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In This Report:

Companies Mentioned:
  • CNPC, DNO, Eni, Exxon, Genel Energy, Gulf Keystone, Heritage Oil, Lukoil, Rosneft, Shell, Statoil, Total, Weatherford
Action Calls
  • Reminder: subscribe to the Market Tracker!
    Today's is the last free Market Tracker! To subscribe, please click here and select your preferred subscription options.
  • Rosneft rumored to be in talks with Exxon 
    Exxon reduces exposure as pressure ratchets up on Maliki.
  • Eventful week for Iraq shows bifurcation of oil and gas industry
    Both Erbil and Baghdad continue to make healthy progress as their oil development moves in different directions.
Headlines
  • Gorran objects to KRG budget
    Reminder that Kurdish dissent exists and could affect effectiveness in face of Baghdad.
  • Al Hal defects to Maliki on NC vote
    NC is in effect dead, but Sadr will continue to milk it.
Calendar
  • June 24 - Parliament [finally] returns from 7 week break 
    The Iraqi parliament finally returned from its long break after multiple delays, on Sunday June 24, with a whimper as the NC vote effort fizzled. Interestingly, in the interim, multiple attempts were made, apparently with Sadrist Trend head Muqtada al-Sadr as its prime mover, to assemble an anti-Maliki coalition capable of moving forward. But when Jalal Talabani, Iraq President and head of the Kurdish PUK party, stated that he would not call a no-confidence vote, forcing consideration of other alternatives last week, it became apparent that forward momentum was flagging. Perhaps with Al Hal's defection finally killing any chance of a near-term no confidence vote, the parties finally decided they could return to a more sure outcome.
     
Action Calls

>> Reminder: Subscribe to the Market Tracker! Based on the popularity of the initial free product, the Dunia Iraq Market Tracker is being converted to a subscription-only service on June 25. Since early 2011, Dunia has produced the weekly tracker to explore what we have called the "Kurdish oil basket," an investment play focusing on public equities trading on exchanges outside of Iraq that are poised to benefit from the enormous hydrocarbon opportunities available in Iraqi Kurdistan. We will continue to look for new Iraq-specific business and investment plays, including Banking and the coming Telecommunications IPOs, analyzing how the political environment affects the business and investment climate there.
 
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>> Rosneft rumored to be in talks with Exxon. Russia's top crude oil producer, Rosneft, has been in talks with ExxonMobil about teaming up with the U.S. group to tap Iraq's huge West Qurna-1 oilfield, Kommersant daily reported on Friday. The daily, citing sources familiar with the situation, said Rosneft may secure 20 percent in the project operated by Exxon in southern Iraq, adding the talks could be wrapped up within a month. West Qurna-1, an 8.7-billion-barrel field in southern Iraq, is producing 406,000 barrels per day, expected to rise 100,000 bpd later this year, an Iraqi oil official said in April, as the country looks to double output over the next three years during its recovery after years of sanctions and war. Sources at Rosneft confirmed to Reuters the company had been in talks with Exxon over Iraq. Spokesmen for Exxon and Rosneft in Moscow declined to comment. "The talks are at the very early stage, there is nothing concrete yet," a source close to Rosneft said. [Source: Reuters]
 
DUNIA'S TAKE: Exxon triple play? Basically a win for Exxon in multiple ways if this deal goes through. First, given the immense pressure on the company, Exxon potentially reduces its exposure to the West Qurna-1 (WQ1) oil field and existing entanglements with the Government of Iraq (GoI), in what has been a very costly and difficult venture. Secondly, Exxon gets to recover some of it's cost immediately when Rosneft buys into the WQ1 deal, again, a benefit because the GoI has been so slow to pay Exxon its back costs. Third, Rosnefts participation in Iraq is part of a broader relationship elsewhere, as Exxon signed a deal with Rosneft in April to develop oil in the Russian Arctic as well as Western Siberia. For Rosneft, this seems to be part of a broader Russian strategy for greater participation in Iraq, with Lukoil buying out Norway's Statoil in West Qurna 2 field earlier this year, and Rosneft reportedly considering partnering with Lukoil there. Yet, it has not been reported that Exxon is considering completely abandoning WQ1, which is prudent - Exxon abandoning WQ1 would cause the GoI to lose face, deepening ire at Exxon and leaving the company without any leverage. On balance, a brilliant move - reduce exposure, but stay cordial to ensure direct engagement with the GoI - which may prove very important as Exxon's development in the Kurdistan region moves towards fruition.

Maliki letter to Washington to stop Exxon. Meantime, as Exxon's overall strategy has become more apparent, Prime Minister Nouri al-Maliki wrote a letter to US President Barack Obama asking the US government to restrain Exxon from exploring in the Kurdistan region. Maliki cited the Exxon move as potentially having dire consequences for the stability of Iraq, including war. We don't however, believe war to be imminent, nor that Exxon in and of itself would be a critical driver; in truth, while Exxon exposes and may even exacerbate existing internal ethnic issues in Iraq, avoiding war lies in a compromise between the GoI and the KRG, not in whether or not Exxon is stopped. Indeed, there are widespread rumors that Total and Statoil are seriously considering moves into the KRG soon. And even without the participation of these other oil majors, the KRG would be able to build its own autonomous oil production and export capability without them - DNO, Gulf Keystone and Genel Energy are significant producers or on the verge of production already, as well as major contributors to the Kurds' oil pipeline development plans.

Pressure is on. What this does reveal, however, is the immense pressure on Maliki and company to try to stuff the genie of Kurdish oil development back in the bottle. Having lost "the battle of the 4th auction round," the emperor has been exposed as having no clothes, with more and more oil companies, including majors, seriously considering the other Iraq - the Kurdistan region. The fact that Maliki was willing to go to the US government for help, making hyperbolic arguments about wars, shows a higher level of pressure on the GoI than we have witnessed in the recent past. This does not mean that development of the oil infrastructure in Iraq proper will slow - indeed it will likely accelerate in the coming years - but it does mean that the KRG is slowly slipping out from under the GoI's thumb. The Kurds will, unhindered, continue on their own path; the key issue now is how Maliki and the other key actors in the GoI react to the intensifying pressure of this situation, raising the chances of a miscalculation. But again, while a catalyst for such a miscue could come from the Exxon situation, it is just as likely, if not more likely, to come from some other direction, or not to come at all. We will continue monitoring the signs closely, to ensure we anticipate if and when these sorts of lines might be crossed, or whether Kurdish oil development can be expected to continue in its current path forward.

 
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>> Eventful week for Iraq shows bifurcation of oil and gas industry. The past week has shown that Iraq's oil development continues apace, with both Baghdad and Erbil pursuing their development in parallel, even as the standoff continues. On the Kurdish side, Heritage Oil continued to explore, spudding its fourth well in its Miran PSC. Meantime, Deputy Prime Minister for Energy Hussain al-Shahristani seemed to signal a potential move by Total into Kurdistan, as he spoke to French Ambassador Denys Gauer warning "French companies operating in the oil sector in Iraq against signing contracts with non-Iraqi government sides or local governments." On the Iraqi side, Shell announced that it had already added 150 million cubic feet per day of gas production capacity since it signed its $17.2 billion deal to capture flared gas in Iraq's southern oil fields.  CNPC also announced that it has started the Halfaya oilfield operation 15 months ahead of schedule. And Weatherford won an $843 million contract from Italy's Eni to boost oil production in the Zubair oil field. [Sources: Reuters, The Telegraph (UK), Wall Street Journal, et al.]
 
DUNIA'S TAKE: Two-speed Iraq. The spate of activity both in the Kurdistan region and in Iraq proper confirmed what has emerged in Iraq; a bifurcated oil industry, with PSC-led development in the Kurdish north, and TSC contracts ruling in the rest of Iraq. The Kurds are moving towards economic autonomy quickly with the announcement of their pipeline initiative, although, they are quick to reiterate, within the context of a federal Iraq. And the pace seems to be accelerating in both regions, as deals and milestones are announced in the south and a stream of potential suitors in the Kurdistan region drives increasing nervousness on the part of Maliki and Shahristani and increasing elation on the part of Kurdish Minister of Natural Resources Ashti Hawrami. As such, accelerating exports mean that Baghdad is no longer much affected by threats of a Kurdish oil cutoff, and the Kurds seek independent oil export revenues. However, there is a window between now and the beginning of 2014 where Kurdish independent exports and therefore independent revenues, will not be in place, which puts the ball is firmly in Baghdad's court. As the Federal authority, it will be they who must act to stop the Kurds from going their own way - undoubtedly, in the coming weeks and months, we will begin to see how they intend to do so, and just how much traction they get in their efforts.
 


Headlines

>> Gorran objects to KRG budget. Erbil is struggling through what leaders describe as ‘economic paralysis’ over the 2012 Kurdistan Regional Government (KRG) budget, with Patriotic Union of Kurdistan (PUK) leaders blaming the opposition Gorran movement for the deadlock. PUK leader Arsalan Baiz, the new head of parliament, ordered Gorran: “Don’t delay the budget, because this affects people’s lives.” Gorran MP Rebaz Fatah responded to Baiz in the Kurdish press by saying that the Opposition “want[s] to be inside the process and to know what is going on.” Gorran’s main objections are that “discrepancies” in the budget only compound corruption and injustice. They have proposed a special committee to handle these issues, though the two ruling parties have not yet responded to this request. [Source: Kurdistan Tribune] Our take: While the two parties controlling Kurdistan - the KDP and PUK - are in a standoff with Baghdad, they have their own internal dispute, as the PUK has gradually lost some of its power base in Sulaymaniyah to the breakaway Gorran party. This may be one of the reasons behind the consolidation of the duopoly's leadership, the Barzanis (KDP) and the Talabanis (PUK) in the KDP home base of Erbil. Following this war of words, however, the two parties were able to pass this budget over Gorran's objections, showing that, despite its solid dissident voice, Gorran remains outside the halls of power as yet. Interestingly, there is a link to the Erbil-Baghdad standoff, as all of the Gorran party's 8 MPs in Baghdad came out against Maliki's no confidence vote - potentially hinting at a (long shot) possibility of an alliance with the Prime Minister. So, with Gorran as a future wildcard, there are two things to look forward to. First, we should monitor the effect that a dissident Gorran party can have on the unity and therefore the strength of KRG as they work to increase their autonomy vis a vis Baghdad. And second, there are the KRG parliamentary elections in 2013, which will indicate if the regime is consolidating power, or if Gorran is gaining traction and becoming a real threat.
 
 
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>> Al Hal defects to Maliki on NC vote. The Hal (Solution) bloc, part of the Iraqiya List, released a statement on June 20 refusing to call for a no-confidence motion against Prime Minister Nouri al-Maliki. Hal, led by Minister of Industry and Minerals Jamal Karbuli, is made up of six members, whose votes would be crucial were the opponents of the Prime Minister to decide to go ahead with a vote. Suhad Fadhel, a Hal MP told Kurdish media, “We believe that withdrawing confidence...threatens the fragile security and political situation in the country.” With Hal’s de facto break, and the formal defection of White Iraqiya, Iyad Allawi’s list now has fewer than 80 MPs. [Source: National Iraq News Agency] Our take: This is interesting mainly because Karbuli's public statement puts the lie to previous rumors that all six Al Hal deputies had signed up to the no confidence vote, thus putting the final nail in the coffin of the measure. Thus, in retrospect it seems that the continuing postponement of the return of the parliament may have been a result of the maneuvering among multiple parties as everyone tried to determine whether the no confidence would or would not happen. Once it was apparent it was dead, parliament could return. However, the most interesting aspect of the no confidence movement has been its evolution. We have always said that a successful no confidence vote was highly unlikely, but what has become apparent is that Sadr has no intention of giving up any time soon, and further, it is the process and threat of no confidence more than the outcome that matters most to Sadr. So despite the lack of a quorum, expect Sadr to continue to pursue this as long as he can, as it provides him with a platform from which to lambast Maliki's authoritarian tendencies. It will be interesting to see whether Sadr mainly gains any real benefit either in the street (possibly) or in terms of concessions from Maliki (unlikely).
  
 


About Us

With offices in Washington DC, Dubai and Kampala, Dunia Frontier Consultants (DFC) provides consulting services to investors and corporations operating at the frontiers of 21st century business. Dunia works closely with a small number of clients internationally to provide an unparalleled level of service. With a world-class staff and highly efficient global network of consultants and partners, we support your endeavors in several key areas:
  • Emerging Markets Investment. The heart of our business, we offer a full suite of financial services, including deal sourcing, due diligence, valuation, and market survey support;
  • Risk Reporting and Analysis. Anchored by rigorous data collection and subject matter expertise, we organize and deploy research teams across the Middle East, Africa and South Asia to help our clients mitigate risks and optimize decision-making in key transactions;
  • Business Development. With well-developed local networks in the world’s financial capitals and across key emerging markets, we identify prime market opportunities and business partners for our clients, and provide essential insights to help them navigate new markets.
  • Information Networking and Design. We develop and refine research methodology and analytic tools to generate useful information for clients operating in data-poor and challenging business environments.
Dunia in Iraq
Dunia has performed dozens of due diligence and market surveys in the agriculture, oil and gas, manufacturing, logistics, and real estate sectors of Iraq. Dunia recently completed an in-depth survey of the upstream oil and gas sector, a number of surveys of the housing and real estate markets of non-Baghdad locals, and continues providing actionable insights on developments in the Ministry of Oil, its operating entities, and with comprehensive analyses of the on-the-ground situation surrounding the major oil fields under development. 
 
Contact: 
Kyle Stelma
Managing Director
Fairmont Hotel Suite 712
Sheikh Zayed Road
Dubai, UAE  65736
kyle.stelma@dfcinternational.com 
971.55.925.9869

The views expressed in this report in connection with securities or issuers accurately reflect the views of Dunia Frontier Consultants and no part of Dunia’s compensation was, is, or will be directly or indirectly, related to the specific recommendations or views expressed in this report. Dunia Frontier Consultants is an independent business and financial consulting firm with a specific focus on emerging markets and has not received compensation from any of the companies mentioned in this report. All pricing of securities in reports is based on the closing price of the securities’ principal marketplace on the night before the publication date, unless otherwise explicitly stated. This report is provided for informational purposes only. This report is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any securities and/or commodity futures contracts. The securities mentioned in this report may not be suitable for all investors and may not be eligible for sale in some jurisdictions where the report is distributed. The information and opinions contained herein have been compiled or arrived at from sources believed reliable, however, Dunia Frontier Consultants makes no representation or warranty, express or implied, as to their accuracy or completeness. Dunia Frontier Consultants has policies designed to make best efforts to ensure that the information contained in this report is current as of the date of this report, unless otherwise specified. Any prices that are stated in this report are for informational purposes only. Dunia Frontier Consultants makes no representation that any transaction may be or could have been effected at those prices. Any opinions expressed herein are Dunia Frontier Consultants’ and are subject to change without notice. Neither Dunia Frontier Consultants nor its affiliates accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents.
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