Iron ore weakness to continue into 2025 and beyond, says Fitch Solutions’ BMI
Looking beyond 2024-2025, BMI analysts maintained their view that iron ore prices will likely follow a multi-year downtrend.
The diplomatic war of independence between Iraq and its northern region Kurdistan is escalating rapidly, with the flashpoint for armed conflict being the Kirkuk oilfield on the boundary between the two sides.
While both sides have pulled back some of their troops poised for conflict recently, 2014 could be decisive as Iraqi Kurdistan plans to ramp up exports directly to Turkey, bypassing Baghdad. Neither side wants an armed conflict, but the momentum may be irreversible.
Which makes it surprising that junior Kurdistan explorer WesternZagros, (WZR-TSXv) hasn’t seen their stock impacted at all—in fact, they just raised over $100 million at a premium to develop their oil assets only kilometers away from Kirkuk.
The question moving forward is whether small companies like WesternZagros will be able to survive a potential war with their frontline assets intact, or whether they will look to cash in on some impressive exploration success and let the majors take the heat.
The Prize is huge—WesternZagros has 1 billion barrels in reserves already, but step-out drilling on their Kurdamir asset could prove the field up to between 10-20 billion barrels.
That trumps the increasing political risk—even when that risk could be an all-out armed conflict over Kurdish independence.
The biggest confirmation of this is the $123 million investment WZR secured earlier this month from Houston-based Crest Energy International.
The deal gives Crest 51,000,000 common shares in WZR, or about 19.8% of the company. For another 10% of outstanding shares in a secured loan agreement, Crest will also loan WZR $57.5 million to further exploration and development activities in Kurdistan.
Exactly what has spurred this massive investment optimism? It’s a combination of drilling success and geopolitical forecasting.
In terms of drilling success, two major discoveries at Sarqala and Kurdamir in southern Kurdistan late last year have quadrupled WesternZagros’ reserves to 1 billion barrels. Now it’s got the capital to fast-track the delineation of these discoveries. That’s already happening:
In terms of geopolitics, a bit of digging around into Crest paints an interesting picture. The US supermajors maintain a strong interest in Iraq’s non-Kurdish oil holdings, so Washington isn’t keen to prop up the Kurds against Baghdad and ignite an armed conflict for Kurdish independence. But private actors see things differently.
Crest is run by a Syrian Christian who has Republican backing and a keen interest in seeing WesternZagros make good on its finds. Like all the other players on the Iraqi Kurdistan scene, Crest is hedging its bets that the Kurds have the upper hand here.
Europe and Turkey agree, and they are homing in on Kurdish oil and gas—as Europe is desperate for supplies and Turkey aspires to become a major energy hub that bridges the Middle East and Europe.
The Latest Escalation—Budgetary Warfare
Baghdad has refused to pay outstanding debt for exports of KRG-produced oil through pipelines controlled by the central government since May 2011.
Baghdad is refusing to pay up because the KRG has been cutting unilateral deals with foreign oil companies (ExxonMobil, Total, Chevron) and attempting to export oil and gas directly to Turkey, bypassing the central government.
The Kurds are cutting Baghdad out of the equation because they need refined oil products; but the move also inches them towards independence. The KRG and Turkey initiated direct crude swaps in return for refined oil products when they were cut off from Iraqi funding.
It’s a tit-for-tat game that has seen Baghdad threaten to revoke the licenses of the supermajors who have had the bravado to strike unilateral deals with KRG and the KRG cut off exports to Baghdad.
Baghdad’s latest maneuver was to nearly cut the Kurds out of the federal budget. The $119 million budget for 2013 was passed on 7 March. The Kurds only got $646 million of the $3.5 billion they requested.
Not only does Baghdad still owe some $3.5 billion to foreign companies operating in the KRG for PAST exports, the new budget means the Kurds can only cover about two months of new crude payments to foreign companies.
So even if production is ramped up in Iraqi Kurdistan, the only way to pay for it will be to ensure direct access to Turkey.
For WesternZagros it’s not an issue—for now. The Company has not declared commerciality, and when it has produced, it has been on the basis of extended well testing.
WZR Investor Relations Manager Lisa Harriman told OGIB that the Iraqi budget was “very anti-Kurd”.
“The budget is one of the most anti-KRG documents to be produced by the Iraqi government – a clear result of the exclusion of the Kurds from the final deal-making. Though 17% of federal revenue is still allocated for monthly block transfers to the KRG, there are a number of punitive measures for the Kurds. Federal strategic expenses, including the military, keep getting larger every budget and, as the 17% monthly payments are calculated after these are deducted, Erbil’s share continues to shrink,” Harriman said.
That’s why the Kurds and the Turks are cautiously experimenting with trucked exports from Kurdistan to Turkey, independent of Baghdad.
From the Kurds point of view, they are in full compliance with the constitution. Certainly Baghdad has backed itself into a corner. By law, the Kurds are to receive 17% of ALL Iraqi oil export revenues. That’s a massive amount of money—much more than it would get by exporting to Turkey.
By refusing to pay up, and then largely cutting the Kurds out the budget, Baghdad has essentially removed one of the last carrots keeping Erbil in line. It’s easier to give up 17% when you’re not getting it anyway.
But there is one more thing keeping the Kurds from that game-changing move: They need to bring the strategically important city of Kirkuk under their control. Kirkuk is home to Iraq’s largest oil field and precariously nestled in the disputed territories right on the KRG’s border.
In this political melee, WesternZagros has one potential bulwark against Baghdad: Russia’s Gazprom Neft owns a 40% interest in WZR’s Garmian block, and Russia seems to privy to the favor of Baghdad of late. Gazprom’s involvement in Kurdistan is a strategic one for Russia, and could be leverage for Kurdistan in dealing with Baghdad.
Pipeline Warfare
Right now Kurdistan is racing to cut as many production deals as possible to ensure it has enough oil to supply a 200,000 bopd pipeline to Turkey that should be completed by 2014.
For now, this is where things stand:
In June 2012, the Kurds began trucking crude oil directly to Turkish refineries, with the refined product trucked back into the KRG. Turkish companies are also discussing energy swaps with the KRG that could see natural gas pumped from the KRG to Turkish power plants and electricity produced in Turkey channeled back to Iraqi Kurdistan.
Turkey’s Genel Energy is reportedly exporting around 20-30,000 bopd from Kurdistan’s TaqTaq field via truck directly to Mersin.
And there’s more of that to come: Genel is planning another pipeline to ramp up exports to Turkey by 2014.
This pipeline will link Iraqi Kurd oilfields directly to Turkey, but it could also tie in to the Baghdad-controlled Kirkuk-Ceyhan pipeline.
And there is also a plan in the works for a parallel pipeline that would supply several hundred million cubic feet of natural gas per day to Turkey annually by 2014. Turkey’s national oil company (TPAO) would be involved in this deal, under which it would acquire the rights to five exploration blocks in Iraqi Kurdistan.
(Late last year, Baghdad tried to “persuade” Turkey not to go down this road by kicking TPAO out of an oil contract with the Iraqi central government and handing it over to Kuwaiti Energy).
This deal hasn’t been finalized yet. The Turks are stalling a bit, and Iraqi officials are alleging that Ankara has promised not to go through with the deal. But again, Baghdad’s budget warfare will likely be the straw that breaks this camel’s back.
There is a northern gas pipeline currently under construction that leads directly to Turkey, and the KRG’s Minister of Natural Resources has said it could be converted to handle oil. The Kurds are actively seeking pumps to convert this now and this pipeline could handle 200,000 bopd and potentially be operational by mid-2013.
Bottom Line? This is the Definitive Year
With the game-changing pipeline set to come on line by 2014, Kurdistan is forcing Iraq to decide—and decide NOW—if diplomacy or war is the answer. These pipelines could represent the point of no return, giving Kurdistan its own royalties and the capital to be truly independent if it chooses that option.
As the definitive moment nears, WZR shareholders must decide—should they stay or should they go now? And how big is the window of opportunity.
By Jen Alic, Guest Editor
Oil and Gas Investments Bulletin
