DNO Seeks Growth outside Iraq

DNO International ASA, the first foreign company to pump oil in Iraq since the 1970s, may invest outside the war-torn country as the regional Kurdish authority and Baghdad officials argue over export payments.

“It’s important for us to look for opportunities in other areas, to have a more diversified portfolio,” Chief Executive Officer Helge Eide said in an interview in Oslo. “We’re looking at eastern Africa, northern Africa and the Middle East onshore. That’s where we have been focusing our new venture activity, with Tunisia being the first opportunity.”

The company last week reported a larger-than-expected loss in the fourth quarter, ending a second year of losses, and revised sales figures after an estimated $133 million in Iraqi revenue failed to materialize. It has spent at least $350 million developing Iraqi assets after signing a production sharing agreement with the Kurdish Regional Government, or KRG, in 2004.

Oman, Egypt

Difficulties in the Kurdish region coincide with efforts from the Baghdad government to develop the world’s third-largest oil reserves and raise capacity fivefold to 12 million barrels a day in the next six years. Companies such as Exxon Mobil Corp., BP Plc and Royal Dutch Shell Plc have signed contracts after two licensing rounds last year.

DNO entered the Middle East in 1998 in Yemen before moving into Iraq after the U.S-led invasion to topple Saddam Hussein. It last year signed a preliminary agreement for a 50 percent interest in an exploration permit in Tunisia with Audax Resources Ltd. The company is also looking at Oman and Egypt, Eide said.

Production was 7,600 barrels a day of oil in Yemen in the fourth quarter, and about 5,900 barrels a day for the local market in Iraq. Before exports were suspended, it produced 31,000 barrels a day for exports from Iraq in the third quarter.

The company plans to invest a total of 360 million kroner ($61 million) this year, which doesn’t include expected payments for Iraq exports. Should exports resume and the payment issue be solved, it will consider making acquisitions outside Iraq, Eide said. We’d “accelerate some of our planned projects and be more active with regards to new ventures in terms of finding new assets in other countries, to be more diversified,” he said.

‘Bumpy Ride’

DNO has “had a bumpy ride” in Iraq, Eide said. It waited two years to get an export permit after starting output. Its operations were temporarily shut by the KRG three months later after the Oslo Stock Exchange forced the disclosure of the authority’s role in arranging a sale of treasury shares in 2008 when DNO needed money. DNO is also fending off a $144 million compensation claim from undisclosed parties that held stakes in its assets at the London Court of International Arbitration.

“If the court rules in favor of the claimants it leaves DNO with very, very, very little cash,” said Trond Omdal, an analyst at Arctic Securities in Oslo, who has a “buy” rating.

DNO and companies such as Addax Petroleum Corp. signed agreements with the Kurdish authorities, which are disputed by the Baghdad government. Revenue was passed to the State Oil Marketing Organization and deposited at the central treasury.

‘Very Soon’

The KRG proposed in January that it allocate part of the sales or that Baghdad compensate the companies directly. Iraq Oil Minister Hussain al-Shahristani said on Feb. 9 that a Kurdish proposal was accepted, without providing details. KRG Prime Minister Barham Saleh said Feb. 15 that exports would start “very soon.”

DNO hasn’t received notification on exports or what payment system will be introduced, Eide said. The company operates three licenses in the area, including the producing Tawke field.

“We hope to retain the terms of the revised contracts signed in 2008,” he said. “We will in the first stage receive 60 percent of revenues from Tawke until we’ve reached a certain level of cost recovery and then we go into standard” terms for both local sales and exports, he said.

Getting payments is crucial for DNO’s expansion to improve its finances. At the end of 2009 it had about 300 million kroner in cash and 478 million kroner in financial assets for sale, including a 12 percent stake in Det Norske Oljeselskap ASA. Eide said they “are continuously monitoring” the bond market where they last raised money in 2007.

Few Bets

“It seems relatively sensible of them to make a few bets in areas that are geologically similar to Yemen, like Tunisia, given that they have the financial capacity to do so,” said Omdal. “There’s a limit to how much further they can go in Iraq, unless they consolidate with some of the other actors.”

The company has also become a target along with other explorers operating in the Kurdish area. China Petrochemical Corp., China’s second-largest oil company, agreed to buy Addax for $7.9 billion in August. A combination between Heritage Oil Ltd. and Genel Energy International Ltd. fell through because of the payment dispute.

Interest in the region has waned since the initial surge in June at the start of crude exports, Eide said.

RAK Petroleum, a closely held oil explorer from the United Arab Emirates, raised its stake in DNO to 10 percent in December. DNO last year rebuffed a RAK offer for its treasury shares. RAK, which is expanding in Oman, has operations and areas of focus that overlap with DNO, Finance Director Pierre Henri Boutry said in an interview last week.

“We’ve only considered them a shareholder, at least until now,” Eide said. “But we are prepared to work with any companies, even if they are shareholders, if they have interesting assets.”

By Marianne Stigset


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