KRG Ministry of Natural Resources

Sunday Times, 22 June 2014, 

Hayward’s bet on Kurdish oil is paying off 

- A strong army and a new pipeline are helping Kurdistan to prosper even as Iraq slides into chaos

This morning in the Turkish port of Ceyhan, the cavernous holds of the United Emblem, a 900ft Greek oil tanker, are being filled with $110m of inky crude piped in from Kurdistan in northern Iraq. It may not appear so, but this is a momentous event.

Iraq, the world’s seventh largest oil producer, is being pushed to the brink of dis–integration. The Sunni jihadist group Islamic State of Iraq and al-Sham (Isis) has taken Mosul, Iraq’s second city.

Amid gruesome images of mass executions of Shia troops and the threat of all-out civil war, oil giants including BP have pulled non-essential workers from the huge oil fields in the south and east of the country. Last week Barack Obama pledged to send up to 300 military advisers in a desperate attempt to stop the rebels’ advance.

Kurdistan, by contrast, is an island of tranquility. In fact, the region, which has operated semi-autonomously since Saddam Hussein’s downfall in 2003, has never been in a stronger position. The same goes for the handful of companies that operate there, such as Genel Energy, the explorer set up three years ago by former BP boss Tony Hayward and Nat Rothschild, the scion of the banking dynasty. There are two reasons for this: a new pipeline and a decent army.

Last November the Kurds completed a 174-mile link to the Turkish pipeline system that gave them, for the first time, a direct outlet to the global market.

Iraq has for years threatened to blacklist companies that do business with the Kurdistan Regional Government (KRG), based in the capital city of Erbil. Baghdad claimed the KRG was breaking the law by signing its own exploration contracts and selling oil direct to customers rather than through the national oil company. Most big traders and oil companies complied.

Iraq’s truly vast fields were located in the south and east and firmly under the federal government’s control. For anyone wanting to play there, Kurdistan was off limits.

The new 300,000 barrel-a-day pipeline to the Mediterranean has dramatically reduced Baghdad’s ability to dictate terms.

A disintegrating Iraq, tragic though it is, means it is even less equipped to fight what now seems inevitable: the birth of Kurdistan as a big oil producer in its own right.

Genel, its largest producer, is at the heart of this transformation. It is among a handful of developers scrambling to ramp up production to meet demand. Traders, meanwhile, are lining up to take what Kurdistan is selling.

An industry source said: “Nobody wanted to commit to buying Kurdish cargoes before because it wasn’t worth what you would lose — access to production from the big fields in the south. But now that it appears this isn’t a blip, the herd is moving.”

This month Ashti Hawrami, the Kurdish oil minister, said he expects to be exporting up to 400,000 barrels a day by the end of the year. If he pulls it off, it would allow the KRG, which still relies on cash from Iraq’s central government, to stand on its own two feet, financially, for the first time in its history.

A source close to the Kurdish government said: “We have the wherewithal to achieve economic independence within the next six months.”

Indeed, even as the United Emblem is filling up with only the third Kurdish export cargo, another tanker has arrived in Ceyhan. Iraq has filed for arbitration in the International Chamber of Commerce against Turkey for its role in facilitating the exports, yet such tactics no longer appear to be cowing companies into shunning the Kurds. Indeed, the KRG confirmed last week that it has received payment into its bank account, which it has also set up in Turkey, for its first cargo.

There is another reason that companies are becoming comfortable with Kurdistan: the Peshmerga, the region’s well-trained army, some 200,000 strong. As the Isis conflagration breaks out across Iraq, Kurdistan has seen no violence.

The Peshmerga have sealed the border and secured additional land, including Kirkuk, site of one of the world’s largest oil fields and a province claimed by both Iraq and Kurdistan. Philip Lambert, founder of Lambert Energy Advisory, said: “Suddenly you have ‘Fortress Kurdistan,’ protected by a fine fighting force, and a new Mediterranean-facing export route for crude. This has been 10 years in the making.”

The dangers, of course, are manifest and unpredictable. Isis could turn its attentions to Kurdistan. The 150,000 refugees from Mosul could destabilise the region. But the Kurds appear determined to use the chaos to take even tighter control of their destiny.

Eleven years ago, when President George W Bush made his infamous “Mission Accomplished” speech on the USS Abraham Lincoln after toppling Saddam Hussein, Kurdistan produced 2,000 barrels of oil a day from one well and exported none. It had been brutalised for decades, had no industry, and its oil fields were unexplored and untapped.

Hawrami engineered the boom that has taken hold since then by inviting in dozens of small developers to find out just how much oil Kurdistan had. The vast quantities they found transformed its prospects.

Iraq has protested every step of the way, blocking or delaying hundreds of millions of dollars in payments for Kurdish oil that it has sold.

The impasse has meant that companies have developed fields slowly and produced less. But the pipeline removes a huge kink in the system. Kurdistan can sell a lot more oil — without relying on the federal government’s infrastructure to do it.

In a recent research note, Citigroup said: “The sustainability of oil exports from Kurdistan ultimately lies in either a permanent deal with Baghdad or the establishment of the Kurdish region as an independent sovereign state. We believe that recent developments in Iraq raise the possibility of both of these occurring in the near future.”

Morgan Stanley last week upgraded its target share price on Genel to £12.35 — more than a quarter above its closing price on Friday of £9.89 — on the expectation of the start of steady exports.

Yet there is another big risk. There are more than 40m Kurds throughout the region, from Turkey to Syria and Iran; 5m live in Iraq. The desire for an independent Kurdish state still burns hot for many, especially in southern Turkey, where extremists regularly clash with government forces.

Walk through the central market in Erbil and you will find for sale maps of Greater Kurdistan, an unrecognisable blob that bleeds across the borders of four countries.

Lambert said: “Will they overreach themselves? The Kurds spent the past decade rebuilding their nation; at this stage a Greater Kurdistan would be a bridge too far. It would destabilise the region and possibly bring new forces upon themselves.”

In 2009, just a few months before the Gulf of Mexico spill led to his exit from BP, Hayward was the first western oil executive to sign a new production contract in Iraq since nationalisation in the 1970s.

Five years on, he finds himself at the heart of another seismic shift in Iraq. “The lines on the map have already been rubbed out,” an industry source said. “You won’t be able to reconstruct Iraq as it was before last week.”

Kurdistan’s hero

If one man can be credited with Kurdistan’s transformation from forgotten backwater to burgeoning oil producer, it is Ashti Hawrami. 

The 66-year-old minister of natural resources for the Kurdistan Regional Government (KRG) spent much of his career in Britain. He moved to Scotland in 1975, where he spent seven years with the British National Oil Corporation.

He gained a PhD in oil engineering while in Scotland and went on to a series of jobs at consult-ancies and engineering companies during the 1980s and 1990s.

In 1999, he was appointed chief executive of ECL Group, which he ran for several years, setting himself set up for a comfortable life at a mansion in Henley-on-Thames, Berkshire.

The KRG had other plans, asking him in 2006 to become its oil minister.

When he took control, there was one 1970s oil well in Kurdistan producing just 2,000 barrels a day. He offered generous terms to entice explorers to the region.

Hawrami has predicted that Kurdistan will be exporting 250,000 barrels a day by next month — most of it through a recently completed pipeline to Turkey, raising the spectre of economic — and potentially political — independence for a region that has in turns been brutalised and ignored for decades.