6 Haziran 2012 Çarşamba

Turkey's pipeline plans could be transformational for oil explorers in Iraqi Kurdistan


Iraq is home to some of the world’s largest oil finds. But the exploration companies based in Kurdistan, in northern Iraq, have been unable to capitalise on their position due to the political tension between Erbil and Baghdad.

However, the impasse may be broken after Turkey, Kurdistan’s largest neighbour, revealed last week it had plans to build a pipeline that could transform the fortunes of such companies.

Credit Suisse analyst Thomas Adolff said: “Regarding Iraqi Kurdish exposed oil companies, we would argue that unlike in recent years, we can see the light at the end of the tunnel.”

Iraqi Kurdistan gained autonomy from the federal Iraqi republic in 2005 after the Kurds helped coalition forces fight off Sadam’s Iraqi forces.

However, the validity of oil and gas contracts issued by the Kurdistan Regional Government has long been disputed by Baghdad. And the resolution of this issue has been one of the main uncertainties for investors.

Oil exports are also a major bone of contention, and in particular the payment mechanism with cash going via Baghdad and only sporadically finding its way back to Kurdistan.

Plans have been drawn up to facilitate greater export volumes, including new pipelines connecting into existing Iraqi infrastructure to the south.

However the immediate future of this route is also tied up in the region’s tumultuous politics.

This is not necessarily helped by the fact that the Kurdish contracts are seen as more attractive for oil firms, meaning Baghdad is finding it more difficult to attract new investment into existing Iraqi oil industry.

In Iraq’s most recent two-day energy auction, the government said it had sold the rights to only three of 12 oil and natural gas exploration blocks, reflecting the tough contract terms on offer.

Yet the proven oil reserves in the south of Iraq are estimated at 143 billion barrels, while the smaller Kurdish region’s reserves total 45 billion barrels.

Currently much of the oil produced in Kurdistan is sold within the region’s domestic market, but this oil is sold at a heavy discount to what could be received in international markets.

Genel Energy (GENL: LON), which is one of the region’s largest oil producers, said revenue is expected to be US$250-300 million for the year, supported by strong sales into the Kurdistan market.

However if the oil were exported, and therefore sold at a higher price, there might be the potential to double those revenues.

This current state of affairs is reason for the subdued share prices of companies active in what’s described as the last great oil frontier.

Gulf Keystone Petroleum (LON:GKP) works with Genel on the Ber Bahr block, with each owning a 40 per cent stake, making it one of the region’s biggest players. The share price has fallen 20 per cent in the last month.

It is the same picture for Afren (LON:AFR), Petroceltic (LON:PCI) and Heritage Oil (LON:HOIL), which are all active in the region.

All four will point to the wider malaise in the markets and the weakening crude oil price as the main drivers behind the fall, rather than Kurdistan. But it is there bubbling in the background.

And there has been some good news from the region. Afren (LON:AFR), for instance, recently announced a “potentially transformational” oil discovery in the Ain Sifni.

Air Sifni is directly south of Gulf Keystone Petroleum’s Shaikan oil field, which is currently estimated to contain between 8 and 13.4 billion barrels of oil.

All will be looking at plans for the Turkish pipeline, which could be transformational.

Heritage Oil would benefit greatly as it is gas focused. Gas in its natural state is incredibly hard to transport. But a pipeline would eliminate this problem.

Iraq is now Turkey’s second biggest trading partner. But the proposed pipeline, which is set to end at the port of Ceyhan in the south east of Turkey, is now straining relations between Baghdad and Ankara.

Investors will watch with a mix of anticipation and fear for the Iraqi federal government’s next step.


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