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Talisman's Decision to Enter Iraq


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Talisman’s Decision to Enter Iraq
Robert A. Neufeld
Athabasca University

Executive Summary

The board of directors of Talisman Energy Inc., a Canadian publicly-traded oil and gas company, has been presented with a request from management that the company jointly purchase a 40 percent interest in Block 44 in the Kurdistan region of Iraq with another Canadian firm called WesternZagros, The investment is potentially very profitable and fits well into Talisman’s growth strategy however it is also very risky. Within its recent past Talisman suffered reputational damage and was forced to sell off its operational investment in Sudan after underestimating the risks involved in operating in a politically unstable region and specifically the efforts of non-governmental organizations and resulting pressures from stakeholders.
The board needs to decide if it should enter Iraq and if Talisman can successfully operate there in a corporately responsible and profitable manner while managing many apparent risks. The main risk is the political and legal relationship between the Kurdistan and the Iraqi Central Government is transitory if not non-existent, and there is higher international support for Iraq unity than Kurdistan independence. The risks are great enough that Talisman should wait to enter Iraq.

Problem Statement

Can Talisman enter and operate as a joint venture in the Kurdistan region of Iraq in a profitable and corporately responsible manner that avoids the issues faced in Sudan, satisfies its stakeholders, preserves its reputation, and meets its growth objectives while successfully managing political and legal risks.


Nearly a decade earlier Talisman entered Sudan without adequately preparing for the many issues it faced there. The negative Sudan experience has motivated Talisman to avoid similar international experiences. The issue in Sudan was activists were successful in portraying Talisman as complicit in fuelling the Sudanese civil war and ensuing human rights violations because the Sudanese government used Talisman paid royalties to purchase weaponry and continue conflict. Talisman’s reputation suffered, as did its share prices, and many board of directors from that experience remain. Despite Talisman’s assessment that the risks were manageable because the operations were physical protected, a peace treaty was in place, and the Sudanese government was recognized by the United Nations (Slawinski, 2009, p. 2), the political environment did not support foreign operations in Sudan. Previous to Talisman entering Sudan the US government placed sanctions on the country, preventing its own companies from operating there (Slawinski, 2009, p. 2). Furthermore, three years after Talisman’s entry into Sudan, the U.S. government prevented any foreign company developing oil and gas in Sudan from selling securities in U.S. financial markets (Slawinski, 2009, p. 3). As well, civil war plagued the country for a half century, the brutality of the conflict was well in the public eye, and the conflict had grown beyond simply a north-south divide to a complex battle for power between groups from across Sudan (Slawinski, 2009, p. 2). Talisman made many improvements in terms of corporate responsibility, transparency of its activities, and relations with the Sudanese government. However, having not sufficiently initially assessed risks, and subsequently not having a risk management plan, Talisman succumbed to pressure from its stakeholders to abandon its Sudan investment.

In Iraq, the Kurds in the Kurdistan region have sought independence for almost 50 years (Slawinski, 2009, p. 2). After the U.S. and Britain invaded Iraq, and removed Saddam Hussein from power, the Kurds saw an opportunity to further their independence and established the Kurdistan Regional Government (KRG) (Slawinski, 2009, p. 6). The American-backed government of Iraq granted Kurdistan some autonomy via a redrafted and ratified Iraqi constitution and the KRG used this autonomy to seek and attain foreign oil investment (Slawinski, 2009, p. 6). However, by no means has the Kurdistan Regional Government been officially recognized within Iraq or internationally. The U.S. government supports the Iraqi Central Government and a unified Iraq and neighboring countries with Kurdish populations contest KRG independence (Slawinski, 2009, p. 6). Furthermore, no federal petroleum law is in place, geographic boundaries are not well defined or agreed upon, and there was no revenue sharing agreement with the Central Iraqi Government who has control over Iraq’s export pipeline system (Slawinski, 2009, p. 7).

Agreements with the KRG and operations within the Kurdistan region are undoubtedly politically and legally risky. KRG independence may not be recognized and the contracts it enters into may not be honored. Should any stakeholder, especially the U.S. government who is already discouraging U.S. based companies from investing in Iraq because of political sensitivity, decide to exert pressure or exercise its power Talisman’s operations could be interrupted or suspended and agreements could be negatively altered or abandoned. As well, if resistance to Kurdistan independence intensifies there is a strong possibility of civil war and resulting human rights issues, a situation very similar to the power struggles in Sudan. Additionally, what the KRG plans to use acquired funds for is unknown. Should it be a concern to any stakeholder that the funds are to be used to gain further independence, resist unification, fuel a potential civil war, or any other adverse cause Talisman could end up in the same situation as Sudan.

Discussion of Alternatives

Talisman’s board of directors can choose to enter the Kurdistan region of Iraq through the proposed joint operation. Talisman is well prepared to enter Iraq, certainly compared to Sudan. The company is led by a new CEO who is a “highly experienced, well-rounded and respected international oil and gas executive” and an experienced board of directors (Slawinski, 2009, p. 4). Talisman has completed due diligence by tracking issues related to the Kurdistan region, consulting many stakeholders and assessing the risks involved (Slawinski, 2009, p. 7). The company has an International Code of Ethics and a Corporate Responsibility Department that has developed policies, procedures and reporting protocols (Slawinski, 2009, p. 3). The proposed investment meets Talisman’s strategy to pursue international opportunities that fit within its technical expertise and financial capabilities while focusing on larger pool sizes that are not available domestically (Slawinski, 2009, p. 4). The investment is very profitable as proposed and allows Talisman to continue its growth rate (see exhibit 1). However, the political environment is contentious and high risk. The U.S. government wants a united Iraq and it is exceptionally possible that the KRG will not be officially recognized which could lead to turmoil such as civil war and pressure from many stakeholders, similar to the situation in Sudan, will occur over again.

Alternatively, Talisman’s board of directors can decide to wait to enter Iraq. There are many unknowns that are out of the company’s control. If Talisman waits it can avoid potential negative impacts of the risky political situation and have time to further assess, monitor, and influence the political situation in Iraq, specifically the Kurdistan region, and solidify the unknowns. There will be more opportunities to enter the region, and those opportunities may come with less risk as laws, agreements, boundaries and revenue sharing agreements come into place. Unfortunately, the drawback of waiting is foregone or delayed revenues and expected profits.


The board of directors should not approve Talisman’s entry into Iraq and should instead suggest a strategy of waiting until various risks are mitigated. The political environment is too volatile and the struggle for power is ultimately what caused civil unrest in Sudan. Furthermore, the U.S. isn’t supporting its own companies investing in the region and is likely to apply pressure on Canadian companies similar to how they did in Sudan.

Talisman should further communicate and negotiate with stakeholders to clarify the unknown circumstances of what the Kurdistan entry fees would be used for, what the KRG would use their share of profits for, progress in terms of recognition of the KRG or progress towards a unified Iraq, establishment of federal petroleum laws, further definition of geographic boundaries, establishment of a revenue sharing contract with the Central Iraqi Government, and an agreement for use of Iraqi pipeline infrastructure that is under the control of the Central Iraqi Government.

In the future, when the political and legal environment in the Kurdistan region, and Iraq in general, improves and is more established and international stakeholders are more supportive of foreign oil and gas exploration and extraction in Iraq, Talisman should invest in the area assuming the situation is still profitable.


Slawinski, N. (2009). Talisman Energy Inc.: The decision to enter Iraq. London, Canada: Ivey Management Services.

Wild, J. J. & Wild, K. L. (2012). International business: The challenges of globalization. (6th ed.). Upper Saddle River, New Jersey: Pearson Education Inc.

Exhibit 1
Block K44 Profitability

| Low Assumption | High Assumption | Revenues | | | Barrels Recoverable | 193,000,000 | 701,000,000 | Current Price | $130 | $130 | Gross Revenue | 25,090,000,000 | 91,130,000,000 | | | | Less: 60% non-KRG share | (15,054,000,000) | (54,678,000,000) | | | | Total Revenue (to Joint Venture) | 10,036,000,000 | 36,452,000,000 | | | | Costs | | | Year 1 Capital Expenditures | (160,000,000) | (437,500,000) | Year 2 Capital Expenditures | (160,000,000) | (437,500,000) | Finding & Development Costs | (318,450,000) | (1,156,650,000) | Gross Costs | (638,450,000) | (2,031,650,000) | | | | Gross Profit (to Joint Venture) | 9,397,550,000 | 34,420,350,000 | | | | Less: KRG Carried Interest (20%) | (1,879,510,000) | (6,884,070,000) | | | | Net Profit (to Joint Venture) | 7,518,040,000 | 27,536,280,000 |

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