Iraq's Kurdish oil output hit by coronavirus, spending cuts as oil dips below $30/b

Dubai — Oil output in the semi-autonomous Kurdish region in northern Iraqi is being hit by the outbreak of the coronavirus, lower spending and delayed payments from the regional government, Norway's DNO and London-based Genel Energy said Wednesday.

DNO said operations in the region are being curtailed by the outbreak of the coronavirus, which will lead to a drop in production from several fields. Production at the Tawke and Peshkabir fields is already set to dip below 115,000 b/d as the number of active drilling rigs will drop to two by the end of March from six at the start of 2020, it said.

"The company's exploration, appraisal and development drilling campaign, historically the most active among the international oil companies in Kurdistan, has been scaled back, as both DNO and contractor staff movements and rotations have been impacted by border closings, quarantines and other coronavirus travel restrictions," DNO said in a statement.

DNO joins Gulf Keystone in warning about potential output roadblocks in their Kurdish operations. Gulf Keystone said on Monday planned expansion in the region to 55,000 b/d by the Q3 target, from 38,000 b/d currently, may be difficult to meet due to the coronavirus outbreak and restrictions on movement of personnel and drilling in the region.

The coronavirus has hurt oil demand, and a breakdown in OPEC+ talks to extend production cuts have combined to send oil prices tumbling. WTI was trading down 6% at $25.69/b by 5:57 am CST, and Brent was 3.26% lower at $29.42/b.

Delayed payments

DNO also warned that the Kurdistan Regional Government had delayed payments, which will limit the company's ability to spend on its operations.

"DNO's ability to maintain its level of spending has also been strained by interruptions and delays to monthly payments for its oil exports from Kurdistan; the last payment received in January covered September 2019 exports," DNO said on Wednesday.

DNO announced on Wednesday a 30% reduction, or $300 million, in its 2020 budget "to shore up its balance sheet in the face of unprecedented market convulsions and plunging oil prices triggered by the coronavirus pandemic.

"The company will suspend guidance, including on production, until it has more visibility on the course of the pandemic and the direct and indirect impact on DNO's operations and financial position," it added.

Genel, which has a 25% stake in the Tawke license with the remainder being held by DNO, said on Wednesday it may not reach the 2020 production target for Tawke on lower expenditure.

"The reduced capital expenditure on the Tawke licence work program increases Genel's cash flow generation in 2020 at the prevailing oil price, although will result in a lower exit rate production that impacts 2021," Genel said in a statement. "Due to this delayed expenditure, Genel's 2020 net production guidance of close to Q4 2019 levels of 35,410 bopd is expected to be impacted."

In January, Genel said production from Tawke and Taq Taq will drop this year, with net output from both fields close to the 2019 fourth quarter of 35,410 b/d. Output averaged 36,250 b/d in 2019.

The Royal Bank of Canada said in a note on Wednesday that the delays in payments in the Kurdish region will act as a "bottleneck."

"Genel and DNO are low-cost oil producers with cash-in-hand that have the capacity to respond and adapt for a period; but we do not expect investors to embrace their risks and rewards, until there is at least clarity on oil sales

payments," the bank said.

Genel said it can be profitable with oil as low as $30/b.

"Genel's producing assets are profitable even at an oil price of $30/bbl and this, coupled with our robust balance sheet, supports investment in growth and the payment of a material dividend," CEO Bill Higgs said in a statement.