Three recent CS notes on Iraqi Kurdish Oil that were released in the last week below.
Released today:
Iraqi Kurdish Oil
Little appeal of TSCs
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Little appeal of TSCs – The trinity of strategic investment by Oil Majors in Iraqi
Kurdistan recently following XOM’s move in late 2011 with clear intentions to
expand further in the region was not surprising – the unfavourable operating
conditions in the South coupled with GOI’s reluctance to provide more
favourable terms for exploration (ie IOCs entered the South in the hope to bid
for more favourable contract terms for exploration in the future, which failed to
materialise as evident from the disappointing 4th licensing round) appear to have
triggered the move by several IOCs with exposure to the South to sign contracts
in the Northern region. Iraqi Kurdistan offers more internationally aligned fiscal
terms, which allows for reserve booking (ie a key driver of oil companies).
This now puts companies representing all five permanent members of the UN
Security Council in the North with the backing of the regional powerhouse
Turkey (eg bilateral energy agreement between Turkey/KRG). There appears to
be a willingness from oil companies to trim/risk losing exposure to the South (eg
Total’s Halfaya, GazpromNeft’s Badrah), and with that emphasises what we
have described previously as an unsuccessful oil policy in the South. Lessons
should be learned from TSCs globally, which struggle to attract relevant players
(eg Mexico). It seems that the GOI should work towards offering PSCs for
exploration to avoid further IOCs to move away from the South.
KRG to restart exports in August – The KRG announced late last week that it
would restart exports in August for a month and described it as a ‘goodwill
initiative’. If payments are forthcoming (ie settling outstanding payments,
committing to regular payments for exports, restoring the supply of refined
products to the KRG amongst others), export volumes would be increased to
200kbd from 100kbd. This conciliatory move comes at the time IOCs are signing
contracts in the North and the Turkish Energy Minister visited Kirkuk – a
disputed city – without the authorisation from the GOI (after the visit to Erbil).
Politically uncertain times in the region – The Iraqi PM reneged on the Erbil
agreement to share power with opposition parties. The Erbil power sharing
agreement ensured his position as PM in return for solving (a) territorial
disputes (eg referendum in Kirkuk) and (b) Oil and Gas matters (eg Oil and Gas
law). The current friction is also creating unprecedented Shiite disunity (eg
Sadrists) in Iraq, according to the International Crisis Group. With the ongoing
conflict in Syria, this makes the situation politically uncertain in the region.
Reuters reported that the Turkish Foreign Minister met with the head of al-
Iraqiya to discuss developments in Iraq and Syria.
Bottom line – We think the entry of the Oil Majors into Iraqi Kurdistan is a vote
of confidence for investments in the region and will likely help de-risk
development of the vast resources yet to be discovered. The intention for further
expansion by CVX and TOT should allow for further consolidation in the region.
Amongst our coverage universe with exposure to the region, we have a
preference for Genel Energy over DNO.
Companies Mentioned (Price as of 03 Aug 12)
Chevron Corp. (CVX, $111.12, OUTPERFORM, TP $120.00)
DNO ASA (DNO.OL, NKr8.62, UNDERPERFORM [V], TP NKr9.40)
ExxonMobil Corporation (XOM, $87.56, NEUTRAL, TP $85.00)
Gazprom Neft (SIBN.RTS, $4.80, NEUTRAL, TP $5.71)
Genel Energy plc (GENL.L, 676 p, OUTPERFORM, TP 1,180.00 p)
Statoil (STL.OL, NKr146.00, UNDERPERFORM, TP NKr158.00)
Total (TOTF.PA, Eu37.45, NEUTRAL, TP Eu44.50)
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Released last week:
Total enters Iraqi Kurdistan - 31 July 2012
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Total enters Iraqi Kurdistan – Total this afternoon announced a farm-in
agreement in two exploration blocks in Iraqi Kurdistan and follows XOM and
CVX as the third Oil Major into the region. Total will take a 35% working
interests in the Harir and Safen blocks from Marathon Oil and will be the
operator for the development phase of the Safen block. Marathon Oil will be the
operator of the Harir block and the exploration operator of the Safen block.
Work plant – A 2D seismic program on both blocks is ongoing and is expected
to be completed by the end of 3Q12. The first exploration well on the Harir block
spudded on 30 July 2012 with the main reservoir objectives in the Cretaceous,
Jurassic and Triassic formations. The first exploration well on the Safen block is
planned for the first half of 2013. No price/prospecitvity was provided by Total.
Looking for more – Total stated in the press release that it ‘is looking for new
opportunities’, while CVX stated at the recent 2Q12 conference call that ‘we
want to participate in their expansion’. This indicates to us that both Total and
CVX are looking to expand further their position in Iraqi Kurdistan. We have
discussed in a note published today (Recap of recent events) that Statoil
(recently exited from WQ-2 in the South) is looking to buy acreage in the region,
while MEES reported interest from Russian companies and TPIC from Turkey.
2nd Major with interests in the South – while CVX was pre-qualified to bid for
future licensing rounds in the South (now removed following its entry into Iraqi
Kurdistan), Total is the second Oil Major after XOM to enter Iraqi Kurdistan with
also an interest in the South. Total’s exposure to the South is via an interest in
the Halfaya TSC (CNPC/Petronas/Total), which recently started production.
The Halfaya project is far from attractive with a fee of $1.4/bbls only versus BP’s
Rumaila of $2.0/bbl and Eni’s Zubair of $2.0/bbl; in other words, Total has very
little to lose in the South and also did not participate in the 4th licencing round in
Iraq because of the unattractive fiscal terms. In addition, while the central
government is likely to take Total’s agreement in the North with displeasure,
there is not much the government can do other than banning Total from future
licensing rounds. Removing Total from Halfaya will have legal ramification and
was also not the path pursued vis-à-vis XOM’s interest in WQ-1, where XOM is
in advanced discussions with Rosneft to sell part or all of its stake in the project.
Bottom line – we view this as another vote of confidence for the region in the
North. Having three Oil Majors with the potential for at least one more to enter
the region and the eventual consolidation that is desired by the KRG will help
de-risk the development (and therefore the production capacity) of the vast
resource base yet to be discovered. Particularly, this is interesting for what it
means for the appeal of oil contracts and questions the investment case in the
South (eg the 4th bidding round was also a disappointment for the government).
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Iraqi Kurdish Oil
A recap of recent events - 31 July 2012
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Movements in Iraqi Kurdistan – CVX recently announced the acquisition of
two exploration PSCs (Rovi and Sarta) in Iraqi Kurdistan from Reliance; the
second US Major after XOM signed six exploration PSCs at the end of 2011.
This ties into KRG’s strategy of having larger and eventually a more
concentrated group of companies developing the vast resource base yet to be
discovered. Particularly, from IOC’s and KRG’s perspective, operatorship of
blocks by IOCs are desired and with this, we are not surprised that CVX did not
in this instance acquire GKP’s minority stake in the Akri Bijeel PSC.
CVX was quicker to announce this transaction and during the 2Q12 call, it
stated ‘we want to participate in their expansion’. This may indicate its intention
to expand further in Iraqi Kurdistan. CVX was the only Major that did not bid in
Iraq’s first licensing round as the terms were unattractive, particularly in the
context of its best in class unit profitability portfolio. We would not call it ‘herd’
mentality, though just like the 1st licensing round in Southern Iraq, the signing of
the Rumaila TSC by BP triggered a wave of entrants into the South. Total and
Statoil both expressed publicly their interest in Iraqi Kurdistan, while MEES also
reported interest from Russian oil companies and TPIC for acreage in the North.
TPIC, involved in exploration and oil trading, may indicate growing diplomatic
ties with Turkey following the recently signed bilaterial agreement between
Turkey/KRG. Interestingly, Hurriyet Daily (July 19th) reported Turkey is looking
to fast-track gas import permission with Turkish engineering firm Siyahkalem
asked to apply within 90 days for a licence to import KRG gas. In the absence of
infrastructure, the actual import itself will take some time, in our view.
Movements in Iraq – The unattractive terms (including delayed payments) and
challenging operating conditions in Iraq are prompting IOCs to reconsider their
position in the South. Statoil sold its stake in WQ-2 to Lukoil, while it is widely
reported that XOM is now in advanced discussions with Rosneft for all or part of
its stake in WQ-1. This may be part of the recently signed strategic alliance
between XOM/Rosneft with implications beyond the Arctic, but nevertheless
interesting to observe XOM’s intention to reduce exposure to the South.
The 4th licensing round recently held was disappointing for Iraq with Total and
BP stating both the geology and terms were not sufficiently attractive. Despite
the completion of the SPMs (not working at full design capacity) recently in
Basra, BP stated at the recent Rumaila presenation that exports could get tough
again next year. This clearly does not bode well for other Majors that do not
benefit as much as BP from the first mover advantage in Iraq. BP also stated
that it is looking at ‘other’ areas, but would not comment on Iraqi Kurdistan. We
don’t believe BP would move to the North given its large exposure in the South.
Bottom line – to state that the risks have been fully removed in the North is far
from sure at this stage; though at the very least recent events are visibly moving
in the right direction for Iraqi Kurdish Oil, in our view. An important event will be
the construction and completion of the 1mbd pipeline by late 2013. The easy
sanctions imposed by the central government on corporates (eg banning from
future licensing rounds) and the KRG (stopping oil product supply) have been
ineffective. The matter of KRG’s revenue share of the Iraqi budget is a much
more complex issue. In addition, Turkey has clearly moved in support of the
KRG – both for reasons of security and security of supply. |
