[ February 2010 ]

Kurdistan Oil Exports

Will the trickle become a torrent?

On June 1st, Iraq's Ministry of Oil lifted its ban on the export of oil produced in the Kurdistan region, approving oil from the Taq Taq and Tawke fields to be sent via pipeline to the Turkish port of Ceyhan. In advance of the national licensing round for eight producing oil fields and two undeveloped gas fields slated to close by June 30th, optimists welcome this thaw in the political impasse between the Kurdistan Regional Government (KRG) and government of Iraq (GOI) which has hamstrung development in the all-important oil sector. Additionally, Heritage Oil recently announced a major discovery in the Kurdistan region — as many as 4.2 billion barrels — at its Miran West field. But with Kurdistan production sharing contracts (PSCs) still in dispute and a raft of national oil legislation still awaiting passage, many potential obstacles remain to oil sector development in the Kurdistan region.

  • Expert 1: Advisor to the KRG President on political and economic affairs

    "Why did Maliki decide to give in on the export issue? This is basically a battle that he had to let go. He is looking to 2010 and seeing that the Kurds are going to be important for an alliance. What we may be seeing is a case of giving up this battle in order to win the war."

  • Expert 2: Former advisor to the Iraqi Ministries of Oil and Finance and the Office of Prime Minister

    "Low oil prices and continuing failure to increase production has made the possibility of a financial crisis for Iraq increasingly likely. Therefore the GOI has begun to take steps to allow exports from KRG-awarded PSCs while continuing to call them ‘illegal’. Exports have already begun with sales being handled by SOMO [the state oil marketer]. All proceeds are paid directly to the DFI [Development Fund for Iraq] which is controlled by the Central Bank of Iraq. The revenue split between Baghdad and the KRG is agreed at 83-17. However, the main unanswered question is how the companies get paid. Baghdad insists the Kurds must pay the international oil companies (IOCs) out of their 17%. However, for the Kurds this is not sustainable"

  • Expert 3: Senior executive of a leading oilfield services firm operating in Iraq

    "This decision does not represent any greater cooperation between the KRG and central government. The central government has said they won’t pay the producing companies. Are the Kurds really going to take from their 17% and share with these companies? They might…but who knows?"

  • Expert 4: Leading scholar on post-war Iraqi economy

    "[The president] emphasized that the growth of the country is related to what the infrastructure can offer…Now the softer development ministries are headed by key players in the government. If you analyze that, you’ll realize the credibility and importance being given to development to make sure we maintain a growth of at least 7% in this economic slowdown."

  • Expert 5: Petroleum geologist at a major Iraqi University

    "The government is coming closer to resolving the oil issue. Yes, the budget crisis is a motivating factor, but you should also remember the public sentiment. People are getting annoyed at the delay, at the inability of the government to have a positive effect. I expect that the security referendum will pass, and of course the recent Miran field discovery has made larger companies more interested in Kurdistan, but it is not yet enough – they are waiting to see who is going to win that arm wrestling match between the Kurdistan government and the central government."

Ergo's House View

Ergo, through numerous projects on the oil and gas and oilfield services sectors in Iraq, has deep insights into these complex opportunities. Although the decision to allow exports from the Kurdistan region is a positive step for the industry, significant hurdles remain to achieving broader cooperation between the central government and the KRG. Baghdad's unwillingness — and the KRG's inability to pay — IOCs could hamper the sector's development. DNO and Addax — the companies whose fields have been authorized to export — were the first to sign PSCs, before the first draft of the national oil law was issued. Although not approved by Baghdad, these contracts are viewed as less objectionable than subsequent PSCs, which are expected to encounter even greater difficulty winning approval from the Ministry of Oil (approximately 20 publicly traded firms currently participate in PSCs).

The prospects for the oil and gas sector in the Kurdistan region are very promising, but will suffer significantly if money is not available to pay the IOCs for developing the fields. The Ministry of Oil is attempting to assert authority over this critical sector, but will need to avoid sending negative signals to foreign firms, particularly in advance of the first licensing round at the end of this month. Despite ongoing impasses, several of our clients are exploring investment opportunities in the oil sector and are conducting due diligence on local firms and management to be best positioned to quickly take advantage of positive future developments.