* Kurdish operation to restart immediately, with local sales
* Will not restart oil exports, no payment deal in place
* DNO shares rise more than 30 percent
(Adds details, shares, further analyst comment)
By Richard Solem
OSLO, Oct 6 (Reuters) - Norwegian oil company DNO International ASA is restarting operations in northern Iraq after settling a dispute with Kurdish authorities, it said on Tuesday, sending its shares up more than 30 percent.
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 the challenge companies 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 Sept. 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," analyst Carl Christian Bachke at brokerage Fondsfinans said.
Shares in DNO were up 31.2 percent at 5.00 Norwegian crowns by 1019 GMT, still well below their 6.66 level on Sept. 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 Plc, which has announced large discoveries in the region, were up 5.7 percent at 514 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.
The field's operators Sinopec and Turkey's Genel Energy were unavailable for comment.
One analyst, who declined to be named, said exports being held back could signal any deal on payment was further away than anticipated.
DNO said on Tuesday it would focus on local sales until a future mechanism for crude exports was in place -- a return to the situation before May, when Baghdad blocked oil exports from the region.
While this domestic market is growing it consumes only around 10,000 barrels per day.
Baghdad has long called illegal oil deals the KRG signed with DNO, Heritage and others but its decision in May to allow oil to flow from Kurdistan raised hopes of a revenue sharing deal.
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 maximize the short-term cashflows for DNO," the letter said. (Additional reporting by Joergen Frich and Terje Solsvik, with Tom Bergin in London; Editing by David Holmes)