November 3, 2010
Could Kurdistan unrest hit UK-listed oil firms?
Foreign oil companies operating in Kurdistan have been thrust into the limelight, as the race for a new Iraqi Prime Minister gets underway.
A parliamentary session will be called on Monday which could see Nuri al-Maliki reappointed as Prime Minister after an inconclusive election in March rendered the country without a government.
The Sunni-backed cross sectarian Iraqiya bloc notched up the most seats, but Maliki's faction has since teamed up with other Shi'ite groups and minority Kurds in a move that may seem him keep hold of power.
Last month, the differing political factions came under pressure from the high court to resume sessions and reach an agreement on a coalition government, but the wait is a tense one for those companies operating in the northern oil province of Kurdistan.
There are over 25 international oil companies operating in the region, including UK-listed Gulf Keystone Petroleum (GKP) and Heritage Oil (HOIL).In an investor update issued on Wednesday, AIM-listed Gulf
Could Kurdistan unrest hit UK-listed oil firms?
Foreign oil companies operating in Kurdistan have been thrust into the limelight, as the race for a new Iraqi Prime Minister gets underway.
A parliamentary session will be called on Monday which could see Nuri al-Maliki reappointed as Prime Minister after an inconclusive election in March rendered the country without a government.
The Sunni-backed cross sectarian Iraqiya bloc notched up the most seats, but Maliki's faction has since teamed up with other Shi'ite groups and minority Kurds in a move that may seem him keep hold of power.
Last month, the differing political factions came under pressure from the high court to resume sessions and reach an agreement on a coalition government, but the wait is a tense one for those companies operating in the northern oil province of Kurdistan.
There are over 25 international oil companies operating in the region, including UK-listed Gulf Keystone Petroleum (GKP) and Heritage Oil (HOIL).In an investor update issued on Wednesday, AIM-listed Gulf
Keystone spoke of the risks associated in an area plagued by fervent political unrest.
"The political situation in Iraq is unsettled and volatile. The political issues of federalism and the autonomy of regions in Iraq are matters about which there are major differences between the various political factions in Iraq.
"The current situation could create uncertainty for the group, in particular with regard to validity of title of the group's assets in Kurdistan and the allocation of revenue generated by those assets."
But with close to a quarter of the world's light oil reserves and home to vast unexplored opportunities, it is little wonder than foreign companies have seized their opportunity to build a portfolio in Iraq.
Kurdistan has long lured foreign operators with the promise of a production sharing agreement that allows for greater revenue to the companies themselves and the option to list reserves on their books - a major draw for shareholders of public listed companies.
The Kurds have awarded contracts to overseas oil companies since 2002 in an ambitious effort to hit one million barrels of oil per day within the next five years. However, its success was thrown into jeopardy late last year when a payment dispute led Kurdistan to halt oil exports to Baghdad, threatening to destroy the region's burgeoning industry.
The Kurdistan Regional Government and Iraqi authorities have since been gridlocked over the right to control the oil resources in Kurdistan, with Kurds believing it their entitlement to control their own resources while Baghdad argues all energy resources fall under the control of the national government.
James Hosie, equity analyst at RBC Capital Markets, says the situation still poses a huge questionmark for the industry.
"The outcome for those companies very much depends on how much say the Kurds get in the new government. The expectation is that the problem will get resolved one day but we have been waiting for a year to see a solution so the 'when' is still very much unknown."
But while uncertainty persists, it has done little to dampen feverish interest in those companies operating there, notably Gulf Keystone.
The company's shares have spiked this week, on a promising operational update. On Monday, chief executive John Gerstenlauer said he was "very encouraged" by recent log results and oil shows seen thus far in the group's Sheikh Adi-1 wells.
Furthermore, the company has focused on moving towards a domestic price for its Sargelu crude oil from its Shaikan-1 discovery.
The promising set of results set the rumour mill in drive with speculation that it had become a takeover target with a possible 250p bid, although analysts have been quick to rubbish the reports as "unsubstantiated".
David Hart, analyst at Westhouse Securities, said the interest in Gulf Keystone will gather pace on growing optimism that a resolution of some sort is on the horizon.
"There seems to be more optimism about finding some sort of resolution, particularly as a coalition government will need the Kurds on side and it will be in their immediate interest to have this dispute settled."
Fellow UK-listed Heritage Oil will no doubt also benefit from a settlement, given that Kurdistan plays a central role in its strategy.
The FTSE 250-listed firm which earlier this year sold off its assets in Uganda, said future plans for drilling in the region will focus on appraisal drilling on the Miran West structure which should kick off in the first half of 2011.
The company said it possesses a "very attractive prospective portfolio that has the potential to create significant shareholder value in the next year through several high impact exploration wells".
Despite its upbeat look, its shares have dropped sharply since it released its interim results at the end of August, amid speculation that it could lose its Miran licence.
However, analyst Melanie Savage at UBS - which recently initiated coverage of the stock - believes the market has been wrong to factor in an 80% chance of loss into its shares.
"Heritage gains access to low geological risk exploration by operating in areas of relatively high political risks," she explained before tagging the stock with a 'buy' recommendation and hailing it its top pick in the European exploration and production sector.
David Hart, analyst at Westhouse Securities, agrees that the company could benefit from renewed talk of a resolution in Iraq and has also tagged the stock with a buy recommendation.
"I suppose in some sense, the closer you get to the coalition, the closer you become to creating a firm hydrocarbon law," he continued, before adding that they have a strong balance sheet to fund further drilling in the province.
In a sign of confidence in the region, US mid-tier player Marathon Oil took a stake in four exploration blocks in Kurdistan late last month, marking its first foray into Iraq.
Samuel Ciszuk, analyst at IHS Global Insight, commented: "The entry of an IOC the size of Marathon will be taken as a significant confidence booster by the KRG and sends a particularly strong signal as it coincides with the central government's awards of three strategic gas fields to second or third tier bidders.
"Its entry will be interpreted by many as a vote of confidence in the KRG's ability to secure its upstream investors' interests vis-a-vis the Iragi government and ensure that even if the region's production sharing agreements have to be renegotiated, the terms would continue to be more profitable than those Iraq itself has offered."
However, Ciszuk warns that while Kurdistan is attempting to manoeuvre itself into the position of kingmaker, they could well overestimate their influence and thus push Iraq's other factions into uniting by demanding too much.
Now all eyes will fall to Monday's session to see what awaits the Kurdistan oil industry.
"The political situation in Iraq is unsettled and volatile. The political issues of federalism and the autonomy of regions in Iraq are matters about which there are major differences between the various political factions in Iraq.
"The current situation could create uncertainty for the group, in particular with regard to validity of title of the group's assets in Kurdistan and the allocation of revenue generated by those assets."
But with close to a quarter of the world's light oil reserves and home to vast unexplored opportunities, it is little wonder than foreign companies have seized their opportunity to build a portfolio in Iraq.
Kurdistan has long lured foreign operators with the promise of a production sharing agreement that allows for greater revenue to the companies themselves and the option to list reserves on their books - a major draw for shareholders of public listed companies.
The Kurds have awarded contracts to overseas oil companies since 2002 in an ambitious effort to hit one million barrels of oil per day within the next five years. However, its success was thrown into jeopardy late last year when a payment dispute led Kurdistan to halt oil exports to Baghdad, threatening to destroy the region's burgeoning industry.
The Kurdistan Regional Government and Iraqi authorities have since been gridlocked over the right to control the oil resources in Kurdistan, with Kurds believing it their entitlement to control their own resources while Baghdad argues all energy resources fall under the control of the national government.
James Hosie, equity analyst at RBC Capital Markets, says the situation still poses a huge questionmark for the industry.
"The outcome for those companies very much depends on how much say the Kurds get in the new government. The expectation is that the problem will get resolved one day but we have been waiting for a year to see a solution so the 'when' is still very much unknown."
But while uncertainty persists, it has done little to dampen feverish interest in those companies operating there, notably Gulf Keystone.
The company's shares have spiked this week, on a promising operational update. On Monday, chief executive John Gerstenlauer said he was "very encouraged" by recent log results and oil shows seen thus far in the group's Sheikh Adi-1 wells.
Furthermore, the company has focused on moving towards a domestic price for its Sargelu crude oil from its Shaikan-1 discovery.
The promising set of results set the rumour mill in drive with speculation that it had become a takeover target with a possible 250p bid, although analysts have been quick to rubbish the reports as "unsubstantiated".
David Hart, analyst at Westhouse Securities, said the interest in Gulf Keystone will gather pace on growing optimism that a resolution of some sort is on the horizon.
"There seems to be more optimism about finding some sort of resolution, particularly as a coalition government will need the Kurds on side and it will be in their immediate interest to have this dispute settled."
Fellow UK-listed Heritage Oil will no doubt also benefit from a settlement, given that Kurdistan plays a central role in its strategy.
The FTSE 250-listed firm which earlier this year sold off its assets in Uganda, said future plans for drilling in the region will focus on appraisal drilling on the Miran West structure which should kick off in the first half of 2011.
The company said it possesses a "very attractive prospective portfolio that has the potential to create significant shareholder value in the next year through several high impact exploration wells".
Despite its upbeat look, its shares have dropped sharply since it released its interim results at the end of August, amid speculation that it could lose its Miran licence.
However, analyst Melanie Savage at UBS - which recently initiated coverage of the stock - believes the market has been wrong to factor in an 80% chance of loss into its shares.
"Heritage gains access to low geological risk exploration by operating in areas of relatively high political risks," she explained before tagging the stock with a 'buy' recommendation and hailing it its top pick in the European exploration and production sector.
David Hart, analyst at Westhouse Securities, agrees that the company could benefit from renewed talk of a resolution in Iraq and has also tagged the stock with a buy recommendation.
"I suppose in some sense, the closer you get to the coalition, the closer you become to creating a firm hydrocarbon law," he continued, before adding that they have a strong balance sheet to fund further drilling in the province.
In a sign of confidence in the region, US mid-tier player Marathon Oil took a stake in four exploration blocks in Kurdistan late last month, marking its first foray into Iraq.
Samuel Ciszuk, analyst at IHS Global Insight, commented: "The entry of an IOC the size of Marathon will be taken as a significant confidence booster by the KRG and sends a particularly strong signal as it coincides with the central government's awards of three strategic gas fields to second or third tier bidders.
"Its entry will be interpreted by many as a vote of confidence in the KRG's ability to secure its upstream investors' interests vis-a-vis the Iragi government and ensure that even if the region's production sharing agreements have to be renegotiated, the terms would continue to be more profitable than those Iraq itself has offered."
However, Ciszuk warns that while Kurdistan is attempting to manoeuvre itself into the position of kingmaker, they could well overestimate their influence and thus push Iraq's other factions into uniting by demanding too much.
Now all eyes will fall to Monday's session to see what awaits the Kurdistan oil industry.
