Kurdistan Oil Explorers Fall as Militants Seize Oilfields

Aug 4. (Bloomberg) -- Eurasia Group President Ian Bremmer examines ISIL activities in Iraq with Tom Keene on “Bloomberg Surveillance.” (Source: Bloomberg)

Oil explorers in Iraq’s Kurdistan region slumped in Oslo and London after Islamic militants seized two oilfields in Northern Iraq.

DNO International ASA (DNO), which gets most of its output from the Kurdish region, fell as much as 11 percent, the biggest drop in more than six months. Genel Energy Plc (GENL) sank as much as 6.6 percent and Gulf Keystone Petroleum Ltd. (GKP) as much as 3.1 percent.

The Ain Zala and Batma oilfields, which together produce about 30,000 barrels a day, are under the control of the Islamic State, a breakaway al-Qaeda group, according to the state-run Northern Oil Co. The Sunni Islamist militants last month occupied the Qayyara oilfield north of Baghdad.

Islamic State, previously known as Islamic State in Iraq and the Levant, has seized territory in northern and western Iraq, taking over oil wells and fighting for control of refineries. Fighters continued their advance yesterday, taking control of the village of Wana, south of the Mosul dam, according to Hisham al-Brefkani, a member of the provincial council of Nineveh.

Kurdish fighters known as peshmerga retreated from the village to protect the dam, al-Brefkani, said by phone. He denied reports the reservoir had fallen into the hands of militants.

Sectarian Conflict

“A lot of people were confident that the peshmerga would have no problem dealing with Isis and defending the Kurdish borders,” Brian Gallagher, an oil analyst at Investec Plc in London who follows several explorers in the region, said today in a phone interview. “It was a shock to the market that Isis had a victory and we saw some readjusting this morning.”

DNO, which produces about two-thirds of its oil in Kurdistan, closed 10 percent lower at 18.90 kroner in Oslo. About 16.9 million shares were traded, four times the average daily volume during the past three months. Genel lost 3.4 percent to close at 967 pence in London, while Gulf Keystone slid 1.6 percent to 79 pence.

Genel declined to comment when contacted by Bloomberg News.

The flare ups raise the prospect of a resurgence of sectarian conflict in Iraq as Prime Minister Nouri al-Maliki’s Shiite-led government struggles to control Sunni-majority regions. Iraq is the second-biggest producer in the Organization of Petroleum Exporting Countries.

Increased Risk

DNO, the first foreign company to drill for oil in Iraq after the U.S.-led invasion in 2003, has operations at the Dohuk and Erbil licenses in northern Iraq, as well as at Tawke, its biggest field.

“We continue to conduct operations at all DNO sites throughout Kurdistan within our established security protocols,” Chief Executive Officer Bjoern Dale said in an e-mail. “Needless to say, we’re in regular contact with the authorities and closely monitor developments.”

“One should always be concerned when there’s a war going on but I don’t believe that the Tawke field and the Kurdish heartland is the main target for the Islamists,” Kjetil Bakken, an analyst at Carnegie AS, said today by phone from Oslo. “The fact that ISIS is progressing towards Kurdish areas is creating fear amongst investors.”

The conflict has increased the risk for the “DNO investment case in the short-term,” Swedbank First Securities analyst Teodor Sveen Nilsen said by e-mail. “In an absolute worst case scenario, with no production from DNO’s Iraqi assets, we see 70 percent to 80 percent downside risk to our cash flow and earnings estimates.”

To contact the reporters on this story: Saleha Mohsin in Oslo at smohsin2@bloomberg.net; Anna Hirtenstein in London at ahirtenstein@bloomberg.net

To contact the editors responsible for this story: Will Kennedy at wkennedy3@bloomberg.net Alastair Reed, Jim Efstathiou Jr.

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