Kurdistan offers some of the cheapest oil in the entire world, with production costs as low as $1 per barrel. Extracting oil is almost like sticking a straw in the ground and sucking it out.
That was the promise for Genel Energy, a small oil producer that focused on drilling for oil in the semiautonomous region of northern Iraq. The company is headed up by the former BP chief Tony Hayward, who came to fame during the Deepwater Horizon catastrophe when after the well blowout, rig explosion that killed 11 workers, and oil spill into the Gulf of Mexico, he said during the frenzy: “I would like my life back.”
Hayward moved on and became the chairman of Genel Energy, which made what seemed like a risky but potentially hugely profitable bet on oil in northern Iraq. For years Kurdistan has been locked in a standoff with the Iraqi government in Baghdad over sovereignty, national revenue sharing, and control over oil production. That deterred some larger companies who risked losing access to Iraq’s massive oil fields in the south if they worked in Kurdistan. Genel Energy went where other companies wouldn’t go. Related: Anadarko Slashes 80% Of Onshore Rigs, To Lay Off 95% Of Contractors
But things have not turned out well for Genel as of late. On February 29, Genel Energy released a damming revision to its oil reserves in Kurdistan. One of its most prized oil assets in Kurdistan was the Taq Taq field, a field thought to hold 683 million barrels of proven and probable reserves. But Genel Energy now says that it got the assessment wrong – Taq Taq may only hold half as much oil as it originally thought. “This is a very disappointing day for myself and the team,” Tony Hayward told investors on a conference call.
After the company oversaw production declines during 2015 at the Taq Taq field, it changed its reservoir model and conducted an internal review. The results of the assessment show that Taq Taq actually only holds around 356 million barrels of proven and probable reserves. Worse, the company has already produced about 184 million barrels, meaning the field only has about 172 million barrels left. The revision will also result in an impairment charge of $1 billion. The company’s market cap is down under $300 million, a fraction of what it was a few years ago. Related: In Risky Move Wall St. Backs Shale With Nearly $10 Billion In Equity
Genel expects Taq Taq’s gross production to be 80,000 barrels per day in 2016, but the field is starting to decline. Next year it will produce 65,000-75,000 barrels per day, a level that will dip again in 2018 to 50,000-70,000 barrels per day.
Needless to say, investors did not receive the news well. Genel’s stock plunged by 40 percent on February 29 after the announcement, the worst loss in the history of the company. On March 3, Genel reported full-year earnings for 2015, posting a $1.16 billion net loss, compared to a loss of $312 million in 2014. Most of the huge loss was due to the impairment charge. By Thursday, Genel’s share price regained some ground, jumping about 12 percent. Related: This Might Be A Multi-Billion Opportunity For Oilfield Services
In addition to the technical challenges, Genel has to deal with an array of “above the ground” problems. Not only do oil companies in Kurdistan have to worry about instability from ISIS fighters to the south, a more important problem is the conflict between the Kurdish Regional Government (KRG) and the Iraqi central government. Baghdad has not transferred the agreed upon funds to the KRG as part of a national revenue sharing agreement. The deal called for Kurdistan to export oil under the umbrella of Iraqi control, and in exchange the KRG would receive funds, but the deal fell apart for most of 2015. Both sides blame the other, but the bottom line is that the KRG has run short on funds. That is not only a problem for public employees in Kurdistan, whom have gone unpaid at times, but also means that oil companies in Kurdistan have not been compensated consistently. The KRG committed to regular payments to oil companies in order to create confidence and a climate of stability, but the KRG still owes Genel about $400 million.
Hayward put on a brave face for investors after informing them of the revision to the Taq Taq reserves. “Even based on this reserve assessment we continue to enjoy some of the lowest cost producing assets in the world with many years production ahead of them.” Genel can drill and produce oil for $2 per barrel, so still expects to profitably produce even at today’s low prices.
By Nick Cunningham of Oilprice.com
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