A worker walks on an oil pipeline at Khurmala oilfield on the outskirts of the city of Arbil, in Iraq's Kurdistan region December 4, 2013.Stringer/Iraq
Kurdistan is one of the most dangerous places on the planet right now, thanks to the Islamic State. Canadian energy companies not only have operations in the area, but some, like Precision Drilling Corp., hope to expand despite the risks. But is it worth it?
Calgary's Precision Drilling has two active drilling rigs in Iraqi Kurdistan, a semi-autonomous region within Iraq that hosts enormous oil fields. Kevin Neveu, the company's president, wants more, and he believes the risks are understandable.
"Having two rigs in Kurdistan is nice, but having five or six or 10 would be nicer," he said on a conference call Monday. "And I think that as the risks in Kurdistan become better understood, I think our business will get back on its feet and start moving forward – probably sooner rather than later."
Greg Anderson, a political science professor specializing in international trade at the University of British Columbia, isn't so sure energy companies have the capacity to grasp the region's complications.
"I see the temptation, but I'm also not so sure folks really appreciate how deep the water is they are starting to swim in, especially there," he said. "I get it, because that's where the high returns are, but I don't know what kind of political advice they are getting or whether they have a good sense of what they are sending their people into."
In addition to the broader instability in the middle east, Kurdistan itself is the centre of some dispute. Legally, Iraqi Kurdistan is not allowed to sell oil on the open market, and must sell it through Iraq's national oil ministry. But the arrangement, and Kurdistan's relationship with Iraq in general, has grown increasingly fraught in recent months, prompting speculation that Kurdistan may consider separating entirely from Iraq.
Talisman Energy Inc. has also been lured by Kurdistan's potential. Hal Kvisle, the company's chief executive, in late 2012 hinted he wanted to sell the company's assets there, only to change his tune a few months later. "I think we can manage this Kurdistan opportunity in a way that could be very value-creating for shareholders," he said in February 2013.
"Kurdistan is one of the most exciting oil structures that I've seen in my career," Mr. Kvisle told investors at an open house a month later. The company then wanted to produce oil in Iraqi Kurdistan, or find a joint venture partner so it could accelerate production. The Kirkuk field, he noted, has 25-billion barrels of recoverable oil, compared to 175-billion barrels in Canada's oil sands.
A big deal never emerged.
"Our efforts to dilute or reduce our position in Kurdistan have obviously taken a bit of a setback with the current hostilities that you're seeing in Iraq," Mr. Kvisle said on a conference call July 29.
Added Paul Smith, Talisman's chief financial officer: "Given the complex geopolitical landscape in Iraq and Kurdistan, we are in the process of reviewing the appropriate timing of entering the market for our Kurdistan dilution process."
U.S. air strikes against Islamic State targets started August 8, and are ongoing. Talisman reports its third-quarter earnings Nov. 4.
Suncor Energy Inc., which inherited international assets in 2009 when it took over Petro-Canada, faced a similar dilemma – the decision to chase growth or retreat because of Libya and Syria's volatile tendencies.
The difference between Precision Drilling and companies like Talisman and Suncor is that service companies can (theoretically) move their rigs. Oil fields aren't going anywhere.
But neither are the risks inherent in the region, nor the temptation chase big wins. Vast oil and gas fields are, after all, located in many "nasty" places, UBC's Mr. Anderson said.
"I don't know where that line in the sand is because if I'm a shareholder, I want them to go after this high return stuff," he said. "If they don't do it, somebody else will."
Carrie Tait