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KUWAIT ENERGY PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2017
23
3.
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Oil and gas assets (continued)
Depreciation, depletion and amortisation
Depreciation, depletion and amortisation is provided on oil and gas assets in production using the unit of production
method, which is the ratio of oil and gas production in the year to the estimated quantities of proven and probable
entitlement reserves at the end of the year plus the production in the year, generally on a field-by-field basis, or a
grouping of fields where those fields are reliant on a common infrastructure. Costs used in the unit of production
calculation comprise the net book value of capitalised costs, together with estimated future development costs
required to recover the proven and probable reserves remaining. The effects of changes in estimates in the unit of
production calculations are accounted for prospectively.
Impairment of oil and gas assets
Where there has been a change in economic conditions that indicates a possible impairment in a discovery field, the
recoverability of the net book value relating to that field is assessed by comparison with the higher of fair value less
costs to sell or value in use. The value in use is calculated as the estimated future cash flows based on management’s
expectations of future oil and gas prices and the future costs of developing and producing the proved and probable
reserves, discounted using a discount rate adjusted for the risk specific to each asset. The Group concluded that each
asset block is a single individual cash generating unit (“CGU”), as each block generates separate cash inflows and the
blocks are not related or dependent upon each other. Where there is evidence of economic interdependency between
fields, such as common infrastructure, the fields are grouped as a single cash-generating unit for impairment purposes.
Any identified impairment is charged to the consolidated income statement. Where conditions giving rise to
impairment subsequently reverse, the effect of the impairment charge is also reversed as a credit to the consolidated
income statement, net of any depletion, depreciation and amortisation that would have been charged since the
impairment.
Commercial reserves
Proven and probable oil and gas reserves as defined in the Society of Petroleum Engineers’ Petroleum Resources
Management System (“PRMS”) are considered as commercial reserves.
Proven reserves include reserves that are confirmed with a high degree of certainty through an analysis of the
development history and a volume method analysis of the relevant geological and engineering data. Proven reserves
are those that, based on the available evidence and taking into account technical and economic factors, have a better
than 90% chance of being produced.
Probable reserves are those reserves in which hydrocarbons have been located within the geological structure with a
lesser degree of certainty because fewer wells have been drilled and certain operational tests have not been
conducted. Probable reserves are those reserves that, on the available evidence and taking into account technical and
economic factors, have a better than 50% chance of being produced.
These reserves are being calculated under existing economic and operating conditions, i.e., prices and costs as at the
date the estimate is made. Prices include consideration of changes in existing prices provided by contractual
arrangements and management’s forecast of future prices.
These estimates, made by the Group’s engineers and annually evaluated by independent reservoir engineers, are
reviewed annually and revised, either upward or downward, as warranted by additional data. Revisions are necessary
due to changes in, among other things, reservoir performance, prices, economic conditions and governmental
restrictions.