VZCZCXRO6157
PP RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #0531/01 0610320
ZNR UUUUU ZZH
P 020320Z MAR 09
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC PRIORITY 1930
INFO RUCNRAQ/IRAQ COLLECTIVE

UNCLAS SECTION 01 OF 03 BAGHDAD 000531 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EPET ENRG PGOV EINV IZ
SUBJECT: RRT ERBIL: OIL FOUND AT SEVERAL NEW SITES IN KURDISTAN 
REGION 
 
This is an Erbil Regional Reconstruction Team (RRT) cable. 
 
Contains business proprietary information, particularly para 10. 
Please protect accordingly. 
 
¶1.  (SBU) Summary: The hydrocarbon potential of the Kurdistan Region 
was almost completely ignored until only the past few years, when 
the regional government launched an aggressive program to develop 
the area's hydrocarbon potential.  Exploration, while still in the 
early phase, is already yielding positive results and oil geologists 
are extremely positive about the potential for finding additional 
oil in the Kurdistan Region (KR).  In addition to two fields already 
producing, companies have recently discovered oil at four new sites 
(although further drilling will be necessary to determine if these 
are commercial discoveries).  Experts estimate that the region's 
potential reserves could range from 10 billion to as many as 45 
billion barrels.  Companies are aware of the political risk involved 
but feel that the commercial gain outweighs this risk.  End 
Summary. 
 
¶2.  (SBU) RRTOff recently met with representatives of three oil 
exploration companies to discuss their activities in the Kurdistan 
Region: Talisman Energy (formerly BP Canada), Gulf Keystone 
Petroleum International (UK), and Niko Resources (Canada). 
 
Strong Potential for Commercial Discoveries 
------------------------------------------- 
 
¶3.  (SBU) The first exploration for oil in Iraq actually started in 
what is now considered the Kurdistan Region, but ceased abruptly 
upon the 1927 discovery of the Kirkuk mega field.  In the early 
1960s, the Iraq Petroleum Company started drilling in Taq Taq (Erbil 
Province).  Work was halted when the GOI, in a dispute over 
royalties, passed a law preventing foreign oil companies from 
exploring for oil outside of producing fields.  In 1978, the 
government-owned North Oil Company recommenced exploration at Taq 
Taq and found what it estimated to be a commercial discovery, but 
development was abandoned after the Iran-Iraq War broke out.  Taq 
Taq would lie undisturbed until 2004, when the Turkish oil company 
Genel Energi (later joined by the Canadian/Swiss Company Addax) 
signed a contract with the Kurdistan Regional Government (KRG) to 
develop the field.   Taq Taq is now one of two producing fields 
within the Kurdistan Region.  Once connected to a pipeline, Taq Taq 
would be able to produce 30,000 - 40,000 bbl/d (barrels per day) 
with a possibility of rising as high as 300,000 bbl/day according to 
the operator.  The Taq Taq operator estimates that the field 
contains 2 billion barrels of oil. 
 
¶4.  (SBU) The second producing field is the Norwegian DNO field 
Tawke.  Tawke is estimated to have reserves ranging from 0.9 to 1.9 
billion barrels with a current expected value of 1.3 billion 
barrels.   DNO is currently producing an estimated 10,000 to 11,000 
bbl/day.  It has built a 34-kilometer pipeline/metering connection 
to the north-south Kirkuk - Ceyhan pipeline to Turkey (the Northern 
Strategic Pipeline).  Once this pipeline is turned on, DNO will be 
able to export 50,000 bbl/day; estimates of eventual output, once 
additional facilities are constructed, range from 100,000-175,000 
bbl/day. 
 
¶5.  (SBU) Contacts are extremely optimistic about the potential for 
finding additional commercial discoveries of oil in the Kurdistan 
Region.  Although a comprehensive oil and mineral survey of the 
region has never been done, visible signs pointing to the likely 
presence of oil deposits are plentiful, such as oil seeps, creeks 
whose water is mixed with oil, and spring water with the telltale 
smell of rotten eggs.  When the government and private land owners 
Qsmell of rotten eggs.  When the government and private land owners 
drilled artesian wells in Chamchamal, Qaradagh, and Tasluha 
(Sulaimaniyah province) during last year's drought, they discovered 
oil mixed with water at a depth of 200 to 300 meters.  Gulf Keystone 
says that the KR has the potential to be a world-class hydrocarbon 
region, noting that no oil company has ever dug a dry well in the 
Kurdistan Region.  The company stated, however, that there is less 
likelihood of finding a super giant field similar to Kirkuk, which 
lies immediately to the south, because of the geological features of 
the region.  Company managers and geologists estimate that reserves 
range between 10 billion barrels to possibly as high as 45 billion 
barrels.  The higher estimate would place reserves in the Kurdistan 
Region on a par with those projected for Nigeria and Libya. 
 
The KRG's Hydrocarbons Business Model 
------------------------------------- 
 
¶6.  (SBU) From 2003 to 2008, the KRG awarded 33 blocks to foreign 
companies, either individually or in conjunction with the Kurdistan 
Exploration and Production Company (KEPCO).   The Kurdistan Region 
model Production Sharing Contract (PSC) includes an initial 
five-year exploration term extendable for seven years for economic 
evaluation.  The entire development period is 20 years, extendable 
for 10 additional years (two five-year options), for a maximum of 30 
years.  The KRG interest during the initial period is executed 
through one of the two public companies whose production-sharing 
 
BAGHDAD 00000531  002 OF 003 
 
 
participation interest is a minimum of 5% to a maximum of 25%.  The 
KRG retains 85% of the production from these fields once the 
exploration expenses have been recovered by the PSC contractor.  The 
remaining 15% is revenue for each contractor.  At the time when all 
the royalties and profits are distributed, the actual working 
interest will be closer to 90% for the KRG and 10% for the 
contractor.  In addition, there is a "signing bonus" that each 
company has agreed to pay.  The amount of these bonuses varies based 
on the specific block location, size, or quantity occupied. 
 
Current State of Play - Some Examples 
------------------------------------- 
 
¶7.  (SBU) Talisman signed a contract with the KRG for block 39 in 
June 2008.  They began seismic in November, and expect to complete 
it in the next few week.  After an additional two to three months 
necessary to process the data, they expect to drill their first 
well.  According to their agreement with the KRG, they have the 
option to enter into a new agreement at each phase.  For instance, 
if seismic results are positive, the company has the option to drill 
exploratory wells.  The decision at each stage lies with Talisman, 
not the government, leaving Talisman to feel that the contract 
leaves it very much in the driver's seat. 
 
¶8.  (SBU) Gulf Keystone (UK) has interests in two blocks in Dahuk 
province.  It is the operator in block 5, with MOL (Hungary) as the 
partner.  (The roles are reversed in block 10, where MOL is the 
operator and Gulf Keystone is the partner.)  Based on an expressed 
commitment by the KRG to award it the block, Gulf Keystone completed 
geological surveys, gas chemical analysis, surface mapping, and 
other assessments of block 5 even before the company signed its 
contract in November 2007.  The company then immediately began 
conducting seismic surveys.  Gulf Keystone expects to start drilling 
its first exploration well between March 10 and 20; the rig is 
currently en route from Turkey.  As soon as the well is completed, 
the rig will be transferred to block 10, and the first well will be 
dug there. 
 
¶9.  (SBU) Niko Resources is the operator of Block 27, in 
Sulaimaniyah Province, in partnership with Vast Exploration 
(Canada).  Although the company signed the contract on the block in 
June 2008, it only commenced seismic in February.  The 2-D seismic, 
which cost USD 15 million, should be completed in six months, after 
which Niko plans to drill its first w%\Wq#Q4OQOQaQ In addition 
to incurring costs involved with exploration, they have made a 
commitment of $200 million to build capacity and infrastructure, 
principally in the areas where they are operating.  While this 
 
BAGHDAD 00000531  003 OF 003 
 
 
additional expense is a contractual obligation, it is a further sign 
of confidence on the part of the oil companies. 
 
Comment 
------- 
 
¶12.  (SBU) Despite the fact that political negotiations between the 
central government and the KRG over development and exploitation of 
the region's hydrocarbon resources remain deadlocked, activities in 
the KR are proceeding full speed ahead.  Oil companies are 
optimistic that the most recent discoveries are just the tip of the 
iceberg.  The production sharing agreements utilized by the KRG is 
helping to force the pace of exploration, since the operating 
companies are required to act within a set period of time or risk 
forfeiting their interests in their blocks.  The acceptance of risk 
is characteristic of the smaller, more entrepreneurial companies 
operating in the region -- we note that none of the oil "majors" are 
present. 
BUTENIS