The KRG is getting creative to secure further investment in its upstream sector and it’s paying off. Last week’s deal with key producers DNO and Genel to wipe out a hefty receivables tab was followed this week by a “final settlement” to a long running dispute with the Pearl Consortium that has stymied gas production.

These developments point to renewed momentum in the KRG’s oil and gas sector, but the big question is whether it’s sustainable. The government’s financial situation remains precarious and it owes some $3bn for prepayments of crude oil.

TAWKE INVESTMENT

Last week’s deal with key producers DNO and Genel wiped out a hefty receivables bill and shows the firms’ confidence in the future prospects of the key Tawke oil field. Rather than aiming for repayment from the KRG, they are confident they can secure the revenues from future Tawke production.

DNO claimed $1.14bn receivables owed from Tawke at end-2016, although $1.05bn of this was unbooked and “subject to final audit and any reconciliation with the KRG.” Booked receivables fell $32mn to $58mn during the first half of 2017. Genel meanwhile put its end-2016 KRG receivables at $253.5mn.

The KRG’s hefty receivables tab and uncertainty over how it would be able to pay it off was a major disincentive to IOCs considering investing in the region. After the latest deals the next biggest creditor is London-listed minnow Gulf Keystone, which operates the 40,000 b/d Shaikan field. Its end-2016 trade receivables were $36mn: any resolution of this would further boost investor confidence.

Under the deal with DNO and Genel, announced 24 August, the KRG transferred its 20% share at the 115,000 b/d Tawke licence to DNO. Stakeholders are now DNO (75% and operator), and Genel (25%). The additional 20% interest equates to an additional 22,000 b/d for DNO at current production rates. In addition, DNO will receive 3% of gross revenues from Tawke, while Genel will receive 4.5%, for a five year period from 1 August.

The KRG also “discharged DNO and Genel from certain payment obligations including production bonuses, license fees, capacity building payments (in the case of Genel) and funding of a water purification project (in the case of DNO).” The water purification project was slated to cost DNO $150mn. Capital building payments still in theory apply at Genel’s 15,000 b/d Taq Taq field (44% op, alongside Sinopec, 36%), but with output slumping (MEES, 4 August) the firm is unlikely to ever have to stump up the cash.

The agreement looks to have already paid dividends. DNO’s H1 2016 report was issued the same day and announced a $30mn increase in planned 2017 capex to $130mn – up from just $36mn in 2016. The majority of this is earmarked for Kurdistan. DNO plans to drill 15 new wells in the region this year, up from the 12 announced in February.

DNO expects production from the Tawke field to remain at around 110,000 b/d in 2017. A further 4,700 b/d comes from the Peshkabir field also situated in the Tawke license. A second Peshkabir well is being drilled, and with an early production facility (EPF) set to be installed at the field DNO anticipates both wells producing by year-end. Two further Peshkabir wells are planned for 2018. Meanwhile appraisal drilling is meant to start at the Benenan heavy oil field in the Erbil license next month.

Map Key Krg Oil & Gas Infrastructure

Key Krg Oil & Gas Infrastructure

TOTAL RECALL

After completing its exit from Kurdistan earlier this year (MEES, 28 April), Total’s planned purchase of Denmark’s Maersk is set to bring it swiftly back to the region (MEES, 25 August). Maersk has 18% interest in the 15,000 b/d-capacity Sarsang block alongside US firms HKN (42% op) and Marathon (20%).

But Total doesn’t seem overjoyed by the prospect of getting its hands on Maersk’s 1,000-2,000 b/d net share of Sarsang output. Speaking about Maersk’s KRG and Kazakhstan assets, CEO Patrick Pouyanné said “we would be happy to participate, but it is quite small…if the partners want to pre-empt [buy Maersk’s stake] I will not be very sad.”

Sarsang abuts the northern edge of the Atrush block (Abu Dhabi’s Taqa 39.9% op, Shamaran 20.1%, Marathon 15%, KRG 25%). Atrush started producing in July and is now connected to the export pipeline to Turkey’s Ceyhan port (MEES, 14 July). Shamaran says output is currently 15,000-20,000 b/d and is on track to reach 30,000 b/d capacity in the coming months. It adds that a sales agreement with the KRG will be “finalized shortly.”

Another firm hoping for this latest momentum to continue is Gulf Keystone (GKP). Implementing the second Shaikan contract amendment has been a priority since 2016. Amongst other things, this would reduce GKP’s capacity building charge from 40% to 30%. The firm’s H1 results will be released on 19 September.

Allied with regular payments from the KRG – payments lag behind those received by bigger firms DNO and Genel – this would give GKP the confidence to invest to boost production capacity. Gulf Keystone says it requires $71mn over 2016 and 2017 ($35.5mn/year) to maintain capacity at 40,000 b/d, rising to $88mn to increase this to 55,000 b/d.

PEARL BREAKTHROUGH

Despite racking up huge arrears with Genel, DNO and Gulf Keystone, the KRG managed to steer clear of the courts. Not so with the Pearl Consortium (Crescent Petroleum 35%, Dana Gas 35%, OMV 10%, MOL 10%, RWE 10%) which produces 300mn cfd of gas from the Khor Mor field. Arbitration began in October 2013, but after a long and acrimonious process the matter has finally been settled.

A joint statement on 30 August says a mechanism has been agreed for the KRG to settle the $2.24bn awarded by the Tribunal to Pearl. “The Parties have mutually agreed to fully and finally settle all their differences amicably.” Under the settlement, the KRG will pay Pearl $600mn immediately, alongside an immediate $400mn payment for investing in the region. This will be used to boost Khor Mor production by 500mn cfd, taking it to 800mn cfd.

Pearl has also been awarded “investment opportunities in the adjacent blocks 19 and 20.” The consortium has commitments “to make appraisal investments on these blocks and developments if commercial oil and gas resources are found.” No mention was made of Pearl’s other non-producing gas asset Chemchemal.

The additional Khor Mor gas and condensate “is expected to begin production in approximately two years,” according to the joint statement. The KRG’s current output is around 400mn cfd according to Minister of Natural Resources Ashti Hawrami. In addition to Khor Mor’s 300mn cfd of non-associated gas, 100mn cfd of associated production comes from local firm KAR’s Khurmala assets. KAR plans to double this to 200mn cfd in the coming years. All current production is used in domestic power generation.

The statement says that 250mn cfd of the additional Khor Mor gas will be purchased by the KRG “on agreed terms to boost the gas supply to power generation plants in the Kurdistan Region.” If the Khor Mor and Khurmala plans proceed smoothly, this would mean around 750mn cfd for domestic power generation in early 2020.

The remainder “will be marketed and sold by Pearl to customers within Iraq or by export, or can be sold to the KRG as well to further boost power generation within Iraq.”

The ambition to export gas is understandable, but the KRG currently lacks the infrastructure to do so. Whether to Turkey as the KRG has long planned, or to other northern provinces of Iraq, this would require significant infrastructure development. And this requires sizeable investment. Not just is it unclear how the KRG would manage this, it’s also unclear how it can stump up the $1bn it has pledged to pay Pearl “immediately.” After all, the DNO and Genel deal sacrifices future revenues because of the government’s inability to pay its immediate debts.

Foreign investment would therefore be required. Khor Mor’s location in south western Kurdistan means that northern Iraq would be the closest market and therefore requiring less pipeline investment. But Turkey to the north east would involve less payment risks. Security risks would arguably be lower too, although the PKK has previously said it would disrupt exports of Kurdish gas to Turkey.

The KRG signed a Gas Sales Agreement with Turkey in 2013 to export an initial 4bcm/year to Turkey from 2017, rising to 10bcm/y by 2020. But, with no export infrastructure, exports won’t start until 2020. Moreover, exports were to come from Genel’s Miran and Bina Bawi fields, development of which has yet to begin. Khor Mor could however supply Turkey with 2.6 bcm/y and its gas is sweeter.

The Repsol-operated Topkhana and Kurdamir gas fields are located close to Khor Mor and could also contribute export volumes. Phase one development of the fields is slated to produce 150mn cfd (1.6bcm/y) and if a sales agreement were reached in the near future, production could begin by early-2020.

At Miran and Bina Bawi, Genel is looking to farm out a stake to a foreign partner – most likely Turkish – and “by the end of the year, we expect to be able to update on the progress of negotiations” (MEES, 4 August).

Chart Germany’s Mena Suppliers... Libya Resurgent, Iraq Uber Alles ('000 B/D)

SOURCE: BAFA, MEES.

ROSNEFT’S ROLE

With Turkey as the planned gas export market, Turkish investment in a gas pipeline always seemed a good bet. But Russian state-firm Rosneft is also a contender. The firm agreed in June to expand the KRG’s crude export pipeline from 700,000 b/d to 1mn b/d and its Q2 results released in August state this is still on track for completion by end-2017. Rosneft is also pushing ahead with its plans to sign production sharing agreements (PSA) for five blocks in Kurdistan (MEES, 16 June).

Rosneft became a crucial player in the KRG in February when it inked a $1bn prepayment deal for Kurdish crude (MEES, 24 March). This was a financial lifeboat for the government which has enabled it to continue making relatively reliable payments to producers such as DNO, Genel and Gulf Keystone.

In June, Rosneft confirmed expectations that the Kurdish crude it is lifting was earmarked for three German refineries where it holds stakes. The impact on Germany’s crude import slate has been marked. Iraq as a whole supplied a record 63,000 b/d to Germany in 2016, 3.3% of total imports, but volumes have soared since February, averaging 117,000 b/d in Q1, 6.6% of Germany’s crude imports (see chart and MEES, 18 August). June saw a record 165,000 b/d.

It’s unclear how much of the volumes come from Kurdistan as opposed to from Iraq’s southern export terminals. But the correlation implies that the recent 100,000 b/d growth is all sourced from Rosneft’s Kurdistan volumes. This alone is around one sixth of the KRG’s approximately 600,000 b/d exports.