KEC was founded in 2005 by former employees of Kuwait Oil Company, Kuwait’s state-owned oil company. The CEO and co-founder of KEC, Ms. Sara Akbar, has over 25 years experience in the industry, and is the first woman to lead an E&P company in MENA. KEC has assembled a cohesive international management team with an average of 27 years of industry expertise and, since its creation, has acquired working interests in nine producing and twelve exploration assets in MENA, Ukraine, Russia and South East Asia. KEC has net proved and probable (“2P”) reserves of 49 million barrels of oil equivalent (“boe”) and current production of over 10,000 boe per day (“boepd”).

The Company was able to finance its activities to date through a series of equity private placements among local and international investors. KEC’s shareholder base is therefore diverse, including local retail investors (36%); KEC founders, including KEC management and Zahra Group, a private Kuwaiti holding company (19%); Kuwaiti investment fund AREF Investments (17%); and a range of other international and regional institutional and private equity investors (30%).

As part of KEC’s $150 million corporate work program for 2009, KEC is planning to invest over $80 million in Egypt and Yemen. Capital expenditures in other countries are mainly for Ukraine, Oman and Russia. IFC is proposing to provide KEC with a $35 million reserve based facility and a $15 million income participation facility to fund the Project. IFC’s funds will be available for use by KEC only in Egypt and Yemen.

50.0 million (USD)

Product Line	IFC Investment (million USD)
Risk Management
Guarantee
Loan	50.0
Equity

* These investment figures are indicative

In Egypt, KEC has interests in three onshore producing assets (Area A in Gulf of Suez, and East Ras Qattara and Burg el Arab concessions, both in the Western Desert), one development asset (Abu Sennan in Western Desert) and an early exploration asset (Block 6 in Southern Egypt). In Yemen, KEC has one producing asset (Block 43, onshore, Central Yemen) and interests in six exploration assets, all onshore in Central Yemen with the exception of Block 15 (offshore Al Mukalla in the Gulf of Aden). Block 43 is expected to cease production shortly.

The project will lead to further exploration, appraisal and development of domestic natural resources in Egypt and Yemen. Both countries have seen significant declines in their oil production in recent times, coupled with a fast increase in domestic demand. Both governments are highly dependent on oil and gas revenues to maintain macro-economic stability as well as their social welfare programs.

In Egypt, oil production has declined from a peak of nearly 900,000 barrels per day (“bpd”) in 1997 to around 710,000 bpd in 2007. Given the rapid increase in domestic oil demand, Egypt is expected to become a net oil importer soon. Oil and gas revenues account for 15% of Egypt’s Gross Domestic Product (“GDP”) and 46% of Egypt’s exports. The sector is also the most important source of fiscal revenues for the Government of Egypt (“GOE”), representing 25% of GOE’s budgeted revenues for 2008/9. In Yemen, the poorest country in the MENA region, oil production is declining at an even more rapid rate, with 2008 output averaging just 293,000 bpd, compared to a peak of 457,000 bpd in 2001. Production decline is expected to accelerate over the next few years if no significant new discoveries are made, with current forecasts predicting Yemen will run out of oil in the next 10 to 12 years. Yemen’s oil and gas sector accounts for over 90% of the country’s export earnings and an estimated 75% of Government of Yemen’s (“GOY”) revenue.

The Project is expected to produce significant development impacts:

- Contribution to Government Revenues: The Project benefits to Egypt and Yemen include revenues that accrue to these governments in the form of production share, royalties and corporate taxes. In 2008, GOE’s fiscal take from KEC’s operations in Egypt was US$58 million and GOY’s take was US$19 million. As stated above, both governments are highly dependent on continuing fiscal revenues from the oil and gas sector in order to sustain their respective social programs. The net present value of the total payments to the GOE from 2009 to 2012 is expected to be over US$100 million. Given the exploratory nature of KEC’s assets in Yemen, future revenues to GOY will depend on the success of the Company’s exploration activities in 2009.

- Employment and development of local skills: The Project will help sustain employment in both countries. In Egypt, the operating company currently employs approximately 50 full time employees and has 175 contractors. This is expected to rise to nearly 70 personnel and approximately 350 contractors by 2010, of which at least 90% will be Egyptian nationals. Without this Project and the associated development and exploration programs, these jobs would be largely lost. In Yemen, due to the early stage of operations, KEC currently has less than 10 people directly employed and approximately 125 contractors. With the start of significant exploration activity this figure is expected to rise to approximately 15 direct employees and an average of 175 contracted staff by 2010. Approximately 70% of direct personnel in Yemen are expected to be Yemeni nationals.

- Supporting the development of local independent E&P sector in MENA: Through this financing, IFC will play an important role in supporting the only sizeable private Kuwaiti E&P player and the only major Kuwaiti company run by a woman. The E&P sector in MENA has traditionally been dominated by large state-owned oil companies or Western oil and gas companies. KEC is one of the first significant attempts by the local private sector to participate in this sector. KEC’s ability to grow into a company on a par with other mid-size international E&P companies is hoped to encourage other such private sector initiatives.

The key development indicators to be monitored during the life of the IFC investment include:

(1) Payments accruing to governments;
(2) Direct employment levels;
(3) Local purchase of goods and services (including contractors); and
(4) KEC 2P net reserves.

- Provide long-term debt and quasi equity financing: Long term financing in US Dollars for Egypt and Yemen is currently largely unavailable for companies such as KEC. International commercial banks are being highly selective in MENA, lending long term only to existing clients or to large low-risk projects in low-risk countries. Local banks are short on US Dollar funds and are currently rarely lending beyond 3 years.

- Develop robust E&S policies and procedures: IFC will apply its unique experience gained from working with small and medium oil and gas companies in developing countries to assist KEC in revising and implementing its group-wide health, safety, environmental and social responsibility management system (“HSESR Management System”). The Company has a recently approved HSESR Management in place and is currently hiring an HSESR Manager. KEC will need to adapt the diverse HSESR practices it has inherited in the different operations it has acquired to create a best practice, consistent approach. The Company has requested IFC’s assistance in this process. IFC’s support has also included the development of an Action Plan to address current and potential E&S issues at KEC’s Egypt and Yemen sites.

- Establish long-term partnership: KEC wants to establish a long-term strategic multi-country/regional partnership with IFC and has indicated an interest in working with IFC in other countries. IFC is one of the very few institutions capable of providing both such a broad geographical expertise and a willingness to invest in high risk countries. The Company is also keen to take advantage of IFC’s somewhat unique ability to provide the full range of debt and equity instruments (including Islamic finance structures) at either the corporate or asset level.
- Provide stamp of approval on corporate governance and Corporate Social Responsibility (“CSR”): KEC expects to complete an IPO on an international stock exchange in the near future. KEC believes IFC’s input on corporate governance matters and CSR will be an important stamp of approval ahead of the IPO and will be a unique contribution of IFC, not provided by any of KEC’s existing shareholders or lenders. IFC is currently discussing with the Company specific “value-added” services in these areas.

The Project is rated Category B under IFC’s Policy on Social and Environmental Sustainability. IFC’s Policy on Social and Environmental Sustainability defines a Category B project as one that will result in limited adverse social or environmental impacts that are generally site-specific and largely reversible, and readily addressed through mitigation measures. KEC operations and planned activities in Egypt and Yemen are all within site-specific locations that are in remote desert areas where no significant environmental and social sensitivities have been identified. Project activities at all locations principally involve the drilling of wells for exploration and production purposes, the completion and maintenance of producing wells, oil and gas production, production processing, oil storage and export to existing pipelines and terminals in both countries. Additional exploration activities such as seismic surveys will also be conducted. Oilfield activities of this scale have a limited footprint and can be readily managed in accordance with good international industry practice. Potential impacts can be avoided, eliminated or minimized by adhering to international standards, guidelines and international design parameters.

IFC has considered the value of the Project’s main benefits (in the form of taxes, royalties, production share and other payments) and has assessed potential governance and other risks to these benefits and has come to the view that the Project should be supported. In coming to this view, IFC has examined various governance and corruption indices for both Egypt and Yemen, including the World Bank Institute’s (“WBI”) Governance Indicators as well as Transparency International’s Corruption Perception Index. Moreover, the World Bank Group (“WBG”) is actively involved in supporting the governments to address issues of governance and corruption. The Company has also agreed to disclose publicly all its payments to both the governments of Egypt and Yemen.

- Egypt: Governance, Revenue Management and Transparency
In the case of Egypt, the GOE’s share of hydrocarbon revenues partly accrues to the Ministry of Petroleum through the Egyptian General Petroleum Company (“EGPC”) and for income taxes to the Ministry of Finance (“MOF”). GOE’s revenues are mostly reinvested or directly applied to finance domestic subsidies for energy products for the country’s population. According to the WBI Indicators, Egypt ranks in the 39th percentile in terms of Government Effectiveness, 43rd percentile in Regulatory Quality, and 36th percentile in Control of Corruption. In Transparency International’s 2008 Corruption Perceptions Index, Egypt ranked 115th overall out of 180 countries measured by this index.

At the request of the GOE, the WBG has been actively engaged in Egypt on transparency and anti-corruption issues since early 2008 and a specific technical assistance package is currently being discussed. WBG is also active in other areas of assistance to GOE in the energy sector including on energy pricing policy (ESMAP- EG Energy Pricing Strategy - P107068) and natural gas distribution (EGYPT Natural Gas Connections Project - P095392). While Egypt is not an Extractive Industries Transparency Initiative (“EITI”) candidate, the WBG has already tried to engage the GOE on this front. All new oil and gas concessions in Egypt follow a model agreement whose main terms are public.

- Yemen: Governance, Revenue Management and Transparency
In the case of Yemen the benefits, mainly in the form of taxes, royalties and other remittances accrue mainly to the Ministry of Oil & Minerals (“MOM”). According to the WBI Indicators, Yemen ranks in the 13th percentile in terms of Government Effectiveness, 24th percentile in Regulatory Quality and 33rd percentile in Control of Corruption. In Transparency International’s 2008 Corruption Perceptions Index, Yemen was positioned 141st out of 180 countries measured.

The GOY is engaged in an active reform process and the WBG, which has a long standing relationship with GOY, has been supporting the GOY in recent measures to improve governance and fight corruption, including: joining the EITI process - Yemen has been an EITI candidate country since 2007, effectively establishing the Supreme National Anti-Corruption Committee (“SNACC”), adopting a new procurement law based on international good practices, and starting to improve public finance management. In Yemen, the main terms of licenses for oil and gas exploration blocks, for which there are regular international bidding rounds, are also public.