Kurdistan oil: military drills

Iraqi forces drive past an oil production plant as they head towards the city of Kirkuk on Monday © AFP

Just over a decade ago, Iraqi Kurdistan was the next big bet for energy investors. It had promising geology, an oil pipeline nearby and an energy thirsty neighbour to the north in Turkey. Brent crude then traded just above $60 per barrel, and rising. Peshmerga fighters would defend the borders. Only naysayers feared sovereign risks.

Fast forward to today. Oil still trades near $60 while Turkey provides an export route for the autonomous Kurdistan Regional Government. Unfortunately the promised KRG oil boom has fizzled while the sovereign risk has gone the other way. The KRG has been at odds with everyone from Islamic insurgents to the Iraqi government. The threat of a battle with Iraqi forces at the northern Iraqi oil hub of Kirkuk boosted crude prices briefly. The bet on Kurdistan’s oil is a lottery. Do not expect a winning ticket.

Geopolitical tension is always a risk factor for the oil exploration business. Double it for the KRG. The military threat from Islamic militants, not to mention a collapse in oil prices after June 2014, slashed market values for listed oil explorers in the KRG. These include Norway’s DNO, one of the earliest entrants, Genel, which was set up by financier Nat Rothschild, Gulf Keystone and Canada’s WesternZagros (taken private this summer). The shares have fallen as much as 90 per cent from their oil boom peaks. None looks likely to recover that loss of value.

But it is also the geological risk that has let the market down. How much recoverable oil is left in the region? True, the KRG does pump a reasonable amount of it these days, exporting as of October last year 614,000 barrels daily, well above a decade ago. However, much of the reported export barrels actually come from fields such as Bai Hasan, which lie in disputed territory around the well-established Kirkuk oilfields.

Note too that the oil reserves of DNO, KRG’s largest international producer, fell in 2016, suggesting it has had trouble finding new barrels to pump. Genel, a partner with DNO in oilfields there, has recently preferred to talk up its prospects on exporting natural gas, rather than oil, to Turkey.

Investors who braved Kurdistan years ago always knew they were investing in a region where politics were volatile and the tanks might roll. They should not be surprised by the spectacular failure of that bet.

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