As of 2009, the Kurdistan Region had not exported a single barrel of crude and was only producing a few thousand barrels of oil per day. Now, just six years later, the Region is promising to produce a million barrels per day within a year's time as new fields come online and existing fields double their production capacity in an unprecedented expansion of the Region's oil and gas industry.
A combination of factors, including sound investment policies and shifting geopolitical circumstances, has prompted this expansion. The big push to increase production and exports came after Baghdad expressed its vehement opposition to Kurdish control over oil polices and the Region's decision to grant its own production sharing contracts. In January 2014, Baghdad cut off the Kurdistan Region's budget after the completion of a pipeline allowing independent oil exports. Export volumes increased gradually and are currently above 280,000 bpd.
Turkey, more than any other player, has made exports possible. Over the last five years, Ankara has proven to be a reliable business partner for the KRG, despite occasional political differences. Exports from Ceyhan continue, and the KRG is able to sell oil through Turkey despite opposition from Baghdad and discouragement from the US.
In the wake of the capture of Mosul by ISIS and the Iraqi army's desertion of its posts in Kirkuk, Peshmerga forces moved to fill a threatening power vacuum that had formed on the Kurdistan Region's borders. The Kirkuk oil fields have since come under KRG control. With the crude they produce stranded due to unusable pipeline infrastructure, the KRG has made use of this oil for its own domestic needs. This, in turn, has freed up more crude from Kurdish fields for export.
The KRG's Ministry of Natural Resources (MNR) expects to export 800,000 bpd of oil by the end of 2015. The recent agreement between Baghdad and Erbil provides a mechanism to restore Kurdistan's budget in return for the KRG's assistance exporting 550,000 bpd of oil for the Iraqi government (250,000 bpd from fields within Kurdistan; 300,000 bpd from fields near Kirkuk). The deal seems very promising, but so far few details have been discussed.
In 2015, both sides will be searching for a way to restore trust and solve the bevy of disputes brought to a head over the eight years of former Iraqi PM Maliki’s divisive tenure. The most contentious issue will be oil, which also entails questions concerning company cost recovery, budgetary funds still owed to the Kurdistan Region, and the KRG's right to export crude independently.
Production at major fields is set to double in 2015. Experts expect production at Tawke to reach 200,000 bpd by the end of the year. Taq Taq should add another 60-70,000 bpd, approaching Tawke's production figures. Khurmala is also expected to expand production to the same levels. New fields are also set to come online. Taqa's Atrush field, Gulf Keystone's Sheikhan field, MOL's operation in the Akri Bajeel block, and Oryx's Demir Dagh field are all poised to produce in 2015.
Looking at the figures above, the picture looks very promising for the Kurdistan Region, and the target outlined by the MNR looks plausible. The question of payments to oil companies still remains an issue, however. In Iraq's 2015 federal budget, funds for cost recovery by IOCs will be included in the KRG's 17% budgetary entitlement. Given the shortcomings of the Iraqi budget and the KRG’s tenuous financial situation– starved for cash by Baghdad over the last year – payments to oil companies in the first half of 2015 are likely to be intermittent, as they were in the later half of 2014.
The KRG insists on its right to export oil at levels beyond the 250,000 bpd it has recently agreed to market through SOMO (Iraq’s State Oil Marketing Organization) in order to cover its budget shortfall and pay oil companies. Baghdad, however, has not yet come around to this idea and has refused to drop lawsuits in US courts against vessels carrying exported Kurdish crude.
Despite a slump in oil prices, Kurdistan should see an array of investments in new fields and new production facilities in 2015. A route for exports has been established, and the ISIS threat has receded. At the same time, many operators have declared commerciality and are contractually obligated to enter the production phase. Two years ago, the MNR found it difficult to press for production plans, because the only available export route relied on transporting oil by truck and there was great uncertainty about the future of crude exports. After a year of successfully selling millions of barrels of crude on international markets, although not without problems, the prospect of exporting oil is very much a reality and the question now is infrastructure capacity rather than politics.
The KRG has ambitious plans to develop Kurdistan's gas fields in 2015, and a recent deal with Genel Energy to develop the Miran field is part of this drive. The MNR will be taking on the task of processing natural gas and is looking at large investments in the gas sector. Many gas fields in Kurdistan have not yet been developed, but the government is signaling its openness to investment in these untapped reserves. Managing a rapid expansion in crude production alongside efforts to exploit gas reserves in producing fields will likely be a challenge for oil companies and the government, although the potential rewards could be great.
The Kurdistan Parliament is considering a draft law authorizing the government to issue bonds in order to finance projects like gas developments and power plants, although many MPs are not yet convinced of its merits. It is not clear if the law will pass in its current from, but a watered down version of the legislation is likely to make it through Parliament. The law's passage will help finance large project including new gas processing facilities, refineries, and power plants, as well as the expansion of existing infrastructure.
Liquidity issues, a financial crisis, battles to establish a route to market for oil exports in the face of court challenges from Baghdad, a collapse in crude oil prices the Region depends on to pay its bills, and war with the so-called Islamic state over the past year all drove home the need to bolster Kurdistan's economic and strategic resilience. In 2015, the Region aims to raise oil exports to levels that will give it the option of self-sufficiency if hostile regional forces reassert themselves.