Playing politics leaves oil minors over a barrel

If a reminder were needed of the political perils faced by small resources companies in the developing world, it was provided last week by Libya's treatment of Verenex Energy. The Canadian explorer has discovered as much as two billion barrels of oil and gas in Libya's Ghadames basin. Despite being a tiny company competing in inhospitable territory against some of the world's biggest international oil firms, Verenex has established in the past four years a track record as the most successful explorer in a country that has Africa's biggest proven oil reserves.

Now, instead of being richly rewarded for its astonishing achievement, it has been manoeuvred into recommending to its shareholders a lower takeover offer from a government that used its muscle to squash a higher bid. The trouble started earlier this year, after China National Petroleum Corporation (CNPC) offered to buy Verenex for about C$499 million (Dh1.71bn) on the strength of its Libyan discoveries. Approval was needed from Verenex's joint venture partner, the Libyan National Oil Company (NOC), but the state oil firm dragged its feet, even though Verenex agreed to pay a C$46.7m "approval bonus" to expedite the clearance. In March, NOC said the state would block the Chinese deal but would match the C$10 per share offer.

In June, however, Verenex disclosed that Libyan authorities were investigating allegations that the Canadian company had been improperly pre-qualified to bid for the exploration rights it had been awarded in 2005. Verenex cried foul, alleging the Libyan government was seeking "either a reduced purchase price or an increased approval bonus", and threatened to take the matter to court. Last month, a senior Libyan official admitted that the General People's Committee, a group of powerful officials headed by the country's president, Muammar Qadafi, was indeed seeking a deal for the state to acquire Verenex at a discount. A price of C$9 per share was suggested as appropriate.

Just a few weeks later, after CNPC withdrew its bid, Verenex has been squeezed into agreeing to be acquired by the Libyan Investment Authority fund for just C$7.09 a share, representing a discount of nearly 30 per cent from the Chinese offer. Some minority shareholders have already voiced their disapproval, but the company's board has recommended the transaction as the best option "realistically available" to Verenex.

The directors clearly had no appetite for a protracted international legal battle and doubted the company could afford or would be allowed to develop its discoveries. The Canadian government, which informed Tripoli in June that it expected the matter to be resolved in a manner fair to Verenex's shareholders, has lately been silent on the affair. Verenex is not the only oil junior to have had its development plans upset this year by a host country's politics. Norway's DNO and Turkey's Genel Enerji are still waiting to be paid for oil worth tens of millions of dollars a day that they have been pumping since the beginning of June for export from northern Iraq. The Chinese state-owned Sinopec is in the same boat after its recent acquisition of Canada's Addax Petroleum, which is also among the region's oil producers.

The problem is that the oilfields are in semi-autonomous Kurdistan, and the producers have been caught in a bitter feud between the Kurdish government and Baghdad over territory and resources. Their contracts are with the Kurds, and Baghdad has not budged from its position that they are "illegal", even though they predate Iraq's current constitution, and despite Baghdad's decision to allow Kurdish oil exports to commence.

"These contracts have to be reviewed by the government of Iraq and amended if necessary," the Iraqi oil minister, Dr Hussain al Shahristani, said earlier this month on the sidelines of an OPEC meeting in Vienna. "The contracts have no standing with us and we will not consider any payment to these companies. Whoever signed the contracts will have to take care of that." The snag with that position is that allowing Baghdad to amend Kurdish oil contracts would amount to handing control of the region's most valuable resource to the central government - not a proposition acceptable to the Kurds.

And if Baghdad ignores the companies pumping the oil when it splits the export revenues it collects, then the Kurds and their foreign partners could all lose money. Dr al Shahristani's uncompromising attitude over Kurdish oil contracts is at odds with his goal of boosting Iraqi output and export revenues, but the political standoff is not just about resource development in existing Kurdish territory.

Also at stake is the Kurds' claim to disputed territories, including the northern city of Kirkuk and its huge oilfield. In other words, the small foreign oil producers in Kurdistan have become pawns in a larger chess game. John Manzoni, the chief executive of Talisman Energy, a Canadian company with stakes in two Kurdish oil blocks, said it was in no hurry to start pumping oil. "We'll move gradually to some sort of constructive political agreement within the next few years, and it might take that long," he told reporters.

In the interim, the Kurdish government is doing what it can to placate its foreign partners by awarding them a bigger share of revenue from local oil sales. That may be small consolation, as the Kurds have only one refinery, with just 20,000 barrels per day (bpd) of initial processing capacity, which they hope eventually to expand to 75,000 bpd. That is still more goodwill, though, than Tripoli is offering.