Close to Achieving Full Independence, KRG Hit with Major Legal Dispute

Thanks to the regions huge untapped oil reserves, its generous production-sharing contracts, and the stability that the local KRG offers compared to the rest of Iraq, Kurdistan has attracted billions of dollars of investment from international oil majors over the past few years.

With the regions first pipeline due to be complete and begin shipping crude by the end of the year, the KRG is finally close to achieving its goal of complete independence from Baghdad, and becoming a major energy exporter. But with this independence comes the risk of facing huge legal disputes from energy companies, a fact Kurdistan is now finding out as it faces its first ever major legal battle against an energy firm.

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Reuters states that a consortium of investors, led by Dana Gas of Abu Dhabi, is seeking payment of over $1 billion, and security on production rights previously promised. A case has been filed at a London court as the consortium looks for payment for work already done, and the previously agreed rights to develop and market gas fields.

Ayham Kamel, an analyst for the Middle East and North Africa at Eurasia Group, explained that “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.”

A partner from a top international law firm told Reuters that governments often owe money to upstream companies, but taking a case to an arbitration court is a strong move that is often avoided by both sides.

“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 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 Consortium, as it is known, consists of Dana Gas, Crescent Petroleum, OMV of Austria, and MOL of Hungary.

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To date it has been producing about 15,000 barrels of oil equivalent a day, and shipping it to the European market via trucks to Turkey. About three months ago it stopped receiving payments for these sales. Dana, which holds a 40percent stake in the consortium, has said that it alone is owed $430 million.

Other than the payments owed, it is looking for clarification from the Kurdistan Ministry of Natural Resources over its contract to develop and market the gas contained at the Khor Mor and Chemchemal gas fields.

Ashti Hamrawi, the minister for natural resources has written to Dana Gas stating that “the KRG does not owe Dana Gas the sum referenced or any other sum and the statement that the sums are ‘overdue’ from the KRG is inaccurate and misleading to investors.”

Dana claims that they were forced to resort to arbitration after previous attempts to resolve the dispute through mediation failed.

By. Joao Peixe of Oilprice.com