Battle lines are being drawn across Iraq’s oil map in the Kurdish north and it is impossible to predict what the final outcome might be. What we do know from events of the week since October 13, when tensions between Kurdistan and the federal government flared up around the disputed oil province of Kirkuk, is that the conflict could simmer for a long time.
As OPEC’s second largest producer with an output of nearly 4.5 million b/d, Iraq’s stability matters to the oil market. But not all of the country’s production is under threat, especially as the majority of it comes from fields in the south, away from the Kurdish conflict. The possibility of disruption centers around 600,000 b/d of crude pumped from Kurdistan and other parts of northern Iraq if the federal government and the Kurds clash for control of the oil fields. More immediately, the market has been pricing in the risk of about 320,000 b/d of production from the Kirkuk becoming stranded with Baghdad having taken over operations at the major oil fields while the only pipeline available to evacuate it to the export markets is controlled by the Kurdistan Regional Government.
A 300-600,000 b/d supply outage, if it comes to that, could be easily plugged, given that there is a little over 1.7 million b/d of unused capacity between the 22 OPEC and non-OPEC countries currently restraining output.
The tussle over northern Iraq’s oil assets became more entrenched this week with Russia’s state oil giant Rosneft doubling down on its support for the KRG, while the federal government in Baghdad made plans to rehabilitate its northern crude export pipeline to Turkey destroyed by ISIS and to invite BP to develop the oil fields in Kirkuk.
Rosneft has agreed to take control of the Kirkuk-Ceyhan oil export pipeline by paying $1.8 billion for a stake of as much as 60%, with the current pipeline operator, the local KAR Group, retaining 40%, CNBC reported Friday.
Rosneft on Wednesday said it had reached a deal to spend $400 million to develop five oil blocks in Kurdistan. The company had signed an agreement just days before the KRG’s controversial independence referendum of September 25 to build a natural gas pipeline and power plants and factories in Kurdistan as well as to expand the oil export pipeline’s capacity.
The Russian giant has a vested interest in protecting Kurdistan’s oil revenues, having loaned the KRG around $1.2 billion earlier this year, which the latter is paying off with its crude sales. Traders Vitol, Glencore, Trafigura and Petraco are also on the hook with billions of dollars in cash-for-crude loans to KRG in recent years, but they haven’t made any moves so far in the escalating conflict.
With all the primary as well as secondary stakeholders keen to safeguard northern Iraq’s oil flows and the KRG in a corner albeit holding some trump cards, a negotiated resolution of Kurdistan’s demands, short of a secession, is a plausible outcome. But it could be far down the road, leaving crude vulnerable to bouts of volatility.
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Headline crude prices for the week beginning 11 February 2019 – Brent: US$61/b; WTI: US$52/b
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2018 was a year that started with crude prices at US$62/b and ended at US$46/b. In between those two points, prices had gently risen up to peak of US$80/b as the oil world worried about the impact of new American sanctions on Iran in September before crashing down in the last two months on a rising tide of American production. What did that mean for the financial health of the industry over the last quarter and last year?
Nothing negative, it appears. With the last of the financial results from supermajors released, the world’s largest oil firms reported strong profits for Q418 and blockbuster profits for the full year 2018. Despite the blip in prices, the efforts of the supermajors – along with the rest of the industry – to keep costs in check after being burnt by the 2015 crash has paid off.
ExxonMobil, for example, may have missed analyst expectations for 4Q18 revenue at US$71.9 billion, but reported a better-than-expected net profit of US$6 billion. The latter was down 28% y-o-y, but the Q417 figure included a one-off benefit related to then-implemented US tax reform. Full year net profit was even better – up 5.7% to US$20.8 billion as upstream production rose to 4.01 mmboe/d – allowing ExxonMobil to come close to reclaiming its title of the world’s most profitable oil company.
But for now, that title is still held by Shell, which managed to eclipse ExxonMobil with full year net profits of US$21.4 billion. That’s the best annual results for the Anglo-Dutch firm since 2014; product of the deep and painful cost-cutting measures implemented after. Shell’s gamble in purchasing the BG Group for US$53 billion – which sparked a spat of asset sales to pare down debt – has paid off, with contributions from LNG trading named as a strong contributor to financial performance. Shell’s upstream output for 2018 came in at 3.78 mmb/d and the company is also looking to follow in the footsteps of ExxonMobil, Chevron and BP in the Permian, where it admits its footprint is currently ‘a bit small’.
Shell’s fellow British firm BP also reported its highest profits since 2014, doubling its net profits for the full year 2018 on a 65% jump in 4Q18 profits. It completes a long recovery for the firm, which has struggled since the Deepwater Horizon disaster in 2010, allowing it to focus on the future – specifically US shale through the recent US$10.5 billion purchase of BHP’s Permian assets. Chevron, too, is focusing on onshore shale, as surging Permian output drove full year net profit up by 60.8% and 4Q18 net profit up by 19.9%. Chevron is also increasingly focusing on vertical integration again – to capture the full value of surging Texas crude by expanding its refining facilities in Texas, just as ExxonMobil is doing in Beaumont. French major Total’s figures may have been less impressive in percentage terms – but that it is coming from a higher 2017 base, when it outperformed its bigger supermajor cousins.
So, despite the year ending with crude prices in the doldrums, 2018 seems to be proof of Big Oil’s ability to better weather price downturns after years of discipline. Some of the control is loosening – major upstream investments have either been sanctioned or planned since 2018 – but there is still enough restraint left over to keep the oil industry in the black when trends turn sour.
Supermajor Net Profits for 4Q18 and 2018
- 4Q18 – Net profit US$6 billion (-28%);
- 2018 – Net profit US$20.8 (+5.7%)
- 4Q18 – Net profit US$5.69 billion (+32.3%);
- 2018 – Net profit US$21.4 billion (+36%)
- 4Q18 – Net profit US$3.73 billion (+19.9%);
- 2018 – Net profit US$14.8 billion (+60.8%)
- 4Q18 – Net profit US$3.48 billion (+65%);
- 2018 - Net profit US$12.7 billion (+105%)
- 4Q18 – Net profit US$3.88 billion (+16%);
- 2018 - Net profit US$13.6 billion (+28%)