One Dud Oil Field Doesn't Set a Trend as Kurds Keep Drilling

(Bloomberg) -- When one of the biggest crude producers in Iraqi Kurdistan downgraded reserves in March, doubts about the economic potential of the region -- a key player in the fight against Islamic State terrorism -- deepened. But evidence suggests it’s too soon to write off the emerging oil province.

The downgrade at Genel Energy Plc’s Taq Taq field, the second in little more than a year, sent its shares tumbling amid gathering anxiety over a region already struggling with weak crude prices and escalating costs to fight militants.

Yet that disappointment stands in contrast to improving prospects elsewhere in Kurdistan. DNO ASA, the area’s biggest publicly listed producer, this month doubled the number of wells planned for 2017 at its Tawke field, while competitor WesternZagros Resources Ltd. increased reserve estimates in March.

“The Taq Taq story is very unfortunate, it has hurt us all,” said Simon Hatfield, chief executive officer of Calgary-based WesternZagros. “Everybody thinks: on top of above-ground risk, now there’s below-ground risk too. But it’s not the same everywhere in Kurdistan."

While drillers have been drawn to the northern Iraqi region by reserves that are cheap to pump, development remains in its early phases. Major projects didn’t begin until the 2000s, and the geology is still being studied; it can sometimes take decades for big producing regions like the Permian Basin or the Caspian Sea to reach full potential. Exploiting natural resources is important to the economy of Kurdistan, whose armed forces have led a crucial fight against Islamic State since 2014.

Genel’s downgrade followed new data showing that the rocks couldn’t hold as much crude as expected. Yet oil and gas basins commonly display variations in distribution, and Taq Taq’s problems aren’t replicated throughout Kurdistan, according to Michael Knights, an analyst at the Washington Institute.

“The Taq Taq downgrade is clearly a blow but they’re increasing oil production in other places that will offset a lot of the declines,” Knights said in an interview, citing the forthcoming start of Abu Dhabi National Energy Co.’s Atrush field. Consultant Rystad Energy AS expects Kurdish oil production to increase more than 10 percent this year to 602,000 barrels a day.

At the start of the year, the region’s future looked brighter. Oil prices had partially recovered, the local government was paying producers more regularly, and the military campaign to chase Islamic State from Mosul was progressing.

Then on March 28, Genel made its announcement. Taq Taq, which had pumped more than 115,000 barrels a day in 2015, was now producing just 19,000. The shares sank as much as 25 percent that morning.

By this point, WesternZagros had already responded to mounting shareholder concern and media reports questioning the region’s prospects, explaining the geological differences between its field and Genel’s deposit, while also stressing Kurdistan’s enduring potential.

Indeed, no other Kurdish field has been downgraded on the magnitude of Taq Taq, according to Lynn Morris-Akinyemi, an analyst at Wood Mackenzie Ltd. “We can’t write off Kurdistan just on one field,” she said in an interview. “We need to see a clear pattern of this happening.”

Production Goal

In 2015, Iraqi Kurdistan said it targeted production of 1 million barrels a day. To lure the necessary investments to reach that goal, it has embarked on an audit of all oil and gas operations, Deputy Prime Minister Qubad Talabani said in December. Findings are yet to be published, and Amanj Raheem, the legal adviser overseeing the audit, didn’t respond to requests for comment. The Kurdish Ministry of Natural Resources declined to comment.

Aside from the Atrush field, which is due to come on stream this quarter, companies including WesternZagros and NewAge Ltd. expect to boost production this year. They benefit from low operating costs in Kurdistan, typically about $4 a barrel in 2016 compared with $16 in the U.K. North Sea, Wood Mackenzie estimates.

The region initially attracted oil majors including Exxon Mobil Corp., but disputes between the regional and federal governments have kept most big oil companies away and prompted some investors to pull back. Exxon has relinquished three of its six exploration blocks, the Iraq Oil Report said in December.


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