86
87
KUWAIT ENERGY plc AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2011
39
29. FINANCIAL INSTRUMENTS (CONTINUED)
Market risk
Market risk is the risk that changes in market prices, such as commodity prices, interest rates and foreign
exchange rates will affect the
Group’s
income or the value of its holdings of financial instruments. The
objective of market risk management is to manage and control market risk exposures within acceptable
parameters, while optimising the return.
The Group is exposed to international commodity-based markets. As a result, it can be affected by changes in
crude oil, natural gas and petroleum product prices and interest rates and foreign exchange rates. The Group
uses derivative financial instruments to manage risks but not for speculative purposes.
Price risk management
Volatility in oil and gas prices is a pervasive element of the Group’s business environment.
The Group is a seller of crude oil, which is typically sold under short-term arrangements priced in USD at
current market prices. In the previous year the Group used oil put options to manage the risks of volatility in
crude oil prices. At the end of the current year the Group has not hedged its exposure to oil price risk.
The Group does not sell gas under any long-term agreements
.
Foreign currency risk management
The Group undertakes certain transactions denominated in foreign currencies. Hence, exposures to exchange
rate fluctuations arise. Exchange rate exposures are managed within approved policy parameters.
The carrying
amounts of the Group’s foreign currency denominated monetary assets
and monetary liabilities
at the reporting date are as follows:
Liabilities
Assets
2011
2010
2011
2010
USD
000’s
USD
000’s
USD
000’s
USD
000’s
Kuwaiti Dinar
-
594
2,832
20,056
Ukraine Hryvnia
1,425
3,430
82
8,240
Russian Rouble
7,452
5,444
422
477
Foreign currency sensitivity analysis
The Group’s main
foreign currency exposure is to fluctuations in the Kuwait Dinar, Ukraine Hryvnia and
Russian Rouble.
The following table detail
s the Group’s sensitivity to a 10
% increase and decrease in the USD against
Kuwaiti Dinar, Ukraine Hryvnia and Russian Rouble. The sensitivity analysis includes only outstanding
Kuwaiti Dinar, Ukraine Hryvnia and Russian Rouble denominated monetary assets and liabilities and adjusts
their translation at the year end for a 10% change in foreign currency rates. A positive number below
indicates an increase in profit and a negative number indicates decrease in profit. All other variables are held
constant. There have been no changes in the methods and the assumptions used in the preparation of the
sensitivity analysis.
2011
2010
USD
000’s
USD
000’s
Impact on consolidated statement of income
Kuwaiti Dinar
(283)
(1,946)
Ukraine Hryvnia
134
(481)
Russian Rouble
703
497
KUWAIT ENERGY plc AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2011
40
29. FINANCIAL INSTRUMENTS (CONTINUED)
Market risk (Continued)
Interest rate risk management
The Group is exposed to interest rate risk as it has borrowed funds from banks and financial institutions and
has placed funds in interest bearing time deposits with banks during the year.
Interest rate sensitivity analysis
The Group’s
exposures to interest rates on liabilities are detailed in note 20 to these consolidated financial
statements. The Group uses interest rate cap (See note 23) to manage interest rate risk on the murabaha
facility.
The following table illustrates the sensitivity of the profit for the year to a reasonably possible change in
interest rates of + 1% with effect from the beginning of the year. These changes are considered to be
reasonably possible based on observation of current market conditions. The calculations are based on the
Group’s financial instruments held at each
consolidated statement of financial position date. All other
variables are held constant. There has been no change in the methods and the assumptions used in the
preparation of the sensitivity analysis.
A positive number below indicates an increase in profit and negative number indicates decrease in profit. A
1% decrease in the interest rates would have the opposite effect.
2011
2010
USD
000’s
USD
000’s
Impact on consolidated statement of income
(530)
(267)
Credit risk management
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial
loss to the Group. The Group has adopted a policy of only dealing with creditworthy counterparties as a
means of mitigating the risk of financial loss from defaults. The Group
’s exposure and the credit ratings of its
counterparties are continuously monitored and the aggregate value of transactions concluded is spread
amongst approved counterparties. Ongoing credit evaluation is performed on the financial condition of
accounts receivable.
During the year, 67% of total revenue (2010: 60%) was derived from the
sales to the Group’s
largest
counterparty, the Egyptian General Petroleum Corporation (2010: Egyptian General Petroleum Corporation).
Further details of the Group’s receivables with EGPC are provided in note 4 (“Debtor recoverability”).
The
Group defines counterparties as having similar characteristics if they are related entities.
Exposure to credit risk
The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to
credit risk at the reporting date was:
2011
2010
USD
000’s
USD
000’s
Trade and other receivables
176,055
135,199
Bank balances
40,477
58,092
216,532
193,291
Kuwait Energy Plc And Subsidiaries
Notes To The Consolidated Financial Statements
For The Year Ended 31 December 2011
Kuwait Energy Plc And Subsidiaries
Notes To The Consolidated Financial Statements
For The Year Ended 31 December 2011
