--Chevron becomes second western oil major in Kurdistan
--Oil major must drill two wells by November 2013
--Deal could heighten tensions between Iraq and Kurdistan
(Adds Reliance comment and analyst comment.)
By Hassan Hafidh and Ben Lefebvre
BAGHDAD--Chevron Corp. (CVX) said Thursday it had signed a deal
with Indian conglomerate Reliance Industries Ltd. (500325.BY) that
would see the California company take stakes in two oil-exploration
blocks in the Kurdish region of Iraq.
Such a deal would make Chevron the second major western oil
company to enter the Kurdish region, following Exxon Mobil Corp.
(XOM) last year. Chevron's move boosts the position of the Kurdish
Regional Government, which has long fought with the Iraqi central
government over who has the right to grant oil-exploration rights
to foreign companies.
The move underscores growing interest in Kurdistan from oil
companies frustrated at the Iraqi government's insistence that they
settle for lower-paying oil-production licenses and not have
more-lucrative direct stakes in oil fields, said Fadel Gheit,
senior energy analyst at Oppenheimer & Co. He added that the
autonomous region is estimated to have vast oil wealth and provides
foreign investors with better infrastructure than in other parts of
Iraq.
"This is potentially a very large oil-deposit area," Mr. Gheit
said.
Under the agreement with Kurdistan, Chevron must drill two wells
by November 2013, company spokesman Gareth Johnstone said.
The deal was signed in the last few days by both companies, said
one person close to the Kurdish Ministry of Natural Resources.
Reliance already holds the oil licenses in question, known as Rovi
and Sarta. At the end of the deal, Chevron would have 80% of the
blocks, joining with OMV Rovi GmbH and OMV Sarta GmbH, which hold
the remaining 20%.
Reliance said it was making the sale as part of a strategy to
restructure its international holdings. The company "will continue
to look for opportunities to invest globally," a Reliance
spokesperson said.
Chevron has prequalified to bid for oil licenses in southern
Iraq, but an official with the Iraqi central government told Dow
Jones Newswires that Chevron would be excluded if it completed a
deal in Kurdistan. The Baghdad oil ministry would terminate its
prequalification and wouldn't deal with it in any future projects,
said the official, who didn't wish to be named.
Chevron, in disclosing its entry into Kurdistan, has tried to
leave the door open for eventual rapprochement with Iraq.
"Chevron has expressed its interest in helping Iraq achieve its
objectives for the oil and gas industry," Mr. Johnstone said. "It
is our belief that Iraq will benefit from this agreement through
local employment, technical training, technology transfer and
revenue to the federal, regional and provisional governments."
Chevron's move may further escalate already high tensions
between Kurdistan and Baghdad. Thanks to a far better security
situation in the aftermath of the U.S. invasion of Iraq in 2003,
Kurdistan has been successful in drawing in foreign-oil companies.
It has signed nearly 50 exploration deals, mostly with second-tier
international oil companies or wildcat explorers. Baghdad maintains
all these contracts are illegal.
A long-standing dispute over the level of payments from the
central government to companies operating in the Kurdish region,
for oil they have produced and exported, also remains unresolved.
Earlier this week, Baghdad accused Turkey and the Kurdish region of
engaging in illegal oil trade, arguing that only the central
government has the right to control oil exports from Iraq.
In an example of how heated this issue has become, Iraqi Prime
Minister Nuri al-Maliki said last month that contracts between the
Kurdish Regional Government and foreign oil companies are dangerous
and could lead to "wars."
Faisal Abdullah, spokesman of Iraq's federal deputy prime
minister for energy, Hussein al-Shahristani, said "the federal
government in Baghdad is the only party authorized by the law to
sign contracts with foreign oil companies."
However, international oil companies are increasingly drawn to
the region, as contracts to redevelop old oil fields and explore
for new ones in southern Iraq turn out to be less attractive than
anticipated.
"Even with the risk of what's going on in Kurdistan, ultimately
it economically makes sense to get in there early and be well
positioned in the long term," said Allen Good, analyst at
Morningstar Inc. "They're betting that the politics get worked
out."
In May, Norway's Statoil ASA (STO, STL.OS) pulled out of a
project to redevelop the West Qurna 2 oil field, saying it would
prefer to employ its capital elsewhere. Iraq's fourth round of
bidding for oil licenses, held in May, resulted in just three of 12
blocks initially being awarded in May, and a fourth in July, as
tough contract terms deterred international oil companies.
The Kurdish region is thought to have fewer oil resources than
southern Iraq, but it still has potential. Independent U.K.-listed
oil explorer Gulf Keystone Petroleum Ltd. (GFSKY, GKP.LN) Thursday
increased by 50% its estimate of the amount of oil held within its
Shaikan discovery. The field is now thought to contain between 12.4
billion and 15 billion barrels of oil, making it a world-class
resource, although how much of that can be recovered is unclear,
due to technical challenges.
Exxon Mobil was the first major international company to enter
Kurdistan, signing six oil licenses in November. However, it has
agreed to freeze its operations there, after intense pressure from
Baghdad. Despite this concession, it remains excluded from bidding
for new oil-exploration licenses in southern Iraq.
--James Herron in London, Rakesh Sharma in Delhi and Simon Hall
in Singapore contributed to this article.
Write to Hassan Hafidh at hassan.hafidh@dowjones.com and Ben
Lefebvre at ben.lefebvre@dowjones.com.
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