Frontier Oil, Venture Capital, & Private Equity (Kurdistan)
Christopher is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A large percentage of the world's major oil company's have now made investments in the most promising, on-shore oil basin in the world: Kurdistan, the northern semi-autonomous region of the Republic of Iraq.
These companies include as of August 2, 2012: ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX), Respol, Marathon (NYSE: MRO) , Hess (NYSE: HES), Total (NYSE: TOT), Talisman (NYSE: TLM) and Gazprom. These majors have decided to make substantial investments in Kurdistan, even though a political and/or legal dispute is ongoing between the Kurdistan government and the central government of Iraq, based in Baghdad.
This dispute centers on the legality of the contracts the Kurdish regional government, known as the KRG, has signed with over 40 oil and gas companies from all over the world, including the aforementioned majors as well as smaller companies such as DNO, Genel (Tony Haywood formerly BP and Rothchild), Gulf Keystone, Heritage Oil and Hunt Oil. Secondary, but equally serious issues include independence of the Kurdish region and the sovereignty rights of the Iraq government on issues of the export of oil.
For historical background, see the Wall Street Journal cover article from July 9, 2008 titled: "Wildcatters Plunge Into Northern Iraq."
Oil, gas, and gas/oil mix have been discovered. Oil production is over 100,000 barrels a day and rising. Oil has been exported in the past via the central government's pipeline, as well as for use internally in Kurdistan. Gas discoveries are world-class with great potential for internal and export use.
At the heart of the dispute has been the inability of these two factions to agree on and/or see passed through the Iraq parliament, a national oil and gas law. The central government wants to control all exports out of the country, as well as the ability to dictate terms/ratify any oil/gas contracts signed with third parties.
The Kurdistan government, relying on provisions of the Iraq constitution and a United Kingdom legal opinion validating their interpretation of the same, takes the position that Kurdistan has the ability to enter into Production Sharing Contracts with third party oil companies, contracts which have more financial benefit then the strict $2 dollar per barrel contracts offered to oil companies in the south of Iraq by the central government to develop declining oil fields or oil fields not developed. Kurdistan exploration is in remote, unexplored regions: true frontier and wildcat territory.
Recently, Kurdistan has made the claim that their rights as a semi-autonomous region and/or under the Iraqi constitution include a questionable claim to make exports independently to other countries, such as Turkey.
In so many words, investing in Kurdistan was a dicey proposition in 2008, and is a dicey proposition in 2012.
Making matters worse, Kurdistan halted all exports of its oil in 2012, claiming that 1.5 billion dollars was owed to it by the central government. The central government, claiming that oil was being smuggled to Iran and/or Turkey has not made a payment to Kurdistan for the benefit of the producing oil companies for over one year.
The basis for the non-payment was that all produced oil was not being accounted for and that audits were being resisted by Kurdistan. An offer of payment of less than half of this amount was made in 2011 by the central government and rejected by the KRG.
In addition, Kurdistan recently aligned with the government of Turkey, and announced a plan to build multiple Kurdish gas/oil pipelines to Turkey, bypassing the central goverment's territory. Kurdistan promises the revenue from the same to the central goverment, after the payment to Kurdistan of 17% of the revenue as is the amount of their current share of the Iraqi budget.
Threats have gone back and forth. Threats of Kurdish independence. Threats of withholding a portion of Kurdistan's 17% of the budget as an off-set for stolen oil, etc.
Reports surface almost monthly that a resolution is near, or that another impasse has been created by some politician or faction.
Yet, obviously the major and minor oil companies that have signed contracts and made substantial investments in Kurdistan are betting a resolution to the dispute is on the horizon.
The investor, looking for return of principal, yield, and capital gains has been wary of investing in some of the pioneers, although returns can be spectacular as witnessed by Gulf Keystone's rise from .20 to over $2, upon its discovery of oil in Kurdistan.
In late 2011, the entry of ExxonMobil into six exploration blocks in Kurdistan, only seemed to fan the flames of the dispute.
Recently though, hope has been generated by two events that a near-term resolution is in sight.
The first event that occurred in July, 2012 was the appearance of a delegation of respected political leaders traveling to Kurdistan and back to Baghdad, in an attempt to mediate the dispute; identify issues and each parties' position, and guide parliament to passing a gas/oil law acceptable to both factions, etc.
The second event, as of August 1, 2012, is that the KRG has in good faith agreed to resume oil exports at a rate of 100,000 barrels a day, despite the continued non-payment for their oil by the central government.
So where does that this all leave an investor? I am sure many have decided to move on to another article by now.
But for those that haven't, consider this:
Now that Kurdistan has been validated to some extent by the majors as well as many feisty micro caps, the safest way to play Kurdistan is to buy a major such as XOM or TLM, most of which are basically mutual funds of the oil and gas world, giving their shareholders indirect exposure to a basket of world-wide plays. The investor collects his dividend and can expect growth.
If a more direct investment and dramatic return is desired, there are two very interesting penny stocks with exposure to Kurdistan. Obviously, the risk on the exploration, financial, and political levels is enormous and taken to the extreme in these securities.
The first security featured is Western Zagros Resources, a spin-off of Western Oil Sands, which was acquired by Marathon Oil in 2007. Kurdistan was too frontier and politically incorrect for Marathon in 2007, thus the spin-off. Western Zagros has a long track history in Kurdistan dating back to 2005. It was one of the first four pioneers into the Kurdistan oil play basin. It is traded on the Toronto Stock Exchange, currently trading at a potential bargain of approx. $1.30 U.S. as of August 2, 2012.
The company went public at a higher price in 2007, with no discoveries and close to $200 million dollars in its treasury. That treasury was depleted by a series of quasi-discoveries and operational mishaps in 2008, 2009, and 2010.
The block Western Zagros selected has been divided into two sections: the Northern block (Kurdimir) and the Southern block (Garmain). The northern block finds WZR partnered with Talisman Energy, a 13 billion dollar company.
The two companies have recently announced a major oil discovery at the well known as Kurdimir-1, with Talisman the operator. The well is currently in the midst of logging and testing. It is said to be a billion barrel find. The southern block now finds WZR partnered with the Russian oil giant, Gazprom.
Gazprom will pay $83 million dollars by August 9, 2012 for this right, of which WZR will net approx. $55 million or so. The southern block contains two oil discoveries including the producing well known as Sarquala-1, which produces 5,000 barrels of oil per day. It has already produced 1 million barrels since June, 2011. More wells are planned for 2013, on both the southern and northern blocks.
Western Zagros' largest investors are TAQA (approx. 19.99%) and John Paulson (approx. 16%). Yes, that is right, John Paulson of legendary hedge fund fame status. George Soros may also still be involved. Paulson and Soros financed a private placement a few years back when the stock was trading around $.50
That is the Western Zagros story.
The other stock I would like to mentioned is quite obscure, opaque, illiquid, etc. So be careful and be cautious.
It is Range Energy Resources, and trades on the Canadian National Exchange, as well as on the pink sheets as RGOZF. The last trade on August 2, 2012 was for approx. .055
Range Energy Resources has an approx. 20% indirect, interest in a well that began drilling in March, 2012 in an exploration block in Kurdistan known as Khalakan. The operator is New Age, which owns a majority interest. Khalakan Gas Plus also has an indirect interest.
The company is based out of Vancouver, and in 2011 was taken over by Crest Investments of Houston, Texas, which has a close connection to the Bush family.
UPDATE AND AUTHOR'S NOTE:
On August 3, 2012, Range Energy Resources disclosed in its monthly progress report required by the Canadian National Stock Exchange, that it has commenced arbitration proceedings in the International Chamber of Commerce, London, against its partner and well operator New Age Al Zarooni 2 Limited ("NAAZ2') and the other shareholder in NAAZ2. Arbitrators are being selected by both sides currently. Range Energy Resources is requesting remedies that would enable the company to obtain information regarding its investment in the Khalakan block (Block 57).
The author notes that he and other shareholders discovered information that the Khalakan well had been spudded in March of 2012 only by reviewing information found on a map of Kurdistan drilling activity provided by Western Zagros Resources.
Apparently, New Age has the Khalahan well under "tight hole" status, and even though to date, Range Energy Resources has invested close to thirty-six million dollars in the Khalakan block and the drilling of its first well, New Age has not felt the need to disclose any status concerning the same to Range Energy Resources. Consequently, Range Energy Resources must be under strict confidentiality not to disclose any information it has concerning the well's status, progress, etc. Range Energy Resources has not, to date, even released confirmation that the well was spudded in March, 2012.
That all being said, a published rumor surfaced in February, 2012, that Total was assuming New Age's interest in the block and operatorship of the well. A map also surfaced showing Total as the operator of block 57 (Khalakan), along with blocks assigned to Hess, Exxon Mobil, etc.
Is the silence related to Total's potential(?) involvement?
Time will tell, but any way you slice this, it looks like interesting times ahead for Range Energy Resources shareholders.
If news of a Kurdish oil discovery is announced in the months to come, this stock will deliver a great return. Although management appears to be on the lookout for other opportunities world-wide, an investor in a speculation such as RGOZF must be prepared to lose all his or her investment.
So, if the investor is willing to take the risks, Western Zagros and Range Energy Resources present two inexpensive ways to play frontier oil, via these quasi-public/venture capital/private equity plays.
CHRISTOPHER LACICH is long TALSIMAN ENERGY, WESTERN ZAGROS RESOURCES, AND RANGE ENERGY RESOURCES. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Chevron and Total SA. (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.