Kurdish old hands buffeted again
KRG producers face both global and local headwinds to their expansion plans. At least it’s not their first time round the block
Three of the longest-standing international oil producers in Iraq’s semi-autonomous Kurdish north are facing challenges arising from global market conditions, but also local difficulties too. Just like in 2014, it is a combination of physical issues with moving their product—six years ago in the form of invasion by so-called Islamic State—and a dramatic slump in global oil prices.
Then as now, cheaper crude hit the firms not only directly but also through corollary delays in receiving reimbursement from the Kurdistan Regional Government (KRG), which is heavily dependent on oil revenues for financial health. Companies active in Kurdistan have reacted by hastily slashing capex guidance and pausing field development.
DNO rows back
Norway’s DNO, the territory’s largest producer by dint of a 75pc operating stake in the prolific Tawke licence in the north-west, announced in mid-March a 30pc, or $300mn, cut in its 2020 budget and cancellation of its dividend for the first half of 2020 on account of “plunging oil prices triggered by the coronavirus pandemic”.
Locally, the global price sfall was being compounded by “interruptions and delays” to monthly payments from the KRG, DNO lamented. It had, at the time, not received a disbursement since January, for exports of Tawke oil as far back as September.
Erbil is aware it can ill-afford to squander the veteran trio's trust
DNO’s exploration, appraisal and development drilling campaign has been radically scaled-back–and resumption of investment necessary to grow or “even maintain” production levels made explicitly contingent on a return to regular and timely remuneration. The threat is not an idle one.
The KRG is aware that a reputation as a reliable payer was hard-won. DNO held back on major capital spending for several years in the middle of the 2010s on account first of non-payment and then while it gained confidence in the government's commitment to regular, timely reimbursement.
London-listed Gulf Keystone Petroleum (GKP) came close to collapse during the previous downturn, surviving only by radical balance-sheet restructuring. Its 80pc interest in the prolific Shaikhan field, also in the north-west, means it is smaller and more Kurdistan-exposed than its peers.
Having posted a maiden profit in 2017, GKP continued to tarry with a planned increase in Shaikhan’s 40,000 bl/d capacity to 55,000 bl/d pending an agreement with the KRG on a revised production-sharing contract. It finally bowed to investor frustration and launched the expansion in June 2018 on the back of rising oil prices, regular payments and the onset of natural decline at the field.
GKP may now be rueing the delay. In mid-March, the firm suspended the project, which had been set for third quarter completion, initially on the grounds of coronavirus-related operational obstacles.
But a late March update expanded on the “economic backdrop compounded by a delay in payments” meaning a pause in all expansion activity. No mention was made of progressing to subsequent development phases–due to raise production to 110,000 bl/d.
The echoes of the firm’s mid-decade travail are ominous. But GKP is at least able to offer the reassurance of a $154mn cash balance and no debt maturing before 2023.
Anglo-Turkish Genel Energy’s brush with 2010s financial meltdown came later than GKP’s. And it was driven less by external events but by two 2016-17 reserves downgrades iat the once-flagship Taq Taq field in central Kurdistan. It once yielded more than 100,000bl/d but, by last year, averaged a mere 11,960 bl/d—leaving a 25pc stake in Tawke as the firm’s most valuable asset.
Genel also issued a downbeat statement in mid-March—confirming an investment pause at Tawke, deeming Taq Taq currently unworthy of capital allocation, and delaying drilling at the Qara Dagh exploration licence in the south-east, while also bemoaning the renewed payment delays. The company’s oft-repeated refrain that it remains profitable at $30/bl oil has lost its reassuring ring.
Erbil is aware it can ill-afford to squander the veteran trio's trust. All three reported early April receipt of payments—albeit only for October's exports. The KRG-for whom crude sales account for over 90pc of state income-is may struggle to maintain reimbursement while continuing to pay high, possibly excessive, running costs, such as civil servant pay.
The authority also faces a potential new Baghdad government less sympathetic, and in a far-worse financial position, than the outgoing administration of prime minister Adel Abdul Mahdi. He had allowed Erbil to continue receiving monthly budgetary allocations in 2019 despite the latter's failure to adhere to an agreement to transfer in return 250,000 bl/d of the territory’s oil for sale on the federal government’s behalf. His as yet unknown successor may not be so accommodating.