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ERBIL, Iraq – Oil production in the Iraqi region of Kurdistan could almost halve by 2027 if there is no new exploration or major investment in the sector, government documents seen by Reuters showed.
A steep decline in oil revenue, a lifeline for the Kurdish Regional Government (KRG), would compound the economic woes of a region already struggling financially within an unstable Iraq, diplomats, officials, and energy experts said.
According to the documents, the Kurdistan Region in Iraq’s (KRI) oil output could rise to 580,000 barrels per day in five year’s time under a scenario in which investment is fully optimized, leaving 530,000 bpd available for export.
But without new investment, the semi-autonomous region might only have 240,000 bpd available to export as older wells become depleted, the documents, which have not previously been reported, show.
“It is very dangerous,” said KRI parliamentarian Karwan Gaznay, who is a member of the region’s oil and gas committee.
“We should be alarmed by it, but it will not be a real issue if we sort out our problems with the Iraqi government, then Kurdistan can develop new blocks and increase production. We have a lot of reservoirs,” he said.
The KRG did not respond to a request for comment.
Under the Iraqi constitution, the region is entitled to a portion of the national budget. But the arrangement collapsed in 2014 when the Kurds seized control of Iraq’s main northern oil fields in Kirkuk from Islamic State and began selling crude from there independently.
In 2018, Iraqi forces retook disputed territories, including the oil city of Kirkuk, and Baghdad resumed some budget payments but they have been sporadic. So far this year, it has sent two payments of 200 billion Iraqi dinars ($137 million).
KRG’s debt currently stands at about $38 billion, according to a government official, and lawmaker Gaznay said oil exports accounted for 85% of the region’s budget.
The KRG’s financial position has improved this year thanks to surging oil prices following Russia’s invasion of Ukraine but a steep decline in output would significantly increase its fiscal constraints.
The region’s oil output has already slipped from about 468,000 bpd in 2019 to 445,000 last year and 434,000 in the first quarter of 2022, according to reports by Deloitte.
“The reason that the current oil production is going down is due to the inability of the ministry of natural resources to bring timely additional investment online to overcome the natural decline of 15% to 20% each year in production for each well,” a source in the KRG said.
The government documents said falls in output at three major oil fields – Tawke, Khurmala, and Taq Taq – are the main reason for decline.
The potential slide in the Kurdish region’s oil output makes it important for the government to boost gas production, but a project to expand one of the biggest fields in Iraq has been suspended due to security concerns.
The oil in the region comes from drilling into fractures in limestone rocks. This initially results in high yields, but aggressive levels of production can rapidly drain the fractures and lead to water flooding in, energy experts said.
Rising water levels in several fields, including Taq Taq, have made it harder to access the oil, according to a government official and energy experts, who put the rapid depletion of the wells down to bad management and the challenging geology.
Energy experts and industry sources say attracting more investment could save the region from sliding into insolvency, but the difficult investment climate is getting in the way.
“There is some field expansions, which are slow. Companies are finding it hard to get approvals and there haven’t been significant new discoveries for several years now,” said Robin Mills, chief executive of consultancy Qamar Energy.
“Without big new developments they risk going into decline in the near future,” he said.
Oil sector setbacks
The Kurdish region has proven oil reserves of less than 3 billion barrels at most, based on the most optimistic forecast, according to the KRG source, only a tiny fraction of Iraq’s overall proven reserves of more than 140 billion barrels.
And the region’s energy sector has faced a number of recent setbacks.
An Iraqi Federal Supreme Court ruling in February deemed the legal foundations of the oil and gas sector in the region to be unconstitutional, forcing some foreign firms, including US oil field services companies Schlumberger, Baker Hughes, and Halliburton, to leave.
The upcoming decision in an arbitration case dating back to 2014 between Turkey and Iraq about the oil export pipeline that runs between the two countries is also sending ripples of uncertainty through foreign firms still in the Kurdish region.
Iraq claims Turkey has violated an agreement by giving the Kurdish region access to the pipeline without Baghdad’s approval.
The final hearing at the International Chamber of Commerce in Paris was in July and there will be a final decision in the next few months, according to Iraq’s oil ministry and sources familiar with the matter.
Foreign oil investors first came to Kurdistan in the era of former Iraqi president Saddam Hussein, when the region was considered more stable and secure than the rest of Iraq.
But the region’s star has started to fade, with the big foreign firms deterred by tensions between the region and the central government in Iraq, a string of downgrades to Iraqi Kurdistan’s oil reserves, and security problems.
Now Kurdistan only has a handful of small and medium-sized operators, many of which complain about the difficult operating environment. If the investment environment does not improve, Kurdistan risks further withdrawals.
“[Kurds] are living a dream and don’t want to wake up,” the KRG source said. – Rappler.com