KRG situation could affect tanker market

Oct 06 2017


This week’s non-binding independence vote in Iraqi Kurdistan may do little to change the semi-autonomous region’s crude output in the short term.

However, the Kurdistan Regional Government’s (KRG) ambition to use the vote as a negotiating tool may have wider ramifications going forward, including for the tanker market, Gibson said in a recent report.

 

Oil is a critical source of funding for the KRG, yet the KRG relies on exports via pipeline to Turkey’s Ceyhan Terminal to export the oil. These export flows are also an important source off demand for the crude tankers, especially Suezmaxes and Aframaxes.

Kurdish exports via Ceyhan average 500,000 barrels per day in the third quarter of this year, underlining its significance.

However, now politics threaten this source of income for the KRG, plus the Mediterranean tanker market’s prospects.

Despite the vote being non-binding, and the KRG suggesting it will not declare independence until negotiations have taken place with Iraq’s central government, this development has clearly concerned neighbouring governments, which have their own Kurdish populations, primarily Turkey and Iran.

Iran may well have less leverage over the KRG but Turkey has threatened to cut off its access to the international oil markets. Oil prices reacted to this threat, with Brent trading near 26 month highs, as any disruption to Kurdish exports, would coincide with an already tightening oil market.

The KRG has few alternative routes to the sea. There are no routes through Iran or Syria. Furthermore, any exports via the south would effectively relinquish control of exports to the central government in Baghdad.

However, Baghdad may have little direct power itself. The KRG has been key to the fight against ISIS and remains a critical ally, whilst Kurdish forces control the necessary oil installations.

The central government could, however, increase its efforts to seek the arrest of vessels carrying Kurdish crude in an effort to make Kurdish exports more problematic.

Fundamentally it is the Turkish Government who holds the physical power to halt oil shipments and disrupt the tanker market, Gibson concluded.

Another report from the Oil Research Team at Thomson Reuters took a look at how Mediterranean crude oil refineries margins could potentially experience negative outcomes from a pipeline closure enforced by Turkey, due to disruption in Kirkuk blend.

A temporary removal of Kirkuk blend from the market, would create a gap in the medium grade oil segment, allowing substitutes, such as Urals, Basrah Light and Arab Light to increase loadings.

The longer term implications could allow the region to increase production by attracting more international oil companies through favourable PSCs, tighter security and low operating costs. 

The report’s highlights include -

·       *Kurdistan is poised to become a regional player, but requires diversity away from the petroleum sectors in order to build an industrial economy utilising oil revenues.

·        *Disruptions to the Ceyhan pipeline will cause Kurdistan’s production to cease and with the resulting lack of exports, economic issues. Further reaching implications will be felt by Mediterranean crude oil markets and refineries.

·        *With regular payments from the KRG to Iraqi oil companies, investment is being directed towards exploration rather than production, amid lower production figures relating to geological issues.

·        *Kirkuk grade seaborne exports have started to increase in terms of volume, over the last three months, a monthly average of 15.1 mill barrels.

·        *Kirkuk blend share in the total Iraqi exports started to increase from May, 2017 onwards, with the share of Kirkuk in Iraqi exports accounting for 12.3%.

·        *In the case Kirkuk blend, exports are removed from the market, this would cause a supply gap of 15 mill barrels in the medium grade oil segment of the Mediterranean region.

·        *Kirkuk crude has been among the most favourable crude streams in the Mediterranean, because of its cracking margins and favourable yields of light ends and middle distillates.

·        *A change in the composition of the crude slate for Mediterranean refineries could result in a fall by up to $1 per barrel in the refinery margins.

Meanwhile, events in Iran, Iraq and Venezuela could halt up to 2 mill barrels of oil exports per day, analysts said earlier this week.

Iran could be de-certified by the US on 15th October, if the Trump administration does a U-turn on lifting sanctions, resulting in fresh sanctions against the country.

In Venezuela, PDVSA has almost run out of money, while the Chinese have stopped helping out the Maduro government. The Iraq situation mentioned by analysts refers to the Kurdish problems as highlighted above. 



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