Iraqi Kurdish Oil
CS Comment
Infrastructure plans clarified
Event: Genel stated late last week that the KICE pipeline is no longer planned
as it is superseded by a separate 1mbd pipeline to be built by August 2013
linking Iraqi Kurdish oil fields with exports markets in Turkey and beyond; a
pipeline to be owned by the KRG and likely constructed by Turkish firms (eg
Calik). This should not come as a surprise following the announcement by the
KRG in late May regarding the bilateral agreement between the KRG/ Turkey.
Progress above the ground: shares of Iraqi Kurdish oil companies have seen
a rather muted reaction to what is, in our view, a significant event; previously
largely unexpected for Turkey to pursue. Why is this progress? Firstly,Turkey
has now moved strongly in support of the KRG and will pay for 'Iraqi Oil' directly
to the KRG rather than SOMO. Secondly, infrastructure will now be built vs
current reliance on (unreliability of) Iraqi infrastructure or limited trucking
capacity. Thirdly, Iraqi leverage over IOCs is diminishing with IOCs moving out
of the South and moving into the North (eg a/c to upstreamonline, XOM is now
in discussions with Rosneft to farm-out part of WQ-1; Statoil exited the South
and it and Total are mulling entry into the North). We also think the backing of
Turkey should encourage more IOCs to enter Iraqi Kurdistan.
Pipeline in detail: the first phase includes a pipeline from Taq Taq to Khurmula,
which is progressing well and is expected to complete in October 2012. A 1mbd
pipeline from Khurmula to Fishkabur (Turkish border) will then be build by late
2013 and will tie into the Kirkuk-Ceyhan pipeline, but with payments to be
managed by the KRG, not SOMO. Meanwhile, Botas is refurbishing the second
line of the Kirkuk-Ceyhan pipeline in Turkey for the anticipated ramp-up in
export from Iraqi Kurdistan. It is important to highlight that it will be 'Iraqi oil' and
therefore as per constitution (and thus a federal state) the central govt will
received 83% of this revenue. There is also amongst other a separate pipeline
(1mbd) planned directly from Iraqi Kurdistan to Turkey and with a completion
date in January 2014, though details at this stage remain patchy.
Interim payment: the national budget remains under the control of the central
government. The KRG is entitled to 17% of Iraqi revenue generation (closer to
11% after some deductions) as per the constitution. This is material to the KRG
and with that timely delivery of pipeline projects as well as field development is
important. The central govt following the infrastructure announcement
responded by halting deliveries of oil product to the KRG and it will most
certainly monitor closely any territorial moves by the KRG into disputed areas, in
our view. The KRG will now barter crude for oil products from Turkey, which is
likely to increase domestic prices to >$80/bbl on ~$100/bbl Brent on a netback
basis (with some discounts likely offered) from $60/bbl (we expect this to
happen in August with trucking capacity at Taq Taq capped at 90kbd). This and
the actual payment to oil companies will be an important event, in our view.
Turkey's perspective: the bilateral agreement was not well received by the
Iraqi central govt. Equally, Iran and Russia, which are the two key oil and gas
suppliers to Turkey will be closely monitoring the situation, in our view. Turkey
via Iraqi Kurdistan (for that matter Iraq) can diversify its energy needs, but this
step is probably also taken from a security (PKK) and political (growing tension
over Syria and Southern Iraq) perspective. This will also bring economic
advantages with Iraqi Kurdistan already an important trading partner, but also
making Turkey via the implementation of these bilateral agreements an
increasingly important transit hub for oil and gas.
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