KurdistanObserver.com

The Race to Tap The Next Gusher
April, 16, 2006

Time Magazine
Kurdistan is rich in oil resources, and the Kurds are ready to deal. But global oil giants have been aced out by a small Norwegian outfit

For most of his life, Khadir honed the occupation he learned as a child: fighting in the Kurdish militia against Saddam Hussein's forces. He was jailed seven times since the age of 14 and saw a favorite uncle executed. Now, at 32, he is perfecting an entirely new skill that could change this region as much as have the wars in which he has fought: drilling for oil. Since late November, he has toiled about 9 m aboveground on the first derrick erected in Kurdistan in decades — by a Norwegian outfit using a Chinese rig, of all things. From the top, there is a panoramic view of the hills around his tiny village of Tawke, where 30 families eke out a meager living herding sheep. It hardly looks like the location for a major economic boom. "We are poor," he says, sitting on his bunk during a break between shifts in January, when Time was invited for a rare visit to the oil operation. "We have nothing."

But that could soon change — perhaps dramatically, according to oil engineers. Last week, Kurdish officials announced that the rig outside Tawke would begin producing oil early next year — Iraq's first new foreign oil production since the U.S. invasion three years ago. Turkish, British and Canadian oil companies have been negotiating with Kurdish officials in recent months to revive old oil fields and drill new ones. "There's a race on to get fields into production," says a Western consultant in Kurdistan, too fearful for his safety to be named. "People are very, very optimistic." Because Kurdistan — the region that comprises the three northernmost provinces of Iraq — is seeing little of the deadly mayhem evident around Baghdad, its economy has the potential for sharp growth. But its very success, as sectarian killings are pushing other parts of Iraq toward civil war, could jolt the country's precarious ethnic and political balance by injecting sizable revenues and foreign investment into an area which already has strong desires for independence.

Ironically, the first winner isn't an oil giant from the "coalition of the willing" but DNO ASA, a small company traded on the Oslo Stock Exchange. DNO in early 2004 negotiated the rights to drill in about 3,900 sq km, inking the contract in the final week before Iraq's interim government took over from the U.S.-dominated Coalition Provisional Authority. DNO's managing director, Helge Eide, said he felt he "had to do it before the interim government came in," fearing Iraq's new rulers might strip the Kurds of rights to negotiate their own energy deals. It was a highly risky move. Iraqi politicians remain bitterly divided over who will ultimately control the country's massive oil resources under its new constitution. Yet as that argument raged, DNO quietly hired the seismic company Terra Seis (Malta) Ltd. to survey its area. The results were stunningly clear. "We could tell very quickly that there was structure containing hydrocarbons," says Kevin Plintz, a Canadian geophysicist who owns Terra Seis.

That wasn't too surprising in Tawke, where generations have watched oil seep out on the surrounding hills and turn to a slick black film in the gnawing winter cold. Sitting cross-legged on his living-room carpet over a lunch of mutton, village chief Tahir Ezeer Omar remembers that when he was 10, a German visitor told his grandfather that the oil in the hills "was like gold, that it would someday create wealth for us." The locals were unimpressed. "All we knew was that the sheep and cows kept getting stuck in the stuff," Omar says.

So far the Norwegians' political gamble seems to have paid off. Last October Iraqis ratified a constitution giving each region the right to cut oil deals — the most bitterly fought-over item during months of wrangling — while allowing Baghdad to divide the revenues equitably between regions. Kurds will get 17%, their estimated portion of Iraq's population. As Iraqis voted, DNO had a 55-m rig driven across the Turkish border in about 100 trucks and then assembled it a few kilometers inside Iraq, near Tawke. The rig — owned and operated by the Great Wall Drilling Co., a subsidiary of China's state-owned National Petroleum Corp., has hit several potential deposits of oil more than 3,000 m underground. And a second DNO rig is planned to go up nearby in June. DNO has tried to tamp down soaring expectations. Eide says that although there is "movable oil, we still don't know how much."

Such measured comments have not stopped the excitement whipping across Kurdistan. "For us, new wells are very, very important," says Falah Mustafa Bakir, senior aide to Kurdish Prime Minister Nechirvan Barzani, over coffee in Kurdistan's capital, Arbil. "It is the future, our means of prosperity." Sarbez Hawrami, ceo of Kurdistan's government-run Oil & Gas Petrochemical Establishment, says "about seven British companies" have approached him to discuss deals. Terra Seis now has 12 seismic machines in Kurdistan working for five oil companies, with a list of others waiting for its services. In the 40-year-old Taq Taq field east of Arbil, two Turkish firms are producing oil for local consumption, and one is drilling three new wells. Last September Canada's Heritage Oil signed an exploration deal. "There were always plans to produce oil in Kurdistan, but there were always objections" from Baghdad, says George Yacu, a Kurd who served in Saddam's Ministry of Oil for 30 years until 1999 and is now oil-and-gas adviser to Kurdistan's regional government.

Kurdish officials estimate their unexplored oil reserves at about 45 billion bbl. If that's accurate, Kurdistan's power could soar within Iraq, which depends almost completely on oil for its exports. Some researchers believe the Kurds' oil estimates are unrealistic, but geologist Plintz says his research suggests that unexplored reserves "could be among the biggest in the world." In addition, more than 10 billion bbl. of proven reserves lie underneath the city of Kirkuk, which is situated outside Kurdistan but whose political status is still disputed by Kurds. Though Kirkuk's oil production has plummeted because of repeated insurgent attacks, Kirkuk, like Kurdish fields, would have huge advantages over other Iraqi sites: its output could be piped a short distance to Turkish refineries without passing through any war zones.

Whether the gushers come in or not, Kurdistan is already booming. On the border with Turkey, about a half-hour drive from the DNO rig, it's clear Kurdistan has become Europe's gateway to Iraq. Trucks from Turkey, Austria, Bulgaria, Germany and the Netherlands are backed up for many kilometers. Sea cargo from Dubai is diverted through Jordan, Syria and Turkey before reaching Kurdistan, where it is transferred to Iraqi trucks before proceeding to Baghdad. That route is the only choice: driving north through Iraq from the Persian Gulf is too dangerous.

As one flies into Arbil, the sole sign of war is the airport's heavy security. Kurdish soldiers — or peshmerga, as they are known — sit in tall watchtowers along the perimeter, and civilian vehicles may not enter the airport gates, where baggage searchers wear ski masks to hide their faces. Flights from the new Kurdistan Airlines and other carriers arrive directly from Istanbul, Frankfurt, Dubai and Beirut. Austrian Airlines officials have agreed the company will be the first European airline to fly to Arbil, with three Vienna flights a week scheduled to start sometime this year.

That's just the start. A sprawling $200 million airport is being built on the existing grounds and is scheduled to open next year. Its 4.8-km runway will be wide enough to land the new Airbus 380 — or, for that matter, the space shuttle, boasts Zaid Zwain, Kurdistan's director of civil aviation. "Imagine, people used to fear the sound of jets because of the bombing," he says, standing on the vast, still unpaved runway.

Indeed, the sensation of not being in Iraq is a key factor in Kurdistan's boom. Almost no Iraqi flag flies, and fewer than 1,000 U.S. soldiers are deployed in the territory. In the lobby of Arbil's only five-star hotel, filled with American and European businessmen discussing prospects, the buzz in the crowd has one persistent theme: in the world's most dangerous country, foreign businesses can work safely by basing their Iraq operations in Kurdistan rather than 320 km south in Baghdad. "For anybody wanting to do anything in Iraq today, the entry point is Kurdistan," says Magne Normann, DNO's senior vice president and Iraq project director. "It's a stepping-stone for moving into the rest of Iraq when the time is right." Last November a television campaign funded by the Kurdistan Development Corp. was launched on U.S. networks showing serene rural scenes, using the slogan the other iraq. Still, that message has not translated for some. "People in the States think I'm living in the desert, one step ahead of someone who wants to put me in an orange jumpsuit," says Harry Schute, a consultant to Kurdistan's Interior Ministry who was deployed to Iraq in 2003 as a U.S. Army reservist.

Yet keeping Kurdistan calm requires a heavy military force. Time traveled four hours north from Arbil to DNO's rig in an armored vehicle, on a road marked by several peshmerga checkpoints. DNO asked Time not to publish its Kurdish employees' real names for fear they would be attacked for working for a foreign oil company. (Khadir is not the oil worker's real name.) Kurdistan's fragile peace could end quickly if Baghdad's government tries to curb the Kurds' growing economic clout and political autonomy. Most Kurds don't seem to want any part of a greater Iraq — especially while ethnic violence continues in Baghdad. Large oil finds in the territory "would bolster the sense on the street that the Kurds can survive on their own," says the Western consultant who did not want to be named.

Tawke's residents are focused on more basic problems these days. Over the mutton, Normann asks Omar, the chief, and the rig's star worker, Khadir, how the company can help the villagers. Omar says they need a water well and 50 desks for the tiny village school. Away from the chief, Normann says he knows that such goodwill can help secure the rig's safety from possible attack. Insurgents last year launched more than 200 attacks on Iraq's oil facilities, and have made more than 30 already this year. But Khadir, who earns $500 a month as a oil-rig roughneck — in a village of poor sheep farmers — says an attack against DNO would surely fail. "Everyone in the village would protect the company, even the kids, because this oil is our future," he says. And while DNO waits for the oil to flow, it seems likely that Tawke's children may soon sit in class at desks.