Since early 2011, Dunia has produced a weekly Iraq market tracker that explores the Kurdish oil basket play for investors who want direct exposure to the enormous hydrocarbon opportunities available in Iraq. To view the archive of those reports, or to add your name to our mailing list, click here.

Dunia’s “Kurdish oil basket play” is based on a couple of assumptions:

A historic growth opportunity in Iraqi oil: Iraq has the fourth largest proven reserves in the world, and this estimate may go up once the country’s oil infrastructure, debilitated by thirty-five years of war and sanctions, is brought up to international standards. As a result of its long history of neglect Iraqi oil represents one of the last chances for the global oil industry to find easy-to-extract, world-class virgin reserves. The problem has been how to gain exposure to this opportunity, when Iraqi oil still represents only a small percentage of the large public oil companies who have locked up many of the oil contracts in Iraq.

Kurdish oil provides a unique opportunity: Kurdish oil companies represent a unique opportunity to gain unadulterated exposure to Iraqi oil prospects because of a historic accident. Throughout the 2000s, the Kurdish Regional Government (KRG) has been licensing foreign oil companies to explore Kurdistan independently of the central Government of Iraq (GOI), which prompted the GOI to threaten to blackball any companies that signed licenses with the KRG. As a result, none of the oil majors signed contracts with the KRG, leaving a space for many small independents, some formed specifically to target Kurdish oil, to step in. This means that uniquely among Iraqi oil companies, Kurdish ones have a disproportionate amount of their reserves and therefore future revenues tied specifically to the Iraqi oil industry.

Based on our assumptions, we filtered the 40-odd entrants into the Kurdish markets, looking for players that would provide a potential investment route for public equity investors who wanted to take a punt on Iraqi oil.  Assuming that such investors would want to invest in some size, a first requirement was that the company be listed in a liquid public market avoiding illiquid markets like Iraq’s own ISX or other frontier markets. And in order to maximize the exposure of this investment to Iraqi oil, we needed the target companies to have a disproportionate amount of their future business in Iraq. With these two strictures, we came up with a list of ten companies, but based on further analysis of the news flow and the performance of the companies over time, we have ended up focusing most of our discussion on four companies: DNO International, Gulf Keystone, Heritage Oil, and WesternZagros. These four key companies all have the vast majority of their near-term assessed resources residing in Kurdistan.

A lot of our coverage to date has focused on Kurdish oil, but this was because of two things. First, the Kurdish play was unique in providing unadulterated, direct exposure to the Iraqi play. Second, oil represents the first play in the Iraqi development cycle. Since oil willbe the driver of Iraqi economic development, playing oil industry growth represents a natural first step in playing Iraq.

However, even as the oil sector develops in Iraq, our coverage has touched on other sectors that we believe will also benefit from what we believe will be an astonishing secular growth story in Iraq, and we expect our coverage to deepen in these areas, including two major areas:

  • Oil services, which will benefit as the oil sector tools up in ramping its operations. In Kurdistan, this means targeting companies that have the most to gain from the drilling already under way as the early explorers start to ramp development and production;
  • Infrastructure development, including transportation, electricity, hospitality, telecoms, as all of these areas are in dire need of upgrading and are seen as prime targets by the government for incentives and direct investment of the petrodollars emerging from the country’s broader development.

We hope our developing coverage can help illuminate what we believe are uniquely promising times in Iraq.

Posted on Tuesday, September 27th, 2011 at 8:33 pm