Kurdistan calling

In contrast to the rest of Iraq, the region welcomed private sector investment as soon as possible after Saddam Hussein’s regime was deposed in 2003, and has been willing to give stakes in its oilfields to incentivise the exploration of the 45 billion barrels the Kurdish Regional Government (KRG) says are in the ground.

The results over the last eight years have been staggering, with the region going from a neglected and isolated governate to the most vibrant market for independent oil companies on earth.

Over 40 production sharing contracts (PSCs) have been awarded to firms hailing from the UAE, USA, UK to as far as Papua New Guinea. The Erbil International Fair on 27 October attracted 850 companies from 25 countries, up from 200 in 2010.

GOING for growth
“I see Kurdistan as a platform or launchpad for growth; it’s on a rapid trajectory,” Bijan Mossavar-Rahmani, DNO Chairman, told Oil & Gas Middle East this month.

“The speed and success Kurdistan has had in opening up and attracting companies is unprecedented in the modern period. They have been tremendously successful in attracting small companies first, which has been followed by larger companies coming in to drill, find, produce and bring their oil to market. It’s actually something of a phenomenon.”

Saad Sadollah, commercial adviser at the KRG’s Ministry of Natural Resources, says the region has gone from a standing start to over 200,000 barrels per day (bpd) by the end of this year. Barham Salih, the Prime Minister for the KRG confirming current output of 120,000 bpd with the ambition to see this more than doubled to 250,000 bpd by the end of 2012.

The KRG, in no small part to thumb its nose at the authorities in Baghdad, has also made a show of transparency in how it has managed the region’s oil resources, publishing the PSC online (bit.ly/KRGPSCs).

Getting competitive
The initial flush of PSC awards has given way to a region-wide campaign of exploration by independents and their contractors, with a production boom due to begin in 2012.
An industry source, speaking anonymously to Oil & Gas Middle East, disclosed that the regional drilling market is now “very, very competitive,” with some firms frozen out on cost to low-bidding rivals including companies from Pakistan and Iraq.

This, together with Kurdistan’s complex geology and attendant long drilling times, means that not every firm that piles into the exploration and drilling market can succeed.

Preparation is key. Tectonic issues, borehole instability, pressure change in-well, and loss circulation are all drilling challenges which require experienced engineers and mean that detailed well planning, risk assessments and field geology work are vital.

Entering the region requires careful planning, and companies in the sector must interact well with the KRG and Kurdish people to get ahead. Expectations of local employment are high, and companies should factor in time and money to train Kurdish employees and win the support of local communities as part of overall project costs.

Choosing the right relationships with suppliers is crucial, as not every firm can guarantee the latest parts can be delivered when required, and oil companies are keeping inventories of equipment on site to mitigate the risk of part breakages when undergoing difficult drilling.

Prospecting to production
Production is on the rise, with Western Zagros – which operates the Sarqala-1 field – lifting its first oil on 18 October for export. UK firm Gulf Keystone, which has recently raised it’s Kurdish reserves estimate to a mean value of 7.5 billion barrels and won $200 million in new investment from capital markets, says it is primed to export oil from the Shaikan field in the first half of 2012.

The region is aiming for a sustained production boom, culminating in 1 million barrels per day by 2015, but political factors – as with so much else in Iraq – are a brake on Salih’s ambitions.

The trick that the KRG will now have to pull off is to resolve the legal and political problems before the region’s production boom gets underway.

Production revenues are still subject to the political and legal wrangling between
Baghdad and Erbil over the status of Iraq’s oil laws and the Kurdish PSCs within them (see pages 14 to 17). Thamir Ghadhban and Natik al-Bayati, members of the Iraqi prime minister’s advisory commission, have suggested that the issue will be resolved in March 2012 with all current contracts respected.

Independents operating in the region are also confident that the issue will be resolved, with Rahmani telling Oil & Gas Middle East “We felt comfortable some of these issues will be resolved and we felt we not only had an understanding of the context, but we could also be helpful in the discussions that could lead to resolutions.”

Revenue woes
While the KRG’s PSCs remain in legal limbo, companies with stakes in the producing fields have not been paid for their profit oil, as oil revenues are controlled by Baghdad.

According to an unnamed source cited by Dow Jones Newswires on 23 October, Baghdad owes the KRG around $1 billion from oil exports since February, having paid up only $450 million of the $1.4 billion payable to the KRG. Officially, oil companies are being reimbursed for their costs under a provisional deal hashed out between Salih and Iraqi Prime Minister Nouri al-Maliki in January this year.

DNO, which has a production capacity in the region of 65,000-75,000 bpd across its interests in the Tawke (55%), Dohuk (40%) and Erbil (40%) fields, says it received $60 million for oil exported in September, only a fraction of contractually-mandated revenue.

DNO and Genel Enerji, which hold 55% and 25% of Tawke respectively, are the hardest hit by the impasse. Genel owns a 44% stake in the Taq Taq field it runs with Sinochem, which is producing at a rate of 35,000 bpd.

DNO has adjusted in October by diverting more of its oil for use in the domestic market, but this option will only be open to a limited extent, and sells Kurdish oil short of what it can fetch from international exports.

Challenges ahead
Oil infrastructure, and the transport and power networks that feed it, has improved enormously since 2003. In contrast with the rest of Iraq, the region has made significant progress in bringing electrical power to citizens and industry, with power on average lasting over 20 hours a day.

Power plants have been transitioned to combined cycle generation, improving reliability and output, with Jordan-based Mass Global the single biggest contributor to the grid from its plants in Erbil (875MW), Dohuk (750MW) and Suleimaniah (also 750MW).

Challenges remain. The main export pipeline for Kurdish oil flows from Erbil to Baiji and from there to the Turkish port of Ceyhan, and much of the region’s exports are still part-carried by road tanker.

The Ceyhan line is old and has been beset with technical problems that have hit oil firms’ bottom lines: DNO’s flows from Tawke were reduced to 32,334 barrels per day in the third quarter of this year, down from 43,192 bpd in Q2, partly due to problems with export flows. The KRG accuses the state-run North Oil Company of mismanaging the pipeline.

The oil-rich city of Kirkuk remains a political powder keg, with a referendum slated for 2007 on whether it should be within the KRG’s aegis or Baghdad’s deferred repeatedly for fears of violence.

The drawdown of US forces that have been vital in securing the green line and the city may bring this problem to a head, with all the outstanding battles over oil laws and revenue sharing intertwined within it.

The bottom line for oil firms in the region is that they may stop getting paid even the partial amounts they currently receive, and would have to wait out a period of political and even martial turmoil.

Despite the risks, independents are set to plow investors’ cash into the region, as it transitions from a prospector’s paradise to one of tomorrow’s major crude producers.