END TO THE STALEMATE?
In the compound ringed by blast walls that houses the Kurdish parliament and other government buildings, the Kurdish regional government's natural resources minister Ashti Hawrami sits in his office, dimmed by heavy drapes. The four-year-old building is clad in brick and boasts a grand entrance hall with an inlaid marble floor and curved staircase. That gives way to more modest decorations inside: inexpensive photographs of oil installations, mass-produced prints of flowers, faux-leather sofas.
Hawrami says there is "big excitement" in the oil industry. He expects the existing contracts agreed by the Kurdistani government will soon be recognized by Baghdad. But push him and even he cannot point to a fundamental change in Baghad's position on the contracts. Put simply, Kurdistan says its contracts are in line with the constitution, while officials in Baghdad insist on central control over oil contracts. "In principle, it has been agreed that everything will be done according to the constitution, and we are not asking for anything outside the constitution, so therefore basically we have an agreement," Hawrami said in November.
Not quite. If Baghdad forces the Kurdistani government to redraft the contracts, explorers' returns could be hit hard. Kurdistan's deals with foreign oil companies are production sharing contracts (PSCs). But Baghdad wants the contracts to be rewritten along the lines of the service deals it has signed with BP and Exxon in the south. PSCs usually offer better returns and more control than service contracts. Analysts at Deutsche Bank calculate the internal rate of return allowed under DNO's contract will be 50 percent. In comparison, Baghdad's $2/barrel service contracts with Royal Dutch Shell yield only 17 percent.
Iraqi Oil Minister Abdul Kareem Luaibi has said the 2011 federal budget will include the expectation of shipments of 150,000 barrels per day from Kurdistan -- more than the Kurds say they can produce.
So even though exports resumed a few weeks ago, with no clarity on the revenue model companies like DNO are yet to be paid. That's not a problem for diversified investors like Marathon Oil and OMV who can afford to sit and wait. But smaller Kurdistan-focused companies will struggle.
Gulf Keystone, for instance, says it has enough cash to last until the second quarter of 2012. By then, it hopes to have a steady cash flow from exports, which will open up the option of debt financing. But if that doesn't happen, it will face a crunch. Analysts at Bernstein calculated that a two-year delay in an oil project's start up could halve its economic value. There have already been casualties.
U.S.-based Caliber Energy's plans for a $100 million flotation failed to materialize, ending its hopes of being a major force in the region. Sterling Energy's shares soared to over 220 pence in late 2009, when it raised $103 million to start drilling, only to fall to under 50 pence a year later, as it encountered drilling problems. The shares now trade around 66 pence.
News of a final deal on exports will please people like Norway-based private investor Eirik Amundsen, who holds 79,000 shares in DNO. "It's been some very tough years, but I have always firmly believed that common sense sooner or later will prevail, and thus give DNO the opportunity to fully develop the potential of its Iraqi assets," he says. "I have to admit, though, it has taken much longer than I anticipated." And while optimism is high, there's no guarantee the wait is over yet.
http://www.cnbc.com/id/42003796