IRAQ - The DNO Operation.

DNO, a small Norwegian oil firm, has managed to get its Tawke field ready to produce crude oil at the initial rate of 5,000 b/d which will be raised to 25,000 b/d within months. But it is still waiting for permission to open the taps on what could be post-Saddam Iraq's first foreign-developed field.

The first to sign two PSAs with the KRG, DNO owns 55% in one venture, having raised this from 40% under an agreement signed on Dec. 28, 2006, with the Kurdish government holding 45%. For this DNO is fully funding the venture. DNO is exploring another KRG area.

Shares in DNO rose on March 22 on reports that Norway's state-controlled giant Statoil was considering a takeover of the small company. DNO has completed a 42-km pipeline linking its Tawke field with the northern Iraqi export line from the Kirkuk field via Turkey. Tawke is estimated to have 100m barrels of recoverable oil.

KRG's ambition has been frustrated by infighting with Baghdad, which has resisted the Kurdish region's wish to run its own oil industry. Under the petroleum law, a 15-member federal council would have the ultimate approval of all contracts across the Kurdish north and areas run by the Sunni and Shi'ite Arabs. Dr Hawrami says he is confident the law would be passed by parliament by end-May or in June, through he reiterates that the KRG maintains its opposition to the draft's annexes.

After building the pipeline and sending out a flurry of optimistic press releases out of its Zakho-based operations over the last three years, however, DNO now is worried. Many MPs in Baghdad, a nine-hour drive south of Zakho, have voiced opposition to the PSAs signed by the KRG. DNO has spent millions drilling wells and building infrastructure. But the delay in the law has put back DNO's production start-up, originally expected early this year. Dr. Hawrami in early 2007 said: "DNO took a lot of risk when they signed. It was before Iraq's constitution was approved so the legal status of the deal was very unclear".

DNO can only start selling crude oil legally when it has an export licence, which the KRG must get on DNO's behalf from the Baghdad federal government, says Thamer al-Ghadhban, a former oil minister and now adviser to Iraqi PM Nouri al-Maliki. That will happen after the law is approved by the Iraqi parliament.

DNO Chief Executive Helge Eide on April 30 was quoted as saying: "We could have been in the position to deliver small volumes of [crude] oil by tanker trucks already today. We've commenced start-up and extended well testing of individual wells. However, we're currently awaiting the outcome of the ongoing process" - referring to the law. Eide says DNO will not move even small volumes of crude oil until the law is in place.

DNO and the KRG amended their PSA in December to ensure it meets all the requirements of Iraqi law. Eide and Dr. Hawrami say no more changes are needed. Concern about the legality of the deal had periodically undermined DNO's stock, though it hit a record high a year ago when DNO said it had discovered a sizable find at the Tawke oilfield.

DNO still has to deal with tricky logistics; the region lacks a local supply base and most equipment must be imported at extra cost, in both time and money. Eide remains sanguine on the impact of near-term delays on cash-flow, saying: "Our cash balance at the end of 2006 was about $70m, and we expect that our cash flow from operations will increase in 2007 on the back of increased production". DNO is hoping its Tawke output would reach 25,000 b/d, or double its total current production, by end-2007. Such levels are a drop in the ocean of the 85m b/d global oil market, but significant to DNO, whose output has struggled to break above 13,000-15,000 b/d in the past three years. DNO operates in its native Norway, Equatorial Guinea, Mozambique and Yemen. For DNO to reach its end-2007 output target would bode well for further exploration in the area. But much more success, like topping output of 100,000 b/d over the next five years, could make DNO a takeover target. "Reaching that level indicates to the big players that there are sizable quantities of oil in place in this region. I believe a big company would move in", says John Olaisen, an Oslo-based analyst at Carnegie investment bank of Sweden.

DNO has explored less than 15% of the acreage under its PSA, and already there is talk of a potential suitor. Statoil has hired a bank to advise on possible acquisition of DNO, but says any move would come after Iraq's draft law is finalised.

In 2004/05, DNO completed 450 km of 2D seismic work, drilled its first well and struck oil. Three appraisals were tested at rates of 4,000 to 8,500 b/d between 2006 and 2007. DNO has two drilling rigs working in its area and a third is being mobilised to the field called Sindy 1, named after the tribe in its region. It is the technical side which has been the greatest challenge. With so little exploration history in its area, making comparisons with neighbouring fields is risky and success is not a certainty. DNO drilled a dry hole at the Khanke-1 well.

DNO has not had a single security incident threaten its 120 or so employees in northern Iraq. Still, since the Iraqi oil sector resumed operations in June 2003, insurgents have killed or kidnapped more than 400 oil officials and workers, according to Iraq's Oil Ministry. Nearly all of these have occurred outside the current KRG region, excluding Kirkuk which has seen a lot of violence since 2003.