March 10, 2016 / 12:16 PM / a year ago

Shrinking oil reserves crimp Iraqi Kurdistan's allure

5 Min Read

* Genel, Afren slash reserves estimates in key fields

* Wells hit water, revealing complex rock geology

* Kurdistan region already facing political, security turmoil

By Ron Bousso

LONDON, March 10 (Reuters) - A string of downgrades to Iraqi Kurdistan's oil reserves is a fresh blow to the autonomous region's fledgling oil industry already crippled by conflict, political strife and low crude prices.

The revisions - resulting from a closer inspection of oilfields after drillers hit more water than expected - take the shine off one of the world's largest oil and gas reserves, which had drawn investors such as Exxon Mobil.

A further loss of faith in the region's oil bonanza also pressures the debt-ridden Kurdistan Regional Government (KRG), which has struggled to ramp up production and exports due to pipeline outages and conflict with Islamic State militants.

"The recent reserve downgrades are another blow to optimism about Kurdish oil production," said Richard Mallinson, geopolitical analyst at consultancy Energy Aspects.

"While there are substantial amounts of oil in this underexplored province, companies are finding it is not as easy to find or produce in the quantities initially expected."

Among the handful of producers still operating in the region, three have in recent months reviewed their estimates of proven oil reserves or reduced output due to geological problems.

Several fields in different areas have, nevertheless, been unaffected by the revisions. For example, Shaikan, operated by Gulf Keystone in the north of the region, saw its reserves upgraded last year to 639 million barrels (mmbbls).

The region still boasts one of the world's lowest production costs, at around $20 a barrel.

Genel Energy lost more than a third of its market value last month after the London-listed company halved the reserves estimate for Kurdistan's largest operational field, Taq Taq, to 356 mmbbls and wrote down its value by $1 billion.

The revision means more than half of the 80,000-barrels-per-day field's reserves have been produced. Genel also operates a second field, Tawke, whose reserves were little changed at 631 mmbbls.

Water levels in the six-year-old Taq Taq started rising rapidly in the second half of last year, prompting a study by consultancy McDaniel & Associates that revealed the porosity of the rock - the ability to access oil - was overstated, leading to the revision, Genel said.

Tony Hayward, Genel's chief executive and a former boss of BP, said in an analyst call that the downgrade was "clearly very disappointing for ourselves and the Kurdistan Regional Government".

More Bad News

The downgrade is a blow to Genel's and other producers' hopes for the region.

"If you take a long-term view, you can look through politics and geopolitical risks," BMO Capital Markets analyst Brendan Warn said.

"But if you haven't got good geology and the oil is not so easily produced, you are much less attractive and no longer a major's acquisition story."

The relatively low cost of producing oil in the region and Genel's plans to unlock gas reserves there still made the firm a compelling investment, Genel said.

For the KRG, whose revenue depends on oil, the revisions are more bad news. The region is struggling to pay field operators due to a dispute over oil revenues with the central government in Baghdad and the need to fund its fight against Islamic State.

The KRG started repaying oil companies earlier this year but still owes them billions of dollars.

Before Genel, Afren Plc wiped the entire proven and probable reserves of 190 mmbbls from its Barda Rash field in western Kurdistan after also hitting more water than expected in wells.

Oryx Petroleum shut two wells in the Demir Dagh field after hitting water, raising suspicions of similar geological problems elsewhere. It also revised lower its proven reserves in the Hawler licence area by 21 percent to 215 mmbbls.

Chevron, the second-largest U.S. oil company after Exxon Mobil, relinquished at the end of 2015 its interest in the Rovi block north of Erbil but continues to test wells in the Sarta area. (Additional reporting by Ahmad Ghaddar; Editing by Dale Hudson)

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