th
4 Quarter 2011 Activity Report
Enquiries: Yousef Al Ebrahim Corporate Affairs Manager Kuwait Energy Company Tel: (+965) 2575 5657/ Ext 343 Fax: (+965) 2575 5679 Mobile: (+965) 9720 3998 Email: Public.Relations@kec.com.kw
Forward looking statements
This Quarterly Activity 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.
Disclaimer: All information provided in this report is for information purposes only. All financial information is unaudited and is subject to an annual financial audit.
Fourth Quarter 2011 Activity Report
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Contents 1. 2. 3. 4 5. 6.
Executive Summary ................................................................................................................................ 4 Reserves ...................................................................................................................................................... 7 Production ................................................................................................................................................. 8 Development Activity ......................................................................................................................... 10 Exploration Activity ............................................................................................................................ 12 Financials................................................................................................................................................. 14
Cover Picture: Ahmad-1X, Gulf of Suez, Area A, Egypt.
Kuwait Energy Company KSCC Salem Al Mubarak St., Laila Tower, Block 4, Bldg. #35, 13th Floor, Office 2, Salmiya, Kuwait P.O. Box. 5614, Salmiya 22067 Kuwait Tel: (965)2575-5657 Fax: (965) 2575-5679
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1. Executive Summary: 4th Quarter 2011 Activity Report For the period ended 31 December 2011 Comparative Performance at a Glance Quarterly comparison
Q4 2011
Q3 2011
Change %
Production
BOEPD
15,018
13,568
10.7%
Revenue*
USD Million
50.4
47.9
5.2%
Corresponding Period
Q4 2011
Q4 2010
Change %
Production
BOEPD
15,018
13,372
12.3%
Revenue*
USD Million
50.4
39.7
26.9%
* Revenue reported is sales less profit petroleum
Quarterly production and sales summary – 4th Quarter 2011
Production and revenue achieved in Q4 2011 constituted a company record. The peak daily production rate of 17,733 barrels of oil equivalent per day (boepd) occurred on the 31st of December.
Daily average working interest production for Q4 2011 was 15,018 boepd, a 10.7% increase on the previous quarter. This increase was due primarily to higher production in Egypt, following exploration success and development wells being brought on line.
Revenue was US$50.4 million for Q4 2011, up 5.2% from Q3 2011 due to higher production and 26.9% increase from Q4 2010 due to higher realized oil and gas prices as well as higher production.
Key activities during the period Financial
Debt Financing: The Company signed a mandate letter for a senior debt facility of US$165 million. The funding target date is Q2 2012.
IPO Update: The Kuwait Energy group completed its restructuring to a Jersey holding company in December 2011, and is currently preparing for a future listing subject to market conditions.
Operations
Health, Safety, Sustainability and Environment: Kuwait Energy classifies its recordable incidents as Lost Time Incidents (LTI), Restricted Work Incidents and Medical Treatment Incidents (MTI). No recordable incidents occurred during Q4 2011.
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The following table provides days without LTI for the countries in which Kuwait Energy operates:
Country
Days without LTI
Egypt
1,113
Ukraine
1,018
Russia
730
Yemen
578
On the 13th of January 2012, KE Head Office has been awarded with ISO 9001:2008 Quality Management System with zero non-conformity to the standards. The implementation and full compliance of Bureau VERITAS’ ISO 9001:2008 fulfills a major London Stock Exchange listing requirement.
Exploration: Area A, Egypt had a successful exploration discovery with the completion of the well Ahmad-1X in the lower Bahariya formation which produced at an initial rate of 890 boepd. In the Abu Sennan Concession, drilling of the Al Salmiya-1X well was completed and is being prepared for testing the Abu Roash C and E formations. A second well, Al Jahraa-1X, was also drilled during the quarter and the Kharita formation is currently being tested.
Development: During Q4 2011, 15 development wells were drilled. In the ERQ field, Egypt, the Shahd SE-5 appraisal well was tested in the lower Bahariya formation with an initial gross oil production rate of 5,500 boepd. In Area A, Egypt, Shukheir NW-9 was drilled and produced at a gross initial rate of 580 boepd.
Portfolio Management: Kuwait Energy continues to manage its asset portfolio and is actively looking for strategic partners to farm in to some of its non-core assets. In Ukraine, the exploration license for the Dubrivska field expired during the quarter and Kuwait Energy chose not to extend the license, which had no impact on production or reserves. In December 2011, the JAA 429 license in Ukraine was terminated by a court resolution following disputes between our two partners in JAA 429, Ukragaz and Ukrabud.
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Key activities during the period (continued) Business Development Kuwait Energy is pursuing its growth strategy with a main geographical focus on the MENA region, specifically in Egypt, Yemen and Iraq Iraq Opportunities: Iraq Fourth Petroleum Licensing Bid Round In 2011, the Iraqi Ministry of Oil announced its intention to offer 12 exploration blocks covering various locations in Iraq. In December 2011, Kuwait Energy attended a workshop held to discuss the technical and commercial aspects of the fourth bidding round contracts. The bid dates have been moved from March 2012 to April 2012 based on requests from several companies interested in the blocks. Kuwait Energy is carrying out preliminary technical evaluations of the blocks and screening potential partners for further cooperation. Yemen Opportunities: An assessment of Yemen gas resources and a feasibility study were completed in April 2011, as per the Memorandum of Understanding (MoU) signed between Kuwait Energy and the Yemen Ministry of Oil & Minerals in October 2010. The study was submitted to Yemen’s Petroleum Exploration and Production Authority. Discussions on next steps are on hold due to the current situation in Yemen.
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2. Reserves: Kuwait Energy engaged Gaffney Cline & Associates (GCA), an independent energy consulting firm, to undertake an audit of its year end 2010 reserves, and Fugro Robertson to estimate its year end 2010 resources. As at 31 December 2010, Kuwait Energy’s working interest Proven and Probable (2P) reserves were 48.8 mmboe, working interest contingent risked resources were 32 mmboe and best estimate of risked prospective resources was 212 mmboe. The prospective resource revision includes adjustments for the Abu Sennan partial divestment. A breakdown of the reserves and resources is shown in the tables below:
Classification
Kuwait Energy Reserves and Resources in mmboe YE10 Working Interest
Category YE09
Production
Reserves
Proven + Probable
51.20
-3.72
Contingent Resources
2C
15.45
--------
Prospective Resources
Best
235.22
--------
--------
=
35%
Proven plus Probable RRR
Acq/Divest
YE10 - WI
YE10 - Net Entitlement
1.11
-0.71
48.77
35.73
16.50
0.00
31.95
3.49
-26.61
212.10
Exploration Revisions Adds 0.90
Proven plus Probable Reserves (Kuwait Energy Working Interest) Sales Gas (bcf)
Crude Oil Condensate (mmbbl) (mmbbl)
Total (mmboe)
Reserves year end 2009 Production Exploration Discoveries Acquisition/Divestments & Revisions
57.91 -1.77 0.00 -2.30
38.61 -3.37 0.90 1.11
3.13 -0.06 0.00 -0.36
51.20 -3.72 0.90 0.40
Reserves year end 2010
53.84
37.26
2.71
48.77
Notes: 1. Reserve and resource estimates are Kuwait Energy Working Interest 2. Resource Estimates are risked 3. 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 GCA and Resource estimates by Fugro Robertson 5. In 2010, KEC won the bid to develop the Siba & Mansuriya fields in Iraq - additional 2P WI reserves of 141.9mmboe were booked post the contract signing in June 2011.
Reserves & Resources Definitions Reserves and resources have been estimated in accordance with the 2007 Society of Petroleum Engineers (SPE), World Petroleum Council, American Association of Petroleum Geologists, Society of Petroleum Evaluation Engineers (SPEE) and Petroleum Resources Management System (PRMS) – commonly referred to as the SPE PRMS.
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3. Production: Kuwait Energy’s working interest share of production and the revenue for the quarter ended 31 December 2011 compared to the quarters ending 30 September 2011 and 31 December 2010 is shown in the table below: Asset
Daily Average Production (boepd) Q4 2011 Q3 2011 Q4 2010
Egypt BEA
692
378
228
Area A
4,300
4,073
4,351
ERQ
5,127
3,718
3,692
Egypt Total* Oman
10,118 2,892
8,168 2,928
8,271 2,763
Yemen
573
605
717
Ukraine
819
1,195
1,020
Russia
617
671
602
Total*
15,018
13,568
13,372
Sales Revenue** (US$ million)
50.4
47.9
39.7
104.36
71.05
10.95
8.60
Average Oil Price*** (US$ per 104.61 bbl) Average Gas Price**** (US$ per 14.06 mcf)
Daily average working interest production for Q4 2011 was 15,018 barrels of oil equivalent per day (boepd), a 10.7% increase from the previous quarter. This increase was primarily due to higher production from the following fields as exploration success and development wells were put on production during the quarter:
ERQ, Egypt: Well Shahd-5 put on production at 5,500 boepd gross Area A, Egypt: Wells Ahmed 1X and Shukheir NW-X9 put on production at 890 boepd and 580 boepd gross respectively BEA, Egypt: Wells BEA-9, BEA-10 and BEA-11 put on production at 686 boepd, 96 boepd and 1,008 boepd gross respectively
* Total may reflect rounded figures ** Sales revenue includes revenue from sale of gas and condensate from Ukraine assets and is less profit petroleum and is based on management accounts which are subject to audit. *** Average Oil Price excludes Karim Small Fields, Oman as it is under a Service Agreement. **** Average Gas Price includes Value Added Tax (VAT).
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Quarterly Revenue and Production The chart below shows quarter-by-quarter daily average production (boepd) and revenue from Q1 2006 to Q4 2011:
16,000
60
14,000 50 12,000
40 10,000
B O E P D
U S 30 $ M M
8,000
6,000
20 4,000 10
2,000
0
Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11
Daily Avg Prodn (BOEPD)
20
120
608
Revenue US$MM
0.1
0.4
0.8
1,971 2,333 3,005 2,891 4,630 5,873 8,264 9,140 9,364 10,021 10,493 12,611 12,798 13,421 13,074 13,168 13,371 12,985 12,902 13,568 15,018 1.1
3.7
7.1
7.3
7.8
13.3
30.1
32.3
15.0
14.4
19.5
26.8
27.6
33.1
36.9
35.8
39.7
41.4
46.5
47.9
50.4
The Q4 2011 production and revenue achieved were 10.7% and 5.2% higher respectively than the previous quarter. Both production and revenue achieved during the quarter were the highest recorded in the history of the Company.
Brent Crude Oil Price
Historical Brent US$/bbl 140 120
US$/bbl
100 80
60 40 20 0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 06 06 06 06 07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11
Historical Brent US$/bbl 63
70
71
61
59
69
74
88
96 123 117 58
46
60
69
76
77
79
77
87 105 117 113 109
Source: EIA
Fourth Quarter 2011 Activity Report
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0
4. Development Activity: Development expenditure up to 31 December 2011 is US$72.2* million which was primarily spent on:  
Drilling 49 development wells in Egypt, Oman and Russia. Upgrading surface facilities in Luzskoye Field, Russia.
Country
Basin/Area
No. of Target Wells
Kuwait Status at end Q4 2011 Energy Interest
Q1 2011 Oman
Karim Small Fields
8
Oil
15.0%
8 Producers
Karim Small Fields
9
Oil
15.0%
9 Producers
Burg El Arab
1
Oil
75.0%
Producer
East Ras Qattara
1
Oil
49.5%
Producer
Russia
Luzskoye
1
Oil
100%
Producer
Q3 2011 Oman
Karim Small Fields
7
Oil
15.0%
7 Producers
Burg El Arab
1
Oil
75.0%
Producer
East Ras Qattara
3
Oil
49.5%
3 Producers
Area A
2
Oil
70.0%
2 Producers
Russia
Luzskoye
1
Oil
100%
Testing
Q4 2011 Oman
Karim Small Fields
9
Oil
15.0%
7 Producers, 2 drilling
Burg El Arab
2
Oil
75.0%
2 Producers
Area A
2
Oil
70.0%
1 Producer, 1 under completion
Luzskoye
2
Oil
100%
2 Drilling
Q2 2011 Oman Egypt
Egypt
Egypt Russia
* Based on management accounts which are subject to audit.
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4.1 Facilities Country Facilities Area A
Shukheir North West (SHNW) Facility: The facility was relocated to a permanent location to upgrade it with a 2,400 bbls tank and three phase production separator, extension and modification for manifolds and tank discharge lines.
Tender for power supply infrastructure was issued. This will eliminate the need for rental generators and diesel for SHNW & Shukheir fields and the accommodation camp resulting in potential savings in operating expenditures of up to US$1.2 million per year.
ERQ Egypt
New pipeline at Qarun completed.
Shahd and Shahd SE Facilities Upgrade: 2,400 barrels tanks installed.
Shebyl Permanent Facilities: 100% completed, diverted well flow to the permanent station and released rental package.
Shahd SE-5 flow line completed.
BEA
Production lines from wells BEA W1-X and BEA-4 have been connected and tied back to the BEA production station eliminating the need for road tankers resulting in reduced operating costs.
Export Line: Design and construction tender of BEA Shipping Export line and pumping station commenced.
Luzskoye Russia
Commissioning of new production facilities was completed, resulting in an increase of processing capacity and the optimization of field operating expenditures.
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5. Exploration Activity: In the twelve months to 31 December 2011 exploration expenditure was US$40.6* million, which was spent primarily on:  
Drilling exploration wells in Egypt and Pakistan; and Acquisition and processing of 2D and 3D seismic.
The table below provides the status of these wells: Country
Basin/ Area
Well
Target
Kuwait Energy Cost Interest
Well Status
2010 Carry over Shebyl-1
Oil
49.5%
Yara-1
Oil
49.5%
GPZZ-4
Oil
78.0%
Gas
40.0%
Oil discovery tested at 600 bopd on production
ERQ Egypt Abu Sennan Pakistan Jherruck
Jherruck-B-1
Dry hole, Plugged & Abandoned (P&A) Gas and condensate discovery initial flow rate test is equivalent to approximately 2,000 boepd (gross) Gas discovery, temporarily suspended, investigating commerciality
Q1 2011
Egypt
ERQ
Dry hole, P & A
Karma-1
Oil
49.5%
Saady-1
Oil
49.5%
Shebyl-East-1
Oil
49.5%
Oil discovery, production tested at 1,500 bopd
Al Ahmadi-1
Oil
78.0%
Gas and condensate discovery initial flow rate test is equivalent to approximately 2,900 boepd (gross)
Ahmad-1X
Oil
70.0%
Oil discovery, production tested at 890 bopd
Fatema-1X
Oil
70.0%
Dry hole, P & A
Al Jahraa-1X
Oil
78.0%
Al Salmiya-1X
Oil
78.0%
Dry hole, P & A
Q2 2011 Egypt
Abu Sennan
Q3 2011 Egypt Area A Q4 2011 Area A Egypt
Abu Sennan
Testing Drilling
* Based on management accounts which are subject to audit. Fourth Quarter 2011 Activity Report
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5.1 Seismic Activity: Seismic activity during 2011 is shown in the table below: Country
Area/Basin
Type
km/km2 During 2011
Egypt
Mesaha
2D
800 km
Data processing in progress.
Yemen
Block 74
2D
267 km
Final technical report and deliverables issued.
Ukraine
NY
3D
54 km2
Pre-stack Time Migration (PSTM) of data from both vintages completed. Data conditioning for PSTM process in progress.
Russia
Luzskoye
3D
28 km2
Processing and interpretation completed. Documentation of results in progress.
Chikshina
3D
14 km2
Data acquisition in progress.
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6. Q4 2011 Financials: Estimated Consolidated Statement of Income: Quarter on Quarter Comparison
Actual Consolidated Statement of Income Q4-2011
Q3-2011
Q4-2010
50.4
47.9
39.7
-
0.7
15.5
Royalties
(1.7)
(3.2)
(2.1)
Operating cost, general and administrative expenses
(25.6)
(17.0)
(16.7)
23.1
28.4
36.4
Revenue (Sales) Other income
Operating Cash Flow
US$ MM
Revenue was US$2.5million higher than the previous quarter primarily due to increased sales volumes. Royalty payments were US$1.5million lower than the previous quarter primarily due to lower sales in Ukraine due to the JAA429 license termination by court resolution. Kuwait Energy is following the matter to find a resolution for this issue. Operating costs, general and administration expenses were US$8.6million higher than the previous quarter primarily due to the write off of JAA 429 receivables and the 10.2% increase in production.
Notes:
All financial numbers are based on management accounts and are unaudited; Revenue is reported net of government take, in line with the common accounting practices of leading E&P companies listed on the London Stock Exchange.
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