Tony Hayward's comeback gamble

The former chief of BP, who was ousted last year after the catastrophic oil spill in the Gulf of Mexico, believes his reputation will be restored in the political hotbed of Iraqi Kurdistan.

Vallares is merging with Genel Energy International. AFP

Tony Hayward has wasted little time in making a return to the oil industry.

The man forced to quit as BP chief executive over the Deepwater Horizon oil spill catastrophe in the Gulf of Mexico last year took up a new leadership position last month as the head of Genel Energy, a merger between the investment company Vallares and Genel Energy International.

Vallares, co-founded by Mr Hayward, is merging with the Turkish outfit in a US$2.1 billion (Dh7.7bn) deal. Mr Hayward will have surprised few with his determination to remain a key player in the world he knows best, but the stage he has chosen for his comeback is interesting because Genel's sole area of activity is Iraqi Kurdistan.

The logic behind the move was made clear by Mr Hayward on the day the deal was announced, when he called Kurdistan one of the "last great frontiers in the oil and gas industry, with low finding and development costs, and proximate to significant markets".

The deal puts a bargain basement price tag on Genel's assets, valuing its probable oil reserves at $5.90 a barrel, the second lowest valuation of oil companies' assets in the FT350 Index in London, where the new company will be listed.

Genel produces 41,000 barrels a day (bpd) in Kurdistan, and aims to reach 90,000 bpd by 2013. It has proved and probable reserves of 1.4 billion barrels of oil equivalent.

"Where else could you buy your way into reserves that size, which are still undervalued?" asks Samuel Ciszuk, an energy analyst at IHS Global Insight.

The news of an industry heavyweight turning his attention to Kurdistan has led to optimism about the future of production in the north of Iraq.

"It is very positive for the region," says John Tottie, an oil and gas analyst for HSBC in Saudi Arabia. "Tony Hayward has a lot of credibility in the industry, and it's a great vote of confidence by someone who had options globally.

"Vallares could have bought anything. They looked at assets in Asia, in the Middle East, and in the end, they chose the Kurdistan region."

Iraqi Kurdistan, a semi-autonomous region represented by the Kurdistan Regional Government (KRG), has sufficient potential to attract the attention of international oil companies, holding proven reserves of 45 billion barrels of crude, according to the KRG. But good feedback from exploration work and easy access to reservoirs is offset by a difficult postwar political situation.

The discount on the Vallares acquisition is the result of a protracted impasse over the legal status of oil production in the region, and the investment represents a significant gamble.

Key to the gamble is a national oil law, which will determine the status of the contracts signed by the KRG with the international oil companies. The legislation has stalled since 2007, primarily over Baghdad's reluctance to give the Kurds too much autonomy over its energy reserves.

Recent efforts to get the legislation implemented were thwarted when the cabinet changed a draft presented to parliament to give the central government more control over Kurdish assets, thus making it unpalatable to the sizeable Kurdish contingent of MPs.

Payments to companies already operating in Kurdistan have started to trickle through from the finance ministry, which receives the revenue generated from the oil flowing out of the region via the Baghdad-controlled Kirkuk-Ceyhan pipeline.

But the two payments made since June only reimbursed the companies for the costs of production.

Allowing international oil companies to make profits in Kurdistan would be tantamount to acknowledging the contracts between them and the KRG, and in turn give the Kurds de-facto control over their energy sector.

As this would bring the region closer to full independence, the idea of adequately rewarding energy companies faces strong opposition in parliament and the cabinet.

Against this backdrop, Mr Hayward's new venture is a risky undertaking.

"Vallares has come in and bought reserves at very much a bargain price. But also at a massive risk, and they are gambling on it going their way," says Mr Ciszuk.

A complete annulment of existing contracts is unlikely, however, as the Kurds hold too much political sway in the coalition of the prime minister Nuri Al Maliki, who needs stability in his ranks to face challenges such as the continuing withdrawal of US forces from Iraq.

An eventual end to the stand-off between Baghdad and Erbil, the capital of the Kurdistan region, will probably result in a compromise solution, but one that will come at a cost to the big oil companies.

"Any sort of compromise would mean that terms get somewhat tougher," says Mr Ciszuk.

Companies operating in the south of the country, such as Shell and ExxonMobil, have struck far less favourable agreements than the smaller companies active in the north.

But the prospect of working under the same conditions as his former rivals does not seem to intimidate the former BP boss.