New Frontiers

New frontiers —
TAQA’s recent investments in northern Iraq are the first step in a long-term commitment to a region with promising potential

When TAQA bought a 20% share of WesternZagros Resources in October 2011, it was not just buying a stake in a Canadian oil company, it was buying access to one of the most promising areas for oil and gas exploration in the Middle East.

WesternZagros has two production-sharing contracts with the Kurdistan Regional Government (KRG) in northern Iraq, allowing it to explore for oil in the Kurdamir and Garmian blocks. Since drilling began in 2008, it has made a number of discoveries and in the process helped to confirm Iraqi Kurdistan as an important new centre for the region’s energy sector.

“Iraq is one of the least explored of any major oil-producing countries and Kurdistan has some of the most prospective unexplored acreage,” says Alex Munton, Middle East analyst at Wood Mackenzie, an energy research firm. “We’ve seen a tremendous rate of reserves growth. We estimate that seven to eight billion barrels of oil have been discovered in Kurdistan since 2005 and it’s still very early days.”

The KRG says there are some 45-50 billion barrels of oil in place in its territory and up to 6 trillion cubic feet of gas. The region is currently producing around 300,000 barrels a day (b/d), but KRG Minister of Natural Resources Ashti Hawrami told a World Economic Forum meeting in Istanbul in June that it aims to lift output to one million b/d by 2015 and two million b/d by 2019.

To help achieve that ambition, the KRG has signed more than 45 production-sharing agreements covering most of its territory. If new discoveries are made, its reserves estimates will only grow.

“There’s a lot of potential in the Kurdistan region and it is still under-explored,” says Nuno Rodrigues, director of business development for oil & gas at TAQA. “The success rate in the past few years of the drilling campaigns by various companies has been tremendous. I wouldn’t be surprised if those reserves numbers go substantially north in the next five to 10 years.”

Lighting up

It is not just the oil and gas lying under the ground that makes Kurdistan such an enticing prospect. The KRG also has ambitions to grow the region’s power generation capabilities, which are already significantly advanced compared to the rest of Iraq. While people in Kurdistan now have access to electricity for around 22 hours a day, it is only available for four to five hours a day in the rest of the country.

Kurdistan’s success in building a regional power generation industry stems from its bilateral partnerships with international power providers (IPPs), who bring much-needed expertise and capital to the table. Under this model, an IPP will finance the construction of and own a power plant from which it then sells electricity to a utility supplier. In return, the KRG agrees to purchase electricity at a minimum price. Through such bilateral agreements, Jordan-based Mass Global Investments Company has built three power plants at Dohuk, Sulaymaniyah and Erbil that now supply 90% of the region’s electricity.

In April this year, TAQA stepped into this market too, announcing a joint venture agreement with Mass Global Investments Company to take a 50% share in a gas-fired independent power plant near Sulaymaniyah. The plant has been operating since 2009 and has a capacity of 750MW, with a further 250MW capacity under construction.

Once the deal is finalised, TAQA and its partner will focus on expanding capacity to 1,500MW by converting it into a combined-cycle plant. In the longer term, the potential also exists for TAQA to combine its oil and gas exploration and production activities in the region with its power generation interests.

“Iraq’s energy sector offers very large opportunities for oil and gas and power investments,” says Imad Ghanem, director of power and water investments at TAQA. “Among the projects the KRG is currently considering is an integrated upstream/midstream/power generation project, developed by the private sector. We’re very keen to assist them with that.”

Companies like TAQA could see an increase in their chances of securing contracts in Kurdistan after the KRG recently decided to expand its power plant-building programme beyond bilateral negotiations to an open tender process. Power plant contracts won through this process should add a further 6,000MW capacity to the 1,500MW of power generated in Kurdistan in 2011. The KRG also wants to develop a 400kV transmission network, which would allow it to export electricity to the rest of Iraq and, potentially, Turkey.

Opportunities are also beginning to arise beyond Kurdistan as Iraq as a whole makes power generation a priority. According to the country’s energy master plan, about 24,400MW of new capacity will be added between 2012 and 2017. Simon Stolp, an energy specialist at the World Bank, predicts capacity in the country will double in the next two to three years as 7,000MW come on stream. New contracts are either being negotiated or are in the process of being awarded, he recently told the Financial Times newspaper.

Mr Ghanem says TAQA is interested in developing additional new power plants, whether in the north or south of Iraq, as well becoming involved in the KRG’s plans to expand the transmission grid.

“We would like to grow relatively quickly in Iraq,” he says. “We think we should be able to add 2,000-3,000MW over the coming five to seven years. We’re looking at opportunities in the south of the country too and in particular at captive IPPs with IOCs [international oil companies]. Iraq could become one of the biggest markets in the region for TAQA, alongside Saudi Arabia.”

The right policies

Since the 2003 Iraq War, doing business in the country has been challenging, but the Kurdish region has been less affected than other parts of the nation. It has also been helped by the business-friendly approach adopted by the KRG.

“Kurdistan Iraq is capable of delivering far more opportunities for its own people and indeed for international investors,” said former KRG Prime Minister Barham Salih at an oil and gas conference in Erbil in November last year. “We are pleased that our policies are proving to be the right ones to attract world-class companies. The days when Kurdistan was an isolated economic backwater are over.”

Some issues remain, however. Perhaps the most pressing is the dispute between Erbil and Baghdad over a proposed federal oil law and, ultimately, control over the country’s hydrocarbon resources. This has delayed a new law being passed that would set a clear framework for the longer-term development of the country’s energy sector.

“Kurdistan has only opened up to investors relatively recently. For many decades it was off the map,” says Mr Munton. “The government is in the early days with this, but so far the success is apparent in terms of the level of investment that has come in, the interest from industry and in the rate of reserves growth. The key issue is relations between Erbil and Baghdad and whether that will be resolved. Everyone in the industry wants to see it resolved. There would be benefits for all sides but we can see it taking quite some time.”

Despite this, there are enough other positive factors to make Iraq, and Kurdistan in particular, an attractive prospect for international companies. Valuations for oil and gas assets are relatively low due to the perceptions of risk, but the economy is growing fast and the security situation is stable in the north and improving gradually in the south.

In order to take full advantage of the opportunities available, TAQA will open an office in Erbil before the end of the year and the company is looking at other projects, both in the south and in the Kurdish north.

"We want to build a long-term presence in Kurdistan," says Mr Rodrigues. “We’re not there for a quick buck or short-term returns. We want to be relevant to the government, and we want to integrate our oil & gas and power businesses in this region and build a material portfolio. We’re actively looking for opportunities to do that."