Oil Pipeline From Kurdistan Makes Gulf Keystone Target: Energy

Todd Kozel’s adventure in Kurdistan may soon pay off.

The American chief executive officer of Gulf Keystone Petroleum Ltd. has dealt with angry shareholders, an ex-business partner’s lawsuit and byzantine politics for six years pursuing billions of barrels of crude in the northern Iraqi region. Now, his $2.5 billion exploration venture is a being called a takeover target as the world’s biggest oil companies look for untapped fields.

Kurdistan is on the verge of an oil boom. The semi-autonomous region of 5.2 million people is completing a pipeline for direct crude exports to Turkey by the end of the year, bypassing central government authorities in Baghdad. The region’s reserves are as much as 45 billion barrels, the local administration estimates, enough to meet U.S. demand for almost seven years.

“Exports are what we’ve been waiting for since 2007, so the pipeline is very big and instrumental for a company like Gulf Keystone,” Kozel, 46, said in a telephone interview. “We are a public company, and consolidation is the next phase in Kurdistan. But that’s not in our plans now.”

Gulf Keystone rose 2.9 percent to close at 185 pence in London today. The benchmark FTSE 100 index slipped 1.6 percent.

Offers could come soon because the new pipeline may boost the value of the Hamilton, Bermuda-based company by 40 percent, according to HSBC Holdings Plc. Moreover, a ruling is expected within weeks in a London lawsuit brought by a former associate claiming 30 percent of the company’s main asset, Kozel said.

Peer Comparison

Gulf Keystone’s legal dispute has held back its performance against peers this year. The shares have gained 1.6 percent, compared with advances of more than 25 percent for Genel Energy Plc, WesternZagros Resources Ltd. and DNO International ASA.

“Gulf Keystone screens quite well as a takeover target once the risk around the court case is removed,” said James Gardiner, an analyst at Peel Hunt in London who gives the stock a buy rating. “They’re sitting on a giant oil field that wouldn’t look out of place in a major’s portfolio.”

Pittsburgh-born Kozel formed his first oil company in 1988 when he was 21 years old. He co-founded Gulf Keystone in 2001 with help from private equity funds from the Middle East. Gulf Keystone started with licenses in North Africa, though it’s now focused on four blocks in Kurdistan and plans to exit its remaining field in Algeria.

Kozel said the company, which has spent $780 million in Kurdistan so far, will be able to fund the development of its fields with cash flow generated once production starts at an initial rate of 40,000 barrels a day this year.

Shaikan Discovery

“The Kurdistan Regional Government is very happy with our plans,” Kozel said. “We can develop Shaikan and our other fields better and possibly faster than others might.”

Exxon Mobil Corp., Chevron Corp. or an Asian national oil company are candidates to snap up the company, said Dougie Youngson, an analyst at VSA Capital Ltd. in London. Gulf Keystone’s main asset, the Shaikan discovery, one of Kurdistan’s biggest ever, will produce 250,000 barrels a day by 2018, according to the company. That would increase Iraq’s total production by about 8 percent.

Other explorers in Kurdistan such as Afren Plc, DNO, Petroceltic International Plc and WesternZagros may also become takeover targets, according to HSBC.

“There will be a wave of consolidation,” said Peter Hitchens, an analyst at HSBC in London. “All of the small players are potentially targets.”

Tax Dispute

Afren and Petroceltic declined to comment on takeover speculation. Officials at DNO and WesternZagros weren’t available for comment.

Direct exports should strengthen Kurdistan in a dispute over revenue-sharing in which it has struggled to get royalties owed from exports sent through pipelines controlled by the central government in Baghdad.

Kozel must overcome his legal difficulties before a deal is on the cards. Rex Wempen, who served in the U.S. Special Forces in the 1990s, claimed in a trial that began in October that his work led to the Shaikan find.

Last month, Kozel quelled a challenge from investors who said the company wasn’t moving fast enough to upgrade its London listing to the main market and attract more institutional investors. The board appointed four independent directors recommended by the M&G Recovery Fund, a disgruntled shareholder.

Gulf Keystone last year said it would issue 10 million new shares to give to executives if the company or its assets are bought, forcing it to say days later it wasn’t planning a sale after shares rose.

For now, Gulf Keystone says it’s focused on developing Shaikan. Achieving its targets may prove too expensive, said Peel Hunt’s Gardiner.

“Bringing a discovery of this size to meaningful levels of production will require hundreds of millions of dollars of investment,” Gardiner said. “There are a number of options available, but uncertainty remains over access to this level of capital for a company of this size.”

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