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KUWAIT ENERGY PLC
NOTES TO THE CONDENSED SET OF FINANCIAL STATEMENTS
Six months ended 30 June 2015
16
8.
PROPERTY PLANT AND EQUIPMENT (CONTINUED)
Acquisition of asset
The Group completed the acquisition of an additional 25% working interest effective 15 January 2015 in the Burg El
Arab (BEA) field in Egypt from Gharib Oil Fields (‘Gharib’) for a purchase consideration of USD 21,361 thousand. The
purchase was accounted for as an asset acquisition rather than a business combination. The net cash outflow arising on
the acquisition was USD 3,984 thousand, which excludes USD 127 thousand cash acquired. The remaining
consideration was settled with receivables due from Gharib. Property, plant and equipment (PP&E) assets with a gross
cost of USD 22,204 thousand were acquired, however the net PP&E additions from the transaction were USD 16,769
thousand as USD 5,435 thousand had been capitalised in prior periods under the terms of a carry arrangement with
Gharib.
Disposal
The Board approved an exit from Yemen Block 43 effective 30 June 2015. As at 30 June 2015, the carrying value of
Yemen Block 43 was nil (31 December 2014: nil) and following the disposal the associated costs and accumulated
depreciation have been removed with no income statement impact.
Impairment considerations
Primarily due to the fall in prevailing oil prices, the Group carried out a review of the recoverable amount of its assets in
accordance with according to IAS 36
Impairment of assets
. Based on the review, the Group believes no impairment is
required at 30 June 2015. Several key assumptions and judgements were required in performing the impairment review,
including estimates of oil and gas reserves, estimates of future oil prices and applicable discount rates in addition to other
asset specific factors, each of which are discussed separately below.
Oil and gas reserves estimates
Where the value in use of an asset has been estimated using a discounted cash flow model, the Group has used the proven
and probable (2P) net entitlement reserves externally certified by Gaffney, Cline & Associates (GCA) for the 2014 year
end, adjusted for production in the period. Since GCA’s last certification exercise, drilling at the Abu Sennan block in
Egypt in the ASA and Al Jahraa structures has led to updated structure maps, static and dynamic models. The Group
believes that the updated maps and models are significant and management’s best estimate of the associated 2P reserves
has been included in the reserves base for the impairment test on this asset. The updated maps and models will be
subject to GCA certification at the 2015 year end.
Oil price assumptions
The Group have assumed a Brent oil price of USD 62/bbl in 2015, USD 75/bbl in 2016, USD 78/bbl in 2017, and USD
83/bbl in 2018 inflated at 2% 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 the views of a reputed third party broker.
Discount rate assumptions
IAS 36 requires that when using discounted cash flows to estimate the value in use of an asset, the discount rate used
should reflect the current market assessment of the time value of money and the risks specific to the assets that are not
factored into the cash flows. The post-tax discount rate applied by management is derived from the Group’s post-tax
weighted average cost of capital (WACC) and is adjusted, where applicable, to take into account any specific risks
relating to the country where the asset is located. The calculation and adjustment of WACC is a highly subjective area
where significant management judgements are required. The Group has determined that a post-tax discount rate of 10%
(2014: 10%) is most appropriate to apply to all assets. Recognising the subjectivity of such judgements, the group has
performed a sensitivity analysis that shows that if higher post-tax discount rates of 12%, 15% and 15% were used in Iraq,
Egypt and Yemen respectively and all other assumptions remained the same, the Siba field in Iraq would be impaired by
approximately USD 18,100 thousand, the BEA field would be impaired by approximately USD 5,800 thousand and
Block 5 in Yemen would be impaired by approximately USD 4,600 thousand.