DNO CEO Refutes Claims of Clash with Iraq Government

OSLO, Dec 15, 2006 (Dow Jones Newswires)

Norway's largest independent oil company, Det Norske Oljeselskap (DNO.OS) has refuted fresh reports of conflict with the Iraqi central government and says it is on target to produce oil there unimpeded in the first quarter of 2007.

"Several articles in the press stating that there are poor relations between the company and the central government are incorrect," said DNO's chief executive Helge Eide in an interview with Dow Jones Newswires.

"The political and security situation in Iraq has not affected our operations there," he said. "We have been in close communication with the oil ministry in Baghdad through our memorandum of understanding, MOU, signed in April 2005, and have got positive feedback from representatives from the oil ministry in Baghdad, also related to our (oil) project in the Kurdish region," Eide added.

DNO's share price fell around 4% as recently as last week on reports of a purported breakdown in relations threatening its progress in Iraq's Kurdish region. Earlier this year stock fell as much as 10% on similar speculation.

DNO maintains that the production sharing agreement signed with the KRG for acreage in the Kurdish region in June 2004, including the Tawke area from which first oil is expected next quarter, will shortly come to fruition and is not being undermined.

"The validity of these agreements is confirmed by several articles in the new constitution of Iraq," Eide said. "One of these articles says that all commercial agreements signed between 1992 and 2004, before the interim government took control are to be honored," he said.

Market participants have suggested that DNO is being unfairly singled out as a relatively small part of a bigger debate, namely the tensions between governing bodies in Iraq over the drafting of a new national petroleum law.

They have said that a lack of transparency over the wider oil asset debate in Iraq and wide-ranging opinions on the matter have muddied the waters.

The company has a high profile as the first of the few western oil companies to have ventured into the politically and security unstable country. "We can be considered as a pioneer in Iraq. When we started the first well in November last year we were the first in that region for decades," Eide noted.

Despite its relative exposure to a potentially volatile political landscape, he said DNO's decision to invest there remains sound, although acknowledging that it still awaits the necessary permit from the central government to export oil from Tawke.

"This process is handled by our partner, KRG. Our job is to develop the Tawke oil discovery and we feel confident that the KRG will resolve these issues when we're ready to export oil," Eide said.

He added: "The cooperation with the Kurdish regional government (KRG) has been excellent and their contribution to the success of our project has been substantial."

Tawke oil will be processed at DNO's adapted offshore central processing facility before being shipped through an existing but near-empty pipeline in the north of the country via Turkey to the Mediterranean.

Precise volumes haven't been divulged, but the development has tested at a flow rate of 5,000 barrels of oil a day. The processing facility has a capacity of 50,000 barrels of oil a day and DNO expects to ramp up to that level by bringing other assets in the surrounding area into production.

Its growth plans in Iraq are centered on the Tawke area and a second called Khanke where drilling has already commenced. "We have a rather large area covered by our agreements. In addition to the high activity level both within exploration and development we will focus primarily on what we have got in the short- to medium-term," Eide said. Longer-term, the high profile position of DNO in Iraq which is currently viewed as unfavorable by some could facilitate growth, Eide said.

"Given our early presence in the area together with our success to date, DNO would probably be seen as a very attractive partner for new companies that will enter the area," he concluded.

DNO has an aggressive drilling program going forward outside Iraq; in Yemen where it plans 30 wells in the next 18 months and the Norwegian and U.K. North Sea.

"We have a very exciting exploration portfolio, with strong upside. Rig capacity is secured...for the next couple of years," Eide said. The focus on drilling leaves DNO little desire to grow through merger and acquisition but its size could leave it open to offers, a possibility for case-by-case assessment, he admitted. "Large oil companies are struggling to replace their reserves through exploration, so they may have to acquire to meet their reserve replacement target," he said.

DNO's own reserves have fluctuated in recent years. Following divestment of many of its Norwegian oil assets in 2003, its reserves tumbled to 28 million barrels of oil equivalent from 144 boe in the previous year. In the year to date, its reserves have lifted back to 138 million boe.

On the production front it has maintained a steadier profile at around 15,000 barrels of oil a day, although that is set to climb as assets in its Yemen and Iraq portfolio come onstream. It hasn't been all plain sailing in Yemen, with a setback at the Nabrajah field earlier this year as several new wells failed to add new production, but drilling will resume at the beginning of next year.

"We have an exciting portfolio there and we continue to have great hopes for Yemen," Eide said.

Copyright (c) 2006 Dow Jones & Company, Inc.


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