KurdistanObserver.com

Norway's DNO Presses On With Kurdistan Oil Deal

By Selina Williams

Of DOW JONES NEWSWIRES

February 4, 2006

LONDON (Dow Jones)--Norwegian oil company Det Norske OljeselskapDNO ASA (DNO.NS) said Friday that drilling operations in northern Iraq's Kurdistan region would continue despite comments from Iraq's deputy prime minister that the deal had not yet received Baghdad's approval.

"It's clear that we have a legal valid agreement in full compliance with the constitution," DNO Managing Director Helge Eide told Dow Jones Newswires, adding that drilling which began in November was continuing.

He said that contact with the central government over the matter would be handled by the Kurdistan Regional Government.

DNO was one of the first oil companies to sign an oil production sharing agreement after the U.S.-led war in 2003. But the deal, which was signed with the KRG, has provoked ire in Baghdad, where the oil ministry says they have not been part of the negotiations.

Deals such as these, where a regional government can agree to and implement oil deals without Baghdad's approval, don't bode well for the eventual central management of Iraq's valuable oil sector, analysts say.

"This could set a precedent and provinces in the south might be tempted to do the same as the Kurds," said Muhammad-Ali Zainy, senior energy analyst at the London-based Centre for Global Energy Studies.

On a more practical level, oil experts say the Kurds lack the technical and managerial expertise needed to go it alone.

The KRG has always maintained it has the authority to negotiate and award oil contracts in its territory for unexplored and undeveloped areas.

But earlier this week, Iraq's Deputy Prime Minister Ahmad Chalabi told Dow Jones Newswires that contracts negotiated by foreign oil companies with the KRG independent of the oil ministry needed to be reassessed in Baghdad.

"They can insist if they want to but the point is they have to comply with the constitution," Chalabi said.

"It's very clear in the constitution that oil belongs to all the Iraqi people and this question needs to be resolved," he said, adding that there had been no communication from the KRG on the matter.

According to article 109 of the Iraqi constitution, oil and gas resources belong to all the people of Iraq in every region. The constitution also states that federal and regional governments should together manage the resources as long as revenue is fairly distributed.

Government officials in Baghdad have long held that contracts signed without the approval of the federal government should be declared void.

DNO signed the production sharing agreement with the KRG in June 2004. Separately, the Norwegian company has a memorandum of understanding with the Iraqi oil ministry for a program training Iraqi oil officials.

Although northern Iraq's oil reserves aren't as big as the giant southern fields around Basra, geologists say the North still has good potential, especially as the area is largely unexplored and modern techniques like seismic imaging have never been used in Iraq.

The KRG, a coalition government formed from the two main Kurdish factions in Iraq, has already signed production sharing agreements with companies including Turkey's PetOil and General Energy, Australia's Woodside Petroleum (WPL.AU).

In addition, the regional government recently signed a memorandum of understanding for a field study and further negotiations towards a PSA with Heritage Oil.

The lack of a petroleum law and significant security risks have kept large foreign oil companies from investing in exploration and production in Iraq.