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Cablegate: Dno Export Pipeline Awaits Green Light

VZCZCXRO9576
PP RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #1570/01 1421133
ZNR UUUUU ZZH
P 211133Z MAY 08
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC PRIORITY 7470
INFO RUCNRAQ/IRAQ COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMCSUU/DEPT OF ENERGY WASHINGTON DC
RUEKJCS/DIA WASHDC

UNCLAS SECTION 01 OF 02 BAGHDAD 001570

SENSITIVE
SIPDIS

STATE FOR EEB AND NEA/I
DOE for George Person

E.O. 12958: N/A
TAGS: EPET ENRG ECON EINV PREL IZ
SUBJECT: DNO EXPORT PIPELINE AWAITS GREEN LIGHT

SENSITIVE - NOT FOR INTERNET DISTRIBUTION - MAY CONTAIN CORPORATE
PROPRIETARY INFORMATION

This is an Erbil Regional Reconstruction Team message.

Summary
-------

1. (SBU) RRTOff met May 15 with Tarik Abdullah Chalabi, General
Manager of Erbil-based Norwegian oil subsidiary, DNO Iraq AS, to
discuss DNO's planned Tawke pipeline, completion of which apparently
awaits the green light from Kurdistan Regional Government (KRG)
authorities, and the quality and pricing of DNO's output from one of
its two fields in the Kurdistan Region. DNO is producing
20,000BBL/day from its Tawke field in Dohuk province, selling off
5,000-7,000BBL/day of the 23-27 API oil to a local topping plant for
conversion into kerosene and diesel for local use, and storing the
rest.

2. (SBU) Output from DNO's newer Hewler field, in an area
administered by Erbil province, is being assessed by laboratories in
Abu Dhabi, but Chalabi expected the specific gravity of the Hewler
field to be in the 30s API. Given increasingly higher international
oil prices, Chalabi appeared unconcerned over the lower prices that
DNO's lower quality (Tawke) oil was garnering, arguing that the
company was satisfied being able to fetch $10-20 below market price,
and suggested the situation would dramatically improve when the
Tawke pipeline came on line. End summary.


Pipeline Status
---------------

3. (SBU) In a May 15 conversation with RRTOff, Norwegian subsidiary
DNO Iraq AS General Manager Tarik Abdullah Chalabi noted that DNO's
12-inch, 43-km pipeline from Tawke to the metering station at Faysh
Khabur (east of Harbur Gate) was nearly complete, but that the
company was awaiting resolution of "political questions" on the
hydrocarbon legislation before finalizing the link. Once complete,
it will link the Tawke output to the Bayji-Kirkuk national pipeline.
Chalabi indicated that DNO was ready to complete the pipeline as
soon as DNO "gets the green light from the KRG." Chalabi said he
expects some resolution in the very near term, citing pressure from
the "20 companies with PSAs (production sharing agreements)." He
offered no detail on where the pipeline actually stops or what
remains to be connected.


Oil Quality
-----------

4. (SBU) Chalabi indicated that the quality of DNO's Tawke output is
between Arab Regular and Arab Heavy; that is, 23 API at the shallow
point and 25-27 API at the deep point. The Hewler structure output
was still being assessed at a laboratory in Abu Dhabi, but was
believed to be in the 30s API when it would begin producing.


Output & Pricing
----------------

5. (SBU) When asked about the May 14 Reuters story reporting
flagging DNO stock prices linked to DNO's low Iraq earnings (only
$62/BBL for its Tawke output January to March 2008), Chalabi was
unconcerned about the lower quality/value of the oil DNO is
producing from Tawke. He suggested that things would improve once
the pipeline was complete, and DNO was able to begin exporting the
oil to Turkey. He recognized the ability to produce larger
quantities of benzene (for instance) from higher API oil, but
suggested that DNO was not interested in competing at the higher end
(e.g., jet fuel) at this time. DNO might ultimately be able to
realize $106/BBL (compared to the market $126/BBL) for the Tawke
output, and Chalabi expected the market price to rise to $150/BBL by
year's end. His reasoning was that if DNO was able to earn $10-20
below the prevailing market price, it would still do quite well
given current and projected prices.

6. (SBU) Additionally, DNO's operating and labor costs were
significantly lower in Iraq than elsewhere in the world. Chalabi's
extensive contacts in the hydrocarbon sector have enabled him to
hire nearly all local labor (engineers and unskilled) on a 50-day on
and 50-day off work structure. He has also maintained reserve
employees ready to step in as others leave and indicated that DNO
rarely used contractors. Of the 20,000BBL/day that Tawke is
producing, DNO is selling 5,000-7,000BBL/day to a local topping
plant for conversion to kerosene and diesel. The company was also

BAGHDAD 00001570 002 OF 002


constructing its own topping plant in order to produce diesel for
its own operational use (replacing the need to purchase on the black
market) and selling the excess.


Background and Biographic Notes
-------------------------------

7. (SBU) Chalabi indicated that DNO Iraq AS was one of three
subsidiaries of DNO (with others in Yemen and Mozambique). DNO has
PSAs for two fields signed in April 2004: Tawke and Hewler
structures. The Tawke field (Dohuk) stretches from Batufa to Tawke
and has 12 wells, all of which are producing to total output of
about 20,000BBL/day (full capacity was purportedly much higher).
The Hewler field (in an area administered by Erbil governorate) is
smaller and drilling is just west of the Great Zab river, and not
yet producing. It has two wells; one proven, and the other that is
still being appraised.

8. (SBU) Norwegian Ambassador Mette Ravn (also accredited to Jordan)
stressed to RRTOffs during a March visit to Erbil that DNO was
operating as a private company. Noting that the GON and USG
positions on hydrocarbons were aligned, she underscored that DNO was
operating in the Kurdistan Region of Iraq without any particular GON
sanction.

9. (U) Chalabi is one of 12 local staff in DNO's Erbil office, with
staffing up from three when the company opened in 2004. He is a
geophysicist by training with 27 years of experience with INOC, and
with a significant number of contacts in the industry. He began
working for UN/FAO in 2003, focusing on water exploration, and
joined DNO after the company's PSAs were signed. Chalabi lives in
Erbil, and travels to Dohuk two-to-three times per week.

#

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