Monday, Dec 23, 2013

(FROM THE WALL STREET JOURNAL 12/23/13)

By Emre Peker

ERBIL, Iraq -- Just two decades ago, Erbil was a dangerous town, attacked on one side by Iraqi dictator Saddam Hussein and on the other by warring Kurdish tribes.

Today, this vibrant capital of Kurdistan, a semi- autonomous region in Iraq, is peaceful as expectations of an energy windfall are creating a boom and helping to refashion a traditional society and an ancient landscape.

Hoteliers including Hilton and Kempinski are erecting buildings that now soar above the city's 7,000-year-old Citadel. New shopping malls compete with the medieval bazaar. And Erbil's historic downtown is ringed by luxury villas, residential towers and commercial offices, driven by a 20-fold surge in property prices since U.S. forces invaded Iraq in 2003.

"A decade ago, Erbil was more like a big village," said Tahir Osman, deputy governor of Erbil Province who helped forge an urban development plan that calls for a Grand-Prix race track. "My dream is changing the Kurdish capital to make it into one of the most important cities in the world."

This dream of a Mesopotamian New York is far from assured. For one, Kurdistan has profited little from its oil and gas resources due to an ongoing dispute with Baghdad over its control.

If Erbil succeeds in resolving that longstanding dispute, it still faces other substantial obstacles. Among them, the country is landlocked and trapped in a politically volatile region with an antiquated banking system, an undeveloped workforce and a non-diverse economy based on energy.

Still, the promise of an estimated 45 billion barrels of oil is rapidly transforming Iraqi Kurdistan, luring expatriates and Western-educated Kurds convinced that the region can compete with energy hubs like the Gulf Emirates in attracting investments.

In an effort to diversify its economy, Kurdish authorities also have introduced investment incentives in manufacturing, agriculture, tourism, banking, insurance and health.

Underpinning their hopes is a decade of security and stability in the region controlled by the Kurdistan Regional Government that stands in stark contrasts to the spiraling sectarian violence in the rest of Iraq.

Conflict-related deaths in Iraq doubled to over 8,000 in 2013 from the prior year, according to the United Nations, while sectarian killings in Erbil and the broader Kurdistan region are rare.

Since Saddam's demise a decade ago, Kurds have enjoyed increasing autonomy from the central government in Baghdad. That cleared the way for oil and gas deals with wildcatters rushing to Iraqi Kurdistan for what some describe as the last virgin frontier on land. As the prospectors unearthed large reserves, oil majors including Exxon Mobil Corp. and Chevron Corp. followed, bringing billions of dollars-worth of investment.

Kurdistan has been exporting oil on a small scale by truck. But last month, it took a big step towards exploiting its resources on a large scale when it agreed to supply Turkey with oil through a new pipeline that Erbil says can handle 1 million barrels per day. It is a contentious issue.

Iraq's government doesn't recognize the deal with Turkey nor dozens of other accords between Kurds and international oil firms. Baghdad fears that crude exports outside its control could set a dangerous precedent for other regions in the divided country and lead to its splintering.

Uncertainty over the outcome of ongoing talks between Erbil, Baghdad and Ankara hasn't stopped executives and Kurds not only from Iraq but also from Turkey, Syria and Iran from flooding into Erbil.

"The whole world was coming here, and I said why not," said Adib Nazer, an Iraqi Kurd, who moved to Erbil in 2006 via Baghdad after completing high-school in Gaziantep, Turkey, and graduating from Los Angeles Pierce College in the U.S. The 33-years-old Mr. Nazer is the youngest of seven siblings who run United Brothers, Iraqi Kurdistan's largest private employer, with interests in energy, construction and other sectors.

Huge challenges remain. Businesses and hotels say Iraqi Kurdistan lacks a qualified workforce and that the oil economy discourages the development of other business skills. Workers from India and Sri Lanka fill the resulting labor shortage.

The consumer trade is uneven. Luxury Turkish retailer Beymen says its Erbil store does a brisk business. But retailers that cater to ordinary Kurds say they tend to shop in the traditional bazaars or during trips abroad to Istanbul, Dubai or Europe.

The city's top hotels provide a glimpse of confidence in Iraqi Kurdistan's future. At Divan Erbil Hotel, a unit of Turkish conglomerate Koc Holding AS that opened its first international branch in Erbil last year, wealthy locals and international businessmen mingle in a 21st-floor sushi restaurant.

They are hoping that oil wealth will grow and seep into the broader economy.

"I'd like to see more high-rises, international brands, restaurants and retailers, all of these areas are wide open, we don't have to focus on energy alone," Mr. Nazer said.

(END) Dow Jones Newswires