BAGHDAD: In the oil patch today, it is indeed the survival of the fittest. So when one of the largest producers in Iraqi Kurdistan, Genel Energy Plc, comes out swinging with production costs as low as $1 per barrel, it inspires a new confidence that may or may not be sustainable given the regional security threats and the difficulties producers are having getting paid for their oil. Still, it’s an impressive number that renders Kurdistan one of the cheapest oil venues on the planet.
With such low production costs, one would assume that the price of Genel would outperform oil; however, the reverse is the reality: Genel is underperforming oil by a large margin.
Though Genel is in a strong position to survive this downturn considering its low cost of production, the uncertainty of payments due by the Kurdistan Regional Government (KRG) are cause for concern. The KRG has approximately $1.7 billion of payments due to three companies: Genel, DNO and Gulf Keystone Petroleum Ltd, as reported by Bloomberg.
In addition to the outstanding KRG invoices, the recent gas pipeline explosion near the subdistrict of Shwan, which disrupted the main power station that supplies almost half of Kurdistan’s electricity, raises serious security concerns for the region.
Unlike the rest of Iraq, Iraqi Kurdistan has been a comparative safe haven—and a great place to do business, even if its unilateral oil agreements with foreign companies sparked the ire of the Iraqi central government in Baghdad. But as the conflict in Syria has spread to parts of Northern Iraq that border Iraqi Kurdistan, there are some indications that the KRG’s security could be breached.
And the liquidity issues faced by the KRG, which have led to delayed payments to companies, may dampen investor enthusiasm. These concerns are directly responsible for lowering the stock price of any company that holds a major stake in Kurdistan. However, Bloomberg reports that 70% of the analysts are positive on Genel, which means that despite today’s legitimate concerns, analysts are hopeful of a solution to the issues plaguing Kurdistan.
With any small rise in crude oil prices, companies like Genel will see a quantum jump in their profits, and companies that can produce oil at $1 per barrel will continue to attract investments in the region.
