Iraq's Oil-Field Auction Falls Short

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Kurdish Region Success

Meanwhile, the Kurdish enclave in northern Iraq is pursuing a very different course and upstaging Baghdad by scoring big successes in starting up its own oil production. With an attractive investment regime that pays oil companies 10% to 15% of the profits, the Kurds have lured exploration bids from smaller oil players not afraid of alienating the Iraqi government, which does not recognize the Kurdish contracts. In just a few years independents such as Norway's DNO (DTNOF.PK), Turkey's Genel Enerji, and Swiss-based Addax Petroleum (AXC.L) have developed the Tawke and Taq Taq fields.

The oil men think they could be on to something big. For instance, Heritage Oil (HOIL.L), a U.K.-listed firm based in Jersey and headed by Tony Buckingham, a former diver and security provider, recently discovered a field called Miran, which it estimates may have 2.3 billion to 4.2 billion barrels of oil.

Until recently, the operators in the landlocked Kurdish region could get their oil out only by tanker trucks. But on June 1, Baghdad began allowing exports, starting with 90,000 barrels per day from the Taq Taq and Tawke fields, through the northern pipeline that ends at Ceyhan in Turkey. The money will go to Baghdad, and how the companies will be paid has yet to be completely worked out. But Mehmet Sepil, Genel's CEO, says, "I don't have any doubt I will be paid."

The activity in the Kurdish-controlled north has even spawned a small merger and acquisition boom. On June 25, China's Sinopec (SNP) agreed to acquire Switzerland's Addax, which has Kurdish production, for $7.2 billion. Earlier, on June 9, Heritage agreed to merge with Genel for $2.4 billion in Heritage stock. "This is the creation of a regional giant," says Heritage CFO Paul Atherton. "It is all about first-mover advantage."

At the June 1 ceremony opening the pipeline for Kurdish oil, Ashti Hawrami, Natural Resources Minister of the Kurdistan Regional Government, said he planned to ramp up the region's production to 1 million barrels per day in four years. He also chided Baghdad, saying its poor field management alone had cost Iraq $60 billion. "This must not be allowed to continue," he said. It's hard to disagree.

Reed is London bureau chief for BusinessWeek.

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