Third 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.
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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: Rig ZJ 47 while drilling well Al Ahmadi-1X, 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
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1. Executive Summary: Third Quarter 2011 Activity Report For the period ended 30 September 2011 Comparative Performance at a Glance Quarterly comparison
Q3 2011
Q2 2011
Change %
Production
BOEPD
13,568
12,902
5.2%
Revenue*
USD Million
47.9
46.5
3.0%
Corresponding Period
Q3 2011
Q3 2010
Change %
Production
BOEPD
13,568
13,168
3.0%
Revenue*
USD Million
47.9
35.8
33.8%
* Revenue reported is sales less profit petroleum
Quarterly production and sales summary – third quarter 2011
Revenue was US$47.9 million for Q3 2011, up 3.0% from Q2 2011 due to higher production and 33.8% from Q3 2010 primarily due to higher realized oil and gas prices.
Daily average working interest production for Q3 2011 was 13,568 barrels of oil equivalent per day (boepd), a 5.2% increase from the previous quarter. This increase was primarily due to reduced downtime in Russia post construction of a new bridge and from ERQ field, Egypt post putting the Shahd -2ST well on production at 4,400 barrels of oil per day (gross) early September 2011.
Key activities during the period Financial
IPO Update: Kuwait Energy held an Extraordinary General Assembly meeting on 3rd August 2011 at which the shareholders approved a capital reduction in connection with its restructuring to Jersey for the purposes of a future listing. Currently, Kuwait Energy is completing the remaining a Kuwaiti regulatory formalities and expects to proceed with the implementation of the capital reduction in early November 2011.
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Key activities during the period (continued) Operations Health, Safety, Sustainability and Environment: Kuwait Energy classifies its recordable incidents as Lost Time Incidents (LTI), Restricted Work Incidents (RWI) and Medical Treatment Incidents (MTI). During Q3 2011, a RWI occurred in Kuwait Energy’s operated asset Area A, Egypt. The incident was related to a minor motor vehicle accident with no serious injuries reported.
The following table provides days without LTI for the countries in which Kuwait Energy operates: Country
Days without LTI
Egypt
1,021
Ukraine
926
Russia
638
Yemen
486
Exploration: Two discoveries were announced during Q3 2011 on the GPZZ-4 and Al Ahmadi-1 wells in the Kuwait Energy operated Abu Sennan concession, in the Egyptian Western Desert. The GPZZ-4 well was drilled first as part of a six-well drilling program. Initial tests from the Lower Bahariya formation recorded a daily production flow rate of 847 barrels (bbls) of condensate and seven million standard cubic feet (mmscf) of gas per day. The GPZZ-4 total production flow rate from the Lower Bahariya formation is equivalent to approximately 2,000 boepd. The Al Ahmadi-1 well showed a daily production flow from the Abu Roash G formation of 800 bbls of condensate and 13.5 mmscf of gas, a total production flow rate equivalent to approximately 2,900 boepd.
Development: Thirteen development wells were drilled during Q3 2011; eleven wells were completed and two wells continued to drill at the end of the quarter. The Shahd-2ST well in ERQ, Egypt has been completed on Lower Bahariya formation with initial gross oil production rate of 4,400 bopd in September in which Kuwait Energy has a 49.5% stake.
Portfolio Management: •
Concluded the sale of a 15% working interest in Mesaha Block, Egypt to Beach Petroleum (Egypt) PTY Limited. Kuwait Energy retains a 15% working interest in the Block.
•
Kuwait Energy is continuing to manage its asset portfolio and is actively looking for strategic partners to farm in to some of its non-core assets.
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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 Egypt, Yemen and Iraq. Iraq Opportunities: Iraq Fourth Petroleum Licensing Bid Round The Iraqi Ministry of Oil announced its intention to offer 12 exploration blocks covering various locations in Iraq. Technical data for each block was made available for purchase in September 2011 along with a preliminary Exploration, Development and Production Service Contract (EDPSC). A workshop to address potential participants’ concerns is planned for early December 2011. Bidding dates are planned to be on March 7th and 8th 2012. 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 (Yemen Gas Master Plan) was completed in April 2011, as per the Memorandum of Understanding (MoU) signed between Kuwait Energy and the Yemen Ministry of Oil & Minerals (MOM) in October 2010. The study was submitted to the Petroleum Exploration and Production Authority (PEPA), Yemen and discussions on the way forward are being progressed.
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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 are 32mmboe and best estimate of risked prospective resources is 212mmboe. 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 30 September, 2011 compared to the quarters ending 30 June, 2011 and 30 September, 2010 is shown in the table below: Asset
Daily Average Production (boepd) Q3 2011
Q2 2011
Q3 2010
BEA
378
323
287
Area A
4,073
4,163
4,335
ERQ
3,718
3,510
3,384
Egypt Total
8,168
7,996
8,005
Oman
2,928
2,723
2,783
Yemen
605
672
752
Ukraine
1,195
1,174
904
Russia
671
338
724
Total
13,568
12,902
13,168
Sales Revenue (US$ million)*
47.9
46.5
39.8
Average Oil Price** (US$ per 104.36 bbl)
109.02
71.05
Average Gas Price*** (US$ per 10.95 mcf)
8.50
8.60
Egypt
 Daily average working interest production for Q3 2011 was 13,568 boepd a 5.2% increase on the previous quarter. This increase was primarily due to reduced downtime in Russia post construction of a new bridge and from ERQ field, Egypt post putting the Shahd-2ST well on production at 4,400 bopd (gross) early September 2011. *
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 Q3 2011: 16,000
60
14,000
50
12,000 B O E P D
40
10,000
8,000
30
6,000
20
4,000
10
2,000 0
Daily Avg Prodn
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 06 06 06 06 07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11
0
20 120 608 1,9 2,3 3,0 2,8 4,6 5,8 8,2 9,1 9,3 10, 10, 12, 12, 13, 13, 13, 13, 12, 12, 13,
Revenue US$MM 0.1 0.4 0.8 1.1 3.7 7.1 7.3 7.8 13. 30. 32. 15. 14. 19. 26. 27. 33. 36. 35. 39. 41. 46. 48
Revenue was up 3% from the previous quarter.
Brent Crude Oil Price Historical Brent US$/bbl 140 120
US$/bbl
100 80
60 40 20
0
Historical Brent US$/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
87 105 117 114
Source: EIA
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Q2 11
Q3 11
U S $ M M
4. Development Activity: Development expenditure up to 30 September 2011 is US$48.0* million which was primarily spent on:  
Drilling development wells in Oman, Egypt and Russia. Upgrading surface facilities and preparing two pads in Luzskoye Field, Russia in preparation for drilling future development wells.
Country
Basin/Area
No. of Target Wells
KEC Status at end Q3 2011 Interest
Q1 2011 Oman
Karim Small Fields
8
Oil
15.0%
Producers
Karim Small Fields
9
Oil
15.0%
Producers
Burg El Arab
1
Oil
75.0%
Producer
East Ras Qattara
1
Oil
49.5%
Producer
Russia
Luzskoye
1
Oil
100%
TD Logging
Q3 2011 Oman
Karim Small Fields
7
Oil
15.0%
6 Producers, 1 Drilling
Burg El Arab
1
Oil
75.0%
Producer
East Ras Qattara
3
Oil
49.5%
2 Producers, 1 Drilling
Area A
2
Oil
70.0%
1 Producer, 1 Under completion
Luzskoye
1
Oil
100%
Drilling
Q2 2011 Oman 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 - Design and Civil works are underway to enable the reallocation of the SHNW facility to a new, permanent central field location
SHNW Export Route – Pipeline Design and Construction contract has been issued for tender along with the Pumping station contract. These works will allow pipeline export of crude from the SHNW Facility to Shukheir -Yusr fields pipeline and result in the elimination of crude trucking, leading to a reduction in operating costs and improvement in operating efficiency.
ERQ
Egypt
El Tebeen Shipping Capacity Upgrade: Upgrade project initiated to increase shipping pump capacities; this will decrease tanker turn-around times and increase operational efficiency
New pipeline at Qarun: Mechanical construction has commenced for the on-spec pipeline, from receiving station to the tie-in point (35% progress)
Shahd Facilities Upgrade (2,400 barrels Tank): Civil work for tank foundation (30% progress)
Shahd SE Facilities Upgrade: (2,400 barrels Tank): Civil work for tank foundation (30% progress)
Shebyl Permanent facilities: Preparation is underway for the Civil and Mechanical works, 1,000 barrels tank and gas boot are on site
Burg El Arab
Production lines from wells BEA W1-X and BEA-4 have been connected and tied back to BEA production station eliminating the need for road tankers thus reducing operating costs
Export Line - Design of BEA Shipping Export line and pumping station has been commenced. Luzskoye Russia
Commissioning of new production facilities are 95% complete resulting in increase of processing capacity and optimization of field operating expenditures.
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5. Exploration Activity: Exploration expenditure up to 30 September 2011 was US$ 26.5* million which was primarily spent on:  
Drilling exploration wells in Egypt. Acquisition and processing of 2D and 3D seismic.
The table below provides the status of these wells: Country
Basin/ Area
Well
Target
KEC Cost Well Status Interest
Shebyl-1
Oil
49.5%
Yara-1
Oil
49.5%
GPZZ-4
Oil
78.0%
Gas
40.0%
2010 Carry over ERQ Egypt Abu Sennan Pakistan Jherruck
Jherruck-B-1
Oil discovery, production tested at 600 bopd, waiting to be put online Dry hole, P & A Initial flow rate from the Lower Bahariya formation is equivalent to approximately 2,000 boepd (gross) Gas discovery, temporarily suspended, investigating commerciality
Q1 2011 Egypt
ERQ
Karma-1 Saady-1
Oil Oil
49.5% 49.5%
Shebyl-East-1
Oil
49.5%
Al Ahmadi-1
Oil
78.0%
Dry hole, P & A Dry hole, P & A Oil discovery, production tested at 1,500 bopd
Q2 2011 Egypt
Abu Sennan
Q3 2011 Egypt Area A Ahmed-1 Oil 70.0% * Based on management accounts which are subject to audit.
Total production flow rate equivalent to approximately 2,900 boepd (gross) Drilling
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5.1 Seismic Activity: Seismic activity during Q3 2011 is shown in the table below:
Country
Area/Basin
Type
km/km2 Status at end Q3 2011
Egypt
Mesaha
2D
800 km
Data processing in progress.
Yemen
Block 74
2D
267 km
Completed interpretation of new 2D lines and integration with old data. Report preparation in progress.
Ukraine
NY
3D
54 km2
Reprocessing of both vintages of NY3D for PSTM in progress.
Luzskoye
3D
28 km2
Processing of new vintage and merging with old vintage in final stages.
Chikshina
3D
14 km2
Preparing for Seismic acquisition which is planned in Q4 2011.
Russia
Latvia
License 1/2009
3D
300 km2
3D short offset processing, pre-stack inversion and basic interpretation completed. Gravity Magnetic data interpretation completed. Interpretation of inversion volumes is in progress.
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6. Q3 2011 Financials: Estimated Consolidated Statement of Income: Quarter on Quarter Comparison
Actual Consolidated Statement of Income
US$ Million Q3 2011
Q2 2011
Q3 2010
Revenue (Sales)
47.9
46.5
35.8
Other Income
0.7
0.7
1.0
Royalties
(3.2)
(2.6)
(3.0)
Operating Cost & General and Administrative Expenses
(17.0)
(14.9)
(14.7)
28.4
29.7
19.1
Operating Cash Flow
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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