Shares in the Kurdistan focused explorers were up sharply in early trade as the first of the super-majors made its move into the semi-autonomous region of Northern Iraq.
ExxonMobil (NYSE:XOM) has signed contracts with the Kurdistan Regional Government for six blocks.
While it is seen as a massive vote of confidence in the area, it is also being viewed as a potentially incendiary move which may provoke a political backlash from the Iraqi authorities in the south.
It comes at a delicate time as Baghdad and the KRG attempt to pass legislation that would support the award of these potentially lucrative oil and gas contracts in Kurdistan.
Of late the region has become a magnet for mid-tier players such as Marathon, Hess (NYSE:HES) and Repsol (MCE:REP).
But Exxon’s entry takes the interest to a different level.
Not surprisingly the shares in the companies that blazed a trail in the area were up strongly.
Gulf Keystone Petroleum (LON:GKP) advanced 13.9 pence, or almost 10 per cent, to 155.65 pence, and Petroceltic (LON:PCI), which gained acreage in the latest contract round, advanced 0.18 pence to 6.68 pence.
Vallares (LON:VLRS) was also on the risers’ list, up 15 pence at 1,000 pence, as was Afren (LON:AFR), which nudged up 7,85 pence, or 10 per cent, to 82.7 pence.
The former’s chief executive, Tony Hayward, described Kurdistan as the last great oil frontier.
The American investment bank Citi was one of the first look at the development of Kurdistan, and it is predicting a period of “major period of news flow”.
Based on data from the US Geological Society, Citi suggest the region could hold over 50 billion barrels of oil – which means it is comparable in scale to Libya.
Counterbalancing this excitement is uncertainty over the production sharing contracts being issued by Kurdistan, which are still being disputed by the authorities in Baghdad.
These concerns are further exacerbated by the news that some oil companies aren’t receiving full payment for their oil exports.
“Both issues are unlikely to be resolved until an Iraqi oil and gas law is ratified, in our view,” Citi said in a note penned by Michael Alsford and Mukhtar Garadagh.
“While some progress has been made with both sides resuming talks for the first time since 2007, there is no visibility on the timing of this legislation.”
The pair suggest that consolidation could be on the cards as the big boys go after a larger slice of the action.
Indeed, we are already witnessing the first significant move in this regard with US$4 billion merger of the Nat Rothschild vehicle Vallares (LON:VLRS) with Genel Energy.
“The approval of an Iraqi oil and gas law and resolution of the outstanding issues between Erbil and Baghdad could be the trigger for the oil majors (currently focused in southern Iraq) to enter the region and consolidate the smaller names with large resource positions,” the Citi pair said.
Largely unexplored prior to 2004, recent drilling has resulted in the discovery of around 5 billion barrels of oil in Kurdistan, the analysts point out.
They expect exploration and appraisal drilling to accelerate into 2012, and estimate that more than 25 E&A wells will be drilled over the next 15 months.
“Based on current production sharing contract terms, Kurdistan has the potential to be a low-cost operating environment in the first or second quartile of our industry cost curve,” Alsford and Garadagh observed.
Gulf Keystone’s progress to date won’t have escaped the notice of the big hitters looking to enter the region in Exxon’s wake.
Earlier this week the explorer unveiled a significant upgrade to the oil in place volumes for the Shaikan block in Northern Iraq.
An independent review by Dynamic Global Advisors estimates the Kurdistan field contains 8 billion barrels of crude calculated on a P90 basis – meaning the oil has a 90 per cent certainty of being produced.
The figure rises from 4.9 billion barrels previously.
Following the analysis carried out by Houston-based DGA the P10 value has increased to 13.4 billion barrels and the mean value to 10.5 billion barrels.
This is the second very significant upgrade to the Shaikan resource estimate this year and the third since 2009.
It is based on preliminary data acquired from Shaikan-4 and 3D seismic taken from the Shaikan and Sheikh Adi blocks. DGA also included the new Triassic discovery made with the Shaikan-2 appraisal well.
Separately, Petroceltic’s chief executive Brian O’Cathain said recently the company was “very fortunate” to grab its highly prospective acreage in Kurdistan.
And he reckons the door has now slammed shut on smaller firms attempting to stake their claim in this emerging oil territory.
In late July the junior explorer teamed up with American firm Hess Corp to snap up two licences in the semi-autonomous region of northern Iraq.
“We were delighted to pick up the two blocks,” O’Cathain said in an interview with Proactive Investors.
“They are excellent blocks with five anticlines – three on one and two on the other – any one of which could potentially contain in excess of 1 billion barrels of oil in place.
“It is the same petroleum system and target horizon as in the adjacent Gulf Keystone’s Shaikan block.
“It is the Shaikan type play that we are chasing, particularly in the Triassic which has been proved up by Gulf Keystone, and other operators in the area.”
“We are only a few kilometres away from Shaikan so we are very optimistic.”
He added: “The Kurdistan assets have the potential to be absolutely huge for Petroceltic, even though our equity in the projects is relatively modest at 20 per cent.
“The fact that we have 20 per cent of what could potentially be 4 or 5 major discoveries is very significant.
“We are very excited about it and we are delighted to have acquired these assets just before the door effectively closed for smaller companies.”