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In This Report:

Companies Mentioned:
  • ExxonMobil, Lukoil, Statoil, Total
Action Calls
  • National Reconciliation Conference looks dead, Sadrists ask their price
    Nothing likely to come of it, unless it is to be used to announce developments elsewhere.
  • Exxon moving into KRG
    Exxon has their contractual commitments, so expect this to continue.
  • Total close to securing Kurdistan oil rights
    Just as we predicted, another major moving towards Kurdistan.
Headlines
  • Increasing attacks along the trigger line
    Triggered by increasing political uncertainty, something to watch.
  • Samsung wins $1 billion WQ-2 contract
    Shows that life goes on in southern Iraq.
Calendar
  • 31 Jan - Parliament to reconvene
    It looks like Iraqiya has decided to end their boycott of parliament, so it will be interesting what their intent is - whether they are simply returning to parliament because too many MPs have threatened to bolt if they can't exercise their parliamentary prerogatives, or if there is some sort of gambit in the offing. Our expectation is that although some individuals in Iraqiya may make their own plays for attention, there is likely no overarching strategy, so expect State of Law to continue to control the agenda and activity here.
  • This week - Exxon reports, Basra single point mooring set enter service
    Watch to see whether the Kurdish PSCs figure in the Exxon report, or if they are downplayed, and see if any new information comes out on it or the negotiations with Erbil and the Iraqi government. On the Basra SPM, an indicator of progress, or not, on southern oil infrastructure, and whether the Iraqi government is getting any better at hitting its targets.
  • Next month - National Reconciliation Conference
    With most disavowing the National Conference, it basically looks dead. Don't expect anything to come of it, although if the idea does resurrect itself, it will likely mean that someone has a significant statement or development to announce for which the conference would provide a convenient stage. So while nothing will likely be accomplished by the conference in and of itself, it could be a sign of movement in other, more significant areas (such as Iraqiya's future, or the Kurdish-Maliki government talks).
Action Calls

>> National Reconciliation Conference looks dead, Sadrists ask their priceAccording to a number of parliamentary sources close to the main political blocs, neither KRG President Massoud Barzani, Sadrist Trend leader Muqtada al-Sadr, Islamic Supreme Iraqi Council head Ammar al-Hakim, or Iraqiya coalition leader Iyad Allawi will agree to attend the so-called “National Conference” tentatively scheduled for the end of January, but now almost certainly delayed to February at the earliest. A meeting of Iraqiya leaders that was supposed to present a unified front on the issue of the national conference “ended without a set of settled options,” Iraqiya politician Iyad al-Samarraie said. Prime Minister Nouri al-Maliki was no more forthcoming in his support for the conference, and the Sadrist Trend, meanwhile, said that such political issues should be settled with mediation from the Hawza (Shiite religious authorities). In response to one of his followers, Sadr wrote, “it is not my concern to attend a conference such as this.” The Sadrist Trend this week said that they would not consider voting for Maliki’s 2012 budget plan unless a defined quantity of petrodollars are distributed to the Iraqi people. [Source: Dunia Sources]
 
DUNIA'S TAKE: National Conference looks dead. The National Conference, as the rump Iraqiya's only remaining bully pulpit, is emblematic of the coalition's current status. Iraqiya is rapidly fading into irrelevance, as Iraqi politics goes on without it, and the other major actors, the Sadrists and the Kurds, sensing the National Conference's diminishing relevance as a negotiating forum and public relations platform, move to cut their own deals with Maliki. And even in deliberating their joint National Conference position, Iraqiya has failed to coalesce around any specific strategy. Indeed, this has always been Iraqiya's problem. Without a unified front against Maliki's deft political maneuvering (and often brutal bully tactics), Iraqiya has never really been able to take full advantage of its slight numerical edge. And as this note went to publication, Iraqiya confirmed that it would end their parliamentary boycott and participate in budget deliberations (though not returning to the cabinet). Further, the defections Iraqiya is experiencing have only solidified, with Jamal al-Batikh stating he was leaving Iraqiya, while Jamal al-Karbuli, leader of the Al Hal faction of Iraqiya openly stating that his group would rather leave Iraqiya than give up their Cabinet Ministries, which include Industry and Minerals. So even if the conference somehow does happen, it will be a mechanism for public relations announcements, and potentially for announcing items that have been decided in other venues; it will not be a negotiations mechanism itself. So look on the National Conference as symbolic at most, empty gesturing at worst.
 
Sadrists push, Kurds remain silent. So the outlines of the Sadrists' separate deal begin to show, as they return to their typical populist themes in their public statements, while the Kurds have continued their silence. As we have stated previously, this indicates to us that the Kurds continue their negotiations, (although they may have also slowed them with Talabani out of the loop), but we expect it could be a very long time before any significant movement is announced publicly, as the items on the docket are very weighty - with the future of oil and gas in Iraq, and potentially the shape of a semi-autonomous Kurdistan both at stake. Thus, the venue that matters most at the moment is the least visible. Lastly, the Sadrists' vague demands for a share of Iraq's petrodollars should not be confused with the Kurdish demands for recognition of their PSCs. While the Sadrists' demands tend to be quelled by popular sops like fuel subsidies or local infrastructure spending, the Kurds want much more substantive, tangible results tied to issues of Kurdish autonomy, in terms of governance over territory and oil and gas resources. Thus, we continue to stress these are two separate tracks, and that the one with the greater impact is undoubtedly the Kurds' issues.

* * * * *

>> Exxon moving into KRG. Defying bluster from Baghdad, US supermajor ExxonMobil is quietly moving into Iraqi Kurdistan, western sources in Erbil said this week. Exxon, whose disputed contracts in the KRG came to light in November, has remained largely silent, fueling rumors that it had abandoned or frozen the deal. But Westerners in Erbil reported this week that Exxon is “definitely here and they are definitely assessing living and working accommodation.” The source continued, “there are around 10 individuals here at any one time looking at what it takes to fully mobilize here - office space, housing space, these types of things.” Separate sources said that Exxon met with KRG Minister of Natural Resources Ashti Hawrami last week, and are preparing to issue tenders for seismic testing work. Observers believe that Exxon could go public with its KRG plans as early as January 31. [Source: Bloomberg, Dunia sources]

DUNIA'S TAKE: Right on time. While we expected Exxon would continue with its low profile moves to avoid inflaming any political passions about foreign companies flouting Baghdad's writ, we fully expected that they would go ahead with preparations to take full advantage of its Kurdish PSCs. It is important to remember that the PSCs are legally binding and commit Exxon to achieving certain milestones by specific times, and thus Exxon must go ahead with preparations to avoid breaching its contract. So expect more of the same here. Thus, as we noted in the November time frame, Exxon will keep its low profile, but the crucial element of time is now on Exxon's side - the longer time drags on without Exxon being severely punished (and the moves thus far have been mostly symbolic), the more likely it is that they will remain unscathed in the long run. However, it is of note that there are reports Exxon is owed some $500 million or thereabouts by the Iraqi government (and not the $50 million that was reported a few weeks ago), so there is still scope for some punishment to come down on them in the future - though none yet. So stay tuned.

Tell for the Kurdish talks. However, one might think of this as a distinct indicator that the Kurdish talks are going well, but we would hesitate to fully commit to that view just yet. The main takeaway is that Exxon is moving forward, but that they would do this whether or not there was significant movement with the talks in Kurdistan, although we can be sure that Exxon is definitely a subject of those discussions. i.e., the Kurds may be making headway with Baghdad, or not, but regardless, Exxon's default path must be to move forward. What might be said, however, is that the parliamentary crisis going on with Iraqiya has opened something of a window for the Kurds and Exxon to continue to build facts on the ground in Erbil that will be hard to undo over time. And thus at one level, time is not on Maliki's side, and the longer that he waits, the harder the genie will be to put back into the bottle. However, by the same token, should Maliki feel the need to make such a move in the longer term, it will need to be much more dramatic. Thus, the current quiet talks between Erbil and Baghdad could be building up a bit of drama for a future point in time.
 
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>> Total close to securing Kurdistan oil rightsFrench oil firm Total is close to securing exploration rights over several oil and gas blocks in Iraqi Kurdistan, the Sunday Times reported. The paper said a deal could be announced within weeks, although it also cited sources close to the situation as saying that the deal could still fall apart. Industry sources told Reuters that Total had been visiting the region ahead of a possible entry. Total could not immediately be reached for comment. Many big western oil companies have been mulling an entry into Kurdistan, by either buying existing players in the region, many of whom are small independents, or by buying new licensing blocks. [Source: Reuters]
 
DUNIA'S TAKE: And a second movement. Just as Exxon continues its movement into Kurdistan, a second piece falls into place. As we noted in November, if Exxon was not severely punished before the January/February time frame, we expected other majors to make similar moves into Kurdistan. And here we see the first move, even as Ashti Hawrami, the KRG's Minister of Natural Resources, indicates other discussions are underway as well. Again, as with the case of Exxon, this indicates to us that at least the less risk-averse oil majors have determined that it will be possible to monetize Kurdish oil at some time in the future, and that the time is now to get their stakes in. But of course at this point, it's a calculated risk. Any movement in the Erbil-Baghdad talks is still anybody's guess; the most we can assess is that they are happening, however slow progress may be. But with the gloves off, and another oil major on the cusp of moving in, we would expect that contract activity and indeed, M&A activity involving our favorite Kurdish plays such as DNO, Genel Energy, Gulf Keystone, and WesternZagros - either as acquiror or target - will continue to heat up for at least the next six months. The only thing to watch for will be the tone around whatever comes out of Erbil and Baghdad, and whether, once it becomes clear that the pace is picking up, there is a backlash among vested interests in the capital and the rest of Iraq. 
 


Headlines

>> Increasing attacks along the trigger line. Since early November, violence has been on the rise in disputed Kurdish-majority areas of Diyala, Ninewa, Salahaddin, and Ninewa provinces, with Khannaqin, Saadiya and Muqdadiya (Diyala), Kirkuk, Hawijah, and Riyadh (Tamim), and Tuz Khurmato (Salahaddin) bearing a particular burden in this regard. While these regions have averaged some 10.1 attacks per week over the past twelve months, that has risen to 10.9 per week since the beginning of June, and 12.5 since early November. Worrisome is the rise in attacks of an overt sectarian nature, including the killing of a number of Kurdish politicians in Diyala and Tamim, and the shooting deaths of more than a dozen religious minorities in Ninewa since the beginning of December. Sunni-Shiite splits in Diyala province’s administration are likely only to exacerbate this already inflamed situation in the coming months. Our take: Given that Iraq has a level of background violence that is higher than some countries, we are hesitant to point to sporadic violence as a trend. (However, we would note that it is partially perception, as, for example in recent years your chances of being murdered were higher in West Philadelphia than Baghdad.) But as we had noted previously, there were two things to watch for: 1) sustained violence, particularly of an ethnic or sectarian nature, and 2) the spread of the violence outside of Baghdad. Now that we are seeing it, we believe it is time to call this the beginning of a potential trend. We hope it will not continue, but it remains a distinct possibility that the ethnic and sectarian violence will continue and that we are seeing the start of that. Accordingly, we will be monitoring this, particularly as we move away the Shiite holy weeks around Ashura and Arbaeen, which will give us a clearer separation from the Shiite targeting that occurs this time of year. And while this could be a direct result of the political instability as various groups take advantage for maximum impact, we will watch for a broader trend.
 
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>> Samsung wins $1 billion WQ-2 contract. South Korea’s Samsung Engineering has won a $998 million oil field service contract for the West Qurna 2 field in Basra, a government memo released Tuesday indicated. Iraq and its partners Russia’s Lukoil and Norway’s Statoil shortlisted Samsung along with Saipem, SNC Lavalin, Punj Lloyd, and Globalstroy Engineering. The tenders processed were for the construction of an oil export pipeline, a tank farm at Tuba, a power distribution station and an associated gas processing plant, and also an oil gathering system, central processing facilities and a water supply system. These improvements are expected to help the field hit its 150,000 bpd target by January 2013.  Our take: Just a reminder that even though there may be fireworks around the ExxonMobil move into Kurdistan, and perhaps the Total move to come, life will go on in southern Iraq. While it is pretty clear that the margins to be made in the South are very thin, there is a very broad spread of companies involved in Iraq, and they have their pick of risk/reward scenarios - high risk/high reward in Kurdistan, lower risk/lower reward in the south (although Exxon might see the risk differently), and other options in the middle elsewhere along the spectrum. So while Statoil has been rumored to be quite unhappy with WQ2, even reportedly mulling ways to exit gracefully, they (or at least Lukoil) have clearly felt comfortable enough to move forward with awarding the Samsung contract. But once again, this is the status quo, where we believe the bigger issues will be decided along the Erbil-Baghdad axis.
 


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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