In the oil patch today, it is indeed the survival of the fittest. So when one of the largest producers in Iraqi Kurdistan, Genel Energy Plc, comes out swinging with production costs as low as $1 per barrel, it inspires a new confidence that may or may not be sustainable given the regional security threats and the difficulties producers are having getting paid for their oil.
Still, it’s an impressive number that renders Kurdistan one of the cheapest oil venues on the planet.
Fall in Genel vs Crude Oil
(Click to enlarge)
With such low production costs, one would assume that the price of Genel would outperform oil; however, the reverse is the reality: Genel is underperforming oil by a large margin.
Though Genel is in a strong position to survive this downturn considering its low cost of production, the uncertainty of payments due by the Kurdistan Regional Government (KRG) are cause for concern. The KRG has approximately $1.7 billion of payments due to three companies: Genel, DNO and Gulf Keystone Petroleum Ltd, as reported by Bloomberg. Related: Gazprom Braces For Gas Price War With U.S. LNG
In addition to the outstanding KRG invoices, the recent gas pipeline explosion near the subdistrict of Shwan, which disrupted the main power station that supplies almost half of Kurdistan’s electricity, raises serious security concerns for the region.
Unlike the rest of Iraq, Iraqi Kurdistan has been a comparative safe haven—and a great place to do business, even if its unilateral oil agreements with foreign companies sparked the ire of the Iraqi central government in Baghdad. But as the conflict in Syria has spread to parts of Northern Iraq that border Iraqi Kurdistan, there are some indications that the KRG’s security could be breached.
And the liquidity issues faced by the KRG, which have led to delayed payments to companies, may dampen investor enthusiasm.
These concerns are directly responsible for lowering the stock price of any company that holds a major stake in Kurdistan. However, Bloomberg reports that 70% of the analysts are positive on Genel, which means that despite today’s legitimate concerns, analysts are hopeful of a solution to the issues plaguing Kurdistan.
With any small rise in crude oil prices, companies like Genel will see a quantum jump in their profits, and companies that can produce oil at $1 per barrel will continue to attract investments in the region. Related: Oil Majors Converging Here Could Mean A New Hotspot
Everything now depends on how investors view the situation in Iraqi Kurdistan. They took their first leap of faith by betting that Baghdad would not be successful in stopping the KRG’s move to export their own oil, independent from the central government. They won this bet, despite threats to ban companies operating in Kurdistan from getting in on the rest of Iraq’s oil play, and some half-hearted attempts to tie up exports in legal battles and sue the traders.
But then the Islamic State stormed onto the scene, and while the Kurdish Peshmerga are Baghdad’s saving grace in terms of keeping the terrorist group from taking over the oil-rich Kirkuk area—which lies in between Baghdad and the territory controlled by the KRG—there are concerns that the KRG might not be able to hold them back forever, constrained by funding and experiencing some internal tensions that could be destabilizing.
The gas pipeline explosion certainly doesn’t help, but investors respond more to the payments situation that they do to vague security concerns.
On 1 February, Genel and DNO saw their share prices jump after the KRG confirmed it would make its payments for crude exports a regular thing this year, and that it would start paying off its $1 billion in debt to these companies.
Genel—led by former BP chief Tony Hayward—has been the darling producer here, and while it’s been averaging about $2 per barrel for production costs, it recently lowered this in some areas to $1 per barrel. And it’s been producing almost 85,000 barrels per day since the beginning of last year. But it’s also racked up sizeable debt—almost $240 million—partly due to the KRG’s inability to pay them. Related: Non OPEC Oil Production To Collapse In 2016
At stake are some 12 billion barrels of oil with an upside potential of 60 billion barrels, and estimated reserves of some 45 billion barrels, along with 22 trillion cubic feet of natural gas. This makes Iraqi Kurdistan the eighth largest oil and gas venue in terms of reserves. And authorities expect that they will export 1.65 million barrels of oil and 10 billion cubic feet of natural gas this year.
So, Genel is producing at rock-bottom prices here, the Kurds are promising to pay up and investors are still interested in getting in on this game. This is enough for KRG leader Massud Barzani to declare that the “time has come” for a referendum on statehood. This, along with the continued threat of ISIS, will be the next challenge to test investor confidence in this cheaper-than-cheap venue.
But either way you look at it, $1 per barrel production costs are extremely tantalizing, and investors have braved far worse venues for far higher costs.
By Rakesh Upadhyay of Oilprice.com
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