Kuwaitenergy Second Quarter 2011 Activity Report

Second 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: [email protected]


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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. Executive Summary ................................................................................................................................... 4 2. Reserves .......................................................................................................................................................... 7 3. Production ..................................................................................................................................................... 8 4 Development Activity ............................................................................................................................ 10 5. Exploration Activity ................................................................................................................................ 11 6. Financials .................................................................................................................................................... 12

Cover Picture: Kuwait Energy signing Siba and Mansuriya gas development contracts in Baghdad, Iraq.

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: Second Quarter 2011 Activity Report

For the period ended 30 June 2011

Comparative Performance at a Glance

Quarterly comparison Q2 2011 Q1 2011 Change %

Production boepd 12,902 12,985 ‐0.6%

Revenue* US$ Million 46.5 41.4 12.3%

Yearonyear comparison Q2 2011 Q2 2010 Change %

Production boepd 12,902 13,074 ‐1.3%

Revenue* US$ Million 46.5 36.9 26.0%

* Revenue reported is sales less profit petroleum

Quarterly production and sales summary – second quarter 2011

Revenue was US$46.5 million for Q2 2011, a quarterly record; up 12.3% from Q1 2011 and

26.0% from Q2 2010, primarily due to higher realized oil and gas prices.

Daily average working interest production for Q2 2011 was 12,902 barrels of oil equivalent per day (boepd), a 0.6% decrease on the previous quarter. This decrease was primarily due to production in the Luzskoye field in Russia being shut‐in for 40 days while a new bridge to transport the oil was being constructed to replace the old bridge which was damaged by floods.

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.

Receipt of Divestment Proceeds: Kuwait Energy received the final payment of divestment

proceeds for the sale of 22% working interest in Abu Sennan, Egypt.

2010 Financial Results and Dividend Announcement: Kuwait Energy provided its 2010 Financial Reports and declared a dividend of 5 fils per share at the General Assembly Meeting held on 27 June 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 Q2 2011, five recordable incidents occurred, two RWIs in Kuwait Energy’s operated assets BEA and Area A, Egypt, two MTIs in Kuwait Energy’s non‐operated Karim Small Fields (KSF), Oman, and one LTI in Kuwait Energy’s non‐operated ERQ asset, Egypt.

The following table provides days without Lost Time Incidents for the countries in which

Kuwait Energy operates:

Country Days without Lost Time Incidents

Egypt 929

Yemen 394

Russia 546

Ukraine 834

Exploration: Three exploration wells were drilled during Q2 2011 with two of these wells successfully discovering oil. The Shebyl East‐1 well in ERQ, Egypt was drilled to a depth of 4,100 meters and initial tests showed a production flow of 1,500 barrels of oil per day. The ZZ‐4 well in Abu Sennan, Egypt encountered oil in the Lower Bahariya formation and was suspended for testing.

Development: Twelve development wells were drilled/spud during the quarter; nine in Oman, two in Egypt and one in Russia.

Portfolio Management:

Kuwait Energy continues to work on closing the 15% working interest partial

divestment in Mesaha, Egypt to Beach Energy. Kuwait Energy and East West Petroleum have agreed not to pursue the Sale and

Purchase Agreement for the partial divestment of Kuwait Energy’s 20% working interest in Burg El Arab, Egypt.

Kuwait Energy is continuing its effort to balance 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’s third petroleum licensing bid round 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 signed on 5 June 2011.

Picture: Kuwait Energy CEO, Ms Sara Akbar, signing the Siba and Mansuriya gas development contracts in Baghdad, Iraq.

Iraq’s fourth petroleum licensing bid round Iraqi Ministry of Oil announced its intention to offer 12 exploration blocks covering various locations in Iraq. Details of the fiscal terms are yet to be provided. The initial timeline is that technical data will be available for purchase is approximately August, fiscal terms and draft contract will be released in November and the bidding/awarding will take place in January 2012. Kuwait Energy is conducting preliminary technical evaluation of the blocks and screening possible prospects with potential partners.

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. The study was submitted to the Petroleum Exploration and Production Authority (PEPA), Yemen and discussion on the way forward is progressing.


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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 is shown in the tables below:

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 5. In 2010, KEC won the bid to develop the Siba & Mansuriya fields in Iraq ‐ additional 2P WI reserves

of 141.9mmboe will be booked once the contract is signed

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.

Proven plus Probable Reserves (Kuwait Energy Working Interest)

Reserves year end 2009 57.91 38.61 3.13 51.20Production -1.77 -3.37 -0.06 -3.72Exploration Discoveries 0.00 0.90 0.00 0.90Acquisition/Divestments & Revisions -2.30 1.11 -0.36 0.40

Reserves year end 2010 53.84 37.26 2.71 48.77

Sales Gas(bcf)

Crude Oil(mmbbl)

Condensate(mmbbl)

Total(mmboe)

YE09 Production Exploration

Adds Revisions Acq/Divest YE10 - WI

Reserves Proven + Probable 51.20 -3.72 0.90 1.11 -0.71 48.77 35.73

Contingent Resources 2C 15.45 -------- -------- 16.50 0.00 31.95

Prospective Resources Best 235.22 -------- -------- 3.49 -26.61 212.10

= 35%

Classification Category

Kuwait Energy Reserves and Resources in mmboe

YE10 Working InterestYE10 - Net Entitlement

Proven plus Probable RRR


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3. Production:

Kuwait Energy’s working interest share of production and the revenue for the quarter ended 30 June 2011 compared to the quarters ending 31 March 2011 and 30 June 2010 is shown in the table below:

Asset Daily Average Production (boepd)

Q2 2011 Q1 2011 Q2 2010

Egypt

BEA 323 295 551

Area A 4,163 4,305 4,333

ERQ 3,510 3,210 3,387

Egypt Total 7,996 7,810 8,271

Oman 2,723 2,756 2,646

Yemen 672 695 768

Ukraine 1,174 1,181 891

Russia 338 543 498

Total 12,902 12,985 13,074

Sales Revenue (US$ million)* 46.5 41.4 36.9

Average Oil Price** (US$ per bbl) 109.02 94.74 70.09

Average Gas Price*** (US$ per mcf) 8.50 8.18 8.03

Daily average working interest production for Q2 2011 was 12,902 barrels of oil equivalent per day (boepd), a 0.6% decrease on the previous quarter. This decrease was primarily due to production in the Luzskoye field in Russia being shut‐in for 40 days while a new bridge to transport the oil was being constructed to replace the old bridge which was damaged by floods.

* 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 Q2 2011:

Revenue was up 12.3% from the previous quarter due to higher realized product prices.

Brent Crude Oil Price

Source: EIA


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4. Development Activity:

Development expenditure in 2Q 2011 was US$ 17.9* 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 five development wells during 2011. Well workovers in BC fields, Ukraine.

Country Basin/Area No. of

Wells Target KEC

Interest Status at end Q2 2011

Q1 2011 Oman Karim Small Fields 8 Oil 15.0% Producers

Q2 2011

Oman Karim Small Fields 8 Oil 15.0% Producers

Oman Karim Small Fields 1 Oil 15.0% Drilling

Egypt Burg El Arab 1 Oil 75.0% Drilling

East Ras Qattara 1 Oil 49.5% Drilling

Russia Luzskoye 1 Oil 100.0% Drilling

* Based on management accounts which are subject to audit. 4.1 Facilities

Country Facilities

Egypt

Area A

Purchased an Export Production Facility for the Shukheir NW field.

ERQ

QPC Treatment Facility: Construction work underway for upgrading the oil separation and treatment facilities to increase capacity and reduce downtime.

Burg El Arab

Installed tank to increased storage capacity of BEA by an additional 500 barrels.

Russia

Luzskoye

Facility upgrades focussed on infrastructure, flow assurance and increasing production capacity including main oil processing facility, well pads and tank storage. A new bridge to transport oil was also constructed to replace the old bridge. These upgrades increase processing capacity to 7,400 bopd and also facilitate a future upgrade to increase capacity to 11,000 bopd.


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5. Exploration Activity: Exploration expenditure in Q2 2011 was US$ 9.0* million which was primarily spent on:

Drilling Egypt 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

Well Status

2010 Carry over

Egypt ERQ

Shebyl‐1 Oil 49.5% Oil discovery, production tested at 600 bopd, waiting to be put online

Yara‐1 Oil 49.5% Dry hole, P & A Abu

Sennan ZZ‐4 Oil 78.0% Suspended for testing and waiting for workover rig

Pakistan Jherruck Jherruck‐B‐1 Gas 40.0% Gas discovery, temporarily suspended, investigating commerciality

Q1 2011

Egypt ERQ

Karma‐1 Oil 49.5% Dry hole, P & A Saady‐1 Oil 49.5% Dry hole, P & A

Shebyl‐East‐1 Oil 49.5% Oil discovery, production tested at 1500 bopd, waiting to be put online

Q2 2011

Egypt Abu Sennan

Al Ahmadi‐1X Oil 78.0% Rigging up

* Based on management accounts which are subject to audit.

5.1 Seismic Activity: Seismic activity during Q2 2011 is shown in the table below:

Country Area/Basin Type km/km2 Status at end Q2 2011

Q1 & Q2 2011

Egypt Mesaha 2D 800 km Acquisition of 2011 seismic infill program completed. Data processing ongoing.

Yemen Block 74 2D 267 km Completed interpretation and old data integration

Ukraine NY 3D 54 km2 Completed seismic processing. Interpretation ongoing.

Russia Luzskoye 3D 28 km2 Completed seismic acquisition, processing ongoing.

Chikshina 3D 14 km2 Preparing for Seismic acquisition

Latvia License 1/2009 3D 300 km2 Acquisition and fast track processing completed, detailed processing ongoing


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6. Financials:

Estimated Consolidated Statement of Income: Quarter on Quarter Comparison

Consolidated Statement of Income

Actual

US$ Million

Q2 2011 Q1 2011 Q2 2010

Revenue (Sales) 46.5 41.4 36.9 Other Income 0.7 0.0 0.3 Royalties ‐ 2.6 ‐ 2.3 ‐2.9 Operating Cost, General & Administrative Expenses ‐14.9 ‐16.9 ‐11.7

Operating Cash Flow 29.7 22.2 22.6

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 12.3% from the previous quarter due to higher realized product prices.

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Kuwaitenergy Second Quarter 2011 Activity Report