This Field’s Production Record Says Much About Kurdistan’s Oil Potential

  • Sep 08, 2019
  • Investing

News out last week that the relatively new development of the Atrush oil field in the semi-autonomous Kurdistan Region of Iraq (KRI) had passed the benchmark of one million barrels of production in July is a reminder that the opportunities are still huge, as highlighted by OilPrice.com recently. Back in 2011, in fact, the former-BP-boss-turned-chairman of Genel Energy, Tony Hayward, called the KRI “one of the last great frontiers” in the oil and gas industry as his new company started prospecting there.

Since then, progress has been complicated by the previous long-running struggle with Islamic State, ongoing budgetary disputes with the Federal Government of Iraq (FGI) in Baghdad and resultant payment delays to foreign prospectors, internal political divisions, and high-profile lawsuits against the government of the Kurdistan region of Iraq (the KRG) and against its former Minister of Natural Resources and now chief energy adviser, Ashti Hawrami.

Discovered only as recently as 2011, it was not until 2013 that the KRG exercised its option to acquire a 25% in the Atrush field, with General Exploration Partners consortium (the parent entity being Canada’s ShaMaranPetroleum) holding the remainder. The field is located in the Zagros foldbelt geological structure in the uppermost geographical area of the KRI’s Northern Zagros area that bleeds into Syria in the West, Turkey in the North and Iran in the East. At that time, estimates were that Atrush held between 1.5 billion and 2.8 billion barrels of oil in place, with recoverable oil columns of 670 million barrels. Early production estimates were for 30,000 barrels per day (bpd), with a base lifting cost (excluding capital expenditure) at between US$3-4 pb, among the lowest in the world.

In 2017, after various changes in ownership stakes, oil first began flowing from Atrush to its central production facility, which was highly propitious for the KRG for three reasons. First, it desperately needed all the money it could get, as the disbursements of budget funding from the Federal Government of Iraq (FGI) in Baghdad was subject to constant interruptions due to disputes between the two sides. This had forced the KRG into selling future production to a range of buyers, most notably Russia. The KRG had been able to bank this money but in so doing had created an appalling debt to Russia, a key reason why the Kremlin’s primary foreign corporate oil proxy, Rosneft, was allowed in November 2017 to do a deal that basically gave it control over all of the KRG’s oil and gas flows. Related: The Coming M&A Wave In U.S. Shale

Increased Russian influence from that point continues to be a defining theme in Kurdistan, in line with Moscow’s geopolitical strategy of expanding its presence in Iraq as a whole and in neighbouring Iran. The Rosneft deal to ‘co-operate’ in the fields of upstream, infrastructure, logistics and trading represented just an acceleration in Russia’s strategy in Kurdistan as a key Middle East centre of power. “It should be seen in an historical context as being a continuation of Russian-Iraqi trade ties the origins of which date back to the Middle Ages,” a former Rosneft senior director told OilPrice.com. “It also enables new markets for Kurdish crude to be opened up, enhanced by the planned deliveries of Kurdish oil to Rosneft’s expanding worldwide refining system,” he added.

The second reason why the onset of production from Atrush was propitious was that the KRG had earlier announced that it was targeting at least one million bpd in oil production, a perfectly reasonable level, given the massive resources in the region but complicated by tangential events – these being the third reason why the Atrush production came at just the right time. In the two years between the new oil production target announcement and Atrush’s first oil, there had been a slew of bad news relating to international oil company (IOC) exploration and development in the KRI, concomitant with a period when the KRG was desperate to offer 20 more oil blocks to foreign investors.

The first of these, ironically, was Hayward’s own new firm, Genel Energy, which issued a statement of a US$181 million write-down in the value of its flagship Taq Taq oil field, in which it had a 44% interest at that point. Worse still were huge downgrades in reserves and output numbers for the site. The former was revised down from gross 2P reserves of 172 million barrels at 31 December 2015 to 59 million barrels as of 28 February 2017, and the latter to output of just 19,000 bpd in 2017 from the 115,000 bpd in 2015. Alarmingly for any would-be foreign bidders for new fields, the decline rate across Taq Taq had been exacerbated by high rates of water breakthrough on key producing wells. Related: Report: Iranian Tanker Offloads Oil At Syrian Port

This, in turn, came in the wake of the very public award against the KRG that it illegally withheld payment from a United Arab Emirates consortium - comprising Dana Gas (one of the largest investors in Kurdistan’s oil and gas industry), Crescent Petroleum, and Pearl Petroleum - for the lifting of liquefied petroleum gas and condensate by or on behalf of the KRG between 30 June 2015 and 31 March 2016. U.S. companies as well, despite the historical vested political interests in Iraq, have also headed for the exits. In December of that year, ExxonMobil pulled out of three of the six exploration blocks it operated in the Kurdistan region - the Qara Hanjeer, Arbat East, and Betwata blocks. Chevron had relinquished its interest in the Rovi block north of Erbil a year earlier, although it continued to test wells in the Sarta area. Overall, from 2014/15 to 2017, IOCs renounced a total of 19 exploration blocks in Kurdistan.

As it now stands, under the current ownership structure - Abu Dhabi National Energy Company (TAQA) holding 47.4% through its TAQA Atrush subsidiary, ShaMaran 27.6%, and the KRG the remainder - Atrush’s production has steadily risen from first significant oil in 2017 at 30,000 bpd to between 34,000 bpd to 35,000 bpd. OilPrice.com understands from sources close to the companies involved, that there have been occasional but – as yet -unsustainable spikes to 40,000 bpd. Given these production spikes, and plans for further drilling, in addition to the de-bottlenecking work over the past few months, sources at the current operators believe that oil production could reach 50,000 bpd within the next 12 months, OilPrice.com understands.