Special Report: Risk, reward and Kurdistani oil

In this part of Iraq, the hillsides sweat oil. Without any coaxing, the sticky black treasure oozes from the layered rock and gathers in pools that bubble as dissolved gases surface. Gradually, as the crude slips down the hillsides, it solidifies into a grey mass that resembles a hardened lava flow.

It's a good metaphor for the progress of oil from the semi-autonomous Iraqi region of Kurdistan over the past five years: big on promise, small on delivery.

Last month, after years of wrangling between Kurdistan's regional capital Erbil and Baghdad over revenues, exports finally started to flow. Foreign investors -- among them Russian oligarchs, a British mercenary boss, U.S. politicians, a former diplomat, and funds controlled by the billionaire investor George Soros -- who have sunk $5 billion into Kurdistan's oil fields, hope they will finally begin to enjoy the rewards.

There's just one problem: Baghdad may have given the green light for exports, but it has yet to agree on how the companies who produce the oil should be paid. This has happened before. For a few months in 2009, oil companies exported their product without payment. When neither side could agree on the oil companies' cut, exports were turned off again.

This time, Baghdad says it is prepared to recognize the contracts the regional government has signed with foreign oil companies. But the central government is sticking to its line that the deals must be rewritten, in a way the companies oppose because it will cut into their profits.

So is Kurdistan on the brink of an oil bonanza, or will the promise end up hardening like the oil from its crude-leaching hills?

"The route to getting paid is looking good," says John Gerstenlauer, Chief Operating Officer of Gulf Keystone, which says it has discovered a field with up to 7 billion barrels of oil. "At the end of the day, none of us are working for a charity so everybody's going to want to get paid."

FIRST IN
It was that sort of optimism that prompted Norway's DNO to become the first western firm to drill for oil in Iraq after the U.S.-led invasion in 2003. Oil companies typically use a complex array of tests -- satellite imaging, seismic surveys, magnetic and aerial mapping -- before deciding where to sink their multi-million dollar wells. But the Chief Executive of DNO had no such problem when he came to drill in Kurdistan.

"It wasn't really based on a lot of in-depth technical studies," says Helge Eide. "You could see the surface features ... the oil seeps. It was a little bit of the stomach feeling ... sometimes you have to base your decision on these simple things."

But if finding the oil was easy, getting paid for it has proved frustratingly difficult. Caught in the dispute between Baghdad and the regional government, DNO has spent more than seven years waiting for word to start exporting.

Late last year, just 20 feet from a spot where oil weeps from the hillside in the middle of one of the region's two main oilfields, DNO's production manager Eric Aillaurd spoke of the long-building sense of anticipation. Nearby a red wellhead, its five-foot tall "Christmas tree" idle, sat unconnected to any pipeline that could ship the crude to market. But, said Aillaurd, the company was just waiting on the word. "If I'm told to start exports, we are ready to start producing in 15 minutes," he told Reuters. "We have the capacity to produce over 50,000 barrels per day once we get the signal."

WEALTHY PROSPECT
Surrounded by maps, seismic charts and photographs of well sites in his office on a leafy residential street in the Christian quarter in northern Erbil, Adnam Samarrai illustrates the risk and reward of Kurdish oil. He's experienced both personally.

In 1962, while working as a geologist for Iraq's state oil company, he was abducted by Kurdish militia and held captive for six months. He was released with a message for his bosses: no more exploration in Kurdistan.

Forty seven years on, Samarrai returned to northern Iraq for Gulf Keystone Petroleum, a small producer listed on London's AIM exchange. This time, in what's called the Shaikan field, Samarrai had more luck, finding what Gulf Keystone says is at least 7 billion barrels and may prove more than double that -- easily one of the world's largest oil discoveries in recent years.

"I always knew there was oil here," says Samarra, 75, whose white mustache matches the few whiskers of hair on his head. The Kurdistan Regional Government (KRG) estimates its territory holds reserves of 45 billion barrels. That figure has not been independently verified, but if it's right, it would mean Kurdistan has more oil than the North Sea has produced over the past 40 years.

Little wonder that oil producers have wanted to get into the region for so long. Foreign oil investment first reached Kurdistan in the Saddam era. Nine years ago, in the last days of the regime, Turkish construction magnate Mehmet Sepil agreed to develop the Taq Taq field, which now has a capacity of 60,000 barrels per day (bpd). Sepil joined forces with Turkish billionaire Mehmet Emin Karamehmet to form a company called Genel Enerji, of which he remains CEO.

http://www.cnbc.com/id/42003796