Importer & exporter Union of iraqi kurdistan region

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Kurdish exports to rise despite falling oil prices

Kurdish exports to rise despite falling oil prices

Despite falling prices of oil, Kurdish oil exports is expected to rise dramatically in 2015, oil producers and government officials told a conference in London on Wednesday.  

“We take a long term view on prices,” Ian MacDonald, a Chevron executive overseeing the region’s production told an industry audience of the Kurdistan Oil and Gas Conference. 

Although benchmark Brent oil prices have now fallen below $60 a barrel for the first time since mid 2009, the oil giant executive said that “prices haven’t affected our assets in the Kurdistan Region.”

Industry insiders credit the dramatic rise of American shale gas and a drop in global demand with the tumbling cost of crude. Cheap oil is good for consumers but can be catastrophic for oil producing nations that depend on hydrocarbon revenues. It also cuts into the profits of energy companies, many of which will scale back their investments as long as prices as are low. 

Mehmet Sepil, President of Anglo-Turkish Genel Energy, emphasizes that while many may scale back exploration, companies will continue to expand production in Kurdistan.

“When we are talking about producing assets, the Middle East has the fewest problems. The cost of producing the oil is much lower,” he said, echoing colleagues who put the costs in Kurdistan at a fraction of the cost of shale and offshore production.  

Kurdistan Regional Government (KRG) Energy Minister Ashti Hawrami put current production at 400,000 barrels per day (bpd), and Baz Karim, the president of the company that operates the region’s pipeline to Turkey, said that production could reach as much as 450,000bpd by the end of the year. 

Hawrami said that the region would reach 500,000 bpd in the first quarter of next year, and was “on track” to reach its goal of 1 million bpd by the end of next year, boasting that the region was already economically self-sufficient and would be a net contributor to Iraq’s budget in 2015. 

The Kurdish energy minister also expressed confidence that prices would bounce back.

“I believe this is another glitch,” he said. “I don’t believe it is a systematic problem, although it will take some time to recover.”

Iraq was hit hard by the price collapse, as it oil revenues contribute to 97% of the federal budget. Lawmakers had originally calculated next year’s budget assuming a global price of $70 per barrel, and experts believed even that price would have forced the war-torn country into deficit. 

Eager to increase national oil sales, Baghdad struck a deal with the KRG on oil exports.  Prime Minister Haider al-Abadi’s government agreed to release the Kurdish budget—which was withheld for almost all of 2014—in exchange for sending 250,000 bdp of Kurdish oil to the national marketing agency, SOMO. 

The deal also requires that the Kurds to work with the state-owned North Oil Company to deliver 300,000bpd from the disputed Kirkuk region to Turkey.  Kirkuk fields had been producing nowhere near their potential since militants damaged a pipeline to Turkey in March, costing the federal government $1.2 million per month in lost revenue according to the Iraqi energy ministry. 

While both Iraqi and Kurdish officials are tentatively pleased with the agreement, many details need to be worked out, including who will compensate the oil companies that have signed production sharing contracts with the KRG.  Some producers worry that low prices will further delay profits.  

“One of the interesting thing for us is what [the price drop] does to the expectation of payments to companies,” said Bijan Mossavar–Rahmani, executive chairman of Norwegian firm DNO. “That’s where the price matter issues most.”

Hawrami conceded that currently there is nothing in either the federal government budget or in the Kurdish budget earmarked for paying the oil producers, and that this would have to be negotiated in a second phase of talks with the federal government. 

He offered some hope to companies, however. Under the agreement, an estimated 50,000bpd of exported Kurdish oil would not have to be handed over to SOMO.

“Any surplus oil that can be sold will be used for paying producers,” Hawrami suggested.

Whether this happens in practice—and whether these revenues will be sufficient to cover producer costs—will become clear in 2015 when the Kurdistan Regional Government begins to send federal oil to Turkey.

 

 RUDAW


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