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Kurdistan and South Sudan: A Tale of Two Breakaway Oil-Rich Nations

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(FinancialPress)—A new oil-rich nation is on the verge of existence in the Middle East, after an important referendum in Kurdistan took place on Monday. A new independent state of Kurdistan could possibly be the first new nation since South Sudan’s international recognition of independence was granted in 2011.

The results of the referendum for Kurdish Independence from Iraq held by the Kurdish Regional Government (KRG), showed overwhelming support to split from Baghdad—with nearly 93% in favour of independence.

Voters answered a simple ‘yes’ or ‘no’ to the question, “Do you want the Kurdistan Region and the Kurdistani areas outside the administration of the Region to become an independent state?”

Turnout for the vote was quite high, with estimates of 72% of the 8.4 million population taking part in the democratic event.

However, while the message of the Kurdish people is beyond clear, the road to national freedom is still long and arduous.

Iraqi Prime Minister Haider al-Abadi and his government have already indicated their refusal to recognize the referendum, smearing it as unconstitutional. Multiple attempts from the Supreme Court were made in the preceding weeks to delay or disband the vote entirely.

Resistance to the referendum also comes from Washington DC, which had advised against the vote, with concerns it would ignite more tensions that have been happening between the KRG’s capital of Irbil and the Iraqi capital in Baghdad. Much of the concern came from the potential to harm joint efforts in the fight against Isis in the country’s remaining strongholds.

From Baghdad’s position, however, the major sticking point is likely that of oil revenues.

Battles over the petrodollars at stake in the region have been ongoing for years, including accusations of KRG officials illegally selling oil to Turkey, and concerns over Kurdish oil fields falling into the hands of the Islamic State.

It is in the combined fight against Isis that the Kurds and Baghdad have seen common ground. However, in the eyes of Baghdad, this was not the time for the Kurds to break off.

Under the constitution, Baghdad has required the KRG to share its oil production with the entire country. From there, the Kurds are to be reimbursed with 17% of the entire Iraqi budget.

Kurdistan has admittedly not been 100% compliant in that protocol, which KRG officials have complained was too restrictive and didn’t give enough in order to pay salaries. Kurdistan also remained angered at the allegations that Baghdad was paying salaries to government workers living in Islamic State controlled regions.

KURDISTAN MUST EXAMINE THE SOUTH SUDAN EXPERIENCE

When it broke away from Sudan in 2011, South Sudan became the world’s youngest nation. Much like Kurdistan, South Sudan is landlocked, and surrounded by destabilized neighbours.

South Sudanese statehood came about after two full-scale civil wars, the first in 1955, and the second, an excruciatingly long war that lasted from 1983 all the way until 2005. That final war concluded with the signing of the Comprehensive Peace Agreement, which gave for the framework required to separate from the central government in Khartoum.

The KRG wasn’t formed until 1992, when a no-fly zone (NFZ) was established with the backing of the United States at the conclusion of the first Gulf War in 1991.

Along with the NFZ, Kurdistan was granted the right to an autonomous region for the Kurds, complete with its own borders, security, flag, constitution, parliament, and even a president. For all intents and purposes, it had everything that a state can have… without a universally recognized border on the map.

But South Sudan and Kurdistan both had very similar support for independence. South Sudan’s ‘yes’ vote to secede was 98.83%, whereas Kurdistan’s was just under 93%. There was also another unofficial Kurdish referendum in 2005, which resulted in 98% support to leave.

Now, complete independence doesn’t immediately equal riches—On the contrary.

Despite six years of independence, South Sudan has yet to iron out the kinks of its newfound sovereignty.

For the first time, South Sudan surpassed Somalia as the world’s most fragile state, according to the 2017 Fragile State Index. The population of South Sudan is twice that of Kurdistan, with over 12 million people, however 7.5 million people in the country are in dire need of humanitarian assistance.

That doesn’t mean there isn’t hope.

Both regions have an abundance of oil, which if produced efficiently and steadily could drastically turn things around for each country.

During the year of its independence South Sudan was producing nearly 350,000 barrels per day of oil. However, lack of cooperation from neighbouring Sudan, who allegedly gouged on transit prices, led to a sudden plummet of production in 2012.

Production resumed in the region in 2013 and 2014, but only to less than half the original levels, at 120,000 barrels a day to 150,000 barrels per day. Thankfully, in 2016, South Sudan reached an agreement with Sudan to peg transit fees on prevailing crude oil prices, instead of the previous fees that were locked in at $24.50 per barrel.

That hasn’t risen the country’s oil production, however, which last year was down to 120,000 barrels per day. But the country still has high hopes to regain its production acumen, as it set its sights on more than double 2016’s numbers to 290,000 barrels per day.

South Sudan and Kurdistan both need oil revenues to survive. In South Sudan’s case, the nation depended on oil production for approximately 98% of its budget and accounting for approximately 60% of the country’s GDP.

Also similar is their dependence on neighbours to get their oil to market. So, any kind of split must be amicable, despite the huge potential each country’s oil wealth could bring.

In Kurdistan’s case, the region sits on approximately 40% of Iraq’s oil wealth, equating to roughly 45 billion barrels of oil. That’s a lot at stake, and it’s no wonder Baghdad isn’t happy.

The KRG’s projections are large, hoping to target 2 million barrels per day by 2019. However, that’s depending on the state’s security position at the time.

South Sudan has an estimated 3.5 billion barrels in proven oil reserves, and despite the strife, still attracts foreign suitors to help move things along.

Work is now planned to commence work on building local refineries in South Sudan, particularly in the oil-producing area of Paluch, which is scheduled to be commissioned by 2020.

This is where Kurdistan is far ahead of South Sudan in the race towards oil independence. Already, the region has its own refinery facilities, and has been benefitting from buyers such as Israel who imports 77% of its oil from the Kurdish region—a buyer-seller relationship likely not to make Baghdad any happier.

Now that the Kurds have spoken with their ballots, it’s up in the air as to whether Baghdad will accept the results, let alone the world. But the fact remains that the potential for both Kurdistan and South Sudan is enormous, as long as their oil is handled correctly.

Energy

Oil prices up on expectations of production cut extension

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(FinancialPress) — A major meeting set for the upcoming week has oil on the rise, as traders look towards it to cement an extension on production cuts – even when gains were capped by rising U.S. output.

Brent crude was up $0.47, reaching $62.69 a barrel by 09:32 GMT. U.S. light crude oil rose $0.32, up to $56.74.

Brent moved within range, with analysts expecting it to move between the $61 and $63 price gap. This happens as the market looks forward to what comes of the OPEC (Organization of the Petroleum Exporting Countries) meeting set for November 30th.

The Organization, allied with other non-members that have Russia at the helm, has managed to orchestrate an effort to end globe-wide oversupply with output restrictions – hoping that this will help prices get off of their current slump. Next week‘s meeting is expected to erase the March 2018 expiry date and thus extend the agreement.

Ole Hansen, Saxo Bank senior manager, stated on the topic: “There’s a general belief that anything but an extension could have a significant negative impact … So the market is just waiting for confirmation that OPEC wants to move on with the extension.“

The fact that storage levels remain consistently high even in light of the recent measures feeds expectations of the OPEC and its allies extending the cuts. However, some believe not all participants will be willing to continue to restrict their production.

Even so, that‘s not the biggest headache OPEC is experiencing – it‘s actually the rise of U.S. drilling that‘s being led by shale oil producers.

But the biggest headache for OPEC has been a rise in U.S. drilling, led by shale oil producers.

Westwood Global Energy Group, which specializes in energy consultancy, noted that the rising rig count is an inaccurate measure of how quickly U.S. output would climb – as producers become even more productive per well. Rig count has risen from 316 rigs in mid-2016 to 738 last week.

“Westwood Global Energy forecasts an 18 percent increase in active rigs in 2018, but more rapid demand growth in certain service areas as operators focus on efficiency and delivering more for less,” the consultancy said.

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Oil manages to stabilize after prior day‘s slump

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(FinancialPress) — Crude oil is beginning to slide after reaching 2-year highs through the first days of November. It experienced a slump in Wednesday‘s session, on the heels of a surprise jump in U.S. supplies. On Thursday, however, prices experienced little change
January Brent crude went down by 13 cents (0.2%) to $61.74 a barrel. December West Texas Intermediate crude, which originally experienced a minor gain, ultimately had 6 cents shaved off of its price (0.1%), to reach $55.27. In the prior session, WTI dropped a heavier 37 cents (0.7%), reaching a price of $55.33 – its lowest close since early November.
U.S. domestic crude supplies rose by 1.9 million barrels by the end of the week of Nov. 10th, as informed by the country‘s Energy Information Administration. This prove the prediction by S&P Global Platts analysts wrong – as it forecasted a drop of 1 million barrels in supply. The American Petroleum Institute (API) reported a 6.5 million barrel a week rise on late Tuesday.
Gasoline stockpile also rose to the tune of 900,000 for the week. Meanwhile, according to the EIA, distillate stockpiles, fell 800,000 barrels. The survey forecast by S&P Global Platts indicates dips in distillates stockpiles of 2 million barrels, and 1 million barrels for gasoline.
Tama Varga, a PVM analyst, said that the recent oil slump is being seen by some traders as “as a healthy and inevitable correction triggered by bulls taking profit,” on a Thursday note. He added that while sentiment looks bearish at the moment, they may believe that the positive trend for crude “should resume shortly“.
Up to the date, WTI has risen 3% overall – propelled by a rally begun in June. Crude hit a two-year high in its benchmark in early November, and recently began pulling back.

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Energy

Venezuela can no loger pay its debts; oil could be seized

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(FinancialPress) — Venezuelan President Nicolás Maduro finally admitted, during a Thursday televised speech, that his government can no longer keep up with the payments of its piling debt. Venezuela is now officially working towards restructuring its debt payments, as is PDVSA – the state-run oil company.

Considering that the country has only $10 billion left in the bank, the $1.1 billion payment made by the oil company on Thursday is very substantial to the country‘s reserves. Maduro said in the speech that “After this payment, starting today, I decree a refinancing and a restructuring of the external debt.“

A deep humanitarian crisis is already whipping the embattled South American nation, as people experience deep shortages of food and medical supplies. Basic items are becoming less and less attainable for the population, as prices skyrocket and wages fail to rise at  a rate that would paliate the inflation. The bolivar – Venezuela‘s currency – is now worth less than a tenth of a U.S. penny.
Should Maduro‘s government fail in its attempt to restructure debt owned by bondholders — a very real possibility, as often it means that they‘d agree to be paid less money —, the country will enter into default.
A potential default could trigger a series of very unfortunate events. Those same bondholders could choose to seize Venezuelan oil as collateral.
Seeing that oil is the only significant external revenue source the government has, this would cut the financial means it has to acquire medical supplies and food. While the country has vast farmlands, it was mismanaged by their office which forces the country to import almost the totality of its food products.
Even if it were a viable course of action, debt restructuring is a long and excruciating process. Venezuela‘s neighboring country Argentina battled in international courts for 15 years to get resolution over its unpaid debts.

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