The potential of Iraq is vast indeed. But who are the companies best-placed to exploit it? Here is a selection. You should note that in some cases Iraq forms only a part of the investment case, and with all of these companies there is a risk that the potential upside from Iraq might remain forever unfulfilled.
Political risk factors are also significant. In addition, with some of the smaller plays there are funding issues, too.
OK, so this one's a giant already. The global oil group that started life as the Anglo-Persian Oil Company has made a huge commitment to Iraq, by being the only oil major to accept Iraqi terms in the recent auction. The giant Rumaila field, the second largest proven reserve in the country with 17.7bn barrels, will earn BP just $2 a barrel for exceeding the minimum quota. That won't make the group rich, but may put it in a stronger position for the second round of explored, but undeveloped, fields and the really big prize – the completely unknown reserves that are thought to lie under the unexplored western desert. BP remains a 'buy' for its large and sustainable dividend yield alone, but its Iraq upside adds spice.
First-half results announced recently were robust and showed that BP is firing on all cylinders. Production volumes rose by more than 3 per cent in the first half and costs have been cut by £1.2bn.
Cash-strapped Petrel has run up bills of $54m developing the Subba and Luhais fields, but has so far received only a $20m advance on the $197m contract signed in 2005.
The lack of a hydrocarbon law is holding up matters, particularly when Petrel wanted to take oil in lieu of cash, and the group seems to have little to show for its decades of involvement in Iraq and its decision to work closely with the oil ministry. However, the technical work on the undeveloped Merjan field in western Iraq, awarded in 2007, and the Saddam-era deal on block 6 in the west of the country are something else. If legal and political progress is made on turning these into genuine exploration deals, it could transform the group.
Just last week, Gulf Keystone made what it termed "a significant discovery" at the Shaikan-1 exploration well in the Kurdistan region of Northern Iraq. "Preliminary test rates indicate 5,000 to 8,000 barrels of 21 to 22 degree API oil per day," it added, estimating oil in place of 300-500m barrels within the tested interval. But the real possible upside comes from the underlying Alan and Mus formations, in which Gulf's targeting possible oil in place of more than 1.5bn barrels.
Shaikan is positioned between two already producing fields, Taq Taq and Tawke. But the stakes are high because Gulf hasn't had much luck with its Algerian drilling programme and this has resulted in some uncertainty around its financial position.
Toronto and London-listed Addax is likely to be bought by Sinopec, having accepted a £4.4bn offer from the Chinese state-owned oil company. This represents a handsome return of over 60 per cent on our August 2007 buy advice on the group. The Chinese are presumably not worried that the regional government's contract on the recently inaugurated Taq Taq field in Kurdistan, in which Addax has a 20 per cent stake, is not recognised by the Iraqi authorities.
This is one of our favourite oil stocks right now: we advised buying the shares last week. Soon to become HeritaGE after a £3.5bn merger with Turkey's Genel Energy, it is taking the plunge to become a Kurdistan-focused oil explorer. Assuming that the deal is finalised by September, the combined group will have proven and probable reserves of 308m barrels of oil, making HeritaGE the largest mid-sized oil exploration company in the FTSE 100 after Tullow Oil and Cairn Energy. The reserves estimate is necessarily conservative, as its Miran field alone could end up having 4.2bn barrels.
Nevertheless, there remain huge risks to this, principally the fact that the regional government's deals are not recognised by the Iraqi government. Still, with HeritaGE's chief executive to be former mercenary and Sandline International executive Tony Buckingham, risk is something that he understands.
Five Iraqi oil plays
| Company | Oil interests | Location | Legal status | IC rating |
|---|---|---|---|---|
| BP | South Rumaila | Southern Iraq | Sound | Good value |
| Petrel | Subba, Luhais,† Merjan fields | Southern and western Iraq | Valid, but unpaid | Speculative buy |
| Gulf Keystone | Shaikan, plus Algeria† | Kurdistan | Uncertain | Speculative buy |
| Addax | Taq Taq | Kurdistan | Uncertain | Buy |
| Heritage Oil | Miran field (Tawke & Taq Taq via merger), plus Congo, Tanzania and Russia assets | Kurdistan | Uncertain | Buy |
