David O'Byrne in Istanbul -

News in August of the merger of Turkish oil company Genel Enerji with the Vallares investment vehicle set up by ex-BP head Tony Hayward came as little surprise - after all, the two had made no secret of months of talks on the back of Vallares assembling a $2bn war chest for upstream acquisitions. But both the scale of the deal and some of the conditions it involves have raised eyebrows, given both the recent history of Genel and the inherent instability in the Kurdish region of northern Iraq where it operates.

The merger itself takes the form of a reverse takeover that values Genel at $2.1bn and gives the two company's current owners equal stakes in Genel. Once the paperwork is complete, the rejigged Genel will continue to operate out of the Turkish capital Ankara, but will apply for a listing on the London Stock Exchange listing under a board which will include CEO Hayward, CFO Julian Metherell, a former Goldman Sachs high flyer who this summer abandoned investment banking for oil prospecting, and Hayward's partner in establishing Vallares, Nathanial Rothschild. A stellar cast that stands in some contrast to the Turkish side - neither of Genel's current majority owners, Mehmet Karamehmet and Mehmet Sepil, will take a seat on the board, instead appointing nominees.

Karamehmet's absence is believed to be related to a ban on his leaving Turkey, imposed after he was last year handed a 11-year jail sentence related to the collapse 10 years ago of his Cukurova Group's Pamukbank. He remains free pending the completion of a appeal. Sepil's absence is thought to relate to his 2010 keelhauling by the UK's Financial Services Authority having admitted to insider trading in shares of Heritage Oil, which was then involved in merger talks with Genel. Appointed as Genel's new president, Sepil's £967,000 fine remains the highest ever imposed by the FSA.

And there's more. As the head of one of Turkey's richest family conglomerates Cukurova Group, Mehmet Karamehmet is no stranger to controversy. Cukurova controls Turkey's biggest mobile phone operator, Turkcell, despite a holding that pans out at less than 15% of Turkcell equity. And for most of the past decade, it has been locked in furiously complex legal battles for control of the company with Turkcell's main shareholders, Sweden's TeliaSonera and Russia's Altimo.

New frontiers

History aside, on paper Genel's assets are impressive. The company operates the TaqTaq oilfield with a 44% in partnership with China's Sinopec (36%) and the Kurdish Regional Government (20%), and holds a 25% stake in the smaller DNO operated Tawke field. Together, the two fields have estimated combined reserves of close on 1bn barrels of oil equivalent and together produce around 41,000 barrels a day (b/d) - a figure expected to more than double by 2013. In addition, Genel holds stakes of between 20% and 40% in four undrilled blocks, all of which are thought to have a high chance of holding major reserves.

According to Hayward, the Kurdish region is one of the calmest parts of Iraq and one of the last great oil and gas frontiers. But while the region may have a high potential and be relatively unprospected, it also carries a high level of risk.

The Kurdistan Regional Government (KRG) has long been at loggerheads with the Baghdad government over its awarding of over 40 production sharing agreements to foreign oil companies, including Genel, in apparent breach of Iraqi law.

The two sides did manage to ink a provisional agreement at the start of the year that allows for the KRG to receive payment for oil exported from the region, enabling it to pay operators and to keep the oil flowing. However, speaking at a conference in Istanbul in September, KRG Oil Minister Ashi Hawrami complained that the agreement is not being honoured. "To date, they have only paid us around a third of revenue due," he said, explaining that this has caused operators to slash production from 180,000 b/d to around 100,000 b/d - a problem he ascribed jointly to political differences between the two administrations and slow moving Baghdadi bureaucracy.

When or if a resolution can be found is unclear. But Hawrani's appearance at the conference alongside Turkish Energy Minister Taner Yildiz - the first occasion on which the two have shared a platform - did send an important message. Namely, that Turkey, through which oil from Iraq's northern oilfields is piped to global markets, is prepared to work with the KRG to help monetise its reserves.

Although that willingness is also assumed to rely on the solving of the long-running problem of the Kurdish separatist group the Kurdistan Workers' Party (PKK), which over the past decade has claimed responsibility for numerous attacks on oil and gas pipelines in Turkey and whose continuing campaign of violence threatens future development of regional assets. "The PKK will use paramilitary means to exact a share of what is in northern Iraq - it has sabotaged pipelines and will do again," says Professor Dogu Ergil of Istanbul's Fatih University, who in 1995 found himself in hot water having authored an official report advocating dialogue with Turkey's Kurdish minority.

"If the Kurdish region of Iraq wants to develop its economic relations with Turkey, it needs to get rid of the PKK," he says, warning that without a solution the region's oil and gas wealth will prove difficult to develop.