Dana Gas has terminated its contract with Enerflex Ltd. to expand the Khor Mor gas field in Iraq’s Kurdistan Region, citing ongoing performance issues that have led to significant delays in the $806 million KM250 project. The project is critical to increasing gas production by 250 million standard cubic feet per day (MMSCF/day) to meet the energy needs of the entire region.

In a statement released on Tuesday, Dana Gas said: “The ongoing impact of these performance issues has significantly impaired Enerflex’s ability to meet its contractual obligations, resulting in unacceptable delays and hindering the progress and timely completion of the Khor Mor Gas Expansion Project.”

Enerflex, a global energy infrastructure provider, has vehemently contested the termination, blaming the delays not on performance issues but on serious security concerns following a drone attack in April 2024. The company claims that attack, which killed four foreign workers near its Khor Mor site, forced it to cease operations and withdraw its staff, a move first reported by The new Arab in May.

Local power companies reported that the disruption caused by the drone attack resulted in a loss of 2,500 megawatts of electricity, underscoring how vulnerable the region’s energy supply is to security threats.

Iraqi security forces have launched an investigation into the attack and promised to bring those responsible to justice.

Meanwhile, the Kurdistan Regional Government (KRG) is also conducting its own investigation. A Kurdish official, who spoke on condition of anonymity, accused armed groups linked to the Iraqi Popular Mobilization Forces (PMF) of being involved in the attack.

Enerflex claims the suspension was a necessary response to the dangerous security situation. “The project site remains unsafe,” the company argued, citing assessments by security experts that supported its decision to declare “force majeure.” Enerflex insists the delays were beyond its control and directly related to the unstable security situation in the region.

A source closely connected to the industry spoke to TNA Speaking on condition of anonymity, Enerflex said on Thursday that while 75% of the KM250 project is complete, Enerflex has not yet resumed operations. The source suggested that pressure from Iran-backed Iraqi militias, who have reportedly threatened further attacks, could influence the company’s decision to delay the resumption of work.

The financial impact of this dispute is significant. Enerflex reported that the Khor Mor project was 85% complete as of June 30, 2024, with approximately $160 million of net revenue unbilled. The project represents approximately 6% of Enerflex’s Engineered Systems backlog. The company has also issued a $31 million letter of credit to support its contractual obligations, which it now considers potentially at risk due to the contract dispute.

Dana Gas and its partner Crescent Petroleum, through their joint venture Pearl Petroleum, have played a central role in developing the Khor Mor and Chemchemal gas fields, which supply over 80% of Iraq’s Kurdistan Region’s electricity needs. The KM250 expansion was originally scheduled to deliver its first gas in April 2024, but the ongoing dispute has cast doubt on that timeline.

Both companies are now preparing for possible legal action. Dana Gas is asserting its right to terminate the contract to ensure the timely completion of the project, while Enerflex is defending its position and contractual rights, arguing that the termination was unjustified given the extraordinary safety issues they faced.

The outcome of this dispute could have far-reaching consequences for energy projects in the Iraqi Kurdistan region, where security problems often complicate operations.