Genel Energy another victim of Kurdish geology



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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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”