Gulf Keystone's Kurdistan Victory

Plum oil acreage makes the smaller UK firm a perfect target

The Kurdistan - Iraq standoff is helping Kurdistan more as companies in Iraq seem to be struggling to increase production rates
The Kurdistan - Iraq standoff is helping Kurdistan more as companies in Iraq seem to be struggling to increase production rates

There is a lot of talk that the UK-based Gulf Keystone Petroleum Ltd (GKP) is ripe for a takeover, even more so now that it has won a case against Excalibur, which asked for a $1.6 billion stake in the company’s oilfields in Kurdistan.

Independent oil explorer, GKP despite large oil finds in the politically sensitive Kurdistan area has always had a legal shadow loom over the company’s credibility and share prices.

For months now, investors have been following the GKP case with particular interest, as it is the most significant company to make something of the Kurdistan energy landscape.

It wouldn’t be an exaggeration to call the UK company, a Kurdistan darling. Beginning of September, in a packed London courtroom, judge Christopher Clarke dismissed claims made by Excalibur Ventures that it was entitled to a 30 per cent share in the oil fields, bringing to close almost three years of legal wrangling.

Gulf Keystone’s chief executive Todd Kozel heard the verdict a relieved man and walked out to a crowd of supporters, described reports. Shares in the company, which had been temporarily suspended ahead of the ruling, soared as much as 26 per cent when trading resumed.

Why is Gulf Keystone so important a company to follow, one may ask.

Well, it’s the obvious and most prominent company to take over for a major exploration firm looking to gain a foothold in the Kurdistan region. The legal battle has proven to be a major obstacle for the company search for a potential suitor.

The company is on the verge of moving into a phase of significant production, with the capacity to produce up to 40,000 barrels of oil per day from Shaikan and up to 400,000 bpd in the coming years.

The company could well be a key contributor in meeting the Kurdistan regional government’s oil production targets of 1 million bpd in 2015 and 2 million bpd by 2019.

But obviously best-laid plans are not for the oil industry. Kurdistan, a semi-autonomous region of Iraq is locked in a dispute with Baghdad over oil exports and payments.

The region was once the domain of smaller firms such as Gulf Keystone but recently big oil companies such as Exxon Mobil, Total, Chevron and Gazprom, have all moved in.

The ongoing disagreement between the Federal Government of Iraq (IFG) and the Government of the Semi-Autonomous Kurdistan Region (KRG) over which authority has the right to enter into petroleum agreements and manage oil and gas in Kurdistan has been well documented.

The IFG maintains that the KRG has breached its constitutional obligation to act jointly with Baghdad in oil and gas matters by passing the Kurdistan Oil and Gas Law 2007 (“Kurdistan Oil & Gas Law”) and signing Production Sharing Agreements (PSAs).

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The KRG on the other hand maintains that it has not breached its constitutional obligations and instead claims autonomy under the Iraqi Constitution, approved by referendum in 2005 and implemented in 2006, to manage oil and gas in Kurdistan, on the basis that this power is omitted from those powers exclusively reserved for the IFG.

Clyde & Co’s partner George Booth says it is clear that only once an agreement between the IFG and the KRG has been reached, and federal oil and gas law is passed, will Iraq’s oil and gas industry be placed on a predictable legal footing.

However, this new oil and gas law has already been years in the making. In the meantime, investors entering Kurdistan do so not certain whether the contracts they acquire with the KRG will be recognised when the new federal legislation comes into force.

Also another major blow to Iraq is that IOCs are not producing oil at the rates they had hoped for. Jean-François Seznec of the National University of Singapore in a paper on Iraq and Kuridistan oil points out that ExxonMobil, for example, obtained the right to redevelop the West Qurna field in the south; it is now producing close to 500,000 bpd from it, on which it earns $1.9 per barrel.

While this is a fairly substantial profit, it is far from the two million bpd that ExxonMobil would need to return 30 to 35 per cent on its original investment—the usual requirement of most IOCs.

ExxonMobil has very publicly spoken of its dissatisfaction with the Iraqi bureaucracy and of its desire to sell its stake in the field.

Such problems have led many oil companies to seek alternatives in the Kurdish territories. The Kurds have some fairly small fields that are presently exploited by smaller IOCs and produce around 200,000 bpd. This oil must be exported through Turkey. The only pipeline currently available for Kurdish export is one that links the Kirkuk field through non-Kurdish territory to Turkey.

If the Kurds use this pipeline, the oil is sold by Iraq’s State Organization for the Marketing of Oil (SOMO). SOMO receives the payments and in turn pays the companies in the Kurdish territories for their expenses and profit share, as stated in their Kurdish profit sharing agreements. The Kurds then get the 17 per cent of SOMO’s oil revenues.

So there is much to be sorted in commercialising the oil which is explored and produced from Kurdistan, but for now the IOCs will be keen to lay hands on acreage that has enough barrels to recover; here is why the take over of a company like Gulf Keystone is useful. Once the land is secured, export terms can always be worked out.

In a statement post the judgement, Gulf Keystone said its priority now was to move from the London Stock Exchange’s Alternative Investment Market (AIM) and onto the main market by the end of 2013.

“We are very pleased to have achieved the best possible outcome from the point of view of the Company and our shareholders. We look forward to pursuing the company’s stated objectives for the future.” With a valuation of around two billion pounds after the verdict from the London Court, Gulf Keystone is one of the biggest companies on AIM.

In numbers:
- 40,000 bpd current production from shaikan field for gulf keystone
- 400,000 bpd is the expected production from shaikan feild
- With a valuation of around two billion pounds after the London Court verdict , Gulf Keystone is one of the biggest companies on AIM
- Two million bpd by 2019, kurdistan aims to reach this dream figure of oil production.


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Oil & Gas Middle East - September 2020

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