Oil Output Freeze Hope Gets Help From an Unlikely Source: Gadfly

Oil ministers from OPEC and non-member countries are looking hard for a recovery in prices, and are hoping their meeting next month will produce an output freeze that can be a first step toward that goal. They're getting some surprise help from Iraq, the member which added more to supply last year than any other country, and that's due in large part to a change in fortunes in Kurdistan.

The Kurdish Regional Government had planned to be overseeing production of 1 million barrels a day of oil by now. Instead, it faces declining output, recurring difficulties in getting its oil to market and renewed pressure from federal authorities.

The northern region was seen as a bright spot for Iraqi production in 2016 after Baghdad asked investors in the south to cut expenditure, forcing them to shelve near-term expansion plans. Sales abroad rose last year despite the collapse of an export agreement with the national government -- instead of handing the bulk of the crude over to Baghdad, the Kurds continued to sell it themselves and shipments from northern Iraq rose above 600,000 barrels per day.

Iraq's oil output, including the contribution from the Kurds, increased by almost 1.4 million barrels per day between July 2014 and June 2015, according to figures compiled by Bloomberg. B ut output stagnated in June, and the downturn that started last month is likely to continue.

T he Kurds had planned to add around 150,000 barrels per day to supply in 2016, but now could see output drop by around 50,000 barrels. Add to that the 150,000 barrels a day the Baghdad government is holding back rather than exporting through the region, and the expected increase becomes a 200,000-barrel-a-day decrease.

The trouble started in mid-February, when the Kurdish pipeline to the Ceyhan export terminal on Turkey's Mediterranean coast was shut for repairs. The line is the only route to move large volumes of oil from northern Iraq to the world market after Islamic State over-ran the old route that passed close to Mosul. Before the shutdown, the pipeline was carrying around 450,000 barrels a day of Kurdish oil and a further 150,000 barrels per day from fields operated by the Baghdad-controlled North Oil Company (NOC).

The pipeline has reopened so its closure, although damaging, was at least temporary. But the region was dealt a more significant blow when key foreign investor Genel Energy slashed estimates for reserves at its Taq Taq field by 48 percent. The revision came after the reservoir was found to be less porous than previously estimated, meaning that the oil it contains cannot flow as easily through the rock and ultimately be extracted for sale.

Importantly, Genel said the downgrade was not price-dependent, suggesting there is little chance that the estimates will increase again, even if oil prices recover. But it helps explain last year's unexpected 37 percent fall in output from the field and forecasts of further declines to come.

Taq Taq is not the only project to have struggled -- output from the Tawke field has disappointed. Norway's DNO slashed investment there as prices fell and Payments from the regional government became erratic. Its investment plans for 2016 will only return output to last year's average level.

Kurdistan's complicated politics are adding to its difficulties. No sooner was the pipeline to Turkey repaired earlier this month than the Baghdad government banned its use to move NOC's crude.

Shipments will only resume after new settlements are reached with the Kurds, Iraqi Oil Minister Adel Abdul Mahdi said on Facebook. Given the long history of mistrust and failed agreements between the two sides, this could take a long time. Meanwhile, the oil will remain in the ground.

The oil market rebalancing is underway -- it's just not coming from where everybody thought it would.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story: Julian Lee in London at jlee1627@bloomberg.net.

To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net.

By: Julian Lee

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