ROMANIA

Immaculately dressed with neatly cropped hair, Baz Karim gestures to the rows of vehicles lining up in the loading bay outside the Erbil refinery. More than 200 trucks pass through every day, picking up oil products such as fuel oil and benzene, before delivering them to cement and steel factories, and distribution networks around the region.The Erbil refinery, the fourth largest in Iraq and the largest private sector one, is a shiny new symbol of private, local investment in Kurdistan – and of the region’s ambitions.

It is part of the Kar Group that Mr Karim founded in 1999, a services company for the oil and gas industry. The company started in fuel trading during the period of United Nations sanctions on Iraq, before the US-led invasion in 2003, supplying fuels funded by non-governmental organisations to the rural poor in Kurdistan.

Mr Karim’s team moved on to help rebuild the country – government ministries needed everything from desks to computers after the war, he recalls.

Unlike international oil and gas companies that have come to Kurdistan to explore, which are blacklisted by Baghdad, local service contractors have managed to bridge the divide.

The company’s first contract, in 2004, was with Baghdad for the engineering and supply of equipment to the Khurmala Dome oilfield. In 2008, a rare joint decision by the federal and regional governments determined that the Khurmala Dome would be developed and operated to supply oil for the Erbil refinery. The Kar Group gets a set fee from the regional government for processing the crude – a model introduced to help kick-start the refining industry.

The refinery processes 40,000 barrels a day, but under an expansion plan its capacity is expected to nearly triple to 110,000b/d by the second half of next year. Mr Karim reckons that once the expansion is complete, the refinery will be able to cover close to 80 per cent of local needs.

In addition to Erbil and the refineries at Baiji, central Iraq, Baghdad and Basra, there are dozens of backyard, so-called “teapot”, refineries. Together they are capable of processing a total of about 790,000b/d of crude, according to the US Special Inspector General for Iraq Reconstruction. The teapot refineries can only produce low-grade diesel, fuel oil and, in some cases, kerosene. In northern Kurdistan, some of them are able to process fewer than 1,000 b/d of very low-grade products.

The surge in Kurdistan’s oil consumption is part of a broader trend within Iraq. The country has seen its oil demand rise to more than 700,000 b/d in 2011, up from just 450,000 b/d in 2003, as economic activity improves, according to estimates by the US Department of Energy.

Power shortages have contributed to the rise in demand, as some areas of Iraq only have a few hours of electricity a day, relying on diesel-powered generators the rest of the time. Although the region has enough refining capacity to meet its rising consumption, years of neglect mean that most plants are only able to run at about half their capacity, forcing Iraq to import refined products from neighbouring countries.

The US Department of Energy estimates that Iraq relies on imports for a third of its petrol consumption and nearly a fifth of its liquefied petroleum gas, including butane and propane.

The lack of capacity has created an opportunity in Kurdistan to build refineries to meet the region’s demand, but crucially also to export south towards Baghdad, and beyond.

DNO, the Oslo-listed oil company and one of the first to enter Kurdistan, has built a small refinery at its Tawke oilfield. The 6,000b/d installation was meant to provide the oilfield’s power generators with diesel, but since then it has become part of DNO’s strategy to market its production, executives say.

The company cannot export as much oil as it would like, because of the disagreements between Erbil and Baghdad, and neither can it sell all its crude oil output into the local market. Thus the small refinery provides DNO with naphtha, diesel and fuel oil, which are in strong demand in Kurdistan.

Other explorers, such as Genel Energy, which recently listed on the London Stock Exchange and is headed by Tony Hayward, the former chief executive of BP, the UK oil group, also argue that even if exports remain limited, the domestic opportunity for their product is large.

Baghdad’s own plan to expand the refining capacity has so far been delayed. In 2008, the federal government announced a 10-year plan to build four refineries with a capacity of 740,000 b/d, at a cost of $20bn.

At the Kar Group, ambitious expansion plans are afoot. Mr Karim wants to develop the business into an integrated oil and gas player. Over the next five years, he plans to focus on investing in the downstream and midstream sectors – including power plants and petrochemical plants – followed by developing exploration and production capacity.

One of the biggest challenges, Mr Karim says, is the “20-30 year management and skills gap” in the country. Iraq, he says, needs to “fast-track” to fill it.

Overall, he is optimistic. “International investors want to see what the country can do. Now that they see the market is stable, the risk is manageable,” he says.

By Sylvia Pfeifer and Javier Blas, Financial Times