43
interpretation of existing law or policy, governments could also require the Group to grant to them larger shares of oil
and gas or revenues than previously agreed, lower agreed cost recovery rates, or postpone or review projects, nationalise
assets, or make changes to laws, rules, regulations or policies which, in each case, could materially adversely affect the
Group’s business, prospects, financial condition and results of operations.
The Group’s operations in Egypt may be disrupted by political and economic developments.
Egypt, which accounts for the majority of the Group’s oil production and revenue, has been subject to profound political
upheaval and multiple changes of government in recent years. In July 2013, in the face of popular demonstrations against
the government, the armed forces deposed the then-existing government and exercised control, pending new elections.
Subsequent months were characterised by widespread civil unrest and violent clashes between supporters of the deposed
government and the new military government. As a result of continuing political uncertainty and security concerns,
commercial activity in Egypt has been negatively affected. Furthermore, the results of the recent presidential election in
May 2014 and upcoming parliamentary elections in July 2014 may lead to the formation of a new government, which
could act to significantly alter the oil and gas legal regime in Egypt or otherwise attempt to alter the Group’s current or
future commercial arrangements in Egypt.
In economic terms, Egypt has faced a significant loss of foreign currency revenue from the decline of external
investment and foreign tourism since the onset of political unrest in early 2011, as Egypt’s foreign exchange reserves
have fallen by more than half, from $36 billion in December 2010 to $16.9 billion in February 2014, according to the
Egyptian Central Bank. In May 2013, Standard & Poor’s lowered Egypt’s sovereign credit rating from B to C, with a
stable outlook, in light of successive waves of political instability, dwindling foreign currency reserves, weakening
public finances and failure to reach agreement on an International Monetary Fund (“
IMF
”) rescue loan. Because Egypt,
acting via EGPC, is a net importer of oil, it depends on a sufficient inflow of US dollars from foreign investment,
tourism, borrowing and other sources to fund its oil imports as well as to process US dollar payments through EGPC to
counterparties, including the Group. In January 2014, for example, the Egyptian Minister for Tourism announced that
Egypt had seen a 41% decrease in revenue from tourism in 2013 as compared to 2012. The decline in foreign currency
revenue and reserves has had a significant impact on the finances of the Egyptian government, resulting in certain
government-owned entities being unable to fulfil their contractual obligations with foreign counterparties. For example,
in the three months ended 31 March 2014, a total of $16.5 million, or 49.7%, of the Group’s $33.2 million received from
EGPC was received in Egyptian Pounds. Since 31 March 2014, a substantial proportion of the cash received from EGPC
has continued to be paid in Egyptian Pounds. The state of the Egyptian economy as a whole, and in particular the
availability of US dollars, may delay, prevent any improvement in or substantially prolong the length of time it takes
EGPC to make payments to the Group, and those payments which the Group does receive from EGPC may increasingly
be paid in Egyptian Pounds instead of US dollars. See “
—Risks relating to the Group—The Group has been dependent
on its operations in Egypt for a significant portion of its revenues, and receivables due from the Group’s operations in
Egypt under the Group’s licence agreements are paid irregularly and after significant delay
.”
In July 2014, the Egyptian government announced a 10% withholding tax payable on dividends and other cash
distributions to shareholders. At present, the Group’s only Egyptian subsidiary, Kuwait Energy (Eastern Desert)
Petroleum Services SAE, which holds the Group’s interest in Area A in Egypt, distributes cash to the Issuer as
repayment of intercompany loan arrangements, which are not treated as dividends and therefore will not be subject to
10% withholding. Once the intercompany loan balances have been repaid, however, any further distributions from
Kuwait Energy (Eastern Desert) Petroleum Services SAE to the Issuer will be characterised as dividends and subject to
this 10% withholding tax. The Egyptian government also announced a temporary 5% income tax effective for the next
three years on any profits above one million Egyptian pounds, in addition to the already existing income tax regime,
applied at progressive rates up to 25%. Kuwait Energy (Eastern Desert) Petroleum Services SAE will be subject to this
additional 5% income tax. Either or both of these changes in Egyptian tax law could have an effect on our financial
results in Egypt, which could render our Area A operations unprofitable and otherwise have a material adverse effect on
our business, prospects, financial condition and results of operations.
The Group expects a substantial amount of its future activity to focus on Iraq, which presents a high-risk operational
and security environment.
Iraq, which accounts for a significant proportion of the Group’s reserves and resources, remains subject to periodic
instability, terrorism and sectarian violence in the aftermath of the removal of Saddam Hussein’s regime, the subsequent
war and the current offensive by ISIS. Under the Group’s current exploration and appraisal drilling plan, Iraq will be the
focus of a substantial portion of the Group’s expected exploration and development capital expenditures to the end of
2016, totalling $359.6 million, primarily in relation to a major gas development project in Siba to complete the gas
processing work and exploration activities and demining in Block 9. In addition to the geological and operational risks
inherent to the Group’s exploration and appraisal programme in Iraq, the Group also faces the risk that governmental
authorities in Iraq may be unable to carry out mine clearing operations in the areas where the Group plans to operate, or
be unable to provide the necessary degree of peace, order, stability and security for the Group to carry out its exploration
