Last week I wrote about political risk in Tanzania. A few days later there was news that foreign companies operating in Iraqi Kurdistan would receive regular payments for their oil from this month.
I was immediately struck by the thought that, if on a scale of one to ten of political riskiness, Tanzania is one, then Iraqi Kurdistan is not short of 10.
Until last week companies such as Genel Energy (LON:GENL) received just spasmodic and meagre payments for their oil exports. There is ongoing fighting in the region against ISIS and as conflicts between Turkey and the PKK, a Kurdish militia, reignited. And, of course there is the collapse in the oil price.
Genel is a mid-cap group (market cap £990mln). It is the largest independent oil producer in Iraqi Kurdistan where it is partnered by DNO.
All these issues mentioned above have impacted negatively on Genel’s share price. The shares are now trading at 337pence against a 52-week high of 900.50p.
You may well think in the circumstances Genel might want to do what Gulfsands Petroleum has done in Syria.
Gulfsands was doing very nicely, thank you, in Syria, before the civil war made operating there nigh on impossible. It decided therefore to pick up some of its marbles and go and play elsewhere–-in this case in North Africa.
But speaking at the release of Genel’s interim results recently, the chief executive of Genel, Murat Ozgul, said: “We remain committed to the Kurdistan Region of Iraq and will continue to invest in our existing oil fields, while moving our major gas fields forward to development.”
I can understand the reasons why he says this. In the interim report Genel investors were told that operations in Kurdistan remain safe and secure. Investors will also likely take encouragement that for the most part Genel has maintained a strong operational performance in what is undoubtedly a challenging environment.
Net working interest output for its two producing fields, Taq Taq (40% interest) and Tawke (25% interest), was 88,800 barrels of oil a day (bopd) in the first half of 2015, an increase of 41% over for the first half of 2014.
The news that Genel last week was paid US$24.5mln by the KRG for its share of Taq Taq and Tawke’s output in August and that going forward there will be regular monthly payments, was very welcome. More welcome still was the announcement that from the start of 2016 the KRG will also started covering back costs. Genel is owed US$370mln in arrears it reckons.
The collapse of the oil price is a worry for all oil companies, but Genel, with life of field finding and development costs less than US$3 a barrel and opex — that is to say lifting costs — on the two main fields in KRI of less than US$2 a barrel, Genel is truly a low cost producer and can live with low oil prices.
All these factors underline why Genel will persevere in Kurdistan. The company has major assets that compare with any in the world in quality and in size. Moreover the business is comfortably profitable.
Also, in the future Genel will certainly play a key role in a KRI gas business. The region has 11 trillion cubic feet (tcf) of gas resources and 80ml barrels of liquid resources (condensate).
The gas is concentrated in two fields Miran (Genel 75 %), (KRG 25%) Bina Bawi (Genel 80%, KRG 20%). This will make Genel, the sole contractor for both fields.
There is a material and growing domestic market opportunity in the shape of 105bn cubic feet per annum (bcf) to 175bcf per annum of near term domestic market demand from power plants and industrial users.
But the real prize is Turkey, which is extremely gas hungry.
A contract has already been signed between KRG and Turkey for the export, through low cost infrastructure and at good prices, of 140bcf a year of gas from 2018 rising to 350bcf in 2020 and an option of increasing to 700bcf thereafter. That is a lot of gas. The gas is for later, however. The oil is for now.
But, both are good reasons for Genel staying put.