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LONDON (Alliance News) - Genel Energy PLC on Monday said it can now push ahead with the development of the Miran and Bina Bawi gas fields in the Kurdistan region of Iraq after finalising the amended production sharing contracts and gas lifting agreements with local authorities.
The amended and restated contracts and agreements, with the Kurdistan regional government, incorporate the commercial terms that were agreed upon back in 2015.
The gas lifting agreements contain conditions, including the execution of final agreements on the midstream gas processing facilities and pipeline transportation, the execution of the financing documents, and the completion of updated competent person's reports for Miran and Bina Bawi, Genel said.
"With the production sharing contract and gas lifting agreement terms formally confirmed, Genel will now be able to progress the project. The company remains committed to developing these large scale, low-cost, onshore gas fields, which will form the cornerstone of gas exports to Turkey under the 2013 KRG-Turkey gas sales agreement," said Genel.
The fields are 300 kilometres from Turkey, one of the world's fastest growing major gas markets with expected demand growth of 3% per year until at least 2020. Turkish gas demand makes the gas reserves in the Kurdistan region of Iraq of far greater strategic importance than oil, and they provide Turkey with the opportunity of materially reducing their gas import costs, according to Genel.
Turkey currently consumes approximately 50 billion cubic meters of gas annually, of which more than half is provided by Russia.
Either party can terminate the gas lifting agreements by February 2018. If Genel does not satisfy the required conditions within 12 months then the regional government can also use its right to terminate the agreement.
In the event that happens, and Genel subsequently fails to conclude new gas lifting agreements within a one-year period, then the regional government can also terminate the Miran and Bina Bawi production sharing contracts.
During the three-year period following such a termination, Genel would have the right of first refusal to participate in the development of the Miran and Bina Bawi gas fields with a 49% working interest on the same terms offered to any third party, Genel said.
"We are very pleased to have signed definitive agreements for our gas project and are now focused on the next step of concluding negotiations with potential partners, and moving the gas project towards the final investment decision. We are determined that 2017 will be a watershed year as we seek to create a gas business that will be transformational for both Genel and the Kurdistan regional government," said Chief Executive Murat Ozgul.
Genel is the sole contractor for both fields with 100% working interest. Previously, it has stated that the pre-front end engineering and design work being carried out by Fluor, alongside the gas development plan being compiled by Baker Hughes, should be completed in the first quarter of 2017.
Importantly, Genel does intend to bring in one or more partners to help with the development and financing of the gas fields. In the event of a successful farm-out, contingent activity could take the form of the environmental and social impact assessment and FEED for the gas treatment and processing facilities, as well as extended well tests and further 3D seismic on the Bina Bawi licence.
Genel's two gas assets had a carrying value of USD1.42 billion at the end of 2015.
The finalisation of commercial agreements with the government will help de-risk the assets and boost the chances of finding a partner.
Under the production sharing contracts, the company will pay a 5.0% royalty on oil and first stage condensate, but no royalty for the raw gas produced.
Under the gas lifting agreements, Genel will deliver gas at contracted quantities for 12 years, comprising of a two-year build-up period and a decade of plateau production.
In the build-up period, Bina Bawi will deliver volumes of 350 to 700 million standard cubic feet of gas per day, while Miran will deliver 250 to 500 million standard cubic feet per day. At plateau, Bina Bawi will deliver 700 million standard cubic feet per day, and Miran will deliver 500 million standard cubic feet per day.
Genel will receive USD1.20 per thousand cubic feet of the raw gas delivered into treatment facilities, it said, and the government is required to purchase at least 80% of the annual production from both fields via a take-or-pay arrangement.
After the decade-long plateau period, Genel will supply gas volumes equal to or less than the previous year until the end of the development period.
The two new fields will be in addition Genel's Tawke and Taq Taq fields in Kurdistan. Overall production from the two assets dropped by 37% year-on-year in 2016. While the Tawke field should deliver a small rise in output this year, Taq Taq is still struggling to maintain production as a result of steep natural declines in reserves.
The level of reserves at Taq Taq remain the key concern for the near-term investment thesis.
Genel is compiling an updated field development plan for Taq Taq and a new competent persons report, both of which should be completed before the end of the first quarter of 2017.
Genel shares were trading 2.3% higher on Monday at 75.99 pence, still 5.6% lower than the start of 2017 and 28% lower than one year ago.
By Joshua Warner; joshuawarner@alliancenews.com; @JoshAlliance
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