Norwegian oil company DNO International is restarting operations in northern Iraq after settling a dispute with Kurdish authorities, it said, sending its shares soaring.

However, DNO said it would no longer export oil from the Kurdish region after an agreement with Baghdad on a payment mechanism failed to materialise, highlighting challenges firms operating in Kurdistan face in getting paid for their oil.

DNO said the Kurdish Regional Government (KRG) had reinstated DNO's rights to production-sharing agreements with immediate effect after lifting a suspension that had been in place since September 21.

'This is one step forward, but also a step back since they won't be exporting oil until there is a payment mechanism in place,' Carl Christian Bachke at brokerage Fondsfinans said.

Shares in DNO soared to close at 5.2 Norwegian crowns ($0.91), still well below their 6.66 level on September 21, the day before a suspension because of the KRG dispute.

Most of DNO's value is tied up in its assets in the semi-autonomous Kurdish region, so the potential permanent loss of its licences, threatened by the KRG, spooked investors.

'The issue had raised the perceived political risk in the region and this had weighed on the share prices of all the companies involved in the region,' Peter Hitchens, oil analyst at Panmure Gordon, said.

Shares in Heritage Oil, which has announced large discoveries in the region, closed up at 512 pence.

The DNO dispute has however dented hopes that Kurdistan, which the KRG says has reserves of at least 40 billion barrels, will become a major oil producer and help Iraq meet its plans to sharply boost output in coming years.

Further away

It was unclear whether Taq Taq, the other main producing oil field in Kurdistan, was still sending crude into the Iraqi pipeline system.

Kurdish and Iraqi officials were unavailable for comment, as were operators Sinopec and Turkey's Genel Energy.

One analyst, who declined to be named, said a halt in exports may mean a payment deal was further away than expected.

DNO said on Tuesday it would focus on local sales until a mechanism for crude exports was in place -- a return to the situation before May, when Baghdad blocked oil exports from the Kurdish region.

While this domestic market is growing it consumes only around 10,000 barrels per day. In a September 5 letter to the KRG, DNO said it had delivered up to 50,000 bpd for export prior to the halt and that it could supply up to 30,000 bpd locally.

Baghdad has long called oil deals the KRG signed with DNO, Heritage and others illegal, but its decision in May to allow oil exports from Kurdistan raised hopes of a compromise.

However, despite DNO and Heritage repeatedly predicting imminent receipt of payments, they have not materialised.

John Manzoni, CEO of Talisman Energy, a Canadian company operating in the region, said last month it could take years for Baghdad and the KRG to agree a payment mechanism.

The KRG originally suspended DNO's operations for up to six weeks and said it might kick DNO out for good after details of Kurdish transactions in DNO shares were released by the Oslo Stock Exchange (OSE).

An Oct. 5 letter from the KRG's Minister of Natural Resources Ashti Hawrami to the directors of DNO, which was attached to DNO's statement on Tuesday, said the KRG had decided a suspension was no longer warranted.

'We are still working on mechanisms for guaranteed payments, however for now we agree with your request that the focus should be on increasing the supply of oil for local consumption ... and also to maximise the short-term cashflows for DNO,' the letter said.

In a statement posted on the KRG website, outgoing Prime Minister Nechirvan Barzani said the Kurdish parliament would form a committee to look into the matter.

'The reason ... is very simple: I have no doubt in my mind about the Minister's actions,' he said, referring to Hawrami.

Barzani also said that the OSE had been informed on November 3 last year that it was the KRG who had bought the shares, blaming the OSE for failing to disclose the information. – Reuters