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Dana Gas - 'We went in with our eyes open'

Dana Gas has struggled to get paid for its work. Yet its chief executive still thinks gas in the Middle East will thrive

"Events, dear boy, events," was British prime minister Harold MacMillan's response when asked what he feared most. Those words may resonate strongly with Patrick Allman-Ward, chief executive of Dana Gas. His company has experienced up close how the unpredictable turn of events in the Middle East can upset the best laid plans.

The Abu Dhabi-listed private-sector gas company has been hit hard by receivables problems in its two largest areas of operation, the Kurdistan Region of Iraq (KRI) and Egypt. In the latter, a poor rate of collections weighs on any decision to invest further in the country. Collections were $79m in Egypt in 2016, the company's financials show, just under two-thirds of its total billings.

Egypt's payment problems have afflicted all foreign oil operators there and jars with the optimism seen in the wake of the IMF's $12bn loan to Cairo in November 2016. At least some of the cash was expected to pay debts to international oil companies.

"We were disappointed that at least a portion of the IMF tranche released in November 2016 was not used to pay down the petroleum sector," says Allman-Ward. "But we're still hopeful because the Egyptians have managed to raise over $0.5bn from the African Development Bank and another $1bn from the World Bank, and has also been successful in bond raising."

Dana Gas is in the middle of a multi-well exploration drilling programme in Egypt, where it is 100% operator in five concession areas, and is looking at opportunities in its portfolio elsewhere in the country, such as in its Block 6 offshore concession, North El Arish. Recent production performance has been encouraging. Fourth-quarter 2016 output rose by 31% to 40,500 barrels of oil equivalent a day, from 30,900 boe/d in Q4 2015.

Resuming payments isn't just a matter for Dana Gas. Allman-Ward argues that it's also important for Egypt's future oil and gas development prospects. "We are in a phase of investment which means that everything we earn in Egypt is reinvested. So if we don't get paid, we can't reinvest it and that's bad for both Egypt and us. It's enlightened self-interest for the government to pay us."

Those with the luxury of hindsight might question Dana Gas's decision to invest so heavily in Egypt, given the country's troubles since the Arab Spring toppled former president Hosni Mubarak in 2011. But 10 years ago, Egypt looked a stronger bet.

"Clearly when Dana Gas invested in Egypt in 2007 it was not anticipated that the events of the Arab Spring would take place, so it was not perceived at that time to be a particularly high-risk investment environment. Subsequently of course it did turn out to be high risk—not so much from a security perspective, but more in relation to the government's ability to pay. That is how we have been bitten by the events of the past six years," says Allman-Ward.

But, whatever the geopolitical risks that have emerged, Dana Gas isn't about to give up on Egypt.

"Over the medium term, I'm cautiously optimistic about Egypt's future. It's a country of 90m people, predominantly young and well-educated. Clearly, there are some short-term macro-economic challenges, but you have to give credit to the government to have taken a series of tough reform decisions around the issue of subsidies," says Allman-Ward.

Kurdish troubles

Dana Gas's other major province—the Kurdistan Region of Iraq (KRI)—has exhibited some of the same tendencies as Egypt. Serious payment problems prompted the company to seek a settlement in the London Court of International Arbitration.

Dana Gas has been active in the KRI since April 2007, when it entered agreements with the Kurdistan Regional Government (KRG) for the development of gas reserves and other gas-dependent downstream industries. Its interests are held via a 35% shareholding in Pearl Petroleum Company Limited, along with Austria's OMV, Hungary's Mol and Dana Gas's sister company Crescent Petroleum.

The arrears far exceed those in Egypt. The company's 2016 financials show the KRI owes it $0.713bn, compared with $265m in Egypt.

But Allman-Ward received some positive news in mid-February, when the London court ruled the KRG must pay Dana Gas's consortium $121m in missing payments for past exports.

Following the judgement, the KRG will have to pay the claimants for condensate and liquefied petroleum gas lifted by or on behalf of the KRG between 30 June, 2015 and 31 March, 2016. The court also dismissed counterclaims by the KRG against Dana Gas, finding that there was no unreasonable delay in their execution of the project.

Despite the problems in Iraq's north, Dana Gas went into KRI "with its eyes open", says Allman-Ward. "We were aware of the challenges but we have felt we were equipped to deal with it."

The broader question, of whether regional governments such as KRG have the right or not to export hydrocarbons independent of the federal government in Baghdad, was already a thorny matter when Dana Gas invested in 2007.

"We had thought that that process of agreeing the oil and gas law of Iraq would have been resolved over a reasonable timeframe, say two to three years. But, unfortunately, under (ex-prime minister Nouri) al-Maliki's regime relations between Baghdad and Erbil became increasingly polarised rather than reconciled. Because of that, no progress was made. In fact, things went backwards in terms of trying to agree legislation which would have resolved the issues about the KRI's right to export," says Allman-Ward.

Knowing of the business risks, Dana Gas tried to ensure it would not be put on the wrong side of Iraqi federal law. "We insisted on a provision in our contract stating that in case we were unable to export, the KRG was obligated to purchase our liquid products from us—the condensate and LPGs—at international prices. The logic for them at the time was that the KRG was actually saving money instead of paying the transport costs of importing these products," says Allman-Ward.

It was a sensible deal for the KRG, argues Allman-Ward, and reflected the commercial advantages to both parties at the time.

Still, controversy arose with the KRG after the Pearl partners Dana Gas and Crescent each sold a 10% share in the consortium to Mol and OMV. Allman-Ward explains this as a strategic decision as the two companies were key partners in the Nabucco pipeline project. "This was going to give them skin in the game to the upstream assets which would provide them with the resource base that would justly the pipeline and they would then be our partners in on-selling the gas into markets in Europe."

The KRG initially supported the plan. The misunderstanding arose, says Allman-Ward, because there was confusion in there about the difference between the principle of selling assets and selling the right to develop the assets. "There was a reaction when the sale took place which was 'you are selling stuff that belongs to us'. We tried to explain that we weren't. The stuff belongs to you, no dispute, it's yours. What we do have is a contract that gives us the exclusive right to develop the assets and that generates a revenue stream and we are selling a share of that projected revenue stream based on our contractual rights for others to share in."

Cash rewards

After three years of arbitration, Dana Gas and its fellow claimants have been awarded a total of $2.084bn for unpaid liquid products supplied to the KRG. The decks are now clear to make an application for damages arising from the KRG's wrongful interference with the field-development rights. The hearing is scheduled for September 2017.

In the meantime, Dana Gas has more immediate matters. "We have $0.7bn of outstanding sukuk (Islamic debt securities) coming up for refinancing at the end of October this year, so clearly our number one priority right now is to address that issue," says Allman-Ward.

Despite the tumultuous events that have eroded Dana Gas's finances—the immediate challenge for Dana Gas is managing its cash, which was down to $302m at the end of 2016, from $470m a year earlier. Allman-Ward believes Dana Gas is still well-positioned in the Middle East gas sector.

"There's a very bright future for gas in the Middle East," says Allman-Ward. "Overall energy demand is increasing strongly. Energy subsidy removal could really liberate the market and make it a level playing field, as well as stimulating domestic gas exploration and production. There is an opportunity for non-associated gas exploration, production and development, and to stimulate companies to invest in those opportunities. But for that there has to be liberalised gas-price environment in the Middle East."

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