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KUWAIT ENERGY PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2015
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3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Oil and gas assets
The Group adopts the successful efforts method of accounting for exploration and evaluation expenditure. Pre-licence
costs are expensed in the year in which they are incurred. All licence acquisition, exploration and evaluation costs and
directly attributable administration costs are initially capitalised as intangible exploration and evaluation assets in cost
centres by well, field or exploration area, as appropriate. Borrowing costs are capitalised insofar as they relate to specific
exploration activities.
These costs are then written off as exploration costs in the income statement unless commercial reserves have been
established (see below) or the determination process has not been completed and there are no indications of impairment.
Tangible non-current assets used in acquisition, exploration and evaluation are classified with tangible non-current assets
as property, plant and equipment. To the extent that such tangible assets are consumed in exploration and evaluation the
amount reflecting that consumption is recorded as part of the cost of the intangible asset.
Upon successful conclusion of the appraisal programme and determination that commercial reserves exist, associated
costs are transferred to tangible non-current assets as property, plant and equipment. Exploration and evaluation costs
carried forward are assessed for impairment as described below.
All field development costs are capitalised as property, plant and equipment. Property, plant and equipment related to
production activities is amortised in accordance with the Group
’
s depletion and amortisation accounting policy.
Proceeds from the farm out of exploration and evaluation assets are credited against the relevant cost centre. Any overall
surplus arising in a cost centre is credited to the consolidated statement of income.
Depreciation, depletion and amortisation
Depletion, 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 period to the estimated quantities of proven and probable entitlement
reserves at the end of the period plus the production in the period, generally on a field-by-field basis, or a group of fields
which 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 estim
ated 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. 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 statement of income. Where conditions giving rise to
impairment subsequently reverse, the effect of the impairment charge is also reversed as a credit to the 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.
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