Interview
Matthew Zais, vice-president of government affairs for HKN Energy, speaks to Rudaw on August 19, 2021. Photo: Rudaw
The Kurdistan Region should be able to compete with Iran and Russia for gas contracts with Turkey that will be coming up for rebids in 2026, said Matthew Zais, vice-president of government affairs for HKN Energy and a former deputy assistant secretary in the United States Energy Department.
“If the right investments are made in time in Kurdistan, then Kurdistan gas could compete for those contracts with Turkey,” he said in an interview on August 19.
The US company HKN Energy holds a 62 percent stake in Duhok’s Sarsang block where it currently produces 32,000 barrels of oil per day and is working with the Kurdistan Regional Government (KRG) to capture gas at the field and deliver it to power generation plants in Duhok.
Omar Moradi: In the past 15 years, did the Kurdistan Regional Government make the right decision to develop the oil and gas sector?
Matthew Zais: Omar, thank you very much for having me today. That’s a big question. I think the results speak for themselves. Obviously, things can always be done better, looking back on it and I think we’re all making efforts to improve what we do. But what’s happened here in the Kurdistan Region over the last 15 years for its economy and oil and gas is pretty remarkable, and pretty remarkable for anywhere in the world. Essentially Kurdistan opened its doors to be a place that was attractive for foreign investment. And in the process, the KRG has gone from producing zero barrels of oil to 450,000 barrels of oil, and so much oil that, right now that the Kurdistan economy, certainly not always full salaries, but at least partial salaries, completely independently from whether or not Baghdad makes budget transfers. And so I think it’s a pretty astonishing transformation economically for the Region. But I think it wasn’t easy getting here and oftentimes there’s still misunderstanding on how significant it was. And it came on the backs of foreign investment, because it didn’t require any investment by the Kurdish people.
So what do you think about the Kurdish oil sector capacity in the near and long term? Do you think the Kurdistan Regional Government can increase oil production by a considerable amount and in a short period of time?
I think there’s certainly opportunity to increase production in the Kurdistan Region. I know that the prime minister himself and the oil minister, or Minister of Natural Resources Dr. Kamal [Atroshi], they’re both focused on increasing production when the time is right. But there is certainly significant potential in the Kurdistan Region to increase that production.
What about the investment in oil and gas sector in the Kurdistan Region? Do you think that possibly in the future more oil companies can return to the Kurdistan Region?
I think so. I think as long as Kurdistan remains a place that is viewed as very attractive for investment, I think companies will continue to come here and invest. I think the next chapter is that companies need to come to invest, to develop gas infrastructure. And I think that will be the next critical sort of next step, both for the Kurdistan economy and the Kurdistan environment.
About the gas sector, when you were in the US energy department, you researched the gas sector. What are the main findings of your research?
I think some of the main findings are, first, there’s significant potential for gas for the Kurdistan Region, in three ways. First, with the right infrastructure and the right investment, the Kurdistan Region can capture and produce enough gas to completely transform its energy, its power market and to produce power off of gas, rather than heavier fuel and dirtier fuel oil. So it will be much cleaner. The second factor is there’s so much gas in the Kurdistan Region that it will be able to better partner with Baghdad and federal Iraq to provide badly needed gas and power in federal Iraq. And the second is, or third, they’ll be enough gas resources in the Kurdistan Region to export internationally to Turkey. And Turkey has some very important contracts that are coming up for rebid in 2026 with some of its other neighbours, to include Iran and Russia. And if the right investments are made in time in Kurdistan, then Kurdistan gas could compete for those contracts with Turkey.
Are the IOCs (international oil companies) actually paying attention regarding the gas sector? Do you think that very big players are coming into this sector and trying to develop potential gas reserves in the Kurdistan Region?
I don’t think we need another big player to come, I think we’re already focused on it. We have companies in the Kurdistan Region that already are producing gas. But for a lot of our companies, we produce what’s called associated gas, which is gas that comes up when we produce oil. And now we need to focus – and that’s what Dr. Kamal and the Ministry of Natural Resources and the prime minister focus on – is how to use that gas effectively. It could replace dirty fuel oil, as I said, that right now is burned to create electricity and produce much cleaner electricity. And I think we’re all focused on trying to help do that.
Regarding HKN policy, how is the oil production and your policy about increasing oil and your development plan at HKN?
So currently we produce 32,000 barrels a day. And we are currently producing or developing an expansion facility, which will transform our production from 32,000 barrels a day to 55,000 barrels a day next June, so June of 2022.
What about associated gas? Are you progressing in using the associated gas and directing it to a different facility to be used in the near future, for example?
We’ve been working for some time with the government and we are continuing to do that very diligently right now so that our associated gas can be delivered to Duhok for power generation.
Is the amount of associated gas enough, for example, to feed and supply Duhok province’s electricity?
It is a very important first step and it will be a significant exchange between heavy fuel oil and gas. Likely we’ll need to add some associated gas from other fields, but it will be a significant transformation of the energy that’s produced, the power that’s produced in Duhok.
What about oil produced in your fields? How do you export the oil and what is the mechanism of exporting the produced oil from your fields to the international markets?
Right now we’ve had to – all of the IOC’s oil eventually ends up in the Iraq-Turkey pipeline that’s exported to the port of Ceyhan. Bit by bit, the government has been building the pipeline infrastructure. We’re one of the last fields that’s not connected to the pipeline, but we will be next year. So right now we have to truck all of our oil to the border crossing, Fishkhabur. But soon we will export all of that oil through the pipeline, which will also be a significant environmental improvement when we’re not running all those trucks to export.
You know environmental issues are always important. What is your environmental policy regarding your operation in the Kurdistan Region?
We take our environmental responsibilities extremely seriously and we have an entire team that focuses on that. And from the larger perspective, whether that’s in the local area or that’s with our gas, and that’s why we’re so focused on helping the KRG enable it to use its captured gas effectively and efficiently, because it’s both a power source and it’s an environmental factor.
Returning to HKN operations, your operation actually is near some area in Duhok province. What did you do for the community around the fields and your blocks?
We take our community relations also very seriously and we’ve done, we’ve invested heavily into the local sector. And I would say, Omar, that I think we can do a better job telling our story about all the things that companies like ours and companies like HKN do for the KRG and for our local communities. So some examples of that are probably that we built the largest school in Duhok, it was $21 million. It’s still there today and it’s in fantastic condition. We created a community centre in the Chamalki sub-district for $300,000. We’ve conducted multiple agricultural projects, multiple agricultural vaccination projects, we conducted a school renovation in Chamalki, we built a volleyball stadium. Just in the last few weeks we finished paving another 40 kilometres worth of roads in the Duhok district. And those are just, that’s just an example of the reinvestment in the area that we’ve conducted. Our company, overall for the Kurdistan Region since we’ve been here, has had over a $2 billion economic impact for the KRG. And we find that significant. But also, part of that is our responsibility to reinvesting in the communities.
How about human resources? What percentage of your staff are actually locals? How do you use local manpower in your fields?
So we have a significant local workforce. And we have a local workforce development plan. So we bring locals onto our workforce at all levels and they have development plans. Unfortunately, when COVID hit, us, like many IOCs, had to lay off a lot of folks. But we are now getting back on our feet, just like the other companies are, and re-hiring. And the local workforce of our company is significant and certainly important for our company.
What about the level of training for example, training and making the local staff ready?
Our local staff receive some of the same training that our foreign staff conduct. We even send some of our staff overseas for training, for instance we have some of our employees going to New York hopefully this fall, COVID permitting, for leadership training. That’s just an example. Technically, our local staff go through the same training with the idea that eventually the operators and the technicians that operate that field are locals and they have been trained side-by-side HKN employees.
Just coming back to your relationship with the Ministry of Natural Resources and the Kurdistan Regional Government’s payment mechanism to IOCs. Do you think that the mechanism of payments to IOCs is a just and right mechanism so oil companies can operate smoothly and invest more in their blocks?
I would just say that we know that these have been difficult days, weeks, months, years for the Kurdistan Regional Government. The payments and the budget allocations from Baghdad are never predictable, if they occur. And we understand the strain that that puts on the Kurdistan Regional economy. And so we know that the prime minister and the government of Kurdistan struggle to make salary payments and to pay the IOCs for their work. It’s a balancing act and it’s tough because if the KRG doesn’t pay the IOCs on time, then that affects our investment, that affects investor confidence, and that effects even companies that are not investing now but may be looking to invest. It hasn’t been perfect, but it’s getting better and I think we see a very clear path forward. We really hope too that a sustainable budget agreement can occur and get implemented with Baghdad that will provide everybody a little more certainty, financially, to include us.
What about Baghdad and Iraq. Recently some companies like BP and Shell are actually announcing suddenly they will exit Iraq and they sold their assets. What is happening there?
Omar, I think there’s no question that federal Iraq has significant expertise and capability to produce the amount of oil that they produce. They’re the second-largest producer for OPEC, I believe. Iraq is. But it has many dynamics that make investment unattractive in federal Iraq, particularly in the south, in two ways. One is, I think a lot of people don’t realize that in federal Iraq, which is much different than here in Kurdistan, federal Iraq has one of the highest state take-rates per barrel. So they keep basically almost 96 cents for every dollar from a barrel of gas, or from a barrel of oil. That’s a very difficult contractual mechanism for companies to feel comfortable with, to invest in.
And then secondly, as we all appreciate, there’s a very difficult political environment in Baghdad that makes investment decisions very slow and sometimes very, very difficult. I think you see that with some of the companies who have been trying for years to capture gas or to implement new oil projects and it becomes very difficult to get those through the process in Baghdad. So what you have is companies deciding that they’re going to leave. And I think that’s a reflection of an investment climate that’s not very friendly.
I think what the Kurdistan Region should be proud of is that they have a model that’s attracting investment. And that model should be the foundation for a more diversified economy going forward. The only US company that has US government financing is in the Kurdistan Region. And that’s our company, HKN. There’s about to be another company that’s going to have US government financing and that’s going to be in the Kurdistan Region as well. I think that’s a reflection of the attractive investment environment in the Kurdistan Region, compared to federal Iraq.
You described the model of the Kurdistan oil contracts as a successful model.
Absolutely.
What do you say about some parties criticizing the Kurdistan Region over the contracts? They say that the government grants more rights to the oil companies and a lot of benefit goes to the oil companies, not government coffers.
I think, Omar, there’s a lot of misperception about the oil contracts in the Kurdistan Region. As I said in my opening answer, the Kurdistan Region got to the point of producing 450,000 barrels a day without having to invest any of its own money, because it was just an attractive environment. And the production sharing contract model that you have here is very standard and it’s not very different than any other production sharing contract model. Part of the challenge though is explaining that to the people, particularly when you’re in an economically-challenged environment where you’re depending upon Baghdad for a budget transfer that may or may not come.
I understand how the oil and gas contracts could become a target for that criticism, but I think it’s also based on misperception, because when those budget transfers don’t come from Baghdad, the government is still able to pay at least partial salaries. And it would never be able to do any of that without the oil and gas sector here producing 450,000 barrels a day. That’s what’s keeping the Kurdistan economy afloat. And so I think we have to do a better job of explaining what we do for the Kurdistan economy, what we do for the Kurdistan Region, and what we do for the Kurdistan people, and the economic impact we’ve had for the region.
Returning to the gas sector, how can the natural gas of Kurdistan compete with the other sources of gas? As you know, we have a huge source of natural gas in neighbouring countries like Iran, other parts of –
Russia.
- like Russia. They get the European market and Turkish market.
I think there’s no economic reason why Kurdistan gas can’t compete. It’s no different gas then –
Even the pricing?
Well, the pricing mechanism has got to be right. So there’s got to be a pricing mechanism in Kurdistan that’s going to attract investment. It’s got to be a price that investors can say ‘that is competitive with the global market and therefore we can dedicate capital to build infrastructure to produce it.’ And if that’s the case, then that gas that’s produced will be able to compete on the international market.
“If the right investments are made in time in Kurdistan, then Kurdistan gas could compete for those contracts with Turkey,” he said in an interview on August 19.
The US company HKN Energy holds a 62 percent stake in Duhok’s Sarsang block where it currently produces 32,000 barrels of oil per day and is working with the Kurdistan Regional Government (KRG) to capture gas at the field and deliver it to power generation plants in Duhok.
Omar Moradi: In the past 15 years, did the Kurdistan Regional Government make the right decision to develop the oil and gas sector?
Matthew Zais: Omar, thank you very much for having me today. That’s a big question. I think the results speak for themselves. Obviously, things can always be done better, looking back on it and I think we’re all making efforts to improve what we do. But what’s happened here in the Kurdistan Region over the last 15 years for its economy and oil and gas is pretty remarkable, and pretty remarkable for anywhere in the world. Essentially Kurdistan opened its doors to be a place that was attractive for foreign investment. And in the process, the KRG has gone from producing zero barrels of oil to 450,000 barrels of oil, and so much oil that, right now that the Kurdistan economy, certainly not always full salaries, but at least partial salaries, completely independently from whether or not Baghdad makes budget transfers. And so I think it’s a pretty astonishing transformation economically for the Region. But I think it wasn’t easy getting here and oftentimes there’s still misunderstanding on how significant it was. And it came on the backs of foreign investment, because it didn’t require any investment by the Kurdish people.
So what do you think about the Kurdish oil sector capacity in the near and long term? Do you think the Kurdistan Regional Government can increase oil production by a considerable amount and in a short period of time?
I think there’s certainly opportunity to increase production in the Kurdistan Region. I know that the prime minister himself and the oil minister, or Minister of Natural Resources Dr. Kamal [Atroshi], they’re both focused on increasing production when the time is right. But there is certainly significant potential in the Kurdistan Region to increase that production.
What about the investment in oil and gas sector in the Kurdistan Region? Do you think that possibly in the future more oil companies can return to the Kurdistan Region?
I think so. I think as long as Kurdistan remains a place that is viewed as very attractive for investment, I think companies will continue to come here and invest. I think the next chapter is that companies need to come to invest, to develop gas infrastructure. And I think that will be the next critical sort of next step, both for the Kurdistan economy and the Kurdistan environment.
About the gas sector, when you were in the US energy department, you researched the gas sector. What are the main findings of your research?
I think some of the main findings are, first, there’s significant potential for gas for the Kurdistan Region, in three ways. First, with the right infrastructure and the right investment, the Kurdistan Region can capture and produce enough gas to completely transform its energy, its power market and to produce power off of gas, rather than heavier fuel and dirtier fuel oil. So it will be much cleaner. The second factor is there’s so much gas in the Kurdistan Region that it will be able to better partner with Baghdad and federal Iraq to provide badly needed gas and power in federal Iraq. And the second is, or third, they’ll be enough gas resources in the Kurdistan Region to export internationally to Turkey. And Turkey has some very important contracts that are coming up for rebid in 2026 with some of its other neighbours, to include Iran and Russia. And if the right investments are made in time in Kurdistan, then Kurdistan gas could compete for those contracts with Turkey.
Are the IOCs (international oil companies) actually paying attention regarding the gas sector? Do you think that very big players are coming into this sector and trying to develop potential gas reserves in the Kurdistan Region?
I don’t think we need another big player to come, I think we’re already focused on it. We have companies in the Kurdistan Region that already are producing gas. But for a lot of our companies, we produce what’s called associated gas, which is gas that comes up when we produce oil. And now we need to focus – and that’s what Dr. Kamal and the Ministry of Natural Resources and the prime minister focus on – is how to use that gas effectively. It could replace dirty fuel oil, as I said, that right now is burned to create electricity and produce much cleaner electricity. And I think we’re all focused on trying to help do that.
Regarding HKN policy, how is the oil production and your policy about increasing oil and your development plan at HKN?
So currently we produce 32,000 barrels a day. And we are currently producing or developing an expansion facility, which will transform our production from 32,000 barrels a day to 55,000 barrels a day next June, so June of 2022.
What about associated gas? Are you progressing in using the associated gas and directing it to a different facility to be used in the near future, for example?
We’ve been working for some time with the government and we are continuing to do that very diligently right now so that our associated gas can be delivered to Duhok for power generation.
Is the amount of associated gas enough, for example, to feed and supply Duhok province’s electricity?
It is a very important first step and it will be a significant exchange between heavy fuel oil and gas. Likely we’ll need to add some associated gas from other fields, but it will be a significant transformation of the energy that’s produced, the power that’s produced in Duhok.
What about oil produced in your fields? How do you export the oil and what is the mechanism of exporting the produced oil from your fields to the international markets?
Right now we’ve had to – all of the IOC’s oil eventually ends up in the Iraq-Turkey pipeline that’s exported to the port of Ceyhan. Bit by bit, the government has been building the pipeline infrastructure. We’re one of the last fields that’s not connected to the pipeline, but we will be next year. So right now we have to truck all of our oil to the border crossing, Fishkhabur. But soon we will export all of that oil through the pipeline, which will also be a significant environmental improvement when we’re not running all those trucks to export.
You know environmental issues are always important. What is your environmental policy regarding your operation in the Kurdistan Region?
We take our environmental responsibilities extremely seriously and we have an entire team that focuses on that. And from the larger perspective, whether that’s in the local area or that’s with our gas, and that’s why we’re so focused on helping the KRG enable it to use its captured gas effectively and efficiently, because it’s both a power source and it’s an environmental factor.
Returning to HKN operations, your operation actually is near some area in Duhok province. What did you do for the community around the fields and your blocks?
We take our community relations also very seriously and we’ve done, we’ve invested heavily into the local sector. And I would say, Omar, that I think we can do a better job telling our story about all the things that companies like ours and companies like HKN do for the KRG and for our local communities. So some examples of that are probably that we built the largest school in Duhok, it was $21 million. It’s still there today and it’s in fantastic condition. We created a community centre in the Chamalki sub-district for $300,000. We’ve conducted multiple agricultural projects, multiple agricultural vaccination projects, we conducted a school renovation in Chamalki, we built a volleyball stadium. Just in the last few weeks we finished paving another 40 kilometres worth of roads in the Duhok district. And those are just, that’s just an example of the reinvestment in the area that we’ve conducted. Our company, overall for the Kurdistan Region since we’ve been here, has had over a $2 billion economic impact for the KRG. And we find that significant. But also, part of that is our responsibility to reinvesting in the communities.
How about human resources? What percentage of your staff are actually locals? How do you use local manpower in your fields?
So we have a significant local workforce. And we have a local workforce development plan. So we bring locals onto our workforce at all levels and they have development plans. Unfortunately, when COVID hit, us, like many IOCs, had to lay off a lot of folks. But we are now getting back on our feet, just like the other companies are, and re-hiring. And the local workforce of our company is significant and certainly important for our company.
What about the level of training for example, training and making the local staff ready?
Our local staff receive some of the same training that our foreign staff conduct. We even send some of our staff overseas for training, for instance we have some of our employees going to New York hopefully this fall, COVID permitting, for leadership training. That’s just an example. Technically, our local staff go through the same training with the idea that eventually the operators and the technicians that operate that field are locals and they have been trained side-by-side HKN employees.
Just coming back to your relationship with the Ministry of Natural Resources and the Kurdistan Regional Government’s payment mechanism to IOCs. Do you think that the mechanism of payments to IOCs is a just and right mechanism so oil companies can operate smoothly and invest more in their blocks?
I would just say that we know that these have been difficult days, weeks, months, years for the Kurdistan Regional Government. The payments and the budget allocations from Baghdad are never predictable, if they occur. And we understand the strain that that puts on the Kurdistan Regional economy. And so we know that the prime minister and the government of Kurdistan struggle to make salary payments and to pay the IOCs for their work. It’s a balancing act and it’s tough because if the KRG doesn’t pay the IOCs on time, then that affects our investment, that affects investor confidence, and that effects even companies that are not investing now but may be looking to invest. It hasn’t been perfect, but it’s getting better and I think we see a very clear path forward. We really hope too that a sustainable budget agreement can occur and get implemented with Baghdad that will provide everybody a little more certainty, financially, to include us.
What about Baghdad and Iraq. Recently some companies like BP and Shell are actually announcing suddenly they will exit Iraq and they sold their assets. What is happening there?
Omar, I think there’s no question that federal Iraq has significant expertise and capability to produce the amount of oil that they produce. They’re the second-largest producer for OPEC, I believe. Iraq is. But it has many dynamics that make investment unattractive in federal Iraq, particularly in the south, in two ways. One is, I think a lot of people don’t realize that in federal Iraq, which is much different than here in Kurdistan, federal Iraq has one of the highest state take-rates per barrel. So they keep basically almost 96 cents for every dollar from a barrel of gas, or from a barrel of oil. That’s a very difficult contractual mechanism for companies to feel comfortable with, to invest in.
And then secondly, as we all appreciate, there’s a very difficult political environment in Baghdad that makes investment decisions very slow and sometimes very, very difficult. I think you see that with some of the companies who have been trying for years to capture gas or to implement new oil projects and it becomes very difficult to get those through the process in Baghdad. So what you have is companies deciding that they’re going to leave. And I think that’s a reflection of an investment climate that’s not very friendly.
I think what the Kurdistan Region should be proud of is that they have a model that’s attracting investment. And that model should be the foundation for a more diversified economy going forward. The only US company that has US government financing is in the Kurdistan Region. And that’s our company, HKN. There’s about to be another company that’s going to have US government financing and that’s going to be in the Kurdistan Region as well. I think that’s a reflection of the attractive investment environment in the Kurdistan Region, compared to federal Iraq.
You described the model of the Kurdistan oil contracts as a successful model.
Absolutely.
What do you say about some parties criticizing the Kurdistan Region over the contracts? They say that the government grants more rights to the oil companies and a lot of benefit goes to the oil companies, not government coffers.
I think, Omar, there’s a lot of misperception about the oil contracts in the Kurdistan Region. As I said in my opening answer, the Kurdistan Region got to the point of producing 450,000 barrels a day without having to invest any of its own money, because it was just an attractive environment. And the production sharing contract model that you have here is very standard and it’s not very different than any other production sharing contract model. Part of the challenge though is explaining that to the people, particularly when you’re in an economically-challenged environment where you’re depending upon Baghdad for a budget transfer that may or may not come.
I understand how the oil and gas contracts could become a target for that criticism, but I think it’s also based on misperception, because when those budget transfers don’t come from Baghdad, the government is still able to pay at least partial salaries. And it would never be able to do any of that without the oil and gas sector here producing 450,000 barrels a day. That’s what’s keeping the Kurdistan economy afloat. And so I think we have to do a better job of explaining what we do for the Kurdistan economy, what we do for the Kurdistan Region, and what we do for the Kurdistan people, and the economic impact we’ve had for the region.
Returning to the gas sector, how can the natural gas of Kurdistan compete with the other sources of gas? As you know, we have a huge source of natural gas in neighbouring countries like Iran, other parts of –
Russia.
- like Russia. They get the European market and Turkish market.
I think there’s no economic reason why Kurdistan gas can’t compete. It’s no different gas then –
Even the pricing?
Well, the pricing mechanism has got to be right. So there’s got to be a pricing mechanism in Kurdistan that’s going to attract investment. It’s got to be a price that investors can say ‘that is competitive with the global market and therefore we can dedicate capital to build infrastructure to produce it.’ And if that’s the case, then that gas that’s produced will be able to compete on the international market.
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