How Juniors Beat the Majors In Iraq’s Oil Boom (NYSE:XOM, NYSE:CVX, NYSE:HES, TSX:WZR)
As the U.S. gears up to become the world’s top oil producer by 2017, another major energy development is shaking up the energy industry halfway around the globe. It’s happening in Iraq, the world’s third-largest oil exporter and second-largest OPEC oil producer.
What’s the story?
According the International Energy Administration (IEA), oil production in Iraqis set to more than double over the next seven years to 6.1 million barrels per day.
That adds up to 45% of the anticipated growth of oil’s global output through 2020, much more than any other nation.
All told, Iraq is looking at a $686-billion opportunity (at current oil prices) just from producing and selling more oil.
U.S.troops may have left Iraq, but international oil and gas companies can’t help themselves. There’s too much opportunity around to not get involved in the action.
That’s why Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), France’s Total S.A.(NYSE:TOT) and many others are in Iraq producing oil and natural gas as I write.
It hasn’t been easy for them, however.
As Investment U Commodity Specialist, Matthew Carr, explained in February:
“Iraq’s massive 143 billion barrels in oil reserves has sparked a power struggle between Baghdad and the semiautonomous Kurdistan Regional Government (KRG).
The central Iraq government and KRG are competing for companies to come in and develop resources. But there’s tension brewing as Baghdad doesn’t formally recognize contracts international oil companies ink with the KRG Ministry of Natural Resources.”
In fact, earlier this year, Exxon signed a deal with the KRG and it was barred from bidding in Iraq’s latest oil auctioning as a result.
Other companies such as Chevron and Hess (NYSE:HES) have also been barred in the past for making oil deals with the KRG.
Why have companies been willing to work with the KRG even though they technically shouldn’t?
The answer is… profit.
Foreign oil companies share a percentage of the profits from oil sold with the KRG. Iraq’s central government, on the other hand, pays them a service fee per barrel of oil produced, which ends up being less money in the end.
Plus, they’re also working with the KRG because Iraq’s central government isn’t in a position to push foreign companies or the KRG around.
For one thing, it’s estimated nearly 20% of the central government’s revenue comes from deals with the KRG.
Second,Iraq needs foreign investment.
Sami al-Araji, head of Iraq’s National Investment Commission (NIC), acknowledged earlier this month, Iraq may need as much as $1 trillion to rebuild its economy and infrastructure.
After months of threatening big oil and gas producers and blacklisting some of them from licensing auctions, in September,Iraq’s central government had a sudden change of heart.
Bloomberg reports, the central government ruled that it will “start making payments to international oil companies working in the northern Kurdish region…”
This is certainly comforting news for major international oil and gas companies working with the Kurds.
But it could prove even better for junior exploration companies.
You see, because Iraq’s central government made such a fuss about international companies working with the KRG in the past, most major producers hesitated to secure deals with the Kurds.
Juniors didn’t have this problem. Since they never had the money to play both sides of the fence, they focused on securing rights with the KRG simply because of its higher profit potential from the get go.
And now they’re sitting on massive, rich oil fields in Northern Iraq that could pay off in droves in the years to come…
- WesternZagros Resources (TSX:WZR): Only a $400-million company, this junior miner owns of the largest exploration area in the Kurdistan region of Iraq. So far this year, its shares have more than doubled, and the company recently announced it discovered oil in two of three target intervals located at the Eocene Reservoir in Northern Iraq.
- Genel Energy (LSX:GENL): Technically it’s not a junior mining company, but it is the largest producing oil and gas company operating in the Kurdistan Region of Iraq. The company is headed by Tony Hayward, former CEO of BP (NYSE:BP), and has a market cap of just over $1 billion. Over the past six months, shares of Genel have surged 32% as it has expanded its Kurdistan assets.
- DNO International (OSLO:DNO; OTC:DTNOF): Two years after signing its first deal with the KRG, in 2006, DNO made its first oil discovery at Tawke Field, a quickly emerging world-class oil field. In fact, oil is so rich in this area that, as the company explains, it is literally “seeping out of the ground” there. Shares have climbed 16% in the last three months.
But these are just a few examples of some smaller oil and gas producers making big moves in the Kurdistan region.
Now that major players are also moving in the area, there’s even more reason to get excited. That’s because we’ll likely see increased M&A action in the region. And takeovers and acquisitions are one the fastest ways to send a company’s shares flying higher.
Bottom line: Juniors are in a prime position to either earn big from the Kurdistan region of Iraq on their own or become takeover targets for bigger energy companies.
Add in the fact a new pipeline is set to be complete by 2014 from the Kurdistan Region of Iraq to Turkey, and you’re looking at an oil development that isn’t going anywhere anytime soon.
This pipeline will give the KRG a lot of leeway from the central Iraqi government in terms of economic freedom. And that only makes the value of junior miners’ operating in Northern Iraq that much more attractive.