Dana Gas reported better results in the third quarter after receiving some arrears payments from Egypt, but the company still faces difficult hurdles to fund expansion and resolve a long-running contract dispute with the Kurdish Regional Government.
The Sharjah-based company reported net earnings of US$38 million in the three months to the end of September, up $10m on the same quarter last year, on revenue $4m higher at $174m. Total production – mainly from its gas assets in the Nile Delta in Egypt and the Khor Mor gas field in Kurdish Iraq – was 3 per cent higher at 68,700 barrels of oil equivalent per day.
Dana Gas has shown steady improvement over the past year and it has a number projects that could help it grow substantially over the next couple of years, but a near-term squeeze looms as flattening production, rising costs and funding commitments put demands on the company’s cash in the coming quarters.
Dana Gas has a history of operational success but its difficulties have stemmed from the fact that the governments in its two main operating areas have accumulated arrears to the company that currently stand at about $1 billion.
Egypt, which accounts currently for $276m of those arrears, has struck a deal with Dana Gas which requires the company to reinvest most of its cash flowing from the deal initially.
One of the key features of the Egypt deal, which was reached in September, is that Dana Gas will be able to retain 100 per cent of the associated condensate produced from its existing assets, doubling its share, and will be able to sell that on the open market. So from the second quarter next year, Dana Gas will have 4,500 barrels per day of condensate to sell, rising to a peak of 7,500 bpd in 2017 – condensate typically sells at a premium to crude oil.
That will help to fund ongoing operations, but Dana will also be seeking project funding for investment in Block 1 to help develop promising extensions to its existing operations and make up for a projected production decline, according the chief executive Patrick Allman-Ward.
The company has also brought in BP in a joint venture to develop Block 3 in the Nile Delta, which is a deep gas play that shows signs of being world class, Mr Allman-Ward says. Dana Gas required BP’s financial heft because drilling costs in such a deep environment run at 10 times those for Dana Gas’s existing assets there.
Dana Gas will also soon seek approval from its board for funding of the Zora gas project off the coast of the Northern Emirates. The company has secured $100m in bank financing but must come up with at least $76m in equity funding due early next year – that could rise because of cost inflation on the project.
But the most frustrating problem for Dana Gas remains its ongoing dispute with the KRG, which owes the company an accumulated $700m, which will not be paid any time soon.
The dispute has been running since 2009 and Dana Gas is seeking a ruling by the London Court of International Arbitration.
“I’m confident the LCIA will uphold our contract but we remain open to discussions and negotiations,” said Mr Allman-Ward. “Our preference is for that as dragging it through the courts in London is no good for them or for us.”
There are no talks scheduled between Dana Gas and the KRG until next April and Mr Allman-Ward’s frustration is apparent.
“We were invited by the government back in 2007 to come and make those investments at a time when no other company in the world was touching the country with a barge pole,” he said. “Not a single contractor would set foot in the place.”
This past year, most international contractors and a number of oil companies evacuated staff during the height of the Islamist insurgency in the summer, but Dana Gas kept supplying power stations. “We kept the lights on,” says Mr Allman-Ward.
The gas potential in the area is enormous and there were previous discussions to double production and supply not only all of the Kurdish region’s gas needs but to export to neighbouring countries, especially Turkey, and even on to Europe eventually.
“It is a very substantial resource and for me it is a crying shame and a lost opportunity that this has got stuck for the last four years,” Mr Allman-Ward said.
“There are over $700m of outstanding receivables and clearly that would be a large ask to repay in one go but the important thing is to have a plan in place.”
amcauley@thenational.ae
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