Kuwaitenergy Third Quarter 2011 Activity Report

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: [email protected]

mailto:[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 ............................................................................................................................ 12 6. 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:

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)


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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

Egypt

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

bbl)

104.36 109.02 71.05

Average Gas Price*** (US$ per

mcf)

10.95 8.50 8.60

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:

Revenue was up 3% from the previous quarter.

Brent Crude Oil Price

Source: EIA

Q106

Q206

Q306

Q406

Q107

Q207

Q307

Q407

Q108

Q208

Q308

Q408

Q109

Q209

Q309

Q409

Q110

Q210

Q310

Q410

Q111

Q211

Q311

Daily Avg Prodn 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

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

Historical Brent US$/bbl 63 70 71 61 59 69 74 88 96 123 117 58 46 60 69 76 77 79 77 87 105 117 114

0

20

40

60

80

100

120

140

US$/

bbl

Historical Brent US$/bbl


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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

Wells

Target KEC

Interest

Status at end Q3 2011

Q1 2011

Oman Karim Small Fields 8 Oil 15.0% Producers

Q2 2011

Oman Karim Small Fields 9 Oil 15.0% Producers

Egypt 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

Egypt

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

Russia Luzskoye 1 Oil 100% Drilling

* Based on management accounts which are subject to audit.


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4.1 Facilities

Country Facilities

Egypt

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

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.

Russia

Luzskoye

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

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

GPZZ-4 Oil 78.0% Initial flow rate from the Lower Bahariya formation 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% Total production flow rate equivalent to approximately 2,900 boepd (gross)

Q3 2011

Egypt Area A Ahmed-1 Oil 70.0% Drilling

* Based on management accounts which are subject to audit.


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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.

Russia

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.

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)

Operating Cash Flow 28.4 29.7 19.1

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.

Documents

Kuwaitenergy Third Quarter 2011 Activity Report