kuwaitenergy fourth quarter 2011 activity report

4th 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: [email protected]

mailto:[email protected]

Fourth Quarter 2011 Activity Report

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.


Contents

1. Executive Summary ................................................................................................................................ 4 2. Reserves ...................................................................................................................................................... 7 3. Production ................................................................................................................................................. 8 4 Development Activity ......................................................................................................................... 10 5. Exploration Activity ............................................................................................................................ 12 6. Financials................................................................................................................................................. 14

Cover Picture: Ahmad-1X, Gulf of Suez, Area A, 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


1. Executive Summary: 4th Quarter 2011 Activity Report

For the period ended 31 December 2011

Comparative Performance at a Glance

Quarterly comparison Q4 2011 Q3 2011 Change %

Production BOEPD 15,018 13,568 10.7%

Revenue* USD Million 50.4 47.9 5.2%

Corresponding Period Q4 2011 Q4 2010 Change %

Production BOEPD 15,018 13,372 12.3%

Revenue* USD Million 50.4 39.7 26.9%

* Revenue reported is sales less profit petroleum

Quarterly production and sales summary – 4th Quarter 2011

Production and revenue achieved in Q4 2011 constituted a company record. The peak daily

production rate of 17,733 barrels of oil equivalent per day (boepd) occurred on the 31st of December.

Daily average working interest production for Q4 2011 was 15,018 boepd, a 10.7% increase on the previous quarter. This increase was due primarily to higher production in Egypt, following exploration success and development wells being brought on line.

Revenue was US$50.4 million for Q4 2011, up 5.2% from Q3 2011 due to higher production and 26.9% increase from Q4 2010 due to higher realized oil and gas prices as well as higher production.

Key activities during the period

Financial

Debt Financing: The Company signed a mandate letter for a senior debt facility of US$165 million. The funding target date is Q2 2012.

IPO Update: The Kuwait Energy group completed its restructuring to a Jersey holding company in December 2011, and is currently preparing for a future listing subject to market conditions.

Operations

Health, Safety, Sustainability and Environment: Kuwait Energy classifies its recordable incidents as Lost Time Incidents (LTI), Restricted Work Incidents and Medical Treatment Incidents (MTI). No recordable incidents occurred during Q4 2011.


The following table provides days without LTI for the countries in which Kuwait Energy operates:

Country Days without LTI

Egypt 1,113

Ukraine 1,018

Russia 730

Yemen 578

On the 13th of January 2012, KE Head Office has been awarded with ISO 9001:2008 Quality

Management System with zero non-conformity to the standards. The implementation and full compliance of Bureau VERITAS’ ISO 9001:2008 fulfills a major London Stock Exchange listing requirement.

Exploration: Area A, Egypt had a successful exploration discovery with the completion of the well Ahmad-1X in the lower Bahariya formation which produced at an initial rate of 890 boepd. In the Abu Sennan Concession, drilling of the Al Salmiya-1X well was completed and is being prepared for testing the Abu Roash C and E formations. A second well, Al Jahraa-1X, was also drilled during the quarter and the Kharita formation is currently being tested.

Development: During Q4 2011, 15 development wells were drilled. In the ERQ field, Egypt, the Shahd SE-5 appraisal well was tested in the lower Bahariya formation with an initial gross oil production rate of 5,500 boepd. In Area A, Egypt, Shukheir NW-9 was drilled and produced at a gross initial rate of 580 boepd.

Portfolio Management: Kuwait Energy continues to manage its asset portfolio and is actively looking for strategic partners to farm in to some of its non-core assets. In Ukraine, the exploration license for the Dubrivska field expired during the quarter and Kuwait Energy chose not to extend the license, which had no impact on production or reserves. In December 2011, the JAA 429 license in Ukraine was terminated by a court resolution following disputes between our two partners in JAA 429, Ukragaz and Ukrabud.


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 in Egypt, Yemen and Iraq

Iraq Opportunities:

Iraq Fourth Petroleum Licensing Bid Round

In 2011, the Iraqi Ministry of Oil announced its intention to offer 12 exploration blocks covering various locations in Iraq. In December 2011, Kuwait Energy attended a workshop held to discuss the technical and commercial aspects of the fourth bidding round contracts. The bid dates have been moved from March 2012 to April 2012 based on requests from several companies interested in the blocks. 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 were completed in April 2011, as per the Memorandum of Understanding (MoU) signed between Kuwait Energy and the Yemen Ministry of Oil & Minerals in October 2010. The study was submitted to Yemen’s Petroleum Exploration and Production Authority. Discussions on next steps are on hold due to the current situation in Yemen.


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 were 48.8 mmboe, working interest contingent risked resources were 32 mmboe and best estimate of risked prospective resources was 212 mmboe. 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 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.

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 Interest YE10 - Net Entitlement

Proven plus Probable RRR

Proven plus Probable Reserves (Kuwait Energy Working Interest)

Reserves year end 2009 57.91 38.61 3.13 51.20

Production -1.77 -3.37 -0.06 -3.72

Exploration Discoveries 0.00 0.90 0.00 0.90

Acquisition/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)


3. Production:

Kuwait Energy’s working interest share of production and the revenue for the quarter ended 31 December

2011 compared to the quarters ending 30 September 2011 and 31 December 2010 is shown in the table

below:

Asset Daily Average Production (boepd)

Q4 2011 Q3 2011 Q4 2010

Egypt

BEA 692 378 228

Area A 4,300 4,073 4,351

ERQ 5,127 3,718 3,692

Egypt Total* 10,118 8,168 8,271

Oman 2,892 2,928 2,763

Yemen 573 605 717

Ukraine 819 1,195 1,020

Russia 617 671 602

Total* 15,018 13,568 13,372

Sales Revenue** (US$ million) 50.4 47.9 39.7

Average Oil Price*** (US$ per

bbl)

104.61 104.36 71.05

Average Gas Price**** (US$ per

mcf)

14.06 10.95 8.60

Daily average working interest production for Q4 2011 was 15,018 barrels of oil equivalent per day (boepd), a 10.7% increase from the previous quarter. This increase was primarily due to higher production from the following fields as exploration success and development wells were put on production during the quarter: ERQ, Egypt: Well Shahd-5 put on production at 5,500 boepd gross Area A, Egypt: Wells Ahmed 1X and Shukheir NW-X9 put on production at 890 boepd and 580

boepd gross respectively BEA, Egypt: Wells BEA-9, BEA-10 and BEA-11 put on production at 686 boepd, 96 boepd and

1,008 boepd gross respectively * Total may reflect rounded figures ** 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).


Quarterly Revenue and Production

The chart below shows quarter-by-quarter daily average production (boepd) and revenue from Q1 2006 to Q4

2011:

The Q4 2011 production and revenue achieved were 10.7% and 5.2% higher respectively than the previous

quarter. Both production and revenue achieved during the quarter were the highest recorded in the history of

the Company.

Brent Crude Oil Price

Source: EIA

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 Q2 11 Q3 11 Q4 11

Daily Avg Prodn (BOEPD) 20 120 608 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 12,902 13,568 15,018

Revenue US$MM 0.1 0.4 0.8 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 46.5 47.9 50.4

0

10

20

30

40

50

60

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

U

S

$

M

M

B

O

E

P

D

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

Q2 11

Q3 11

Q4 11

Historical Brent US$/bbl 63 70 71 61 59 69 74 88 96 123 117 58 46 60 69 76 77 79 77 87 105 117 113 109

0

20

40

60

80

100

120

140

US$

/bbl

Historical Brent US$/bbl


4. Development Activity:

Development expenditure up to 31 December 2011 is US$72.2* million which was primarily spent on:

Drilling 49 development wells in Egypt, Oman and Russia. Upgrading surface facilities in Luzskoye Field, Russia.

Country Basin/Area No. of

Wells

Target Kuwait

Energy

Interest

Status at end Q4 2011

Q1 2011

Oman Karim Small Fields 8 Oil 15.0% 8 Producers

Q2 2011


Egypt Burg El Arab 1 Oil 75.0% Producer

East Ras Qattara 1 Oil 49.5% Producer

Russia Luzskoye 1 Oil 100% Producer

Q3 2011


Egypt

Burg El Arab 1 Oil 75.0% Producer

East Ras Qattara 3 Oil 49.5% 3 Producers

Area A 2 Oil 70.0% 2 Producers

Russia Luzskoye 1 Oil 100% Testing

Q4 2011

Oman Karim Small Fields 9 Oil 15.0% 7 Producers, 2 drilling

Egypt Burg El Arab 2 Oil 75.0% 2 Producers

Area A 2 Oil 70.0% 1 Producer, 1 under completion

Russia Luzskoye 2 Oil 100% 2 Drilling

* Based on management accounts which are subject to audit.


4.1 Facilities

Country Facilities

Egypt

Area A

Shukheir North West (SHNW) Facility: The facility was relocated to a permanent location to upgrade it with a 2,400 bbls tank and three phase production separator, extension and modification for manifolds and tank discharge lines.

Tender for power supply infrastructure was issued. This will eliminate the need for rental generators and diesel for SHNW & Shukheir fields and the accommodation camp resulting in potential savings in operating expenditures of up to US$1.2 million per year.

ERQ

New pipeline at Qarun completed.

Shahd and Shahd SE Facilities Upgrade: 2,400 barrels tanks installed.

Shebyl Permanent Facilities: 100% completed, diverted well flow to the permanent station and released rental package.

Shahd SE-5 flow line completed.

BEA

Production lines from wells BEA W1-X and BEA-4 have been connected and tied back to the BEA production station eliminating the need for road tankers resulting in reduced operating costs.

Export Line: Design and construction tender of BEA Shipping Export line and pumping station commenced.

Russia

Luzskoye

Commissioning of new production facilities was completed, resulting in an increase of processing capacity and the optimization of field operating expenditures.


5. Exploration Activity:

In the twelve months to 31 December 2011 exploration expenditure was US$40.6* million, which was spent primarily on:

Drilling exploration wells in Egypt and Pakistan; and Acquisition and processing of 2D and 3D seismic.

The table below provides the status of these wells:

Country Basin/

Area

Well Target Kuwait

Energy

Cost

Interest

Well Status

2010 Carry over

Egypt

ERQ Shebyl-1 Oil 49.5%

Oil discovery tested at 600 bopd on production

Yara-1 Oil 49.5% Dry hole, Plugged & Abandoned (P&A)

Abu Sennan

GPZZ-4 Oil 78.0% Gas and condensate discovery initial flow rate test is equivalent to approximately 2,000 boepd (gross)

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 1,500 bopd

Q2 2011

Egypt Abu Sennan

Al Ahmadi-1 Oil 78.0% Gas and condensate discovery initial flow rate test is equivalent to approximately 2,900 boepd (gross)

Q3 2011

Egypt Area A Ahmad-1X Oil 70.0% Oil discovery, production tested at 890 bopd

Q4 2011

Area A Fatema-1X Oil 70.0% Dry hole, P & A

Egypt Abu Sennan

Al Jahraa-1X Oil 78.0% Testing

Al Salmiya-1X Oil 78.0% Drilling

* Based on management accounts which are subject to audit.


5.1 Seismic Activity:

Seismic activity during 2011 is shown in the table below:

Country Area/Basin Type km/km2 During 2011

Egypt Mesaha 2D 800 km Data processing in progress.

Yemen Block 74 2D 267 km Final technical report and deliverables issued.

Ukraine NY 3D 54 km2 Pre-stack Time Migration (PSTM) of data from both vintages completed. Data conditioning for PSTM process in progress.

Russia Luzskoye 3D 28 km2 Processing and interpretation completed. Documentation of results in progress.

Chikshina 3D 14 km2 Data acquisition in progress.


6. Q4 2011 Financials:

Estimated Consolidated Statement of Income: Quarter on Quarter Comparison

Actual

Consolidated Statement of Income US$ MM

Q4-2011 Q3-2011 Q4-2010

Revenue (Sales) 50.4 47.9 39.7

Other income - 0.7 15.5

Royalties (1.7) (3.2) (2.1)

Operating cost, general and administrative expenses (25.6) (17.0) (16.7)

Operating Cash Flow 23.1 28.4 36.4

Revenue was US$2.5million higher than the previous quarter primarily due to increased sales volumes. Royalty payments were US$1.5million lower than the previous quarter primarily due to lower sales in

Ukraine due to the JAA429 license termination by court resolution. Kuwait Energy is following the matter to find a resolution for this issue.

Operating costs, general and administration expenses were US$8.6million higher than the previous quarter primarily due to the write off of JAA 429 receivables and the 10.2% increase in production.

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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