Iraqi- Investec welcome Gulf Keystone's new discovery in Shaikan-2 well 

(MENAFN - ProactiveInvestors - UK) Despite the market's muted reaction to Gulf Keystone's (LON:GKP) latest discovery at the Shaikan oilfield in Kurdistan, Investec analyst Angus McPhail emphasised the significance of the find.

While it unvieled this major piece of news on Thursday, the popular oil explorer's shares fell around 12 per cent.

The oil explorer confirmed that its first deep appraisal well has now been drilled to a total depth of 3,300 metres in the 'middle triassic'. Here it discovered the Kurre Chine C zone over an 80 metre interval, from a depth of 3,195 to 3,275 metres. Kurre Chine C has since been flow tested and it achieved variable rates up to 4,450 barrels a day, of 36 degree API oil.

The Shaikan oilfield is currently estimated to contain between 5 and 10 billion barrels of oil-in-place. And this latest discovery, in a deeper Triassic age reservoir that could not be reached in previous wells, will add to this impressive tally.

Importantly Gulf Keystone said that Kurre Chine C is highly pressured and it correlates with the high pressure zone penetrated at the bottom of Shaikan-1 " which prevented that well from being drilled deeper.

In a note to clients today Investec's McPhail repeated a 'buy' recommendation and 208 pence a share target price, while saying: "Shaikan 2 appraisal well has made a significant oil find.

"Max flow rates of 4,450 barrels a day over an 80 metre interval is good," he added. "The market may be disappointed that a revised oil-in-place number wasn't provided, and original target depth of guidance of over 4,000 metres compared 3,300 metre (actual) wasn't reached."

For McPhail the most significant point is the correlation of data between this well and the original Shaikan well which first struck oil in 2008.

McPhail said: "The news helps to support our belief that the Shaikan anticline is one massive structure, and this is further substantiated by the fact that the high pressure/depth readings are correlated with Shaikan 1.

"Focus will now turn to the Shaikan 4 well which is currently being drilled, and a result is anticipated soon."

In the meantime Gulf Keystone will now continue with its testing programme in the Triassic and Jurassic reservoirs in the Shaikan-2 well.

Yesterday's discovery was the second significant announcement in as many weeks for Gulf Keystone. Last Wednesday it revealed that the Sheik Adi project in Kurdistan could potentially be a 'world class' oil discovery, after a new independent assessment that puts the size of the Sheik Adi oilfield between 1 and 3 billion barrels of oil.

Combined with Shaikan, and the Akri-Bijeel discovery, the group's assets are now estimated to contain almost 12 billion barrels of oil " on a 'mid-case' P50 estimate.

Independent preliminary evaluation of the Sheikh Adi resources was carried out by Dynamic Global Advisors (DGA). It was based on wireline logging data from the Sheikh Adi-1 well, core samples, 2D and 3D seismic and regional data.

Gulf Keystone also confirmed today that it has completed drilling Sheikh Adi-1, which was the first exploration well on the structure, to a depth of 3,780 meters in the Triassic zone. It said that a series of flow tests will now be performed on a number of Jurassic zones in the well.

Sheikh Adi is immediately to the west of Shaikan block. Gulf Keystone has a 80 per cent working interest in Sheik Adi, with the remaining 20 per cent interest held by the Kurdistan Regional Government.

Last week's announcement helped lift Gulf Keystone's shares which, like many other popular AIM stocks, had been under severe pressure as the recent market turmoil forced some investors to sell assets to cover trading losses.

At the height of the recent selling, Gulf Keystone shares were down more than 50 per cent from the November 2010 highs of 196p.

This sits oddly with the group's operational progress on the ground in Kurdistan, however, where things are developing quite rapidly. Firstly, Gulf Keystone has continued to find more oil through its ongoing appraisal drilling, particularly on the Shaikan oilfield where it is now drilling deep targets.

Meanwhile the political environment is reportedly improving in the semi-autonomous region, a view supported by the recent restart of oil exports from northern Iraq.

Neighbouring Kurdistan-operating oil firm DNO is now exporting its production from the region and Gulf Keystone is now making preparations to export its production " from the upper reservoirs in the Shaikan oilfield.

Initially Gulf Keystone plans to export 5,000 barrels of oil. This is then expected to rise to 40,000 barrels a day by the end of 2012.

"We believe that the positions of the Baghdad Government and Kurdistan Regional Government (KRG) are gradually merging and that increase in production and exports would serve everyone's best interests," Fox-Davies analyst Shahin Amini said in a recent note to clients.

"The payment of US104 million to DNO by KRG in June 2011 is particularly encouraging as it was the first payment to a foreign oil company for oil exports from Kurdistan."