Genel Energy Targets DNO to Boost Kurdish Oil Foothold

Genel Energy Plc, the biggest oil producer in Kurdistan, plans to start acquisition talks with Norway’s DNO International ASA (DNO) as soon as its merger with ex-BP Plc chief Tony Hayward’s Vallares Plc is completed.

“We have a serious amount of cash in our coffers and DNO is already our natural partner in northern Iraq,” Genel’s President Mehmet Sepil said today in a telephone interview from Ankara. “We can start official talks after our listing.”

DNO, the first foreign company to begin pumping oil in Iraq since the 1970s, surged to a seven-month high in Oslo trading. Prospects for drilling in Kurdistan, home to about 40 percent of Iraq’s 115 billion barrels of reserves, have been boosted by reports that Baghdad has resolved a dispute with the Kurdish regional government over how to share oil revenue. Exxon Mobil Corp. (XOM) signed an exploration accord with the Kurds last week.

“Genel is DNO’s best peer,” said Teodor Nilsen, an analyst at Oslo-based First Securities ASA. “They have comparable assets. A combined DNO, Genel would definitely make sense.”

DNO agreed in September to merge with the petroleum units of RAK Petroleum PCL, its largest shareholder, in a deal valuing it at $1.64 billion and the RAK units at $250 million.

“It’s of course nice to hear that people like DNO and appreciate what we’re doing,” said Tom Bratlie, a company spokesman. “But that kind of speculation is impossible for me to comment on,” he said. “As you know DNO has just decided the merger with RAK and that is our key focus at the moment.”

Share Listing

Genel plans to start acquisition talks with DNO after its shares are listed in London, which could take place as early as next week, and DNO completes its merger with the RAK units, Sepil said.

Vallares, the investment vehicle led by Hayward, announced the $2.1 billion reverse takeover of Ankara-based Genel in September. The deal leaves both companies with equal stakes in the new venture, which is targeting northern Iraq, a region described by Hayward as “one of the last great oil and gas frontiers.”

Genel Energy has stakes in six oilfields in northern Iraq, which is controlled by the Kurdistan Regional Government, and is producing oil in two of them. It says those interests amount to a potential 356 million barrels of proven reserves. Genel and DNO are partners in the region’s Tawke and Dohuk fields.

‘Strategic Fit’

“It’s definitely potentially a good strategic fit and would make it a unique dominant Kurdish player in one of the last great regions,” said Trond Omdal, an analyst at Arctic Securities ASA.

DNO jumped 7.3 percent to 8.845 kroner at the close of trading in Oslo, the highest since April.

Genel Energy will use its $2.1 billion in cash on acquisitions and developing existing fields, Hayward said Sept. 8. It will allocate one-third of the cash to accelerate development of its six oilfields in the Kurdistan region of Iraq, he said. An equal amount will be spent on acquisitions of some of the 41 oil companies operating in the region.

Genel will start building a pipeline in February to connect its Taq Taq oilfield, south of the regional capital Erbil, to a pumping station near the Turkish border, Sepil said. From there, it could feed into the existing pipeline from Kirkuk in Iraq to Turkey’s Ceyhan terminal on the Mediterranean.

The 24-inch line will run 255 kilometers (160 miles) with a capacity of more than 400,000 barrels a day, and will cost as much as $450 million, Sepil said. “We are hoping that the pipeline will become operational within 15 to 18 months of the start of construction,” he said.

Taq Taq, in which Addax Petroleum Corp has 36 percent and Kepco of South Korea 20 percent, will have a capacity of 120,000 barrels a day by February compared with 90,000 now, Sepil said. Output at Tawke is currently 75,000 barrels a day, he said.

To contact the reporter on this story: Ercan Ersoy in Istanbul eersoy@bloomberg.net.

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net.

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