LONDON -- More than 100,000 billion cubic feet of gas and around 45 billion barrels of oil, virtually untapped. It may sound too good to be true, but it isn't -- as long as the politics can be sorted out.
These massive, untapped oil and gas resources are in Kurdistan, a large, semi-autonomous region of Northern Iraq.
The Kurdistan Regional Government, or KRG, largely runs affairs in the region, and in recent years independent oil explorers have flocked there, attracted by its huge, untapped reserves.
Exports not allowed
Until recently, Western oil companies have been allowed to export the oil they produce, thus providing tax revenues and much-needed development funds for the oil companies.
However, in April, exports were suspended due to a dispute over payments between the KRG and the Iraqi central government. Tensions rose another notch just over a week ago, when the KRG and the Turkish government announced a joint plan to build a pipeline to export oil directly from Kurdistan to Turkey, bypassing the main Iraqi export pipelines.
The Iraqi government is unhappy about the deal and claims that it breaches oil and gas laws in the country, something the Kurds dispute.
Ready to rock
Political risk is probably the main reason that most of the oil super-majors -- companies like FTSE 100 stalwarts Royal Dutch Shell (NYSE: RDS-B ) and BP (NYSE: BP ) -- have avoided Kurdistan so far. Only ExxonMobil has chosen to take the plunge, buying six exploration blocks in the region last year.
Exploration so far has been carried out by independent oil companies, three of which are London-listed and have made significant finds.
Gulf Keystone Petroleum
I took a look at Gulf Keystone Petroleum (LSE: GKP.L ) earlier this week, following the publication of its annual results. It is probably the most successful of the Kurdistan oil explorers, thanks to its huge Shaikan field, which contains around 8 billion barrels of oil and is almost ready for full development.
Although GKP is well-funded and might be able to scale production up to 100,000 barrels of oil per day, or bopd, using its own resources, full field development -- estimated to be worth 400,000 bopd -- will require bigger financial firepower of the sort that only an oil major can provide.
Following Tony Hayward's departure from BP, he raised $2 billion from investors when he engineered the reverse takeover of Turkish independent oil explorer Genel Energy (LSE: GENL.L ) , propelling it into a listing on the LSE. At the time, Hayward explained his enthusiasm for Kurdistan, saying, "Arguably, it is the last big onshore 'easy' oil province available for exploration by private companies anywhere in the world."
Genel is currently producing 45,000 bopd for the Iraqi domestic market and says that further expansion is prevented by the current export embargo. However, by 2014 it expects to have increased production capacity to 200,000 bopd at its Taq Taq field and to 100,000 bopd at its Tawke field.
Genel's current operations are broadly cash-flow neutral, with production revenue funding its exploration. The company's $1.8 billion net cash has remained largely untouched over the last year and equates to 83% of its current market cap, meaning that Genel's considerable oil reserves are virtually included for free in its share price.
Hayward's ambition is to create a large, independent exploration and production company like Tullow Oil. I think he might just pull it off.
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Heritage Oil (LSE: HOIL.L ) has been something of an outlier in the Kurdistan story, but its Miran block is shaping up to be a sizable gas asset that will probably deliver substantial quantities of oil, as well.
Heritage is already in talks with the Kurdish and Turkish authorities over plans to sell the gas to domestic and export markets, so, as with Gulf Keystone and Genel, its shares look very cheap if you assume that the export issues will be resolved.
There's always a risk
The main reason shares in all three of these companies seem good values at present is that political risk remains. My belief is that the export issues will be resolved, allowing both governments and companies to generate massive amounts of wealth for themselves. But there's always the risk that a worst-case scenario will emerge and Iraq will plunge into civil war -- or, more realistically, that these problems will take much longer than expected to resolve.
For me, the risk is reflected in the share prices of these companies -- and it’s a risk worth taking, in moderation. But you'll have to make your own decision.
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