132
could face further delays as a result of the current conflict. The escalation of tensions in Iraq could inhibit the Group’s
ability to exit the asset on favourable terms, or at all, or could delay the timing of such exit. See “
Risk factors—Risks
relating to the jurisdictions in which the Group operates—The Group expects a substantial amount of its future activity
to focus on Iraq, which presents a high-risk operational and security environment.
”
Block 9
Block 9 is a prospective exploration oil block comprising a gross area of 866 km
2
and located north of the city of Basra,
near the Iranian border. A Group company, KEC Kuwait, is the operator of the block with a 70% revenue and cost
interest, held through the exploration, development and production service contract entered into with South Oil Company
(of the Iraqi Ministry of Oil) on 27 January 2013. Pursuant to an economic interest assignment agreement, all of the
rights and obligations of KEC Kuwait’s interest in the Block 9 service agreement have been transferred to Kuwait
Energy Iraq Ltd, with effect from 3 February 2013. The Group is engaged in active negotiations to farm out a portion of
its working interest share in the Block 9 licence and expects to conclude an arrangement by the end of 2014. If such a
farm out arrangement is entered into, the proportion of the Block 9 contingent resources in the CPR that are attributable
to the Group will be reduced accordingly. Under the terms of the Block 9 licence, the other parties to the licence will
have a right of first refusal to acquire the working interest that is subject to any proposed farm out. See “
Risk Factors—
Risks relating to the Group—The economic valuations contained in the CPR may not provide an accurate estimate of the
value of the Group or its assets
.” The Group’s JV partner is Dragon Oil (Holdings) Limited, which holds a 30% working
interest and revenue interest. Following the KEC Kuwait Restructuring, the Issuer will provide a performance guarantee
in respect of the obligations of KEC Kuwait under the exploration, development and production service contract for
Block 9.
The service contract is in the five-year exploration period, which is set to expire in January 2018, with two two-year
extension options subject to approval by the South Oil Company. Upon commercial discovery, the JV partners may
apply to the South Oil Company to designate the area of the discovery as a development area, which if granted would
initiate a development phase under the service contract with a duration of 20 years, extendable by five years subject to
newly negotiated terms and conditions. Upon commercial discovery and application to the Iraqi Ministry of Oil, the
South Oil Company may impose a holding period of up to seven years prior to any such development phase
commencing.
At the start of the exploration period, no wells had been drilled in Block 9 and only a sparse 2D seismic dataset existed.
However, the Yadavaran field, a producing field across the Iranian border, extends into the north-eastern part of the
block, and it is believed that the Nahr Umr field extends into the western part of the block. The contingent resources in
the block are attributed to the potential development of parts of the two fields lying within the block.
Under the terms of the service contract, the Group will be responsible for initial processing of recovered hydrocarbons,
to separate oil, natural gas and water. This initial processing is expected to be performed in facilities constructed and
operated by the Group, and which will be on-site in close proximity to the development wells. The minimum work
obligations for Block 9 are to: (i) acquire 866 km of 2D seismic (or an equivalent amount of 3D seismic data based on a
conversion rate of 5 km of 2D seismic to 1 km
2
of 3D seismic) over the contract area, including processing and
interpretation thereof; (ii) drill one exploration well to a minimum of 4,500m or 500m below the top of the Sulaiy
formation or, in the event that the exploration period is extended, drill an additional exploration well to an agreed-upon
depth; and (iii) perform detailed geophysical and geological studies necessary for the proper exploration of the contract
area. The Block 9 service contract stipulates a minimum expenditure obligation of $90 million prior to January 2018.
The Group commenced drilling an exploration well in Block 9 in March 2014, with demining operations to clear 3D
seismic corridors to commence by the end of 2014. In the event of a discovery, the Group will decide on the number of
appraisal wells to be drilled and submit a Declaration of Commerciality to the government, which, once approved, will
be followed by a submission of a Field Development Plan.
The Group’s committed capital expenditures at Block 9 in relation to its exploration and appraisal programme as at 1
June 2014 were approximately $52.7 million through the end of 2016.
Future sales
Once processed at a field’s central processing facility, the Group will be responsible for delivering the separated natural
gas, LPG and condensate via pipelines to the contractual delivery points for the relevant product. The Group will
construct a 47-kilometer gas and LPG pipeline to the Khor Al Zubair Depot, and a 10-kilometer condensate pipeline to
tap into the Khor Al Zubair-Alfao state pipeline. At the point of delivery to the state pipeline the Group is paid its agreed
servicing fee per boe and custody of the petroleum is transferred to the Iraqi government, who is then responsible for
further transport (including transport costs), sale and delivery.
