U.S. Markets close in 4 mins.

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 gas investor in Iraqi Kurdistan has filed the first major legal case against its 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 investors, has filed an arbitration case in London to clarify the amount of money the investors are owed for work already carried out and their rights to develop and market gas fields, the Abu Dhabi-listed company said on Tuesday.

The Kurdish autonomous region's massive untapped oil reserves, lucrative production-sharing contracts and safe environment compared with the rest of Iraq have prompted international oil companies over the last few years to commit to investing billions of dollars in blocks there.

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

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

"It is Dana and its affiliates that owe the KRG significant sums," the Kurdish regional government's Ministry of Natural Resources said in a statement. It said the KRG has "incurred very large losses" as a result of misrepresentations and a "failure to meet commitments and promises" that the company had made.

Baghdad has long called the upstream contracts by the KRG illegal. The two sides have been locked in a longstanding payment disagreement, with the KRG consistently claiming billions on behalf of its upstream investors.

In continued defiance of the central government, the KRG is expected to export significant volumes of crude oil for the first time via a new pipeline, following initial shipments by truck through Turkey to the international market.

The first pipeline shipments will start by the end of the year, bolstering the KRG's 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 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.


LAST RESORT

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

It is not unusual for a government to owe upstream companies money, but moving to 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 Ministry of Natural Resources over its contract with the government to develop and market gas from the Khor Mor and Chemchemal fields, Dana said. The KRG said that it does "not recognize" Pearl Petroleum at all.

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

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

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 has produced gas and petroleum liquids amounting to about 100 million barrels of oil equivalent 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.

Dana said it was resorting to arbitration after an effort to resolve its differences with the ministry through mediation failed.

The company said it "very much hopes that all outstanding matters with the Ministry of Natural Resources 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 KRG said that it "requires that Dana Gas undertake without qualification to provide an uninterrupted gas supply from the Khor Mor field".

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

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 writedown on an asset in Kurdistan.