Iraqi Oil Shutdowns Worsen

Gulf Keystone Petroleum Ltd. will become the latest oil producer in Iraqi Kurdistan to cut production, as a legal spat between the region’s government and Baghdad that’s pushed up crude prices drags on.

The London-listed company said it expects to shut-in Shaikan field flows processed at Production Facility 1 on Friday. Those that go to Production Facility 2 will continue to be sent to storage tanks for around another two weeks before being closed off.

Gulf Keystone “continues to believe that the suspension of exports will be temporary,” it said.

The Iraqi federal government and officials from Kurdistan are set to meet again in Baghdad next week. Those may lead to the resumption of more than 400,000 barrels a day of Iraqi oil exports that go through Turkey, a KRG official told Bloomberg.

Other companies including DNO ASA and HKN Energy have already started to lower production in Kurdistan. Genel Energy Plc expects to shut down the field of Sarta this weekend, according to a company statement. 

Turkey closed a pipeline running from the northern Iraqi region to the Mediterranean port of Ceyhan on Saturday. That was after an international business tribunal said the Kurdistan Regional Government shouldn’t export oil from the terminal without Baghdad’s approval.

The Paris-based International Chamber of Commerce largely ruled against Turkey in a case brought by Iraq’s federal government. The move was part of Baghdad’s long-running attempt to rein in the KRG, which ultimately wants independence, and take more control over its oil.

Brent crude has climbed 5.7% this week to above $79 a barrel, in part because of traders’ fears of a long stoppage. The US has urged the KRG and Baghdad to allow exports to restart quickly.

Baghdad says it’s up to the KRG to break the deadlock by accepting that Iraq’s state oil-marketing firm, known as SOMO, should handle Kurdish shipments from Ceyhan.

Smoother Relations

The discussions are complicated by the KRG owing hundreds of millions of dollars to oil traders, including Trafigura Group, from deals signed in the past decade.

Still, relations between the KRG, based in Erbil, and Baghdad have improved since Mohammed Shia Al-Sudani became Iraq’s prime minister in October. The ICC case was brought by a previous administration.

“We’ve seen talks going on even before the arbitration handed down its ruling,” said Richard Bronze, head of geopolitics at Energy Aspects, a consultant to energy traders. “There’s a reasonable chance for them to come up with some kind of deal that allows the restart of the pipeline sooner rather than later.”

Gulf Keystone’s shares have slumped 18% this week, while those of Norway’s DNO are down 6.3%.

The combined storage capacity for PF-1 and PF-2 at Shaikan is roughly 150,000 barrels, Gulf Keystone said. Shaikan produces around 45,000 barrels a day of crude.

Photo Credit – iStock.com/Jian Fan