A man looked for firewood in Somaliland. Agence France-Presse/Getty Images
When London's Genel Energy GENL.LN -0.68% Genel Energy PLC U.K.: London GBp949.50 -6.50 -0.68% Nov. 13, 2013 12:04 pm Volume : 82,094 P/E Ratio 0.26 Market Cap GBp2.25 Billion Dividend Yield N/A Rev. per Employee GBp2,292,700 9609559509459a10a11a12p1p2p3p4p 09/09/13 Genel Pulls Out Somaliland Sta... More quote details and news » PLC decided last year to search for oil in Somalia, it didn't negotiate with the country's internationally recognized government in Mogadishu.
Instead, Genel Chief Executive Tony Hayward flew to a city about 500 miles north: Hargeisa, the dusty capital of breakaway Somaliland. He visited the separatist president at home and told the resources minister that Genel could spend about $100 million prospecting there.
"We will find oil," said Mr. Hayward at the July 2012 meeting, according to him and the resources minister, Hussein Abdi Dualeh. Somaliland gave Genel permission to prospect.
Mr. Hayward, BP BP.LN -0.27% BP PLC U.K.: London GBp482.60 -1.30 -0.27% Nov. 13, 2013 12:06 pm Volume : 8.90M P/E Ratio 5.95 Market Cap GBp90.30 Billion Dividend Yield 4.91% Rev. per Employee GBp2,864,460 11/11/13 Offshore Oil Drilling Takes Of... 11/06/13 BP to Give Up Control of Libya... 11/01/13 BP Names Michael Gibbs CIO More quote details and news » PLC's chief during its 2010 Deepwater Horizon disaster in the Gulf of Mexico, has joined a breed of wildcatters who deploy a risky and sometimes lucrative strategy: Look for oil in politically or geologically fraught lands after cutting deals with governments that claim the lands, even if those claims are in dispute.
These oilmen operate on what the 56-year-old Mr. Hayward calls "the political frontier." They sometimes defy the wishes of Washington and the United Nations, which say companies can amplify conflicts and foment instability by entering disputed lands.
Genel executives Tony Hayward and Mehmet Sepil hope to find oil in Somaliland. Bloomberg News
In Somaliland, Mr. Hayward is stepping into a decadeslong conflict. The northern-Somalia region declared independence in 1991. But Somalia still claims it, and the U.N. doesn't recognize its independence.
The breakaway Somaliland's oil agreements are particularly contentious because they sometimes overlap leases that the central Mogadishu government negotiated years ago and that are held by companies such as BP, Royal Dutch Shell RDSB.LN -1.41% Royal Dutch Shell PLC B U.K.: London GBp2134.50 -30.50 -1.41% Nov. 13, 2013 12:05 pm Volume : 1.65M P/E Ratio 9.83 Market Cap GBp133.72 Billion Dividend Yield 5.37% Rev. per Employee GBp3,388,700 21802160214021209a10a11a12p1p2p3p4p 11/08/13 Kashagan Giant Oil Field Won't... 10/31/13 Refining Hurts Big Oil, But Ex... 10/31/13 Two Alberta Oil-Sands Projects... More quote details and news » PLC and ConocoPhillips. COP -1.01% ConocoPhillips U.S.: NYSE $72.82 -0.74 -1.01% Nov. 12, 2013 4:00 pm Volume (Delayed 15m) : 3.09M AFTER HOURS $72.82 0.00 0.00% Nov. 12, 2013 5:11 pm Volume (Delayed 15m): 30,383 P/E Ratio 11.08 Market Cap $90.12 Billion Dividend Yield 3.79% Rev. per Employee $3,317,750 74.0073.5073.0072.5010a11a12p1p2p3p4p5p 11/08/13 Kashagan Giant Oil Field Won't... 11/01/13 BP Names Michael Gibbs CIO 10/31/13 What WSJ Canada Is Reading Thu... More quote details and news »
A U.S. State Department official says that without a resolution between the central and regional governments, oil deals "are going to create conflict." A July U.N. report says making oil deals in fractious Somali regions could "constitute threats to peace and security."
Somalia believes Genel's deal could "destabilize" the nation, the Mogadishu government told Mr. Hayward in a 2012 email The Wall Street Journal reviewed, alleging that Genel is "in search of more profits by creating more problems in this part of the world."
Mr. Hayward says he disagrees. Since BP replaced him in 2010 after the Deepwater Horizon explosion and spill, he has staked his future on the notion that finding oil will not only make money but also make people stop fighting.
"If people have the opportunity to earn money and buy a BMW, rather than run around the hills with a Kalashnikov," he says, "they'll do it."
Somaliland's Mr. Dualeh says oil will help win recognition and generate income for his stable but extremely poor region.
Global wildcatters like Mr. Hayward are playing a growing role in the oil industry. Big companies often avoid exploring regions that are unstable or have troublesome geology. Yet, they need new reserves. So they sometimes rely on small firms to find oil in risky places. If political or geological challenges don't disrupt production, bigger companies often follow.
The blueprint is Genel's success in Iraq's Kurdistan region. A decade ago, big oil companies weren't there, largely because of security concerns. Genel made a deal with Kurdistan's leaders anyway, becoming one of the first Western prospectors to drill there. Rivals eventually followed.
Others have made similar bets. U.K.-listed Tullow Oil TLW.LN -2.28% Tullow Oil PLC U.K.: London GBp879.50 -20.50 -2.28% Nov. 13, 2013 12:03 pm Volume : 986,642 P/E Ratio 0.34 Market Cap GBp8.33 Billion Dividend Yield 0.91% Rev. per Employee GBp1,191,490 9209008808609a10a11a12p1p2p3p4p More quote details and news » PLC in 2006 agreed to buy a company to which Uganda had granted exploration rights in borderlands that the Democratic Republic of Congo contests. After Tullow's exploration partner began prospecting in 2007, troops from Congo and Uganda clashed there, killing several civilians.
The area "was at that time less peaceful than it is now," says Tullow spokesman George Cazenove.
By drilling "real wildcat" wells in such places, he says, prospectors are "hoping to hit the mother lode and therefore a big company will come in and buy out the whole license." Tullow last year sold some of its Uganda assets for $2.9 billion.
A Congolese official says the country now accepts Tullow's agreements with Uganda. Congolese and Ugandan officials say their countries now meet to discuss oil exploration in border regions.
U.K.-based Surestream Petroleum Ltd. and South Africa's SacOil Holdings Ltd. SCL.JO 0.00% SacOil Holdings Ltd. South Africa ZAc27 0 0.00% Nov. 13, 2013 1:59 pm Volume : 214,857 P/E Ratio N/A Market Cap ZAc258.15 Million Dividend Yield N/A Rev. per Employee N/A 27262510a11a12p1p2p3p More quote details and news » said last year they secured rights from Malawi in an area Tanzania claims. Officials for the companies and countries declined to comment or didn't respond to inquiries.
U.S.-based Murphy Oil Corp. MUR +0.05% Murphy Oil Corp. U.S.: NYSE $61.87 +0.03 +0.05% Nov. 12, 2013 4:04 pm Volume (Delayed 15m) : 2.04M AFTER HOURS $61.87 0.00 0.00% Nov. 12, 2013 4:25 pm Volume (Delayed 15m): 309,808 P/E Ratio 10.31 Market Cap $11.56 Billion Dividend Yield 2.02% Rev. per Employee $2,628,260 6463626110a11a12p1p2p3p4p 10/30/13 Morning MoneyBeat: For the Lov... More quote details and news » and U.K. partner Sterling Energy SEY.LN 0.00% Sterling Energy PLC U.K.: London GBp43.50 0.00 0.00% Nov. 12, 2013 4:35 pm Volume : 0 P/E Ratio N/A Market Cap GBp96.00 Million Dividend Yield N/A Rev. per Employee GBp488,679 More quote details and news » PLC have announced deals with Cameroon in offshore areas Equatorial Guinea claims. Murphy and officials of the countries declined to comment or didn't respond to inquiries. Sterling entered the area before the dispute flared up, says Sterling CEO Alastair Beardsall.
Workers drilled for oil at a Genel well in Iraq's Kurdistan region. Justin Scheck/The Wall Street Journal
Because small companies have less money, "by definition they have to go to the frontier, either the technical frontier or the political frontier," says Mr. Hayward. "There's no point in them following the big guys."
Mr. Hayward was drawn to Somaliland because it seemed a promising place to repeat Genel's success.
Genel was founded in 2002 by Mehmet Sepil, a Turkish construction magnate. He says current Iraqi president and longtime Kurdish leader Jalal Talabani phoned that year with a proposal: Develop Kurdistan's neglected oil fields.
"At the time, the political risk was very, very big," says Mr. Sepil, now Genel's president, from his Ankara office. (The Che Guevara portrait on his wall shows, he says, that he is an "old leftist.") The U.S. was preparing to invade Iraq, and relations between Turkey and the Kurds were "very sensitive."
Mr. Talabani, who suffered a stroke, couldn't be reached for comment.
Mr. Sepil and a partner agreed with Kurdistani leaders to spend at least $35 million prospecting, he says. Unable to hire a drilling contractor—none could get insurance—he spent $14 million for a used rig he trucked into the hills, he says. He eventually struck oil.
The Baghdad government told Mr. Sepil his Kurdistan leases weren't legitimate, he says. In 2004, he met Baghdad officials to negotiate approval, documents reviewed by the Journal show. They never reached a deal.
Baghdad adheres to its long-standing position, says an Iraqi Oil Ministry spokesman, that contracts signed in Kurdistan aren't valid if the central government hasn't approved them. He says Baghdad is open to negotiating with Kurdistan. A Kurdistani-government spokesman says its deals are legal.
Genel continued drilling despite the controversy.
Genel's success finding oil inspired other small companies to follow. Then, midsize companies like U.S.-based Hess Corp. HES -1.15% Hess Corp. U.S.: NYSE $79.94 -0.93 -1.15% Nov. 12, 2013 4:05 pm Volume (Delayed 15m) : 2.23M AFTER HOURS $80.04 +0.10 +0.12% Nov. 12, 2013 4:42 pm Volume (Delayed 15m): 4,632 P/E Ratio 7.75 Market Cap $27.30 Billion Dividend Yield 1.25% Rev. per Employee $1,262,740 8281807910a11a12p1p2p3p4p 09/03/13 Activist Investors Use Executi... More quote details and news » entered. Hess says it continues to work in Kurdistan.
Exxon Mobil Corp. XOM -0.31% Exxon Mobil Corp. U.S.: NYSE $92.67 -0.29 -0.31% Nov. 12, 2013 4:00 pm Volume (Delayed 15m) : 8.83M AFTER HOURS $92.67 0.00 0.00% Nov. 12, 2013 4:25 pm Volume (Delayed 15m): 1.89M P/E Ratio 12.10 Market Cap $406.10 Billion Dividend Yield 2.72% Rev. per Employee $5,168,010 93.5093.0092.5010a11a12p1p2p3p4p5p 11/12/13 Chevron, Brazil's Petrobras St... 11/11/13 The Hunt for Biofuels Looks Be... 11/08/13 Kashagan Giant Oil Field Won't... More quote details and news » and Chevron Corp. CVX -0.89% Chevron Corp. U.S.: NYSE $120.00 -1.08 -0.89% Nov. 12, 2013 4:00 pm Volume (Delayed 15m) : 6.05M AFTER HOURS $120.00 0.00 0.00% Nov. 12, 2013 5:05 pm Volume (Delayed 15m): 867,941 P/E Ratio 9.75 Market Cap $232.86 Billion Dividend Yield 3.33% Rev. per Employee $3,588,150 12212112011910a12p2p4p6p 11/12/13 Chevron, Brazil's Petrobras St... 11/01/13 Chevron Pumps Up Its Spending 11/01/13 The Race for Oil, and Chevron'... More quote details and news » , the world's largest oil companies, have reached deals since 2011 to enter Kurdistan. Exxon declined to comment.
Early explorers to Kurdistan, says Chevron's Iraq chief, Donnie MacDonald, "de-risked it to a degree."
Thanks to growth in Kurdistan, Genel reported 2012 net income of $75.9 million on $333.4 million in revenue, up from a $57.7 million net loss on $24 million in 2011 revenue.
Oil is bringing Kurdistan prosperity. Its capital, Erbil, has boomtown trappings: a modern airport and marble-fa├žade condominiums, next to goats grazing dusty lots. New cars follow well-paved roads into the countryside.
In 2011, a banker set Mr. Sepil up for dinner in London with Mr. Hayward, who wanted back into oil exploration.
Trained as a geologist, Mr. Hayward rose from working offshore rigs to BP's helm in 2007. After leaving BP, he found partners and started an oil-investment firm.
He was eager to prospect and delve into politics as big-firm CEOs can't, he says. In oil-rich countries, he says, small firms offer "an opportunity for the guys at the top of a company to have a much deeper personal relationship with the key leaders."
At the dinner, Mr. Hayward, who dresses like a London banker, told the long-haired Mr. Sepil he wanted to move into politically or geographically risky Mediterranean and African regions. They agreed they could use Turkish and U.K. diplomatic contacts for access. "I said, 'Let's use our relationships like I used it in Kurdistan,' " Mr. Sepil says.
Mr. Hayward's firm acquired Genel in a deal that took it public in 2011. One technically challenging region they began exploring was off Morocco's coast, Mr. Hayward says.
Genel also consulted an in-house geologist with knowledge of Yemen's oil deposits. Such deposits, he told Genel, should also be present across the Gulf of Aden in Somaliland.
Somaliland fit the profile Mr. Hayward and Mr. Sepil sought: geologically promising, too risky for big companies and with diplomatic ties to their home countries.
Like Kurdistan a decade ago, Somaliland is self-governed and more stable than Somalia's south. The capital, Mr. Hayward says, "is very, very poor—as Kurdistan was when it all started in Erbil."
Turkey and the U.K. support Mogadishu but also support oil development in Somaliland, say diplomatic and oil-company officials. "We welcome inward investment into Somalia, including Somaliland," the U.K. foreign office says.
As in Kurdistan, oil seeps from the ground. Yet big oil companies aren't prospecting. Shell and others had leases in the 1980s to explore in Somalia, including parts of Somaliland, but suspended operations amid growing violence.
In the past decade, wildcatters began seeking local Somali leases. London's Ophir Energy OPHR.LN -0.39% Ophir Energy PLC U.K.: London GBp330.40 -1.30 -0.39% Nov. 13, 2013 12:04 pm Volume : 580,100 P/E Ratio N/A Market Cap GBp1.96 Billion Dividend Yield N/A Rev. per Employee N/A 3403353303259a10a11a12p1p2p3p4p 10/29/13 GAIL India in Talks With Ophir... More quote details and news » PLC entered Somaliland in 2004 by acquiring an interest in a company that was granted a concession there in 2003—one that overlaps with a lease BP holds from Mogadishu.
Ophir says its lease is legitimate. Its partner, RAK Gas LLC of United Arab Emirates, in September acquired a controlling stake in the lease; RAK Gas didn't respond to inquiries. BP says its Somali leases are valid and that it is discussing them with Mogadishu.
Mogadishu says it considers leases by regional Somali governments invalid. The constitution "doesn't allow any federal states to enter any agreements, whether that's Somaliland or any other region," says Somalia's natural-resources minister, Abdirizak Omar Mohamed.
In July 2012, Genel chartered a plane to Hargeisa. Somaliland's Mr. Dualeh says he was thrilled to see Mr. Hayward—whom he knew from TV newscasts—arrive at his ministry building.
After Somaliland announced the Genel deal, Mogadishu objected: "There is no 'Independent Republic of Somaliland,' " federal oil adviser Patrick Molliere wrote in an email to Mr. Hayward, reviewed by the Journal. "You were the BP CEO, and you know that you cannot sign with a local federal government."
Mr. Hayward says he was unfazed: "It's not dissimilar to the experience in the Kurdistan region of Iraq." Genel says it believes the regional government has jurisdiction.
Genel's block overlaps with a ConocoPhillips lease from Mogadishu. ConocoPhillips isn't exploring in Somalia, but "we have not relinquished our interests there," a company spokesman says.
Mogadishu has decried other such deals. "Companies like yours are creating potential possible instabilities," Mr. Molliere wrote in May to Chairman Bijan Mossavar-Rahmani of Norway's DNO International AS DNO.OS -0.53% DNO International ASA Norway: Oslo kr18.83 -0.10 -0.53% Nov. 13, 2013 1:05 pm Volume : 795,359 P/E Ratio 13.95 Market Cap kr19.54 Billion Dividend Yield N/A Rev. per Employee kr3,924,350 19.1019.0018.9018.8010a11a12p1p2p3p4p5p More quote details and news » A, which has an exploration agreement with Somaliland. Mr. Mossavar-Rahmani says the lease is valid.
Lane Franks, president of Phoenix-based Liberty Petroleum Corp., formed a company that agreed last year with Somalia's Galmudug state to explore an area there that Mogadishu had awarded to Shell.
He negotiated with Galmudug President Abdi Hassan Awale, he says. The U.N.'s July report called Mr. Awale a "warlord" who fought U.N. peacekeepers in the 1990s. Mr. Franks says he is aware of Mr. Awale's history but believes he has changed. He "seemed to be a man who really wanted what was best for his people," he says.
Mr. Awale, by phone, said: "I don't know what you mean about, with the 'warlord.' " He declined to comment further, requesting contact by text message; he didn't answer subsequent texts.
Mogadishu and Shell officials say they objected to the leases. Somalia's supreme court approved Galmudug's right to sign leases, says a Mogadishu official, adding that the central government expects to appeal.
Shell CEO Peter Voser says Shell is discussing returning to Somali offshore sites. At a March meeting in the Netherlands, Shell officials told Mogadishu officials they "should take responsibility and action" on leases that overlap Shell's, according to documents the Journal reviewed. Shell and Mogadishu officials confirm the meeting.
Genel teams this year began seismic tests in Somaliland. They pulled out this September after a security threat. "Discussions continue with the Somaliland government in order to facilitate a resumption of activity," Genel said last month.
Somaliland's Mr. Dualeh says it may create an armed "oil protection force."
Mr. Hayward says Genel is seeking new lands and is optimistic about opportunities "east of the Caspian, through the 'stans of various names to Afghanistan."
Write to Justin Scheck at justin.scheck@wsj.com and Alexis Flynn at alexis.flynn@wsj.com