Here's a post from iii that should get PIMM really excited......................
It's very long but if anybody is serious about investing in GKP, you should read every word. I have, twice. Enjoy.
Once again, many many thanks Spidymonkey for translating mundane number crunching into a visually awesome, intuitively obvious - NAV Calculator:
http://www.navcalculator.com/GKP_NAV.php
What you 'do' in today's hi-tech computer visualisation world is just so far beyond my capabilities that I can only look-on in amazement. I am sure that I'm not alone! You must surely be gainfully employed doing this type of stuff and I hope they pay you accordingly! But I have to say that the meagre contributions received on your site to date just do not seem right. I will come back to this.
The main point of this post is to review that infamous 'BBBS Potential' button - based on what we know today.
Using the updated price and profit values that Spidy has just implemented:
- an oil price of $100,
- a PSC profit of 13% before tax (corresponding to tpo's 7.8% profit after the 40% AISP tax),
- a Discount Rate Reduction Factor (DRRF) of 0.6185 (corresponding to the reduction observed within the Cannacord Adams evaluation of several generic Kurdistan PSC's when applying a Discount Rate of 10%),
and with all other settings 'as is', the 'BBBS Potential' button yields:
· £52.47/share with the default DRRF value of 0.6185
· £84.83/share if no Discount Factor is applied (DRRF=1.0)
The above calculations do of course presume that the current number of shares in issue will remain at 854.116 million. Which, given the BOD's penchant for healthy (!) Option awards, is extremely unlikely - nay, guaranteed impossible - to be the case. There are already 'quite a few' Options outstanding - and we are now in that 'time of year' again! So let me take a stab at the next RNS, combine it with the previous known outstanding Option awards - and hey presto, we are probably looking at close to 935 million shares. Sticking that in the Calculator then gives the following results for the 'BBBS Potential' button:
· £47.93/share with the default DRRF value of 0.6185
· £77.49/share if no Discount Factor is applied (DRRF=1.0)
I'll come back to these rather large £ numbers a bit later - first a deeper look at the input OIP numbers that I guestimated for this button so many moons ago:
Potential OIP - the 'BBBS Potential' button
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I've been steady as a rock on my 100 billion barrels across all four Blocks for quite some time now. I started out by saying "I ain't being conservative no more", but alas and alack, Shaikan keeps showing me up - as I have admitted in several of my more recent posts. Let me be clear - my current view is that 100 billion barrels is DEFINITELY conservative. I have been working on a post for some time now that attempts to justify why Shaikan will most likley end up containing 30+ billion barrels. That post is now delayed further (by this one!), but it won't change anything with respect to my nice round numbers on the 'button' - it will only add justification as to why I view 100 billion barrels as CONSERVATIVE. IMO.
It's all Shaikan's fault - it just keeps getting bigger and better - and this has a knock-on effect on Ber Bahr and Sheikh Adi which are both 'calibrated' on Shaikan in accordance with the main man's estimations (x1.5 and x0.5 respectively). Similarly, Akri Bijeel has always been conservatively extrapolated as 'another Shaikan again'. Anyway, enough about me, what have GKP been saying lately? Ah yes, the 'LSE Presentation'. That was made by TK in London on 26th January, followed a few days later by JG's presentation of the same material in New York. The Presentation itself is not that interesting - but the 'remarks' made by TK and JG are extremely revealing:
- Thanks to mOlineux, we have a summary of TK's remarks here:
http://www.iii.co.uk/investment/detail? ... id=9213686
- and thanks to HamishNY, we have JG's comments here:
http://www.iii.co.uk/investment/detail? ... id=9237609
Now before examining any of their comments, I think it's important to review the 'character' of these merchants who 'manage our expectations'. I think it's worthwhile going right back to the Shaikan pre-drilling expectations as summarised on slide #24 of the February 2009 presentation (couldn't find it on the GKP website - good job other people keep copies!):
http://www.proactiveinvestors.co.uk/gen ... y_mode.pdf
So the pre-drill expectation for Shaikan was just 2.67 billion barrels P50 - assuming ALL potential reservoirs from Cretaceous through to the Permian are "full to spill". LOL! So where did it all go so right Todd? Clearly, the pre-drill expectation for Shaikan was that - like Miran West - the reservoirs would be predominantly fractured limestones - with NO significant matrix porosity. The total pore volume available for fluids in such reservoirs are just the fractures themselves - conventional logs would reveal ZERO Net Pay. The reservoir volumes would have to be guestimated purely on the basis of fracture porosity, fracture density etc. As things turned out - the drill bit and the logs showed that Shaikan has been blessed with a great degree of dolomitisation throughout most of it's reservoirs. This is not incidental. Whilst the process by which Limestone is transformed into Dolomite is still not that well understood (it requires the 'right' conditions of burial pressure, temperature, fluid regime etc) - the crucial aspect is that the process 'generates' porosity in the rock. The porosity (vugs and holes) yielded in the dolomitisation process are the stuff of an oilman's dream - because this is matrix porosity, which is capabable of storing at least an order of magnitude more than mere fracture porosity. So when matrix porosity is found to be full of the black stuff, it translates into Net Pay - which consequently will also be an order of magnitude greater than reservoirs containing just rock fractures filled with hydrocarbons (that last word is intended for Miran West of course!). So, there you go, 2.67 billion CAN jump to 26.7 billion with a little help from matrix porosity. And then some (IMO). Todd's dream then turned into a fantasy when he found all that high pressure light oil down in the Upper Triassic, together with oodles of H2S enriched gas which will come in very handy when it comes to recovery and 'mixing' of the heavier oils in the Jurassic (and perhaps even the Cretaceous). But I digress. What is my point? The point is that GKP were VERY conservative from the get-go on their Shaikan expectations.
And the level of conservatism did not stop there. Next, Todd's CNN interview at the end of November 2009. I highly recommend that some should go back and watch again. Because, there was no mention of 18 billion barrels Hub. Todd's numbers were 10-15 billion barrels. Most of us were gob-smacked. And at the FirstEnergy Global Energy Conference a few days later, Todd was asked to clarify whether he was talking OIP resources or recoverable reserves. He said "both" as he was "hedging his bets". LOL! His precise words were:
"I said it for both actually… I hedged my bets… (laughs) It’s errrr… yes, I did. On the Shaikan, I said potential. My personal opinion of the potential, and it’s not guidance, the guidance should come from DGA. Managements’ impression is 10 to 15. The upper limit on DGA is approximately just shy of 11 billion, just from the Jurassic. Now we have tested roughly 20000 barrels per day from the Triassic, and we’re unable to test the oil zone that we drilled underneath that. So, it is not out of the realms of possibility from both the combination of the DGA report on the Jurassic, the further appraisal that is going to be required of the structure… and it’s a HUGE structure, and time is going to tell, it is not out of the realms of potential. 10 to 15 billion barrels is possible."
and during the course of the presenation Todd also said:
"These numbers are from the DGA Report, which was published a couple of months ago. Original oil in place, now this is just information from the Jurassic, the first half of the well we drilled; anywhere in a range from, as I said, probably P90 of a billion and P1 of 10.5 billion. We’ll get to the significance of that, and why we’re even talking of that number, generally in the industry we would not look that far down a Reserve Chart, but in this case it’s quite significant. (Slide 16). That’s why! We drilled this well at 2950m, we have yet, on logs or any well test, to see one drop of water. The lowest well… the next well we can correlate to is 26km away, and from that we can tell that the water is roughly… probably a few hundred metres below where we TD’d this well. So, without further exploration drilling, without further appraisal drilling on this structure, we’ve got to look at it and say, alright, fine, let’s be conservative, and that number is 2 to 5 billion. If you start factoring in these and further appraisal, that is where under managements expectations, I said it this weekend on CNN, it was 10 to 15 billion barrels. Managements expectation based on this information… could very well be, just for Shaikan, let alone the package of four licences, we could be looking at potential reserves in the range of 10 to 15 billion barrels for these licences in Kurdistan."
There was a hushed silence from the 'men in suits' - I couldn't hear precisely what they were thinking, but I suspect it was along the lines of 'yeah right, another brash arrogant yanky bullsheeter'. Well how think you now you slimy suited city so-and-sos? The current Shaikan OIP stands at 8 to 13.4 billion with at least three major upgrades still to come: (i) inclusion of ALL log and test results - especially the *crappy* zones - from SH-4 and SH-2, (ii) SH-5 and (iii) SH-6. (This doesn't include the Lower Triassic and Permian upside which will now, regrettably, most likely become a bounus for the next-man.) It is self-evident from the above that Todd Kozel is CONSERVATIVE.
And since TK is conservative, the only possible 'description' for JG is "ultra-conservative". IMO.
So what did the Republicans have to say about Shaikan during their LSE Presentations? According to the above posts:
- TK: "The upside potential on Shaikan is 100% based upon 8-13 bn barrels of oip". Which is 16 bn (P90) - 21 bn (Pmean) - 26.8 bn (P10).
- JG: "He said that he believes current figures (for Shaikan in particular) are conservative. He later mentioned on 2 separate occasions they are confident Shaikan is full to spill and a figure of 18bn barrels is likely."
So who do you believe? Mr conservative, or Mr ultra-conservative, (or BBBS who has a documented history - read my past posts - of being conservative LOL). I would definitely not go down the ultra-conservative path of tpo, Dalesmann and co who immediately jumped on the JG 18 billion number. Nah, I'm with Todd here, our conservatism is starting to converge nicely around the mid-twenties. Don't forget that Todd's 21 billion is most likely just down to the currently drilled Upper Triassic. They didn't stop drilling all wells to date at the Kurre Chine C for no reason - the pressure down there must be massive. And the SOURCE of the high pressure will NOT be water in the under-lying Kurre Chine Dolomite Formation. Since it is unlikely that GKP will be the 'steward' when SH-7 hits, I guess I could begrudgingly 'settle' for a conservative 25 billion barrels and call it quits after SH-6. I am of course only talking about Shaikan here.
So what did they say about Ber Bahr? From the posts above:
- TK: "went on to say that BB is the same as Shaikan if successful in terms of the drill site I think (later referred to BB as 1.5 times Shaikan)."
- JG: "BB - 5bn to 10bn expected"
Well thanks JG, but I'll stay with TK on this one. I am reassured to see Todd re-state the x1.5 Shaikan as it was first mentioned a long time ago - before the 3D seismic results. It seems that nothing much has changed between 2D and 3D (oh, apart from a mere 5%-10% increase in size lol!) with regard to relative sizes between SH, BB and SA. So I also remain with TK's previous guidance on Sheikh Adi at x0.5 Shaikan (rather than JG's "SA - 3bn to 6bn"). But, to be fair to JG, he has 'moved' somewhat in the space of a few weeks. It seems like only yesterday that JG announced by RNS that the BB pre-spud estimate had been revised downwards from 1.9 bn to 1.5 bn. So the 'new JG P50' of 7.5 bn has risen dramatically by a factor of 5 in the space of the last couple of months - do you think they've spotted some matrix porosity at BB? LOL!
Finally, what about Akri Bijeel? Again from the posts:
- TK: "They are NOT calling AB a discovery yet. Estimated to contain 2.5 bn barrels"
- JG: "AB - MID 20s. (yes, big number). Said if they don't get good price for AB share (process to start this week) then they would hang on as could be v profitable."
Hmmmm, you gone very quiet Todd - anything to do with that interview you gave to Dow Jones NewsWires on 14th September 2011 and your comment about "the possibility of an 8 billion barrel discovery" at Bekhme? I guess it must be a bit like Sheikh Adi - you know it's there but haven't yet figured out the best way to crack it open. Frac it, that's what I say, frac it, frac it, frac it. Monster frac - if the oil found a way in there then good ol' Texas technology will find a way to get it back out I'm sure (if the latest fraccing techniques can open-up malleable, ductile shale beds - imagine what can be achieved in stressed, brittle carbonate rocks ..). And as for you JG, of course you ain't gonna sell AB anytime soon - those "MID 20s" are just too valuable for the next-man. And, btw JG, - snap, I've also been ultra- conservative with a 25 bn estimate for AB Potential since way back when.
In conclusion: the BBBS Potential button is conservative. IMO. And perhaps also in TK's opinion. BUT, and this is a big BUT, remember that we are talking about POTENTIAL. GKP's days are obviously numbered, and there will sadly be insufficient time to PROVE all of the Potential. But that does not mean that the Buyer will get the Potential for free.
I was going to stop 'Potential OIP' here. But I just heard a question from cyberspace saying 'BBBS - how much OIP will be proven by the end of SH-6?'. Ok, if you insist, but this is ONLY my opinion:
SH-6, if it confirms the OWC in the Jurassic - in accordance with the flank location selected for this well - then there will be TWO major consequences:
1. The OIP at Shaikan will gain a crucial boundary point for Shaikan OIP calculations. This, together with the wide areal coverage of all six Shaikan wells, will allow for quite precise estimates of OIP in the Jurassic. There will also be significant proven volumes in the Upper Triassic, but with an open-ended 'lowest known oil' since the Triassic OWC will remain unknown. Even so, I would expect total proven OIP of the order 18bn (JG) to 21 bn (TK). These volumes should mostly fall within 2P category. IMO.
2. The OWC, if confirmed by SH-6, is NOT only relevant to Shaikan. The Shaikan Jurassic OWC is most likely one and the same as the OWC for the SH-SA-BB mega-structure. Simply because the spill-point at Shaikan is also most likely one and the same as the spill-point for the SH-SA-BB mega-structure. I am starting to tire from banging on about this for so long. One more time, look at the series of slides from #15 through #18 in the May 2010 Investor Presentation:
http://www.gulfkeystone.com/uploads/gkp ... y-2010.pdf
- slide #14 shows the seismic-interpreted top Jurassic surface with a 'base (OWC) level' of 784m TVDSS. The SH, SA and BB structures are clearly 'separate'.
- slide #15 shows the seismic-interpreted top Jurassic surface with a 'base (OWC) level' of 1169m TVDSS. The SA and BB structures start to 'merge', but SH is clearly 'separate'.
- slide #16 shows the seismic-interpreted top Jurassic surface with a 'base (OWC) level' of 1500m TVDSS. The SA and BB structures become 'one', and SH is starting to 'merge' (although GKP have made things less-than-clear by their decision to 'cut-out' the Al Qush area surface interpretation).
- slide #17 shows the seismic-interpreted top Jurassic surface with a 'base (OWC) level' of 2230m TVDSS. All three structures are now definitely 'one' (and you don't need to be a rocket scientist to eye-ball what is happening in the 'cut-out' Al Qosh area). The choice of the (P1, at that time) 2230 m TVDSS reference depth is not coincidental. This is the predicted depth of the OWC from oil pressure data in SH-1 together with the outrageous (at the time) use of water pressure data from the Jebel Kand well sitting 26 km away! BUT, this apparent 'long-shot' prediction of OWC does not stand alone - that same depth is very close to the spill-point depth of the Shaikan structure which was of course determined from seismic (i.e. two entirely separate datasets - one from pressure, the other from seismic, pointing at the same depth location). When the OWC depth coincides with the structure spill-point depth - the structure is regarded as being 'filled to spill'. Coincidence is rare (there is normally a reason for most things), and when you 'observe' what you expected (filled to spill), take heed. IMO.
- an expanded contour map corresponding to slide #17 is shown in slide #14. A slide I have referenced so many time before. This slide says SO MUCH MORE than GRH1's two- dimensional surface images (sorry GRH1, absolutely no offence intended, but as you well know, surface images will never say anything about the VOLUMES below). Slide #14 speaks sub-surface VOLUMES. This slide is the primary source of my 'BBBS Potential' OIP estimates.
So as I was saying, .... the OWC, if confirmed by SH-6, will lead directly to the calculation of OIP volumes throughout the entire SH-SA-BB mega-structure - PROVIDED THAT the 3D seismic interpretation confirms the connectivity shown by the 2D seismic from slide #14 in the May 2010 Presentation. How much OIP will that be? Much will depend on confirmation at BB-1. It will not be crucial to have good flow-rates at BB-1 - but the well must show that the Jurassic interval is fully oil-bearing. And, ideally, at least a few successful formation pressure tests to confirm the same pressure regime as Shaikan. With those two boxes ticked, it will merely be a case of projecting appropriate reservoir parameter for Net/Gross, Porosity and Saturaion throughout the mega-structure volume defined by the 3D seismic. There will be higher uncertainties throughout SA and BB of course due to the lack of wells, but a mightily SIGNIFICANT volume of OIP will become proven. IMO.
Ok, enough about the background to the 'BBBS Potential button - back to the big £ numbers that it produces. As I mentioned above, using 935 million shares in issue, the button yields:
· £47.93/share with the default DRRF value of 0.6185
· £77.49/share if no Discount Factor is applied (DRRF=1.0)
The latter value above, £77.49, is equivalent to US$122 at current exchange rates. As previously commented by many others, an NOC who is primarily interested in securing resources (rather than achieving a direct profit from the PSC) will most likely be willing to apply a zero Discount Rate. But these guys are not stupid either - they would probably also apply a risk factor of 50% to the whole deal. Don't you think CJ? Now what would that give? US$61 - cheap at half-price...
And if the same 50% risk factor logic were to be applied by some cheapskate American IOC, then they may only offer 50% of the first number - around £24/share. Not good enough IMO - show them the door Todd - or threaten a merger with BP, um, I mean Genel ...
GLA,
BBBS
