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Genel buffeted by regional politics

The decision by Kurdistan's Regional Government to commence oil exports independently of Iraq has major implications for the region and frontier producers such as Genel.
June 5, 2014

Last month, the Kurdistan Regional Government (KRG) confirmed that it had commenced crude oil exports independently of the Iraqi central government. The move demonstrates that patience at the KRG has worn thin following protracted delays over the framework agreement covering oil exports from the region. According to Kurdish officials, the Iraqi government has not only stonewalled negotiations, but has failed to distribute Kurdistan's share (17 per cent) of crude oil exports since March of this year.

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The Iraqi government has long been at odds with Kurdish officials over the latter's decision to unilaterally determine the terms of exploration and production (E&P) contracts struck with foreign oil companies. And its relationship with the KRG has become all the more fraught due to the region's growing commercial ties with Turkey. Baghdad's failure to fulfil its obligations under its original revenue-sharing agreement was probably designed to destabilise the KRG, which needs to find around $750m (£446m) a month to cover its public sector wage bill. With a fifth of the region's populace on the government payroll, this obviously presents a problem, but the hardball play by the Iraqis may well have backfired.

Instead of bringing Kurdish officials into line, it has forced them into moving ahead with independent sales of crude that had been stored at the Turkish Mediterranean port of Ceyhan (in expectation of a compromise on the framework agreement). It is no exaggeration to suggest that the spat over oil royalties has the potential to redraw the political map of the region, but it obviously has potential implications for regional producers - most notably Anglo-Turkish Genel Energy (GENL).

Last year, Genel's production was constrained by limited export capacity, but the opening of a new pipeline route into Ceyhan could facilitate a 50 per cent increase. It may need to. Analysts at Wood & Co estimate that exports from Kurdistan, currently 100,000 barrels a day, would need to expand fourfold to cover the KRG's wage bill - a difficult, although by no means impossible, task. Theoretically, an export route from Ceyhan would mean that producers such as Genel, which has previously been forced to sell at a substantial discount to Brent crude, could achieve something approaching the market rate. The stumbling block is that big energy traders like Trafigura are understandably wary of crossing the Iraqi oil ministry for fear of jeopardising existing commercial relationships.