Syria EU Sanctions Update - Declaration of Force Majeure

abarrelfullabarrelfull wrote on 12 Dec 2011 13:20
Tags: gulfsands sinochem syria upstream

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Gulfsands Petroleum plc ("Gulfsands", or the "Company" - AIM: GPX), the oil and gas production, exploration and development company with activities in Syria, Iraq, Tunisia, Italy and the U.S.A., wishes to provide the following update on the European Union's ("EU") recent announcement of additional sanctions in relation to Syria.

The EU has imposed successive rounds of sanctions on Syria since May this year, the most recent measures being those adopted in the Council Decision of 1 December, as published in the Official Journal of the European Union on 2 December.

Gulfsands and its subsidiaries (collectively "the Group") are subject to these EU sanctions, have at all times complied with them and will continue to comply with them, as from time to time amended. The Directors have taken and will continue to take legal advice and to liaise as appropriate with HM Treasury to this end.

The most recent amendment to the sanctions is the inclusion on the designated list of inter alia General Petroleum Corporation ("GPC"), the Syrian government's principal holding company responsible for investments in the oil and gas sector and coordination of oil and gas production by foreign operating companies.

Pursuant to the Block 26 Production Sharing Agreement ("the PSC"), GPC is the Syrian government's representative and effectively the Group's partner in the production of oil from Block 26. This is the case for all foreign companies operating in Syria, several of which are also subject to the EU sanctions.

The fundamental effect of the additional sanctions is to preclude the Group, until further notice, from engaging in activities, including funding activities, connected with the production, delivery or sale of crude oil from its Block 26 fields.

Declaration of Force Majeure

The Directors have been advised that these restrictions constitute grounds to invoke the force majeure provisions of the PSC and the Group has now given notice accordingly.

Emerald Energy, a wholly-owned subsidiary of Sinochem, a Chinese state-owned company and the Group's 50% working interest partner in Block 26 (together the "Contractor"), has agreed to the issuing of this declaration of force majeure and to it being binding upon the Contractor under the PSC.

Based upon preliminary indications from GPC, the Syrian state is prepared to accept this notice of force majeure. In this eventuality, the PSC will not be terminated and the Group's rights under the PSC will be preserved.

However, GPC has indicated that the Syrian state intends, during the pendency of the force majeure period, to produce oil from Block 26, at its own cost and using its own resources, as the state deems circumstances to require. The PSC provides that the Syrian state has the power to effect such a requisition during a period of national emergency. The PSC also provides that such requisition shall be limited to the period of the emergency and that the Group shall be compensated for the oil so produced.

Financial Implications

The immediate consequence of the force majeure declaration is that the Group cannot expect for the foreseeable future to receive any revenue from its Syrian assets, which comprise substantially all of its revenue-generating activities. In this connection, it should be noted that the Group has no debt and substantial net cash balances, which as of 30 November exceeded $120 million.

Continuing Presence in Syria

The Group is not precluded by the EU sanctions from continuing to maintain a presence in Syria. In this regard, the Directors are conscious that the Group employs approximately 100 Syrian nationals and residents in Damascus and in the field. All of these employees have played some role in building the Group to its present state and a number of the senior team have contributed extremely valuable technical competence. These people represent both an important intangible asset of the Group and a team to whom the Group owes considerable humanitarian obligations at this difficult time. It is accordingly the Directors' present intention that these employees will be retained and will continue to be paid in full.

The Group has built, over the past few years, an asset base of substantial long-term value in Syria. It is to be presumed that Syria will eventually emerge from the present upheaval and it is the Directors' resolve to seek to ensure that, when that day arrives, the Group is positioned to retain its assets and to re-commence production activities. Accordingly, the Group will for the time being, continue to maintain its presence in Syria.

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