In November 2007, Gulf Keystone's subsidiary, Gulf Keystone Petroleum International Limited (GKPI: 50% Gulf Keystone Petroleum Limited; 50% Etamic Limited***) and its partner, MOL Hungarian Oil and Gas Public Company Limited (“MOL”) were awarded interests in two blocks in Kurdistan:
Shaikan
The Shaikan Block is situated approximately 90 kilometres North-West of Erbil and covers an area of 283 square kilometres. The interests under the Production Sharing Contract ("PSC") are GKPI 75% (operator), MOL 20% and Texas Keystone Inc. 5%.
A total of 171 kilometres of 2D seismic was acquired on the Shaikan block in 2008 and on 27 April 2009 the Company spudded its first exploration well, Shaikan-1. The Shaikan-1 well is being drilled in a proven hydrocarbon area, in reasonable proximity to other successful discovery wells. Shaikan-1 is targeting multiple horizons ranging from 600 metres to approximately 3,000 - 3,500 metres in depth. In the event of a discovery well being drilled, the multiple horizons have aggregate anticipated in place reservoir volumes in the range of 2 billion barrels of oil* as estimated by the Gulf Keystone technical team**.
The Shaikan-1 well spudded on 27 April 2009 and a significant oil discovery was announced on 6 August 2009.
Upon completion of the Shaikan-1 well the commitments under the first phase of the PSC will have been completed with an option to enter into Phase 2.
The Kurdistan Regional Government ("KRG") has an option to nominate a third party interest of up to 15% in the Shaikan PSC and a further option to nominate a government interest of up to 20% following a commercial discovery.
Akri-Bijeel
The Akri-Bijeel block is adjacent to the Shaikan Block. The interests in this PSC are MOL 80% (operator) and GKPI 20%. Acquisition of 442 kilometres of 2D seismic was completed in August 2008 and the processing and interpretation of the seismic data is underway. A well location has been selected and the intention is to drill the first Akri-Bijeel well (Bijeel-1) following the completion of the Shaikan well.
The KRG has an option to nominate a third party interest of up to 20% in the Akri-Bijeel PSC and a further option to nominate a government interest of up to 20% following a commercial discovery.
On 20 July 2009, GKPI announced the award of significant interests in two further PSCs for the exploration, development and production of hydrocarbon resources in the Sheikh Adi and Ber Bahr Blocks of the Kurdistan Region of Northern Iraq. Etamic Limited successfully negotiated for the award of the Sheikh Adi PSC and the assignment of an interest in the Ber Bahr PSC. GKPI proposed and it was agreed that Etamic merge these interests with GKPI's existing interests in exchange for the issue of new shares in GKPI conferring Etamic a 50% equity interest in GKPI. Etamic will fund 50% of the costs to be incurred by GKPI following the current drilling campaign on Shaikan-1 and Bijeel-1.
Sheikh Adi
The Sheikh Adi Block is situated North East of Dihok and lies to the West and on trend with the Shaikan structure. The Block covers an area of 180 square kilometres. GKPI will operate and have an 80% interest in the Sheikh Adi PSC, which has an initial three year exploration phase commencing in July 2009. The Company believes that the Block has hydrocarbon potential at multiple levels from Cretaceous, Jurassic, Triassic and Permian levels and has a mapped defined undrilled surface anticline covering approximately 32 square kilometres covered by modern seismic data.
The KRG has a 20% carried interest.
Ber Bahr
The Ber Bahr Block covers an area of 350 square kilometres and lies to the North of Dihok and on trend with the Shaikan and Sheikh Adi Blocks. The Ber Bahr PSC is operated by Genel Energy International Limited (40%) and has an initial two year exploration phase which commenced in March 2009. GKPI has a 40% interest in the Ber Bahr PSC. The Company believes that the Block has hydrocarbon potential at Jurassic, Triassic and Permian levels. The Block has a mapped undrilled surface anticline covering an area of approximately 45 square kilometres in two lobes and is covered by a modern 2D seismic grid.
The KRG has a 20% carried interest.
*Potential oil in place volumes are quoted in reservoir barrels as there is insufficient data to allow estimation of an oil shrinkage factor and a recovery factor.
**Where relevant analogue data was not available the reservoir parameters used are "best estimates" made by GKPL personnel based on their current understanding of the regional geology.
***Background to our new strategic partner Etamic Limited:
Etamic Limited is a newly formed independent energy fund founded for the purpose of making investments in the upstream oil and gas exploration and production business in the Middle East and Central Asia.
Etamic is entirely independent of Gulf Keystone Petroleum, its directors and management.
In return for a 50% equity interest in Gulf Keystone Petroleum International Limited ("GKPI"), the holding company for the Kurdistan assets, Etamic secured interests in two near-term exploration blocks in Kurdistan (Sheikh Adi and Ber Bahr) awarded under very favourable terms:
No bonuses due on Ber Bahr
No bonuses due on Sheikh Adi until declaration of a commercial discovery
No third party back-in rights
Significant historical scientific information without the requirement to reimburse past costs related to this information
Etamic will also contribute its share of GKPI's future exploration and development costs following the drilling of Shaikan-1 and Bijeel-1.
In summary, Etamic has brought to Gulf Keystone Petroleum's shareholders access to valuable assets in Kurdistan, acquired under much more favourable terms than the Company's existing Shaikan and Akri-Bijeel blocks, which has greatly reduced shareholder risk while increasing the investment upside potential.
