Dana Gas’ operational progress during 2010 has continued its enviable operational track record, which both reflects the high quality of our hydrocarbon assets and is also a testament to the skills and commitment of our professional staff who continue to deliver high performance and solid results across our business units.

During 2010 we increased production across the Group by 31% to 55,500 boepd and increased our profits by 80% to AED 158 million.

In Egypt, we have increased our proved reserves by 90% to 89 MMboe and proved plus probable reserves by 15% to 152 MMboe.  Production in Egypt was raised by 20% to 42,300 boepd, in line with our target projections.  We now plan to increase production by more than 20% during 2011, followed by a similar increase in 2012 when our third gas processing plant comes on stream.  

In the Kurdistan Region of Iraq we have achieved an impressive 76% increase in production, driven by consistent production of gas throughout the year, with continuous deliveries to two power stations.  With the recent completion of our LPG processing plants, we are now in full operational mode extracting valuable condensate and LPG from the produced gas, and our near term focus in Iraq is on achieving high utilisation at the gas processing plants. We continue to press for payment for the condensate that has been delivered to the Kurdistan Regional Government (KRG), and are actively engaged with the KRG to expedite these overdue payments with urgency. 

In Sharjah, we are moving ahead with the development of the Zora Field. A consolidated engineering contract, covering concept, basic and detail engineering for the offshore platform, pipeline to shore and the onshore gas processing facilities was awarded.

Dana Gas continued to deliver strong operational and financial performance during 2010, in spite of challenges which have caused some delays to our gas project in Iraq and also the UAE Gas Project to import gas from National Iranian Oil Company (NIOC). In this respect, I am particularly pleased that we delivered four quarters of consistent profits with no material exceptional items which reflects the strength of our balance sheet and the robustness of our earnings. During 2010, revenues from the sale of hydrocarbons increased to AED 1.79 billion, with gross profit reaching AED 781 million, representing year-on-year increases of 40% and 79%, respectively. These results reflect the Company’s continuing growth in Egypt and the Kurdistan Region of Iraq.

Business Development and Outlook

While our portfolio is robust  to support our future growth ambitions, we continue to explore promising hydrocarbon opportunities and new country entries to expand and diversify our portfolio within the MENASA Region.

During 2010, we reviewed a number of business opportunities across the Region. While our prime focus remains on growing our cash flows and maximising shareholder value, we plan to steadily build our asset base, albeit prudently managing our precious financial resources in light of regional and global conditions. 

Management and Staff

I would like to thank all our staff, a team of energetic, committed and creative professionals, who have worked tirelessly to deliver these results. As Dana Gas’ most valuable asset, we will continue to build our team and retain high calibre individuals to deliver on our goals and aspirations.

OPERATIONAL REVIEW

Egypt

Our team in Egypt has delivered yet another year of outstanding performance. Production during the year increased by 20% for the second year in a row, averaging 42,300 boepd, and with five new fields being brought on stream. The eleven exploration wells that we drilled during 2010 yielded 7 new discoveries, continuing the successful trend of 2009, a tribute to our team’s deep knowledge of our asset base and the expertise of our exploration staff.  As a result, our proved “working interest” reserves (1P) increased by 90% from 46 MMboe at the end of 2009 to 89 MMboe at the end of 2010, and our proved plus probable (2P) reserves increased by 15% from 132 MMboe to 152 MMboe, notwithstanding production of 15.4 MMboe during the year. This represents a 229% Production Replacement Ratio for our 2P reserves – an extremely impressive result by industry standards. 

Exploration

During the year our exploration programme focused on the two Nile Delta Concessions, West Manzala and West Qantara.  As a result of our successful exploration track record, we have been awarded another four Development Leases - two of which are contiguous and sizeable - bringing the total area covered by Development Leases to over 25% of the original Concessions acreage.  This is particularly valuable as the exploration rights of a Development Lease are retained for the whole of its term (20 years, with a possible 5 year extension). 

During 2010 we entered into the last extension to our exploration rights in the Concessions and relinquished 25% of the acreage as required under our Production Sharing Agreement with the Egyptian authorities. This extension is for two years and during this period our exploration program will focus on drilling prospects within these areas. After final relinquishment of the exploration acreage in June 2012, our exploration efforts will refocus on the substantial remaining prospect portfolio now contained in the Development Leases.

During 2010, our exploration success was mainly in the shallow Kafr El Sheikh reservoir and the Messinian Abu Madi and Qawasim formations. Of particular interest was the South Abu El Naga discovery whose high liquid yield resulted in higher revenues based on international market prices for natural gas liquids. This discovery, combined with the encouraging Salma Delta North discovery, reinforces our belief in the attractiveness of this acreage, since with its gas water contact being 40 metres deeper than the adjoining Salma Delta field, it indicates a new pool of hydrocarbons.

Our Nile Delta Concessions’ exploration portfolio has been reviewed by Gaffney Cline & Associates, independent engineering consultants, who have reported a most likely risked resource of 1.8 trillion cubic feet of gas.  Our exploration programme in 2011 will continue to target multiple horizons across our acreage and will include wells to test larger prospects in the deeper Sidi Salim formation.

Production and Development – Nile Delta

During 2010 Dana Gas produced 77 Bcf of gas plus 2.5 MMb of petroleum liquids, a total of 15.3 MMboe, from eleven fields in our Nile Delta Concessions.  The 20% increase in production was achieved as a result of five discoveries - Sama, Orchid, Sharabas, Faraskur and South Faraskur - being brought on stream during the year. 

Our gas processing plant at El Wastani in the Nile Delta operated throughout the year handling production from the El Wastani/El Wastani East, Luzi, Dabayaa, El Basant, Azhar, Orchid, Sharabas, Faraskur and South Faraskur fields.  The latter three fields are all located to the east of the Nile and in order to bring them on stream a process facility was built, with gas and separated condensate being piped under the Nile River.   By the end of the year the El Wastani plant was handling 200 MMscfpd of raw gas whilst maintaining its excellent record of reliability and availability.  Our second gas processing plant at South El Manzala, which can treat dry gas up to a capacity of 60  MMscfpd, handled production from the Sondos and Sama fields.

During the year, five successful appraisal and development wells were drilled on the Nile Delta fields alongside a continual program of working over production wells to increase or maintain production rates. 

In 2011 we will increase the total throughput of our El Wastani plant to 240 MMscfpd, with enhancement of LPG recovery to follow in 2012. We shall work on tying back our recent discoveries to this plant, while development drilling will continue to optimise production across the developed fields.  In addition to this and as a direct result of our continued exploration success in this area, we will scale up production capacity to the east of the Nile over and above our plans made in early 2010.  A new plant, capable of handling 120  MMscfpd of gas with full condensate and LPG recovery, will be built in the easternmost portion of our acreage  to handle production from the Salma Delta, Salma Delta North, Tulip and South Abu El Naga fields.  This new plant will come on stream in 2012, and combined with the El Wastani and South El Manzala plants, will take our total gas handling capacity to over 400  MMscfpd. 

Production and Development – Upper Egypt

During 2010, along with our 50% partner Sea Dragon Energy Ltd, we achieved an average gross production rate of 628 bopd from the Al Baraka field in the Komombo Concession.  In May 2010, a development drilling campaign commenced with 8 development wells being drilled and 6 placed on production.  In late 2010, two wells were hydraulically fractured to increase their productivity and in January 2011 these were together producing at circa 300 bopd.  The development program for 2011 is aimed at increasing recovery of oil from the five discovered reservoirs through the drilling of five development wells.  During 2010, 477 km of 2D seismic data was acquired resulting in the generation of a new prospect inventory.  A commitment exploration well was drilled at the Memphis prospect and was subsequently abandoned as it did not encounter  commercial hydrocarbons but was nonetheless very useful as it gave  important information on the petroleum system of the area.

Gas Liquids Extraction Plant, Gulf of Suez

In Egypt, we are continuing to build an LPG extraction plant at Ras Shukheir on the Gulf of Suez through Danagaz’ shareholding  in Egyptian Bahrain Gas Development Company (“EBGDCo”).  This plant is expected to come on stream in mid 2011, after a gross project investment of approximately AED 350 million, and will extract 130,000 tonnes per annum of LPG from a gas stream of 150 MMscfpd.  Dana Gas has a net 26.4% stake in this joint venture.

Kurdistan Region of Iraq

In the Kurdistan Region of Iraq, Dana Gas’ interests are held via a 40% shareholding in Pearl Petroleum Company Ltd (“PPCL”), our partners being Crescent Petroleum 40%, OMV of Austria 10% and MOL of Hungary 10%.   Together with our partners, we produce gas from the Khor Mor Field and deliver it to power stations at Erbil and Chemchemal, and as we near completion of our gas processing plant this project is evolving from a construction/commissioning phase to a fully operational phase. 

During 2010 gas and condensate was produced throughout the year, with raw gas production, net to Dana Gas’ 40% interest, amounting to 22 Bcf plus 1.1 MMbbls of condensate, giving a total net production to Dana Gas of 13,200 boepd.  This was an increase of 76% on the production achieved during 2009 when all production was through our Early Production Facility (“EPF”).  In 2010 we commenced production through the first LPG train of our gas processing plant at Khor Mor, and production was progressively increased to meet demand from the power stations. Both the EPF and LPG Train-1 of the gas processing plant were completed at the end of the year, and we commenced LPG production and lifting in January 2011.

Marking an important milestone in this project, we have now achieved full plant capacity and are delivering 250 MMscfpd.  The commencement of LPG sales will significantly boost our revenues. 

The above represents successful delivery of Phase 1 of this project and, whilst our current focus will remain on continuing production, our long term objective remains to fully exploit the enormous potential of the Khor Mor and Chemchemal fields to supply gas to both domestic and export markets.  Our experience of production from the Khor Mor field and the well test data that we have obtained demonstrates that this is a highly prolific, world class gas condensate field.  With the recent major gas discoveries in the region, we are confident that the Kurdistan Region of Iraq will become a major gas producing province capable of exporting gas within the region and into Europe.  With our partners Crescent Petroleum, OMV of Austria and MOL Hungarian Oil and Gas Company, we are well positioned to maximise these opportunities.

We are conscious that during 2010 we did not fully receive payment from the KRG for the produced petroleum liquids delivered to the KRG.  In the latter part of 2010 and early 2011 we have delivered condensate and LPG to private buyers, under the direction of the Kurdistan Regional Government, which has ensured that we receive revenue for part of our production.  While we press the KRG for payment, we are consciously calibrating further investment, and after ensuring timely and regular payment arrangements we plan to resume full scale investment for full development of the Khor Mor and Chemchemal fields.

UAE

UAE Gas Project

Our UAE Gas Project to process and transport imported gas continues to await the commencement of regular gas supplies from NIOC.  In 2001, a long term internationally binding gas supply agreement was signed between our partner Crescent Petroleum and the NIOC to import gas into the UAE. While the construction and interconnection of our facilities have long been successfully completed, regular gas supplies have yet to commence.   

In July 2009, Dana Gas was notified by Crescent Petroleum that they are seeking a legal ruling on the gas supply contract with NIOC through international arbitration, as per the 25-year agreement between them, a process that is still ongoing.  This follows several years of delays in gas delivery by NIOC, and demands for performance from customers in the UAE.  Dana Gas has no direct contractual relationship with NIOC, its role being the transporter and processor of gas within the UAE, and holding a 35% stake in the marketing and sales operations of the processed gas and petroleum liquids. In July 2010 NIOC introduced gas into its completed transmission network and Dana Gas’ UGTC pipeline and SajGas processing facilities in Sharjah for commissioning purposes. However, subsequently as it pressured up, NIOC discovered significant leaks in its offshore gas transmission system which it is now rectifying. This repair will likely take several more months to complete, and regrettably NIOC is not expected to be in a position to deliver gas until the end of this year. 

Joint Venture with Emarat

Our wholly-owned subsidiary UGTC, has implemented a 50:50 joint venture project with the UAE Government entity Emarat. This joint Hamriyah Gas Pipeline Project, the largest gas transmission pipeline (48-inch diameter) in the UAE, connects the Sharjah gas hub at Sajaa to the fast-growing industrial area at Hamriyah, and covers a distance of 32 km with a capacity of one billion cubic feet per day.  The 48-inch pipeline is now operational for use by 3 end users in the Hamriyah area - SEWA, FEWA and CNGCL - under terms of a 25 year contract.

UAE – Sharjah Offshore (Zora Field)

In our Sharjah Western Offshore Concession, we are completing the requisite contractual arrangements including gas sales.   Whilst the project has taken longer than expected to complete the necessary contractual arrangements,  we  are now close to project construction kick-off with a view to commence production in the second half of 2012 at an anticipated production rate of 60 MMscfpd.  The field development plan requires the drilling of two wells and an offshore wellhead facility connected to a gas pipeline to transport the gas onshore for processing and marketing  within the UAE.  The total development cost of this field is estimated to be  AED 450 - 550 million.

Reserves

Gaffney Cline & Associates have carried out an independent evaluation of Dana Gas Egypt’s hydrocarbon reserves which has resulted in a 15% rise in proved plus probable reserves to 152 MMboe.  The 2010 year end “working interest” reserves for the Company in MMboe were as follows.

FINANCIAL REVIEW

Further Growth and Continued Financial Stability 

The Group reported strong financial  results in 2010 with net profit after tax increasing by 80% to AED 158 million and a robust balance sheet by year end. In 2011, we will continue to fund our  investment requirements with our internal cash flows  and external financing. 

Key Financial Metrics

Overall Summary 

2010 was an excellent year for the Group, as we reported a 40% increase in revenue backed by production growth and higher hydrocarbon prices. Our Gross Profit increased by 79% which demonstrates our ability to control operating costs with rising production. Net profit after tax for the year increased by 80% to AED 158 million from AED 88 million in 2009, which reflects the impact of growing production and higher oil prices coupled with lower operating costs per barrel of oil equivalent. Our production in Egypt increased by over 20% compared to 2009, and in the Kurdistan Region of Iraq we ramped up our production by 76%.

During the year an amount of AED 480 million was generated from operating activities of the Group, an increase of 25% on 2009. The generated cash was mainly utilised for our capital expenditures. 

Increasing Production and Higher Commodity Prices

The Group increased its average production by 31% to  55,500 boepd, as compared to
42,200 boepd in 2009. Of this increase, 57% was contributed by our Egypt operations, where production increased from 34,700 boepd to 42,300 boepd in 2010 as we brought five newly discovered fields to production. Kurdistan operations contributed 43% to the production increase, where our average production in 2010 stood at 13,200 boepd (net to Dana Gas), as compared to 7,500 boepd in 2009. 

In 2010 average realised prices for liquids witnessed an increase of 32.5%. This contributed AED 167 million of the increase in our gross revenues.

Gross Profit

The Group reported a record gross profit of AED 781 million, an increase of 79% over the previous year. This increase reflects the Group’s ongoing and growing operations in Egypt and the Kurdistan Region of Iraq and the impact of our continuous cost review and optimisation strategy.

Exploration Write-Offs 

In 2010, in line with our exploration strategy in Egypt, we drilled a total of eleven exploration wells of which seven were successful. This resulted in an increase of 15% on Proved and Probable (2P) “working interest” reserves. The remaining four wells being dry were written-off. In comparison to last year our exploration expenditure of AED 436 million was reduced by 89%. 

Comprehensive Income

The total comprehensive income for the year stood at AED 276 million compared to
AED 458 million in 2009. The comprehensive income for 2010 includes the profit for the year and an unrealised gain of AED 118 million booked on the Group’s investment in MOL shares. In 2009 the unrealised gain on MOL was much higher at AED 370 million resulting in higher comprehensive income. This unrealised gain is directly booked to equity in line with the Company’s published accounting policy. 

Cash from Operations

In 2010 our cash flow from operations increased by 25% to AED 480 million from AED 385 million in 2009. This principally reflects higher cash flow from our Egypt operations and improved overall working capital management partially offset by higher tax. We commenced the year with a cash balance of AED 781 million and ended the year with a balance of AED 583 million, a decrease of AED 198 million. Our cash management strategy has been to manage our capital expenditures with our internal cash generation, the cash-in-hand principally being used for finance cost payments. We start 2011 with renewed plans to manage our liquidity with a combination of further improvement in internal cash generation and seeking non-recourse funding for capital projects.

Capital Investment 

Capital investment in 2010 was AED 740 million, which translates into cumulative capital investments of approximately AED 2 billion over the last two years. In Egypt, the Group spent approximately AED 444 million whilst in the Kurdistan Region of Iraq the investment spend was AED 216 million. 

Balance Sheet

Total assets at the year end stood at AED 11.8 billion, an increase of 4% from last year’s total assets of AED 11.4 billion. This increase was largely due to the increase in the value of our significant  capital expenditures in Egypt and Kurdistan Region of Iraq, as well as our investment in MOL shares. Total net assets at year end amounted to AED 7.9 billion, with the book value per share being AED 1.20 (2009: AED1.16 per share). 

Capital Markets Relationship

Dana Gas recognises the importance of investor relations and capital market communications, and addresses these globally from the headquarters in Sharjah and from our London office. During the year, members of the senior management team, including the CEO, regularly met with investors, bond holders, analysts and investment banks to discuss the strategy, plans and performance of the Group. Further in 2010, the Company initiated the process of organising investor calls after release of each of our quarterly and annual earnings, and will continue to do so in 2011. This initiative has been much appreciated by the investor community, and is a part of our commitment towards information dissemination and transparency. 

Financial Strategy & Outlook

Longer term, we will continue to focus on value creation for our esteemed Shareholders through focussed investment in our core assets and growth from new business development opportunities that meet our investment criteria.  

For 2011, we will continue to fund our  investment requirements with internal cash flows  and appropriate external financing. 

In particular, we will focus on maintaining a robust balance sheet and strong liquidity for the Group. Our US$ 1 billion Sukuk is maturing in October 2012, and as a proactive measure, we plan to implement a Sukuk Liability Management program with regard to the bond. On our further capital funding arrangements, we are working with international financial institutions to structure appropriate non-recourse financing for the development of our discoveries and projects such as the Zora Field development project.

Ahmed Al Arbeed
Chief Executive Officer