Kurdish oil drama reaches breaking point

Enough was enough this week for DNO, the small Norwegian oil company much-watched as a gauge of whether foreign investment in Iraqi Kurdistan will work.

It responded to the Kurdistan government’s outrage over a minor media controversy in Norway in the only way it could: by pointing out the real issue at hand and acting on it. However disappointed Kurdistan was about slander it had suffered at the hands of Norwegian journalists, DNO was equally disappointed by the failure to receive any payment for the Kurdish oil it has been exporting for four months.

This week is offered a grovelling apology to oil grandees in Kurdistan followed by an icy postscript: until you figure out how to pay us, we will not export your oil internationally, it said. DNO added that it will focus on domestic oil sales until Baghdad and Erbil settled their long-running dispute once and for all.

Oslo-based DNO was one of the first companies to invest in developing Iraqi Kurdistan’s tremendously rich but unexploited oil reserves after the fall of Saddam Hussein in 2003. It started exporting oil from its Tawke field in June, joining in the euphoria that accompanied an apparent breakthrough between the central government and Kurdistan’s regional government. For years Baghdad and Erbil had bickered over what constitutes a proper oil license. Baghdad – or Iraqi oil minister Hussain al-Shahristani, specifically – called Iraqi Kurdistan’s licenses illegal. This chilled foreign interest in developing the autonomous region’s estimated 40bn barrels of reserves.

Companies like DNO and Addax, recently bought by China’s Sinopec, continued to invest despite being in legal limbo. Then came June 1. Erbil’s unilateral decision to release DNO and Addax’s oil for export seemed to solve the matter through a brilliant political stunt of bluff-calling. Erbil knew it held the moral as well as economic high ground when it pointed out how absurd it was that a years-long dispute centred on the personal grievances of Mr Shahristani was blocking Iraq from profiting from Kurdish oil in its hour of direst need. The treasury was losing millions of dollars a day as oil stayed below $60 a barrel.

With the nominal sign-off of Iraq’s president and a lavish ceremony, Kurdistan’s oil minister Ashti Hawrami opened the taps to start exporting oil. He more or less ignored the consequences and the details, such as payment arrangements in the first exporters, in the interest of showing strength and resolve.

DNO, Addax, and Genel Energy, the marquee early exporters, spent the summer looking comfortable with the government’s line that payment would be sorted out in a matter of months, not years, and that mere bureaucracy was holding up the process. It is starting to appear, however, like the payment issue is deeply rooted in the same power struggles between the centre and provinces – and the larger than life egos representing them – that held up the exports in the first place. The oil companies were clearly losing patience.

That was why the Kurdistan government’s outburst on September 21 seemed so extraordinary. It was responding to a convoluted saga in Norway. The Oslo stock exchange, where DNO is listed, had investigated a fishy-looking transfer of DNO shares in 2008. The shares were bought by the Kurdistan government and the transfer was legal. DNO weighed in against the investigation and the exchange. Norwegian media then got hold of minutes of investigation hearings and printed their own conclusions, including insinuations that Mr Hawrami, the oil minister, acted as an inappropriate intermediary in the share deal.

Erbil issued a blast of fury under the heading, “Causing serious harm to the [Kurdish Regional Government] reputation.” It continued, “This internal dispute between DNO and [the Oslo Stock Exchange] should not have targeted the KRG minister by selectively releasing such misleading information … We cannot allow our reputation to be undermined.”

The punishment was out of all proportion: DNO’s operations in Kurdistan were suspended with immediate effect, and DNO was given six weeks to “remedy … to our full satisfaction, the damage done to the KRG reputation.” If it failed to do so, the KRG reserved the right to “consider termination of DNO’s involvement in the Kurdistan Region with or without compensation. Any compensation, if offered, will factor in the magnitude of damages caused to the KRG.”

The order, signed by Mr Hawrami, was a temper tantrum. It did more to undermine the reputation of the KRG than the Norwegian affair itself. Scurrilous reports by Norwegian media were out of the control of DNO. It was unclear how the company could restore the government’s “reputation” when it did not impugn the government in the first place. Suddenly, companies interested in investor-friendly Iraqi Kurdistan faced the possibility that their licenses would be revoked “without compensation” if they offended the personage of the oil minister.

The KRG also looked hypocritical amid its self-righteousness. Oil deals are a two-way understanding, and the government had not fulfilled its most basic obligation to DNO. DNO, Addax, and Genel are not being paid for their daily thousands of barrels fed into the Iraq-Turkey pipeline, and there is no timetable nor assurance they can believe in, as a byzantine struggle between the KRG oil ministry, the Baghdad oil ministry, and the central Iraqi Treasury plays out. The payment issue was the real cause for furore.

The government’s actions precipitated two letters of apology from DNO on October 5. They worked; the company restarted production on October 6, sending its shares soaring. One one of the apology letters was addressed to Mr Hawrami personally, and the other to the Iraqi and KRG governments generally. The final lines of one carried a measured rebuke. It was the most important point contained in the letters:

“As you are aware, the export [of oil] was stopped on Monday 21 September 2009. DNO is prepared to resume the export of oil to the international markets once a future payment mechanism is in place. The increase of export will be step wise in line with good and prudent oil field practices.”

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