Shrinking oil reserves crimp Iraqi Kurdistan's allure

* Genel, Afren slash reserves estimates in key fields

* Wells hit water, revealing complex rock geology

* Kurdistan region already facing political, securityturmoil

By Ron Bousso

LONDON, March 10 (Reuters) - A string of downgrades to IraqiKurdistan's oil reserves is a fresh blow to the autonomousregion's fledgling oil industry already crippled by conflict,political strife and low crude prices.

The revisions - resulting from a closer inspection ofoilfields after drillers hit more water than expected - take theshine off one of the world's largest oil and gas reserves, whichhad drawn investors such as Exxon Mobil.

A further loss of faith in the region's oil bonanza alsopressures the debt-ridden Kurdistan Regional Government (KRG),which has struggled to ramp up production and exports due topipeline outages and conflict with Islamic State militants.

"The recent reserve downgrades are another blow to optimismabout Kurdish oil production," said Richard Mallinson,geopolitical analyst at consultancy Energy Aspects.

"While there are substantial amounts of oil in thisunderexplored province, companies are finding it is not as easyto find or produce in the quantities initially expected."

Among the handful of producers still operating in theregion, three have in recent months reviewed their estimates ofproven oil reserves or reduced output due to geologicalproblems.

Several fields in different areas have, nevertheless, beenunaffected by the revisions. For example, Shaikan, operated byGulf Keystone in the north of the region, saw itsreserves upgraded last year to 639 million barrels (mmbbls).

The region still boasts one of the world's lowest productioncosts, at around $20 a barrel.

Genel Energy lost more than a third of its marketvalue last month after the London-listed company halved thereserves estimate for Kurdistan's largest operational field, TaqTaq, to 356 mmbbls and wrote down its value by $1billion.

The revision means more than half of the80,000-barrels-per-day field's reserves have been produced.Genel also operates a second field, Tawke, whose reserves werelittle changed at 631 mmbbls.

Water levels in the six-year-old Taq Taq started risingrapidly in the second half of last year, prompting a study byconsultancy McDaniel & Associates that revealed the porosity ofthe rock - the ability to access oil - was overstated, leadingto the revision, Genel said.

Tony Hayward, Genel's chief executive and a former boss ofBP, said in an analyst call that the downgrade was"clearly very disappointing for ourselves and the KurdistanRegional Government".

MORE BAD NEWS

The downgrade is a blow to Genel's and other producers'hopes for the region.

"If you take a long-term view, you can look through politicsand geopolitical risks," BMO Capital Markets analyst BrendanWarn said.

"But if you haven't got good geology and the oil is not soeasily produced, you are much less attractive and no longer amajor's acquisition story."

The relatively low cost of producing oil in the region andGenel's plans to unlock gas reserves there still made the firm acompelling investment, Genel said.

For the KRG, whose revenue depends on oil, the revisions aremore bad news. The region is struggling to pay field operatorsdue to a dispute over oil revenues with the central governmentin Baghdad and the need to fund its fight against Islamic State.

The KRG started repaying oil companies earlier this year butstill owes them billions of dollars.

Before Genel, Afren Plc wiped the entire proven andprobable reserves of 190 mmbbls from its Barda Rash field inwestern Kurdistan after also hitting more water than expected inwells.

Oryx Petroleum shut two wells in the Demir Daghfield after hitting water, raising suspicions of similargeological problems elsewhere. It also revised lower its provenreserves in the Hawler licence area by 21 percent to 215 mmbbls.

Chevron, the second-largest U.S. oil company afterExxon Mobil, relinquished at the end of 2015 its interest in theRovi block north of Erbil but continues to test wells in theSarta area. (Additional reporting by Ahmad Ghaddar; Editing by Dale Hudson)