Gulf Keystone still awaiting payment from Kurdistan government

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GULF KEYSTONE PETROLEUM LTD (GKP), which counts “Sugar King” Robert Kuok and some 100 Malaysian investors as shareholders, appears confident that it will receive the remaining 85% of oil production payments due to it from the Kurdistan Regional Government (KRG). Collectively, Malaysian investors hold an estimated 11% equity interest in the exploration and production company while Kuok has 3.02% in GKP through Kerry Asset Management Ltd. 

GKP, which is listed on the London Stock Exchange, has been producing oil for close to a year in the Shaikan field in Iraq’s Kurdistan region, but has only received a fraction of the payment due. As at June 30, US$350 million was still owing.

CEO John Gerstenlauer believes the KRG will keep its word after it  announced it would make initial payments to the oil producers in the region in November, to be followed by further payments on a regular basis. However, it did not specify the exact date for the first payments.

“They [the KRG] have had a lot of issues. They were trying to get their share of the Iraqi budget that hasn’t been coming to them over the last couple of years, they have the Islamic State of Iraq and Syria (ISIS) militants problem, additional expenses for the Peshmerga military, they have 1.5 million refugees to take care of.

“But they are gradually ramping up [production]. They have nearly 300,000 barrels a day [now] and will continue to ramp up. We’re pretty confident of that. As they get their revenue off of that [production], they’re getting into a better financial position and I don’t think they would have publicly committed to these payments if they weren’t concerned that they could do it,” Gerstenlauer tells The Edge in a recent interview.

 He says it would be a challenge for the oil producer to hit its next target of 70,000 barrels per day if it does not receive payment as it would need further investment of US$350 million. GKP is producing 24,000 barrels per day currently and is on track to hit 40,000 barrels by end-2014. The company has already invested US$750 million on the Shaikan field.   

As at June 30, GKP had cash and cash equivalents of £223.5 million while borrowings totalled £219.66 million. It had accumulated losses of £323.7 million.

Eventually, the target is to hit 100,000 barrels per day in the Shaikan field, which it expects to achieve by August 2018 in the best case scenario.  

Apart from the production sharing contract (PSC) it secured for the Shaikan field, GKP also holds a PSC for three other exploration blocks in Kurdistan, namely Sheikh Adi, Ber Bahr and Akri-Bijeel.

In a year, GKP’s share price has shed some 50.32% from £1.55 per share to 77 pence at the end of last Thursday. Its share price took a hit as delayed payments and news of the company evacuating key staff from Kurdistan due to the ISIS threat caused jitters among investors. The share price fell to a five-year low and closed at 43.5 pence on Oct 15. However, it has rebounded since.

Asked if he is concerned about the outbreak of war in Iraq as a result of the US-led fight against ISIS, Gerstenlauer says: “No, but we have to be aware of it. There’s really been no direct threat to Kurdistan aside from a couple of days in early August. A lot of the movement against the Kurds were in Iraq. We’ve had no security problems at all since then. It is a relatively minor issue to us right now, thanks to the KRG and Peshmerga … Right now, there is no indication of it getting worse here.”

He says the company is well aware of the high risk situation, given that the Kurdistan region is near the ongoing war. But he adds that if it weren’t for the risk involved, it would have been near impossible for a small independent producer like GKP to secure the 130 sq km Shaikan onshore oilfield that, initial studies show, has total reserves of 1.28 billion barrels.  

“It’s the good and the bad. We have to go where some of the big boys don’t want to go yet to have some opportunity. Sometimes it works out and sometimes it doesn’t. It’s the way small companies make their living,” he says.

GKP’s production cost is US$3 per barrel. Even with the current low crude oil price of US$77.72 for Brent, GKP stands to make a handsome profit. However, all these would hinge on the KRG’s commitment to make regular payments.

Eventually, GKP plans to diversify out of Iraq but not until it achieves the target of 100,000 barrels per day, when it would have significant “freed-up cash” for diversification.

“There’s a lot of risk being in just one area, especially volatile areas like Iraq, Iran and Syria. As soon as we get some freed-up cash, we will look hard at diversifying,” Gerstenlauer says.

This article first appeared in The Edge Malaysia Weekly, on November 24 - 30, 2014.