Monday, 3 August 2015

Kurdistan ~ payments coming

by Will Forbes

The singularly most important concern for investors in Kurdistan-based companies over recent times has been the ability of the contractors to get paid on a timely basis for their production, and to a lesser extent, to recover back payments owed. This has taken a further step forward today with the publication of a statement from the MNR.


The full text of the statement is at the bottom of the post, but the important section to our minds is

"[t]herefore, from September 2015 onwards, the KRG will on a monthly basis allocate a portion of the revenue from its direct crude oil sales to the producing IOCs, to cover their ongoing expenses. Furthermore, as export rises in early 2016, the KRG envisages making additional revenue available to IOCs to enable them to begin to catch up on the past receivables due under their production sharing contracts."

A clear statement of intent from the KRG is extremely welcome, and shares in Kurdistan-based companies have all jumped today in trading. While the move to start compensating companies for back payments in early 2016 is very positive, this still leaves uncertainty for the period from September until then.  


When the KRG refer to covering "ongoing expenses", does this mean (i) just opex (ii) opex and in-country G&A (iii) opex, G&A and debt payments (iv) other? Obviously inclusion of debt payments would be more material, especially for Gulf Keystone, which does not have the cash piles that DNO and Genel enjoy (although all three have made efforts to support cash inflows through domestic sales). Non-producers such as Oryx, WesternZagros and ShaMaran should also benefit as it becomes clearer that funds invested in development will see a clear path to monetisation through sales.


In the meantime, we would expect that each are being paid regularly (GKP receives monthly payments under a direct contract with a domestic offtaker currently). 

We'll hear more at results announcements (in chronological order):
GENL - Q215 results - August 6th
DNO   - Q215 results - mid August
Oryx   - Q215 results - mid August
WZR   - Q215 results - August 13th
SNM   - Q215 results - August 14th
GKP    - H115 results - August 27th


We look forward to clarification on this point in time.



***



Statement by Ministry of Natural Resources regarding the producing International Oil Companies (IOCs) in the Kurdistan Region

From September 2015 onwards, the Kurdistan Regional Government (KRG) will on a monthly basis allocate a portion of the revenue from its direct crude oil sales to the producing international oil companies (IOCs), and as export rises in early 2016, the KRG envisages making additional revenue available to IOCs.

At the start of 2015, the KRG reached a deal with the federal government in Baghdad to export crude oil in exchange for regular payments of the Region’s 17% revenue entitlement. The arrangement was enshrined in the 2015 federal Iraqi budget.

The KRG recognizes the spirit of cooperation in which the budget deal was struck with the federal government and it remains determined to build on such progress, and through dialogue and discussion to reach a lasting agreement with Baghdad on all outstanding issues relating to oil and gas and revenue sharing.

The KRG has also been pleased with the level of technical cooperation on the ground from federal government entities such as the North Oil Company (NOC) and SOMO. The KRG will continue to facilitate oil export from NOC-operated fields in Kirkuk via the KRG’s pipeline network to Turkey.

However, due to a number of factors, the federal government has to date been unable to provide the Kurdistan Region with its monthly budgetary dues. As a result, the KRG has been obliged to introduce direct crude oil sales from Ceyhan to help pay Kurdistan Region’s governmental salaries, maintain vital government services, and of course, pay the Peshmerga and other security forces who are fighting Islamic State terrorists.

Although the revenue gained from direct sales is still below Kurdistan’s 17% share of the federal budget, it is significantly higher than the amount the federal government was able to allocate to the KRG on a monthly basis.

In this regard, the KRG acknowledges and appreciates the economic contribution to the Kurdistan Region made by the producing IOCs and their success in raising oil export from Kurdistan to record levels. They have demonstrated their commitment to the people of Kurdistan at a time when the Region has been fighting terrorism, enduring a budget shortfall from the federal government in Baghdad, and shouldering the social, political and economic burden of an influx of 1.8 million refugees and internally displaced people.

The KRG also recognizes the patience of the producing IOCs, which, despite receiving hardly any payments for their crude oil production since May 2014, have maintained operations and have continued to invest to support Kurdistan’s crude oil export.

Crude oil export is the principal revenue earner for the Kurdistan Region. But, it is also recognized that it is difficult for the IOCs to sustain oil export at its current levels, let alone increase it as planned, without receiving their financial dues.

Therefore, from September 2015 onwards, the KRG will on a monthly basis allocate a portion of the revenue from its direct crude oil sales to the producing IOCs, to cover their ongoing expenses. Furthermore, as export rises in early 2016, the KRG envisages making additional revenue available to IOCs to enable them to begin to catch up on the past receivables due under their production sharing contracts.

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