Kurdistan bounces back with oil revival but challenges remain

Semi-autonomous region unlikely to meet the requirement to transfer 250,000 barrels per day of oil export revenues to the federal government

The Atrush oilfield in Kurdistan, Iraq. The company last achieved a million barrels of monthly production in July. Courtesy: Taqa

The markets in Erbil are busy again and the mood is more optimistic. With ISIS largely vanquished and oil exports booming, the Kurdistan region of Iraq has made a surprising economic recovery from deep crisis. It has a chance to learn from previous mistakes and put itself on a firmer footing, but there are still warning signs ahead.

In late 2016, with control of the Kirkuk-area oilfields secured by Kurdish forces following the mid-2014 fall of Mosul to ISIS, the autonomous region was exporting about 650,000 barrels per day. A hefty loan and payments for ownership of an oil pipeline from Russia’s state giant Rosneft had given the Erbil government some financial breathing space. The settlement of a long-running arbitration case with Dana Gas of Sharjah opened the way for renewed gas development.

But the Kurds’ disastrous and misconceived referendum on independence in September 2017, shooting themselves in the foot like Brexit, gave Baghdad the chance to exploit a split between the two main political parties and retake much of the disputed territories. The region’s oil production was slashed to about 335,000 bpd and, with no share of the federal budget, it fell further into a financial crisis.

President Massoud Barzani had stayed on well beyond the expiry of his (already extended) term, which was part of the dispute between his Kurdistan Democratic Party and the Patriotic Union of Kurdistan, based in the southern Kurdish city of Sulaymaniyah.

But following the federal election in May, the new government in Baghdad, headed by the economist and former oil minister Adel Abdel Mehdi, has taken a more conciliatory line. With its existing pipeline from Kirkuk to the Turkish border unusable because of ISIS sabotage, it has agreed to send about 100,000 bpd through the main Kurdish pipeline.

Border customs collection has been unified and Baghdad has been paying the salaries of Kurdish civil servants and the Peshmerga military. The wage bill has been cut, partly by eliminating “ghost” positions. The new budget promises the Kurdistan region about $9 billion of the federal budget, if it transfers 250,000 bpd worth of revenues to the federal treasury.

The Kurdish government has finally been paying oil companies on a regular basis, encouraging them to make investments. Consequently, production has boomed. This has been led by the private Kurdish company KAR Group, which operates Khurmala, the northern most part of the Kirkuk field, still under Erbil’s control.

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The new Peshkabir field, operated by DNO of Norway, part-owned by RAK Petroleum of Ras Al Khaimah, has quickly reached 50,000 bpd of output. Taqa of Abu Dhabi, operator of the Atrush field, has bought out half the stake of its erstwhile partner Marathon, and production there is now approaching 30,000 bpd.

Several smaller fields have also made progress, with Genel Energy announcing last month development of the Sarta field in partnership with Chevron. Rosneft, which was awarded five exploration blocks as part of its series of deals in 2017, also aims to begin output this year.

From their nadir, total exports have rebounded to about 430,000 bpd, bringing the region almost $9bn in gross revenues per year at current prices. Its rising output combines with the rest of Iraq’s gains to put pressure on compliance with the Opec deal.

But there are warning signs ahead: geological, economic and political. On the geological front, it has become apparent that the rugged Kurdish mountains and gorges hint at the complexity of the rocks below. Several fields have fallen short of expectations: production at Genel’s flagship Taq Taq has collapsed from 140,000 bpd in 2015 to just 12,000 bpd. The reservoir rocks are highly fractured, and once oil is drained from these fractures, the underlying water enters production wells. Worryingly, the other large producing field, Tawke, held by DNO and Genel, has also recently started declining.

The region has long sought to exploit its large gas resources to meet domestic needs and then export to Turkey, which seemed under way with Rosneft’s promise to build a gas pipeline. But it is now unclear whether the Turkish economy, in danger of recession and set to receive additional Russian supplies at the end of this year, needs to buy much more gas. Electricity subsidies and non-payment at home remain a heavy drain on the budget, too. Despite recent rain, the region, like the whole of Iraq, faces a growing water crisis from drought and dams on its rivers upstream in Iran.

The thorny issue of disputed territories also remains, with specialist journal Iraq Oil Report recently investigating DNO's drilling in the contested Bashiqa area near Mosul. The end-game in eastern Syria risks further spillover of refugees and ISIS fighters into the adjoining parts of Iraq.

And the Kurds are unlikely to meet the requirement to transfer 250,000 bpd of oil export revenues to the federal government, concerned this would jeopardise their financial independence. The economy is still undiversified, government roles still allocated by patronage and nepotism, and the budget mostly dependent on oil, whether from the Kurds’ own or their share of earnings from Basra.

The regional authorities need to heed the warnings that oil production may not keep increasing and is even in danger of dropping, unless new developments and exploration are expedited. As the region seems to have more gas than oil, securing markets for it – whether at home, in Turkey or in the federally-controlled part of Iraq – is essential. Whether independent or autonomous, the region faces the acute challenge of sustaining economic viability.

Robin Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis