Exploring for Oil Within Iraq Is a Risky Business, but Will It Pay Off?

The autonomous region of Kurdistan within Iraq could be a gold mine for international oil and gas companies such as Chevron (NYSE: CVX  ) , Total (NYSE: TOT  ) , and Talisman Energy (NYSE: TLM  ) . Indeed, reports have claimed that the region contains so much oil that it is literally seeping out of the sand.

However, exploration in the region is costly and dangerous. Is it worth the effort?

It would be silly not to
At first glance, it would appear as if oil companies would be mad not to jump at the chance of exploring Kurdistan.

Reports have estimated that Kurdistan's oil reserves stand at 45 billion barrels and that its gas reserves stand at an additional 20 trillion cubic feet -- that's around the same as the Safaniya field in the Persian Gulf, Saudi Arabia. This is the world's largest offshore field and it has been producing 1.5 million barrels of oil per day since 1957.

Nevertheless, despite the lucrative prospects of operating within Kurdistan, operators face multiple challenges.

Not an easy place to operate
Currently, there are about 40 operators in various stages of exploration within Kurdistan. However, operators have found recruiting skilled workforces challenging. Although the Iraq war is officially over, violence remains an everyday occurrence.

The most recent spate of oil-related violence has occurred around Iraq's main northern oil export pipeline, which has now been shut off for 40 days as bomb after bomb has torn parts of the line into pieces.

Unfortunately, gunmen have also threatened the crews that have been sent out to repair the pipeline, which has resulted in officials cancelling all operations within the region. As described by Reuters:

Maintenance crews have threatened to walk out rather than be sent to the area, where five technicians were gunned down a month ago before they could repair the damage caused by the first blast. Since then, three more bombings have inflicted further damage on the line. Three further repair missions have been thwarted by ambushes, despite having military escorts.

However, one company that knows Iraq well is Chevron, and the company has plenty of plans for growth.

Experience in the region
Chevron has been actively engaged in Iraq since 2003 and it has been building a portfolio of key exploration prospects within the region.

For example, during July 2012, Chevron acquired operating interests in the Rovi and Sarta blocks. Then in June 2013, Chevron acquired an interest in and an operatorship of the Qara Dagh block.

The company's work program anticipates the commencement of an exploration well in 2014. However, progress has been slow, and infighting between Iraq's main government and the Kurdistan region's autonomous government has hampered the national integration of operations.

However, with Chevron's only operations within Iraq located in Kurdistan, the company doesn't have as much to lose as other operators do because the Iraqi government cannot influence decisions within the region.

Aside from Chevron, French oil major Total is one of the three oil majors working within Iraq. Once again, operating within Iraq has not been an easy ride for Total as the company's chief executive, Christophe de Margerie, and over a dozen other defendants have faced corruption charges related to the UN's oil-for-food program.

Luckily for Total, all charges were dropped during 2013 and the company has been allowed to expand throughout Iraq. According to company information, Total's interests in Iraq include a 18.75% interest in the Halfaya field in Missan province. The field came on-stream in June 2012 with a capacity of 100,000 barrels per day and expectations call for it to rise to 535,000 barrels per day in 2017. Total also has interests in several other exploration blocks throughout Kurdistan.

What's more, recent reports have claimed that the oil giant is considering the construction of a "world-scale" petrochemical complex in Iraq.

Unfortunately, unlike Chevron, Total is not just limited to Kurdistan, and the company has a lot to lose if the Iraqi government place sanctions on the company for working within the Kurdistan region.

The payoff could be huge
It's not just the oil majors that are active within Iraq. A whole host of smaller companies are seeking riches in the region, and Talisman Energy is one of them.

Talisman has interests in two blocks, Kurdamir and Topkhana, which cover more than 119,000 acres within the Kurdistan Region of Iraq.

Talisman successfully completed the Kurdamir-2, or K-2, exploration well in early 2013 and it placed the well on a month-long extended test in the first quarter of 2014. Unfortunately, the exploration well K-3 flowed at non-commercial rates. The company plans to drill the Kurdamir-4 appraisal well during 2014. The company spudded the Topkhana-2, or T-2, exploration well in December 2013 and expects rig release in the third quarter of 2014.

Still, as part of its ongoing restructuring program Talisman is planning to sell all or part of its interests within Iraq. However, if its flow tests conducted within the first half of this year prove to be lucrative, then the company could rethink its decision to sell.

Foolish summary
All in all, there appear to be lucrative returns to be had from exploring within Iraq, but is the risk worth the reward? Well, while researching this piece I failed to find any publicly available information that related to employee injury or death in regard to the exploration activities of Total or Chevron within the region. Sadly, however, it would appear as if several contractors working for Talisman Energy in the region have lost their lives.

Perhaps the reward is not yet worth the risk.

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