At a time when the Kurdistan Regional Government (KRG) is actively seeking foreign investment and the strengthening of its relationships with major international partners, the DNO fiasco serves as a major blow to the region.
The KRG has worked tirelessly to attract direct interest and investment predominantly in its oil sector, much to the dismay of the Iraqi central government. Already the stance of Baghdad towards what it labels as “illegal” contracts signed by the KRG, has deterred major oil companies mindful of meddling in political disputes. Now the publicity around this case unnecessarily raises concerns on investments in the region.
The fallout is a lot more politically relevant than any amount of commercials, at the centre of this dispute, would ever matter. Baghdad wasted no time in using this case to bolster its case against the KRG.
The dispute arose when the Oslo Stock Exchange (OSE) made public details of a DNO sale of shares in October 2008, in an ongoing dispute in the oil-companies delay in providing information. More specifically it highlighted the involvement of the KRG in acting as intermediaries in the transaction in question.
Such publicity and coverage around the KRG “role” was met naturally by stiff defence by Kurdish officials, who have remained insistent that their part in the deal was to only facilitate the sale on behalf of Genel Energy, the beneficiaries of the shares, and to help DNO at a time where exports in the region were been hampered by ongoing wrangles with Baghdad.
The KRG suspended DNO operations until it could sufficiently repair the “unjustifiable and incalculable” damage that it had done to its reputation.
Although, in later meeting betweens the KRG and OSE the government was cleared of any wrongdoing, the revelation and ensuing controversy was embarrassing. In the short-term, under such spotlight there could be no immediate repair to the KRG’s image.
DNO was one of the first foreign companies to start work in the region and mooted as the first foreign company to pump crude in Iraq since the 1970’s. The productive gains of DNO in its successful drilling in the Tawke oil fields simultaneously served as a remarkable political milestone for the Iraqi Kurds.
DNO started exports in June, much to the jubilation of the region. It is evident that success of DNO was important to the KRG not primarily due to the revenue streams that it unearthed to the region, but more due its symbolic importance to the region. Clearly, this stance by KRG was vindicated by increased heightened interest and economic coverage in the region upon commencement of exports.
As such, KRG’s willingness and desire to aid its foreign partner is understandable, however, in the circus that can be the media spotlight, the move by the KRG was risky and avoidable. Whether the questions posed have any substance is one side of the equation, however, the mere fact that such questions are asked of a government has undesirable and long-term ramifications, even if it has been clearly proved by the KRG to the satisfaction of OSE that they have done no wrongdoing, or more importantly that they were never the object of the investigation in any shape or form.
The KRG should never have taken the risk of becoming directly or indirectly embroiled in such a far-reaching saga. Alternative and less murky facilitation of the finances would have avoided such allegations at government officials. DNO itself should have sought alternative means of short-term funding.
To many observers without insight into the exact nature of the deals, it is naturally unusual that a government would act as a mediator of such cash-raising initiatives. Without publication of the full extent of the dealings, with selective information as was published by OSE, people will draw their own predictable conclusions on the part of the Kurdish government.
Furthermore, why did the OSE reveal such information if it knew that the KRG was not implicated wrongly in the deal, knowing full well that it was not a Kurdish organisation that would be affected but essentially the region itself?
More importantly, it is the job of DNO to ensure full compliance with Norwegian laws and regulations, why did it take so long to release the relevant information requested to the OSE? It should have acted much sooner, in the knowledge of what potential releases by the OSE would entail to both itself and its Kurdish partners.
OSE released this information under a freedom of information law, propelled by requests from newspapers. It begs the question, whether those who pressurised the OSE to release the information had political and commercials gains in the knowledge of the likely storm that this would bring.
Although, “risky” in the eyes of some investors, the lucrative returns on the momentous untapped Kurdistan market is plain to see. Many smaller oil companies have struck gold in the region and DNO is no different. The fact that its shares plummeted by over 50% upon the announcement by the KRG that it would suspend its operation for six weeks and would reserve the right to revoke DNO’s contract, tells its own story.
While payment terms have not been agreed for its recent exports, for companies such as DNO its simply a case of bridging short-term financial exploration burdens, once the Production Sharing Agreement (PSA) kick in, its financial clout increases dramatically.
This is clearly the reason behind its decision to sell a portion of its shares to create necessary capital that would allow it to assume its unprecedented windfall when exports commence.
While the lack of a national hydrocarbon law, owed to intense disputes between the Iraqi mosaic on sharing the immensely rich Iraqi cake, has proved a major obstacle, Baghdad’s agreement to authorise limited exports from the Kurdistan Region started a surge of interest in the region.
Kurdistan has the capacity and the capability to become one of the major oil and gas producers in the world, and the race to take “early” advantage has paid healthy dividends to a number of international companies. Some companies scrambled to increase their financial and strategic clout to assume a stronger hand in the region. For example, Heritage Oil Ltd is in the process of merging with Turkey’s Genel Energy International Ltd. While more recently, china’s second-largest oil company, China Petrochemical Corp., agreed the purchase of Addax Petroleum Corp.
In the aftermath of the DNO dispute, there has been perception of increased risk to licenses in the Kurdistan Region. This has placed the KRG in a highly-difficult position. While the threat to oust DNO altogether certainly got hold of Norwegian ears, any action to carry out this threat would see the KRG lose just as much as DNO, as it would seriously undermine general operations in the area and may in fact increase spotlight on the debacle further.
Regardless of the fact that they may not be at direct fault in an internal Norwegian issue, the KRG must work hard to remedy its image as much as it has demanded DNO do to their satisfaction. There is a much bigger picture, than the operations of a single company in this case.
Already, StatoilHydro ASA, Norway’s biggest oil and gas producer, involved in the preliminary bidding of some contracts in Iraq, expressed that it was monitoring the DNO situation.
Fortunately, the furore over this dispute has died down significantly after various meetings and mediations with the share value of DNO on the rise after dramatic falls. However, the KRG can ill-afford the smallest of controversies, lest give their adversaries in the region the ammunition to undermine their development and quest for prosperity and strategic standing.
In spite of this case, the immense interest in investing in the region, underpinned by some of the most favourable foreigner friendly legislation around, will be unaffected once the dust settles.