By Selina Williams 

Oil companies that piled into Iraqi Kurdistan after Saddam Hussein's ouster are running into trouble, unraveling the region's promise as source of easy-to-drill oil and threatening Iraq's production surge.

Chevron Corp. and Exxon Mobil Corp. have been exploring for oil in Kurdistan since 2012, but have yet to develop anything. Two of the region's leading producers are stumbling: Genel Energy PLC in February said its largest oil field had only half the oil it thought, while Gulf Keystone Petroleum Ltd. said it is running out of money to pay its debts because of low oil prices and the lack of regular payments from the Kurdistan Regional Government for the oil it has pumped.

The regional government's Ministry of Natural Resources declined to comment.

Any slowdown in Kurdistan's oil production could affect energy markets because previous drilling success there helped Iraqi output climb by almost 20% in 2015 to 3.99 million barrels a day -- about 4% of global output. This mounting production contributed to a global glut and helped sink prices to $27 a barrel in January, the lowest level in 12 years.

Kurdistan, a region about the size of Switzerland, was once believed to hold as much petroleum as the North Sea. It has been a magnet for Western investment in the past decade -- a rarity in the Middle East, where most international oil companies are either banned from exploring for and pumping oil or are forced to work under stingy contracts.

The regional government estimates Kurdistan has at least 45 billion barrels of oil to be found. The energy industry has long referred to these resources as "easy oil": onshore and pumpable with traditional methods, like fields in Saudi Arabia and Kuwait, where production can cost as little as $2 a barrel.

That is far cheaper than more typical recent oil-and-gas developments, many of which are deep beneath the sea or embedded in shale rock, requiring costly drilling infrastructure and techniques.

But these assumptions about Kurdistan oil are being questioned by some companies reviewing the geology -- and not liking what they are finding.

"Kurdistan is not easy oil," said one oil executive whose company has worked in the region. More of the oil requires additional techniques, such as horizontal drilling, than previously thought, the executive said. Much of it has turned out to be a type of crude described as heavy -- harder to pump and refine and less valuable on international markets.

That crude can also contain toxic and flammable hydrogen sulfide gas that requires additional investment to strip out, said Jessica Brewer, from energy consultancy Wood Mackenzie.

"There's obviously large volumes of oil in place," she said. "It's how much can be recovered economically that is important."

While oil production in Kurdistan grew to around 430,000 barrels a day in 2015 from virtually nothing a decade earlier, it is still well below earlier Kurdish government plans to be pumping one million barrels a day by now.

Kurdistan became a magnet for Western investment after 2006, when the regional government unveiled attractive terms for international oil companies that weren't available in southern Iraq.

The region had been largely ignored under Saddam Hussein's rule. But in 2011, former BP PLC chief Tony Hayward hailed Kurdistan as one of the industry's last great frontiers.

Mr. Hayward engineered a $2.1 billion deal that year to take over Genel, the largest foreign oil producer in Kurdistan, and said the region's prospects "have never been brighter." Giants like Exxon, Chevron and France's Total SA followed, along with many other oil companies.

Genel's prize field Taq Taq is currently producing only 80,000 barrels a day, around half of last year's peak output. By 2018, output is expected to fall to as low as 50,000 barrels a day.

Mr. Hayward said the Taq Taq downgrade was a "major setback," but noted the company still had some of the lowest-cost producing assets in the world.

Genel is to hold its annual general meeting on Wednesday. The company declined to comment further.

Genel's announcement followed a steady stream of bad news for other oil companies' fields there.

In January 2015, U.K.-listed Afren PLC said its Barda Rash field essentially held no reserves. In March, Irish explorer Petroceltic International PLC and the U.S.'s Hess Corp. pulled out of the Dinarta license, citing disappointing well results. In November, Chevron relinquished its Rovi block without explanation after drilling exploration wells.

Exxon said its exploration operations continue in line with its contractual obligations. Afren, Petroceltic and Hess declined to comment.

Kurdistan's producers were already in trouble before problems with the geology emerged. In 2014, Islamic State militants advanced on Kurdistan's borders coming within a few hours' drive of some of the oil fields. The Kurds' expensive fight against Islamic State has yielded some important victories in recent months, with the militant group on the defensive after intensified airstrikes by a U.S.-led coalition, but the threat remains.

Kurdish oil exports were temporarily halted in February following an attack on a pipeline through Turkey.

The regional government and Baghdad authorities argued over whom oil revenues belonged to, prompting the central government to withhold funding from the Kurds. In turn, the regional government fell behind by over a billion dollars in payments to international oil companies. The KRG is far from clearing the arrears, but has begun paying some of it back.

"There are geopolitical challenges for the region -- it's not for everybody," said Gulf Keystone Chief Executive Jón Ferrier.

Gulf Keystone is weighed down by debt incurred when oil prices were high and relies on the Kurdish government's payments to meet its own repayments to bondholders. The company is facing crunchtime next year when $575 million is due and is looking to restructure its debt.

However, Mr. Ferrier said that the Shaikan field has enough oil to keep producing and generating revenue for at least 40 years.

 

(END) Dow Jones Newswires

April 26, 2016 18:23 ET (22:23 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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