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Bloomberg: Kurdish Oil Riches Lure Wildcatters Unswayed by Deaths in Iraq: ‘Iraq, awash in oil…’

EXTRACT: Royal Dutch Shell Plc, Europe’s largest oil company, says it’s concerned about safety. Shell had stipulated three requirements before it would allow its employees to work in Iraq: free elections, a petroleum law and improved security across the country, says Adam Newton, a spokesman in London. Only one condition has been met. “We were pleased to see that free elections led to the formation of Iraq’s democratic government,” he says. “The security situation continues to pose considerable challenges to the lives of the Iraqi people.” He declined to comment specifically on the Kurdish region.

THE ARTICLE

By Kambiz Foroohar
 
Magne Normann, head of DNO’s Iraq unit July 2 (Bloomberg) — A few miles outside the village of Tawke in northeastern Iraq, black smoke billows over the green hills as a 100-foot fire rages unchecked.

Najman Yousef, a former Kurdish guerrilla, inspects the scene. This blaze, unlike the attacks roiling the rest of Iraq, is a positive sign: It’s burning the excess oil gushing from one of the first wells drilled since the fall of Iraqi dictator Saddam Hussein four years ago.

Yousef, who once fought off Saddam’s Republican Guard in the mountains nearby, has given up his Kalashnikov AK-47 to work on an oil platform built by Norwegian wildcatter Det Norske Oljeselskap ASA, or DNO. Oil producers such as Canada’s Western Oil Sands Inc. and Heritage Oil Corp.; Switzerland-based Addax Petroleum Corp.; Genel Enerji, a unit of Turkey’s Cukurova Holding AS; and the U.K.’s Sterling Energy Plc are all exploring the region, which the Kurds have controlled since 1991.

“Before, I was a fighter,” says Yousef, 30, who survived Saddam’s war of annihilation against the Kurds. “Now, I’m building Kurdistan, and the oil will help us.”

Yousef and the rest of the area’s 5 million Kurds are sitting atop what the Kurdish natural resources minister and Iraqi government estimate to be 25 billion barrels of oil in a rugged stretch of land twice the size of New Jersey.

That’s double the 12.9 billion-barrel estimate for Mexico’s reserves, according to the BP Statistical Review of World Energy, and equivalent to more than 80 percent of U.S. reserves.

Extending Reach

The Kurdish territory encompasses three provinces, Suleimani, Erbil and Dohuk, which are wedged between Turkey on the north, Syria on the west and Iran on the east.

Freed from Saddam’s regime — which the Kurds say used bombs and chemical weapons to kill more than 180,000 of their brethren — the Kurds are opening the door to outside investment. They’re also weighing the risks of extending their reach into neighboring areas that have large Kurdish populations.

The prime target is the multiethnic Iraqi city of Kirkuk, which is 60 miles (97 kilometers) from the Kurdish capital, Erbil, and home to the second-biggest oil field in the world.

The new territories would give the Kurds potential reserves of about 55 billion barrels, or almost half of Iraq’s oil. That counts 10 billion barrels in Kirkuk and 20 billion barrels in other disputed areas, Kurdish Natural Resources Minister Ashti Hawrami says.

`Lost Time’

Controlling those areas would mean Iraq’s Kurds would have more oil than Nigeria, Africa’s biggest oil producer. Expansion would also set up a confrontation with Turkey, which has its own Kurdish minority and opposes Iraqi Kurds’ taking over Kirkuk.

“The Kurds want to make up for the lost time under Saddam,” says former U.S. Undersecretary of Commerce Franklin Lavin, who resigned in June. The U.S., which invaded Iraq in 2003, is trying to persuade construction and petrochemical companies to use the Kurdish area as a base.

“We want to encourage companies that are looking at Iraq to think about the Kurdish region as a possible gateway into the country,” Lavin says.

Douglas Layton, director of Kurdistan Development Corp., an Erbil-based firm that promotes the region, says the Kurds aim to create a trading and commercial hub that extends beyond oil.

“Our goal is to be in a position to challenge Dubai,” says Layton, referring to the Persian Gulf emirate that’s become a financial and tourism center.

Oil Law Stalemate

Numerous roadblocks stand in the way of the Kurds’ ambitions. In February, after more than a year of negotiations, Iraq’s cabinet approved an initial version of a petroleum law. The Kurds benefited because the draft gave regional governments the right to manage undeveloped fields such as the one at Tawke.

The Kurds are the only group so far to take advantage of a provision in Iraq’s new constitution that allows one or more of Iraq’s 18 provinces to designate itself a region.

At the end of April, Iraq’s Shiite oil minister, Hussain Shahristani, introduced amendments to the draft, called annexes, which allocated management of 93 percent of the country’s oil reserves to Iraq National Oil Co. The Kurds say they ended up with fields that were commercially unattractive to develop.

The Kurds countered. Under their plan, 58 percent of Iraq’s reserves would be run by the national oil company; the rest would fall to the Kurdistan Regional Government and other local bodies. The Kurds also want the country’s oil revenue to be split among the regions based on population.

`Enough Money for Everyone’

Kurdish members of the Iraqi parliament, who make up about a quarter of that body, will reject the draft law as it stands, says Kurdistan Regional Government spokesman Khaled Salih.

“There’s enough money for everyone,” says Adnan Mufti, the speaker of the Kurdistan National Assembly.

As Iraq’s factions jostle for influence in the new national government, Shahristani has warned the Kurds not to sign oil deals with foreign companies. In March, he said that even the agreement with DNO may not be valid because it hasn’t been approved by the central government.

“All the contracts that have been signed either by the previous regime or by the northern region will have to satisfy the conditions of the new law,” Shahristani said in Vienna at a meeting of the Organization of Petroleum Exporting Countries.

Major oil companies are staying on the sidelines amid the feuding and escalating violence. Iraq’s Interior Ministry reported that 2,123 civilians died in May alone even as the U.S. deployed an extra 30,000 troops.

Majors Stay Away

In the Kurdish region, a car bomb exploded outside the Ministry of the Interior in Erbil on May 9, killing 19 people. The area had been free from terrorism since May 2005.

Royal Dutch Shell Plc, Europe’s largest oil company, says it’s concerned about safety. Shell had stipulated three requirements before it would allow its employees to work in Iraq: free elections, a petroleum law and improved security across the country, says Adam Newton, a spokesman in London. Only one condition has been met.

“We were pleased to see that free elections led to the formation of Iraq’s democratic government,” he says. “The security situation continues to pose considerable challenges to the lives of the Iraqi people.” He declined to comment specifically on the Kurdish region.

U.S. companies are hanging back too. Irving, Texas-based Exxon Mobil Corp., the world’s biggest oil producer, is waiting for a petroleum law, spokesman Len D’Eramo said in a May 24 e-mail.

“If the Iraqi government decides it wants international oil companies to partner with them in developing their resources, Exxon Mobil would be interested in participating,” he wrote.

Wildcatters Welcome

Rochdi Younsi, an analyst with Eurasia Group, a New York- based firm that advises on political risks, says big companies worry that if they enter the Kurdish region before a petroleum law is ratified, they’ll hurt their chances of working in the rest of Iraq.

“Major oil companies don’t want to damage their relationship with Baghdad,” Younsi says.

For now, that leaves Iraqi Kurdistan to wildcatters such as DNO. The Norwegian company sealed two production-sharing agreements with the Kurdistan Regional Government in 2004, gaining a 55 percent stake in the two licenses. DNO will take 10-30 percent of the profits; the rest will go to the regional government.

Dawn Convoy

Magne Normann, head of DNO’s Iraq unit, hired Great Wall Drilling Co., a unit of Beijing-based China National Petroleum Corp., to dig for the oil. DNO has 80 trucks standing by at the field to begin shipments to local markets. It’s waiting for the national government in Baghdad to issue an export license to use an Iraqi-owned pipeline to Turkey.

“We signed our agreements before the interim government was in place in 2004,” Normann says. “We took all the political risk. There should be compensation for that.”

DNO is shouldering physical risks, too. Getting to Tawke from Erbil is a logistical challenge. Normann and his team of Kurdish and French engineers leave the capital in a convoy of three sport utility vehicles at 4:30 a.m. on a March morning. Before they go, they’re briefed by a security adviser, who gives only his first name, Graham.

“If your team leader is killed, follow your driver,” says Graham, referring to the person who’s in charge in each vehicle. “If you’re fired upon, just drive. Do not stop.”

Signs of Wealth

After five hours navigating bone-rattling dirt roads, the convoy reaches Tawke. Apart from a satellite TV dish, the mud houses appear not to have changed in 100 years. There’s one sign of incipient wealth: On a hilltop, streams of black, gooey crude oil cut through the green grass.

“The oil seepages were a hint that there could be commercial oil here,” Normann says.

Later, at the site of the well fire, Normann almost skips with joy. After drilling, companies typically open up the well to see how fast oil is coming out. In most cases, there are no storage facilities during such tests, so drillers simply burn the oil. The blaze’s intensity can be an indication of the oil pressure in a well.

At first, DNO had estimated the Tawke field held 100 million barrels and would reach peak production of 50,000 barrels a day next year, he says. Now, it appears that it may contain much more. The well that’s burning, DNO’s fifth in Tawke, has a flow rate of 12,000 barrels a day, 40 percent greater than a previous well in the same area.

“A couple of more wells like this one and we’ll meet our target for this year,” Normann says.

`Great Potential’

The company aims to produce as much as 30,000 barrels a day in 2007 from the Tawke field. “The oil structure is huge and has great potential,” he says. “We still don’t know how much oil there is.”

Iraq, awash in oil, hasn’t lived up to its potential output for almost three decades. The country reached peak production of 3.7 million barrels a day in 1979, behind only Iran and Saudi Arabia.

A year later, Saddam attacked Iran. During the ensuing eight-year war, wells were bombed and Iraq diverted manpower to fight its enemy, the Iranians.

In 1990, two years after peace with Iran, Saddam invaded Kuwait, leading to the first Gulf War in 1991. The United Nations curbed oil development by imposing sanctions that prohibited companies from investing in Iraq. The sanctions stood until Saddam was toppled in 2003. He was charged with war crimes by the Iraqi Special Tribunal and convicted in November 2006. He was hanged on Dec. 30, 2006.

Doubling Production?

Today, Iraq pumps 1.95 million barrels a day, according to the U.S. Special Inspector General, which is monitoring the country’s reconstruction. That’s about half of its 1979 level and 27 percent less than its 2.6 million barrel-a-day production before the U.S. invasion. It’s using just 27 of its 78 known oil fields. Only 10 percent of Iraq has been explored for oil, according to the U.S. Energy Information Administration.

Oil production could double to 4 million barrels a day within five years, according to the Iraq Atlas, a report published in May by Englewood, Colorado-based consulting firm IHS Inc. says.

Once the violence has abated, Iraq will need investment by foreign companies with technologies such as 3-D seismic imaging. With better equipment, reserves of 116 billion barrels could increase by another 100 billion barrels, the report says. That would make Iraq second only to Saudi Arabia in reserves.

`Gold Mine’

“The security situation and the absence of a petroleum law mean most oil companies will stay out,” says Saad Rahim, an analyst at PFC Energy in Washington, which advises oil companies. “Otherwise, Iraq will be a gold mine.”

The Kurds have been waiting for years to benefit from the riches. About 30 million Kurds live in the mountainous regions of Iran, Iraq, Syria and Turkey, making them the Middle East’s largest ethnic group without a state of their own.

Most Kurds are probably descended from the Indo-European tribes that moved across Iran. They’re ethnically closer to Iranians than to Arabs and speak an Indo-European offshoot of Persian.

Today, most students in Iraqi Kurdistan study English as a second language rather than Arabic, the language of the rest of Iraq.

The Iraqi Kurds have never accepted that they’re part of Iraq. After the defeat of the Ottoman Empire in World War I, the Kurds won the promise of autonomy in the August 1920 Treaty of Sevres. The pact was never ratified.

Ottoman Empire

Instead, France and Britain took over the Ottoman Empire’s Middle Eastern territories. Winston Churchill, Britain’s colonial secretary at the time, helped lump together Kurds, Sunni Muslims and Shiite Muslims in 1920 to create modern-day Iraq. When the Kurds and Shiite tribes rebelled, Britain’s Royal Air Force bombed the insurgents into submission.

For the past 60 years, the Iraqi Kurds have been fighting for autonomy and losing. They’ve become political pawns caught between Iraq, Turkey and Iran, says Himdad Muhammad, a professor at Salahaddin University in Erbil.

In 1974, encouraged by former U.S. Secretary of State Henry Kissinger and Shah Mohammed Reza Pahlavi of Iran, the Kurds rose against Saddam’s Baath Party. The U.S. and Iran supplied weapons, money and advisers. After Iran and Iraq made up, Kissinger pulled the plug and the Kurdish insurgency collapsed.

“A Kurdish proverb says the Kurds have no friends but the mountains,” Muhammad says. “The mountains cannot betray you when their interests change.”

Chemical Ali

From 1986 to ’89, Saddam launched the so-called Anfal campaign to punish the Kurds. His cousin, Ali Hassan al-Majid, better known as “Chemical Ali,” was in charge.

In one attack in March 1988, the Iraqi army and air force dropped poison gas on the Kurdish city of Halabja, near the Iranian border. About 5,000 people were killed. Al-Majid was eventually charged with using poisonous gas to clear Kurdish villages when he went on trial before the Iraqi Special Tribunal in August 2006. Chief Judge Abdullah al-Amiri entered a plea of not guilty for him after al-Majid refused to make a plea. In June, al-Majid was sentenced to death.

The Kurds rose against Saddam again in March 1991. The dictator’s Republican Guard used helicopter gunships to crush the rebellion. Almost 2 million Kurds fled to the snow-covered mountains on the borders of Iran and Turkey. The office of the UN High Commissioner for Refugees called the exodus the largest in the agency’s 40-year history.

Television cameras broadcast images of people starving and freezing amid a severe blizzard, galvanizing the West to launch a humanitarian rescue mission, Kurdistan Development’s Layton says.

Rescue Mission

The U.S., U.K. and France imposed a no-fly zone in northern Iraq to protect supplies of food and clothing. Iraqi aircraft were forbidden in the area. That effort, in response to the blizzard, allowed the Kurds to survive and to win back the three provinces they now hold.

“It was the worst snow in 50 years, and that saved their lives,” says Layton, who worked for a medical nongovernmental organization in the Kurdish region 16 years ago. “It was turning into a humanitarian catastrophe and it was live on CNN.”

Even before Saddam’s fall, the Kurds were planning their own oil industry. In 2002, Jalal Talabani, then leader of the Patriotic Union of Kurdistan, one of two main Kurdish political parties, invited Turkey’s Cukurova to set up an oil unit in Iraq.

Taq Taq

Talabani’s goal was to develop the Taq Taq field about 75 miles northwest of Suleimani, the Kurdish region’s second- largest city. The unit, Genel Enerji, signed a production- sharing agreement in July 2002.

It took over the field in February 2003, a month before the U.S. invasion. Genel has since formed a joint venture, TaqTaq Operating Co., with Switzerland’s Addax. The field has 400 million barrels in recoverable reserves, says Les Blair, TaqTaq’s general manager. The company aims to start pumping 200,000 barrels a day by 2009, he says. By then, the field’s reserve estimates may be revised higher.

“After the no-fly zones were instituted at the conclusion of the first Gulf War, the Kurds had a degree of autonomy but no opportunity to build an economy,” Lavin says.

Now the economy — and the Kurds’ clout — is gaining steam. In 2005, they elected their own regional president, Massoud Barzani. An army of 90,000 Peshmerga soldiers, named after the Kurdish for “those who face death,” patrols Iraqi Kurdistan’s borders. No Iraqi flags fly in the region. Iraqi soldiers can’t enter without permission.

`Uncle Jalal’

The Kurds are full participants in Iraq’s national government for the first time, says Safeen Dizayee, an adviser to Kurdish President Barzani. Talabani, the Kurdish Patriotic Union leader, is now Iraq’s president. He’s affectionately known as “mam Jalal,” a Kurdish term meaning “uncle Jalal.” Deputy Prime Minister Salih Barhim and Foreign Secretary Hoshyer Zubari also are Kurds.

“We’re the glue that’s holding Iraq together,” Dizayee says. “We’ve been trying to put Humpty back together again.”

In Erbil, 220 miles from Baghdad, more than two dozen yellow cranes tower over construction sites. Almost all foreign investment in Iraq is in the Kurdish region, says Layton, who keeps a loaded Kalashnikov by his desk. He says he learned how to shoot when he was 9 years old, adding that Saddam had put a price on his head in the 1990s because he helped the Kurds.

“Everyone in Iraq has a gun,” he says.

Kurdish New Year

In April, National Real Estate Co., one of the largest publicly traded companies in Kuwait, signed a deal with Kurdistan Development to build a 300-room hotel and a commercial center in Erbil. Those will join luxury housing developments such as British Village, a gated community. Another half- finished development, called Dream City, may have its own conference center, supermarket and U.S.-style school.

The sense of Kurdish separateness and optimism is pervasive on March 20, the eve of the Kurdish New Year known as Nowruz. Iranians, Afghans and Tajiks also celebrate Nowruz. Iraqi Arabs observe the Islamic New Year, which this year fell on Jan. 20.

In the old fort that’s the emblem of Erbil, a band plays traditional music using a daf, a large frame drum, and a ney, a flute. Young men in Kurdish-style baggy pants and big woolen belts dance. Giggling children run up and down new escalators at the half-constructed $1 billion Nasdak shopping mall.

`Father of Fire’

The Kurds can still mess things up as they weigh taking over Kirkuk, says Joost Hiltermann, an Amman, Jordan-based project manager for International Crisis Group. Once known as Baba Gurgur, Kurdish for “father of fire,” Kirkuk is a coveted prize in the oil wars. It holds reserves second only to the Ghawar field in Saudi Arabia, according to the U.S. Department of Energy.

Saddam pushed as many as 120,000 Kurds, Turkomans and Assyrians out of northern Iraq to make Kirkuk more Arabic, says Narmeen Ahmad, general director at the Kurdistan Regional Government’s Ministry of Extra Regional Affairs, which deals with disputed territories. The Kurds say they are the right people to develop Kirkuk’s potential.

“Kirkuk is the heart of Kurdistan,” says Neema Yusuf Juma, 68, who has lived in Kirkuk all of her life. “If they’ll deny us Kirkuk, we’ll take Baghdad.”

The 90-minute drive from Erbil to the dusty, garbage-strewn city means abandoning the relative safety of the Kurdish capital for the Iraq of suicide bombings and municipal breakdowns. Hours after a journalist’s visit on March 19, a series of car bombs and mortars killed 18 people and injured 50.

Kirkuk’s Woes

Past the tan walled compounds Saddam once used as jails, oil rigs dot the barren countryside. A natural-gas flare burns through the haze of the afternoon sun. At an Iraqi army checkpoint, soldiers wearing body armor peer nervously from behind sandbags and coils of barbed wire.

Inside the town, hospitals, police stations and most government services are barely functioning, says Abdul Rahman Mustafa, Kirkuk’s governor.

“Baghdad is not providing enough support,” says Mustafa, who survived an assassination attempt by a suicide bomber in December. “This city has never benefited from its oil.”

The Kurds are pushing for a legal way to determine Kirkuk’s future. One part of Iraq’s new constitution, Article 140, calls for a referendum by the end of 2007 to resolve the fate of all territories claimed by the Kurds.

An Iraqi government committee is offering 20 million Iraqi dinars (about $20,000) and a parcel of land in the south of the country to Arab families who leave Kirkuk. There are no statistics yet on whether people are moving.

`Legal Solution’

“Saddam expelled the Kurds and brought in Arabs,” Ahmad says. “The constitution offers a legal solution, and we want to implement it.”

Iraq’s Shiites and Sunnis oppose a referendum that the Kurds are likely to win. Turkey also is against Iraqi Kurds gaining Kirkuk because the move might provoke Turkey’s 20 million Kurdish residents to demand greater rights. That leaves the Kurds in a bind. Angering Turkey may weaken a pillar of the Kurds’ oil strategy by denying the landlocked region an outlet for exports.

“Iraqi Kurds would have nothing if they cannot export their oil,” says Soner Cagaptay, director of the Turkish Research Program at the Washington Institute for Near East Policy.

Exporting crude oil is essential, DNO’s Normann says. The Norwegian company has installed a 27-mile pipeline from its Tawke field to a pipeline that connects Kirkuk to the Turkish port of Ceyhan.

`It May Take a While’

The Kirkuk pipeline runs to a refinery 50 miles south before turning north again toward the Turkish border, passing through an area controlled by the Kurdistan Regional Government. Insurgents have crippled the portion that lies in Sunni Arab territory. DNO plans to use only the section controlled by the Kurds, which has been free from attacks.

Amid the violence of Iraq, such tortuous setups don’t inspire confidence among the world’s petroleum giants.

“Oil companies are not going to commit unless the security improves and they have guarantees about their investment,” Eurasia Group’s Younsi says. “It may take a while.”

The Kurds are used to waiting. They’re betting that this time, even with countless risks, the lure of oil riches will bring the outside help they need.

To contact the reporters on this story: Kambiz Foroohar in New York at [email protected] ;

Last Updated: July 1, 2007 19:01 EDT

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