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The business community in Iraq, and internationally, is focused on the task of rehabilitating the oilfields and re-building the country. This is hardly a surprise; quite apart from the investments to be undertaken directly by the oil companies, Iraq's National Development Plan foresees over $200 billion in investment in services, economic stimulus and environmental protection from 2010 to 2014.

For investors not directly involved in energy and construction, however, it has not been so easy to get exposure to the Iraqi economy. Yes, there is a stock market, but it is relatively small and companies tend to be thinly traded.

But as Mark DeWeaver, of Quantrarian Asia Hedge, points out, there are many parallels between Iraq and the frontier markets we have seen develop in recent years:

• Like Sir Lanka after 2001, a civil war is coming to an end;
• like Russia in the mid-‘90s, inflation has come down dramatically; and
• like Taiwan in the late-‘80s or, even better, Saudi Arabia ten years ago, exports are set to soar.

If that's really the case, and if the political factions can successfully conclude the ongoing election process in a peaceful and democratic manner, then it will be reasonable to expect the investment community to start taking more notice.

Both Northern Gulf Partners and Godvig Capital already operate Iraq-focused funds, while FMG's Special Opportunity Fund will soon give exposure to shares on the Iraqi stock market, in addition to shares in companies that derive a significant part of their business from Iraq. The fund can also hold Iraqi dinars, dollars, euros, and bonds.

Clearly this is at the high-risk end of the spectrum, and although the minimum investment is just $10,000, the fund is restricted to high-net-worth individuals. But if Iraq can stay on track this may be the first of many investment products to benefit from Iraq's future success.

Baghdad, 12 May 2010 - Reuters

Iraq’s two remaining supergiant oilfields, Kirkuk and East Baghdad, are not on the table for joint development with international oil firms following two oil contract bidding rounds last year, a senior Iraqi oil official said yesterday.

Emerging from violence, Iraq is in desperate need of billions of dollars to rebuild. It signed 10 deals with global oil companies to develop some of its largest oilfields, in a bid to boost its crude output capacity to near Saudi Arabian levels of 12mn bpd from 2.5mn bpd now.

Not all the oilfields that were auctioned in the two bidding rounds were awarded.

No deals were struck for the supergiant 8.1bn-barrel East Baghdad oilfield or the Kirkuk fields with an estimated 8.5bn barrels in reserves. Nor were bids made for the smaller Eastern Fields and Middle Furat.

Iraq and Royal Dutch Shell briefly explored the possibility of reviving talks over Kirkuk after the first bidding round last year, according to Iraqi officials, and there have also been some discussions over East Baghdad.

But Abdul-Mahdy al-Ameedi, director of the Oil Ministry’s licensing and contracting office, said that there were no talks now with any foreign oil companies to develop the fields.

“We have offers from many companies, they want to develop them but really we don’t,” al-Ameedi told Reuters in an interview.

By Mark A. DeWeaver, of Quantrarian Asia Hedge

Two good rules for emerging stock market investors have always been: (1) buy crises and (2) buy export booms.  The first would have worked well in Sri Lanka in the weeks following the Tamil Tiger suicide attack on the country’s main airport in July, 2001.  Had you bought Sri Lankan stocks then and held them until February, 2007 you would have made about six times your money.  Another case was Russia in April, 1995 when inflation was running at 229% and the communists seemed to have a good chance of winning the 1996 elections.  By September, 1997, the market had gone up eight times as inflation fell to 13% and Yeltsin won another term as president.

As for rule two, consider the Taiwan market during the period from December, 1985 until February, 1990.  The index rose about twelve times in local currency terms as exports doubled and the exchange rate strengthened from 40 to 26 New Taiwan dollars to the US dollar.  Or more recently, think of the Saudi market, which went up ten times from December, 2000 to February, 2006 while exports tripled on increased oil production and a rise in the price from $30 to $70 a barrel.

Anyone trying to follow these two rules would find little to like about most of the emerging markets that make the headlines today.  The crises (e.g. in the Chinese property sector) generally seem to be just beginning rather than nearing resolution while the export booms (e.g. in Brazilian resources) are for the most part old news.  Surprisingly, however, one of the world’s least noticed markets not only combines features of all four of the above examples but is also open to foreign investors.  Like Sir Lanka after 2001, a civil war is coming to an end; like Russia in the mid-‘90’s, inflation has come down dramatically; and like Taiwan in the late ‘80’s or, even better, Saudi Arabia ten years ago, exports are set to soar.

Yes, I’m talking about the Iraq Stock Exchange.

Blood in the streets

It’s easy to understand why Iraqi stocks aren’t on the radar screen of most foreign fund managers at the moment.  While the third Baron Rothschild advised buying “when there’s blood in the streets,” no one wants that blood to be their own.  And Baghdad, which is home to the stock exchange and the majority of the brokers and listed companies, remains a scary place to visit.

But conditions of travel for the investor aren’t really the best indicator of when it’s safe to invest.  A more relevant signal is the fall in Iraqi civilian deaths from violence.  At the height of the insurgency from mid-2006 to mid-2007, Iraq Body Count put the death toll at 2,500 – 3,000 a month.  So far this year it’s been in the range of 200 – 300.  While no one would argue that this is an acceptable state of affairs, it tends to be during just such transitions from the absolutely appalling to the merely awful that the big money in emerging markets gets made.

Naturally, things could get worse again.  But this seems unlikely for the simple reason that restarting the sectarian civil war isn’t really in anyone’s interest.  The Sunni insurgents effectively lost in 2007 and have no reason to expect a different outcome today.  The Shia have found that political power is more likely to stem from the ballot box than the barrel of a gun (contrary to Chairman Mao’s famous dictum).  And the Kurds are clearly better off as part of a unified Iraq than as citizens of an independent state that neither their neighbors nor, presumably, the US would recognize.

The threat from Al Qaeda-linked extremists seems to be receding as well.  They no longer appear to have the capability to stage monthly mass casualty bombings—recently their attacks have only occurred every other month—and the deaths of the leaders of Al Qaeda in Iraq and the Islamic State of Iraq at the hands of Iraqi and American forces on April 18 may well turn out to be a turning point in the government’s “war on terror.”

From zero to hero

Equally important for stock market investors has been the drop in Iraqi inflation, which fell from 65% in 2007 to 6.8% in 2009.  Year-on-year core inflation for February was just 3.35%.  The currency has strengthened significantly as well—from 2,354 Iraqi dinars to the US dollar in April 2003, in the middle of the invasion, to 1,170 today.

This made it possible for the Central Bank of Iraq to lower its benchmark overnight rate from 20% in 2007 to 7% by the end of 2009.  Effective April 1, this rate was cut again, to 6%, while at the same time the required reserve ratio was reduced from 25% to 20%.  (The required reserve ratio is a percentage of deposits that commercial banks are required to hold as reserves at the central bank.)

Cuts in the central bank’s benchmark interest rate are particularly significant because cash, rather than loans, continues to be the biggest asset of the Iraqi banks.  (Their main operating businesses consist of charging fees for services such as wire transfers.)  Since there is little lending, either inter-bank or to nonfinancial companies and individuals, central bank reserves are the banks’ main source of interest income.  Lowering the benchmark rate reduces this income stream, thereby forcing them to lend more.

While much of the rest of the world continues to deleverage, in Iraq the trend is thus in the opposite direction—from a state of practically zero leverage to one where the banks play their normal role as financial intermediaries.  This is clearly positive for the stock market because a general increase in the supply of credit naturally means that more funds will be available for local investors to buy shares—either because they buy with borrowed money or because taking out loans frees up their existing cash holdings.

The coming oil bonanza

As if all this weren’t enough, Iraq is sitting on vast reserves of low-cost oil, which after three decades of war and sanctions remain largely unexploited.  Since June of last year, international oil companies have won bids to develop over 10 million barrels a day in additional capacity.  Added to current production of 2.6 million barrels a day in 2009, this new supply would allow Iraq to surpass Saudi Arabia as the world’s biggest producer.

While the Oil Ministry is hoping to get to this point in six years, many believe such a timeframe is unrealistic—for example, because it doesn’t allow enough time to build the pipelines and other facilities needed to transport such an enormous amount of oil.  But even a doubling of Iraq’s oil output would still lead to a boom not unlike those experienced by the OPEC countries (including Iraq itself) during the 1970’s.  The resulting fiscal surplus would quickly make its way into the economy via tax cuts, subsidies, and an increase in investment and salaries at the state-owned enterprises, which account for the lion’s share of Iraqi employment.

The effect on the stock market would be explosive.  Rising oil exports would have a direct impact on the supply of funds available to speculators as repatriated US dollar revenues were converted into local currency.  At the same time, listed company profits and dividends would rise rapidly as Iraq began a dramatic ascent from poverty to affluence.

A great story

The combination of reduced violence, increased leverage, and an impending oil windfall would seem to be a ‘perfect storm’ for Iraqi stocks.  So far the market remains becalmed: the index is still at 2007 levels, recent daily trading values have been only about a million US dollars.  But things could easily pick up long before the banks start lending or the new oil begins to flow.

Already a number of fund management companies are said to have started marketing the Iraq story to potential clients.  It will be an easy story to tell—a crisis is ending and an export boom is beginning.  And while there’s no way of knowing how much they will raise, in a pool of liquidity as small as the Iraq Stock Exchange even a relatively small inflow will seem like a storm surge.

Mark A DeWeaver, PhD, manages the hedge fund Quantrarian Asia Hedge (www.quantrarian.com), and can be reached at [email protected].

The opinions expressed here are those of the author, and do not necessarily reflect the views of Iraq Business News.

Baghdad, 07 May 2010 - AFP

An oil dispute between Iraq and the autonomous northern region of Kurdistan has been resolved, the central government's oil minister said in Baghdad on Thursday.

"We reached an agreement with the Kurds that all revenues will be handed over to SOMO and the Iraqi government will be responsible for paying the extraction expenses in Kurdistan," Hussein al-Shahristani told reporters.

SOMO is Iraq's State Oil Marketing Organisation which deals with sales of crude and other petroleum-based products.

Iraqi Kurdistan halted oil exports in October last year due to a payment dispute with Baghdad.

The two sides previously clashed over how oil revenues should be distributed and Kurdish authorities had said they would not resume crude exports until Baghdad paid the foreign energy companies which are pumping the oil.

The central government had repeatedly said it was opposed to the Kurds signing their own contracts, a position which Kurdish officials disregarded by making dozens of agreements with foreign firms.

With an estimated 115 billion barrels, Iraq has the world's third largest proven oil reserves behind only Saudi Arabia and Iran. Its oil revenues account for around 85 percent of government income.

Since November, Baghdad has signed contracts with foreign firms to develop 10 oil fields around the country, with the aim of raising its output, currently at 2.4 million bpd, to between 10 and 12 million bpd.

Baghdad, 07 May 2010 - Reuters

Iraq sees no need to even discuss an Opec quota until its output reaches 4 million barrels per day (bpd) so any talk of a specific limit before then is premature, the country's oil minister said.

Iraq has agreed deals that would boost output to over 12 million bpd in seven years from around 2.5 million bpd now. Unless global demand grows rapidly, Opec is unlikely to sit back and let Iraq increase output at will. Tough negotiations are expected with Baghdad on a level for eventual output curbs.

"Before Iraq reaches 4 million bpd it is not even necessary to discuss mechanisms to specify a quota," Oil Minister Hussain Al-Shahristani told Reuters. "After Iraq reaches 4 million bpd, we will start to discuss the mechanism to assigning quotas. We aren't talking about any number in the meantime."   

Iraq could reach 4 million bpd in two to three years, Al-Shahristani said. Output in April stood at around 2.28 million bpd, according to a Reuters survey.

The service contracts Iraq has signed with some of the world's largest oil firms encourage quick gains in output.
 Payment for investments made is not triggered until those gains are made.

Iraq is the only one of Opec's 12 members without an output target as it rebuilds its shattered economy after years of war and sanctions.  

Opec output targets have previously been set based on oil reserves. Iraq's reserves are just below Iran's, and Tehran has an output target of 3.34 million bpd.  

Iraq strengthened its hands for any future negotiations when it agreed the deals that would increase its capacity to around three times that of Iran.

If Iraq were to build facilities to produce 12 million bpd, it would be second only to Saudi Arabia's capacity now of 12.5 million bpd.

The world’s biggest oilfield contractors are building bases in the deserts of Iraq in a bet they’ll profit as the country strives to boost crude oil output to rival Saudi Arabia.

Schlumberger Ltd., Halliburton Co. and Baker Hughes Inc. are among companies this past week that said they’re expanding operations in Iraq. Weatherford International Ltd., the fourth- largest oilfield-services provider by market value, will expand staff in Iraq to more than 1,000 by July, Chief Executive Officer Bernard Duroc-Danner told investors yesterday on a conference call.

The prize is a share of the billions of dollars to be spent as the war-torn country seeks within seven years to increase crude-oil production capacity to 12 million barrels a day, on a par with the world’s largest oil exporter, Saudi Arabia. Iraq’s current production is about 2.4 million.

“It’s all becoming more real, in that contract awards are getting closer,” said Jeff Tillery, an analyst at investment bank Tudor, Pickering, Holt & Co. in Houston. “It’s a big opportunity for these guys.” Revenue potential is high, he said. “The profit side is a little bit of a leap of faith.”

The risks are financial, legal and political. Contractors don’t yet have a firm grip on what costs might be, Duroc-Danner said. Last month’s parliamentary elections left no political party with enough seats to govern alone, and Iraq doesn’t have a law yet for how oil revenue will be distributed.

Second-Biggest Field

Iraq’s government has signed 10 contracts for oilfield development with London-based BP Plc, Exxon Mobil Corp. and other producers.

BP, which is leading development of Iraq’s biggest oil field, known as Rumaila, awarded $500 million in service contracts last month. Included were projects won by Geneva-based Weatherford and a partnership between Schlumberger, based in Houston and Paris, and state-owned Iraqi Drilling Co.

Rumaila may become the second-biggest oil field by production in the world, BP said earlier this year. Saudi Arabia’s Ghawar field is the largest.

Halliburton, which plans to invest $100 million in Iraq this year, said it’s in the process of securing its first major base in Iraq.

‘Plenty of Work’

“There’s going to be plenty of work in Iraq, and believe me, all the service companies will have opportunities there,” David Lesar, chief executive officer at Houston-based Halliburton, said on an April 19 conference call with investors. “So we’re going along at the pace we want, and we’re confident we’re going to be successful.”

Schlumberger’s base will have 300 people this year, and that number will double by early 2011, CEO Andrew Gould said last month.

“Competition will be fierce, start-up costs high, and we do not expect significant revenue before 2011,” Gould said at the Howard Weil Energy Conference in New Orleans. “The significance of Iraq will only really emerge once the post- election political landscape is understood and some form of oil law has been passed.”

Development of Iraq’s oil industry is moving ahead as security improves after decades of wars and sanctions.

Al-Qaeda

U.S. and Iraqi forces said yesterday that they killed two of al-Qaeda’s regional chiefs in raids. A day earlier, Prime Minister Nouri al-Maliki said Iraqi and U.S. forces killed the terror network’s two principal leaders in the country. “Iraq is probably the biggest opportunity, along with possibly Brazil, confronting the oil-services industry,” said James D. Crandell, an analyst at Barclays Capital in New York. “It’s a country that has a significantly higher capability of exporting crude oil, but it needs a lot of work done on its fields.”

Within five years, service providers may be competing for more than $5 billion annually in contracts, he said.

The four biggest oilfield contractors all rose 4 percent or more yesterday on the New York Stock Exchange. Schlumberger gained 17 cents to $68.02 today, and Halliburton fell 2 cents to $33.29. Baker Hughes climbed 60 cents to $50.89, and Weatherford dropped 59 cents to $16.62.

‘Surge’ coming

if anything, service companies are late in positioning themselves for the “upcoming surge” in oil contracts, said Nansen Saleri, CEO at Quantum Reservoir Impact in Houston and former reservoir-management chief at Saudi Arabia’s state oil company. “Iraq is pregnant for huge growth,” Saleri said yesterday.

The country has potential reserves of 200 billion to 300 billion barrels of oil, Saleri said, and “the early movers will be the big winners.”

“It presents a tremendous opportunity for the service companies,” Gene Shiels, a spokesman for Houston-based Baker Hughes, said yesterday.

All of the companies said investors shouldn’t be quick to judge results from their Iraq forays.

“It’s going to be a very expensive place to operate, at least initially, because you’ve got all your mobilization costs, you’ve got people you’ve hired, bases that you’ve built,” Shiels said. “It’s going to take some time.”

Baghdad, 23 April 2010 - Reuters

The initial development plan agreed by Royal Dutch Shell, Malaysian partner Petronas and Iraqi oil officials includes inviting oil service firms to drill 15 new wells, an Iraqi oil official said.

The plan also includes building two new crude processing plants with a capacity of 50,000 barrels per day each and boosting capacity at an existing processor to 120,000 bpd from 100,000 bpd, the official said, asking not to be identified.

The plan was put together at a meeting last Thursday in the southern oil hub of Basra of officials from Iraq's South Oil Co (SOC) and executives of Shell and state-run Petronas.

The two companies won the right to develop the 12.6 billion barrel Majnoon oilfield, one of the world's biggest, in the second auction held by Iraq last year of oilfield development contracts, and the contract was signed early this year.

It is one of 10 oilfield development deals that could take Iraq to third place among oil producing nations from 11th now and boost its capacity to Saudi levels of 12 million barrels per day from around 2.5 million bpd currently.

""We discussed preliminary plans to raise the output in the Majnoon oilfield and if everything goes according to the plan an output of 175,000 barrels of oil equivalent per day could be achieved in 24 months,"" said the SOC oil official, who was not authorized to speak to the media.

The SOC nominated Abdul Sahib Qutub, a former deputy oil minister and current adviser to Oil Minister Hussain al-Shahristani, to head the Majnoon joint management committee, the official said.

For Majnoon, the Shell-led group proposed a per-barrel remuneration fee of $1.39 and pledged to increase output to 1.8 million bpd from a current production level of around 45,000 bpd.

23 April 2010 - Reuters

Total is consdering a bigger stake in the Halfaya oilfield, in a bid to increase its presence in Iraq, its chief executive said on Thursday.

China National Petroleum Company (CNPC) is the majority partner in the oilfield and Total owns an 18.75 percent stake in the field. "Iraq is a strong part of our strategy in the world and we certainly don't intend to remain a minority partner in the Halfaya field," Christophe de Margerie told an international oil conference in Paris. Iraq, which has the world's third largest oil proven reserves, signed a final contract earlier this year to develop Halfaya with CNPC, Total and Malaysian state firm Petronas.

Halfaya, in southern Iraq, has estimated reserves of 4.1 billion barrels of oil.

The field could help turn Iraq into one of the world's three biggest oil producers and earn Iraq billions of dollars it needs to rebuild after decades of war, sanctions and economic decline.

The deals emerging from two oil contract auctions could raise Iraqi output capacity in seven years to 12 million barrels per day, rivalling top producer Saudi Arabia, from around 2.5 million barrels oer day now.

But Iraq's oil minister has raised questions over the planned expansion as Baghdad considers OPEC output curbs that may keep supply well short of ambitious capacity targets.

Iraq's Oil Ministry has agreed to slash signature bonuses on two oilfield development deals secured by oil companies but is turning them into unrecoverable payments rather than soft loans, an official said on Wednesday.

The signature bonus for the 8.7-billion-barrel West Qurna Phase One oilfield to be paid by Exxon Mobil and Royal Dutch Shell will be cut to $100 million from $400 million, said Sabah Abdul Kadhim, head of the legal section of the ministry's petroleum contracts and licensing directorate.

The bonus for the 4-billion-barrel Zubair oilfield won by Italy's Eni (ENI.MI) and its partners Occidental Petroleum Corp and South Korea's KOGAS will be $100 million also, compared to $300 million previously, he said.

The deals are among a series signed this year and last year that have the potential to catapult Iraq into third place from 11th among global oil producers, with its capacity possibly rivalling top producer Saudi Arabia's.

Potential capacity of 12 million barrels per day compared with 2.5 million bpd now would give Iraq the billions of dollars it needs to rebuild after years of war and economic decline.

Iraq still owes about 24 billion dollars in war reparations for the 1990 occupation of oil-rich Kuwait, a Kuwaiti lawmaker was quoted as saying on Tuesday.

Adnan Abdulsamad, head of parliament's budgets committee, said the emirate had so far received 17.5 billion dollars out of the 41.8 billion dollars approved by a United Nations special compensation fund.

Kuwaiti newspapers quoted him as saying that the emirate had filed compensation claims worth 177 billion dollars for damages from the invasion and seven-month occupation by Saddam Hussein's forces.

Iraq is required to put five percent of its oil revenues into a UN reparations fund, which has so far paid out 28.9 billion dollars to claimants.

Since Saddam's overthrow following a US-led invasion in 2003, Iraq has repeatedly appealed to Kuwait and other countries to waive tens of billions of dollars in compensation and debt.

The bulk of the money is owed to Kuwait and Saudi Arabia.

Iraq also owes Kuwait around 16 billion dollars for loans to Saddam for Iraq's 1980-88 war with Iran, which was largely bankrolled by the oil-rich Gulf states.

Iraq, struggling with insecurity and a raft of economic problems since the US invasion and occupation, has appealed for the percentage taken out of its oil revenues to be reduced.

UN chief Ban Ki-moon in July urged Iraq to consider investments and other alternatives to resolve reparations disputes with Kuwait, and pressed the Security Council to help Baghdad meet outstanding obligations.

Last September, Kuwait's Foreign Minister Sheikh Mohammad al-Sabah said his country is considering a proposal by Ban to recover the unpaid compensation by investing in joint ventures in Iraq.

( AFP )