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Gloom falls on Kurdish oil

Iraq’s autonomous northern province had bold energy plans, but mounting debts, conflict and subterranean trouble are taking their toll

FOR the Kurdish region of northern Iraq the energy honeymoon is over – at least for now. A slump in oil revenue resulting from depressed global prices is just one negative factor among a slew of problems facing the Kurdish Regional Government (KRG).

One of the key concerns for Iraqi Kurds is the degree to which it relies on a single oil-export route: the Iraq Turkey Pipeline (ITP) to Ceyhan on the Mediterranean coast. From 17 February until 11 March the ITP was closed, denying the KRG revenue from the 0.6m barrels a day of oil that would normally have been flowing through it. During the entire month of March, Kurdish oil exports averaged only around 327,000 b/d.

The ITP was shut on the orders of the Turkish military as the army began an operation against the militant Kurdish separatist group the Kurdistan Workers’ Party (PKK) close to the pipeline in Sirnak province. To the intense frustration of the KRG it remained closed for three weeks as troops completed their mission and mines were cleared from the area.

The Kurdish region’s oil reserves are much smaller than had originally been assumed


Now that the Turkish military and the PKK are at war again, the chances of more disruptions to exports cannot be ruled out, especially as the Kurdish separatists are thought to be preparing for a new offensive against the army before the summer. Furthermore, Turkish military commanders in the east of the country, who have never been convinced of the wisdom of helping Iraqi Kurds export their oil, are the people who will decide on the fate of the pipeline, rather than the government. The authorities in Ankara are preoccupied with a range of other matters - including taking a harder line against Islamic State (IS) - meaning that affairs relating to oil exports from northern Iraq have slipped down their list of priorities.

The capacity of the ITP is estimated at 0.7m b/d. But security issues aside it is unlikely to be operating at this level in the immediate future.

This is partly because fiscal constraints imposed on the KRG by low oil prices mean that international oil companies have been forced to curtail exploration and development programmes. Just two rigs are now operating in Kurdish Iraq, compared with more than 25 two years ago. The economic crisis has directly affected oil output. Production at the Taq Taq field operated by Genel Energy fell from 185,000 b/d in mid-2015 to 83,500 b/d in January, while output from DNO’s Tawke field averaged just over 120,00 b/d in January, down from 150,000 b/d in November. At the same time, financial constraints are preventing Gulf Keystone Petroleum from investing in the Shaikan field to raise capacity above 35,000 b/d.

That is not to imply that the KRG’s production capacity will remain at 0.65m b/d, even if the region’s declared aim of reaching 1m b/d by end-2016 (the original target was end-2015) now seems beyond reach. New production from the Atrush field, operated by the Abu Dhabi National Energy Company, towards the end of this year, another 20,000 b/d from Tawke and similar volumes from some other smaller producers will lift output. Production capacity will continue to rise, but less quickly than before.

Limiting promises

While the cash shortage may be simply a short-term constraint until oil prices recover, a more worrying longer-term concern has surfaced. The Kurdish region’s oil reserves are much smaller than had originally been assumed, with drilling encountering much more water than had been predicted. Genel and DNO were the latest companies to downgrade their reserves – Genel by 48% – in the footsteps of Mol, Afren and Gulf Keystone Petroleum. The result is that P1/P2 reserves in the Kurdish region have fallen from the 45bn barrels claimed by the KRG in the boom years up to 2013 to something closer to 6bn today.

Broken relations

Compounding the KRG’s energy problems is the breakdown in cooperation between Erbil and Baghdad. In June 2014, as the Islamic State terror group seized large areas of territory, the KRG took control of Kirkuk.

It then forced the federal Northern Oil Company (NOC) to hand over the management of the Avana Dome of the Kirkuk field and the Bai Hassan field with total production capacity of 300,000 b/d which is exported through the ITP. Until March this year the KRG benefited from around 150,000 b/d produced by NOC from the Baba Dome at Kirkuk, and from Jumboor and Khabaz fields.

The oil was added to the flow to Ceyhan, but the federal government received no revenue at all.

In mid-March the Baghdad authorities called time on this, and ordered NOC not to supply the ITP any more. The KRG has been left with the awkward problem of placating customers who had bought NOC crude in forward contracts.

At present there also seems little hope of a December 2014 agreement between Baghdad and Erbil to pool exports at Ceyhan and for the KRG to receive 17% of oil revenue accruing to the federal government.

Former premier Nouri al-Maliki cut payments to the KRG, and the Haider al-Ababi administration, facing its own financial crisis, was not able to honour in full its financial commitments to Erbil.

Since June 2015 the KRG has been exporting oil independently of the federal government. But a combination of low global oil prices, stagnant oil production and ongoing problems with the ITP have meant that revenue has fallen well short of expenditures.

Despite the gradual introduction of fiscal reforms the KRG is running a deficit of more than $100bn each month, leaving civil servants awaiting back pay and threatening social unrest.

Also owed millions of dollars are the IOCs operating in the Kurdish region. For now, the major players say they have no plans to quit the area. But shareholder pressure is growing, and Gulf Keystone said in March there was "significant doubt" about its survival.

Against the background of all these problems the KRG will need to think long and hard before deciding how best to balance its relationship with Ankara on the one side and Baghdad on the other.

One thing is certain: the KRG cannot survive without Turkey’s good will. It may decide, too, that its longer-term security is best served by cooperating with the federal government in Baghdad, even if it means a drop in export volumes and revenue. In this post-honeymoon era none of the options seems perfect.

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