Kuwaitenergy Third Quarter 2011 Activity Report

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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.

Third 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: 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

Third Quarter 2011 Activity Report

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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.

Third Quarter 2011 Activity Report

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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)

Third 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 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

Third Quarter 2011 Activity Report

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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.

Third Quarter 2011 Activity Report

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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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