Energy firm hits Iraqi Kurdistan with first major legal dispute

DUBAI/LONDON: Iraqi Kurdistan’s largest oil and gas investor has filed the first major legal case against its regional government over $1 billion in owed payments and production rights, just as the autonomous region looks to become a major energy exporter. Dana Gas, leading a consortium of energy investors, has filed an arbitration case in London to clarify the amount of money they are owed for work already carried out and on their rights to develop and market gas fields, the Abu Dhabi-listed company said Tuesday.

The Kurdish regional government’s (KRG) massive untapped oil reserves, lucrative production-sharing contracts and safe environment compared to the rest of Iraq have prompted international oil companies to commit to investing billions in blocks over the last few years.

ExxonMobil, Chevron and Total SA have entered Kurdistan even at the risk of losing contracts in the south.

Baghdad has long called Irbil’s upstream contracts illegal with the two governments locked in a long-standing disagreement and the autonomous region consistently claiming billions on behalf of its upstream investors.

In continued defiance of the central government, the KRG is expected to step on to the international stage later this year with its first crude oil exports via a new pipeline, following initial exports by truck through Turkey.

The first pipeline shipments will start by the end of the year, bolstering its long search for independence as it will soon earn more from its exports than it receives from the central government in Baghdad.

“It’s only natural at this stage for the relationship to get more complicated as the financial burden weighs more heavily on smaller entities, while the bigger IOCs [international oil companies] can bear some more of the payment issues,” said Ayham Kamel, Middle East and North Africa analyst at the Eurasia Group consultancy.

Dana Gas is also owed significant sums by the Egyptian government, which has still not decided on how or when exactly it will pay back over $6 billion it owes to upstream companies.

The case is the first major instance of a company suing the KRG, a partner at a top international law firm told Reuters, adding that such claims in other countries were frequently conducted through bilateral or multilateral investment treaties.

It is not unusual for a government to owe upstream companies money but moving into arbitration is less desirable.

“It’s pretty much the last resort. First because if you have an investment you need the government’s goodwill to continue operating there. And second, even if you win, there’s no guarantee you can make the country pay,” the lawyer said.

“The KRG could decide not to pay and then the company needs to take the claim to a state court and the chance of getting a court to go against the government is low so the next step is to search for assets outside the country.”

The Pearl Petroleum consortium wants “clarification” from the Natural Resources Ministry over its contract with the government to develop and market gas from the Khor Mor and Chemchemal fields, Dana said.

The consortium is made up of Dana, Crescent Petroleum of the United Arab Emirates, Austria’s OMV, and Hungarian oil and gas group MOL.

To date, the consortium has invested over $1 billion and produced approximately 100 million barrels of oil equivalent of gas and petroleum liquids in Kurdistan, the statement said.

Dana, which holds 40 percent of the consortium, has previously said it alone is owed about $430 million by the Kurdish government. The firm said it was resorting to arbitration after an effort to resolve its differences with the ministry through mediation failed.

Dana said it “very much hopes that all outstanding matters with the Natural Resources Ministry will be resolved, amicably and in good faith, in the shortest possible time, in order to enable full and proper development of the fields.”

The case was filed at the London Court of International Arbitration under the terms of Dana’s 2007 agreement with Kurdistan, the company said.

There was no immediate comment from the Kurdistan government.

Announcing third-quarter earnings last week, OMV said it would book special charges of around 100 million euros ($135 million) for the quarter, partly because of a write-down on an asset in Kurdistan.

A version of this article appeared in the print edition of The Daily Star on October 23, 2013, on page 5.




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