Two weeks ago I posted a piece about the disintegrating nation of Iraq and the emerging nation of Iraqi Kurdistan whose President, Massoud Barzani, is now openly calling for independence and planning a referendum on the subject.
One question which is heavily commented in energy markets is what affect, if any, will the evolution of the situation have on oil prices in the short term and long term.
Genel Energy
Genel Energy was founded by a Turkish entrepreneur, Mehmet Sepil, and established a production sharing contract with Iraqui Kurdistan in 2002, before the U.S. invasion of the country and before the historic agreement in 2005 between warring Kurdish political groups which led to the political stability the region enjoys today.
In September 2011, well before the U.S. withdrawal from Iraq, BP’s former Managing Director, Tony Hayward, led his investment company, which had raised $ 2.2 billion, to merge with Genel. Genel had, by this time, not only began production at Taq Taq, its first field, but was well on its way to becoming the largest operator in the autonomous region.
The critical piece of infrastructure is a 250 miles long pipeline running from Kurdistan’s capital, Erbil, across the Turkish border where it connects to the older Kirkuk-Ceyhan pipeline which has allowed Iraq to export is oil through Turkey when the pipeline was not blocked due to sabotage or political issues.
In an interview with the BBC, Hayward explains how the Iraqi Kurdistan is safe and secure and hints that it might be time for him to sell Genel to one of them:
Iraqi regular troops have also reportedly fled the city of Kirkuk facing the ISIL’s advance but dropping the city into the lap of Kurdistan’s armed forces. If Kirkuk were to end up being part of Iraqi Kurdistan, then the gamble made first by Sepil and then by Hayward and his colleagues will be worth even more!
Timing is everything
In last week’s post I spoke about the importance of taking the long view as a way to balance value creation with financial results. In the case of Genel Energy, we see Hayward merge with Genel about 10 years after Mehmet Sepil started working on the Kurdistan deal and then starting to see his own exit 3-5 years later!
The other thing about the story I find fascinating, is the deep interplay between history, geopolitics and energy which has come together in what appears to be a very favorable way for Mr. Hayward and Genel.
Is this the only outcome that could have been expected? My guess is that if Iraq had succeeded as a unified country, the investments would still make sense but that the value of the relationship with the political leadership of Kurdistan and local business interests is significant higher in the increasingly likely event of an independent Kurdistan with or without Kirkuk.