Kurdish Cash-In: Oil explorer WesternZagros courts Euro partner in Iraq

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Upon releasing its first quarter 2012 results, Calgary-based oil explorer WesternZagros Resources (WZR: TSXV) sparked added interest today with the revealing of a possible partnership on the horizon with a yet-to-be-named large European oil company. Speculation from industry insiders hints that this courtship is aligned with none other than French giant, Total SA (TOT: NYSE). Previous statements from Total leaned towards interest in acquiring a position in the nearly sovereign Iraqi region of Kurdistan.

WesternZagros' CEO and President, Simon Hatfield, told Reuters that it was his company's massive Garmian block that drew the interest of the major in question, and could possibly set the $345 million mkt cap company up for its funding going forward.

"Our Garmian block would be the single biggest piece," said Hatfield. "We're relying on getting about $55 million in back costs from the large European partner we're about to get, which will give the company funding through next year."

WesternZagros' Kurdistan assets near the Iranian border include both the Garmian and Kurdamir blocks, believed to potentially contain reserves of 5 billion barrels of oil. With 40% interest in each block, and an operator role in the Garmian, WesternZagros' position was initially gained through early entry in the region prior to a onslaught of further companies flocking to the autonomous region of Kurdistan that included Exxon Mobil (XOM: NYSE).

"We were part of the early movers in Kurdistan," said Hatfield. "Now it's a very crowded space."

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The lack of proper identification of the large interest in the block has more to do with the tie-ups expected at the government level. The Kurdistan Regional Government (KRG) centred in Erbil is said to be asking for a bonus of close to $100 million for Garmian. On top of the initial payout, a percentage believed to around 20% of the European company's profit oil allocation is anticipated to be tacked on in order to further aid infrastructure development.

Much of the standoffishness of the region has also come from its moody relationship with the nation's capital in Baghdad. To date, much of the investment into Iraq's oilfields has poured into the country's more southern regions, at the behest of Erbil's wishes and efforts to draw activity Kurdistan's way.

"There are a number of other large European companies looking very hard at Kurdistan, and they're all a little bit late," said Hatfield. "Like ExxonMobil, they've all held off, (but) now they're seeing that the contracts in the rest of Iraq are not working out that well. Meanwhile the contracts in Kurdistan are actually working out quite well, although the export issue has to be resolved."

While exports still haven't been opened up for the region to the industry's liking, WesternZagros has been able to derive income from its Sarqala-1 well, which generated $25.9 million of gross oil proceeds in Q1 2012, which more than doubles the proceeds of the preceding quarter.

"We were part of the early movers in Kurdistan, Now it's a very crowded space." - Simon Hatfield, CEO and President of WesternZagros Resources

"We have had no issues meeting the targets and no issues selling our oil on the domestic market," said Hatfield. The company sells the light crude on monthly contracts and gets paid in advance by the local refineries.

"We monitor where our oil goes and it goes to local topping plant in Kurdistan where they take off the light ends - and that's worked very smoothly," he said.

Iraq's Deputy Prime Minister for Energy Hussain al-Shahristani has said most of the oil produced in Kurdistan is being smuggled across borders, mainly to Iran, instead of fulfilling its export obligations.

"I am very pleased with the continued strong operational performance in the first quarter and delighted with the world-class oil discovery at Kurdamir which followed it," said Hatfield in the company's latest official statement on the quarter. "We have already exceeded our expectations at the Kurdamir-2 well by discovering a giant field with over one billion barrels on a Mean Prospective Resources basis, and we have yet to drill and test the deeper zones. We are confident that our appraisal, exploration and production activities planned for both of our exploration blocks in the coming months will build on our recent success."