International oil companies operating in the autonomous Kurdistan region of northern Iraq are no strangers to political instability or difficult operating environments.
Until last month, though, 2017 had been shaping up to be one of their calmer years of recent times.
Shares in Genel Energy, the London-listed company until recently chaired by Tony Hayward, the former BP boss, gained 93 per cent in the first nine months of the year. Oslo-listed shares in DNO of Norway, a fellow Kurdish oil producer, rose almost 43 per cent and the FTSE All-Share Oil and Gas Producers’ Index was down 5 per cent over the period.
“Things were going so well,” said Al Stanton, analyst at RBC Capital Markets.
But since Kurds voted for independence in a non-binding referendum on September 25, the familiar foe of uncertainty has returned to haunt the sector.
Political tensions between Baghdad and the autonomous Kurdistan Regional Government in Erbil were raised this week when federal forces regained disputed territories including the city of Kirkuk, the oilfields around it and much of the Kirkuk region.
The central government in Baghdad also closed Kurdish airspace to international flights.
In Turkey, Recep Tayyip Erdogan, the president, denounced the Kurdish vote for independence as treachery and threatened to shut off the main pipeline that takes 500,000 barrels of crude a day from Kurdish oilfields to the Turkish port of Ceyhan.
Genel’s assets are in non-disputed KRG territory, as are most of DNO’s. Nonetheless, shares in Genel have dropped 22 per cent since September 22, the last full trading day before the vote. DNO is down 9 per cent.
The oil companies are trying to steer clear of the political tensions. Genel and Gulf Keystone Petroleum, another London-listed, Kurdistan-focused producer, said drilling and exports were continuing. Critically, payments the producers receive from the KRG in exchange for crude exports are still being made.
This had not always been the case. Genel and DNO were owed sizeable sums from a period between mid-2014 and September 2015 when the KRG was struggling to balance its books. The administration in Erbil was facing against a multitude of problems, not least falling oil prices and having to divert funds towards the fight against Isis and Baghdad withholding budget payments.
But as of two years ago, KRG payments to oil companies have been regular. In August, Genel and DNO reached agreement with the KRG to settle missed payments. The companies said the first payment under the settlement was made on Monday.
So far the companies are “right when they say people are still going in and out and their oil is still flowing out”, said Michael Knights, a fellow at the Washington Institute for Near East Policy.
Nevertheless, investors remain jittery about threats that oil exports from the KRG could be curtailed, said Mr Stanton.
“That would be very unattractive for anyone in Kurdistan but you’d have to have a sustained shut-in [of exports] before you would recognise that it was a cause for concern,” he said. “Until that happens . . . everyone is a little bit nervous.”
In the case of Genel, analysts suggest a deal with an external investor to help develop two potentially huge gasfields could take longer than expected as a result of the tensions.
Genel has been in talks about the fields with possible funders including TEC, the Turkish state energy company. The expectation is their output would be exported to Turkey, helping reduce its reliance on gas imports from Russia.
However, it would be politically difficult in the current climate “for the Turks to support a gas project when they have been threatening to cut off pipeline export [of oil]”, said Stephane Foucaud, analyst at GMP FirstEnergy.
There could be other funders, however. And analysts point to Russian interest in the region.
Russian oil companies took on a greater role in Iraqi Kurdistan ahead of the referendum this year with the implicit backing of Moscow. On Thursday, Rosneft, Russia’s state-controlled oil company, vowed to push ahead with oil projects in Kurdistan and said it could take up to a 60 per cent stake in the KRG oil pipeline.
Rosneft has extended to the KRG more than $1bn in loans guaranteed by future oil sales. It has also agreed to help expand the capacity of the oil pipeline and work on developing infrastructure to turn the region into a big natural gas exporter.
Gazprom Neft, the oil business of Russia’s natural gas export monopoly, has been active in Iraqi Kurdistan for years. Though it is producing less than 10,000 b/d, Sergei Petrov, the company’s Middle East head, said last month it was in negotiations with the KRG and was “ready to expand”.
The US and UK, allies of the Kurdistan region since 1991, publicly opposed the independence referendum but Russia was more circumspect.
Sources in the KRG said they were happy to have Russia onside and believe it may help their relations with Turkey. Vladimir Putin, the Russian president, has warned that cutting off oil exports from the KRG would raise global crude prices and urged other countries not to “provoke” the situation.
A KRG official said the arrangement with Russia “demonstrates confidence in the KRG’s oil sector, despite all the recent political developments”.
Regardless of whether tensions escalate further, analysts say the Kurdish producers will struggle for investor attention while other independent producers are active in less volatile parts of the world.
“The challenge is the rest of the [oil and gas] sector also seems to be waking up,” says Mr Stanton. “It’s a tough enough sector to make money so do you really want to go looking for trouble?”
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