Fourth Quarter 2010 Activity Report
Enquiries: Abbas Al‐Rasheed Public Relations Advisor Kuwait Energy Company Tel: (+965) 2575 5657 – 2575 5878 / Ext 314 Fax: (+965) 2575 5679 Mobile: (+965) 9729 8106 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 2010 Activity Report
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Contents
1. 2. 3. 4 5. 6.
Executive Summary ................................................................................................................................... 4 Reserves .......................................................................................................................................................... 8 Production ..................................................................................................................................................... 9 Development Activity ............................................................................................................................... 11 Exploration Activity .................................................................................................................................. 12 Financials .................................................................................................................................................... 14
Cover Picture: Kuwait Energy Management Team from the Strategy Meeting of 31 October 2010 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: Fourth Quarter 2010 Activity Report For the period ended 31 December 2010 Comparative Performance at a Glance Quarterly comparison
Production
boepd
Revenue**
US$ Million
Yearonyear comparison Production
boepd
Revenue**
US$ Million
Q4 2010
Q3 2010
Change %
13,372
13,168
1.5%
39.7
35.8*
10.9%
Q4 2010
Q4 2009
Change %
13,372
12,798
4.5%
39.7
27.6
43.8%
* Q3 2010 revenue reported here is different to the numbers reported in the Q3 2010 Activity Report, due to accounting adjustments resulting from an additional Government share paid on East Ras Qattara (ERQ), Egypt. ** Revenue reported is sales less profit petroleum and is based on management accounts which are subject to audit.
Quarterly production and sales summary – fourth quarter 2010
Average daily working interest production was 13,372 barrels of oil equivalent per day (boepd), a 1.5% increase on the previous quarter; revenue was up 10.9% from the previous quarter due to higher production from East Ras Qattara (ERQ), Egypt and Ukraine and product prices. Production was up 4.5% compared to Q4 2009 primarily due to production increases in ERQ, Egypt and Ukraine . Revenue was US$39.7 million; up 43.8% from Q4 2009 as a result of higher production and higher realized oil and gas prices.
Key activities during the period Financial PreIPO Equity: Kuwait Energy is currently in the process of completing a Rights Issue to existing Shareholders of KD30.7 million (~US$100million) which was approved at the Shareholders’ meeting held on 10 October 2010. These additional funds will be utilized in the development of the Company’s reserve base, further exploration and to pursue major growth opportunities.
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Key activities during the period (continued)
Operations Health, Safety, Environment and Social Responsibility: No Recordable Incidents* in Kuwait Energy operated assets and ten recordable incidents in Kuwait Energy’s non‐operated assets:
HSE Recordable Incidents (Kuwait Energy Non‐Operated Assets) # of Incidents in Q4 2010
Field/Area
Classification
Karim Small Fields, Oman
LTI (Lost Time Incidents)
5
MTI (Medical Treatment Case Incidents)
3
MVI (Motor Vehicle Incidents)
2
Block 43, Yemen
* Recordable Incidents are measured in terms of the consequences associated with health, safety and the surrounding environment that could lead to fatalities, LTI, MTI, and Restricted Work Incidents (RWI). On 13 December 2010, Kuwait Energy, in Egypt, passed two years acting as Operator without any recordable incidents. On 31December 2010, Kuwait Energy, in Russia, passed one year acting as Operator, without any recordable incidents.
Exploration: BEA‐W‐1X well, Burg El Arab (BEA), Egypt was completed in the Abu Roash G formation and is producing 140 barrels of oil per day. Balharak South‐2X well, Block 49, Yemen was completed and tested three objectives with one objective flowing traces of oil with water. The well has been suspended for further evaluation. Kunri‐A‐1 well, Kunri, Pakistan was plugged and abandoned. Four exploratory wells: Jherruck‐1, Pakistan, Yara‐1, Shebyl‐1 in ERQ and ZZ‐4, Abu Sennan, Egypt were drilling at the end of the quarter. The acquisition and processing of the 3D seismic data of 300 km2 in Latvia offshore blocks was also completed. Production: Production increased by 204 boepd from the previous quarter primarily due to Ukraine and the ERQ field, Egypt. Development: Ten successful development wells drilled during the quarter in the Karim Small Fields, Oman.
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Key activities during the period (continued) Divestment: Work continued towards closing the transfer of Kuwait Energy’s 22% interest in Abu Sennan and 15% in Mesaha to Beach Energy Limited and the assignment documentation is now with the regulatory authorities and the Minister for signing. All pre‐emptive rights in relation to both concessions have either expired or been waived. Sale and Purchase Agreement for sale of 20% interest of BEA to East West Petroleum has been signed and Kuwait Energy is currently working on closing the transfer of interest.
Business Development
Iraq Opportunities: On 20 October 2010, Kuwait Energy participated in Iraq’s Third petroleum licensing bid round and was awarded 20 year term gas development contracts for the Siba and Mansuriya fields. Kuwait Energy will be the operator of Siba, where it will participate with a 60% contractor share alongside Türkiye Petrolleri Anonim Ortaklığı (TPAO), who retains the remaining 40%. TPAO will be the operator of Mansuriya, participating with a 50% contractor share, while Kuwait Energy and Korea Gas Corporation (KOGAS) will retain 30% and 20% respectively. The Siba and Mansuriya gas contracts were initialed on 14 November 2010 and the signing is expected during the first quarter 2011. Yemen Opportunities: The Yemen gas sector has significant potential to further develop supply to power plants, industry participants and the domestic market. The Yemen Ministry of Oil and Minerals signed a Memorandum of Understanding (MoU) with Kuwait Energy on 6 October 2010 allowing the Company to conduct a six‐ month 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. For further details please refer to the press release on our website www.kec.com.kw. Following the signature of this MoU, Kuwait Energy commenced a comprehensive assessment of the gas reserves and resources as well as a study of the gas demand and infrastructure in Yemen. Russian Acquisition: Kuwait Energy completed the acquisition of Pechora Energy Company LLC and OJSC VIK, which own the two Russian oil fields, Luzskoye and Chikshina, from Concorde Oil and Gas Limited. Kuwait Energy entered into this transaction in December 2009. Prior to the transaction, Kuwait Energy had a 36.56% working interest in the Luzskoye and Chikshina oil fields through its 36.56% ownership of Concorde Oil & Gas Limited. With the completion of the transaction, Kuwait Energy has a 100% working interest, as well as operatorship, of the two oil fields. Fourth Quarter 2010 Activity Report
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Key activities during the period (continued) Technology Related Developments: In Q4 2010, Kuwait Energy signed a five year technology sharing contract with Schlumberger. This contract grants Kuwait Energy access to Schlumberger’s oilfield services expertise and technologies. Kuwait Energy will benefit from oil and gas software and IT infrastructure solutions which improve business performance, reduce exploration and development risk, and realize the full potential of its oil and gas fields. The Company also entered into a three‐year agreement with East West Petroleum Corporation, a Calgary‐based exploration and production company, for the application of emerging unconventional oil and gas technologies in concessions owned by Kuwait Energy. Kuwait Energy will benefit from East West Petroleum’s technologies in identifying resource plays such as: shale gas, shale oil and tight sand gas, for future development. The identification process is studied through comprehensive rock and formation analyses, state‐of‐the‐art drilling design and modern reservoir fracturing applications for unconventional and conventional reservoirs. The agreement covers 13 exploration and production concessions held by Kuwait Energy in four countries, namely Egypt, Yemen, Ukraine and Russia.
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2. Reserves: Kuwait Energy has engaged Gaffney Cline & Associates (GCA), an independent energy consulting firm, to undertake an audit of its year end 2010 reserves which is expected to be completed in Q1 2011 . As at 31 December 2009, Kuwait Energy’s working interest Proven and Probable (2P) reserves are 51.2mmboe. A breakdown of the reserves is shown in the tables below: KEC WI Reserves/Resources mboe Exploration Acq/Divest & YE09 Production Adds Revisions (GCA/NSAI)
Classification
Category
Reserves
2P
43,445
3,235
2,394
8,592
51,197
Contingent & Prospective Resources
Mid Case
921,146
800,854
1,722,000
2P RRR
=
340%
YE08
Proven plus Probable Reserves (KEC Working Interest) Sales Gas (mmcf) Reserves year end 2008 Production Exploration Discoveries Acquisition/Divestments & Revisions Reserves year end 2009
Notes:
Crude Oil Condensate (mbbl) (mbbl)
85,350 1,894 0 ‐25,545 57,912
25,041 2,892 2,394 14,070 38,614
4,470 28 0 ‐1,307 3,135
Total (mboe) 43,445 3,235 2,394 8,592 51,197
Estimates above are KEC working interest and are unrisked. Estimates above exclude Karim Small Fields (Oman) which is covered by a Service Agreement which does not allow external reporting of reserve volumes. Year end 2009 reserves were audited by Gaffney Cline & Associates (GCA) with the exception of Russia which was audited by Netherland Sewell & Associates (NSAI). Year end 2009 contingent and prospective resources were estimated/reviewed by Fugro Robertson Limited, UK. Reserves & Resources Definitions Reserves and resources have been estimated in accordance with the 2007 Society of Petroleum Engineers (SPE), World Petroleum Council (WPC), American Association of Petroleum Geologists (AAPG), Society of Petroleum Evaluation Engineers (SPEE) and Petroleum Resources Management System (PRMS) – commonly referred to as the SPE PRMS. Fourth Quarter 2010 Activity Report
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3. Production: Kuwait Energy’s working interest share of production and the revenue for the quarter ended 31 December 2010 compared to the quarters ending 30 September 2010 and 31 December 2009 is shown in the table below: Asset
Daily Average Production (boepd)
Q4 2010
Q3 2010
Egypt
Q4 2009
BEA
228
287
257
Area A
4,351
4,335
4,779
ERQ
3,692
3,383
2,809
Egypt Total
8,271
8,005
7,845
Oman
2,763
2,783
2,805
Yemen
717
752
933
Ukraine
1,020
904
925
Russia
602
724
290
Total
13,372
13,168
12,798
(US$
39.7
35.8
27.6
Sales Revenue (US$ per boe)
32.27
29.55
23.44
Sales Revenue million)*
Kuwait Energy’s Q4 2010 average daily working interest production was 13,372 boepd, a 1.5% increase on Q3 2010, primarily due to Ukraine and ERQ, Egypt; and a 4.5% increase on Q4 2009 production primarily due to higher production from ERQ, Egypt, Ukraine and Russia. Revenue was up 10.9% from the previous quarter due to higher production from ERQ, Egypt and Ukraine and product prices. Q3 2010 revenue reported here are different to the numbers reported in the Q3 2010 Activity Report due to accounting adjustments resulting from an additional Government share paid on ERQ, Egypt.
* 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. Fourth Quarter 2010 Activity Report
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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 2010:
16,000
45
14,000
40
35
12,000
30 10,000
B O E P D
25 8,000 20 6,000 15 4,000
10
2,000
0
U S $ M M
5
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
Daily Avg Prodn (BOEPD)
20
120
608
Revenue US$MM
0.1
0.4
0.8
0
1,971 2,333 3,005 2,891 4,630 5,873 8,264 9,140 9,364 10,021 10,493 12,611 12,798 13,421 13,074 13,168 13,371 1.1
3.7
7.1
7.3
7.8
13.3
30.1
32.3
15.0
14.4
19.5
26.8
27.6
33.1
36.9
35.8
39.7
Revenue was up 10.9% from the previous quarter due to higher production from ERQ, Egypt and Ukraine and product prices. Note: Q3 2010 revenue is different to that reported in the Q3 2010 Activity Report due to accounting adjustments resulting from an additional Government share paid on ERQ, Egypt.
Brent Crude Oil Price 140
120
US$/bbl
100
80
60
40
20
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
Historical Brent US$/bbl 62.8 70.3 70.8 60.7 58.6 68.6 74.4 88.4 96.2 122.5 117.5 58.0 45.8 59.7 69.3 75.5 77.3 79.4 76.9 85.1
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4. Development Activity: Development expenditure in 2010 totalled US$49.6* million which was primarily spent on the drilling of 33 development wells, 32 in Oman and one in ERQ, Egypt. This expenditure also includes 2009 carry over wells in Egypt, Ukraine and Russia. During the fourth quarter, a total of ten development wells were drilled in Karim Small Fields in Oman: Country Oman
Basin/Area Karim Small Fields
No. of Wells
Target
KEC Interest
Oil
15.0%
10
Status at end Q4 2010 Producers
* Based on management accounts which are subject to audit.
4.1 Facilities Country
Facilities Area A Installed rental indirect heater at Um‐El Yusr station to improve water separation and reduce back pressure at Yusr production manifold.
Egypt
Ukraine
ERQ Qarun Petroleum Company (QPC) receiving area: On‐spec delivery: Completed all civil, mechanical and electrical work. Shahd SE: Installed two tanks (2,400 bbls each), completed mechanical work, conducted hydro test, and both tanks are on stream. Completed all required modifications to the new production separator. Al Zahraa: Installed two tanks (2,400 bbls each), completed mechanical work to bring both tanks on stream. BC Performed compressor maintenance, installed flow meters for condensate and water in the gas plant.
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5. Exploration Activity: Exploration expenditure in 2010 totalled US$43.1* million which was primarily spent on the drilling of 11 exploration wells (eight in Egypt, two in Pakistan and one in Yemen). During the fourth quarter, exploration expenditure totaled US$18.4* million and the key activities were: BEA‐W‐1X well, BEA, Egypt was completed in the Abu Roash G formation and is producing 140 boepd. Balharak South‐2X well, Block 49, Yemen was completed and tested three objectives with one objective flowing traces of oil with water. The well has been suspended for further evaluation. Kunri‐A‐1 well, Kunri, Pakistan was plugged and abandoned. Four exploratory wells: Jherruck‐1, Pakistan, Yara‐1, Shebyl‐1 in ERQ and ZZ‐4, Abu Sennan, Egypt were drilling at the end of the quarter. Acquisition and processing of the 3D seismic data of 300 km2 in Latvia offshore blocks was completed. Well Target KEC Cost Well Status Basin/ Country Area Interest 2009 Carry over Egypt
ERQ BEA
Q1 2010 Egypt ERQ
Diaa‐1 BEA‐1ST**
Oil Oil
49.5% 75.0%
Oil Producer Oil Producer; oil bearing in two deeper exploration zones
Rana SE‐2 Abu Fudha‐1
Oil Oil
49.5% 49.5%
Oil Producer Dry hole
BEA‐W‐1X Al Zahraa West‐1
Gas Oil
75.0% 49.5%
Oil Producer Abandoned due to technical reasons
Al Zahraa West‐2 BS‐2X
Oil Oil
49.5% 75.3%
Dry hole Suspended
Q2 2010 Egypt
BEA ERQ
Q3 2010 Egypt ERQ Yemen Block 49 Q4 2010
Egypt
Pakistan
Abu Sennan ERQ
AS ZZ‐4
Oil
72.0%***
Drilling – Carried over to 2011
Yara‐1
Oil
49.5%
Drilling – Carried over to 2011
ERQ
Shebyl‐1
Oil
49.5%
Drilling – Carried over to 2011
Oil Gas
40.0% 40.0%
Dry Hole Drilling – Carried over to 2011
Kunri Kunri‐1 Jherruck Jherruck‐1
* Based on management accounts which are subject to audit. ** Development well with exploration objectives at deeper levels (extension well) *** Kuwait Energy has divested 22% of Abu Sennan to Beach Energy Ltd subject to Egyptian Regulatory approvals
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5.1 Seismic Activity: Seismic activity during 2010 is shown in the table below: Country
Area/Basin
Type
km/km2
Status
Mesaha
2D
1,000 km
DB
3D
76 km2
Completed seismic interpretation.
Area A
3D
655 km2
Data reprocessing completed.
Area A
3D
655 km2
Interpreting reprocessed seismic data.
Mesaha
2D
1,000 km
Data interpretation completed.
Block 74
2D
267 km
Acquisition of seismic completed, data processing in progress.
Egypt
Area A
3D
655 km2
Interpretation of data is in progress.
Yemen
Block‐74
2D
267 km
Processing of data in progress.
Ukraine
NY
3D
54 km2
Acquisition in progress.
North Block
3D
300 km2
Acquisition and fast track processing completed.
Q1 2010 Egypt
Acquisition of seismic processing completed.
and
data
Q2 2010 Ukraine Egypt Q3 2010 Egypt
Yemen
Q4 2010
Latvia
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6. Financials:
Estimated Consolidated Statements of Income: Quarter on Quarter Comparison
Actual US$ Million
Consolidated Statement of Income Revenue (Sales) Other Income Royalties Operating Cost, General & Administrative Expenses EBITDA
Q4 2010 39.7 15.5 (2.1) (16.7) 36.4
Q3 2010 35.8 1.0 (3.0) (14.7) 19.1
Q4 2009 26.3 7.9 (0.4) (16.1) 17.8
Notes: All financial numbers are based on management accounts and are unaudited; December 2010 numbers are on an estimated basis. 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. Revenue was up 10.9% from the previous quarter due higher production from East Ras Qattara (ERQ) Egypt and Ukraine and product prices. Other income includes partial receipts on divestment of 22% working interest in Abu Sennan and 15% working interest in Mesaha, Egypt Q3 2010 financial numbers reported here are different to the numbers reported in the Q3 2010 Activity Report due to accounting adjustments resulting from an additional Government share paid on ERQ, Egypt.
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