Kurdistan to raise Genel and Gulf Keystone's profiles

A recent agreement between Turkey and northern Iraq is bringing hope to oil and gas companies based in Iraq, as exports are revived after a long stalemate.

Background

Iraq relies heavily on oil for its national revenue, with an estimated 95% of its budget funds coming from hydrocarbons.

However, the country has been plagued by a feud between the south, represented by Baghdad, and the north, led by the semi-autonomous Kurdistan Regional Government (KRG).

According to data compiled by the Organisation of the Petroleum Exporting Countries (OPEC), Iraq has the world's fourth-biggest reserve base - 143 billion barrels of crude oil and 126.7 trillion cubic feet of gas - following Venezuela, Saudi Arabia and Iran. Kurdistan accounts for 43.7 billion barrels of proven oil reserves, 25.5 billion more barrels of unproven reserves and between three and six trillion cubic metres of gas, representing almost 30% of Iraq's proven oil reserves.

As a result, Kurdistan alone could easily sit in the top 10 oil-rich countries in the world. However, under Iraq's revenue-sharing scheme, put in place in 2007, more than 80% of all oil revenues are distributed to Baghdad, while 17% go to the Kurds. Additionally, all exports go through a Baghdad-controlled pipeline, with the federal government collecting revenues for distribution.

However, changes to the way the central government calculates payments have angered Kurdistan. The KRG says it has not received enough money to pay the operators of oil and gas projects working in Kurdish Iraq.

"There was originally a September agreement between the KRG and Baghdad in a hope that it would lead to payment [of outstanding monies] due to contractors for historic oil exported from Kurdistan," a source close to the matter explained to Interactive Investor.

"One slug of payment ($530 million (£348 million) on 8 October 2012) was made and there were hopes that a second slug of payment (of around $300 million) would come through, but [that] was not the case.".

The matter escalated earlier in March, when Iraq's delayed 2013 budget was eventually passed in the absence of Kurdish politicians. Less than $650 million had been set aside for oil companies in the north, just a fraction of the $3.5 billion needed to cover the shortfall.

This especially poses a problem for international oil firms who rely on exports for their profits.

Glimmer of hope

"Things are starting to look much better," explains Malcolm Graham-Wood, oil and gas adviser for VSA Capital. He notes that after months of talks between almost-independent Kurdistan and neighbouring Turkey, an agreement was reached in December, making way for an "energy corridor" at the border and providing new opportunities for oil companies on the ground. Oil products are now being carried through the Turkish border on top of trucks.

Our source tells us that although there are low volumes of crude being trucked - a few thousands of barrels a day for some companies - it was still a "significant" development as Turkey and the KRG strengthen their relationship.

Graham-Wood shares this train of thought, adding: "It is the beginning of the relation between the KRG and the companies operating under the KRG, and that enables them to be able to sell their crude oil not necessarily through Baghdad."

Under the new agreement, Graham-Wood explains, exploration is back on the map as well as exports, with Kurdistan's energy minister, Ashti Hawrami, claiming a gas pipeline is currently being laid and could be converted to ship up to 300,000 barrels of crude per day by June.

Kurdistan back on the map

Although no oil company would make any formal comment on the situation, Genel Energy, which refers to itself as the "leading" exploration and production company in the region, has seen steadily rising production capacity from 150,000 barrels of oil per day (bopd) in 2011 to an estimate of more than 400,000 bopd by the end of 2013.

In addition, the company said, substantial infrastructure has been completed "with more planned", including a one million bopd oil pipeline to Fishkabur on the Turkish border.

The importance of Kurdistan as a major hydrocarbon province has been underlined by the recent entry of some of the world's leading independent oil and gas companies, following Genel's example.

Indeed, Graham-Wood says, in the past 12 months supermajors such as Exxon Mobil, Total, Chevron and smaller major companies including WesternZagros Resources, Heritage Oil, Petroceltic International and Gulf Keystone Petroleum have entered the northern market. With this level of interest building, "further corporate activity is likely", confirms Genel.

Companies such as Genel have already been carefully enhancing their position through acquisition and expansion in the region - for example, Genel bought Heritage's Miran well in January.

Furthermore, Turkey has vowed it will invest in Kurdistan.

Genel has said it is working "closely" with both the KRG and the Turkish government on the long-term supply of gas from Kurdistan into the Turkish gas market, calling it a " very significant project requiring substantial infrastructure development".

At Genel, the average net working interest production for 2013 is expected to be in the range of 45,000 to 55,000 bopd, generating revenues of between $300 million and $400 million dependent on the level of any export sales, with its Kurdistan exploration programme of four high-impact wells targeting over 750 million barrels of oil equivalent (mmboe) gross unrisked resources in 2013.

In 2014, the company says, the appraisal and development programmes at Iraqi Taq Taq and Tawke fields could be on track to bring 140,000 bopd (net) production capacity.

"This shows the difference between what Kurdistan was like five years ago and now," Graham-Wood says.