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Gulf Keystone expands massive Shaikan oil discovery with latest well

Gulf Keystone Petroleum (LON:GKP) shares climbed around 5 percent after it confirmed that the Shaikan-3 appraisal well had been completed in Northern Iraq.

Shaikan-3 in Kurdistan has been completed as a production well from the Jurassic reservoirs in the Sargelu formation – just like the nearby Shaikan-1 well.

Importantly the well is designed to test the shallow Cretaceous intervals, which could not be properly tested in Shaikan-1. 

To this end Shaikan-3 proved successful. The well defined the lower portion of these Cretaceous intervals - known as the Garagu resources – between 1,060 and 1,157 metres.

Gulf Keystone puts the Garagu oil in place volumes between 220 million and 2.2 billion barrels (P50 – P10), following two separate flow test on Shaikan-3, and based on the previously gathered data.

The ‘P range’ relates to the probability of the volumes estimated. So P50 represents a 50 percent probability that the actual volumes in the ground will equal or exceed the estimate, whereas a P10 estimate would have a 10 percent chance.

The news prompted a fairly modest rally on London’s AIM market, with shares adding around 8.5 pence to trade at 172 pence per share.

The fact that such a discovery, which GKP chief operating officer John Gerstenlauer described  as ‘massive by any standard’, prompts a mere 5 percent rise suggests the latest update had been widely anticipated.

The threat of litigation by former partner Excalibur Ventures has recently unsettled investors, though GKP is confident it will see off the challenge.

That said, the news from the ground has been uniformly upbeat. The initial Shaikan-1 well propelled Gulf Keystone to become one of the most talked about, and invested in, stocks on London’s AIM market. 

Shaikan-1 tested 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. 

Based on the results from the initial Shaikan well an independent report was compiled. It put Shaikan’s oil in place resources at around 1.9 billion barrels and saw upside to 7.2 billion (P90 - P10). 

However it could not properly test either the shallower Cretaceous or deep down to the Permian – at around 5,000 metres.

GKP recently began a comprehensive work programme to fill in these gaps. With Shaikan-3 testing the shallow reservoirs in the immediate vicinity of Shaikan-1, meanwhile work on the Shaikan-2 deep-appraisal well began in December 2010.

Shaikan-2 will take 6 months to drill to a depth of 5,000 metres.

Richard Nolan, equity analyst at Daniel Stewart, highlighted that GKP successfully achieved its goal with Shaikan-3.

“The P50 / P10 range provided today encompasses some earlier market estimates of near 500 million barrels.” 

“Considering the proximity between Shaikan-1 and Shaikan-3 compared to the lateral extent of the Cretaceous we view the fact that they encountered significant volumes as positive and are optimistic about the volume estimate range and its potential upside,” Nolan said in a note to clients.

Meanwhile Evolution Securities oil analyst David Farrell stressed that the Garagu resources represent an incremental addition to the Shaikan discovery – although he has a more conservative view on the level Garagu’s recoverable resource.

The analyst also noted that he would have liked more information, relating to detail on the flow test rates, oil viscosity or quality (NYSEMKT:API). 

“Our assumed P50 recoverable resource estimate of 66 million barrels for the Cretaceous Garagu formation is hardly transformational for the Shaikan story but is an incremental addition,” Farrell said. 

Lionel Therond, oil and gas analyst at Fox-Davies, described it as a positive result that adds up to the existing resources estimates for Shaikan-1. 

“A positive result that adds to the 4.2 billion barrel existing oil in place estimate based on the Shaikan-1 discovery well,” Therond said.

“However the P50 estimate of 220mmbbl is lower than our expectation of 600 million barrels of oil in place for the Cretaceous formation.”

He adds: “Obviously the upside is material and contingent on further appraisal drilling down the flank of the structure but conversely there is also a downside scenario towards the P10 estimate which has not been published by the company.”

The clear message that sticks out from analyst coverage is that the range of the P50-P10 estimate for Garagu is wide to say the least. Indeed GKP say as much in this morning’s statement. 

According to Gulf Keystone, the large spread between the P50 and P10 volumes relates to the uncertainty regarding the exact nature of the Cretaceous reservoirs down dip, on the flanks of the Shaikan structure.  

“If the Cretaceous is oil bearing near the flanks, then the P10 volumes become more likely and it is possible that the oil will also be less viscous and of higher API gravity,” the company said.

GKP, and its partners, will now formulate a development plan for the Garagu resources.