Addax/Sinopec are taking the hit today, in other words, they are merely the vanguard preparing the way for later entries like Heritage to thrive.

Heritage is not the only company that appears to like this thinking. Any chief executive of the E&Ps in early-stage exploration there will tell you the same thing. The logic is always reasonable. A recent argument in support is that a resolution on payment awaits the installation of the new KRG government under Barhim Salih (with Ashti Hawrami, oil minister and architect of the oil deals, remaining in place).

Heritage, facing a billion-dollar cash alternative, did not believe in this story enough to stick with Genel. But it believes it over the long term. So, perhaps, did the early arrivals who told the same stories three years ago.

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