(08/27/12) How to Swim in Iraqi Oil Profits

Beyond the big names that are rebuilding the Iraq energy sector, here’s a smaller player starting to reap the benefits of working the world’s second largest oil reserves, observes Florian Neuhof of The National.

DNO International (Frankfurt: NK1A), a Norwegian oil and gas company that last year merged with the UAE’s RAK Petroleum, posted strong first-quarter results on the back of low production costs and payments for its Kurdish oil.

The company’s stock price was further boosted by news that RAK Petroleum had reconsidered its plans to divest more than a quarter of its holding ahead of a listing on the London Stock Exchange.

Net profits rose to 307 million Norwegian krone ($51.7 million), compared with a loss of 115m krone the previous year, and 289m krone in the previous quarter.

While sales declined by 27% to 711.5m krone on the quarter, lifting costs almost halved to $5.50 a barrel in that period. In Kurdistan, where DNO operates one of the autonomous region’s biggest oilfields, a barrel of oil was produced for only $2.50.

"We’ve demonstrated the ability to fast-track production at low cost," said Bijan Mossavar-Rahmani, DNO’s executive chairman. Profits were bolstered by payments from the Kurdistan Regional Government (KRG) in consecutive quarters, as the lack of revenue from exports was compensated by domestic sales.

"We’re selling oil into the local market and we’re getting paid for that. The Kurdish government has been very supportive," said Mossavar-Rahmani. The company has received $70m over the past two quarters, said Mossavar-Rahmani, who expects payments of this size to continue.

The KRG and Iraq’s central government are embroiled in a long-running dispute over the contracts granted to international oil companies in Kurdistan, which Baghdad refuses to recognize. As a result, compensation for oil production has been sporadic, as the central government is responsible for handing out the proceeds from exports.

DNO merged with RAK Petroleum after its financial position had become untenable, as its heavy exposure to Kurdistan left it vulnerable to the payments dispute between the KRG and Baghdad. The company remains committed to Kurdistan, and hopes to raise production at the Takwe field to 100,000 barrels per day (bpd) from the current 50,000 bpd by the end of this year. DNO hopes next year to raise production at the shared production site to 200,000 bpd.

Mossavar-Rahmani said the dispute over exports would not prevent the sale of Takwe crude to undermine DNO’s finances once more. "These are significant volumes of oil. That oil will flow to the markets," he said.

DNO shares rose 6.5% in trading on the Oslo Stock Exchange yesterday. The company’s share prices was supported not only by positive earnings news, but also by RAK Petroleum’s announcement that it was reconsidering its plans to divest over a quarter of its stake in DNO.

DNO is targeting a second listing in London by the end of the year. RAK, which holds 42.8% of DNO, had intended to reduce its stake to 30% in anticipation of the London listing.

Norwegian shareholders had feared that would devaluate the stock and asked the UAE company to refrain from such a move. "RAK Petroleum has acceded to this request," the company said yesterday.