The Energy Sector in the KRG

Originally commissioned late 2015

The KRG, as a separate entity, ranks 8th in the world in terms of oil and gas reserves, with 50 billion barrels of proved reserves and 80 billion barrels of unproved reserves, as well as 8-10 trillion cubic meters of natural gas reserves. The KRG has managed to woo large international oil companies, such as Exxon Mobil and Chevron, thanks, in part to the perceived stability in the region. In May of this year the KRG exported 17,906,242 barrels of crude oil, with this number dropping in June and further in July to 16,019,090 due in part to an interruption to an export pipeline caused by a bomb attack on a section in Turkey. Efforts to expand domestic production of electricity and domestic refinement of oil are underway. The latter is naturally expected to increase revenues from oil production. The domestic demand for electricity is increasing and, if the KRG’s economy expands as hoped, should increase further. One floated target was to increase domestic electricity production to 5000 MW by the end of 2016.

The region faces serious challenges on a number of fronts to its energy sector. One major issue that has shaken investor confidence has been the ongoing dispute between the KRG and the central government in Baghdad, with the KRG wanting greater autonomy over the managing of its sales of oil, including exporting the oil itself, while Baghdad is anxious to maintain its share of the revenues. The dispute spiked in 2014 when the KRG started exporting and selling oil via a pipeline into Turkey, shipping it from the Turkish port of Ceyhan, to which Baghdad responded by cutting the KRG’s federal budget. This led to the KRG being forced to take out loans and to pre-sell future oil, which it is now paying off.

Earlier this year, Erbil and Baghdad reached an agreement that would allow exports and collaborative efforts between the two entities to resume, however, this fell apart a few months later. Amid this turbulent environment, payments to international oil companies operating in the KRG have been massively delayed or in some cases still have not been delivered, causing the share price of these companies to suffer. While exports have resumed and the KRG is working towards meeting its oil export commitments, analysts predict disputes between Baghdad and the KRG are likely to flare again in the future over this issue.

Nonetheless, while there are disputes over who gets to run the oil, the facts on the ground are developing positively for the KRG, with its two pipelines to Turkey and the continued presence of large, international firms. Indeed, the KRG’s arrangement with Turkey holds considerable promise as the latter’s rapidly growing population and growing economy mean that its demand for energy is ever-expanding. Moreover, Turkey, being eager to end its reliance on Russia and Iran, with which it has less than warm relations, has expended not inconsiderable effort in developing closer ties with the KRG.

Another issue, however, that threatens the KRG’s energy sector is the ongoing conflict with ISIL militants. While the fighting has not overly affected production, it did come very close to some of the KRG’s oil fields, namely the Khurmala Dome and Shaikan. In addition, some companies had to abandon their exploration activities, which may well hamper the development of the sector. Added to this is the psychological impact: an executive of one large American firm reported seeing smoke rising from the fighting. The impact of such events is hard to measure but will certainly have some effect. All told, however, the KRG still remains a relative area of calm compared to the increasing existential threats faced by the government in Baghdad.

 

 

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