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Hopeful Kurdish oil battles challenges in Iraq

Financial and political troubles are delaying the expansion of KRG oil production

A perfect storm of financial, political and security challenges is battering the Kurdish Regional Government (KRG) in northern Iraq, forcing its energy sector to hunker down. The region has stopped receiving government resources and, is funding a military campaign against Islamic State (IS) while caring for 1.8 million refugees and displaced people. Independent oil exports, deemed to be illegal by the federal government, began in June (see table). Although direct sales are bringing in more than was received from Baghdad in 1H 2015, they are still not covering the costs.

Oil production is currently in the range of 650,000-700,000 barrels per day (b/d). KRG’s Natural Resources Minister Ashti Hawrami told the Kurdistan-Iraq Oil and Gas Conference in London in early December that the region “would have reached 1m b/d by now, but we are one year behind schedule due to the IS fight and the stopping of payments by Baghdad. But we will reach this figure by the end of 2016.”

Achieving this goal may not be easy. The IOCs operating in the Kurdish region are feeling the effects of delayed payments from the KRG, with all development expenditure on hold and workforces reduced. Output from two major fields, Taq Taq and Tawke, has declined over recent months. 

The government in Irbil is paying what it can when it can. This, DNO Executive Chairman Bijan Mossavar-Rahmani said, is not sustainable: “IOCs require regular payments to cover costs of exploration and development. We need sustained payments, not surprise payments.”

According to Gulf Keystone CEO Jon Ferrier, “because of the payments problem we can’t take things any further. It’s very frustrating, we are on a financial knife-edge.” On 30 November the KRG paid out $75m to IOCs – the third monthly payment in a row. But millions of dollars are still outstanding: Gulf Keystone alone is owed $280m.

The road to independence

The KRG’s unspoken message is that the strategy of pushing ahead with oil exports that are independent of the federal government and its marketing arm, SOMO, will continue. The 2016 federal budget, like the current one, stipulates that the Kurdish region will receive 17% of state revenue in return for SOMO handling the region’s oil exports. But Kurdish representatives are not taking the pledge at face value. “If the 2016 budget for the KRG exists only on paper, as in 2015, then we have to go on with direct oil sales.”

A further step down the road of energy independence will be taken when the KRG exploits its very considerable reserves of natural gas. Saad Sadollah, Commercial and Business Adviser at the Ministry of Natural Resources, estimates the region’s gas reserves at around 100 trillion cubic feet (cf), but says the real figure could be double that.

The target is to produce not only a sufficient volume to feed all power stations in the Kurdish region but also to enable the export of gas to Turkey. An inter-governmental gas sales agreement was signed in 2013 under which the KRG will supply Turkey with 10bn cubic metres (cm) by 2020, with an option to increase the volume thereafter.

The initial focus of gas sector development is on the Miran and Bina Bawi fields operated by Genel Energy. The fields contain 11.4 trillion cf of raw gas and 8.4 trillion cf of sales gas. Once the Kurdish region’s demands (300-500m cf/d) are met, gas will be exported. The operator will deliver 1,200m cf/d to the KRG on a take-or-pay basis, and will also be responsible for the gas treatment facilities, receiving a tolling fee from the government. It is also leading on an EPC tender and securing equity and debt financing. Genel is targeting final investment decision in the second half of 2016, with sales gas production from Miran and Bina Bawi starting in 2019.

Saad Sadollah acknowledges that challenges remain – not least that of establishing the sector from a standing start at a time of severe fiscal constraint. 

Also much of the natural gas in the KRG region has a high percentage of H2S and CO2, which “requires costly solutions.”

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