As the Syrian Civil War approaches its 10-year anniversary, UK-headquartered firm Gulfsands Petroleum is eagerly awaiting the lifting of sanctions on the Assad government, allowing the once-listed now-private firm to re-enter and take back production at its 20,000 b/d Block 26 asset in northeast Syria, the firm’s only significant asset.
The firm “turned a significant corner in 2019, putting to bed many of the legacy issues in its portfolio, and is now able to focus almost entirely on its world class assets in Syria: protecting and preserving its rights and preparing for a return to operations,” it said in its annual report released earlier this month.
“While the macro situation is, of course, beyond the control of Gulfsands itself,” the firm is ready to return “as soon as circumstances allow” – adding that there are “a number of reasons to be optimistic for the future of Syria.”
Gulfsands’ Block 26 was one of Syria’s most promising oil assets when the war erupted in 2011, forcing the UK minnow (and every other western firm) to declare force majeure and halt operations. The firm still retains 50% of the block, with Chinese state firm Sinochem holding the other half. But since 2014 when production restarted (see chart), Syrian state firm General Petroleum Corporation (GPC) has operated the field – with partial revenues handed over to the local Kurdish authorities. Gulfsands does not receive royalties from ongoing operations.
In terms of Syria’s current energy mix, Block 26 remains a key source of ‘domestic’ crude. Gulfsands says “total unauthorized production during 2019 was estimated to be around 7.1mn barrels of oil” which works out to 19,450 b/d. As Oil Minister Ali Ghanem recently said, the Syrian government currently oversees production of around 24,000 b/d – mostly from southeastern Deir Ez-Zor. Mr Ghanem puts total domestic demand at 146,000 b/d, excluding the 40,000-80,000 b/d Syria intermittently receives from Iran, implying that the Kurdish-held northeast sells 60,000-80,000 b/d to the Syrian government with 20,000 b/d coming from Gulfsands’ Block 26 fields.
For Gulfsands, GPC’s ‘unauthorized’ production is merely a drain on the field’s remaining 2C resources of 67.3mn barrels oil (and 35bn ft³ of gas). Some 46mn barrels have already been extracted – 27.7mn since the firm declared force majeure. At current output levels, the field’s reserves would last another nine years. But Gulfsands says more exploration work is needed and reckons it could bring total block production to 100,000 b/d in the case of new discoveries.
As for the firm itself, its ownership spent the last several years essentially mothballing Gulfsands, rendering it resilient enough to withstand nil revenues until Syria reopens. This involved relinquishing exploration licenses in Morocco and Tunisia; now only one ‘non-core’ asset remains, an exploration license in Colombia that the firm says is unviable due to ‘environmental restrictions’.
In addition to shedding assets, the core ownership group has also shed investors since its 2018 delisting from London’s Alternative Investment Market. This included Iraqi co-founder Mahdi Sajjad who was pushed out in 2015 as well as Rami Makhlouf whose 6% share was controversially diluted to almost nothing in 2016. Mr Makhlouf, who leveraged family ties to the Assad regime to become the richest man in Syria, has recently fallen out with his cousin President Bashar al-Assad and has had his assets seized.
Gulfsands’ ownership now overwhelmingly consists of three players – Waterford Finance (an investment vehicle belonging to Russian financier Michael Kroupeev), UK investor Richard Griffiths, and ME Investments which belongs to Syrian billionaire and Petrofac CEO Ayman Asfari. In late 2019, the ownership group committed £4.1mn ($5.15mn) to keep the doors open; it has $2.2mn in free cash and an $8.6mn debt liability.
How long can they wait? The owners are cautiously optimistic, but also note that if unable to procure finance in the coming years, it “might cast significant doubt upon the company’s ability to continue as a going concern.” And all this rests on whether President Assad will welcome back a private western (albeit Russian/Syrian owned) company – especially as he pawns off state assets to Russian and Iranian government-linked firms in a bid to pay back their war efforts