As explained during the presentation given at the Market and Media Update on 28 September 2009, DNO signed two Production Sharing Agreements (PSA) in Kurdistan in 2004. DNO was the only participant to the PSA at the time with a 40 % economic/beneficial interest. On several occasions DNO communicated to the market that the final terms of the contracts would be subject to final review and the additional participants on the PSA's would be reported in due course.
Following implementation of, and in accordance with, the new oil and gas law in the Kurdistan Region in 2007, all contracts were subject to review to comply with the new legislation. In all countries, including Norway, there are certain requirements to be fulfilled for companies which apply for contracts for exploration and production of oil and gas. For DNO's contracts in Kurdistan such review was completed in March 2008.
As reported at the Market and Media Update on 28 September 2009, DNO is involved in arbitration proceedings related to certain third party interests in Kurdistan. Such third parties were not approved to be part of or have any rights in the PSC's following the reviews which were completed in March 2008.
DNO has rejected the basis for any claims from such third parties, which relates to up to 10 % beyond DNO's interest in the PSC. The first part of the arbitration has ruled the right to seek compensation for damages from DNO Iraq AS, which is a subsidiary of DNO International ASA. The arbitration proceedings are therefore continuing and a final award with respect to possible compensation for damages is expected in the second quarter of 2010.
Accordingly there are no other parties who have any rights to an interest in the PSC's, beyond what were reported on 6 April 2009.
Ongoing arbitration proceedings are confidential as is any award, subject of course to any legal obligation on DNO to disclose or report any future possible award. DNO is therefore unable to make any further comments related to the arbitration.
There has been no formal statement of claim specifying the damages requested in the arbitration to date. During our ongoing discussions with KRG we have understood that the arbitration is not part of the present suspension period in Kurdistan, which DNO is working to resolve as soon as possible.
DNO has reported the arbitration in the note to the 2008 Annual report and in the notes to the Second Quarter 2009 Interim Report. No further information can be given at this stage.
Following the review which was completed in March 2008 the definition of the contracts changed from Production Sharing Agreements (PSA) to Production Sharing Contracts (PSC) and below is an extract of the content of a DNO Stock Exchange Notice disclosed to the market on 14 March 2008:
DNO today confirms that it has signed revised agreements with the Kurdistan Regional Government ("KRG") amending the production sharing contract it holds for the Dohok and Erbil license areas. The Dohok area has been divided into two license areas, one for the Tawke oil field and one for the remaining Dohok area.
The Company now holds three Production Sharing Contracts (PSC) in Kurdistan - Northern Iraq:
, with a working interest to DNO of 55 %
, with a working interest to DNO of 40 %
, with a working interest to DNO of 40 %
The balance of the working interests in all PSC's is held by the KRG as a Government Interest and Third Party Interest to be appointed by the KRG
In April 2009 DNO reported certain assignments which had been completed in relation to its contracts in Kurdistan. Below is an extract from this notice:
DNO has been advised by the Kurdistan Regional Government (KRG) that it has completed the assignment of a 25% Third Party Interest in the Tawke Production Sharing Contract (PSC) to Genel Enerji. This right of appointing an additional party to the PSC is included in most of KRG's contracts, and in the case of Tawke, the right was scheduled to be exercised by the end of 2008.
The assignment process started in the last quarter of 2008, and it was agreed to by the end of last year, and all remaining formalities were recently finalized. The assignment is effective from 1st January 2009 for the purposes of paying costs.
DNO has been further advised by the KRG that it has also completed the assignments of the Third Party Interest in the Duhok PSC, also to Genel Enerji and the Erbil PSC to another private investor. Duhok and Erbil are still in the exploration/appraisal phase.
DNO International ASA
1 October 2009