Gulf Keystone Expands Exploration Operations in Algeria

Gulf Keystone

Gulf Keystone Petroleum Limited has made a major expansion of its exploration and appraisal activities in Algeria with the introduction of BG North Sea Holdings Limited, a subsidiary of BG Group Plc, as strategic partner in the Hassi Ba Hamou Perimeter exploration, appraisal and exploitation contract ("HBH").

Gulf Keystone and its partner SONATRACH, the Algerian state oil company, have signed an agreement with BG under which BG will be introduced as a partner in the HBH Perimeter, onshore Algeria. In addition, agreement has been reached by all parties on a significant expansion of the planned exploration and appraisal activities on HBH.

HBH was awarded to Gulf Keystone in April 2005, following the 6th International Licensing Round, with the HBH Contract becoming effective in September 2005. HBH covers 18,380 square kilometers in the Allal Dome area of Central Algeria, a gas prone area that includes the Hassi Ba Hamou gas discovery and a number of leads and prospects.

On the basis of a subsequent full technical and economic review of the area, SONATRACH and Gulf Keystone have identified a significant potential gas resource base within the HBH Perimeter. As a consequence, SONATRACH and Gulf Keystone have concluded that a materially increased work program will be required to fully evaluate its potential. The work program that the partnership, Gulf Keystone, SONATRACH and BG, have now therefore committed to carry out during the first exploration and appraisal phase of the HBH Contract will include the acquisition of 2,000 kms of 2D seismic, 500 square kilometers of 3D seismic, and the drilling of at least six exploration and appraisal wells.

Under the agreement, BG will acquire 49% of Gulf Keystone's interest in HBH and assume the role of Operator. Following completion of this transaction, which is conditional upon the final approval of the relevant Algerian authorities ("Completion"), Gulf Keystone will hold a 38.25% interest, BG a 36.75% interest and SONATRACH a 25% interest in HBH.

Gulf Keystone and BG have additionally agreed to study the potential for further co-operation with respect to gas exploration, appraisal and development projects within Algeria.

The commercial terms of this transaction are required to be kept confidential.

Mr. Bill Guest, President of Gulf Keystone, commented:

"This is a strategically important transaction for Gulf Keystone.

We are delighted that BG is joining SONATRACH and Gulf Keystone as a partner in this highly prospective area, the comprehensive evaluation of which we will now be able to accelerate. BG brings a highly complementary technical and operational expertise and is firmly focussed on the rapid commercialisation of gas from this and potentially other concession areas within Algeria.

Completion of this transaction will place the Company in a strong position to further develop its business."