What Does Iraqi Oil Mean for Energy Investors?

On January 9, Iraqi Kurdistan started shipping oil through its crude pipeline to Turkey. While the oil shipped was a fraction of Iraq's total production, the implications are very large. 

Kurdistan is a self governing region of Northern Iraq. It has estimated reserves of 45 billion barrels of oil and a population of only 4.7 million.

By exporting its oil to Turkey, Kurdistan is violating Iraq's constitution, which mandates that all Iraqi oil revenues go to the central government in Baghdad and the Kurds receive 17% of the total sum. Because of various factors, Kurds complain that they do not receive the full 17%, and have decided to go out on their own. 

The pipeline to Turkey could one day result in 400,000 barrels of oil per day exported annually. With that export of oil, Kurdistan is poised to realize higher revenues and attain greater autonomy.

Companies that benefit
ExxonMobil (NYSE: XOM  ) , Chevron (NYSE: CVX  ) , and Total (NYSE: TOT  ) have all signed exploration agreements with the Kurdish government. For those international companies, the prospect of developing Kurdistan is very enticing. Because many of its fields have gone undeveloped due to Western sanctions, oil fields in Kurdistan and Iraq in general are relatively easy to develop.

Kurdistan itself has great potential. It is expected to produce 2 million barrels per day by 2019, or currently around Venezuela's production level today. 

Because they are working with Kurdistan, ExxonMobil and Total have an awkward relationship with the government of Iraq, which has not approved exporting oil to Turkey. The two multinational companies develop fields in both Kurdistan and Iraq. 

Iraq's deputy prime minister for energy affairs, Hussain al-Shahristani, recently called ExxonMobil's intention to develop Kurdistan's oil a serious error. By working with the Kurds, the two multinational companies risk losing the opportunity to develop Iraq's southern region.  

Iraq has a total of 141.4 billion barrels of proven reserves, so if the multinationals are kicked out of Southern Iraq, they will be missing an opportunity to develop around 100 billion barrels of oil.

Perhaps as a hedge against the probability that Iraq punishes ExxonMobil for working with Kurdistan, the oil company recently agreed to sell a major stake in the Iraqi project West Qurna-1 to an investor group that includes PetroChina. 

Despite the geopolitical uncertainly and periodic violence in Iraq, China is very eager to invest because it needs oil. Its economy is growing rapidly and it has not yet managed to unlock its own shale resources. The International Energy Agency projects that by 2020, 80% of Iraq's oil will be shipped to Asia, including 1.5 million barrels per day to China. 

The bottom line
The flow of oil through the Kurdish pipeline to Turkey shows that the Iraqi government is still not in full control. The federal government is relatively weak and cannot assert itself.

In addition to the Kurds openly defying Iraq, there was recently a violent rebellion in Anbar province. If civil war does break out,  Iraqi strife could destabilize oil markets and send the price of oil higher. 

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