As exports from Kurdistan rapidly grew from 150,000 barrels per day to 300,000 barrels per day to 600,000 barrels per day, downward crude prices were mitigated by increases in exports. As oil sank into the $20 per barrel range, investment in new production or sustaining current production seized up in every oil patch around the world. Again, Kurdistan was not immune.
In the second quarter of 2016, oil prices leaped to nearly $50 per barrel. A sense of the worst is behind us started prevailing and for several reasons, Kurdistan will rise off the bottom quicker and stronger.
First, production is dominated by Kurdistan-focused producers, including, KAR, DNO, Genel Energy, Oryx and HKN. As the market normalizes and especially with regular and contractual based payments of entitlements, these companies will use the proceeds that they earn in Kurdistan to continue investing in Kurdistan. This circulation of capital in the local market is essential for an economic rebound, and it mitigates against capital flight.
Second, Kurdistan is relatively cheap oil to produce, compared to offshore oil, for example. Oil produced in Kurdistan is efficiently exported by pipeline and sold to international markets. Major international oil purchasers have extended pre-payment financing to the KRG, another testament that the oil is trusted and valuable.
Third, the KRG has embarked on an ambitious and timely reform program to modernize the way the government does business. While oil prices were high and export volumes were increasing, the KRG had abundant funds to become complacent rather than constantly focusing on improving the delivery of services in more efficient and cost effective ways. The reform program will ease the burden on resources for operational expenses and provide more funding for longer-term economic development.
Fourth, Kurdistan is set to be an exporter of value added goods and services. The investment decisions of the past five years are starting to yield opportunities for the sale of industrial goods – steel and rebar, cement, fuels and even electricity – to the near abroad. This provides employment opportunities for locals in the manufacturing of the goods. It also creates important and stabilizing economic linkages with the neighbors. In the past several years, Iraq focused on increasing oil exports with little value added. All the while, Kurdistan was quietly building industry that will pay dividends for decades to come.
And, fifth, the brave Peshmerga continues to advance against the Islamic State enhancing the overall feeling that the Region is stable, defendable, and safe for investment. The international community has increased its support for the war effort in recognition that the Peshmerga are aligned with the values of the modern world on fighting and defeating threats to the homeland and the exportation of terror around the world.
Regional political stability remains a challenge. The relationship between the Kurdistan Region and Baghdad is at another threshold. The Kurdish people are increasingly calling for a process to determine the future of Kurdistan as part of Iraq. Commitments made through political agreements, with some even enshrined in the Iraqi Constitution, continue to be shelved rather than implemented. There are multiple ways forward that are achievable, and none should concern investors. The common thread is a peaceful, agreeable solution that is accepted by all sides in good faith.
Although the oil price is the headline for measuring economic performance, Kurdistan is much more dynamic than that. 2016 is the year of better governance, bold reform, industrial output advancement, contract affirmation, and the expression of the will of the people for peace and prosperity.