The current state of the KRG’s energy industry is a far cry from its early days in 2007-8 and the speed with which the industry has developed has been breathtaking. The Region has attracted many of the big international players in energy and the prospect of the region producing 1 million bpd has attracted many investors. The building up of the industry has been impressive but recently sustaining this speed of development has not been easy.
Two years ago the main issue for Kurdish oil was finding a route to get it to market. The issue of how to get Kurdish crude to market has now almost been resolved. However, in the process other issues have arisen, such as, the war with ISIS, the pipeline security, crippling public sector salaries and low oil prices.
ISIS being on the border has not helped confidence from a security point of view, however, ISIS has not particularly affected the region’s oil industry, from an operational perspective. Turkey-PKK fight may cause pipeline security issues but may very well be only a temporary issue.
The above factors have all contributed to a slowdown in the pace of development, however a lack of regular payments to oil companies and low oil prices have been the main factors causing the slowdown in the industry. Low oil prices have affected operations elsewhere in the world, so this is not unique to Kurdistan. Low oil prices coupled with liquidity and a financial crisis in Kurdistan have however exacerbated the problem.
Despite a promising start in 2015, with the announcement of a deal with Baghdad favorable to the Kurds, this has been largely ignored and Baghdad did not commit to its end of the bargain. Meanwhile, the KRG has managed to increase exports and find buyers on the international market. Oil was sold on forward sales contracts and in the second half of the year, the Kurdistan Region was expecting to receive around $850 million a month to cover its expenses and pay oil companies around $100 million a month. The plan looked great and the promise of payment was very good for the industry, however, in August 2015 oil prices took another dive and this has affected Kurdistan’s total receivables.
Despite all the issues, investors are still bullish toward the Kurdish oil industry’s prospects but the KRG has some serious choices to make if it is to overcome its recent problems.
Civil servants’ salaries make up the majority of government expenditure and the government has been trying to reform the public sector. There has, however, been little appetite on the part of the major political parties to move on the issue.
To maintain the momentum in the Kurdish oil industry, regular payments to the IOCs are essential. Production is still increasing but without new capital entering new development projects, the current rapid expansion will come to a halt.
The KRG has little power over oil prices and regional instability but the Kurdish government can start by reforming the public sector and reducing the huge burden on the region’s finances. Overdue reforms are gathering pace and the main political parties are slowly coming around to the idea. Although the problem has been identified, the reforms will not be as quick as some are hoping but will surely start soon.