LONDON: On the last Sunday of February 2016, late in the evening, Genel Energy’s chairman and former BP boss Tony Hayward held an urgent call with the board to break some bad news: The firm’s prized oil field was worth much less than they had thought. Hours later, the company released a statement to the London Stock Exchange announcing the halving of the reserves of the Taq Taq oil field in Iraqi Kurdistan, the value of which had already been hurt by the collapse in oil prices and the proximity of Daesh (ISIS) fighters.
The news forced Genel to write down $1 billion and saw its shares lose a third of their value.
Genel says it announced the bad news as quickly as possible after an independent review of the oil field, conducted promptly after extra water was found in wells late last year.
“Up to and including the first half of 2015, there was no cause for concern – the Taq Taq reservoirs were performing in line with expectations,” Chief Executive Officer Murat Ozgul told Reuters. “Once we started to see the wells decline ... we took appropriate steps.”
But some industry figures argue that Genel might have been able to avoid the surprise if it had conducted reviews of its oil fields annually, as is standard in much of the industry, instead of allowing a four-and-a-half year gap between audits.
“Yearly reserve revisions are part and parcel of the business [both upward and downward] – so their absence alone may warrant further investigation,” said Nick Ingrassia, managing director at oil exploration consultancy 6 Point Energy.
Genel, whose share price still lingers at around 90 percent below its early 2014 peak, has told investors it will now switch to reviewing reserves annually.
Nevertheless, it insists it did nothing wrong by taking so long to uncover the shortfall.
“We understand the market perspective,” said Ozgul, who argues that annual reports would not have uncovered the drop in reserves any earlier. “What the company did in the past was correct, based on the information we had at the time.”
Ozgul – who took over from Hayward as CEO last year after Hayward became chairman – urges investors to look past the downgrade and focus on the future, as Kurdistan, an autonomous region in northern Iraq, starts paying off debts to oil companies and Genel gears up to pump gas to Turkey.
Kurdistan has long been high on the agenda of oil companies as it is one of the last places in the world with easy and cheap-to-extract reserves.
A long-running dispute between the autonomous Kurdistan Regional Government and Baghdad over the right to exploit the oil kept big companies away, allowing room for smaller players like Genel.
BP under Hayward, a geologist and veteran oil explorer, studied entering Kurdistan but was deterred by tensions between the region and the central government in Iraq, where BP is one of the largest investors.
Hayward, whose time as BP’s CEO ended abruptly following the deadly 2010 Gulf of Mexico spill, bought Genel, then a private company, in 2011 together with financier Nat Rothschild. Their goal was to develop assets in Kurdistan and Africa at a time when oil prices stood above $100 per barrel.
Hayward became CEO while another BP veteran, Rodney Chase, formerly deputy CEO of the British giant, became chairman.
The firm quickly won favor among London investors, claiming shortly after its listing in 2011 to be “the largest independent U.K.-listed exploration and production company by proved and probable reserves.”
But its searches for oil in Malta, Angola and Morocco ended with little success last year and a write-down of $480 million.
That left its main investments in Kurdistan, where it has a 44 percent stake in Taq Taq. China’s Petroleum & Chemical Corp. holds 36 percent and Kurdistan the rest.
Alarm bells were set off when water levels in Taq Taq started rising rapidly in the second half of 2015. A subsequent study by consultancy McDaniel & Associates revealed that the ability to access oil in the field had been significantly overstated, leading to the reserves downgrade.
Genel expects to produce up to 70,000 barrels per day of oil from Taq Taq and the nearby Tawke field this year, down from 85,000 in 2015.
After the $1 billion impairment, anyone who had bought a Genel share for 10 pounds in early 2014 was left with just 70 pence.
Meanwhile, the oil price collapse made it unlikely that Genel investors could be rescued by a merger with a larger firm.
“The downgrade makes Genel more reliant than they already were on oil price recovery in order to generate value for shareholders,” said Daniel Slater, research director at Arden Partners stockbrokers.
Since those depths, Genel’s share price has recovered somewhat, nearly doubling to around 130 pence as oil prices have also risen.
Nevertheless, the poor performance has led to criticism of Hayward from some investors, including tension between Hayward and the venture’s early backer Rothschild.
Both men declined to comment for this story.
Hayward owns just 0.5 percent of Genel, while Rothschild owns around 8 percent, making him the third largest investor after Turkish businessmen Tolga Bilgin and Mehmet Karamehmet.
Hayward, who also serves as nonexecutive chairman of miner Glencore, will remain chairman despite the setback, says Ozgul: “He is the ideal fit for our chairman and has stated publicly that he has no intention to leave.”
Ozgul says the fortunes of Kurdish oil firms will improve as the government of the region cuts spending, leaving more money for repayment of arrears to oil firms and as independent oil pipeline exports via and to energy-hungry Turkey are rising.
“Despite the challenges, progress in the KRG oil industry has been impressive – exports have risen from next to nothing to well over half a million barrels a day,” Ozgul said. “The speed of infrastructure development in the region has been incredible.”
The company’s future growth hangs in large part on the success of the development of the Miran and Bina Bawi gas fields, which it plans to link via pipeline to Turkey.
Genel is in advanced talks to sell a stake in the project to the Turkish government, although talks have been slowed down by tensions in the region, according to Ozgul.
“Politics will define the speed of the development of the project,” Ozgul said. “We will try our best with the Turkish entity – they are after all the natural partner – until the end of the year and I am hopeful about the result.”
Genel plans to sell down around half of its stake in the gas fields, Ozgul said, adding that if talks with Turkey fail, the company has “a Plan B with other international partners.”