A tale of two gulfs: the rise and fall of oil prospecting

While the black-gold rush is on in Kurdistan, it's a different story in Syria

Tom Bawden
Tuesday 20 September 2011 01:30

The changing oilscape of the Middle East was mapped out yesterday, with prospering Kurdistan-focused Gulf Keystone preparing a $200m (£128m) rights issue to fund its rapid growth while Syria-focused Gulfsands Petroleum warned of a 40 per cent cut in production.

AIM-listed Gulf Keystone, which is seeking admission to the main market next year after soaring interest in Kurdistan helped to push its shares up by 60 per cent in the past six weeks, confirmed it was considering an "equity fundraising", the details of which could be announced as soon as today.

The oil explorer is seeking cash to develop its booming Shaikan discovery in the semi-autonomous region of Iraq and to build a pipeline connecting the site to the existing 600-mile pipe that runs between Kirkuk in Iraq and Ceyhan in Turkey.

Gulf Keystone, which is solely focused on Kurdistan, plans to raise a further $350m selling its stake in the Akri-Bijeel block in Kurdish Iraq.

The company's prosperous outlook has made it the subject of takeover rumours in recent weeks, which it has denied. Vallares, the acquisition vehicle set up by the financier Nat Rothschild and the former BP chief executive Tony Hayward, which agreed to buy Kurdistan-focused Genel Enerji this month, has emerged as a potential suitor for Gulf Keystone, in the expected event that it later comes up for sale.

Gulf Keystone's fortunes differ sharply from those of Gulfsands, which operates some loss-making oil production in the US and is exploring for hydrocarbons in Tunisia, but is totally reliant on Syria for its profits.

Shares in Gulfsands continued their descent yesterday, bringing their decline this year to well over half, after the company admitted for the first time since the uprising began in March that its output would suffer.

Having said repeatedly that the group's operations were continuing uninterrupted, chief executive Richard Malcolm said the Syrian authorities instructed him on 8 September to cut oil production by almost half as a result of sanctions – imposed by the US in August and the EU this month – preventing the export of oil.

In an embarrassing twist for Gulfsands, the sanctions were enforced in response to a brutal Syrian crackdown on protesters that has resulted in thousands of deaths. This action was authorised by President Bashar al-Assad, whose cousin Rami Makhlouf has close ties with the company, and a 5.7 per cent stake – which was frozen last month.

The diverging outlooks for Gulf Keystone and Gulfsands underline just how fluid the oil business has become in the region, as the fallout from the Arab Spring adds to the uncertainties in Iraq.

In the months before the Arab Spring uprisings, Syria looked to offer a more attractive, stable environment for oil exploration than Kurdistan, analysts said. With persistent uncertainty over whether contracts signed by Kurdistan regional government would be recognised by Baghdad, the so-called super-majors were putting off going into Kurdish Iraq. This paved the way for smaller operators such as Gulf Keystone to make their mark.

Then, in May, the Kurds reached an interim agreement with Baghdad, which safeguarded revenues generated in Kurdistan and fuelled increasing optimism that a federal oil law will be passed by the end of the year, formalising contracts signed with the regional government. As a result, big oil companies such as Repsol from Spain and Marathon Oil and Hess from the US have piled into the region.

In neighbouring Syria, prospects were moving in the opposite direction. Mr Malcolm of Gulfsands warned yesterday that "some considerable uncertainty now exists in Syria as to how events will unfold over the coming weeks and months".

Samuel Ciszuk, of IHS Global Insight, forecast the sanctions would probably "take several years to sort out and present immense challenges for Gulfsands".

Julian Metherell, a co-founder of Vallares, who is to become its finance director, said: "Before the Arab Spring, there was a real sense that things were opening up. People were talking about how it was opening up and increasingly Syria was seen as an attractive place to take a position.

"The paradox is that Syria has gone backwards as a result of the uprising. It now looks a very uncertain place to be committing capital. Meanwhile, in Kurdistan people are looking progressively more comfortable about the regulatory and political regime."

He forecast that eventually the resulting democratisation of the Arab states should lead to an increase in oil production to finance the rising provision of social services.

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