Hungary's MOL Acquires 10% Stake in Iraq's Pearl Petroleum and Access to Kurdish Gas

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Researched by Industrial Info Resources (Sugar Land, Texas)--Hungary's leading energy company MOL Hungarian Oil & Gas Company (BDP:MOL) (Budapest) has acquired a 10% stake in Iraq's Pearl Petroleum, which owns rights to the Chemchemal and Khor Mor gas fields in the oil-rich Kurdish region of Iraq. MOL's investment in Pearl Petroleum comes close on the heels of an investment made by Austrian energy major OMV AG (OTC:OMVKY) (Vienna, Austria), which acquired a 10% stake in Pearl Petroleum.

Before OMV's acquisition, Dana Gas PJSC (ABD:DANA) (Sharjah, United Arab Emirates) and Crescent Petroleum (Sharjah, United Arab Emirates) together held a stake of 50% in Pearl Petroleum. OMV reportedly paid $350 million to Dana Gas and Crescent Petroleum for a 10% stake while MOL traded 3% of its shares with each of the two companies for a 10% stake in Pearl Petroleum. The move is also seen as a strategic step taken by MOL after Russia's fourth largest energy company Surgutneftgas OJSC (Moscow, Russia) purchased a 21.2% stake in MOL earlier this year.

The stake in Pearl Petroleum will give MOL access to the Khor Mor and Chemchemal gas fields in the Kurdish region, estimated to produce 90 million cubic feet per day of gas in addition to liquefied petroleum gas and condensate. Crescent Petroleum and Dana Gas have jointly spent about $605 million in developing the gas fields, building gas-powered plants, and setting up a 176-kilometer long liquefied natural gas transportation network. By 2014, it is forecasted that the production potential of these gas fields could be about 3 billion cubic feet per day of gas along with other associated liquid fuel. The new project partners are expected to bring in additional investments to the tune of $8 billion to develop the assets and also assist in building a sustainable, steady source of gas supply to the Nabucco pipeline.

European energy companies have been strategically exploring opportunities to acquire assets and companies in the Middle East and Central Asia in order to gain energy independence from Russia. The development of oil and gas fields in the Kurdish region will help European nations circumvent Russia and develop alternate energy sources and routes. One such route is the 3,300-kilometer, $10 billion Nabucco pipeline, which will connect Azerbaijan with Austria and Turkey. Construction of the pipeline, with a delivery capacity of 4.5 billion-13 billion cubic meters, is expected to begin by 2010. OMV and MOL, each own a 16.6% stake in the Nabucco project. Construction of the pipeline has met with unprecedented delays because of varying political intent and financing issues. However, the stimulus package recently announced by the European Union includes funds of $312.5 million for the Nabucco pipeline. The European Investment Bank (Luxembourg) has also extended a $10.5 billion loan for the project. The pipeline's first delivery is scheduled for commencement in 2013.

It is expected that 50% of the gas recovered from Chemchemal and Khor Mor will be diverted to the Nabucco pipeline. According to industry analysts, this should take care of the first phase of the pipeline, which will require about 1.5 billion cubic feet of gas by 2015. The remaining 50% of the gas will be used to fulfill the domestic demand of about 500 million cubic feet per day, and the surplus will be exported to Turkey and countries in Europe.

The Iraqi government has condemned the stake of western oil and gas companies in Pearl Petroleum. The federal oil ministry, which was not involved in the deal, has rejected the contract, claiming it to be illegal. The largely autonomous Kurdish region of Iraq has been signing and executing oil and gas deals with private and international companies, despite opposition and concerns raised by the federal government. The Kurdish Regional Government, which has been at loggerheads with the federal government over oil legislation policies, has stated that the contract is binding, legal and technically correct. Dana Gas, the first private sector natural gas company in the Middle East, and Crescent Petroleum, a leading upstream energy company in the United Arab Emirates, signed a service contract with the Kurdish government in 2007 to develop the Khor Mor and Chemchemal fields. The two fields have estimated reserves of 3.6 trillion cubic feet of gas. Iraq has proven gas reserves of around 112 trillion cubic feet, making it the tenth largest worldwide in terms of gas reserves.

The latest news is that the Iraq government in Baghdad has just turned down the deals signed by the Kurdish regional government with Crescent and Dana relative to supplying the Nabucco pipeline. A spokesman said Iraq's plans would not include companies that have contracted with the KRG independently of the Baghdad government which is rejecting any deals that do not include the federal ministry of oil.

This latest development is part of an ongoing clash over the legality of deals with the KRG. There is currently some prospect of compromise that would allow Kurdish oil to be exported and this may, in time, extend to gas exports. Investors and potential investors with KRG are watching how this chronic contention will affect their payment prospects.

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