Independent oil exports – a new leaf for Kurdistan Region and International Oil Companies?

Sitting on more than 45 billion barrels of oil reserves, Kurdistan has enormous potential but with the region also awash with great problems, it has faced a difficult predicament.

A deadly war with the Islamic State along an extended frontline and the reality of housing 1.8 million refugees is only made worse with the long running budget issues between Baghdad and the Kurdistan Regional Government (KRG).

Baghdad effectively halted budget payments under former Prime Minister Nouri al-Maliki in January 2014 and a subsequent agreement last December under current premier Haider al-Abadi has seen the Kurds receive a fraction of their agreed entitlement.

This vicious cycle has meant that local salaries were often not paid, let alone the millions owed to International Oil Companies (IOC) under respective Production Sharing Contracts.

The last remaining umbilical cord that Baghdad has over the Kurdistan Region is control of oil exports but after months of feuding and growing impact on the economy of Kurdistan, the KRG had no choice but to resume independent oil exports in recent weeks and receive proceeds from the sales directly.

This finally puts matters into Kurdish hands and rather than pleading for budget payments from Baghdad each month, they control their own destiny.

Plummeting oil prices have hardly helped but this can be offset with increased daily production.

As budget payments have threatened to put a stranglehold over the region, the balance sheets of established IOCs in the region such as Genel Energy and Gulf Keystone Petroleum have fared badly.

These so called smaller companies took the risk to explore for oil and were rewarded with significant discoveries, potentially making them majors in their own right. However, as share prices for both companies clearly show, potential in the ground is no consolation for lack of payments.

In this light, the KRG statement this week that promises IOCs a share of the oil revenues from September was a welcome boost that received much publicity. The announcement is a major milestone for such companies even if the finer details remain unclear such as exactly what these payments will amount to and how arrears amounting to hundreds of millions of dollars will be paid back.

The KRG has eyes on rapidly expanding production from the circa 500kbpd to 1 million bpd but such a plan relies heavily on IOCs and their ability to implement an infrastructure capable of supporting new outputs.

This is easier said than done if the focus of the IOCs is on getting by each month, let alone placing further investment in infrastructure.

Nevertheless, the recent announcement sets the platform for growth and stability. It will take time but with Kurdistan in control of its own destiny, such targets and commitments are very much achievable.

Independent oil exports allow Kurdistan and IOCs to turn a new page and this can only be good for the numerous foreign companies waiting on the sidelines to invest.

First Published: Kurdish Globe

Other Publication Sources: Various Misc

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