KRG switches to PSC terms to conserve cash outflows to IOCs

Kurdistan exports and payments to IOCs remain unpredictable with the situation subject to change on a daily basis. The Kurdistan Regional Government’s (“KRG”) monthly export report and news flow from the E&Ps gives a glimmer into the dynamics of operating in and getting paid in Kurdistan.

On 4^th February, the KRG published its January 2016 monthly export report – the KRG exported 602mbbl/d through the Kurdistan pipeline network to the port of Ceyhan in Turkey; this is down from 644mbbl/d in December and the Q4 2015 average of 648mbbl/d. The export line was down for just one day last month. Fields operated by the KRG contributed 452mbbl/d (Q4 2015 average was 476mbbl/d), while the North Oil Company’s fields contributed 150mbbl/d (Q4 2015 172mbbl/d).

Today, Genel announced that the Taq Taq field partners have received a gross payment of USD16.3 million from the KRG for oil exported through the main export pipeline; this is down on the USD30 million paid in recent months, as the KRG employs the terms of the Kurdistan’s Production Sharing Contracts (“PSC”) for the first time, rather than an ad hoc payment system. Genel's share of the gross Taq Taq payment fell to USD9 million, from USD16.5 million. The impact of the shortfall has been softened somewhat by the payment of an additional USD3.2 million (USD1.8 million net to Genel) to cover past receivables.

The change to the PSC was clearly intended to reduce the KRG’s cash outflows, so the payment reduction should not be a surprise. The silver-lining is that payments are now linked to the oil price and the PSC provides greater certainty on asset valuations and the merits of increasing spending to help stabilise and potentially grow oil production. However the payment made in January reflects comprise of a number of components: crude quality adjustment, deduction of transportation charges, handling costs as well as the PSC terms, and in general, greater clarity on these variables will need to be disclosed in order to better forecast future cash flows.