Via Forbes, a report on northern Iraq oil opportunities:

 The Zagros Foothills exploratory play in Kurdistan is the highest potential onshore area in the world, especially to be looking for oil. The drilling results there from the last several years easily justify the high ranking given to the area by my colleagues at IHS Global Insight. However, in our just published report, the IHS Herold Kurdistan Regional Play Assessment, we found that much of the acreage in the highly prospective Zagros Fold Belt region in Kurdistan, which ranks among the best basins in the world for large oil prospects, has been licensed for exploration and production (E&P), and the area is now entering a period of consolidation. Despite the discovery of seven billion barrels of oil during the past five years, the majority of the known geological structures remain to be drilled.

In our report, which I wrote along with my colleague Katherine M. Flynn, an energy company equity analyst at IHS, we found the key here is that with the exception of some distant blocks on the Iranian border, nearly all the exploration licenses have been issued since 2007 — there is no more land available. Despite the uncertain geopolitical situation, the play is ripe for consolidation, particularly for larger companies who wish to take advantage of the potential of this huge play and who have the financial resources and intestinal fortitude to stomach the significant risks.

The play, which is located in the Northeastern part of Iraq, occupies almost nine million acres or 35,000 sq. kilometers, which is about one-third the size of Pennsylvania or one-half the size of Abu Dhabi. Petroleum exploration began in the Kurdistan region more than 100 years ago and the Kirkuk field, which has produced more than 11 billion barrels of oil, was discovered in 1927. Kirkuk is southwest of the more geologically complex structures of the Zagros Fold Belt, as are numerous other discoveries that have been developed. While some of the large structures within the core of the fold belt were drilled and proven to be productive, none were commercially developed prior to 2006 due to internal political considerations.

The initial production sharing contract (PSC) was issued by the Kurdistan regional government to Genel Energy in July 2002 covering lands that included the Taq Taq structure. During June 2004, DNO International was awarded a production sharing agreement that included the Tawke structure. Since that time, 47 additional PSCs have been granted, for a total of 49 licenses awarded to date in the region.

These licenses all have a five-year exploration period with a two-year extension possible. The play is at the stage now where the operators must make declarations of commerciality or relinquish the acreage without going to production. Secondly, many of these licenses are held by smaller companies with limited financial resources. Their need for capital should make this region of interest to E&P clients, to their capital providers, and to equity investors.

While many structures remain untested and unproven in the region, the first two blocks to be awarded, drilled and bought into production — block 2 (in the Tawke field), and block 33 in the Taq Taq field, have been credited with reserve estimates of 600 million barrels of oil apiece. At 10,000 acres per field, that works out to an amazing 60,000 barrels per acre, which is a very good field. The potential is immense, but the risks are quite pronounced.

The geopolitical risks are especially daunting, but they offer the best explanation for why the large valuation gap exists between both the equity market and transaction values of Kurdistan reserves and a net present value of existing fields. According to our valuation analysis of energy companies, several of the companies currently operating in the play are significantly undervalued in the market–by as much as one-fourth to one-half, which is likely due to several risk factors, although the reported entrance into the play by ExxonMobil and the interest shown by Total has clearly been a benefit to the equity pricing of these smaller producers. Taking into account the size and geographic spread of their acreage positions, as well as drilling results to date, there are several companies that stand to benefit most as the play evolves. They pose very attractive acquisition targets.

Aside from the continued geopolitical instability in the region, several technical risks present challenges to operators in Kurdistan. The first relates to the estimation of potential reserves, which, at this point, are subject to enormous variability, since few of the discoveries have had appraisal wells drilled. The second technical hurdle relates to infrastructure, especially the pipeline system in the region, which will need to be expanded if the play area is to produce at rates the reported discoveries indicate is possible.

In addition, existing operators in the play are going to be greatly challenged, the report said, to exploit and appraise the fields they currently have in hand as well as their other licenses in the play because the service industry capacity is just not there yet. The value in the play is there, that is clear. What is not clear is whether that value will be realized in a timeframe that is acceptable to investors. The key to success for E&P companies operating in Kurdistan is that they must have a very high tolerance for risk, and they must be patient in waiting for a payday. The rewards may be great, but they may not be realized for some time.