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To: Dennis Roth who wrote (172353)	12/4/2012 11:44:13 AM
From: Dennis Roth	1 Recommendation Read Replies (1) \| Respond to of 206104

CS Comment on Iraq and Iraqi Kurdish Oil 04 December 2012, 6 pages, 4 figures Report file download at the bottom of this page sendspace.com A recap of recent events Payment received from the first tranche – Genel announced yesterday that it received $132m for Taq Taq’s and Tawke’s historic export revenues, which will be booked in 4Q12. This combined with 1H12 revenues take it to just over $250m of revenue for 2012 (in line with CSe); at the bottom end of its guidance range. It is unclear how much is currently being exported (payments in quarterly arrears) and whether production is now being redirected to domestic sales. Exports widely reported to be cut – the press widely reported that exports from Iraqi Kurdistan have fallen sharply in recent weeks amid renewed dispute with the central government. This is not surprising and is in line with our expectation given the failure of many past agreements. In other words, the commitment to also export 250kbd from Iraqi Kurdish fields in 2013 look less likely, in our view, and sustainable export volumes may only occur once the KRG builds its own 1mbd pipeline targeted for completion in 1H14. This pipeline matters as the payment unreliability should be removed as ‘Iraqi Oil’ would then be managed by the KRG, not SOMO, though as per constitution the central government will be entitled to its share of revenue. This has no implications to our estimate for Genel. Since the company plans to operate on a cash flow neutral basis, we had already reflected a more conservative estimate to the full field development of Miran/Bina Bawi, which form a large part of its 2013 capex. This aside, we assume higher domestic sales y/y in 2013 as the domestic refining capacity is being expanded. Implication for the region – tensions have recently risen between the North and the South. Military clashes have eased since the Nov 16th clash at Tuz Khurmatu, but the oil dispute continues. The influx of oil companies to the North and the disappointing 4th bid round should give the central government a reason to sit down and hammer out a more sustainable agreement with the North. The exodus of oil companies from the South in itself will have implications for the outlook for production from the South. This is because it is unclear which technically and financially capable companies remain in the south, particularly for WQ-1 – a project previously expected to provide the largest increments to production growth over the medium term. While Rumaila should contribute y/y (up to 100kbd growth) in 2013, Majnoon suffers from delayed pipeline completion, while the development is also complicated by unexploded ordnance in the area. Kirkuk will be in decline, while Zubair should deliver some growth in 2013, though nothing to get excited about. Other bottlenecks – While 2012 saw decent export growth from the South (200-300kbd y/y) benefiting form the start-up of two new SPMs easing export bottlenecks, there remain three links that will hamper exports along the supply chain – (a) network of pipelines, (b) storage facilities, and (c) pumping stations that provide the connection between the fields and the main export depot at Fao, the available pumping and storage capacity at Fao and the offshore export facilities for loading tankers. It is unsurprising, thus, to see the Oil Ministry reviewing production plateaus for the existing TSCs signed in 2009. Making room for quality – until recently, most KRG acreage with the exception of certain border blocks and minor government stakes were taken. In the last couple of months, we have seen a number of smaller companies relinquish blocks, which should allow for further license awards. In terms of entry, while we still await STL to make its move, UAE’s Taqa is entering via the Atrush block, while a Turkish state firm is widely reported to be looking at five blocks. In essence, we continue to see the quality of companies in the North improving and this trend is unlikely to reverse, in our view. We maintain our longer-term positive stance on Iraqi Kurdistan. We prefer Genel over DNO.