No. 2 Follows No. 1
Anirban is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The second largest oil company of the US, Chevron (NYSE: CVX), has followed the largest oil company ExxonMobil (NYSE: XOM) to enter into the much disputed Kurdistan region of Iraq by buying a majority stake in two exploration blocks from Indian conglomerate Reliance Industries. Chevron bought an 80% stake in the Sarta and Ravi block, which lies over an area of 490 square miles north of Erbil, for an amount of around $200-$300 million and according to the agreement with the Kurdistan government, Chevron must drill two wells by November 2013. This has resulted in Iraq barring Chevron to enter into any agreement with the Iraqi government. So did Chevron play the right chords by choosing Kurdistan against Iraq as a potential destination for operation? Let’s see.
The Barrier
Kurdistan is a part of Iraq but is run by an autonomous government and has long awaited disputes with Baghdad regarding the sharing of oil revenues. The Iraqi government has issued notice to take severe action against companies going into direct agreement with the Kurdistan Regional Government. The Iraqi government did not allow Exxon to participate in the bidding for new oil exploration licenses in southern Iraq for signing up oil exploration licenses in six blocks with Kurdistan and has also forced them to freeze operations in those blocks. But this has not been able to deter other oil companies from investing in the Kurdistan region. Why? Simply because of the business friendly approach of the local Kurdistan government and the exploration potential of the area.
The Proposition
There are many reasons behind the oil companies investing in the Kurdistan region at the cost of investing in Iraq. According to analysts, the Kurdistan government has a better financial proposition to offer to oil companies than Iraq. The agreement offered by the Kurdistan government will result in earnings of $3-$5 per barrel for the oil companies in comparison to an earning of less than $1 per barrel if they invest in Iraq. The oil companies are getting production sharing offers from Kurdistan in comparison to not so lucrative fees paid if they operate in southern Iraq. This is attracting companies such as Exxon, Chevron, Hess, and Marathon Oil to Kurdistan whereas companies like Statoil (NYSE: STO) are moving out of Iraq to invest elsewhere. Though the Kurdistan region may have fewer oil resources than southern Iraq, it is still well endowed with high oil deposits. The area is expected to hold up to 40 billion barrels of oil and significant reserves of natural gas and has a daily production capacity of around 250,000 barrels. The Kurdistan government has also signed almost 50 deals with oil companies and explorers to explore in the area and since 2005 there have been around 20 discoveries in the region of around 8 billion barrels of recoverable oil and natural gas. The problem that oil companies operating in the Kurdistan region face is regarding exporting oil as the pipelines are controlled by Iraq’s central government.
The Bottom-line
Chevron has invested in blocks which lie in a region under the control of the Kurdistan Regional Government and is not located in the disputed region which both Baghdad and Irbil claim to control. Hence it might not be possible for Baghdad to force Chevron to suspend operations like it did in the case of Exxon, nor has Chevron placed any bidding for licenses in the southern area of Iraq, which might get suspended. Chevron has no operations in Iraq and hence might not be affected by the ongoing dispute between Baghdad and Irbil. If Chevron can address the export problem and the US government doesn’t impose any regulation against investing in Kurdistan, then Chevron has made a good decision of investing in Kurdistan. Don’t take your eyes off the stock nor on the happenings in the region. The stock is worth watching.
anirbandutta has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Chevron and Statoil (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
