Kuwaitenergy First Quarter 2011 Activity Report

First Quarter 2011 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.

First 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 ............................................................................................................................. 11 Financials ................................................................................................................................................. 12

Cover Picture: Kuwait Energy drilling in Abu Sennan Concession, 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

First Quarter 2011 Activity Report

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1. Executive Summary: First Quarter 2011 Activity Report For the period ended 31 March 2011 Comparative Performance at a Glance Quarterly comparison Production

boepd

Revenue*

US$ Million

Year-on-year comparison Production

boepd

Revenue*

US$ Million

Q1 2011

Q4 2010

Change %

12,985

13,373

-2.9%

41.4

39.7

4.3%

Q1 2011

Q1 2010

Change %

12,985

13,421

-3.2%

41.4

33.7

22.8%

* Revenue reported is sales less profit petroleum

Quarterly production and sales summary – first quarter 2011 

Revenue was US$41.4 million for Q1 2011, a quarterly record; up 4.3% from Q4 2010 and 22.8% from Q1 2010, primarily due to higher realized oil and gas prices.



Daily average working interest production for Q1 2011 was 12,985 barrels of oil equivalent per day (boepd), a 2.9% decrease on the previous quarter primarily due to wells shut-in for workover maintenance in ERQ, Egypt and natural production decline for a mature field.

Key activities during the period Financial 

IPO Update: Following approval from shareholders at the 2009 AGM, Kuwait Energy retains its intention to list on the London and/or Kuwait Stock Exchanges, the timing is dependent on market conditions. Kuwait Energy is on track in terms of its internal preparation.



2010 Financial Audit: Kuwait Energy external auditors, Deloitte and Moore Stephens prepared the 2010 consolidated financial statements and independent auditors report for the year ended 31 December 2010.

First Quarter 2011 Activity Report

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Key activities during the period (continued) Reserves and Resources  Kuwait Energy year end 2010 Reserves were audited by Gaffney, Cline and Associates (GCA) and

proven and probable working interest reserves of 48.8 million barrels of oil equivalent (mmboe) were reported.

 Fugro Robertson estimated Kuwait Energy’s working interest contingent risked resources to be 32mmboe and best estimates of risked prospective resources of 212mmboe.

Operations Health, Safety, Sustainability and Environment: The unrest in Egypt during Q1 2011 led to a brief, precautionary pause for 10 days on exploration activities in Abu Sennan Concession in the Western Desert, Egypt to allow employees to return home safely to their families; regular exploration activities have now resumed. Abu Sennan is a nonproducing field and there was no disruption to production or other operations in Kuwait Energy’s three other producing fields in Egypt namely Area A, Burg El Arab and ERQ. Kuwait Energy classifies its recordable incidents as Lost Time Incidents (LTI), Restricted Work Incidents (RWI) and Medical Treatment Incidents (MTI). During Q1 2011, three recordable incidents occurred, one RWI unrelated to our daily operations and an MTI and RWI in the non-operated Karim Small Fields (KSF), Oman.

The following table provides days without recordable incidents for the countries in which we operate: Country Days without recordable incidents Egypt

838

Yemen

304

Russia

455

Ukraine

743



Exploration: Four exploration wells were carried over from 2010 and three wells spud during Q1 2011. From these seven wells, two were discoveries, oil in ERQ, Egypt and gas in Jherruck, Pakistan, and commerciality is being investigated. Three wells were dry holes and two wells (ZZ-4 in Abu Sennan and Shebyl East -1 in ERQ) were drilling at the end of the first quarter.



Development: Eight development wells drilled during the quarter in the Karim Small Fields (KSF), Oman. Four were producers, three were under completion and one was drilling at the end of the quarter.



Portfolio Management: Kuwait Energy completed the partial divestment of 22% working interest in Abu Sennan concession, Egypt to Beach Energy in April 2011 and continues to work on closing the 15% working interest partial divestment in Mesaha, Egypt to Beach Energy and 20% working interest partial divestment in Burg El Arab, Egypt to East West Petroleum.

First Quarter 2011 Activity Report

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Key activities during the period (continued) 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. The Siba and Mansuriya gas contracts were initialed on 14 November 2010 and contract signing is now anticipated in Q2 2011.

Kuwait Energy as operator of the Siba gas field has finalized the 2011 work program and budget for submission and approval of the Iraqi Government post signature of the contracts. Kuwait Energy has also commenced recruitment of people to meet the staffing requirements in Iraq.

Yemen Opportunities: An assessment of Yemen gas resources and a feasibility study (Yemen Gas Master Plan) was completed as per the Memorandum of Understanding (MoU) signed between Kuwait Energy and the Yemen Ministry of Oil & Minerals (MOM) in October 2010. We are waiting for an opportunity to present the study to the Petroleum Exploration and Production Authority (PEPA), 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 are 48.8mmboe, working interest contingent risked resources to be 32mmboe and best estimate of risked prospective resources of 212mmboe. The prospective resource revision includes adjustments for the Abu Sennan partial divestment. A breakdown of the reserves and resources are shown in the tables below:

Classification

Kuwait Energy Reserves and Resources in mmboe YE10 Working Interest

Category YE09

Production

Exploration Revisions Adds

Acq/Divest

YE10 - WI

YE10 - Net Entitlement 35.73

Reserves

Proven + Probable

51.20

-3.72

0.90

1.11

-0.71

48.77

Contingent Resources

2C

15.45

--------

--------

16.50

0.00

31.95

Prospective Resources

Best

235.22

--------

--------

3.49

-26.61

212.10

=

35%

Proven plus Probable RRR

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

Crude Oil (mmbbl)

Condensate (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 Gaffney Cline & Associates (GCA) and Resource estimates by Fugro Robertson

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.

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3. Production: Kuwait Energy’s working interest share of production and the revenue for the quarter ended 31 March 2011 compared to the quarters ending 31 December 2010 and 31 March 2010 is shown in the table below: Asset

Daily Average Production (boepd) Q1 2011

Q4 2010

Q1 2010

295

228

326

Area A

4,305

4,351

4,526

ERQ

3,210

3,692

3,218

Egypt Total

7,810

8,271

8,070

Oman

2,756

2,763

2,839

Yemen

695

717

867

Ukraine

1,181

1,020

1,123

Russia

543

602

522

Total

12,985

13,373

13,421

(US$

41.4

39.7

33.7

Sales Revenue (US$ per boe)

34.66

32.27

27.90

Egypt BEA

Sales Revenue million)*



Daily average working interest production for Q1 2011 was 12,985 barrels of oil equivalent per day (boepd), a 2.9% decrease on the previous quarter primarily due to wells shut-in for workover maintenance in ERQ, Egypt and natural production decline for a mature field.

* 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.

First Quarter 2011 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 Q1 2011:

16,000

45

14,000

40 35

12,000

30

B O E P D

10,000 25 8,000 20 6,000 15 4,000

10

2,000

0

5

Q1 06

Q2 06

Q3 06

Daily Avg Prodn (BOEPD)

20

120

608

Revenue US$MM

0.1

0.4

0.8

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

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 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

Revenue was up 4.3% from the previous quarter due to higher realized product prices.

Brent Crude Oil Price

Historical Brent US$/bbl 140 120 100 80

US$/bbl

60 40 20 0

Historical Brent US$/bbl

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

63

70

71

61

59

69

74

88

96

123

117

58

46

60

69

76

77

79

77

87

105

Source: EIA

First Quarter 2011 Activity Report

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0

U S $ M M

4. Development Activity: Development expenditure in 1Q 2011 was US$ 9.4* million which was primarily spent on:   

Drilling eight development wells in KSF, Oman.

Upgrading surface facilities and preparing two pads in Luzskoye Field, Russia in preparation for drilling five development wells during 2011.

Well workovers in BC fields, Ukraine.

Country

Basin/Area

No. of Wells

Target

KEC Interest

Status at end Q1 2011

Oman

Karim Small Fields

4

Oil

15.0%

Producers

Oman

Karim Small Fields

3

Oil

15.0%

Under completion

Oman

Karim Small Fields

1

Oil

15.0%

Drilling

* Based on management accounts which are subject to audit.

4.1 Facilities Country

Facilities Area A Purchased an Export Production Facility and other services from SAPESCO, an oilfield equipment provider for the Shukheir NW field.

Egypt

ERQ QPC Treatment Facility: Preparation of mechanical and civil construction works for the treatment facility to accommodate indirect heaters, separators and desalters.

Burg El Arab Installed one oil tank of 500 barrels capacity at well BEA-W-1X. Luzskoye Russia

Upgrades to the main processing unit to increase oil processing capacity to 7,400 bopd with an option to increase the capacity to 11,000 bopd.

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5. Exploration Activity: Exploration expenditure in Q1 2011 was US$ 9.2 million which was primarily spent on:  

Drilling seven exploration wells.

Acquisition and processing of 2D and 3D seismic data in Egypt, Yemen, Ukraine, Russia and Latvia.

The table below provides the status of these wells: Country

Basin/ Area

Well

Target

KEC Cost Interest

ERQ

Shebyl-1 Yara-1

Oil Oil

49.5% 49.5%

Abu Sennan

ZZ-4

Oil

50.0%

Jherruck

Jherruck-B-1

Gas

40.0%

Karma-1 Saady-1

Oil Oil

49.5% 49.5%

Shebyl-East-1

Oil

49.5%

Well Status

2010 Carry over Egypt

Pakistan

Oil discovery Dry hole, P & A Drilling, current depth 10,663 ft out of target depth of 16,020 ft Gas discovery, temporarily suspended, investigating commerciality

Q1 2011 Egypt

ERQ

Dry hole, P & A Dry hole, P & A Drilling, current depth 6,810 ft out of target depth of 13,399 ft

5.1 Seismic Activity: Seismic activity during Q1 2011 is shown in the table below: Country

Area/Basin

Type

km/km2

Q1 2011 Egypt

Mesaha

2D

800 km

Acquiring 2011 seismic infill program

Yemen

Block 74

2D

267 km

Completed seismic acquisition and processing

Ukraine

NY

3D

54 km2

Completed seismic acquisition

Russia

Luzskoye

3D

28 km2

Seismic acquisition ongoing

Chikshina

3D

14 km2

Preparing for Seismic acquisition

License 1/2009

3D

300 km2

Acquisition and fast track processing completed, detailed processing ongoing

Latvia

Status

First Quarter 2011 Activity Report

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6. Financials: Estimated Consolidated Statement of Income: Quarter on Quarter Comparison

Actual US$ Million

Consolidated Statement of Income

Revenue (Sales) Royalties Operating Cost, General & Admin Expenses Operating Cash Flow

Q1 2011 41.4 - 2.3 -16.9 22.2

Q4 2010 39.7 -2.1 -16.7 20.9

Q1 2010 33.7 -1.0 -13.4 19.3

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.

Revenue was up 4.3% from the previous quarter due to higher realized product prices.

Q4 2010 numbers are post completion of 2010 audit.

First Quarter 2011 Activity Report

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