BMI View: Gazprom has received an ultimatum from the Iraqi central government forcing the Russian behemoth to choose between its holdings in Kurdistan and those in s outhern Iraq. This is the latest development in the central government ' s battle to stem an exodus of foreign oil companies to Kurdistan. Until Baghdad can offer better licensing terms and improve its business environment, it is likely to continue losing out to the n orth. While we remain bullish on Iraqi oil production over our 10- year forecast period, foreign players who have exited southern Iraq will be reluctant to return unless the central government offers better terms and acquiesces to their desire to maintain holdings in Kurdistan.
The exodus of foreign players from fields controlled by Baghdad looks set to continue, with the central government issuing an ultimatum to Russia's Gazprom. The Russian oil and gas giant has been told it must choose between its assets in Kurdistan or those in southern Iraq. In August, Gazprom acquired a stake in two blocks controlled by the Kurdistan Regional Government (KRG); however, reports indicate that Baghdad sent the company a letter at the end of October making it clear the company should cancel its deals with the KRG or, alternatively, completely exit its holdings in the Badra fields in the south.
Badra, is set for first oil in 2013 and should register output of 15,000 barrels per day (b/d), rising to the 170,000b/d by 2017. Gazprom is developing the field with Kogas, Petronas, and Iraqi state-owned Oil Exploration Company. However, the Russian oil and gas company has jeopardised its stake at Badra by taking a 40% stake in the Garmian bloc and an 80% stake in the Shakal block in Kurdistan, which the company estimates could contain up to the 3.6bn barrels of oil (bbl) of oil of total oil in place (compared to 300mn bbl at Badra).
A lthough Gazprom has given no indication as to how it will react , the company was well aware of the risks when it entered the upstream sector in Kurdistan - which suggest s it may be prepared to cut its losses in southern Iraq . Gazprom ' s exit would be particularly worrying for Baghdad because the Russian giant is a state - controlled player rather than a Western international oil company (IOC), suggesting the Ebril ' s appeal is growing stronger at the expense of lucrative investment from state owned and affiliated Russian players.
Baghdad looks set to continue to adopt a combative stance. It recently took a tough line against ExxonMobil, and after the US oil major acquired a stake in Kurdistan's upstream it received a similar letter from the central government giving the company an ultimatum. As we wrote previously, this strategy was ultimately unsuccessful as Exxon chose to sell its holdings in the south in order to hang on to its assets in the KRG ( see our online service, November 9, 2012, 'ExxonMobil Selling Southern Iraq Stake: The First, But Maybe Not The Last,').
Although we expect the strong growth in total Iraqi oil production we have witnessed in recent years to continue, with total output reaching 7.8mn b/d from 2.9mn b/d in 2012; ongoing disputes between Erbil and Baghdad are downside risks. Much-needed investment in southern Iraq's oil fields and infrastructure could be undermined by the continued exit of foreign oil companies to the north. Moreover, Erbil's decision to completely halt exports to the south highlights that the stakes are high if the Iraqi oil sector is to realise its potential.
|Strong Growth Forecast, But Baghdad-Erbil Relations Could Sour Outlook|
|Iraq Oil Production, Net Oil Exports & Percentage Change y-o-y ('000b/d)|
New Contract Terms And Improved Relations Key To Iraqi Outlook
This is the latest in a string of exits by foreign oil companies, who when forced to make the choice between Erbil's more lucrative contract terms and better business environment or dealing with Baghdad, have been willing to risk their relations with the latter ( see 'Total Defies Baghdad As Showdown Looms,' August 21; 'Statoil Eyes Controversial Kurdish Play,' May 28; and 'Chevron Enters Kurdistan,' July 20).
With Kurdistan cited as among the world's last low-cost frontiers (containing easily extractable oil in large fields), its upstream assets are proving attractive to foreign players. According to independent estimates published by WesternZagros, Kurdistan holds some 6bn bbl of oil and 1.56trn cubic meters (tcm) of natural gas.
Kurdistan is thought to hold just 20% of the Iraq's hydrocarbons reserves, suggesting southern Iraq's upstream should be attracting stronger interest from foreign players; however, the country's most recent licensing round failed to meet expectations (see, 'Fourth Round Falls Flat,' June 6 ). The continued loss of foreign players to KRG, which Baghdad claims lacks the legal authority to enter into contracts independent of the central government, has only intensified concerns that southern Iraq may be missing out on the investment that is critical to boosting production.
The central government's decision to delay its planned licensing round while it revises its contract terms in an effort to boost the competitiveness of its acreage, and progress on revenue agreements with Erbil hold upside risk for southern Iraq's upstream (see, Revised Terms Could Raise Upstream Interest, September 4,' and 'Progress Made In Baghdad-Erbil Dispute, But Fundamental Issues Remain Unsolved', October 2) . Yet foreign operators will likely be reluctant to give up stakes in the KRG to re-enter acreage held by the central government, making some agreement amongst all parties a necessity if Baghdad is to tempt important players to return to its oil fields.