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Belgrano, are you sure that Iraq pays more for other oil companies?
The PSA-s (Profit Sharing Agreement) that I checked pay around 40% less remuneration vs the Kurd PSC-s (profit oil).
(Although you can argue that Kurdistan is riskier and its harder to extract oil, so higher compensation is justified... But who cares if they just wanted to bring the kurds to their knees?..)
"20.6/ barrel low" I respectfully disagree, at least in the context of GKP. (Sorry if I misrepresented it, I understand it as a fix payment/barrel.)
The $ 151m is a completely different matter, and there is a further approx $ 40-50m net [for the GKP] in the CRP. So the sum is lets say $ 200m.
Why I would take a $ 20/barrel without hesitation: 50k(Bpd)*30(days/month)*12(month)*20=$360 million.
If we just calculate the share with the Working Interest (61.5%), its over $ 220 million. The OPEX was around $ 3.1/barrel so OPEX is max 50-60m/year, 40-45m in CAPEX is required to keep the production flat + some S&G... More than $ 100m would remain. Beyond anything that we can hope for.
If anything like this were offered (unfortunately I doubt in it...), it should be accepted.
This paying the production costs is a total BS.
In federal Iraq, even the most primitive TSC contracts have cost recovery mechanism (after reaching a certain production target). DPC-s on the other hand are actually "nerfed" PSC-s. Changing the contracts to DPC-s would most certainly scale back profit oil revenues because in federal Iraq the investment costs are usually lower.
Things that I do not understand:
-Why is GOI hesitant to pay the costs?... They have basically the same mechanism.
-Why not "simply" change the ICO-s contracts to DPC-s with Bagdad and make the Kurds to pay the difference in profit oil that IOC's would get according to the current (PSC) contracts?
-Barzani argued in the latest interview that they view the PSC contracts as legal ones and are siding with IOC-'s (which is their very interest because no one will ever invest there if IOC-s are ***ed). But why argue when Bagdad clearly has the upper hand and you know that PSC-s are unacceptable because of the activist Supreme Court full of pro-Iran & anti-KRG judges?... KRG should support IOC-s to make a new contract with Bagdad and compensate for any disadvantage compared to the existing one. Not easy stuff, might ake time but it is clearly straightforward and could be carried out. I mean if Bagdad indeed wishes to make any deal and resume exports. Hopefully, Bagdad will give some exact offer to IOC-s in the near future and there can be some negotiations.
I am trying to do some research regarding this possible contract modification.
At the end of the day it will come down whether GKP gets a correct deal or not.
What is interesting that I do not see why this proposed Profit Sharing Agreements (PSA) are fundamentally different than PSC-s. I did not found detailed explanation how this contracts work, only that contractors effectively get a certain share of the profit (and said to be more investor friendly). But I still do not see the legal framework why PSA-s are OK, while PSC-s are not... In an article it is stated that oil and gas law may be in front of the Iraqi Parliament in December. If that's the ground for PSA-s then what if it wont be passed?...
This is a huge mess.
https://www.oilandgasmiddleeast.com/news/adipec-2021/adipec-2023-iraqs-fifth-and-sixth-licencing-rounds-promise-profit-sharing
https://www.zawya.com/en/projects/oil-and-gas/new-iraqi-oil-law-to-allow-production-sharing-with-foreign-firms-vhwjw8mu
Sorry, there was a typo on my part but you understood it anyway what I meant.
Mr Spacetomato,
Its up to you. The reason why I am not selling yet is because I still see huge value (upside) here, although I am increasingly worried because of Bagdad's agenda. Maybe incompetence is met with malevolence. The main reason why I am not selling is because Kurdistan's oil sector simply can not function without IOC's. And if they are "robbed" then Kurdistan will become uninvestable, while the economy will get crashed for a long time because of the decline in oil production.
The way that I see forward: give the IOC-'s a fair deal: give them a similar TSC or RSA that they have now with 65-70 USD oil prices. According to my calculations 22-24 USD/barrel should be more than enough to cover not only the OPEX and maintenance CAPEX -but also leave some profit for the producers. + 8 dollar/barrel production cost, then the monthly oil exenses should be: 28 (or 30) * 400k (bpd) *30 (day)=360-380 million dollars expense per month. (To compare that KRG has a monthly share of $ 1.3 billion/month and they have another $4-500m revenue.) I think they should be able to pay, but of course they want to ask as much from Bagdad as they can, while Bagdad wants the opposite.
If you search back, the maximum amount that KRG paid in a quarter was $ 1.6 billion in 2022, so more than 500 million per month. Usually they paid around $ 1 billion/quarter. GKP specifically had a huge cost recovery in the year of 2022. It still leaves the issue of recovering cost from the past, but for Shaikan (55-60k bpd) and Tawke (100k+ bpd) there is hardly any unrecovered cost from the past - if you exclude receivables its around $ 50-60m for Shaikan.
https://gov.krd/english/information-and-services/open-data/
Suddenly, we rather have more questions than answers.
Who will pay the costs/fees, GOI or KRG?
Who will make the new contract, the KRG or GOI? The finance minister hinted that KRG should adjust the contracts...
Then what to do with the unrecovered costs, capacity building payments and working interests?
They cant even agree on transportation fees... Just that is said to be 8 USD/barrel. Also, the 22-24 USD production cost per barrel is interesting. Shaikan has an OPEX around 3-3.3 USD and with 50-60m CAPEX/ year, the production can be kept flat, so the production should all-in-all be around 7 USD for Shaikan (and of course another 14-16m G&A expense for the company...). So for GKP getting a fixed amount of 16-18 USD/ barrel (even if 20% of profit would get taxed, like now with CBP) would be OK, compared to the previous situation with the PSC. But of course the production costs - just like the crude quality - differ greatly between fields.
I do not think that all this can not be sorted out in a short period of time.
Gentlemen please try to focus to the GKP here...
@BroadfordBay
@PUTUP
Are you still holding?
And an other question: if PSC-s are modified to PSA-s or TSC-s of whatever f*ck, then in accounting terms, are the companies obligated to write down the production assets in the balance sheets?
Just to give you some info:
GKP's unrecovered costs: ~50m USD
Reciavables: 151m USD
Shaikan's OPEX/barrel (probably the lowest in the region): 3 USD
In order to keep the production flat one well/ year needs to be added, that costs around 40-50m USD. So thats an 3-4 USD CAPEX/barrel (to the paying interest, which is 80%).
If GKP got paid for reciavables and the 50m unrecovered cost, then we can talk about the PSC modification. Anything above a fixed 6-7 USD/barrel - for "profit oil" - would not be worse compared to the current PSC. This is just for the Shaikan, in other fields it might be much more complicated and the costs might be higher. Another question is what to do with the 'working interests' once the PSC-s are nullified. The KRG has working interests in several PSC's and it has quite some value... Adjusting these contracts should take quite some time.
I have seen no indication in the news that Bagdad directly negotiated with AKIPUR about changing the contracts or there were any serious proposal. It seems that some people in Bagdad are in rush to negotiate and US also takes part but I do not see any obvious progress or even proposal... On the other hands kurds should be aware that noone will invest there anymore if the PSC's are replaced with unfair contracts, not to mention the lawsuits.
Anyway is there anyone familiar with how much money are getting those IOC's in federal Iraq? How "rewarding" are those TSC-s?
Btw, Bagdad issued some more "advanced" contract this year:
https://www.reuters.com/markets/commodities/iraqs-massive-total-oil-deal-heralds-new-revenue-sharing-formula-2023-07-19/
Hi xxxAccountant,
If I remember correctly, Genel will publish an update on Tuesday.
GKP Genel
Main "Asset" Shaikan Tawke
Years left (P2 reserves, before ITP shutdown production rate) 25 years 7 years
Mcap: approx the same, you can check it somewhere above 300m USD
R factor (latest) 27% 16% (or close to it)
Paying interest 80% 25%
Working interest 61.50%; 25%
CBP (tax) 20% of Profit oil; 0%
Unrecovered costs (approx) 50; 0
Cash approx 80m; 390m
Reciavable 151m; 100m
Debt (face value) approx 0m 240m
Trade payables (& accrued exp.) approx 70m 70m
*where "approx" is my best guess.
GKP profit oil calculation: After royalty production*(1-cost recovered/maximum cost recovered)*27%(R factor)*61.5%(WI)
(and minus 20% of this is Capacity Building Payment)
Genel profit oil calculation: After royalty production*(1-cost recovered/maximum cost recovered)*16%(R factor)*25%(WI)
I see the following important differences
-Genel has a serious lawsuit against KRG because of the termination of 2 PSC contracts where they invested more than USD 1.5 billion.
https://www.reuters.com/world/middle-east/iraqs-krg-says-genel-energy-not-entitled-compensation-2021-12-12/
KRG of course has counterclaims. Now I do not know whether this is just their technique to negotiate, but that would be brutal if Genel should pay compensation... In my opinion, the good news is that the lawsuit is in London.
-Crude quality, Shaikan's oil is heavy, Tawke's oil is close to Brent's "quality" so in general, one barrel from Tawke can worth 5-10 USD more. There are even arguments that if SOMA will decide which oil to put into the pipeline, then Tawke's oil has the advantage because of quality.
-Genel is looking for M&A, because the Tawke field will be depleted in 6-8 years. Sarta got shut down and Taq Taq is insignificant.
So overall both are extremely interesting! (I have only GKP (so far..!)
Good luck!
"First step is to agree with the region and companies on adjusting (!!!) their existing contracts to be consistent with Iraq's constitution (!!!). We could reach a deal in three days."
This part is the most important! I see still huge risks here. Either they are gonna try to f*** us over (and ICO's will reject the proposal) and we may enter into other months of stalemate or we will get fair proposals and we will go into the moon.
What I like so far: GOI acknowledged past debts (basically the unpaid receivables). And because there is not much unrecovered cost for GKP (net. approx 50 mUSD if we exclude the receivables), to be honest I do not see that of a huge issue entering into a TSC (technical service contract) where GOI pays the costs (CAPEX+OPEX) + ICO's get a fixed amount, lets say 5-6 USD per barrel - now I do not know whether that would apply for WI or PI - but that would be 70-90m FCFF for GKP/year, assuming 55k bopd productuon. Of course those companies who have large unrecovered costs from the past would be ****ed.
So in case of such a PSC modifications, the AKIPUR should hold together and demand the payback of all unrecovered costs. In my opinion if we were to get an unfair contract modification (where I can not imagine that AKIPUR would not fight), without the recovery of past cost (but getting the 151m!) GKP is still to worth 1.8-2 GBP with a brutal (20%) WACC. And I am just speculating here, nothing else! This is just my opinion how I "imagine" the situation. And a TSC with fixed amount "fee" would protect from downward oil swings and also not reward for high oil price . Correct me (maybe @PUTUP?) if I misunderstand the functioning of the TSC-s.
JakelaMotta
You completely misunderstanding it and I do you a favor and explain how it works.
What you are referring to is the 200/500=40%, which is GKP's revenue share with MAXIMUM cost recovery.
GKP is NOT entitled for the total value of those barrels. Repeat with me GKP is NOT entitled for the total value of those barrels. GKP according to the PSC is entitled for:
1) Cost oil: to get back its past CAPEX+OPEX
2) Profit oil: which depends on the produced volumes and R factor, it is a tiny fraction of GKP-s historical revenues. To be exact it is around 25%.
So, itf GKP gets back all its "investment expenditure" (past CAPEX+OPEX) then the revenue, so the profit will drop because in form of cost oil, it will be only able to recover its very recent cost and expenditures. So basically what you do not get is that the cost oil will drop very much if all the past cost are recovered, and we are in fact quite close to that. I think GKP has one "great" year left for this huge cash flow generation, assuming all the things get fixed (and no large additional production expansion is made). Then it can generate like 80-90m USD.
You are welcome.
Guys you better start understanding the PSC and do your own modeling.
With local sales there can not be any (significant) cash flow generation until the approx 20 million account payable is not paid back. According to the PSC, with 33k bpd production and $ 30 realized price the net entitlement is $ 10.7 million. With $6m/month run rate. free cash flow can be maximum around $5m. This can increase to $8.5 million with 45k bpd, assuming that expenditures and cost don't rise which is also nonsense... So I think - with the current conditions - at best GKP can generate currently around 6-7 million/month. And again there is $ 20m payable (towards local suppliers) to manage.. So there wont be any significant rise in the cash balance until the end of the year just because of the local sales.
On the other hand, regarding net entitlements:
After the cost recovery pool will get empty (which means annual cost oil will be equal to the annual CAPEX+OPEX), there will be like 80-90 million USD/year free cash flow generation potential (assuming around 55k bpd production). And regarding the net entitlement for the company, the net(!) cost recovery pool can be around $ 55-60m USD (although there is 120m in account payable to be paid...).
Again these are the actual current(!) numbers, I am not talking about any additional investment (potential).
Gentlemen,I think you better learn from PUTUP and appreciate him, he is by far the most informed among us.
GKP worths significantly more than today's price if Bagdad will implement reasonable solutions which I hope it will.
You can dream that it will go up tenfolds - I will be happy with you - but any serious analyst will tell you that - based on our current information - the share in any bull scenario does not worth more than GBP 2.5-3.
Well, if I run my model.. I calculate with: 75 USD Brent with 60k bpd production forever (and an implied negative "g" in TV), 25% discount on realized prices (56.25/barrel) and then we use a WACC of 20% (while assuming that the $151 will be fully paid) then the fair value per share for me is GBP 2.22. With 15% WACC it is GBP 2.65. (Yes I know PUTUP demands higher WACC, probably rightly so.)
But for it of course PSC needs to be legitimized (oil and gas law were the best but they are unable to pass that since 15 years..) and GKP needs to get paid.
From acquisition perspective supermajors can diversify the risk so in my opinion (!) they would use a WACC around 12%. That implies a value of GBP 3.1/share for the 2P reserves (500m barrels). If they could rump up production to 110k barrels per day until 2026 -- which is very unlikely - then and also utilize the resources then it can worth GBP 4 for a supermajor (but in reality they would likely not offer anything like this). But we are very far from that, basic things like the payment, pipeline resumption and PSC legitimization needs to be shorted out first.
@Putup,
according to your calculations, how much "unused" CRP is left?
If I remember correctly, the latest number was around $ 220 million. 80% (paying interest) of this is $ 176 M. From the $151 M receivables 75% is cost recovery which is approx $ 112 M, so the leftover is around $ 63.5 M. Do I miss anything?
With local sales currently $ 8.5m is for cost recovery and 2.5m profit oil. But there is $4m OPEX and CAPEX, so ceteris paribus the cost recovery pool would dry up in (63.5/4.5=) 14 months. If they still wont get the $151m receivables then I guess they should(!) be able to invoice against those claims...
@theoryman
If I know correctly, KRG revieved around $ 400 millions per month in the last 3 month. On the top of that - with US involvement - Bagdad agreed to give $ 1.5-1.6 billion to fully cover the saleries. This will be distrubuted in 3 portion and the federal governmnent backs the loan agreements.
According to the budget law, the KRG should get around 1 billion just for oil revenues (and they should have other 3-4 million (?) for other revenues).
Regarding the production around Kirkuk, idk whether they can effectively redirect that but if not then you can calculate that 80k bpd * 60 (USD/barrel because of quality discount) * 30 (days per month) * 5 (months)=$ 720 million. But again idk wheter they can redirect it or not. But for sure Bagdad paid for the KRG so far $ 1.2 billion and granted 1.5 billion in loans while recieved 3 times 80k bpd into refineries (worth around 4-500 million USD). So in financial terms if it continues, it is sure that it wont be financially sane for Bagdad because as local sales rump up, they wil be FORCED to pay more than 400 millions/month anyway. The higher the official Kurd production, the more they will have to pay, because - correct me if I am wrong - but the Budget Law requires the them (KRI) to export or if not possibly sell the oil in domestic markets, at least 500k bpd. I think they KRI should be easily over 300k bpd for now.
Https://www.oilandgasmiddleeast.com/news/iraq-new-law-allows-foreign-companies-to-own-oil-output
Iraq: New law allows foreign companies to own oil output
With this new law, Iraq seeks to leverage its oil wealth to attract foreign investment. If this got passed (effectively legitimizing PSC-s)... would be very great.
@theoryman
If you look back at the past, Bagdad never really cared for the quotas.
Also the increased production should allow Kurdistan to receive a larger share from the federal budget, in my opinion they should be around 300k bpd.
Also Bagdad does not really make money with local sales and even the 120k bpd for the refineris won't make difference. They need to pay monthly 4-700 million dollars for Kurds while having almost no revenue from the Region while they also loose export around 80k bpd from Kirkuk. Also the USD 150 billion federal budget is financed by USD 50 billion deficit... I think Bagdad has every financial (!) reason to reopen the pipeline.