Todd Kozel and Gulf Keystone continues to court controversy

Todd Kozel, the CEO of Kurdistan oil explorer Gulf Keystone Petroleum (GKP), has certainly had more than his fair share of controversy over the last couple of years.

During a divorce court battle with his wife, Ashely, she alleged that he had hidden $150 million in Gulf Keystone shares in offshore trusts. Court depositions also talked of Kozel’s visits to the Windmill and Bourse Restaurant strip clubs and lavish spending on his clients!

Now, it is the court case with Rex Wempen and Excalibur Ventures, which started last week that has reignited the controversy surrounding Kozel and Gulf Keystone. The Sunday Times ran an interesting take on the case yesterday, which summarises many of the issues being considered by the court in this complex piece of litigation.

Investors were hoping for an out-of-court settlement before the case started last Wednesday but this proved to be wishful thinking and the battle lines are now drawn to decide whether Excalibur’s assertion that it is entitled to 30% of Gulf Keystone’s significant oil assets in Kurdistan following the Shaikan discoveries is anything more than hindsight litigation.

Certainly the court case has been a drag on sentiment for Gulf Keystone for some time and has been part of the reason for the halving of the share price from over £4 in early 2012, as well as fading takeover hopes. The successful issue of $275 million of convertible bonds last week seems to indicate that investors are comfortable with the risks involved around the court case however. Make no mistake thought that if the case is lost, it could be an ugly period for Gulf Keystone and I’m sure Todd Kozel is hoping this sorry affair will be decided once and for all by the British courts.

Yesterday’s Sunday Times article is as follows:

WHEN the email pinged into his inbox, Rex Wempen’s heart sank. The former Green Beret had spent 18 months putting together a huge oil deal in Kurdistan, northern Iraq. It had finally been agreed, but as he read the message, the terrible truth struck him: his partner had cut him out.

On that November morning five years ago, of course, the billions the deal would generate were just a dream. Nobody knew how much — if any — oil lay beneath the craggy hills of Iraq’s forgotten north.

Today, the answer is clear: a lot. More, in fact, than anyone could have imagined. And arguably nobody has done better out of the Kurdish oil boom than Todd Kozel, Wempen’s former partner.

Kozel, a bluff Texan, runs Gulf Keystone Petroleum, which with a market value of £1.8 billion is one of the largest companies on AIM — thanks entirely to the enormous finds in Kurdistan.

Wempen claims that Kozel would not have struck it rich if he had not brought him the opportunity. Tomorrow, the opening arguments in Wempen v Kozel, one of Britain’s biggest corporate legal battles, will be heard in the High Court in London.

At stake is what Wempen claims he is contractually owed — a 30% stake of Gulf Keystone’s Kurdish assets, worth at least £950m.But the 12-week trial will not only determine who owns how much of Gulf Keystone. It will also provide a glimpse into the chaos Kurdistan unleashed when it flung open its doors to western firms, who fought tooth and nail for a piece of an old-fashioned oil boom.

According to court documents, Wempen and Kozel met in December 2005, two-and-a-half years after America invaded Iraq. By then, Wempen was an old hand in Iraq. He had retired from the military in the 1990s but re-enlisted after the September 11 attacks, serving in Iraq and Afghanistan. After he left the services for a second time, he stayed on in Baghdad as a consultant.

As the city descended into violence, he moved to Erbil, the capital of Kurdistan which, by comparison, was peaceful. The semi-autonomous region had agreed to stay in a larger federal Iraq, but wanted greater control over its destiny. That meant its oil.

Generous terms were offered to entice explorers but none of the industry’s heavyweights took the bait. The government in Baghdad disagreed with the Kurds’ interpretation of their powers and threatened to blacklist any company that dealt with them.

For those brave, or foolish enough to try, Kurdistan was a golden opportunity, but Wempen was no oil man. A contact put him in touch with Ali Al-Qabandi, a director at Gulf Keystone and Kozel’s right-hand man. In court papers, Kozel admits that until he met Wempen, he had no inkling that Kurdistan was about to open up. Just two months later, in February 2006, the two men signed the “collaboration agreement” that is at the heart of their dispute.

Kozel had started in the oil business with his brothers, running Texas Keystone. He listed Gulf Keystone in London, but in the oil world, it was a tiddler.

Kurdistan was a ticket to the big time. The partners agreed to seek oil concessions there. Wempen’s firm, Excalibur Ventures, would be entitled to 30%, while Texas Keystone had rights to 70%. Crucially, Kozel had the right to transfer some of Texas Keystone’s stake to Gulf Keystone. In June that year, they flew to Kurdistan to meet Ashti Hawrami, the oil minister.

According to Gulf Keystone’s defence, the meeting did not go well. Hawrami told Wempen he had “created an unfavourable impression among a number of individuals within the [Kurdistan government] as a result of his failure to deliver promises previously made”.

Kozel did not cut Wempen loose, though. On the contrary, they continued to work together over the next year.

The partners zeroed in on the Shaikan field, and by July 2007 a deal was close. According to court documents, Gulf Keystone sent Wempen an email containing a draft production contract for Shaikan. It named Texas Keystone, Gulf Keystone and Excalibur as parties to the deal. On October 9, with negotiations reaching the final stages, Texas Keystone sent Wempen an updated version.

Less than four weeks later, on November 6, Kozel announced the deal to the world. Gulf Keystone was named lead partner in the consortium that had won exclusive rights to Shaikan. Excalibur was not mentioned.

Gulf Keystone argues that Wempen should not have been surprised by Excalibur’s exclusion. This is because on August 6, 2007, Kurdistan passed its first oil law. It required developers to prove they were foreign, had the financial capability to proceed and a track record of “good corporate citizenship”.

Gulf Keystone alleges that Excalibur — that is, Wempen and his younger brother Eric, a tax attorney who worked at UBS, the investment bank — fulfilled none of the above.

Kurdistan’s new rules, in effect, disqualified Excalibur. What’s more, Kozel claims he was told to get rid of Wempen. Kozel says that he met Hawrami, “in or around late July or early August [2007]” at a London hotel, and the minister told him that, “he would need to submit a [contract] without Excalibur’s name on it … for the concession to be granted”.

Kozel has another line of defence. The original “collaboration agreement” was between Texas Keystone, where Kozel owned a one-third stake, and Excalibur.

When Kozel unveiled the Shaikan deal, it was Gulf Keystone — not Texas Keystone — that took the biggest share, with 75%. Mol, the Hungarian oil group, had 20%, while Texas Keystone took a 5% interest. Though its share of the costs would be covered by Gulf Keystone.

Why did Texas Keystone — the prime signatory to the venture with Excalibur — end up with a small, passive stake? Apparently, it decided that the “risk of participating … outweighed the rewards”, according to documents filed with the court.

Kozel, who is executive chairman and a shareholder of Gulf Keystone, acknowledges that staff from both companies worked on the negotiations that led to the Shaikan deal. He insists, though, that Texas Keystone was “entirely separate from and independent of Gulf Keystone”.

Texas Keystone simply had a change of heart, he has argued. The deal was too risky. It was not, however, for Gulf Keystone and as a separate entity it had no obligations to Excalibur. So goes the argument.

It will be up to the judge to decide whether that reasoning holds water. The case has hung like a cloud over Gulf Keystone for years. This week Wempen, who has stayed in the shadows, will finally have his day in court this.