Kurdistan’s Oil Future

Courtesy of The Financial Times, an interesting look at oil-rich Kurdistan:

“…I have spent the past few days touring the oil-rich semi-autonomous region of Kurdistan in northern Iraq, visiting oilfields and interviewing its officials and foreign executives. It is boom time for Kurdistan, which optimists hope could soon produce more oil than some members of Opec. As I am leaving, Kurdistan is celebrating the arrival of ExxonMobil, the first of the so-called supermajors to enter the territory to explore for oil.

But the future will not be a simple trajectory.

Exploration success. The oil and gas map of Kurdistan five years ago was largely blank. Today, dozens of oilfields dot it as companies discover hydrocarbons in commercial quantities in eight of every ten wells they drill. But drilling is not as easy as it appeared to be a few years ago, due to the complex geology of the region, and budgets are overrunning by more than a third in some cases.

Promises, but a tough reality. The Kurdistan Regional Government expects production to reach 1m barrels a day – more than double the output of Ecuador, the smallest member of the Opec oil cartel – by 2015, up from less than 200,000 b/d at present.

Yet future production depends on a political agreement between the KRG and the federal government in Baghdad to approve the long-awaited Iraqi petroleum law, which has been delayed since 2007. While an interim agreement allows for limited exports, which could run at 175,000 b/d next year, companies will be reluctant to invest heavily to lift output towards the 1m b/d target until a political agreement allows the passage of the petroleum law. The KRG and Baghdad say that the legal text will be done by the end of 2012, but cynical oil executives in Erbil note that both sides have repeated the same message for the past five years.

The arrival of Big Oil: Five years ago only a few small companies ventured into the region, but the nametags at a recent oil and gas conference in Erbil read like a Who’s Who of the industry. The pioneers, including the Oslo-listed DNO that is privately owned by Genel Enerji of Turkey, and London-listed Gulf Keystone are still there, but new entrants are arriving, including large groups such as Hess and Marathon of the US, Repsol YPF of Spain, and OMV of Austria. Exxon has become the first supermajor to sign a contract to explore the region. Oil executives, diplomats and regional officials say other supermajors could soon join the world’s largest oil company.

The impact of the arrival of Exxon is unclear. Optimistic oil executives say it could force Baghdad to accept the KRG’s demands to develop its own industry, but others say that could sour relationships between Kurdistan and the federal government, delaying indefinitely the approval of the petroleum law. The arrival of another supermajor – Chevron of the US, Total of France and Eni of Italy are the names frequently mentioned – could give the KRG the upper hand, however.

The time for M&A. Most of the territory open for exploration has already been snapped up, so new entrants have just two routes: a so-called farm-in agreement, whereby a company buys a stake in a field or exploratory area in exchange for financing, or buying existing companies. The KRG, which by necessity backed small companies at the very beginning, would now prefer to see a consolidation in the sector that leaves fewer and bigger players.

After the arrival of Exxon, the market is valuing the current players at much higher multiples, so expect multibillion dollar deals. Oil executives in Erbil talk in particular about two deals: Gulf Keystone, which could be bought by a supermajor seeking a quick entry; and a potential merger of DNO and Genel Enerji.

Turkey is the new friend. Five years ago, Ankara branded some of the most senior KRG officials as terrorists. Today, Turkish diplomats see Iraqi Kurdistan as a source of energy to power the country’s rapid economic growth. Ankara wants to buy natural gas from Kurdistan for power generation. Moreover, Turkey wants to consolidate Ceyhan as the oil port of the eastern Mediterranean. The port is already the end of the Iraq-Turkey Pipeline and the Baku-Tiblisi-Ceyhan pipeline. Ankara would like to see another oil pipeline – most likely to low-quality Kurdish heavy oil – reaching the port and, potentially, a natural gas pipeline from Kurdistan feeding an LNG plant. Ankara and Erbil even dream that the Iraqi Kurdistan could supply natural gas to the Nabucco pipeline.

The Kurdish boom towns. Erbil, the political capital of Iraqi Kurdistan, is entering an oil boom. The city of 1m people, which still lacks a good hospital, has seen the opening of its first luxury hotel – and another three are under construction. Oil executives fly in and out with airlines offering new routes each month. But while money is pouring in, the region has yet to develop services to benefit from it, importing everything from equipment to food. Costs are rising fast too. Housing prices are rocketing and salaries in the oil industry have doubled in the past five years. And with more than 40 companies elbowing for space in Erbil and the region, retaining competent staff is a problem. Local political commentators are already warning that the region – like others in Latin America, Africa and the Middle East – could see the blessing of oil turning into a curse.

This entry was posted on Saturday, November 19th, 2011 at 9:05 pm and is filed under Uncategorized.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

Comments are closed.

Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.