Oil Explorer Presses On in Syria – GUY CHAZAN

With the sanctions noose tightening around Syria, one small U.K.-based oil company has been touting its exploration success there and vowing to press on with an ambitious drilling program regardless of the rising international pressure on the country’s oil sector.

The bloody crackdown on protesters opposed to Syrian President Bashar al-Assad has put companies with operations in the country, like Gulfsands Petroleum PLC, under mounting scrutiny. Gulfsands’ share price has halved since clashes broke out in January, amid concerns its activities would be disrupted by the violence.

The company also has received criticism over its ties to people

close to the Assad regime, in particular the president’s first cousin, Rami Makhlouf. Gulfsands revealed last week that it had paid Mr. Makhlouf—whose company is an investor—part of its profits.

Gulfsands first entered Syria in 2000, when it was awarded a license to explore and develop Block 26, a vast area in the northeast of the country. It now has a 50% working interest in the block, with the rest owned by the Chinese company Sinochem, and is producing about 24,000 barrels of oil a day there from two fields, Yousefieh and Khurbet East.

Despite the scrutiny, however, Gulfsands is calling attention to its activities in Syria. In a statement Friday, Gulfsands said it had discovered oil in the eastern part of the Yousefieh field. It said its operations in Block 26 « will continue as planned with the drilling of one development and one exploration well » and that production there was continuing « without interruption. »

Its ongoing commitment to Syria has already drawn some unwanted attention, however. Platform, a London-based environmental group, has demanded an investigation into the company’s dealings with the Assad regime, warning that it might be in violation of European Union sanctions.

In a statement Aug. 24last Wednesday, Gulfsands said it was « fully compliant with all applicable sanctions and is committed to continuing compliance with any sanctions that may apply from time to time. »

Sanctions have gradually ramped up on Syria in reaction to President Assad’s heavy-handed attempts to snuff out the rebellion there. Earlier this month, the U.S. froze Syrian assets and banned the import of Syrian petroleum products. The EU also has announced it was imposing an asset freeze and travel ban on 15 more Syrian individuals, many from Mr. Assad’s family and the country’s military establishment.

However, none of the sanctions prohibit foreign companies from operating in Syria, and a spokesman for Gulfsands said so far the measures had « no impact » on the company’s operations. « Operationally, everything is very strong, and are continuing without disruption, » he said.

One of those subjected to sanctions is President Assad’s cousin Mr. Makhlouf, a wealthy businessman who owns Syria’s largest mobile-phone company, Syriatel, and several big construction and oil firms. Mr. Makhlouf’s investment company, Al Mashrek Global Invest, owns 5.75% of Gulfsands.

Last week Gulfsands issued a statement acknowledging its links with various Makhlouf-owned companies. It said one of them, Ramak, was entitled to a 2.5% of net profit interest on Block 26 production. Ramak received its first payment of the profit share from Gulfsands and Sinochem in 2010.

The company also said it rented office premises in Damascus from a company owned by Makhlouf interests and had paid Ramak $270,000 for various « support and administrative services to the Block 26 joint venture. »

Gulfsands said its relationships in Syria had all been conducted « on arms-length commercial terms » and it had « behaved at all times with absolute propriety. » It said it had suspended all payments to Makhlouf-related entities last May, when the U.K. imposed sanctions on the businessman and members of his family. Al Mashrek Global is still an investor in Gulfsands.

But Gulfsands investors worry that the company’s closeness to Assad family members increases its vulnerability should the government fall. « If there’s regime change, and they kick out any companies associated with the old regime, then that could make life pretty difficult for Gulfsands, » said Nick Copeman, an analyst at Oriel Securities. But he said it should not be unfairly punished for its links to Mr. Makhlouf. « It appears that it’s hard to build a business of any size in Syria without an association with the existing regime. » A spokesman for Gulfsands declined to comment.

—Alexis Flynn contributed to this article.

Write to Guy Chazan at guy.chazan@wsj.com

Source: http://online.wsj.com/article/SB10001424053111904009304576532501110614950.html