It has not being easy going for Dana Gas, one of the rare – if not the first – privately-owned natural gas E&P companies in the Middle East. The Sharjah-based company has been embroiled in a dispute with the Iranian government, hit some rough patches in its expansion bid in Egypt, and currently finds itself in the midst of a complicated litigation process with the Kurdistan Regional Government (KRG) in Iraq.
The man at helm of the company is clearly weathering the storm with a smile on his face, however. Dr Patrick Allman-Ward, the chief executive officer of Dana Gas, was a veteran of the industry even before joining the company in 2012, and is confident he will see Dana Gas through any turmoil in which the company may find itself.
During his illustrious career spanning almost 35 years, Allman-Ward has worked in nearly all of the major oil and gas hubs in the world, from Malaysia to Houston, the most notable of his roles being with Royal Dutch Shell and Saudi Aramco (in a joint venture).
“The reason I was interested in Dana Gas in the first place was the growth potential that the company has in Egypt and also in the Kurdistan region of Iraq. There are very few companies that I’m aware of, the size of Dana Gas, that are sitting on the scale of growth opportunities that is represented in our portfolio and that – as an explorer and a geologist – is thrilling,” the executive tells me, referring to his doctorate degree in mining geology from Imperial College, London.
The Iranian dispute
Dana Gas, which was listed on the Abu Dhabi Securities Exchange (ADX) in 2005, has encountered a variety of challenges throughout its 11 years of existence, the initial one being its entanglement in a dispute with the Iranian government. As part of a 25-year contract, the National Iranian Oil Company (NIOC) was to provide Crescent Petroleum, a sister company of Dana Gas, with 600mn cubic feet of gas per day (mcf/d) from its Salman gas field through an undersea pipeline built specifically for that purpose.
The gas import project – reported to be worth $1bn – was one of significant strategic importance, not just for the fact that it would serve as a diversified source of energy, but also because the supply amount represents about one-tenth of the UAE’s total gas consumption, and would be used to feed the gas-starved commercial and industrial units in the Northern Emirates.
“Dana Gas was IPO’d for the UAE gas [import] project in 2005, and the first gas was expected to be delivered in the same year. But it was not. This was at the same time that the [Mahmoud] Ahmadinejad regime took over Iran, and then the Iranian officials decided that the gas price that they had negotiated four or five years earlier, in 2001, was no longer attractive to them. So they entered into a dispute process to negotiate higher tariffs and gas prices, which was never resolved and ended up in arbitration,” Allman-Ward reveals.
“There have been some discussions and, parallel to that, the arbitration process continues. This year the final damages phase of the arbitral process will be heard, and that is going to take place from 1 September. We are confident there will be a damages award. The only question really is how much that will be,” he says.
“That was a frustrating beginning for Dana Gas,” the CEO admits. “Fairly quickly after it was realised that the gas was not coming from Iran, the company needed to produce its own gas. So the company raised $1bn and purchased assets, the primary ones being in Egypt.”
The Egyptian adventure
Dana Gas ventured into Egypt in January 2007 and has since increased gas production by up to 40% from its facilities in the country. The company is currently producing at the full capacity of El-Wastani processing plant, 195mn standard cubic feet of gas per day (mmscf/d) and 5,400 barrels of condensate. The Balsam discoveries in 2015 have been tied in and contribute 24mn standard cubic feet of gas per day.
However, Dana Gas’ journey in Egypt hasn’t been smooth sailing. The Arab Spring swept through North Africa in 2011, before shaking up the Middle East, throwing Egypt into major turmoil. The oil and gas industry in the country, along with other crucial sectors of the economy, therefore, was plunged into crisis. “Since then, the story in Egypt has been about recovering money from the market, and discussing and negotiating win-win solutions with the Egyptian government, whereby we can continue to invest in Egypt,” Allman-Ward says.
He elaborates, saying: “In 2014, we managed to negotiate something called the Gas Production Announcement Agreement with the [Egyptian] government, whereby we have undertaken to invest in drilling new development wells and to add them to our existing facilities. In return for $355mn-worth of new investments over the course of three years, there will be incremental gas and liquid production. We agreed with the government that we will take both our share of the incremental liquid production as well as the government’s share.We will sell that volume in the international market, directly to third parties, which will allow us to get paid directly in US dollars.”
Dana Gas has since been pressing ahead with its E&P campaign in its Balsam asset and has also entered into a partnership with BP. The company has drilled and started producing gas from the Balsam 2 and 3 wells, both of which were discovered close to the initial Balsam 1 facility. “The wells were completed by the end of October [2015]. In a question of months, we have seen these two wells tied in. Once again, there has been an increase in production, manifesting itself in our production profiles,” Allman-Ward says.
The Kurdistan conflict
Dana Gas ventured into the vast oil- and natural gas-rich Kurdistan region of Iraq in 2007, in a consortium – known as Pearl – with Crescent Petroleum. The KRG, despite awarding the Pearl consortium a 25-year deal to develop the Khor Mor and Chemchamal gas fields, has been unhappy about certain apparently thorny issues in the agreement ever since.
The KRG, according to Allman-Ward, was displeased over particular clauses of the agreement relating to, “whether we [Pearl] were entitled to the liquids; how long was the duration of the contract; were we entitled to develop the two fields; were we prevented from exporting liquids from Kurdistan by virtue of circumstances pertaining; and, under those circumstances, were the KRG obliged to pay for those products? And if so, at what prices? These were all parts that the KRG disagreed with us about, in terms of our interpretation of the contract.
“On top of that,” he continues, “there was also a further disagreement about the accounting mechanism – how to account for revenues earned by the consortium partners, versus the money owed to the KRG.” In 2009, the disagreements became a dispute when Pearl, which at that time was a 50/50 joint venture between Crescent Petroleum and Dana Gas, sold 10% each to Hungary’s MOL and Austria’s OMV. The KRG protested, saying the consortium had violated the contract and claiming entitlement to a share of the money that Pearl had earned from that stakes sale.
“Since 2009, the resolution of the dispute didn’t make progress and we had to go to a dispute resolution mechanism in 2013, first to mediation and when that didn’t work, to arbitration. However at all times we’ve made it clear that we think a negotiated settlement is the right way to go, rather than litigation,” Allman-Ward says.
Elaborating on the legal process, the CEO adds: “It has been helpful to us because in the arbitration [in the London Court of International Arbitration], what we’ve been able to establish – through judgements made by the tribunal – is that our contract is legal and binding, that our contractual interpretation is shared by the tribunal, and they’ve confirmed that we have the title to the hydrocarbons, that we are entitled to export those hydrocarbons, and – if we’re not able to export them – that the contract specifies that the government of KRG has got to take and pay for those products at international prices. And that the duration of the contract was at least 25 years with two five-year extensions.”
The London court has ruled in favour of the Pearl consortium, ordering the KRG to pay $1.963bn for liquid products – in the form of both condensates and LPGs – that it had lifted but did not pay for till June 30, 2015, as per the terms of the contract.
“That’s clearly established out rights. We had been booking receivables in our financial results, because we believed that these were legitimate invoices for which we had not been paid, and of course it’s then helpful to us to have this tribunal agree that these are indeed monies that are owed to the consortium,” Allman-Ward says.
Under his leadership, Dana Gas has been navigating through troubled waters both at home and abroad. Despite facing hardships in the current low oil price period, much like its regional and global peers, Dana Gas has registered a profit of $6mn in Q1 2016. Also in the first quarter of this year, the company started producing gas from the Zora offshore gas field in Sharjah to feed entities such as the Sharjah Electricity and Water Authority (SEWA) for power generation. Although output began at 20mcf/d, the CEO hopes to soon achieve a flow rate of 40mcf/d from the field.
Allman-Ward is also focussing on increasing Dana Gas’ production capabilities at home – a strategy that he believes will help the UAE meet its growing gas requirements. “There are, particularly in the Northern Emirates, exploration opportunities. I think that, given the fact that the UAE is gas-short, and given the fact that they are currently building LNG import facilities in Fujairah, which will mean that the UAE will need to pay international prices to import gas for that shortfall, it makes eminent sense to encourage the exploration for additional gas sources domestically, because it’s my conviction that there are additional gas fields to be found throughout the country,” he says.
However, Dana Gas has axed 40% of its total workforce, mostly at its headquarters in Sharjah, in order to survive the lean period. “We are looking at what we will have to do in terms of reducing operating costs elsewhere in our business and that, clearly, is not about just cutting costs,” Allman-Ward states. “It’s about looking intelligently at the way we go about executing our business and making sure that we take out unnecessary costs where we can. You need to protect the technical integrity of the company going forward, to make sure that we can continue to operate efficiently, and that we have a basis from which to regrow the company.”
