The Middle East: Where Supply Agreements Outweigh Peace Agreements
In September the Kurdish Regional Government (KRG) held a referendum to seek a consensus on declaring independence. The unsurprising landslide in favor of the move came as little surprise. In response, Baghdad launched a campaign on October 16 with the goal of keeping the Kurdistan region a part of northern Iraq. Particularly, the military wanted to reclaim the oil fields in Kirkuk and the Avana dome. We at TankerTrackers.com wanted to both witness and report what impact this geopolitical event had on oil production and regional exports.
First, let’s begin with the lay of the land. Kurdistan is a geo-cultural area divided across Turkey, Iran, Iraq and Syria. The population is estimated at 33 million with slightly more than half located in Turkey. They speak their own language and are for the most part, moderate Muslims, but also Christian, Jewish, Zoroastrian, among others. The fight for independence for this landlocked people has been a challenge across many centuries. Self determination has been denied time after time by the host states within which they reside. However for Iraqi Kurdistan, much has changed. Once Saddam Hussein’s regime came to an end, the Kurds, with their semi-autonomous rule, were able to reap in the rewards of much more of the oil revenue. Suddenly, shopping malls, high rises and luxurious residential compounds started popping up, particularly as oil prices exceeded $100 per barrel.
In terms of oil infrastructure, Iraqi Kurdistan has plenty of large pocket reserves, some of the largest in the world in fact, with production sites located nearby. Those sites are connected via pipeline which begins in Kirkuk snakes through key areas toward the border with Turkey and continues to the BOTAS oil terminal along the Mediterranean Sea in the port of Ceyhan. At present, oil production is around a million barrels a day and slightly more than half is exported. The problem however, is that exports can only be achieved through Turkey as all other options remain geopolitically unviable.
Operations at the BOTAS Oil Terminal in Ceyhan are effectively divided between four participants: Turkey, Azerbaijan and Iraq (Baghdad & Iraqi Kurdistan or KRG). Azerbaijan’s national oil company SOCAR has its own jetty located on the west side while Baghdad and KRG have a jetty on the east side. KRG’s two berths are on the very south end of that jetty while the two berths north belong to Baghdad’s State Oil Marketing Organization (or SOMO).
On land, SOCAR has seven white storage tanks totaling 7 million barrels, while KRG and Baghdad have 12 brown tanks, of which 8 belong to the KRG. Thanks to Planet’s constellation of 170+ dove satellites acquiring daily images, we are able to take note of any changes in oil storage between any two dates. Notably, we see storage lids rise when oil is transferred from the Kirkuk-Ceyhan pipeline, and storage lids lower when filling up tankers. Here’s an example of a 24 hour change noted between 26 and 27 October.
Over the past month we’ve been bouncing theories back and forth regarding recent developments. Even though disruptions in oil flows (due to conflict) should send the Brent oil barrel price higher (now up 8% at $61 since the Kurdistan referendum was held), we think this occasion was also a great opportunity to export more — -or at least keep total exports steady. In this scenario, we think Baghdad decided to take advantage of the disruptions up north by boosting oil production in the south (Basrah) and re-open idle capacity in their offshore terminals. Given that the major oil storage sites across the southern region aren’t fully operational due to faulty pumps and pipelines, there’s little to no crude oil stored in them. Satellite imagery from Planet helped us validate our theory and has showed zero change in the key Fao storage site over the past week. The Fao storage site was built to feed the oil terminals. So, while Ceyhan’s exports dropped month-on-month by 205Kbpd (Kilo barells per day) during October, Basrah boosted entire October’s exports to 3.3Mbpd (Million barrels per day) from 3.24Mbpd in September, which is a boost of only 60Kbpd, giving a net change of -145Kbpd for both ports.
Conclusion: Just because you heard about a conflict take place in the Middle East, does NOT mean that there’ll be a significant crude oil supply shortage. Supply agreements mean more than peace agreements, and are almost never broken. Customers have zero patience or tolerance for unreliable suppliers, so they find alternatives until those suppliers are called back to the negotiation table the following year. Iraq couldn’t allow that to happen, but benefited from the price rise due to the situation. Though they didn’t have a proper working storage with which to meet demand, they quickly boosted production and exports. Conflicts cost cash.
TankerTrackers.com
