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By Andres Cala, Energy Tribune:
Earlier this month, former BP chief executive Tony Hayward, in a different manifestation, said the Kurdish region in Iraq was “one of the last great oil and gas frontiers” after paying $2.1 billion for a little known company with fields there that could hold billions of oil barrels.
After the purchase of Turkish Genel Enerji, he is rumored to be targeting Gulf Keystone, a small company that found a massive oil field in Kurdistan and is now planning a new 0.5 million bpd capacity pipeline to connect it to Iraq’s export artery to Turkey.
The deal for the renamed Genel Energy is just the most recent of a flurry of acquisitions and deals in the Kurdish region, which include Marathon Oil, Hess, and Spain’s Repsol. Companies not able to compete with bigger majors in the rest of Iraq have decided to defy Baghdad betting that eventually the contracts will be honored.
The optimism was triggered by an agreement in May between Baghdad and the Kurdish Regional Government to share revenue and to pay oil producers for their costs, not profit, which opened the way for exports from the region to resume after months shut in.
But earlier this month oil exports of 100,000 bpd were stopped once again for less than a week. Immediately the simmering standoff flared up as Baghdad blamed the KRG for the intentional disruption and the KRG blamed the Baghdad-run oil company for mismanaging the export system.
The KRG has signed more than a dozen deals and the region could hold 45 billion barrels. But those contracts are considered illegal by Baghdad, which ultimately controls export pipelines. The oil related standoff is far from resolved and is not only holding back Kurdish aspirations, but of the entire country.
Indeed, many believe the tit for tat this time was triggered by the Iraqi cabinet approval late last month of an oil law. Parliament still has to pass it, but the KRG has already rejected it. Control over the strategic city of Kirkuk, one of Iraq’s richest oil regions and the most likely trigger of another civil war, still hasn’t even been addressed.
Meanwhile, Iran-backed Shiite and Saudi-backed Sunni militias are increasingly falling back on sectarian warfare as they position themselves ahead of the US withdrawal. Shiite, Sunni, and Kurdish militias are gearing up for a fight, however distant it may be, as foreign powers vie to influence the outcome.
Uncertainty just looms high in Iraq, one of the biggest hopes to boost lagging global production driving bullish pressure on oil prices. Despite the powder cake, Hayward –infamous for his handling of the Gulf of Mexico Macondo spill- is not going wayward.
Both the Kurds and the central government have successfully attracted dozens of companies willing to assume heightened risk and lackluster revenue over the long haul. A fourth licensing round, mostly for gas fields, is expected next year. Oil companies big and small investors are in one way or another betting long, and in the Kurdish case, as a long shot.
“The important issue is the political risk. This is going on, push and pull,” said Manouchehr Takin, senior upstream analyst in the Center of Global Energy Studies. “But companies have gone to Iraq. I think it’s very low risk because the prize is so huge, but it will take a long time.”
Iraq’s has 143 billion barrels of proven reserves, the fourth biggest behind Venezuela, Saudi Arabia, and Iran. It’s cheap to produce and reserves will almost certainly increase. The central government has so far signed more than two dozen contracts with international oil companies to develop 12 fields to boost production capacity to 12.5 million barrels per day by 2017, from its current 2.75 million bpd, a scenario broadly ruled out in the industry as unattainable.
For small companies in the Kurdish region, the risk is worth it when at stake are majority shares in production sharing agreements that could eventually produce hundreds of thousands of barrels a day. Oil titans were lured by the size of well known huge fields, despite low returns imposed by Baghdad. The promise of juicier future contracts compensated for the risk. “Oil discoveries are so huge. For international companies, that is a good price,” Takin said.
Iraq is far from realizing its known potential and oil markets are not holding their breath. Production gains -while significant- have been slow and erratic, and are nowhere near on track to meet Iraq’s promise of almost a five-fold output increase, simply on technical and infrastructural grounds. Resurfacing insecurity and sectarian tensions, especially as the US withdrawal deadline looms closer, have further tempered expectations.
Bank of America-Merrill Lynch estimated in January that production would reach 4.4 Mbpd by 2015. The CGES sees 4 million bpd closer to 2018. Wood Mackenzie, the oil consultancy, earlier this year estimated 5 million by 2018. The International Energy Agency estimated this year 4 million bpd by 2016.
Aside from political instability and security, analysts say a phase by phase development is a better policy option because flooding the market would be counterproductive to maximize revenue. Timing is also a potentially explosive issue if and when OPEC has to adjust its quota system to Iraq’s output surge.
Rising internal demand to fuel the country’s likely double-digit annual economic growth and oil-intensive reconstruction, topped with subsidizing, is also expected to limit export potential.
But the biggest handicaps are in the form of internal infrastructure bottlenecks and lack of expertise. Oil export facilities, for example, could only accommodate half of Iraq’s targeted production even after adding a planned three-fold increase of current export capacity to at least 6.6 million bpd from the current 2 million bpd.
Additionally, Iraq needs to upgrade and expand its pipeline infrastructure, to build more storage and oil terminal facilities, to boost its water desalination facilities to increase the recovery rate in wells, and to increase its power generation, all prerequisites before it realizes its crude production potential.
At least 200 drilling rigs would have to simultaneously operate in Iraq to drill over 1000 wells a year. “It is not certain if that number of drilling rigs could be mobilized and transported to Iraq within such a short period and that they could be properly maintained and operational over those years,” the CGES report says.
