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Working from revenue back to production

lse:gkp

#1

Mixing and matching revenue with production can be fraught with difficulties - E.g. production from one month is booked as a sale in the next…

So in reality you should either stick to revenue sharing or production sharing and stay way clear of working from one to the other.

So the next question comes, is it worth doing with GKP in terms of filling in a gap of knowledge?

Using the simplest spreadsheet at my disposal, I have taken Mikey’s 52.2% interpretation of the PSC, my adjustment by 4% to 48.2% to reflect fees etc. and an extra column.

The idea is to work from known revenue back and check against known production figures, sourced from GKP and MOL data.

Mikey’s figures are way off as expected.

My 48.2% ties in well for the first 6 months, GKP and MOL.

The next column is an adjustment to match the average production for July and August according to GKP.

Given the minimal difference introduced, I feel that the figures produced for production are of use in filling in the gaps. My original concern was that the figures produced would only appear to be useful when they were in fact completely misleading.

Firstly, why does the average daily production on a monthly basis vary so much? Is it the production/revenue problem really that large, or is due to work in progress, or is a mixture of both, or…

Secondly, if the av daily production is the same in the next payment, then I would be expecting gross payment of $29 million plus or minus $1 million to cover reasonable expectations - more days, higher (Brent-22).


#2

Nice work TM. With regard to varying figures (and hence revenue) from one month to the other IMHO is due to ‘creative accounting’ most probably done by the KRG! I Suspect in months where the pay is low, the KRG does not pay for the full production, but pays extra the following month! Notice the alternation in pay from one month to the other which could made more visible in a bar chart. Although this is partly due to varying POO , but I suspect it is also due to this ‘creative accounting’ rather than variation in production level! So, I am sorry to say, there isn’t much point trying to calculate the monthly production from the given payment as we can’t trust whether it covers for exactly the full production in that particular month.

image

Best Regards @ValueSeeker8


#3

Hi VS8, thanks for getting back to me with your thoughts.

My initial thoughts were that, for the reason you outlined, I should not go anywhere near the path of working from payments to production.

How about the repeated references to improved commercial clarity though? Maybe what was true, no longer reflects the current practices?

There is a phrase in the (Brent-22) agreement that was the start of the increased clarity.

" Under the agreement, the KRG will purchase Shaikan crude oil at the monthly average Dated Brent oil price minus a total of c.$22 per barrel for quality discount, as well as domestic and international transportation costs."

I took the reference to Dated as meaning production in a month gets paid at a rate derived from that month’s average figures for market price - no messing about, no slippage, no hard luck stories!

As always, before anyone else uses these figures, they had better make sure they understand the uncertainty in them; resulting from the underlying assumptions used in the calculations.


#4

I have taken Mikey’s 52.2% interpretation of the PSC, my adjustment by 4% to 48.2% to reflect fees etc. and an extra column.

Theoryman.
Can you please explain

You have taken my 52.2% and removed 4% to reflect Fee’s.

As the Fee’s you have introduced reduce the percentage figures which in turn increases the production figures . . what do “Fee’s” represent . . and why have you deducted anything from what GKP has stated as the “Summary of terms Shaikan Production Sharing Contract”


#5

Mikey, I went through the following steps.

I saw your 52.2% based calculations and was surprised there was no reduction for fees etc. because in my experience there always have been in previous PSCs I have studied. Maybe this one was different though?

I then calculated the average monthly production figures for Jan to June 2018 based on your 52.2% and compared them to GKP data. They were too low by about 8% which meant about 4 needed to come off your 52 - quick bit of mental arithmetic.

I also looked at the Payments RNS

https://ir1.euroinvestor.com/asp/ir/GulfKeystone/NewsRead.aspx?storyid=13972547&ishtml=1

That specifically, as I expected based on previous experience, refers to payment - in kind for License Fees. They are listed and there is an explanatory addition under (5).

Using the Royalty figure as a known 10%, it is then a simple ratio calc to see that the License Fees are around 4% for that period.

So there are two distinct ways of showing that the 4% reduction gives a far better match to reality than your not including fees at all.

For the sake of keeping one issue separate from another, do not go on to the next stage until you understand all of the above.

If you want to use that flowchart, even though it refers to revenue :roll_eyes: , then look at the (1) content in very small print. That refers to just one of the listed fees previously mentioned in the RNS.

If the 40% still applies, then that would mean 40% of the PO 16.2% would be being taken; which is about 6.5%: for just that one fee!

So what does that tell us?


#6

Hi Theoryman.

No matter which way you work it out, the figures in the screenshot the 52.2% are written in stone, otherwise why would GKP have shown the 52.2% in the calculations they displayed to the world in many Presentations & RNS’s


What you are saying is that GKP are wrong but you are correct.

When there are millions at stake IMO there cannot be any hidden 4%'s . . legally it has to be shown.

The way I see it is, Mathematics should display exactly how figures are arrived at without the need for added adjustments figures to suit the end result.

The RNS to which you relate to remove 4% from the above calculation is headed “Report on Payments to Governments for 2017” which is a totally different year, and for all you know could be a totally different set of figures from 2018.

The GKP calculations clearly show the 100% Gross Revenue minus 10% Royalty fee’s
Plus, in my opinion, if there where/are any additional payments to be made to KRG in addition to the 10% Royalty figure I would not expect such payments to be shown in the Monthly Payments, but instead to be shown in the Yearly Accounts

Also in the “present calculation” shown in the screenshot it shows the Contractor as receiving 40% of 90% as a “Cost Recovery payment” . . . then the R-factor splits the 60% of 90% between 30–15% to the Contractors 70–85% to the KRG

The reason for the 40% of 90% “Cost Recovery payment” is because of the KRG’s failure since the 1st Amendment to pay their percentage shares of Shaikan’s Capex, so through that 40% of 90% the KRG is playing catch up on past non payments.

Plus as the Oil sales go through the KRG, if there are any dues owed to the KRG, they should be shown and removed before the Monthly Payment figure is issued.

“All of the crude oil produced by Gulf Keystone was sold by the KRG. All proceeds of sale were received by or on behalf of the KRG, out of which the KRG then made payment for cost oil and profit oil in accordance with the Shaikan PSC to Gulf Keystone, in exchange for the crude oil delivered to the KRG. Under these arrangements, payments were made by or on behalf of the KRG to Gulf Keystone, rather than by Gulf Keystone to the KRG”

The original requirement of the R-Factor was two fold.
a) over the Licence Period, to repay the Capex spent on Shaikan to the Contractors based on their Working Interest percentages
b) over the Licence Period, based on the Contractors Net Interest percentages to pay the Contractor their Profits.

(the contractors profits were shown years back by GKP as being in the region of $8.25pb +/-)

If the R-Factor was working as intended originally, the Production could be calculated by dividing the payment by profit per barrel costs.


#7

Mikey, I am not saying GKP are wrong, I am saying that you do not fully understand how PSCs work beneath the surface.

The slide you keep posting has (1) after Contractor, which refers to a FURTHER reduction from PO for Capacity Building. That is in very small print at the bottom of the slide.

The Payments RNS refers to Licence Fees, one of which is Capacity Building.

All those fees are taken in-kind immediately from production and not at a later stage from revenue generated from the non-reduced production. The problem GKP has is knowing what the actual value raised from that bit of production was, hence their reference to “estimated”.

Remember that in a standard PSC, the producer takes ownership of their share of the oil at the surface, it is theirs do with as they want. The problem with the Shaikan PSC is that the oil is sold by the MNR on behalf of GKP. So the essential difference between production sharing and revenue sharing gets blurred in this case - a PSC flowchart that refers to revenue!

They are NOT hiding it, it is plain sight but for some reason you are not seeing it.

Even if you refuse to accept that either/both GKP sourced references to payments in-kind is/are correct, your own calculations show that there must be a reduction and yet you refuse to accept there is one.


#8

Theoryman.

Are you basing your thoughts and calculations on the MOL Third Quarter Earnings Report, because if you are your assumptions may be entirely wrong, and you may need to revise your thoughts.

IMO you may need to visit the Capacity Building Bonus in the original Shaikan Contract and the 1st Amendment

GKP & MOL are signatures in the Shaikan PSC made in 2008, but, the big difference is that GKP is the KRG Nominated Operator.

As the Operator of the Shaikan Licence under the terms of the PSC GKP is, in my opinion, solely responsible for the monthly Capacity Building account auditing by the 10th of each month, and Payments into the KRG Shaikan Capacity Building Bank Account set up by the KRG, and in my opinion MOL are not responsible for such KRG Payments.

Therefore in my opinion the Monthly Payments GKP receives cannot be correlated to MOLs Monthly Payments as they differ by the Payments the KRG take at source from GKP.

IMO the KRG have a need to be “in control” of every aspect of payments and don’t trust anyone, and with the Payments being made 3 months in arrears, they can check and recheck everything.


#9

Mikey, one last attempt, after this I will wave the white flag and formally give up.

The production figures I am comparing the output from the spreadsheet to, are two figures from GKP, both contained in the same RNS. These are specifically for the average over the first 6 months and then the average for July plus August of this year.

You are repeatedly using your opinion of what ought to be happening, compared to my use of facts in the public domain, to show what is actually happening.


#10

Theoryman.

On the 16th January GKP issued the following RNS
https://ir1.euroinvestor.com/asp/ir/GulfKeystone/NewsRead.aspx?storyid=13781953&ishtml=1
Shaikan Crude Oil Sales Agreement Signed

The agreement is effective from 1 October 2017 until 31 December 2018. GKPI will now invoice the KRG for oil sales for the months from October 2017 onwards on the basis of the realised netback price and net entitlement volumes in accordance with the Shaikan Production Sharing Contract, as amended by the 1st PSC Amendment in 2010 (“Shaikan PSC”).

The Oil Sales agreement states that Payments from October 2017 will be made on a “realised netback price and net entitlement volumes” according to the 1st PSC Amendment 2010"

On the 29th June 2018 GKP by pdf issued a Report on Payments to Governments for the year 2016

In the Report GKP reported on the Payments the KRG had deducted at source before Payment is made to GKP

Also on the 29th June 2018 GKP issued RNS 9571S
https://ir1.euroinvestor.com/asp/ir/GulfKeystone/NewsRead.aspx?storyid=13972547&ishtml=1

The Report on Payments to Governments for 2017, and IMO details what payment such as the Capacity Building Bonus has been deducted during 2017

GKP first issued the Payments formula the Payments are made under in the 2018 March Presentation , which, IMO includes every deduction otherwise if the formula did not include all deductable fee’s, the figures in the formula would be different.

The Payment Formula was issued in the first Presentation made after the Shaikan Crude Oil Sales Agreement was signed and before the 2016 and 2017 GKP Reports on Payments to Governments.

For those worried about the Shaikan Crude Oil Sales Agreement having ended on the 31st December 2018, please NOTE, the Oil Sales Agreement became effective from 1 October 2017 until 31 December 2018 . . . which is 3 months in Arrears from the signing date prior to the 16th January 2018 RNS


#11

Which RNS please


#12

Theoryman.

I have never posted any production figures for pre June 2018 months.

I have only posted figures for August 32,110 and September 29,612.

Your figures for the same months are August 27.4 and September 30.4

So we arrive at different figures from different methods.

This is a forum of different minds.

You work by your methods and I will work by mine.


#13

The production figures come from the RNS, 20 th September 2018, Half Year Results.

Your original figures for Aug and Sept were both wrong. You used the wrong figure for the average price of Brent in both and the wrong number of days in August - apart from that they were spot on!

I corrected both of those for you and you thanked me.

I then applied the correct version of your flawed method to generate the numbers in the spreadsheet for the 52.2% column for the first 6 months. This was an attempt, which has obviously failed miserably, to show you were working from a set of assumptions that were just not true.

There are three pieces of information that ought to make you stop and think about the position you are taking and repeatedly defending.

As far as I can understand, you haven’t even refuted one of them, never mind all three.

1 Your own method of working out what the Av Daily Production, when applied to the first 6 months, gives figures which are too low - clearly shown in the spreadsheet.

2 Your method allows for 0% of production to be removed in-kind to pay for fees, but the latest Payment to Government for 2017, gives a value for them!

3 Your own flowchart contains a reference to one of those fees. It’s not explicitly contained in the flowchart but it is most certainly is implicit in the actual workings of the PSC.

I have come to the conclusion that there is absolutely no benefit to me in having any further exchanges with you.


#14

Please Note.
September Payment
https://ir1.euroinvestor.com/asp/ir/GulfKeystone/NewsRead.aspx?storyid=14156528&ishtml=1
Gulf Keystone confirms that a gross payment of $22.4 million ($17.6 million net to GKP)

80% of 22.4m = 17.92m not 17.6m . . . (1.7857% has been deducted from GKP’s 17.92m entitlement)

August payment
https://ir1.euroinvestor.com/asp/ir/GulfKeystone/NewsRead.aspx?storyid=14156528&ishtml=1
Gulf Keystone confirms that a gross payment of $27.1 million ($21.2 million net to GKP)

80% of 27.1m = 21.68m not 21.2m . . . (2.214% has been deducted from GKP’s 21.68m entitlement)

July Payment
https://ir1.euroinvestor.com/asp/ir/GulfKeystone/NewsRead.aspx?storyid=14087266&ishtml=1
Gulf Keystone confirms that a gross payment of $26.6 million ($20.9 million net to GKP)

80% of 26.6m = 21.28m not 20.9m . . . (1.8327% has been deducted from GKP’s 21.28m entitlement)

June Payment
https://ir1.euroinvestor.com/asp/ir/GulfKeystone/NewsRead.aspx?storyid=14054825&ishtml=1
Gulf Keystone confirms that a gross payment of $22.6 million ($17.7 million net to GKP)

80% of 22.6m = 18.08m not 17.7m . . . (2.1018% has been deducted from GKP’s 18.08m entitlement)

May Payment
https://ir1.euroinvestor.com/asp/ir/GulfKeystone/NewsRead.aspx?storyid=14028501&ishtml=1
Gulf Keystone confirms that a gross payment of $27.0 million ($21.2 million net to GKP)

80% of 27m = 21.6m not 21.2m . . . (1.8519% has been deducted from GKP’s 21.6m entitlement

And the same happens to each Payment before May that GKP has received and each time the percentage deducted has varied.

To me the deductions whilst un-named could be the Capacity Bonus monthly deductions


#15

Theoryman.

Yes I thanked you for providing me with the name of the website not the link, that provides average monthly Brent figures, and I will use those figures when I calculate Octobers payment figures.

I now have Statista.com in my favourites
https://www.statista.com/statistics/262861/uk-brent-crude-oil-monthly-price-development/


#16

Turns out earlier this year, gross production and export were not the same thing because of Domestic Sales - thought that malarkey had finished ages ago.

Once they stopped in June, the 48.9% column then works well IMO, to within 1 in the 3rd sign figure or roughly 0.3% of the actual value.

So no prizes for predicting what the figures will be for October’s, November’s and December’s gross income.

Amazingly they managed to keep the production high when (Brent-22) was high and then only let it start to drop when the PoO dropped - brilliant project management :wink:


#17

Apparently they do have a sense of humour! :wink:

Edit:
They failed to become a boring oil company though! :slight_smile:


#18

Mikey,

What happened to the infrastructure tax of 40%?
In 2017, they decided it would be lowered to 30%.
But on your slide, it has disappeared.
Have I missed something ?


#19

Bravedog.

I don’t know what you mean by “slide”
Do you mean the following screenshot ? ?

The Infrastructure Tax was 40% and from what I can make out it was reduced in the 2010 1st Amendment.

Now I can see no reference to the the Infrastructure Tax so it may have been changed to the Capacity Building Tax, same Tax different name. ? ? ? ?


#20

Thanks Mikey,

Yes, name change. On your screencast I couldn’t read the footnote on my iPhone


which says that the capacity building payment on profit oil is 40% until the 2nd amendment comes.

There is however something misleading in the November 2019 presentation p. 27 (which isn’t different) because a quick overview leads us to believe that there is no capacity building payment.

Without the footnote, it is the profit oil OMV will get!

And this shows the unfair treatment GKP deserves compared to MOL: for 100$ profit oil, GKP has only 56$, whereas MOL gets 20$ when GKP booked reserves are 4 times bigger!

Hopefully this will change now that GKP has new shareholders: all the partners is a field must be treated equally.