2014 was a transitional year for Gulf Keystone Petroleum (LSE: GKP). The company completed a management reshuffle and ramped up oil production by more than 300%.
But as we enter 2015, Gulf Keystone is facing one big headwind: the falling price of oil. Although, the oil producer is better positioned than many of its peers to weather the storm.
Crunching numbers
The key question is, how much does it cost Gulf Keystone to produce a single barrel of oil?
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The general rule of thumb is that it costs $20 per barrel to move crude oil by truck, $10 by rail and $5 by pipeline. Of course, these figures vary depending on your location but they are a helpful rough guide.
Within Gulf Keystone’s most recent trading update, the company reported that a record number of 354 trucks were loaded on 29 December with nearly 58,000 gross barrels of Shaikan crude and sent to the Turkish coast for export sale.
What’s more, at the end of the first half of 2014, Gulf Keystone reported that:
“Initial payments for the export crude oil sales received with the realised price at the Shaikan facility estimated as US$51-56/bbl…”
During the first half of 2014 Brent crude was trading above $100/bbl, so Gulf Keystone is selling its crude at a signification discount to the market price. While it is true that heavy Kurdish crude sells at a discount to Brent, official figures show that during October, Kurdish crude was being sold at a modest discount of only $8 to the Brent benchmark. Gulf Keystone’s discount is even wider.
Still, with Brent trading at $45.70/bbl at time of writing, even a modest discount of $8/bbl implies that Gulf Keystone is currently selling its oil for just under $38/bbl. After taking out the transportation cost of $20/bbl, you’re left with an $18/bbl margin.
The good news is that Gulf Keystone is a low-cost producer. During the first half of 2014, cash operating costs per barrel excluding royalty, production and capacity payments due to the KRG were $8.9/bbl. Gross production costs per barrel for the Shaikan field during the period were approximately $5/bbl.
On the other hand, general and administrative expenses during the first half, along with interest costs, excluding one-off gains totalled $45m, or around $19.50/bbl based on the 2.3m barrels produced during the period.
So based on the above figures from the first half of last year, Gulf Keystone is losing $10 to $6.50 per barrel of production with oil prices at current levels. This is excluding capital spending.
Only a guide
Nevertheless, while the above figures give a rough idea of Gulf Keystone’s financial position, they’re not entirely correct. Indeed, over the past six months the company has ramped up production to 40,000 gross barrels of oil per day, three times more than the average daily production of 13,000/boed reported for the first half of last year.
This production increase will have certainly pushed down production and admin costs on a per barrel basis. And it’s possible that Gulf Keystone could still be taking a per barrel profit, even after factoring in the current oil price and Kurdish heavy oil discount.
So overall, after an increase in production, coupled with already low production costs, Gulf Keystone is better placed than most to weather a low oil price.
