kuwait energy company third quarter 2010 activity

Third Quarter 2010 Activity Report Second Quarter 2010 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]

Kuwait Energy

mailto:[email protected]

Third Quarter 2010 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 ......................................................................................................................................................8

3. Production ..................................................................................................................................................9

4 Development Activity ............................................................................................................................ 11

5. Exploration Activity ............................................................................................................................... 13

6. Financials ................................................................................................................................................. 14

Cover Page: Kuwait Energy celebrated its fifth anniversary on 28 August 2010

Kuwait Energy Company KSCC Salem Al Mubarak St., Laila Tower, Block 4, Bldg. #35, 13th Floor, Office2, Salmiya, Kuwait

P.O. Box. 5614, Salmiya 22067 Kuwait Tel: (965)2575-5657 Fax: (965) 2575-5679


1. Executive Summary: Third Quarter 2010 Activity Report

For the period ended 30 September 2010

Comparative Performance at a Glance

Quarterly comparison Q3 2010 Q2 2010 Change %

Production boepd 13,168 13,074 0.7%

Revenue* US$ Million 39.8 36.9 7.9%

Corresponding Period Q3 2010 Q3 2009 Change %

Production boepd 13,168 12,611 4.4%

Revenue* US$ Million 39.8 26.8 48.5%

* Revenue reported is sales less profit petroleum

** In the Q2 2010 activity report, revenue for Q2 was reported as US$32.9million. This has been revised to

US$36.9million during the recent mid-year audit concluded by Company auditors

Quarterly production and sales summary – third quarter 2010

Average daily working interest production was 13,168 barrels of oil equivalent per day (boepd), a 0.7% increase on the previous quarter; revenue was up 7.9% from the previous quarter.

Production was up 4.4% compared to Q3 2009 primarily due to production increases in ERQ, Egypt and Russia.

Revenue was US$39.8 million; up 48.5% from Q3 2009 as a result of higher production and

higher realized oil and gas prices.

Key activities during the period

Financial

Profit: Reported third quarter 2010 net profit (unaudited) of US$7.7million, up US$1.3million from second quarter 2010.

Pre-IPO Equity: Kuwait Energy is currently in the process of a Rights Issue to existing Shareholders of KD24 million (~US$100million) which was approved at the Shareholders meeting held on 10 October 2010. The closing date for the Rights Issue is the 4 November 2010. These additional funds will be utilized in the development of the Company’s reserve base, further exploration and to pursue major growth opportunities.


Key activities during the period (continued)

Letter of Credit Facility: The Company finalized a US$20 million letter of credit facility with J P Morgan against 50% cash collateral.

Production Hedging: Kuwait Energy finalized a production hedging transaction with Citi Bank. As per this agreement, the Company is hedged at US$81.85/barrel for 2,000bpd of crude oil for one year commencing October 2010.

Operations

Health, Safety, Environment and Social Responsibility: No Recordable Incidents in Kuwait

Energy operated assets and six recordable incidents in Kuwait Energy non- operated assets: a

Medical Treatment Incident (MTI), three Lost Time Incidents (LTI) in KSF, Oman and two LTI in

Block 43.

Recordable Incidents are measured in terms of the consequences associated with health, safety

and the surrounding environment that could lead to fatalities, LTI, MTI and Restricted Work

Incidents (RWI).

Exploration: Well BEA- W-1X in Burg El Arab, Egypt encountered oil shows at the shallower Cretaceous levels and also at deeper Jurassic levels. This well was drilled to a depth of 18,350 ft, which is the deepest well in the Western Desert, Egypt to date. During the Q4 2010 the well will be production tested.

Well Balharak South 2X in Block 49, Yemen was spud on 11 August 2010. This is Kuwait Energy’s first operated exploration well in Yemen. The target depth of 7,708 ft is expected to be reached by mid November 2010.

Production: Production increased marginally from the previous quarter due to increased production in Oman and Russia. Production in the fourth quarter 2010 is expected to increase primarily due to a full quarter of production from Al Zahraa-3, ERQ Field, Egypt.

Development: Successfully drilled a total of ten development wells, nine in Oman and Al

Zahraa-3 in ERQ Field, Egypt. The Al Zahraa-3 well in ERQ field is currently producing ~2,200

bopd, gross.

Divestment: Kuwait Energy entered into a Sales and Purchase Agreement with Beach

Petroleum to partially divest a 22% interest in Abu Sennan and a 15% interest in Block 6, Egypt.

These divestments reduce Kuwait Energy’s exploration commitments and their finalization is

subject to customary regulatory approvals including the Egyptian government approvals.


Business Development

Iraq Opportunities: Kuwait Energy has been pursuing potential growth opportunities for over three years. On the 24 June 2010, the Company was pre-qualified by the Iraq Ministry of Oil to participate in the 3rd petroleum licensing bid round. During Q3 2010, Kuwait Energy’s Iraq team attended a technical workshop in Istanbul and prepared to submit bids for Siba and Mansuriya gas fields on 20th October 2010.

Kuwait Energy’s bids were successful and the Company was awarded 20 year term gas development contracts for Siba and Mansuriya gas fields. Kuwait Energy will be the operator of Siba, participating with a 60% contractor share and Türkiye Petrolleri Anonim Ortaklığı

(TPAO) participating with 40%. TPAO will be the operator of Mansuriya, participating with a 50% contractor share, Kuwait Energy 30% and Korea Gas Corporation (KOGAS) 20%. For further details please refer to the press release on our website www.kec.com.kw

Ahmed Haidar, Business Development Manager placing a winning bid in Iraq on 20 October 2010

Yemen Opportunities: The Yemen gas sector has existing potential opportunities to supply power plants, industry and the domestic market. The Yemen Ministry of Oil and Minerals signed a Memorandum of Understanding (MoU) with Kuwait Energy on 6 October 2010, that allows the Company to conduct a six-month study addressing the potential development of natural gas reserves in Yemen and the optimization of the country’s natural gas resources for the benefit of its people. For further details please refer to the press release on our website www.kec.com.kw

Russian Acquisition: On 31 December 2009, Kuwait Energy agreed to acquire for shares, Pechora Energy Company and VIK (two wholly owned subsidiaries of Concorde Oil & Gas Plc), the owners of two assets Luzskoye and Chikshina in Russia. Prior to this acquisition, Kuwait Energy has a 36.56% interest in the two subsidiaries. In the third quarter 2010 we have made significant progress with the documentation requirements of European Bank for Reconstruction and Development (EBRD) which has financed this operation and are close to completion.

http://www.kec.com.kw/

http://www.kec.com.kw/


2010 Budget

Item 2010 Budget

Production 5.4 mmboe

Daily Average Production 14,839boe

Production Costs US$40.0million

Exploration Capital US$36.5 million

Development Capital US$112.0 million

Total Capital US$148.5 million

2010 Work Program

In 2010, we have a target to achieve the following work program together with our Joint Venture

partners:

11 Exploration wells + 1 carry over well from 2009

34 Development wells + 4 carry over wells from 2009

152 Workover wells


2. Reserves: Kuwait Energy’s working interest year end 2009 Proven and Probable (2P) reserves are 51.2mmboe. This represents an increase of 18% over year end 2008. A breakdown of the reserves is shown in the tables below:

YE08 Production Exploration

Adds

Acq/Divest &

Revisions

YE09

(GCA/NSAI)

Reserves 2P 43,445 3,235 2,394 8,592 51,197

Contingent &

Prospective

Resources

Mid Case 921,146 -------- -------- 800,854 1,722,000

2P RRR = 340%

Classification Category

KEC WI Reserves/Resources mboe

Proven plus Probable Reserves (KEC Working Interest)

Reserves year end 2008 85,350 25,041 4,470 43,445

Production 1,894 2,892 28 3,235

Exploration Discoveries 0 2,394 0 2,394

Acquisition/Divestments & Revisions -25,545 14,070 -1,307 8,592

Reserves year end 2009 57,912 38,614 3,135 51,197

Sales Gas

(mmcf)

Crude Oil

(mbbl)

Condensate

(mbbl)

Total

(mboe)

Note:

Estimates above are KEC working interest and are unrisked

Estimates above exclude Karim Small Fields (Oman) which is covered by a Service Agreement which

does not allow external reporting of reserve volumes.

Year end 2009 reserves were audited by Gaffney Cline & Associates (GCA) with the exception of

Russia which was audited by Netherland Sewell & Associates (NSAI).

Year end 2009 contingent and prospective resources were estimated/reviewed by Fugro Robertson

Limited, UK.

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.


3. Production:

Kuwait Energy’s working interest share of production and the revenue for the quarter ended 30

September 2010 compared to those of the quarter ended 30 June 2010 is shown in the table below:

Asset Daily Average Production (boepd)

Q3 2010 Q2 2010 Q3 2009

Egypt

BEA 287 551 227

Area A 4,335 4,333 4,892

ERQ 3,383 3,387 2,538

Egypt Total 8,005 8,271 7,657

Oman 2,783 2,646 2,776

Yemen 752 768 1,024

Ukraine 904 891 886

Russia 724 498 268

Total 13,168 13,074 12,611

Sales Revenue (US$

million)*

39.8 36.9** 26.8

Sales Revenue (US$ per

boe)

32.85 31.01 23.06

Kuwait Energy’s Q3 2010 average daily working interest production was 13,168 boepd, a 0.7%

increase on the Q2 2010, due to increased production in Oman and Russia and a 4.4% increase on the

Q3 2009 production due to increased production in BEA and ERQ Fields in Egypt, Ukraine and Russia.

* Sales revenue includes revenue from sale of gas and condensate from Ukraine assets and is less profit petroleum ** In the Q2 2010 activity report, revenue for Q2 was reported as US$32.9million. This has been revised to US$36.9million

due to the recent mid-year audit concluded by Company auditors where the Royalty amounts were added back into the revenues.


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

to Q3 2010:

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

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

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 39.8

0

5

10

15

20

25

30

35

40

45

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


4. Development Activity:

Development expenditure to 30 September 2010 was US$42.3 million. During the quarter a total of ten

development wells were drilled and all were producers: nine in Oman and Al Zahraa-3 in ERQ Field,

Egypt. The Al Zahraa-3 well in ERQ field is currently producing ~2,200 bopd, gross.

The BC 116a well in BC Field, Ukraine which was cased and completed in Q2 2010, produced late in the third quarter. Well 304 in Luzskoye Field, Russia which was cased in Q2 2010 was temporarily abandoned. It is planned to perforate the deeper sands which have oil shows, at a later stage. The table below summarizes the ten development wells drilled during the third quarter 2010:

Country Basin/Area No. of

Wells

Target KEC

Interest

Status at end Q3 2010

Oman Karim Small Fields 9 Oil 15.0% Producers

Egypt ERQ/Al Zahraa 3 1 Oil 49.5% Completed, producing

~2,200bopd, gross

4.1 Facilities

Country

Facilities

Egypt

Area A – Tender to replace Shukheir North West rental facility with a permanent facility was called off due to high prices. Currently discussing lease to buy option with the rental facility provider. ERQ – Currently completing construction of the treating facility.

Russia

State approval to complete upgrades to the Central Processing Facility (CPF) received. Progressed paperwork for approval of the interfield flow line system required by Russian authorities.


5. Exploration Activity:

Exploration expenditure during Q3 2010 was US$14.3 million. Exploration drilling activity focused on two wells Al Zahra West-2 in ERQ, Egypt and Balharak South 2X in Block 49, Yemen. Al Zahra West-2 was a dry hole and Balharak South 2X is currently drilling and reached 4,200 ft by the end of the quarter and its target depth is 7,708 ft. Well BEA-W-1X in Burg El Arab, Egypt encountered oil shows at the shallower Cretaceous levels and also at deeper Jurassic levels. This well was drilled to a depth of 18,350 ft, which is the deepest well in the Western Desert, Egypt to date. During the Q4 2010 the well will be production tested.

Country Basin/

Area

Well Target KEC Cost

Interest

Well Status

2009 Carry over

Egypt

ERQ Diaa-1 Oil 49.5% Oil Producer

BEA BEA-1ST* Oil 75.0% Oil Producer; oil bearing in two deeper

exploration zones

Q1 2010

Egypt

ERQ Rana SE-2 Oil 49.5% Oil Producer

Abu Fudha-1 Oil 49.5% Dry hole

Q2 2010

Egypt

BEA BEA-W-1X Gas 75.0% Completed, currently production testing

ERQ Al Zahraa West-1 Oil 49.5% Abandoned due to technical reasons

Q3 2010

Egypt ERQ Al Zahraa West-2 Oil 49.5% Dry hole

Yemen Block 49 BS-2X Oil 75.29% Spud on 18 Aug 2010, currently drilling

Q4 2010 Plan

Egypt

Abu

Sennan

AS ZZ-4 Oil 72.0%**

ERQ Yara-1 Oil 49.5%

ERQ Shebyl-1 Oil 49.5%

Area A Shukheir NW

(western ext)

Oil 70.0%

BEA BEA-NW-1X Oil 75.0%


Q4 2010 Plan (continued)

Pakistan Kunri Kunri-1 Oil 40.0% Spud on 06 October 2010, currently drilling

Jherruck Jherruck-1 Gas 40.0%

* Development well with exploration objectives at deeper levels (extension well)

** Kuwait Energy has divested 22% of Abu Sennan to Beach Energy Ltd subject to Egyptian Regulatory

approvals

5.1 Seismic Activity:

Seismic activity during the Q3 2010 is shown in the table below:

Country Area/Basin Type km/km2 Status

Q1 2010

Egypt Mesaha 2D 1,000 km Acquisition of seismic and data processing

completed.

Q2 2010

Ukraine DB 3D 76 km2 Completed seismic interpretation.

Egypt Area A 3D 655km2 Data reprocessing completed.

Q3 2010

Egypt Area A 3D 655km2 Currently interpreting data.

Mesaha 2D 1,000 km Data interpretation in progress.

Yemen Block 74 2D 267 km Acquisition of seismic completed, data

processing in progress.

Q4 2010 Plan

Ukraine NY 3D 54 km2 Acquire 3D seismic.

Latvia North Block 3D 300 km2 Acquire 3D seismic.

Yemen Blocks 82 & 83 3D 150 km2 Acquire 3D seismic, reprocess available seismic

data


6. Financials:

Estimated Consolidated Statements of Income: Quarter on Quarter Comparison

Consolidated Statement of Income

Actual

US$ Million

Q3 2010 Q2 2010

Revenue (Sales) 39.8 36.9

Other Income 1.0 0.3

Royalties (3.0) (2.9)

Operating Cost (12.2) (7.0)

General and administrative expenses (4.5) (4.7)

EBITDA 21.1 22.6

Depletion of oil and gas properties (14.4) (14.4)

Finance Cost & Others 0.2 (0.1)

Depreciation of other assets (0.2) (0.1)

Taxation relating to Subsidiaries 1.1 (1.4)

Provision for Zakat & KFAS (0.1) (0.2)

Profit for the period 7.7 6.4

Estimated Consolidated Statements of Income: Q3 2010 Comparison to Budget

Q3 2010

Consolidated Statement of Income US$ Million

Actual Budget

Revenue (Sales) 39.8 37.3

Other Income 1.0 -

Royalties (3.0) (6.0)

Operating Cost (12.2) (10.2)

General and administrative expenses (4.5) (4.1)

EBITDA 21.1 17.0

Depletion of oil and gas properties (14.4) (15.3)

Finance cost & others 0.2 -

Depreciation of other assets (0.2) -

Taxation relating to Subsidiaries 1.1 -

Provision for Zakat & KFAS (0.1) 0.0

Profit for the period 7.7 1.7

Notes: Budget at US$60/boe All financial numbers are based on Management accounts and are unaudited; September 2010 numbers are on an estimated basis.

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.

kuwait energy company third quarter 2010 activity

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