My third visit to Kurdistan and Erbil which is clearly growing and vibrant after the war when it should be remembered no production was lost. Recent troubles between Turkey and Syria involving Kurds have a different angle but neither the PKK nor the YPG are friends of the KDP, the largest party in Kurdistan. Payments resumed and relationships even between Erbil and Baghdad are improving such that the latter transfer about $380m to Erbil. The KRG is meant to deliver 250/- b/d to SOMO but so far is only delivering around 100,000 bopd to Ceyhan.
During our visit we met with the legendary Dr Ashti Hawrami, formerly Energy Minister and now Assistant Prime Minister with responsibility for energy affairs with the Prime Minister effectively taking over as Minister of Natural Resources. Kurdistan has managed to go through the war in Iraq and Syria, the Independence referendum and the halving of the oil price from 2014-2016 and has come out of the process stronger and more resilient than ever. The message we repeatedly heard from all over was ‘Kurdistan is open for business.’
With Genel we visited the Taq Taq, Bina Bawi and Sarta fields which are at the forefront of Genel’s production growth plans in different ways. We did not go to the already prolific Tawke field or Peshkabir fields nor the exploration prospect at Qara Dagh.
At Taq Taq much has changed as the company attempts to use the substantial infrastructure which could use some higher throughput to make it even more efficient. We looked at two CPF’s one that has seen substantial upgrading whilst parts of the other have been taken to use at Peshkabir. It is even possible that as the Bina Bawi field is only 30km away as the crow flies that development there might also benefit from the slight overcapacity.
Taq Taq is having a second wind as the company has been successfully been drilling on the flanks of the licence with significant success and pleasingly offsetting any of the field’s natural decline. The facility at Taq Taq is one of the most sophisticated I have seen for many years and the operational team that runs it is amongst the smartest I have seen in many years of visiting such installations. It is a great platform from which to deliver its own hydrocarbons but also to be a massive infrastructure bonus to subcontract to other parts of the portfolio.
Next stop was Bina Bawi which I have seen in promotional material from Genel many times over the years. Without wanting to spook anything it looks like at long last a project viable to all sides is getting off the ground. The problem with Bina Bawi has been that the combination of the early stage oil so much wanted by Genel must be married to the potential economics of funding the midstream process and therefore making acceptable returns from the gas investment.
With significant local demand for gas to replace diesel, as well as potential in export markets such as Turkey it looks as if an agreement may be emerging, in that the MNR is moving towards an agreement that works for both parties and rewarding both time scales. With the physical ability to run oil down hill to a processing station on one side of the hill and to pipe the gas to markets on the other side it seems possible to de-risk Bina Bawi. Whilst the MNR sometimes take good time to make a decision it is usually to make sure that contracts are profitable and robust and which reward both sides, if this is to happen here it is possible to see oil production in around a year. This would obviously be a major league plus to Genel.
Before seeing Sarta we had a teach-in from Genel’s partners in-country, Chevron who have been in Kurdistan for many years. By way the most important thing we learned was quite how committed Chevron is to Kurdistan. Apart from a brief, war related, pull-out this team has been on the ground in-country for some years and certainly intend to remain so. Jim Hunt, who runs the Sarta process for Chevron said that in his view, Sarta is huge.
This size of development is indeed unusual for Chevron, but it is a business that they can replicate, a model that they can repeat time and again. Chevron are of the view that the field could produce 80-100,000 bopd which supports Genel’s view that it has the potential to be the largest field in Kurdistan. Lease, operate, maintain is the mantra and once up and running it is designed to go from signing to production in 12 months. The Chevron board like the KRI model and would to roll it out some more, and stronger partners Genel could not wish for. For Genel though it has the potential to add significantly to their production, we visited the site which has been growing very fast and pictures I have seen since show just how quickly it is being developed.
So, it that works then with a contract signed in August 2019 then first oil should be expected towards the end of next year, maybe sooner. Sarta has Tertiary to Triassic with P50 gross unrisked resource estimate of c.500 MMbbls with the smaller Jurassic Mus-Adaiyah reservoir only estimated at 150 MMbbls. With the Sarta-2 and Sarta-3 wells being re-completed and the CPF having a capacity of 20,000 b/d the latter works and is reasonably inexpensive. (Genel’s investment for 50% of Phase 1A to end 2020 is $60m) We visited the Sarta Phase 1A site which is already being prepared and the facility construction is well under way and a pipeline planned between the two wells.
Finally, the Qara Dagh project which the company has also started work on and will drill the QD-2 well in Q2 2020. The QD-1 well was drilled in 2011 and for various reasons including encountering the reservoir much deeper than prognosis didn’t flow at commercial rates. The 2 well will drill 10km to the North West of QD-1 testing the structural crest and this represents a very decent part of the exploration upside in the portfolio. Finally, it has since been announced that Genel has indeed signed a rig contract for the drilling of the QD-2 well at Qara Dagh as expected. It will indeed test the structural crest 10km to the NW of the QD-1 well which tested sweet, light oil but the well had operational difficulties. Spud date is confirmed to be in H1 2020 with the rig booked and unrisked gross mean resources at QD are currently estimated by Genel at c. 200m MMbbls.
Genel – Conclusion
Final thoughts after the visit to Kurdistan were very positive indeed. The country is, whatever reports suggest, is safe and secure and very much ‘open for business’. Erbil, whilst not quite ‘the new Dubai’ as some have labelled it is modern, workmanlike and a city full of professionals wanting to get things done.
For Genel there is much upside, it has existing success at Tawke recently added to by Peshkabir and at Taq Taq it is delivering on the wells being drilled around the flanks and it may also provide infrastructure for other local fields. But the potential upside from Bina Bawi, Sarta and Qara Dagh give it an added amount of substantial upside that is by no means in the current valuation and gives massive scope.
2P Reserves of 155 Mmboe and 264 Mmboe of unrisked oil and resources are so substantial that much potential is to be expected for years to come. Net Production of 37,400 b/d gave fcf of $76m in 1H 2019 and the company has cash of $92m as at start of August. This is all more than capable of funding an aggressive capex budget, a material and progressive dividend as well as M&A when appropriate. It gives Genel a yield of around 7%, another serious encouragement to appeal to high income funds as well as sector investors. Layer the possible production from Sarta and Bina Bawi and potential from Qara Dagh makes the company of a significant size, certainly significantly higher than today.
Gulf Keystone Petroleum
We finished the week spending valuable time with GKP culminating with a day re-visiting for some of us the giant Shaikan field where ambitious plans are afoot to significantly increase production to at least 55,000 bopd and then some more. Obviously we saw PF-1 which was just being commissioned when I was last in-country and the PF-2 which then was only a field with a large house on it. This time PF-2 is up and running whilst PF-3 is the large site yet to be developed but just looking at it is awe inspiring.
Growth at Shaikan has been very impressive, the PF-2 has cleverly used very similar kit to that at PF-1 resisting the temptation to over engineer and thus lose control of expenditure. Indeed we had a number of presentations with regard to the debottlenecking which has been highly successful. In addition a smart series of upgrading work has been done on a well by well basis where in some cases wells have quite significantly increased their production.
Having said all that the bullish plans to increase production from the current rate of around 38,000 bopd to 55,000 bopd are well under way, fully funded and expected to deliver next year. This will move GKP onto another level and revenue will grow commensurately, being able to feed the ambitious plans for what will be a substantial company by size. Having said that the company has even more ambitious plans which, subject to approvals from a number of quarters, not least the company’s own board. These plans are to go to 75,000 bopd in the not too distant future followed by a whopping 100,000 bopd within five years, a plan that the company has significant confidence in.
Gulf Keystone already has substantial cash flows which fund all this capex, a buy-back programme as well as a dividend which offers shareholders a yield at the moment of around 8%. This means that an investor, whilst being able to assess the risk of the future programme actually being delivered is being more than adequately rewarded and should it all come off then it will repay in spades, just a shame that Sammy won’t be staying for the show but he should take great credit for the company’s recovery and recuperation.