According to recent reports, the oil output of the Kurdistan Region hit an unprecedented rate of 650,000 barrels per day. Dubbed by some as the last great oil frontier, Kurdistan is estimated to have 40 billion barrels of oil reserves that saw a flock of junior to mid-size oil companies and later oil majors to the region.

But in spite of the new oil flows highs and immense revenue potential, Kurdistan still suffers from the ironic predicament of a lack of income.

Successive disputes with Baghdad over revenue sharing and exploration somewhat dampened sentiment in the oil industry. 2014 was highlighted by a lack of budget payments from Baghdad but also crucially the start of independent oil exports. Whilst a deal was reached late last year with Baghdad for Kurdistan to export 550,000 barrels of oil per day for a share of the national budget, disputes with Baghdad have continued with promised payments from Baghdad only trickling through in recent months and substantially less than the $1 billion dollars that is due.

This has a significant impact on the local economy and the payment of salaries, with most of the people still relying on government paid jobs. However, a notable squeeze is felt on the numerous oil companies operating in the region, many with rising debts on their books.

In theory, with stable payment cycles, the Production Sharing Contract’s (PSC) are still very much appealing. Oil companies stand to make an excellent return on their investment, especially if rates of production continue to steadily increase.

But with millions of dollars owed to the likes of Gulf Keystone Petroleum and Genel Energy, the short-term pressures for such companies quickly grow meaning that they have to take on an unrealistic cycle of increased debt to maintain their production levels and operations.

Of course, the substantial monies owed for previous exports could just as quickly transform the fortunes of these companies. A regular payment cycle has been an elusive goal but with the increased export figures from Kurdistan and with further rises in production targeted, Kurdistan is ready to assume the next step in its journey as a major oil player.

This may result in further short-term pressures if the KRG-Baghdad oil deal doesn’t hold up, but Kurdistan now has the infrastructure and potential to easily go at it alone. Ironically, Kurdistan would gain more from selling its current output directly than the 17% that they are supposed to get from Baghdad.

For the foreign oil companies, the long-term outlook is bright and they can reap the rewards from the substantial investments that they have made in Kurdistan but the priority to get to the clearer horizons is negotiate their way through the short-term turbulent waters.

The marked decline in oil prices since mid-2014, although stabilizing and rising in recent weeks, has only increased focus on the importance of a stable revenue cycle.

The region may yet witness a consolidation of the oil industry, a logical step in any blossoming oil industry where many small to mid-sized companies dot the landscape. The Kurdistan Regional Government has a strong interest in ensuring any acquisitions and mergers happen on the terms that protect the region.

OPEC took a risky move by staying relatively idle as oil prices tumbled. There are signs that this may have worked as US oil reserves show signs of decline and the more costly shale extraction begins to slowdown.

But with Saudi Arabian exporting oil at new records, Iranian crude set to return to the market and with Kurdistan exports set to increase further, oil prices will not rocket back to previous heights and should instead settle around the $70-$80 mark.

This is still a significant increase from the lows of January and would be welcomed by Kurdistan and in particular the oil companies in the region.

First Published: Kurdish Globe

Other Publication Sources: Various Misc