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Investors are drilling for oil in the
Kurdistan region
8.2.2007
By Christopher Helman
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February 8, 2007
With violence raging in Iraq, some American
investors are drilling for oil in the
Kurdish-controlled 'Kurdistan region' north.
Very quietly in September, under the watchful eye of
the Kurdish Oil Protection Force, a crew funded by
Prime Natural Resources of Houston started drilling
for crude in Kurdistan (northern Iraq). The idea was
to reach a target depth of 9,500 feet in a Bina Bawi
field around New Year's and uncork what seismic
studies indicate could be 500 million barrels of
oil. Success would make Prime and its partners the
first Americans to find new oil in post-Saddam Iraq.
Long before ExxonMobil (nyse: XOM - news - people ),
BP (nyse: BP - news - people ) and Chevron (nyse:
CVX - news - people ) pile on, Prime is making an
audacious move at a very delicate time. The dispute
over hydrocarbons is very much at the heart of the
civil war raging in Iraq: Sunnis, who ruled under
Saddam, want their share of oil riches, which mostly
lie in the Kurdish-controlled north and the Shiite
south. The factions seem close to a federal law over
how to distribute petro revenues--which might tamp
down the violence--but are hung up on who would have
final say, the feds or the regional government.
Until that's settled, Uncle Sam doesn't want any oil
company, American or otherwise, cutting deals with
any group. The State Department said as much to
Prentis B. Tomlinson, chief executive of Calibre
Energy, one of Prime's partners, when it summoned
him for a scolding in the fall. "My response was, 'I
wish you had called me before we had made the
investment,'" winks Tomlinson, 64. "Still, there's
no law that precludes us from being there."
But there is the lure of relatively quick and hefty
profits. Early investors in Calibre, an o-t-c
bulletin board stock with minimal operations (it
lost $1.9 million on revenue of $21,000 in 2005),
stand to pocket $100 million or so if a new stock
offering becomes effective early this year. And
there are other western investors in Iraqi
Kurdistan. Adjacent to the ridge formation that
marks Bina Bawi is a field called Taq Taq, where a
Swiss-Canadian outfit, Addax Petroleum, says it
found 2 billion barrels in September. Last April
Norwegian explorer DNO hit pay dirt--330 million
barrels in the Tawke field. Other prospectors
include Canada's Heritage Oil and Western Oil Sands.
Where is Big Oil? "The supermajors won't go in yet;
they can't afford the headlines. What workers would
they send there, and who would be willing to break
the news to their family when they got killed?" asks
Peter Newman, head of the oil and gas practice of
Deloitte & Touche. "Plus, these projects are too
small for the big guys."
Since 2003 there have been 375-plus attacks on Iraq
oil assets: pipelines blown up, engineers shot, fuel
trucks set on fire. Iraq's oil output is down from a
prewar 2.5 million barrels per day to 1.9 million.
Considering that Iraq's estimated reserves of 150
billion barrels are second only to Saudi Arabia's,
oil economists think Iraq could easily produce 5
million barrels a day for many years. While the
Kurdish areas are safer than the rest of Iraq,
roughly half the nation's postwar oil production
deficit is traced to the very area where the
wildcats are drilling. Seventy-five miles from Bina
Bawi runs Iraq's biggest export route, the
Kirkuk-to-Ceyhan pipeline. Before the war it carried
900,000 barrels a day from northern Iraq to Turkey's
Mediterranean coast. Today it's lucky to do 500,000.
Oil was first discovered in Kirkuk in 1927 by the
Turkish Petroleum Co. Its estimated
10-billion-barrel reserve caught the attention of
Saddam, who in the mid-1970s began "cleansing" the
area of Kurds, replacing them with Sunni Arabs.
Since the U.S. invasion the Kurds have been moving
back, and reclaiming petroleum assets, partly by
letting foreign oil companies drill near Kirkuk.
Not that this settles the matter of who owns what
oilfield. Oil Minister Hussein al-Shahristani, a
Shia, insists that Baghdad will not recognize any
contract between foreign oil companies and the
Kurdistan Regional Government (KRG). Nechirvan
Barzani, prime minister of the KRG, counters that
the Kurds, who compose 17% of Iraq's population,
will secede if their authority over regional
oilfields is eroded. "We don't believe a centralized
oil policy has been successful since Iraq's
inception," says Qubad Talabani, the KRG's
ambassador to the U.S. and son of Iraq's president.
How did Westerners get in? In 2002 Jalal Talabani,
then president of the the Patriotic Union of
Kurdistan (now president of Iraq), signed up
Turkey's Petoil and Genel Enerji to the first
production-sharing agreements, under which the Kurds
were promised roughly half of any oil produced.
Petoil is a small oil explorer that owns refineries
and transports oil across Turkey, making it a
natural recipient of Kurdish crude. But Petoil
needed a partner to shoulder some of the risk and
put up the cash to drill Bina Bawi.
A Texas mining consultant who had worked with Petoil
years ago suggested that it meet with Richard
Anderson, Prime's chief executive, to discuss a
possible deal. Anderson, now 53, flew to Ankara to
chat with Petoil Chairman Güntekin Köksal and
General Manager Ali Ak. After several months of
negotiations Prime in 2004 decided to contribute
several million dollars for 50% of Petoil's stake in
Bina Bawi and several Iraqi oil prospects. They
called the new joint venture Pet-Prime. "We thought
a U.S. company would be an ideal partner in that
region, for political, technical and economical
reasons," says Ak in an e-mail exchange. "Prime
Natural Resources was the first company to show an
interest." Prime later sold 20% of its stake to
Calibre for $5.5 million and another 20% to Hillwood
Energy--a unit of of Hillwood Development Co.,
headed by H. Ross Perot Jr.--for what's thought to
be an equal amount.
Prime Natural Resources is a closely held, secretive
company. Acquired a decade ago by the New York City
hedge fund Elliott Associates, Prime has an old oil
hand at the helm. Anderson has been with the company
since 1998; before that, as the managing partner of
Hein & Associates, he presided over the audit
committees of oil services companies like Boots &
Coots and Grant Geophysical (other-otc: GRNPQ.PK -
news - people ). Taking advantage of high oil
prices, Anderson has sold most of Prime's oil and
gas fields in east Texas and the Gulf of Mexico; it
retains a big stake in an oilfield in Colombia.
If successful, Bina Bawi will be Prime's biggest
investment. It has spent tens of millions of dollars
evaluating seismic data and funding drilling crews,
mostly Turks, Kurds and Romanians. Larger outlays
will come once they find oil--typically for such
projects, $300 million or more in pipelines and
processing plants over the next decade.
Addax (latest-12-month sales: $2 billion) has
already spent $124 million. A source close to the
Taq Taq project says the company will have to shell
out $3 billion over the next ten years to build out
the infrastructure in order to get at its 45%
interest in an estimated 2.7 billion barrels. (It
recently expanded its agreement with the Kurds to
include exploration in the Kewa Chirmila prospect,
thought to hold 650 million barrels of oil.) This
year the KRG intends to export some production from
the project to the regional market. Headquartered in
Geneva, Switzerland and listed on the Toronto
exchange, Addax is accustomed to working in tough
places; it's in Nigeria alongside Shell and Chevron.
Its partner in northern Iraq, Genel Enerji, is a
division of Turkey's powerful Cukurova Group
conglomerate, controlled by Chairman Mehmet Emin
Karamehmet.
DNO has anted up approximately $100 million for
three exploration deals in northern Iraq. That's
bought a 55% share of any production, though it has
to foot all the bills. With annual revenue of $300
million or so, DNO has interests in Yemen,
Equatorial Guinea, Mozambique and Norway's
continental shelf.
Few stand to make more money than early investors at
Calibre Energy of Washington, D.C. Before
wildcatting in Iraq, Calibre was a tiny energy
company controlled by veteran oilman Prentis
Tomlinson, with a handful of oil and gas prospects
in Texas. Over the last 30 years Tomlinson has
operated a dozen companies, some of which flamed
out. In the late 1990s Benz Energy, a
Vancouver-exchange-listed exploration company,
stumbled while developing the Oakvale gas field in
Mississippi but stayed alive by selling assets to
Prime Natural Resources. A few properties were held
by Calibre, formed in 2005 and taken public in
January 2006 in a reverse merger with a listed shell
company called Hardwood Doors & Milling Specialties.
After raising $18 million or so in several private
placements, Calibre bought its stake in the Bina
Bawi project in September.
With little more than a handful of wells in Texas,
Calibre is still a very useful vehicle to its
backers. In October it filed a prospectus with the
Securities & Exchange Commission to sell 71 million
shares bought by 160 early investors but never
traded on the market. (Only 4 million Calibre shares
change hands today.) The offering is timed to
coincide with the end of drilling at Bina Bawi.
Tomlinson, whose 20 million shares are worth a
recent $52 million, says neither he nor any
directors intend to sell in the offering. But what
could the early investors reap? They paid $19.5
million for a total of 41.5 million shares and
warrants. Average cost per share: 47 cents. Says
Tomlinson, "It's a unique opportunity, with a very
narrow window."
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