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At this point in time it is no surprise to anyone that the crisis in Iraq is capable of spilling over into other regions. The situation is complex, to say the least, and it has economic implications far beyond the massive loss of lives. For each death, the fortunes of families, regardless of how meager they might already be, become personal disasters. For each attack on industry and trade, the fortunes of entire companies and countries can be at stake.
Unless the news from the region changes significantly following the writing of this column, the situation in Iraq is at a sort of standoff. Although the word “chaos” still properly describes the situation, Fox News reported this past weekend that “stalemate” would also be fitting. The ISIS and other terror groups are now stretched to their limits, which is an especially good thing, since the Iraqi forces are in the same condition. The potential economic problems, especially with regard to oil, are, if you pardon the pun, still quite liquid. And discussion of oil always leads to Kurdistan.
Source: Genel Energy
Although independently governed, Kurdistan is still considered a part of Iraq. With some of the largest underutilized oil reserves on the planet, the Kurds are hoping to take advantage of the crisis by leveraging the conflict to their own advantage and declare complete independence from Iraq. What ISIS will do in Iraq, after having now declared a caliphate, is anybody’s guess. What many people do not understand is that the Kurds are politically and economically opposed the the al-Maliki administration which has attempted, with varying degrees of success, to stop the flow of Kurdish oil to the West.
Kurdistan understands that its oil is the key to its emergence as a prosperous country. In fact, what Massoud Barzani, the Kurdish president, sees is an opportunity, not only to become completely independent, but to annex the nearby area of Kirkuk, replete with its additional oil fields. How this all plays out may have significant bearing on the success of lack thereof of the oil explorations and operations in the region. Not only does Kurdistan want that oil exported, they want the producers paid, because they are, in reality or in effect, partners of those ventures. Therefore, they want to turn that oil into cash. The problem is that, as of 01 July, the Kurdish Regional Government (KRG) has been able to sell only one shipment of oil, thanks to Iraq. The problem for the oil companies is that the KRG collects the proceeds of the sales, takes their own cut first, then pays the oil companies from what is left.
The U.S. is not helping Kurdistan get its oil to market, as Secretary of State John Kerry, is busy pushing the Obama doctrine of a strong and unified Iraq. Remind me to ask them how that is working so far. Perhaps the answer can be found in the fact that oil majors like ExxonMobil and BP have already been evacuating non-essential personnel. Shell is prepared to follow suit. But it is far too early to say that all is lost.
The Kurds are “charting a course to independently develop oil reserves that the KRG calculates at 45 billion barrels.” Should they be able to secure the Kirkuk fields, they will add additional reserves of 141 billion barrels. Perhaps the most generally accepted notion of the outcome or the oil companies in Kurdistan is that the ones that can stay the course through the chaos will be big winners once Kurdistan is free of Iraq’s hold.
British companies currently operating in Kurdistan include: Genel (LSE:GENL), Gulf Keystone Petroleum (LSE:GKP), Sterling Energy (LSE:SEY), Heritage Oil (LSE:HOIL). As oil prices are tending to drop, it will take some courage to stay in the game. It also provides a prime opportunity for new investors to set themselves up for some potentially significant gains.
Risky? Yes, it is. But that has always been the nature of the petroleum sector. It’s also the reason to play the investment game.
