Iraq: Current Political and Business Environment

September 26, 2011

Iraq: Current Political and Business Environment

Lunch with Northern Gulf Partners: Yesterday we hosted an investor lunch with Zaab
Sethna, Partner and Head of the Baghdad Office of Northern Gulf Partners (NGP), an
Iraq focused investment firm, and Chris Ruth, the firm’s Managing Partner. Mr. Sethna
was previously an adviser to the Iraqi government. Key topics included country specific
growth opportunities and challenges, infrastructure limitations, the development of the
oil and gas sector, oil services and drilling market dynamics and political nuances.
Iraq Growing Rapidly: Iraq’s economy is growing rapidly, with projected GDP growth
of 11.5% this year and the country’s 2012 national budget up 36%. Logistical,
infrastructure, storage and commercial opportunities are emerging as a result.

Significant Oil and Gas Market Ambitions: NGP believes oil production can be raised
to 6mb/d to 6.5mb/d in the next decade. In the meantime, the firm expects proven oil
reserves will rise significantly. Contracts awarded in the first three licensing rounds are
not at risk of renegotiation in the advent of a national oil law, in the firm’s opinion, as
the political actors are aware of the necessity of IOC’s, the development of oil to the
economy, and the potential damage to future investment.

Kurdistan Contracts at Risk: The central government and political classes view
Kurdistan oil contracts as illegal, particularly those struck after 2007 and ones in
contested territories. NGP believes there is a severe risk that these contracts will be
renegotiated and oil companies operating in the region will continue to be blacklisted.
However, oil service companies operating in Kurdistan are not at risk of being
blacklisted, in NGP’s opinion.

Oil Service Market and Rig Count Could Grow 10-Fold: Oil services and drilling in Iraq
is currently a $600 million to $800 million market and is likely to develop into a $6 to $8
billion market. We believe the run rate by year-end will be close to $1.5 billion. There are
about 30 rigs drilling currently and NGP believes the rig count could ultimately surpass
300 rigs. The scope of work being performed today is largely limited to workovers, with
most drilling campaigns yet to commence. The future of the market lies in the
integrated services model, in NGP’s opinion and ours. Service companies are not looked
at with the same disdain as oil companies; however, there is an intense focus on cost
controls due to cultural mindset.

Multi-Year Growth Story: We believe Iraq represents one of the largest multi-year
growth stories for the oil services industry this decade. Companies that are able to
execute and mitigate the political and security pitfalls in Iraq will be rewarded in our
opinion. Our favorite ways to invest in the expansion in Iraq are through the large caps:
BHI, HAL, SLB, and WFT. In the small caps GGS has good exposure to the market.