The prospects for Kurdish oil were given a boost yesterday when DNO, a Norwegian explorer, said that a big oil company had offered $700 million (£351 million) for its licence in Kurdistan.

The indicative offer for the licence, which was rejected by DNO, includes its discovery at Tawke, in northeastern Iraq, in territory administered by the Kurdistan Regional Government (KRG), and represents almost half the value of DNO. It sent the Norwegian explorer’s shares up 12 per cent on the Oslo bourse.

DNO declined to name the interested purchaser, describing it as “a large international oil company”. Speculation yesterday centred on Statoil, the Norwegian oil multinational, which recently revealed plans to open an office in Erbil, the capital of the Kurdish region, to study exploration opportunities in the region.

A bid by a big Western oil group for a Kurdish oil licence would be the first significant foreign investment in Iraq’s oil industry. The threat of kidnappings and violence has kept foreign investors from the vast oil reserves in southern Iraq, while political risk has deterred oil majors from setting foot in the Kurdish region.

Oil industry experts also pointed to Indian or Chinese companies, which have been aggressive in their pursuit of oil assets, and they highlighted the significant risk for a Western oil major in making a Kurdish investment. “No oil major would invest in the Kurdish region because they know it will wreck their chances in southern Iraq,” the chief executive of one oil company with interests in the region said.

DNO’s activity in Kurdistan and its Tawke find have fuelled controversy in Iraq and created friction between the KRG and the national Government in Baghdad, which resented the issuing of oil exploration licences by the Kurdish administration.

The Norwegian explorer acquired its licence in 2004 and confirmed its discovery at Tawke in 2005, but development of the prospect has been dogged by quarrels between Erbil and Baghdad over ownership of mineral rights and agreement over a federal Iraqi petroleum law, which would create a legal regime for oil exploration. Development of Kurdistan’s oil prospects is believed to be a key plank in the KRG’s softly-softly strategy of creating an independent Kurdish state. The KRG has issued licences to a number of other companies, including Addax Petroleum, a Canadian explorer, which hopes to develop the Taq Taq field in collaboration with Genel Enerji, a Turkish oil business.

Agreement with Baghdad over the oil law is essential to enable oil exports to be made from the region. DNO has laid a pipeline to connect the Tawke oilfield with Iraq’s main northern export pipeline, which links the Kirkuk oilfield to the Turkish port of Ceyhan. The final link to the export route awaits the passage of the oil law in Baghdad, which DNO hopes will occur in September.

The northern export route has been shut since the American-led invasion of Iraq because of bombings of the pipeline by insurgents. Closure of the northern pipeline has hit efforts to raise Iraqi oil exports above their present 1.7 million barrels per day (bpd) to prewar levels as high as 2.5 million bpd.

The Iraqi Government is trying to rebuild the pipeline, but the explorers in Kurdistan hope that a link to the export route near the Turkish border will secure their exports and avoid the violence taking place in the Kirkuk region. Hussain al-Shahristani, the Iraqi Oil Minister, expressed confidence this week that the Iraqi parliament would pass the oil law soon.

However, the minister hinted that resolution of the dispute between Baghdad and Erbil was still not assured. He said that the new law would review oil and gas deals struck by Saddam Hussein and the KRG to “guarantee total national control and the highest return for Iraq” and added: “Any contract that contradicts this has to be redrawn.”

The KRG has accepted the principle that all oil revenues should be divided between the Iraqi regions, but insists that its region must be compensated for oppression of it during the Saddam regime, when it was excluded from participating in the oil wealth.

DNO yesterday revealed further progress at its Tawke prospect, with the appraisal of a further well, drilling deeper into the reservoir. It said that a test had achieved flow rates of 8,000 bpd from its Tawke 8 well.

Takeover speculation has swirled over DNO before. In January, its shares rose 16 per cent when a major shareholder said that he had received an offer for his 5 per cent stake.

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts