Shrinking oil reserves crimp Iraqi Kurdistan's allure

Forza Petroleum

10/03/2016 12:13

* Genel, Afren slash reserves estimates in key fields 
    * Wells hit water, revealing complex rock geology 
    * Kurdistan region already facing political, security 
turmoil 
 
    By Ron Bousso 
    LONDON, March 10 (Reuters) - A string of downgrades to Iraqi 
Kurdistan's oil reserves is a fresh blow to the autonomous 
region's fledgling oil industry already crippled by conflict, 
political strife and low crude prices. 
    The revisions - resulting from a closer inspection of 
oilfields after drillers hit more water than expected - take the 
shine off one of the world's largest oil and gas reserves, which 
had drawn investors such as Exxon Mobil  XOM.N .  urn:newsml:reuters.com:*:nL3N0TZ3H4 
    A further loss of faith in the region's oil bonanza also 
pressures the debt-ridden Kurdistan Regional Government (KRG), 
which has struggled to ramp up production and exports due to 
pipeline outages and conflict with Islamic State militants. 
 urn:newsml:reuters.com:*:nL5N16F117 
    "The recent reserve downgrades are another blow to optimism 
about Kurdish oil production," said Richard Mallinson, 
geopolitical analyst at consultancy Energy Aspects.  
    "While there are substantial amounts of oil in this 
underexplored province, companies are finding it is not as easy 
to find or produce in the quantities initially expected." 
    Among the handful of producers still operating in the 
region, three have in recent months reviewed their estimates of 
proven oil reserves or reduced output due to geological 
problems. 
    Several fields in different areas have, nevertheless, been 
unaffected by the revisions. For example, Shaikan, operated by 
Gulf Keystone  GKP.L  in the north of the region, saw its 
reserves upgraded last year to 639 million barrels (mmbbls). 
    The region still boasts one of the world's lowest production 
costs, at around $20 a barrel. 
    Genel Energy  GENL.L  lost more than a third of its market 
value last month after the London-listed company halved the 
reserves estimate for Kurdistan's largest operational field, Taq 
Taq, to 356 mmbbls and wrote down its value by $1 
billion. urn:newsml:reuters.com:*:nL3N168331 
    The revision means more than half of the 
80,000-barrels-per-day field's reserves have been produced. 
Genel also operates a second field, Tawke, whose reserves were 
little changed at 631 mmbbls. 
    Water levels in the six-year-old Taq Taq started rising 
rapidly in the second half of last year, prompting a study by 
consultancy McDaniel & Associates that revealed the porosity of 
the rock - the ability to access oil - was overstated, leading 
to the revision, Genel said. 
    Tony Hayward, Genel's chief executive and a former boss of 
BP  BP.L , said in an analyst call that the downgrade was 
"clearly very disappointing for ourselves and the Kurdistan 
Regional Government". 
     
    MORE BAD NEWS 
    The downgrade is a blow to Genel's and other producers' 
hopes for the region. 
    "If you take a long-term view, you can look through politics 
and geopolitical risks," BMO Capital Markets analyst Brendan 
Warn said.  
    "But if you haven't got good geology and the oil is not so 
easily produced, you are much less attractive and no longer a 
major's acquisition story." 
    The relatively low cost of producing oil in the region and 
Genel's plans to unlock gas reserves there still made the firm a 
compelling investment, Genel said. 
    For the KRG, whose revenue depends on oil, the revisions are 
more bad news. The region is struggling to pay field operators 
due to a dispute over oil revenues with the central government 
in Baghdad and the need to fund its fight against Islamic State. 
    The KRG started repaying oil companies earlier this year but 
still owes them billions of dollars.  
    Before Genel, Afren Plc  AFRE.L  wiped the entire proven and 
probable reserves of 190 mmbbls from its Barda Rash field in 
western Kurdistan after also hitting more water than expected in 
wells.  urn:newsml:reuters.com:*:nL3N0UR2GE 
    Oryx Petroleum  OXC.TO  shut two wells in the Demir Dagh 
field after hitting water, raising suspicions of similar 
geological problems elsewhere. It also revised lower its proven 
reserves in the Hawler licence area by 21 percent to 215 mmbbls. 
    Chevron  CVX.N , the second-largest U.S. oil company after 
Exxon Mobil, relinquished at the end of 2015 its interest in the 
Rovi block north of Erbil but continues to test wells in the 
Sarta area. 
 
 (Additional reporting by Ahmad Ghaddar; Editing by Dale Hudson) 
 ((ron.bousso@thomsonreuters.com; +44)(0)(2075422161; Reuters 
Messaging: ron.bousso.reuters.com@reuters.net)) 
 
Keywords: IRAQ KURDS/OIL