Gulf Keystone’s Shaikan oil field in Kurdistan has the very real potential of being a “company maker”.
There is, however, an even greater prize if Shaikan and the adjacent projects of Sheikh Adi, Akri Bijeel and Ber Bahr turn out to be part of the same oil body.
Then GKP would really have something to shout about - a find on the scale of the Kirkuk to the south, which is estimated to have 60 billion barrels of oil in place, 20 billion of them recoverable.
The company has a significant stake in each of the projects mentioned.
But let’s back up a bit. Tests so far have mainly concentrated on Shaikan and just one well there – the imaginatively named Shaikan-1.
What was uncovered there was enough to give GKP and its executives the sense they are onto something really quite big.
The company drilled and tested at five levels from 1,450 metres through to 2,850 metres with a combined rate of more than 20,000 of oil barrels a day.
But it had to stop drilling at the lowest levels because it encountered a very high pressure zone that was above the tolerance of the well design.
However the company now knows it can produce from Shaikan-1, which it will do during a period of extended testing. It has facilities nearby to handle the crude, which will be sold into the local market.
Analysts suggest Gulf Keystone will sell it for US$30 a barrel, with a “netback of about US$10”.
“We will sell that oil to the local market to a refiner on a tripartite basis,” chief financial officer Ewen Ainsworth told Proactive Investors.
An independent report was compiled on this initial discovery by Dynamic Global Advisors, which assessed the oil in place resources of the order of 1.9 billion barrels, up to 7.2 billion “on a p90 to p10 range”.
“They also detailed there was the case of 13 billion barrels of oil in place – though there is a higher level of uncertainty to that,” says Ainsworth.
“However there were a lot of deeper levels we weren’t able to test. Dynamic Global Advisors view is that these additional deeper zones add another one to five billion barrels.
“All of those numbers do not include anything for gas – which is potentially big.
“The resource potential is really quite enormous.
“As we drill more wells and gain more information we can confirm the numbers with the potential to expand beyond the 1.9 to 7.2 billion barrels of oil in place range.
“As a minimum we expect to get a couple of billion barrels of oil in place out of this. What we are now looking for is the upside.”
In all of this the water level will be key to just how much oil is in place at Shaikan and across all the other projects.
So far the group is yet to encounter water. The analysis from an old well at Jebel Kand and drilling at Akri Bijeel and Shaikan suggest the oil-water contact zone is at around 2,230 metres.
“If this was the case this increases the potential for all the structures, Shaikan, Sheikh Adi, Akri Bijeel and also Ber Behr to be full of oil,” says Ainsworth.
“Then we get back to the Kirkuk case with 60 billion barrels of oil in place.”
For GKP, it is all systems go. Sheikh Adi is currently drilling and Akri-Bijeel has discovered and also tested oil. Shaikan-2 is spudding soon, while Shaikan-3 will be drilled just 100 yards away from the first hole, but to a much shallower level of around 1,200 metres.
This is designed to test the Sarmord and Garagu formations that could not be tested in Shaikan-1, and if successful will show that GKP can produce from two different levels.
“Shaikan two and four will go all the way to the Permian to test the high pressure zone we encountered at Shaikan-1,” Ainsworth said.
“If we were to get a discovery it would be the first time hydrocarbons have been found in the Permian.
“To appraise Shaikan it will take in the region of six to seven wells. That will take us to the end 2011 and possibly into early 2012.”
A stand-off between Baghdad and the Kurdistan Regional Government makes oil exports impossible at the moment, though it has actually been a help rather than a hindrance to GKP.
The tension has kept the risk-averse super-majors out of the region, allowing Gulf Keystone and its mid-tier partners MOL of Hungary and Genel of Turkey time to prove up their assets.
Longer-term there are obvious downsides if the company is unable to pump its oil into lucrative export markets, where it will receive a far higher price than it would locally.
“If that dispute didn’t exist we wouldn’t have been able to get access to this sort of opportunity. The Shells and BPs would have come in and taken it all,” Ainsworth says.
“This is an opportunity to create an awful lot of value which otherwise wouldn’t have been.
“That there has is no agreement between the KRG and Baghdad means we can continue to appraise.
“As the size of our reserves grows, we will need to start building the skills and resource base of a much larger company.
“At the same time the larger companies continue to struggle to replace reserves. Buying something with big reserves – and onshore would make sense.”
Disclosure: no position