Falling prices, rising threats cool interest in Kurdish oil
Apr. 24, 2015
IRBIL, Iraq (AP) — The hall for the Irbil Oil and Gas Exhibition this week was crowded with company displays, executives and investors. But conspicuously absent were international oil giants like Shell, Exxon-Mobil and Chevron that only a year ago were eager to exploit the promising reserves of Iraq's autonomous Kurdish region.
The threat of Islamic State group militants, who have swept across much of northern Iraq and are battling Kurdish forces only miles away from the Kurdish capital, Irbil, has dampened international interest. The security threat only increases oil companies' doubts, on top of falling oil prices and disputes between the Kurds and the Iraqi central government in Baghdad.
At the exhibition — the main oil and gas industry gathering in the Kurdish region — slick displays with giant video screens advertising oil services companies and drilling equipment fill the hall festooned with Kurdish flags as young men in suits bustle around importantly.
But the event, which ends Saturday, just can't compare to past ones, said Baryam Akdogan of the Turkish Teffen Contracting group.
"In the previous years, I saw the exhibition had much bigger participation from oil companies," he said.
The Kurds estimate their autonomous region in northern Iraq holds some 45 billion barrels of oil and have made no secret of their desire to use this potential source of income to fuel further independence from the central government. But thanks to lower oil prices and instability, those dreams of financial independence may be farther away than ever.
"You have a security backlash, especially with the oil and gas international companies, (since) most of the fields were located in the disputed area, where the Islamic State is near," said Arian Barzan, of the Kurdish Qaiwan oil company at the exhibition. "Those guys are not willing to risk their employees' lives, so they pull back."
While Kurdish oil is easy and cheap to extract, its attractiveness has waned not just because of the deteriorating security situation, but the 50-percent drop in oil prices in the last six months. Then there is the opposition from the central government.
In early 2014, the Kurdish region began exporting its oil directly to Turkey without going through the central government. That immediately provoked an angry response from Baghdad, which cut off the 17-percent share of the annual budget normally promised to the Kurdish region and began suing companies seeking to directly buy Kurdish oil.
"For the international oil companies, the attractiveness is linked to the amount of money they are going to get out of it and as it is, the Kurds can't pay the oil companies there right now," said Kirk Sowell, a political risk analyst and publisher of Inside Iraqi Politics. "It's going to take much longer, years longer than expected, to recoup expenses, much less profits."
Strapped for cash and under assault from the Islamic State, the Kurdish government agreed in December to return to the old deal and send 550,000 barrels per day to Iraq in return for its share of the budget.
The deal is already on shaky ground, with the Kurds not sending their full amount of oil — due to technical reasons, they say — while Iraq has only sent a fraction of the estimated $600 million due every month amid suspicion that the Kurds are still stockpiling their oil to sell independently.
Meanwhile the three international oil companies working in Kurdistan, Genel Energy, Gulf Keystone Petroleum and Norway's DNO haven't recouped their already-substantial investment, but they've already invested far too much to pull out.
"The Kurdish Regional Government at this point is too big to fail for those who have put a lot of money into it," said Sowell.
Hiva Mirkhan, a member of the Kurdish parliament's financial committee, acknowledges that the government has started to receive partial payments from Baghdad, but said it needs that to cover the day-to-day functioning of the government. There isn't enough to cover maintenance on the oil infrastructure or pay the oil companies.
"Since there's no money and the oil exportation has gone down, it makes the private companies hesitate to come to the region," she said.
The situation has had a direct effect on the economy and worsened the employment situation. Young graduates aren't finding the expected jobs in the oil sector and local companies are laying people off.
Sitting in the Caffe di Italia coffee shop filled with flat screen TVs showing soccer matches, Rami Khasraw, who recently graduated with a degree in petroleum engineering, talked about how close he came to getting a job with the American oil services company Schlumberger.
"Just before my graduation in May, the recruiting staff of Schlumberger came to the university and said they had an offer for me," he said, as his friends sipped espressos and puffed on water pipes. "I was supposed to start the job with them in June... but when Daesh drew close to the region on Aug. 6, they put us on hold," Khasraw said, using the Arabic acronym for the Islamic State group.
Khasraw isn't optimistic that the oil companies and investment money are going to come flooding back to Kurdistan any time soon as the Islamic State group remains entrenched around Mosul not far from a number of oil fields. Also, just last week on April 17, a bomb exploded outside the U.S. consulate in Irbil.
"In my opinion, there won't be any improvement in the short term, as you can see, it's getting worse day-by-day," he said.
Schemm reported from Baghdad. Associated Press writer Salar Salim in Irbil, Iraq contributed to this report.