Gulf Keystone Petroleum (AIM: GKP) confirmed that it has completed its ‘re-organisation of interests’ in Kurdistan - which see the company take full control of its operating subsidiary. Amendments to its original Production Sharing Contracts (NASDAQ:PSC) have now been approved by the Kurdistan Regional Government (NYSE:KRG) and all the other parties in each of the respective PSCs.
Back in March 2010, Gulf Keystone announced its plans to assume 100% control of its GKPI operating subsidiary, following a material default by the company’s investment partner in Kurdistan, ETAMIC. The amendments to the PSCs reflect this structural change of ownership. As a result of the deal, Gulf Keystone effectively doubled its working interests throughout its Kurdistan operations.
"We regard this as an excellent outcome for our shareholders who have secured a substantial uplift in exposure to outstanding resources and highly prospective pre-drill acreage,” Gulf Keystone chief executive Todd Kozel commented.
“Additionally the company enjoys a much simplified ownership structure for its assets and full alignment with its regional partner”. The company’s current interests (subject to certain back-in rights and profit sharing agreements) are - 75% of the Sheikan Oilfield, 80% of the Sheikan Adi, 40% of Ber Bahr and 20% in Akri Bijeel.
Under the terms of the deal, the company must spend US$52m, which is being funded from the proceeds of the recently completed US$165m placing. Additionally, the KRG is also entitled to an Additional Infrastructure Support Payment (ETAMIC’s overdue obligation).
The company noted that the payment date, in relation to the infrastructure payments for the Shaikan and Akri-Bijeel Blocks, have been revised from the original agreement, and they will be fully payable on 15 August 2010. Also the other parties on the Shaikan and Akri-Bijeel PSCs have agreed to extend the timeframe for Gulf Keystone to nominate a ‘Third Party Participant’ until 20 June 2011.
Regarding Ber Bahr, the company noted that the existing US$10m ‘Capacity Building Payment’ will now be due upon the declaration of a commercial discovery.
The amended PSCs now approved and with its greater stake in its key projects, CEO Kozel said: “[We] look forward to continuing success with our operations in Kurdistan together with the Kurdistan Regional Government as a key stakeholder in our projects."
The amended PSCs became effective on 1 August 2010.
In its daily Oil & Gas roundup, London-based stockbroker Evolution Securities said the news was a bonus, as the broker had not expected the KRG approval till later this month. Importantly, the stockbroker highlighted that the approval, and the formal exit of Gulf Keystone’s former partner, removes “a layer of doubt” for investors.
“It is fair to say the market was sceptical of ETAMIC's interests in Gulf Keystone's Kurdistan licenses and confirmation that GKP has assumed all of ETAMIC's interests (and therefore doubled its own) should remove a layer of uncertainty from the story,” Evolution stated.
Gulf Keystone has become one of the AIM markets more popular oil and gas explorers over the past 12 months, with investor interest growing progressively since it initially discovered oil on the Skaikan Block in August 2009.
The company's outstanding performance is underlined by GKP’s share price which stood at just 13p per share before the Shaikan discovery. Since the discovery was reported on 6 August 2009 the share price has exploded, gaining over 700% in twelve months, today the GKP shares are trading at around 106p .
GKP shares hit a 52-week high of 130p per share in October 2009.
The major Shaikan-1 discovery was the company’s first exploration well in Kurdistan, Iraq, and it proved to be the key operational highlight in 2009. The company subsequently carried out detailed testing and appraisal work, discovering several oil bearing formations in the process.
Shaikan-1 has an independently assessed resource in the range of 1.9bn barrels to 7.4bn barrels, with further upside potential identified. To date, appraisal of the Shaikhan discovery has encountered this significant resource across several formations - the Cretaceous Sarmord, Jurassic Barsarin, Sargelu, Alan, Mus, Butmah, Baluti and Triasic Kurre Chine.
Last week, almost a year to the day from the initial discovery, Gulf Keystone said it has now demonstrated aggregate capacity of more than 20,000bopd (barrels of oil per day) “from just a fraction” of the Shaikan discovery in Kurdistan.
The latest testing on the Shaikan-1 well shows that the Butmah section of the Jurassic interval is in-line with previous estimates. Butmah was re-tested with final production rates of 4,650bopd, of 17.68 degrees API oil and a gas-to-oil ratio of 34 standard cubic feet per barrel of oil.
Next the company will re-test the Mus section of the Jurassic, and subsequently the Sargelu section - which has already demonstrated natural flow rates of almost 7,500bopd. Sargelu will also be configured for long-term production test, following the delivery of production facility equipment earlier this month.
Production testing will last for at least 18 to 24 months and accumulate valuable data related to reservoir characteristics and oil recovery factors. The testing volumes of 8,000 to 10,000 bopd are expected to generate Gulf Keystone’s first oil production revenue in Kurdistan.
Elsewhere in Kurdistan, the company recently began drilling its first exploration well on the Sheikh Adi block immediately to the West of the Shaikan block.
The Sheikh Adi structure has an estimated resource potential in excess of one billion barrels.
The Sheikh Adi-1 well is designed to drill through the Cretaceous, Jurassic and the Triassic age rocks, to a planned total depth of 3,850 meters and it will take six months to drill.
Disclosure: The author holds no positions in the company