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Analysis: Iraqi KRG faces obstacles to maintain crude oil export quality

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Analysis: Iraqi KRG faces obstacles to maintain crude oil export quality


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* Consequences from Taq Taq output plunge
* Dispute with condensate provider
* Recent and potential disruptions to Kirkuk flows

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The regional government of semi-autonomous Iraqi Kurdistan appears to be struggling to maintain the quality of its oil exports, just as it has signed a landmark supply agreement with Rosneft aimed at opening up new markets for Kurdish crude.

The problem surfaced last month in a regulatory filing by Gulf Keystone Petroleum, which produces heavy crude from Kurdistan's giant Shaikan field, disclosing a Kurdistan Regional Government decision to stop accepting Shaikan crude for blending into pipeline exports of Kurdish crude for delivery to the Turkish Mediterranean oil terminal at Ceyhan.

Instead, the KRG has agreed to shoulder the cost of transporting Shaikan crude by truck for onward export as a stand-alone product and to continue paying Gulf Keystone a flat $15 million/month for current and past exports, the company said.

Kurdish officials said the action was taken to preserve the quality of the crude exported by pipeline.

The main problem for the KRG, however, is unlikely to be solely the low API and relatively high sulfur content of Shaikan crude, which so far has been pumped in limited quantities -- recently at a rate reported by Gulf Keystone of about 37,000 b/d.

More likely, the KRG's unexpected decision to exclude Shaikan crude from the export pipeline reflects much bigger problems for the regional government in coping with a large drop in output from one of Kurdistan's major producing fields, compounded by delays in bringing new fields onstream.

Taq Taq, a field operated by a joint venture between Genel Energy and Sinopec, is one of two major fields that for the past several years have been the mainstays of Kurdish light crude oil production. The other is DNO-operated Tawke.

Until last year, the two fields had similar prospects, with reserves in each case estimated at over half a billion barrels and long-term prospects of expanding production to 200,0000 b/d.

But their fortunes diverged sharply in late February 2016, when Genel stunned investors by slashing its estimate of Taq Taq's initial proven and probable reserves by nearly half, to 356 million barrels from 683 million, with gross remaining 2P reserves as at December 2015 of only 172 million barrels.

The company also indicated output from the field could shrink to as little as 50,000 b/d by 2018 from the then-expected average for 2016 of 80,000 b/d.

Last year, Tawke's output averaging 107,000 b/d easily outstripped Taq Taq's actual average output of only 60,000 b/d. As at December 31, 2016, Tawke still had 504 million b of proven and probable reserves.

Tawke production continues to trend upwards but only gradually, and certainly not by enough to offset the big decline from Taq Taq. It averaged 110,000 b/d in December 2016, DNO reported.

The other main source of crude contributions to the KRG's piped export stream is northern Iraq's major Kirkuk field, which lies in territory disputed between Eribil and Baghdad.

In practice, the administration of the huge field's three oil domes has long been partitioned between the KRG and Iraq's federal government, with the KRG opportunistically strengthening its position following the major Islamic State group insurgency in mid-2014.

But the Kirkuk field, which gave its name to northern Iraq's Kirkuk export crude grade long before the underdeveloped Kurdistan region started its own oil exports, is a source of medium-heavy crude.

Beginning in the era of late Iraqi dictator Saddam Hussein, Kirkuk's crude has been made heavier by the injection of large volumes of excess heavy fuel oil into the reservoir -- an unwanted by-product from ageing Iraqi refineries.


All this adds up to a ton of trouble for the KRG, which has struggled to pay its oil contractors and staff following Baghdad's suspension of federal budget transfers to the region in early 2014, and the crash in oil prices and major IS group insurgency later that year.

The big question now is whether sufficient new sources of Kurdish light crude can be developed fast enough to offset Taq Taq's decline, allowing the KRG to shore up its reputation as a reliable exporter of a crude blend with Kirkuk grade specs.

Only that, paired with better relations with Baghdad, could help the KRG substantially reduce the hefty discount to other regionally traded crudes at which it currently sells its oil to international buyers.

Certainly there are other Kurdish fields with light crude waiting in the wings. One is Atrush, operated by Abu Dhabi National Energy Co., or Taqa. Another is Gazprom-operated Sarqala, and a third is Kurdamir, on a block operated by Repsol adjacent to Gazprom's license.

Early-stage production has already begun at Atrush and Sarqala, while the partners in Kurdamir plan to file a revised development plan for their field by the end of this year.

With a state-controlled or large international producer leading each development, production from all three fields could in theory be ramped up quickly.

But even major producers and government-backed companies such as Taqa and Gazprom are currently balking at investing heavily in drilling campaigns while they remain deeply uncertain of the KRG's ability to pay for future crude exports.

Even DNO, long entrenched in Kurdistan as an oil producer and currently the biggest producer of the region's crude, has said its investment in further drilling to bring Tawke's output capacity to 135,000 b/d is "contingent on regular and predictable export payments" from the KRG.

After pledging early last year to make prompt and regular monthly payments for contractual volumes of oil delivered for export, the KRG is still running behind on such payments.

DNO and Genel last week reported the receipt from the KRG of $36.73 million for gross December 2016 exports from Tawke and $17.46 million for gross exports from Taq Taq that month. They also received about $10 million in aggregate toward recovery of amounts owed for earlier exports.

The one sliver of good news to emerge recently on the KRG's situation is that the regional government has not hung Gulf Keystone out to dry.

The company last week reported receiving its standard $15 million payment for December exports, indicating the KRG has not yet been squeezed into giving up on prospects for Shaikan's vast store of heavy crude to become a future money-spinner.

But for that to happen in anything sooner than the distant future, the KRG would probably have to build a new pipeline dedicated to heavy crude exports.

Gulf Keystone's previous disclosures on the high cost of transporting Shaikan crude by truck to the Turkish Mediterranean port of Dortyol, as happened until May 2016, mean that any near-term profits from trucked exports of Kurdish heavy crude to the Turkish coast are likely to be marginal.

Still, with Gulf Keystone's cash position standing at just $121.6 million as of last week, the KRG continues to treat the revenue-poor oil developer as a special case, ensuring it just about stays afloat.

Kurdistan's known petroleum resources also include meaningful volumes of condensate in the Khor Mor and Chemchemal fields, for which the Pearl Petroleum consortium, led by UAE affiliates Crescent Petroleum and Dana Gas, hold development contracts.

Much to the partners' disappointment, as indicated in Dana's regulatory filings related to an international arbitration case against the KRG, negotiations with the regional government to start development of Chemchemal, which holds major condensate reserves, have not yet reached fruition.

Pearl currently produces gas from Khor Mor, used as feedstock for two Kurdish power plants, along with LNG and condensate. But those operations, too, are included in the arbitration case, in which Pearl partners also including OMV and MOL have already won a partial settlement award of about $2 billion.


Nonetheless, officials at Iraq's federally-controlled North Oil Co. last week told S&P Global Platts gas condensate had been added to the Kirkuk export mix. One official said Khor Mor condensate was being added.

Another official, who did not comment on the source of the condensate, said 10,000 b/d of condensate was being injected into gathering stations, swelling the 168,000 b/d flow of crude being sent for export from northern Iraqi oil fields under NOC control to 178,000 b/d.

Since repeated IS group attacks on Iraq's federal export pipeline put the line permanently out of action three years ago, NOC has been sending limited volumes of crude from Kirkuk and smaller northern Iraqi fields for export through the KRG's pipeline under successive makeshift agreements between Baghdad and Erbil.

While the use of Khor Mor condensate to thin Kirkuk and even Shaikan crude might seem an obvious way for the KRG to control the quality of the crude passing through its export pipeline, the regional government previously suspended that practice over a dispute with Pearl over payments for condensate.

Given the continuing bad blood between the KRG and Pearl over the subsequent arbitration case, the reintroduction of Khor Mor condensate into the export stream points to growing KRG desperation.

Adding to KRG woes is growing anti-government activism by supporters of the opposition Patriotic Union of Kurdistan party, which earlier this month briefly interrupted crude flows from NOC fields when a security force loyal to the PUK took over and temporarily halted operations at a pumping station.

The activists' main complaint was that not enough Kirkuk crude was reaching a refinery near Kurdistan's Sulimaniyah province, where a large majority of voters support the PUK.

Yet another potential problem is a recently signed energy cooperation agreement between Iraq's federal government and Iran, which includes a plan to build a 150 km crude oil pipeline from Kirkuk to Kaneqin, on the the Iranian border, to feed refineries in northwestern Iran.

That pipeline, if built, would bypass the KRG export system and reduce exports from Ceyhan by Iraq's federal State Oil Marketing Organization, thereby lessening KRG political leverage in negotiations with Baghdad.

Unless the KRG could compensate with higher output from the Kirkuk domes under its control, it might suddenly need to accelerate Shaikan's development to avoid deviating too far in the lighter direction from Kirkuk blend specs.

How this will all pan out is far from obvious. The biggest hope on the near horizon for the KRG may be Atrush, which could be developed quickly with the help of Abu Dhabi government resources.

Last week, in an operating and financial statement, junior Atrush partner Shamaran reported that construction of the 30,000 b/d Atrush phase 1 production facility was complete, with final commissioning in progress.

Four production wells had been completed and connected to the production facility, ready for start-up, and work on pipelines to connect the field to the KRG export pipeline was well underway, with completion expected in Q2, the company added.

--Tamsin Carlisle,
--Edited by Jeremy Lovell,