Is Iraq's House Too Divided for Oil?

During trading on the London stock exchange Wednesday, stock in Genel Energy took a nose dive after it announced imminent exports of Kurdish oil from Turkey. While western Iraq is in the hands of al-Qaida, recent trends suggest there's no safe investment refuge even in the Kurdish north.

Genel Energy, led by former BP boss Tony Hayward, said exports of crude oil from its operations in the Kurdish region of Iraq are "expected to commence in the near future."

Last week, the Kurdistan Regional Government of Iraq announced it expected 2 million barrels of its crude oil would be exported from the Turkish sea port of Ceyhan by month's end. That volume should double by the end of February and eventually top the 10 million barrel mark by December.

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Hayward's company said it expected good things in Iraq following what he said was a "transformational year" for Genel Energy. A recent deal reached between the KRG and Turkey, in conjunction with the completion of an independent Kurdish oil pipeline, "has paved the way for steadily rising oil export volumes from Taq Taq and Tawke over the course of 2014."

Genel said it expected to produce as much as 70,000 barrels of Kurdish oil per day in 2014, nearly twice as much as last year. The market, however, shrugged it off, saying it was too early to declare victory in the Kurdish north.  The share price in Genel [GENL] was off more than 4 percent in Wednesday trading.

The Kurdish region of Iraq has been shielded from violence experienced elsewhere in the country. In Fallujah, in Iraq's western Anbar province, al-Qaida is experiencing a revival in an area where it took U.S. combat forces two attempts to rid the area of insurgents. The battle for Iraqi Prime Minister Nouri al-Maliki, seeking a third term in office in April, hit closer to home this week during fights over the 2014 budget.

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Baghdad and the KRG are at odds over oil issues in the country. Last year, Kurdish members of the Iraqi Parliament boycotted budget talks and this year's talks are no less fractious. A draft $150 million budget calls for 400,000 bpd of Kurdish oil exports, far beyond what it's capable of, and threatens to withhold the KRG's share of revenues if it doesn't meet the requirement. Both sides blame the other for delaying the measure.

Despite the legal imbroglio, there's been no shortage of interest in oil prospects. The International Energy Agency says the Kurdish north may hold 4 billion in proven reserves while KRG estimates it may hold 45 billion barrels of unproven reserves. Last week, Gazprom Neft [GZPFY], the oil arm of gas company Gazprom, said it produced first oil from its Badra oil field in eastern Wasit province, near the Iranian border.  The company said production should ramp up to 170,000 bpd by 2017 but Iraq's overall potential is restricted by the lack of export options from southern terminals.

U.S. lawmakers are debating the state of affairs in Iraq more than ten years after the invasion.  For better or worse, overall developments have been in a holding pattern since the post-war constitution was drafted in 2004. While the Kurdish north may be pulling away from the grips of power in Baghdad, both sides are still too intertwined to make unilateral gains.

By. Daniel J. Graeber of Oilprice.com