October 16, 2014

Kurdish energy in the face of unrest

Global oil demand is on the rise. OPEC predicts that by 2035 the world’s primary energy needs will have increased by 54% and that the price of oil will have risen to $155 per barrel. Kurdistan, particularly Iraqi Kurdistan, is primed to benefit from this increase in demand. At the beginning of 2014 OPEC estimated that Iraq is the world’s fourth largest country by share of world crude oil reserves at 12%. Further, recent infrastructure investment in the region has increased access to these reserves. In 2013, the Kurdistan Regional Government of Iraq completed a pipeline from the Taq Taq oil field to Faysh Khabur on the Turkey-Iraqi border, which connects to the Kirkuk-Ceyhan pipeline. The Kurdistan Regional Government predicts that, as a result of investment, oil exports from Iraqi Kurdistan could reach 2 million barrels annually by 2019. It is not surprising, therefore, that Western oil companies including Exxon Mobil, Chevron and Marathon have begun to establish themselves in the region.

However, increasing political unrest in the region threatens to overwhelm Kurdistan’s energy potential. The rise of the Islamic State (“IS”) has destabilised an already politically fragile region. Such instability presents oil companies with a hostile working environment and in recent months a number of energy companies have been affected by the rise of IS.

For example, earlier this month, OP Hawler Kurdistan declared an event of Force Majeure in respect of its drilling service contract with Atlantic Onshore Services, a subsidiary of KS Energy. OP Hawler Kurdistan stated that the continuing unrest in Kurdistan had restricted access to worksites, causing operations to be shut down and its drilling project to be paused.

A number of drilling companies were also affected over the summer. Abu Dhabi National Energy Company suspended its operations and significantly reduced staffing levels at the Atrush Block as a precautionary measure, whilst Afren Plc temporarily halted its work at the Barda Rash field citing security related issues. Perhaps most dramatically, Hess Corp was forced to suspend its oil drilling operations in the region and evacuate non-essential staff in order to ensure staff safety amid ongoing violence.

In recognition of the threat to the international energy market and in an attempt to reassure companies operating in the region, U.S. Secretary of State John Kerry recently endorsed Iraqi Prime Minister Haider al-Abadi’s plans to mend Baghdad’s relations with Sunnis and Kurds. Kerry backed Abadi’s readiness to rapidly move forward on the oil agreements necessary for the Kurds.

Nevertheless, despite the attempts at political guidance from the West, instability in the region is unlikely to abate soon and disruption to oil exploration and drilling projects will continue for the foreseeable future. Consequently, energy companies will increasingly seek to mitigate their risk of financial loss and protect their energy projects. One way of doing so is to seek insurance cover.

According to Quartz, there has been a rise in demand for political risk insurance alongside the rise of IS. Insurer Clements Worldwide estimates that the instability in northern Iraq has increased political risk insurance premiums by 50% for new policies and 10% for existing policies. Yet this suggests that demand for political risk policies has begun to outstrip supply. Consequently, it may become more and more difficult for businesses to find suitable insurance cover; and any cover that is offered may be on unfeasible terms. Other types of insurance cover will be available, including force majeure insurance, war & political risk insurance and political violence & terrorism insurance. However, companies seeking these alternative covers may face the same difficulties that they face with political risk insurance. Businesses could attempt to widen the cover available to them under their existing insurance policies, although this too may prove difficult since loss caused by political action, unrest and war is often excluded from usual business insurance policies.

Despite the search for suitable insurance becoming more demanding, business must ensure that they find adequate cover to protect their potentially lucrative stakes in the Kurdish energy market.

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