Gulfsands Petroleum announces corporate update

Thursday, Feb 02, 2012

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 U.S.A., wishes to provide the following corporate update.

Syria

Production

As previously reported, the Company and its 50% working interest partner in Block 26, Syria, Sinochem (together referred to as the "Contractor" under the Production Sharing Contract "PSC")), declared force majeure in respect of Block 26 production operations on 11 December 2011, in response to the tightening of EU sanctions (the "Sanctions") against Syria.

Since that date, the Contractor has had no involvement in any production from Block 26.

General Petroleum Company ("GPC"), the Syrian state-owned oil company which is effectively the Contractor's joint venture partner under the PSC has continued since 11 December to produce oil from Block 26 at the rate of approximately 4,000 barrels per day. Contractor has received no payment in respect of such production.

As of the date hereof, inclusive of arrears of payments owed in respect of production up to 30^th November the Contractor is owed approximately US$50 million of which half is owed to Gulfsands. This figure will continue to increase modestly at current levels of production.

Legal advice received by the Board is to the effect that the declaration of force majeure is entirely valid and that both the Company's and the Contractor's positions are protected under the terms of the PSC, a contract governed by both English and Syrian Laws. The conduct of all parties to date has been consistent with a mutual reservation of all rights pursuant to the PSC, pending a resolution of the present difficult situation.

Block 26 Exploration

Following successful testing of the KE102 Appraisal Well, the results of which were announced on 31^st January 2012, the Board has decided to cease exploration activity within Block 26 for the duration of the Sanctions.

While the Sanctions do not explicitly preclude further exploration, the Board considers such cessation to be consistent with the intent of the Sanctions and a matter of financial and operational prudence in response to increasing difficulties in procuring access to essential technical services and supplies required for these activities. Accordingly, appropriate notices have been served under the Company's drilling contracts.

It is disappointing to be obliged to cease exploration following a recent run of considerable success and with substantial exploration potential still untapped. The current Exploration Period for the Block 26 PSC expires in August this year and because the PSC's minimum work obligations have long since been fulfilled, it is uncertain whether the remainder of the Exploration Period has also been suspended by the Company's declaration of force majeure. However, the Board intends to retain a full exploration capability in country and remains hopeful that, when the present difficult situation is resolved, such capability combined with the previous track record of proven exploration success will be persuasive with the Syrian authorities in extending the Exploration Period to account for the period lost due to the Sanctions.

Local Staff and Creditors

The Company's local staff in Syria is a highly valuable resource and has been in large part responsible for the success enjoyed in Syria to date. As previously stated and as reiterated to GPC and the Syrian Oil Ministry, it is the Company's present intention, on behalf of Contractor, to retain substantially all local staff throughout this difficult period, to continue to pay them and to provide as best possible for their security.

In the same spirit, all bona fide trade creditors in respect of obligations predating the cessation of production activities are being paid.

The Board is convinced that this level of commitment, combined with the maintenance of a visible office and presence in Damascus, is not only necessary to the fulfilment of the Company's legal, moral and humanitarian obligations but is also the best possible insurance that the Company will be well-positioned to recommence activities when the present difficult situation in due course resolves itself.

Financial Position

The Group at present has unrestricted cash balances in excess of US$120 million, substantially all of which are held in diversified short term money market funds in the UK, and has no debts. Gulfsands' share of outstanding accounts payable in Syria in respect of obligations arising prior to the date of declaration of force majeure amounts to approximately $5 million while the "burn rate" inherent in continuing to pay our Syrian staff and maintain a local presence, absent any exploration activity, is estimated at approximately at US$500,000 per month (to the Company's 50% interest.)

The Company is thus well-placed to endure a long period of continued uncertainty in its Syrian operations.

Forward Strategy

The Board believes that the situation in Syria will be resolved in due course and that the Company will be able to resume profitable operation. All efforts are being made and will continue to be made to that end. It is clearly not possible to estimate when such a resolution will occur.

In the interim, the Company enjoys the good fortune of possessing significant financial resources, highly competent human and technical resources (including the local staff in Syria whose members are keen to contribute to non-Syrian projects wherever possible and appropriate) and the credibility of having built a successful exploration and production operation. The Board and management are aware of numerous opportunities, especially in the present difficult capital markets climate, to acquire both exploration acreage and prospective production at an attractive cost of entry. Several such opportunities are being actively evaluated. In all cases the emphasis is upon cash conservation, the ability to fast-track early production and the opportunity to maximise the Company's explicit operational strengths and experience. The overriding objective is to build, as quickly as practicable, a viable non-Syrian leg to the business, within the capacity of the Company's present and prospective financial resources to sustain.

Resignation of Chief Financial Officer

Andrew Rose, the Company's Chief Financial Officer, has informed the Board of his intention to leave the Company to pursue other interests. It has therefore been agreed that his resignation will become effective from 30 April 2012.

Mr Rose has committed to ensure an orderly transition prior to his departure, including supervising all work necessary to sign off the Group's financial statements for the year ended 31^st December, 2011.

While it is with regret that we acknowledge Mr Rose's decision to leave the Company, his departure is entirely amicable on both sides. Over the past three and a half years, Mr Rose has done an outstanding job of building a financial reporting and control function which will stand the Company in good stead for the future and which certainly provides a sound platform for the diversification already mentioned. Mr Rose now wishes to take on new challenges and the Board wish him every success in whatever role he next assumes.

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.

Source: Gulfsands Petroleum

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