Oil Juniors in Kurdistan Confronted by New Petroleum Law 17.8.2006 

Analysts expect if the law is approved, Baghdad will protest and put all means available at work to remove it. At the same time, the new law comes at a time that Shi’ite militias are entering the Kirkuk region, including the city, to reclaim the region by the use of arms. Growing religious and ethnic tension is already reported widely.

The new law is also a total violation of the existing agreement between the Baghdad government and Kurdish parties that national law will prevail as long as a referendum has not been held about the position of Kirkuk. The new Iraqi constitution claims that Kirkuk is part of Iraq, without full powers given to Kurdish officials. New political conflict is expected in the coming months, possibly resulting in renewed violent clashes in the region.

In recent years, several agreements have been signed between the Kurdish regional government and international oil and gas operators. All contracts are however disputed by Baghdad as long as no end-solution has been reached. In the last few days, new Iraqi Minister of Oil, Hussein Shahristani, has reiterated that any contracts with international companies in the Kurdish region should be made through the oil ministry in Baghdad.

The Kurdish proposal comes at the same time that the Iraqi government is also preparing an Iraqi hydrocarbon law, which could be ratified before the end of 2006. International oil and gas majors are eagerly awaiting that development; until now, old rules still exist.

For already operating companies such as Norwegian oil and gas minnow DNO and K Petroleum Company (KPC), which is a subsidiary of Canadian Heritage, increased insecurity seems to be heading their way.

Already, investors have been keeping an eye on DNO’s operations, even as drilling has been rather successful. Both independents, for which much of their future attractiveness to investors and shareholders will depend on their current Iraqi assets, could be hit by a financial debacle if Baghdad’s rule of law prevails. Iraqi government officials have been reiterating that companies dealing with Kurdish regional government officials could be faced by a full refusal of operations in the future.

The DNO currently holds a concession in the Zakho region of Kurdistan, where already several tests have revealed oil reservoirs. The Tawke-1 wildcat has shown a flow rate of 5,000 barrels per day (bpd). While, total assessments have shown a potential of 100 million barrels of crude oil.

Heritage Oil has signed two MOUs for an area comprising some 1,300 square kilometres. Production-sharing agreements are currently in the final stages of negotiation as well.

Woodside Petroleum is still assessing its options where to start exploration, while already setting up shop.

Another Canadian minnow, Western Oil Sands [TSX:WTO], has lately signed up for an Exploration and Production Sharing Agreement (EPSA) on a yet undefined acreage in Kurdistan, but is slated to be around Sulaimaniyah. Other assets of Western Oil Sands are a 20% stake in Shell Canada’s [TSX:SHC] oil sand operations.

Conclusion

The combination of Kurdistan’s attractive oil reserves, stability and high crude oil prices, could be only a fata-morgana for the current operators, if Baghdad puts its foot down.

Kurdistan is still a part of Iraq, some operators seem to forget. The next months could be crucial to the future of DNO, Sterling Petroleum and Heritage. A debacle in Iraq could see investors and shareholders flee to more stable areas.

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