Norwegian independent DNO’s move for fellow Iraqi Kurdistan producer Gulf Keystone should be welcomed by all interested parties.
For Gulf Keystone shareholders, the $300mn cash-and-shares bid offers a way out before their ownership gets diluted under Gulf Keystone’s last-ditch restructuring plan. For Gulf Keystone’s partners in the Shaikan field, it holds out the prospect of an operator with some cash for investment in the field’s development. And for DNO, it offers a chance to broaden its asset base in northern Iraq’s Kurdish region, for a reasonably low outlay, at a time when there are signs of confidence returning to the region’s upstream sector.
But the move will be welcomed most in the corridors of power in Erbil, where it will be read as a sign of belief in the region’s prospects. This is quite the turnaround from the start of this year, when Gulf Keystone’s chief executive said the Kurdistan Regional Government’s (KRG) inability or unwillingness to pay for crude exports had put his company “on a financial knife edge”. Massive downgrades to reserve estimates had also shaken the sector that was already caught in the middle of a political stand-off between Erbil and Iraq’s central government.
A new payment agreement, implemented in February, was aimed at ensuring planned production capacity rises. DNO and Turkish firm Genel have said that, after five months of regular payments under the new system, they will hold their end of that bargain.
Erbil hopes the investment pays off – its battles with Islamist group Isis, in northern Iraq and in Syria, is a massive drain on finances that depend entirely on crude sales. The potential for fresh disruption to exports through Turkey is always at the back of minds, and even more so in a post-coup world, hence the sounding out of plans for an export pipeline through Iran.
The potential deal has a political angle too. Genel trumpeted its ambitions to be a consolidating force in the KRG oil sector. And the KRG is highly dependent on Turkey for its crude export route and for future gas sales. The unremitting slide in Genel’s market capitalisation and the reserves downgrade of its Taq Taq field look to have taken it out of the consolidation game for now, although it is too early to entirely rule out a counter bid for Gulf Keystone. Given the delicate and ever-shifting political relationships within and between Turkey, Iraq, the KRG and the wider region, Erbil may be pleased to see a more unambiguously external company taking on Shaikan.
Another reason the KRG may welcome DNO’s takeover bid is that the Norwegian company should know if a troubled region is likely to prosper — it has experience in Yemen.
Indeed, so beset on all sides is the KRG that is wouldn’t take a huge leap of imagination to see it slipping into the same situation as Yemen. That hydrocarbon-rich nation was producing around 400,000 b/d in 2001, but declining production at mature fields and attacks on infrastructure made any increase unfeasible.
US government agency the EIA, somewhat charitably, describes Yemen’s upstream industry as being “in a state of flux”. A cargo of crude may sail from Yemen’s Ash Shihr terminal next month — it would be the first since early 2015.