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Gulf Keystone Petroleum Ld08 May 2008 GULF KEYSTONE PETROLEUM LTD ("Gulf Keystone" or the "Company") 2007 RESULTS ANNOUNCEMENT Gulf Keystone Petroleum Limited (AIM: GKP), an independent oil and gasexploration company operating in Algeria and Kurdistan, today announces itsresults for the year ended 31 December 2007. Highlights - In January 2007, BG farmed into the HBH licence in Algeria. - In 2007 Gulf Keystone acquired 2,047 kilometres of 2D seismic and 533 square kilometres of 3D seismic on the HBH licence area. In 2008, the Company and its partners will drill six wells on the HBH licence in Algeria. - In November 2007, Gulf Keystone entered into two production sharing contracts in the Kurdistan Region of Northern Iraq. - In 2008, Gulf Keystone acquired 170 kilometres of 2D seismic in Kurdistan - In January 2008 ALNAFT (the Hydrocarbon National Agency in Algeria) approved the proposed Development Plan for the GKN and GKS oil fields following the Declaration of Commerciality in June 2007. Todd Kozel, Chairman and Chief Executive Officer said: "2007 was a year of significant challenges for Gulf Keystone Petroleum fromwhich I believe the Company has emerged both operationally and strategicallystronger. Entering into two production sharing contracts in Kurdistan,entitlement to production from the GKN-1 oil field and continuing explorationactivity in Algeria has ensured the shape of Gulf Keystone, and as such ourfuture prospects, has improved considerably over the past year." Christopher Garrett, the Company's Vice President of Operations, who has over 29years relevant experience within the sector and who has been involved with thisproject for over 2 years has reviewed and approved the technical informationcontained in this announcement. Mr Garrett is a Fellow of the GeologicalSociety, a member of the Petroleum Exploration Society of Great Britain, and aCertified Petroleum Geologist (American Association of Petroleum Geologists).He meets the criteria of a qualified person under the AIM guidance note formining, oil and gas companies. Enquiries Gulf Keystone Petroleum+44 (0) 20 7514 1400Todd Kozel, Chairman and Chief Executive Officer RBC Capital Markets+44 (0) 20 7653 4667Sarah Wharry Tristone+44 (0) 207 399 2470Simon Ashby-Rudd Citigate Dewe Rogerson+44 (0) 20 7638 9571 Media: Martin JacksonAnalysts: George Cazenove or visit: www.gulfkeystone.com Executive Chairman & Chief Executive Officer's Statement Overview The year began well with approval by the Algerian Council of Ministers for theintroduction of BG Group into the Hassi Ba Hamou ("HBH") Contract in theTimimoun Basin / Allal High area in central Algeria, with its formalratification by an announcement in the Official Journal of Algeria. This was,for Gulf Keystone, a strategically important transaction which significantlyenhanced our financial position and brought in a strong partner as operator. The Declaration of Commerciality by the Joint SONATRACH / Gulf KeystoneManagement Committee in June 2007 for the GKN and GKS oil fields, located inBlock 126a, South East Constantine Basin, North Algeria, was followed byconfirmation in January 2008 of approval by ALNAFT (the Hydrocarbon NationalAgency) of the Field Development Plan. This triggered an entitlement to a shareof production revenues from the GKN and GKS fields effective from 10 October2007, which are a first for Gulf Keystone marking our evolution into anexploration and production company. In November 2007, we were delighted, in partnership with MOL Hungarian Oil & GasPublic Company Limited ("MOL"), to be awarded interests in two blocks inKurdistan. This was an important first step in the diversification of GulfKeystone's asset portfolio and extended our relationships with majorinternational energy companies. We have made a good start to the current year. Two wells have been completedand preparations are advanced for the commencement of a third well of a six wellcampaign to be drilled by our operating partner BG Group on the HBH Permit,Algeria. 2D seismic on the Shaikan Block, Kurdistan, has been completed andseismic on the Akri-Bijeel Block, Kurdistan, has begun. I would like to thank all of the Company's employees who have contributedenormously to the strong position that we now enjoy. Management A number of directors decided to leave the Company after termination of the RAKPetroleum proposal and the Company then embarked on a major restructuringinitiative. I assumed the role of Chairman and Chief Executive and co-founder Mr. AliAl-Qabandi assumed one of the vacant Director positions. In January 2008, I was delighted to welcome Mr. Jeremy Asher and Mr. Mehdi Varzias Non-Executive Directors of the Company. Jeremy Asher has considerable oiland gas and business management experience and Mehdi Varzi, a joint Iranian andBritish national, has considerable experience in the international oil and gasindustry. Both have significantly strengthened our Board. I was also delighted to welcome Mr. Ewen Ainsworth who joined the Board inJanuary 2008, as Finance Director. Ewen Ainsworth has over 20 years experienceof finance roles within the oil and gas industry, including as Finance Directorof a publicly listed oil and gas company. Operating Review Algeria Hassi Ba Hamou ("HBH") Permit The HBH Permit, awarded to Gulf Keystone in May 2005, comprises five blockswithin an area of 18,380 square kilometres in the Timimoun Basin / Allal Higharea in central Algeria. The HBH Permit contains the significant HBH gas fieldthat was discovered by SONATRACH in 1965. Following approval by the Algerian Council of Ministers, the introduction of BGGroup ("BG") into the HBH Contract was formally ratified in January 2007 by anannouncement in the Official Journal of Algeria. This completed the transactionbetween Gulf Keystone and BG, first announced in August 2006, in which BGacquired a 36.75% interest in the HBH Concession, with Gulf Keystone retaining a38.25% interest and SONATRACH a 25% interest. The 3D seismic programme shot over 533 square kilometres of the HBH gas field,which began in July 2007, has been completed on plan and the results have beenevaluated giving the partners a greater understanding of the gas discovery. The HBH Permit wide 2D seismic programme was completed on 4 December 2007 with2,047 kilometres of seismic having been acquired to fulfil the 2,000 kilometrecommitment. Early indications from the data interpretation are that promisingleads and prospects have been identified over the HBH Permit, three of which thepartners agreed to prioritise as drill targets in the six well campaigncurrently underway. The six well drilling programme planned for the HBH LicenceArea consists of three exploration wells and three development wells which willsatisfy the contractual commitment for Period 1 of the Exploration Licence. Spudded on 16 December 2007, HBH-4, an appraisal well on the HBH gas field, thefirst of the six well campaign, was successfully drilled to a total depth of1,011 metres and tested. A production test, completed on reservoirs of Devonianage, achieved a stabilised flow rate of 12,800 cubic metres per hour (10.8mmscfg per day) through an 88/64-inch choke. The drill rig then moved to well HBHN-1, an exploration well to the north of theHBH gas field, which was spudded on 21 February 2008. The well completeddrilling in April 2008 but failed to find commercial quantities of hydrocarbonsand it was abandoned. The rig has now moved to prepare for drilling of the third well of the six wellcommitment, exploration well RM-1. Blocks 108 and 128a Formal ratification in the Official Journal of Algeria of The Council ofMinisters of the award of the Ben Guecha Blocks (108 and 128a), which GulfKeystone signed in April 2005, occurred in January 2007, marking the start ofthe first three year period of exploration on the contract. Gulf Keystone immediately commenced exploration and appraisal activities on theBlocks. On Block 108, we completed the processing and preliminaryinterpretation of 156 square kilometres of 3D seismic acquired over theproducing Ras Toumb field. The inventory of potential prospects has beenreviewed and the risks and rewards are currently being assessed. The remaining work commitment covering the blocks includes the drilling of oneappraisal well on the Ras Toumb field and the drilling of one exploration well. Block 126 SONATRACH and Gulf Keystone reached final agreement on all aspects of the fielddevelopment plans for the GKS and GKN oil fields, located in Block 126a, SouthEast Constantine Basin, North Algeria on 25 June 2007, the joint ManagementCommittee for the 126a Block unanimously approved the declaration ofcommerciality for both fields. The Development Plan was then submitted to ALNAFT (the Hydrocarbon NationalAgency) for approval which was received in January 2008. Approval conferred onGulf Keystone entitlement to its first producing revenues effective from 10October 2007. The GKN-1 well is currently producing at approximately 1,000 bopd gross and theDevelopment Plan envisages bringing the GKS-2 well on stream as soon aspracticable. SONATRACH and Gulf Keystone intend to build a pipeline to connectGKS-2 to the existing evacuation pipeline so that this well can beginproduction. The GKS-2 well produced at a rate equivalent to 4,586 bopd and 4.61mmcfgd when it was tested in 2005. The two fields will then be developed in a staged process through theacquisition of a 3D seismic survey and a development drilling programme jointlyconducted by SONATRACH and Gulf Keystone. In addition, it is intended that theexisting facilities will be upgraded to handle c3,000 bopd (gross). Block 129 Early in 2007, the environmental impact assessment was completed and the workprogramme and budget finalised to include the testing of one of the twodiscovery wells Hassi El Kerma-1 ("HEK-1") and Hassi El Kerma-3 ("HEK-3"), theacquisition of additional 2D seismic and the processing of 412 square kilometresof 3D seismic acquired over the DDN discovery. In April 2007, Gulf Keystone commenced workover operations on well HEK-3, an oiland gas discovery well drilled by SONATRACH in 2004. At that time, the well wastested over the Cretaceous, Coniacian limestone interval and achieved, postacidisation, a flow rate of 184 barrels of oil over a 4 hour period, prior tothe well being suspended. Gulf Keystone re-entered the well and tested the samezone, over the measured interval 2,439 to 2,446 metres, employing an acidfracturing technique to improve connectivity between the reservoir and thewellbore. After cleaning up the well, a stabilised flow rate of 1,040 barrelsper day of 31 degrees API oil was achieved through a 32/64 inch choke. The wellwas flowed through a separator for a total of 4.5 days and over 3,500 barrels ofoil were produced during this period. The crude contained little entrained gasand has an estimated gas/oil ratio of 93 standard cubic feet per barrel. Thewell is presently suspended. A large amount of good quality engineering data was collected during the testprogramme which, combined with the produced volume of oil and the long flow andshut in periods, is providing valuable data for reservoir evaluation and fielddevelopment study purposes. SONATRACH and Gulf Keystone are evaluating thepotential for the commercial development of the HEK discovery. Kurdistan Gulf Keystone was delighted in November 2007 to be awarded interests in twoProduction Sharing Contracts ("PSC's") covering the Shaikan Block and theAkri-Bijeel Block and also to be in partnership in these PSC's with MOL, throughits subsidiary Kalegran, and Texas Keystone Inc. ("Texas Keystone"). Shaikan Block The Shaikan Block is situated approximately 90 kilometres North-West of Erbiland covers an area of 283 square kilometres. The interests under the PSC areGulf Keystone 75% (operators), Kalegran 20% and Texas Keystone 5%. GulfKeystone will carry Texas Keystone's 5% share of initial costs and expensesprior to drilling the first well. Acquisition of 2D seismic on the Shaikan Block began on 2 March 2008 and wascompleted on 19 April 2008. A total of 171 kilometres was acquired utilisingboth vibrator and dynamite sources. The 2D seismic is now being processed. Akri-Bijeel Block In consideration for introducing Kalegran into the Shaikan partnership, GulfKeystone received a 20% interest, on a ground floor basis, in the Kalegranoperated PSC covering the Akri-Bijeel Block. The Akri-Bijeel Block is adjacentto the Shaikan Block. The interests in this PSC are Kalegran 80% (operator) andGulf Keystone 20%. The partners expect to begin an extensive 2D seismic programme on theAkri-Bijeel Block in the second quarter of 2008 to assess the explorationpotential of the Block. The commercial terms of the PSC are in line with the terms and conditionspublished by the Kurdistan Regional Government ("KRG") on its website. Both thePSCs are of a 25 year duration with an initial 3 year exploration phase. GulfKeystone's expected total expenditure for these two blocks over the next threeyears, given its current interests, is approximately US$53 million, the majorityof which is expected to have been incurred during the initial six month period. Financial Review The Company reports a loss after taxation of US$30.0m (2006: profit US$46.3m)for the year ended 31 December 2007. This loss is after a charge of US$20.6m asa result of an impairment test on Block 126a following the failure to findcommercial levels of hydrocarbons in GRJ. Net cash generated for the period of $28.9m (2006: $7.9m), reflected thecollection of $55m from the partial disposal of HBH in the prior year, whichadded significantly to the group's cash reserve. Net cash used in operatingactivities for the period was $11.4m (2006:$11.3m). In common with many exploration companies, the Group raises finance for itsexploration and appraisal activities in discrete tranches to finance itsactivities for specific periods. The directors actively monitor the cashrequirements of the business, and further funding is raised as and whenrequired. The group's existing cash reserves, which stood at $88.3m at 31December 2007 (2006: $59.3m), along with the expected production revenue fromthe GKN and GKS fields, are considered to be sufficient to cover known workcommitments on existing projects. A successful outcome from these workcommitments will require additional financing for these projects as they moveinto appraisal and/or development. Outlook The shape of Gulf Keystone, and as such our future prospects, has improvedconsiderably over the past year. Gulf Keystone is now entitled to its first production revenues from Block 126and it is anticipated that this will allow the development of these fields to beself financing. The Gulf Keystone / SONATRACH Joint Venture is focused onincreased production from the GKN and GKS fields and the prudent futuredevelopment of these fields. The work programme on the HBH Permit is progressing at a steady pace. Operator,BG North Sea Holdings, is currently preparing to drill the third well of a sixwell programme while the partners, SONATRACH / Gulf Keystone / BG, continue toevaluate the economic potential of the HBH discovery and further explorationupside. Our 2D seismic survey on the Shaikan Block in the Kurdish Region of Iraq hasbeen completed and it is intended to drill an exploration well on the Shaikanstructure as soon as a drilling rig and services can be contracted. Ourpartner, MOL, has brought forward their planned 400 kilometre 2D seismicprogramme on the Akri-Bejeel Block in Kurdistan, its process to acquire seismicbegan in April 2008. The results of that survey will be used to plan anexploration drilling programme on the Block. The progress being made on bothblocks in Kurdistan is outstanding. I am confident that 2008 will prove to be a year of historically unparalleledactivity and potential for Gulf Keystone. TF Kozel Executive Chairman & Chief Executive Officer Directors' Report The directors present their annual report and the consolidated financialstatements of Gulf Keystone Petroleum Limited (the "Group") for the year ended31 December 2007. Gulf Keystone Petroleum Limited is a public company, incorporated in Bermuda,and quoted on the Alternative Investment Market of the London Stock Exchange. Principal Activities The principal activity of the Group during the year was that of oil and gasexploration operating in the Republic of Algeria and the Kurdistan Region ofNorthern Iraq. Results and Dividends The Group's net loss after tax for the year was $30.0 million (2006: net profitof $46.3 million). The directors do not recommend a dividend for the year(2006: $ nil). Capital Structure Details of the authorised and issued share capital, together with movements inthe Company's issued share capital during the year are shown in Note 15. There are no specific restrictions on the size of a holding nor on the transferof shares, which are both governed by the general provisions of the Company'sbye-laws and prevailing legislation. The Directors are not aware of anyagreements between holders of the company's shares that may result inrestrictions on the transfer of securities or on voting rights. Details of the employee share scheme are set out in Note 21. No person has any special rights of control over the Company's share capital andall issued shares are fully paid. With regard to the appointment and replacement of directors, the Company isgoverned by its bye-laws, the Companies Act (Bermuda) and related legislation. Review of the Business and Future Developments A review of the business is given on pages 3 to 6 of this document. Post Balance Sheet Events On 10 January 2008, ALNAFT (the Hydrocarbon National Agency in Algeria) approvedthe proposed Development Plan for the GKN and GKS oil fields located in NorthernAlgeria. The Field Development Plan envisages producing oil from the GKN-1 well(currently producing at approximately 1,000 bopd gross) and bringing the GKS-2well on stream as soon as practicable. Under the terms of the Development Plan, the Group is entitled to an approximate30% to 49% share of production from the GKN-1 well effective from 10 October2007. As a result, oil production revenue of $5.4 million and cost of sales of$3.3 million has been recorded for the year ended 31 December 2007. Directors The following directors have held office during the year. TF Kozel - Executive Chairman & Chief Executive Officer (2) JW Guest - President (resigned 23 July 2007) RW Parsons - Chairman (resigned 23 July 2007) (1) Sheikh Sultan Bin Saqr Al-Qassimi - Non-Executive Director (resigned 23 July2007) (1) AA Al-Qabandi - Executive Vice President (appointed 23 July 2007) (2) JR Cooper - Finance Director (resigned 23 January 2008) M Varzi - Non-Executive Director (appointed 7 January 2008) (3) J Asher - Non-Executive Director (appointed 21 January 2008) (3) KE Ainsworth - Finance Director (appointed 24 January 2008) (1) Member of the audit committee, remuneration and appointments committee anddirectors' remuneration committee up to 23 July 2007. (2) Member of the audit committee, remuneration and appointments committee anddirectors' remuneration committee from 23 July 2007 to 21 January 2008. (3) Member of the audit committee, remuneration and appointments committee anddirectors' remuneration committee from 22 January 2008. Directors' Report continued Directors' Interests in Shares and Options Directors' interests in the shares of the Company, including family interests,were as follows: At 31 December 2007 At 1 January 2007 Number of Number of common shares common sharesTF Kozel 20,050,000 20,050,000RW Parsons n/a 300,000JW Guest n/a 698,614JR Cooper n/a 126,533AA Al-Qabandi 5,500,000 5,500,000 In addition to the above interests, TF Kozel and AA Al-Qabandi are shareholdersin Gulf Keystone Petroleum Company LLC which owns 40,000,000 Common Shares. On 15 February 2008, Agile Energy purchased 250,000 ordinary shares in theCompany at a price of 31.50p. Agile Energy is a Channel Islands company owned bythe Asher Family Trust, of which J Asher is the settlor and lifetimebeneficiary. Directors' interests in share options of the Company, including familyinterests, as at 31 December are disclosed on Page 12. Substantial Shareholdings Other than the directors' interests shown above, the Company has been notifiedof the following substantial interests as at 14 April 2008: Number of Common Shares Percentage of issued share capital Chase Nominees Ltd 37,999,296 13.64%Credit Suisse Client Nominees (UK) Ltd 20,984,862 7.54%Gibca Ltd 20,000,000 7.18%Appollo Nominees Ltd 19,530,605 7.01%Credit Suisse Securities (Europe) Ltd 16,850,920 6.05%HSBC Global Custody Nominee (UK) Ltd 10,553,000 3.79%Evolution Securities Nominees Ltd 10,436,000 3.75% Going Concern The Directors have considered the factors relevant to support a statement ongoing concern. They have a reasonable expectation that the Group will continuein operational existence for the foreseeable future and have therefore used thegoing concern basis in preparing the financial statements. In common with many exploration companies, the Group raises finance for itsexploration and appraisal activities in discrete tranches to finance itsactivities for specific periods. The directors actively monitor the cashrequirements of the business, and further funding is raised as and whenrequired. The group's existing cash reserves, which stood at $88.3m at 31December 2007 (2006: $59.3m), along with the expected production revenue fromthe GKN and GKS fields, are considered to be sufficient to cover known workcommitments on existing projects. A successful outcome from these workcommitments will require additional financing for these projects as they moveinto appraisal and/or development. Annual General Meeting 2008 The resolutions to be proposed at the Annual General Meeting ("AGM") to be heldon 10 June 2008 are set out in the Notice of the AGM which can be found on Page46. By order of the board TF Kozel Executive Chairman & Chief Executive Officer 7 May 2008 Corporate Governance Statement Principles of Corporate Governance Although not required to, the policy of the Board is to manage the affairs ofthe Group in accordance with the principles underlying the Combined Code onCorporate Governance insofar as is appropriate given the circumstances of theGroup. The Board The Group is led and controlled by a Board comprising the Executive Chairman andChief Executive Officer, two Non-Executive Directors and two ExecutiveDirectors. There are no matters specifically reserved to the Board for its decision,although board meetings are held on a regular basis, outside of the UK, andeffectively no decision of any consequence is made other than by the directors.All directors participate in the key areas of decision-making, including theappointment of new directors, through the Remunerations and AppointmentsCommittee. The Board is responsible to shareholders for the proper management of the Group.A statement of directors' responsibilities in respect of the financialstatements is set out on Page 14. The Non-Executive Directors have a particularresponsibility to ensure that the strategies proposed by the Executive Directorsare fully considered. To enable the Board to discharge its duties, all Directors have full and timelyaccess to all relevant information. There is no agreed formal procedure for the Directors to take independentprofessional advice at the Group's expense, however, independent professionaladvice is made available where considered appropriate. All Directors submit themselves for re-election at the Annual General Meeting atregular intervals. There are no specific terms of appointment for Non-ExecutiveDirectors. During 2007, 13 scheduled board meetings were held. Eight meetings took place incontinental Europe, five of which were in countries outside of the EU; four inNorth America and one in the Middle East. Board Committees The following committees, which have written terms of reference, deal withspecific aspects of the Group's affairs. As a result of Board changes during2007, Todd Kozel and Ali Al-Qabandi were required to sit on several committeesas an interim measure until two non-executive directors were appointed. Whilstthis is not considered to be best practice, the Company made every effort toappoint several non-executive directors to rectify this situation and on 22January 2008, Mehdi Varzi and Jeremy Asher were appointed as members of theRemuneration and Appointments Committee and the Audit Committee. The Remuneration and Appointments Committee The Remuneration and Appointments Committee is responsible for makingrecommendations to the Board on the Company's framework of Executiveremuneration and its cost. The Committee determines the contract terms,remuneration and other benefits for each of the Executive Directors and forother senior members of management and is advised, as necessary, by a leadingfirm of recruitment consultants. The Committee comprised Roger Parsons andSheikh Sultan Bin Saqr Al-Qassimi up to their resignation on 23 July 2007, ToddKozel and Ali Al-Qabandi to 21 January 2008 and has comprised Mehdi Varzi andJeremy Asher since that date. Details of the Directors' remuneration are setout on Pages 11 to 13. The Audit Committee The Audit Committee comprised Roger Parsons and Sheikh Sultan Bin SaqrAl-Qassimi up to their resignation on 23 July 2007, Todd Kozel and AliAl-Qabandi up to 21 January 2008 and has comprised Mehdi Varzi and Jeremy Ashersince that date. Its primary tasks are to review the half-yearly and annualaccounts before they are presented to the Board, focusing in particular onaccounting policies and areas of management judgement and estimation. TheCommittee is responsible for monitoring the controls which are in force toensure the integrity of the information reported to the shareholders. TheCommittee acts as a forum for discussion of internal control issues andcontributes to the Board's review of the effectiveness of the Group's internalcontrol and risk management systems and processes. It advises the Board on theappointment of external auditors and on their remuneration for both audit andnon-audit work, and discusses the nature and scope of the audit with theexternal auditors. The Committee assesses the performance of the externalauditors as well as their independence and objectivity. The external auditors confirm their independence each year in writing to theCommittee. The Committee, which meets at least three times per year, provides a forum forreporting by the Group's external auditors. Meetings are also attended, byinvitation, by the Finance Director and CEO. Internal Control The Board acknowledges its responsibility for establishing and monitoring theGroup's systems of internal control. Although no system of internal control canprovide absolute assurance against material misstatement or loss, the Group'ssystems are designed to provide the Directors with reasonable assurance thatproblems are identified on a timely basis and dealt with appropriately. The key procedures that have been established and which are designed to provideeffective control are as follows: - Management Structure: The Board meets regularly to discuss all issues affecting the Group; and - Investment Appraisal: The Group has a clearly defined framework for investment appraisal and approval is required by the Board where appropriate. The Board regularly reviews the effectiveness of the systems of internal controland considers the major business risks and the control environment. Nosignificant control deficiencies have come to light during the year and noweakness in internal financial control has resulted in any material losses,contingencies or uncertainties which would require disclosure as recommended bythe guidance for directors on reporting on internal financial control. The Board considers that in light of the control environment described above,there is no current requirement for a separate internal audit function. Relations with Shareholders The Executive Chairman and Chief Executive Officer and Finance Director are theCompany's principal spokespeople with investors, fund managers, the press andother interested parties. Each of the Non-Executive Directors are available toattend meetings with major shareholders (without the Executive Directorspresent), if requested by such major shareholders. At the Annual GeneralMeeting, private investors are given the opportunity to question the Board. This year's AGM will be held on 10 June 2008. Report of the Remuneration and Appointments Committee Remuneration and Appointments Committee The Remuneration and Appointments Committee comprised Roger Parsons and SheikhSultan Bin Saqr Al-Qassimi up to their resignation on 23 July 2007, Todd Kozeland Ali Al-Qabandi up to 21 January 2008 and has comprised Mehdi Varzi andJeremy Asher since that date. The Committee was provided with information supplied by Opus Executive Partners("Opus"), a specialist recruitment Company, with regard to structuringDirectors' remuneration packages and searching for suitable candidates. Opusdid not provide any other services to the Group. Details of the remuneration of each director are set out below. Remuneration Policy The policy of the Committee is to reward Executive Directors in line with thecurrent remuneration of Directors in comparable businesses, taking intoconsideration the advice of independent benefit consultants in order to recruit,motivate and retain high quality executives within a competitive market place. There are two main elements of the remuneration packages for Executive Directorsand Senior Management: • basic annual salary (including Directors' fees) and benefits; and • share option and bonus share incentives. There are no pension arrangements in the Group. The Directors have share options granted to them under the terms of the ShareOption Scheme which is open to other qualifying employees. The exercise ofoptions under the Scheme is based upon the satisfaction of conditions relatingto the share price and length of employment. The conditions vary from grant togrant. Directors' Contracts It is the Company's policy that Executive Directors should have contracts withan indefinite term providing for a maximum of one year's notice. In the event ofearly termination, the Directors' contracts provide for compensation up to amaximum of basic salary for the notice period. Todd Kozel, Ali Al-Qabandi and Ewen Ainsworth have service contracts with theCompany. These can be terminated by either side on twelve months' notice forTodd Kozel, six months for Ewen Ainsworth and one week for Ali Al-Qabandi. Non-Executive Directors The fees of Non-Executive Directors are determined by the Board as a wholehaving regard to the commitment of time required and the level of fees insimilar companies. Directors' Emoluments Bonus 2007 2006 Salary Shares Fees Total Total $ $ $ $ $ TF Kozel 675,000 - - 675,000 675,000RW Parsons - - 47,379 47,379 141,000JW Guest 330,808 416,634 - 747,442 1,316,406Sheikh Sultan Bin Saqr Al-Qassimi - - 26,322 26,322 45,000JR Cooper 360,662 164,322 - 524,984 434,584CA Brown - - - - 220,062AA Al-Qabandi 119,096 - - 119,096 - 1,485,566 580,956 73,701 2,140,223 2,832,052 Directors' Interests in Options Directors' interests in share options of the Company, including familyinterests, as at 31 December 2007 and for the comparative period, were asfollows: Date of grant Number of Exercise Option exercise period options over Price common (Great British shares Pence)2007TF Kozel 20 Aug 05 2,650,000 48.00p 20 Aug 05 - 19 Aug 14AA Al-Qabandi 20 Aug 05 500,000 48.00p 20 Aug 05 - 19 Aug 14 2006TF Kozel 20 Aug 05 2,650,000 48.00p 20 Aug 05 - 19 Aug 14AA Al-Qabandi 20 Aug 05 500,000 48.00p 20 Aug 05 - 19 Aug 14RW Parsons 20 Aug 05 50,000 48.00p 20 Aug 05 - 19 Aug 14JW Guest 20 Aug 05 50,000 48.00p 20 Aug 05 - 19 Aug 14JW Guest 5 Jan 06 2,100,000 66.00p 5 Jan 06 - 30 Dec 15Sheikh Sultan Bin Saqr Al-Qassimi 20 Aug 05 500,000 48.00p 20 Aug 05 - 19 Aug 14JR Cooper 29 Sep 06 1,200,000 59.75p 29 Sep 06 - 28 Sep 09CA Brown 11 May 06 400,000 60.50p 14 May 06 - 5 Oct 07 For the above Directors, the exercise of an option is subject to the followingvesting conditions being satisfied: (a) on or after the share price of Common Shares reaches 96p, an optionshall be exercisable in respect of one-third of total shares under option; (b) on or after the price of the Common Shares reaches 144p, an optionshall be exercisable in respect of a further third of total shares under option;and (c) on or after the price of the Common Shares reaches 192p, an optionshall be exercisable in respect of 100 per cent of the shares under option. There were no share options exercised during the year. On 15 February 2008, KE Ainsworth was granted 1,000,000 options over commonshares and M Varzi and J Asher were each granted 100,000 options over commonshares with an exercise price of 30p. The options will become exercisable infull after a period of three years from the date of grant provided the Company'sclosing share price on any day after the Date of Grant is at a level which is noless than 133% of the option price that is 39.9p. Upon a change of control the above conditions fall away for all options and alloptions become exercisable. There have been no other changes in Directors' interests in share options in theyear other than the lapse of CA Brown, JW Guest, RW Parsons, Sheik SultanAl-Qassimi and JR Cooper's options. Bonus shares The Group granted bonus share payments to certain employees pursuant to GulfKeystone's Executive Bonus Scheme, subject to continuing employment. These bonusshares are awarded over a period of three years but measured at fair value atthe date of grant. JW Guest was the one exception to this as in 2006 his grantwas awarded over a two year period. The number and value of shares granted areas follows: Directors' Bonuses 2007 2007 2006 2006 Number Total Number Total of shares $ of shares $ JW Guest 684,019 416,634 678,614 806,221JR Cooper 253,065 164,322 126,533 150,326 937,084 580,956 805,147 956,547 The awards are included in the directors' emoluments on Page 12. JW Guest's award includes entitlement for both 2006 and 2007 and certain othercontractual rights, including a percentage of salary to be taken in sharesinstead of cash. The market price of the shares at 31 December 2007 and 31 December 2006 was32.3p and 70p respectively and the range during 2007 was 25.5p to 72.5p. Approved TF Kozel Executive Chairman & Chief Executive Officer 7 May 2008 Directors' Responsibilities in the Preparation of Financial Statements The Directors are responsible for preparing the Annual Report and the financialstatements in accordance with applicable law and regulations. The Directors have elected to prepare the group financial statements underInternational Financial Reporting Standards ("IFRSs"). International Accounting Standard 1 requires that financial statements presentfairly for each financial year the Company's financial position, financialperformance and cash flows. This requires the faithful representation of theeffects of transactions, other events and conditions in accordance with thedefinitions and recognition criteria for assets, liabilities, income andexpenses set out in the International Accounting Standards Board's 'Frameworkfor the Preparation and Presentation of Financial Statements'. In virtually allcircumstances, a fair presentation will be achieved by compliance with allapplicable IFRSs. Directors are also required to: • properly select and apply accounting policies; • present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; and • provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance. The Directors are responsible for keeping proper accounting records whichdisclose with reasonable accuracy at any time the financial position of theCompany, for safeguarding assets and for taking reasonable steps for theprevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporateand financial information included on the Company's website. Legislation in Bermuda governing the preparation and dissemination of financialstatements may differ from legislation in other jurisdictions. Independent Auditors' Report to the members of Gulf Keystone Petroleum Limited We have audited the Group financial statements of Gulf Keystone PetroleumLimited for the year ended 31 December 2007 which comprise the ConsolidatedIncome Statement, Consolidated Balance Sheet, Statement of Changes in Equity,Consolidated Cash Flow Statement, Summary of Significant Accounting Policies andthe related notes 1 to 25. This report is made solely to the Company's members, as a body. Our audit workhas been undertaken so that we might state to the Company's members thosematters we are required to state to them in an auditor's report and for no otherpurpose. To the fullest extent permitted by law, we do not accept or assumeresponsibility to anyone other than the Company and the Company's members as abody, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors The directors' responsibilities for preparing the Annual Report and thefinancial statements in accordance with applicable law and InternationalFinancial Reporting Standards (IFRSs) are set out in the Statement of Directors'Responsibilities. Our responsibility is to audit the financial statements in accordance withrelevant legal and regulatory requirements and International Standards onAuditing (UK and Ireland). We report to you our opinion as to whether the financial statements give a trueand fair view and whether the financial statements have been properly preparedin accordance with the accounting policies as set out in the Summary ofSignificant Accounting Policies. In addition we report to you if, in our opinion, the Company has not kept properaccounting records or if we have not received all the information andexplanations we require for our audit. We read other information contained in the Annual Report and consider whether itis consistent with the audited financial statements. The other informationcomprises only the Directors' Report, the Report of the Remuneration andAppointments committee, the Chairman's and the Chief Executive Officer'sStatement and the Corporate Governance Statement. We consider the implicationsfor our report if we become aware of any apparent misstatements or materialinconsistencies with the financial statements. Our responsibilities do notextend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing(UK and Ireland) issued by the Auditing Practices Board. An audit includesexamination, on a test basis, of evidence relevant to the amounts anddisclosures in the financial statements. It also includes an assessment of thesignificant estimates and judgements made by the directors in the preparation ofthe financial statements, and of whether the accounting policies are appropriateto the Group's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information andexplanations which we considered necessary in order to provide us withsufficient evidence to give reasonable assurance that the financial statementsare free from material misstatement, whether caused by fraud or otherirregularity or error. In forming our opinion we also evaluated the overalladequacy of the presentation of information in the financial statements. Opinion In our opinion: • the financial statements give a true and fair view, in accordance with IFRSs, of the state of the Group's affairs as at 31 December 2007 and of its loss for the year then ended; • the financial statements have been properly prepared in accordance with the accounting policies set out in the Summary of Significant Accounting Policies; and • the information given in the Directors' Report is consistent with the financial statements. Deloitte and Touche LLP Chartered Accountants and Registered Auditors London, United Kingdom 7 May 2008 Consolidated Income Statement for the year ended 31 December 2007 Notes 2007 2006 $'000 $'000 Continuing Operations Revenue 5 5,414 - Cost of sales (3,257) - Gross profit 2,157 - Other income/(expense) Gain on sale of assets 24 - 61,103 Impairment of intangible exploration assets 9 (20,585) -General and administrative expenses (16,172) (16,589)(Loss)/profit from operations 3 (34,600) 44,514 Interest revenue 5 5,183 2,160Finance costs (101) (229) (Loss)/profit before tax (29,518) 46,445 Tax expense 6 (377) (136) (Loss)/profit after tax for the year (29,895) 46,309 (Loss)/profit per share (cents)Basic 7 (10.79) 17.69Diluted 7 (10.79) 16.74 Consolidated Balance Sheet as at 31 December 2007 Notes 2007 2006 $'000 $'000 Non-current assets Property, plant and equipment 8 24,097 26,782Intangible assets 9 41,996 19,955Financial asset 12 6,155 5,597 72,248 52,334Current assetsInventories 11 5,526 4,711Trade and other receivables 12 6,047 59,999Cash and cash equivalents 12 88,286 59,328 99,859 124,038Total assets 172,107 176,372 Current liabilities Trade and other payables 13 36,684 10,835Tax liabilities 6 377 136Provisions 14 1,054 2,050Total liabilities 38,115 13,021 Net assets 133,992 163,351 EquityShare capital 15 1,853 1,853Share premium account 15 159,076 159,063Share option reserve 16 3,988 3,535Exchange translation reserve 16 27 (43)Accumulated losses 17 (30,952) (1,057)Total equity 133,992 163,351 The financial statements were approved by the Board of Directors and authorisedfor issue on 7 May 2008 and are signed on its behalf by: TF Kozel Executive Chairman & Chief Executive Officer KE Ainsworth Finance Director Consolidated Statement of Changes in Equity for the year ended 31 December 2007 Attributable to equity holders of the Group Share Share Share Accumulated Exchange Total option losses translation capital premium reserve reserve equity account $'000 $'000 $'000 $'000 $'000 $'000 Balance as at 1 January 2006 1,638 135,349 502 (47,366) (57) 90,066 Share based payment expense - - 3,033 - - 3,033Exchange differences arising on translation of - - - - 14 14overseas operationsShare conversion and issue 215 23,714 - - - 23,929Net profit for the year - - - 46,309 - 46,309Balance at 1 January 2007 1,853 159,063 3,535 (1,057) (43) 163,351 Share based payment expense - - 453 - - 453Exchange differences arising on translation of - - - - 70 70overseas operationsShare conversion and issue - 13 - - - 13Net loss for the year - - - (29,895) - (29,895)Balance at 31 December 2007 1,853 159,076 3,988 (30,952) 27 133,992 Consolidated Cash Flow Statement for the year ended 31 December 2007 Notes 2007 2006 $'000 $'000 Operating activitiesCash used in operations 18 (15,916) (13,418)Tax paid (136) -Interest received 4,625 2,160Net cash used in operating activities (11,427) (11,258) Investing ActivitiesProceeds from prior year sale of assets 55,000 -Purchase of intangible assets (9,184) (3,166)Purchase of property, plant and equipment (455) (1,401)Net cash generated by / (used in) investing activities 45,361 (4,567) Financing activitiesInterest paid - (229)Repayment of loan (5,000) -Proceeds on issue of share capital 13 23,929Net cash (used in) / generated by financing activities (4,987) 23,700 Net increase in cash and cash equivalents 28,947 7,875Cash and cash equivalents at beginning of year 59,328 51,439Effect of foreign exchange rate changes 11 14 Cash and cash equivalents at end of the year being bank balances and cash on hand 12 88,286 59,328 Consolidated Financial Statements Summary of Significant Accounting Policies General information The Company is incorporated in Bermuda and it is quoted on the AlternativeInvestment Market of the London Stock Exchange. The Company serves as theholding Company for the Group, which is engaged in oil and gas exploration andproduction, operating in the Republic of Algeria and the Kurdistan Region ofNorthern Iraq. Adoption of new and revised accounting standards In the current year the Group has adopted IFRS 7 Financial Instruments:Disclosures which is effective for annual reporting periods beginning on orafter 1 January 2007 and the related amendment to IAS 1 Presentation ofFinancial Statements. The impact of the adoption of IFRS 7 and the changes toIAS 1 has been to expand the disclosures provided in these financial statementsregarding the Group's financial instruments and management of capital (see Note23). Four Interpretations issued by the International Financial ReportingInterpretations Committee became effective for the current period. These are:IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting inHyperinflationary Economies; IFRIC 8 Scope of IFRS 2; IFRIC 9 Reassessment ofEmbedded Derivatives; and IFRIC 10 Interim Financial Reporting and Impairment.The adoption of these Interpretations has not led to any changes in the Group'saccounting policies. At the date of authorisation of these financial statements, the followingStandards and Interpretations which have not been applied in these financialstatements were in issue but not yet effective: IAS 23 (revised) Borrowing Costs IAS 27 (revised) Consolidated and Separate Financial Statements IFRS 3 (revised) Business Combinations IFRS 8 Operating Segments IFRIC 11 IFRS 2 Group and Treasury Share Transactions IFRIC 12 Service Concession Arrangements IFRIC 13 Customer Loyalty Programmes IFRIC 14 IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction The Directors anticipate that the adoption of these Standards andInterpretations in future periods will have no material impact on the financialstatements of the Group except for revised segment disclosures when IFRS 8 comesinto effect for periods commencing on or after 1 January 2009. Basis of accounting The financial statements have been prepared in accordance with InternationalFinancial Reporting Standards ("IFRSs"). The financial statements have been prepared under the historical cost basis,except for the valuation of share options and contingent deferred consideration,and on a going concern basis. The principal accounting policies adopted are setout below. Basis of consolidation The consolidated financial statements incorporate the financial statements ofthe Company and enterprises controlled by the Company (its subsidiaries) made upto 31 December each year. The Group uses the purchase method of accounting forthe acquisition of subsidiaries. Consolidated Financial Statements Summary of Significant Accounting Policies continued Basis of consolidation (continued) The results of subsidiaries acquired or disposed of during the year are includedin the consolidated income statement from the effective date of acquisition orup to the effective date of disposal, as appropriate. Where necessary,adjustments are made to the financial statements of subsidiaries to bring theaccounting policies used into line with those of the Group. All intra-group transactions, balances and unrealised gains on transactionsbetween Group companies are eliminated on consolidation. Unrealised losses arealso eliminated unless the transaction provides evidence of an impairment of theasset transferred. Revenue Revenue is recognised to the extent that it is probable that economic benefitswill flow to the Group and the revenue can be reliably measured. Revenue ismeasured at the fair value of consideration received or receivable and reflectsactual sales value in respect of petroleum production in the normal course ofbusiness, net of sales related taxes. Petroleum sales are recorded when goodsare delivered and title has passed. Interest income is accrued on a time basis, with reference to the principaloutstanding and at the effective rate of interest applicable, which is the ratethat exactly discounts estimated future cash receipts through the expected lifeof the financial asset to that asset's net carrying amount. Leasing Rentals payable under operating leases are charged to the income statement on astraight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operatinglease are also spread on a straight-line basis over the shorter of the period tothe next rent review date and the lease term. Foreign currencies The functional and presentation currency of the Company, and the presentationcurrency of the Group, is US Dollars. Transactions in currencies other than US Dollars are recorded at the rates ofexchange prevailing on the dates of the transactions. At each balance sheetdate, monetary assets and liabilities that are denominated in foreign currenciesare retranslated at the rates prevailing on the balance sheet date. Non-monetaryassets and liabilities carried at fair value that are denominated in foreigncurrencies are translated at the rates prevailing at the date when the fairvalue was determined. Gains and losses arising on retranslation are included inthe income statement for the year. On consolidation, the assets and liabilities of the Group's operations which usefunctional currencies other than the US Dollar are translated at exchange ratesprevailing on the balance sheet date. Income and expense items are translated atthe average exchange rates for each month in the year. Exchange differencesarising, if any, are classified as equity and transferred to the Group'stranslation reserve. Such translation differences are recognised as income or asexpenses in the period in which the operation is disposed of. Consolidated Financial Statements Summary of Significant Accounting Policies continued Taxation The tax expense represents the sum of tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year earned in theUnited Kingdom by the Group's subsidiary. Taxable profit differs from net profitas reported in the income statement because it excludes items of income orexpense that are taxable or deductible in other years and it further excludesitems that are never taxable or deductible. The Group's liability for currenttax is calculated by using tax rates that have been enacted or substantivelyenacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differencesbetween the carrying amounts of assets and liabilities in the financialstatements and the corresponding tax bases used in the computation of taxableprofit, and is accounted for using the balance sheet liability method. Deferredtax liabilities are generally recognised for all taxable temporary differencesand deferred tax assets are recognised to the extent that it is probable thattaxable profits will be available against which deductible temporary differencescan be utilised. Such assets and liabilities are not recognised if the temporarydifference arises from the initial recognition of goodwill or from the initialrecognition of other assets and liabilities in a transaction that affectsneither the tax profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differencesarising on investments in subsidiaries and associates and interests in jointventures, except where the Group is able to control the reversal of thetemporary difference and it is probable that the temporary difference will notreverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheetdate and reduced to the extent that is no longer probable that sufficienttaxable profits will be available to allow all or part assets to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in theyear when the liability is settled or the asset is realised using rates thathave been enacted or substantially enacted by the balance sheet date. Deferredtax is charged or credited in the income statement, except when it relates toitems charged or credited directly to equity, in which case the deferred tax isalso dealt with in equity. Property, plant and equipment other than oil and gas interests Property, plant and equipment are stated at cost less accumulated depreciationand any accumulated impairment losses. Depreciation is provided at ratescalculated to write each asset down to its estimated residual value evenly overits expected useful life as follows: Fixtures and equipment - 20% straight-line Intangible assets other than oil and gas Intangible assets, other than oil and gas assets, have finite useful lives andare measured at cost and amortised over their expected useful economic lives asfollows: Computer software - 33% straight-line Consolidated Financial Statements Summary of Significant Accounting Policies continued Intangible and tangible non-current assets - oil and gas interests The Group adopts the full cost method of accounting for its oil and gasinterests. Under the full cost method of accounting all costs relating to theexploration for and development of oil and gas exploration and evaluationinterests, whether productive or not, are accumulated and capitalised asnon-current assets within geographic cost pools. Exploration and evaluationcosts are generally classified as intangible non-current assets during theexploration and evaluation phase and are carried forward where activities in anarea have not yet reached a stage which permits reasonable assessment of theexistence of economically recoverable reserves, and subject to there being noimpairment. Costs dealt with in this way include seismic data, licence acquisition costs,technical work, exploration and appraisal drilling, general technical supportand directly attributable administrative and overhead costs. Exploration and evaluation costs are transferred to property, plant andequipment upon declaration of commerciality and amortised, together withdevelopment costs and decommissioning costs capitalised, over the life of thearea, generally the field. Upon cessation of exploration on each licence, or otherwise when an impairmentof an exploration and evaluation asset arises, an impairment test is performedfor the pool and any balance of unsuccessful exploration and evaluation costscarried forward in the pool is amortised over the life of the pool. Depreciation, depletion and amortisation is provided under the unit ofproduction method which uses the estimated remaining commercial reserves and thenet book value and any further anticipated costs to develop such reserves. Impairment of tangible and intangible non-current assets At each balance sheet date, the Group reviews the carrying amounts of itstangible and intangible assets to determine whether there is any indication thatthose assets have suffered an impairment loss. If any such indication exists,the recoverable amount of the asset, or group of assets, is estimated in orderto determine the extent of the impairment loss (if any). For exploration andevaluation assets, the group of assets considered is the pool. For other assetswhere the asset does not generate cash flows that are independent from otherassets, the Group estimates the recoverable amount of the cash-generating unitto which the asset belongs, generally the field. Recoverable amount is the higher of fair value less costs to sell and value inuse. In assessing value in use, the estimated future cash flows are discountedto their present value using a pre-tax discount rate that reflects currentmarket assessments of the time value of money and the risks specific to theasset for which the estimates of future cash flows have been adjusted. If the recoverable amount is estimated to be less than its carrying amount, thecarrying amount is reduced to its recoverable amount. An impairment loss isrecognised as an expense immediately. Disposals of oil and gas interests The difference between the fair value of the consideration receivable and thecarrying value of the relevant proportion of the oil and gas asset disposed ofis first applied to reduce any unsuccessful exploration and evaluation costcarried in the pool, with any excess gain recognised in the income statement. Carry of expenditures and farm-in arrangements Where the Group enters into a commercial agreement which includes carry ofexpenditures or a farm-in, the arrangement is accounted for according to itscommercial substance. Generally, in the case of a farm-in, the substance is thatthe counterparty has acquired a share, or a greater share, of the underlying oiland gas reserves and the arrangement is treated as a partial disposal. Where thesubstance is that the counterparty has acquired a right, or a conditional rightto be reimbursed by the Group out of future production, a liability isrecognised at the time the obligation arises. In the case of a carry, aliability is recognised when the obligation is probable and is no longerconditional upon factors under the Group's control. Inventories Inventories relate to materials acquired for use in exploration activities.These are valued at the lower of cost and net realisable value. Capitalisation of interest Any interest payable on funds borrowed for the purpose of obtaining a qualifyingasset will be capitalised as a cost of that asset. However, any associatedinterest charge from funds borrowed principally to address a short-term cashflow shortfall during the suspension of development activities shall be expensedin the year. Financial instruments The Group's financial instruments comprise of cash and borrowings together withvarious items such as other receivables and trade payables, which arise directlyfrom its operations. The main purpose of these financial instruments is toprovide working capital. Financial assets and financial liabilities are recognised on the Group's balancesheet when the Group has become a party to the contractual provisions of theinstrument. Impairment of financial assets Financial assets, other than those valued at fair value through the profit andloss, are assessed for indicators of impairment at each balance sheet date.Financial assets are impaired where there is objective evidence that, as aresult of one or more events that occurred after the initial recognition of thefinancial asset, the estimated future cash flows of the investment have beenimpacted. Objective evidence of impairment could include: • significant financial difficulty of the issuer or counterparty; or • default or delinquency in interest or principal payments; or • it becoming probable that the borrower will enter bankruptcy or financial reorganisation. For certain categories of financial asset, such as trade receivables, assetsthat are assessed not to be impaired individually are subsequently assessed forimpairment on a collective basis. Objective evidence of impairment for aportfolio of receivables could include the Group's past experience of collectingpayments, an increase in the number of delayed payments in the portfolio pastthe average credit period, as well as observable changes in local or nationaleconomic conditions that correlate with default on receivables. The carrying amount of the financial asset is reduced by the impairment lossdirectly for all financial assets. If in a subsequent period, the amount of theimpairment loss decreases and the decrease can be related objectively to anevent occurring after the impairment was recognised, the previously recognisedimpairment loss is reversed through profit or loss to the extent that thecarrying amount of the investment at the date the impairment is reversed doesnot exceed what the amortised cost would have been had the impairment not beenrecognised. Trade receivables Trade receivables do not carry any interest and are stated at their nominalvalue as reduced by appropriate allowances for estimated irrecoverable amounts. Contingent deferred consideration Contingent deferred consideration embedded in certain asset sale contracts istreated as a financial instrument and recognised immediately at its fair valueand then reviewed on a periodic basis until the contractual rights to the cashflows from the financial asset expire. Movements in the fair value are taken tothe income statement. Financial liabilities and equity Financial liabilities and equity instruments are classified according to thesubstance of the contractual arrangements entered into. An equity instrument isany contract that evidences a residual interest in the assets of the Group afterdeducting all of its liabilities. Borrowings Interest-bearing loans and overdrafts are recorded at the proceeds received, netof direct issue costs. Finance charges, including premiums payable on settlementor redemption, are accounted for on an accrual basis and are added to thecarrying amount of the instrument to the extent that they are not settled in theyear in which they arise. Trade payables Trade payables are not interest bearing and are stated at their nominal value. Cash and cash equivalents Cash and cash equivalents comprise of cash on hand and demand deposits and othershort-term highly liquid investments that are readily convertible to a knownamount of cash and are subject to an insignificant risk of changes in value. Equity instruments Equity instruments issued by the Company are recorded at the proceeds received,net of direct issue costs. Provisions Provisions are recognised when the Group has a present obligation as a result ofa past event which it is probable will result in an outflow of economic benefitsthat can be reliably estimated. Decommissioning provision The decommissioning provision represents management's best estimate of theGroup's liability for restoring the sites of drilled wells to their originalstatus, discounted where the effect is material. Share-based payments The Group has applied the requirements of IFRS 2 to bonus shares and shareoption schemes allowing certain employees within the Group to acquire or receiveshares of the Company. For all grants of bonus shares and share options, thefair value as at the date of grant is calculated using an appropriate optionpricing model and the corresponding cost is recognised over the expected life ofthe option. The fair value of the bonuses granted is recognised as an employee expense witha corresponding increase in equity to the extent that company performanceconditions are expected to be met. The fair value of the bonuses granted ismeasured using the standard methodology applied by the Company taking intoaccount the terms and conditions upon which the bonuses were granted. To theextent that previous estimates relating to the satisfaction of performanceconditions change, a corresponding adjustment is recognised in the incomestatement. Critical accounting estimates and judgements Estimates and judgements are continually evaluated and are based on historicalexperience and other factors, including expectations of future events that arebelieved to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resultingaccounting estimates and assumptions will, by definition, seldom equal relatedactual results. The estimates and assumptions that have a significant risk ofcausing a material adjustment to the carrying amounts of assets and liabilitieswithin the next financial year are discussed below. Impairment review of GKN and GKS An impairment test of the Group's producing pools requires a comparison of thecarrying value of the assets of the pool with the estimated discounted net cashflows from future production to measure any impairment charge. The future netcash flows from production reflect estimates of reserves, productive rates,future oil and gas prices and costs, all of which are inherently uncertain,together with the application of an appropriate discount rate. Management uses aset of assumptions as at the date of the test which it considers to becollectively reasonable in its judgement, and employs an economist to assist inperforming the tests. However, because of these uncertainties the actual futurecash flows could materially differ from those estimated. Contingent deferred consideration from HBH sale As part of the HBH agreement with the BG group ("BG"), if gas reserves of theHBH field are agreed (in accordance with the agreement) to be greater than 800bcf BG will pay the Group an additional $4m for every 100 bcf over 800 bcf froma minimum of 900 bcf up to a maximum of 1,300 bcf. The Group estimates, based ona previous independent review of potential reserves that the Group will receive$8m contingent deferred income, which discounted to money of the day at 10% perannum results in an estimated receivable contingent deferred income of $6.2m at31 December 2007 (2006: $5.6m). Carrying value of intangible exploration and evaluation assets The outcome of ongoing exploration, and therefore whether the carrying value ofintangible exploration and evaluation assets will ultimately be recovered, isinherently uncertain. Management makes the judgements necessary to implement theGroup's policy with respect to exploration and evaluation assets and considersthese assets for impairment at least annually with reference to indicators inIFRS 6. Decommissioning costs The Group has estimated that decommissioning costs for wells will beapproximately $850,000 per well based on recent experience. It has provided forits share of this amount for GKN-1, GKS-2 and GKS-3. The total amount providedin the balance sheet as at 31 December 2007 at net present value is $1.1m. Estimating revenue recognised The production revenue recognised by the Group is calculated using the monthlyaverage Sahara Blend oil price between 10 October and 31 December 2007 as thefinal sales price at which the revenue will be calculated had not been agreedwith SONATRACH at the date of signing this report. The average Sahara Blend oilprice for this period totalled $89.46 per barrel. Notes to the Consolidated Financial Statements For the year ended 31 December 2007 1. Presentation of financial statements The financial statements have been prepared in accordance with InternationalFinancial Reporting Standards ("IFRSs"). These financial statements are presented in US Dollars since that is thecurrency in which the majority of the Group's transactions are denominated. 2. Business and geographical segments Business and geographical segments For management purposes, the Group is currently organised into three legalentities - Gulf Keystone Petroleum Limited and its subsidiaries Gulf KeystonePetroleum International Limited and Gulf Keystone Petroleum (UK) Limited. Geographical segments For the purposes of segmental reporting, the primary segment reporting format isdetermined to be geographical segments. The Group's main exploration andproduction activities take place in Algeria and the Kurdistan region of NorthernIraq with corporate support functions in Bermuda and the United Kingdom. Business segments The secondary segment reporting format is business segments of which the Grouphas one segment being the exploration and production of oil and gas. Segment information for each geographical location is presented below: 2007 United Algeria Kurdistan Kingdom Bermuda Eliminations Total 2007 2007 2007 2007 2007 2007 $'000 $'000 $'000 $'000 $'000 $'000 Revenue 5,414 - - - - 5,414Inter-segment sales - - 6,639 - (6,639) -Total revenue 5,414 - 6,639 - (6,639) 5,414 Cost of salesProduction costs (3,257) - - - - (3,257)Gross profit 2,157 - 6,639 - (6,639) 2,157 Impairment of intangible (20,585) - (20,585)exploration assets - - -General and (1,902) (1,289) (7,423) (11,647) 6,089 (16,172)administration expenses Segment result (20,330) (1,289) (784) (11,647) (550) (34,600) Interest revenue 5,183Finance costs (101)Loss before tax (29,518)Tax (377)Loss after tax (29,895) Notes to the Consolidated Financial Statements For the year ended 31 December 2007 continued 2. Business and geographical segments continued 2007 continued United Kingdom Algeria Kurdistan Bermuda Eliminations Total 2007 2007 2007 2007 2007 2007 $'000 $'000 $'000 $'000 $'000 $'000 OTHER INFORMATIONCapital additions 17,509 25,836 57 - - 43,402Depreciation and 2,487 3 2,632amortisation 183 - (41)Impairment losses 20,585 - - - - 20,585recognised BALANCE SHEETAssetsSegment assets 71,179 31,633 3,611 144,947 (79,263) 172,107 LiabilitiesSegment liabilities (73,845) (32,916) (1,522) (5,347) 75,515 (38,115) 2006 United Algeria Kurdistan Kingdom Bermuda Eliminations Total 2006 2006 2006 2006 2006 2006 $'000 $'000 $'000 $'000 $'000 $'000 Revenue - - - - - -Inter-segment sales - - 4,276 - (4,276) -Total revenue - - 4,276 - (4,276) - Cost of salesProduction costs - - - - - -Gross profit - - 4,276 - (4,276) - Gain on sale of assets 61,103 - - - - 61,103Impairment of intangible - - - - - -exploration assetsGeneral and (5,517) - (4,024) (11,412) 4,364 (16,589)administration expenses ResultSegment result 55,586 - 252 (11,412) 88 44,514 Interest revenue 2,160Finance costs (229)Profit before tax 46,445 Tax (136)Profit after tax 46,309 Notes to the Consolidated Financial Statements For the year ended 31 December 2007 continued 2. Business and geographical segments continued 2006 continued United Kingdom Algeria Kurdistan Bermuda Eliminations Total 2006 2006 2006 2006 2006 2006 $'000 $'000 $'000 $'000 $'000 $'000 OTHER INFORMATIONCapital additions 4,726 - 65 - - 4,791Depreciation and 106 - - - 276amortisation 170 BALANCE SHEETAssetsSegment assets 61,225 - 1,459 173,441 (59,753) 176,372 LiabilitiesSegment liabilities (66,742) - (873) (2,258) 56,852 (13,021) 3. Profit / (loss) from operations 2007 2006 $'000 $'000 Profit/(loss) from operations has been arrived at after charging:Depreciation of property, plant and equipment- owned assets 2,568 212Amortisation of intangible assets 64 64Impairment of intangible exploration assets 20,585 -Staff costs (see Note 4) 7,539 8,160Auditors' remuneration for audit services (see below) 120 105Operating lease rentals (see Note 20) 413 610Exchange loss 229 157 Amounts payable to Deloitte & Touche LLP, and the previous auditors, in respectof both audit and non-audit services were: 2007 2006 $'000 % $'000 % Audit services- Annual statutory audit of the Group 106 63% 94 53%- Annual statutory audit of UK subsidiary 14 8% 11 6% 120 71% 105 59%Other services pursuant to legislation- Interims 32 19% 24 13% Tax services- Compliance services 16 10% 49 28% 168 100% 178 100% Other assurance services payable in respect of the interims for 2006 were toBaker Tilly. Notes to the Consolidated Financial Statements For the year ended 31 December 2007 continued 4. Staff costs The average monthly number of employees (including executive directors) for theyear was as follows: 2007 2006 Number Number Office and management 14 14Exploration staff 40 35 54 49 Their aggregate remuneration comprised: 2007 2006 $'000 $'000 Wages and salaries 3,628 3,823Social security costs 3,458 1,304Share based payment (see note 21) 453 3,033 7,539 8,160 5. Revenue 2007 2006 $'000 $'000 Sale of goods 5,414 - Interest revenue- Interest on bank deposits 4,625 2,160- Unwinding of discount on contingent income 558 - 5,183 2,160 6. Tax expense 2007 2006 $'000 $'000 Provision for current UK corporation tax 313 60Provision for deferred UK corporation tax 64 76Tax attributable to the Company and its subsidiaries 377 136 Under current Bermuda laws, the Group is not required to pay taxes in Bermuda oneither income or capital gains. The Group has received an undertaking from theMinister of Finance in Bermuda exempting it from any such taxes at least untilthe year 2016. Any corporate tax liability in Algeria is settled out of SONATRACH's share ofoil under the terms of the Production Sharing Contracts and is therefore notreflected in the tax charge for the year. In December 2006 the AlgerianGovernment announced the introduction of a windfall tax. The tax applies to allforeign operators in Algeria producing hydrocarbons (gas or liquids) inassociation with SONATRACH. The tax is only applied to any profits generatedwhen the average price of a barrel of oil is greater than $30 in the monthconcerned. In GKP's forecast production range the windfall tax will only beapplied at 5% of GKP's share of production from Algeria. Notes to the Consolidated Financial Statements For the year ended 31 December 2007 continued 6. Tax expense continued In Kurdistan, the Group is subject to corporate income tax on its income frompetroleum operations. The rate of corporate income tax is currently 40% for alltaxable profits in excess of nine million Iraqi Dinar (equivalent to $7,359 atthe 31 December 2007 exchange rate). However, any corporate income tax arisingfrom petroleum operations will be paid from the Kurdistan Regional Government ofIraq's share of petroleum profits. The tax currently payable is based on taxable profit for the year earned in theUnited Kingdom by the Group's subsidiary. UK corporation tax is calculated at30% of the estimated assessable profit for the year of the UK subsidiary. Deferred tax is provided for due to the temporary differences which give rise tosuch a balance in jurisdictions subject to income tax. During the currentperiod no taxable profits were made in respect of the group's Kurdistan PSCs. Asa result, no corporate income tax has been provided in the period. The charge for the year can be reconciled to the profit/(loss) per the incomestatement as follows: 2007 2006 $'000 $'000 Profit/(loss) before tax (29,518) 46,445 Tax at the Bermudan tax rate of 0% (2006: 0%) - -Effect of different tax rates of subsidiaries operating in otherjurisdictions (377) (136)Tax expense for the year (377) (136) 7. Earnings / (loss) per share The calculation of the basic and diluted earnings / (loss) per share is based onthe following data: 2007 2006 $'000 $'000 Earnings / (loss) (Loss)/profit for the purposes of basic and diluted loss per (29,895) 46,309share 2007 2006 Number Number Number of shares Weighted average number of ordinary shares for the purposes of 276,963,270 261,769,050basic earnings/(loss) per share Adjustments for:-bonus shares n/a 1,669,707-share options n/a 13,240,500 Weighted average number of ordinary shares for the purposes of 276,963,270 276,679,257diluted earnings/(loss) per share Notes to the Consolidated Financial Statements For the year ended 31 December 2007 continued 8. Property, plant and equipment Oil & Gas Fixtures & Properties Equipment Total $'000 $'000 $'000 At 1 January 2006 Cost 24,849 923 25,772 Accumulated depreciation - (178) (178) Net book value 24,849 745 25,594 Year ended 31 December 2006 Opening net book value 24,849 745 25,594 Additions 1,233 167 1,400 Depreciation charge - (212) (212) Closing net book value 26,082 700 26,782 At 31 December 2006 Cost 26,082 1,090 27,172 Accumulated depreciation - (390) (390) Net book value 26,082 700 26,782 Year ended 31 December 2007 Opening net book value 26,082 700 26,782 Additions 460 255 715 Adjustment to prior year transfer (904) - (904) Depreciation charge (2,304) (264) (2,568) Foreign currency translation differences - 72 72 Closing net book value 23,334 763 24,097 At 31 December 2007 Cost 25,638 1,417 27,055 Accumulated depreciation (2,304) (654) (2,958) Net book value 23,334 763 24,097 The depreciation charge of $2,304,000 on oil and gas properties (2006: $nil) hasbeen included in cost of sales and the depreciation charge of $264,000 onfixtures and equipment (2006: $212,000) has been included in general andadministrative expenses. The adjustment to prior year transfer relates to a transfer between intangibleassets and property, plant and equipment (see Note 9). Notes to the Consolidated Financial Statements For the year ended 31 December 2007 continued 9. Intangible assets Exploration & Computer software Total evaluation costs $'000 $'000 $'000 At 1 January 2006 Cost 16,722 156 16,878 Accumulated amortisation - (27) (27) Net book value 16,722 129 16,851 Year ended 31 December 2006 Opening net book value 16,722 129 16,851 Additions 3,330 61 3,391 Disposal of HBH (223) - (223) Amortisation charge - (64) (64) Closing net book value 19,829 126 19,955 At 31 December 2006 Cost 19,829 217 20,046 Accumulated amortisation - (91) (91) Net book value 19,829 126 19,955 Year ended 31 December 2007 Opening net book value 19,829 126 19,955 Additions 41,738 45 41,783 Adjustment to prior year transfer (see Note 8) 904 - 904 Impairment write off (20,585) - (20,585) Amortisation charge - (64) (64) Foreign currency translation differences - 3 3 Closing net book value 41,886 110 41,996 At 31 December 2007 Cost 41,886 265 42,151 Accumulated amortisation - (155) (155) Net book value 41,886 110 41,996 The net book value at 31 December 2007 is made up of intangible assets relatingto HBH $7.5m; Block 108 $3.2m; Block 129 $5.6m; and Kurdistan $25.7m. During 2007, an impairment loss was recognised in respect of intangibleexploration assets relating to Block 126a following the failure to findcommercial levels of hydrocarbons in GRJ. The additions to oil & gas exploration and evaluation costs in the year relateto the simulation and testing of GRJ-2, which has been subsequently written offin the year; drilling of the HBH-4 appraisal well and the acquisition of HBH 2Dand 3D seismic. The amortisation charge of $64,075 (2006: $64,452) has been included in generaland administrative expenses. Notes to the Consolidated Financial Statements For the year ended 31 December 2007 continued 10. Subsidiary Details of the Company's subsidiaries at 31 December 2007 are as follows: Name of subsidiary Place of Proportion of Proportion of Principal incorporation ownership voting power interest held activity % %Gulf Keystone Petroleum (UK) Great Britain 100 100 Geological, geophysicalLimited and engineering services Gulf Keystone Petroleum Bermuda 100 100 Exploration andInternational Limited evaluation activities in Kurdistan 11. Inventories 2007 2006 $'000 $'000 Exploration materials 5,526 4,711 12. Financial Assets Non-current financial asset This balance represents $6.2m (2006: $5.6m) of contingent deferred considerationfrom the HBH agreement with BG that is required to be recorded at fair value inaccordance with IAS 39. This amount is recorded as a financial asset andrepresents the estimated fair value of potential future "bonus" payments inrespect of the approved commercial reserves attributable to the HBH field upondevelopment. The timing of payment of this amount is uncertain but it has beenincluded in non-current assets. Trade and other receivables 2007 2006 $'000 $'000 Disposal of HBH - 55,000Recoverable from BG - 2,014Trade receivables 4,269 -Prepayments for inventories - 1,175Other receivables and prepayments 1,778 1,810 6,047 59,999 The $4.3m trade receivable owing from SONATRACH relates to production revenuefrom the GKN-1 well for the period from 10 October to 31 December 2007. Included within other receivables and prepayments is an amount of $458,000(2006: $458,000) being the deposit for the UK office which is receivable aftermore than one year. The directors consider that the carrying amount of trade and other receivablesapproximates to their fair value and no amounts are provided against them. Notes to the Consolidated Financial Statements For the year ended 31 December 2007 continued 12. Financial Assets continued Cash and cash equivalents Cash and cash equivalents comprise of cash and short-term deposits held by theGroup. The carrying amount of these assets approximates to their fair value.Certain restrictions relating to cash balances are explained in Note 19. 13. Trade and other payables Trade and other payables principally comprise amounts outstanding for tradepurchases and ongoing costs. The directors consider that the carrying amount of trade payables approximatesto their fair value. 2007 2006 $'000 $'000 Due within one year:Trade payables 226 1,483Amounts owed to related parties - 5,050Accrued expenses 36,458 4,302 36,684 10,835 14. Provisions Decommissioning Provision $'000 At 1 January 2007 2,050Decrease due to revision of estimate (687)Utilisation of provision (410)Unwinding of discount 101At 31 December 2007 1,054 Of this provision for well abandonment for three wells, the expenditure isexpected to be incurred over the next five to 10 years. 15. Share capital 2007 2006 $'000 $'000Authorised 500,000,000 Common shares of $0.01 each 5,000 5,000 50,000,000 Non-voting shares $0.01 each 500 500 60,000 Series A Preferred shares of $1,000 each 60,000 60,000 65,500 65,500 Notes to the Consolidated Financial Statements For the year ended 31 December 2007 continued 15. Share capital continued Common shares Share Share Shares Amount Capital Premium No $'000 $'000 $'000 Issued and fully paid Balance 1 January 2006 253,732,140 136,987 1,638 135,349 Share issue August 2006 21,600,000 23,929 215 23,714 Bonus scheme shares October 2006 148,000 - - - Bonus scheme shares December 2006 - - - 1,274,968Balance 31 December 2006 276,755,108 160,916 1,853 159,063 Retention scheme shares October 2007 652,832 6 - 6 Retention scheme shares November 2007 71,098 1 - 1 Bonus scheme shares December 2007 561,518 6 - 6 Balance 31 December 2007 278,040,556 160,929 1,853 159,076 In October and November 2007, 723,930 new shares were issued as part of aone-off retention scheme. In December 2007, 561,518 new shares were issued as part of the Company's bonusshare scheme (2006: 1,422,968 new shares). In August 2006, 21.6m new common shares were placed at £0.62 per common share tofinance continuing exploration and development activities. Rights attached to share capital The holders of the common shares have the following rights: The holders of the common shares (subject to the other provisions of thebye-laws) are: (i) entitled to one vote per share; (ii) entitled to receive notice of, and attend and vote at, general meetings of the Company; (iii) entitled to dividends or other distributions; and (iv) in the event of a winding-up or dissolution of the Company, whether voluntary or involuntary or for a reorganisation or otherwise or upon a distribution of capital, entitled to receive the amount of capital paid up on their Common Shares and to participate further in the surplus assets of the Company only after payment of the Series A Liquidation Value (as defined in the Bye-laws) on the Series A Preferred Shares. Notes to the Consolidated Financial Statements For the year ended 31 December 2007 continued 16. Other reserves Share option Exchange reserve translation $'000 reserve $'000 Balance at 1 January 2006 502 (57)Currency exchange difference - 14Employee share bonus and share options charge 3,033 -Balance at 31 December 2006 3,535 (43) Currency exchange difference - 70Employee share bonus and share options charge 453 -Balance at 31 December 2007 3,988 27 17. Accumulated losses $'000 Balance at 1 January 2006 (47,366) Net profit for the year 46,309Balance at 31 December 2006 (1,057) Net loss for the year (29,895)Balance at 31 December 2007 (32,221) 18. Reconciliation of profit / (loss) from operations to net cash used inoperating activities 2007 2006 $'000 $'000 (Loss) / profit from operations (34,598) 44,514Adjustments for:Depreciation of property, plant and equipment 2,568 212Amortisation of intangible assets 64 64Impairment of intangible exploration assets 20,585 -Stock written off 249 -Foreign exchange loss 229 -Share based payment expense 453 3,033(Increase) in inventories (1,064) (1,239)Decrease in provisions (996) -Decrease / (increase) in receivables (1,050) (56,613)(Increase) in non-current financial assets - (5,597)(Decrease) / increase in payables (2,356) 2,208Net cash used in operating activities (15,916) (13,418) Notes to the Consolidated Financial Statements For the year ended 31 December 2007 continued 19. Guarantees Cash backed guarantees As part of the contractual terms of the Algerian contracts, the Group has givenbank guarantees to SONATRACH of $21.6 million. These are cash backed guaranteeswhich effectively reduce the free cash available that the Group has on itsbalance sheet. The $21.6 million total is comprised of $6 million for theBottena ("129 Contract") work programme and $15.6 million for the Ben Guecha ("108/128b Contract") work programme. These guarantees are for the exploration andevaluation work programmes stipulated in the contracts and are reduced as thework programmes are completed. Other guarantees The Group has provided a guarantee of $3.75 million to the Federal Government ofthe Republic of Iraq to state it will meet the minimum financial commitment and/ or the minimum exploration obligations as required under the terms of the PSC.The guarantee is reduced as the work programme is completed. 20. Operating lease arrangements The Group as a lessee 2007 2006 $'000 $'000 Minimum lease payments under operating leases recognised as 413 610expense for the year At the balance sheet date, the Group had outstanding total commitments undernon-cancellable operating leases, which fall due as follows: 2007 2006 $'000 $'000 Within one year 418 531In the second to fifth years inclusive 46 805 464 1,336 Operating lease payments represent rentals payable by the Group for certain ofits office properties in the UK and Algeria and residential properties inAlgeria. The UK lease is for ten years from February 2005 with a break clauseat year 5 which is January 2010. The Algerian properties are leased for twoyears or less. 21. Share based payments 2007 2006 $'000 $'000Bonus shares (credit)/charge (57) 2,184Share options charge 510 849 453 3,033 Equity settled share option plan The Group plan provides for a grant price equal to the closing market price ofthe Group shares on the date of grant. The vesting period is generally 10 yearsfor options granted before August 2006 and 3 years for options granted afterthat. If options remain unexercised after a period of 10 years from the date ofgrant, the options expire. Furthermore, options are forfeited if the employeeleaves the Group before the options vest. Notes to the Consolidated Financial Statements For the year ended 31 December 2007 continued 21. Share based payments continued The weighted average contractual life relating to the share options outstandingat the year end was 7 years (2006: 7 years). 2007 2006 Number of Weighted average Number of Weighted exercise price share options share options average (in pence) '000 '000 exercise price (in pence) Outstanding at 1 January 13,241 57.2p 6,992 53.8pGranted during the year 1,850 33.8p 7,249 61.5pForfeited during the year (6,100) 60.3p (1,000) 65.6pOutstanding at 31 December 8,991 50.3p 13,241 57.2p Exercisable at 31 December 1,581 51.9p 1,997 51.9p The inputs into the stochastic (Monte-Carlo) valuation model are as follows: 2007 2006 Weighted average share price on date of grant (in pence) 33.8p 61.5p Weighted average exercise price of options granted in the year (in pence) 33.8p 61.5p Expected volatility was determined by using the average of a peer group ofsimilar oil and gas companies over a seven year period for grants before 2006and over a five year period after that. This was thought more instructive giventhe limited nature of the Company's history. The expected volatility was calculated as 43.5%/43.1% for September 2006 andOctober 2006 and 36.0% for all grants in 2007. The expected term of the September 2006 and October 2006 grants were five tonine years. The 2007 grants have been calculated using an expected term of fourto five years. The risk free rate was 4.2% and 4.3% for the September 2006 andOctober 2006 grants respectively and 4.9%, 5.0% and 4.5% for the September,October and December 2007 grants. The Company has made no dividend payments to date and as there is no expectationof making payments in the immediate future, therefore the dividend yieldvariable has been set at zero for all grants. Share options outstanding at the end of the year have the following expiry dateand exercise prices: Exercise price Options ('000) Expiry date (pence) 2007 2006 19 August 2014 48.0 4,250 5,100 05 October 2007 60.5 - 400 29 September 2015 85.0 492 492 30 December 2015 66.0 - 2,100 29 September 2009 59.8 2,049 4,799 18 October 2009 59.0 350 350 17 September 2010 31.0 1,050 - 11 October 2010 39.5 550 - 05 December 2010 33.0 250 - 8,991 13,421 Notes to the Consolidated Financial Statements For the year ended 31 December 2007 continued 21. Share based payments continued Bonus Shares The Group issues bonus shares to certain employees for a nominal consideration.Bonuses are generally granted over three years and are vested in three equaltranches during those years subject to continued employment. These share-basedpayments are measured at fair value at the date of grant. The fair value of theshares granted is recognised as an employee expense with a correspondingincrease in equity. The fair value of the shares granted is the market price onthe date of the award and is charged to the income statement over the vestingperiod taking into account the terms and conditions upon which the shares weregranted. Bonus Shares ('000) 2007 2006 As at 1 January 3,093 -Issued during the year 783 3,093Lapsed during the year (38) -Sold during the year (1,153) -As at 31 December 2,685 3,093 22. Related party transactions Transactions with related parties Transactions between the Company and its subsidiaries are disclosed below. During the year the parent Company entered into the following transactions withits subsidiary, Gulf Keystone Petroleum (UK) Ltd: 2007 2006 $'000 $'000 Purchases of services in year 6,639 4,276Amounts owed to related parties at year end 597 - These amounts relate to the provision of geological, geophysical and engineeringservices by Gulf Keystone Petroleum (UK) Limited. On 9 June 2006 the Group signed loan agreements with GIBCA Limited and FalconPartners Trust, both related parties, to provide an unsecured debt facilitydrawn down in aggregate by US$5 million at an interest rate of 7% and for a termof 12 months. Sheikh Sultan Al-Qassimi is a shareholder in GIBCA Limited and MrTodd Kozel has a relationship with Falcon Partners Trust. On 13 January 2007the Group repaid in full these loans on the completion of the BG deal. Theinterest expense paid and accrued for in the year was nil (2006: $228,693). Texas Keystone Inc. Texas Keystone Inc is a related party of the Group because Mr Todd Kozel, adirector of the Company, is also a director of Texas Keystone, Inc. ("TKI"). On 21 December 2007, the Company entered into a Joint Operating Agreement ("theAgreement") for the Shaikan Block in Kurdistan in which TKI holds a 5%participating interest. TKI initially led the pursuit of opportunities in theKurdistan region and participated in the successful signature of the ProductionSharing Contract for the Shaikan Block. In return for this and TKI's continuingparticipation, Gulf Keystone Petroleum International Limited will be liable andpay for TKI's share of the costs of the Exploration Work Programme and all costsancillary to the Joint Operations. Notes to the Consolidated Financial Statements For the year ended 31 December 2007 continued 22. Related party transactions continued No guarantees have been given or received. No provisions have been made fordoubtful debts in respect of the amounts owed by related parties. Remuneration of key management personnel The remuneration of the directors and officers, the key management personnel ofthe Group, is set out below in aggregate for each of the categories specified inIAS 24 Related Party Disclosures. The names and positions held by thosedirectors and employees identified as key management personnel are as follows: TF Kozel - Executive Chairman & Chief Executive Officer JW Guest - President (resigned 23 July 2007) RW Parsons - Chairman (resigned 23 July 2007) Sheikh Sultan Bin Saqr Al-Qassimi - Non-Executive Director (resigned 23 July2007) AA Al-Qabandi - Executive Vice President (appointed 23 July 2007) JR Cooper - Finance Director (resigned 23 January 2008) I Patrick - Director of Commercial & Legal Affairs (Gulf Keystone Petroleum (UK)Ltd) IA Al-Khaldi - Chief Operating Officer C Garrett - Vice President Operations D Mackertich - Executive Vice President Exploration & Technical Further information about the remuneration of individual directors is providedin the Report of the Remuneration and Appointments Committee on pages 11 to 13. 2007 2006 $'000 $'000 Short-term employee benefits 3,206 3,462Share based payment - options 510 849Share based payment - bonus shares (57) 2,184 3,659 6,495 23. Financial instruments Capital Risk Management The Group manages its capital to ensure that the entities within the Group willbe able to continue as going concerns while maximising the return tostakeholders through the optimisation of the debt and equity balance. The Groupis not subject to externally imposed capital requirements. The capital structureof the Group consists of cash and cash equivalents and equity attributable toequity holders of the parent, comprising issued capital, reserves andaccumulated losses as disclosed in Notes 15, 16 and 17. Gearing Ratio The Group's Board of Directors reviews the capital structure on a regular basis.As part of this review, the Board considers the cost of capital and the risksassociated with each class of capital. Given the current stage of development of the Group's assets, it is the Group'spolicy to finance its business by means of internally generated funds andexternal share capital. As a result, there was no debt at 31 December 2007. Significant Accounting Policies Details of the significant accounting policies and methods adopted, includingthe criteria for recognition, the basis of measurement and the basis on whichincome and expenses are recognised, in respect of each class of financial asset,financial liability and equity instrument are disclosed in the Summary ofSignificant Accounting Policies. Notes to the Consolidated Financial Statements For the year ended 31 December 2007 continued 23. Financial instruments continued Categories of Financial Instruments Carrying Value 2007 2006 $'000 $'000Financial assetsFair value through profit and loss (designated at recognition) 6,155 5,597Loans and receivables (including cash and cash equivalents) 94,333 119,327 Financial liabilitiesAmortised cost 36,684 10,835 Financial Risk Management Objectives The Group's management monitors and manages the financial risks relating to theoperations of the Group. These financial risks include market risk (includingcurrency and fair value interest rate risk), credit risk, liquidity risk andcash flow interest rate risk. The Group does not presently hedge against these risks as the benefits ofentering into such agreements is not considered to be significant enough as tooutweigh the significant cost and administrative burden associated with suchhedging contracts. The risks are closely reviewed by the Board on a regular basis and steps aretaken where necessary to ensure these risks are minimised. Market risk The Group's activities expose it primarily to the financial risks of changes inforeign currency exchange rates and changes in interest rates in relation to theGroup's cash balances. The operating currencies of the Group are Great British Pounds (GBP), US Dollars(USD), Algerian Dinars (DZD) and Iraqi Dinars (IQD). The Group does not hedgeagainst the effects of movement in exchange rates. The risks are monitored bythe Board on a regular basis. During the financial year the Group diversified its operations into Kurdistan inNorthern Iraq, exposing the Group to an additional foreign currency risk arisingfrom the use of Iraqi Dinars. This additional exposure is being managed in thesame manner as the Group's other foreign currency risks. There have been no other changes to the Group's exposure to market risks or themanner in which it manages and measures the risk. Foreign currency risk management The Group undertakes certain transactions denominated in foreign currencies,being any currency other than the functional currency of the Group subsidiaryconcerned. Hence, exposures to exchange rate fluctuations arise. Notes to the Consolidated Financial Statements For the year ended 31 December 2007 continued 23. Financial instruments continued The carrying amounts of the Group's significant foreign currency denominatedmonetary assets and monetary liabilities at the reporting date are as follows: Assets Liabilities 2007 2006 2007 2006 $'000 $'000 $'000 $'000 Great British Pounds 1,160 998 (43) (342)Algerian Dinars 397 (454) (300) (573) Foreign currency sensitivity analysis The Group is mainly exposed to the currency of the United Kingdom (Great BritishPounds), Algeria (Algerian Dinars) and Iraq (Iraqi Dinars). The following table details the Group's sensitivity to a 10% increase anddecrease in the US dollar against the relevant foreign currencies. 10% is thesensitivity rate that represents management's assessment of the reasonablypossible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominatedmonetary items as at the balance sheet date, and adjusts their translation atthe year end for a 10% change in foreign currency rates. The sensitivityanalysis includes external loans as well as loans to foreign operations withinthe Group where the denomination of the loan is in a currency other than thecurrency of the lender or the borrower. A positive number below indicates an increase in profit and net assets where thedollar weakens 10% against the relevant currency. For a 10% strengthening of thedollar against the relevant currency, there would be an equal and oppositeimpact on the profit and other equity, and the balances below would be negative. GBP Currency Impact DZD Currency Impact IQD Currency Impact 2007 2006 2007 2006 2007 2006 $'000 $'000 $'000 $'000 $'000 $'000 Profit or 116 100 40 41 - -loss The Group's sensitivity to foreign currency has decreased during the currentyear, particularly in relation to GBP denominated monetary assets, as there hasbeen a decrease in the value of GBP bank balances and GBP accounts receivable in2007. Interest rate risk management The Group's policy on interest rate management is agreed at Board level and isreviewed on an ongoing basis. The current policy is to maintain a certain amountof funds in the form of cash for short-term liabilities and have the rest onrelatively short term deposits, usually one month notice to maximise returns andaccessibility. Interest rate sensitivity analysis The sensitivity analysis below has been determined based on the exposure to theinterest rates for cash and cash equivalents at the balance sheet date. A 0.5%increase or decrease is used as it represents management's assessment of thereasonably possible changes in interest rates. Notes to the Consolidated Financial Statements For the year ended 31 December 2007 continued 23. Financial instruments continued If interest rates increased by 0.5% and all other variables were held constant,the Group's profit for the year ended 31 December 2007 would increase by$441,430 per annum (2006: increase by $296,640). If interest rates decreased by 0.5% and all other variables were held constant,the Group's profit for the year ended 31 December 2007 would decrease by$441,430 per annum (2006: decrease by $296,640). The Group's sensitivity to interest rates has remained relatively constantduring the current period due to the fairly constant cash balance for themajority of the current financial year. Credit risk management Credit risk refers to the risk that a counterparty will default on itscontractual obligations resulting in financial loss to the Group. The Group hasa non-current financial asset totalling $6.2m (2006: $5.6m) which represents theestimated fair value of potential future "bonus" payments payable by BG to theGroup in respect of the size of the ultimately approved commercial reservesattributable to the HBH field upon development. In addition to this non current financial asset, trade and other receivablesoutstanding from the BG Group at balance date totalled $462,810 (2006: $57.0m).The credit risk in relation to the BG receivables is considered to be minimal. The Group also had a trade receivable outstanding from SONATRACH, Algeria'snational oil development enterprise, totalling $4.3m at 31 December 2007. The group has no other major counterparties. Liquidity risk management Ultimate responsibility for liquidity risk management rests with the board ofdirectors. It is the Group's policy to finance its business by means ofinternally generated funds and external share capital. In common with manyexploration companies, the Group raises finance for its exploration andappraisal activities in discrete tranches to finance its activities for limitedperiods. Further funding is raised as and when required. When any of theGroup's projects move to the development stage, specific financing, includingdebt, may be required to enable development to take place. Liquidity and interest risk tables The following tables detail the Group's remaining contractual maturity for itsnon-derivative financial liabilities. The tables have been drawn up based on theundiscounted cash flows of financial liabilities based on the earliest date onwhich the Group can be required to pay. Weighted Less than 1 1 to 3 Total Average month months Effective Interest Rate2007 % $'000 $'000 $'000 Non-interest bearing n/a 25,200 11,484 36,684 2006Non-interest bearing n/a 10,835 - 10,835 Notes to the Consolidated Financial Statements For the year ended 31 December 2007 continued 23. Financial instruments continued The following table details the Group's expected maturity for its non-derivativefinancial assets. Weighted Less than 1 1 to 3 1 to 5 Total Average month months years Effective Interest Rate2007 % $'000 $'000 $'000 $'000Non-interest bearing n/a - 6,047 6,155 12,202Variable interestrate instruments 5.25% 88,286 - - 88,2862006Non-interest bearing n/a 55,000 4,999 5,597 65,596Variable interestrate instruments 3.64% 59,328 - - 59,328 The undiscounted value of those non-interest bearing assets with cash flowsexpected in the one to five year bracket is $8 million (2006: $8 million). Forall other financial assets the book value equals the undiscounted value of theasset. 24. Gain on sale of assets The gain on sale of assets recorded in 2006 was principally comprised of fundsreceived from the farm in deal with BG for a 36.75% interest in the HBH block of$55m. Against that consideration the cost of sales (the amount previouslyinvested by Gulf Keystone on HBH) were calculated as $657,583 (the carryingvalue of that interest in the Group's balance sheet, of $222,899 and costsincurred of $434,683). Additionally, Gulf Keystone recorded a contingent deferred consideration of$5.6m in 2006 which due to the unwinding of the discount rate, has increased to$6.2m in 2007 (refer to Note 12). The remainder of the gain recorded in 2006 wasfor the sale of surplus stock ($163,735) and the temporary loan to a third partyof a drilling rig under contract to Gulf Keystone ($1m). 25. Subsequent events On 10 January 2008, ALNAFT (the Hydrocarbon National Agency in Algeria) approvedthe proposed Development Plan for the GKN and GKS oil fields located in NorthernAlgeria. The field Development Plan envisages producing oil from the GKN-1 well(currently producing at approximately 1,000 bopd gross) and bringing the GKS-2well on stream as soon as practicable. Under the terms of the Development Plan, the Group is entitled to a 30% to 49%share of production from the GKN-1 well effective from 10 October 2007. As aresult, oil production revenue of $5.4m and cost of sales of $3.3m has beenrecorded for the year ended 31 December 2007. GULF KEYSTONE PETROLEUM LIMITED (the "Company") NOTICE OF ANNUAL GENERAL MEETING To the holders of common shares Notice is hereby given that the 2008 annual general meeting of the Company willbe held at the Khanzad Hotel and Resort, Salahaldeen Road, Bastora, Erbil,Kurdistan, Iraq on Tuesday 10 June 2008 at 10am (local time) for the followingpurposes: To consider and, if thought fit, to approve the following resolutions: 1. THAT the Directors' Report and statutory financial statements of theCompany in respect of the financial period ended 31 December 2007 together withthe Auditor's Report thereon be received and approved. 2. THAT Mr Ali Al-Qabandi, who is required to retire by rotation inaccordance with the Company's bye-laws, be and is hereby appointed as aDirector. 3. THAT Mr Mehdi Varzi, who was appointed as a Director by the Board ofDirectors on 22 January 2008 to fill a vacancy, be and is hereby elected as aDirector. 4. THAT Mr Jeremy Asher, who was appointed as a Director by the Board ofDirectors on 22 January 2008 to fill a vacancy, be and is hereby elected as aDirector. 5. THAT Mr Kristian Ewen Ainsworth, who was appointed as a Director bythe Board of Directors on 22 January 2008 to fill a vacancy, be and is herebyelected as a Director. 6. THAT Deloitte & Touche LLP, be re-appointed as the Company's auditorsuntil the close of the Company's next annual general meeting of the members ofthe Company and that the Board of Directors be authorised to determine theAuditor's remuneration. 7. THAT in accordance with Bye-law 51 of the Company's Bye-laws theDirectors of the Company be and are hereby authorised to reduce the issued sharecapital of the Company by way of a repurchase of shares, and THAT pursuant toBye-law 52 of the Company's Bye-laws the Directors of the Company be authorisedin their absolute discretion to determine by resolution of the Directors theterms and dates of such repurchases as well as the amount of shares to berepurchased, and THAT such authorities shall remain in place unless and untilthe members of the Company resolve otherwise. By Order of the BoardT F Kozel, DirectorMilner House18 Parliament StreetHamilton HMFXBermuda 7 May 2008 Note Every member entitled to attend and vote at the meeting may appoint anotherperson as his/her proxy to attend and vote thereat instead of him/her and suchproxy need not be a member. Forms appointing proxies must be deposited at theCompany's Branch Registrar in Jersey, Channel Islands (for the attention ofSophie de Freitas, Registry Manager, Computershare Investor Services (C)Limited, Ordinance House, 31 Pier Road, St Helier, Jersey JE4 8PW, ChannelIslands) not less than 48 hours before the time appointed for holding the saidmeeting or any adjourned meeting. A record of the minutes of the last annualgeneral meeting of the members of the Company will be available for inspectionat the meeting. This information is provided by RNS The company news service from the London Stock Exchange
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Share Price:
150.90
Bid:
150.00
Ask:
151.00
Change:
9.10 (6.42%)
Spread:
1.00 (0.667%)
Open:
145.10
High:
155.60
Low:
145.00
Prev. Close:
141.80
Last checked at -
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