Monday, September 28, 2009

The debacle of DNO's share sale to Turkish Genel Enerji and the role of Kurdish minister in question

By Shwan Zulal

Norway's Det Norske Oljeselskap (DNO) shares were suspended on Monday 21 September and the company share prices were down by almost 45 per cent. This is mainly due to the suspension of its contract by Kurdistan Regional Government (KRG), which is a substantial percentage of DNO's business. The Kurdish government has suspended DNO's operations for a maximum period of six weeks and expects DNO to find ways to remedy the damage done to the KRG's reputation after the recent controversy about the share sale; meanwhile another contractor has been brought in to operate the DNO's production until the dispute is resolved.

DNO International Oil is Oslo Listed and is one of the first companies which has started oil exports from Kurdistan Region. The company is operating in Tawke oil field and productions have started at June 2009. According to the Kurdish Natural Resources Ministry figures, DNO was planning to export between 50,000 to 60,000 barrels per day via Turkey.

The episode was sparked by the disclosure of details of share sales which involves selling a substantial stake in the company by KRG officials to Genel Enerji in October 2008. KRG Natural Resources Minister, Ashti Hawrami was exasperated by Oslo Stock Exchange's (OSE) disclosure on 18 September, which showed the involvement of the minister in the transaction. Hawrami and KRG officials refused to take any questions on the minister's involvement and have issued a statement denying any wrong doing.

OSE claims that DNO knew at the time that the shares were sold to a single buyer linked to one of its projects, and therefore should have identified the buyer. Earlier this year in June Norwegian authorities fined DNO, 2.4 million NKr (370,000) US dollars for not providing sufficient information about the share sale made in October 2008. OSE argued that according to the usual disclosure rules DNO should have identified the buyer, and on appeal DNO was found not to be not in breach of the Securities and Trading Act, for not informing the market, but they were found to be in breach of the Stock Exchange Act for not informing the stock exchange and were subsequently fined.

Ashti Hawrami was named by OSE when considering its decision on DNO's conduct in releasing the information about the Genel Enerji share deal to the market; moreover Dagens Naeringsliv has reported that further investigation has also brought to light Hawrami's involvement by acting as a middle man. The sale involves 43.9 million shares, which is 4.75 per cent of the company and valued at around 30 million US Dollars at the time of the sale. Details are emerging that the stake was held on UK nominee account and was subsequently sold to Genel Enerji which is owned by the Cukurova Group. There are rumours that Hawrami was the beneficiary for the UK nominee account but it is not clear yet as to who have directly benefited from the deal. Moreover DNO disclosed the connection in April when Genel was awarded a stake in DNO's Duhok and Tawke production in Kurdistan Region.

The KRG issued a statement saying that the disclosure is due to a row between DNO and its regulator OSE which had caused "unjustifiable and incalculable" harm to its reputation and added:" KRG has facilitated the treasury shares transaction with the sole intention of helping DNO to raise the capital required for its projects in the Kurdistan Region. We wish to make it absolutely clear that neither the KRG nor any of its ministries, officials, employees or advisers has benefited directly or indirectly, through DNO or Genel Enerji, from the transaction or subsequent resale of the shares referred to by OSE."

DNO reiterated that it does not agree with OSE's decision to publish the content of the document and the resolutions made by the OSE's board of directors and committees. DNO was quoted by Dow Jones newswire saying;"By doing so the OSE has breached its confidentiality obligations and released misleading and incomplete information, and this has caused the media to publish speculative, misleading and incorrect information causing unjustifiable and incalculable harm to the reputation of DNO as well as the KRG and Minister of Natural Resources."

Amidst all the controversy, Norway's financial regulator Kredittilsynet is reported to have asked the police to query DNO's share sale. The fallout has affected confidence in the licences granted or to be granted by KRG to the foreign oil companies, as it is evidence that the regions' administration have undermined due process and acted incompetently. Furthermore, the row has casted doubts on the future of a planned merger between Turkeys Genel and Heritage Oil which are two significant players in Kurdistan as well as negatively affecting shares in other oil companies operating in the Kurdish area like Keystone and the exception was Sterling Energy as its share rose last week after assigning an Egyptian company to start drilling in the Region.

Kurdistan Region is said to have reserves of at around 45 billion barrels, and the authorities have been hoping to become a major oil exporter in the area in pursuit independence aspirations one day. Nevertheless this row has damaged the reputation of the region and it once again highlighted the urgency for reform and the need for transparency and the rule of law.

KRG has also asked for an apology to try to restore its reputation, but the damage has been done and it will take time and hard work by the Kurdish government to convince investors that Kurdistan is open for business and the government does not act arbitrarily as it wishes. Law suits have been discussed by KRG and DNO, and details of who has benefited from the share sale and any foul play by either side may yet come out, meanwhile DNO has hinted that it is considering to list in another exchange.

The disclosure of information about KRG minister's involvement in the deal and acting as an intermediary in an obscure transaction will defiantly present an opportunity for Baghdad to have a dig at KRG and reiterate its rhetoric and position of refusing to recognise any oil contracts entered into by the KRG and render them illegal.

The debacle highlights the opaque way KRG has been dealing with its financial affairs and the way it manages public finances. The minister in question and other government officials may have acted fraudulently or it may well be incompetence and naivety, the result is an embarrassment for Kurdistan Region. If KRG version of events were true and the share deal was a mere capital raising exercise, the questions which needs to be answered is; why this was not made public at the time and who had authorised such transaction because after all it is public money.

If the minister has acted capriciously in both occasions of share sale and the suspension of DNO contract, he should certainly lose the cabinet's confidence and questions needs to be answered about who knew what and why proper procedures were not followed dealing with public finances. A transaction of this magnetite and on such high level of government needs much more scrutiny together with diligence and professionalism.

There is yet more drama to come as the minister is indignant that he has done nothing wrong and DNO is trying to please KRG officials by attacking OSE. The suspension on DNO shares has been lifted despite the company request to keep it suspended by OSE and shares have somewhat rebounded on Friday by as much a 19 per cent after Reuters reported that sources from KRG have said that they are "hopeful" the row would be settled.