In early October, in the Kurdistan region of northern Iraq, an oil well operated by Talisman Energy bit deep into a fractured limestone formation and found a thin layer of light oil at the Cretaceous level. The reservoir wasn’t large. Flow rates from it aren’t expected to reach commercial volume. But the fact the well was drilled at all was a good sign for Talisman’s partner, Calgary’s WesternZagros Ltd.
More than eight years after it entered Iraq, WesternZagros’s once controversial bet on Kurdistan now seems more likely than ever to pay off . Major oil companies, which shunned the region for years, are now moving in. Meanwhile, a proposed pipeline that would transport Kurdish oil directly into Turkey— bypassing the political quagmires of southern Iraq—could soon become a reality.
“We did take risks going in there first,” says Simon Hatfield, the company’s CEO. But that risk has translated into prime Kurdish real estate. “Every single reservoir we’ve drilled has had oil or gas or both in it,” Hatfield says.
Neglected and closed off from the world under Saddam Hussein, Iraqi Kurdistan was, for decades, among the last great undeveloped oil plays in the Middle East. Not long after the U.S invasion in 2003, though, wildcatters and juniors started trickling into Erbil, the Kurdish capital, hoping to change that. Calgary’s Western Oilsands Inc. arrived in Kurdistan in 2004. At the time, the oil was quite literally seeping out of the ground, says Hatfield, then an executive with Western Oilsands. “These were areas that hadn’t been touched with the drill bit ever,” he says.
In 2006, Western signed a deal with the Kurdish regional government to drill three exploratory wells. In 2007, after Western was bought out by Marathon, the company’s Kurdish assets were spun off into a new, separate entity, WesternZagros.
While all this was happening in Canada, in Iraq, the Kurdish regional government was trying to negotiate a federal oil and gas law with the new central government. The Kurds wanted to retain the right to issue contracts, something Baghdad sought for itself. Those talks broke down in 2007.
In the absence of a deal, Erbil continued to invite foreign companies in. The contracts the Kurds offered were significantly sweeter than those in southern Iraq. But Baghdad vowed to keep any company operating in Kurdistan out of its own rich fields. That threat kept the major oil companies from investing in Kurdistan until last year, when ExxonMobil broke the embargo. Three others, including Gazprom, which is partnering with WesternZagros, followed suit.
The arrival of the majors doesn’t mean the political problems are over. But it could mean a brighter future for early entrants like WesternZagros. Hatfield, along with most analysts, believes its stock remains undervalued. With big companies seeking a way into Kurdistan, there could be more takeovers on the way. “But we’re not looking to sell ourselves. I don’t think we’re ready,” he says. “Yet.”