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 Oil explorer WesternZagros heads for Kurdistan tie-up

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Oil explorer WesternZagros heads for Kurdistan tie-up  24.5.2012  
By Peg Mackey - Reuters

Nechirvan Barzani, prime minister of Kurdistan Regional Government, speaks during the first International Energy Arena Erbil, in the Kurdish regional capital Erbil, on May 20, 2012. Photo: AFP/SAFIN HAMED)
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May 24, 2012

LONDON, — WesternZagros is about to join forces with a large European oil company in Iraqi Kurdistan, the company's chief executive said, enhancing the Canadian explorer's ability to expand production and reserves in the year ahead.

Simon Hatfield, speaking to Reuters on Wednesday, said WesternZagros's giant Garmian block was part of a major Kurdish oil play by the European company, which he declined to identify.

Industry sources say the company is most likely Total . The French oil major has said it is considering possible investment in the semi-autonomous region, after ExxonMobil signed up for six exploration blocks late last year.

"Our Garmian block would be the single biggest piece," Hatfield said. "We're relying on getting about $55 million in back costs from the large European partner we're about to get, which will give the company funding through next year."

A new Kurdish deal with Total would fan the flames between Erbil and Baghdad, locked in a long-running feud over oil and land. Total, like Exxon, is also developing a major oilfield in southern Iraq. Baghdad says any contract signed by Arbil is illegal.

The assets of Kurdistan-focused WesternZagros - the Garmian and Kurdamir blocks near the border with Iran - could potentially contain reserves of 5 billion barrels.

It holds a 40 percent stake in each block's production sharing contract and operates Garmian. Erbil now holds the remainder and has been negotiating with the European party for the past six months over a 40 percent stake, said Hatfield.

The veteran oil explorer expects the deal to be finalised in the next month for Garmian, which potentially holds recoverable oil reserves of 1.7 billion barrels and is producing up to 6,000 barrels per day (bpd) from the Sarqala-1 well.

Shares of Calgary-based WesternZagros were trading at 88 Canadian cents, down 3.3 percent. The stock has risen from 67 cents at the end of 2011.

The unidentified European major will eventually take over as operator, Hatfield said.

"They had their lawyers in Calgary last week doing their final legal due diligence with our lawyers," he said. "But ours is not the only deal this company is looking at - that's why it's taking so long."

As many as six blocks could be included in the package the European major wants to present to its executive committee.

"It's a big company and they want a material position," said the chief executive. "There's not a lot left, so they've got to piece it together."

On the ground in the northern region since 2004, WesternZagros says the neighbouring Kurdamir block potentially contains recoverable oil reserves of 1.5 billion barrels.

"We were part of the early movers in Kurdistan and now it's a very crowded space," said Hatfield.

As a result, there's a high price to pay for entry.

Arbil is asking for a bonus of close to $100 million for Garmian, plus a percentage - believed to be around 20 percent - of the European company's profit oil allocation that will be dedicated to infrastructure development.


Until the end of last year, Kurdistan had been a no-go area for oil majors with mega-contracts to develop Iraq's supergiant southern oilfields who feared the wrath of Baghdad.

But Kurdistan's potential and attractive contracts are coming up in boardroom discussions as the central government's oil programme gets bogged down in red tape and infrastructure bottlenecks.

"There are a number of other large European companies looking very hard at Kurdistan - they're all a little bit late," said Hatfield.

"Like ExxonMobil, they all held off now they're seeing the contracts in the rest of Iraq are not working out that well and the contracts in Kurdistan are actually working out quite well - although the export issue has to be resolved."

An intense wrangle between Iraq's central government and the Kurdish region over export rights for Kurdish oil has kept many of the world's top players away from the region.

Hatfield said WesternZagros, which has a market capitalisation of $330 million, would push ahead with development regardless.

"Either this gets resolved the way it should - the federal petroleum law gets passed and the Kurdish region gets open access to exports through the federal system. Or the Kurds will go alone with the support of Turkey," he said.

For now, the company has had no issues with payment for its sales of Sarqala crude, which netted $12.9 million last year. And a $25.9 million target for the first quarter of this year was met.

"We have had no issues meeting the targets and no issues selling our oil on the domestic market," said Hatfield. The company sells the light crude on monthly contracts and gets paid in advance by the local refineries.

"We monitor where our oil goes and it goes to local topping plant in Kurdistan where they take off the light ends - and that's worked very smoothly," he said.

Iraq's Deputy Prime Minister for Energy Hussain al-Shahristani has said most of the oil produced in Kurdistan is being smuggled across borders, mainly to Iran, instead of fulfilling its export obligations.

Hatfield said the company was looking to further develop its Kurdish assets and was not looking be bought out. The Abu Dhabi National Energy Co bought a 19.9 percent stake in the explorer late last year.

"We're funded to carry on. We believe the next few wells we're going to drill will not only dramatically increase production, but dramatically increase the proven reserves that we have," he said.

"Now is not the time to sell the company."

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