Dubai-linked Dragon Oil to drill in Tunisia

Dragon Oil, the producer majority-owned by Dubai, has chosen Tunisia as the stage for its first expansion outside Turkmenistan.

Dragon Oil is to pay 75 per cent of drilling costs- up to $26.6 million - in exchange for a 55 per cent stake in a new joint venture company with Australia's Cooper Energy and Jacka resources. CourtesShow more

Dragon Oil, a petroleum producer majority-owned by Dubai, has bought into an exploration block in the country whose ongoing revolution sparked the Arab Spring.

The agreement to invest up to US$26.6 million (Dh97.6m) in an offshore field in Tunisia is the company's first step outside Turkmenistan after lacklustre drilling in Yemen.

"Of course they could have found [assets] in a safer region, but that would have come at the much higher price," said Pavel Sorokin, an analyst at Alfa Bank in Moscow. "There are political risks in Tunisia, but the political risks are associated with any country in the region."

Shares of Dragon Oil listed in Dublin jumped 1.8 per cent to close at €5.60 on Monday, the day of the announcement.

The Tunisian investment could offer a potential supply source for Emirates National Oil Company (Enoc), which owns 51 per cent of Dragon.

The Dubai Government-owned producer and retailer, which buys oil at market prices but must sell it at a lower rate mandated by the federal Government, has struggled this year to supply its petrol stations in Sharjah and the Northern Emirates. The Sharjah Government ordered Enoc's stations there to shut down after they failed to restore the flow of petrol.

Under the Tunisia agreement, Dragon Oil is to pay 75 per cent of drilling costs - up to $26.6m - in exchange for a 55 per cent stake in a new joint venture company with Australia's Cooper Energy and Jacka Resources. The Tunisian government has yet to approve the farming-out of the exploration block, which covers 4,616 square kilometres of seas.

"The selection of projects in which they can participate and which will not come at a huge price is quite limited globally," said Mr Sorokin. "They're trying to maximise the potential return without making huge upfront payments."

If the joint venture strikes oil, Dragon would take over production.

"We believe our experience offshore [in] Turkmenistan with complex and challenging reservoirs will be useful" in Tunisia, said Abdul Jaleel Al Khalifa, the chief executive of Dragon Oil.

Dragon Oil's investment comes less than a year after a vegetable seller in Tunisia set himself on fire, sparking a revolution that unseated Zine El Abidine Ben Ali from the presidency and inspired uprisings in nations including Libya and Egypt. Fears of supply disruptions stemming from the regional unrest helped push oil prices up as high as $126 a barrel this year.

In Tunisia, as in other post-revolution countries, oil officials have been quick to reassure their foreign partners that production-sharing contracts will remain unchanged despite the changes of government. "The authorities are aware of the need for investments to kick-start the economy again and are not going to make any radical moves on energy contracts," said Jean Baptiste Gallopin, the regional analyst for the risk assessment company Control Risks.

But the prospect of further change to the government could change the landscape for foreign companies such as Dragon Oil. Elections for an assembly to craft a new constitution in Tunisia are scheduled for October 23.

Anti-corruption sentiment has also made Tunisian officials more careful in compensating foreign operators for the oil and gas they produce, leading to some delays.

"There's been a widespread climate of suspicion and uneasiness among the Tunisian bureaucrats," Mr Gallopin said.

"The officials at the high level are wary of being accused of illegal dealings, and as a result they are being very cautious in their dealings with private companies in general."