DNO ASA (DTNOF) Q2 2023 Earnings Call Transcript

DNO ASA (OTCPK:DTNOF) Q2 2023 Earnings Conference Call August 17, 2023 4:00 AM ET

Company Participants

Haakon Sandborg – Chief Financial Officer

Orjan Gjerde – General Manager, DNO North Sea

Jostein Lovas – Communication Manager

Bijan Mossavar-Rahmani – Executive Chairman

Conference Call Participants

Teodor Sveen-Nilsen – SpareBank 1 Markets

Nikolas Stefanou – Renaissance Capital

Tom Erik Kristiansen – Pareto Securities

Ina Golikja – Fearnley Securities

Haakon Sandborg

I’ll get started then and good morning. Hello, everyone. Welcome now again to our second quarter earnings call. This has been quite an extraordinary and challenging quarter from the end of Q1 basically have had no production in Q2 from our operated assets in Kurdistan. This stands still for our main producing assets has obviously severely impacted our second quarter operational and financial results.

On the other hand, we continue our outstanding exploration success in the North Sea with a large discovery in the Carmen well. Our new West Africa assets are also performing well. So in the current situation, we clearly benefit from having a diversified portfolio in addition to Kurdistan.

Let’s go to the next one. Yes. So the production shutdown in Kurdistan that followed from the Iraqi-Turkey, the closure of the Iraqi-Turkey pipeline at the end of March that was due to an arbitration ruling at the time in favor of Iraq against Turkey regarding exports of Kurdish oil. The pipeline closure led to a four-month stop in our production before we receive in partial oil production from the Tawke field in mid-July for sales of our entitlement to local trading companies.

With the build-up of local sales now in Kurdistan, we expect at least a doubling of net production in Q3 from the second quarter, which should again strengthen our results for the current quarter.

Looking at Q2, we had the actual net production at 14,400 barrels of oil equivalent per day, that is actually the lowest we have had in 13 years, dropping from 89,400 BOE per day in the first quarter and again mainly due to the lack of Kurdistan production.

But the North Sea production was, however, also down to 10,800 BOE per day in the second quarter from a level of 14,800 barrels per day in Q1. This drop was primarily due to an extended shutdown at the Norne FPSO in May, June that impacted our production from our key Alve and the Marulk assets.

In addition, there was planned maintenance at the Ula — in the Ula area in the quarter. So but then we are pleased with the first production from the Fenja field, starting up in late April and currently contributing around 2,000 BOE per day net to DNO.

So with the resumption of normal operations from July, our North Sea production is now back to the levels we had in the first quarter. And further production from our new assets in Cote d’Ivoire in West Africa was high and stable at 3,500 BOE per day net to DNO in Q2. So we are pleased with the good operational performance of these assets.

Otherwise, we maintain our strong financial position with cash balances of $743 million and net cash at $177 million at the end of the second quarter. We’re also pleased to announce today that DNO Board of Directors has approved another dividend payment of NOK0.25 per share. And that is continuing the quarterly distribution program that we’ve been running for quite a while now.

Next slide. So with low exports due to the pipeline closure, we are clearly facing a difficult challenging situation in Kurdistan as I said. So we are taking prudent measures to cut spending and cost with the aim of recovering the Kurdistan reduced spend by cash flow from local sales. This will be until we are in a position to resume regular exports again.

As we said, we restarted the partial production from the Tawke field in mid-July. This is done both for well integrity and the reservoir testing and of course also to step up local sales. The current gross Tawke production is around 40,000 barrels of oil per day.

The contractors entitlement represents around 50% of this volume, split 75% to DNO and 25% to Genel. The prices for the local sales vary by contract that averaged around half of the net prices we achieved before the pipeline closure.

These local sales are prepaid directly to DNO by the buyers before they take oil delivery to road tankers at our trucking terminal. So there is no payment risk here. We also run pretty efficient truck loading operations with capacity to load substantial volumes on a daily basis in Kurdistan.

We have the Peshkabir field, the remaining shut in to minimize cost run rates. Other cost reduction and cash preservation measures include the release of the three large rigs, drilling rigs we have in the Tawke license. Unfortunately, we also have had to do staff reductions and we have discussions with our suppliers to cut costs and extend the payments until the KRG’s arrears to DNO are addressed.

So that was a brief, go on the next one, a brief discussion on Kurdistan. We can revert, of course, to more in the Q&A session. Moving now to the — our new West Africa assets. We are, as mentioned, pleased to see strong and stable gas production from Block CI-27 in Cote d’Ivoire.

We hold an indirect interest in the block of just over 9% since we acquired a one-third stake in the operator Foxtrot International in Q4 last year. As such, the Q2 gross production averaged 224 million cubic feet of gas per day and 1,700 barrels of oil per day. This was up 6% from the average production in 2022. Now in Q2, DNO’s share of profits from this block was $3 million and free cash flow net to DNO was $6 million.

Block CI-27 is a key asset for the country, producing more than 90% of total gas production in Cote d’Ivoire. This comes from offshore gas fields with the pipeline transport onshore for electricity generation. The gas is sold on a take-or-pay government contract and discussions are on-going now to increase the price formula gap from the current level of $6.5 per MMBtu. And this would be, if we agree, would be in exchange for higher investments aimed at increasing gas production from the block.

In addition, DNO also holds an 8% indirect interest in Block CI-12 where Foxtrot as the operator has secured a rig for drilling of two exploration wells starting in Q4 this year. There’s also plus one optional well. And as a new exploration area for DNO, we are excited about seeing the results from these wells going forward.

Great. So let me now hand over to my good colleague, Orjan, and he will review North Sea progress.

Orjan Gjerde

Thanks, Haakon. Good morning, everyone — everybody. It’s very good to meet you all. My name is as mentioned, Orjan Gjerde, and I’m the General Manager of the North Sea business in DNO.

Our strategy is to be an exploration-focused cycle oil gas company, which means delivering long-term growth in resources, reserves and production through exploration success and take part in profitable development projects for growth in future production. With our six to eight exploration and appraisal wells per year, we are more active than most of the oil and gas companies on the NCS at least when it compared to size.

Over the last three to four years, we have focused on our exploration efforts closer to existing infrastructure with a meaningful participating interest and lower risk prospects. Our largest core area is by far the position we have built in the Northeast part of the North Sea, the Troll-Gjoa area.

This position has been built over several years, starting already in the oil exploration times in 2015 and fall significantly after DNO’s free entry through the acquisition of Origo. The starting point was to acquire the best available data and to gain access to new acreage through APA application and targeted BD work.

I would argue that 100 million barrels of oil equivalents we have found net to DNO over the last 2.5 years validates the strategy we have chosen to follow. These are discoveries with clear path to commercialization, some with several host platform alternatives and therefore carries high value.

From the Norwegian Sea part of our portfolio, we have new gas production coming in, in 2024 and 2028 from the developments of Andvare and Berling discoveries. Both PDO’d in 2022 and approved by the Ministry of Petroleum and Energy earlier this year.

Our three discoveries of Rover Nord, Rover Sor and Kveikje are all part of an AMI, a cooperation agreement with three other licenses representing the Grosbeak, Swisher and Toppand discoveries led by Equinor where we are looking into the so-called Ringvei Vest development in the Troll-Gjoa area. Ringvei Vest will be a reference project which other alternative development solutions will be measured up against.

Other discoveries in the area, both current and future, will be taken into consideration during these discussions. It’s important for us to assess other alternatives, development concepts and Ringvei Vest to ensure maximum value from our discoveries and the area as our own.

During the first half of 2023, we have also spent a lot of time together with our new partner in the Brasse discovery to identify a fast track, lower-cost tieback to the Brage production facilities where we aim for a final investment decision early next year.

As previously also reported, we have concluded that the most efficient solution going forward is handing over the operatorship to OKEA whom also is the operator of the Brage platform. Regarding discoveries, I’d like to add a few comments to the Carmen discovery.

The next slide. As we previously have reported, this is the largest discovery in the Norway in a decade. It’s a significant gas and condensate discovery with a midpoint volume of some 175 million barrels of oil equivalents and with a significant upside potential.

With a 30% holding interest this discovery alone represent 53 million barrels of oil equivalent net to DNO. Carmen is the sixth discovery for DNO in the Troll-Gjoa area since 2021, following the Rover Nord discoveries, Kveikje, Heisenberg and Ofelia, as you can see on the map to the right. The three discoveries not included in the current Ringvei Vest AMI are all targeted to be appraised this and next year.

As you also can see from the map, there are discoveries — these discoveries are near by several potential host platforms. We have the Utbygging infrastructure to the Northeast, Kristin to the West, Troll/Fram to the Southeast and even Oseberg to the South, which is under the label down in the left corner on the map. All these will be assessed for potential development solutions for the discoveries in this area.

With many development alternatives and potential synergies between these discoveries, we would argue these hydrocarbons carries the higher value than most other discoveries of the similar size. Also this is demonstrated by recent transactions in the area.

Our active exploration is in the area, continues through this and next year, illustrated on the map with the yellow dots. These include our DNO-operated Kjottkake prospect in the license PL1182S.

You see the dot on the map. That represents the Kveikje prospect, which in a success case, could unlock several smaller discoveries we have in the area called BOSS, which means [indiscernible] Orion/Syrah synergies, a cluster of small discoveries operated by [indiscernible] . But it’s not only here, we are drilling exploration wells. Worth mentioning is the DNO operated Norma exploration well currently drilling further south in the North Sea. This is DNO’s first operated HPHT well chasing light oil in the Alve, Vilje, Ringhorne neighborhood.

I have further information of this year’s drilling schedule on my next slide. So next please. Here you can see the excellent start of the year with three discoveries. These were followed by two dry wells in the license called Litago and Eggen. These prospects carry different characteristics and raw discoveries and hence also had different risks. Even though the wells were dry, they were drilled at a relatively low cost and gained interesting information, partly de-risking other prospects in the license.

At the 15th of July, we started Bergknapp appraisal well after first drilling a pilot hole checking the area for shallow gas. Even though no shallow gas was encountered in the pilot, we unexpectedly hit shallow gas in the main var. At the 28th of July, after an assessment of risk, the partnership agreed to suspend operation permanently plugging the well, replan and then return to drill a new well at the nearby location later in the year.

As mentioned, we have already spur the Norma well further south in the North Sea. And then next up is Ofelia appraisal. And finally the Cuvette well, which may also slide into 2024. In total, we had a predrill estimated outcome of this campaign of 55 million barrels of oil equivalents net to DNO. The result so far is as much as 78 million barrels of oil equivalents and there are more to come.

So what can we expect from these successes when it comes to future production? It’s early days, and therefore, hard to estimate exactly, but we have made attempt to illustrate the potential outcome on this slide you see now.

What is obvious from all these discoveries is that we will have a material organic growth in production over the coming decades. As the discoveries are quite recent, detailed plans for development are not yet ready. So please read this graph as an indication of a potential future production curve based on the current discoveries, which are considered commercial.

Short-term, we have the restart of Trym gas production coming on early 2024, and the Andvare development starting production later in 2024. Thereafter, in the medium term, we have Brasse, Berling and Bergknapp which were estimated to come on production in the period from ’26, ’27 and up until ’29.

From the late 20s, the Troll-Gjoa discoveries should come in production, timing will then depend on host selection and development concept. As the graph shows, this may take us up to a production level north of 50,000 barrels a day within the next seven, eight years, an impressive growth graphic.

From our exploration portfolio, we have eight firm wells scheduled through 2025 in addition to seven more currently under evaluation. These are not included in this outlook. My short summary of all this is that we successfully have followed our low-risk near-field exploration strategy, gaining high-value discovered volumes which will give us material growth in production going forward.

We are currently producing just below 5 million barrels of oil equivalents per year. And we had about 35 million barrels of oil equivalents in PP reserves at the beginning of this year. Over the last 2.5 years, we have found three times our PP reserves and 20 times our current annual production net to DNO. So I can say that at least I am very happy with the achievements delivered by the DNO North Sea team in Stavanger.

With that, I hand over to my colleague, Haakon, again.

Haakon Sandborg

Thanks, Orjan. It’s time to look at the financial results now. Maybe not as fun as usual, but let’s go through it anyway. We have the revenues dropping by $211 million in Q2. Kurdistan was down by $136 million, of course, due to the production shutdown.

But also this time, North Sea revenues dropped by $75 million, mainly due to the shutdown of the Norne FPSO in the months of May and June. And this, as we have talked about, reduced production from the Alve and Marulk gas fields in the Q2. We also have an effect on North Sea revenues by lower oil and gas prices in the second quarter. With lower production, our cost of goods sold were also lower by $48 million in the quarter and that came mostly from reduced depreciation and lifting costs in Kurdistan.

On the other hand, expense exploration was up by $10 million to $16 million in the quarter, explained by dry well costs and seismic acquisitions in the North Sea. When you look at the P&L, the other costs were fairly stable in Q2. So on this basis, we show an operating loss of $15 million in Q2 again, primarily from much lower revenues that with some offset from reduced cost. We have a fairly stable net financial expenses this time in the quarter, but the tax expenses dropped by $68 million from Q1, and that was due to lower revenues and lower taxable profits in the North Sea.

So all in, we show a net loss of $19 million for Q2. Just to also talk about on a year-to-date basis through the first half of this year, revenues are down by around 50%. That with help from reduced expense exploration and lower net finance expenses, we still show a net income of $69 million for the first six months.

Next one. We look at the cash flow, we have a cash flow from operations of $16 million for the quarter, dropping from $155 million in Q1, again, from lower revenues. We have included here $18 million in the positive working capital adjustments, mainly coming from an increase in trade payables and accruals in the North Sea, driven by the high drilling activity and also oil prepayments. Shown on the slide on the tax, we paid a further $80 million in North Sea tax installments in Q2, and we have thereby completed the tax payments or installments for 2022.

Looking forward, for the second half of this year, we expect a tax refund this time over $6 million for Norway and a tax refund from the UK of around equivalent to $30 million. On the investment side, we had $73 million in asset investments and capitalized exploration in Q2. This was a split between the CapEx of $45 million in the Tawke PSC and for North Sea assets and also $28 million for exploration drilling.

Further, we had the $7 million in the UK Decom where we are now finishing up the projects just now. We had the $6 million in net cash inflow from Cote d’Ivoire. The net finance outflow this time of $27 million was driven by $22 million in dividends that we paid in the second quarter. Our cash balances were thereby reduced by $168 million in Q2, but we have a strong remaining cash balance of $743 million at the end of the quarter.

Again, looking forward to the coming quarters, we expect that cash flow and development in our cash balances in the second half of this year will be improving significantly from the first six months. This will be with the support of local sales in Kurdistan, higher North Sea production. And also that we have a tax refunds of $36 million that compares to payments of $123 million in the first half of this year. So the outlook is now much better than we have for the first six months.

Next one. So just to summarize what I talked about the reduction in cash balances coming mainly from production shutdown in Kurdistan, high NCS tax payments and also the dividend payments in the second quarter. With a remaining net cash position of $177 million we maintain a robust balance sheet. And we’re also pleased to note that the equity ratio is high and stable now at 50%. That’s quite a strong level.

So this concludes our presentation today. You have heard that we are proactively managing the export shutdown in Kurdistan. We are building long-term value in the North Sea through successful exploration and development. Our new West Africa producing assets are performing well and we now also add exploration upside in this region. And finally, we maintain our solid financial strength.

So I think I’ll hand back to Jostein now to manage the Q&A session. Jostein?

Question-and-Answer Session

A – Jostein Lovas

Thank you, Haakon and Orjan for your good presentations and we’re ready to take questions. I am seeing that Teodor Sveen-Nilsen, one of our — our analysts following us. He is already raising his hand. So please ask your – go ahead, Teodor.

Teodor Sveen-Nilsen

Good morning. Can you hear me?

Jostein Lovas

Yes.

Teodor Sveen-Nilsen

Perfect. Thanks for taking my questions. A few questions from me here. First just on this deal with the local sales, which by the way, looks pretty impressive. The deal would 50-50 split between KRG and Genel and yourself. Is that linked to the PSA or is that just ad hoc deal? So that’s the first question. Second question, the price of the local sales, is that linked to any particular benchmark or is that negotiated just on every lifting? Third question, that is on the North Sea and the slide that you showed on I think it was slide eight, Orjan, the production profile. Just curious, how much of the production from the Troll area comes from Carmen? That’s all. Thanks.

Haakon Sandborg

Yes. We have Bijan, our Chairman and Executive Chairman with us, but do you want me to cover the first question, Bijan?

Bijan Mossavar-Rahmani

Yes, if you would, please.

Haakon Sandborg

You asked Teodor about the 50-50 approximate split. This is very much linked to an exact calculation under the production sharing contract. So we have calculated our cost oil entitlement and also our profit oil entitlement into that approximate 50% number. In reality it’s more like 51% something, but we’re just for simplicity calling it 50-50, but it is based exactly on the production-sharing contract terms. Second question was on the pricing for the local sales. These are negotiated contract by contract. There are several buyers, not just this one. And we have, well, okay, we are in discussion, so I won’t give away the position there, but we are discussing what the future prices will be. So these discussions are ongoing now. We have a very solid position with our trucking operations and pipeline, et cetera, in Kurdistan and can supply in a very competitive manner into their local market for the time being. But it’s a negotiation — negotiated price on individual contracts, Teodor. The other question, do you want to cover?

Bijan Mossavar-Rahmani

Yeah, the curve towards the end there, around half the production is common. And remember, this is rough estimates and early phase, but it’s a significant part of the production towards the end.

Haakon Sandborg

Teodor, I hope that answered your questions?

Teodor Sveen-Nilsen

Yes, absolutely. Actually, even one more and that is, of course, regarding pipeline. What outstanding issues are before the pipeline can open? That will be my final question, promise.

Haakon Sandborg

Bijan, do you want to cover that?

Bijan Mossavar-Rahmani

Teodor, first just to add a little bit more cover — color to what Haakon said. Yes, the 50-50 roughly is tracks the current PSC splits. And in fact we’re probably following the PSC more closely than in quite some time in the sense that the government is taking its share of the oil, and we are taking our share of the oil, our entitlement share and selling it into the market and being paid directly. And when you have these direct payments, this cash and carry payments, as Haakon mentioned in the presentation, you remove this problem that we’ve had from time to time. That the payments are locked up for a while and then hopefully, eventually released, but now we get paid directly. And a market — local market is developing quite rapidly in Kurdistan. As you well know, other international oil companies are also selling into the market. I think we’re selling to some of the same traders, but more traders will pop up because the margins are quite attractive. The difference between the pricing in the local market and the pricing on international markets, although there are some nuances where you can’t do anything absolute comparison. But as more buyers come into the market, there’s more competition and more bidding for prices and prices are sort of inching up a bit to reflect the fact that they’re now multiple sellers and multiple buyers and more of a market and more competition. All that is very good. You asked about the pipeline, the portion of the pipeline that gets up to the border has now, again, as you probably know, others may not, has been reversed, and we deliver the government’s entitlement share, as I believe other companies do as well. At the pipeline, it flows south and is utilized by refineries down the line to the south. The pipeline through Turkey to Ceyhan and the Mediterranean market, remains closed. Part of that has had to do has been explained by the pipeline operator to maintenance issues and some other related issues. And part of it, of course, has to do with the resolution of the differences between the arbitrating parties with respect to the nature of the arbitration, the size of the operation, the payments and so on. If the pipeline opens up, there still is a question as to what happens to the oil is now going down south and feed the refinery. Most of the other companies, maybe all the other companies or operators will have difficulty putting oil into the line and shooting it north when the oil is going south. We more — at the border so we will not have that problem like gives us an advantage and an ability to move oil into the pipeline at such time as the pipeline has reopened. But the fact that prices are inching up, that the market is strong. The market of Tawke oil is quite strong. We had to request for volumes now more and more on this basis of prepayments to us before delivery. And the market is probably for Tawke oil anyway, is probably greater — well it is greater than that Tawke can produce and we have to consider whether the timing is right to open up Peshkabir as well. We said that we’re producing about 40,000 barrels a day. We can come back to the levels we had before the pipeline closure of around 100,000 barrels a day. Peshkabir has been closed. We had expected it to remain closed. But if it can be opened under the right commercial terms on the same basis, it would be helpful not just in terms of cash generation for us and for our partner, Genel, it would mean more oil going to the pipeline south that the government can use its one-half entitlement oil to feed its refineries and it means that we can restart the gas reinjection program where the Peshkabir gas was injected into the fields at Tawke that’s another important part of the testing and reservoir modeling and reservoir work that we’ve been doing. So that may be the next logical step in terms of operations or operator in Kurdistan that put us on a much, much firmer footing if all these pieces fall into place. So I think that’s exciting that we found and the other companies have found an alternative. The government has been supportive and that our PSCs are being respected in the sense that we are getting our entitlement oil and we’re free to do it without oil. What we want and to shop it around and get prepaid in advance for security of the revenue stream, but also again, we get paid in advance, even when we were getting paid previously, there was always a several month delay that about delays change a much longer delay. So we feel pretty upbeat about the situation in Kurdistan now, but there’s still a significant difference between the market price for the crude in the Mediterranean and the price that we’re receiving and we’d like to close that gap as best as foreign conditions and logistics and so on with permits. So stay tuned on that one as we develop these — pursue these options.

Jostein Lovas

The next question comes from Nikolas Stefanou of Renaissance Capital I believe. Please go ahead and unmute yourself, Nikolas.

Nikolas Stefanou

Gentlemen. Hi. Good morning and thank you for taking my questions. I’ve got a couple on this deal and then one on the budget. You said that is exactly how the PSC terms are. But if I recall correctly, the PSC terms had to do the specific price, the KRG would give you, but now there’s been a divergence because you’ve got the price you get from marketing your own crude and then the price that KRG gets. So are you — how does that — how does that reconcile for you to get a 50% entitlement? Which I would also kind of like there have been a bit higher because you’re effectively running a kind of like $40 oil price at this point now. So that’s kind of like — that’s my first question. You could clarify that. The second one is, I want to understand how consistent this marketing your own crude and other IOC marketing you own crude, how consistent this is with the deal repealing back that did on that SOMO should market the Kurdish crude because we’re talking about almost 100,000 barrels per day now with Kirkuk as well. But it’s not been given to SOMO, if I’m kind of like correct now, but given kind of like locally to other marketers. And this is going to create a problem with the budget? And then my final question is on how you think of your own budget because on some kind of like basic calculation I’ve done, you — with maybe a $40 oil price realization you get at Tawke now and based on the cost base you’ve given in your — in the previous quarter, I think, maybe you make something like $10 million or $15 million from Kurdistan each quarter now? It is something, but it’s not something like material. How do you factor this in with your broader budget, especially in the next few quarters when you have to make some decisions in the North Sea? Thank you.

Haakon Sandborg

Good. Thanks, Nikolas. Good to speak with you again. I don’t know, Bijan, should I discuss on the PSC calculation.

Bijan Mossavar-Rahmani

Yes.

Haakon Sandborg

I touched on it with the Teodor’s question as well, Nikolas. But it’s the normal if you follow the production-sharing contract we have discussed with the shareholders and investors in the past. You have a cost oil allocation under the debt that goes to the contractors. It’s up to 45% of production in a given period less than a 10% royalty payable to the MNR or KRG. And the rest that is not going to cost oil that covers the contractors cost is then going to a sharing of the profit oil between the KRG and the contractors. So that profit oil has a sliding scale in terms of how much the government’s share will be in any given situation. So we use — that sliding scale where we are now on the profit oil and you sort of determine how much of the production in the quarter is going to cover costs. And remaining is going to the sharing of the profit oil. So I’m not going to go into the details on the exact calculation, but it’s run on that basis. You run the percentage to cost oil allocation and then the rest is the percentage to the profit oil allocation between government and contractors. So this is based on the long-standing production sharing contract terms that we’ve had since we came into the region many years ago. So I hope that covers that question. Anything to add on that, Bijan?

Bijan Mossavar-Rahmani

No, I think you’ve described it correctly. And these PSCs, the calculation is as Haakon mentioned is very classic PSC fiscal regime. In terms of marketing, typically under the PSCs, the operator markets on behalf of all the participants in the joint venture, including the government, but each one has the really the right to take their oil and market it themselves as a service provided by the operator. I think the only important condition is that the sales and sales prices be it on an arm’s length basis. So some company doesn’t sell to its own trading arm at a discount and get some advantage that way. So this is all fairly consistent with how PSC is working and should work. You asked about SOMO. We have not been a party to those discussions and deliberations and know as much about the current status and the changing status as you do and it also sort of reads the press on this, we know no more. We’re not party to those discussions either on the budget or on SOMO. The PSC gives us certain rights. Those rights are embedded in the PSC and legally enforceable. And there’s no reason to think this would be any different. You may have seen — some of you may have seen a statement by an association called APIKUR Association of the petroleum industry of Kurdistan that came, I think, two or three days ago in which — these are the four probably largest producers or four of the largest producers in Kurdistan, ourselves, HKN, Gulf Keystone and Genel and the statement said that we encouraged and that’s both in the budget discussions and any marketing discussions and any oil law, the rights of the companies out of the PSCs be observed and respected. So that is our position as companies, and that’s the correct way to approach it. And we’ve signed agreements and those agreements create obligation and rights for the signatories. And we may agree to change those, but we have not done so. We’ve not been asked to do so. We’ve had no discussions about it. The situation is complicated, it’s complex and there’s a — there are different parties involved, but we’re just glad to be back in business and back in the game, and the government takes it to oil, as I said, and under what terms it sells our oil, it delivers all the refineries, we don’t know. It’s their concern, but we have our share as determined by the PSC terms that Haakon described to try to sell in the best possible price to have every reason to do so as do the other companies. The pricing is fair because there a few buyers and they have perfect information about pricing and who produces how much. The quality of the pricing, they’ve circled the wagons as we say, in the United States and they’re trying to hold prices at a level that is advantageous to them and we are trying to do the same and a push for a price that gives a fair split in terms of the sharing of that margin between international prices and Kurdistan prices, recognizing that there are certain other considerations in this as well. So I think all this is positive. You said $15 million is peanuts. Well, it’s not really peanuts, it is $15 million. I don’t know if that’s the right number. I think the right number is a little higher than that. But the quality of the payment, again, is better, I’d rather have let’s say, the figure is $15 or $20 million. I’d rather have that money sitting at an international bank account in Dubai or in Norway or in New York that has more value to me than the $30 million a much bigger figure sitting in another bank accounts where I don’t have access to it and it’s locked up for a long time to come and not earning interest, that should be earning interest. But — so the quality of the dollars is also different than that gives an uplift to these figures, and that should be borne in mind as well. And we expect this number to go up as we open up, and there is a lot of demand, strong demand for oil — for Tawke oil I’m sure for some of the other crudes as well.

Jostein Lovas

We have a couple of more questions.

Haakon Sandborg

But, sorry, we have one more question from Nikolas that we haven’t covered. I understood your third question, Nikolas, to be around assuming in your question, you had assumed a $40 per barrel oil price, local sales? And how would that look for our cash flow and budget, I think you recalled it for the second half of this year in Kurdistan. As we talked about in the presentation, we are quite flexible on our cost structure and our spend levels in Kurdistan, and we will adapt the cost and the spend levels to what we see coming in, in terms of cash flow. In other words, we want to make sure that the local sales will be covering our spending in Kurdistan, covering all the cost. So if you assume what you did, the $40 and the current volumes around 40,000 barrels per day gross. I think we should be in good shape to do what we’re aiming to do to cover the spend by the local sales, and then that will be until we can start exporting again and get back to the normal earnings and cash flow in the DNO group. So I don’t think I’m going to go into a lot of detail, but really trying to adapt the spend level to what we see we can negotiate and get in terms of revenues and cash flows with the local buyers. And I think we’re on a very good footing and the starting point for those continued discussions on the buyer level and also on the pricing level for the oil we produce now currently for local sales.

Bijan Mossavar-Rahmani

Just a little bit more color. I mean, we’ve hit the brakes on costs, as we’ve announced previously, and again, we’ve let all the rigs go. We’re not doing any drilling. Our crack team in Kurdistan that used this downtime to do maintenance at Tawke and that allows us to hit the accelerator now. We’ve had important redundancies. We don’t like redundancies. We don’t like letting all these go. But I think our reduction in Kurdistan in terms of the staffing in Kurdistan we’re down 300 individuals. And again, it’s a difficult decisions. But I think they understand that the times are tough and everyone is taking something of a haircut as a result. So more volume, better pricing, lower costs, and that goes a long way to increasing the cash coming out of Kurdistan. And if you bring additional production on downstream, it will be, I think, in a quite solid shape. Thank you.

Jostein Lovas

We have a couple of more questions coming up. I think we will wrap this up after about an hour so please be a bit to the point in your questions. Tom Erik Kristiansen is the first one from Pareto.

Tom Erik Kristiansen

My question, Bijan, you touched on the quality of payments. With that regard, when the pipeline opens again, hopefully for exports, is it given that you will immediately just put all the production there? Or do you want to see payment mechanisms restored and some of the amounts owed to you from previous sales recovered before all the oil is going for exports? So is that call it a DNO decision or will it be a government decision in the Kurdistan region? Thank you.

Bijan Mossavar-Rahmani

Well, it’s — our rights are pretty well established and not always negotiable. We’ve been — now had two instances where we’ve delivered oil and haven’t been paid three during my tenure at DNO. The one during the ISIS period, we eventually got paid back and we got paid back with 20% of Tawke, the governance, the piece of Tawke and royalty. So we resolve that, I expect we will find a resolution to the arrears as well. It may take longer and what form it takes, I don’t know, but that’s certainly on the table and the Kurdistan government has repeatedly stated that they will honor that obligation to pay us the monies that are rightfully ours. We understand why those funds were held back, to some extent we do. But we also expect that those funds will be released. But what tranche and so on over a period of time. And I don’t know, we’d like to release quickly and right away but that will be part of a discussion with the government. Moving forward, again, I think when the pipeline is opened, how that will — what that means, what sort of volumes will go through that line will depend on a number of factors, and it’s not just related to our commercial interest, but other considerations as well. But we’d like to put the oil in the two markets that provide us the best netbacks and the pipelining over these distances provides the best netback rather than trucking and so on. So a working pipeline is the most efficient and effective way to move these volumes over these distances. It’s — and the market in the Mediterranean is quite strong. As you know, the Euros oil is a comparable crude to occurs on blend thus feeding the Mediterranean refineries is not coming there as in the volumes that they would like, those refiners are out looking for more oil and our oil would be something that they love to get their hands on, and there have been times when this oil has sold at a premium to Brent typically a decent side of the discount because of the quality, it’s heavier and more sour. So this is — unfortunately, the timing has been not good. This was the best time to be selling this oil in that market, but this sort of period could continue. But the pipeline is clearly from the numbers point of view, the best way to move the oil. But again, if you pipe 1 million barrels and then don’t get paid for it and 100, 000 you do get paid for it, you’re going to go for that being paid for it scenario. So that has to be sorted out.

Jostein Lovas

Great. I think the last questions will come from Ina Golikja at Fearnley. I should also say that press requests can be sent our way after the meeting and we’ll deal with that then. So Ina please go ahead.

Ina Golikja

Thank you. Thank you very much for taking my question. I had just a couple of questions remaining now. And the first one looking a little bit of the local market. You mentioned that there is demand for your oil, but I was wondering if you could give us a little — an estimate of like the capacity of that local market. And if — how much oil — oil DNO can provide to that market is regulated somehow? Or it just follows the demand during the weeks or the months. So if you have a certain share of the total market that you can go up to or — because we also know that other USCs are selling to the local market. We just want to understand how much you can increase your share? And the second one was on the DNO03 bond. I was just wondering if you can provide some color if you intend to, let’s say, buy back that bond in the next quarters? Or how you expect to address that one, if you can give us a little bit of color? Thank you.

Bijan Mossavar-Rahmani

Let me start with the local sales one. I think we try to be careful by saying we’re saying we’ll sell to local traders rather than to the local market as such in the sense that there’s not like demand for — by consumers for crude has suddenly jumped to these levels. At the right price at $2 a barrel, the local market will extend from Houston to Singapore, I mean, the oil will find the way to market in unlimited amounts and also when — I mean we know that there’s demand for certain products in Kurdistan, not all products. So a barrel is refined, the refiners will sell to the local markets. The — that part of the barrel, whether it’s gasoline or the diesel or naphtha or whatever the parties for that particular refinery market. And the rest, they will sell and sometimes that it’s those other derivatives that go to — to other markets. And especially if they were previously importing certain products from outside because they weren’t producing enough of it, they can use the local oil, hopefully produce oil to generate or produce or refine that component and then sell the rest. So how that’s working out, we don’t know. But these are how refineries typically work. But I just want to make a cautionary statement. It’s not like the local market goes up and down 40,000, 50,000, 60,000, 70,000 barrels a day from week to week, it’s the local trader that was taking this oil, where they’re placing it, we don’t know. And how much of it stays, what parts of it stay, what parts they re-export it or export it to other markets, we don’t know. But surely, demand doesn’t jump up and down by those levels depending on what the DNO does or the other companies do at any given time. Haakon, would you like to address the bond issue?

Haakon Sandborg

Yes, thank you. I think Jostein we should close the Q&A after this last question. Thank you, Ina. Good to speak to you again. As you know, we’ve been buying back in the DNO03 several times in the past, and the outstanding amount now is $131 million with a maturity at the end of May next year. So there isn’t that much running room remaining — on the remaining maturity. But, yes, we’ve been considering leverage buyback ahead of time or wait for maturity. I’ve been trying to see if there is any volumes available for us to discuss with the bondholders in the market. In other words, could they approach us directly and see if we can make a deal on the buyback. We have done that several other transactions in the past. It’s a good way, in my mind, finding out what the price level would be. And so far, there’s been very little coming our way from the bondholders. So they seem to like and that’s good, that’s very supportive of us. I want to sit until we call or until maturity. But I’m not going to go to say, absolutely, we want to call it now or later or wait for maturity. But we’re sort of looking at how things develop and taking the total picture of the company into the equation. But we are clearly prepared to — we’re very well able to pay back at the end of May next year. And there’s absolutely no problem on that or whether we may do ahead of time, yes, we’re coming down on the buyback premium under the bond agreement. So that’s also one thing to follow. But I think mostly is to see whether we can see some movements in the marketplace with the current bondholders, if they want to approach us, and we can maybe buy back here some of the volumes in ahead of time in that direction. So I think I’ll then finish up and hand back to Jostein.

Jostein Lovas

Yes. It’s like you said, we are done for today. And I hope you got your answers and it was great spending an hour with you. Okay. Take care. See you in three months.

Haakon Sandborg

Thanks very much. Bye-bye.

Bijan Mossavar-Rahmani

Bye.