Saturday, February 28, 2009 0 comments ++[ CLICK TO COMMENT ]++

For oil bulls with high risk tolerance... Iraq

I'm bearish on commodities, including oil & gas, but many, including my readers, aren't. For those who are bullish and can tolerate extremely high risk, one area they might want to check out is Iraq. Report on Business magazine, The Globe & Mail's magazine insert, has an in-depth story of the activities of several Canadian oil & gas companies that are prospecting for oil in Iraq. I didn't read the full article yet but it's interesting.

It's quite obvious why Iraq is risky. The government is as unstable as the country. USA will be withdrawing from Iraq within two years according to Obama's plan. After the withdrawl, USA will be leaving behind a theocratic government*, and possibly a dysfunctional military and police apparatus. The legal system is questionable and property rights are uncertain.

Of importance to these oil companies, who are operating in the Kurdistan region, is the question of the legality of the contracts they signed with Kurdistan. It's not clear how the Iraqi government will handle the Kurdistan issue. The American government used to support the Kurds but seems to be slowly withdrawing support for them. I have no idea what is going to happen there but I have always said that if USA withdraws from Iraq, there is a possibility of a major civil war with the potential for Iraq to break into three. I hope that doesn't happen for everyone's sake but I am just a distant observer. I also hope that Iraq somehow strengthens their property rights and treats foreign firms fairly--not easily but fairly--because oil is one of the few hopes for the Iraqi economy.

Why is Iraq attractive if you are bullish on oil? Because it is one of the few regions of the world with under-explored territory with huge potential. It is also one of the few places where cost of extraction is likely to be really low, if you do manage to find oil (contrast this with Russia or Canada, which is very expensive, either due to the quality of oil or the harsh climate.) To see how amazing the oil potential is, consider how in some regions "...crude seeps to the surface on its own initiative." I'm not saying this is going to lead to a major find but it reminds me stories I read, referring to the period 70 years or 80 years ago, of oil literally flowing out of the ground on its own.

If anyone is interested in the potential for oil in Iraq, they can consider investing in one of the four Canadian oil & gas companies that are mentioned: Talisman (TSX: TLM, NYSE: TLM), WesternZagros (TSXV: WZR), Niko Resources (TSX: NKO) and Addax Petroleum (TSX: AXC). The Iraqi projects are obviously early stage and hence is super-high-risk. Basically, if you don't find oil, you go bust. But only WesternZagros is actually a pure play on Iraq. Talisman is one of the largest oil & gas companies in Canada with a market cap of around $12 billion, so it isn't a pure play on Iraq. Niko and Addax have market caps around $3 billion. Niko mostly operates in India and I'm not sure about Addax. WesternZagros is the junior that is pure-play on Iraq. It was spun off from Western Canadian Oil Sands, an oil sands company, and is a tiny company that trades on the Venture Exchange (basically a penny stock).

Anyway, thought some of you might be interested in these companies.

(* As a side note, I hate to get political but it is worth pointing out what the US government has done in Iraq. This has to be one of the greatest blow-backs in many decades. Not only did USA end up losing many lives on both sides, destabilize the region, and temporarily disrupt oil supplies, it ended up creating a theocratic state. Think about the irony in this for a minute. You have a hardcore Christian like George Bush, whose core supporters aren't a fan of anyone out of the Middle East except certain hardcore conservatives from Israel, ends up creating a theocratic state. The leading party in Iraq, the one that runs the government right now and will likely retain support for many years, is run by clerics. The Iraqi Constitution that was written with the aid of Americans was written by these clerics, and although I have not read it and am not a legal expert of any sort, I'm sure will not support liberties of any sort. I'm not saying Saddam Hussein was a virtuous leader that we should support. But Iraq wasn't run by clerics when Saddam was in power and it wasn't a theocratic state.)

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