- The Kurdish Regional Government is making important progress in its efforts to maintain control of key oilfields in northern Iraq and quickly increase exports from an increasingly autonomous Kurdistan.
- As the trickle of exports from Kurdistan grows in the months ahead, the barrels will pressure crude prices at the margin, especially in the Mediterranean.
- On a macro basis, the expansion of exports from Iraqi Kurdistan adds supply to a global balance where lackluster economic activity is already yielding downward revisions to oil demand growth.
The Kurdish Regional Government (KRG) is making important progress on a number of fronts in its efforts to maintain control of key oilfields in northern Iraq and quickly ramp up crude exports from an increasingly autonomous Kurdistan.
Much attention lately has been paid to a single Kurdish charter floating 60 miles off the Texas Coast near Galveston. The tanker United Kalavytra - and its 1 million barrel crude cargo, had been tied up in legal limbo seeking a US Gulf Coast outlet for nearly a month. The legal proceedings between Baghdad and the KRG in a Houston courtroom finally came to a head this week when a Texas state judge threw out an order to seize the cargo. This paves the way for sale and delivery of the crude. In fact, the vessel in question appears to have quietly set sail for destinations unknown hard on the heels of the judge's ruling.
Prior to the United Kalavytra, the KRG had achieved some traction in marketing its crude oil to a number of outlets. The KRG sold about 1 million barrels of crude to Israel during June. Another 500,000 barrels were delivered into the Israeli port of Ashkelon this month. The Hungarian oil company, MOL Group, also purchased 600,000 barrels of Kurdish crude this month via Croatia. According to Turkish officials, eight million barrels of KRG crude has already been transferred to eleven different tankers from storage in Turkey. Turkish officials also suggest that tanker loading at the Turkish Mediterranean port of Ceyhan is continuing.
In the US, both LyondellBasell and Axeon Specialty Products were willing to import KRG crude before being spooked by the legal proceedings in Texas. Some US refiners may remain reluctant to take a chance on Kurdish barrels given potential litigation and the risk to long-term relationships with the Iraq state oil marketing company SOMO. US refiners imported 341,000 bpd of Iraqi crude in 2013, and maintained a similar pace in the first half of 2014. This is down from 627,000 bpd 5 years ago according to the US Energy Information Administration (EIA).
Nonetheless the end of this legal sideshow in Houston is a big help in the future marketability of crude sourced from Kurdistan, if only on the opposite side of Atlantic. And greater KRG sales in Europe will merely displace Russian and Saudi crude from Europe to American markets.
New Marketing Angles & Pipeline Expansions
The legal saga of the past few weeks has prompted the KRG to shift its marketing approach and target audience. KRG officials are now keen to sell their crude in much smaller parcels on vessels carrying about 250,000 barrels, or about one fourth the size of the United Kalavytra. Smaller cargoes will allow more options and less transparency, both good for the marketing efforts being made from Erbil, the KRG capital.
The events off the coast of Texas also overshadowed important KRG infrastructure upgrades designed to significantly expand exports over the next few months. The KRG has also been working overtime to bolster capacity on their pipeline into Ceyhan. Turkey gave the green light to the KRG to use the export terminal at Ceyhan in May this year. Earlier this month, Ankara formally asked the US administration to end the prohibition on the sale of crude oil from Iraqi Kurdistan.
The first phase of expansion, additional pumping capacity near the Iraqi/Turkish border at Fishkabur, was brought into service last week. This pressure boosting station effectively doubled export capacity on the pipeline from 125,000 bpd to 250,000 bpd. The KRG is already planning another booster station on the pipeline that would lift capacity to 500,000 bpd by the end of 2014. The KRG said its goal is to increase oil sales to around 1 million bpd by the end of 2015.
Greater KRG Autonomy & Revenue Needs Follow ISIS Moves this summer
The armed forces of the KRG have played an instrumental role in containing the Islamic State (ISIS) incursion into central and northern Iraq. Just last week, the key Mosul Dam was recaptured from ISIS with control immediately transferred to Kurdish Peshmerga fighters.
The KRG needs the funds from increased oil sales to contain the ISIS threat to its territory. The containment of the Islamic State is a goal clearly shared by the leadership in Baghdad, Tehran and Washington. Iran is already sending weapons to support the KRG and is helping to protect the Shia minority in southern Iraq. US diplomats have suggested that Kurdish oil sales should be banned until terms are worked out between Baghdad and Erbil. At the same time, a State Department spokesman just this week, in response to the Texas court ruling, insisted that KRG oil sales are a purely commercial rather than a diplomatic issue.
Recent political developments in Baghdad may help resolve oil sales issues, and in turn, encourage Kurdish crude exports. Prime Minister Nouri al-Maliki was pushed out of office and senior Kurdish politicians have quickly rejoined the administration in Baghdad. Most notable was Hoshiyar Zebari, a Kurd, who returned to his post as Iraqi Foreign Minister last week. Kurdish politicians had suspended their roles in government last month after al-Malaki accused the Kurdish capital of Erbil of harboring Sunni rebels.
These developments have bolstered the KRG's legitimacy in the global political arena and its movement toward greater autonomy. Erbil's big push to achieve exports of 1 million bpd by the end of next year is critical to obtaining the economic clout it needs to fight off the threat from the Islamic State.
Head to Head in the Med - Little Room for New Supplies
As the trickle of exports from Kurdistan grows in the months ahead, the barrels will pressure crude prices at the margin. This new supply source comes at an especially tough time for Mediterranean markets. Russian and Middle Eastern producers are already battling it out for crude market share in Europe amid a sharp multiyear drop in both NW Europe and Med refinery capacity as well as the onset of autumn refinery maintenance in the Atlantic Basin.
On the supply side of the equation, Libyan crude exports are rising and reached 665,000 bpd this month after averaging 400,000 bpd in July, and 265,000 bpd in the first half of 2014. Saudi production is now above 10 MM bpd. The kingdom has been quick to use cuts in European contract differentials to maintain its market share in Europe as Libya short haul supplies return to the market. The same Saudi reaction can now be expected as more crude begins flowing into the Mediterranean market from northern Iraq via Ceyhan. Both Libya and Iraqi Kurdistan, alongside Russia, now constitute the Saudis' rapidly expanding short haul competition in Europe.
Global Economy Fails to Cooperate
On a macro basis, the expansion of exports from Iraqi Kurdistan adds more barrels to a global balance where lackluster economic activity, especially in the EU, is already yielding big downward revisions to global oil demand growth. The latest Oil Market Report from the International Energy Agency (IEA), released August 12th, cut global oil demand in 2014 by 300,000 bpd to 1 million bpd. The reports focused on the slower economic prospects in the OECD.
Updated demand numbers in key emerging economies also look underwhelming. July data released this week by China's National Bureau of Statistics and General Administration of Customs show China became a net exporter of refined products last month. The same data implied China's apparent oil demand (net imports + domestic refinery runs) was 2% lower (more than 200,000 bpd) in July 2014 than the previous year. Given the softening global demand picture going forward, and with no slowing in the pace of shale related production growth in North America, making room for KRG in this year's crude exports is a difficult proposition.
The information in this report is purely the opinion of the author, as of the date of this report, and does not represent a recommendation to buy or sell by the author or by Mobius Risk Group, LLC. Information and data have been obtained from sources considered reliable; however, Mobius Risk Group LLC does not guarantee that the information is accurate or complete.