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Tony Hayward's comeback gamble
2.10.2011
By Florian Neuhof - The National UAE |
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October 2, 2011
Tony Hayward has wasted little time in making a
return to the oil industry.
The man forced to quit as BP chief executive over
the Deepwater Horizon oil spill catastrophe in the
Gulf of Mexico last year took up a new leadership
position last month as the head of Genel Energy, a
merger between the investment company Vallares and
Genel Energy International.
Vallares, co-founded by Mr Hayward, is merging with
the Turkish outfit in a US$2.1 billion (Dh7.7bn)
deal. Mr Hayward will have surprised few with his
determination to remain a key player in the world he
knows best,
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Tony Hayward. Photo: foreignpolicy.com |
but the stage he has chosen for his comeback is
interesting because Genel's sole area of activity is
Iraqi Kurdistan. The logic behind the move was made
clear by Mr Hayward on the day the deal was
announced, when he called Kurdistan one of the "last
great frontiers in the oil and gas industry, with
low finding and development costs, and proximate to
significant markets".
The deal puts a bargain basement price tag on
Genel's assets, valuing its probable oil reserves at
$5.90 a barrel, the second lowest valuation of oil
companies' assets in the FT350 Index in London,
where the new company will be listed.
Genel produces 41,000 barrels a day (bpd) in
Kurdistan, and aims to reach 90,000 bpd by 2013. It
has proved and probable reserves of 1.4 billion
barrels of oil equivalent.
"Where else could you buy your way into reserves
that size, which are still undervalued?" asks Samuel
Ciszuk, an energy analyst at IHS Global Insight.
The news of an industry heavyweight turning his
attention to Kurdistan has led to optimism about the
future of production in the north of Iraq.
"It is very positive for the region," says John
Tottie, an oil and gas analyst for HSBC in Saudi
Arabia. "Tony Hayward has a lot of credibility in
the industry, and it's a great vote of confidence by
someone who had options globally.
"Vallares could have bought anything. They looked at
assets in Asia, in the Middle East, and in the end,
they chose the Kurdistan region."
Iraqi Kurdistan, a semi-autonomous region
represented by the Kurdistan Regional Government
(KRG), has sufficient potential to attract the
attention of international oil companies, holding
proven reserves of 45 billion barrels of crude,
according to the KRG. But good feedback from
exploration work and easy access to reservoirs is
offset by a difficult postwar political situation.
The discount on the Vallares acquisition is the
result of a protracted impasse over the legal status
of oil production in the region, and the investment
represents a significant gamble.
Key to the gamble is a national oil law, which will
determine the status of the contracts signed by the
KRG with the international oil companies. The
legislation has stalled since 2007, primarily over
Baghdad's reluctance to give the Kurds too much
autonomy over its energy reserves.
Recent efforts to get the legislation implemented
were thwarted when the cabinet changed a draft
presented to parliament to give the central
government more control over Kurdish assets, thus
making it unpalatable to the sizeable Kurdish
contingent of MPs.
Payments to companies already operating in Kurdistan
have started to trickle through from the finance
ministry, which receives the revenue generated from
the oil flowing out of the region via the
Baghdad-controlled Kirkuk-Ceyhan pipeline.
But the two payments made since June only reimbursed
the companies for the costs of production.
Allowing international oil companies to make profits
in Kurdistan would be tantamount to acknowledging
the contracts between them and the KRG, and in turn
give the Kurds de-facto control over their energy
sector.
As this would bring the region closer to full
independence, the idea of adequately rewarding
energy companies faces strong opposition in
parliament and the cabinet.
Against this backdrop, Mr Hayward's new venture is a
risky undertaking.
"Vallares has come in and bought reserves at very
much a bargain price. But also at a massive risk,
and they are gambling on it going their way," says
Mr Ciszuk.
A complete annulment of existing contracts is
unlikely, however, as the Kurds hold too much
political sway in the coalition of the prime
minister Nuri Al Maliki, who needs stability in his
ranks to face challenges such as the continuing
withdrawal of US forces from Iraq.
An eventual end to the stand-off between Baghdad and
Erbil, the capital of the Kurdistan region, will
probably result in a compromise solution, but one
that will come at a cost to the big oil companies.
"Any sort of compromise would mean that terms get
somewhat tougher," says Mr Ciszuk.
Companies operating in the south of the country,
such as Shell and ExxonMobil, have struck far less
favourable agreements than the smaller companies
active in the north.
But the prospect of working under the same
conditions as his former rivals does not seem to
intimidate the former BP boss.
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