Analyst provides insight to DNO-KRG dispute

 The IHS Global Insight Middle East energy analyst provides detailed analysis on the resolution of the DNO/KRG dispute.

DNO Returns

The Kurdistan Regional Government (KRG)’s Energy Minister Ashti Hawrami today reinstated DNO’s production-sharing agreements (PSAs) fully with immediate effect, allowing the Norwegian company to retake charge of operations at its producing Tawke field and apparently drawing a line under the recent dispute. “All issues with respect to the notice from KRG have now been resolved and DNO is looking forward to continuing its successful co-operation with KRG to the benefit of the Kurdistan Region and all people of Iraq”, DNO said in a statement. It also released the content of a letter from Hawrami saying “we now realise that your unfortunate internal disagreements with the [Oslo Stock Exchange] were exploited by the media beyond DNO’s control”.

DNO’s contracts and operations in the autonomous Iraqi Kurdistan region were completely and immediately suspended about two weeks ago, with the KRG Energy Ministry claiming that DNO had done “unjustifiable and incalculable harm” to the KRG’s and Hawrami’s reputation. Information released by the Oslo Stock Exchange (OSE) on dealings between DNO and the KRG and another key IOC active in the region, Turkey’s Genel Enerji, raised suspicions of possible share price manipulation, as well as questions about the personal conduct of Hawrami himself. Related documents that the OSE claimed it had to release under Norwegian law failed, however, to prove any such suspicions.

Nevertheless, the seeming overreaction of the KRG could be safely said to have exacerbated popular suspicions of some kind of wrongdoing, making it appear that the KRG was trying to divert attention away from itself and towards DNO in the matter. The relatively unspecified demand that DNO rectify the damage to KRG’s reputation was the latter’s only avenue to get at the OSE, further punishing DNO and its shareholders, and raising fears among the region’s investors that other eventual politically motivated disputes could suffer a similar fate.

KRG Defence

The KRG has not communicated its own version of events in a very effective and unified way, but a clearer picture has emerged through interviews over the past two weeks with key people including Hawrami. Wanting to help one of its key investors to raise money in the midst of last year’s financial meltdown, the KRG, through Hawrami, bought DNO shares on behalf of Genel Enerji—months before the Turkish company could raise the cash—in order to provide some support for DNO which, due to the dispute about the rights to the region’s oil resources, was still unable to export or get paid from its prolific Tawke field. The KRG later said that the deal with Genel involved the company taking on the full market risk—as well as reward—from the outset, meaning that the profit made from the appreciation of DNO shares during that time was paid in full to Genel.

The KRG leadership has also affirmed that Hawrami and his ministry acted in a fully official and sanctioned way, reaffirming its support for him at a time when corruption issues have been at the forefront of recent election losses by the two parties in the governing coalition.

Questions Turn North

Reasons for the KRG’s conduct still remain somewhat unclear, but questions are now increasingly being directed at the OSE and the allegedly selective information it released about the issue. DNO has not yet said whether it intends to pursue legal action against the OSE for an alleged wilful breach of confidentiality, but is reportedly still studying the possibility of delisting from the Norwegian exchange and listing instead in London.

The OSE has on several occasions over the past five years investigated DNO for wrongdoing, but has never managed to convict the company of any serious breach. (This latest matter resulted only in a minor fine for not having communicated swiftly enough with the exchange and investors.) There is talk among Norwegian investors of a breakdown at some level of personal relations between the exchange and DNO, leading to what some sources characterise as “a tendency to repeated harassment” from elements within the OSE. This interpretation is somewhat enforced by the statement published today in which DNO quotes Hawrami as saying “the selective information released on the KRG, which appeared among the [OSE’s] published documents has created an ideal opportunity for the opponents of our oil and gas policies to try to undermine and damage the KRG’s success over the last three years…we can now discern a clear and well-orchestrated attempt from the outset that has been exploited for political purposes”—though with regard to the OSE this last appears to politicise the issue far too much.

Missing the Exports

While the whole affair so far seems to have given Iraq’s anti-decentralisation forces some ammunition, pointing as it has to the KRG’s institutional inability to deal with complex business and legal matters in the region, the subsequent halt of DNO exports will leave a hole in the central government pocket. The reduced production at DNO’s Tawke field may well be followed by a halt of exports from the region’s other producing field, Taq Taq, managed by China’s Sinopec in association with Genel Enerji. That will mean the loss of almost 100,000 b/d of Iraqi exports—exports from whose sales revenue the Iraqi central government has become accustomed to keeping more than 80% since they were allowed to begin in June. This is likely to put considerable pressure on the central government and the oil ministry to finally resolve the impasse with the KRG about the region’s oil and gas autonomy, although it also signals that few see any resolution of the issue before the January parliamentary elections.

In fact, the decision to allow DNO to suspend exports appears to have been presented to the company as a concession for the rocky ride it has just experienced at the hands of the KRG. Ultimately, however, the move is judged to be in the KRG’s interests, enabling it to raise the pressure on Iraq’s central government and avoid continued grilling about its local regulations and practices. “Over the last few months, the Region has demonstrated (with DNO’s help) that the Region can easily export 100,000 barrels of oil per day and that this can be doubled in a very short period of time. We are still working on mechanisms for guaranteed payments, however for now we agree with your [DNO] request that the focus should be on increasing the supply of oil for local consumption (to solve local needs) and also to maximize the short term cash-flows for DNO”, Hawrami said in the letter to DNO, which the company published together with its own press release.

Outlook and Implications

The dispute appears resolved to DNO’s and KRG’s mutual benefit now, but still leaves something of a sour aftertaste. The KRG’s incredibly harsh immediate reaction has demonstrated the risks in doing business in the region—where institutions and governance practices remain young and untested—should a company fall into a politically charged dispute of some kind. The KRG’s own actions surrounding the share transaction also appear somewhat naïve and unprofessional. Now, however, questions have mostly turned back to the OSE’s conduct and its instigators, although that is unlikely to result in anything concrete that would benefit DNO.

In Iraq, the KRG is countering criticism over its handling of the issue from the central government by closing the taps on export volumes, lowering Iraqi revenues. This is likely to once again fuel calls from within certain sectors of the Iraqi polity to reach a deal with the Kurds, although the general political standstill as everyone focuses on the January elections is unlikely to make any change possible until after a new parliament has been sworn in.