To downgrade oil reserves once may be regarded as unfortunate; to do so twice looks like carelessness.
Genel Energy’s stumbles in the Kurdish region of Iraq have sent the value of its shares down to just 7 per cent of their 2014 high. While serious for the company, this latest bad news is more of a blow for the region’s economic and political aspirations.
Genel Energy, launched by the former BP boss Tony Hayward in 2011, cut its reserves at the flagship Taq Taq field, up in the Kurdish mountains, from 499 million barrels to 172 million barrels in 2016, then on March 28 again to 59 million barrels. Taq Taq production has tumbled from 116,000 barrels per day to 19,000 bpd.
The reservoir rocks are highly fractured, allowing wells to drain oil rapidly through the cracks. But the small pores in the reservoir rock matrix here, which hold the bulk of the oil in typical fields, are not contributing to production at all. Once the relatively small volume of oil in the fractures is drained, they fill with water.
Genel is not the only company to get into trouble with Kurdish geology. MOL Group’s Akri-Bijeel block slashed its reserves by 99 per cent in 2015, Afren went bankrupt after writing down the Bardarash field in 2015 while DNO, Genel’s partner in the Tawke field, had to suspend production at the Summail gasfield after it began producing water.
Genel still has hopes for the Kurdish region, via development of the large Miran and Bina Bawi gasfields. But progress on a gas sales agreement with Turkey has been painfully slow and the company needs a partner to contribute the capital for field development. The cash-strapped Kurdish government will also have to finance a processing plant and pipeline. Oddly, given strained relations with their main gas suppliers, Russia and Iran, the Turks have not been in a particular hurry.
For the Kurds, Genel’s decline has brought further problems. Already struggling with about US$20 billion of debt and long arrears to the oil companies, every barrel is vital. Khurmala, the northern part of the giant Kirkuk field, has been operated by the local Kurdish company KAR since 2009. Following ISIL’s capture of Mosul, the Kurds took control of most of the other Kirkuk-area fields, which with Khurmala now yield about 350,000 bpd out of the region’s 600,000 bpd production.
Some new fields are on the way. The most important is Atrush, operated by Abu Dhabi’s Taqa, whose recently completed feeder pipeline allows it to produce 30,000 bpd. Heavy oil output from the giant Shaikan field has also grown, but Gulf Keystone, its operator, cannot do much more without further investment and regular payments in full from the government.
Growing dependence on the disputed front-line territories around Kirkuk for financial solvency casts a cloud over Kurdish national aspirations. Two of the region’s three leading parties – the KDP, which largely controls the oil portfolio, and the PUK, which rules Kirkuk – have agreed on a referendum on independence. They have been held before but this time it seems more serious.
Baghdad, though, has not accepted the fait accompli of Kirkuk’s change of control. As ISIL is gradually driven out of Mosul, the federal authorities’ attention may shift to a resolution of matters with the Kurds. The northern part of the Kurdish region is effectively controlled by the KDP, which is under strong Turkish influence. But the advance of a Syrian Kurd-led alliance on ISIL’s capital of Raqqa worries Ankara. Now the Russians, via a deal for their state champion Rosneft to buy Kurdish oil for an advance payment, have strengthened their role in the mix.
Geography and then geology have been the Kurds’ friends in advancing their quest for nationhood. But now Genel’s fractured rocks and fractured finances have added another obstacle in the way of piecing together a Kurdish state.
Robin Mills is the chief executive of Qamar Energy, and author of The Myth of the Oil Crisis.
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