CS RESEARCH - Iraqi Kurdish oil in play - Eventful weeks - past and ahead - Thomas Adolff
Event – Iraqi Kurdistan and Turkey announced last week bilateral energy plans, involving oil, gas and downstream
plans that rely on Turkey, not Baghdad. This also includes (a) a separate and direct pipeline to the port of Ceyhan, for
which Calik applied for a license, and (b) a possibility to barter crude for products in the near-term. This update
appears to be months in the making and follows the decree passed by the Turkish Council of Ministers in November
2011, which would allow for direct imports of oil and oil products once licenses are granted from Iraqi Kurdistan and
bypassing payment to SOMO. The rationale is straight forward; as Iraqi Kurdistan is increasing its production capacity
with now the backing from relevant IOCs and the fact that Iran is becoming a more problematic source of energy
supply for Turkey with tighter sanctions, the rapidly growing Turkish economy needs a reliable source of energy.
Significant FDI into Iraqi Kurdistan by Turkish companies is also evident of the growing economic integration between
the two.
While Turkey stated that it will take into account the views of the federal Iraqi government, it appears to us that the
relationship is deteriorating between Ankara and Baghdad. The KRG was, however, clear in stating that it would be
‘Iraqi oil’ and that the central government would be entitled to its share. The wording, however, points to a change in
the path of the payment. SOMO failed to pay as it views PSCs signed by the KRG as unconstitutional. This bilateral
energy plan is likely to force the federal government to the table on matters related to ‘Oil and Gas’ and ‘Territorial
disputes’.
Exodus in the South? The first licensing round in Iraq in 2009 followed a ‘herd’ mentality after BP signed the Rumaila
TSC. Iraq has since failed to create an ideal operating environment unlike in Iraqi Kurdistan. Recently, we have started
to see some exodus, and possibly the 4th licensing round in Iraq on 30th-31st May may provide further signals. Statoil
is exiting the WQ-2 project and has withdrawn from the 4th licensing round, for which it was pre-qualified, while we
view Total (and possibly TPAO) as unlikely to bid. XOM is not pre-qualified since its move to sign contracts with the
KRG, though maintains its stake in WQ-1. Meanwhile, a small Chinese company also withdrew from the process.
The failure to attract relevant IOCs and further exodus of relevant IOCs will impact longer-term production growth in
Iraq. Particularly, the Common Seawater project is an important project longer term and XOM no longer leads this
project. We look to (a) the fees offered in the 4th licensing round, whether Baghdad may be forced to offer better terms
for ‘exploration risk’ and (b) the quality of IOCs/NOCs winning the bids. It is not about resources, but about fiscal terms
as was indicated by Statoil and the withdrawal of Statoil is indicative.
Herd mentality to the North? XOM signed 6 PSCs, both Total and Statoil have said they are mulling opportunities in
Iraqi Kurdistan. This is interesting for what it means for the appeal of oil contracts in the South and is undermining the
historical position of the first two rounds – that IOCs would accept unattractive TSCs for the right to bid in the future on
more attractive terms – and questioning the investment case in the South. Regarding Iraqi Kurdish exposed oil
companies, we would argue that unlike in recent years, we can see the light at the end of the tunnel. Genel (O/P,
TP1,180p), backed by its Turkish alliance, is our preferred way to play this.
Note published 28th May 2012 |
