Gulf Keystone Petroleum Regulatory News (GKP)

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27 March 2014

Gulf Keystone Petroleum Ltd. (LSE: GKP)

("Gulf Keystone" or "the Company")

2013 Results Announcement

Gulf Keystone, an independent oil and gas exploration, development and production company with operations in the Kurdistan Region of Iraq, today announces its results for the year ended 31 December 2013.

HIGHLIGHTS

Operational - in the year to 31 December 2013 and post year end

Kurdistan reserves and resources

· Publication of the Competent Person's Report ("CPR"), the first third-party evaluation of the Company's Reserves, Contingent Resources and Prospective Resources across the Company's portfolio in the Kurdistan Region of Iraq, comprising the Shaikan, Sheikh Adi, Ber Bahr and Akri-Bijeel blocks, identifying 12.5 billion barrels of gross oil in place and 1.2 billion barrels of combined gross 2P and 2C recoverable oil reserves and resources, of which 680 million barrels of net 2P and 2C oil reserves and resources are attributable to Gulf Keystone

Shaikan Block (75% working interest; Operator)

· Approval of the Shaikan Field Development Plan ("FDP") by the Ministry of Natural Resources of the Kurdistan Regional Government ("MNR" and "KRG") in June 2013

· Commencement of commercial production from the first Shaikan production facility ("PF-1"), with expected production capacity of 20,000 barrels of oil per day ("bopd"), in July 2013, and ramp-up of production to stable levels of about 10,000 bopd in early 2014 with 16,000 bopd achieved in March 2014

· Gross production from Shaikan to 31 December 2013 totalled 496,921 barrels, with gross sales of 304,680 barrels

· Beginning of Shaikan crude export deliveries by truck to Turkey in December 2013 in line with the Company's marketing strategy developed in co-operation with the MNR

· 189,746 gross barrels of Shaikan crude export deliveries to 31 December 2013 and approximately 690,000 gross barrels by mid-March 2014 with the expectation to receive payment of the Company's full entitlement for Shaikan crude export deliveries

· Commissioning of the second Shaikan production facility ("PF-2") is ongoing with first initial production of 10,000 bopd expected in Q2 2014; full production capacity of 20,000 bopd expected by the end of Q4 2014

· Shaikan-7, the first deep exploration well, targeting previously undrilled mid to lower Triassic and Permian horizons, spudded in June 2013 with drilling ongoing in the Triassic; potential to add to already discovered resources with first results expected in Q2 2014

· Completion of the regional independent export pipeline from the Kurdistan Region of Iraq to Turkey

Sheikh Adi Block (80% working interest; Operator)

· Approval and commencement of the appraisal programme

· Sheikh Adi-3, the first appraisal well, spudded in December 2013 to appraise Jurassic targets and evaluate the Triassic upside; the well is currently drilling below 2,240 metres in the Jurassic

· Acquisition of 111km of additional 2D seismic data has been completed

Ber Bahr Block (40% working interest)

· The successful side-track of the original Ber Bahr-1 exploration well in May 2013 confirmed the existence of a commercial Jurassic discovery

· A 3D seismic survey is underway, planned for completion by mid-year 2014

· The first appraisal well is planned to spud in Q4 2014

Akri-Bijeel Block (20% working interest)

· The new Triassic oil discovery made on the Bakrman structure with the Bakrman-1 exploration well in February 2013

· The block declared commercial in October 2013 based on the Bijell-1 Jurassic discovery and the Bakrman-1 Triassic discovery

· Bijell extended well test ("EWT") facility was completed and became operational in early 2014 with initial flow rates of about 3,500 bopd from the Bijell-1B well; the facility is expected to reach its full production capacity of 10,000 bopd by the end of 2014

· Drilling of two additional appraisal wells Bijell-2 and Bijell-4 is ongoing; both are expected to be tied to the EWT facility

Financial - as at 31 December 2013

· Loss after tax: $32.0 million (2012: $81.8 million)

· Loss per share: 3.69 cents (2012: 9.61 cents)

· As at 31 December 2013, cash, cash equivalents and liquid investments: $82.0 million (2012: $262.3 million). As at 1 March 2014, cash, cash equivalents and liquid investments: $76.0 million

Corporate Developments - to 30 December 2013 and post period end

· Simon Murray, C.B.E. was appointed Non-Executive Chairman of the Board in July 2013

· Five additional Non-Executive Directors were appointed to the Company's Board

· Successful transition from AIM, a market operated by the London Stock Exchange plc. ("LSE"), to the Official List, by way of a Standard Listing, and to trading on the Main Market of the LSE

· Successful "tap issue" of the unsecured convertible bonds in the amount of US$50 million, consolidated with the US$275,000,000 convertible bonds issued in October 2012 and due October 2017

· Completion of the trial in the English Commercial Court in London of all the claims asserted by Excalibur Ventures LLC ("Excalibur") against Gulf Keystone, two of its subsidiaries (together the "Companies") and Texas Keystone Inc. with all claims dismissed and all issues ruled in favour of and costs awarded to the Companies and Texas Keystone Inc.

· In January 2014, the Company received £17.5 million of litigation costs incurred by the Companies and Texas Keystone Inc. and commenced proceedings to recover additional £5.61 million of the litigation costs from Excalibur's funders

OUTLOOK

· Increase Shaikan production capacity to 40,000 bopd by the end of Q4 2014 and 66,000 bopd by Q1 2016 before progressing to the medium-term target of 100,000 bopd in line with the approved Phase 1 of Shaikan FDP

· Expand export sales and generate steady revenues

· Utilise cash generated from increasing oil sales, in addition to the available debt financing, to initiate the next stage of the Shaikan project execution, drilling development wells and constructing and commissioning PF-3

· Obtain and evaluate results of the Shaikan-7 exploration well, currently targeting deeper Triassic and Permian horizons in the Shaikan block and potentially providing further upside to reserves and resources beyond the recent CPR

· Side-track the original Shaikan-6 appraisal well to obtain better understanding of the oil water contact levels in Shaikan, again providing potentially significant further upside to reserves and resources beyond the recent CPR

· Prepare a review of the Shaikan FDP to include Cretaceous, Triassic and potentially Permian developments, subject to the results of Shaikan-7

· Conclude discussions with the MNR on a connection of the Shaikan field to the regional oil export pipeline infrastructure

· Appraise the Sheikh Adi discovery, continue to target additional exploration prospects on the block and make decision regarding early production and development

Todd F Kozel, Chief Executive Officer of Gulf Keystone, commented:

"2013 was another successful year for Gulf Keystone as we transitioned from a pure exploration play to an exploration, development and production company, heading in 2014 towards our target of 40,000 bopd of production capacity from the world class Shaikan field. We continuously improve our operational performance having recently achieved a record loading of nearly 20,000 barrels of Shaikan crude in one single day at our production facility, which will be delivered to the international market in line with our marketing strategy developed in cooperation with the Ministry of Natural Resources.

"We have recently passed an important milestone with our successful listing on the Main Market of the London Stock Exchange, a further demonstration of how Gulf Keystone continues to develop. This important move followed the recent publication of the Competent Person's Report which has set a solid initial baseline of reserves and resources, from which we expect to build.

"We continue to be encouraged by the recent positive political developments in the Kurdistan Region of Iraq, where the fast pace of economic development was maintained in 2013, not solely but largely due to the burgeoning O&G sector. Against this background, with a number of funding options open to us and a clear path to significantly ramping up production, we are focused on delivering the Company's strategy for 2014 and beyond."

The management team will host a conference call for analysts at 11am today. A live audio webcast of the call will be available on the Company's website www.gulfkeystone.com.

Enquiries:

or visit: www.gulfkeystone.com

Notes to Editors:

· Gulf Keystone Petroleum Ltd. (LSE: GKP) is an independent oil and gas exploration, development and production company focused on exploration in the Kurdistan Region of Iraq.

· Gulf Keystone Petroleum International (GKPI) holds Production Sharing Contracts for four exploration blocks in Kurdistan, the Shaikan, Sheikh Adi, Ber Bahr and Akri-Bijeel blocks.

· GKPI is the Operator of the Shaikan Block, which is a major commercial discovery, with a working interest of 75% and is partnered with Kalegran Ltd. (a 100% subsidiary of MOL Hungarian Oil and Gas plc.) and Texas Keystone Inc., which have working interests of 20% and 5% respectively. Texas Keystone Inc. holds its interest in trust for Gulf Keystone, pending transfer of its interest to the Company.

· Gulf Keystone is moving into the large-scale phased development of the Shaikan field targeting 100,000 bopd of production capacity during Phase 1 of the Shaikan Field Development Plan following its approval in June 2013.

Disclaimer

This announcement contains certain forward-looking statements. These statements are made by the Company's Directors in good faith based on the information available to them up to the time of their approval of this announcement but such statements should be treated with caution due to inherent uncertainties, including both economic and business factors, underlying such forward-looking information. This announcement has been prepared solely to provide additional information to shareholders to assess the Group's strategies and the potential for those strategies to succeed. This announcement should not be relied on by any other party or for any other purpose.

This communication and the information contained herein is not an offer of securities for sale in the United States. Securities may not be offered or sold in the United States unless they are registered or are exempt from registration. Any public offering of securities to be made in the United States would be made by means of a prospectus that would contain detailed information about the company and its management, as well as financial statements. The company does not intend to register any portion of this offering in the United States or to conduct a public offering in the United States or any other jurisdiction. Any public offering of securities to be made in the United States would be made by means of a prospectus that would contain detailed information about the Company and its management, as well as financial statements. Copies of this communication are not being, and should not be, distributed in or sent into the United States.

This communication is directed only at (i) persons who are outside the United Kingdom or (ii) persons who have professional experience in matters relating to investments falling within Article 19(2) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended from time to time (the Order) or (iii) high net worth entities, and other persons to whom it may lawfully be communicated, falling within Article 49(2) of the Order or (iv) certified high net worth individuals and certified and self-certified sophisticated investors as described in Articles 48, 50, and 50A respectively of the Order or (v) persons to whom this communication may otherwise be lawfully communicated (all such persons together being referred to as relevant persons). Any investment activity to which this communication relates will only be available to and will only be engaged with, relevant persons. Any person who is not a relevant person should not act or rely on this document or any of its contents.

This communication is distributed in any member state of the European Economic Area which applies Directive 2003/71/EC (this Directive together with any implementing measures in any member state, the Prospectus Directive) only to those persons who are qualified investors for the purposes of the Prospectus Directive in such member state, and such other persons as this document may be addressed on legal grounds, and no person that is not a relevant person or qualified investor may act or rely on this document or any of its contents.

GULF KEYSTONE PETROLEUM LIMITED

Statement of Non-Executive Chairman

It is a great privilege to address shareholders of Gulf Keystone in this, my first Chairman's Statement since joining the company in July 2013.

In the past twelve months, Gulf Keystone has continued its remarkable journey and has further consolidated its position as one of the leading independent exploration companies in the Kurdistan Region of Iraq. Most significantly, however, your company has successfully transitioned from a pure exploration player into being a meaningful development and production company with a clear path to producing 100,000 bopd. The approval in June 2013 of the Field Development Plan ("FDP") for the world-class Shaikan commercial discovery, the first among the Production Sharing Contracts awarded in or after 2007 in the region, is a clear highlight of the reporting period and a resounding endorsement of the Company by the Kurdistan Regional Government's Ministry of Natural Resources ("KRG" and "MNR") . 

I am acutely conscious that since the time when commercial production from the Shaikan field began in late July we have not achieved the levels of oil sales that we had hoped to achieve during 2013, despite having a higher level of production capacity available since the summer. However, since December 2013, when Shaikan crude oil deliveries by truck commenced to export markets, our ramp-up in production has been increasing steadily and we are determined to continue in the same vein in 2014.

As one of the genuine early movers into the Kurdistan Region of Iraq, Gulf Keystone is a trusted and long standing partner of the KRG and people of the Kurdistan Region of Iraq. Not only are we playing a key part in the development of Kurdistan's considerable oil wealth, but we continue to make a significant contribution to the economic and social fabric of the region through our community relations programme. As you will read in this report, this includes a number of sustainable initiatives primarily focused around training, education and healthcare, designed to not only improve the standard of living of those closest to our areas of operations, but to ensure that the region's hugely talented population have the opportunities to fulfil their potential, including in future generations having the requisite skillset to develop their extensive natural resources for the long term good of the country. In 2013, in consultation with the MNR, we commenced the work on the Company's long-term Corporate Social Responsibility Plan, encompassing all aspects of our operations. We are pleased to report that this work has now been completed and the plan has been submitted to the MNR for final approval.

In addition, in response to the MNR's request to support its activities to alleviate the plight of hundreds of thousands of Syrian refugees fleeing their homeland and crossing the border into the Kurdistan Region of Iraq, we made an industry leading pledge to support the KRG and to help avoid a humanitarian crisis.

In preparation for our transition from AIM to the Standard Segment of the Official List and admission to trading on the Main Market of the London Stock Exchange ("LSE"), which was successfully accomplished in March 2014, considerable progress was made to ensure that the business was structured accordingly. Part of that preparation included the commissioning of a Competent Person's Report ("CPR"), which established an important and understandably conservative initial baseline for Gulf Keystone's Reserves and Resources and which we can build on going forward. AIM has been a very good home for Gulf Keystone since our IPO in 2004, but as we continue to grow and realise the potential of our world class acreage, we felt it was the appropriate moment to move up. With the support of our advisers (we were pleased to welcome Deutsche Bank AG, London Branch into the team during the year), a considerable amount of endeavour has gone into preparing for life as a Main Market company.

One key work stream has been ensuring the highest standards of corporate governance, a review which started with the splitting of the Chairman and Chief Executive roles. I joined in July and thereafter we welcomed five new Non-Executive Directors during the year. In 2013 and the year to date we have made good progress towards many of our objectives, even though we have a great deal further to go in the year ahead. Among our achievements I would like to underline the establishment of a new remuneration policy in line with the advice of external advisors and a general tightening of internal and external procedures consistent with the move to the Main Market. I should also mention that our executive directors volunteered directly to forego any short term bonuses in respect of 2013.

On behalf of everyone at Gulf Keystone, I would again like to thank Ali Al-Qabandi, the co-founder of the Company, and Mehdi Varzi, a long-standing non-executive director, for all of their input and contributions in helping to build Gulf Keystone into the company it is today.

I am pleased to report that the Board and its various committees, including the most recent addition of the HSSE and CSR Committee, are functioning well and, in advance of the move to the Main Market of the LSE, we have adopted the practices and standards befitting of a Main Market company.

Personally, I am extremely excited about the future. The business is uniquely well placed to build upon its leading position in the region. With the full support of our hosts, our world class asset base and the right team in place, including our 250-strong workforce in-country, we are well positioned to create more value for all of our stakeholders. 

On behalf of the Board I would like to thank the KRG and people of the Kurdistan Region of Iraq for their ongoing faith in us. I would also like to thank all our partners and investors, as well as everyone within the Company for their unswerving commitment to continuing to help Gulf Keystone on its remarkable journey. 

Simon Murray

Non-Executive Chairman

Statement of Chief Executive Officer

2013 was another year of important operational progress for Gulf Keystone, as the Company completed the transition from explorer to producer with the commencement of commercial oil production at our flagship Shaikan field in the Kurdistan Region of Iraq. I would like to thank the Government of the Kurdistan Region of Iraq for their support as we move towards our vision of being a significant independent exploration, development and production company listed on the Main Market of the London Stock Exchange.

In 2013, the Company continued to appraise the Sheikh Adi discovery, while two additional discoveries were made by our partners on the Akri-Bijeel and Ber Bahr blocks. This remarkable exploration success means that today Gulf Keystone has a share in four contiguous blocks with five discoveries with one of them already being at an early stage of commercial production. 

The commencement of commercial oil production from the Shaikan field followed approval in June of the Shaikan FDP by the MNR. This was a historic moment for Gulf Keystone, and we are proud to be working with the MNR and our partner MOL to continue to develop the field. We have been a pioneer in the region from the outset and this milestone reconfirmed our goal to become a key player in the upstream oil industry in Kurdistan.

The first Shaikan production facility (PF-1), capable of producing 20,000 barrels of oil per day, was fully commissioned in July with domestic sales achieved shortly after in August. The Company continued to monetize its production through domestic sales until December when crude oil export deliveries by truck to Turkey commenced, in line with the Company's marketing strategy developed in co-operation with the MNR. Total production from Shaikan, since the early production operations began in late 2010, is now rapidly approaching 2.6 million barrels, out of which three cargoes totalling approximately 690,000 barrels have already been trucked to Turkey and loaded for delivery to international markets with the fourth cargo expected to be loaded by the end of March 2014.

Three wells are currently tied to the facility, namely Shaikan-1, -3 and -4. Production from PF-1 has recently increased from 10,000 bopd to approximately 16,000 bopd and we plan to reach 20,000 bopd of production in the near term. The second Shaikan production facility ("PF-2") is currently being commissioned with two wells, Shaikan-2 and -5, already tied into the facility. Production from PF-2, which ultimately will be capable of producing 20,000 bopd, will commence in Q2 2014. Our immediate focus remains on achieving the target of 40,000 bopd of production capacity by the end of 2014.

These operational highlights were followed early in 2014 by the first third party evaluation of the Company's Reserves, Contingent Resources and Prospective Resources of our interests in the Kurdistan Region of Iraq. The CPR, prepared by ERC Equipoise Limited, identified 12.5 billion barrels of gross oil in place and 1.2 billion barrels of oil of combined gross 2P and 2C recoverable reserves and resources across the Company's portfolio, comprising the Shaikan, Sheikh Adi, Ber Bahr and Akri-Bijeel blocks. It is an important step in the growth of Gulf Keystone, demonstrating the size of our assets and significant potential for future increases in the existing numbers of reserves and resources. Shaikan is a significant industry asset with 2P value of US$1 billion, as indicated in the CPR, which does not take into account our extensive contingent resources. It is important to remember that we have not yet appraised the full potential of the field. As we drill more wells and increase production we will get a fuller understanding of its geology and the recovery factor assumptions are expected to increase. 

Shaikan is a phased development and the Company today is at an important juncture in this process. We have achieved several months of stable production and exports record, following which we are on a clear path to ramp up production from Shaikan, while fully expecting to receive the first payment for Shaikan crude export deliveries in line with the terms of the Shaikan Production Sharing Contract. The increase of production from 20,000 bopd to 40,000 bopd will enable us to generate substantial cash flow and help us progress to the full implementation of Phase 1 of the Shaikan FDP. Being operator of Shaikan means that we control the pace of development and capital expenditure and we will continue to seek funding at an appropriate cost of capital and a structure for the continued development of the Shaikan field and activities related to other fields in which the Company has participating interests. Financing decisions in order to fund the Shaikan Phase 1 activities will be made in conjunction with an anticipated increase in production capacity and sales of up to 40,000 bopd in 2014 and the recurring revenues this will provide. As Gulf Keystone matures as a producer, an increasingly diversified base of funding opportunities will become available.

In December, we were extremely pleased to have reached the end of the trial of the claims asserted by Excalibur against the Company, its two subsidiaries and Texas Keystone Inc. After a three year long process, which required a lot of time and effort from the Company and created unfortunate and significant uncertainty for our shareholders, the English Commercial Court ruled in our favour in the most unequivocal manner, acknowledging the speculative nature of Excalibur's claims, all of which have been dismissed. We worked hard to defend our position in the interests of our shareholders and the Court ruled all issues in favour of and awarded costs to the Companies and Texas Keystone Inc.  In January 2014, the Company received £16.9 million of litigation costs incurred by the Companies and Texas Keystone Inc. and commenced proceedings to recover additional £5.61 million of the litigation costs from Excalibur's funders.

I strongly believe that the Company's move to the Main Market in March 2014 has been an important and necessary hurdle for us to demonstrate the Company's increased size and maturity as an E&P player, as well as our desire to target a broader institutional investor audience. Having now passed this hurdle, the Board and the management team are aligned and focused on delivering the Company's strategy. 

I would like to take this opportunity to thank my fellow Board members, my management team and all the Company's employees for their commitment, dedication and hard work over the past twelve months. 2013 was another year of growth and delivery for Gulf Keystone and this is down to the efforts of our team.

Finally, at the end of 2013, important political momentum was gained with the completion of the Kurdistan-Turkey export oil pipeline, which became fully operational early in 2014. It is a major achievement for the Kurdistan Region of Iraq and, having made the significant leap from explorer to producer, Gulf Keystone will continue to progress with the development of the Shaikan field in 2014, making an increasing contribution to Kurdistan's production and exports. We look forward to continuing to work for the benefit of the Kurdistan Region of Iraq and all our stakeholders.

Todd F Kozel

Chief Executive Officer

Operational Review

Gulf Keystone achieved a number of significant milestones in its operations in the Kurdistan Region of Iraq in 2013. After the MNR approved the FDP for the Shaikan field, which the Company operates, commercial production from this key asset began in late July 2013. Against the backdrop of the significant progress being made on the independent pipeline infrastructure from Kurdistan to Turkey, the Company achieved its goal of having Shaikan crude delivered to the export market ahead of 2014. In December 2013, oil crude trucking operations commenced from Shaikan PF-1 with approximately 690,000 barrels delivered by truck to Turkey by mid-March 2014.

Last year, we commenced the implementation of the approved Phase 1 of the staged large-scale development of Shaikan with the drilling of Shaikan-10, our first development well, and achieving stable production levels of 10,000 from PF-1 by early 2014, which are expected to increase to 20,000 in Q2 2014. Shaikan PF-2 is being commissioned and our target is to reach cumulative production capacity of 40,000 bopd by the end of 2014.

In an important step in Gulf Keystone's transition from an oil and gas exploration company to a production company and as part of our move from AIM to the Main Market of the LSE, in March 2014 we released the CPR prepared by ERC Equipoise Limited. This report provided the Company and the market with the first baseline indication of reserves and resources across our portfolio in the Kurdistan Region of Iraq, against which we will now be measuring our future progress.

Elsewhere across our portfolio, we began appraising the Jurassic discovery on the Sheikh Adi block with the Sheikh Adi-3 well, which spudded in December 2013. Subject to the outcome of the appraisal programme, decision will be made regarding early development and production from Sheikh Adi, which we operate.

In May 2013, Genel Energy, the operator of the Ber Bahr block, announced that Ber Bahr-1, the first exploration well on the block, confirmed existence of a Jurassic commercial discovery. A 3D seismic survey is ongoing and the first appraisal well is expected to be spud by the end of 2014. Earlier in 2013, MOL Hungarian Oil and Gas plc, the operator of the Akri-Bijeel block, announced a new Triassic discovery made with the Bakrman-1 exploration well, before declaring the block commercial in October 2013, based on the Bijell-1 and Bakrman-1 discoveries. Finally, early production from the Bijell Extended Well Test facility commenced with initial flow rates of 3,500 bopd, while the operator is planning to submit an FDP for the Bijell and Bakrman discoveries in Q2 2014.

Reserves and Resources

The CPR identified 12.5 billion barrels of gross oil in place and 1.2 billion barrels of oil of combined gross 2P and 2C recoverable reserves and resources across the Shaikan, Sheikh Adi, Ber Bahr and Akri-Bijeel blocks. All 2P reserves and the majority of 2C contingent resources have been identified within the Company-operated assets of Shaikan and Sheikh Adi, and most of these reserves and resources, based on current information, are in the Jurassic formation. 299 million barrels of gross 2P oil reserves in the Jurassic formation of the Shaikan field, with 163 million barrels of net 2P reserves to Gulf Keystone, have been assigned on the basis of the planned 26 development wells of the Shaikan FDP Phase 1. These wells, which will mainly target the Sargelu, Alan and Mus formations only in the Jurassic, represent fewer than 25% of approximately 109 wells currently envisaged for the Shaikan full field development. The CPR establishes an NPV valuation using a 10% discount rate of US$1,004 million nominal based on the Company's net entitlement and a 'base case' oil price scenario. The assumptions dealing with the derivation of the 2P valuation are contained in the CPR Section 9 'Shaikan Fiscal Terms' and should be referred to in order to understand the basis of calculation. The CPR is available on Gulf Keystone's website at http://www.gulfkeystone.com/investor-centre/presentations-and-technical-reports.

The CPR is an important baseline indication of resources and reserves, with potential for future increases through the full implementation of Phase 1 of the Shaikan Field Development Plan and its further project phases, which will include the drilling of a substantial number of development wells, acquisition of additional production data from the existing and additional production facilities and further exploration drilling in and development of the Cretaceous, Triassic and potentially Permian formations. The CPR does not take into account undrilled and untested horizons, which are currently being targeted by our first deep exploration well on Shaikan, and we see a clear route for unlocking the upside to these initial 2P and 2C numbers through drilling more wells and thus obtaining a better understanding of the oil water contact levels and the actual fracture porosity. We also anticipate that our 2C contingent resources will be converted to 2P reserves as the next phase of the Shaikan development gets approved.

Production and Development

Shaikan (75% working interest; Operator)

Further to the MNR's approval of the Shaikan FDP, Gulf Keystone obtained the right to commence commercial production from the field in June 2013. The approved Phase 1 of the Shaikan FDP envisages the first initial stage with production building from 20,000 bopd to 40,000 bopd and then progressing to 100,000 bopd. The Company's immediate target is to reach 40,000 bopd of production capacity by the end of 2014, before initiating the next stage of the Shaikan project execution and increasing production capacity from 40,000 bopd to 66,000 bopd by Q1 2016.

Shaikan PF-1 became operational in late July and achieved a steady ramp-up of production resulting in total gross production of 183,000 barrels as at 1 September 2013, at which point production had increased to 12,400 bopd. By late December production operations and sales from PF-1 stabilised and continued in January, February and March 2014 at the level of approximately 10,000 bopd (gross) with total cumulative production from late 2010 to early 2014 from the early Jurassic Sargelu producers Shaikan-1 and -3 having surpassed 2.1 million barrels. In addition to the Shaikan-1 and Shaikan-3 wells, Shaikan-4, also a Jurassic Sargelu producer, was tied into PF-1 in March 2014, increasing total PF-1 output to about 16,000 bopd with a further increase to 20,000 bopd anticipated in Q2 2014. With the addition of Shaikan-4, our cumulative production from the field to date is approaching 2.6 million barrels.

The Shaikan-2 and Shaikan-5 wells are tied into PF-2 and the production facility is currently being commissioned with first Jurassic production, initially of approximately 10,000 bopd, expected in Q2 2014. The connection of Shaikan-10 to PF-2 will be completed in Q2 2014, increasing PF-2 production capacity. In order to achieve 40,000 bopd of production capacity from PF-1 and PF-2 in 2014, the Company intends to re-configure Shaikan-8, initially drilled as a gas injection well, into a fourth producer tied into PF-1, as well as to tie in the deep exploration well Shaikan-7, which is currently being drilled, to become the fifth producing well at PF-1. Additionally, productivity of the Shaikan-1 and Shaikan-3 wells will be enhanced through the replacement of the existing 3 ½" tubing by 4 ½" tubing. An additional production well will be drilled and connected to PF-2, alongside Shaikan-2, -5 and -10, the latter being our first development well drilled and completed as a producer in October 2013.

Since Shaikan crude oil export deliveries commenced in December 2013, three cargoes totalling in excess of 105,000 tonnes (690,000 barrels) of oil have been delivered from PF-1 to Turkey by truck and loaded at the port of Dortyol. The fourth cargo of approximately 33,000 tonnes (215,000 barrels) of Shaikan crude is expected to be loaded by the end of March 2014. The move to 40,000 bopd of production capacity will allow further expansion of export crude oil sales and the additional cash generated, in addition to the Company's near term debt financing options, will facilitate the move to the next stage of the Shaikan project execution. This next stage envisages a further 60,000 bopd of additional production capacity in order to reach the medium-term target of 100,000 bopd, which will require construction of additional production facilities with gas injection and water handling capabilities, as well as the drilling of a substantial number of development and production wells.

Akri-Bijeel (20% working interest)

In November 2013, MOL Hungarian Oil and Gas plc, the operator of the Akri-Bijeel block, declared the block commercial based on the discoveries made by the Bijell-1 well in the Jurassic in 2010 and the Bakrman-1 well in the Triassic in February 2013. While appraisal drilling continues, the operator is in the process of preparing the Field Development Plan for the Bijell and Bakrman discoveries, which is expected to be submitted to the MNR in Q2 2014 and approved later in 2014.

In early 2014, following the successful side-tracking and testing of the Bijell-1B well and the completion and commissioning of the Bijell Extended Well Test ("EWT") facility, early production operations began from the Bijell field. Early flow rates from the Bijell-1B well are around 3,500 bopd with an anticipated increase to the facility's full capacity of 10,000 bopd by the end of 2014.

Exploration & Appraisal

Shaikan (75% working interest; Operator)

Shaikan-7, the first deep exploration well on the Shaikan block, spudded in June 2013 to evaluate the previously undrilled mid to lower Triassic and Permian horizons. The well is being drilled with the Weatherford Rig 319 (3,000HP) close to the crest of the Shaikan structure, approximately 1km east of the Shaikan-1 discovery well. Exploring this potential exploration upside may provide significant additions to reserves and resources beyond the recent CPR.

Following a number of side-tracks and after setting casing at the bottom of Kurre Chine B formation below 2,600 metres in the upper Triassic, Shaikan-7 will drill into the deep Triassic and is then expected to penetrate the Permian. This vertical well is planned to reach a total depth below 4,500m in the Permian with the first results expected in Q2 2014. 

Sheikh Adi (80% working interest; Operator)

After making the Jurassic discovery with the Sheikh Adi-2 well in November 2012, the Company and the KRG, our partner in the block, unanimously agreed to move to an appraisal programme for the Sheikh Adi field to appraise Jurassic targets and evaluate the Triassic upside. Sheikh Adi-3, the first well to appraise the Sheikh Adi discovery, spudded in December 2013, and is currently drilling below 2,240 metres in the Alan formation in the Jurassic. A well testing programme to evaluate the potential of the Jurassic reservoirs in the Sheikh Adi footwall is currently being designed, before the well enters the Triassic. Subject to the outcome of the appraisal programme, decision will be made regarding early development and production from Sheikh Adi.

Approximately 111 km of new 2D seismic data acquired in the north of the block during 2013, has been processed to evaluate potential new structures.

Ber Bahr (40% working interest)

The Ber Bahr-1 exploration well was successfully side-tracked in the first half of 2013 and tested 2,100 bopd of 15 degree API oil from the Jurassic Sargelu formation. Genel Energy, the operator of the block, stated in May that the results of the Ber Bahr-1 well confirmed the existence of a commercial oil discovery. A 3D seismic survey is underway, planned for completion by mid-year 2014. The operator plans to spud an appraisal well in the fourth quarter of 2014.

Akri-Bijeel (20% working interest)

In 2013, the operator was progressing its extensive exploration and appraisal programme on the block. In addition to the already mentioned Bijell-1B side-track, the Bijell-2 appraisal well was drilled and tested in the Jurassic. Once it has been drilled into and tested in the Triassic, Bijell-2 is expected to be tied in to the Bijell EWT facility in H2 2014. Bijell-4, the third appraisal well, is currently drilling and Bijell-6 is expected to spud early in Q2 2014. Both wells are envisaged to be tied into the Bijell EWT facility, subject to the well testing results.

Following the Bakrman-1 Triassic oil discovery in January 2013, the operator plans to start an appraisal programme, consisting of two wells, in April 2014. Bakrman-2, which will target Triassic horizons, will be followed by Bakrman-3 in Q4 2014. Acquisition of 200 km² of 3D data is ongoing and the operator plans to commence early production from the field in 2015.

In line with the Company's decision to undertake a gradual strategic exit from Algeria, our remaining limited activities in Algeria will continue to focus on an orderly exit from the small GKN/GKS oil fields in the Ferkane area.

John Gerstenlauer

Chief Operating Officer

Financial Review

Results for the Year

Operating Results

2013 was a landmark year for Gulf Keystone Petroleum. Following the approval of the Shaikan FDP in June 2013, the Group has entered a critical phase in its development as it transitions from pure explorer to oil producer. The approval of the FDP, together with the commissioning of the PF-1 production facility in the summer of 2013, has led to the Group recognising commercial production from the Shaikan block in July 2013 and commercial sales thereafter. Commercial production and sales have been shortly followed by the commencement of the export of crude oil in December 2013. 

Gross production for the year totalled 496,921 barrels of oil (2012: 832,859 barrels of oil) and gross sales were 304,680 barrels of oil (2012: 825,485 barrels of oil). These sales, all of which came from domestic sales from the Shaikan block, generated $6.7 million of revenue in 2013 (2012: $32.2 million). Revenue for sales from commercial production was recognised in line with the terms of Shaikan PSC, with the price achieved on domestic sales in 2013 being $41.2/bbl. For all commercial production during 2013, the point of delivery to the customer is considered to be the metering point at the Shaikan field.

Trucking of Shaikan crude to the export market commenced in December 2013 with a total of 189,746 barrels (gross) leaving the Shaikan facility by 31 December 2013. Given the payment mechanism for sales to the export market is currently developing within the Kurdistan Region of Iraq, and the fact that the Group is in the early stages of producing oil for this market, revenue is being recognised on the basis of cash receipt, consistent with our producing peers in the region. The Group expects to receive its full entitlement for Shaikan crude trucked to international markets and estimates that the value of the production sent during 2013, net to the Group, is approximately $7 million, gross of royalty. Further details of sales revenues and the assumptions associated with their recognition and measurement can be found in the Summary of Significant Accounting Policies, Critical accounting estimates and judgements and note 2 to the consolidated financial statements. 

The recognition of commercial sales has resulted in the Group recognising a gross profit margin associated with Shaikan block production for the first time in 2013. In contrast, during 2012, all $32.2 million of revenue related to test production, where test production revenue is recognised with an equal and offsetting amount against cost of sales. This resulted in an amount equal to revenue being credited to intangible assets against exploration and evaluation costs, reducing the net book value in the balance sheet and showing a $nil gross profit.

Operating costs on a per barrel basis, excluding royalty, inventory movements, production payments due under the PSC terms to the KRG, depreciation, depletion and amortisation costs and share-based payment charges were $44.00 per barrel on an entitlement basis reflecting the lack of consistent production achieved throughout 2013 (2012: $28.31 per barrel) and the production sent to the export market, for which no entitlement has been recognised until the associated cash is received. Adjusting for the production sent to the export market, operating costs would be $27.20 per barrel net to the Group. 

At 30 June 2013, the Shaikan block assets, with a carrying value at time of transfer of $443.5 million (31 December 2012: $357.7 million), were transferred from intangible assets to property, plant and equipment. This reflects the fact that assets in this block are now considered developing and producing assets following the Group's criteria for the transfer being met with the approval of the FDP. The Group's internal determination of commercial reserves has been supplemented by the CPR report from ERC Equipoise, which was finalised during the first quarter of 2014 (see Operational Review for further details). The property, plant and equipment balance for the Shaikan block is now being depreciated using the unit of production method based on entitlement production and reserves. The depreciation charge relating to these assets for 2013 was $2.4 million (2012: $nil), and is recorded within cost of sales; see notes 3, 10 and 11 to the consolidated financial statements for further details.

Non-Operating Results

General and administrative expenses for 2013 were $15.8 million (2012: $82.1 million), a reduction of $66.3 million. This can be attributed to a number of factors as discussed below.

On 13 December 2013, the English Commercial Court (the "Court") handed down its full judgment dismissing all the claims asserted by Excalibur Ventures LLC ("Excalibur") and deciding all issues in favour of the Group and Texas Keystone (the "Defendants") (see Excalibur Claims section for further details). The Court ordered that the full sum paid into the Court as security for the Defendant's costs be paid out to the Defendants and the amount received by the Company (£17.5 million, net of outstanding legal fees of £0.6 million) has been credited against 2013 administrative expenses (see note 4 to the consolidated financial statements). The Company received this amount in January 2014. The Company was awarded a further £3.2 million, and Texas Keystone, an additional £2.4 million to be recovered from Excalibur and their financial backers, following an assessment of costs on an indemnity basis. As at the date of this report, these funds have not yet been received, and while the Company intends to pursue these claims, it cannot be certain that any further amounts will be paid by Excalibur and its financial backers. For further details of the claim, and the circumstances of its resolution, please refer to note 23 to the consolidated financial statements. This refund of legal costs has resulted in a reduction of administrative expenses of $45.8 million (2013: $19.0 million net credit to costs incurred in relation to the Excalibur litigation; 2012: $26.8 million costs incurred).

The costs associated with the share bonus awards and the options awarded under the Company Share Options Plan and Long Term Incentive Plan decreased from $25.9 million in 2012 to $12.6 million, reflecting no new grants during the year. Of these costs, $2.9 million has been included within intangible assets and property plant and equipment (2012: $6.0 million), as these employment costs are directly attributable to technical staff working on capital oil and gas projects. In addition, cash bonuses for senior management have reduced by $6.4 million to $7.6 million (2012: $14.0 million), in line with Group remuneration policy and no new awards granted to Executive Management for the year ended 31 December 2013.

Other losses of $1.2 million (2012: other gains of $5.2 million) comprise foreign exchange losses of $1.2 million (2012: $6.4 million gain), with the Group holding no derivative financial instruments at year end requiring mark-to-market valuation (2012: $1.2 million mark-to-market valuation loss). The currency and interest rate hedges which the Company entered into to partially mitigate the risk associated with converting U.S. dollars to sterling were all held to maturity.

Interest revenue remains low in accordance with prevailing interest rates and has reduced from 2012 due to a lower average cash balance (2013: $0.8 million; 2012: $1.2 million). Finance costs of $10.4 million (2012: $4.5 million) are made up of the accretion charge on the decommissioning provision of $0.4 million (2012: $0.3 million) and interest payable in respect of the Convertible Bonds of $23.4 million (2012: $4.6 million) out of which $13.4 million (2012: $0.5 million) was capitalised within intangible assets. The increase in convertible bond interest expense is due to the fact that the original $275.0 million issue was in place for the whole of 2013, compared to the last two months of 2012, and a "tap" issue of $50 million was completed during November 2013 (see Convertible Bonds section).

The tax cost for 2013 is $0.1 million (2012: $1.6 million) and arises on UK activities.

The results for 2013 show a decreased loss after tax of $32.0 million (2012: $81.8 million) reflecting the reduction in administrative expenses discussed previously, offset by a gross operating loss of $5.3 million and increased finance costs.

Cash Flow

Net cash outflow from oil and gas operations after operational and administrative expenses was $25.1 million (2012: $59.0 million). The loss from operations of $21.1 million (2012: $82.1 million) was adjusted for non-cash expenditure of $13.0 million (2012: $25.4 million), that includes share-based payments and depreciation, depletion and amortisation costs. Non-cash expenditure was reduced by a decrease in share-based payment expense from $20.0 million to $9.8 million, there being no change to the value of the Algeria decommissioning provision (2012: $3.5 million) but offset by an increase in depreciation to $3.0 million (2012: $0.6 million), including the charge to the Shaikan oil and gas assets. See note 21 to the consolidated financial statements for further details.

Working capital adjustments result in a $17.0 million cash outflow (2012: $2.2 million outflow) increasing operational cash outflow relative to accounting loss from operations. The increases in inventories and payables are in line with the level of increase in the Company's activities during the year, while the significant increase in receivables results from the outstanding Court costs receivable, which was paid shortly after year end.

Convertible bond coupon payments of $17.2 million were made during 2013 (2012: $nil) and are included within cash used in operating activities.

Tax paid in 2013 was $0.7 million (2012: $1.7 million) and interest received was $0.8 million (2012: $1.2 million). Net cash outflow from operating activities after tax and interest was $42.1 million (2012: $59.4 million).

Cash used in investing activities totalled $182.3 million (2012: $172.3 million), which comprises $131.8 million spent on intangible assets (2012: $191.9 million) and $59.0 million (2012: $1.3 million) spent on property, plant and equipment offset by a reduction in liquid investments of $8.6 million (2012: $20.9 million decrease). The spend on property, plant and equipment has increased following the transfer of the Shaikan assets from intangible assets to property, plant and equipment at 30 June 2013. All Shaikan block capitalised spend during the second half of the year has been recorded as property, plant and equipment. The majority of the $131.8 million cash spent on intangible assets relates to the Company's exploration activities in the Kurdistan Region of Iraq, including the drilling, testing and workovers of wells on the Sheikh Adi, Ber Bahr and Akri-Bijeel blocks, Akri-Bijeel surface facility construction and the acquisition and processing of seismic data as well as additions to the Shaikan block in the first half of 2013. Overall, cash spend on intangible assets and property plant and equipment was comparable to 2012 (2013: $190.9 million; 2012: $193.2 million).

Cash generated by financing activities amounted to $53.9 million (2012: $270.2 million) and primarily results from the "tap" issue of the $50 million convertible bonds during November 2013. In 2012, significant funds were raised through the $275.0 million convertible bonds in October 2012 to fund the Group's capital work programme throughout 2013. A further $4.7 million was raised in 2013 through the funds received following the exercises of the warrants previously granted and options under the Company's share option plan (2012: $1.3 million).

The net overall decrease in cash and cash equivalents during the period was $170.4 million (2012: $38.5 million increase). Foreign exchange losses on cash balances were $1.3 million (2012: $7.1 million gain).

Cash and cash equivalents totalled $82.0 million at 31 December 2013 (31 December 2012: $253.7 million). Cash, cash equivalents and liquid investments totalled $82.0 million at 31 December 2013 and $141.1 million at 30 June 2013 (31 December 2012: $262.3 million).

Excalibur Claims

On 13 December 2013, the English Commercial Court handed down its full judgment dismissing all of the claims asserted by Excalibur against the Defendants. Excalibur has announced that it does not intend to appeal this judgment. Up until the date of the judgment, Excalibur had paid £17.5 million into the court as security for costs, comprising £10.7 million for Gulf Keystone and £6.8 million for Texas Keystone. The court ordered that the defendants should receive the £17.5 million in its entirety, in addition to a further £5.6 million indemnity costs recoverable from Excalibur and its backers. To date, the £5.6 million has not been recovered and the Company is launching legal proceedings to recover the balance. Further details of the claim and its resolution are given in note 23 to the consolidated financial statements.

Convertible Bonds and Capital Structure

In October 2012, in order to fund the Company's ongoing work programme through 2013, the Company completed an oversubscribed offering of Convertible Bonds, raising $275.0 million gross proceeds. These Convertible Bonds were admitted to the Official List of the Luxembourg Stock Exchange in January 2013. In November 2013, the Company completed an additional offering of Convertible Bonds (the "tap" issue), raising a further $50.0 million gross proceeds. The bonds issued in 2013 have been consolidated with those issued in 2012 to form a single series. All of the Convertible Bonds are due to mature on the fifth anniversary of the initial bond issue in October 2017; see note 17 to the consolidated financial statements for further details.

Funds raised via the offering of the Convertible Bonds enhanced the Company's liquidity position and have contributed to the Company's strategy of developing the production capabilities of the Shaikan block to the level where future development will be funded by ongoing, stable production and export sales.

This is the second time Gulf Keystone has accessed the debt capital markets, with an equity-linked product, and the success of the offering demonstrates investors' confidence in the Company's continuing development of the Shaikan block and other opportunities.

No changes were made to the authorised share capital during 2013. At the date of this report, 888,933,057 common shares are in issue.

During February 2013, 7.1 million common shares were issued including 6.5 million to the Employee Benefit Trust ("EBT"), to satisfy awards made under the 2010 and 2011 Executive Bonus Scheme that were deemed to have vested. Further details of the awards granted and vested are given in the Directors' Report and notes 20 and 24 to the consolidated financial statements. These issues were reported in the 2012 Annual Report and Accounts.

During 2013, 4.6 million common shares were issued in response to option exercises by the Company's employees and directors.

The common shares issued during 2013 to satisfy awards under the Company's bonus and option incentive schemes represent 1.32% of the Company's share capital as at the date of this report. There were no additional share bonuses or LTIP options granted in 2013.

Corporate Activities

During 2013, the Company continued to work towards obtaining admission to trading on the London Stock Exchange plc's ("LSE") Main Market for listed securities. The late 2013 resolution of the Excalibur case in the Company's favour removed a significant amount of uncertainty that had previously held the Company back from applying for admission to the Official List of the United Kingdom Listing Authority ("UKLA"). The Competent Person's Report ("CPR"), prepared by ERC Equipoise and released on 14 March 2014 was an important step towards admission to the Official List. The admission to the Official List occurred at 8.00am on 25 March 2014, just prior to the date of this report. Trading in the Company's common shares on AIM was simultaneously cancelled.

Other and Further Events

The Company continues to explore options for the disposal of its 20% working interest in the Akri-Bijeel block together with its appointed corporate advisers, whom are responsible for coordination of, and advice on, the process. The disposal process remains ongoing at the date of this report, with the Group continuing to actively market its interest. The block was declared commercial in October 2013 by the operator, MOL. Early production has recently commenced from the Extended Well Test ("EWT") facility following the tie-in of Bijell-1B, with initial production at around 3,500 barrels per day. These developments, together with the Bakrman discovery in 2013, all enhance the prospect of a successful conclusion to the disposal process. The Akri-Bijeel intangible asset (2013: $103.1 million; 2012: $64.6 million), including the associated working capital balances, continues to be classified as an asset held for sale. Further details of this asset, and the facts and circumstances of the proposed sale, are given in note 12 to the consolidated financial statements.

The Company continues to effect an orderly exit from its Algerian operations and continues the discussions with Sonatrach regarding the exit from Block 126a (GKN and GKS oilfields under the Ferkane Permit).

Financial Strategy and Outlook for 2014

2013 has been a year of significant progress for Gulf Keystone, a year in which the Company achieved important operational and financial milestones. These milestones include the $50 million "tap" issue follow-up to the highly successful 2012 Convertible Bonds issue, the approval of the Shaikan FDP and the commencement of commercial production from this block.

The Group's current committed capital work programme and immediate focus remains on achieving its target of 40,000 bopd of production capacity from the Shaikan block's PF-1 and PF-2 by the end of 2014, which will allow further expansion of export crude oil sales. The first Shaikan production facility is already producing oil for commercial sale and the second is due to produce "first oil" in the second quarter of 2014. Gulf Keystone, together with its partners, continues to carry on its exploration and appraisal programmes on the prospects identified in the Sheikh Adi, Akri-Bijeel and Ber Bahr blocks aimed at unlocking significant value and increasing reserves and resources across all of the Company's licence interests.

The Group's business is highly capital intensive and on 20 March 2014, the Company included a statement in its announcement of the publication of its prospectus in connection with the admission to the Official List, that it was of the opinion that the Group does not have sufficient working capital for its present requirements, representing a material uncertainty over the going concern assumption (see the Directors' Report for further details). 

Existing cash resources at 1 March 2014 were $76.0 million. It is expected that these may be enhanced over the next 12 months by:

· achieving further consistent oil production and domestic and export sales from Shaikan increasing up to 40,000 bopd;

· the exercise of the Shaikan Government Option, the Shaikan Third Party Option, the Akri-Bijeel Government Option and/or the Akri-Bijeel Third Party Option under the terms of the Shaikan and Akri-Bijeel PSCs;

· any proceeds from the potential sale of the Group's interest in the Akri-Bijeel Block; and/or

· reimbursement of the additional £5.6 million litigation costs by Excalibur.

With reference to the above, under the terms of the Shaikan and the Akri-Bijeel PSCs, the KRG has the option (the "Government Option") to participate in an undivided interest in the petroleum operations of the relevant block. In addition to the Government Option, the KRG also has the option to nominate a third party to have an undivided interest in the petroleum operations of the Shaikan block and the Akri-Bijeel block (the "Third Party Option").

However, in order to address a potential shortfall in working capital, the Company is currently seeking additional, cost-effective financing in the form of high yield bonds. Prior to this report, on 19 March 2014, the Company announced that it has mandated Deutsche Bank and Pareto Securities to arrange a series of fixed income investor meetings in the US, Europe and Asia commencing 20 March 2014. A debt offering of up to US$250 million in accordance with Reg S/144A is expected to follow, subject to market conditions; investor meetings are on-going at the date of this report.

The Company expects to utilise cash generated from increasing oil sales, in addition to the funds from the contemplated raising of up to US$250 million in debt financing, to initiate the next stage of the Shaikan project execution and increase production capacity to 66,000 bopd by Q1 2016. The increase of Shaikan production capacity to 66,000 bopd is the Company's next step towards reaching the medium-term target of 100,000 bopd set for Phase 1 of the approved Shaikan FDP.

KE Ainsworth

Finance Director

Management of Principal Risks and Uncertainties

Getting risk management right is an essential component of business success. It supports the achievement of our strategic objectives and protects our business, our people and our reputation. Identifying, understanding and mitigating the risks we face, whilst being able to maximise the value from business opportunities, supports effective decision making. Responding quickly when risks crystallise to mitigate their impact is a key element of our risk management process which underpins the safe delivery of our business plans and strategic objectives, protects our licence to operate, and helps to create a long-term competitive advantage. 

The Board, its Committees and the senior management team are actively engaged in monitoring and limiting, where possible, the risks to which the Company and its subsidiaries (together "the Group") are exposed. During 2013, we have regularly considered our risk profile and updated the Group risk register. The following table indicates the key risks the Group faces, their potential impact and the mitigation measures that we have in place. The list is not exhaustive or in priority order, and may change at any time.

Directors' Report

The Directors are pleased to present their report on the affairs of the Group, together with the consolidated financial statements of the Company and auditor's report, for the year ended 31 December 2013. A review of the business is set out in the preceding sections of this Annual Report, including the Statement of Non-Executive Chairman and Statement of Chief Executive Officer, Operational Review and Financial Review, which are incorporated into this report by reference. The Corporate Governance statement also forms part of this report. 

Results and Dividends

The Group's financial results for the year ended 31 December 2013 are set out in the consolidated financial statements. The Group made a net loss after taxation for the year of $32.0 million (2012: $81.8 million loss) and the Directors do not recommend a dividend for the year (2012: $nil). Future payments of dividends are expected to depend on the earnings and financial condition of the Company and such factors as the Board of Directors consider are appropriate.

Capital Structure

Details of the authorised and issued share capital, together with movements in the Company's issued share capital during the year, are shown in note 20 to the consolidated financial statements. The business is financed by means of debt (see note 17 to the consolidated financial statements), internally generated funds and external share capital. 

There are no specific restrictions on the size of a holding nor on the transfer of common shares, both of which are governed by the general provisions of the Company's Bye-laws and prevailing legislation. The Directors are not aware of any agreements between holders of the Company's common shares that may result in restrictions on the transfer of securities or on voting rights. No person has any special rights of control over the Company's share capital and all issued common shares are fully paid.

Details of the employee share schemes are set out in note 24 to the consolidated financial statements and details of the Directors' awards are included in the Report of the Remuneration Committee.

Voting Rights and Bye-Law Amendments

The Company's Bye-laws may only be revoked or amended by the shareholders of the Company by resolution passed by a majority of not less than three-fourths of such shareholders as vote in person or, where proxies are allowed, by proxy at a general meeting. Resolutions put to the vote of any general meeting are decided on a show of hands unless a poll is demanded in accordance with the Company's Bye-laws.

Directors

With regard to the appointment and replacement of Directors, the Company is governed by its Bye-laws, the Companies Act (Bermuda) and related legislation. In accordance with the Bye-Laws, one-third of all the Directors are required to retire by rotation every year at the Annual General Meeting. 

The following Directors have held office during the year:

Todd Kozel -Chief Executive Officer(3)

Simon Murray - Non-Executive Chairman (joined the Board in July 2013)(2)(3)

John Gerstenlauer - Chief Operating Officer(4)

Ewen Ainsworth - Finance Director

Lord Guthrie - Non-Executive Director(3)

Mark Hanson - Non-Executive Director(1)(2)(3)

Jeremy Asher - Non-Executive Deputy Chairman (joined the Board in July 2013)(1)(3)

John Bell - Independent Non-Executive Director (joined the Board in July 2013)(1)(2)(3)

Philip Dimmock - Independent Non-Executive Director (joined the Board in July 2013)(1)(3)(4)

Thomas Shull - Independent Non-Executive Director (joined the Board in July 2013)(3)(4)

Andrew Simon - Non-Executive Director and Senior Independent Director (joined the Board in September 2013)(1)(2)(3)

Ali Al Qabandi - Business Development Director (retired by rotation in June 2013)

Mehdi Varzi - Non-Executive Director (retired by rotation in June 2013)

(1) Member of the Audit Committee

(2) Member of the Remuneration Committee

(3) Member of the Nominations Committee

(4) Member of Health, Safety, Security and Environment Committee

Directors' indemnities

The Company has made qualifying third party indemnity provisions for the benefit of its Directors which were made during the year and remain in force at the date of this report.

Directors' Interests in Shares

The Directors who held office at 31 December 2013 had the following interests in the common shares of the Company, including family interests:

(1)Includes common shares held directly, by family members and through the Gulf Keystone EBT which are held subject to the discretion of the EBT Trustee.

At the date of this report, the EBT held 9,402,442 common shares of the Company. A further 10,000,000 common shares are held by the Exit Event Trustee in relation to the Exit Event Award (see note 24 to the consolidated financial statements). 

Directors' interests in share options of the Company and the Company's bonus scheme grants, including family interests, as at 31 December 2013 are disclosed in the Report of the Remuneration Committee.

Significant Shareholdings

The Company has been notified of the following significant shareholdings as at 18 March 2014:

Going Concern

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Chairman's Statement, Strategic Review by the Chief Executive Officer and Operational Review. The financial position of the Group at the year end, its cash flows and liquidity position are included in the Financial Review. In addition, note 26 to the consolidated financial statements includes the Group's objectives, policies and processes for managing its capital, its financial risk management objectives and details of its financial instruments and hedging activities. Note 26 also describes exposures to credit risk and liquidity risk.

Following commencement of first commercial production in July 2013 and sales thereafter along with the commencement of the export of crude oil in December 2013 from the Shaikan Block, the Group has entered a critical phase in its development as it transitions from pure explorer to oil producer. The Group's business requires substantial capital expenditures for the foreseeable future, being at least the next 12 months, to finance the exploration, development and production of its existing oil reserves and resources. 

The Group is dependent on existing cash resources, which totalled $76.0 million at 1 March 2014, together with production revenues from its interest in the Shaikan Block in order to meet its future working capital requirements. Existing cash resources may be enhanced over the next 12 months from the date of this report by achieving further consistent oil production and domestic and export sales from Shaikan, increasing up to 40,000 bopd; the exercise of the Shaikan Government Option, the Shaikan Third Party Option, the Akri-Bijeel Government Option and/or the Akri-Bijeel Third Party Option under the terms of the Shaikan and Akri-Bijeel PSCs; any proceeds from the potential sale of the Group's interest in the Akri-Bijeel Block and/or the reimbursement of an additional £5.6 million of litigation costs by Excalibur Ventures LLC (see note 23 to the financial statements). 

Whilst the Group believes that one or more of the above events are likely to occur, if none of these events occur, and the Group is unable to otherwise enhance its existing cash resources, then the Directors would expect the Group to require additional working capital by the end of May 2014. If only one of these events occurs in the next 12 months from the date of this document, this would reduce any potential working capital shortfall and, depending on the final proceeds from the event, potentially remove it completely.

In order to address this potential shortfall in working capital, the Group is currently seeking to raise additional debt financing by the end of April 2014. The Group has mandated Deutsche Bank and Pareto Securities to arrange a series of fixed income investor meetings in the US, Europe and Asia, which commenced on 20 March 2014. A debt offering of up to $250 million in accordance with Reg S/144A is expected to follow, subject to market conditions.

Whilst there can be no certainty that a debt transaction will follow the Group's investor meetings, any debt raised will enhance the Group's liquidity position and support the Group's on-going capital work programmes, including increasing sales to up to 40,000 bopd by the completion and commissioning of Shaikan PF-1 and PF-2. If such debt financing is not available or not available on appropriate terms, the Group would also look to achieve funding via a further equity-linked or equity financing. 

The Directors have concluded that the early stage of fundraising and the insufficiency of the current working capital to fulfil the Group's current working programme create a material uncertainty that casts significant doubt upon the Group's ability to continue as a going concern. Nevertheless, based on the forecasts and projections prepared at the time of preparation of this annual report and after making enquiries, and considering the uncertainties described above, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For these reasons, they continue to adopt the going concern basis in preparing this annual report and financial statements.

Significant Agreements - Change of Control

There are a number of agreements that take effect, alter or terminate upon a change of control of the Group including employee share plans and the Convertible Bonds. None of these are considered to be significant in terms of their likely impact on the business of the Group as a whole. Furthermore, the Directors are not aware of any agreements between the Group and its Directors or employees that provide for compensation for loss of office or employment that occurs because of a takeover bid.

Auditor

Each of the persons who is a Director at the date of approval of this annual report confirms that:

By order of the Board

Todd F Kozel

Chief Executive Officer

26 March 2014

Chairman's introduction into the Corporate Governance section

Dear Shareholder

In my first year as Chairman, we have made progress towards strengthening our governance arrangements. On 25 March 2014, the Company's common shares were admitted to the standard segment of the Official List. As a consequence of a standard listing the Company is not subject to the UK Corporate Governance Code (the "Code"), as amended in September 2012. However the Board recognises the importance of good governance and has considered the principles and provisions set out in the Code. In anticipation of a standard listing and in order to strengthen the governance framework of the Group, the Board resolved in December 2013 to follow all the requirements of the Code voluntarily. Therefore, I am pleased to confirm to you that the reporting in this annual report follows the requirements of the Code, except as set out in the "Statement of compliance with the UK Corporate Governance Code" section of the Corporate Governance Report.

The Board is ultimately responsible to shareholders for all the Group's activities, its strategy and financial performance, for the efficient use of the Group's resources and for social, environmental and ethical matters. The Board, with the assistance of the Audit Committee, approves the Group's governance framework and reviews its risk management and internal control processes.

The most significant reporting changes have been to our Directors' Remuneration Report together with the introduction of the advisory vote on our remuneration policy and annual report on remuneration at the 2014 AGM. The 2013 Report consists of the Remuneration Committee Chairman's introduction regarding the work performed by the Committee during the year, a policy report stating the Company's revised policy on remuneration as well as an annual remuneration report detailing the elements of Directors' remuneration for the year.

The additional reporting required by the Code also includes the statement made by the Directors in the Directors' Responsibilities Statement that they consider the annual report and accounts, taken as a whole, to be fair, balanced and understandable. The processes which underpin and support the Directors' confidence in making this statement are long established and embedded into our business and include the review of the narrative sections of the annual report and accounts by our external advisers who verify its accuracy and consider the tonality and balance of approach. In addition, our external Auditors read the narrative sections of the Annual Report and Accounts to identify any material inconsistences with the financial statements. Our Board members receive drafts of the Annual Report and Accounts in sufficient time to facilitate their review and input.

Additional disclosures in respect of how the Audit Committee addresses the key issues it has considered during the year can be found in the Audit Committee Report. A separate Nominations Committee report also forms part of this year's Corporate Governance Report. The Nominations Committee Report describes the work of this Committee during the year and the principles applied in determining the most appropriate structure and suitable candidates for the Board.

In 2013, our Board was further strengthened with five new Non-Executive Directors who come from a variety of backgrounds and bring a range of skills and experience to the Board. The Board has taken the opportunity to review and enhance the composition of the Bard Committing by co-opting these new Directors. Furthermore, a new Health Safety Security Environment and Corporate Social Responsibility Committee ("HSSE and CSR Committee")was established in September 2013 to enhance Board oversight on the management of safety and security issues at GKP.

With this new stronger Board we will continue to implement sound principles of good governance in the way we run the Company and build upon the high standards that we have implemented to date.

Simon Murray

Chairman

Governance: Corporate Governance Report

Introduction

One of the Board's primary responsibilities is to ensure that the Company is run in the best long-term interests of our shareholders and wider stakeholders. This is achieved through the Board's commitment to maintain high standards of governance and to aim to create a culture which demands the same commitment and performance from all of our employees and contractors and in all our business activities. The governance processes applied across the Group are illustrated below and in the individual Committee reports.

Statement of Compliance with the UK Corporate Governance Code

Although Gulf Keystone, as a Bermuda incorporated Company, is not required to comply with the UK Corporate Governance Code, the Board resolved that, in the view of the Company's recent move from AIM to the Standard Segment of the Official List of the United Kingdom Listing Authority of The London Stock Exchange(the "Main Market"), the principles and provisions of the UK Corporate Governance Code will be applied and followed across the Group.

The version of the Corporate Governance Code applicable to the current reporting period is the September 2012 UK Corporate Governance Code (the "Code"). As at the date of this report, the Board considers that it and the Company have complied with the provisions of the Code, except for the following matters:

- In 2014, the Company undertook a rigorous review of the Non-Executive Directors' independence in line with the Listing Rules' guidance. It was concluded that, excluding the Chairman, four Non-Executive Directors out of ten Board members are independent, i.e. less than half of the Board (B.1.2). In addition, requirements D.2.1 and B.2.1 of the Code regarding the number of independent members were not met for the Remuneration and Nominations Committees. 

The non-compliance is the result of the limited time the Company had, between the adoption of the Code and the date of this report, to address this issue. The Company is seeking to appoint at least one additional Independent Non-Executive Director which will improve the Board balance.

- The Company does not have Non-Executive Directors' contracts available for inspection at the registered office in Bermuda as it was deemed impracticable to do so, but will make these contracts available at the AGM.

- Given the recent changes to the Board composition and the voluntary adoption of the Code, the Board are looking into the most appropriate ways of conducting a formal Board evaluation (B.6). For further details please refer to the "Performance evaluation of the Board and its Committees" section of the Corporate Governance Report.

The Code is issued by the Financial Reporting Council and is available for review on the Financial Reporting Council's (FRC's) website http://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/UK-Corporate-Governance-Code-September-2012.aspx.

Matters reserved for the Board

The Board has a formal schedule of matters specifically reserved to it for decision. They cover the key strategic, financial and operational issues facing the Group and include:

· the Group's strategic aims and objectives;

· changes to the Company's capital, management or control structures;

· dividend policy and dividend recommendation;

· half-yearly reports, interim management statements, final results, annual report and accounts;

· the overall system of internal control and risk management;

· major capital projects, corporate actions and investment;

· communication policy; and

· changes to the structure, size and composition of the Board.

The Board is responsible to shareholders for the proper management of the Group. In 2013, the Board has continued to focus its efforts on strategic objectives that will create shareholder value and ensuring that these are properly pursued. 

The Gulf Keystone Board and its Committees

As at the time of this report, the Board comprised three Executive Directors and eight Non-Executive Directors (including the Chairman). The Company regards four of the Non-Executive Directors (excluding the Chairman) as independent. The Company's Executive and Non-Executive Directors come from a variety of backgrounds and bring different ideas and perspectives to the table ensuring that the Company's Directors have the right experience to meet the needs of the business. The Company places high importance on having an appropriate Board composition with the eight Non-Executive Directors, ensuring that the strategies proposed by the Executive Directors are fully considered and appropriately challenged.

Currently, the Board has four Committees: Audit and Risk Committee (the "Audit Committee"), Remuneration Committee, Nominations Committee and Health, Safety, Security and Environment and Corporate Social Responsibility ("HSSE and CSR") Committee. Each standing Board Committee has specific written terms of reference issued by the Board and adopted by the relevant Committee, updated most recently in December 2013 in anticipation of the move up to the Main Market. All Committee Chairmen report orally on the proceedings of their Committees at the meetings of the Board. Where appropriate the Committee Chairmen also make recommendations to the Board in accordance with their relevant terms of reference. In addition the minutes of the Committee meetings are included in the papers distributed to all Board members in advance of Board meetings.

To ensure Directors are kept up-to-date on developing issues and to support the overall effectiveness of the Board and its Committees, the Non-Executive Chairman and Committee Chairmen communicate regularly with the Chief Executive and other Executive Directors. The key governance mandates of the Board's four main Committees are shown below.

Board Committees

Audit Committee

The Audit Committee comprises four Non-Executive Directors. As at 31 December 2013, the Audit Committee members were Mark Hanson (Chairman), Andrew Simon, Jeremy Asher and John Bell. Mark Hanson has served as the Chairman of the Committee throughout the year. In March 2014, Philip Dimmock was appointed to the Committee and Mark Hanson stepped down as Chairman of the Audit Committee to be replaced by Philip Dimmock. The Committee members have been selected to provide the wide range of financial and commercial expertise necessary to fulfil the Committee's duties. The Board considers each Committee member's experience to be recent and relevant for the purposes of the Code. This Committee meets at least three times per year and, during the year ended 31 December 2013 the Committee met three times.

The terms of reference of the Audit Committee are documented and agreed by the Board and are available in the corporate governance section of Gulf Keystone's corporate website www.gulfkeystone.com. The Audit Committee report is set out in a separate section of the Corporate Governance report.

Nominations Committee

As at 31 December 2013, the Nominations Committee members were Field Marshal the Lord Guthrie of Craigiebank (Chairman) and Mark Hanson, who served on the Committee for the full year joined by Simon Murray, Todd Kozel, Philip Dimmock and Thomas Schull in September 2013. In March 2014, Jeremy Asher, John Bell and Andrew Simon, were appointed to the Committee and Lord Guthrie stepped down as Chairman of the Nominations Committee to be replaced by Simon Murray. The Nominations Committee formally met once during the year. In addition to the formal meetings, Lord Guthrie and Mark Hanson were actively involved in the search for the Non-Executive Chairman and Non-Executive Directors with the assistance of Odgers Berndtson, one of the UK's pre-eminent executive search firms. The terms of reference of the Nominations Committee are documented and agreed by the Board and are available in the corporate governance section of Gulf Keystone's corporate website www.gulfkeystone.com. The Nominations Committee report is set out in a separate section of the Corporate Governance report.

Remuneration Committee

As at 31 December 2013, the Remuneration Committee comprised four Non-Executive Directors: Andrew Simon (Chairman), Simon Murray, John Bell and Mark Hanson. This Committee, which meets at least twice per year, is responsible for making recommendations to the Board concerning the compensation of the Executive Directors and the Chairman, as well as the level and structure of remuneration for senior management. PricewaterhouseCoopers ("PwC") was appointed as Gulf Keystone's remuneration consultant in March 2014. The Remuneration Committee has met four times during the year. The Committee is also responsible for the determination of the Group's remuneration policy. The details of the policy as well as the activities undertaken by the Committee during the year can be found in the Directors' Remuneration Report. The terms of reference for the Remuneration Committee are available in the corporate governance section of Gulf Keystone's corporate website www.gulfkeystone.com.

HSSE & CSR Committee

The HSSE & CSR Committee was set up in September 2013 to ensure that appropriate systems are in place to maintain health, safety, security and environmental risk and the corporate social responsibility of the Group. The Committee comprises two Non-Executive Directors, Philip Dimmock (Chairman) and Thomas Shull and the Group's COO, John Gerstenlauer. The Committee meets at least four times a year. In 2013, the Committee met two times as it was in existence for less than half of the year. The primary function of the Committee is to oversee the development of the Group's policies and guidelines for the management of HSSE and social risks, evaluate the effectiveness of these policies and their ability to ensure compliance with applicable legal and regulatory requirements, evaluate and oversee the quality and integrity of reporting to external stakeholders concerning HSSE and CSR, and review the results of any independent audits of the Group's performance in regard to HSSE and CSR making recommendations, where appropriate, to the Board concerning the same. The Committee also examines specific safety issues as requested by the Board.

Since its constitution, the Committee has reviewed a range of safety-related matters. This included consideration of the recommendations that arose from the internal audit of the Group's HSSE arrangements carried out by PwC as part of their internal audit function and the development of an action plan to address these recommendations. Shortly after its creation, the Committee carried out a site visit to the Shaikan block in order to observe and assess the safety measures in place. The Committee did not note any violations of the Group's HSSE policy during the visit. During 2013, the HSSE policy was reviewed to ensure it remained adequate and up-to-date. It was requested that a management report on the Group's safety matters was produced and provided to the Committee on a monthly basis. The Committee will also consider the engagement of a specialist HSSE firm to perform any future reviews if required. The terms of reference of the HSSE and CSR Committee are documented and agreed by the Board and are available in the corporate governance section of Gulf Keystone's corporate website www.gulfkeystone.com.

Division of Responsibilities of Chairman and Chief Executive

In May 2013, the Board resolved that, as part of the move from AIM to the Main Market, and in keeping with the best practice of the Official List, the roles of Chairman and Chief Executive Officer, previously fulfilled by Todd Kozel, would be split. On 4 July 2013, Simon Murray was appointed to the Board of Gulf Keystone as Non-Executive Chairman. This appointment represented a significant step forward for the Company as it expanded and strengthened its Board in advance of its recent admission to the Official List of the London Stock Exchange.

Whilst retaining a close working relationship, the Chairman and Chief Executive have clearly defined and separate responsibilities divided between running the Board and the business. They meet regularly between Board meetings to ensure a full understanding of evolving issues and to facilitate effective decision making. They are responsible to the Company's shareholders for the successful delivery of the strategy.

The Role of the Chairman

In running the Board, the Chairman is responsible for creating an environment which facilitates robust and constructive challenge and debate. In creating this environment the Chairman encourages open communications and aims to ensure that the Non-Executive Directors' constructive challenge and suggestions are considered by the Executive Directors dispassionately and on their merits. The Chairman is responsible for setting the Board's agenda and ensuring that adequate time is available for discussion of all agenda items, in particular strategic issues.

In 2013, the Board evaluated the Chairman's external commitments. The Board is satisfied that the Chairman committed sufficient time to his duties in relation to the Company.

The Role of the Chief Executive

Supported by the Executive Directors and senior management team, the Chief Executive, within the authority delegated by the Board, has day to day management responsibility for implementing the Group's strategy and running the Group.

The Role of the Senior Independent Director

Andrew Simon holds the role of the Senior Independent Director, having been appointed to this position in March 2014. He is responsible for assisting the Chairman with effective communications to Gulf Keystone's shareholders and is available to shareholders should they have any concerns which have not been resolved through the normal channels of the Chairman, Executive Directors or our Investor Relations Department or if these channels are not appropriate.

He is also available to our Non-Executive Directors should they have any concerns which are not appropriate to raise with the Chairman or which have not been satisfactorily resolved by the Chairman.

Changes to the Board

In 2013, the Company welcomed five new Non-Executive Directors and a Non-Executive Chairman to the Board. Simon Murray was appointed to the Board as Non-Executive Chairman in July 2013. Jeremy Asher, John Bell, Philip Dimmock and Thomas Shull were each elected as a Non-Executive Director at the 2013 Annual General Meeting, having been proposed by a major shareholder in accordance with Bye-Law 94.2 of the Company's Bye-Laws. Andrew Simon was appointed as a Non-Executive Director in September 2013.

The search, selection and appointment process for Non-Executive Directors is described in the section on the Nominations Committee.

Mehdi Varzi and Ali Al-Qabandi retired from the Board by rotation in July 2013.

Board meetings and attendance

Board meetings are held on a regular basis, outside the UK, and no decision of any consequence is made other than by the Directors. The Directors' attendance record at the scheduled Board meetings and Board Committee meetings for the year ended 31 December 2013 is shown in the table below. For Board and Board Committee meetings, attendance is expressed as the number of meetings that each Director attended out of the number that they were eligible to attend. In addition to those scheduled meetings, ad hoc meetings and Board administration calls were arranged to deal with matters between scheduled meetings as appropriate.

(1) Appointed as a Director with effect from 4 July 2013

(2) Appointed as a Director with effect from 25 July 2013

(3) Appointed as a Director with effect from 1 September 2013

Directors' independence

The independence of each of the Non-Executive Directors is considered upon appointment, annually and at any other time a Director's circumstances change in a way that warrants reconsideration. The Board considers whether the Director is independent of management and any business or other relationship that could materially interfere with the exercise of objective and independent judgement by the Director or the Director's ability to act in the best interests of the shareholders. In particular, the Board has considered each Non-Executive Director's interest in share compensation schemes, including the Company Share Options Plan and Executive Bonus Schemes, and any positions which the Director holds, or held, in companies with which Gulf Keystone has commercial relationships. The Board has concluded that, four out of seven Non-Executive Directors (excluding the Chairman) are independent. Where compensation arrangements in the form of shares exist, the Non-Executive Director was deemed not to be independent

Information and support

The Group is committed to supply the Board and its Committees with full and timely information, including detailed financial, operational and corporate information, to enable Directors to discharge their responsibilities. The Committees are provided with sufficient resources to undertake their duties. All Directors have access to the advice of senior management and, where appropriate, the services of other employees for all governance and regulatory matters. Independent professional advice is also available to Directors in appropriate circumstances, at the Company's expense.

The Board also keep up to date with developments in relevant law, regulation and best practice to maintain their skills and knowledge. Monthly reports are produced by management of the Group to ensure that the Board are well informed on the Group's latest operational, financial, corporate and investor relations updates.

A wealth of papers and reports are prepared by management prior to all Board and Committee meetings allowing the Board to effectively address all of the items on the relevant meeting's agenda. These papers are provided to the Board in a timely manner allowing for sufficient time to review the information prior to the meeting and raise questions where necessary.

Re-Election of Directors

The Company's Bye-laws provide for each Director to be re-elected by shareholders at least once every three years. The Board believes that continuity is essential for a business like Gulf Keystone and that allowing each Director to serve a three-year term prior to standing for re-election facilitates the retention of experienced and appropriately skilled individuals.

Performance evaluation of the Board and its Committees

The Board and its Committees are satisfied that they are operating effectively and that each Director has performed well in respect of his individual role on the Board. The Board believes that the performance of all the Directors continues to be effective and that they each demonstrate commitment to the role. The Board is satisfied that the individuals currently fulfilling key senior management positions in the organisation have the requisite depth and breadth of skills, knowledge and experience.

Given the recent changes to the Board's composition and the Company's recently stated intent to comply with all aspects of the Code, the Board has been considering the most appropriate methodology for formal evaluation of the Board and its Committees' effectiveness with a view to implementation in 2014-2015. As a start of the process, the Audit Committee performed internal evaluation of its effectiveness at its December meeting.

Risk management and internal Control

The Board acknowledges its responsibility for establishing and monitoring the Group's systems of internal control. Although no system of internal control can provide absolute assurance against material misstatement or loss, the Group's systems are designed to provide the Directors with reasonable assurance that problems are identified on a timely basis and dealt with appropriately. The Board regularly reviews the effectiveness of the systems of internal control and considers the major business risks and the control environment. The Board is accordingly satisfied that effective controls are in place and that risks have been mitigated to an acceptable level. 

The Company is subject to a variety of risks which derive from the nature of the oil and gas exploration and production business and relate to the countries in which it conducts its activities. The key procedures that have been established and which are designed to provide effective control are as follows:

The Board also believes that the ability to recognise the value of working as a partnership with host governments is a critical ingredient in managing risk successfully. 

The Directors have derived assurance over the control environment from the following internal and external controls during 2013:

- implementation of policies and procedures for key business activities;

- an appropriate organisational structure;

- control over non-operated activities through delegated representatives;

- specific delegations of authority for all financial and other transactions;

- segregation of duties where appropriate and cost effective;

- business and financial reporting, including KPIs;

- reports from the Group Audit Committee;

- reports and findings from the Group's internal auditors on the areas identified and recommended for review by the Audit Committee; and

- reports from the Group's external auditor on matters identified during its audit.

The above procedures and controls have been in place in respect of the Group for the 2013 accounting period and up to the date of approval of the Annual Report and Accounts. There were no significant weaknesses or material failings in the risk management and internal control system identified in any of the above reviews and reports.

Relations with investors

Regular communications with the Company's diverse shareholder base, including institutional and retail equity investors, as well as debt investors, are given high priority by the Board. The Chairman, Chief Executive Officer, Chief Operating Officer, Finance Director, Legal and Commercial Director and Head of Investor Relations are the Company's principal spokespersons, engaging with investors, fund managers, analysts, the press and other interested parties. 

The Company is committed to maintaining a constructive dialogue with all its investors, including through providing regular updates on its operations and corporate developments. The Company has an established practice of issuing regulatory announcements on the Company's operations and/or any new price sensitive information. The Company's website at http://www.gulfkeystone.com/, which is regularly updated, contains a wide range of information on the Company, including a dedicated investor section where investors can find share price and financial information, regulatory announcements, investor presentations, technical reports, corporate webcasts, videos and photos, interviews with the Company's management, etc. 

Gulf Keystone seeks to respond to all correspondence from shareholders as far as is applicable and proactively seeks to provide quarterly updates to the Company's major investors, as well as regular update meetings and calls with fund managers. Each of the Non-Executive Directors are available to attend meetings with major shareholders (without the Executive Directors present), if requested by such major shareholders. A list of the Company's major shareholders can be found in the Directors' Report. Further to the Company's issue of convertible bonds in October 2012 and a subsequent tap issue of such bonds in November 2013, the Company's Investor Relations today encompass communications with both equity and debt investors.

The Executive Directors of the Board regularly present at public conferences and investor meetings. Throughout 2013, the Company has given a number of investor presentations, which are available to view on the Company's website. Since the Annual General Meeting in 2013 was held in Bermuda, the Board and management hosted a dedicated shareholder event in London on 4 July 2013 particularly tailored for private investors. At the Investor Day, the Board and management presented to shareholders on all aspects of the Company's business and corporate strategy and took questions from the audience. The Investor Day was recorded and a webcast was made available on the Company's website at http://www.gulfkeystone.com/investor-centre/webcasts.

In accordance with its Bye-Laws, last year the Company implemented the provisions of the Bermuda Companies Act 1981, in accordance with the AIM rules, regarding electronic communications with its shareholders in order to give shareholders more choice and flexibility in how they receive information from the Company. The number of communications sent by post has been reduced, resulting not only in cost savings for the Company but also speeding up the provision of information to shareholders.

A list of the Company's significant shareholders can be found in the Directors' Report.

Annual General Meeting

The Board uses the AGM to communicate with private and institutional investors and welcomes their participation. It is policy for all Directors to attend the AGM if possible. 

Audit Committee Report

Role

The Board has delegated to the Committee responsibility for overseeing the financial reporting, internal risk management and control functions, internal audit and for making recommendations to the Board in relation to the appointment of the Group's internal and external auditors.

In accordance with its terms of reference, the Audit Committee, which reports its findings to the Board, is authorised to:

- review the integrity of the Group's financial reporting and significant financial accounting estimates and judgements;

- monitor the effectiveness of the Group's risk management framework and internal controls;

- monitor and review the effectiveness of the Group's internal audit function;

- advise the Board on the appointment of the external auditor and on the remuneration for both audit and non-audit work;

- discuss the nature and scope of the audit with the external auditor; and

- assess the performance, independence and objectivity of the external auditor and any supply of non-audit services.

Composition

The Audit Committee currently comprises four Non-Executive Directors, two of whom are considered to be independent. The members of the Audit Committee during the year were as follows:

- Mark Hanson (Chairman)(1)

- John Bell (joined the Audit Committee 17 September 2013)

- Andrew Simon (joined the Audit Committee 17 September 2013)

- Jeremy Asher (joined the Audit Committee 17 September 2013)

- Philip Dimmock (joined the Audit Committee 18 March 2014)

- Lord Guthrie (retired from the Audit Committee 17 September 2013)

- Mehdi Varzi (retired from the Board by rotation 20 June 2013)

(1) Mark Hanson stepped down as Chairman of Audit Committee to be replaced by Philip Dimmock in March 2014. Mark Hanson remains a member of the Committee.

Meetings

Four Audit Committee meetings were held in the financial year and to-date, at key times within the Group's reporting and audit calendar. The Committee discussed, among others, the following matters:

The meetings were also regularly attended by Ewen Ainsworth (Finance Director), Tony Peart (Legal and Commercial Director), senior finance management, Deloitte LLP (external auditor) and PricewaterhouseCoopers LLP ("PwC") (internal auditor).

Principal activities during the year

During the year, the main focus of the Audit Committee has been to support and oversee the Group's ongoing review and evaluation of its risk management systems and internal controls, ensure the robustness and integrity of the Group's financial reporting, and assess the effectiveness of both the internal and external audit processes.

The Committee has devoted significant time to reviewing these areas, which are integral to the Group's core management and financial processes, as well as engaging regularly with management, internal audit function and the external auditor. On the instruction of the Audit Committee, the internal audit function, undertook a number of reviews. The Committee worked closely with the management team to ensure the recommendations of the internal audit function are actioned in an efficient and timely manner. The creation of the internal audit function in 2012 has led to a number of improvements in the Group's controls and processes. For example, the establishment of HSSE and CSR Committee and an IT management group were a result of internal audit recommendations, among others. The Group also undertook anti-bribery policies and procedures review as bribery was determined as one of the principal risks given the nature of the business and the region in which the Group operates. The audit did not raise any significant areas of concern and indicated that the Group have appropriate processes in place. 

The Committee has, where necessary, taken initiative in requesting information in order to provide the appropriate constructive challenge for its role. During the course of the year, the information that the Committee has received has been timely and clear and has enabled the Committee to discharge its duties effectively.

Significant issues considered by the Audit Committee in 2013 and early 2014

The Committee assesses whether suitable accounting policies have been adopted and whether management have made appropriate estimates and judgements. The Committee reviews accounting papers prepared by management which provide details on the main financial reporting judgements. The Committee also reviews reports by the external auditor on the full year and half year results which highlight any issues with respect to the work undertaken on the audit and provide further insights into the judgements used by management. The significant issues considered in the year are detailed below:

Internal audit

The Audit Committee has oversight responsibilities for the internal audit function. The internal audit annual plan is reviewed and approved and all reports arising therefrom are reviewed and assessed, along with management's actions on findings and recommendations. PwC are invited to and attend Audit Committee meetings where appropriate and is also given the opportunity to meet privately with the Audit Committee without any members of management present. Where PwC's attendance of the Audit Committee's meeting is not practicable, a report on the progress of the reviews and findings is prepared for the Committee's consideration.

From its establishment in 2012 to the date of this report, the internal audit function has carried out the following reviews:

- Budgeting for capital expenditure

A review of the design and operating effectiveness of key controls in place relating to the capital expenditure budgeting process, monitoring of spend against budget and authorisation of capital expenditure.

- Procurement and tendering

A review of the design and operating effectiveness of key controls in place relating to the procurement tendering process during the last 12 months.

- Financial controls

A review of the design and operating effectiveness of the Group's financial controls around month-end reporting, payroll and reconciliations of major accounts.

- Selected administrative expenses

A review of the design and operating effectiveness of key controls in place relating to a number of selected administrative expenses.

- Health and safety

A review of the Group's controls around ensuring the compliance with various operational health and safety regulations, information maintenance and reporting of health and safety matters to executive management.

- IT strategy

A review of the design and operating effectiveness of key controls in place relating to the IT infrastructure.

- Bribery Act compliance

A review of Group's response to the UK Bribery Act, the overall bribery risk assessment, training, communication and ongoing compliance reporting protocols in place in the areas of Group's operations.

The findings of the internal audit reviews were communicated to management who, based on the recommendations, prepared an action plan for addressing the issues raised. A report on the progress made on each action point is presented to the Audit Committee at each committee meeting.

External Auditor

The Audit Committee is responsible for the development, implementation and monitoring of the Group's policy on external audit including ensuring that the auditor remains objective and independent. To fulfil its responsibility regarding independence, the Audit Committee considered:

- the external auditor's plan for the current year, noting the role of the audit partner, who signs the audit report and who, in accordance with professional rules, has not held office for more than five years, and any changes in the key audit staff;

- the overall extent of non-audit services provided by the external auditor, in addition to its case-by-case approval of the provision of non-audit services by the external auditor;

- the external auditor's written confirmation of independence to the Audit Committee; and

- the past service of the auditor who was first appointed in 2006.

Audit tendering

The Audit Committee has noted the changes to the Code, the recent findings of the Competition

Commission and the Guidance for Audit Committees issued by the Financial Reporting Council, each in the context of tendering for the external audit contract at least every ten years. The Group's external audit was last tendered in 2011, resulting in a decision to retain Deloitte LLP as the Group's auditor. Since the appointment of Deloitte LLP in 2006, there have been two different senior statutory auditors in line with the required rotation timetable. Having previously conducted a full tender exercise and considered retendering in subsequent years, the Committee will continue to give consideration to the timing of the next formal tender in light of the regulatory requirements and any further changes in the regulatory framework. There are no contractual obligations that restrict the choice of external auditors.

Effectiveness of external auditor

To assess the effectiveness of the external audit process, the auditors are asked on an annual basis to articulate the steps that they have taken to ensure objectivity and independence, including where the auditor provides non-audit services. Gulf Keystone monitors the auditors' performance, behaviour and effectiveness during the exercise of their duties, which informs the Audit Committee's decision to recommend reappointment on an annual basis. The external auditor's fulfilment of the agreed audit plan and any variations from the plan and the robustness and perceptiveness of the auditor in its handling of the key accounting and audit judgements are also considered when making a judgement on auditor effectiveness. The Committee also held discussions with the management team regarding the efficiency of the audit process.

Following the above, the Audit Committee has recommended to the Board that Deloitte LLP be reappointed.

Non-audit services

As a safeguard to help to avoid the objectivity and independence of the external auditor becoming compromised, the Committee has a formal policy governing the supply of non-audit services by the external auditor. The Group engages external advisers to provide non-audit services based on the skills and experience required for the work, and cost. The Group may engage the external auditor to provide a limited range of non-audit services where this is the most effective and efficient way of procuring such services as long as the Group is satisfied that the auditor's objectivity and independence will not be compromised as a result. 

In 2013, Deloitte LLP provided the following services to the Group:

- advisory services to the Remuneration Committee (see "Remuneration Committee Report" for details);

- corporate finance services in relation to the move up to the Standard Segment of the London Stock Exchange; and

- advisory services in relation to the assessment of operational efficiencies in Kurdistan.

A breakdown of the fees paid to the external auditor in respect of audit and non-audit work is included in note 4 to the consolidated financial statements.

The Committee considered the potential threats that engagement of Deloitte LLP to perform non-audit services may pose to auditor independence. Deloitte LLP ensured that necessary safeguards were put in place to reduce the independence threats to an acceptable level. The Committee was satisfied that, given the nature of the work and the safeguards in place, the provision of non-audit services did not undermine auditor objectivity and independence.

Committee Evaluation

During the year, a review of the Audit Committee's effectiveness was completed. This was conducted by reference to the Committee's responsibilities as stated in the Audit Committee's Terms of Reference. The assessment concluded that the Audit Committee was effective in carrying out its duties.

Nominations Committee Report

Role

The Board has delegated to the Nominations Committee the responsibility for ensuring the Board has the right balance of experience and skills to support our strategy.

In accordance with its terms of reference, the Committee, which reports its findings to the Board, is authorised to:

· review the structure, size and composition required of the Board and the balance of skills, experience, independence and knowledge;

· oversee executive succession planning taking into account challenges and opportunities facing the Group;

· identify and nominate for the approval of the Board candidates to fill Board vacancies as and when they arise;

· make recommendations to the Board concerning the continuation in office of any Director, including suspension and termination of service;

· appoint external search consultants to assist with appointments as required; and

· determine skills and capabilities required for new appointments.

Composition

The Nominations Committee currently comprises four Non-Executive Directors, the Non-Executive Chairman and the CEO. The members of the Nominations Committee during the year were as follows:

- Lord Guthrie (Chairman)(1)

- Mark Hanson

- Simon Murray (joined the Nominations Committee 17 September 2013)

- Philip Dimmock (joined the Nominations Committee 17 September 2013)

- Thomas Shull (joined the Nominations Committee 17 September 2013)

- Todd Kozel (joined the Nominations Committee 17 September 2013)

- Jeremy Asher (joined the Nominations Committee 18 March 2014)

- John Bell (joined the Nominations Committee 18 March 2014)

- Andrew Simon (joined the Nominations Committee 18 March 2014)

- Mehdi Varzi (retired from the Board by rotation 20 June 2013)

(1) In March 2014, Lord Guthrie stepped down as Chairman of Nominations Committee to be replaced by Simon Murray. Lord Guthrie remains a member of the Committee.

Process used for board appointments

In appointing Non-Executive Directors, the Board's practice is to use external recruitment consultants where appropriate. During the year, terms were negotiated with Odgers Berndtson, one of the UK's pre-eminent executive search firms, to act as recruitment consultants for the Board. Other than providing recruitment consultancy services, Odgers Berndtson has no other connection with the Group.

The Committee adopts a formal, rigorous and transparent procedure for the appointment of new directors to the Board. In May 2013, the Board decided to split the roles of Chairman and Chief Executive Officer. Following this decision, a search for a Non-Executive Chairman and at least one other Independent Non-Executive Director was initiated and led by the Nominations Committee. Odgers Berndston were provided with a detailed brief of the desired candidate profile based on merit and against objective criteria (including an assessment of the time commitment expected) and their services were used to conduct a thorough search to identify suitable candidates for both Chairman and Senior Independent Non-Executive Director positions. The Nominations Committee considered a list of potential candidates and the balance of skills, knowledge, independence, diversity and experience on the Board to ensure that a suitable balance was maintained. Those shortlisted were interviewed by members of the Board including the Nominations Committee and the Legal and Commercial Director. Following this process, Simon Murray and Andrew Simon were invited to join the Board and to become Gulf Keystone's Chairman and Senior Independent Non-Executive Director. Mr Murray's and Mr Simon's other significant commitments were disclosed to the Board before their respective appointments and can be found in their biographies on the Gulf Keystone's corporate website www.gulfkeystone.com. The Board was and continues to be satisfied that Mr Murray and Mr Simon would allocate sufficient time to the Company to discharge their responsibilities effectively. Mr Murray's and Mr Simon's wealth of public company board experience, valuable commercial expertise, knowledge of capital markets and strong network of contacts, both globally and across the Far East, were the main factors taken into account in the Board's decision. 

In addition to the appointments of Chairman and Senior Independent Non-Executive Director, Jeremy Asher, Thomas Shull, John Bell and Philip Dimmock were each elected as a Non-Executive Director of the Company at the 2013 Annual General Meeting, having been proposed by a major shareholder in accordance with Bye-Law 94.2 of the Company's Bye-Laws.

There are no arrangements or understandings between any Director or executive officer and any other person pursuant to which any Director or executive officer was selected to serve. There are no family relationships between the Directors.

Other matters considered by the Nominations Committee

During the year, other matters considered by the Nominations Committee included the consideration of succession planning for the Board and the key skills and experience required for future recruits. The Company is continuing the search process, with the assistance of Odgers Berndtson, one of the UK's pre-eminent executive search firms, for at least one other independent non-executive director, and a further announcement on that process will be made in due course. The assessment of succession planning will be further developed during the course of next year.

The Committee recognises the benefits of having diversity across all areas of the Group and believes that this adds to Gulf Keystone's continued success and advantage. When considering the optimum make-up of the Board, the benefits of diversity of the Board are appropriately reviewed and balanced where possible, including in terms of differences in skills, industry experience, business model experiences, gender, race, disability, age, nationality, background and other contributions that individuals may bring. The Committee continues to focus on encouraging diversity of business skills and experience across the Board. In identifying suitable candidates to fill the Non-Executive Director position, the Committee will seek candidates from a range of backgrounds, with the final decision being based on merit against objective criteria. The Committee notes that the Company has no female Directors on its Board at present and therefore is looking to address this in the future Board appointments. 

Remuneration Committee Report

Introduction

This report is on the activities of the Remuneration Committee for the period to 31 December 2013 and early 2014. It sets out the remuneration policy and remuneration details for the Executive and Non-Executive Directors of the Company. The Company is incorporated in Bermuda and therefore is exempt from the required disclosures under Schedule 8 of The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 as amended in August 2013 (the "Regulations) but the Directors have decided to provide such disclosures insofar as they are still compliant with the Company's Bye-Laws. The report is split into three main areas:

- the statement by the Chairman of the Remuneration Committee,

- the policy report, and

- the annual report on remuneration.

Remuneration Committee Chairman's statement

Dear Shareholder,

On behalf of the Board, I am pleased to present the Directors' remuneration report for the year ended 31 December 2013.

I hope that 2013 will be seen as a turning point in the way Gulf Keystone approaches remuneration. There has in the past been some investor concern about certain aspects of executive remuneration. On my appointment as Chair of the Remuneration Committee, we agreed to undertake a detailed review of past and future remuneration policies, with the objective of developing a forward looking remuneration policy which satisfies best practice standards of corporate governance, whilst keeping the ability to attract and retain top quality executives to deliver the Company's business strategy.

During the last quarter of 2013, the Committee engaged Deloitte's remuneration practice on a one off basis to provide a thorough analysis of the Company's historical remuneration practice and payments to Executive Directors together with an external market context. Deloitte were asked to comment on the current remuneration framework and remuneration policy in the light of this review. The results of their work were taken into account by the Committee when developing the new remuneration policy. On an ongoing basis PricewaterhouseCoopers LLP ('PwC') will be the independent remuneration advisor to the Committee.

As a Bermudan domiciled company we are not under an obligation to follow the Regulations. However, we have elected to seek an advisory vote at the 2014 AGM on the Company's remuneration policy report and the annual report on remuneration. It is not currently possible under the Company's bye-laws to have a binding vote on the policy report as required under the Regulations. We will also include a resolution to change the Company's Bye-Laws to enable future votes on the policy to be binding with effect from the 2015 AGM.

Whilst basic salary levels have been kept low in the past, the benchmarking exercise carried out by Deloitte helped us to conclude that the level of long-term incentives and short-term bonuses were notably above the market range. It should be noted that there are ongoing obligations in respect of awards already granted. In this context, deferred cash and share bonus awards will vest in 2014 and the remaining outstanding Long Term Incentive Plan ("LTIP") options will vest on satisfaction of the applicable performance conditions. In addition, the Executive Directors decided on their own initiative that no short term bonuses were to be paid for 2013 given the performance of the business.

Gulf Keystone is an entrepreneurial company operating in one of the last and most challenging frontiers of the oil exploration industry. The Company is moving from exploration to production, with significant future capital expenditure to move production from 10,000 bopd towards 40,000 bopd by the end of 2014, with a target of 100,000 bopd set for Phase 1 of the Shaikan FDP in the medium term. Our ability to achieve these targets and move to even greater production levels will be dependent not only on the significant investment in infrastructure required both by Gulf Keystone and the KRG, but also on the complex regional geopolitical situation. Consequently we will always need to retain a considerable element of flexibility in ensuring the right level of fairness for all of our stakeholders.

In designing the new policy, we have benchmarked ourselves against a group of oil and exploration companies of similar size on the London market, recognising the entrepreneurial nature of the business, whilst seeking to establish a remuneration policy which is compatible with the Code and which demonstrates clearly how the Directors have been and will be paid and how this relates to the Company's performance.

The work done by the Remuneration Committee has resulted in the following proposals.

1. Basic salaries will not increase significantly in 2014 and will be reviewed annually.

2. Pension provision.

Historically there has been no provision for pension benefits and it is proposed to make a 15 percent cash allowance for this effective from 1st January 2014.

3. Annual Bonus (short-term)

The maximum bonus potential for the CEO would be 200 percent of salary and for the other executive directors 150 percent of salary, with a set of demanding quantified metric targets.

4. LTIP

Since the existing scheme is due to mature in August 2014, we will be introducing a new LTIP, which will be subject to shareholder approval at the next AGM and will be effective from July 2014. As with the Short-term Bonus, the maximum entitlement for the CEO will be an LTIP award of 200 percent of salary, with 150 percent of salary for the other executive directors.

In designing the new annual bonus and LTIP arrangements, the metrics were selected to reflect the Company's strategic objectives. For the annual bonus, it was decided that, the metric most likely to generate shareholder value and cash flow at this stage of the company's development is production based on bopd. In addition to production, a number of qualitative objectives will be set for each of the Executive Directors. For the LTIP, the performance metrics will be based on comparative total shareholder return ("TSR"), production and increase in contingent resources, which are considered the best basis for generating shareholder value over the medium term.

Furthermore, I will be undertaking a consultation with our major shareholders prior to the 2014 AGM to seek their feedback on the revised remuneration policy.

We believe that the new policy will make it easier for shareholders to understand what directors are paid and will be paid, whilst ensuring that pay is linked to performance and the executive team is rewarded at an appropriate level for delivering the Company's strategic objectives.

Andrew Simon

Remuneration Committee Chairman

Policy

Introduction

In light of the change to the Corporate Governance approach, the Directors' Remuneration Policy (the '"Policy'") as set out below will operate from 1 January 2014 and be put to an advisory shareholders vote. It will become formally effective at the 2014 Annual General Meeting and will apply for the period of 3 years from the date of approval.

Summary

The Company's policy is to attract, motivate and retain individuals of the calibre necessary to achieve the strategic priorities of the Group. Furthermore, our new policy is constructed to offer packages that are significantly weighted towards performance based elements with measures that reflect corporate and operational performance. The aim is to set targets that are stretching yet achievable.

Differences in policy from the wider employee population

Our remuneration policy is not unique to our directors. The same principles underpin how we reward and compensate all our colleagues. We aim to provide base pay to all colleagues that is market competitive and to offer them the opportunity to share in our success through a variety of bonuses and incentive schemes.  

Discretion

The Committee has discretion in several areas of policy as set out in this report. The Committee may also exercise operational and administrative discretions under relevant plan rules approved by shareholders as set out in those rules. In addition, the Committee has the discretion to amend policy with regard to minor or administrative matters where it would be, in the opinion of the Committee, disproportionate to seek or await shareholder approval.

It is the Committee's intention that commitments made in line with its policies prior to the date of the 2014 AGM will be honoured, even if satisfaction of such commitments is made post the AGM and may be inconsistent with the remuneration policies. This includes the exit event awards set out below.

Exit Event Awards

In March 2012, the Company made Exit Event Awards to certain Executive Directors and employees equivalent to the value of up to 2.0 million common shares. Exit Event Awards are cash settled awards which are conditional on the occurrence of an Exit Event which envisages a sale of either the Company or a substantial proportion (i.e. more than 50%) of its assets. A further award of 0.9 million common shares was made in December 2013 to the employees with no additional Exit Event Awards made to directors. The Exit Event Awards made in 2012 expire in March 2017 and the additional awards expire in December 2018. The purpose of the Award was to encourage employee retention in the event of any corporate transaction up to the point of Exit Event completion as well as align the interests of the Company's employees and key management personnel with shareholders.

The Company appointed a trustee (the "Exit Event Trustee") to hold and, subject to the occurrence of an Exit Event, to sell sufficient common shares to satisfy the Exit Event Awards. In total 10.0 million common shares were issued to the Exit Event Trustee to satisfy the initial, additional and any future Exit Event Awards to full-time employees of the Company and subsidiary companies, subject to the occurrence of an Exit Event, with such beneficiaries to be determined in due course. The preparation of the Exit Event Awards involved detailed discussions with a number of the Company's leading institutional and other shareholders who held, in aggregate, in excess of 35 per cent of the issued share capital of the Company, as well as consultation with the Company's advisers. The Company will not grant any further Exit Events Awards to the directors of the Company and its subsidiaries.

A summary of the remuneration components is detailed below.

Policy table (for determination of Executive Directors' pay) 

The performance metrics that are used for our annual bonus and LTIP have been selected to reflect the Group's key performance indicators at this stage of its development. In considering appropriate performance metrics the Committee seeks to incentivise and reinforce delivery of the Company's strategic objectives achieving a balance between delivering annual return to shareholders and ensuring sustainable long-term profitability and growth.

Production based on bopd is used to assess short-term operational performance as it is key to revenue and cash generation. We aim to achieve production in line with the Group's annual budget and market guidance with allowance given to unplanned events that may cause reduction in production levels and are outside of the Company's control.

Increase in contingent resources is a key indicator of exploration success and field performance and measures the percentage of production that has been replaced during the year.

Gulf Keystone's strategy is focused on building long-term sustainable value growth. Our primary strategic objective is to deliver substantial returns to shareholders.

Since safety is of central importance to the business, the award of any bonus is subject to an underpin that enables the Remuneration Committee to reduce the bonus earned if there is a safety event that, in the Committee's opinion, warrants the use of such discretion.

The Committee calibrates performance targets by due reference to selected Exploration and Production ("E&P") comparator group and other indicators of the economic environment to ensure targetsrepresent relative as well as absolute achievement.

Non-Executive Directors Fees

The Company provides a level of fees to support recruitment and retention of non-executive directors with the necessary experience to advise and assist with establishing and monitoring the Company's strategic objectives.

The Non-Executive Chairman and Non-Executive Directors receive an annual fee paid in monthly instalments. The fee for the Chairman is set by the Remuneration Committee and the fees for the Non-Executive Directors are approved by the Board, on the recommendation of the Chairman and CEO.

Non-Executive fees are positioned in line with similarly sized international companies. The following fees were reviewed in 2013 and will normally be reviewed on an annual basis in line with inflation and general movement of pay within the Company.

(1) The Chairman and Non-Executive Directors are remunerated in GBP (£), however, the values disclosed in the Annual Report on Remuneration are reported in USD as it is the functional currency of the Group. 

(2) Chairman's fee was set at £500,000 on appointment and was reduced to £350,000 per annum as of 1 January 2014.

Non-Executive Directors do not receive any other benefits. Apart from the pre December 2012 awards, Non-Executive Directors do not participate in any of the Company's share plans.

The Company will set out in the section headed "Statement of implementation of remuneration policy in the following financial year" the fees for that year for each of the Non-Executive Directors.

Illustration of the Application of the Remuneration Policy

For each person who is an Executive Director of the Company as at the date of this report, an illustration was prepared (see the tables below) setting out an indication of the level of remuneration that would be received by the Director in accordance with the Directors' Remuneration Policy in 2014.

In developing the scenarios, the following assumptions have been made:

Recruitment Remuneration

It is our policy to recruit the best candidate possible for any executive board position. We seek to avoid paying more than necessary to secure the candidate and will have regard to guidelines and shareholder sentiment when formulating the remuneration package.We structure salary, incentives and benefits for candidates in line with the above remuneration policy and accordingly participation in short and long term incentives will be on the same basis as existing directors. The table below outlines our recruitment policy:

Where an existing employee is promoted to the Board, the policy set out above would apply from the date of promotion but there would be no retrospective application of the policy in relation to subsisting incentive awards or remuneration arrangements. Accordingly, prevailing elements of the remuneration package for an existing employee would be honoured and form part of the ongoing remuneration of the person concerned. These would be disclosed to shareholders in the Annual Remuneration Report for the relevant financial year.

Non-Executive Directors recruited will be remunerated in accordance with the Company's policy.

Details of Directors' service contracts and letters of appointment

Each of the Executive Directors has a service contract, the date of which is shown below. These contracts provide for 12 months' notice from the CEO and 6 months' notice from the other executive directors, with the same notice periods required from the Company. They do not specify any compensation in the event of termination or change of control. 

Non-Executive Directors do not have a service contract, but each has received a letter of appointment. No compensation is payable for the loss of office to Non-Executive Directors, which, depending on circumstances of termination, may be with or without notice. There are no other service agreements or material contracts, existing or proposed, between the Company and its Directors.

Executive Directors service contracts and Non-Executive Directors' appointment letters will be available for inspection at the 2014 AGM (for 15 minutes prior to the meeting and during the meeting). As the Company's registered office is in Bermuda, it is not practicable to make the service contracts and appointment letters available at the Company's registered office.

One third of Directors are required to stand for re-election every year in accordance with the Company's Bye-Laws.

Details of the service contracts and letters of appointment in place as at 31 December 2013 for Directors are as follows:

(1) Appointment can be terminated by the Company with immediate effect under certain circumstances in accordance with the Company's Bye-Laws.

(2) Appointment can be terminated by either party at any time on 6 months' written notice at any time during the term of employment.

(3) Appointment can be terminated by either party giving the other one month's written notice at any time during the term of employment.

(4) Appointment can be terminated by the Non-Executive Director giving the Company one month's written notice at any time during the term of employment.

The Committee's policy for setting notice periods is that a maximum 12 month period will apply for Executive Directors. The Committee may in exceptional circumstances arising on recruitment, allow a longer period, which would in any event reduce to 12 months following the first year of employment.

Policy on payment for Directors leaving employment

Contractual notice periods for Executive Directors are normally set at 6 months' notice with the exception of the CEO whose notice period is set at 12 months. The notice period required to be given by the Company is identical to that required from the Executive Directors.

The Committee will honour Executive Directors' contractual entitlements. Service contracts do not contain liquidated damages clauses. If a contract is to be terminated, the Committee will determine such mitigation as it considers fair and reasonable in each case. There are no contractual arrangements that would guarantee a pension with limited or no abatement on severance or early retirement. There is no agreement between the Company and its directors or employees, providing for compensation for loss of office or employment that occurs because of a takeover bid (other than the Exit Event Awards set out above). The Committee reserves the right to make additional payments where such payments are made in good faith in discharge of an existing legal obligation (or by way of damages for breach of such an obligation), or by way of settlement or compromise of any claim arising in connection with the termination of an Executive director's office or employment.

We classify terminations of employment arising from death, ill health, disability, injury, retirement with Company's agreement or redundancy automatically as 'good leaver' reasons. In addition the Committee retains discretion under the incentive plan rules to determine 'good leaver' status. In the event such discretion is exercised, for example, recognising significant long term contribution to achievement of strategic objectives, a full explanation will be provided to shareholders as part of the annual report on remuneration. The Remuneration Committee will only use its general discretion to determine that an Executive Director is a good leaver in exceptional circumstances.

The reason for leaving may impact treatment of the various remuneration elements as follows:

There are no other contractual provisions agreed prior to 27 June 2012.

The current LTIP scheme, under which 2009 and 2010 LTIP awards were made and which expires in August 2014, stipulates that any Option not exercised by the time of cessation shall remain exercisable until the expiry of the Exercise Period unless within the three months after such cessation the Board in its absolute discretion shall determine that the Option in whole or in part shall cease to be exercisable on a specified date within the Exercise Period.

Change of Control

The following is the position on a change of control of the Company:

Relationship to Employee Pay

Pay levels for employees at all levels across the Group are determined in relation to a number of factors including economic conditions, cost of living, market practice and colleague feedback. In addition the Committee considers the general basic salary increase, remuneration arrangements and employment conditions for the broader employee population when determining remuneration policy for the Executive Directors.

The Company does not use any remuneration comparison metrics and has not conducted a formal consultation process with employees in designing the remuneration policy,

Consideration of Shareholder Views

We consult with shareholders on our remuneration policy and its execution. We welcome their constructive feedback and use this effectively to shape our approach. In 2014, we intend to hold shareholder consultation with our largest shareholders regarding our new remuneration policy. 

Feedback on the remuneration policy received by way of the advisory vote at the 2014 AGM will be considered at the first Remuneration Committee meeting after the AGM. Feedback received annually in 2014 and subsequent AGMs, as well as any additional feedback received during any other meetings with shareholders, will be considered as part of the Company's annual review of remuneration policy.

Annual report on remuneration

Single total figure of remuneration $'000s

(1) Ali Al Qabandi and Mehdi Varzi retired by rotation from the Board on 20 July 2013

(2) Simon Murray was appointed as Non-Executive Chairman on 4 July 2013

(3) Jeremy Asher, John Bell, Philip Dimmock and Thomas Shull were appointed as Non-Executive Directors on 25 July 2013

(4) Andrew Simon was appointed as a Non-Executive Director on 1 September 2013

(5) Benefits include personal travel and accommodation associated with work in a number of locations and medical insurance

(6) Other payments include the one-time payments made to Non-Executive Directors for additional duties performed during the calendar year

(7) Chairman's fee was set at £500,000 on appointment and was reduced to £350,000 per annum as of 1 January 2014.

(8) The cash bonus quantum represents the full value of cash bonus awarded in relation to 2012 performance. This includes the value of the deferred portion of the bonus

(9) This relates to 50% of the third tranche of the 2009 LTIP options which vested in 2013. For the purpose of this table, the award has been valued using the share price on the two dates when the respective operational targets were achieved and announced. These targets were satisfied in 2011 and 2012 respectively. However, the vesting was deferred, as only one-third of the total award can vest in any one financial year.

(10) This relates to the second tranche of the 2009 LTIP options which vested in 2012 on the achievement of the share price target of 200 pence per share.

Director's pension entitlements

No payments have been made in 2013 or prior years. From 2014 onwards, subject to the approval of the Remuneration Policy as disclosed in the Policy Statement section of this report, a cash allowance in lieu of a pension provision will be payable at a rate of 15% of Executive Directors' gross salary.

Benefits

The benefits provided included the following:

· Medical insurance - $10,765;

· Travel and accommodation - $121,123.

Scheme interests awarded during the financial year

No share interests were awarded to the Directors under any of the current share awards schemes which include the Company Share Option Plan ("CSOP"), LTIP and Share Bonus Scheme.

Payments to past Directors

No payments to past Directors were made during 2013.

Payments for loss of Office

There were no payments for loss of office made during 2013.

Director's shareholding and share interests

The Company's Remuneration Policy will also introduce formal shareholding requirements (rather than voluntary guidelines) applicable to executive directors and senior executives. Participation in long-term incentive schemes may be scaled back or withheld if the requirements are not met or maintained. Executive directors are required to hold shares valued at two times salary within 5 years of the new remuneration policy approval. For the purpose of meeting the shareholding requirement, the net value of vested but unexercised awards is included.

Directors' shareholdings and share interests as at 31 December 2013 were as follows:

(1) Includes any shares owned by connected persons

(2) Includes all of 2010 LTIP options and the remaining 50% of the third tranche of 2009 LTIP options

(3) Includes the vested tranches of 2009 LTIP options and CSOP options

The details of the option exercised during the year are set out below:

Historic CEO Pay $'000s

Change in Remuneration of the Director undertaking the Role of CEO

(1) Includes benefits

Relative importance of spend on pay

For the purposes of the table, total employee pay number includes total pay for all employees and Executive Directors of the Company.

As continued investment in the Group's assets is critical for the delivery of the Group's strategy, capital expenditure is included as a comparator in the relative importance of spend on pay chart.

Statement of implementation of remuneration policy in 2014

The Company's remuneration practices are managed in accordance with the remuneration policy set out above, a policy for which the Remuneration Committee is seeking shareholder approval of at this year's AGM. Consequently, the Remuneration Committee is not anticipating any changes in remuneration for the current year.

Comparator Group

The Committee is making no changes to the comparator groups used for remuneration in respect of 2014.

Salaries benefits and pension

No change from policy set out.

The following table sets out the entitlements for 2014:

Annual Bonus

The following table sets out the maximum bonus opportunity for the Executive Directors:

Performance Conditions and Weighting

The performance metric used for the determination of the annual bonus is production based on bopd. In addition to production, a number of qualitative objectives will be set for each of the Executive Directors.

The targets for the bonus plan participants in 2014 have been set by the Remuneration Committee. Owing, however, to their commercial sensitivity the targets will not be disclosed until the 2014 Directors' Remuneration Report is published in 2015, when statements regarding the extent to which the targets have been attained will be published.

LTIP Grants

It is the intention of the Remuneration Committee to make the following grants to the Executive Directors in 2014:

The Performance Conditions and Targets for this Award are as follows:

In relation to the comparative TSR condition vesting will start for median performance of this element of the award (25% of this element vesting) with full vesting for upper quartile performance.

The awards vest on a straight line basis between performance levels.

Consideration by the directors of matters relating to directors' remuneration

The Remuneration Committee is responsible for making recommendations to the Board on the Company's framework of executive remuneration and its cost, reviewing the ongoing appropriateness and relevance of remuneration policy, recommending to the Board for approval the quantum of the Group's annual variable compensation and the annual compensation packages for individual Executive Directors and senior management, and engaging and liaising with external advisers, as necessary, on the appropriateness of the recommended variable and fixed compensation packages. The Remuneration Committee determines the contract terms, remuneration and other benefits for each of the Executive Directors and for other senior members of management and is advised, as necessary, by a specialist firm of remuneration consultants.

The Executive Directors do not participate in discussions and decisions regarding their own remuneration. The fee for the Chairman is set by the Remuneration Committee and the fees for the Non-Executive Directors are approved by the Board, on the recommendation of the Chairman and CEO.

In 2013 the Remuneration Committee met three times. The committee discussed, amongst others, the following matters:

During the first half of the year the committee comprised Mehdi Varzi (Chairman), Mark Hanson and Lord Guthrie. On 20 July 2013, Mehdi Varzi retired by rotation from the Board and consequently the Remuneration Committee and Simon Murray, Non-Executive Chairman of the Board, was appointed as an intermediate Chairman of the Remuneration Committee. In September 2013, the Committee's membership was revised to comprise Simon Murray (Chairman), Andrew Simon, Mark Hanson and John Bell. On 1 October 2013, Simon Murray stepped down as Chairman of the Remuneration Committee and Andrew Simon was appointed to Chairman's role. As at 31 December 2013, the Committee comprised Andrew Simon (Chairman), Simon Murray, Mark Hanson and John Bell.

In addition, Todd Kozel (CEO) and Tony Peart (Legal and Commercial Director) have assisted the Committeein its work, but never in respect of their own remuneration.

Remuneration advice

In the last quarter of 2013, the Remuneration Committee engaged Deloitte to provide a thorough analysis of the Company's historical remuneration practice and payments to Executive Directors together with an external market context. Deloitte were asked to comment on the current remuneration framework and remuneration policy in the light of this review. The results of this work have been taken into account by the Remuneration Committee when devising a remuneration policy for the Group for 2014. This engagement with Deloitte was a one off arrangement with no intention to retain Deloitte as ongoing Remuneration Committee advisers, to avoid any potential conflict of interest as the wider Deloitte practice are also engaged as the Group's auditor. Deloitte did not give advice on the overall amounts to be paid to directors or those in key management position or on specific quantitative measurement criteria in the remuneration packages. The Board was satisfied that this work was not inconsistent with Deloitte's role as auditor to the Company. Deloitte is a member of the Remuneration Consultants Group and as such, voluntarily operates under the code of conduct in relation to executive remuneration consulting in the UK. The fees for this project which were based on a fixed project fee of £65,000.

In early 2014, PricewaterhouseCoopers ("PwC") was appointed by the Committee as their independent advisor. PwC were selected on the basis of their track record of providing robust, salient and independent advice in matters pertaining to executive remuneration. PwC is a member of the Remuneration Consultants Group and abides by its code. Fees will be determined on a time and materials basis at prevailing market rates. PwC also provide internal audit services to the Company. No fees were incurred in the provision of remuneration advice by PwC to the Committee during 2013.

In February 2014, the Company engaged MM&K to advise the Remuneration Committee on the design and implementation of a new equity-based long-term incentive plan to replace the existing plan that expires in August 2014. MM&K were previously engaged by the Company to advise on the design and implementation of the current CSOP that is due to expire in August 2014. No fees were incurred in the provision of advice by MM&K to the Committee during 2013.

Andrew Simon

Chairman of the Remuneration Committee

26 March 2014

Directors' responsibilities statement

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.

The Directors have elected to prepare the Group financial statements under International Financial Reporting Standards (IFRSs) as adopted by the European Union and Article 4 of the IAS Regulation.

International Accounting Standard 1 requires that financial statements present fairly for each financial year the Group's financial position, financial performance and cash flows. This requires faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board's 'Framework for the Preparation and Presentation of Financial Statements'. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable IFRSs. 

In preparing these financial statements, International Accounting Standard 1 requires that directors:

· properly select and apply accounting policies;

· present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

· provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance; and

· make an assessment of the Group's ability to continue as a going concern.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group's transactions and disclose with reasonable accuracy at any time the financial position of the Group. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Group's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Responsibility statement

We confirm that to the best of our knowledge:

· the financial statements, prepared in accordance with International Financial Reporting Standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group ;

· the strategic report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that they face; and

· the annual report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group's performance, business model and strategy.

By order of the Board

Todd F Kozel

Chief Executive Officer

26 March 2014

26 March 2014

Consolidated Income Statement

For the year ended 31 December 2013

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2013

Consolidated Balance Sheet

As at 31 December 2013

The financial statements were approved by the Board of Directors and authorised for issue on 26 March 2014 and signed on its behalf by:

Todd F Kozel

Chief Executive Officer

KE Ainsworth

Finance Director

Consolidated Statement of Changes in Equity

For the year ended 31 December 2013

Consolidated Cash Flow Statement

For the year ended 31 December 2013

(1) Liquid investments comprise short-term liquid investments of between three to 12 months maturity while cash and cash equivalents comprise cash at bank and other short-term highly liquid investments of fewer than three months maturity. The combined cash, cash equivalents and liquid investments balance at 31 December 2013 was $82.0 million (2012: $262.3 million).

Summary of Significant Accounting Policies

General information

The Company is incorporated in Bermuda and, during 2013, was quoted on AIM, a market operated by the London Stock Exchange (registered address: Cumberland House, 9th Floor, 1 Victoria Street, Hamilton, Bermuda). Subsequent to the year end, on 25 March 2014, the Company's common shares were admitted, with a standard listing, to the Official List of the United Kingdom Listing Authority ("UKLA") and to trading on the London Stock Exchange's Main Market for listed securities. Pursuant to Rule 41 of the AIM Rules, the Company gave notice that trading in the Company's common shares on AIM was cancelled on the same day. In 2008, the Company established a Level 1 American Depositary Receipt programme in conjunction with the Bank of New York Mellon which has been appointed as the depositary bank. The Company serves as the holding company for the Group, which is engaged in oil and gas exploration and production, operating in the Kurdistan Region of Iraq and the Republic of Algeria.

Adoption of new and revised accounting standards

Standards not affecting the reported results or the financial position

In the current year, the following new and revised Standards and Interpretations have been adopted. Their adoption has not had any material impact on the amounts reported in these financial statements but may impact the accounting for future transactions.

At the date of authorisation of these financial statements, the following Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective:

The Directors do not anticipate that the adoption of the Standards and Interpretations listed above will have a material impact on the financial statements of the Group in future periods.

Statement of compliance

The financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRSs") as adopted by the European Union.

Basis of accounting

The financial statements have been prepared under the historical cost basis, except for the valuation of hydrocarbon inventory and the valuation of certain financial instruments, which have been measured at fair value, and on the going concern basis. Equity-settled share-based payments were initially recognised at fair value, but have not been subsequently revalued; cash-settled share based payments are recognised at fair value. The principal accounting policies adopted are set out below.

Going concern

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Chairman's Statement, Strategic Review by the Chief Executive Officer and Operational Review. The financial position of the Group at the year end, its cash flows and liquidity position are included in the Financial Review. In addition, note 26 includes the Group's objectives, policies and processes for managing its capital, its financial risk management objectives and details of its financial instruments and hedging activities. Note 26 also describes exposures to credit risk and liquidity risk.

Following commencement of first commercial production in July 2013 and sales thereafter from the Shaikan Block, the Group has entered a critical phase in its development as it transitions from pure explorer to oil producer. The Group's business requires substantial capital expenditures for the foreseeable future, being at least the next 12 months, to finance the exploration, development and production of its existing oil reserves and resources. 

The Group is dependent on existing cash resources, which totalled $76.0 million at 1 March 2014, together with production revenues from its interest in the Shaikan Block in order to meet its future working capital requirements. Existing cash resources may be enhanced over the next 12 months from the date of this report by achieving further consistent oil production and domestic and export sales from Shaikan, increasing up to 40,000 bopd; the exercise of the Shaikan Government Option, the Shaikan Third Party Option, the Akri-Bijeel Government Option and/or the Akri-Bijeel Third Party Option under the terms of the Shaikan and Akri-Bijeel PSCs; any proceeds from the potential sale of the Group's interest in the Akri-Bijeel Block and/or the reimbursement of an additional £5.6 million of litigation costs by Excalibur Ventures LLC (see note 23 to the financial statements). 

Whilst the Group believes that one or more of the above events are likely to occur, if none of these events occur, and the Group is unable to otherwise enhance its existing cash resources, then the Directors would expect the Group to require additional working capital by the end of May 2014. If only one of these events occurs in the next 12 months from the date of this document, this would reduce any potential working capital shortfall and, depending on the final proceeds from the event, potentially remove it completely.

In order to address this potential shortfall in working capital, the Group is currently seeking to raise additional debt financing by the end of April 2014. The Group has mandated Deutsche Bank and Pareto Securities to arrange a series of fixed income investor meetings in the US, Europe and Asia, which commenced on 20 March 2014. A debt offering of up to $250 million in accordance with Reg S/144A is expected to follow, subject to market conditions.

Whilst there can be no certainty that a debt transaction will follow the Group's investor meetings, any debt raised will enhance the Group's liquidity position and support the Group's on-going capital work programmes, including increasing sales to up to 40,000 bopd by the completion and commissioning of Shaikan PF-1 and PF-2. If such debt financing is not available or not available on appropriate terms, the Group would also look to achieve funding via a further equity-linked or equity financing. 

The Directors have concluded that the early stage of fundraising and the insufficiency of the current working capital to fulfil the Group's current working programme create a material uncertainty that casts significant doubt upon the Group's ability to continue as a going concern. Nevertheless, based on the forecasts and projections prepared at the time of preparation of this annual report and after making enquiries, and considering the uncertainties described above, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future, being at least the next 12 months. For these reasons, they continue to adopt the going concern basis in preparing this annual report and financial statements.

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and enterprises controlled by the Company (its subsidiaries) made up to 31 December each year. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities.

Sales and interest revenue

Revenue is measured at the fair value of the consideration received or receivable. Sales revenue represents the Group's share of sales from petroleum production, net of sales related taxes and VAT.

Revenue is recognised when all of the following conditions are satisfied:

- the amount of revenue can be measured reliably;

- it is probable that the economic benefits associated with the transaction will flow to the entity; and

- the costs incurred or to be incurred in respect of the transaction can be measured reliably.

Sales revenue is recognised when the goods are delivered and the title has passed. To the extent that revenue arises from test production during an evaluation programme, an amount is charged from evaluation costs to cost of sales so as to reflect a zero net margin.

Interest revenue is accrued on a time basis, by reference to the principal outstanding and at the effective rate of interest applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount on initial recognition.

Property, plant and equipment other than oil and gas interests

Property, plant and equipment is stated at cost less accumulated depreciation and any accumulated impairment losses. Depreciation is provided at rates calculated to write each asset down to its estimated residual value evenly over its expected useful life as follows:

Intangible assets other than oil and gas interests

Intangible assets, other than oil and gas assets, have finite useful lives and are measured at cost and amortised over their expected useful economic lives as follows:

Oil and gas assets

The Group adopts the modified full cost method of accounting for its oil and gas interests having regard to the requirements of IFRS 6 - 'Exploration for and Evaluation of Mineral Resources'.

Pre-licence costs

Costs incurred prior to having obtained the legal rights to explore an area are expensed directly to the income statement as they are incurred.

Exploration and evaluation costs

Under the full cost method of accounting all costs relating to the exploration for and appraisal of oil and gas exploration and evaluation ("E&E") interests, whether commercial or not, are accumulated and capitalised as non-current assets within geographic cost pools.

Expenditure directly associated with evaluation or appraisal activities is initially capitalised as intangible non-current assets. Such costs include licence acquisition, technical services and studies, seismic acquisition, exploration and appraisal well drilling, payments to contractors, interest payable and directly attributable administration and overhead costs.

E&E costs incurred during the exploration and evaluation phase are carried forward, subject to there being no indication of impairment, where activities in an area have not reached a stage which permits reasonable assessment of the existence of economically recoverable reserves. E&E costs are transferred to development and production assets within property, plant and equipment upon the approval of a development programme by the relevant authorities and the determination of commercial reserves existence. Unsuccessful E&E costs are retained within intangible non-current assets and amortised as described below. E&E costs are not amortised prior to the conclusion of appraisal activities.

Development and production assets

Development and production assets are accumulated within geographic cost pools and represent the cost of developing the commercial reserves discovered and bringing them into production, together with the E&E expenditures incurred in finding commercial reserves transferred from intangible E&E assets as outlined above.

The cost of development and production assets also includes the cost of acquisition and purchases of such assets, directly attributable overheads, and costs for future restoration and decommissioning.

Depreciation of oil and gas assets

The net book values of producing assets are depreciated generally on a field-by-field basis using the unit of production ("UOP") basis which uses the ratio of oil and gas production in the period to the remaining commercial reserves plus the production in the period. Costs used in the calculation comprise the net book value of the field, and any further anticipated costs to develop such reserves.

Any unsuccessful E&E costs retained within intangible non-current assets are depreciated on a UOP basis by reference to the commercial reserves of the wider geographic cost pool.

Commercial reserves are proven and probable ("2P") reserves estimated using standard recognised evaluation techniques. The estimate is regularly reviewed by independent consultants.

Impairment of tangible and intangible non-current assets

At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset, or group of assets, is estimated in order to determine the extent of the impairment loss (if any). For exploration and evaluation assets, the group of assets is the relevant full cost pool. Where the assets fall into an area that does not have an established pool or if there are no producing assets to cover the unsuccessful exploration and evaluation costs, those assets would fail the impairment test and be written off to the income statement in full.

For other assets where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

Any impairment identified is immediately recognised as an expense.

Disposals of oil and gas interests

The difference between the fair value of the consideration receivable and the carrying value of the relevant proportion of the oil and gas asset disposed of is first used to reduce any unsuccessful exploration and evaluation cost carried 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 of expenditures or a farm-in, the arrangement is accounted for according to its commercial substance. Generally, in the case of a farm-in, the substance is that the counterparty has acquired a share, or a greater share, of the underlying oil and gas reserves and the arrangement is treated as a partial disposal. Where the substance is that the counterparty has acquired a right, or a conditional right to be reimbursed by the Group out of future production, a liability is recognised at the time the obligation arises. In the case of a carry, a liability is recognised when the obligation is probable and is no longer conditional upon factors under the Group's control.

Borrowing costs

Borrowing costs directly relating to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are capitalised and added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale.

Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation.

All other borrowing costs are recognised in the income statement in the period in which they are incurred.

Non-current assets held for sale

Non-current assets (and disposal groups) classified as held for sale are measured at the lower of carrying value and fair value less costs to sell.

Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. The condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition. Management must be committed to the sale which should be expected to qualify for recognition as a completed sale within one year from date of classification.

Taxation

The tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year. Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities, based on tax rates and laws that are enacted or substantively enacted by the balance sheet date.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable 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 the period when the liability is settled or the asset is realised based on tax laws and rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also recognised in equity.

Foreign currencies

The individual financial statements of each Group company are presented in the currency of the primary economic environment in which it operates (its functional currency). For the purpose of the consolidated financial statements, the results and the financial position of the Group are expressed in US dollars, which is the functional currency of the Company, and the presentation currency for the consolidated financial statements.

In preparing the financial statements of the individual companies, transactions in currencies other than the entity's functional currency are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary assets and liabilities carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Gains and losses arising on retranslation are included in the income statement for the year.

On consolidation, the assets and liabilities of the Group's foreign operations which use functional currencies other than US dollars are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period. Exchange differences arising, if any, are recognised in other comprehensive income and accumulated in equity in the Group's translation reserve. On the disposal of a foreign operation, such translation differences are reclassified to profit or loss.

Inventories

Inventories, except for hydrocarbon inventories, are valued at the lower of cost and net realisable value. Hydrocarbon inventories are recorded at net realisable value with changes in hydrocarbon inventories being adjusted through cost of sales.

Financial instruments

Financial assets and financial liabilities are recognised on the Group's balance sheet when the Group has become a party to the contractual provisions of the instrument.

Trade receivables

Trade receivables are measured at amortised cost using the effective interest method less any impairment.

Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and demand deposits and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.

Liquid investments

Liquid investments comprise short-term liquid investments of between three to 12 months maturity.

Financial assets at fair value through profit and loss

Financial assets are held at fair value through profit and loss ("FVTPL") when the financial asset is either held for trading or it is designated at FVTPL. Financial assets at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any dividend or interest earned on the financial asset and is included in the other gains and losses line in the income statement.

Derivative financial instruments

The Group may enter into derivative financial instruments including foreign exchange forward contracts to manage its exposure to foreign exchange rate risk.

Derivatives are initially recognised at fair value at the date a derivative contract is entered into and are subsequently remeasured to their fair value at each balance sheet date. The resulting gain or loss is recognised in the profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship.

A derivative with a positive fair value is recognised as a financial asset whereas a derivative with a negative fair value is recognised as a liability. A derivative is presented as a non-current asset or a non-current liability if the remaining maturity of the instrument is more than 12 months and it is not expected to be realised or settled within 12 months. Other derivatives are presented as current assets or current liabilities.

Impairment of financial assets

Financial assets, other than those valued at FVTPL, are assessed for indicators of impairment at each balance sheet date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted.

For certain categories of financial asset, such as trade receivables, assets that are assessed not to be impaired individually are subsequently assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of receivables could include the Group's past experience of collecting payments, an increase in the number of delayed payments in the portfolio past the average credit period, as well as observable changes in local or national economic conditions that correlate with default on receivables.

Financial liabilities and equity

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.

Equity instruments

Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs, which are charged to share premium.

Convertible bonds

The net proceeds received from the issue of convertible bonds are split between a liability element and an equity component at the date of issue. The fair value of the liability component is estimated using the prevailing market interest rate for similar non-convertible debt. The difference between the proceeds of issue of the convertible bonds and the fair value assigned to the liability component, representing the embedded option to convert the liability into equity of the Group, is included in equity and is not remeasured. The liability component is carried at amortised cost using the effective interest method until extinguished upon conversion or at the instrument's maturity date.

Issue costs are apportioned between the liability and equity components of the convertible bonds based on their relative carrying amounts at the date of issue. The portion relating to the equity component is charged directly against equity.

The interest expense on the liability component is calculated by applying the prevailing market interest rate for similar non-convertible debt to the liability component of the instrument. The difference between this amount and the interest paid is added to the carrying amount of the convertible bonds.

Borrowings

Interest-bearing loans and overdrafts are recorded at the fair value of proceeds received, net of transaction costs. Finance charges, including premiums payable on settlement or redemption, are accounted for on an accrual basis and are added to the carrying amount of the instrument to the extent that they are not settled in the year in which they arise. The liability is carried at amortised cost using the effective interest rate method until the maturity of the borrowing.

Trade payables

Trade payables are stated at amortised cost. The average maturity for trade and other payables is one to three months.

Provisions

Provisions are recognised when the Group has a present obligation as a result of a past event which it is probable will result in an outflow of economic benefits that can be reliably estimated.

Decommissioning provision

Provision for decommissioning is recognised in full when damage is done to the site and an obligation to restore the site to its original condition exists. The amount recognised is the present value of the estimated future expenditure for restoring the sites of drilled wells and related facilities to their original status. A corresponding amount equivalent to the provision is also recognised as part of the cost of the related oil and gas property. The amount recognised is reassessed each year in accordance with local conditions and requirements. Any change in the present value of the estimated expenditure is dealt with prospectively. The unwinding of the discount is included as a finance cost.

Share-based payments

Equity-settled share-based payments to employees and others providing similar services are measured at the fair value of the entity instruments at the grant date. Details regarding the determination of the fair value of equity-settled share-based transactions are set out in note 24.

The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight- line basis over the vesting period, based on the Group's estimate of equity instruments that will eventually vest. At each balance sheet date, the Group revises its estimate of the number of equity instruments expected to vest as a result of the effect of non-market based vesting conditions. The impact of the revision of the original estimates, if any, is recognised in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to equity reserve.

For cash-settled share-based payments, a liability is recognised for the goods or services acquired, measured initially at the fair value of the liability. At each balance sheet date until the liability is settled, and at the date of settlement, the fair value of the liability is remeasured, with any changes in fair value recognised in profit or loss for the period. Details regarding the determination of the fair value of cash-settled share-based transactions are set out in note 24.

Leasing

Rentals payable under operating leases are charged to the income statement on a straight-line basis over the term of the relevant lease.

Critical accounting estimates and judgements

In the application of the Group's accounting policies, which are described above, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of revision and future periods if the revision affects both current and future periods.

Carrying value of intangible exploration and evaluation assets

The outcome of ongoing exploration, and therefore the recoverability of the carrying value of intangible exploration and evaluation assets, is inherently uncertain. Management makes the judgements necessary to implement the Group's policy with respect to exploration and evaluation assets and considers these assets for impairment at least annually with reference to indicators in IFRS 6. Further details are provided in note 10.

When an asset is expected to be disposed of or abandoned, the recoverable amount reflects the expected net disposal consideration, together with the value of any liabilities avoided or transferred.

Carrying value of producing assets

Assets relating to the Shaikan block were transferred to property, plant and equipment as at the end of June 2013 following the approval of the Shaikan Field Development Plan ("FDP"). Commercial production commenced on this block in July 2013. Oil and gas assets within property, plant and equipment are held at historical cost value, less accumulated depreciation and impairments.

Producing assets are tested for impairment whenever indicators of impairment exist. Management assesses whether such indicators exist, with reference to the criteria specified in IAS 36, at least annually. For 2013, management determined that there are no indicators of impairment by comparing management's estimate of the discounted future cash flows that the Group expects to derive from the Shaikan field to its carrying value. Key judgements in deriving the future cash flows include future oil and gas prices, production volumes, future costs and the appropriate discount rate to be used. Further details are provided in note 11.

Decommissioning costs

The cost of decommissioning is estimated by reference to the Group's experience, with key judgements including the application of local laws and regulations, estimates of the related costs, inflation and discount rates. Further details are provided in note 18.

Depreciation, Depletion and Amortisation

Amortisation and depreciation of oil and gas properties is calculated on a unit-of-production basis, using the ratio of oil and gas production in the period to the estimated quantities of proved and probable reserves on an entitlement basis at the end of the period plus production in the period, on a field-by-field basis. Proved and probable reserve estimates are based on a number of underlying assumptions, including oil and gas prices, future costs, oil and gas in place and reservoir performance, which are inherently uncertain. Management uses established industry techniques to generate its estimates and regularly references these estimates against those of joint venture partners and external consultants. Such external estimates include the Competent Persons' Report prepared by ERC Equipoise, released in March 2014.

Reserves estimates

Commercial reserves are determined using estimates of oil-in-place, recovery factors and future oil prices. Future development costs are estimated using assumptions as to numbers of wells required to produce the commercial reserves, the cost of such wells and associated production facilities, and other capital and operating costs. Reserves estimates principally affect the depreciation, depletion and amortisation charges.

Revenue

The recognition of revenue during 2013, and particularly the recognition of revenue from exports, is considered to be a key accounting judgement. The Group began commercial production from the Shaikan field in July 2013, domestic commercial sales followed shortly afterwards and the export of crude oil by truck commenced in December 2013. For all commercial production, the goods are considered to be delivered and the title passed at the point of loading at the Shaikan field. For sales into the local market, it is clear that at this point of delivery, economic benefit will flow to the Group and that revenue and costs can be measured reliably and thus revenue is recognised. However, in contrast, as the payment mechanism for sales to the export market is currently developing within the Kurdistan Region of Iraq, the Group considers that, at this point in time, revenue can be only reliably measured at the point of cash receipt. As at the date of this report, no cash receipts have been received for oil sent for export. However, given that exports by the KRG via truck only commenced in December 2013, management do not consider that the payment is past due and the Group expects to receive its full entitlement for trucked exports.

Share-based payments

The share-based payments charge is determined based on a number of assumptions which include but are not limited to the fair value of awards, vesting period and number of shares to vest. Further details are provided in note 24.

Capitalisation of borrowing costs

The accounting policy for oil and gas assets describes the nature of the costs that the Group capitalises, which include applicable borrowing costs that are directly attributable to qualifying assets as defined in IAS 23 Borrowing Costs ("IAS 23"). Management has considered the definition of qualifying assets in IAS 23 and has determined that the Group's capitalised cash expenditures on its four Kurdistan blocks meets the definition of qualifying assets. Consequently, the interest associated with capital expenditures on the four Kurdistan blocks has been capitalised.

Classification of assets as held for sale

The classification of Akri-Bijeel asset as an asset held for sale is one of the critical accounting judgements made by the Group's Directors. The Directors believe that the Akri-Bijeel block continues to meet the criteria of an asset held for sale as set out in IFRS 5, notwithstanding the fact that this intangible asset was classified as held for sale at 31 December 2011 and 2012. Further details are provided in note 12.

Notes to the Consolidated Financial Statements

1. Segment information

For the purposes of resource allocation and assessment of segment performance, the Group is organised into three regional business units - Algeria, Kurdistan and the United Kingdom. These geographical segments are the basis on which the Group reports its segmental information. The chief operating decision maker is the Chief Executive Officer. He is assisted by the Chief Operating Officer, the Finance Director, the Legal and Commercial Director and the Vice President of Operations as well as the Country Managers in the Kurdistan Region of Iraq and Algeria. 

The accounting policies of the reportable segments are consistent with the Group's accounting policies. 

Each segment is described in more detail below:

- Kurdistan Region of Iraq: the Kurdistan segment consists of the Shaikan, Akri-Bijeel, Sheikh Adi and Ber Bahr blocks and the Erbil office which provides support to the operations in Kurdistan;

- United Kingdom: the UK segment provides geological, geophysical and engineering services to the Gulf Keystone Group; and

- Algeria: the Algerian segment consists of the Algiers office and the Group's operations in Algeria.

Corporate manages activities that serve more than one segment. It represents all overhead and administration costs incurred that cannot be directly linked to one of the above segments.