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You are receiving this e-mail because you expressed an interest in investment in Iraq.
In This Report:

Companies Mentioned:
  • Exxon, WesternZagros
Action Calls
  • Sadr in Erbil to mediate on crisis 
    Sadr won't resolve stalemate. Watch Baghdad and Erbil for signs.
  • WesternZagros discovers new oil field, shares rise 20%
    Hopefully those who may have sold into strength were able to get back in.
Headlines
  • NA Still Supports Maliki...With Conditions
    Reminder of limits of Maliki's power.
  • Second SPM exports two million barrels in first shipment
    Kurdish oil becomes less relevant, though not totally irrelevant.
Calendar
  • May 23 - P5+1 Nuclear Talks in Baghdad
    With the next round of the nuclear talks between Iran and six world powers to be held in Baghdad, it seems Iraq is starting to take on a diplomatic role more in line with its geopolitical positioning in the middle east. Lying at an ethnic pivot point between the Turkish north, Arab south and west, and Persian east, as well as straddling a sectarian fault line, Iraq might be expected to begin to take a growing intercessionary role in the region. Further, given its ties both to the US and the West in general, as well as Tehran, perhaps Iraq can carve out a constructive role in tamping down the mounting confrontation over nuclear weapons. In the domestic sphere, successful talks could further heighten Maliki's stature and grow his political capital, allowing him to rise somewhat above the domestic disputes with the Kurds, Sadrists and Iraqiya and potentially press his advantage there.
  • May 30-31 - 4th Round Oil and Gas Auction
    Watch to see whether Baghdad is successful in attracting solid bids for the Fourth round concessions, which would further strengthen Baghdad's hand vis-a-vis the Kurds. If Baghdad's auction is weak, however, it will cast doubt on the Baghdad approach, particularly in the area of more risky oil exploration as in the 4th Round, which would give the Kurds as well as foreign oil companies an opening for arguing that the terms of the current contracts are unattractive and unreasonable.
     
Action Calls

>> Sadr in Erbil to mediate on crisis. Powerful Iraqi Shiite cleric Moqtada al-Sadr arrived in Iraq's Kurdistan region on Thursday, presenting himself as a mediator in a crisis between Iraq's premier and the region's president. "I met Nouri al-Maliki in Tehran, and I came to listen to the opinion of the Kurdish leaders and their views," Sadr told a news conference at Erbil airport, after arriving on a private plane from Tehran. "Everyone should look out for the public interest and the unity of the Iraqi people, and I hope that everyone will be responsible," he said. Sadr then presented a list of 18 points that he wants to discuss with Kurdish leaders. "Minorities are an important part of Iraq, and we have to bring them to participate in building Iraq, politically, economically and in security," Sadr said, also calling for "cancelling the policy of neglect and marginalisation."
Sadr spokesman Salah al-Obeidi earlier told a news conference in Baghdad that the cleric had accepted an invitation to visit Kurdistan, saying "the crisis needs such a move to resolve the situation." 
He added that "the sayyid (Sadr) is trying to put Al-Ahrar (his parliamentary bloc) and himself personally in the middle." [Sources: AFP, et al]
 
DUNIA'S TAKE: Sadr makes his move. As we noted previously, the evolution of the Erbil-Baghdad standoff, with the dismembering of Iraqiya as a political force means that the Kurds have become the primary opposition to Maliki albeit from within the governing coalition. And as we also mentioned, this moves Sadr into the cat-bird seat as the pivotal "swing vote" and king maker. Thus, this week as Sadr moves to build bridges with Erbil, despite the fact that he never embraced their ambitions for regional autonomy in the past, is clearly a move to take full advantage of that position. However, this does not mean Sadr has suddenly had a change of heart and wholeheartedly embraced Kurdish aspirations. Instead, we would assert he is in for the long game here. Rather than offering viabl solutions to resolve the crisis, Sadr is positioning for provincial elections in 2013 and parliamentary elections in 2014. Hence his internal diplomatic mission to preserve "the unity of the Iraqi people", even as he makes reference to minority rights, is an opportunistic attempt to keep his main rival for Shiite votes - Maliki - off balance, while simultaneously blocking his ability to create facts on the ground ahead of the coming elections.

Implications for Kurdish ambitions. So observers should not expect Sadr to hasten a resolution of the Erbil-Baghdad standoff by either bridging the two sides' differences or throwing his weight behind one of the sides. On the contrary, it's actually in Sadr's interest, with one eye on the coming election cycle, that the debate continue to rage (although without exploding into open violence), as the ongoing crisis weakens Maliki. And to ensure that happens, meantime, Sadr is able to take the statesmanlike pose of "ensuring" the Kurds' collective voice is heard, but only to the extent of continuing the pressure on Maliki, not to the extent that the Kurds can actually win any major concessions. Sadr by no means wants a strongly autonomous Kurdish region; what he wants is a check on Maliki's power, using the Kurds as vociferous allies. (Indeed, more autonomous Kurds might turn inwards towards their own regional politics, leaving national politics where they are a useful counterbalance to Maliki.) So while the Kurds will gain another voice railing against Maliki's domination and "dictatorial" tendencies, they will not get any help in strong autonomy, especially with respect to oil and gas, which the Sadrists continue to maintain is the common patrimony of the entire Iraqi people.

Debate moves elsewhere. Thus, we have in effect a confirmation of the ongoing stalemate. The Kurds gain an ally in protesting Maliki's domination, but one who is not willing to push as far as they would like. On the other hand, in the last few weeks, Shahristani has clearly made moves to de-escalate the debate in two ways. First, he moved two weeks ago to effectively push the deadline for 
Exxon to choose between the Kurdish PSCs and West Qurna 1 out by several months by saying they would not penalize Exxon unless they made progress "on the ground" in the Kurdish region. And second, he raised the possibility that Exxon might be able to keep its contracts that were not in disputed territories, as long as the contracts were approved by Baghdad. So the stage is set for Exxon to move away from the center of the debate (a position it seemed they would rather avoid, given their studious silence throughout). Instead, watch for other broader issues to become the bellwethers of progress in the Baghdad-Erbil debate: namely, the fate of Kirkuk (and the rumored talks with BP), the oil export debate (Baghdad's back debt to Erbil versus Erbil's intermittent oil export cutoffs and failing to meet export targets). And in particular, look for potential unilateral moves by either side as one core portion of the standoff has settled into stalemate. But progress won't come directly from Sadr, as he attempts to make political hay from the crisis. It will have to come from Baghdad and Erbil deciding to follow through on the initial constructive steps they have taken thus far, stepping back from the precipice and setting Exxon aside, and trying to solve the real problem themselves.
 
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>> WesternZagros discovers new oil field, shares rise 20%. WesternZagros Resources Ltd. today announced that the mean estimate of gross unrisked contingent resources has increased to 147 million barrels of recoverable oil (corresponding to 464 million barrels of mean estimated gross discovered oil initially in place) and the mean estimate of gross unrisked prospective resources ("Mean Prospective Resources") has increased to 1.2 billion barrels of recoverable oil (corresponding to 3.6 billion barrels of mean estimated gross undiscovered oil initially in place) for the Oligocene reservoir in the Kurdamir Block. These results follow the major oil discovery at the Kurdamir-2 exploration well in the Kurdistan Region of Iraq. The significant increase in both Mean Contingent and Prospective Resources is due to the fact that Kurdamir-2 encountered a 118 meter light oil column with no indications of a water leg at the Kurdamir-2 location, proving that the oil leg in the Oligocene reservoir on the flank of the Kurdamir structure is involved in a much larger trap than was previously interpreted. The updated resource estimates has been confirmed by an independent audit. [Source: Company, MarketWire]


 
DUNIA'S TAKE: WesternZagros continues discovering. Once again, WesternZagros impresses with another significant oil discovery, causing shares to rise 20% over the past week. We noted last summer that WesternZagros was possibly our favorite in our "Kurdish oil basket," underfollowed and yet with enormous prospects, allowing for continuing newsflow on new oil discoveries, so this news is not terribly surprising. And four weeks ago, we noted that usually the shares come back in after their periodic spikes, allowing investors to trade around a core position - thereby playing WesternZagros' long term prospects with the core position while gaining incremental upside from short term volatility in the shares. Well, we hope traders who might have sold after the last spike had enough time to rebuild their short-term WZR position before this most recent spike. And, as we mentioned last month, our long term outlook remains positive throughout this volatility, with WZR and indeed the entire basket of Kurdish shares typically undervalued relative to their reserves because of the Baghdad-Erbil standoff, despite the fact that we continue to believe that there is likely eventually to be a settlement that preserves a solid portion of their value.

Our outlook now? The shares may come in this time as well, but with the last two discoveries happening so closely together, new investors may start to come into WZR, potentially beginning to erode our volatility play, since the play was predicated on low liquidity and weak sustained demand in the shares. Further, some of the week-on-week escalation in the Erbil-Baghdad standoff of the past few months seems to have moderated a bit with the apparent short-term truce called by Shahristani in mid-April (mentioned above). So while we believe the shares are still likely to come in again this time, we think investors should watch them closely to see if the volatility is as strong as it has been historically. But while the volatility play relies on watching these short-term fluctuations, our longer term play is intact. Baghdad and Erbil seem to be looking for a way to avoid what could be a disastrous confrontation over oil and territory, and so, while we expect there to be bumps along the way, which would spark additional volatility, we are hopeful that by backing off the near-term pressure, Shahristani and the Kurds are signaling that they are at becoming more serious in pursuing a negotiated resolution. We will continue to monitor the signs for potential positive resolution, which would eventually allow Kurdish oil shares to achieve valuations in line with their reserves. What will we watch for? Both the positive signs, like Baghdad releasing funds to Erbil, and oil exports starting to flow from Kurdistan, and the negative signs such the BP deal in Kirkuk coming to fruition and the movement of Kurdish
peshmerga militia towards that city. These and other signals will show in the coming weeks whether we are on a path of continuing confrontation, or if there is reason to look optimistically on Erbil-Baghdad negotiations.

 


Headlines

>> NA Still Supports Maliki...With Conditions. The pan-Shiite National Alliance renewed its support of Prime Minister Nouri al-Maliki this week, but with caveats. A source within the alliance said that the parties put a number of conditions on the PM, “most of which were linked to the Central Bank and non-interference in his work as well as leaving the Electoral Commission elections to the Parliament without pressuring.” The source said that “Maliki agreed to all these conditions for the renewal of confidence in him.” In past weeks, the premier has had his authority undermined first by threatening to fire  longtime Central Bank Governor Sinan al-Shabibi and then by trying to sack the leadership of the Independent Higher Elections Commission (IHEC). Maliki was rebuked by political and religious leaders on the former, and lost a key parliamentary vote on the latter. Without the support of key NA factions, the Premier could very well lose a vote of no-confidence. [Source: Sumerian News] Our take: This shows that Maliki still cannot single-handedly dominate parliament. The other Shiite parties within the National Alliance, who collectively form the foundation for Maliki's parliamentary majority, do not want to see an unfettered Maliki any more than Sadr does, and so they will strive to ensure that Maliki does not interfere with certain important reins of power, in particular the Elections Commission. Now, Maliki has done a good job of maintaining their broad and vocal support, as bad things, like summary arrests, tend to happen to those individuals who stand too brazenly in Maliki's way, but as a group they will continue to seek to contain Maliki with moves like this. So pluralistic politics still exist in Iraq, despite the Kurds' and Sadrists' rhetoric about a "new dictatorship."

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>> Second SPM exports two million barrels in first shipmentIraq successfully exported its first shipment of two million barrels of crude from the second of four single point moorings (SPMs) floating off the Basra coastline, media reported. The terminals, built by Australia’s Leighton Holdings, each have a capacity of 850,000 barrels per day, and are expected to more than double the country’s export capacity. The first shipment from the new SPM left early on Tuesday, delivering the crude to India’s state-run Indian Oil Corp. Shipments from the first SPM, which came online last month with a capacity of 300,000 bpd were halted, as there is not currently enough oil to feed both terminals. “After bringing a second export terminal online, we are confident that we’re ready to deal with exporting more crude in the future,” a South Oil Company official said. Production from Iraq’s southern fields is set to hit 2.75 million bpd by the end of the year. [Source: Reuters]  Our take: We noted last week that the SPMs would undercut Kurdish leverage from their cutting off of oil exports. However, this news item reminds us of two interesting facts. First, the onshore capacity bottleneck is already obvious with only two of the four total SPMs operational, as the first SPM's operation had to be halted because of the lack of onshore capacity to supply both simultaneously. So obviously, while the Kurds' leverage is diminished by the SPMs, the Government of Iraq likely can't completely ignore Kurdish production yet, which passes through Turkey to the north and thus avoids any bottlenecks in the south. Secondly, this is a reminder of the fact that, should Iran follow through with threats to close off the straits of Hormuz, the ability to export northwards to the Mediterranean could certainly become much more important, which would in turn theoretically strengthen the Kurds' hands.

 


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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