Energy firm hits Iraqi Kurdistan with first major legal dispute


By Mirna Sleiman and Julia Payne

DUBAI/LONDON, Oct 22 (Reuters) - The largest oil and gasinvestor in Iraqi Kurdistan has filed the first major legal caseagainst its government over $1 billion in owed payments andproduction rights, just as the autonomous region looks to becomea major energy exporter.

Dana Gas, leading a consortium of investors, hasfiled an arbitration case in London to clarify the amount ofmoney the investors are owed for work already carried out andtheir rights to develop and market gas fields, the AbuDhabi-listed company said on Tuesday.

The Kurdish autonomous region's massive untapped oilreserves, lucrative production-sharing contracts and safeenvironment compared with the rest of Iraq have promptedinternational oil companies over the last few years to commit toinvesting billions of dollars in blocks there.

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

The Kurdistan government fired back at the lawsuit, sayingDana Petroleum had made "misleading" statements about beingowned money, and ordering it to withdraw the allegations.

"It is Dana and its affiliates that owe the KRG significantsums," the Kurdish regional government's Ministry of NaturalResources said in a statement. It said the KRG has "incurredvery large losses" as a result of misrepresentations and a"failure to meet commitments and promises" that the company hadmade.

Baghdad has long called the upstream contracts by the KRGillegal. The two sides have been locked in a longstandingpayment disagreement, with the KRG consistently claimingbillions on behalf of its upstream investors.

In continued defiance of the central government, the KRG isexpected to export significant volumes of crude oil for thefirst time via a new pipeline, following initial shipments bytruck through Turkey to the international market.

The first pipeline shipments will start by the end of theyear, bolstering the KRG's long search for independence as itwill soon earn more from its exports than it receives from thecentral government in Baghdad.

"It's only natural at this stage for the relationship to getmore complicated as the financial burden weighs more heavily onsmaller entities, while the bigger IOCs can bear some more ofthe payment issues," said Ayham Kamel, Middle East and NorthAfrica analyst at the Eurasia Group consultancy.

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


The case is the first major instance of a company suing theKRG, a partner at a top international law firm said, adding thatsuch claims in other countries are frequently conducted throughbilateral or multilateral investment treaties.

It is not unusual for a government to owe upstream companiesmoney, but moving to arbitration is less desirable.

"It's pretty much the last resort. First because if you havean investment, you need the government's goodwill to continueoperating there. And second, even if you win, there's noguarantee you can make the country pay," the lawyer said.

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

The Pearl Petroleum consortium wants clarification from theMinistry of Natural Resources over its contract with thegovernment to develop and market gas from the Khor Mor andChemchemal fields, Dana said. The KRG said that it does "notrecognize" Pearl Petroleum at all.

Part of its output is in the form of condensate, a lightvaluable oil which is being exported by truck through Turkey tothe Mediterranean market. The consortium produces some 15,000barrels per day of oil equivalent.

Exports of condensate via truck began in the fall of 2012,but the consortium stopped receiving payments from these salesabout three months ago.

The consortium is made up of Dana, Crescent Petroleum of theUnited Arab Emirates, Austria's OMV, and Hungarian oiland gas group MOL.

To date, the consortium has invested over $1 billion and hasproduced gas and petroleum liquids amounting to about 100million barrels of oil equivalent in Kurdistan, the statementsaid.

Dana, which holds 40 percent of the consortium, haspreviously said it alone is owed about $430 million by theKurdish government.

Dana said it was resorting to arbitration after an effort toresolve its differences with the ministry through mediationfailed.

The company said it "very much hopes that all outstandingmatters with the Ministry of Natural Resources will be resolved,amicably and in good faith, in the shortest possible time, inorder to enable full and proper development of the fields".

The KRG said that it "requires that Dana Gas undertakewithout qualification to provide an uninterrupted gas supplyfrom the Khor Mor field".

The case was filed at the London Court of InternationalArbitration under the terms of Dana's 2007 agreement withKurdistan, the company said.

Announcing third-quarter earnings last week, OMV said itwould book special charges of around 100 million euros ($135million) for the quarter, partly because of a writedown on anasset in Kurdistan.

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