Monday, April 30, 2007

Foreign Oil Projects Stall In Wait For Iraqi Permits

The WSJ reports:

After building a 42 kilometer pipeline and sending out a flurry of optimistic news releases over the past three years, Det Norske Oljeselskap, a small Norwegian oil company, is still waiting for permission to open the taps on what could be post-Saddam Hussein Iraq's first foreign-developed oil field.

The holdup: Iraqi politicians in Baghdad, a nine-hour drive south of here, have yet to approve a hydrocarbon law laying down the legal framework for foreign investment in the country's sensitive oil industry. Lawmakers could vote on a version of the law in May, but the legislation has already missed a series of deadlines since the American-led invasion four years ago.
DNO's plight in this remote Kurdish town in northern Iraq underscores one of the thorniest obstacles to jump-starting Iraq's creaky petroleum industry. Most of the oil-rich country is wracked with political, ethnic and religious violence, making it almost impossible for big international oil companies to work here.

But even in this peaceful, semiautonomous Kurdish enclave, a number of small foreign companies like DNO are still waiting for their operations to be officially sanctioned by Iraq's central government. DNO was one of the first to sign development deals with the Kurdish government back in 2004 and has spent millions drilling wells and building transportation and storage infrastructure.

But DNO needs an export license to sell its crude to global markets, and a decision to grant one won't come until after the Iraqi Parliament passes a petroleum law. And even after the law is approved there is no certainty as to when the export license will be granted. DNO had originally planned to start pumping oil for global-oil markets earlier this year.

"We have heard so much about DNO's oil coming on stream, and yet the production-start date remains uncertain. It says a lot about the political and legal challenges of working in Iraq," says Alex Munton, an analyst based in Edinburgh, Scotland, for consultant Wood Mackenzie.

Kurdish politicians enthusiastically support DNO's project. A booming oil industry here could boost economic activity and further underpin Kurdish aspirations for more autonomy from Baghdad or even formal independence.

DNO says it is ready to pump crude as soon as it gets the green light from Baghdad. Its almost-finished pipeline snakes over this region's rolling hillsides to an existing export line, which runs to the Mediterranean port of Ceyhan in Turkey.

Iraq's oil legislation has been stalled most recently over differences between Kurds on one side and Sunni and Shiite politicians and oil ministry officials on the other. The Kurds want authority to sign deals like the one they have with DNO. Baghdad officials have so far insisted on federal oversight.

Iraqi officials have said they expect a prolonged parliamentary debate on the issue. Executives from some of the world's biggest international oil companies, meanwhile, say many crucial details aren't addressed in current drafts, making any decision on foreign exports even more remote.

The delays have frustrated DNO shareholders. Back in June 2004, DNO shares soared when the company announced it had signed a contract with Kurdish officials. DNO shares have gyrated since, climbing to a record a year ago when the company said it had made a sizable find at the Tawke oil field here.

In Oslo, DNO shares currently trade at around 12 kroner, or about $2, down 29% from a stock-split adjusted record of 16.94 kroner hit a year ago. The current level is still about eight times the price of shares in 2004 before the Kurdish deal was announced and when global oil prices were much lower.

DNO Chief Executive Helge Eide is taking the legal uncertainty in stride. "We're currently awaiting the outcome of the ongoing process," Mr. Eide said recently, referring to the oil law.

Mr. Eide is sanguine on the impact of near-term delays on cash flow, although analysts caution that delays of several months would begin to hurt. "Our cash balance at the end of 2006 was about $70 million, and we expect that our cash flow from operations will increase in 2007 on the back of increased production," Mr. Eide said.

DNO and Kurdish officials tinkered with some provisions of their contract late last year to ensure it met requirements laid out in drafts of the current petroleum law. Mr. Eide and Kurdish oil minister Ashti Hawrami both say they don't expect to have to amend their deal further.

DNO, which operates in Norway, Africa and the Middle East, is hoping production from its operations here will start at around 5,000 barrels a day or so in the early stages and ramp up to 25,000 barrels a day, or double the company's current total output, by the end of the year.

These are drops in the ocean of the 85 million barrel-per-day global oil market, but significant to DNO, whose output has struggled to break out of a 13,000 to 15,000 barrels-per-day range the past three years.