Annual Report 2015

KUWAIT ENERGY PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2015

CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY

(CONTINUED)

Critical accounting judgements

Recoverability of exploration and evaluation costs

The carrying value of intangible

exploration and evaluation assets (“E&E”) represent active exploration projects.

Under

the Group’s accounting policy for E&E costs, such costs are capitalised as intangible assets, and are assessed for

impairment when circumstances suggest that the carrying amount may exceed its recoverable value. This assessment

involves judgement as to (i) the likely future commerciality of the asset and when such commerciality should be

determined, and (ii) future revenues and costs pertaining to the asset with which question is associated, and the discount

rate to be applied to such revenues and costs for the purpose of deriving a recoverable value. Note 13 discloses the

carrying amounts of the Group’s E&E assets as well as details of impairment charges arising during t

he year.

The key areas in which management have applied judgement are as follows: the Group’s intention to proceed with a

future work programme for a prospect or licence; the likelihood of licence renewal or extension; and the success of a

well result or geological or geophysical survey. In addition, the Group holds exploration costs related to Block 49 in

Yemen with a carrying value of USD 20.9 million where in 2015 the political and security situation has become

unstable. Further details are provided in note 13.

Key sources of estimation uncertainty

The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the

balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and

liabilities within the next financial year.

Impairment of oil and gas properties

Determining whether oil and gas properties are impaired requires management to estimate the future net revenue from

oil and gas reserves attrib

utable to the Group’s interest in that field. This requires

significant estimates to be made

including, future oil and gas prices, production volumes, capital/operating expenditures and an asset specific discount

rate. The Group also operates in certain countries with heightened geopolitical exposure and risk of challenge in respect

of licence terms. In particular, the following areas of estimation uncertainty and judgements were considered.

(a)

The Group has assumed that the Block 5 license expiry date in Yemen will be further extended to compensate for

new force majeure claims accruing after 7 March 2016 till the date of resuming production, without which there

would be a material additional impairment charge; and

(b)

The Group has a carrying value of USD 21.8 million (2014: USD 26.7 million) on the Mansuriya field which is

located in North East Iraq where the political and security situation is currently unstable. If the security situation

does not improve in the longer term, there could be a material additional impairment charge.

Further details

of the Group’s oil and gas assets and related impairment charges during the year

are provided in note 14.

Commercial reserves

Calculation of the recoverable value of oil and gas properties and depletion calculations require estimates to be made

of quantities of commercial oil and gas reserves, which are based on estimates determined by

Kuwait Energy’s

qualified

petroleum engineers and are subject to third party review. Management believes these reserves to be commercially

productive and will provide revenues to the Group adequate to recover remaining net un-depreciated and un-depleted

capitalised oil and gas properties as at 31 December 2015.

Convertible loans fair value

As outlined in note 23, the total

finance charge associated with the Group’s convertible loans, which are held at fair

value, depends on the exercise of certain conversion or prepayment options by the lenders and the Company which are

future events and inherently uncertain. At the balance sheet date the Group has assessed the fair values of the loans

based on their best estimate of the relative likelihood of the occurrence of each conversion or prepayment option.