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Iraqi workers walk in South Rumaila oil field, in southern Iraq, December 2, 2009. (ATEF HASSAN)
Iraqi workers walk in South Rumaila oil field, in southern Iraq, December 2, 2009. (ATEF HASSAN)

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Kurdistan: A lot of oil, a lot of risk Add to ...

In the bright, open lobby of the Erbil International Hotel in the Kurdistan region of northern Iraq, Western businessmen in blue jeans huddle with regional officials in business suits. Sitting quietly nearby, their weapons checked at the door, is a gaggle of security men, many of them former Kurdish fighters, now in civilian clothes.

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These days, Kurdish leaders and international investors assembling here speak a common language: oil. Kurdistan sits on plenty of it, and the region's current peace is a welcome feature for oil companies looking to explore here.

But Kurdistan's oil fields pale in comparison with the mega oil fields to the south. The Kurds are staking a potentially explosive claim on the area around Kirkuk, which holds vastly more rewarding, but risky opportunities.

Just 90 kilometres south of Erbil, Kirkuk and its resources are at the centre of a power struggle between Iraqi Kurds and Arabs that threatens the fragile stability of the entire country. The resulting sectarian strife makes the region a dangerous place in which to do business.

Unlike Erbil, Western executives rarely venture to Kirkuk. When they do, they travel in three-car armoured convoys, accompanied by heavily armed private security forces, and they mostly stick to the outskirts to avoid trouble, like the car bomb that killed six in a market last month.

With nearly a quarter of the world's easily accessible, light oil reserves and huge tracts of unexplored land, Iraq's oil industry offers immense rewards, both to the country and the international oil companies that are warily pursuing deals.

And for a growing number of companies, the threat of political violence re-erupting in Iraq is a risk worth taking. International oil giants coming to Iraq are already looking past the days of war and regional conflict, as they jockey to secure a piece of the prize early.

On Dec. 11, the major oil players will have a key opportunity to place their bets on Iraq's future. Baghdad plans to auction off the right to develop 10 unexplored but highly prospective oil and gas fields, including some near Kirkuk, following a similar auction earlier this year.

Some 40 of the world's biggest oil companies are qualified to bid next week. Their ultimate success hinges on Iraq's ability to forge political compromises that will allow for peaceful development. The crucial test is Kirkuk, where Kurds and Arab Iraqis battle for control of the area, while coveted oil resources offer lasting economic benefits.

"Iraq is a high-risk place, there is no way around it," says Samuel Ciszuk, a Middle East energy analyst with IHS Global Insight. "But the opportunity for reward is also great."

If things go well - an enormous if - Iraq could boost its production from 2.5 million barrels a day to more than seven million by 2016, making it the third-largest producer after Saudi Arabia and Russia.

That additional Iraqi supply would have a major impact on world oil markets, helping to moderate prices by replacing production from depleting reserves elsewhere and meeting rising demand from the developing world.

In Iraq, the usual geological and financial challenges for international oil companies are magnified by sectarian violence, legal minefields and political strife. The conditions are less than ideal, and some early projects will likely produce only a modest return on capital.

"It's like a prelude to a kiss," says Fadel Gheit, New York-based analyst with Oppenheimer and Co. But strategically, international oil companies "cannot afford not to be in Iraq so it's a bitter medicine they have to take in order to establish a foothold."

Mr. Gheit says all the major oil companies are struggling to maintain production as current fields decline and international opportunities remain limited. Companies like Exxon Mobil Corp. have to increase production by 200,000 barrels a day from new fields just to offset declines from existing production. That's the reason such companies are investing heavily in Canada's oil sands, even though costs are enormous.

From where Iraqi Oil Minister Hussain al-Shahristani sits - in the ministry's rundown office building on the north side of the capital, shielded by concrete barriers and layers of Iraqi forces - the country's oil policy looks due south.

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