Gulf Keystone Petroleum
|Public limited company|
|Traded as||LSE: GKP|
|Industry||Oil and gas industry|
Number of locations
|Kurdistan Region of Iraq|
|Jón Ferrier (CEO)|
|Services||Oil exploration and production|
Number of employees
Gulf Keystone Petroleum Limited (LSE: GKP, OTCQX: GFKSY) is an oil and gas exploration and production company operating in the Kurdistan region of Iraq. It is listed on the main market of the London Stock Exchange. The company is registered in Bermuda with branch offices in Arbil, Kurdistan, Algiers, Algeria, and London, UK. Through its subsidiary, Gulf Keystone Petroleum International, the company owns production sharing contracts for four exploration blocks in Iraqi Kurdistan.
Shaikan oil field
Shaikan is an oilfield in Northern Iraq, in which Gulf Keystone Petroleum currently holds 75% of a production sharing agreement with the Kurdish Regional Government. It is notably one of the largest Super Giant oilfields discovered in the last 50 years.
Shaikan was declared a commercial discovery on August 1, 2012 following a five-well appraisal program. Initially independent estimates place the gross oil-in-place (OIP) volume at 13.7 billion barrels (P50) potentially making it one of the largest oilfields discovered in Iraqi Kurdistan.
The oilfield covers an area of some 130 to 150 square kilometres (50 to 58 sq mi), and comprises a series of limestone reservoirs stacked upon each other. These reservoirs encompass a very long period of geological time, from the Cretaceous which ended some 65 million years ago to the Triassic, which began some 248 million years ago. Gulf Keystone believe that hydrocarbons may also exist in the more ancient Permian formation.
An audit of the Shaikan oilfield published in March 2014 appeared to show that dramatically less oil could be recovered than had been previously advised and expected. The audit implied a recovery of only 12% of the oil in the Shaikan reservoir and indicated that Shaikan contained just 9.215 billion barrels (1.4651×109 m3) of which just 545 million barrels (86.6×106 m3) could hope to be recovered net to Gulf Keystone This appeared to be significantly less than the 13.7 billion barrels (2.18×109 m3) previously claimed by Gulf Keystone Petroleum to be in place in the field. This apparently low recovery level was partly a presentation issue, because elsewhere the audit expressed the opinion that the recovery could be some 20%. As a direct consequence of the perceived negative audit the share price of Gulf Keystone Petroleum crashed by 40% in the days following the publication of this official audit. This audit was reviewed between June and September 2015 in order to take account of additional well and substantial production data. This resulted in the Proved and Probable Reserves increasing by 114%, from 299 million to 639 million barrels. The Proved, Probable and Possible Reserves rose by 152%, from 389 million to 982 million barrels.
The worldwide historic average recovery rate has been stated at the Geological Society in London to be some 24%, though many good-quality reservoirs greatly exceed that. Typical recovery rates for Type 2 and Type 4 fractured carbonate reservoirs have been quoted by as 26% and 34% respectively and these figures are consistent with earlier estimates given by Gulf Keystone for Shaikan. A conference held by the Society of Petroleum Engineers in Istanbul on 23–26 February 2015 had the title "How Can We Double Carbonate Reservoir Recovery?" and addressed the issue of potentially lifting the current global average recovery rate for carbonate reservoirs of 30% to a much higher level of 60% or more (source: Society of Petroleum Engineers). Modern developments with Enhanced Oil Recovery (EOR), which feature strongly in the plans of companies such as Chevron, can achieve high recoveries of the In Place oil volume. The initial stages of production at Shaikan are to be natural reservoir pressure. Longer term, output from the wells will be maintained via the use of Electric Submersible Pumps, the re-injection of gas into the reservoir to help maintain pressure and reduce oil visocity, and potentially other technological approaches. Gulf Keystone has previously said that Shaikan should produce oil for 80 to 100 years.
The former Chief Executive Officer of Gulf Keystone explained to the market that the apparent reduction in the In Place oil at Shaikan was misleading. This was because the 13.7 billion barrels total included oil in the Cretaceous, Jurassic and Triassic reservoirs, whereas the headline figure in the 2014 audit covered only the Jurassic. The current phase of the development program is restricted to the Jurassic, which contains an enormous oil column of over 1000 meters in height. The auditors decided in 2014, because the current emphasis is on the Jurassic, to exclude the Cretaceous and Triassic from their Reserves assessment.
Earlier presentations given by Gulf Keystone gave higher recoverable volumes than the 2014 and 2015 ERC Equipoise audit report. In one talk John Stafford gave to the Geological Society in 2013 the following details were reportedly revealed:
Productivity Index 250 stbbl/d/psi; Permeability 12,000 mD; Radius of Investigation 317,000 ft; Time 2,188 hours; Connected Volume 13 billion bbl
Furthermore, the auditors' assessment use relatively low porosity figures for the highly fractured carbonate reservoirs at Shaikan. It has been difficult for some shareholders to reconcile the apparent low fracture porosity figures suggested in the audits with the fact that the drilling on Shaikan has been notoriously difficult because of huge losses of drilling mud which have probably been lost into the fracture network. This is also in apparent contrast to reports from over 50 yrs earlier which indicated that the huge Kirkuk oil field in Kurdistan also has significant fracturing in its reservoirs and other apparent similarities between Kirkuk and Shaikan (Daniel, E. J., 1954, Fractured Reservoirs in the Middle East, AAPG Bull., v. 38, p. 774-815.) Daniels even refers to one well where a 14 ft timber when lowered into it was returned to surface after undergoing a 180 degree rotation! The former Chief Executive Officer of Gulf Keystone referred shortly before Christmas 2014 to "the drill bit dropping three metres at Shaikan" during the drilling. The likelihood of significant fracturing and potentially cavernous porosity at Shaikan appears to be real. The former Chief Executive Officer has also said that Shaikan has "one hell of a fracture population".
In April 2014 the American Association of Petroleum Geologists were told in Houston, Texas by Gulf Keystone and two of its external fracture consultants that:
"Oil-bearing reservoirs of the Shaikan Anticline in northern Iraq, with billions of barrels of oil in place, consist of highly fractured Mesozoic carbonates. Extensive field and core work documents an interconnected network of fractures dominated by closely spaced, bed-normal extension fractures, supplemented by strike-slip conjugate shear fractures and local low-angle thrust planes. Younger fracturing consists of flexural-slip bed-parallel shearing and shear reactivations of the earlier bed-normal fractures. Characteristics of these natural fractures vary by lithology, diagenesis, and structural position, with fracture heights being greater in the more homogeneous formations and bed-parallel shear being best developed on the steep forelimb of the anticline. Fractures in certain formations have been subjected to significant dissolution, with open, millimeter- to centimeter-scale slots developed along what were originally calcite-mineralized fractures. Most fractures in core, even the dissolution slots, are strata-bound, but vertical inter connectivity is enhanced by faults. Fracture patterns and bed-normal stylolites provide information on the structural development of the Shaikan Anticline, recording a pre-fold maximum compressive stress that was parallel to bedding and aligned in the NE-SW direction, evolving into the present-day, NNE-SSW oriented stress system." [AAPG Datapages/Search and Discovery Article #90189 © 2014 AAPG Annual Convention and Exhibition, Houston, Texas, USA, April 6–9, 2014].
This evidence suggests that the Shaikan discovery is very substantial, and its significance is accentuated by the low success rate of wildcat exploration worldwide, which has been on a five to six-year downtrend. The Chief Financial Officer of Gulf Keystone indicated in March 2015 that the likely recovery rate from Shaikan was likely to be significantly above the 12% level implied by the auditors in 2014. The current Chief Executive Officer consistently describes Shaikan as World-Class.
The first phase of the development of Shaikan - "Phase Zero" - had a target of producing 40,000 barrels of Shaikan crude oil per day. This target was successfully met by the end of 2014. In 2015, the oil was being exported under agreements reached between the Kurdistan Regional Government and the National Government of Iraq. The export was initially using long-distance road tankers to the Turkish coast, but during the summer of 2015 the road tankers began being re-routed along a much shorter distance to the export pipeline at Fishkabur, where the Shaikan crude is injected into the pipeline via a mixing plant operated by DNO. A more efficient arrangement involving the installation of a pipeline connection directly into the Shaikan field is anticipated. On 11 May 2015 an output of 41,345 barrels per day was commemorated with a group photograph in Kurdistan (source: Gulf Keystone Petroleum). In August 2015 the 45,000 barrels per day level was reached.
Further phases, which will be implemented in the coming years, have previously been said by Gulf Keystone to target a longer-term production level of 400,000 to 500,000 barrels of Shaikan crude oil per day. Such a level would put Shaikan into an elite group of international oil fields. The company is not currently stating its long-term expectations, but in September 2015 it said that its next benchmark objective was 110,000 barrels of Shaikan crude oil per day.
The achievement of these very high output levels will involve drilling more production wells over the coming years, the construction of additional surface facilities to receive the oil from the wells, remove the associated gas and prepare the oil for export, and the connection into the export pipeline.
Whilst this will represent a substantial project, the total capital cost will be relatively modest by international standards. This is because of the high outputs anticipated per well, the relatively shallow depth of the reservoirs compared to modern deep drilling, and the readily accessible onshore operations which do not suffer from severe winters which can otherwise hamper production operations. The lifting costs per barrel of Shaikan crude are already among the lowest in the world. In September 2015 the company announced that new understandings of how the Shaikan reservoir was behaving would further reduce future capital expenditure levels because the wells would individually produce more oil and drain a greater proportion of the reservoir than was previously anticipated, thereby reducing the number of additional wells required.
Gulf Keystone also holds substantial interests in the Sheikh Adi, Ber Bahr and Akri-Bijeel blocks, which are adjacent to the Shaikan block. Four separate discoveries have been made in these blocks, in addition to the discovery at Shaikan. Each of these discoveries had been described by Gulf as a "company maker in its own right".
The Sheikh Adi discovery is particularly significant because Gulf has an 80% interest in it. A Field Development Plan for the discovery is due to be put to the Kurdistan Regional Government during the fourth quarter of 2015, and the discovery has been described by Gulf as a significant side-lobe to the Shaikan oilfield. The oil in Sheikh Adi is intended to be processed using surface facilities within the Shaikan block.
The Akri-Bijeel asset is considered non-core by Gulf Keystone. It is on production but the operator MOL revealed during 2015 that the output level was modest and well below previous indications of what the asset would be achieving at that stage. Gulf Keystone's stake in the asset has been formally described as "for sale" for a considerable period. In March 2014 the Akri-Bijeel oilfield had been said by its operator Kalegran (part of the large Hungarian company MOL) to be producing at an initial 3,500 barrels per day (560 m3/d).
Take over speculation and litigation
Gulf Keystone's initial operations in Algeria were rather less successful than had been hoped, and the share price weakened as a consequence. RAK Petroleum PCL announced an agreement in April 2007 to acquire Gulf Keystone Petroleum, but the transaction was not completed. The company continued as an independent and altered its strategy, working with the American company Texas Keystone International to complete the acquisition of exploration acreage in Kurdistan. A small American company called Excalibur Ventures had initially drawn the attention of Texas Keystone to the possibility of acquiring exploration acreage in Kurdistan. This initially included a majority position in the Shaikan block, for which Gulf Keystone would be the operator, and a minority position in the Akri-Bijeel block, for which MOL would be the operator (op. cit). In the summer of 2009 the Shaikan wildcat well was a success, and it was realized that the volume of oil in Shaikan was much greater than had been expected from the pre-drill assessments made by the company's geophysicists. The share price strengthened considerably as a consequence, moving beyond its previous high levels. As time passed and more wells were drilled, the volume of oil judged to be in Shaikan continued to rise.
In late 2011, Exxon Mobil announced it had signed exploration contracts for six blocks in the Kurdistan Region of Iraq, including one block adjacent to the Shaikan block. An article appeared in The Independent on Sunday on 18 December 2011 suggesting that a number of major oil companies were potentially interested in Gulf Keystone's discovery. A further article in that publication on 19 February 2012 stated that ExxonMobil had looked closely at Shaikan. It said that "the one-time minnow's growth has been so extraordinary in the past two months that [it] would comfortably qualify for the FTSE 100 blue chip club". Gulf Keystone's executive chairman said in the article: We're not that little kid in sort pants anymore..." and that the £3.5 billion market capitalization was due to the "world waking up" to the vast oil reserves the company possessed. He also commented that he "hoped that small private investors...some of whom have risked their life-savings on GKP, would not be squeezed out by the big city firms".
Speculation about interest by larger oil companies in Gulf Keystone's assets has raged for several years on internet bulletin boards and in the media. The company itself has also referred on various occasions to such possibilities. The company issued a news release on 19 December 2011 explaining that ExxonMobil had not made an offer for the company, though the Independent on Sunday had not in fact made such a claim. A large team of executives from Gulf and its advisers and lawyers went to China in early 2012 in connection with undisclosed commercial matters. After the share price reached a peak in late February 2012, the absence of any announcement by Gulf Keystone about corporate activity reduced the level of market expectation regarding a possible takeover bid, and the share price consequently eased back. At that same time, the American company Excalibur Ventures secured third-party litigation funding for a high-profile trial in the Commercial Court in London (which Excalibur would subsequently lose) for around 30% of Gulf Keystone's key assets in Kurdistan, to which they claimed they were entitled because of their introduction of Texas Keystone to the opportunities which existed in Kurdistan. This impending trial acted as a further dampening effect upon investor sentiment. It was not until December 2013 that the Excalibur claim was fully dismissed by Lord Justice Christopher Clarke in a Judgement which was highly critical of Excalibur and also of the manner in which the "gargantuan in scale" litigation had been conducted against both Gulf Keystone and Texas Keystone.
Subsequent to removing the threat posed by Excalibur and moving toward the achievement of the "Phase Zero" production level of 40,000 barrels per day of production, disruption in the region caused by ISIS and the difficulties experienced by the Kurdistan authorities in paying fully for the oil being exported by three Kurdistan operators including Genel as well as Gulf Keystone continued to adversely affect market sentiment.
On 1 April 2015 the chairman of Gulf Keystone, who had left the company the previous day, ignited fresh speculation about corporate activity involving Gulf Keystone when he revealed that the company was involved in commercial talks with other oil companies. Four oil companies were said in August 2015 to be assessing the company's assets in the context of possible corporate action.
- "Declaration of Commerciality". Retrieved 2012-08-27.
- "OIP Upgrade". Retrieved 2012-08-27.
- paper by Jack Allen, "Controls on Reservoir Performance"
- "John Stafford". Retrieved 2013-09-17.
- "Mud losses during drilling". Retrieved 2015-04-25.
- Gulf Keystone Petroleum
- Gulf Keystone Petroleum, including at the 4 July 2013 Investor Day
- news release by MOL
- London Stock Exchange
- Financial Times, Lord Justice Christopher Clarke
- Lord Justice Christopher Clarke an Appeal Court Judge in London, also Gulf Keystone Petroleum
- London Stock Exchange, Gulf Keystone Petroleum, Lord Justice Christopher Clarke
- Kurdistan Regional Government
- The Independent on Sunday
- Interactive Investor, LSE, ADVFN and various media commentators
- Harry Matovu QC in evidence given in the Commercial Court in London
- Lord Justice Christopher Clarke, Gulf Keystone Petroleum, Memery Crystal, Clifford Chance, Excalibur Ventures
- Lord Justice Christopher Clarke, Gulf Keystone Petroleum, Memery Crystal
- Kurdistan Regional Government, other Governments and international media
- Gulf Keystone Petroleum, Genel, Kurdistan Regional Government
- Reuters, "Gulf Keystone ex-chairman says he was forced out, tried to lure Exxon", Wednesday April 1, 2015 4:11 BST