67
Egyptian Pounds rather than US dollars. If, however, the proportion of payments received from EGPC in Egyptian
Pounds substantially increases going forward, the Group may experience a more significant impact on the US dollar
value of its Egyptian revenues and increased exposure to the value of the Egyptian Pound. Due to an increasingly
constrained global foreign exchange market for Egyptian Pounds, the Group may be unable to convert certain quantities
of its Egyptian Pounds to US dollars going forward, which could limit the Group’s ability to distribute cash to other
jurisdictions within the Group.
If receivables from EGPC remain past due for a lengthened period, if expected cargo payments arranged by EGPC are
not received as planned, or if payments on existing or new receivables are even further delayed or settled in a currency
other than the US dollar, the Group may also be required to impair or discount certain of its existing past due receivables,
resulting in an impairment charge on the Group’s consolidated income statement which would lower or eliminate the
Group’s net profits for the period in which the impairment was recognised.
Production volumes and development programme
During the periods covered by the historical financial information, the increase in the volume of the Group’s oil working
interest production has been the primary driver of the increase in the Group’s revenue. The volume of crude oil produced
by the Group is a function of the success of the Group’s development programme. Particularly in those assets for which
the Group benefits from relatively low break-even operating costs, namely its producing assets in Egypt and Yemen,
working interest production growth has contributed to both growth in revenues as well as growth in the Group’s
operating profit and operating profit margin.
The Group’s future working interest production volume will be determined by the number of development wells drilled,
their depth, the amount of time and resource it takes to bring planned wells into production, and the flow rates achieved
in the Group’s existing and planned development wells. The flow rate for a given development well is a key element in
determining whether production from that well is economic, and whether additional capital expenditures are required to
enhance drilling and workover activities and to achieve sufficient commercial production.
In line with its development programme, the Group expects to incur further significant operating expenses and capital
expenditures from 2014 to 2016 to undertake a major gas development project in Siba in Iraq and significant exploration
work in Block 9 in Iraq, and continue its drilling programme in Egypt and Yemen. See
“The Group’s business—
Exploration, appraisal and development programmes.”
The level of expenditures incurred in its development
programme will, subject to the availability of sufficient funding, be higher than projected if the Group is successful in its
exploration and appraisal drilling to convert those hydrocarbons that are currently classified as contingent or prospective
resources into reserves, and in developing new reserves and resources into producing assets.
The volume of the Group’s working interest production is also a function of its 2P net entitlement reserves, and as a
result may increase or decrease in line with the level of reserves.
Exploration programme
Certain of the Group’s assets, and in particular those in Iraq, contain predominantly contingent and prospective
resources, and are currently in the exploration and appraisal stage. Production volume from the Group’s planned wells in
Iraq and elsewhere, and production in a cost effective and timely manner, will be impacted by the Group’s ability to
successfully execute its exploration and appraisal programme, as set out in
“The Group’s business—Exploration,
appraisal and development programmes.”
The Group expects to incur further significant operating expenses and capital
expenditures from 2014 to 2016 to drill exploration wells, in particular in Block 9 in Iraq to convert those hydrocarbons
that are currently classified as contingent resources into reserves, and subsequently commence production from those
assets. Although substantially all of the Group’s fields have undergone some degree of appraisal work, the known
accumulations of petroleum with respect to these assets nonetheless cannot be classified as reserves at this time
according to SPE PRMS definitions and guidelines (as set out in the CPR) because the applied projects are not yet
considered mature enough for commercial development, for example, due to lack of viable markets, dependence on
technologies still under development or insufficient data about the resources to assess commerciality. A significant
portion of the Group’s projected working interest production is dependent on assets currently classified as contingent
resources and prospective resources. The Group’s ability to convert those hydrocarbons that are currently classified as
contingent or prospective resources into reserves, particularly in Iraq, and to commence production in a cost effective
and timely manner, will be a key factor in determining the Group’s working interest production volumes going forward.
Depletion rates
The Group’s exploration, appraisal and development expenditures on a given field, once capitalised, are recognised in
subsequent periods as a depletion charge within cost of sales on the Group’s consolidated income statement according to
