Shareholders in Gulf Keystone Petroleum (LSE: GKP) got a bit of good news on Thursday, with the latest update on its reserves in the Kurdistan region of Iraq.
At the company’s flagship Shaikan field, estimates for proven reserves (1P) have been upped by 55% since the previous estimate in March 2014, from 198 to 306 million barrels gross. Meanwhile, the 2P figure (which includes both proven and probable reserves) has more than doubled, from 299 to 639 million barrels gross.
The company reckons the uprated 2P figure is “significantly de-risking the field’s commerciality“, although there really wasn’t much doubt as to the commercial viability of Shaikan.
Gulf also says it can get the stuff out of the ground more cheaply than originally thought, using gas instead of water in the operation — and that should mean more oil per well and fewer wells needed.
Further reserves
The fledgling Sheikh Adi resource currently only has a contingency (2C) reserve estimate right now, of 112 million barrels gross, but Gulf reckons an appraisal that is currently underway should see that upgraded to 2P (probable) reserves. And a new prospect in the area has been identified which is thought to hold around 169 million barrels gross.
That all sounds good, but the share price response has been disappointing. Despite an early rise when the markets opened, as I write it’s flat at 32p. Why?
Well, chief executive Jón Ferrier enthused that the result is an “…endorsement of the calibre of Shaikan as a world-class field“, but we really already knew that.
Mature oil fields like Shaikan are expected to see their reserves estimates increasingly raised as oil flows and appraisals become more accurate, with early appraisals tending to be on the cautious side. In fact, some investors will probably be disappointed that the latest estimates aren’t actually higher.
Size isn’t everything
And, of course, no oil reserve in the world is worth anything if you can’t get it to market and turned into cash, and a sober reflection on that after the initial excitement might be behind the flat share price. Gulf’s problem is not the size and quality of its reserves, but its total dependence on the Kurdistan Regional Government (KRG) for exporting the oil and stumping up the cash.
After a lengthy spell of not paying, and after Gulf started selling its oil on the domestic market (at much lower prices), the KRG has finally started making moves towards establishing a regular payment schedule, and only last month it made its first payment. It amounted to a relatively paltry $15m (of which Gulf only netted $12m), but it was a start.
The trouble is, confidence is still not high, as the KRG understandably has bigger issues to deal with than making sure Gulf Keystone shareholders get their money. It’s probably going to take a few more payments, on time and of suitable size, before shareholders can start to relax a little. But that’s still only payments for current shipments, and there are rather significant arrears of $283m yet to be addressed.
Not there yet
So while the reserves update is good news, it doesn’t actually say a lot about Gulf Keystone’s long-term viability at this stage.