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In This Report:

Companies Mentioned:
  • BP, ExxonMobil, Total, WesternZagros
Action Calls
  • Stakes rise as GoI courts BP in Kirkuk
    Definite escalation, but let's hope it stays war of words. Watch Kurdish peshmerga around Kirkuk.
  • WesternZagros climbs 18% on oil find
    Reminder of WZR's promise, trading around core position to profit from volatility.
  • Arab League summit a qualified success
    AL summit concludes without significant security breach, strengthening Maliki.
  • National conference date proposed
    Most likely stillborn, but if it gains traction, something may be afoot.
  • This week - Arab League summit aftermath
    It looks like Maliki's radical shutdown of Baghdad's transportation and communications networks achieved the desired effect, as there were no major incidents during the Arab League summit. Look for one of two outcomes this coming week, however. Either Al Qaeda in Iraq (AQI) will take the opportunity once networks are reopened to show that they are still viable and a lot of the attacks that would have happened last week will explode onto the scene, or there will be a decline in activity as the main reason for the attacks has passed and AQI has moved on to different targets.
  • April 5 - proposed date for National Reconciliation Conference
    Iraqiya is still pushing the summit, but most likely it won't happen anyways. But watch to see if it does come to pass. If so, it may indicate another party - the Kurds or the Sadrists - has something substantial to announce, so it may be significant in that case.
  • April 20 - Rewritten contract terms expected for 4th Oil ang Gas Auction
    A date to watch since these contract terms could indicate just how far the Baghdad government is willing to bend on allowing more favorable terms for oil companies in Iraq, given the increasing pressure on them, both from existing IOCs and the ExxonMobil defection to the Kurdish region.
Action Calls

>> Stakes rise as GoI courts BP in Kirkuk. According to Northern Oil Company (NOC) officials, the Iraqi government has reached a preliminary agreement with British Petroleum (BP) for work on the northern Kirkuk field, located in the heart of land disputed by Kurds and Arabs. Speaking with local media this week, NOC undersecretary Hussein Allam said that an initial agreement between BP and the government “is part of a high-level plan carried out by the Oil Ministry through the Northern Oil Company to develop the production of the northern fields through a partnership contract signed with BP.” On Thursday, Ministry of Oil officials confirmed that Kirkuk was in play but said that BP was just one of six companies vying for government contracts. Predictably, the Kurds have reacted angrily to the news, releasing a statement concerning this news that “Neither Iraq’s federal Oil Ministry nor state-owned oil companies have the right to unilaterally award contracts to develop ‘present’ fields in Kirkuk province or in other adjacent areas.” [Source: Wall Street Journal, Reuters, Bloomberg, et al.]
DUNIA'S TAKE: Rapid fire succession of escalating events. During the past few weeks, we have witnessed increasing escalation in the stalemate between Erbil and Baghdad. Although the standoff has been at a simmer for years, the latest spark seems to have been the ambiguity of Exxon CEO Rex Tillerson's statement that the company remained committed to both its Kurdish PSCs and its TSCs with the Government of Iraq (GoI). While the Kurds immediately siezed upon this by declaring victory for their Kurdish PSCs, Baghdad claimed that Exxon sent them a letter days later stating they would freeze activity in the Kurdish region (which of course would endanger their being able to hit the milestones required contractually by the PSCs). The Kurds of course denied Baghdad's assertion, this past week going so far as to assert that the Minister of OIl was lying about the Exxon's purported freeze. Now, with the GoI announcing agreement in principle with BP to increase its oil production, it is the Kurds' turn to furiously deny Baghdad's right to sign a contract, claiming that any improvements to existing oil fields must be approved jointly by the center and regions. (Whereas the Kurds assert that totally-new oil field exploration and development, as in the PSCs, is the sole prerogative of regions and governorates-i.e., the Kurdish region.)

Atmosphere of tension broadening. Meanwhile, the Baghdad-Erbil relationship has escalated in other areas, as Massoud Barzani, President of the Kurdish Regional Government (KRG), made a fiery speech on the Kurdish new year holiday of Nowruz, not to declare Kurdish independence as some had hoped (or feared), but barely stopping short of calling Maliki a dictator. While this did not break any new ground not tread in the height of last fall's Kurdish tirades, it did show that the Kurds were becoming more agitated by the state of relations with Baghdad. Further, the Kurds began throttling back Kurdish oil exports, reportedly to 50,000 barrels per day from recent levels of around 100,000, and threatening to cut off oil exports entirely, if they were not paid an estimated $1.5 billion owed to Kurdish oil producers. Now, Baghdad has promised a total of $560 million, provided that the Kurds submit to a full audit by the board of supreme audit. However, this is a red herring; as an audit of Khurmala has been done and submitted for 6 months, but its operators have not been paid.

Now, the significance. Threatening to have BP move into Kirkuk under the aegis of the central government is a significant escalation of the war of words between Baghdad and Erbil. Now, as far as we know, there is no actual contract yet, but we see this as Baghdad finally positioning their own "facts on the ground" along the same lines that the Kurds have in the past - by signing agreements directly with foreign companies that the other side finds technically illegal. However, if this agreement comes to pass in reality, it is much more of a serious escalation because Kirkuk is at the symbolic heart of so much that characterizes the entire dispute between the Kurds and the GoI. Not only are the Kirkuk oil fields massive, but they lie directly along the "Trigger Line" of disputed territories. Shots have been fired many times before in that area, not only between Kurds and Arabs, but among other ethnic and sectarian minorities in the area. As such, the GoI's move signals a qualitative change in the game. Much of the escalation of the past month has been words and innuendo; as we have mentioned before, this is where it could spill over into actual fighting. Even the bright spot that might seem like de-escalation - Baghdad's apparent concession offering $560 million to the Kurds came with the significant caveat of submitting to the board of supreme audit, which would gives Baghdad power over Kurdish compliance, making the Kurds play to Baghdad's rules. 

Watch out for real escalation.
 So, both sides have pushed to the brink in the war of words, but  have not yet crossed the line into real physical escalation. Baghdad has an agreement "in principle", but not yet a contract with BP, as far as we can tell. The Kurds have lambasted Maliki, but gone no farther. Baghdad has made a concession, but on terms the Kurds are hard-pressed to want to or be able to meet. So far so typical in this chess game. But what is important now is that the escalation in words is such, treading so close to taboo areas like Kirkuk and open Kurdish defiance of Baghdad, that each side has also raised the possibility of a miscalculation or a misread of the other side's intentions, and of which red lines cannot be crossed. As a result, it will be increasingly important to closely monitor the signs that will show whether or not the confrontation remains in the realm of words, not actions. Chief among those signs would be violence levels in Kirkuk and Tamim province along the trigger line, as well as any potential accompanying movements of the Kurdish Peshmerga militia towards Kirkuk. Again, as yet, we believe that neither side actually wants to cross a line; however, there is now an increased possibility that some line will be crossed somewhere, intentionally or not. In the meantime, don't count the BP deal until there's a contract announced, and don't count the Kurdish money until the GoI has disbursed it.

Lining up the markers. So one interesting thing that this standoff and its ongoing developments does present is a way to keep score as to leverage points both sides continue to marshal in the ongoing debate. As such, we have listed some of the most obvious leverage points for each side below. This is not meant to be exhaustive, only thought-provoking (note the $1.5 billion owed to Kurdish producers is used as a weapon on both sides). Clearly, on paper, Baghdad seems to have the greater weight of advantages on its side. However, the one key advantage that the Kurds continue to cling to tenaciously is their special status as an autonomous region within Iraq. That has continued to be generally accepted by the nation's population, partly because of the Kurds' history as a persecuted minority under previous governments, and the Kurds have continued to drive the broadening of their autonomy over time. What this current dispute and potentially escalating crisis does is severely test that principle. The crisis has not escalated into action yet, but we would watch the key markers for shifts in fortunes, and particularly the last one - as the hope is that this crisis is resolved before the tensions erupt into violence.

* * * * *
>> WesternZagros climbs 18% on oil find. WesternZagros Resources Ltd. climbed almost 18%, but is still off year highs, after announcing that it has made a major oil discovery in the Oligocene reservoir at the Kurdamir-2 exploration well in the Kurdistan Region of Iraq. Simon Hatfield, CEO, said: " The Kurdamir-2 discovery is the third high-impact discovery on our Blocks in ten months and is an important confirmation of our queue of high-quality, light oil exploration opportunities." WZR is now trading at 79 cents a share with more than 2.7 million shares changing hands. [Source: Nasdaq]

DUNIA'S TAKE: Why WesternZagros is a favorite. This announcement reminds us why we've remained positive on WesternZagros for the past year. The stock is underfollowed, and apparently underappreciated by investors, but when one examines the company's oil assets, it shows a huge range of prospects, potentially offering plenty of future positive newsflow. However, it is important to get the play right, as WesternZagros is volatile with periodic price spikes followed by periods where it mostly trades sideways, aside from the monumental rise following the purchase of 20% of the company by Taqa in October. Unfortunately for WesternZagros shareholders, since 
Taqa tends to buy and hold properties for its own long-term benefit, that investment probably also put off a lot of suitors who would otherwise like to acquire WesternZagros. That also partially explains the lack of breakout on acquisition speculation like those in Gulf Keystone, and perhaps DNO. In our opinion, then, the play on WesternZagros is twofold. First, we have often mentioned it as a longer-term core holding in a basket of shares in high-quality Kurdish oil companies that will benefit from an eventual positive resolution to the Erbil-Baghdad confrontation over oil in the region. And the second play would be to trade, either stand-alone or around the core holding, in order to take advantage of the company's volatility, knowing it tends to come back to earth after price spikes. Given this rationale, it may make sense to trim some shares now for repurchase at a lower level, as for either play - for a trade or for a punt on the Erbil-Baghdad agreement, the risk/reward may have shifted in the short term, despite WesternZagros' longer-term prospects.


>> Arab League summit a qualified success. Complete with representation from all Arab League countries–save now suspended Syria–ten of which were represented by their heads of state, Iraq’s first Arab League summit in more than two decades took place without a major security incident. While the summit’s practical result was perhaps less than forceful, the positive symbolism for Iraq was unmistakable, even though the ten heads of state in attendance represented a smaller number than attended recent Arab League summits in other regional capitals. [Source: Reuters] Our take: Maliki can point to the Arab League summit as a qualified success, as no significant incidents occurred, and none of the week's events were postponed or relocated. However, this success came at a high cost as police were required to sleep at their posts, traffic to central Baghdad was cut off, and cell phone networks (often used to detonate remote-controlled bombs) were disabled. Nonetheless, there were some lasting positives, as the summit attendees likely came away with a positive impression of the security environment in Baghdad. Also, the process of beefing up security in the city itself yielded calls to revamp previous security plans built on the assumption of US troop support. And for Maliki personally, with the Summit removed as a leverage point for his rivals, the Prime Minister once again has a free hand to turn again to domestic politics. Meantime, we will be watching to see whether AQI attempts to carry out the attacks they undoubtedly had originally planned for Baghdad that were thwarted by the clampdown, or if it shifts its attention elsewhere (perhaps to Ninewa?), having missed its critical window of opportunity in the city.

* * * * *
>> National conference date proposed. During a meeting last Sunday, Iyad Allawi’s Iraqiya bloc proposed April 5 as the date for a long-rumored meeting of political leaders. This was confirmed by Iraqi president Jalal Talabani, who said the date was reached after “extensive deliberations and consultations with Prime Minister Nouri al-Maliki, Parliament Speaker Osama al-Nujaifi, and other leaders and political figures.” [Source: aknews, aswat al iraq] Our take: Right on time, Iraqiya has proposed a date for the National Reconciliation Conference as expected, now that the Arab League summit has passed. Now that an actual date has been mooted, watch to see if anyone outside of Iraqiya actually takes the bait. Jalal Talabani apparently said the date was reached after "extensive deliberations" with Maliki and the Iraqiya Parliament Speaker Osama al-Nujaifi, so perhaps there is some hope, but the effort could be stillborn since Iraqiya the same day announced a boycott unless there was a commitment to activate the Erbil Agreement. Since we believe the Erbil Agreement is a dead letter, and no one else seems to have any potential win out of the Reconciliation Conference, the new effort is likely dead. However, if someone besides Iraqiya picks up on the Conference, it could signal something announcement-worthy is in the works from other discussions.


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;
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  • 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. 
Kyle Stelma
Managing Director
Fairmont Hotel Suite 712
Sheikh Zayed Road
Dubai, UAE  65736 

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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