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Hunt Oil Skirts Baghdad, Signs Deal with Kurds

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DUBAI, United Arab Emirates Sep 10, 2007 (From the Wall Street Journal via Dow Jones Newswires)

Hunt Oil Co. has struck a deal to explore for oil in Iraq's semiautonomous Kurdish region, signaling a new willingness by some large Western companies to bypass the fractious government in Baghdad and deal directly with regional authorities in the war-torn country.

The regional government of Kurdistan and Dallas-based Hunt said over the weekend they had agreed to jointly explore for oil in the Kurdish enclave. Hunt, a closely held family concern with a reputation for risk taking, will operate the project, the two sides said.

The deal is a victory for Kurdish officials, who have been trying to attract large, well-known oil companies to the region for years. It bolsters their claim to autonomy in issues such as natural-resource policy, thereby strengthening their hand in sometimes-testy relations with Baghdad.

At the same time, it is a significant blow to the central government in Baghdad. This summer, a draft petroleum law designed to spur foreign investment nationwide languished in Parliament. Iraq's failure to pass the law has hobbled efforts to impose some measure of central control over the country's vast but investment-starved oil industry. As a result, it has also weakened Baghdad's ability to rein in the Kurdish region's ambitions for greater autonomy.

For the global oil industry, the deal is a watershed in the on-again, off-again scramble by Western companies to set up shop in Iraq. Iraq's oil reserves are estimated to be around 115 billion barrels, the third-largest in the world, behind Saudi Arabia and Iran. But because of decades of war, large tracts of land in Iraq remain relatively unexplored.

Giant oil companies like Royal Dutch Shell PLC and BP PLC have shown interest in someday tapping those fields. They have courted Iraqi oil officials by setting up research joint ventures and offering to train Iraqi staff. But so far, Big Oil has remained on the sidelines as smaller companies have sent representatives into Baghdad and Iraq's northern Kurdish region to negotiate deals.

Though the stepped-up presence of U.S. troops has helped to damp violence lately in some other parts of the country, the Kurdish north has emerged as a relatively safe area for foreign investors, attracting real-estate and oil-field developers alike. Kurdish officials have signed a handful of agreements with small companies to explore for oil or develop fields.

The region currently contributes a very small percentage of the country's overall oil production, but Kurdish officials say they believe it holds large stores of untapped reserves. It's impossible to quantify the region's prospects, but many oil companies -- big and small -- have expressed interest in one day exploring there.

For large multinationals, the lack of security makes any meaningful fieldwork difficult. But more crucially: Since the overthrow of Saddam Hussein during the U.S.-led invasion in 2003, there has been no legal framework for signing deals and ensuring they last beyond the current government.

Hunt operates oil fields around the world, but is small compared with super majors like Exxon Mobil Corp., Shell or BP, which run large-scale refining and other petrochemical businesses in addition to their production operations. Still, it is a well-known name in the American oil patch, and has years of experience in tough business environments -- from Yemen to Peru.

"The Hunt deal is different," said Tariq Shafiq, an oil analyst and former Iraqi oil official who helped write the proposed national legislation. "This is Hunt, an important American company. So far, important companies have refrained" from signing deals without a national petroleum law.

The government of Prime Minister Nouri al-Maliki has been under increasing pressure from the Bush administration to push through the national oil law. Washington views it as a critical step in cementing the shaky ties between Iraq's three main sects: Shiite Muslims in the south, Sunni Muslims in the central and western parts of the country, and Kurds in the north.

The legislation was one of several specific benchmarks Washington imposed on Mr. Maliki's government as a measure of political progress in Baghdad. Ryan Crocker, the American ambassador to Baghdad and Gen. David Petraeus, the top U.S. military commander in Iraq, are expected to cite the lack of political progress in Baghdad as a major hindrance to stabilizing the country, during testimony on Capitol Hill this week.

But for much of the year, Iraqi lawmakers balked at moving the legislation along. Frustrated Kurdish officials approved their own version of a regional petroleum law this summer. The Hunt deal is the first signed under that law.

The deal shows the new Kurdish law "has created a supportive and transparent business environment" for international oil companies, said Ashti Hawrami, Kurdish minister for natural resources, in a statement. Mr. Hawrami said that any eventual revenue from the deal will be shared with other Iraqi regions. Financial terms weren't disclosed.

That is consistent with current practices, in which revenue collected from the state-run oil-marketing agency is required to be sent to government coffers in Baghdad, and then incorporated in the federal government's overall accounts. (U.S. and Iraqi officials have alleged widespread smuggling and corruption across the industry.) The concession also keeps the Hunt deal consistent with the draft national legislation, should it be revived. That could help ease concerns of Baghdad officials.

Ray Hunt, chief executive of Hunt and the patriarch of the family's business interests -- which span energy, real estate, private investment and ranching -- said in a statement that he was pleased to be "participating in the establishment of the petroleum industry in the Kurdistan region of Iraq." He was traveling yesterday and unavailable to comment further, according to a Hunt spokeswoman.

The spokeswoman said Hunt determined that conditions were right to sign the deal, after the regional law was passed. "They have a new petroleum law which is transparent and which calls for immediate work in the region," she said in response to emailed questions. The Kurdish regional government "provided all of the necessary processes to begin work and we were ready to go."

It's unclear whether other big Western firms will feel as comfortable moving into Kurdistan. As a privately held company, Hunt doesn't have to answer to public shareholders and is nimbler than its larger competitors in the industry. But its foothold in Iraq may make other deals with big companies more likely, especially if officials in Baghdad's central government don't raise too much of a fuss about being bypassed this time around.

A Shell spokeswoman said her company would only consider working in Iraq when living and working conditions in the country improve. A BP spokesman said the company would consider it only when the security and political situation stabilizes.

Iraq's Oil Ministry has criticized a series of previous deals that Kurdish officials have signed with much smaller oil companies in recent years. But the ministry has stopped short of moving aggressively to force Kurdish officials to annul them. The government also has its hands full with more pressing concerns, including the establishment of basic security across the country. A spokesman for the Oil Ministry in Baghdad said exploration contracts with foreign companies should be signed only after the adoption of a new national oil law. Without referring specifically to the Hunt contract, the spokesman characterized all deals concluded before the passage of the national law as lacking legitimacy.

An oil official close to Iraqi Oil Minister Hussain Al-Shahristani was more blunt: "Any contract signed by the Kurdistan regional government isn't valid until it is approved by the central government in Baghdad," adding that the government in Baghdad can't approve any contract until Parliament passes the oil law.

Mr. Maliki's government approved a draft national oil law earlier this year, and forwarded it to Parliament with great fanfare. At the time, the Bush administration touted the deal as a sign of political progress. But American officials have long underestimated the nationalistic fervor tied up with oil issues in Iraq. Many national politicians, Oil Ministry technocrats, labor unions and regional officials opposed the draft from the start. Kurdish officials, in particular, objected to provisions that limited their ability to cut deals on certain fields or prospects on their own and without oversight.

A spokeswoman for the White House declined to comment on the deal.

Kurdish officials and Hunt said a local subsidiary of the Texas company will begin geological survey and seismic work by the end of the year and plans to drill its first exploration well next year.

For Hunt, the deal means a long-term presence in Kurdistan exploring a virgin tract of land. But it doesn't mean quick new oil for either the company or thirsty global markets.First, Hunt has to find oil. Then, if initial tests and drilling show promise it could need to spend hundred of millions, if not billions, to build the infrastructure necessary to develop the field, a process that can take years -- even for small discoveries.

In addition, past legal wrangling in Kurdistan has delayed promising projects by much smaller companies. DNO ASA, a Norwegian concern operating in Kurdistan, has drilled wells and pumped oil there, but it has so far failed to win an export license to sell its oil to world markets.

Philip Shishkin in Baghdad and Hassan Hafidh in Amman, Jordan, contributed to this article.

Copyright (c) 2007 Dow Jones & Company, Inc.

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