As logistical difficulties, security challenges, and political tension continue in Iraq proper, the Kurdistan region is looking more attractive to some oil and gas companies.

Having passed its own hydrocarbon law in 2007, the Kurdistan Regional Government (KRG) in northern Iraq has been trying to attract oil companies to help develop the region’s potential. However, it has been doing so to the displeasure of Iraqi national government, which stands to lose authority, revenues, and business in other parts of the country as the KRG’s leadership threatens a push toward independence.

Recently, several E&P companies have opted to do business in the Kurdistan region.

• On Aug. 6, Genel Energy agreed to acquire an additional 21% interest in the Bina Bawi exploration block from Hawler Energy Ltd. The transaction was in addition to its acquisition of 23% interest in the Bina Bawi block earlier in August. The block, located in the center of the Kurdistan region, covers 240 sq km (93 sq miles).

• On Aug. 1, Gazprom Neft through its subsidiary Gazprom Neft Middle East BV announced it signed two production-sharing contracts (PSC) with the KRG. The PSCs cover the Garmian and Shakal blocks.

• Total announced July 31 that it signed a farm-in agreement for two exploration blocks -- Harir and Safen. The company completed an acquisition of 35% interest in the blocks held by Marathon Oil KDV BV. The blocks cover areas of 705 sq km (272 sq miles) and 424 sq km (164 sq miles), respectively. On Aug. 20, ShaMaran Petroleum Corp. announced the sale of its 20% undivided participating interest in the Taza production-sharing contract to a subsidiary of Total S.A.

• On July 19, Chevron Corp. announced its subsidiaries completed a transaction to acquire interests in two blocks. The company plans to acquire Reliance Exploration & Production DMCC’s 80% interest and operatorship of the PSCs covering the Rovi and Sarta blocks, which cover a combined area of approximately 1,124 sq km (490 sq miles).

“These are huge oil companies making pretty massive political decisions by moving into the KRG,” said Robert Powell, the Economist Intelligence Unit’s senior economist for the Middle East. “They could be potentially hastening the day that Iraqi Kurdistan becomes independent. They are also jeopardizing their oil contracts in the south, and they are only adding to the tension.”

Chevron’s latest business deal in the area prompted the Iraqi government to blacklist it from signing any oil deals with the oil ministry. The action came as tension continued to brew between Baghdad and Kurdistan concerning management of oil fields.

The moves by the oil companies leave substantial question marks about the future participation of oil companies in Iraq proper, Powell said, calling Iraq unique because of sheer scale of opportunity there.

Iraq has the fourth largest proven petroleum reserve in the world, following Saudi Arabia, Canada, and Iran, according the US Energy Information Administration (EIA). However, a lack of investment after years of wars and sanctions has hindered the country’s ability tap its reserves on a large scale.

The EIA reported that Iraq is one of the few places in the world left with a vast amount of underexploited oil reserves. The majority of the country’s hydrocarbon resources are in the Shiite areas of the south and the Kurdish north.

In 2011, the country produced about 2.63 MMb/d of oil, EIA data showed. Iraq’s proven reserves stood at 115 Bbbl.

“Pretty much every major oil company in the world fell over itself trying to get a piece of that pie,” Powell said. “The problem was the price they paid was extremely high.”

Despite the huge volumes, the returns are marginal, he added. Moreover, doing business in Iraq is difficult. Exporting oil from the country is arduous. Logistics companies must work hard to provide security.

“Companies went there because the opportunity was unique,” Powell said of Iraq in general. However, some are starting to leave the south because of those difficulties and turn toward potential lucrative prospects in the north, specifically the Kurdistan region.

“Some of the finds (in Kurdistan) have been quite impressive,” Powell said before pointing to Gulf Keystone Petroleum (GKP), which has oil fields capable of producing more than 10 Bbbl. GKP’s E&P program for 2011-12 includes five appraisal wells on the Shaikan block and three exploration wells on the Sheikh Adi, Akri-Bijeel, and Ber Bahr blocks, according to the company’s website.

So far, two or three exploration wells drilled in the Bina Bawi block have encountered significant hydrocarbons, according to Genel. Bina Bawi-3, the most recent well, encountered a gross hydrocarbon column of more than 800 m (2,645 ft) in the Jurassic zone and two Jurassic reservoir intervals tested separately achieved an aggregate flow rate of more than 4,000 barrels a day of light, 44° to 47° API oil.

The resource potential of the Garmian and Shakal blocks is expected to exceed 3.6 Bboe, according to Gazprom.

Although the Kurdistan region doesn’t have the proven oil reserves that Iraq proper has, Kurdistan is an easier place to do business, Powell said. The area has production-sharing agreements that are more lucrative for oil companies.

However, the region has some downfalls – the biggest is the lack of pipelines, especially critical for transporting oil from fields where production is more than 1 MMbbl/d. Pipelines are the key to development puzzle, Powell said. The existing pipeline system belongs to the Iraqi government, which hampers KRG’s export efforts.

At one point, the KRG briefly exported its oil, but those exports stopped in 2009 after only four months, according to the EIA. “The Iraqi Oil Ministry has been adamant that oil produced in the KRG will have to be shipped via SOMO, Iraq’s oil exporting arm.”

KRG could build a new pipeline, which would bring all kinds of political difficulties, Powell added. Possible pipeline routes could go through Turkey; however, that country is nervous about an independent Kurdistan region and possible consequences.

Contact the author, Velda Addison, at vaddison@hartenergy.com.