Rising Power Of ISIS, Concern For BP And Exxon

Includes: BP, XOM
by: Value Hunters


The fighting in Iraq and Syria is taking a turn for the worse with important Syrian basis now under ISIS control.

Recently the ISIS forces have managed to get hold of the AinZalah as well as Batma oilfields near Kurdish region, with 30,000 per day production capacity.

The rising power of ISIS can be a major concern for BP and Exxon.

The ongoing fight in Iraq is taking toll with the passage of time as militants of the Islamic State in Iraq and Syria (ISIS) are pushing their way from north to the south of Iraq. Currently, Iraq is divided into three segments: Kurds, Sunnis and Shias. Kurds have already been pushing their agenda for a separate state, and now the Sunni militants under ISIS are fighting against the Shia led government to gain control of Iraq.

Recently the ISIS forces have managed to get hold of the AinZalah as well as Batma oilfields near Kurdish region. The militants tried to get hold of the Mosul Dam as well, but were pushed back by the Kurdish forces avoiding a serious threat for the city of Mosul, the second largest city of Iraq.

The two captured fields have a combined capacity of 30,000 barrels production per day, which will not only give support to ISIS's cause, but also damage the Iraqi government's earnings. This means that we should expect a marginal fall in production per day. That being said, major oil fields are in southern region of Iraq which means overall production would remain unaffected by the incursion of the ISIS. It should be noted that there is still potential for disruption of oil production, as the ISIS seems to be closing down towards the Kurdish region for resources. In this region, a pipeline connects Turkey with Kurds transporting 600,000 barrels of oil per day. Iraq was planning to ramp up the supply to 1 million barrels per day.

Source: Vox

The unrest will have a huge impact on the global community especially the neighbors, as Iraq is blaming Saudi Arabia for spreading genocide in the country and supporting the Sunni militias, which entered Iraq after gaining strength in Syria. If ISIS does get control of Iraq, then we might see a troubling situation for Iran as well due to its Shia majority population.

While the unrest continues, oil production of Iraq is expected to show disruption causing the crude oil price to rise. We can already see that Crude Oil Brent is picking up pace after the fighting started in Iraq, evident from the graph below.

Source: NASDAQ

We were expecting increase in the price of crude oil as the ISIS forces seems to be going towards the southern region invading one city after another. Moreover, this fall is not in line with the overall tumulus situation in the entire Middle Eastern region.

According to some analysts, if everything goes well, Iraq could ramp up its production from the current 3.3 million barrels per day to 6 million barrels a day eventually, reaching up to match the oil-producing giants like Russia and Saudi Arabia, producing 10 million barrels per day each. But there is a chance that the occurrence of militia attacks in the Kurdish region can adversely affect the analyst's expectation. Even though southern oil fields are free from militants' attacks, history tells us that poor infrastructure can damage the aim of the Iraqi oil industry of reaching a production level of 12 million barrels per day by 2020, trailing only behind Saudi Arabia.

Moving on to the companies operating in Iraq, we can see that Exxon (NYSE:XOM), BP (NYSE:BP) and Shell (NYSE:RDS.A) are cautious about their workers safety, as BP announced to pull out non-essential staff, while production is expected to continue. Royal Dutch Shell commented that safety and security of the staff is its top priority. Exxon is also operating in the region but it declined to make any comments regarding the evolving situation in Iraq. The Iraq Oil Report, however, said that Exxon Mobil has evacuated its staff from Iraq. These three companies along with other international companies operate in the southern region of Iraq that produces 90% of total oil, which for now is safe from the ISIS militants. According to the government, 100,000 police officials have been put on high alert for the protection of oil facilities. But the way ISIS is advancing, it is difficult to say if the police can withhold the militants' push.

Exxon is currently producing oil from the West Qurna 1 oil field located in the far south of Iraq. Last year, Exxon sold off 25% of its stake in the oil field to PetroChina (OTCPK:PCCYF) and 10% to Pertamina of Indonesia, which left Exxon with only 25% interest and remained lead contractor of the project. According to Exxon, this field had the capacity to produce around 500,000 barrels of oil per day by the end of 2013. This meant that Exxon would earn $676 million, as the company receives $1.90 per barrel for production of over 244,000 barrels a day. The oil field is expected to reach 900,000 barrels per day by 2015, which means huge revenues for Exxon Mobile as well as its other partners, in return for investing $1.65 million in 2013.

All these figures show a good potential for higher revenues, improving growth rate of Exxon. In the worst case scenario on the other hand, if ISIS does get to the far south of Iraq, then there is a possibility that western companies operating the filed might lose control of the fields. However, if that happens it would create a make or break situation for Exxon, since the company is earning revenues in billions every year, which can recover the investment it has already made in the West Qurna 1 field. On the other hand, there would be a slight change in the production growth of Exxon as it would lose 25% share of the production from the Qurna field, which is considered to have huge potential to report high production figures in future.

Source: ECON

British Petroleum reported positive news regarding its LNG deal with CNOOC to supply 1.5 mtonnes of gas to China for over 20 years, starting from 2019 onwards. In the recent past, CNOOC signed two separate LNG deals with BP's rival BG Group (OTCQX:BRGYY) for 8.6 m tonnes of gas for 20 years. So this deal means that BP is still fighting its way to stay in the Asian market, which is expected to show higher demand in the coming years for energy, especially LNG. Our expectation is based on the new long-term gas deals that China has recently signed with Gazprom (OTCPK:OGZPY), BP and BG Group.

Soon after, the upside from the gas deal was confronted with the concerns regarding BP's operation in southern Iraq. The company is a part of the consortium operating the Rumalia oil field, which welcomed two new oil producers - Petrofac (OTCPK:POFCY) and China Petroleum Engineering and Construction Corp. - for nearly $1 billion gone to the government of Iraq. This field is estimated to hold 17 billion barrels of recoverable reserves, representing 12% of Iraq's known reserves. BP was aiming to increase the production to 2.85 million barrels a day by 2016, which would have accounted for 7% of the OPEC production. The most recent reported output of Rumalia has been 1.4 million barrels per day, making this field the second largest oil producer in Iraq. In the consortium, BP has 38% interest which means that a good amount of revenues would be earned by the company from this field. For this reason we want to believe what Bob Dudley (CEO of BP) said regarding the militant situation, believing that operating the oil field is currently safe since the unrest is in the northern parts of Iraq, pretty far from the Rumalia field. But we have the same concerns here as we have for Exxon, that the ISIS is raiding and capturing towns with brute force, which can be a problem for both Exxon and BP in the future if ISIS are not stopped. For BP we believe that while the Rumalia oil field is vital for the country, it would put a minor dent on the financial statements of the company in worst case scenario, but would not cause any major setback, owing to its huge annual revenue from other operations compared to its revenue from Rumalia field.

For this reason we are expecting a little dip in the share price of both the stocks in the near future. However, it will not remain like this in the long term as we are expecting that the situation would improve due to U.S. support for the Iraqi government. The recent increase in media coverage due to reports of genocide has increased international pressure on U.S. to take assertive action.

Moreover, in the north, the Kurds have been considered as pro-west by the U.S., which indicates that the U.S. will prevent ISIS from going into Kurdish region of Iraq. This means Exxon operations in the Kurdish regions would remain safe, providing support to the share price.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.