Kurdistan referendum: Barzani's legacy

With the Kurdistan referendum fast approaching on 25th September, OGInsights reviews the latest developments in this run-up period. What is important to note is that the question being put to the Kurdistan people is sufficiently vague – the meaning of an “independent” Kurdish state is intentionally not set out. Independence can mean self-rule and independent governance with varying degrees of autonomy from Federal Iraq or complete separation from Baghdad at the extreme.

The referendum should be viewed as an opinion poll, something that reminds the world and reaffirms the Kurdish aspirations for independence. It is not something that will have any immediate impact on the administration of the Kurdistan region, trade between Kurdistan and its neighbours or money flows with Baghdad. It certainly is not a declaration of independence either.

The referendum is symbolic and timing is more opportunistic than reasoned. President Massoud Barzani is coming to the end of his term and holding a referendum as being the first step to eventual independence is his chance to leave a legacy. The turnout is expected to be high and a “yes” vote is deemed inevitable which will score popularity points for President Barzani. Barzani has ensured that the voting ballots, systems and infrastructure is largely in place for a referendum at the beginning of September although the actual date will be the 25th, signalling the seriousness of this referendum for Barzani.

Leaving a legacy seems to be an important driver for this referendum, with Barzani spending much political ammunition to secure it. Turkey was not notified of the date of the referendum lest they would undermine it, Iran will fear reignition of calls by its own Kurds for independence and both the US and Baghdad will be annoyed that the referendum includes the disputed areas after being told to explicitly exclude them.

However, Kurdistan’s neighbours have not reacted to date suggesting a level of tolerance recognising that the referendum could be a tiger with no claws. Any action by neighbours is likely to take place before the referendum as any action taken post the referendum results will likely have minimal meaningful impact on Kurdistan and in some cases could have reciprocal impact on the initiator. For example, whilst Turkey could close the oil export pipeline and halt investment in Kurdistan gas, Turkey does do a lot of other trade with Kurdistan. Similarly, any retaliation by the US could see the loss of Kurdish support for the war in Syria.

The referendum will be closely watched around the world, but the results are not expected to be a surprise.

Related posts:

• Kurdistan independence referendum

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Kurdistan E&Ps have been paid for May shipments

Kurdistan E&Ps have been paid for May shipments.

The Tawke partners have confirmed receipt of USD39.6 million. The amounts will be shared pro-rata by DNO (55%) and Genel (25% WI) and comprises USD33.2 million towards May deliveries and USD6.4 million towards past receivables.

The Taq Taq partners have received USD12.2 million and will be shared pro-rata by Genel (44% WI) and Addax (36% WI). The payment comprises USD11.1 million towards May deliveries and USD1.2 million towards past receivables.

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SNE North is Sirius

Cairn has completed the SNE-1 North exploration well (Sirius prospect), located c.15km north of the original SNE-1 discovery. The well reach TD 2,837m and was completed ahead of schedule. A 24m gross hydrocarbon column was encountered across three intervals with 11m net condensate and gas pay in the primary objective and 4m net oil pay in the secondary objective.

A full set of oil, condensates and gas samples were recovered to surface from the 500 series sands, the same sand series that contributes the bulk of volumes in the main SNE field. The oil is slightly lighter at 35˚ API (vs. 32˚ API in SNE).

Further work will be required to establish the size and commerciality of the discovery, although FAR has assigned 294mmbbl of mean recoverable resources. The find has positive connotations for the block demonstrating further hydrocarbon potential to the north of the block. The well will now be plugged and abandoned and concludes the five well 2017 drilling campaign and the Stena DrillMAX rig will be released.

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Kosmos extends position in Mauritania

Kosmos noted in its Q2 results that it had farmed in to a 15% non-operated interest in Block C-18 Mauritania. The farm-in extends Kosmos' postion in this recently proflific play which contains the Tortue gas discovery to the south.

Tullow Oil holds 90% WI (State 10%) and will reduce its interest to 75% post transaction, whilst retaining operatorship. The block is deepwater (over 2,300m depth) and has recently completed a 600km2 3D seismic campaign.

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Mozambique LNG moves one step closer to FID

On 31^st July, Anadarko finalised two agreements with the Mozambique government (the marine concessions) which pave the way for FID of the LNG project. The agreements would allow Anadarko as operator to progress with the design, building and operation of the marine facilities for the project and could see FID in 2018. The next step is to begin with resettlement plans, the completion of which would allow construction to commence.

Separately, the partners continue with efforts to secure long-term offtake contracts and the high proportion of offtake by equity holders of the licence reduces the risk surrounding the project. Asian players Mitsui (20%) and PTTEP (8.5%) have a need to source long term gas supply, as do the Indian participants ONGC (16%), Oil India (4%) and Bharat (10%). The remaining Area 1 licence holders are Anadarko (26.5%) and ENH (15%).

Area 1 is estimated to hold c.75tcf of recoverable gas and will initially have two LNG trains at the proposed onshore processing plant with 12mtpa capacity for the Golfinho/Atum field. The scale of the resources does pose a threat to upcoming global LNG developments, particularly Australian projects which also target the Asian gas markets, and could see a glut in the 2020s particularly with Qatar also looking to up its LNG exports.

Earlier this month saw Petronas cancel its large Pacific NorthWest LNG project on the west coast of Canada.

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Brasse continues to grow

Faroe has successfully completed the Brasse sidetrack appraisal well 31/7-2A. Very high quality reservoir sands were encountered and the well penetrated an 18m oil and a 4m gas column. Recoverable resource estimates have been increased to 56-92 mmboe (from 43-80 mmboe).

The sidetrack was drilled to a total depth of 2,275m. It is located 1km to the west of the appraisal well (31/7-2) and 2.4km to the south of the main discovery well (31/7-1). The appraisal well will now be plugged and abandoned as planned.

An extensive data acquisition programme was carried out in the 31/7-2A sidetrack, including the cutting of cores together with a full suite of wireline logs and fluid samples. Pressure data also indicates good communication within the reservoir. The data supported an increase in the recoverable resources estimates.

Faroe is now moving the development of the field forward with the aim of fast tracking the development given its robust economics at low commodity prices, which could see first oil in 2020/21.

Extensive feasibility studies have been carried out focussing on a sub-sea development tied-back to one of the hosts in the nearby area (either Brage or Oseberg Sør). This work is ongoing and external studies have already been undertaken for the Subsea Production System (SPS),  flow assurance and pipeline and marine work.  Technical and commercial activities related to the potential hosts were formally initiated in Q4 2016.

The preliminary development plan envisages three to six production wells and an optional water injection well for pressure support.  Initial flow rates from the prolific Brasse reservoir are expected to be higher than previously thought, with predicted delivery rates above 30mboepd. The early estimates of the cost of this development is c.USD550 million mid-case for a scenario consisting of four wells and one subsea template.

Faroe now plans to finalise the concept selection with subsequent submission of a Plan for Development and Operations (PDO) to the authorities in 2018.

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Centrica and Bayerngas combine forces

On 17^th July 2017, Centrica and SWM/Bayerngas announced that they had reached agreement to combine their E&P businesses. The respective E&P businesses will be vended into a newly incorporated JV with Centrica holding 69% and SWM holding the remainder 31% in the JV. Key assets in the combined business include Kvitebjorn, Stratfjord and Ivar Assen in Norway, Cygnus in UK and Hejre in Denmark.

Source: Centrica investor presentation

The combination will create a leading pan-European E&P with Centrica’s assets providing a strong production base and Bayerngas providing a development weighted portfolio. The JV will become one of the largest players across the North Sea and will be the biggest producer in 2017.

European E&P 2017E production rankings
Source: Centrica investor presentation

European E&P reserves rankings
Source: Centrica investor presentation

There is no consideration for the transaction, but Centrica will make a series of deferred payments totalling GBP340 million (on a post-tax basis) into the JV between 2017 and 2022; these payments are in respect of upcoming decommissioning in Centrica’s E&P portfolio.

The move signals Centrica’s and SWM’s desire of moving away from E&P to focus on their core utility businesses, in line with other European utilities in recent years, some of whom have completely exited E&P. This follows on from Centrica’s efforts of streamlining its upstream portfolio with the exit of Canada and Trinidad & Tobago earlier this year and SWM’s search for a buyer of its Bayerngas business.

Centrica was known to be in discussions with ENGIE E&P on a potential combination, however following the latter’s sale to Neptune, Centrica turned its efforts to other partners which likely included other “loose” North Sea portfolios such as Dong (now sold to Ineos) and Maersk Oil as well as consolidator Ineos. Bayerngas has also spent the last couple of years searching for a public E&P merger partner, but a lack of success in finding a suitable candidate eventually led to consideration of Centrica.

The rationale for this deal centers on the positioning of the combined business for an exit. In their standalone forms, the Centrica portfolio was likely to be too large to find a private equity buyer with the two large North Sea vehicles having done their deals (i.e. Chrysaor and Neptune) and with the Bayerngas portfolio having too much development to be attractive.

The combined business is now more balanced and is of a size that one day will appeal to private equity when more money is available in this space. Alternatively, an IPO is another exit option but will have to wait until the equity markets show signs of being open again to the oil & gas sector. Nevertheless the combined portfolio in its current form, whilst sizeable and sustainable for years to come, lacks a growth story needed to entice a buyer, whether that is private equity or the public markets.

The creation of an E&P focussed business through this JV should allow it to pursue a strategy independent of its utility owners, and this includes implementing investment and the portfolio rationalisation necessary to steer the business to an exit in the mid to longer term.

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