# Strategic report

_Source: `DeepSeekOCR_Ardian_pruned_1k/energy-oil-gas-e-p/LSE_GKP.L_2021/LSE_GKP.L_2021.mmd` · pages 2-8_

---

Strategic report
Our investment case
Chairman's statement
Chief Executive Officer's review
Operational review
Financial review
Our asset
Operating in Kurdistan
Crude oil payments
Business model
Strategy and objectives
Key performance measures
Stakeholder engagement
Sustainability report
Management of principal risks and uncertainties
Viability statement

Governance
Board of Directors 58
Corporate governance report 60
Nomination Committee report 70
Audit and Risk Committee report 73
Safety and Sustainability Committee report 77
Technical Committee report 79
Remuneration Committee report 81
Directors' report 99
Directors' responsibilities statement 101

September:
Completed
debtlentocking of
PF-2, increasing total
field processing capacity
to c.57,500 bopd

October:
Payment of $50 million
interim dividend and
record 2021 gross
monthly production of
45,654 bopd

November:
Submission of
draft Shaikan Field
Development Plan to
the Ministry of Natural
Resources

Our asset
READ MORE
on pages 14 to 17

![](images/2_0.jpg)

![](images/2_1.jpg)

READ MORE
on pages 6 and 7

Sustainability report

READ MORE
on pages 28 to 45

<--- Page Split --->

## Our investment case

![](images/3_0.jpg)

## Robust financial position

• The Shaikan Field is highly cash generative

• Rigorous focus on maintaining capital discipline and our leading low cost structure

• Robust balance sheet, enabling us to safeguard the future of the Company and our ability to deliver against our strategy through economic and commodity cycles

$2.7/bbl

gross Opex in 2021

$122.2 million

free cash flow in 2021

Cash balance 2017-2021 ($m)

![](images/3_1.jpg)

![](images/3_2.jpg)

## Long life asset with proven production track record

• The Shaikan Field ranks among the largest energy developments in Kurdistan and has significant growth potential

• 100 million stock tank barrels (MMstb) produced to date

• Estimated 489 MMstb of 2P reserves left to produce as at 31 December 2021 \( ^{(1)} \) , equivalent to a 2P gross reserves life index of around 30 years \( ^{(2)} \) 

>100 MMstb

oil produced from the Shaikan Field to date

30 years

estimated 2P gross reserves life index \( ^{(2)} \) 

Shaikan Field production history ('000 bopd)

![](images/3_3.jpg)

(1) Based on the 31 December 2020 Competent Person's Report adjusted for 2021 production.

(2) 489 MMstb of estimated gross 2P reserves as at 31 December 2021/gross average production for 2021 of 43,440 bopd.

<--- Page Split --->

![](images/4_0.jpg)

## Balancing sustainable growth with shareholder returns

• Committed to balancing investment in sustainable growth with shareholder returns

• Delivered against this promise in 2021, reinstating our annual dividend policy of at least $25 million and paying total dividends of $100 million

• 2021 gross average production increased 19% to 43,440 bopd, the third year of consecutive production growth since 2018

• Submitted a draft Field Development Plan to the MNR to capitalise on the significant future growth potential of the Shaikan Field

## 19%

increase in gross average production in 2021

## $100 million

dividends paid in 2021

$340 million cumulative shareholder distributions declared since 2019

![](images/4_1.jpg)

(3) As at 30 March 2022.

![](images/4_2.jpg)

## Safety and sustainability underpin our business

• Focused on enhancing the safety and sustainability of our business

• Strategic priorities include minimising environmental impact, workforce safety, enhancing diversity & inclusion, generating local economic value and strong governance and compliance

• The Gas Management Plan will enable us to eliminate routine flaring and significantly reduce our carbon intensity per barrel by 2025

## >50%

reduction in scope 1 and 2 CO \( _{2} \)  emissions per barrel by 2025

## "A"

MSCI ESG Research rating \( ^{(4)} \) 

MSCI ESG rating history

![](images/4_3.jpg)

(4) MSCI ESG Research as at 24 September 2021. MSCI ESG Research aims to measure a company's resilience to long-term, financially relevant ESG risks. Companies are rated on a AAA-CCC scale relative to the standards and performance of their industry peers. "A" is at the upper end of the "average" rankings of BB, BBB and A.

<--- Page Split --->

# Chairman's statement

![](images/5_0.jpg)

2021 was characterised by both an improvement in the oil price and operational environment. The price of Dated Brent averaged \(71/bbl in the year, up \)29/bbl versus the 2020 average, driven by the partial recovery of global demand and the continued regulation by OPEC+ of supply. At the same time, COVID-19 restrictions gradually loosened, with a return to more normal working patterns in the field. Having taken rapid action in 2020 to protect staff, reduce costs and preserve liquidity, the Company was able to capitalise on these better conditions.

Since the beginning of the year, the price of Brent crude has continued to increase, although it remains volatile. While the improvement in oil price drives increased cash flow, I and the Board are deeply concerned about the primary reason for the increase, the invasion of Ukraine. Our thoughts are with the many Ukrainian citizens who have had to flee their homes or have lost their lives due to the conflict.

In 2021, Gulf Keystone generated significant cash flow due to its strong leverage to the recovery in oil price, increased production and continued cost and capital discipline. In line with the Company's strategy of balancing investment in sustainable growth with shareholder distributions, in March 2021 the Board reinstated the Company's dividend policy of paying at least $25 million annually to shareholders. Total dividends of $100 million were subsequently paid in 2021, given continuing strong oil prices and cash generation.
We are focused on driving sustainable growth and value from the Shaikan Field for the benefit of all stakeholders.

Jaap Huiskes
Non-Executive Chairman

Since the beginning of 2022, Gulf Keystone has paid a $50 million interim dividend and we are pleased to have declared $90 million of additional dividends, comprising a $25 million 2021 annual ordinary dividend for shareholder approval at the Company's AGM on 24 June 2022 and a $65 million interim dividend payable in May 2022. Including these, prior dividends and $50 million of share buybacks, since 2019 the Company has distributed $340 million to shareholders.

Capitalising on a strong balance sheet and improving operating conditions, the Company also resumed investment in the Shaikan Field, restarting drilling activities ahead of schedule in June and bringing two new wells, SH-13 and SH-14, on stream by the end of the year. The Company also resumed engagement with the MNR on Gulf Keystone's vision to develop the Shaikan Field's almost 800 MMstb of 2P reserves and 2C resources, resulting in the submission of a draft Field Development Plan ("FDP") towards the end of 2021.

<--- Page Split --->

Phase 1 of the draft FDP is expected to enable Gulf Keystone to increase gross production plateau to between 85,000-95,000 bopd while reducing carbon intensity per barrel by over 50% through the implementation of a Gas Management Plan. We are committed to ensuring the FDP generates significant value for all of Gulf Keystone's stakeholders. We continue to actively engage the MNR to obtain approval of the draft FDP and in the meantime have focused our capital expenditure programme for 2022 on production, safety and preparatory activities.

Sustainability continues to be a strategic focus for the Board, which is supported by Gulf Keystone's Safety and Sustainability Committee. With the submission of the draft FDP, the Board was pleased to see the Company's Gas Management Plan, and its objectives of reducing carbon intensity and eliminating routine flaring, move a step closer. The Company also continued to make significant social and economic contributions to Kurdistan through local employment and community engagement programmes, local supply chain investment and generation of revenues from the field for our host government, the KRG.
The Board continued to engage with Gulf Keystone's shareholders in 2021, both at the Annual General Meeting ("AGM") and on a more frequent basis with the Company's major shareholders. We welcome ongoing engagement and feedback from all investors and encourage all GKP shareholders to participate in our 2022 AGM. This year, the Company's remuneration policy will be subject to a binding shareholder vote at the AGM. The Board has made minor changes to the current policy, which was approved at the 2019 AGM with support in excess of 98%.

The only change to the Board over the last year was the appointment of Jon Harris as Gulf Keystone's new CEO in January 2021. Jon has been instrumental in successfully resuming investment in the Shaikan Field and advancing negotiations with the MNR as we seek approval of the FDP.

On behalf of the Board, I would like to thank Jon, the rest of the leadership team and all of Gulf Keystone's employees for another strong year of operational and financial delivery. In addition, I would like to thank all of our stakeholders for their ongoing support. We are excited about the future and we look forward to further progress in driving sustainable growth and value from the Shaikan Field for the benefit of all of Gulf Keystone's stakeholders.

Jaap Huijskes
Non-Executive Chairman
29 March 2022

![](images/6_0.jpg)

<--- Page Split --->

# Chief Executive
Officer's review

![](images/7_0.jpg)

I am pleased to report strong operational and financial delivery for Gulf Keystone in 2021. By growing production from the Shaikan Field and maintaining our rigorous focus on cost and capital discipline, we were able to capitalise on our leverage to an improving oil price and generate revenue of $301 million and adjusted EBITDA of $223 million. We delivered on our strategy of balancing investment in sustainable growth and shareholder returns, as we resumed drilling activities and submitted a draft Field Development Plan ("FDP") to the Ministry of Natural Resources ("MNR") while also returning $100 million of dividends to our shareholders.

The foundation of our performance is a rigorous focus on safety, which is one of Gulf Keystone's core values. Despite carefully managing the resumption of drilling activities, we were disappointed to record a lost time incident ("LTI") in October. We are committed to continuous learning and carried out detailed investigations and implemented remedial actions to safeguard against future incidents.

Gross average production in 2021 was 43,440 bopd, at the top end of our tightened guidance range of 42,000-44,000 bopd. This represented a 19% increase versus the prior year and the third consecutive year of production growth. Higher production was driven by the contribution from well workers taking place in 2020 and 2021 and the contribution of two new wells, SH-13 and SH-14, at the end of the year.

We were pleased to successfully restart drilling activities in June, ahead of schedule. Despite a promising start, the need for an acid stimulation programme on SH-13 and equipment failures and wellbore issues in the subsequent side-track on SH-14 created delays. Nonetheless, we were able to surmount these challenges to bring SH-13 and SH-14 on stream towards the end of the year and spud SH-15 in early 2022.
We continue to deliver against our strategic commitment to balance growth with shareholder returns.

Jon Harris
Chief Executive Officer

We also continued to progress development of the full potential of the Shaikan Field's significant reserves and resources with the submission of a draft FDP to the MNR towards the end of 2021. This was the result of several months of constructive engagement with the MNR and our partner MOL following the resumption of discussions in 2021.

The draft FDP comprises a plan to increase Phase 1 gross production plateau to between 85,000-95,000 bopd while significantly reducing our carbon intensity. We plan to achieve this by expanding Jurassic gross production plateau up to 85,000 bopd and testing the Triassic reservoir, targeting gross production plateau of up to 10,000 bopd. At the same time, we will implement a Gas Management Plan to eliminate routine flaring through the reinjection of natural gas into the reservoir, underpinning our target to more than halve our scope 1 and 2 emissions per barrel by 2025. The Gas Management Plan is critical to our licence to operate in Kurdistan and responds to both GKP's and the KRG's desire to eliminate routine flaring and reduce the emissions intensity of the region's production.

In keeping with our commitment to eliminate routine flaring, we have applied to endorse the World Bank's "Zero Routine Flaring by 2030" initiative. Beyond the Gas Management Plan, we are exploring the viability of several other projects to reduce our scope 1 and 2 emissions intensity further beyond the 2025 target.

Our focus on climate risk is just one part of our ESG agenda and sustainability strategy. Our other priorities include working safely, minimising our impact on the local environment, supporting and developing our people, generating economic value in Kurdistan and maintaining strong governance and compliance. We are particularly proud of our social and economic contribution to Kurdistan, our home for over 15 years, and see significant opportunities from the FDP for further local job creation, workforce development and investment in our local supply chain and communities as we generate increasing revenues for the KRG and the region from the Shaikan Field. In 2021, $336 million was generated for the KRG, primarily from production entitlements, royalties and capacity building payments.

<--- Page Split --->

While we continued to invest in growth in 2021, we also delivered against our strategic commitment to balance growth with shareholder returns. We understand the importance of cash returns to our shareholders and we were pleased to reinstate our dividend policy of distributing at least \(25 million annually, subsequently distributing total dividends in the year of \)100 million. Since the beginning of 2022, we have distributed a further \(50 million and we are delighted to declare \)90 million of additional dividends, comprising a \(25 million 2021 ordinary annual dividend for shareholder approval at the Company's AGM on 24 June 2022 and a \)65 million interim dividend payable in May 2022.

We have entered 2022 with momentum and hit the milestone in February of 100 MMstb cumulative gross production from the Field since inception. Gross average production year to date has been around c.45,500 bopd, and we remain focused on delivering our 2022 gross average production guidance of 44,000-50,000 bopd.

As a Company, we are deeply saddened and concerned about the invasion of Ukraine and the resulting humanitarian crisis. Our thoughts are with the people of Ukraine and we are all hoping for a swift and peaceful end to the conflict.

While there has been no impact on our operations to date, we are closely monitoring the developing situation in Ukraine. This includes potential sanctions being imposed on Russian entities, which could adversely impact our business.

We also continue to monitor the broader political and regulatory environment in the Kurdistan Region and Federal Iraq following the recent ruling by the Iraqi Federal Supreme Court regarding the Kurdistan Region Oil & Gas Law. We have noted the KRG's strong opposition to the ruling and agreement by both the KRG and the Federal Government to engage on what has been a long-standing issue. To date, we have seen no impact from the ruling on our business. While the timing of approval of the FDP is uncertain given the scale of the project, constructive engagement continues with the MNR, and further progress is required before we fully execute FDP activity, including drilling beyond SH-15. For the remainder of 2022, we are focused on executing activity that enables us to expedite the FDP following approval. This includes activities to prepare for expansion of our production facilities to include water handling and preparation of well pads and installation of flowlines to enable a continuous drilling programme. We are also focused on well interventions and workovers. Net capital expenditure guidance for 2022 is \(85-\)95 million.

We are targeting gross Opex of \(2.9-\)3.3/bbl, with the increase versus 2021 primarily due to increased operational activity and the continued catch-up of previously scheduled work programmes deferred due to COVID-19.

Assuming timely payment of invoices and continuing strong oil prices, we are expecting strong cash flow generation in 2022. This would provide flexibility to fund a potential increase in capital expenditure, with progress on the FDP, and the opportunity for further distributions to shareholders, while preserving adequate liquidity and maintaining a robust balance sheet.

I would like to thank the teams in Kurdistan and the UK for their hard work and contributions to a strong year of performance. I would also like to give my thanks to our Chief Operating Officer, Stuart Catterall, who has retired from Gulf Keystone after five years with the Company. Stuart has helped us steer the Company through a volatile oil price cycle and the COVID-19 pandemic, enabling us to emerge stronger and more focused on driving sustainable value from the Shaikan Field.

Stuart will be succeeded by John Hulme who joins us at the end of April from Noreco where he was their COO. John brings a wealth of experience from more than 30 years in the industry, previously working at Exxon, Anadarko, Santos and Newfield. I look forward to welcoming John to GKP.

Jon Harris
Chief Executive Officer
29 March 2022