DNO International ASA - Update on projects in Kurdistan

 

 

AMENDMENTS TO THE PRODUCTION SHARING CONTRACTS

 

The Company now holds three Production Sharing Contracts (PSC) in Kurdistan - Northern Iraq:

 

 

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.

 

Commenting today, Helge Eide, Managing Director said -"Signing the three PSC's represents a new and important milestone to the joint cooperation between our partner KRG and DNO.

The new terms of our PSC's are now in line with the recently enacted legislation and we are pleased with the overall terms of the contracts.  As a result of the joint efforts undertaken by KRG and DNO, substantial progress has been made since commencement of operations in 2005, and the Tawke oil field was successfully developed as a fast-track and low cost project with test production commencing within one year of discovery. We are also very encouraged by the recent news from the Hawler # 1 well, which we hope will form the basis for our second field development within the Region".

 

Dr. Ashti Hawrami, Minister for Natural Resources of the KRG, said: "The KRG is very pleased with the outcome of this review. DNO has been a long-term friend of the Kurdistan Region, and we look forward to a continued strong relationship. This completed review with DNO means that all of the KRG's existing contracts have been successfully reviewed. With very promising well-testing in recent months, DNO are ready to export oil from the Region, and we will ensure that they are able to do so. This will be a tremendous benefit for the Region and all of Iraq."

The purpose of the amendments is to bring the PSC's into conformity with the Oil and Gas Law of the Kurdistan Region of Iraq and the standard commercial terms published by the KRG last year, including royalty, cost recovery and profit sharing components.

 

The review was conducted by the KRG in accordance with Article 54 of the Oil and Gas Law which required review of the PSC's by the Regional Council for the Oil and Gas Affairs of the Kurdistan Region -Iraq (the "Regional Council"), taking into consideration the prevailing conditions when the PSC's were originally entered into.

The most significant changes to the terms of the PSC's are:

 

- The split of the previous Dohok license area in two parts, one covering the area of the Tawke oil field and one for the remaining Dohok area, with different working interests, cost recovery and profit oil components.

 

- The recovery of all past costs incurred to date within the new Tawke PSC as well as the new Dohok PSC on a separate revenue sharing mechanism applicable to the Tawke PSC whereby DNO will be entitled to 60% of the revenues up to a gross revenue of 484 million USD from the Tawke oil field. Thereafter standard cost recovery rates will apply.

 

- Introduction of a "R factor" in the Profit Oil calculation, which adjusts the financial returns to the Contractor and Government based on relative level of cumulative capital spending and cumulative revenue, consistent with the KRG Model PSC.

 

The ultimate financial impact of the amendments to the terms of the PSC is dependent on several factors including operational outcomes, reserves, production and cost levels. It is the opinion of DNO that the terms of the PSC contracts provide a solid basis for creating substantial values to our shareholders, the Region and all of Iraq.

 

Drilling of the Hawler # 1 well commenced during November last year as the first well in Erbil PSC area.

 

As previously reported influx of oil was observed while drilling through the top of the Cretaceous reservoir horizon. Oil shows were also observed in several additional intervals while drilling.

 

A 7" liner was installed before deepening the well to evaluate some additional potential reservoir horizons. In the Jurassic interval an open hole test was conducted delivering approximately 9 000 bopd and 11 million scf/d through a 1" choke size. The flow rates are assumed to be restricted by surface test equipment. The forward plan is to further deepen the well before an extensive test program will be undertaken.