Syria Sanctions and Commercial Relationships with Makhlouf Interests

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Gulfsands Petroleum plc (“Gulfsands”, the “Group” or the “Company” – AIM : GPX), the oil and gas production, exploration and development company with activities in Syria, Iraq, Tunisia, Italy and the USA, wish to provide the following information on the Company’s activities in Syria.

In light of the recent sanctions against Syria, and following certain comments in the press concerning the relationship between the Group, Mr Rami Makhlouf and corporate entities in which Mr Makhlouf and other members of his family are involved (collectively the “Makhlouf Interests”), Gulfsands wishes to provide the following clarifications.

US and EU Sanctions

Gulfsands notes that the US and EU have imposed a number of sanctions against Syria and various named individuals and organisations. Gulfsands is fully compliant with all applicable sanctions and is committed to continuing compliance with any sanctions that may apply from time to time.

Background to the Group’s involvement in Syria

The Group first entered Syria in 2000, as the junior partner of Ocean Energy in a collaborative venture which was subsequently awarded a licence to explore and develop Block 26 (“the Block 26 Joint Venture”). This followed a public tender in 2002 in which several other international oil companies participated, with the resultant Production Sharing Contract (“PSC”) eventually being signed in May 2003. The PSC was ratified by the People’s Assembly and signed into Syrian law via presidential decree. The public tender for Block 26 was the first such tender in Syria, all previous oil and gas licences having been awarded by direct negotiation.

Following the takeover of Ocean Energy by Devon Energy in 2003, the latter elected to withdraw from the Middle East in 2005, as a result of which Gulfsands was able to increase its interest to 50% and assume operatorship of Block 26. The remaining 50% interest was assumed by a Russian company which was subsequently purchased by Emerald Energy, which in turn was taken over by Sinochem in 2009.

The Group’s Syrian interests are held in a subsidiary of Gulfsands Petroleum PLC, which is a UK incorporated, British managed and UK domiciled public company. Gulfsands Petroleum PLC has not changed its place of incorporation or domicile since incorporation, and recent press reports that might suggest otherwise are incorrect.

Relationships with the Makhlouf Interests.

Since the time of its first entry into Syria, the Group has had constructive commercial relationships with various Makhlouf Interests. All such relationships have been conducted on arms-length commercial terms, have been properly documented and have been disclosed as required by pertinent laws and regulations, including the AIM Rules of The London Stock Exchange (“the AIM Rules.”)

The Group has fulfilled all contractual obligations pertaining to such commercial relationships and has behaved at all times with absolute propriety.

Following the imposition by the UK in May 2011 of sanctions against certain individuals and organisations in Syria, including Mr. Rami Makhlouf and members of his family, the Group has suspended all payments to the Makhlouf Interests under the commercial agreements noted below, and has suspended the voting, dividend and transfer rights pertaining to the shares in Gulfsands held by Al Mashrek.

The commercial relationships between the Group and the Makhlouf Interests are as follows:

Al Mashrek Shareholding

Al Mashrek Global Invest (“Al Mashrek”), a company owned beneficially by Makhlouf Interests, owns 5.75% of the Company’s issued share capital. These shares were acquired in August 2007, at a premium to the then prevailing market price, in a placing that was disclosed at the time in accordance with the AIM Rules. Al Mashrek is not represented on the Board of the Company, has no influence over or involvement in the management of the Group’s affairs and has at no time sought such influence or involvement.

Damascus Office Lease

The Group rents office premises in Damascus from a company owned beneficially by Makhlouf Interests. The lease is on terms negotiated at arms-length and considered normal for a commercial lease of this kind in Syria. The rent payable has been approved for cost recovery by Syria’s General Petroleum Corporation, pursuant to the Block 26 Production Sharing Agreement.

Cham Holdings, a company in which Al Mashrek is reported to be a material shareholder (alongside other prominent Syrian businessmen and companies also rents space in the same building). Its lease is completely independent of the Group’s lease, as are the operations of the two organisations.

Ramak Services Agreement

Ramak, a company owned beneficially by Makhlouf Interests, has since 2000 provided various support and administrative services to the Block 26 Joint Venture(s). Ramak was engaged by the original Ocean Energy (80%) and Gulfsands (20%) joint venture to provide advice and to assist in identifying, evaluating and pursuing E & P opportunities in Syria, including in connection with the successful public tender for Block 26.

These services, which are all in the ordinary course of business for an E & P venture operating in a foreign jurisdiction, are documented in a service contract with the original joint venture which is governed by English law and has been amended as appropriate from time to time. The fees payable in respect of these services, which today aggregate less than $250,000 per annum, have been borne by successive joint ventures pro rata to the participants’ respective participating interests from time to time and are today the responsibility of the current 50/50 joint venture between the Company and Sinochem.

In addition, Ramak has since the commencement of the original agreement in 2000, received milestone payments totalling US$900,000 from these joint ventures. Gulfsands has been responsible for US$270,000 of these payments, reflecting the Company’s, pro rata interest in these joint ventures at various points in time. Further, modest milestone payments may be earned by Ramak in the event various Block 26 production targets are reached. None of those production levels have been reached to date and only one such production level involving the potential payment of a US$500,000 milestone payment is anticipated to be reached.

The services agreement entered into with Ramak and documented at that time under the oversight of Ocean Energy’s general counsel (as 80% participating interest holder and senior partner in the collaborative venture), provided Ramak with an entitlement to receive a 2.5% Net Profit Interest on Block 26 production attributable to the joint venture and Ramak began to receive payment in respect of this Net Profit Interest during 2010. The cost of the Net Profit Interest has been borne in equal proportions by the Group and Sinochem.

Lapsed 2007 Proposal for Joint Venture with Cham Holdings

In October 2007, as announced at the time pursuant to the AIM Rules, the Group proposed to establish a strategic joint venture in partnership with Cham Holdings. The purpose of the proposed joint venture was to pursue the acquisition of several high value energy projects in Syria and Iraq. The joint venture did not in fact proceed and no projects were acquired.

There are no other commercial relationships between the Group and Makhlouf Interests and no additional commercial relationships are currently in contemplation.

Block 26 Operations

To date the company’s operations in Block 26 continue unaffected by events in Syria. Further, we have no information beyond that which has appeared in the press as would enable speculation as to the possible course of future events in Syria.

Andrew West, Chairman, said:

“The Board of Gulfsands Petroleum recognises the importance of the Company’s interests in Syria and is satisfied that the Group is in compliance with the current US, EU and UK sanctions regime and that our commercial relationships with various Makhlouf Interests have at all times been conducted with propriety and in accordance with pertinent laws and regulations, including the disclosure obligations enshrined in the AIM Rules.”


Gulfsands is listed on the AIM market of the London Stock Exchange.

Gulfsands owns a 50% working interest and is operator of Block 26 in North East Syria. The Khurbet East oil field was discovered in June 2007 and commenced commercial production within 13 months of the discovery. This field is producing at an average gross production rate of approximately 21,500 barrels of oil per day through early production facilities. A second field discovery, the Yousefieh field, was brought on-stream in April 2010, and is currently producing approximately 2,500 barrels of oil per day. Block 26 covers approximately 5,414 km2 and encompasses existing fields which currently produce over 100,000 barrels of oil per day, and are operated mainly by the Syrian Petroleum Company. The current exploration license expires in August 2012. Gulfsands’ working interest 2P reserves in Syria at 31 December 2010 were 53.6 mmbbls.

Gulfsands has acquired or is acquiring working interest positions in two exploration permits in Tunisia (Chorbane and Kerkouane Permits) and one exploration permit in Southern Italy (G.R15.PU) from ADX Energy Ltd the operator of all three permits. The Company’s interest in the Chorbane permit remains subject to the completion of the Company’s farm obligations and the Company’s interest in each of these permits remains subject to final approvals from the governments of Tunisia and Italy.

Kerkouane Permit – Offshore Tunisia
G.R15.PU Permit (Pantelleria Permit) – Offshore Italy

G.R15.PU, is located offshore the island of Pantelleria southwest of Sicily in Italian waters and the Kerkouane Permit is located offshore northeast Tunisia. The two permits are contiguous and comprise a total area of approximately 4,500 km2.

The operator has identified multiple leads and targets on these permits. Drilling operations were recently completed at the Lambouka-1 well in late 2010 where gas was encountered in the Abiod Formation. However, as a result of down-hole problems, no fluid samples or gas flow were established. The well was suspended with the intention of re-entering at a later date and drilling and testing the reservoir in a sidetrack hole up-dip of the existing discovery.

Gulfsands has completed its earn commitments with respect to the Kerkouane and Pantelleria Permits with the drilling of the Lambouka-1 well. Gulfsands has earned a 30% working interest in both permits by paying approximately 35% of the cost the Lambouka-1 well and reimbursing the operator for a portion of various pre-drill costs that include a recently completed 3D seismic programme.

Chorbane Permit – Onshore Tunisia
The Chorbane permit is located in central Tunisia and covers an area of 2,428 km2. The permit is surrounded by several producing oil fields and extensive oil & gas infrastructure. Gulfsands’ forward work commitment for the Chorbane permit includes the drilling of one exploration well in the first quarter of 2011 for which Gulfsands will pay 80% of the first $5 million in drilling costs, and 40% of the drilling costs in excess of $5 million, so as to earn a 40% interest in the permit.

A number of prospects and leads have been indentified within the permit, the most prospective being a large tilted horst block (“Sidi Daher”) where the operator has identified multiple potential targets estimated to hold recoverable mean un-risked prospective resources of 175 billion cubic feet of gas (“bcfg”) and 44 million barrels of oil from Tertiary and Cretaceous aged reservoirs.

Gulfsands signed a Memorandum of Understanding in January 2005 with the Ministry of Oil in Iraq for the Maysan Gas Project in Southern Iraq, following completion of a feasibility study on the project, and is negotiating details of a definitive contract for this regionally important development. The project will gather, process and transmit natural gas that is currently a waste by-product of oil production and as a result of the present practice of gas flaring, contributes to significant environmental damage in the region. The Company is actively engaged in discussions with respect to financing and potential equity partners. Gulfsands has no reserves in Iraq.

Gulf of Mexico, USA
The Company owns interests in 30 leases offshore Texas and Louisiana, which include 20 producing oil and gas fields with proved and probable working interest reserves at 31 December 2010 of 3.2 mmboe (figures adjusted for the disposal of non-core properties in December 2010).

Certain statements included herein constitute “forward-looking statements” within the meaning of applicable securities legislation. These forward-looking statements are based on certain assumptions made by Gulfsands and as such are not a guarantee of future performance. Actual results could differ materially from those expressed or implied in such forward-looking statements due to factors such as general economic and market conditions, increased costs of production or a decline in oil and gas prices. Gulfsands is under no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable laws.

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