Kuwait Energy Annual Report 2010 by Kuwait Energy Company (KEC)

On the Cover: The Epic of Gilgamesh The Epic of Gilgamesh is the oldest story ever found in the history of mankind and is thought to have been written around 4,000 BC. The story is about a famous Sumerian King of Uruk (now Iraq) who had a passion for immortality. This fascinating piece of work was intelligently designed to explore human nature and values. It sets the line between right and wrong, between what is practical and what is not. It explores feelings such as love, compassion, infatuation, fear and greed. It explains the nature of friendship, loyalty, death and wisdom. It explains the interrelationships between humans and gods at the time in a rich text loaded with characters ranging from ordinary human beings to superheroes enriched with superstitious monsters and locations such as the guardian of the cedar forest, the bull of the heavens, waters of death and the edge of the world. The story starts with a description of the powerful king of Uruk, Gilgamesh, who rules with arrogance and greed. To curb his harsh rule, the gods create Inkido, a wild man who faces Gilgamesh in a ght which he loses but mysteriously transforms them to best friends.

About the Artist: Hisham Zubari born in Bahrain in May 1965, is from a family of artists and has been drawing and painting since childhood. He is a petroleum engineer by profession and is currently the Head Reservoir Engineer at the Bahrain Petroleum Company. He has held several art exhibitions including “Inspiration” in 1993 and “Gilgamesh” in 2006 and is the recipient of the Golden Leaf Award, which is the rst prize for the contemporary art in the Gulf Cooperation Council (GCC) Art exhibition held in Qatar in 1999.

In a show of strength, they manage to kill the monster Humbaba, the guardian of the cedar forest (believed to be in the mountains of Lebanon). Ishtar, the goddess of love, admires Gilgamesh’s strength and offers herself as a wife, promising him inconceivable wealth. When Gilgamesh refuses, she sends Uruk the Bull of the Heavens to destroy them all. Gilgamesh, with Inkido’s support manages to kill the monster. By such act, Ishtar and the gods feel humiliated. To avenge Gilgamesh, the gods then decide to get rid of his best friend, Inkido, for interfering with the gods’ wishes. Gilgamesh, seeing his best friend’s body decompose, gets scared of death and sets on a dangerous and exhausting journey to seek immortality. He looks for Utnapishtim and his wife, the sole survivors of the great ood and he learns of a plant, that renews youth (believed to be in Bahrain). He obtains the plant but a serpent manages to steal it during his sleep. He learns a lesson about how a man should live. As Kuwait Energy marks its entry into Iraq, it illustrates this fascinating story of Gilgamesh in this report as a tribute to the Iraqi people. I will tell you a secret of the gods, A ower that grows in the great deep It has the secret of youth

H. H. Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah Amir of the State of Kuwait

H. H. Sheikh Nawaf Al-Ahmad Al-Jaber Al-Sabah Crown Prince of the State of Kuwait

Who We Are Kuwait Energy, an independent MENA exploration and production Company, is headquartered in

Kuwait and has regional offices in Cairo, Sana’a, Basra, Baghdad, Kiev and Ukhta, overseeing operations in eight countries, namely Egypt, Yemen, Iraq, Oman, Ukraine, Latvia, Russia and Pakistan.

Its participation interests range from 15% to 100% across its 53 exploration, development and

producing leases, providing a balance of risk diversification with significant upside exploration potential. Kuwait Energy currently operates 20 of these 53 leases.

Led by its founders, Dr. Manssour Aboukhamseen, a Kuwaiti entrepreneur and Sara Akbar one of the Middle East’s most recognized and experienced oil industry CEOs, Kuwait Energy has since 2005, successfully:

• Demonstrated its ability to grow production year-on-year • Been profitable every year

• Increased its operatorship of assets and demonstrated an operator capability • Established a qualified and experienced management team

• Developed an extensive contact network within regional governments and industry • Grown technical expertise and headcount

Executive Management Strategy Meeting - 28 October 2010

Contents Message from the Chairman and Managing Director

Board of Directors

Kuwait Energy Assets

Financial and Operational Highlights

Chief Executive Officerâ&#x20AC;&#x2122;s Report

Financial Performance

Portfolio Management

Operations

Development Activities

Production Summary

Reserves

Exploration Activities

Business Development

Other Corporate Activities

Corporate Governance Report

Remuneration Report

Risk Management Report

Corporate Social Responsibility Report

Kuwait Energy Five Year Summary

Consolidated Financial Statements and Independent Auditorsâ&#x20AC;&#x2122; Report for the year ended 31 December 2010

Glossary and Definitions

Focused on Growth

Kuwait Energy Milestones Operations

Financials

He had seen everything...

He had known everything...

The ancient days before the flood...

He had journeyed to the edge of the world...

Focused on Growth

Message from the Chairman and Managing Director On behalf of my colleagues on the Board, I am delighted to report that 2010 has been another important year for Kuwait Energy. We entered into Iraq with successful bids on the Siba and Mansuriya gas fields, enjoyed continued exploration success on our key assets, achieved an average daily working interest production of 13,258 barrels of oil equivalent per day (boepd), reported year end 2010 proven and probable working interest reserves of 48.8 million barrels of oil equivalent (mmboe) and celebrated the Company’s fifth anniversary. Kuwait Energy is now moving forward into a new, exciting chapter of growth and technological innovation.

Financial Overview Kuwait Energy reported a net profit of US$21.9 million for 2010 which continues the Company’s excellent track record of reporting net profits each year since inception in August 2005. The average daily working interest production achieved for 2010 was 13,258 boepd, a 15.3% rise on 2009. The operating cash flow in 2010 was US$85.6 million up 67.5% on 2009, primarily due to increased production and higher product prices. Kuwait Energy had a successful rights issue to existing shareholders, which was fully subscribed and raised in excess of US$100 million. These additional funds will be utilized to pursue the organic growth element of the Company’s expansion plans, to develop recent discoveries and to drill additional wells in the Middle East and North Africa (MENA) region, especially in Egypt. Operations Operationally, Kuwait Energy enjoyed continued success in exploration and development drilling, increased production and concluded a market entry into Iraq which will be transformational for the Company. In the first half of the year, exploration activity was chiefly focused on Egypt. The second half also saw a heavy emphasis on Egypt with activities in Pakistan and Yemen. Exploration expenditure in 2010 totalled US$41.6 million which was primarily spent on drilling 11 exploration wells (eight in Egypt, two in Pakistan and one in Yemen). Development expenditure in 2010 totalled US$68.4 million which was primarily spent on drilling 33 development wells, 32 in Oman and one in East Ras Qattara, Egypt.

A significant operational milestone was achieved in October 2010 with the successful bidding for the Siba and Mansuriya gas fields in Iraq’s third petroleum licensing round. The Siba and Mansuriya fields are estimated to contain gross proven and probable reserves in excess of 2.3 trillion cubic feet of gas and 93 million barrels of condensate. Kuwait Energy will be the operator of Siba with a participating share of 60%, a partner in Mansuriya with a participating share of 30%. The 20-year contract terms will allow Kuwait Energy to enter into a long-term partnership with Iraq for the development of its natural gas resources both for domestic consumption and for potential exportation. The success comes after three years of preparation and hard work by Kuwait Energy and represents a significant milestone, both in terms of the Company’s focus on expansion in the MENA region, and also in contributing to a new era of positive collaboration between Iraq and Kuwait. Corporate Development Kuwait Energy retains its ambition to seek a listing on the London and/or Kuwait Stock Exchanges and continues to work closely with its external advisors to prepare for this event. The timing of the listing will be subject to market conditions. Corporate Governance Further to the initiatives taken in 2009 to bring its corporate governance framework in line with international practices and standards, the Board of Directors has established a new Board Nomination Committee during 2010. The report on Corporate Governance will elaborate further on the roles and responsibilities of the Nomination Committee. Corporate Social Responsibility Kuwait Energy is a strong believer in good Corporate Social Responsibility behaviour and is committed to growing its reputation as a responsible and trustworthy Company in the eyes of all stakeholders. Implementing international best practices, Kuwait Energy maintains the highest possible safety standards, respects the environment and works very closely with its communities to address important aspects of local needs and ensure Kuwait Energy contributes to the areas where it operates. In 2010, Kuwait Energy also completed its third consecutive year of involvement in the Kuwait Science Fair, which generates student interest in maths and science from an early age. Board Composition During 2010, Walter Brandhuber was replaced by Rabih Soukarieh who has over 20 years of corporate, investment banking and private equity cross industry experience in the MENA region. On behalf of my colleagues, I would like to thank Walter for his efforts and contribution during

his time at Kuwait Energy and welcome Rabih to the Board. I would like to take this opportunity to thank all Board members for their contribution and efforts in 2010. Employees Kuwait Energy enjoys a multinational, multicultural workforce and at year end 2010 had 464 employees from 29 countries. On behalf of the Board, I would like to thank everyone at Kuwait Energy for their continued hard work, determination and professionalism without which the development and continued growth of the Company would not be possible. Outlook There are outstanding opportunities for developing oil and gas assets in the Middle East as the region opens up to international oil companies. A business development opportunity in the Company’s priority MENA region was progressed in October 2010, via the signing of a Memorandum of Understanding with the Yemen Ministry of Oil and Minerals to conduct a study addressing the potential development of natural gas reserves in Yemen and the optimization of the country’s natural gas resources for the benefit of its people. Your Company is focused on capturing a number of large scale projects available in Iraq, Kuwait and Yemen. Despite the upheaval in the region during the first quarter of 2011, our operations remain largely unaffected. For us, 2011 promises to be an exciting year and we expect to deliver significant growth to our shareholders through one or more of these transformational projects.

Dr. Manssour Aboukhamseen Chairman and Managing Director

Focused on Growth

Board of Directors

From left to right : Tareq Al Wazzan - Rabih Soukarieh - Sara Akbar - Dr. Manssour Aboukhamseen - Jason Selch - Mohammad Algharaballi - Ashour Habeeb

Dr. Manssour Aboukhamseen Executive Chairman

Sara Akbar Chief Executive Officer

Dr. Manssour Aboukhamseen is a successful business entrepreneur, leader and founder of several successful business enterprises in Kuwait. He has over 25 years of experience in the oil and gas industry in Kuwait Oil Company (KOC), Zahra Group and Kuwait Energy.

Sara Akbar is a renowned professional and personality in the oil and gas industry, both in Kuwait and internationally. She has over 30 years experience in the oil and gas industry having worked in several challenging positions in KOC and Kuwait Foreign Petroleum Exploration Company (KUFPEC).

He has a Ph.D in Modern History from Berkeley University, California, U.S.A. He is the Executive Chairman of the Board, a position he has held since June 2006 and is also the Managing Director and oversees the internal audit function of the Company.

She has a B.Sc in Chemical Engineering from Kuwait University. Since October 2005, Sara has been the Board representative of the Twenty Fifth Project Management Company, Kuwait, a shareholder of the Company and Chief Executive Officer of Kuwait Energy.

Jason Selch Non-Executive Director

Ashour Habeeb Non-Executive Director

Jason Selch is the Portfolio Manager of Helios Energy Fund and has over 25 years experience in the energy sector.

Ashour Habeeb is Vice President of Corporate Affairs in Zahra Group Holding, Kuwait.

He was formerly the Managing Director of Equity Group Investments, a private investment firm based in Chicago, USA.

He has over 35 years experience in the oil and gas industry where he has worked in various capacities in KPC and KOC as Manager of Sales and Administration, Manager of Bunker Sales and Manager of Crude Oil & LPG.

He holds a BA in Economics and an MBA in Finance from the University of Chicago. He was awarded the Chartered Financial Analyst (CFA) designation in 1997. Since January 2007, Jason has been an independent Board Director and is the Chairman of the Board Audit Committee and a member of the Board Compensation Committee. Tareq Al Wazzan Non-Executive Director Tareq Al Wazzan is the CEO and Managing Director of AREF Energy Holding Company, a subsidiary of the AREF Investment Group, a leading investment group in Kuwait. He has over 24 years experience in the oil and gas industry managing several strategic projects and has gathered an indepth understanding of the oil supply chain and international energy markets. He has a B.Sc in Business Administration from San Diego State University, USA. Since March 2008, Tareq has been the Board representative of AREF Energy, a shareholder of the Company. He is also a member of the Board Audit and Nomination Committees. Mohammad Algharaballi Non-Executive Director Mohammad Algharaballi heads the Venture Development in AREF Energy Holding Company, a subsidiary of AREF Investment Group, a leading investment group in Kuwait. He has a B.Sc in Petroleum Engineering from Colorado School of Mines, USA. Since March 2008, Mohammad has been the Board representative of AREF Energy, a shareholder of the Company. He is also the Chairman of the Board Compensation Committee. He is also Board Director of Dindir Petroleum International, Sudan as a representative of Higleig Petroleum Services and Investment Company (HPSIC). AREF Energy owns 64% of HPSIC.

He has a Diploma in Oil Handling from the University of Pittsburgh in Pennsylvania, USA. Since October 2008, Ashour has been the Board representative of Zahra Group, a shareholder of the Company. He is also the Chairman of the Board Nomination Committee and a member of the Board Audit and Compensation Committees. Rabih Soukarieh Non-Executive Director Rabih Soukarieh is a member of the Board of Directors as well as the Senior Executive Officer of Millennium Private Equity Company Ltd, a private equity management firm based in Dubai. He has over 20 years of corporate and investment banking, private equity cross industry experience in the Middle East and North Africa (MENA) region. He is also a director of Moobility Telecom International Holding Ltd, (Friendi Group) and a director of Algeria Gulf Bank, Algeria. He has an MBA from Northeastern University, Boston, USA, a BSc. in Finance from Indiana University, Bloomington and is a Chartered Financial Analyst. Since October 2010, Rabih has been the Board representative of the Sharia Bahrain Energy Holding (a subsidiary of Millennium Private Equity), a shareholder of the Company. He is also a member of the Board Nomination Committee.

Focused on Growth

Kuwait Energy Assets As at 31 March 2011 Region

Egypt

Iraq

Yemen

Oman Pakistan

Ukraine

Russia Latvia Cambodia

Ref

Licence

Revenue Interest

Cost Interest

Operator

Status

Area A (5 Blocks)

70.00%

Kuwait Energy

PAEP

Mesaha*

30.00%

Melrose Resources

Abu Sennan

50.00%

78.00%

Kuwait Energy

ADEP

BEA

75.00%

Kuwait Energy

PAEP

ERQ (5 Blocks)

49.50%

ENAP Sipetrol

PAEP

Siba

45.00%

60.00%

Kuwait Energy

ADEP

Mansuriya

22.50%

30.00%

TPAO

ADEP

Block 15

41.56%

43.75%

Kuwait Energy

Block 35

83.82%

88.24%

Kuwait Energy

Block 43

28.33%

33.33%

DNO

PAEP

Block 49

64.00%

75.29%

Kuwait Energy

Block 74

34.00%

40.00%

Kuwait Energy

Block 82

21.25%

25.00%

Medco Energi

Block 83

21.25%

25.00%

Medco Energi

KSF (18 Fields)

15.00%

Medco LLC

PAEP

Jherruck

40.00%

NHEPL

Kunri

40.00%

NHEPL

Bilousivska-Chornukhynska (BC)

100%

Kuwait Energy

PAEP

North Yablunivska (NY)

100%

Kuwait Energy

ADEP

Dubrivksa

100%

Kuwait Energy

JAA 429 (Bilske & Kulichihinske)

25.00%

Ukrbud

PAEP

Chikshina

100%

Kuwait Energy

Luzskoye

100%

Kuwait Energy

PAEP

Licence 1 â&#x20AC;&#x201C; 2004

45.00%

50.00%

Kuwait Energy

Licence 1 - 2009

45.00%

50.00%

Kuwait Energy

Block E**

20.62%

Medco Energi

Notes: EA = Exploration Asset PAEP = Producing Assets with Exploration Potential ADEP = Awaiting Development with Exploration Potential *

In August 2010, Kuwait Energy divested 15% WI in Mesaha, Egypt to Beach Energy Ltd which is subject to Government approval. This partial divestment has not been included in the table above.

** Interest in the process of being relinquished, subject to Government approval.

MENA Region Iraq Pakistan Egypt Oman Yemen

Eurasia Region

Russia Latvia Ukraine

Producing Assets with Exploration Potential Awaiting Development with Exploration Potential Exploration Asset

Focused on Growth

Financial and Operational Highlights 2010

2009

Sales Revenue

US$ million

141.8

88.3

Cost of Sales

US$ million

102.9

70.8

Operating cash flow

US$ million

85.6

51.1

Net Income

US$ million

21.9

5.6

Property, Plant & Equipment

US$ million

68.4

102.7

Exploration & Evaluation Assets

US$ million

41.6

72.0

Total Capital Expenditures

US$ million

110.0

174.7

Total Assets

US$ million

740.9

680.9

Debt

US$ million

53.0

28.0

Shareholder Equity

US$ million

631.3

580.1

Earnings per Share

US Cents

2.07

0.52

Average WI Production

BOEPD

13,258

11,499

Proven plus Probable Reserves*

MMBOE

48.8

51.2

Exploration

Development

Workovers

19**

Capital Expenditures

Total Wells Drilled / Workovers

* Excludes Oman where the Service Agreement does not allow external reporting ** Capitalised workovers only

Chief Executive Officer’s Report On behalf of the management team of Kuwait Energy, I am delighted to report our activities for 2010.

Financially, our Company has continued its excellent track record of reporting profits every year since inception, a record of which I am very proud. Operationally, the Company has achieved a 15% rise in production, sustained reserve volumes, increased assets in which Kuwait Energy is the Operator and has successfully bid on two gas fields, Siba and Mansuriya, in Iraq.

(ii) Capital Expenditure US$110 million was spent during the year on: • 33 development wells • 11 exploration wells • Upgrading and new facilities

Financial Performance

(iii) Credit Rating

Our financial performance has been underpinned by increased production, higher oil and gas prices and the receipt of partial divestment proceeds. This has contributed to an increase in net profit from US$5.6 million in 2009 to US$21.9 million in 2010.

Kuwait Energy was credit rated by Capital Intelligence, Cyprus for the first time in 2009 and was accredited with a long term credit rating of BBB-. The credit rating was reviewed in July 2010 and the Company continues to be accredited with a BBB-. The drivers of this rating include: producing assets generating good cash flows, a large proportion of assets which are income generating, a well capitalised balance sheet, increasing production together with growing reserves and a coherent strategy aided by very good management with significant oil industry experience.

(i) Cash The Company generated an operating cash flow of US$85.6 million in 2010, up 67.5% compared to US$51.1 million in 2009. Cash and bank balances as at 31 December 2010, were US$58.1 million. Kuwait Energy had a successful rights issue to existing shareholders, which was fully subscribed and raised in excess of US$100 million. During the year, the Company finalized a US$20 million letter of credit facility with JP Morgan against 50% cash collateral. The Company also had approximately US$5 million remaining to be withdrawn from the existing IFC financing facility.

(iv) Oil Hedging With effect from October 2010, the Company entered into a production hedging agreement with Citi Bank. Kuwait Energy will be ensured a price of at least US$81.85/barrel for 2,000 bopd of crude oil for a one year period ending in September 2011.

Focused on Growth

Portfolio Management In keeping with the Company’s strategy of constantly reviewing its assets to maintain an optimum mix and efficient operation, 2010 saw further portfolio changes.

Production increased in East Ras Qattara, Egypt due to the exploration discovery of Diaa-1 and development of the exploration discovery in the Al Zahraa field (Al Zahraa-3).

The Company signed sale and purchase agreements to divest:

Production increased by 123% in Russia to 587 boepd and would have been even higher if not for a temporary suspension of operations caused by extreme weather conditions and a local infrastructure problem beyond Kuwait Energy’s control, which is now resolved.

• A 25% working interest (WI) in JAA 429, Ukraine to Ukrbud, a private Company in Ukraine. • A 22% WI in Abu Sennan and 15% WI in Mesaha concessions in Egypt to Beach Petroleum for a consideration of US$24.33 million. This resulted in a reduced cost for Abu Sennan and Mesaha concessions on the balance sheet of US$10.01 million (Mesaha transaction pending Government approval). • The Company’s revenue interest in Blocks 35 and 49 in Yemen increased during 2010 from 32.5% to 83.8% and from 42.3% to 64.0% respectively following withdrawal of some joint venture partners. These divestments enable the Company’s capital expenditure to be more aligned with its target ratio of 80:20 between producing/developing assets and exploration assets. It will also reduce Kuwait Energy’s share of exploration expenditure commitments. The divestments also show that Kuwait Energy is committed to obtaining value on all its assets at whichever stage of the asset’s life cycle is most appropriate. Kuwait Energy remains the operator in the Abu Sennan concession, where it will retain equity stake of 50%. Kuwait Energy will retain a 15% stake in the non-operated Mesaha concession.

Operations Production Kuwait Energy’s production has continued to grow year on year with average daily production in 2010 of 13,258 boepd, a 15% increase on 2009. This increase was due primarily to significantly increased production in Egypt, moderate increases in Ukraine and Oman and Kuwait Energy’s increased working interest in Luzskoye, Russia.

The Company has been involved in an arbitration with Ukrnafta for over three years in relation to a dispute concerning our ownership interest in the RudivskyChervonozavodsky (RC) field in Ukraine. Ukrnafta, the operator of the field, refused to acknowledge the full interest rights of Carpatsky Petroleum Corporation (CPC), a wholly owned subsidiary of Kuwait Energy. The arbitration tribunal of the Arbitration Institute of the Stockholm Chamber of Commerce issued its decision in September 2010 with CPC being awarded damages in the amount of US$145.7 million plus post-award interest and costs of approximately US$1.2 million. The tribunal also declared the joint activity agreement between Ukrnafta and CPC in respect to the joint exploration and development of this field terminated by reason of Ukrnafta’s breach. We are diligently pursuing collection of this award.

Development Activities • 33 development wells drilled in 2010 • Major focus on improved understanding of Kuwait Energy’s diverse assets 2010 represented a year of consolidation for Kuwait Energy’s development activities following a very active 2009, and was a period of detailed geological and engineering studies, enabling the Company to better understand its assets. Thirty three development wells were drilled during the year and the Company continued its excellent record of safe development drilling. The majority of 2010 drilling activity took place in Oman with the resulting oil rates and reserves exceeding budget expectations. In addition, the successful Al-Zahraa development well drilled in Egypt’s East Ras Qattara Block, produced at an initial flow rates of over 2,000 bopd.

A second well at East Ras Qattara has been deferred until 2011. Detailed geoscience and engineering studies were undertaken in Egypt, on the Burg El Arab, Shukheir NW and Yusr fields. The development of Burg El Arab will recommence in 2011 with the drilling of three development wells. Further development in Shukheir NW and Yusr will likely include a water or gas injection project to maximise reserves and value.

His name was Gilgamesh Surpassing all kings He is the hero of Uruk He leads the way He is the protector of his men He slew Humbaba of the Cedar Forest He slew lions in the mountain passes, He seized and killed the bull that Comes down from heaven

In Russia, a detailed study was completed resulting in an amended development plan requiring dual completion technology and a water support project. Five development wells are planned for Russia during 2011. Studies were also completed in the BC and NY fields in Ukraine where future development activity will be focused on workovers of existing wells.

Focused on Growth

Production Summary Country

Egypt

2010 Daily WI Average (boepd)

2009 Daily WI Average (boepd)

% Change

BEA

347

193

79.8%

Area A

4,386

4,008

9.4%

ERQ

3,421

2,092

63.5%

8,154

6,293

29.5%

570

311

45.4%

RC*

285

N/A

Bitkov**

N/A

JAA 429

414

333

24.3%

984

969

1.5%

Asset

Total

Ukraine

Total Indonesia

ARD***

N/A

246

N/A

Oman

KSF

2,757

2,635

4.6%

Yemen

Block 43

775

1,093

(29.1%)

Russia

Luzskoye

587

263

123.1%

13,258

11,499

15.3%

Kuwait Energy Total

The Joint Operating Agreement in respect of the RC field was terminated in 2010 as part of a favourable arbitration award.

* * The joint venture holding in the Bitkov-Babchenske field has been the subject of legal proceedings, the outcome of which resulted in Kuwait Energy no longer having an interest in the joint venture and therefore no production from this field was reported in 2010. * * * ARD fields contract expired 22 April 2009.

Reserves Kuwait Energy Year End 2010 Reserves & Resources as at 31 December 2010 Kuwait Energy Reserves and Resources in mmboe Classification

Working Interest

Category YE09

Production

Exploration Adds

Revisions

Acq/Divest

YE10

YE10-Net Entitlement 35.73

Reserves

Proven + Probable

51.20

(3.72)

0.90

1.11

(0.71)

48.77

Contingent Resources

15.45

........

16.50

0.00

31.95

Prospective Resources

Best

235.22

........

3.49

(26.61)

212.10

Proven plus Probable RRR

35%

Proven plus Probable Reserves (Kuwait Energy Working Interest) Sales Gas (bcf)

Crude Oil (mmbbl)

Condensate (mmbbl)

Total (mmboe)

Reserves year end 2009

57.91

38.61

3.13

51.20

Production

(1.77)

(3.37)

(0.06)

(3.72)

Acquisition/Divestments & Revisions

(2.30)

1.11

(0.36)

0.40

37.26

2.71

Exploration Discoveries Reserves year end 2010

0.00

53.84

0.90

0.00

0.90

48.77

Notes 1 2 3

Reserve and resource estimates are Kuwait Energy working interest Resource estimates are risked Estimates above exclude Karim Small Fields (Oman) which is covered by a Service Agreement which does not allow external reporting of reserve volumes 4 YE10 reserves were prepared by Gaffney, Cline & Associates (GCA) and resource estimates by Fugro Robertson

Reserves and Resources Definition

Reserves and resources have been estimated in accordance with 2007 Society of Petroleum Engineers (SPE), World Petroleum Council (WPC), American Association of Petroleum Geologists ( AAPG ), Society of Petroleum Evaluation Engineers (SPEE), Petroleum Resources Management System (PRMS) â&#x20AC;&#x201C; commonly referred to as the SPE PRMS.

They met in the marketplace Of the great-walked Uruk They grappled each other

Foreheads crashed like wild bulls They staggered

The doorposts trembled The outer walls shook

Focused on Growth

Exploration Activities • Six of the eleven wells drilled with exploration objectives resulted in success (55% success rate) • From 2008 to 2010 Exploration added 10.5 mmboe of proven plus probable reserves at an average finding cost of US$8.2/boe Exploration Drilling

Business Development

Eleven exploration wells including one extension well (development well deepened to exploration target) were spud in 2010 resulting in three discoveries, positive hydrocarbon indications on logs in three wells, and five dry holes. Four exploratory wells were drilling on 31 December 2010 and carried over to 2011.

Business development continues to be a core focus for Kuwait Energy as it strives to meet its 2015 targets of daily production of 75,000 boepd of which 45,000 boepd is to come from new post-2010 assets, and proved and probable reserves of 400 million boe.

As operator, Kuwait Energy drilled one discovery exploration well and two wells with hydrocarbon indications on logs in 2010 in Burg El Arab field, Western Desert of Egypt. These results include a discovery at the Cretaceous level in a new fault block. One extension well (development well with an additional exploration objective at deeper levels), also resulted in positive log indications, establishing upside potential for the Burg El Arab Concession, Egypt. The exploratory well of Abu Sennan, which is under drilling with a target of the Jurassic formation, has positive hydrocarbon indications on the logs at the Cretaceous level. Drilling of the well is being continued for deeper targets. Kuwait Energy also had exploration success on two non-operated concessions: East Ras Qattara, Egypt and Jherruck, Pakistan. The exploration program of 2010 yielded a 55% exploration success rate. Exploration success during 2010 added 0.9 mmboe of proven plus probable reserves. Geophysical and Geological Studies During 2010, Kuwait Energy acquired 1,267 kilometres of 2D seismic data in Egypt and Yemen. Kuwait Energy also acquired 300 km2 of 3D seismic in Latvia offshore. This represented the first offshore seismic operation for the Company. Kuwait Energy continued its collaboration with Fugro Robertson Limited, United Kingdom to provide specialized geological and geophysical support related to the exploration function and to assist in the preparation of a detailed prospects and leads inventory.

On 25 June 2010, Kuwait Energy’s continuous and persistent efforts to enter the Iraqi exploration and production market were rewarded when the Iraqi Ministry of Oil pre-qualified Kuwait Energy to take part in oil and gas development bid rounds in competition with some of the world’s largest exploration and production companies. This display of confidence by the Iraqi Ministry of Oil enabled Kuwait Energy to participate in Iraq’s Third Petroleum Licensing Round held on 20 October 2010. The outcome of the Licensing Round was extremely positive for Kuwait Energy with the Company successfully bidding on two gas development and production service contracts for the Siba and Mansuriya fields. Kuwait Energy will be the operator of the Siba field. These successful bids constitute a significant milestone for Kuwait Energy and it is the Company’s intention that this success will represent just the start of a thriving business for Kuwait Energy in the highly prospective Iraqi market. In the meantime, Kuwait Energy will continue to evaluate all new potential opportunities in Iraq as they arise. In October 2010, Kuwait Energy signed a Memorandum of Understanding with Yemen’s Ministry of Oil and Minerals. The framework of the MoU facilitates Kuwait Energy’s conducting of a study to address the potential development of natural gas reserves in Yemen and the optimization of the country’s natural gas resources for the benefit of its people. Kuwait Energy will also advise the Ministry on the most suitable uses and applications for the country’s gas resources in order to ensure production sustainability and to maximize revenue generation and job creation.

Other Corporate Activities Health, Safety, Environment and Social Responsibility (HSESR) HSESR is a key priority at Kuwait Energy and I am pleased to report that during 2010 we passed two years of operations in Egypt and one year of operations in Russia with zero recordable incidents. The recordable incidents as we classify them are lost time incidents, restricted work incidents and medical treatment incidents.

Human Resources The Human Resources department has implemented a number of training programmes in 2010 to enhance employee performance to support the Company’s overall business objectives. Kuwait Energy completed the training of 23 Kuwaiti and international students through the Company’s annual ‘Future Energy’ internship program to give students the opportunity to understand our industry.

Technology In October 2010, a five-year contract was signed with Schlumberger. Kuwait Energy is now benefiting from access to a leading global oilfield service provider’s stateof-the-art technologies. This collaboration is enabling the pursuit of smarter operations at a faster pace and improving the Company’s capabilities to operate fields. Kuwait Energy will also benefit from software and information technology infrastructure solutions to deliver improved performance, which in turn will reduce exploration and development risk and help realize the full potential of its oil and gas fields.

Hear me elders of Uruk.. It is for Inkido, my friend, that I weep.. I wail like a woman.. He was my happiness.. An evil force seized him from me.. My friend, my younger brother.. We were the ones who killed the bull of heaven.. We were the ones who killed humbaba of the Cedar Forest.. What is this sleep that has now come on you? You have gone dark and cannot hear me.. Inkido did not open his eyes..

Sara Akbar Chief Executive Officer

Focused on Growth

Corporate Governance Report Kuwait Energy endeavours to continuously improve its corporate governance to meet the best international practices and standards.

Internal Management Controls The Delegation of Authority document provides the framework for the management of all aspects of the business of Kuwait Energy. It is mandatory and applies to the operations of the business in all Kuwait Energy offices. It has been adopted by the Board to enhance the efficiency of the management of the Kuwait Energy group of companies.

Corporate Governance Review by the International Finance Corporation (IFC) The IFC is the private sector investment arm of the World Bank and is widely perceived to be a leader amongst multilateral financial institutions in the area of corporate governance in emerging markets. Further to the corporate governance review carried out in 2009 with assistance from the IFC, Kuwait Energy has been improving and upgrading its corporate governance practices continuously.

Board Performance Kuwait Energy’s Board comprises seven members. The Chairman of the Board also performs an executive role as the Managing Director of the Company. The CEO and four other (non-executive) Directors all represent (or represented at the time of appointment) significant shareholders. Jason Selch is an independent director on the Board. There is a clear distinction in the roles of the Chairman and the CEO. The Chairman has the overall responsibility of communicating with shareholders and keeping the Board updated on the Company’s key activities. Additionally, the Chairman also oversees the internal audit function. The CEO is at the forefront of the organization providing leadership to the Company, its employees and all its operational activities. The CEO is primarily responsible for increasing shareholder value which is a function of

the strategic direction, growth, optimal management of resources and cost effectiveness of the Company. The role also includes ensuring high standards of health, safety, sustainability and environmental practices, minimizing risks and satisfying corporate governance requirements.

Board Directors’ Terms of Reference In 2010, Kuwait Energy undertook the decision to formalise the Board Directors’ terms of reference. The Board functions in a spirit of teamwork and cooperative support. Every Board member is required to: • Attend scheduled Board meetings of the Company’s Board; • Represent the shareholders and the interests of the Company as a fiduciary in accordance with the Kuwait General Company Law; and • Participate as a full voting member of the Company’s Board in setting overall objectives, approving plans and programs of operations, formulating general policies, offering advice and counsel, serving on Board committees and reviewing management performance. The Chairman has the overall responsibility of communicating with shareholders and keeping the Board appraised in this regard. Additionally, the Company issues quarterly activity reports to its shareholders with periodic updates on the operations and activities of the Company.

2009 Annual General Meeting All shareholders of the Company were invited to attend the Annual General Meeting of Shareholders held on 12 May 2010 in Kuwait. Shareholder invitations and proxy letters for shareholder representatives were made available to the shareholders in advance of the meeting. The shareholders were provided with copies of the 2009 Company Annual Report and audited financial statements. The CEO presented to the shareholders the Company’s milestones since 2005, its 2009 operational and financial highlights and the Company’s outlook for 2010. The presentation was followed by a question and answer session with the Company’s senior management.

No.

Board Directorsâ&#x20AC;&#x2122; Terms of Reference

The Director shall fully understand the Boardâ&#x20AC;&#x2122;s roles and responsibilities and help ensure that the Board is discharging those roles and responsibilities to the best extent possible.

The Director shall fully understand the corporate governance and conduct policies of the Company and help ensure the Board is acting in accordance with those policies at all times and actively promoting them through the organization.

The Director shall exercise duty of loyalty to the Company, by NOT: Conducting transactions in which they have a personal interest; Disclosing confidential information; Entering into contractual relations with a competing company; Using assets and facilities of the Company for personal benefit/gain; Using information and business opportunities received in their official capacity for personal gain

The Director shall exercise full duty of care to the Company, including: Acting honestly in the interests of the Company; Displaying maximum care and prudence that may be expected from a good manager in a similar situation and under similar circumstances; Ensuring that the Company acts in compliance with all applicable laws and regulations; Requesting sufficient information from management to enable him/her to make balanced decisions.

The Director shall commit adequate time to the position, including the time to attend Board and committee meetings, time to prepare him/herself for meetings, and time to stay adequately abreast of Company developments.

The Director shall ensure maximum contribution of his/her knowledge, skills, expertise, abilities, and professional resources as an individual to ensure the Board is maximizing its capacity and attaining full utilization of its members.

The Director shall fully participate in Board discussions by ensuring that he/she gives full consideration and depth of analysis to issues discussed at meetings and that he/she always feels open to express his/her opinions and points of view on given matters, whenever appropriate.

The Director shall ensure objectivity of analysis to ensure that his/her points of view are not unduly swayed by the Chairman, Committee heads, or other members and instead are based on facts and objective consideration of all matters.

The Director shall ensure that he/she takes individual responsibility to stay educated and informed on any subjects, topics, or matters related to the Company or industry in general.

The Director shall voice concern to the Chairman or other members as appropriate, if he/she feels that any of the terms discussed in these Terms of Reference are not being realized or have been compromised for any reason.

After the ship was finished, I loaded

Onto her whatever I had from silver and gold..

Seeds of all living creatures.. All my family,

The beasts of the field

The wild creatures of the plain.. All the craftsmen..

Focused on Growth

Board Members The following members served on the Board of Directors during 2010: 1.

Manssour Aboukhamseen

Sara Akbar

Chief Executive Officer

Jason Selch

Non-Executive Independent Director

Tareq Al Wazzan

Non-Executive Director

Mohammad Algharaballi

Non-Executive Director

Ashour Habeeb

Non-Executive Director 1

Walter Brandhuber

8. 1

Executive Chairman

Rabih Soukarieh

Non-Executive Director

Rabih Soukarieh replaced Walter Brandhuber on the Board in October 2010

Board Meetings The Board met six times in 2010 on the following dates: Sl. No

Meeting Ref No.

Date

Place

1/2010

23 March 2010

Kuwait

2/2010

11 May 2010

Kuwait

3/2010

30 May 2010

Kuwait

4/2010

09 August 2010

Kuwait

5/2010

24 October 2010

Kuwait

6/2010

14 November 2010

Kuwait

The attendance of Board and Board Committee members during 2010 was as follows: Board (6 Meetings)

Audit Committee (3 Meetings)

Compensation Committee (3 Meetings)

Manssour Aboukhamseen

6/6

Sara Akbar

6/6

Jason Selch

6/6

3/3

Tareq Al Wazzan

5/6

3/3

Mohammad Algharaballi

6/6

3/3

Ashour Habeeb

5/6

3/3

2/3

Rabih Soukarieh

1/1

Walter Brandhuber

5/5

Board members attendance at the Board meetings in 2010 was 95%

Board Committees To facilitate transparency in the management of the Company’s business and encourage participation by the Board members, the Board has formed three Committees, namely the Audit Committee, Compensation Committee and the Nomination Committee. The members and Chair of the Committees are appointed, reappointed and replaced by the Board by simple majority. The Corporate Governance Committee that previously existed was integrated into a new Nomination Committee in August 2010. The Committees are made up of three members each, constituting only the non-executive Directors on the Board. Audit Committee

Compensation Committee

Nomination Committee

Chairman

Jason Selch

Mohammad Algharaballi

Ashour Habeeb

Members

Tareq Al Wazzan

Jason Selch

Tareq Al Wazzan

Ashour Habeeb

Rabih Soukarieh

Audit Committee The Board Audit Committee is responsible for assisting the Board in fulfilling its fiduciary responsibilities to provide oversight with respect to: (a) The integrity of the Company’s financial statements and other financial information provided to stockholders and others; (b) The Company’s system of internal controls; (c) The engagement and performance of the independent auditors; (d) The performance of the internal audit function; and (e) Compliance with legal requirements and Company policies regarding ethical conduct In so doing, the Committee provides a focal point for free and open communications amongst the non-Executive Directors, the Company’s management, the internal auditors and the independent auditors. The Executive Directors do not attend the Audit Committee meetings.

Brother saw no brother from heaven, No mortal could any longer be seen Even the gods were horrified..

They cowered like dogs by the celestial wall..

Focused on Growth

The Audit Committee met three times during 2010. Key items considered at these meetings were: 1. Review of 2010 Interim Accounts 2. Audit Plan for 2010 Financials 3. Proposed 2010 Reserves Audit Process 4. Economic Assumptions 5. Appointment of Internal Auditor In addition to the above, the Audit Committee has been delegated with an internal control function, as follows: a) Reviewing with the management and the independent auditors the adequacy of the Company’s internal controls, including computerized information system controls and security. b) Reviewing with management the scope and results of management’s evaluation of disclosure controls and assessment of internal controls over financial reporting, including the related certifications to be included in the Company’s periodic reports. c) Reviewing with the independent auditors the scope and results of their review of management’s assessment of internal controls over financial reporting.

e) Developing for the Board’s approval and annually reviewing the chart of authorities and delegation of authorities to management. f) Considering possible conflicts of interests of Directors and any related party transactions of Directors and making relevant proposals to the Board. g) Overseeing the development and implementation of a Board induction process for new Directors and a program of continuing Director development as required. h) Developing a process for evaluating Board effectiveness and coordinate the annual Board effectiveness evaluation. i) Reviewing corporate governance policies and practices throughout the Company and make relevant proposals to the Board to improve their effectiveness.

d) Reviewing the Company’s overall Sharia compliance.

j) Monitoring trends and best practices in corporate governance and nomination practices in order to properly discharge its duties.

e) Reviewing and approving the Company’s financing / investment proposals, as and when required.

k) Performing any other activities relevant to this Committee and its charter, at the request of the Board.

Nomination Committee

The first meeting of the Nomination Committee took place on 20 April 2011, at which the Committee took the initiative of establishing criteria for the evaluation of Board member performance in 2011.

In 2010, the Board established a Nomination Committee to assist the Board in ensuring sound governance practices of the organization. Key authorities and responsibilities of the Nomination Committee include: a) Preparing the criteria and procedure for selecting Board members and by which the Board makes Nomination for members. b) Assessing, at least once a year, the size and composition of the Board and the performance of individual Board members and report their findings to the Board. c) Making proposals for the reelection or termination of Board members and, if required, the appointment of replacement members.

d) Reporting to the Board on the advisability of permitting a member of the Board to become a member of another Company’s Board and developing a policy on whether and how to cap the number of Directorships a Director may hold.

Compensation Committee The Board Compensation Committee is responsible for reviewing and approving, on behalf of the Board, management recommendations regarding all forms of compensation to be provided to the executive officers and directors of the Company, including stock compensation, and all salary, bonus and stock compensation guidelines to all employees. Key responsibilities of the Compensation Committee include: a) Reviewing with Company management and approving the compensation policy for executive officers and directors of the Company, and such other managers of the Company as directed by the Board; b) Reviewing with Company management and approving all forms of compensation to be provided to the executive officers of the Company; c) Acting as administrator of the Company’s compensation plans, including granting awards to executive officers and directors, reviewing aggregate awards for other eligible individuals and determining the terms and conditions of such awards. The Committee shall also make recommendations to the Board of Directors with respect to amendments to the plans and changes in the number of shares reserved for issuance under such plan;

d) Evaluating the performance of the Chairman and the Chief Executive Officer (and such other executive officers as the Committee deems appropriate) in light of the Company’s current business environment and the Company’s strategic objectives; e) Reviewing with Company management and approving recommendations with regard to aggregate salary budget and guidelines for all Company employees; f) Evaluating the need for, and provisions of, employment contracts or severance arrangements for the Executive officers. The Compensation Committee met three times during 2010. Key items considered at these meetings were: 1. 2009 Bonus computation; 2. Proposal for Remuneration of Board and Committee members; 3. Review of Employee Bonus Scheme and Computation Mechanism The Executive Directors do not attend the Compensation Committee meetings.

Responsibility Statement of the Directors We confirm on behalf of the Board of Directors that to the best of our knowledge: (a) The financial statements that have been prepared in accordance with the applicable set of IFRS accounting standards give a true and fair view of the assets, liabilities, financial position and profit and loss of the Company and the undertakings included in the consolidation taken as a whole; and (b) The management report, comprising the Message from the Chairman and Managing Director, Chief Executive Officer’s Report, Risk Management Report and the Corporate Governance Report included in this 2010 Annual Report includes a fair review of the performance of the business and the principal risks and uncertainties that it faces. For and on behalf of the Board of Directors,

Manssour Aboukhamseen Chairman & Managing Director

Jason Selch Director and Chairman – Board Audit Committee

Focused on Growth

Remuneration Report Board Directors’ Remuneration: The Kuwait Commercial Law and the Company’s Articles of Association stipulate that in any year in which no dividends are distributed to the shareholders, Board members’ remuneration, for their services, shall be limited to a maximum of KD1,000 per annum. In 2010, the Directors were paid the following remuneration for their services: Director

2010 in US$

Manssour Aboukhamseen

3,500

Jason Selch

3,500

Sara Akbar

3,500

Tareq Al Wazzan

3,500

Mohammad Algharaballi

3,500

Ashour Habeeb

3,500

Walter Brandhuber

3,500

Rabih Soukarieh

3,500

Assuming 1KD = US$3.50 The Directors are entitled to receive reimbursement for reasonable expenses that are incurred by them and that are necessary for the performance of their duties to the Company. Expenses may be reimbursed by the Company on presentation of an invoice or voucher indicating the amount of the expense, the nature of the expense and the business purposes involved. The expenses anticipated include (i) transportation costs, including one round-trip business class airline ticket, between the Director’s home town and the location of any meeting of the Board, shareholders or committee that the Director is required to attend, (ii) lodging at a five-star hotel. Any Board member who needs to travel internationally to attend a meeting is paid an honorarium of US$500 per meeting.

Executive Directors and Executive Management Remuneration* 2010 in US$

2009 in US$

% Change

Manssour Aboukhamseen, Executive Chairman

376,250

Nil

Sara Akbar, CEO

336,350

Nil

Mohammad Al Howqal, COO

304,850

Nil

Roger Phillips, CFO

325,850

Nil

* includes fixed salary, housing and transport allowances Other benefits: Health Insurance for self and family and annual air tickets allowance of US$6,650

Executive Directors and Executive Management Service Contracts Date of Contract

Term

Notice period by Company

Manssour Aboukhamseen

7 June 2006

Three years. Post 3 years - annual rolling contract

90 days

Sara Akbar

7 June 2006

Three years. Post 3 years - annual rolling contract

90 days

Mohammad Al Howqal

14 May 2006

Three years. Post 3 years - annual rolling contract

90 days

Roger Phillips

19 August 2007

Three years. Post 3 years - annual rolling contract

90 days

Employee Incentive Scheme The objectives of the Employee Incentive Scheme (EIS) are to reward Kuwait Energy’s employees for sustained good performance and to reward for both short and medium term business objectives by a combination of cash and share rewards. While the focus of the scheme is on annual performance, the scheme is designed in such a manner that the ‘benefits’ are received by the participants in a staggered manner over a three year period.

I brought out a swallow and set it free... The swallow, flew back to the ship... I brought out a crow and set it free... The crow found a branch and did not return...

Focused on Growth

Eligibility This scheme is applicable to all employees of the Kuwait Energy group of companies. Where the employee has joined before 1 October of a given year, he/she may be deemed eligible for a prorated amount of shares as per the scheme in effect that year. Employees who have joined on or after 1 October will not be eligible for shares for that given sub-scheme. Annual Incentive Entitlement 40% of the employeesâ&#x20AC;&#x2122; incentive entitlement will be paid out in cash as annual incentive and 60% will be converted into shares at the fair value (if the Company is not listed) or market price (after listing). The EIS shares will not be eligible for dividends or bonus shares until the shares have been vested. The allocated EIS shares will vest in a staggered manner as follows: - 30%, 30%, and 40% shares after one, two, and three years respectively

Executive Directors and Executive Management EIS Details of cash and shares bonuses granted to Executive Directors and Executive Management through EIS: No. of shares granted (subject to vesting)

Cash (in US$) 2010

2009

2010

2009

Manssour Aboukhamseen

56,689 (paid in 2011)

61,000 (paid in 2010)

71,789

90,974

Sara Akbar

56,689 (paid in 2011)

61,000 (paid in 2010)

71,789

90,974

Mohammad Al Howqal

56,689 (paid in 2011)

54,432 (paid in 2010)

71,789

79,624

Roger Phillips

56.689 (paid in 2011)

62,760 (paid in 2010)

71,789

88,156

Mohammad Algharaballi Director and Chairman - Board Compensation Committee

The snake smelled, its fragrance It crawled up and carried it away.

Risk Management Report During the fourth quarter of 2010, Kuwait Energy established a Risk Management function to further strengthen its corporate governance in preparation for an IPO. We believe that the identification and management of key potential risks will underpin the successful delivery of our business and strategic objectives as an independent oil and gas Company. As of December 2010, Kuwait Energy has adopted a risk management framework and policy, and risk registers for major projects, to strengthen project leadersâ&#x20AC;&#x2122; decision-making. Kuwait Energy believes that each project in each of its many diverse countries of operation holds a unique combination of risks. However, the Company has identified the principal risks which pervade its operations and established mitigation strategies. Risk management serves to strengthen the balance between ambition and practicality regarding our portfolio through a risk assessment on a case-by-case basis with risk reporting structures. Risk management education is offered at all levels of the Company to ensure a standardized level of risk awareness for all employees. Looking forward into 2011, Kuwait Energy expects to have a risk management process fully embedded into all aspects of planning, project development and management. Principal Risks and Uncertainties Strategic Risks Risks that impact the Companyâ&#x20AC;&#x2122;s ability to create shareholder value and meet shareholder expectations are: RISK

MITIGATION

Capital allocation

Consistent 80/20 capital allocation with 80% allocated to discovered reserves and resources and 20% allocated to exploration activities. The annual budget is approved by the Board which reviews capital allocation according to the 80/20 guidance.

Appropriate portfolio mix

The Company continues to maintain a diverse portfolio of assets which are spread across the Middle East/ North Africa and Eastern Europe. The Company has determined a clear process to review acquisitions according to Company goals and risk appetite.

Identification and mitigation of risk

The Companyâ&#x20AC;&#x2122;s risk profile and its risk management approach are discussed and reviewed annually by senior management. Comprehensive risk management processes and procedures continue to be improved in order to build the risk awareness for all projects and enhance mitigation strategies.

Acquisitions and divestments in line with growth strategy

The Company and its advisors have significant experience which they apply to the assessment of potential growth areas. The Company has determined its growth strategy to be focused on the Middle East/ North Africa region and business growth will follow this guidance.

Macroeconomic issues

Consistent monitoring of regional economic, political, and energy markets through market analysis by reputed third party experts when needed.

Focused on Growth

Operational Risks Risks that impact exploration, development and production and involve staff, contractors, communities, suppliers or events that impact reputation, cause cost overruns or revenue losses, are: RISK

Oil and gas resource estimates

MITIGATION

Whilst the Company continues to enhance the quality and quantity of data it uses to assess recoverable resources, calculations contain uncertainties which are inherent in reservoir geology, and the seismic and well data available. The Company seeks to enhance its technological expertise continually. In 2010, Kuwait Energy signed a technology sharing agreement with Schlumberger in an effort to address this issue.

Government regulations

Changes in laws and regulations could potentially increase or decrease the cost of development or exploration projects. Strong relationships with government officials on the ground empower the Company to anticipate changes and advocate for consistency in its contracts with government entities.

Political instability

Political stability in countries of operations is of paramount concern for Kuwait Energy, which takes such risk into account during acquisition bids. Additionally, the Company justifies its exposure in some countries through spreading this exposure across other diverse assets and through JV arrangements.

HSE

The Company’s risk management and HSE functions collaborate to evaluate safety and security risks through a rigorous assessment process to determine mitigation strategies. The Company considers local buy-in to be a defining feature of its security approach and one of the advantages to being an indigenous Company. The Company is taking additional measure to increase its ability to ensure HSE compliance among its contractors.

Relations with local stakeholders

The Company has implemented social engagement programs in Egypt, Ukraine and Kuwait including the Kuwait Science Fair and the Professional Women’s Network of Kuwait. The Company consistently looks for additional opportunities to impact local communities positively.

Government relations for license renewal

Company staff work directly and indirectly with government stakeholders in order to clarify responsibilities and set realistic guidelines. The Company evaluates its acquisition and commercial processes regularly to ensure compliance standards for new projects are met by the Company and its contractors.

Financial Risks Risks that impact access to funding in order to meet financial obligations are: RISK

MITIGATION

Currency rate fluctuations

The Company’s policy is to conduct and manage its business in US dollars which is its reporting currency. Company subsidiaries use US dollars with only small amounts held in other currencies in order to comply with local regulations and meet immediate operating or administrative expenses.

Access to capital

Kuwait Energy’s future depends on additional financing which cannot always be guaranteed. Therefore, the Company has maintained strong banking and equity relationships. The Company does not anticipate major financing challenges beyond the inherent risks experienced by sector peers.

Oil price volatility

Whilst not under the control of the Company, this risk is mitigated through hedging a portion of production against this risk.

Corporate Social Responsibility Report Overview Kuwait Energy is a strong believer that the cornerstones of good Corporate Social Responsibility (“CSR”) behaviour should be placed at the heart of any professional organization. Kuwait Energy is committed to a sustainable economic development by making a positive difference in areas such as employee and community rights, training, health and safety, the environment and good business conduct. We maintain the highest possible safety standards, respect the environment and work very closely with our communities to address important aspects of local need and ensure Kuwait Energy contributes to the areas where it operates. We are committed to growing our reputation as a responsible and trustworthy Company in the eyes of all our stakeholders. Kuwait Energy employs and trains a large number of local people and at year-end 2010, 70% of our employees were local to the country of operation. Activities Kuwait Energy’s CSR activities incorporate humanitarian assistance and a wide array of community initiatives in the Company’s areas of operations. In 2010, Kuwait Energy completed its third consecutive year of involvement in the Kuwait Science Fair, which generates student interest in maths and science from an early age. At a community level, Kuwait Energy implemented health and social programmes including the renovation of hospitals and transport infrastructure, the provision of heating and water supply systems and the coordination of recycling campaigns.

Gilgamesh sat down and wept. His tears flowed down his cheeks. He took the hand of Urshanabi, the Boatman: For whom have my hands laboured, Urshanabi? For whom has my heart’s blood been spent? I have not obtained any advantage for myself.

In Egypt, in association with the Al-Shoban Al Moslemeen foundation, Kuwait Energy donated food to the poor in the Ras Gharib area and in coordination with certified charities sponsored the education of orphaned children and for the provision of medical treatment. In association with Resala Charity, Kuwait Energy is sponsoring the education of underprivileged preparatory students in Ras Gharib in what is called “Kuwait Energy’s Preparatory Class”. Based on the students’ monthly report, the families of the top five students will be given a financial reward as an encouragement to them to care for their children’s education. Kuwait Energy is supporting the AMAR International Charitable Foundation in its first steps into the Republic of Yemen. AMAR International Charitable Foundation is widely known in the Arabian Peninsula for its 20 years of work with the governments of the Republic of Iraq and the Republic of Lebanon. Kuwait Energy is a Founder Member of AMAR’s sister organisation, the IBBC, which is a charitable company that promotes business, education and training throughout the region. The Yemen initiative aims to help reduce maternal and child mortality in the community through preventative medicine and vaccinations, to decrease the cases of common preventable diseases, and to provide paid work opportunities to local employees. In Somalia, Kuwait Energy provided support to a project studying the drilling of new water wells and rehabilitating existing water wells, in the regions of Somaliland and Puntland to help during droughts and dry seasons. Other CSR initiatives included community work in the Chornuki, Mirgorod and Sencha regions of Ukraine.

Focused on Growth

Kuwait Energy Five Year Summary As at 31 December

Units

2006

2007

2008

2009

2010

Product sales revenue

US$ million

2.4

25.9

90.8

88.3

141.8

Cost of sales

US$ million

1.7

10.1

71.0

70.8

102.9

Operating cash flow

US$ million

1.4

17.9

50.8

51.1

85.6

Net profit

US$ million

1.0

20.6

29.9

5.6

21.9

Total assets

US$ million

87.2

239.6

577.7

680.9

740.9

Debt

US$ million

28.0

53.0

Total equity

US$ million

84.9

193.7

525.7

580.1

631.3

Proven plus probable WI reserves

mmboe

18.5

34.1

43.4

51.2

48.8

WI Production

mmboe

0.2

1.2

3.0

4.2

4.8

Development wells

Workovers

19*

Wells drilled

Expenditure

US$ million

4.8

13.8

31.0

41.6

Financial performance

Financial position

Reserves and production

Exploration

* Capitalised workovers only

Enjoy your life,

Spend it in happiness, not despair

Savor your food; make each of your days a delight.

Bathe yourself...

Wear bright clothes that are sparkling clean Let music and dancing fill your house

Love the child who holds you by the hand,

And give your wife pleasure in your embrace. That is the best way for a man to live.

Consolidated Financial Statements and Independent Auditorsâ&#x20AC;&#x2122; Report For The Year Ended 31 December 2010

INDEX Independent auditors’ report • 36 - 37 Consolidated statement of income for the year ended 31 December 2010 • 38 Consolidated statement of comprehensive income for the year ended 31 December 2010 • 39 Consolidated statement of financial position as at 31 December 2010 • 40 Consolidated statement of changes in equity for the year ended 31 December 2010 • 41 - 42 Consolidated statement of cash flows for the year ended 31 December 2010 • 43 Notes to the consolidated financial statements • 44 - 81

Deloitte & Touche, Al-Fahad, Al-Wazzan & Co.

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Fahad Al-Salem Street Salhia Complex, Entrance 2 P.O. Box 23049, Safat 13091 Kuwait City, Kuwait

Ahmed Al-Jaber Street Dar Al-Awadi Complex P.O. Box 20174, Safat 13062 Sharq, Kuwait

Tel: +965 2243 8060 Fax: +965 2245 2080

Tel: +965 2240 8844 Fax: +965 2240 8855

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INDEPENDENT AUDITORS’ REPORT The Shareholders Kuwait Energy Company K.S.C. (Closed) Kuwait Report on the consolidated financial statements We have audited the accompanying consolidated financial statements of Kuwait Energy Company K.S.C. (Closed) (“the Parent Company”) and subsidiaries (together referred to as “the Group”), which comprise the consolidated statement of financial position as at 31 December 2010, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Management’s responsibility for the consolidated financial statements The Parent Company’s management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatements, whether due to fraud or error. Auditors’ responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the Group’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Group as at 31 December 2010, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

Report on Other Legal and Regulatory Requirements We are also of the opinion that the consolidated financial statements give all the information required by the Commercial Companies’ Law and the Parent Company’s Articles of Association, proper books of account were kept by the Parent Company, the stocktaking was carried out in accordance with recognised principles and the accounting information provided in the Board of Directors report is in agreement with the books. We have obtained all the information we considered necessary for the satisfactory performance of our audit. We further believe, according to the information given to us, that no violations of the Commercial Companies’ Law or the Parent Company’s Articles of Association have occurred during the year ended 31 December 2010, which might materially affect the Group’s activities or its financial position.

Jassim Ahmad Al-Fahad Licence No. 53-A Al-Fahad, Al-Wazzan & Co. Deloitte & Touche

21 April 2011

Qais M. Al-Nisf License No. 38-A Moore Stephens Al Nisf & Partners Member of Moore Stephens International

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME For the year ended 31 December 2010

Notes

2010

2009

USD 000’s

Revenue

141,772

88,312

Cost of sales

(102,860)

(70,761)

38,912

17,551

Gross profit Exploration expenditure written off

Net impairment losses

General and administrative expenses

Operating profit/(loss) Loss on held for trading derivative

Other income

Foreign exchange loss Finance costs

Profit before tax, provisions for contribution to Kuwait Foundation for the Advancement of Sciences (“KFAS”), Zakat and Directors’ fees Taxation relating to subsidiaries

(1,084)

(19,952)

(20,226)

18,960

(8,361)

(675) 4,222

10,801

(463)

(485)

(1,818)

(691)

20,226

1,264

2,129

4,425

Provision for contribution to KFAS

(201)

(51)

Zakat

(227)

(58)

(25)

(27)

Directors’ fees Profit for the year

21,902

5,553

Earnings per share - Basic (cents)

2.07

0.53

- Diluted (cents)

2.07

0.51

The accompanying accompanying notes notes set set out out on on pages pages 44 9 toto46 The 81form forman anintegral integralpart partofofthese theseconsolidated consolidated financial statements. statements. financial

(4,602)

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 December 2010

Note Profit for the year Other comprehensive income Exchange differences on translation of foreign operations

2010

2009

USD 000â&#x20AC;&#x2122;s

21,902

5,553

(628)

Cash flow hedge - Net change in fair value

(3,662)

Other comprehensive loss for the year

(3,596)

Total comprehensive income for the year

18,306

Theaccompanying accompanyingnotes notes set set out out on on pages pages 44 9 toto46 The 81form forman anintegral integralpart partof ofthese theseconsolidated consolidated financial statements. statements. financial

(628) 4,925

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 31 December 2010

Notes

2010 USD 000â&#x20AC;&#x2122;s

2009 USD 000â&#x20AC;&#x2122;s

ASSETS Non-current assets Intangible exploration and evaluation assets

242,586

229,176

Property, plant and equipment

277,983

276,404

Held to maturity investment

49,950

Deferred tax asset

9,146

5,546

529,715

561,076

Current assets Inventories

17,862

16,043

Trade and other receivables

135,199

74,126

3,483

58,092

26,157

211,153

119,809

740,868

680,885

Liquid investments 20

Cash and bank balances Total assets EQUITY AND LIABILITIES Equity Share capital

406,452

372,330

Share premium

157,163

134,059

Statutory reserve

7,446

5,210

Voluntary reserve

7,446

5,210

Share-based compensation reserve

1,093

431

25,000

Shares to be issued 9

Cash flow hedging reserve

(3,662)

Foreign currency translation reserve

(8,632)

(8,698)

Retained earnings

63,996

46,566

631,302

580,108

Total equity Non-current liabilities Long-term loans

53,000

20,000

Long-term provisions

1,790

1,699

54,790

21,699

Current liabilities Trade and other payables

50,439

30,212

Derivative financial instruments

4,337

Current portion of long-term loans

48,866

54,776

79,078

Total liabilities

109,566

100,777

Total equity and liabilities

740,868

680,885

Manssour Aboukhamseen Chairman & Managing Director Theaccompanying accompanying notes notes set set out out on on pages pages 44 9 toto46 The 81form forman anintegral integralpart partofofthese theseconsolidated consolidated financial statements. statements. financial

payments (See note 24)

Balance at 31 December 2010

157,163

(1,410)

12,562

11,856

134,059

7,446

2,236

5,210

USD 000’s

reserve

Statutory

7,446

2,236

5,210

USD 000’s

reserve

Voluntary

1,093

886

(224)

431

USD 000’s

reserve

compensation

Share-based

(25,000)

25,000

USD 000’s

issued

Shares to be

(3,662)

USD 000’s

reserve

hedging

Cash flow

Foreign

(4,472)

(8,632)

63,996

21,902

46,566

USD 000’s

earnings

Retained

(8,698)

USD 000’s

reserve

translation

currency

Theaccompanying accompanyingnotes notesset set out out on on pages pages 44 9 toto46 The 81form forman anintegral integralpart partof ofthese theseconsolidated consolidatedfinancial financialstatements. statements.

406,452

Transfer to reserves

Recognition of share-based

12,438

128

21,556

372,330

USD 000’s

Share issue costs

combination

Issue of shares in a business

incentive scheme (See note 24)

Issue of shares under employee

Issue of share capital (See note 21)

for the year

Total comprehensive income

for the year

Other comprehensive loss

Profit for the year

Balance at 1 January 2010

premium

capital

For the year ended 31 December 2010

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES

Total

631,302

886

(1,410)

33,412

18,306

(3,596)

21,902

580,108

USD 000’s

Balance at 31 December 2009

payments (See note 24)

Recognition of share-based

Transfer to reserves

combination

Shares to be issued for business

Share issue costs

bonus scheme

Issue of shares under joining

incentive scheme (See note 24)

Issue of shares under employee

Issue of share capital (See note 21)

for the year

Total comprehensive income

year

Other comprehensive loss for the

Profit for the year

Balance at 1 January 2009

USD 000’s

134,059

(89)

11,875

5,210

569

4,641

USD 000’s

reserve

Statutory

5,210

569

4,641

USD 000’s

reserve

Voluntary

Share-based

431

345

(91)

177

USD 000’s

reserve

compensation

25,000

USD 000’s

issued

Shares to be

(8,698)

(628)

(8,070)

USD 000’s

reserve

translation

Foreign currency

accompanying notes pages formananintegral integralpart partofofthese theseconsolidated consolidatedfinancial financialstatements. statements. TheThe accompanying notes set set outout on on pages 44 9toto8146form

372,330

635

11,759

122,247

premium

capital

359,871

For the year ended 31 December 2010

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (CONTINUED)

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES

46,566

(1,138)

5,553

42,151

USD 000’s

earnings

Retained

580,108

345

25,000

(89)

635

23,634

4,925

(628)

5,553

525,658

USD 000’s

Total

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 December 2010

Notes OPERATING ACTIVITIES Profit before tax, provision for contribution to KFAS, Zakat and directors’ fees Adjustments for: Depreciation, depletion and amortisation Exploration expenditure written off Net impairment losses Impairment losses recognised on trade receivables Gain on farm out of working interests Loss on held for trading derivative Loss of sale of other assets Amortisation of discount on held to maturity investment Finance costs Interest income Share-based compensation expense Provision for retirement benefit obligation Operating cash flow before movement in working capital Increase in trade and other receivables Increase in inventories Increase in deferred tax asset Increase in trade and other payables Increase in derivative financial instruments Payment of KFAS Tax paid Directors’ fees paid Payment of retirement benefit obligation Net cash generated by operating activities INVESTING ACTIVITIES Purchase of intangible exploration and evaluation assets Purchase of property, plant and equipment Purchase of other fixed assets Proceeds from sale of held to maturity investment Proceeds from farm out of working interests Proceeds from disposal of other assets Acquisition of subsidiaries Decrease / (increase) in liquid investments Interest received Net cash used in investing activities FINANCING ACTIVITIES Proceeds from issue of share capital Net movement in long-term loans Finance costs paid Net cash generated by financing activities Effect of foreign currency translation Net increase / (decrease) in cash and bank balances Cash and bank balances at beginning of the year Cash and bank balances at end of the year

Issue of shares under joining bonus scheme Issue of shares under employee incentive scheme

2009

USD 000’s

20,226

1,264

60,417 1,329 (181) 675 132 1,818 (80) 886 348 85,570 (38,783) (1,834) (3,600) 18,113 4,337 (51) (1,010) (25) 62,717

42,802 4,602 1,084 4,027 (75) 691 (3,722) 345 129 51,147 (10,727) (6,866) (5,546) 6,703 (274) (946) (27) (4) 33,460

(41,614) (64,413) (3,612) 13,256 8,683 7 3,483 2,256 (81,954)

(40,991) (50,118) (2,503) 1,055 (3,483) 2,800 (93,240)

32,002 20,828 (1,724) 51,106 66 31,935 26,157 58,092

23,545 27,840 (647) 50,738 (628) (9,670) 35,827 26,157

(36,694)

NON-CASH TRANSACTIONS FINANCING ACTIVITIES Held to maturity investment set-off with long term loans

2010

635

224

The on pages pages 944toto4681form formananintegral integralpart partofofthese theseconsolidated consolidated The accompanying accompanying notes notes set set out out on financial statements. statements. financial 8

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 1.

INCORPORATION AND ACTIVITIES Kuwait Energy Company K.S.C. (Closed) (“the Parent Company”) is a Closed Kuwaiti Shareholding Company incorporated on 1 August 2005 in accordance with the Commercial Companies Law in the State of Kuwait. The Parent Company and its subsidiaries (together referred to as “the Group”) have been established with the following objectives: • Conduct feasibility studies of oil and natural gas industries. • Exploration of crude oil and natural gas outside Kuwait after obtaining necessary licences from the Ministry of Energy. • Trade in petroleum and its derivatives through importing and exporting oil and its derivatives to and from Kuwait under the consent of Ministry of Energy and Kuwait Petroleum Corporation. The Group does not currently trade in petroleum or its derivatives. • Participate in the incorporation and ownership of companies involved in the oil and gas industry. • Sell and purchase shares in companies of similar objectives. • Utilise the financial surpluses of the Group by investing them in portfolios by specialised companies and entities. • Own movables and real estate required to conduct its operations within the limits permitted by law. The Parent Company’s address is Salem Al Mubarak Street, Layla Tower, Block 49, Building No. 35, 10 th Floor, P.O. Box 5614, Salmiya-22067, Salmiya, Kuwait. These consolidated financial statements were approved for issue by the Board of Directors of the Parent Company on 21 April 2011 and are subject to the approval of the Annual General Assembly of the shareholders.

ADOPTION OF REVISED STANDARDS Revisions and amendments to IFRS adopted in the current year During the year, the Group has adopted the following revisions and amendments to International Financial Reporting Standards (“IFRS”) issued by International Accounting Standards Board which are relevant to and effective for the Group’s consolidated financial statements beginning on or after 1 January 2010. Standards • IFRS 3 (Revised) Business Combinations • IFRS 8 (Revised) Operating Segments • IAS 1 (Revised) Presentation of Financial Statements • IAS 7 (Revised) Statement of Cash Flows • IAS 17 (Revised) Leases • IAS 27 (Revised) Consolidated and Separate Financial Statements • IAS 31 (Revised) Interests in Joint Ventures • IAS 36 (Revised) Impairment of Assets • IAS 38 (Revised) Intangible Assets • IAS 39 (Revised) Financial Instruments: Recognition and Measurement The adoption of these Standards have not led to any changes in the Group’s accounting policies except for the adoption of IAS 27 (Revised) Consolidated and Separate Financial Statements and IFRS 3 Business Combinations as described below. IFRS 3 (Revised) Business Combinations IFRS 3 (2008) has been applied in the current year prospectively to business combinations for which the acquisition date is on or after 1 January 2010 in accordance with the relevant transitional provisions. The revised standard requires acquisition-related costs to be accounted for separately from the business combination, generally leading to those costs being recognised as an expense in the consolidated statement of income as incurred, whereas previously they were accounted for as part of the cost of the acquisition. It also allows a choice on a transaction-by-transaction basis for the measurement of non-controlling interests at the date of acquisition (previously referred to as ‘minority interests’) either at fair value or at the non-controlling interests' share of recognised identifiable net assets of the acquiree. If the business combination is achieved in stages, the acquirer’s equity interest held prior to control being obtained are remeasured to fair value at the date of obtaining control, and any gain or loss is recognised in the consolidated statement of income.

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 2.

ADOPTION OF REVISED STANDARDS (CONTINUED) Revisions and amendments to IFRS adopted in the current year (Continued) IAS 27 (Revised) Consolidated and Separate Financial Statements The revised Standard has specifically, affected the Group's accounting policies regarding changes in ownership interests in its subsidiaries that do not result in loss of control. Previously, increases in interests in existing subsidiaries were treated in the same manner as the acquisition of subsidiaries, with goodwill or a bargain purchase gain being recognised, when appropriate; for decreases in interests in existing subsidiaries that did not involve a loss of control, the difference between the consideration received and the adjustment to the noncontrolling interests was recognised in the consolidated statement of income. Under IAS 27 (2008), all such increases or decreases are dealt with in equity, with no impact on goodwill or the consolidated statement of income. Standards in issue not yet effective At the date of authorisation of these consolidated financial statements, the following Standards applicable to the Group were in issue but not yet effective: Effective for annual periods beginning on or after • IAS 1 (Revised) Presentation of Financial 1 January 2011 Statements Effective for annual periods beginning on or after • IAS 12 (Revised) Income Taxes 1 January 2012 Effective for annual periods beginning on or after • IAS 24 (Revised) Related Party Disclosures 1 January 2011 Effective for annual periods beginning on or after • IAS 27 (Revised) Consolidated and Separate 1 July 2010 Financial Statements Effective for annual periods beginning on or after • IAS 32 (Revised) Financial Instruments: 1 February 2010 Presentation • IAS 34 (Revised) Interim Financial Reporting Effective for annual periods beginning on or after 1 January 2011 • IFRS 3 (Revised) Business Combinations Effective for annual periods beginning on or after 1 July 2010 Effective for annual periods beginning on or after • IFRS 7 (Revised) Financial Instruments: 1 January 2011 Disclosures Effective for annual periods beginning on or after • IFRS 9 Financial Instruments 1 January 2013 Effective for annual periods beginning on or after • Improvements to IFRSs issued in 2010 1 July 2010 and 1 January 2011, as appropriate Management of the Group anticipates that the adoption of these Standards where applicable and once they become effective in future periods will not have a material financial impact on the consolidated financial statements of the Group in the period of initial application.

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 3.

SIGNIFICANT ACCOUNTING POLICIES Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). Basis of preparation These consolidated financial statements have been prepared on the historical cost basis except for the measurement at fair value of share-based payments and certain financial instruments. The accounting policies have been applied consistently by the Group and are consistent with those used in the previous year except for the adoption of new and revised Standards (See note 2). These consolidated financial statements are presented in US Dollars (“USD”), which is the Parent Company’s functional and presentation currency, rounded off to the nearest thousand. The principal accounting policies are stated below. Basis of consolidation These consolidated financial statements incorporate the financial statements of the Parent Company and entities controlled by the Parent Company (its subsidiaries) as detailed in note 30. Control is achieved where the Parent Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The results of subsidiaries acquired or disposed of during the year are included in the consolidated statement of income from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group. All intra-group transactions, balances, income and expenses are eliminated in full on consolidation. Going concern The directors have, at the time of approving these consolidated financial statements, a reasonable expectation that the Parent Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing these consolidated financial statements. Business combinations Acquisitions of subsidiaries and businesses are accounted for using the acquisition method. The cost of the acquisition is measured at the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination the acquirer measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition related costs are recognised in the consolidated statement of income as incurred. Where appropriate, the cost of acquisition includes any asset or liability resulting from a contingent consideration arrangement, measured at its acquisition-date fair value. Subsequent changes in such fair values are adjusted against the cost of acquisition where they qualify as measurement period adjustments. All other subsequent changes in the fair value of contingent consideration classified as an asset or liability are accounted for in accordance with relevant IFRSs. Changes in the fair value of contingent consideration classified as equity are not recognised.

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 3.

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Business combinations (continued) The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 (revised 2008) are recognised at their fair value at the acquisition date, except for non-current assets (or disposal groups) that are classified as held for sale in accordance with “IFRS 5 Non-current Assets Held for Sale and Discontinued Operations”, which are measured at fair value less costs to sell. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period (see below), or additional assets or liabilities are recognised, to reflect new information obtained about facts and circumstances that existed as at the acquisition date that, if known, would have affected the amounts recognised as at that date. The measurement period is the period from the date of acquisition to the date the Group receives complete information about facts and circumstances that existed as at the acquisition date and is subject to a maximum of one year. Where a business combination is achieved in stages, the Group’s previously-held interests in the acquired entity are remeasured to fair value at the acquisition date (i.e. the date the Group attains control) and the resulting gain or loss, if any, is recognised in the consolidated statement of income. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognised in equity are reclassified to the consolidated statement of income, where such treatment would be appropriate if that interest is disposed off. In accordance with normal oil exploration and production industry practice, identifiable assets and liabilities are ascribed fair values, and the balance of the fair value of the consideration given being allocated as the fair value attributable to the oil and gas properties and related hydrocarbon reserves and therefore, goodwill does not normally arise on acquisitions. Interests in joint ventures A joint venture is a contractual arrangement whereby the Group and other parties undertake an economic activity that is subject to joint control that is when the strategic financial and operating policy decisions relating to the activities of the joint venture require the unanimous consent of the parties sharing control. Where a Group entity undertakes its activities under joint venture arrangements directly, the Group’s share of jointly controlled assets and any liabilities incurred jointly with other venturers are recognised in the financial statements of the relevant entity and classified according to their nature. Liabilities and expenses incurred directly in respect of interests in jointly controlled assets are accounted for on an accrual basis. Income from the sale or use of the Group’s share of the output of jointly controlled assets, and its share of joint venture expenses, are recognised when it is probable that the economic benefits associated with the transactions will flow to/from the Group and their amount can be measured reliably. Joint venture arrangements that involve the establishment of a separate entity in which each venturer has an interest are referred to as jointly controlled entities. The Group reports its interests in jointly controlled entities using proportionate consolidation. The Group’s share of the assets, liabilities, income and expenses of jointly controlled entities are combined with the equivalent items in the consolidated financial statements on a line-by-line basis. Where the Group transacts with its jointly controlled entities, unrealised profits and losses are eliminated to the extent of the Group’s interest in the joint venture.

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 3.

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Financial assets All financial assets are recognised and derecognised on a trade date where the purchase or sale of a financial asset is under a contract whose terms require delivery of the financial asset within the timeframe established by the market concerned, and are initially measured at fair value, plus transaction costs. Financial assets are classified as “cash and cash equivalents”, “trade and other receivables” and “held to maturity investment”. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. Effective interest method The effective interest method is a method of calculating the amortised cost of a debt instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset, or, where appropriate, a shorter period to the net carrying amount on initial recognition. Cash and cash equivalents Cash and cash equivalents in the consolidated statement of cash flows include cash, bank balances and shortterm deposits with an original maturity of three months or less. Trade and other receivables Trade receivables are measured at initial recognition at fair value, and are subsequently measured at amortised cost using the effective interest method, less any impairment. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial. Appropriate allowances for estimated irrecoverable amounts are recognised in the consolidated statement of income when there is objective evidence that the asset is impaired. Held to maturity investments Bonds with fixed or determinable payments and fixed maturity dates that the Group has the positive intent and ability to hold to maturity are classified as held to maturity investment. Held to maturity investments are measured at amortised cost using the effective interest method less any impairment, with revenue recognised on an effective yield basis. Impairment of financial assets Financial assets are assessed for indicators of impairment at each consolidated statement of financial position 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 asset have been impacted. For trade receivables, objective evidence of impairment could include: (i) significant financial difficulty of the issuer or counterparty; or (ii) default or delinquency in interest or principal payments; or (iii) it becoming probable that the borrower will enter bankruptcy or financial re-organisation. 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 of 60 days, as well as observable changes in national or local economic conditions that correlate with default on receivables. For financial assets carried at amortised cost, the amount of the impairment is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate.

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 3.

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Financial assets (Continued) Impairment of financial assets (Continued) The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in the consolidated statement of income. Derecognition of financial assets The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire; or it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received. Financial liabilities and equity Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement. Equity instruments An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Group are recognised at the proceeds received, net of direct issue costs. Trade payables Trade payables are recognised initially at fair value, net of transaction costs incurred. Trade payables are subsequently stated at amortised cost. Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the consolidated statement of income over the period of the borrowings using the effective interest method. Derecognition of financial liabilities The Group derecognises financial liabilities when, and only when, the Groupâ&#x20AC;&#x2122;s obligations are discharged, cancelled or they expire.

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 3.

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Oil and gas assets Oil and gas exploration, evaluation and development expenditure The Group uses the modified full cost method of accounting for exploration, evaluation and development expenditure, whereby all expenditures incurred in connection with the acquisition, exploration, evaluation and development of oil and gas assets, including directly attributable overheads, interest payable and exchange differences directly related to financing development projects, are capitalised in separate geographical cost pools. Cost pools are established on the basis of geographical area having regard to the operational and financial organisation of the Group. Intangible acquisition, exploration and evaluation costs incurred in a geographical area where the Group has no established cost pool are initially capitalised as intangible non-current assets except where they fall outside the scope of IFRS 6 “Exploration for and Evaluation of Mineral Resources” whereby they are expensed as incurred subject to other guidance under IFRS. Tangible non-current assets used in acquisition, exploration and evaluation are classified with tangible noncurrent assets as property, plant and equipment. To the extent that such tangible assets are consumed in exploration and evaluation the amount reflecting that consumption is recorded as part of the cost of the intangible asset. Upon successful conclusion of the appraisal programme and determination that commercial reserves exist, such costs are transferred to tangible non-current assets as property, plant and equipment. Exploration and evaluation costs carried forward are assessed for impairment as described below. Proceeds from the farm out of exploration and evaluation assets are credited against the relevant cost centre. Any overall surplus arising in a cost centre is credited to the consolidated statement of income. Depreciation and depletion Depletion is provided on oil and gas assets in production on a field by field basis using the unit of production method, based on proven and probable reserves on a field by field basis, applied to the sum of the total capitalised exploration, evaluation and development costs on a field by field basis, together with estimated future development costs on a field by field basis at current prices. Oil and gas assets which have a similar economic life are aggregated for depreciation purposes. The effects of changes in estimates in the unit of production calculations are accounted for prospectively over the estimated remaining proven and probable reserves of each field. Impairment of value Where there has been a change in economic conditions or in the expected use of an asset that indicates a possible impairment in an asset, management tests the recoverability of the net book value of the asset by comparison with the estimated discounted future net cash flows based on management’s expectations of future oil prices and future costs. Any identified impairment is charged to the consolidated statement of income. Intangible non-current assets are considered for impairment at least annually by reference to the indicators in IFRS 6. Where there is an indication of impairment of an exploration and evaluation asset which is within a geographic pool where the Group has tangible oil and gas assets with commercial reserves, the exploration asset is assessed for impairment together with all other cash generating units and related tangible and intangible assets in that geographic pool. Where the exploration asset is in an area where the Group has no established pool, the exploration asset is tested for impairment separately and, where determined to be impaired, is written off.

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 3.

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Oil and gas assets (Continued) Commercial reserves Proven & probable oil and gas reserves are considered as commercial reserves. Proven reserves include reserves that are confirmed with a high degree of certainty through an analysis of the development history and a volume method analysis of the relevant geological and engineering data. Proven reserves are those that, based on the available evidence and taking into account technical and economic factors, have a better than 90% chance of being produced. Probable reserves are those reserves in which hydrocarbons have been located within the geological structure with a lesser degree of certainty because fewer wells have been drilled and certain operational tests have not been conducted. Probable reserves are those reserves that, on the available evidence and taking into account technical and economic factors, have a better than 50% chance of being produced. These reserves are being calculated under existing economic and operating conditions, i.e., prices and costs as at the date the estimate is made. Prices include consideration of changes in existing prices provided by contractual arrangements and managementâ&#x20AC;&#x2122;s forecast of future prices. These estimates, made by the Groupâ&#x20AC;&#x2122;s engineers, are reviewed annually and revised, either upward or downward, as warranted by additional data. Revisions are necessary due to changes in, among other things, reservoir performance, prices, economic conditions and governmental restrictions. Other fixed assets Other fixed assets are stated at cost less accumulated depreciation and any accumulated impairment losses. Cost includes the purchase price and directly associated costs of bringing the asset to a working condition for its intended use. Depreciation is calculated based on the estimated useful lives of the applicable assets on a straight-line basis, on the following basis: Office equipments 5 years 5 years Motor vehicles Furnitures and fittings 10 years The estimated useful lives, residual values and depreciation method are reviewed at each year end, with the effect of any changes in estimate accounted for on a prospective basis. Maintenance and repairs, replacements and improvements of minor importance are expensed as incurred. Significant improvements and replacement of assets are capitalised. The gain or loss arising on the disposal or retirement of other fixed assets is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the consolidated statement of income. Operating leases Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred. In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefit of incentives is recognised as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 3.

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Derivative financial instruments The Group enters into a variety of derivative financial instruments to manage its exposure to profit rate and oil price fluctuations, including interest rate caps and oil put options. Derivatives are initially recognised at fair value at the date the derivative contract is entered into and are subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss is recognised in the consolidated statement of income immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in the consolidated statement of income depends on the nature of the hedge relationship (see below). A derivative with a positive fair value is recognised as a financial asset while a derivative with a negative fair value is recognised as a financial liability. Hedge accounting The Group designates certain hedging instruments which include oil put options as cash flow hedges in order to mitigate the risk arising from fluctuations in oil prices. At the inception of the hedge relationship, the Group documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether the hedging instrument is highly effective in offsetting changes in fair values or cash flows of the hedged item attributable to the hedged risk. Note 9 sets out details of the fair values of the derivative instrument used for hedging purposes. Cash flow hedges The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income. The gain or loss relating to the ineffective portion is recognised immediately in the consolidated statement of income. Amounts previously recognised in other comprehensive income and accumulated in equity are reclassified to the consolidated statement of income in the periods when the hedged item is recognised in the consolidated statement of income. However, when the forecast transaction that is hedged results in the recognition of a nonfinancial asset or a non-financial liability, the gains and losses previously recognised in other comprehensive income and accumulated in equity are transferred from equity and included in the initial cost of the nonfinancial asset or non-financial liability. Hedge accounting is discontinued when the Group revokes the hedging relationship, when the hedging instrument expires or is sold, terminated, or exercised, or when it no longer qualifies for hedge accounting. When a forecast transaction is expected to occur, any gain or loss accumulated in equity at that time remains separately in equity and is recognised in the consolidated statement of income when the forecast transaction is ultimately recognised in the consolidated statement of income. When a forecast transaction is no longer expected to occur, the gain or loss accumulated in equity is recognised immediately in the consolidated statement of income. Revenue recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and revenue can be reliably measured. Revenue represents the value of sales exclusive of related sales taxes of oil and gas arising from upstream operations when the oil has been lifted and the title has passed. Interest income is recognised on an accrual basis in accordance with the substance of the relevant agreement.

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 3.

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Royalties Royalties are accounted for in the consolidated statement of income in the same period as the income to which they relate and are included within operating expenses. Royalty arrangements that are based on production, sales and other measures are recognised by reference to the underlying arrangement. Inventories Crude oil is valued at fair value less costs to sell. Any changes arising on the revaluation of inventories are recognised in the consolidated statement of income. Other inventories comprising mainly of spare parts, materials and supplies are valued at cost, determined principally on a weighted average cost basis, less allowance for any obsolete or slow moving items. Purchase cost includes the purchase price, import duties, transportation, handling and other direct costs. Retirement benefit cost The Group accounts for retirement benefits under IAS 19 “Employee Benefits”, with amounts being payable to employees on completion of employment in accordance with the Kuwaiti Labour Law. These arrangements qualify as a defined benefit arrangement. For defined benefit scheme, the cost of providing retirement benefits is determined using the Projected Unit Credit Method, with actuarial valuations being carried out at each consolidated financial position date. Actuarial gains and losses that exceed 10 per cent of the present value of the Group’s defined benefit obligation at the end of the prior year are amortised over the expected average remaining working lives of the employees. Past service cost is recognised immediately to the extent that the benefits are already vested, and otherwise is amortised on a straight-line basis over the average period until the benefits become vested. The liability is not externally funded. The retirement benefit obligation recognised in the consolidated statement of financial position represents the present value of the defined benefit obligation as adjusted for unrecognised actuarial gains and losses and unrecognised past service costs. Foreign currencies The individual financial statements of each group entity are presented in the currency of the primary economic environment in which the entity operates (its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each entity are expressed in USD, which is the functional and presentation currency of the Parent Company. In preparing the financial statements of the individual entities, transactions in currencies other than the entity’s functional currency (foreign currencies) are recorded at the rates of exchange prevailing at the dates of the transactions. At each consolidated statement of financial position date, monetary items denominated in foreign currencies are retranslated at the rates prevailing at the consolidated statement of financial position date. Nonmonetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences are recognised in the consolidated statement of income in the period in which they arise except for exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur, which form part of the net investment in a foreign operation, and which are recognised in the foreign currency translation reserve and recognised in consolidated statement of income on disposal of the net investment. For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group’s foreign operations are expressed in USD using exchange rates prevailing at the consolidated statement of financial position date. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuated significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange differences arising, if any, are classified as equity and transferred to the Group’s foreign currency translation reserve. Such exchange differences are recognised in the consolidated statement of income in the period in which the foreign operation is disposed of.

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 3.

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Contingencies A contingent asset is not recognised in the consolidated financial statements but disclosed when an inflow of economic benefits is probable. Contingent liabilities are not recognised in the consolidated financial statements unless the outflow of resources embodying economic benefits is probable and the amount of the obligation can be measured reliably. They are disclosed as contingent liabilities unless the possibility of an outflow of resources embodying economic benefits is remote. Borrowing costs Borrowing costs directly attributable 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 added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Other borrowing costs are calculated on the accrual basis and are recognised in the consolidated statement of income in the period in which they are incurred. Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the consolidated statement of financial position date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the receivable is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably. A decommissioning provision is calculated as the net present value of the Groupâ&#x20AC;&#x2122;s share of the expenditure which may be incurred at the end of the producing life of each field in the removal and decommissioning of the production, storage and transportation facilities currently in place. The cost of recognising the decommissioning provision is included as part of the cost of the relevant property, plant and equipment and is thus charged to the consolidated statement of income on a unit of production basis in accordance with the Groupâ&#x20AC;&#x2122;s policy for depletion and depreciation of tangible non-current assets. Period charges for changes in the net present value of the decommissioning provision arising from discounting are included in finance costs. Share-based payments Equity-settled share-based payments to employees are measured at the fair value of the equity 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 straightline basis over the vesting period, based on the Groupâ&#x20AC;&#x2122;s estimate of equity instruments that will eventually vest.

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 3.

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Impairment of tangible assets At each consolidated statement of financial position date, the Group reviews the carrying amounts of its tangible 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 is estimated in order to determine the extent of the impairment loss (if any). 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 or value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using 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. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately. Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately. Taxation Certain of the Parent Companyâ&#x20AC;&#x2122;s subsidiaries are subject to taxes on income in various foreign jurisdictions. Income tax expense represents the sum of the tax currently payable and deferred tax. Current tax The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated statement of income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Groupâ&#x20AC;&#x2122;s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the consolidated statement of financial position date. Deferred tax Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements of the relevant subsidiaries and the corresponding tax bases used in the computation of taxable profit, and are accounted for using the liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences, and deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) 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 consolidated statement of financial position date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realised, based on tax rates (and tax laws) that have been enacted or substantively enacted by the consolidated statement of financial position date. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 3.

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Kuwait Foundation for the Advancement of Sciences The Group is legally required to contribute to the Kuwait Foundation for the Advancement of Sciences ("KFAS"). The Group's contribution to KFAS is recognised as an expense in the period during which the Group's contribution is legally required. Zakat The Group is legally required to contribute to the Zakat. The Group's contribution to Zakat is recognised as an expense in the period during which the Group's contribution is legally required.

JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY In the application of the Group’s accounting policies, which are described in note 3, management is 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 the revision and future periods if the revision affects both current and future periods. Key sources of estimation uncertainty The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the consolidated statement of financial position date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Effectiveness of hedges Determining the effectiveness of hedges require significant estimation as to the various inputs (future oil prices, cash flows, whether the hedge will be terminated before expiry). Management uses data received from various sources to measure effectiveness of hedges. Recoverability of exploration and evaluation costs Under the full cost method of accounting for exploration and evaluation (“E&E”) costs, such costs are capitalised as intangible assets by reference to appropriate cost pools, and are assessed for impairment when circumstances suggest that the carrying amount may exceed its recoverable value. This assessment involves judgement as to (i) the likely future commerciality of the asset and when such commerciality should be determined, and (ii) future revenues and costs pertaining to any wider cost pool with which the asset in question is associated, and the discount rate to be applied to such revenues and costs for the purpose of deriving a recoverable value. Note 14 discloses the carrying amounts of the Group’s E&E assets. Impairment of oil and gas properties Determining whether oil and gas properties are impaired requires management to estimate the future net revenue from oil and gas reserves attributable to the Group’s interest in that field. A net impairment loss of USD Nil (2009: USD 1,084 thousand) was recognised during the year. Depletion of oil and gas properties Depletion of the cost of oil and gas properties and information reported on estimated quantities of proven oil and gas reserves are based on estimated oil and gas reserves which have been determined by competent and qualified petroleum engineers. Management believes these reserves to be commercially productive and will provide revenues to the Group adequate to recover remaining net un-depreciated and un-depleted capitalised oil and gas properties as at 31 December 2010.

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010

JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY (CONTINUED) Key sources of estimation uncertainty (Continued) Impairment of other fixed assets and useful lives The Group’s management tests annually whether tangible assets have suffered impairment in accordance with accounting policies stated in note 3. The recoverable amount of an asset is determined based on value-in-use method. The method uses estimated cash flow projections over the estimated useful life of the asset discounted using market rates. The Group’s management determines the useful life of other fixed assets and the related depreciation charge. The depreciation charge for the year will change significantly if actual life is different from the estimated useful life of the asset. Decommissioning The provision for decommissioning obligations depends on the cost and timing of decommissioning works, legal requirements and the discount rate to be applied to such costs. Management have conducted an internal review of these factors, based on information currently available, in the calculation of this provision. The carrying amount of the decommissioning provision at 31 December 2010 is shown in note 26 to these consolidated financial statements. Business combination In a business combination, the acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 Business Combinations are recognised at their fair values at the acquisition date, except for non-current assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, which are recognised and measured at fair value less costs to sell. The Group’s management determines the fair values of the acquiree’s identifiable assets, liabilities, contingent liabilities and non-current assets classified as held for sale. 

REVENUE 2010

2009

USD 000’s

Oil sales

126,760

78,634

Gas sales

15,012

9,678

141,772

88,312

SEGMENTAL INFORMATION IFRS 8 requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segment and to assess its performance. The information reported to the Group’s chief operating decision maker for the purposes of resource allocation and assignment of segment performance is specifically focussed on the geographical area (country). All of the segment revenue reported below is from external customers. The accounting policies of the reportable segments are the same as the Group’s accounting policies described in note 3. Segment profit represents the profit earned by each segment. This is the measure reported to the chief operating decision maker for the purposes of resource allocation and assessment of segment performance. For the purposes of monitoring segment performance and allocating resources between segments: • There are no assets used jointly by any reportable segment. • There are no liabilities for which any segment is jointly liable other than the murabaha facilities from International Finance Corporation (See note 25) amounting to USD 45,000 thousand (2009: USD 20,000 thousand) which has been taken jointly by the Parent Company, Kuwait Energy Egypt Ltd and Kuwait Energy Yemen Ltd.

352,658

Segment assets

obligation

Retirement benefit

property and equipment

and amortisation of

Depreciation, depletion

and equipment

Purchases of property

evaluation assets

exploration and

Additions to intangible

Other information

Segment liabilities

equipment

Property, plant and

evaluation assets

34,050

25,489

20,796

13,466

98,257

154,132

28,766

Segment results

Intangible exploration and

84,582

Segment revenues

31 December 2010

2,379

2,429

14,146

7,215

3,083

27,897

37,625

6,124

15,929

Yemen

USD 000’s

Egypt

USD 000’s

683

USD 000’s

Iraq

16,832

15,660

4,154

8,228

15,510

(1,581)

18,058

USD 000’s

Oman

348

675

1,505

61,597

2,718

72,679

(13,078)

USD 000’s

Kuwait

SEGMENTAL INFORMATION (CONTINUED) The following is an analysis of the Group’s revenue and results by reportable segments:

For the year ended 31 December 2010

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES

Pakistan

2,595

128

9,493

9,517

USD 000’s

Somalia

168

766

USD 000’s

Ukraine

4,880

17,394

4,012

110,220

15,126

151,280

(122)

15,013

USD 000’s

Russia

1,601

5,259

224

16,254

54,794

29,619

92,923

2,863

8,190

USD 000’s

Latvia

3,685

2,740

5,553

7,227

(37)

USD 000’s

Indonesia

(836)

USD 000’s

Cambodia

(197)

USD 000’s

Total

348

60,417

68,419

41,614

109,566

277,983

242,586

740,868

21,902

141,772

USD 000’s

327,633

Segment assets

obligation

Retirement benefit

equipment

property and

amortisation of

depletion and

Depreciation,

equipment

property and

Purchases of

evaluation assets

exploration and

Additions to intangible

oil and gas assets

Impairment losses on

Other information

Segment liabilities

equipment

Property, plant and

evaluation assets

28,994

17,383

30,247

6,363

107,457

156,659

3,766

Segment results

Intangible exploration and

44,368

2,143

2,348

8,308

(820)

1,889

3,027

13,752

20,235

7,257

16,607

USD 000’s

Segment revenues

31 December 2009

Yemen

Egypt

Oman

7,601

10,230

1,904

3,234

9,400

129

410

1,337

64,627

2,254

81,385

(3,367)

3,475 17,531

USD 000’s

Kuwait

14,896

USD 000’s

SEGMENTAL INFORMATION (CONTINUED)

For the year ended 31 December 2010

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1,443

6,898

6,700

USD 000’s

Pakistan

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES

598

USD 000’s

Somalia

2,343

21,464

5,564

103,987

19,000

139,047

3,454

9,618

USD 000’s

Ukraine

18,892

50,147

30,401

85,180

USD 000’s

Russia

395

208

1,868

2,136

USD 000’s

Latvia

1,311

1,188

132

245

(3,829)

2,823

USD 000’s

Indonesia

195

(5,203)

USD 000’s

Cambodia

129

42,802

53,950

40,991

1,084

100,777

276,404

229,176

680,885

5,553

88,312

USD 000’s

Total

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 ‘6.

SEGMENTAL INFORMATION (CONTINUED) Revenue from major products and services The Group’s revenues from oil and gas are disclosed in note 5 to these consolidated financial statements. Information about major customers Included in revenues arising from Egypt for the year is revenue of approximately USD 84,582 thousand (2009: USD 44,368 thousand) which arose from sales to the Group’s largest customer.

COST OF SALES USD 000’s 26,603

Depletion of oil and gas assets and decommissioning assets

59,511

42,261

7,669

1,897

102,860

70,761

2010

2009

USD 000’s

GENERAL AND ADMINISTRATIVE EXPENSES

9,530

Depreciation of other assets

8,002

906

541

Impairment losses recognised on trade receivables

1,329

4,027

Professional fees

3,486

2,962

789

1,676

Travel expenses Others

3,912

3,018

19,952

20,226

2010

2009

USD 000’s

DERIVATIVE FINANCIAL INSTRUMENTS

Financial liabilities carried at fair value through profit or loss Held for trading derivatives not designated in hedge accounting relationships (See a below) Derivatives that are designated and effective as hedging instruments carried at fair value Oil put options (See b below)

USD 000’s 35,680

Staff costs

2009

Operating costs Royalties

2010

675

3,662

4,337

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 9.

DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) Derivatives are financial instruments that derive their value by referring to profit rate, oil prices or other indices. Notional principal amounts merely represent amounts to which a rate or price is applied to determine the amounts of cash flows to be exchanged and do not represent the potential gain or loss associated with the market or credit risk of such instruments. Derivatives are carried at fair value and shown in the consolidated statement of financial position net of any internal arbitrage deals. Positive fair value represents the cost of replacing all transactions with a fair value in the Group’s favour had the rights and obligations arising from that instrument been closed in an orderly market transaction at the consolidated statement of financial position date. Credit risk in respect of derivative financial instruments is limited to the positive fair value of instruments. Negative fair value represents the cost to the Group in favour of the counter parties. The Group deals in interest rate cap to manage its profit rate risk on murabaha facilities. Similarly the Group deals in oil put option to manage its oil price risk. a)

Held for trading derivatives Derivatives used for hedging purposes but which do not meet the qualifying criteria for hedge accounting are classified as ‘Held for trading derivatives’. Interest rate cap is an agreement to cap the profit rate on murabaha facilities at 2 % when the LIBOR is more than 2 % and equal to or less than 5 %. The interest rate cap matures on 30 June 2014. The notional amounts of interest rate cap together with the fair value as at 31 December is summarised as follows: Fair value Held for trading Derivatives Notional principal value (Negative) /Positive 2010

2009

2010

2009

USD 000’s

- Interest rate cap b)

50,000

(675)

Cash flow hedges This instrument enables the Group to mitigate the risk of fluctuations in oil prices for 60,000 barrels of oil per month by locking the price at USD 81.85 up to the strike price of USD 95. The fair value of oil put option at the end of the reporting period is determined by discounting the future cash flows using the curves at the end of the reporting period and the credit risk inherent in the contract, and is disclosed below. The following table details the notional principal amount and the fair value of the oil put option outstanding at the end of the reporting period. Fair value Cash flow hedge Notional principal value (Negative) /Positive 2010

- Oil put option

60,000 barrels of oil per month up to 1 October 2011

2009

2010

2009

USD 000’s

(3,662)

The oil put option settles on a monthly basis. The oil put option is designated as a cash flow hedge in order to reduce the Group’s exposure to fluctuations in oil prices and is deemed to be highly effective.

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010

10.

OTHER INCOME

Interest income Others

11.

2010

2009

USD 000’s

3,722

4,142

7,079

4,222

10,801

FINANCE COSTS

Borrowing costs on bank overdrafts and loans Less: amount included in cost of qualifying assets

2010

2009

USD 000’s

6,135

3,180

(4,317)

(2,489)

1,818 12.

PROFIT FOR THE YEAR Profit for the year is stated after charging: 2010 USD 000’s 9,530 60,417 463 1,329 -

Staff costs Depreciation, depletion and amortisation Foreign exchange losses Impairment losses Impairment losses recognised on trade receivables Exploration expenditure written off

13. a)

2009 USD 000’s 8,002 42,802 485 1,084 4,027 4,602

EARNINGS PER SHARE Basic earnings per share The earnings and weighted average number of shares used in the calculation of basic earnings per share are as follows: 2010 2009 USD 000’s Profit for the year Weighted average number of shares for the purposes of basic earnings per share (thousand) Basic earnings per share (cents)

691

USD 000’s

21,902

5,553

1,055,692

1,042,169

2.07

0.53

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010

13. b)

EARNINGS PER SHARE (CONTINUED) Diluted earnings per share The earnings used in the calculation of diluted earnings per share are as follows: 2010 USD 000’s Earnings used in the calculation of diluted earnings per share

21,902

2009 USD 000’s 5,553

The weighted average number of ordinary shares for the purposes of diluted earnings per share reconciles to the weighted average number of ordinary shares used in the calculation of basic earnings per share as follows: Shares Shares Weighted average number of ordinary shares used in the calculation of basic earnings per share (thousand)

1,055,692

1,042,169

Shares deemed to be issued for no consideration in respect of: Employee options (thousand) Business combinations (thousand) Weighted average number of ordinary shares used in the calculation of diluted earnings per share (thousand) Diluted earnings per share (cents)

2,472

1,055

36,052

1,058,164

1,079,276

2.07

0.51

Basic and diluted earnings per share reported were 0.54 cents and 0.52 cents for the year ended 31 December 2009, before retroactive adjustments to the number of shares following the rights issue (See note 21). 14.

INTANGIBLE EXPLORATION AND EVALUATION ASSETS Exploration and evaluation assets

USD 000’s Cost As at 1 January 2009

161,732

Additions

40,991

Acquisition of subsidiaries

29,396

Transfer from capital work in progress

1,659

Exploration expenditure written off

(4,602)

As at 31 December 2009 Additions

229,176

Farmed out of working interests (See note below)

(25,830)

41,614

Transfer to other receivables (See note 35 (a))

(2,374)

As at 31 December 2010

242,586

As at 31 December 2010, exploration and evaluation cost of USD 242,586 thousand (2009: USD 229,176 thousand) were not amortised, pending further evaluation of whether or not the related oil and gas properties are commercially viable. The additions to intangible exploration and evaluation assets include USD 272 thousand (2009: USD 415 thousand) of finance costs on qualifying assets capitalised during the year.

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010

14.

INTANGIBLE EXPLORATION AND EVALUATION ASSETS (CONTINUED) During the year, the Group has farmed out of certain of its working interests for total proceeds of USD 28,159 thousand. a. The Group has farmed out 25 % of the working interest in JAA 429 for a consideration of USD 3,829 thousand. The terms of the transaction resulted in farm out of exploration and evaluation assets of USD 1,500 thousand, property, plant and equipment of USD 1,569 thousand (See note 15) and other working capital items of USD 579 thousand and gain on farm out of USD 181 thousand. b. The Group has farmed out 22 % of the working interest in Abu Sennan for a consideration of USD 20,100 thousand which has been netted off against exploration and evaluation assets. The terms of the transaction resulted in farm out of intangible exploration and evaluation assets of USD 9,305 thousand. c. The Group has farmed out 15 % of the working interest in Mesaha for a consideration of USD 4,230 thousand which has been netted off against exploration and evaluation assets. The terms of the transaction resulted in farm out of intangible exploration and evaluation assets of USD 721 thousand. Net cash inflow on farm out

Total farm out proceeds Less: To be received in 2011(See note 19) Less: Cash and bank balances disposed as part of farm out Net cash inflow on farm out

2010

2009

USD 000’s

28,159

(19,464)

(12)

8,683

15.

Cost As at 1 January 2009 Additions Transfer to oil and gas assets Transfer to intangible exploration and evaluation assets Acquisition of subsidiaries Currency translation effect As at 1 January 2010 Additions Transfer to oil and gas assets Transfer to other receivables (See note 35 (a)) Farm out of working interests (See note 14) Disposal of other assets Currency translation effect As at 31 December 2010 Depreciation, depletion, amortisation and impairment losses As at 1 January 2009 Charge for the year Impairment losses Currency translation effect As at 1 January 2010 Charge for the year Farm out of working interests (See note 14) Disposal of other assets Currency translation effect As at 31 December 2010 Carrying amount As at 31 December 2010 As at 31 December 2009

PROPERTY, PLANT AND EQUIPMENT

For the year ended 31 December 2010

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2,692 (1,033) (1,659) 1,005 1,005 (1,005) 1,005

59,232 42,261 1,084 (15) 102,562 59,350 (431) 3 161,484 270,594 270,870

USD 000’s

Capital work in progress

272,165 50,866 1,033 50,131 (763) 373,432 64,354 1,005 (4,775) (2,000) 62 432,078

USD 000’s

Oil and gas assets

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES

6,521 3,954

409 541 (1) 949 906 (53) 1,802

2,399 2,509 2 (7) 4,903 3,611 (192) 1 8,323

USD 000’s

Other fixed assets

868 575

161 161

575 575 454 1,029

USD 000’s

Decommissioning assets

277,983 276,404

59,641 42,802 1,084 (16) 103,511 60,417 (431) (53) 3 163,447

277,256 53,950 (1,659) 51,138 (770) 379,915 68,419 (4,775) (2,000) (192) 63 441,430

Total

USD 000’s

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 15.

PROPERTY, PLANT AND EQUIPMENT (CONTINUED) During the year, the Group incurred impairment losses on certain oil and gas properties of USD Nil (2009: USD 1,904 thousand) and reversed previously recognised impairment loss of USD Nil (2009: USD 820 thousand). The impairment loss realised in the previous year was due to the decrease in oil and gas reserves in the related fields. The impairment losses of the previous year were calculated using the reserves report dated 31 December 2009 prepared by independent reserve auditors. The additions to oil and gas assets include USD 4,045 thousand (2009: USD 2,074 thousand) of finance costs on qualifying assets capitalised during the year. The property, plant and equipment of the subsidiaries Kuwait Energy Egypt Ltd, Kuwait Energy Yemen Ltd and Pechora Energy Company Limited are under registered mortgage to secure certain bank loans (See note 25).

16.

HELD TO MATURITY INVESTMENT 2009 USD 000’s

2010

USD 000’s -

BNP Paribas Islamic bonds

49,950

During 2010, these bonds have been liquidated and USD 36,694 thousand of the liquidation proceeds have been set off against the BNP Paribas loans (See note 25). 17.

INCOME TAX EXPENSE The charge for the year comprises: 2010 USD 000’s

Foreign tax Current: - tax expense on profits

2009 USD 000’s

(1,471)

(1,121)

7,125

5,546

Deferred: - deferred tax assets for the year - deferred tax reversal for the year

(3,525) 2,129

4,425

The deferred tax asset of USD 9,146 thousand as at 31 December 2010 (2009: USD 5,546 thousand) is due to accumulated tax losses incurred by Rudis Drilling Company L.L.C and Pechora Energy Company Limited. These tax losses are expected to be deductible against taxable profits in the foreseeable future. The deferred tax asset reversal of USD 3,525 thousand (31 December 2009: Nil) is due to recognition of profits in Rudis Drilling Company L.L.C. and Kuwait Energy Egypt Ltd. 18.

INVENTORIES

Crude oil Spare parts, materials and supplies

2010

2009

USD 000’s

3,162

2,471

14,700

13,572

17,862

16,043

Spare parts, materials and supplies are used in operations and are not held for re-sale.

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010

19.

TRADE AND OTHER RECEIVABLES 2010

2009

USD 000’s

Trade receivables

65,201

44,555

Prepayments, deposits and advances

18,379

16,194

Receivable on farm out of working interests (See note 14)

19,464

Other receivables

32,155

13,377

135,199

74,126

Other receivables include amounts to be received in connection with the arbitration claim (See note 35 a). The average credit period on sales is 60 days. No interest is charged on the overdue trade receivables. As at 31 December 2010, trade receivables of USD 25,624 thousand (2009: USD 25,329 thousand) were fully performing. Included in the Group’s trade receivables balance are debtors with a carrying amount of USD 39,577 thousand (2009: USD 19,226 thousand) which are past due at the reporting date for which the Group has not provided against as there has not been a significant change in credit quality and the amounts are still considered recoverable. Ageing of past due but not impaired 2010

2009

USD 000’s

61 – 90 days

14,403

9,878

91 – 120 days

5,504

2,796

121 – 180 days

14,016

5,394

5,654

1,158

39,577

19,226

> 180 days Total

During the year, the Group has written off impaired trade receivables of USD 1,329 thousand (2009: USD 4,027 thousand). In determining the recoverability of a trade receivable, the Group considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the reporting date. Management believes that there is no credit provision required as all the trade receivables are fully collectible. The maximum exposure to credit risk at the reporting date is the carrying amount of each class of receivable mentioned above. The directors consider that the carrying amount of trade and other receivables is approximately equal to their fair value. During the year the Group has impaired trade receivables of USD 1,329 thousand (2009: USD 4,027 thousand).

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010

20.

CASH AND BANK BALANCES 2010 USD 000’s Cash and bank balances

58,092

2009 USD 000’s 26,157

Bank balances amounting to USD 18,738 thousand (2009: USD 11,813 thousand) are restricted against issue of letters of guarantee. 21.

SHARE CAPITAL The authorised share capital consists of 1,270,000 thousand shares of 100 fils each amounting to Kuwaiti Dinar (“KD”) 127,000 thousand (31 December 2009: 1,300,000 thousand shares of 100 fils each amounting to KD 130,000 thousand). The issued and paid up share capital consists of 1,132,268 thousand shares of 100 fils each (31 December 2009: 1,035,264 thousand shares of 100 fils each). During the year, the Parent Company increased its paid up share capital by issuing a) 60,591 thousand shares of a nominal value of 100 fils each and share premium of 55 fils each through the rights issue (See note 34), b) 36,052 thousand shares of a nominal value of 100 fils each and share premium of 101 fils each, c) 149 thousand shares of a nominal value of 100 fils each and share premium of 39 fils each (See note 24) and d) 212 thousand shares of a nominal value of 100 fils each and share premium of 101 fils each (See note 24).

22.

STATUTORY RESERVE As required by the Commercial Companies Law and the Parent Company’s Articles of Association, 10% of profit for the year before KFAS, Zakat and directors fees is to be transferred to the statutory reserve until the reserve reaches a minimum of 50% of the paid up share capital. This reserve is not available for distribution except for payment of a dividend of 5% of paid up share capital in years when retained earnings are not sufficient for the payment of such dividends.

23.

VOLUNTARY RESERVE In accordance with the Parent Company’s Articles of Association, 10% of profit for the year before KFAS, Zakat and directors fees is required to be transferred to the voluntary reserve until the shareholders decide in the annual general assembly meeting upon recommendation by the board of directors to discontinue the transfer. There are no restrictions on distributions from this reserve.

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 24.

SHARE-BASED PAYMENTS At an Extraordinary General Meeting held on 14 October 2008 the Parent Company’s shareholders approved the issue of shares to employees in accordance with the employee incentive scheme (“EIS”) approved by the Board of Directors (“BOD”). The EIS is available to specified employees employed at the beginning of the financial year and pro-rated for specified employees who have joined before 1 October of the financial year. The entitlement of each employee is determined based on the maximum incentive entitlement decided by the BOD and the weighted average of corporate performance ratings (including branch weightage for employees of subsidiaries) and individual performance ratings. The share options are vested in a staggered manner of 30%, 30% and 40% after 1, 2 and 3 years respectively. Any unutilised share options cannot be carried forward. If the employee leaves the Group (other than due to exceptional circumstances beyond the employee’s control) during the vesting period, the unvested shares will be forfeited. If the employee leaves the Group due to exceptional circumstances beyond the employee’s control during the vesting period, the fair value of the unvested share options will be paid in cash. The unvested shares are not entitled to dividends or bonus shares. The EIS is operational for 10 years (effective 1 January 2008). The source of the shares granted under the EIS will be through issues of new shares before the Parent Company gets listed and through treasury shares of the Parent Company once it gets listed. The total number of shares to be granted under the EIS is not to exceed 10% of the paid-up share capital. As at 31 December 2010 (31 December 2009: 1,055 thousand shares), the entitlement of employees under the EIS is as follows: Total share options granted (thousands) 928

Number of employees 140

Vesting dates 1 January 2011 1 January 2012

140

807

1 January 2013

140

737 2,472

Total number of granted shares

Year ended 31 December 2009

Year ended 31 December 2010 Number

Fair value

000’s

USD 000’s

Number

000’s

Fair value

USD 000’s

Outstanding at beginning of the year

1,055

670

602

303

Granted during the year

1,842

1,291

708

495

Forfeited during the year

(64)

(41)

(75)

(37)

Exercised during the year

(361)

(224)

(180)

(91)

Outstanding at the end of the year

2,472

1,696

1,055

670

The Group records an expense, based on its best estimate related to the fair value determined by reference to the fair value of the share options from independent market sources at the dates of the grant 1 January 2008 (139 fils/share), 1 January 2009 (201 fils/share) and 1 January 2010 (201 fils/share) on a straight-line basis over the vesting period. At 31 December 2010, management has estimated that all 140 employees will be entitled to the shares under the EIS and recognised an expense of USD 886 thousand (2009: USD 345 thousand) including reversal of previously recognised expenses relating to forfeited shares as the cost of EIS and credited the share-based compensation reserve in equity. The share-based compensation reserve will be reversed and share capital/share premium credited on issue of the vested shares. During the year the Parent Company issued 361 thousand shares (2009: 180 thousand shares) to employees who exercised their entitlements as at 1 January 2010 under the EIS.

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010

25.

LONG-TERM LOANS Current

Non-current

2010

2009

2010

2009

USD 000’s

Due to foreign banks

48,866

53,000

20,000

2010

2009

USD 000’s

The details of long-term loans are as follows: Description (i) USD 35 million murabaha facility from International Finance Corporation (“IFC”) that bears profit rate of LIBOR plus 3.64% to 4.01% per annum. (a) (ii) USD 15 million murabaha facility financing from IFC that bears profit rate of 1.176% per annum plus 5% earnings before interest, depreciation, amortisation and extraordinary items on borrowing base assets. (b) (iii) The Loan from European Bank for Reconstruction and Development (“EBRD”) bears interest rate of LIBOR plus 6.5% per annum. The repayment is in quarterly instalments commencing 27 January 2012 and ending 27 October 2013. (c) (iv) The Parent Company’s borrowings under a USD 50 million revolving loan credit facility from BNP Paribas that bears interest rate of LIBOR plus 0.3 % to 5.5% per annum.

30,000

5,000

15,000

8,000

40,866

53,000

68,866

(a) The facility is secured by pledges on the assets of the subsidiaries Kuwait Energy Egypt Ltd and Kuwait Energy Yemen Ltd (See note 15). The loan is to be repaid on 15 June 2014. (b) The facility is secured by pledges on the assets of the subsidiaries Kuwait Energy Egypt Ltd and Kuwait Energy Yemen Ltd (See note 15). The facility is to be repaid in 2 annual instalments of USD 7,500 thousand each on 30 June 2014 and 30 June 2015. (c) The debt is secured by pledges on the assets of the subsidiary of Pechora Energy Company Limited (See note 15). As at 31 December 2010, the Group has undrawn loan facilities amounting to USD 5,000 thousand (2009: USD 30,001 thousand).

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 26.

LONG-TERM PROVISIONS

Decommissioning provision Retirement benefit obligation Deferred tax liability

Decommissioning provision As at 1 January Unwinding of discount Changes in estimate As at 31 December

2010

2009

USD 000’s

1,087

575

703

355

769

1,790

1,699

2010

2009

USD 000’s

575

454

575

1,087

575

The provision for decommissioning is based on the net present value of the Group’s share of the expenditure which may be incurred at the end of the producing life of each field (currently estimated in 2017, 2026 and 2028) in the removal and decommissioning of the facilities currently in place. The provision has been estimated using existing technology, at current prices, and discounted at a rate of 10%. b)

Retirement benefit obligation

2010

2009

USD 000’s

As at 1 January

355

230

Current service cost

348

129

Benefits paid

As at 31 December

(4)

703

355

The most recent actuarial valuation of the present value of the defined benefit obligation was carried out at 31 December 2010. The present value of the defined benefit obligation, and the related current service cost and past service cost, were measured using the Projected Unit Credit Method. The principal assumptions used for the purposes of the actuarial valuations were as follows: For the year ended 31 December 2010 Discount rate

For the year ended 31 December 2009

6.25%

6.5%

6.00% p.a.

5.5% p.a.

3.75% p.a.

2.75% p.a.

Expected rate of increase in - Basic Salary & Variable allowances Long-term inflation Demographic assumptions Retirement age -Non-Kuwaiti employees Age 55 Age 55 The total charge for the year is USD 348 thousand (2009: USD 129 thousand) which has been included in the consolidated statement of income under general and administrative expenses.

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010

27.

TRADE AND OTHER PAYABLES 2010

2009

USD 000’s

Trade payables

29,783

25,037

Joint venture payables and accruals

13,374

3,839

Advances received

3,500

Salaries and bonus payables

3,250

1,036

532

300

50,439

30,212

Tax payables

Trade creditors and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade purchases is 30 days. No interest is charged on the overdue trade payables. The Group has financial risk management policies in place to ensure that all payables are paid within the pre-agreed credit terms. The directors consider that the carrying amount of trade payables approximates their fair value. 28.

RELATED PARTY TRANSACTIONS Related parties comprise major shareholders, directors and executive officers of the Group, their families and companies of which they are the principal owners. All related party transactions are conducted on an arm’s length basis and are approved by the board of directors. Balances and transactions between the Parent Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. The related party transactions and balances included in the Group’s consolidated financial statements are as follows: 2010

2009

USD 000’s

a) Transactions included in the consolidated statement of income Interest income from Concorde Energy

2,488

b) Compensation of key management personnel: Key management personnel include the Board of Directors and other members of the management team. The remuneration of key management personnel during the year was as follows: 2010

2009

USD 000’s

2,187

2,758

Termination benefits

154

Share-based payments

249

185

2,476

3,097

Salaries and other short-term benefits

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010

29.

JOINT VENTURE The Parent Company has 20% equity interest in Medco L.L.C., a joint venture. The following amounts are included in the Group’s consolidated financial statements as a result of the proportionate consolidation of Medco L.L.C. 2010 2009 USD 000’s

USD 000’s

Current assets

7,282

8,131

Non-current assets

8,228

9,400

Current liabilities

4,154

3,234

Income Expenses

Year ended 31.12.10

Year ended 31.12.09

USD 000’s

18,063

14,927

(19,644)

(11,452)

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 30.

SUBSIDIARY COMPANIES The subsidiaries of the Parent Company are as follows: Ownership % Companyâ&#x20AC;&#x2122;s name Kuwait Energy Egypt Ltd

2010

100

2009

Country of operations

Type of activity

100

British Virgin Islands

Egypt

Exploration / development/ production

Pakistan

Exploration

Kuwait Energy Pakistan Ltd

100

British Virgin Islands

Kuwait Energy Yemen Ltd

100

British Virgin Islands

Yemen

Exploration

100

Netherlands

Ukraine/ Latvia/ Russia

Exploration / development/ production

Egypt / Yemen

Exploration / development/ production

Kuwait Netherlands Cooperative

100

Oil Search (Mena) Limited

100

British Virgin Islands

Kuwait Energy Service Ltd

100

British Virgin Islands

Dormant

Kuwait Energy Finance Ltd

100

British Virgin Islands

Dormant

Kuwait Energy Iraq Ltd

100

British Virgin Islands

Dormant

Kuwait Energy Somalia Ltd

100

British Virgin Islands

Dormant

KEC Gulf Holding Ltd

100

British Virgin Islands

Dormant

Kuwait Energy Cambodia Ltd

100

British Virgin Islands

Dormant

Lobstarom Holdings Ltd

100

Cyprus

Dormant

KIC Petrochemicals

100

Kuwait

Dormant

Kuwait ARD Indonesia

100

Kuwait

Dormant

Kuwait Bawean Indonesia

100

Kuwait

Dormant

Country of incorporation

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 31.

OPERATING LEASE ARRANGEMETNS

Minimum lease payments under operating leases recognised in the consolidated statement of income

2010

2009

USD 000’s

USD 000’s 1,218

1,548

At the consolidated statement of financial position date, the Group had outstanding commitments for future minimum lease payments under operating leases, which fall due as follows; Within one year 1,135 1,417 Between two years and five years 918 688 2,053

2,105

Operating lease payments represent rentals payable by the Group for certain of its office properties. Leases are negotiated for an average term of one to two years and rentals are fixed for an average of two years with an option to extend for a further two years at the then prevailing market rate. 32.

FINANCIAL INSTRUMENTS Significant accounting policies Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset and financial liability are disclosed in note 3 to these consolidated financial statements. Categories of financial instruments 2010

2009

USD 000’s

Financial assets Held to maturity investment

49,950

Trade and other receivables

130,198

58,406

3,483

58,092

26,157

Long-term loans

53,000

68,866

Trade and other payables

46,407

30,212

4,337

Liquid investments Cash and bank balances Financial liabilities

Derivative financial instruments

Financial risk management objectives The Group’s management monitors and manages the financial risks relating to the operations of the Group through internal risk reports which analyse exposures by degree and magnitude of risks. These risks include market risk (including commodity price risk, interest rate risk and foreign currency risk), credit risk and liquidity risk.

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 32.

FINANCIAL INSTRUMENTS (CONTINUED) Market risk Market risk is the risk that changes in market prices, such as commodity prices, interest rates and foreign exchange rates will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return. The Group is exposed to international commodity-based markets. As a result, it can be affected by changes in crude oil, natural gas and petroleum product prices and interest rates and foreign exchange rates. The Group uses derivative financial instruments to manage risks but not for speculative purposes. Price risk management Volatility in oil and gas prices is a pervasive element of the Group’s business environment. The Group is a seller of crude oil, which is typically sold under short-term arrangements priced in USD at current market prices. The Group uses oil put options to manage the risks of volatility in crude oil prices (See note 9). The Group does not sell gas under any long-term agreements. Foreign currency risk management The Group undertakes certain transactions denominated in foreign currencies. Hence, exposures to exchange rate fluctuations arise. Exchange rate exposures are managed within approved policy parameters. The carrying amounts of the Group’s foreign currency denominated monetary assets and monetary liabilities at the reporting date are as follows: Liabilities

Assets

2010

2009

2010

2009

USD 000’s

594

355

20,056

3,545

Ukraine Hryvnia

3,430

3,790

8,240

5,975

Russian Rouble

5,444

27,527

477

724

Kuwaiti Dinar

Foreign currency sensitivity analysis The Group’s main foreign currency exposure is to fluctuations in the Kuwait Dinar, Ukraine Hryvnia and Russian Rouble. The following table details the Group’s sensitivity to a 10% increase and decrease in the USD against Kuwaiti Dinar, Ukraine Hryvnia and Russian Rouble. The sensitivity analysis includes only outstanding Kuwaiti Dinar, Ukraine Hryvnia and Russian Rouble denominated monetary assets and liabilities and adjusts their translation at the year end for a 10% change in foreign currency rates. A positive number below indicates an increase in profit and a negative number indicates decrease in profit. All other variables are held constant. There have been no changes in the methods and the assumptions used in the preparation of the sensitivity analysis. 2010

2009

USD 000’s

Impact on consolidated statement of income Kuwaiti Dinar

(1,946)

Ukraine Hryvnia

(481)

Russian Rouble

497

(319) (219) 2,680

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 32.

FINANCIAL INSTRUMENTS (CONTINUED) Market risk (Continued) Interest rate risk management The Group is exposed to interest rate risk as it has borrowed funds from banks and financial institutions and has placed funds in interest bearing time deposits with banks during the year. Interest rate sensitivity analysis The Group’s exposures to interest rates on liabilities are detailed in note 25 to these consolidated financial statements. The Group uses interest rate cap (See note 9) to manage profit rate risk on the murabaha facility. The following table illustrates the sensitivity of the profit for the year to a reasonably possible change in interest rates of + 1% with effect from the beginning of the year. These changes are considered to be reasonably possible based on observation of current market conditions. The calculations are based on the Group’s financial instruments held at each consolidated statement of financial position date. All other variables are held constant. There has been no change in the methods and the assumptions used in the preparation of the sensitivity analysis. A positive number below indicates an increase in profit and negative number indicates decrease in profit. A 1% decrease in the interest rates would have the opposite effect.

Impact on consolidated statement of income

2010

2009

USD 000’s

(267)

(318)

Credit risk management Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group has adopted a policy of only dealing with creditworthy counterparties as a means of mitigating the risk of financial loss from defaults. The Group’s exposure and the credit ratings of its counterparties are continuously monitored and the aggregate value of transactions concluded is spread amongst approved counterparties. Ongoing credit evaluation is performed on the financial condition of accounts receivable. During the year, 60% of total revenue (2009: 50%) was derived from the sales to the Group’s largest counterparty-Egyptian General Petroleum Corporation (2009: Egyptian General Petroleum Corporation). The Group defines counterparties as having similar characteristics if they are related entities. Exposure to credit risk The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was: 2010

2009

USD 000’s

Held to maturity investment

49,950

Trade and other receivables

130,198

58,406

3,483

58,092

26,157

188,290

137,996

Liquid investments Bank balances

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 32.

FINANCIAL INSTRUMENTS (CONTINUED) Credit risk management (Continued) The maximum exposure to credit risk for trade receivables at the reporting date by geographic region was: 2010

2009

USD 000’s

Egypt

57,376

36,959

Yemen

1,381

1,524

Ukraine

4,500

2,231

Oman

1,503

1,322

Russia

441

2,519

65,201

44,555

Liquidity risk management Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. Ultimate responsibility for liquidity risk management rests with the management, which has built an appropriate liquidity risk management framework for the management of the Group’s short, medium and longterm funding and liquidity management requirements. The Group manages liquidity risk by maintaining adequate reserves and banking facilities, by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. The following tables detail the Group’s remaining contractual maturity for its financial liabilities. The tables have been drawn up based on the undiscounted cash flows of financial liabilities. At 31 December 2010

Financial liabilities

Long-term loans Trade and other payables

Less than 1 year

Between 3 and 5 years

More than 5 years

Total

USD 000’s

59,298

5.3

9,090

50,208

46,407

9,090

50,208

105,705

Weighted average effective interest rate

Between 1 and 3 years

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 32.

FINANCIAL INSTRUMENTS (CONTINUED) At 31 December 2009

Financial liabilities

Weighted average effective interest rate

Less than 1 year

Between 1 and 3 years

Between 3 and 5 years

More than 5 years

Total

USD 000’s

Long-term loans

48,866

13,866

62,732

3.88

Trade and other payables

30,212

79,078

13,866

92,944

Fair value of financial instruments Management believes that the fair value of all of the Group’s financial assets and financial liabilities is not significantly different from their respective carrying values. Capital risk management The Group manages its capital to ensure that it will be able to continue as a going concern while maximising the return to the shareholders through the optimisation of debt and equity balance. The Group’s overall strategy remains unchanged from 2009. The capital structure of the Group consists of equity comprising issued share capital, statutory reserve, voluntary reserve and share based compensation reserve as disclosed in notes 21, 22, 23 and 24 respectively, other reserves and retained earnings. Gearing ratio The gearing ratio at year end was as follows:

Debt (i) Less: Cash and bank balances and liquid investments Net debt Equity

2010

2009

USD 000’s

53,000

68,866

(58,092)

(29,640)

(5,092)

39,226

631,302

580,108

Net debt to equity ratio

(i) Debt is defined as long-term loans as detailed in note 25. 33.

JOINT VENTURE INTERESTS Operator

Country

Block

Interest

KEC KEC Melrose SIPETROL KEC

Egypt Egypt Egypt Egypt Egypt

Burg El Arab Abu Senan Block 6 Eas Ras Qatar Area A

75.00% 50.00% 15.00% 49.50% 70.00%

Medco Energi

Yemen

Block 82

21.25%

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010

33.

JOINT VENTURE INTERESTS (CONTINUED) Operator

34.

Country

Medco Energi KEC KEC KEC DNO CCC Medco Energi NHEPL NHEPL Medco L.L.C.

Yemen Yemen Yemen Yemen Yemen Yemen Cambodia Pakistan Pakistan Oman

KEC KEC KEC KEC KEC KEC KEC KEC

Ukraine Ukraine Ukraine Ukraine Ukraine Latvia Russia Russia

Block

Interest

Block 83 Block 15 Block 35 Block 74 Block 43 Block 49 Block E Kunri Jherruck Karim Small Fields BilousivkoChornuskhynska Dubrivka North Yablunivska Kulichihinske Bilske Block E5 Luszkoye Chikshina

21.25% 41.56% 88.24% 34.00% 28.33% 64.00% 20.625% 40.00% 40.00% 15.00% 100.00% 100.00% 100.00% 25.00% 25.00% 45.00% 100.00% 100.00%

GENERAL ASSEMBLY The Shareholders’ Annual General Assembly held on 12 May 2010 approved the annual audited consolidated financial statements of the Group for the year ended 31 December 2009. The Shareholders’ Extraordinary General Assembly held on 10 October 2010 approved the rights issue of 198,324 thousand shares with nominal value of 100 fils each and share premium of 55 fils each.

35.

CONTINGENT LIABILITIES AND CAPITAL COMMITMENTS a) Ukrnafta dispute Joint Activity Agreement # 410/95 and its subsequent amendments (“JAA 410”) govern the joint exploration and development of the Rudivsky-Chervonozavodsky gas condensate field in Ukraine (the “RC Field”) by Carpatsky Petroleum Corporation (“CPC”) and Ukrnafta. CPC’s interest in the RC Field is 14.91% and CPC claims that it is entitled to make additional investment under JAA 410 in order to restore its investment in the RC Field back to 50%. Ukrnafta disagrees with CPC’s claim to make additional investment. As a result, CPC commenced arbitration proceedings to claim for the termination of JAA 410 and seek damages to recover CPC’s actual share interest in JAA 410. The arbitration tribunal has issued its decision in favour of CPC in September 2010. In response to the arbitration, Ukrnafta issued court proceedings claiming: (i) termination of JAA 410 and damages from CPC; and (ii) injunctive relief against Parent Company and CPC to prevent CPC’s further involvement in JAA 410. On 24 September 2010, the Tribunal awarded CPC USD 145.7 million plus USD 1.2 million in costs and ordered the termination of CPC’s interest in the RC field. CPC has commenced recovery proceedings against Ukrnafta for receiving the arbitration award. KEC and CPC anticipate that their position will be ultimately vindicated and are committed to vigorously pursuing this matter.

KUWAIT ENERGY COMPANY K.S.C. (CLOSED) AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010

35.

CONTINGENT LIABILITIES AND CAPITAL COMMITMENTS (CONTINUED) a) Ukrnafta dispute (Continued) Since CPC’s interest in the RC field has been terminated by the Tribunal, the Group has re-classified all the related assets and liabilities into “Other receivables” (See note 19). The receivables from Ukrnafta will be set off against the arbitration award upon receipt of the same. b) Pechora Energy Company Limited arbitration Petromanagement-1 has filed 2 cases against Pechora Energy Company Limited (“Pechora”) in the Moscow Arbitration Court for claiming amounts due for services provided along with interest for delayed payments. Pechora has filed counterclaims against Petromanagement-1 in the Moscow Arbitration Court. All the cases have been dismissed by the Moscow Arbitration Court and are now in various stages of appeal. Both the Parent Company and Pechora anticipate that their position will be ultimately vindicated and are committed to vigorously pursuing these matters.

2010

2009

USD 000’s

d) Other contingent liabilities - letters of guarantee

21,238

22,776

e) Capital commitments (other than covered by letters of guarantee)

87,762

80,724

36.

UNDRAWN LETTER OF GUARANTEE FACILITIES The Parent Company has a letter of guarantee facility of USD 20 million (2009: Nil) against 50% cash collateral from JPMorgan Chase Bank N.A. The undrawn letter of guarantee facilities at the reporting date under this facility amounted to USD 15 million (2009: Nil).

37.

SUBSEQUENT EVENTS Subsequent to the year end, Egypt, Yemen and Oman have experienced significant political events that had an impact on the business environment in these countries as a whole. These events did not have an impact on the consolidated financial statements of the Group as at 31 December 2010. However, such political disruptions could have an impact on the Group’s future performance, profits and growth due to the expected fluctuations in the foreign currency exchange rate, interest rate, oil prices etc. and possible change in the value of the Group’s assets in these countries. However, the management of the Group believes that the Group will not be exposed to any significant implications due to the nature of its business and industry characteristics.

38.

PROPOSED DIVIDENDS The Board of Directors proposed to distribute cash dividends of 5 fils per share for 2010 (2009: Nil). This proposal is subject to the approval of the Annual General Assembly.

Glossary & Definitions AGM:

Annual General Meeting of Shareholders

barrel:

The standard barrel of crude oil or other petroleum product contains 42

AAPG: bbl: BOE/boe: bcf: Board: bpd: bopd: BOEPD/boepd: B.Sc:

BA: CEO: Company: Development Well: Dry hole: EBITDA: Exploration Expenditure: Exploratory well: EIS: Field: GCA: HSESR: IFC: IPIMS: kms: KD: KOC: KUFPEC: KPC:

LPG:

American Association of Petroleum Geologists

US gallons, or 35 Imperial gallons or 159 Liters Barrel

Barrels of oil equivalent; A BOE conversion ratio of 6 Mcf: 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead Billion cubic feet

Board of Directors of Kuwait Energy Barrels per day

Barrels of oil per day

Barrels oil equivalent per day Bachelor of Science Bachelor of Art

Chief Executive Officer

Kuwait Energy Company KSCC or Kuwait Energy

A well drilled within the proved or probable reserves area of an oil or gas reservoir to the depth of a stratigraphic horizon known to be productive

An unsuccessful well; a well not capable of producing commercial quantities of oil or gas

Earnings Before Interest, Taxes, Depreciation and Amortization; An approximate measure of a Companyâ&#x20AC;&#x2122;s operating cash flow

All costs associated with drilling of exploratory wells and other costs incurred in evaluating commercial viability of a geological structure

A hole drilled: a) to find and produce oil or gas in an area previously considered unproductive area; b) to find a new reservoir in a known

field, i.e., one previously producing oil and gas from another reservoir, or c) to extend the limit of a known oil or gas reservoir Employee Incentive Scheme

The geographical area encompassing a group of one or more underground petroleum pools sharing the same or related infrastructure Gaffney, Cline & Associates

Health, Safety, Environment and Social Responsibility International Finance Corporation

International Petroleum Industry Multimedia System Kilometres 1 km = 0.621 miles Kuwaiti Dinar

Kuwait Oil Company

Kuwait Foreign Petroleum Exploration Company Kuwait Petroleum Corporation Liquefied Petroleum Gas

Meters; 1m = 3.281 feet

Mbbl:

Thousand barrels

MENA: mboe: MM: MMBOE/mmboe: MBA: NHEPL: N / A: NSAI: Proven: Probable: Production: PRMS: Ph. D: Reserves: RRR: sq. kms:

scf: SPE: SPEE: US$/US$: WI: Workover:

WPC: YE09: YE10: 2C: 2D: 2P:

3D: 3D seismic: #:

Middle East & North Africa Thousand barrels oil equivalent Million

Million barrels oil equivalent

Master of Business Administration

New Horizon Exploration & Production Limited, Pakistan Not Applicable

Netherland Sewell & Associates, Inc

Proven reserves are those quantities of petroleum which, by analysis of geological and engineering data, can be estimated with reasonable certainty to be

commercially recoverable, from a given date forward, from known reservoirs and under current economic conditions, operating methods, and government regulations

Probable reserves are those reserves which analysis of geological and engineering data suggests are more likely than not to be recoverable The quantity of petroleum produced in a given period Petroleum Resources Management System Doctrate

Reserves are those quantities of hydrocarbons which are anticipated to be

commercially recovered from known accumulations from a given date forward

Reserves Replacement Ratio; derived using total reserves additions in a period/ total production in same period Square kilometers

Standard cubic feet

Society of Petroleum Engineers

Society of Petroleum Evaluation Engineers United States Dollars

Working Interest; A Companyâ&#x20AC;&#x2122;s equity interest in a project before reduction for royalties or production share owed to others under the applicable fiscal terms Operations on a producing well to restore or increase production World Petroleum Council Year-End 2009

Year-End 2010 (Kuwait Energy follows January to December as its financial/ reporting year)

Contingent Resources Mid - case Recoverable Volume 2 dimensional

Proven plus Probable Reserves 3 dimensional

Derived from a set of seismic lines. 3D seismic data provide detailed information about fault and subsurface structures Number

FORWARD LOOKING STATEMENT This Annual Report includes statements that contain words or phrases such as “will”, “aim”, “will likely result”, “ believe”, “ expect”, “will continue”, “anticipate” “estimate” “intend” “plan”, “contemplate”, “seek to”, “future”, “objective”, “goal”, “project”, “should” “will pursue” and similar expressions or variations of such expressions which are “forward looking statements”. Such forward looking statements are by their nature speculative and based on various assumptions. Any such statements are hypothetical with respect to prospective events and should not be construed as being indicative of the actual events which will occur or a guarantee of future performance. All forward-looking statements are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those contemplated by the relevant forward looking statements. Important factors that could cause results to differ materially from the Company’s expectations include, among others:

General economic and business conditions in Kuwait and other countries; The Company’s ability to successfully implement its strategy, growth and expansion plans, and technological changes; Changes in the value of the Kuwaiti Dinar and other currency changes; Changes in Kuwaiti or international interest rates; Changes in laws and regulations that apply to investment companies in Kuwait; Changes in political conditions in Kuwait and other countries; and Changes in the foreign exchange control regulations in Kuwait.