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New Iraq oil law a boon for Kurdistan explorers

Published: 23:18 31 Aug 2011 AEST

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The approval over the weekend by the Iraqi cabinet of the long-delayed draft oil law is being interpreted as positive by analysts assessing its impact on companies working in semi-autonomous Kurdistan.

It will now be sent to parliament for final passage. And when enacted it will provide foreign explorers a more solid legal framework for their activities.

The law is also seen as pivotal to reconciling Iraq's factions - especially Iraqi Arabs and Kurds - as the country rebuilds after years of war.

It is good news for companies already operating in Kurdistan such as Gulf Keystone Petroleum (LON:GKP), Heritage Oil (LON:HOIL) and DNO Exploration, as well as newcomers including Petroceltic (LON:PCI) and Afren (LON:AFR), which have recently landed production sharing contracts.

“It is our view that the PSCs signed by the Kurdish government would be honoured by the oil law,” said UBS analyst Melanie Savage.

“If this is correct, it would be extremely positive for Afren – we currently apply a 50 per cent risk weighting for risks around approval of the current PSCs – with over 20 per cent upside to Afren’s net asset value for a reduction in political risk.”

In a note to clients she restated her buy advice, and says Afren is worth 203 pence a share.

In July Afren revealed it was buying two assets to be funded by through a US$200 million credit facility and a share placing, in which it will issue 84 million new shares (about 8.5 per cent of its current share capital).

It is acquiring a 60 per cent stake in the Barda Rash production sharing contract from Komet Group as well as taking a 20 per cent stake in the Ain Sifni PSC, from the Kuristan Regional Government. 

The oilfield is operated by Hunt Oil, which owns 60 per cent, while the KRG retains 20 per cent.

Between them these two assets give Afren 890 million barrels of independently certified net 2C oil resources, and a total net un-risked 1.074 billion barrel resource.

Afren said it hopes to deliver gross production of 125,000 barrels of oil per day (bopd) in just over five years. In phase one it plans to establish production at 15,000 bopd by the end of next year. This will step up to 35,000 bopd by the end of 2013, hitting its main target by 2017.

It will also be undertaking an active exploration and appraisal drilling programme over the next two years.

In the same month, Petroceltic acquired two undrilled exploration assets both of which are positioned along strike of significant oil fields. 

The first, known as the Dinarta PSC, covers 1,319 square kilometres of highly prospective land close to Gulf Keystone’s massive Shaikan oil discovery. 

The Shakrok PSC is smaller, covering 418 square kilometres. However it is also highly prospective and is in the same geological neighbourhood as the Taq Taq oilfield operated by Addax Petroleum and Turkish oil firm Genel Enerji.

Under the terms of the deal Petroceltic will have a 16 per cent working interest in the project, although it will actually meet 20 per cent of the costs. 

Each PSC has an initial three year exploration period. During this time Petroceltic expects to spend US$72 million on a 2D seismic programme and at least one exploration well. 

The company said that most of this cash will be spent within the next six months. It also said that this includes all signing and capacity building bonuses payable to the KRG, under the terms of the PSCs.

The KRG has a 20 per cent free-carry stake in the two PSCs.

Zooming in on the PSCs, Dinarta contains a number of already identified surface structures and it considers the resource potential to be very significant. 

Shakrok, meanwhile, contains significant surface anticlines, and multiple reservoir targets are believed to be likely to be present in Jurassic and Triassic age rocks, the company said.  

Of course interest in the area is increasing as witnessed by speculation over Gulf Keystone’s potential as a takeover target.

This met with a firm rebuttal from the company’s chief executive Todd Kozel, who told investors: “The board of Gulf Keystone is confident that it has built an enviable asset base in Kurdistan, with significant further upside potential. 

“We are therefore committed to continuing to successfully prove the potential of our oilfields in Kurdistan.”

City broker Fox-Davies isn’t surprised the rumours have begun to surface. However, the reported take-out price of £1.4 billion significantly undervalued GKP’s prospects in Kurdistan, it adds.

“It should not come as a surprise that the management may seek to monetise the assets through a corporate deal, in parallel with the continuation of the development and exploration work programmes,” the broker said in a note today.  

“These are world class assets and should attract significant interest from major groups that are familiar and comfortable with the political and regional challenges.”

Fox-Davies rates the stock a ‘buy’ up to 275 pence – just under a £1 above the current price.

 

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