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Rosneft, the Russian state oil company, has made its first foray into the Middle East with an agreement to develop projects with Crescent Petroleum, an Emirates-based private energy company.

Badr Jafar, Crescent Petroleum's executive director, said the two companies were planning to form a joint operating company based in the Middle East, and were looking at possible projects in Iraq. He said he expected the first Gulf-based gas project to be announced within three weeks.

"The potential reserves in place are such that it is a significant opportunity," he said. The agreement comes after months of diplomatic exchanges between the UAE and Russia focusing in part on strengthening their ties in energy ventures.

Iraq will supply crude to at least two Asian buyers at around 10 percent below contract volumes for June, possibly the first major cut in allocations by the OPEC producer this year, industry sources said on Wednesday.

The cut was on medium-heavy Basrah Light crude, they said.

It was not immediately known why Iraq cut the supply, but it might be related to production problems at its oilfield, the sources said.

Oil output and exports from Iraq fell last month due to repeated attacks against the Kirkuk-Ceyhan export oil pipeline and possible pumping problems in Basra fields.

A Reuters survey showed oil output in Iraq -- the only member of the 12-member OPEC producer group that does not have an agreed production limit -- fell to 2.28 million barrels per day (bpd) in April from 2.32 million bpd in March.

Iraq's oil exports fell slightly in April to 1.767 million bpd from 1.79 million bpd the month before, an Iraqi Oil Ministry official has said.

Iraq exported an average of 1.42 million bpd from the southern oil hub of Basra and 341,965 bpd from the northern oilfields around Kirkuk, including about 9,983 bpd by trucks to Jordan.

The fall in exports was due to bad weather in Basra and a brief halt of exports via the Kirkuk-Ceyhan pipeline after a bomb attack last month.

Term buyers of Iraqi crude have not been eager to take Basrah Light in the first quarter of this year due to increased supplies of other medium-heavy grades, such as from Saudi Arabia, Qatari al Shaheen crude and the new Russian ESPO Blend, traders have said.

Reflecting the weak demend, Iraq's State Oil Marketing Organisation (SOMO) made a rare offer of 3 million barrels of Basrah Light on the spot market for loading in March.

Demand for Basrah Light improved slightly last month, with some cargoes heard to have traded at premiums to the official selling price (OSP), trader said.

Iraq raised the OSP of its Basrah Light crude loading in June to customers in Asia by 10 cents to a discount of $1.05 to the average of Oman/Dubai quotes.

Top oil exporter Saudi Arabia earlier this week said it would supply full volumes to at least seven Asian clients in June, steady from May, as oil held within the kingdom's preferred range and Asia was expected to lead demand growth. (Additional reporting by Florence Tan, James Topham in TOKYO, Ahmed Rasheed in BAGHDAD and Alex Lawler in LONDON; Editing by Ramthan Hussain)

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.

Banks in the Middle East and Africa saw stable outlooks at a very high level of 92.8 per cent at the end of the first quarter, a latest report on Global Banking Trends Q1 2010 by Fitch Ratings said.

Negative rating actions for banks globally halved in the first quarter and the proportion of positive ratings increased to 76 per cent in the quarter compared to 54 per cent in the last quarter of 2009, the rating agency said.

Most of Fitch's bank ratings globally continued to have Stable outlooks (for 71.1 per cent) at the end of first quarter. Even as rating activity fell slightly in Q1, the ratio of negative to positive outlooks recorded a significant improvement, the rating agency said.

Banks in the Middle East and Africa witnessed high-level stable outlooks with 77 of the 83 banks showing stable outlook on long-term IDRs with five in the negative.

According to the report, the last quarter saw 126 rating actions of which 54 per cent were positive. "Evidence began to emerge in mid-2009 that global economic recovery was gaining momentum," Fitch said.

The positive development is driven by emerging markets, it said. There are increasingly encouraging signs that the economic recovery will continue even with the expected decrease in government support, the report said. "Nevertheless, Fitch notes that despite improvements throughout major advanced eco-nomies, the pressure on banks has only just started to ease, as banks' asset quality typically lags the underlying economic recovery," it added.

In the first quarter, number of positive rating actions increased to 90 from 68 in Q4 of 2009, to represent more than 75 per cent of rating actions. In contrast, negative rating actions halved to 29. Overall, rating activity fell slightly to 119 rating actions in the first quarter this year, compared with 126 in the last quarter of 2009.

While globally, the ratio of negative to positive outlooks improved significantly to (-)11.2 at the end of first quarter from (-)24.1 at the end of last quarter of 2009, in case of the developed markets this ratio was (-)11.9 compared to (-)16.

In developed markets, the number of total rating actions fell to 33, from 49. The proportion of negative rating actions increased slightly to 66.7 per cent in the first quarter from 59.2 in the previous quarter.

Fitch downgraded 12 and upgraded four banks. In developed Europe, Greek and Portuguese banks were affected by negative changes. The rating agency said deteriorating public finances in these countries have increased banks' sensitivity to capital markets.

In emerging markets, the proportion of positive rating actions was near 92 per cent driven by the Russian Federation, where the banking sector performed better-than-expected during the global financial crisis.

Following the upgrade of the Indonesian sovereign to 'BB+' from 'BB' in the first quarter, eight Indonesian banks were upgraded, accounting for the majority of upgrades in emerging markets.

The downgrades in emerging markets can be mainly attributed to Greek banks' subsidiaries. These came as a consequence of the downgrade of the Greek sovereign, said Fitch.

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.

The Iraqi Oil Ministry has awarded ExxonMobil a project to inject water in crude oil fields in an effort to enhance production. The contract, estimated at several billions of dollars, was meant to take place in oil fields in southern Iraq.

Officials said ExxonMobil would inject 12 million barrels of water per day from the Gulf into the wells. They said Exxon would share the costs of the project with companies selected to manage the wells, including Russia's LUKoil, Italy's Eni and Royal Dutch Shell

The Oil Ministry has determined that water-injection would be required to maximize production of the southern oil fields. Baghdad has sought to increase oil production to up to four million barrels per day.

06 May 2010 - oilvoice

TNK-BP Holding and Iraq Oil Company for Oil Investments (IOCOI) have signed an agreement to establish a joint venture aimed at identifying potential projects to acquire, develop and operate oil and gas fields on the territory of Iraq.

The two companies will consider joint acquisition of fields with commercial reserves within Iraqi provinces. TNK-BP has been qualified by the Ministry of Oil of Iraq to develop oil and gas projects.

'Iraq is one of the world's leading oil producing countries. We welcome the establishment of the joint venture with IOCOI, part of the HMBS group, which has a century-long history and a substantial opportunity set in the Iraqi market. TNK-BP is interested in the expansion of its international business; it possesses cutting-edge exploration and production technology, and world-class cadre required to identify and implement joint projects in Iraq', Mikhail Fridman, interim Chief Executive Officer of TNK-BP, said.

'We welcome our partnership with TNK-BP, one of the leading Russian oil companies, which is aimed at identifying and implementing joint oil and gas projects in Iraq. IOCOI enjoys vast opportunities in transport and logistics business and is interested in entering the Iraqi oil sector. We are also interested in delivering necessary consulting support in the framework of the activity of the joint venture in Iraq', Mustafa A.W.M.Al-Bunnia, General Manager of IOCOI, said

Russia's TNK-BP, half owned by BP, has establish a joint venture to develop oil and gas fields in Iraq, TNK-BP said on Wednesday.

It said, it has signed an agreement with the Iraq Oil Company for Oil Investments (IOCOI) to establish the venture.

"The two companies will consider joint acquisition of fields with commercial reserves within Iraqi provinces," the Russian company said in a statement.

(Reporting by Vladimir Soldatkin)

( AFX News Limited )

Development of Iraq's oilfields by foreign oil companies is progressing swiftly despite the lengthy process of government formation after Iraqi elections in March, a senior Statoil executive said on Tuesday.

"The major oil companies are starting to move forward at a very high speed. Oil companies are tendering huge contracts and making commitments in the market," said Kjetil Tonstad, Statoil's vice-president for International Exploration and Production, Middle East. "Execution is going full speed ahead despite the political situation."

International oil firms have signed up to deals that could vault Iraq into the top three of world oil producers in 2017. But final deals were signed just months before elections in March, leading to concern that politics could delay work.

Iraq is in a political vacuum after an inconclusive vote, with former Prime Minister Iyad Allawi winning a slim lead over Prime Minister Nuri al-Maliki and neither side yet to conclude tie-ups with groups that would give them a majority.

"Both Maliki and Allawi are positive on the contracts," said Tonstad, talking to reporters on the sidelines of an energy event. "No questions were raised in the election campaign or after questioning the contracts. A contract is a contract, it's awarded and then you have an obligation to go ahead."

Norway's Statoil and Russian partner LUKOIL would increase output to 120,000 barrels per day (bpd) at Iraq's West Qurna phase two oilfield in 2012, Tonstad said. That was the level set by Iraq for first commercial production at the field.

The consortium has already started issuing tenders for work at the field, he said. He declined to give further details.

Lukoil and Statoil sealed the 20-year deal to develop the West Qurna Phase Two, a 12.9 billion barrel oilfield in the south, in an auction in December.

In a presentation to an industry event, Tonstad hailed the opening of Iraq's oilfields to foreign investment last year as marking the largest opening in an oilfield province since the collapse of the former Soviet Union.

"We still haven't captured the significance of this historical moment," he said.

Plans to reach around 12 million bpd of output under the contracts in 2017 were feasible, but faced a myriad of challenges, he said. The development would mark an unprecedented build in capacity in the oil industry, marking an increase of around 10 million bpd from Iraq's current capacity of 2.5 million bpd.

Challenges included security in a country emerging from war and sectarian violence, access to water, and limited construction capacity and workforce availability, he said.

The ability of the world oil market to absorb 10 million bpd of increased output in such a short time was also unclear, he said.

"From my point of view, the fields can deliver, the infrastructure can be dealt with, but can the market take all this oil? And if not, does Iraq want to invest billions of dollars in building capacity that would remain idle?"

Statoil was evaluating the possibility of taking part in an upcoming bidding round for Iraqi gas fields, he said.

Royal Dutch Shell Plc, Europe’s biggest oil company, posted a 57 percent increase in earnings after production climbed for the first time in more than three years following startups in Brazil and Russia.

Net income in the first quarter rose to $5.48 billion from $3.49 billion a year earlier, The Hague-based Shell said in a statement today. The shares jumped to the highest in almost two years in London trading after earnings adjusted for inventories and one-time items beat analyst estimates.

( Bloomberg )