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KUWAIT ENERGY PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended 30 June 2016
25
4.
CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY
In the application of the Group’s accounting policies, which are described in note 3, management is required to make
judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily
apparent from other sources. The estimates and associated assumptions are based on historical experience and other
factors that are considered to be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are
recognised in the year in which the estimate is revised if the revision affects only that year or in the year of the revision
and future years if the revision affects both current and future years.
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 12 discloses the carrying amounts of the Group’s E&E assets as well as details of impairment charges arising
during the 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, including where
extensions have been applied for and have not yet been granted; 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 US$ 21.6 million (31 December 2015: US$ 20.9 million) where in 2015 and 2016 the political and security situation
has become unstable. Further details are provided in note 12.
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 attributable 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 untill the date of resuming production, without which
there would be a material additional impairment charge; and
(b)
The Group has a carrying value of US$ 32.8 million (31 December 2015: US$ 31.4 million) for 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 unless the
terms of the applicable agreements were amended.
Further details of the Group’s oil and gas assets and related impairment charges during the year are provided in note
13.