On 23 April, Gulfsands Petroleum finalized its decision to delist from London’s Alternative Investment Market (AIM) continuing an unending corporate rollercoaster dating back to December 2011, when European Union (EU) sanctions forced it to declare force majeure at its only producing asset, Block 26 in Syria’s northeastern Al-Hasakah governorate (see map).

The company insists it “remains cautiously optimistic in the medium term” regarding the prospect of a Syria return whilst also remaining committed to compliance with European law. But Brussels is unlikely to lift the ban on EU-based entities conducting business with Syria any time soon, with the gruesome conflict now into its seventh year. And given the West’s opposition to Syrian President Bashar al-Assad, there’s a good chance sanctions will remain in place even after the guns fall silent.

Syria produced around 380,000 b/d before war erupted in 2011 and enjoyed partnerships with foreign firms including Total and Shell, as well as smaller companies like Croatia’s INA and Canada’s Suncor. Many firms bid farewell to their marginal Syrian output and wrote off the losses as the situation deteriorated in late 2011, but Gulfsands’ fate remains tangled up in Syria’s geopolitical puzzle.

The company insists it aims to “look beyond simply preserving, protecting and preparing for a return to Syria” and focus on acquiring additional assets, but in reality, it appears more likely the now-delisted firm will hibernate and await a return to Block 26’s low-cost output. Prior to the sanctions, the firm pulled in $81mn alone from Syria in 2011.

Today Gulfsands is running on fumes. Its three main shareholders agreed to lend £8mn ($10mn) for operating expenses through February 2021. The cash-poor company will also save around £250,000 ($338,000) a year in AIM associated costs with its delisting.

Gulfsands still technically holds a 50% working interest at Block 26; Chinese state firm Sinochem holds the other half. The block’s producing fields are operated by Dijla Petroleum Company, a 50:50 JV between Gulfsands and Syrian state firm General Petroleum Corporation (GPC). Block 26 had 173mn barrels in contingent reserves (proved and probable) as of end-2016.

15-20,000 B/D OUTPUT

According to a recent update, Gulfsands “understands but is unable to verify” that Block 26 is producing 15,000-20,000 b/d—with GPC acting as the sole operator under the auspices of Dijla. Though the territory is under the control of the Kurdish YPG, GPC engineers have operated several of the region’s fields under a 2014 understanding.

GPC reportedly produced around 17,000 b/d through 2017 as well, but due to EU sanctions on the state firm, Gulfsands does not receive a cent of revenue from its crown jewel asset. That the block’s fields and infrastructure escaped the wrath of war and can still produce at pre-war levels offers Gulfsands a rare piece of good news (see chart).

GLORY DAYS

Gulfsands was arguably pre-war Syria’s most successful independent oil company. Production from Block 26’s Khurbet East field began in mid-2008, just a year after the field’s discovery (MEES, 14 July 2008). The adjacent Yousefieh field came online in April 2010. The two fields produce 25° and 23° API crude respectively, which was sent to a nearby Syrian Petroleum Company (SPC) facility, added to the sour Souedieh blend (24.1° API), and piped to the Mediterranean for export.

With high oil prices and profits soaring, Gulfsands was eager to expand output. Gross production peaked at 24,000 b/d in August 2011, with plans to hit 33,000 b/d by Q4 2012. In late 2010, the firm awarded Italian services firm Saipem a $129mn contract to build a 50,000 b/d central processing facility at Khurbet East. The same year a 24,000 b/d pipeline to the SPC facility was completed to replace trucking.

With Block 26 production ramping up, the firm expanded scope to Tunisia exploration, whilst divesting from its long-held Gulf of Mexico assets. The firm was also keen to develop an Iraq portfolio—all the while continuing exploration at Block 26.

The Iraqi co-founder of Gulfsands and then-president Mahdi Sajjad was “quietly confident” that another commercial discovery would be made before the block’s exploration license was to expire in August 2012. Six wells were drilled in 2011, and a discovery was indeed made at Khurbet East—this time 8.8mn barrels of lighter 34°API crude. But the discovery was regrettably announced two days after the firm declared force majeure on 12 December 2011.

Initially, Gulfsands coped with Syria’s increasing instability: operations at Block 26 continued unharmed and Gulfsands executives remained confident. In July 2011, communications chief Ken Judge admitted to reading some “very interesting press coverage in recent days” whilst nonetheless assuring investors that both corporate activities in Damascus and operational activities at Block 26 would continue “without interruption and without interference” despite what investors may have seen “on television or in the press.” December 2011 sanctions not only halted Gulfsands’ Syria operations but also dried up the firm’s only revenue stream, leading to limited attempts to diversity post-2011.

Chart Erratic Production at Syria's Block 26 ('000 B/D)

*gulfsands projection.
source: GULFSANDS, syria report, mees.

THE ROAD TO DAMASCUS

American Jon Dorrier founded Gulfsands in 1998 along with former colleague David DeCort and Mr Sajjad. Their business model was simple: the (then) Houston-headquartered firm would use Mr Sajjad’s regional contacts to acquire interests in Iraq and Syria—largely inaccessible to western firms at the time— while financing acquisitions with a cashflow from established assets in the Gulf of Mexico.

And the plan worked. In May 2003, US-focused Devon Energy and Gulfsands signed a PSA for Block 26 for $17mn. Devon took 80% while the three-employee Gulfsands was left with the remaining 20%. It was the first time a US firm had been involved in Syrian upstream since the 1980s (MEES, 2 June 2003), and American officials attended the signing ceremony in Damascus.

The first hiccup came in 2005 when the Bush administration imposed sanctions on Damascus citing “an unusual and extraordinary threat.” While not technically banned from exploration, Devon cited trouble importing equipment and pulled out, selling 30% of its stake to Gulfsands and the other 50% to Kremlin-linked Soyuzneftegaz – a firm whose other key overseas foray was sanctions-busting in Saddam-era Iraq. Gulfsands signed an MoU to gather, process, and transport associated gas at Misan in 2005, but the firm’s Iraq ambitions never really came to fruition (MEES, 21 February 2005).

MAKING CONNECTIONS…

Three months after drilling the Block’s first commercially viable well in April 2007, Syrian kingpin and billionaire Rami Makhlouf invested $20.3mn in Gulfsands through his Cham Holding for a 6.3% stake in the London-listed company. As Mr Assad’s cousin and Syria’s most prominent businessman, Mr Makhlouf offered Gulfsands unprecedented access, a fact then-chairman Andrew West was not shy to admit, citing Gulfsands’ unique chance to “acquire direct and indirect interests in several potentially high value projects” in Syria.

The US treasury announced sanctions against Mr Makhlouf and his businesses in 2008—banning US firms from involvement with the mogul. Mr Makhlouf called the sanctions a “badge of honor.” Knowing the risk of abandoning its Syrian insider, shareholders instead sacked founders and key figures Mr Dorrier and Mr DeCort—thereby shrugging off its American ties. The Houston office was closed, London became the firm’s new headquarters and Khurbet East began producing a few months later.

…AND CASH

Sinochem reportedly offered $650mn to buy out Gulfsands in 2009, but instead the Chinese state firm purchased minnow Emerald Energy (who bought Soyuzneftegaz’s 50% share in 2006 for $16.9mn) for a whopping $878mn—signaling just how lucrative Block 26 was thought to be. And for three years, it was: Gulfsands recorded profits of $27.8mn, $44.7mn and $55.1mn in 2009, 2010 and 2011 respectively. Syrian operations accounted for profits of $81.4mn in 2011, while all other operations resulted in losses of $26.3mn. Gulfsands finished the year with a $124.2mn cash balance.

But it all went downhill from 2012 when it could no longer count on revenues from its keystone asset. The firm posted a $28.6mn loss in 2012 with Syria losses amounting to $4.5mn (losses from other operations totaled $22.5mn). For 2013-17 Gulfsands recorded successive losses of $26.3mn, $16.1mn, $69.2mn, and $19.8mn. The company was forced to resort to borrowing to keep its doors open.

Map Syria’s energy infrastructure, Political divisions as of May 18

Syria’s energy infrastructure, Political divisions as of May 18

BEDLAM ON THE BOARD

For several years Schroders was Gulfsands’ largest single shareholder with around a 17% stake, but as the situation in Syria unraveled and investors fled, Russian financier Michael Kroupeev moved in through his investment firm Waterford Finance, replacing Schroders as the biggest shareholder. Mr Kroupeev was the former head of Emerald Energy before Sinochem bought it out, so he knew the assets, and the importance of Gulfsands’ Syrian connections. Soyuzneftegaz also bought 5% of Gulfsands for good measure.

Whether or not Mr Kroupeev’s key aim was always a return to Syria, Waterford certainly talked a good game as regards turning Gulfsands into a ‘normal’ internationally-focused upstream minnow. By 2013 Gulfsands was playing up “exciting opportunities” in Morocco, Tunisia, and Colombia, but by 2015 the oil price crash meant the firm lacked the capital to even cover its operating expenses (MEES, 20 March 2015). Of the three countries, Gulfsands’ only remaining assets are two exploration blocks in Colombia.

Mr Kroupeev blamed Gulfsands veterans Mr Sajjad and Mr Judge for running the company into the ground, accusing management of “recklessly wasting the company’s and therefore shareholders’ resource, in effect proactively forcing the company to its knees.”

He bemoaned the directors blowing cash on assets producing “no significant commercial results” whilst paying themselves “excessive and unjustified renumeration in the context of the company’s underperformance.” With support from shareholder Richard Griffiths, Mr Kroupeev succeeded in forcing out Mr Judge and Mr Sajjad in 2015 (MEES, 22 May 2015).

By early 2016, Waterford held 39% of the firm’s shares while Mr Griffiths’ various holding companies possessed around 30%, enabling the two to dominate the indebted firm. Mr Sajjad divested his 7% share, whilst through a stock issuance Mr Kroupeev was able to dilute Mr Mahklouf’s share from around 6% to practically nothing. Mr Makhlouf sued Gulfsands in a Syrian court.

In March 2016, Ayman Asfari, CEO of UK-based services firm Petrofac, took a 10% stake in the firm. Mr Asfari, currently the subject of an investigation by the UK’s Serious Fraud Office into Petrofac relating to Iraq corruption allegations, bought shares in Gulfsands in part due to Mr Kroopeev’s close ties to the Kremlin, a source with knowledge of the situation tells MEES. A native Syrian billionaire whose political ambitions are unclear, Mr Asfari’s presence coupled with Mr Makhlouf’s departure raise interesting questions for the firm’s future in Syria.

With Mr Kroopeev, Mr Griffiths, and Mr Asfari, in full control, Gulfsands will now look to wait out the war, hoping for sanctions to be suspended sooner rather than later. It is tempting to take the delisting decision as part of a new scheme to relocate the firm and avoid EU sanctions but all three men have business interests in the UK that sanctions-busting would jeopardize. With its old guard replaced completely, Gulfsands nonetheless finds itself in a similar position to 20 years ago: waiting to bank on its well-connected directors and (re)enter a Syria full of surprises.