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KUWAIT ENERGY PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended 30 June 2016
34
13.
PROPERTY PLANT AND EQUIPMENT (CONTINUED)
Farm-out and disposal
During the period ended 30 June 2016, there was no farm-out or disposal of oil and gas assets. In 2015, the Group
completed the farm-out of a 10% participating interest in the Iraq Block 9 exploration, development and production
service contract to EGPC, resulting in a profit of US$ 33.9 million. The Group now has a 60% working interest share in
Block 9.
During first half of 2015, the Group disposed of its interest in Yemen Block 43. Following the disposal, the related costs
of US$ 24.9 million and accumulated depletion of US$ 24.9 million have been removed with no income statement impact.
Impairment
The Group carried out a review of the recoverable amount of its assets in accordance with IAS 36
Impairment of assets
.
Based on the review, the Group believes no impairment is required at 30 June 2016. Primarily due to the fall in prevailing
oil price in 2015, the Group recorded an impairment loss of US$ 69 million, including US$ 8.5 million on the Block 5 field
in Yemen, US$ 10.6 million on BEA and US$ 25.2 million on the Abu Sennan fields in Egypt, US$ 16.9 million on Siba and
US$ 7.8 million on Mansuriya fields in Iraq, which has been recognised in the consolidated income statement in 2015.
The key assumptions and judgements used in the impairment test included post-tax discount rates of 14% for the assets
in Yemen and the Mansuriya field in Iraq, 11% for the assets in Egypt and 12% for the assets in Iraq other than the
Mansuriya field and a Brent oil price of US$ 45/bbl in 2016, US$ 60/bbl in 2017, US$ 70/bbl in 2018, US$ 80/bbl in 2019,
inflated at 1.5% per annum thereafter. The oil price assumptions are the Group’s best estimate based on conditions
prevailing at the balance sheet date and take into consideration external forecasts. For every US$ 1/bbl fall in oil price
assumptions, impairment charge will increase by approximately US$ 6-7 million. If the discount rate had been increased
by 1% for all assets, it would have increased the impairment charge by approximately US$ 20.4 million.
In Yemen, the Block 5 license expired on 8 June 2015. However, production was interrupted on several occasions due to
sabotage of the main oil export pipeline and no production has been possible since 7 April 2015 due to closure of the
port at Ras Isa. For lost production days, the Group has filed a number of notices of force majeure to the Yemeni
Government, represented by YICOM. YICOM has agreed to extend the Block 5 license expiry date to settle force majeure
claims up to and including 7 March 2016. The force majeure claims settlement with YICOM specifically excludes any new
force majeure claims that may accrue after 7 March 2016, which will be subject to further claims. However, based on the
force majeure mechanism of the contract and the agreed license extension by YICOM to settle previous force majeure
claims, the Group has calculated the impairment charge for Block 5 on the assumption that the licence expiry date will
be further extended to compensate for new force majeure claims accruing after 7 March 2016 until the date of resuming
production.
The Group, along with other partners of Block 5, has a firm intention to maintain the facilities at the field in operational
condition until such time as it becomes possible to resume production, even if there is further delay. Non-Yemeni
employees have been withdrawn for their safety and security and the Sana’a office is currently closed, however the Block
5 field facility remains available for the use of the Group and essential Yemeni employees remain on site.
In Iraq, as at 30 June 2016 the Group held oil and gas assets with a carrying value of US$ 32.8 million (31 December 2015:
US$ 31.4 million) in relation to the Mansuriya field located in North East Iraq where in 2014, the political and security
situation became unstable. On-site operations at the Mansuriya field have been put on hold, however, management
believes that in the longer term the situation will be resolved and that no additional impairment is required, on account
of security concerns.
A request for arbitration has been filed against the Group (pursuant to the ICC Rules of Arbitration) under which the
claimant asserts that it has a right to an increased non-controlling share in one of the Group’s key oil and gas assets. The
arbitration is at an early stage. The Group has filed its answer to the request for arbitration and the arbitration tribunal
is in the process of being constituted. No substantive written submissions have been filed. We believe that their position
will not be vindicated, and we are firmly committed to vigorously rebutting the claim.