# Strategic report

_Source: `DeepSeekOCR_Ardian_pruned_1k/energy-oil-gas-e-p/LSE_GKP.L_2017/LSE_GKP.L_2017.mmd` · pages 3-9_

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Strategic report

<table><tr><td>About us</td><td>IFC</td></tr><tr><td>Investment case</td><td>2</td></tr><tr><td>Chairman&#x27;s statement</td><td>4</td></tr><tr><td>Executive review</td><td>6</td></tr><tr><td>Operational review</td><td>8</td></tr><tr><td>Business model</td><td>10</td></tr><tr><td>Strategy and performance</td><td>12</td></tr></table>

<table><tr><td>Board of Directors</td><td>30</td></tr><tr><td>Senior management</td><td>32</td></tr><tr><td>Corporate governance report</td><td>34</td></tr><tr><td>Audit and Risk Committee report</td><td>40</td></tr><tr><td>Nomination Committee report</td><td>44</td></tr><tr><td>Remuneration Committee report</td><td>46</td></tr></table>

<table><tr><td colspan="2">Financials</td></tr><tr><td>Directors&#x27; responsibilities statement</td><td>63</td></tr><tr><td>Independent auditor&#x27;s report</td><td>64</td></tr><tr><td>Consolidated income statement</td><td>70</td></tr><tr><td>Consolidated statement of comprehensive income</td><td>70</td></tr><tr><td>Consolidated balance sheet</td><td>71</td></tr><tr><td>Consolidated statement of changes in equity</td><td>72</td></tr><tr><td>Consolidated cash flow statement</td><td>73</td></tr></table>

<table><tr><td colspan="2">Additional information</td></tr><tr><td>Directors and advisers</td><td>100</td></tr><tr><td>Key shareholder engagements 2017/18</td><td>IBC</td></tr><tr><td>Glossary</td><td>IBC</td></tr></table>

Cover photograph shows an active natural oil seep at an Eocene aged outcrop located on the Shaikan block, north of Production Facility 1.

<table><tr><td>Shaikan</td><td></td></tr><tr><td>Overview</td><td>14</td></tr><tr><td>Reserves and resources</td><td>16</td></tr><tr><td>Regular payments and steady exports</td><td>17</td></tr><tr><td>Field Development Plan</td><td>18</td></tr><tr><td>Business operations and stakeholder engagement</td><td>20</td></tr><tr><td>Shareholder engagement</td><td>21</td></tr><tr><td>Safe and reliable operations</td><td>22</td></tr><tr><td>Management of principal risks and uncertainties</td><td>24</td></tr></table>

<table><tr><td>HSSE and CSR Committee report</td><td>58</td></tr><tr><td>Technical Committee report</td><td>60</td></tr><tr><td>Directors&#x27; report</td><td>61</td></tr></table>

<table><tr><td>Summary of significant accounting policies</td><td>74</td></tr><tr><td>Notes to the consolidated financial statements</td><td>82</td></tr></table>

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## INVESTMENT CASE

We have the people, capability and resources to invest in production growth in Shaikan, one of the largest fields in Kurdistan.

## A compelling story

![](images/4_0.jpg)

## Focused on Shaikan's significant upside potential

An independent evaluation of Shaikan's resources by ERC Equipoise verified gross 2P reserves of 615 million stock tank barrels ('MMstb') of oil as at 31 December 2016. Shaikan possesses significant development potential, with cumulative production to date (10 April 2018) sitting at 48 MMstb or just over 8% of the 2P reserves.

page 16

## 2

## Fully financed for the next stage of Shaikan's development towards 100,000 bopd

As a result of the financial restructuring in 2016, strong operations and sustained payments, the Company is now cash flow positive and has a strong balance sheet, with a robust cash position of \(203 million as at 10 April 2018.

Gulf Keystone is fully financed to invest in the next stage of Shaikan's development, which will increase daily production to 55,000 bopd with an estimated gross capex range of between \(175 million and \)215 million (including 25% contingency), before moving towards 75,000 bopd, and then to 100,000 bopd in the longer term, as we integrate the Triassic production with the Jurassic that is already onstream, once the ongoing discussions with the MNR and MOL regarding the commercial framework of Shaikan have concluded.

pages 18 and 19

![](images/4_1.jpg)

## 3
Crude Oil Sales
Agreement

In January 2018, the Company signed the Crude Oil Sales Agreement, which provides increased clarity on the marketing of the Shaikan crude. The Crude Oil Sales Agreement also moves Gulf Keystone to an invoicing mechanism where monthly payments will be linked to the international oil price and output from the field. The Crude Oil Sales Agreement, which is valid until 31 December 2018, will place a discount for export sales of c.\(22 per barrel for quality and transportation, in line with other oil sales agreements in the region. During the 2017 financial year, Gulf Keystone received eleven payments from the Kurdistan Regional Government totalling \)165 million gross ($132 million net to the Group). This payment cycle has enabled the Company to continue to be cash flow positive and become profitable by generating a profit of $14.1 million for 2017.

page 17

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## 4

## Consistent operational delivery

The Company has a track record of meeting its production guidance, reducing its operating costs on a gross field basis consistently year on year, from \(7/bbl in 2014 to \)2.8/bbl in 2017. The Company achieved average gross production of 35,298 bopd for 2017, in the middle of the 32,000-38,000 bopd guidance range, and has set a gross production target for 2018 of 27,000-32,000 bopd. The lower range compared to 2017 is due to the uncertainty related mainly to the exact performance of the wells at lower reservoir pressures ahead of the installation of downhole pumps.

page 8 and 9

## 6

## Track record of safe
and reliable operations

Gulf Keystone is pleased to report a strong HSSE performance for 2017, with no LTI's occurring in the period and its facilities remaining secure throughout the year. The Company attained plant uptime of 99% at Shaikan in 2017, which could only have occurred if safe and reliable operations were achieved. This is of the utmost importance to the Company and remains a crucial priority for the business going forward.

page 22 and 23

## 5

## Access to export pipeline

In November 2017, the MNR resumed exports of the majority of Shaikan's crude via the export pipeline to Turkey, demonstrating the suitability of the field's crude within the Kurdish blend, whilst the remainder is sold into the domestic market. A landmark development in late 2017 was initiated, of the pipeline tie-in project, which will take oil from the field to the Turkish coast by mid-2018.

page 17

## 7

## Positive geopolitical trajectory

The well-publicised war against Daesh was fought comparatively close to our operations, which fortunately were never directly affected. Whilst the Kurdish independence referendum, held in September 2017, created some uncertainty in the region, the regular and consistent payments made to oil companies demonstrates the importance and the resilience of the oil and gas industry to the Kurdistan Region of Iraq.

page 25

## 8

## The team to deliver

Since 2015, the Board and senior management team at Gulf Keystone have consistently delivered on the Company's corporate objectives, including safe and reliable operations at Shaikan, a reduction in costs (at a corporate and operational level), commercial progress with the MNR and MOL and strict financial discipline, enabling the business to achieve a profit for the first time since its entry to Kurdistan. The Board and senior management team are fully aligned with shareholders and will continue to focus on delivering value for all stakeholders for the foreseeable future.

page 30 to 33

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## CHAIRMAN'S STATEMENT

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The successful implementation of the Crude Oil Sales Agreement is an important commercial event for the Company.

Keith Lough
Chairman

![](images/6_1.jpg)

Throughout 2017 and into 2018, Gulf Keystone has, with continuing support from the Kurdistan Regional Government ("KRG") and the Ministry of Natural Resources of the KRG ("MNR"), made considerable progress, reflecting the strong alignment of economic interests between operators and Kurdistan. Everyone stands to benefit from the responsible development of the region's natural resources, including Shaikan, one of its most-prized oil fields.

During much of 2017, Kurdistan was buffeted by the political complexities of the region, including the war against Daesh, which for Kurdistan has come at a considerable human and economic cost. In the broader region there were the well-publicised issues impacting both Syria and Turkey. The Kurdish independence referendum that was held in September 2017 contributed to yet more uncertainty for the area where we operate.

The significance of these macro factors, which are clearly out of our control, were profound for our business and our efforts to both create a climate for investment and build deeper liquidity in our shares. This year has seen considerable political and economic uncertainty, leading to a significant drain on the region's financial and other resources.

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From an operational perspective, Shaikan continued to perform well throughout 2017. From a commercial perspective, as we have highlighted in recent communications, Gulf Keystone has been seeking clarity around the contractual framework in which it operates. Whilst work remains to be done, the very important Shaikan crude oil export sales agreement ("Crude Oil Sales Agreement"), which was worked on during 2017 and announced in January 2018, represented a major milestone for the Company. The successful implementation of the Crude Oil Sales Agreement is an important commercial event for the Company and moves the business closer to finalising its commercial negotiations and restarting investment into Shaikan. We remain optimistic about shortly arriving at a satisfactory outcome with our partners: the MNR and MOL.

Concurrent to the ongoing negotiations with the MNR, the team has been readying the Company for the future, with substantial technical and commercial work completed. Having closed the year with a cash balance of $160 million, and the plans put in place to deliver the target of increasing production to 55,000 bopd, the Company has the means to move swiftly towards delivering more value from the field for all stakeholders.
We strive to keep our shareholders abreast of progress and take our responsibilities in this regard extremely seriously. Whilst the Company has been busy working on both the updated Field Development Plan ("FDP") and advancing discussions with its partners, it is only appropriate to provide updates to the market once items are concluded and can be described clearly. We appreciate the absence of news flow may feel frustrating for investors.

An updated and comprehensive suite of Key Performance Indicators ("KPIs") were introduced for the Company in 2017 as part of our continued efforts to achieve high standards of corporate governance, and to support both our commitment to transparency and, of course, alignment between our staff and our shareholders. We are also committed to ensuring a greater focus on diversity across all our teams, improving the development of all employees and promotion of women and local employees into positions of seniority.

The KPIs for 2017 are described in the Remuneration Committee Report, which is in the Annual Report.
I would like to thank our shareholders for their ongoing support through what the Board recognises has not been an easy period. We would also like to thank our hosts, the government and people of Kurdistan who have helped enable continuous operations throughout this challenging year. It has been an unsettling time for our staff in London, and particularly for those in Erbil and in the field. There has been uncertainty for many, both at work and at home, and, on behalf of the Board, I thank all our staff for their deep professionalism, stoicism and good grace throughout. It has been said before, but my belief is that Gulf Keystone has a strong future ahead of it.

As I finish my tenure as Chairman, which has been a privilege, I would like to wish good fortune to all those connected with Gulf Keystone. I am delighted to be handing over the role of Chairman to Jaap Huijskes. Jaap has already demonstrated his enormous value to the Board and the Company as a whole, as a Non-Executive Director, and I know his experience and skills will serve him well in his new role.

Keith Lough
Chairman
10 April 2018