Iraqi Kurdish Oil
CS Comment - 20 March 2013
Recap of recents events
Speaking on the tape – according to Reuters, the KRG Energy Minister said ‘a
gas pipeline now being laid can be converted to ship up to 300kbd of crude by
June’. This is the first time we have heard the Minister go live with this, and this
could possibly be interpreted as good progress being made towards the full
implementation of the May 2012 accord between KRG/Turkey in 1H13.
This is a 36-inch gas pipeline (with our current base case of a dual oil pipe to be
laid by 1H14) from Chemchemal to Dohuk, which is almost complete. It is
another 40-50km to Fishkabur, and we previously stated that there is a potential
for this pipeline to be converted into a crude pipe. Depending on the pumps, a
36-inch pipe should accommodate for 0.8-1.0mbd capacity.
We view the 300kbd of potential exports by June as linked to the current
production capacity in Iraqi Kurdistan. We believe there is production capacity in
the range of 350-400kbd currently in Iraqi Kurdistan, and when adjusting for
local refinery supply agreements, there is the potential for 300kbd of exports.
To be clear, this will be ‘Iraqi oil’ with 83% of the revenues going to the central
government as is laid out in the constitution. Most of the revenue (>90%) in Iraq
is created through crude exports, and the KRG is entitled to 17% of this (prior to
any reductions). When adjusting for reductions, the export capacity in Iraqi
Kurdistan amounts close to its entitlement of overall Iraqi export revenues.
Greater provincial autonomy – a number of provinces are working towards
greater autonomy as part of a federal state versus the current form of a rather
centralised version. The Wasit province – a largely Shia dominated province –
in Southern Iraq is now adopting the same interpretation of the constitution as
the KRG. The Wasit province has a number of TSCs, including the Badrah and
Ahdab fields signed with the federal government.
The constitution states that the federal government has primary authority over
‘Existing’ fields, while ‘New fields’ or prospective resources (exploration) fall into
the purview of the regions. With this interpretation, the Wasit province has
signed a PSC with an oil company. The provincial government itself is a joint
venture partner in the PSC. Approval to bring in seismic equipment should be
viewed as a catalyst in this instance. A number of provinces, including Basrah,
have been frustrated by the inefficient centralised approach and have called for
greater autonomy, whilst being part of a federal state.
Convergence in fiscal terms? Following recent moves by IOCs (ie leaving the
South for the North), there appears to be a greater push from the remaining
IOCs for better terms on the existing TSCs. To avoid further exodus of
technically capable IOCs, there is a chance that the federal government may
agree to better terms, which we would view as a convergence to what we see in
the North, adjusted for geological risks. It is probably also relevant to point out
that renegotiations do little to accelerate production in the short-term.
Stock call – our preferred way to gain exposure to Iraqi Kurdistan is Genel.
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Finding Iraq’s Economic Miracle
By the Editors Mar 19, 2013 6:52 PM ET
bloomberg.com
For many in the U.S., the 10th anniversary of the invasion of Iraq has been an occasion for settling scores and playing “what-if” games with history. Iraqis don’t have that luxury -- as evidenced by the day’s wave of bombings and assassinations that left at least 50 dead.
For Iraq, this anniversary underscores the need for Prime Minister Nouri al-Maliki and his government to find a new sense of responsibility and engagement. Otherwise, the country’s future may be as dark as its recent past.
The latest political crisis in Baghdad stems from the resignation of Finance Minister Rafi al-Issawi at a March 1 rally of fellow members of Iraq’s Sunni minority. They were protesting what they view as efforts by Maliki, a Shiite, to trample their rights.
Many Iraqis think Maliki’s strong-arm moves in recent months -- detaining thousands of Sunnis on terrorism-related charges, arresting Issawi’s bodyguards in December and forcing through a 2013 budget that shortchanged Iraq’s semi-autonomous Kurdish region on oil revenue -- were designed to consolidate his support among Shiite hardliners. If so, the strategy doesn’t seem to have worked: The charismatic Shiite cleric Moqtada al- Sadr has begun holding his own anti-government rallies. The favorite guessing game in Baghdad these days is whether Sadr will join with the pan-sectarian Iraqiya Bloc to try to force Maliki from power now, or bide his time until next year’s parliamentary elections.
Market’s Influence
Can anything compel Maliki to forge an accommodation with Sunnis, his Shiite rivals and the increasingly independent Kurds? Certainly not the U.S., which despite giving billions of dollars in aid ($57 billion from 2003 to 2012, and about $2 billion this year) has virtually no influence in the country it tried to remake.
It’s possible, however, that market forces have a shot. Maliki’s government is sustained by oil-fed graft -- Iraq surpassed Iran as the Organization of Petroleum Exporting Countries’ second-largest exporter last year. If the flow of oil revenue dries up, so will the government’s political support. Thus it may be good news that when the government took bids on a fourth round of oil licenses last year, none of the major Western companies bothered to show up.
There are many reasons for this: corruption, political instability, bureaucratic hassles and the failure of the government to rebuild its crumbling pipelines and storage facilities, as well as fears about security in the capital. Besides, there’s now a better partner for the oil companies: the semi-autonomous Kurdistan Regional Government. The Kurds have outraged the central government by signing more than 50 independent deals with foreign companies, including Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX), and are moving oil across the Turkish border in trucks rather than using pipelines controlled by Baghdad.
Maliki must realize that his bid to be Iraq’s founding father is doomed unless he improves the economy. A first step would be to offer friendlier terms to foreign oil companies. Instead of insisting on technical service contracts, in which the companies get only a flat fee per barrel, Maliki should agree to share the oil that comes out of the ground, as the Kurds do. (To his credit, he did discuss this with Exxon Chief Executive Officer Rex Tillerson in January in Baghdad.) A bigger step would be for the government finally to pass a comprehensive deal to share the nation’s oil revenue -- an initiative that has been stuck in the legislature since 2007.
Neighbors’ Role
A thriving Iraq will depend on stronger relations with its neighbors. Turkey has to play a careful game. While it is reaping an economic boon from the Kurds -- total exports to Iraq broke $10 billion last year -- Turkey has little to gain from instability or civil war in its eastern neighbor. Nor do Turkish leaders want to see the emergence of a fully independent Kurdistan, which might embolden Turkey’s Kurdish minority. Instead of antagonizing the Baghdad government with talk of building a pipeline from the Kurdish area across its border, they should encourage Massoud Barzani, president of the Iraqi Kurdistan Region, to negotiate a deal he and Maliki can live with. That’s hard but not impossible: The Kurdish leadership seems to understand that it isn’t in a position to exert full control over Kirkuk and that an independent Kurdistan without it may not be worth having.
Then there is the other regional Sunni power: Saudi Arabia. Although the Saudis don’t like the oil competition, the last thing they should want is for Iraq’s Shiite leaders to feel pushed into the patronage of Iran. The Saudis should open an embassy in Baghdad, where they’ve had none since 1990. More substantially, Saudi Arabia and Qatar could make a gesture to Maliki by doing more to keep the weapons they supply to opponents of Syrian dictator Bashar al-Assad -- whom Maliki unwisely supports -- from ending up in the hands of Sunni militants in western Iraq. The anniversary-day explosions in Shiite areas of Baghdad are a reminder that Maliki’s efforts to clamp down on Sunni violence aren’t entirely unjustified.
Without ignoring what’s gone wrong, this anniversary is best used to decide what Iraq can do right. Our feeling is that economic growth is the key, which requires Maliki’s ensuring the human and political rights of the Sunnis and reaching an accord with the Kurds. If his common sense and political pragmatism seem to be waning, perhaps the oil markets can help set him straight.
To contact the Bloomberg View editorial board: view@bloomberg.net.
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