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Kurdistan Proves Unstable Start as Emerging Oil Producer After WesternZagros Revises Oil Reserves

Genel’s downgrade followed new data showing that the rocks couldn’t hold as much crude as expected.


Genel’s downgrade followed new data showing that the rocks couldn’t hold as much crude as expected. Yet oil and gas basins commonly display variations in distribution, and Taq Taq’s problems aren’t replicated throughout Kurdistan, according to Michael Knights, an analyst at the Washington Institute.

“The Taq Taq downgrade is clearly a blow but they’re increasing oil production in other places that will offset a lot of the declines,” Knights said in an interview, citing the forthcoming start of Abu Dhabi National Energy Co.’s Atrush field. Consultant Rystad Energy AS expects Kurdish oil production to increase more than 10 percent this year to 602,000 barrels a day.

At the start of the year, the region’s future looked brighter. Oil prices had partially recovered, the local government was paying producers more regularly, and the military campaign to chase Islamic State from Mosul was progressing.

Then on March 28, Genel made its announcement. Taq Taq, which had pumped more than 115,000 barrels a day in 2015, was now producing just 19,000. The shares sank as much as 25 percent that morning.

By this point, WesternZagros had already responded to mounting shareholder concern and media reports questioning the region’s prospects, explaining the geological differences between its field and Genel’s deposit, while also stressing Kurdistan’s enduring potential.

Indeed, no other Kurdish field has been downgraded on the magnitude of Taq Taq, according to Lynn Morris-Akinyemi, an analyst at Wood Mackenzie Ltd. “We can’t write off Kurdistan just on one field,” she said in an interview. “We need to see a clear pattern of this happening.”

In 2015, Iraqi Kurdistan said it targeted production of 1 million barrels a day. To lure the necessary investments to reach that goal, it has embarked on an audit of all oil and gas operations, Deputy Prime Minister Qubad Talabani said in December. Findings are yet to be published, and Amanj Raheem, the legal adviser overseeing the audit, didn’t respond to requests for comment. The Kurdish Ministry of Natural Resources declined to comment.

Aside from the Atrush field, which is due to come on stream this quarter, companies including WesternZagros and NewAge Ltd. expect to boost production this year. They benefit from low operating costs in Kurdistan, typically about $4 a barrel in 2016 compared with $16 in the U.K. North Sea, Wood Mackenzie estimates.

The region initially attracted oil majors including Exxon Mobil Corp., but disputes between the regional and federal governments have kept most big oil companies away and prompted some investors to pull back. Exxon has relinquished three of its six exploration blocks, the Iraq Oil Report said in December.

Blocks on Offer

The Kurdistan Regional Government’s plan to make 20 more oil blocks available this year will test the region’s ability to lure more investors.

“We’re certainly looking” at these blocks, Steve Lowden, CEO of closely held NewAge, said in an interview. Gulf Keystone Petroleum Ltd., another producer in Kurdistan, and WesternZagros both said they plan to focus on current assets.

Genel, which says its Taq Taq deposit has pumped 206 million barrels of oil since starting output in 2008, also owns a 25 percent stake in DNO’s Tawke field, yet it’s looking to natural gas for growth. The company plans to export Iraqi gas to neighboring Turkey, CEO Murat Ozgul said in an interview.

Nevertheless, oil will continue to dominate in Kurdistan, according to Rystad analyst Espen Erlingsen, who said “long-term” output could reach about 800,000 barrels a day.

Iraq holds the world’s fifth-largest proven oil reserves, according to BP Plc, and is the No. 2 producer in the Organization of Petroleum Exporting Countries, after Saudi Arabia. Kurdistan’s mixed success makes it no different from any other emerging oil province, according to WesternZagros’s Hatfield.

“The KRG has a similar history as any part of the world: part of an OPEC country opens up for exploration, everyone floods there, everyone is really excited,” Hatfield said. “They drill a bunch of wells, some of them are successes, some disappointments, that’s normal.” Source: Bloomberg 

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