in an everchanging marketplace - APICapic.com/files/AR-2010/Annual_Report_2010_English.pdf · 2018-11-19 · Iraq 10% Arab Petroleum Investments Corporation (APICORP) is an inter

Annual Report 2010

Fluidity in an everchanging marketplace

APICORPP.O. Box 9599Dammam 31423Kingdom of Saudi Arabia

Telephone (966) 3 847 0444Fax (966) 3 847 0011 (966) 3 847 0022Telex 870068 APIC SJE-mail [email protected] [email protected] www.apicorp-arabia.com www.apic.com

APICORP(Bahrain Banking Branch)Almoayyed Tower26th FloorAl Seef DistrictP.O. Box 18616 ManamaKingdom of Bahrain

Telephone (973) 17 563 777Fax (973) 17 581 337

ApicoRp Annual Report 2010 01

ApicoRp Shareholders 02Mission and Vision 03Financial Summary 03Board of Directors 04Executive Management 05chairman’s Statement 06Statement by the chief Executive and General Manager 08

Annual Review of the Arab Macro-economicand Energy investment outlook 10 The Economy and Markets 11 Oil and Gas Markets 14 The Arab Energy Investment Outlook 15 The Investment Climate 19

ApicoRp Activities in 2010 Project and Trade Finance 24 Direct Equity Investments 26 Equity Participations 30 Treasury and Capital Markets Activities 32 Economics and Research 33 Conferences and Seminars 35

2010 Financial Statements Independent Auditors’ Report to the Shareholders 38 Statement of Financial Position 39 Statement of Income 40 Statement of Comprehensive Income 41 Statement of Changes in Equity 42 Statement of Cash Flows 44 The Formation, Status and Activities of APICORP 45 SignificantAccountingPoliciesAppliedintheFinancialStatements 46 Notes to the Financial Statements 55

CONTENTS

Iraq 10%

Arab Petroleum Investments Corporation (APICORP) is an inter Arab multi-lateral development bank, established on 23 November 1975 in accordance with an international agreement between governments of the ten member states of the Organisation of Arab Petroleum Exporting Countries (OAPEC).

APICORP’S ShAREhOlDERS

APICORP is wholly owned by the member states of the Organisation of Arab Petroleum Exporting Countries (OAPEC) who are listed as follows:

Apicorp

libya 15%Egypt 3%

Syria 3%Iraq 10%

Saudi Arabia 17%

Bahrain 3%

Kuwait 17%

UAE 17%

Qatar 10%

Algeria 5%

02 ApicoRp Annual Report 2010

APICORPThe pioneer Financial

institution of the Arab oil and Gas industry

since

1975


MISSION & vISION

FINANCIAL SUMMARY 2008–2010

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TOTAL ASSETS

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SHAREHOLDERS’ EQUITY

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NET INCOME

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895

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27.6

58.5

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4,31

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41

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95.2

(US$ MILLIONS)

APICORP’s mission is to contribute to the development and the transformation of the Arab hydrocarbon and energyindustriesthroughequityanddebtfinancing,advisoryandresearch.

We will measure our success by our ability to • Bethepartnerofchoiceofoilandgasandenergy-relatedcompanies,bothpublicandprivate; • Berecognizedasaworld-classprofessionalinstitutionandtheleadingsourceof research on the Arab hydrocarbon and energy industries.

We will achieve our vision by • Profitablycomplementingtheofferingofprivatesectorfinancialinstitutions; • Attractingandretainingthebestprofessionalsintheindustry; • Pioneeringsolutionsforourclients; • Maintainingaportfolioofactivitiesweatheringthecyclicalityoftheindustry; • NurturingaperformanceculturethroughouttheCompany.


BOARD OF DIRECTORS

Naser Mohamed Al-SharhanFor the United Arab Emirates

(Member of the Audit Committee)

Farid BakaFor the Democratic and

Popular Republic of Algeria(Member of the Audit Committee)

Mahmood Hashim Al-KoohejiFor the Kingdom of Bahrain

(Chairman of the Audit Committee)

Abdullah A. Al-ZaidChairman of the Board

For the Kingdom of Saudi Arabia

Mohamed Ali Al-HuweijDeputy Chairman of the Board

For the Socialist Peoples’ libyan Arab Jamahiriya

H.E. Eng. Sufyan Al-AllouFor the Syrian Arab Republic

Hassan M. Habib Al-RufaieFor the Republic of Iraq

Fayadh Hassan Nima (up-to 31 December 2010)

ibrahim Ben A. Al-MannaieFor the State of Qatar


Shaikh Talal Naser A. Al-SabahFor the State of Kuwait


Sherin Ahmed Mohamed For the Arab Republic of Egypt

H.E. Eng. Sameh Fahmi(up-to 6 February, 2011)


ExECUTIvE MANAGEMENT

Ahmad Bin Hamad Al-NuaimiChief Executive and General Manager

Nabeel A. Al-AdsaniDeputy General Manager

pRoJEcTS DEpARTMENT

Dr. Abdulaziz S. AlidiExecutive vice President

Basema T. MahroosSenior vice PresidentBusiness Development

Antony BridgensSenior vice PresidentBusiness Development

pRoJEcT & TRADE FiNANcE DEpARTMENT

Nicolas ThevenotExecutive vice President

Bassam Al-TamimiSenior vice PresidentNAAM Business Group

Rajesh Ramanathanvice PresidentGCC Business Group

TREASURY & cApiTAL MARKETS DEpARTMENT

Hesham FaridExecutive vice President

Richard Burnell Branch Manager(APICORP) Bahrain Banking Branch

Faiq Hussain Senior vice President, MM, Fx and Arbitrage

FiNANciAL coNTRoL DEpARTMENT

Ayman F. Zeyadahead

Khaled YousefAccounts and Control Manager

Kamran KhanFinancial & Management Accounts Manager

opERATioNS DEpARTMENT

Mohamed Al-Mubarak head

ADMiNiSTRATioN & HUMAN RESoURcES DEpARTMENT

Sami Rashed Al-Sunaidhead

Mahdi Al-MahdiPublic Affairs Manager

iNFoRMATioN SYSTEMS DEpARTMENT

Mohammed i. El-Khoulyhead

BoD SEcRETARY, TERMS /coMpLiANcE

Ali Hassan Fadel

RiSK DEpARTMENT

Suresh Merguhead

ADViSoRS

Talal KhalilAdvisor, Technical

Ali AissaouiAdvisor, Economics

ChAIRMAN’S STATEMENT

Theyear2010wasayearofmixedfortunes,asitcameintheaftermathofamajorfinancialcrisisthat ledto global recession, high unemployment, and systemicweakness in the financial system, that accordinglyconstrained credit and investment. however, in spite of all that, the global economy is improving. Moreover, the arising discontent in parts of the Arab world, from exacerbated socio-economic inequalities, may lead to increasing uncertainties in the Arab region.

Financial ResultsIn spite of the above circumstances, APICORP’s operations in 2010, reported a net income of US$ 95.2 million, compared to US$ 58.5 million in 2009, a 63% increase. Total assets by year end, were US$4.3 billion, compared to US$4.1 billion in 2009, a 5% increase, while total shareholders’ equity also rose to US$1.1 billion in 2010, compared to US$1.0 billion in 2009 a 10% increase. Dividend PayableInaccordancewiththeCorporation’sstatutes,10%oftheyear2010netprofithasbeentransferredtotheLegalReserve, and in accordance with the Management recommendation, the Board of Directors called an extra-ordinaryGeneralAssemblymeetingthatinturnapprovedaUS$200million,tobecapitalizedasbonussharesto member states, thus raising the Corporation’s paid-up capital to US$ 750 million

Treasury and Capital Markets Inspiteofthenegativeimpactoftheglobalfinancialcrisis,APICORP’strongliquiditypositionresultedinthesettlementofitsUS$250milliontermloanontimeandwithoutrecoursetothefinancialmarkets.Alsoin2010,APICORPmadeitsfirstappearanceintheDebtCapitalMarketsbysuccessfullyconcludingaSAR2billion(US$533million)Fiveyearbondissue.Thefirst-timeissuerratingofA1forlongtermdebtandPrime-1forshorttermdebtratingthatAPICORPreceivedfromMoody’sInvestmentServicesinJune2010,furtherrecognizedthe strong credit credentials of APICORP.

Direct Equity InvestmentsAPICORP’s direct equity investments portfolio consists of 13 Arab joint venture projects, distributed among 6 Arabcountries.Eightoftheseprojectsareengagedinrefining,petrochemicalsandfertilizerssectors;threeofthem are in petroleum services sectors that include: Seismic services and drilling of wells for Oil & Gas, storage ofpetroleumproducts;whiletwoareoperativeinthegasseparationindustrysector.

By 31st December 2010, total value of APICORP’s direct equity investments was US$366 million, an 8% increase over its 2009 value of US$ 339.

On behalf of the Board of Directors of Arab Petroleum Investments Corporation (APICORP), it gives me great pleasure to present the 35th Annual Report on the Corporation’s activities and financial results for theyear ended 31 December 2010.



Project and Trade FinanceProjectfinanceactivityremainedatitshistoricallowsin2010asaresultoftheunfavorablecircumstancesthatdominatedtheworld’sfinancialmarketsandnegatively impactedthecreditmarketsand investments intheoil and gas sectors. The Corporation continued its support to the oil and gas industry by providing loans and advisoryservices,aresult,inspiteofthedifficultiesfacedbythefinancialmarkets,ourloanportfolioandnetincomecontinuedtogrowduringtheyear2010,wherenetincomefromprojectandtradefinanceactivityin2010 was amounted to US$ 26.5 million, compared with a budget of US$ 28.3 million. while loan assets by the end of 2010 were US$ 2.5 billion, compared to US$ 2.6 billion in 2009.

ItisworthmentioningherethattheCorporationhasalsostrengthenitscompetitivepositioninthefinancingofthe hydrocarbon and energy projects in the Arab world, at a time that saw the withdrawal of the regional and internationalfinancialinstitutionsfromthemarketsofthissectoroftheindustry.

Economic and Research DepartmentThe Economic and Research Department at APICORP is dedicated to the study of economic and policy issues relevant to the Corporation’s business development and growth strategy. The addressing of these issues is focusedonthescanningoftheCorporation’sbusinessenvironmentandtrends,theimpactoftheglobalfinancialcrisisanditseffectsontheArab(MENA)economicandenergyinvestmentoutlook;thecontinualenhancementofour in-housecountry riskmethodology, inaddition to thedisseminationofour researchfindingsthroughtheeconomiccommentary,whichhassignificantlyexpanded,and isconsideredasanaddedvalue to theeconomic and energy policy debate related to energy industry in the Arab region.

On behalf of the Board of Directors and the staff of the Corporation, I would like to record my deep thanks and appreciations to governments of the member states for the support they provide to the Corporation. Finally, and with great honour, I would like to express my thanks and gratitude to the government of the Custodian of the Two holy Mosques, Kingdom of Saudi Arabia, for the special care it provided to the Corporation.

Abdullah A. Al-ZaidChairman of the Board of Directors

STATEMENT By ThE ChIEF ExECUTIvE AND GENERAl MANAGER

Throughoutthisperiod,APICORPhasevolvedthusensuringthesignificanttransformation,overtime,of itsbusiness strategy, scope of operations, and competitive advantage to meet the modern day demands, and ensuring that APICORP maintains its prominent position among local, regional and international financialinstitutions,throughthesignificantparticipationinthearrangingofmajorfinancingsfortheoil,gas,petrochemicalandenergyindustriesintheArabregion,infulfillmentofitsobjectives.

In that respect, I am more than pleased to inform you that since our establishment, APICORP’s has participated inprovidingproject loanstotheoilandgas industriestothevalue inexcessofUS$126billion,withafinaltakeapproximatingUS$11billion.This ispositively reflected in thecontinuinggrowthof theCorporation’sloans portfolio balance to the amount of US$ 2.5 billion by the end of 2010. In addition, since inception in 1975, APICORP has also invested as an equity owner in 22 oil and gas joint venture projects with a total value in excess of US$ 13 billion.

Inconfirmationofitsstandingasrolemodelanduniquebusinessactivities,APICORP’stotalassetshavegrownto US$ 4.3 billion from US$ 186 million in 1976. In its 35 year’s history, the Corporation has achieved a total net income of US$ 1.2 billion, of which, the sum of US$ 566 million was distributed as cash dividends to the shareholders,whileUS$410millionwascapitalizedasbonussharestomemberstatesin1981,1996,2003and2010,thusincreasingtheCorporation’spaidupcapitaltoUS$750million,whiletheremainingprofitsweretransferred to the Corporation’s reserves. It is worth mentioning here that the Corporation’s capital adequacy ratioattheendof2010hasrisento29.2%fromits2009levelsof25.7%,whichsignifiesthestrongcapitalbasethat the Corporation enjoys.

Energy investmentsInspiteoftheongoingturmoil inpartsoftheArabworld, it isexpectedthatglobaleconomicandfinancialfundamentals will continue to support the need for energy investment growth in the Arab region. While the stabilityofthefinancialsystem,andthecoordinatedmonetaryandfiscalpolicies,togetherwiththeincreasedindustrial production have largely contributed to the global economic recovery in 2010. As for the Arab region, the recovery impetus will be strongest in the GCC states despite cost uncertainties, availability of feedstock, and accessibility to funding. Uncertainties in countries affected by the turmoil, will impact both domestic and foreigncapitalflowforsometime.Tocopewiththesecircumstances,Arabenergypolicymakersandprojectsponsors were left with no choice but to reassess their investment strategies and scale down their project portfolios.

ApicoRp Achievements in 2010 In spite of the magnitude of the challenge, the year 2010 was full of unprecedented achievements in the history of theCorporation.TheseachievementscanbeattributedtohighflexibilityofthemanagementoftheCorporationinconfrontingtheunfavourablechallengesthatariseasaresultofthefinancialandeconomicturmoil intheregionandinternationally.Theseremarkableachievementswereattainedunderthesignificanttransformationof the Corporation’s business strategy and competitive advantage.

35 Years in ApicoRp’s HistoryThis year’s annual report celebrates 35 years since the Corporation began its operations on the 23rd November 1975, and the remarkable success that the Corporation has achieved throughout its lengthy history and its continuing evolution.



Settlement of the US$ 250 million Term Loan on TimeInthemidstoftheresultingturmoilofthefinancialcrisis,APICORPcontinuedtohonoritsobligations,and,onthe25April2010theCorporationrepaiditsUS$250millionfiveyearTermLoanFacilitywhichwassignedon27April 2005. The sound liquidity enjoyed by the Corporation has made it possible for APICORP to repay that loan fromitsinternalresourcesandwithoutrecoursetorefinancefromthemarkets.ConfirmingtheCorporation’snatural liquidity levels higher than before the crisis.

The Rating by Moody’s investment ServicesInJune2010,APICORPreceivedfromMoody’sInvestorsServicesfirst-timeissuerratingofA1forlong-termdebtandPrime-1forshort-termdebt.ThatratingisatestimonyofAPICORP’shealthyfinancialprofile,aswellasitslongestablishedtrackrecordasaleaderintheArabOilandGasprojectfinancearena,coupledwithstrongcommitmentfromourshareholders,long-termfinancialstability,robustprofitability,high-qualityassetportfolio and a sustainable track record since APICORP’s inception back in 1975.

In addition, the rating also signifies an important milestone in APICORP’s history, and is expected toemphatically enhance our ongoing operations, as well as our fund raising options, and would certainly facilitate the achievement of our medium and long term goals.

ApicoRp’s Debut Bond issueAlso,inOctober2010,APICORPmarkeditsfirsteverappearanceinthedebtcapitalmarkets,bysuccessfullyconcluding a landmark SAR 2 billion (US$ 533 million) bond issue, which was oversubscribed three times, attractinganaggregatebooksizeofSAR6billion(US$1.6billion).ThefiveyearbondcallableafterthreeyearsattheoptionofAPICORPwasthefirstsuchstructureintheSaudicapitalmarketsandwaspricedat110basispoints over the Saudi Interbank Offered Rate (SIBOR).

APICORP received an overwhelming diverse response from a wide range of investors including government agencies,banktreasuries,corporatetreasuriesandinsurancecompanieswhichaffirmsinvestors’unwaveringconfidenceinAPICORP.Theproceedsofthebondissuewillbeusedtofurtherstrengthenourfinancingandequity portfolios, in support of the region’s oil, gas and energy industries.

ApicoRp petroleum Shipping FundAPICORP was given approval by the Board of Directors to set up investment funds with the objective of diversifying its sources of income and provide the investors with investment related products. From among the investment opportunities that were put into perspective, the idea of establishing APICORP’s Investment Fund for Oil Tankers was taken into consideration.

This investment has been considered on the light of the rapid development and installation of high capacity oil refineriesandpetrochemicalplantsintheMiddleEastandAsia,whichwilleventuallyleadtoincreasedvolumeof commercial inter-change of oil products between the Middle East countries, the Asian region and rest of the world, creating great opportunities, while enhancing the demand for medium range product tankers.

The Sale of AcBc (Alexandria carbon Black company)Within the framework of its divestment plan, aimed towards the selling of some of its long held equities to achieveprofitsandmobilizefundsforanewphaseofinvestments,(APICORP)signedanagreementtosellits12 % stake in the Egypt-based Alexandria Carbon Black Company (ACBC).

Thismoveispartofour5year investmentstrategytoredeployfundsfordiversificationintonewmidstreamsectors,particularlyoilrefining,storage,transportandshippingacrosstheMENAregion.

To conclude, according to recent APICORP research, the region’s oil and gas industry offers an investment potential of around $530 billion for the period 2011-2015. With no doubt, these large investment opportunities would certainly provide APICORP with abundance of investment potentialities.

Ahmad Bin hamad Al-NuaimiChief Executive and General Manager


ANNUAL REViEW of the Arab Macro-Economic and Energy Investment Outlook


STIll-STRONG FUNDAMENTAlS DESPITE hEIGhTENED UNCERTAINTy

Comingintheaftermathofamajorfinancialcrisis,deeprecessionandhighunemployment,2010wasayearofmixedfortunes.Despiteremainingweaknessesinthefinancialsystem,whicharestillconstrainingcreditandinvestment, the global economy is surely mending. however, wherever socio-economic imbalances could not be prevented, they spilled over into the political arena slowing down painfully the process of recovery. More dramatically in parts of the Arab world, discontent arising from exacerbated socio-economic inequities has developed into political turmoil, creating as much uncertainty as hope.

Against this unfolding backdrop, our commentary reviews the Arab economic and energy Investment outlook. To the extent that energy demand, interest rates and oil prices are key determinants of investment activity, the global and regional economies combine with the credit and energy markets to shape the outlook. Accordingly, thecommentaryisinthreemainparts:thefirstexploresthestateoftheeconomyandmarkets;thesecondreviewstheregion’sinferredenergyinvestmentoutlook;thethirdreassessestheenergyinvestmentclimateinthe wake of current events. The Economy and MarketsGlobal and Arab Economies

Theprocessofrecoverywitnessedbytheglobaleconomyin2010waslargelyattributedtothestabilizationofthefinancialsystem,theeffectsofcoordinatedexpansionarymonetaryandfiscalpolicies,andincreasedindustrial production to rebuild depleted inventories. however, according to the latest IMF’s World Economic Outlook, which was released under the theme “Recovery, Risk, and Rebalancing”,1 the recovery has been uneven across the world. While growth was sluggish in most advanced countries, it was much stronger in emerging and developing economies.

[1] IMF, World Economic Outlook, October 2010.


hence, growth for 2010 is put at 2.7% in advanced economies and 7.1% in emerging markets and developing countries. This translates into a robust growth of 4.8% for the world as a whole. For 2011, growth is projected to beslowerasmostcountrieshaveplannedtoexitormoderatetheirfiscalstimulusandshifttheirfocusonfiscalconsolidation (Figure 1). For the recovery to be sustained, conventional drivers of growth, i.e. consumption and investment,havetosubstituteforthetemporaryeffectofinventoryaccumulationandfiscalstimuli.Expectationsare that in most advanced countries consumption and parts of investment are likely to remain weak in the short to medium term. By contrast, in most emerging economies, consumption and investment may stay strong, therefore supporting growth and expansion.

Figure 1: overview of Global and Regional Growths

While the global economy is mending, the Arab world faces greater uncertainties. To be sure, the region fared wellin2010.Growthacceleratedto4.2%asmostcountriesmanagedtobuildenoughfiscalspacetoweatherthe global recession. however, ongoing social and political upheavals in parts of the region do not augur well. Whether or not growth can be sustained to the pre-crisis trend shown in Figure 1 now depends on a number of countries maintaining social and political stability. This is a major challenge, which hinges on the capacity of governments to develop fresh policy reforms to tackle the socio-economic problems that have been besetting them. The most pressing challenge is creating enough jobs for a rapidly expanding population and warding off renewedthreatofinflation.


APICORP ResearchSource: IMF, WEO updateOct 2010 and own compilation and forecast for the Arab world

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The Credit Markets

In an effort to stimulate the US economy, the Federal Reserve has been reducing, since December 2008, its benchmarkinterestrate–thefedfundsrate–towardszero.AtthesametimeitsignaledthatUSeconomicconditionsmightjustifyprolongingthenear-zeroratepolicy.Theimplicationisthatfurthereffortstosupportrecovery had to be backed by additional monetary accommodation. But because the Fed’s low interest rate policy had already reached its bound, the Federal Reserve had to turn to unconventional policy tools to provide that extra accommodation. The adoption of “quantitative easing” means creating money to purchase long-term securities on the open market with the aim of lowering longer-term interest rates. As these purchases are settled throughthebankingsystem,theyresultinasignificantaugmentationinbanks’reserves.

The risk is that rather than lending these reserves, banks would instead use them to shore up their balance sheets. Nonetheless, at least excess reserves have been associated with improved interbank markets. This is illustrated in Figure 2 by the evolution of the dollar spread between lIBOR and the overnight index swap (OIS), a conventional measure of liquidity stress in these markets. The spread jumped to more than 35 bps in the wake ofheightenedsovereignrisksinpartsoftheEurozone,whichunderminedconfidenceinthesoundnessofsomebanks during the summer of 2010. It has since resettled near its pre-crisis levels of 10 bps.

Figure 2: pre- and post-crisis evolution of Libor-oiS spreads

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Apicorp researchusing bloomberg database

(as of 31 Jan 2011)


Reduced concerns about counterparty and liquidity risks in the interbank markets have somewhat improved funding for business. however, dollar credit markets remain tight and margins over lIBOR are still high. In this context,capitalinflowstotheArabworld,thebulkintheformofloans,slightlyrecoveredfromthetroughof2009.But,withalittlelessthan$100billionin2010,theseflowswerefarbelowthe2007peakofsome$180billion. Furthermore, the average loan margin, although having decreased from the 2009 peak of 285 bps to about 210 bps in 2010, is still three times the pre-crisis level of some 70 bps. As touched upon in the last section whendiscussingtheinvestmentclimateintheregion,weshouldexpectunfoldingeventstoaffectboththesizeandcostofcapitalinflows.

Oil and Gas Markets Despite a strengthening of the global economy in 2010 oil prices remained within the band of $70-$90/bbl we anticipated and advocated for OPEC basket price (Figure 3). 2 however, recent data and forecasts, pointing to stronger than anticipated demand in fast-growing emerging economies, have unanchored expectations for prices. When the IEA reported, in February 2011, that global demand grew at a staggering 2.8 mb/d in 2010, the strongest annual increment since 2004, prices had already unhooked from the band. Although the IEA is at variance with OPEC on the near-term outlook, market conditions appear reminiscent of the steep upward drift experienced before July 2008. Therefore, instead of indulging once more in a sterile speculation vs. fundamentals debate, we should call on OPEC and the commodity futures regulating agencies to act more sensibly. The former by adjusting output to balance a tightening physical market, the latter by setting and enforcing position limits to dampen speculative trading in the futures market.

Figure 3: 2010 oil prices Stabilization Within $79-90/bbl


2 For the determination and justification of this band see: A Aissaoui “GCC Oil Price Preferences: At the Confluence of Global Energy Security and Local Fiscal Sustainability”, in Energy Security in the Gulf: Challenges and Prospects, ECSSR, Abu Dhabi, 2010.

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winter 2008-09opEc’s output cuttotaling 4.2 mb/d

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APICORP ResearchSource: Using OPEC database, as of Jan 2011

2010: stabilizationwithin Apicorp’s$70-$90/bbl band


By contrast to the tightening oil market, natural gas markets have, in the wake of the so-called ‘shale gas revolution’,witnessedasignificantanddisruptiveoversupply.Fastgrowingproductionfromshalegasformationsin the U.S. has deeply affected global supply fundamentals. As a result, natural gas prices have not only greatly deviatedfromoilprice-parity,buttheyhavesignificantlydivergedbetweenregionalmarkets.Weexpectpricestoevolveinarangeof$4-$5/MBtuinthefullyliberalized,wellsuppliedUSmarket,andinarangeof$8-$10/MBtuin markets where oil-linked prices still prevail.

The Arab energy investment outlook

Our review of energy investment in the Arab world, which is project-based, is underpinned by the above developments in three main ways. First, global energy demand is recovering. Second, despite current uptrend, wecontinuetoassumethatcrudeoilpriceswouldstabilizeagainwithintheanchorpricerangementionedbefore. Reports of higher than anticipated demand will encourage investors to bring back in line some of the oil-based projects they had previously shelved or postponed and to slate for development new ones. Third, and by contrast, gas investors, which face a more challenging market, may put higher value on the option to wait.

Overview of Key trends

On this basis, we expect growth in energy capital investments to continue recovering from the contraction that occurred during the crisis (Figure 4). Current review for the period 2011-15 points to a higher potential investment of $530 billion, compared to $470 billion in the last review.3 Furthermore, the total amount of investments shelved or postponed is expected to drop to 19% of potential, compared to 29% in the last review. As a result, actual capital requirements should amount to $430 billion for the period 2011-15, compared to $335 billion in the last review.

Figure 4: Rolling 5-year reviews of Arab energy investments

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APICORP ResearchOCT 2010

3 We usually covers MENA region, whose potential energy investment is projected to $615 billion for the 5-year period 2011-15 (source: APICORP’s Economic Commentary, Vol. 5 No. 10-11). In the present commentary, we focus on the Arab world only, i.e. excluding Iran.


Geographical Pattern

Closelyreflectingthedistributionpatternofcrudeoilandnaturalgasreservesintheregion,70%oftheenergyinvestmentpotentialcontinuestobelocatedinfivecountriesnamelySaudiArabia,theUAE,Qatar,AlgeriaandEgypt. In the same vein, the GCC area accounts for nearly two thirds of the region’s potential. Within it, the UAE takes over Qatar as the second biggest potential energy investor (Figure 5).

Figure 5: Geographical pattern of energy investment


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lebanon

Mauritania


In Saudi Arabia, potential capital investment is estimated at $130 billion. With Saudi Aramco and SABIC reaffirming their commitment to implement their investment programs, shelved or postponed projects areexpected to decline to 6% of potential, compared to 21% in the previous review. In the UAE, revised potential investment totals $74 billion with projects made redundant amounting to 20%. Potential capital investment in Qatar is estimated at $70 billion. In this country, we continue to assume that the moratorium on further developmentoftheNorthFieldgasreserves(beyondthePearlandBarzanprojects)willnotbeliftedduringthereview period. Accordingly, shelved and postponed projects, even though much less than the 36% found in the last review, are likely to remain relatively high at 32% of potential. In Algeria, Sonatrach is anticipated to recover fully from its 2010 paralysis and resume normal investment activities. hence, potential investment has been revised upward to $57 billion, while postponed projects are expected to drop to 19% of potential, compared to 31% in the last review. Finally, in Egypt, we keep to the revised potential investment of $42 billion with the hope that, despite current turmoil, project redundancy will be contained to 17% of potential.

Although similar trends are evident in the rest of the key petroleum producing countries, the below-potential Kuwait and Iraq deserve some explanation. Kuwait has the highest rate of postponed and shelved projects. This, however, has more to do with the dynamics of domestic politics and policy than the effect of global and regionaluncertainties.Inthiscontext,itisdifficulttoestimatethecountry’sactualcapitalrequirementsaslongas major components of the upstream program remain at a standstill, or key downstream projects such as the al-Zourrefineryareundecided.Iraq,wheretheambitionstoachievethefulldevelopmentoftheoilsectorhavebeen revived, the extent of foreign investors’ contribution will depend on the ability of the Iraqi authorities to provide an ultimate solution to recurrent security problems.

Sectoral Pattern

Of the $430 billion of actual capital requirements in the Arab world, the oil supply chain accounts for 42%. This will be needed to develop new production and transportation capacity, sustain current production through enhanced oil recovery (EOR) programs, and finalize the expansion program of the refining and oil-basedrefining/petrochemicalsectors.Thegassupplychainaccountsfor36%.Thisamountwillbeneededtodevelopnew production and transportation capacity for both natural gas and the associated NGls, expand capacity to meetdomesticrequirementsandfinalizeongoingexportbasedprojects,includinggasbasedpetrochemicalsandfertilizers.

Capital requirements in the oil-, gas- and nuclear-fuelled power generation sector represent the remaining 22% (capital expenditures for nuclear based power generation is implicit in the UAE’s case).4 It should be noted that contrary to other links of the energy supply chains, where future investment is project-based, investment in the power sector is growth-based. Therefore, no assumption of shelved or postponed projects is made. The resulting prospect of this chronically under-developed sector is highlighted in the Box. Contraction of Arab economies, and the apparently lesser demand for electricity, may provide temporary respite to a constrained capacity. yet, this sector needs to catch up with an unmet potential demand.

4 Abu Dhabi’s first such a plant is not expected before 2017.


Box: investments in the power Generation Sector *

b1. As a result of high population growth rates and fast expanding urban and industrial sectors, many countries in the Arab world have been struggling to meet rapidly increasing demand for power. however, compared to recent trends, projected demand is expected to be slightly curbed as a result of current economic contraction. Also, expectation of better load management and gradual phasing out of price subsidies could help rein in excess demand growth.

b2. Accordingly, power generation capacity is projected to grow at a relatively subdued rate of 7.7% for the period 2011-15, resulting in an additional capacity of 80.4 GW over that period. This increment, whichrepresents46%ofthe2010estimatedaggregatecapacityof175GW,justifiesthehugecapitalinvestment of $92.9 billion found in the present review. A regional breakdown of these projections (Table below) shows that 60% of that expansion is expected in the GCC, which remains the fastest growing area. This shouldcomeasno surprise, taking into account its record ratesof urbanization and themassive requirements for water desalination and air conditioning.

b3. In implementing their investment programs, power generators will be facing the same challenges as the rest of the industry. As discussed in the main text, these pertain to cost, feedstock and funding.

* See Ali Aissaoui, ‘Powering The Arab Economies in a New, More Challenging Environment’ (MEES, 25 January 2010).

2009capacity

generation(GW)

27.543.187.82.9

161.3

Maghreb 1Mashreq 2GCC 3Other Arab countries 4

Arab world

1 Maghreb: Algeria, libya, Mauritania, Morocco and Tunisia.2 Mashreq: Egypt, Iraq, Jordan, lebanon, PT and Syria.3 GCC: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and UAE.4 Other Arab countries include Sudan and yemen, but exclude Comoros, Djibouti and Somalia for lack of data.Compilations and projections by APICORP Research.

2009electricity

production(TWh)

111.6231.6391.512.6

747.3

medium-term annual

growth(Percent)

6.57.58.57.2

7.7

2010-14capacityaddition

(GW)

10.920.248.01.3

80.4

correspondingcapital

requirerments(G$)

13.125.153.01.7

92.9



The investment climateCost Uncertainties

As indicated by the evolution of our index (Figure 4), the cost of an ‘average energy project’, which has risen almost three times between 2003 and 2008, is expected to increase again, after having slightly dropped in the lastreview.The25%upwardtrendunderpinningthecurrentreviewmaybeexplainedbytwofactors.Thefirstis that project sponsors will be focusing on important projects, which mostly entail higher costs. The second factorisrelatedtoanticipatedcostinflation,whichisstilltentative.Theextentthelatterfactorispredictableisexaminednextbyanalyzingatypicalprojectcoststructure.

The most preponderant element in a project cost is the price of engineering, procurement and construction (EPC), which represents 70%-80% of the total cost of a typical large scale energy project. Using the criteria outlined by the Independent Project Analysis, the key contributing cost factors to EPC are the prices of factor inputs, contractors’ margins, and project risk premiums when assumed by contractors, as is the case of lump sum turnkey (lSTK) contacts. To these three factors we have added our own, which is the cost of ‘excessive largeness’. In order to cope with unrelentingly rising costs, the major Arab project sponsors have sought to increase the scope and/or scale of their projects in order to lower unit costs and maintain an adequate return on invested capital. Anecdotal evidence suggests, however, that the economies of scope and scale of some large projects in the region have been offset by the diseconomies of the resulting complexities.

Reflecting theabovecomponents,Figure6showsa typicalcoststructureofa largescaleenergyproject.Prices of factor inputs (steel, copper, cement, and so on), which represent some 45% of total project cost, are expected to rise again after having softened during the recession, but at a pace more in line with that of major industrial materials and equipments than of raw commodities. Contractors’ margins are also likely to increase with the number of projects on the rise again. Furthermore, as the global credit crisis has forced an up-pricing of risk, we should expect project risk premiums to remain relatively high. ‘Others’ denotes a miscellaneous componentthattendstomirrortheagainrisinggeneralpriceinflationintheregion.Henceitishardtoinferhowup and for how long the overall cost trend is likely to be again, when combining all cost components.

Figure 6: Typical cost structure of a large-scale energy project

Factor inputs

contractors’ margins

risk permiums

Excessive largeness

others

45%10%

15%10%

20%


Feedstock Availability

Although a great number of Arab countries are endowed with substantial gas reserves, their supply situation isdifficulttogauge.Amongthedifferentmetricswehavedevelopedtoprovideaclearersupplypicture,ourpreference is for the one measuring the trend towards an optimal supply threshold (OST), which is explained next. 5

Reflectingthestructureanduseofpetroleumreserves(crudeoil,NGLsandnaturalgas),OSTisdefinedastheonesetofsolutionsthatequalizestheshareofnaturalgasproductionintotalpetroleumproductionwiththatof natural gas reserves in total petroleum reserves. A simple Euclidean distance, expressed in percent, shows how far or near different countries are from that threshold. This is illustrated by the 2010 cross section in Figure 7.KeepingprogresstowardstheOSTlineshouldnormallybeencouraged;unlesssuchamoveisperceivedtoo expeditious as a result of demand growing faster than additions to reserves. This appears to be the case of Iraq, the UAE, libya, Saudi Arabia and Kuwait, whose distances to OST are lower than 5%. Therefore, each of these countries now runs the risk of not being able to keep its position once there. This is already the case of Bahrain, whose negative distance suggests that it is using more gas than it would possibly manage to supply in some future.

Figure 7: Distance to the optimal Gas Supply Threshold

5 For a thorough analysis of the pattern of natural gas supply in the region, see Ali Aissaoui, “MENA Natural Gas: A Paradox of Scarcity Amidst Plenty”, MEES, 27 December 2010.


bahrain

kuwait

saudi Arabia

libya

uAE

iraq

Tunisia

Egypt

oman

syria

iran

Algeria

qatar

yemen

-10% -5% 0% 5% 10% 15% 20% 25%

Distance to the optimal Gas Supply Threshold


OST metric can be seen as a rather mechanistic interpretation of reality, which needs to be balanced with market and economic considerations. It may indeed be perfectly rational to under-produce commercial gas if marketsarenotthereor,takingaccountoftheheavilysubsidizeddomesticprices,thereturnsfrominvestmentare lower than canbeobtained fromother uses. The alternativesmay include recyclingmore field gas toincreasethesupplyofhighexportvalueNGLsorinjectinggasintodepletingoilfieldstoenhancetheirrecovery.

Funding Accessibility

Cost uncertainties and feedstock availability are compounded by a marked shift in projects’ capital structure. In a context of a continuing tight credit environment, we have witnessed a trend towards a more equity-weightedcapitalstructure.Basedonmostrecentdeals,theaverageequity-debtratiointheoil-basedrefining/petrochemical sectors has been 35:65. The ratio in the gas-based downstream sector has been 40:60 to factorinhigherfeedstockrisks.Inthepowersector,theratiohasbeenresetto30:70toreflectlowerleveragein independent power/water projects. On this basis, the resulting average capital structure for the whole oil and gas supply chain is likely to be 57% equity and 43% debt for the period 2011-15. This compares with the equity-debt ratios of 54:46 found in the 2009-13 review and 50:50 in the 2008-12 review.

This trend poses new challenges for achieving the needed amount and mix of equity and debt . On the one hand, we have estimated that any prolonged period of low oil prices below $70/bbl will affect project sponsors’ abilitytoself-financeupstreaminvestments.Ontheotherhand,fundingprospectsforthestillhighlyleverageddownstream will be even more daunting. The annual volume of debt would be in the range of $37 billion to $46 billionforthenextfiveyears.Thelowerboundofdebtresultsfromtheactualcapitalrequirementsfoundinthecurrent review and the likely capital structure highlighted above. The higher bound corresponds to the potential requirement and the speed at which remaining redundant projects will be brought back when the business climate fully improves. The lower bound compares to the all-time annual record of $38 billion achieved in the loan market prior to the credit crisis. Nowadays, such amounts of debt can hardly be raised owing to lesser credit availability, higher costs of borrowing and tighter lending conditions. And this is despite the move by some Arab public investment funds to tap governments’ net savings and step up their lending and involvement in the local debt market.

Re-mapping the Energy Investment Climate

In the context of unfolding socio-political developments in parts of the region, projects’ and companies’ credit ratings,whicharealmostalwayscappedbysovereignceilings,willbecloselyscrutinized.Asan immediateconsequence of current events, Tunisia and Egypt have seen their rating downgraded. Tunisia to a lower investment-grade and Egypt to a lower speculative-grade. While others might be placed on a negative credit outlook, we expect a fewer number of countries in the GCC area to retain their higher investment grades and, as a result, to be able to continue accessing funds at lower cost and better terms.


As not all Arab petroleum-producing countries are rated, APICORP maintains its own “perceptual mapping” of the energy investment climate. The mapping is a two dimensional representation of a 3-D space encompassing all 15 Arab petroleum-producing countries (Figure 8). Countries are plotted on the basis of three scored attributes: country risk, enabling environment and potential investment. They appear in different quadrants at varying distances from an Ideal Point, which is the centre of gravity of the highest achievable scores.

Figure 8: perceptual Mapping of the Energy investment climate

Themapping,whichhasrecentlybeenupdatedtoassesstheimpactofthefinancialcrisis,isunderreviewinan attempt to ponder the impact of the events unfolding. At the moment of writing the changes captured in this waytorangefromSaudiArabiasettlingnearthe“idealpoint”benchmark,toasignificantdeteriorationofthepositions of Egypt and Tunisia. Egypt breaks out the cluster formed of libya and Algeria, and Tunisia out of that formed of Bahrain and Oman. The remaining countries are in three contrasting clusters: a) while maintaining their strong positions, Qatar, the UAE and Kuwait have moved apart from each other, with Qatar widening its lead;b)Mauritania,SudanandYemenseetheirpositionslightlydeteriorating;c)ThestillsinglyIraqcontinuesitspositivestreak;eventhoughveryfarfromtheidealpoint,itscurrentlocationunderscoresrapidprogress.

Strong enabling

environment

Weak enabling

environment

vastinvestmentpotential

high country

risk

IRQ

KSA

QAT

KUWUAE

OMA

TUN

EGySyR

BAh

lIB

yEM

AlG

SUD MAU

IDEAl POINT lowcountry

risk

limitedinvestmentpotential

APICORP ResearchUpdated Jan-Feb 2011 Investment grade

Speculative gradeNot rated

CRA SOvEREIGN RATING



Conclusions

Notwithstanding heightened uncertainty stemming from the ongoing turmoil in parts of the Arab world, we expectglobaleconomicandfinancialfundamentalstocontinuesupportingtheresumptionofenergyinvestmentgrowth in the region. The impetus for recovery will be strongest in the GCC area despite project sponsors facing many of the same challenges, i.e. cost uncertainties, feedstock availability and funding accessibility. however, access to funding will be most testing in countries affected by the turmoil. While the predicament they face could turn for the better, the likelihood is that of a deteriorating investment climate that could deter both domestic and foreign capital for some time. Meanwhile, faced with more pressing social demands, governments will hardly be capable of funding the resulting shortfalls.

1 IMF, World Economic Outlook, October 2010.

2Forthedeterminationandjustificationofthisbandsee:AAissaoui“GCCOilPricePreferences:AttheConfluenceofGlobalEnergySecurity and local Fiscal Sustainability”, in Energy Security in the Gulf: Challenges and Prospects, ECSSR, Abu Dhabi, 2010.

3 We usually covers MENA region, whose potential energy investment is projected to $615 billion for the 5-year period 2011-15 (source: APICORP’s Economic Commentary, vol. 5 No. 10-11). In the present commentary, we focus on the Arab world only, i.e. excluding Iran.

4AbuDhabi’sfirstsuchaplantisnotexpectedbefore2017.

5 For a thorough analysis of the pattern of natural gas supply in the region, see Ali Aissaoui, “MENA Natural Gas: A Paradox of Scarcity Amidst Plenty”, MEES, 27 December 2010.


PROJECT AND TRADE FINANCE

Projectfinanceactivityhasstayedathistoricallowsin2010asbanks’appetiteforlendinghasnotreboundedand as sponsors/developers have remained cautious since the economic recovery has remained weak and its sustainability uncertain. Trade Finance has been by comparison far more dynamic.

Themainprojectandtradefinancetransactionsprogressedin2010aredetailedinthebelowtable.

cLiENTMAiN

SpoNSoRS

AMoUNT AND

TYpE oF FAciLiTY

DATE oF

SiGNiNGpURpoSE ApicoRp RoLE

AMPTC OAPECUS$ 93 million

ConventionalNovember 2010 vessel acquisition

Mandated lead

Arranger

Aqua Consortium ltd

(GMMOS Group)

Abraaj Capital

Waha Capital

US$ 185 million

ConventionalDecember 2010

Offshore oil

servicesParticipant

Abraaj Aqua SPv

(GMMOS Group)

Abraaj Capital

Waha Capital

US$ 80 million

MezzanineDecember 2010

Offshore oil

servicesParticipant

Egyptian General

Petroleum

Corporation (EGPC)

Arab Republic of

Egypt

US$ 208 million

IslamicApril 2010

Import of

petroleum

products

Participant

Egyptian General

Petroleum

Corporation (EGPC)

Arab Republic of

Egypt

US$ 400 million

ConventionalJuly 2010

Import of

petroleum

products

Participant

Ma’aden Aluminum

Company

Ma’aden

Alcoa

US$ 1,186 million

IslamicNovember 2010 Aluminum smelter

Mandated lead

Arranger

Mercuria Energy

Trading Pte ltd.

Mercuria Energy

Group

US$ 500 million

ConventionalDecember 2010

Corporate

purposesParticipant

Ministry of Power,

Energy & Mineral

Resources –

Bangladesh

Government of

Bangladesh

US$ 110 million

ConventionalAugust 2010

Import of

petroleum

products

Participant

Saudi Aramco

TotalRefiningand

Petrochemical

Company

Saudi Aramco

Total, S.A.

US$ 3.4 billion

Conventional and

Islamic. Secondary

market purchase.

June 2010Refiningand

petrochemicals

Mandated lead

Arranger

APICORP Activities in 2010


ADvISORy

TheCorporationhascontinuedtodevelopitsspecializedadvisoryserviceswhichcatertothehydrocarbonandrelated industries in the region. In 2010, two new mandates were awarded to APICORP, for both of which work has carried over into 2011.

cLiENT MAiN SpoNSoRS MANDATE

Government of Syria Government of SyriaAssessment of various refiningprojects

JANA Chemicals NAMA Chemicals Modeling Bank

The Corporation has continued to extend its full efforts throughout the global economic downturn, which began in2008,toensurethecontinuityofbusinessandfulfillmentof itsMandate.Despitethesignificantreductionin transactionssince2008, theeffortsof theCorporationhaveensurednosignificant contractionof assetsor revenue stream.Despite a significant amount of loan repayments in 2010of aroundUS$550million ingross terms, and a sluggish business environment, the Corporation has demonstrated its capability to originate attractive transactions and contain the decrease of the loan portfolio from an historical peak of US$ 2.62 billion in 2009 to US$ 2.542 billion in 2010.

For2010,thenetincomegeneratedbytheprojectandtradefinanceactivitiesatAPICORPhasamountedtoUS$ 26.5 million compared with a budget of US$ 28.3 million, while in 2009 and 2008, net income amounted respectively to US$ 30.1 million and US$ 29.7 million. 2010 net income for P&TF remains nevertheless above the US$ 23.9 million net income generated in 2007.

As a positive side of APICORP’s new environment, pricing on deals which have been entered in 2010 have beensignificantlyhigherthanthelowlevelsseenin2006-2008.Thecommitmentsbeingmadein2010haveconsequently increased the overall yield of the loan portfolio.

Furthermore, despite the deterioration of the global business environment, APICORP has maintained a clean portfolio with no payment default.

To conclude, in a depressed environment, the Corporation has been in a position to enhance the quality and yield of its portfolio of loans as well as to continue to be active and to play an instrumental role in the energy industry in the Arab world.

Considering its exceptional track record combined with the solid rating obtained from Moody’s in June 2010, the Corporation is in a strong position to play a pivotal role in the region for the debt funding of the Arab energy industryasmanyfinancialinstitutions,bothinternationalandregional,havewithdrawnfromtheprojectandtradefinancemarket.


1) Bahrain National Gas company (BANAGAS)ApicoRp share: 12.5%BANAGAS was established in 1978 to extract and market lPG and light naphtha from associated gas. BANAGAS produced around 80.6 thousand MT of propane, 86.4 thousand MT of butane and 195.6 thousand MT of light naphtha during 2010. Due to the increase in the lPG prices, BANAGAS has achieved a net income of around BD 13.3 million, compared to BD 8.3 million ofnetprofitin2009.

2) Arab Drilling & Workover company (ADWoc)ApicoRp share: 20%ADWOC was established in 1978 to provide drilling and related operation services in libya and nearby Arab markets. ADWOC total revenues for the firstninemonthsof2010reachedLD130.7million(US$106.3million).Netprofit for thesameperiodamountedtoLD21.8million (US$17.7million)which is 14.7% higher than the same period of 2009.

3) Arab company For Detergent chemicals (ARADET)ApicoRp share: 32%ARADET was established in 1981 to produce 50,000 tons/yr of linear alkyl benzene(LAB).TheLABcomplexatBaiji,inoperationsince1987,alsoincludesanaromatics linewithacapacityof30,000 tons/yrofbenzeneandtoluene.By the end of 2010, ARADET produced and sold over 36.7 thousand tons of lAB. With the improvement of production cost and market prices, ARADET sales value from lAB and other secondary products reached around US$ 66.7 million, and the Company managed to achieve a net income of US$ 12.0 million compared to US$ 11.6 million in 2009.

DIRECT EQUITy INvESTMENTS


The total investments of APICORP encompasses eight petrochemical, three Oil & Gas services and two gas prod-ucts companies in six Arab countries with a total value of US$ 366 million at the end of 2010, compared to US$ 339 million at the end of 2009. Four petrochemical companies and one gas product are located in Egypt. Saudi Arabia hosts IBN ZAhR, IBN RUShD, and yANSAB petrochemical companies. The seismic and drilling companies are situated in libya. The remaining three companies are located in Bahrain, Iraq, and Tunisia.

The range of the products from the projects in Saudi Arabia, Iraq, and Egypt consists of: Methanol, Ethylene Gly-col,Polyethylene,Polypropylene,MethylTertiaryButylEther(MTBE),Aromatics(BTX),LinearAlkylBenzene(LAB),NitrogenFertilizers(AmmoniaandUrea)andsyntheticfibers(Polyester,PolyAcrylic).

Abriefsummaryoneachofdirectequityinvestmentperformanceandtheirprofitabilityin2010isprovidedbelow:


4) Tankage Méditerranée (TANKMED)ApicoRp share: 20%TANKMED was established in 1984 to provide storage services for petroleum products at la Skhira terminal in Tunisia. TANKMED’s total storage capacity stands at 363,000cubicmeters.TANKMEDmaintainedacapacityutilizationrateof94.3%.Bytheendof2010,TANKMEDhasachievedanetprofitofTD8.3million,whichis40%higherthanthe2009profits.

5) Arab Geophysical Exploration Services company (AGESco)ApicoRp share: 16.67%AGESCO was established in 1985 to provide advanced seismic services in libya and the Arab world. The Company maintains two & three seismic crews andwasabletoachieveanetprofitasattheendofSeptember2010ofaroundLD10.8millioncomparedtothebudgetedfigureofLD5.8million.

6) The Saudi European petrochemical company (iBN ZAHR)ApicoRp share: 10%IBN ZAhR, established in 1985 in Jubail, can produce 1.5 million tons/yr of methyl tertiary butyl ether (MTBE), a gasoline octane booster and 1.1 million tons/yr of polypropylene. During 2010, IBN ZAhR produced 1,375 KMT of MTBEand965KMTofPP,whilesalesfigureshavereached1,368KMTand956 KMT of MTBE and PP respectively. IBN ZAhR achieved a net income of US$555millioncomparedtoUS$376millionbudgetandanetprofitofUS$421millionin2009.Theincreasein2010profitabilityhasbeenmainlyduetothe improvements in the MTBE and PP price margins in the world markets.

7) The Arabian industrial Fibers company (iBN RUSHD)ApicoRp share: 3.45%IBN RUShD was established in 1993 in yanbu on the west of Saudi Arabia. IBN RUShD is an integrated petrochemical complex composed of three plantsfortheproductionofaromatics(730,000tons/yr),purifiedterephthalicacid (PTA 350,000 tons/yr) and polyester (146,000 tons/yr). By the end of 2010, the net loss incurred by IBN RUShD was SR 684 million, compared to SR 390 million losses for 2009.


8) oriental petrochemicals company (opc) ApicoRp share: 14% OPC was established in 1996 with an initial capacity of 120,000 tons/yr polypropylene that can be expanded to 162,000 tons/yr. The Company announced the successful commissioning of its plant at the beginning of 2002, and since then it has become the main producer and supplier of polypropylene in the local market. By the end of 2010, OPC produced around 143.4 KMT and sold around 150 KMT of PP. Due to the increase in the prices of the imported feedstock (Propylene) which was not matched by a similar increase in the PP margins, the Company incurred a net loss of lE 45.6 million comparedtoanetprofitofLE78.6millionin2009.

9) Alexandria Acrylic Fibers company (AFco)ApicoRp share: 10%AFCOwasestablished in late2003 inEgypt,and ithasapolyacrylicfiberplant with a nameplate capacity of 18,000 tons/yr completed in 2006. Currently AFCO is in the process of expanding it to 54,000 tons/yr. The plantwascommissiontoproducepolyacrylicfibers,whichisusedmainlyinmanufacturing carpets and blankets. By the end of 2010, AFCO was able to produceapproximately24.1 thousandtonsofacrylicfibers.With regard tothefinancial results, theCompany incurreda lossofLE33million in2010,comparedtoanetprofitofLE14.3millionin2009.

10) Yanbu National petrochemical company (YANSAB)ApicoRp share: 1.57%yANSAB was established in early 2005 by SABIC with a paid up capital of SR 5,625 million, of which SABIC owns 55%, SABIC partners in IBN RUShD and TAIF own 10%, and the remainder percentage was offered to the Saudi public. The complex is designed to produce 900,000 tons per year of low and high polyethylenes, 700,000 tons per year of ethylene glycols, 400,000 tons per year of poly propylene, in addition to some other by products. yANSAB petrochemical complex started commercial operation on March 1st, 2010, withsuccessfuloperationrecord.YANSABachievedanetprofitbytheendof2010ofaboutSR1.67billion (US$446million).Thepershareprofit forthe 2010 was about SR 3.0 compared to pre operation per share loss of (SR 0.052) during 2009. yANSAB share price on the Saudi Stock Market (TADAWUl) traded at around SR 47 by the end 2010.



11) Egyptian Methanol company (E-Methanex)ApicoRp share: 7%Metanex Corporation, Egyptian Petrochemicals holding Company (EChEM), Egyptian Natural Gas holding Company (EGAS), Egyptian Natural Gas Company (GASCO) and APICORP established E-Methanex in 2005 with an equity commitment of US$ 420 million to build a US$ 950 million cost methanol production facility in Damietta, Egypt with a nameplate capacity of 1.28 million tons per year. By the end of February 2011, construction work was nearly complete (99.4%). The Company achieved commissioning (89.4% progress) and expects to begin commercial production during the 2nd quarter of 2011.

12) Misr oil processing company (Mopco)ApicoRp share: 3.03%MOPCO, starting January 2009, has officially become the full owner ofEAgrium, and its issued capital was doubled from lE 996 million to lE 1,992 million, of which lE 1,985 million is paid up. As a result of this acquisition, APICORP’s share which was previously 7% in EAgrium has been diluted to 3.03%. MOPCO expansion project (ex. EAgrium) consists of two identical and integrated units, each with a capacity of 400,000 tons/y of Ammonia and 635,000 tons/y of Urea. Upon completion, MOPCO’s total capacity will increase to 1.2 million tons/y and 1.9 million tons/y of Ammonia and Urea, respectively. The construction of the expansion project at (MOPCO 2 & 3) site in Damietta has restarted in October 2009 and is expected to be completed andbecomeready forcommercialstart-upduringthefirstandthesecondquarter of 2012. In 2010, the Company operated its existing Ammonia/Urea complexverysuccessfully;674thousandtonsofUreawasproducedofwhich654thousandtonswassold,generatinganetprofitofaboutEP451millioncompared to EP 526 million in 2009.

13) The Egyptian Bahraini Gas Derivatives company (EBGDco)ApicoRp share: 20%The Egyptian Natural Gas Company, DANAGAZ of Bahrain and APICORP established EBGDCO in early 2007 in Egypt with a share capital of US$ 25 million, to construct a US$ 96 million facility located at Ras Shakair for propane and butane recovery from 150 million cfd of associated natural gas feed. The plant is currently under construction with over 71% progress achieved and planned to be completed during the last quarter of 2011.

NB: As part of its new strategy which envisages exit from some of its investment portfolio companies and the recy-clingoftheresultingprofitsinnewinvestmentopportunities,APICORPhassoldits17yearslonginvestment(12%share) in Alexandria Carbon Black Company (ACBC) to Birla Group in December 2010.



APICORP EQUITy PARTICIPATIONS AS AT 31 DECEMBER 2010

COMPANy NAME PAID-UP CAPITAl PARTICIPATION OThER MAJOR ShAREhOlDERS ACTIvITIES

Bahrain National Gas Company (BANAGAS)Bahrain

BD 8million

12.5% National Oil and Gas Authority (NOGA), BahrainChevronAsiaPacificCompany

Extraction and marketing of lPG and condensates from associated gas.

Arab Drilling and Workover Company(ADWOC)libyan Arab Jamahiriya

lD 60million

20% Arab Petroleum Services Co. (APSC), libya Santa Fe, USAFirst Energy Bank

Drilling and related opera-tions in the Arab world.

Arab Company for Detergent Chemicals (ARADET)Iraqzv

ID 36million

32% Government of the Republic of IraqGovernment of the Kingdom of Saudi ArabiaGovernment of the State of KuwaitArab Mining Company, AmmanThe Arab Investment Co., Saudi Arabia

Production and marketing oflinearalkylbenzeneandthe excess of intermediary products.

Tankage Mediterranee(TANKMED)Tunisia

TD 16.2million

20% I’Entreprise Tunisienne d’Activités Petro-lieres (ETAP), TunisiaNational Oil Distribution Company (SNDP)Societe Tuniso Seoudienne d’Investissement et de Développement (STUSID)Banque Tunisio-Koweitienne de Développement (BTKD)

Storing, trans-shippingand handling petroleum and petrochemical prod-ucts at la Skhirra terminal.

Arab Geophysical Exploration Services Company (AGESCO)libyan Arab Jamahiriya

lD 19 million

16.67% Arab Petroleum Services Co. (APSC), libya National Oil Co., libya

Providing advanced seismic services in the Arab world.

Saudi European Petrochemical Company(IBN ZAhR)Saudi Arabia

SR 1,025million

10% Saudi Basic Industries Corp. (SABIC) Saudi ArabiaEcofuel, Italy

Production of gasolineoctane booster MTBE,and Polypropylene (PP).

The Arabian Industrial Fibers Company (IBN RUShD), Saudi Arabia

SR 8,510million

3.45% Saudi Basic Industries Corp. (SABIC), Saudi ArabiaPublic Investments Fund, Saudi ArabiaGIC, KuwaitSaudi Pharmaceuticals Co., Saudi ArabiaSAFCO, Saudi ArabiaOthers

Production ofAromatics, PTA andPolyester Fibers.


COMPANy NAME PAID-UP CAPITAl PARTICIPATION OThER MAJOR ShAREhOlDERS ACTIvITIES

Oriental Petrochemical Company (OPC) Egypt

lE 120million

14% Oriental Weavers Group, EgyptArab International Investments Co., libyaAl-Ahli Bank, EgyptEgyptian Petrochemicals Co., EgyptMisr Insurance Co., Egypt

Production and marketing ofPolypropylene.

Alexandria Acrylic Fibers Company (AFCO)Egypt

lE 286.55million

10% Alexandria Carbon Black Co., EgyptThai Carbon Black Public Co., ltd. ThailandThai Rayon Public Co., ltd. ThailandThai Acrylic Fiber Public Co., ltd. ThailandSidikerir Petrochemicals Co., EgyptSaudi Egyptian Industrial Investment Co., Egypt

Production andmarketing of AcrylicFibers

yanbu National Petrochemical Company (yansab)Saudi Arabia)

SR 5,625million

1.57% SABICSABIC Partners in Ibn Rushd and TaifSaudi PublicOthers

Production andmarketing of PE, EG, PPand other by products

Egyptian Methanex Methanol Company (EMethanex)*Egypt

US$ 420million

7% Methanex Corporation, CanadaEgyptian Petrochemicals holding ztCompany(Echem),EgyptEgyptian Natural Gas holding Company (Egas), EgyptEgyptian Natural Gas Company (GASCO), Egypt

Production andmarketing of Methanol

Misr Oil Processing Company (MOPCO)*Egypt

lE 1,992million

3.03% Egyptian General Petroleum Corporation, EgyptAgrium, CanadaNational Investments Bank, EgyptEgyptian Petrochemicals holding Company (Echem), EgyptEgyptian Natural Gas holding Company (Egas), EgyptEgyptian Natural Gas Company (GASCO), EgyptAl Nasr Petroleum Company, EgyptOthers

Production andmarketing of Ammoniaand Urea

The Egyptian Bahraini Gas Derivative Company (EBGDCO)*Egypt

US$ 25million

20% The Egyptian Natural Gas holding Company (Egas)Danagas of Bahrain

Fractionation of naturalgas liquids (NGl) torecover Propane andButane.

* The projects of EMethanex, MOPCO and the Egyptian Bahraini Gas Derivative are still under construction.



TREASURy AND CAPITAl MARKETS ACTIvITIES IN 2010

2010continued tobeaverychallengingyear for theglobalfinancialsectordue to the long lastingadverseimpactsoftherecentglobalfinancialcrisisandtheongoingproblemsintheSovereignDebtspace,especiallyintheEuroZone;inGreece,inIrelandandotherperipheralnations.Evenastheconcernsregardingthedoubledip recession receded, the banking system around the world remains fragile.

APICORP’s strategy during 2010 was on prioritizing liquidity management and minimizing risks, given thechallenging market and economic environment that has existed since the credit crisis. In this regard, on 25th April 2010,APICORPrepaiditsUS$250millionfive-yeartermloan.InitsfirsteverfundraisingfromtheCapitalMarkets,inOctober2010,APICORPsuccessfullyraisedSAR2billion(US$533million),byissuingafiveyearA1ratedBond. Treasury and Capital Markets, assets continued to grow, during 2010 which stood at US$ 1,358 million as at 31 December 2010, compared to US$ 1,117 million as at 31st December 2009. During 2010, Treasury and Capital Markets achieved a higher gross income than the previous year, with Total Income of US$ 16 million for the year 2010, compared to US$ 13 million for the year 2009, in spite of the historic low libor rates that existed during the year.

APICORP’s liquidity measured by cash, placements and investment in Treasury Securities amounted to a comfortable US$ 598 million as at 31st December 2010.

The Fixed Income securities portfolio excluding investments in treasuries amounted to US$ 747 million, and continues to be focused on strong credits, with an average portfolio rating of A+. The foreign branch of APICORP which started its operations as an Investment Bank in Bahrain during last quarter of 2006, continues tocomplementsalltheTreasuryandCapitalMarketsactivitiesofAPICORP’sheadoffice.Wecontinuetoplaceemphasistofurtherexpandinganddiversifyingourfundingbase,whichisvitaltofinanceourcoreactivitiesandmaintainsufficientliquiditylevels.


ThE DEPARTMENT OF ECONOMICS AND RESEARCh

The Economics and Research Department is dedicated to the study of economic, energy and policy issues relevant to APICORP’s business development and growth strategy.

To address these issues, we have continued to focus on three separate but interdependent areas in 2010 :

(i) the scanning of the Corporation’s business environment and trends, highlighting the impact of the global financialcrisisanditslaggedeffects,ontheArab(MENA)economicandenergyinvestmentoutlooks;

(ii) the continual enhancement of our in-house country risk methodology and the associated “perceptual mapping”oftheenergyinvestmentclimateintheArab(MENA)world;

(iii) thedisseminationofour research findings throughourmonthly Economic Commentary, as well as through numerous presentations and talks in international conferences and symposia.

Furthermore, our annual Review of Energy Investments in the Arab/MENA world has become a trusted source ofinsightfulanalysis inthefield.Repetitionofthereviewyearafteryear,since2003,hasmadetrendstudiespossible, thus offering analysts a useful tool for policy and planning.

Both the Economic Commentary and the Review of Energy Investments have greatly contributed to elevating APICORP’sexternalprofileandhelpedstrengthenourrelationshipwithpeerinstitutions,researchcentersandspecializedagencies.

In 2010, the department released a series of discussion papers entitled Economist’s Opinion, which aims to provide a means for discussing interesting global economic and business topics spanning global macroeconomics, government policy, business strategy, and market behavior. It has contributed to building research network with economic professionals and business practitioners globally.


As shown below, the topics addressed in 2010 in the Economic Commentaryhavesignificantlyexpanded,toadd value to the region’s economic and energy policy debate.

• “APICORP’s Annual Review of the Arab Economic and Energy Investment Outlook - A Dim light at the End of a long Tunnel”, January-February 2010

• “To What Extent has the Global Financial Crisis Reshaped Our Perception of the Energy Investment Climate in the Arab World? ”, March 2010.

•“OnBeingFair,BeautifulandNearlyPerfect:AReflectionOnTheEthics,EconomicsAndPoliticsOfOilPrices”, April 2010.

• “The Arab Energy Investment Outlook in a Changing landscape - A Summary of APICORP Report to the 9th Arab Energy Conference”, May 2010.

• “Macondo and Global Oil Supplies and Prices”, June-July 2010.

• “Finding A Needle In the Dodd-Frank haystack And Wondering What To Expect From It - Our Readers Warn Of The Unintended Consequences Of The ‘Disclosure Of Payments By Resource Extraction Issuers’”, August 2010.

• “Joint Report to the G20 on Energy Subsidies: A Critical Review”, September 2010.

• “MENA Energy Investment Outlook: Recovery Despite Uncertainty”, October-November 2010.

• “MENA Natural Gas: A Paradox of Scarcity Amidst Plenty”, December 2009.

The Economist’s Opinion has been assembled into one single book volume which aims to shed lights on today’s economic issues and policy debate.

•”STANCE: One Economist’s Take On The Dynamic Global Economic Issues Of Today, The Collective volume of Economist’s Opinion released in 2010,” December 2010

All publications are accessible on APICORP website: www.apicorp-arabia.com



TITlE DATE vENUE

Qatar Conference for economic development, under the patronage of the Qatari Crown Prince APICORP presented a paper entitled: “The Challenges ofEconomicDiversificationintheGCCcountries”

10 February Qatar

A visit by the Bahrain Minister of Oil and Gas Affairs to APICORP’s Banking Branch in Bahrain, where he discussed with APICORP’s management a number of investment issues related to oil, gas and petrochemicals.

21 February Bahrain

Meeting and brainstorming session organised by Saudi Aramco focused on global and regional economic outlook and the threats and opportunities for investments

24 February Saudi Arabia

APICORP delegation (led by Chief Executive) to the State of Kuwait. APICORPdelegationmetwiththeofficialsoftheKuwaitInvestmentAuthority and the Kuwait Petroleum Corporation where matters related to APICORP’s involvement in Kuwait oil-related projects were discussed.

8 March Kuwait

APICORP chaired a workshop “Responsible Investment in Energy Markets” within the works of Robeco Conference held in Bahrain.

24 March Bahrain

7th Syrian International Oil and Gas Exhibition and the accompanying symposium, held under the patronage of the Syrian Prime Minister.

5-8 April Syria

APICORP presented a work paper to the 9th Arab Energy Conference entitled: “Energy and the Arab Cooperation” held under the patronage of h.E. the Prince of Qatar.

9-12 May Qatar

Participation in Euromoney Saudi Arabia 2010 Conference under the patronage of h.E. the Saudi Finance Minister.

18-19 May Saudi Arabia

APICORP participated in the semi-annual meeting of Arab Energy Forum, to discusstheMeansandMethodsofEnergyRationalizationinArabCountries,in addition to other subjects.

21-20 May Qatar

In response to an invitation from h.E. the Syrian Deputy Prime Minister , a delegation from APICORP, headed by the Chief Executive and General Manager visited the Syrian Arab Republic, with the aim of presenting APICORP’sratingexperiencetotheSyrianofficials.

19 July Syria

Robecco Summer Forum held in Amsterdam, holland, where discussions werefocussedonfinancialmarketsactivitiesduringtheperiodthatfollowedtheglobalfinancialcrisisandtheresultantfinancialandpoliticialchallenges.

2-3 July holland

Saudi Solar Energy Forum under the title: “The Sun: The Main Source of Energy, which was held at Saudi Aramco hQ in Dhahran.

10 October Saudi Arabia

In response to an invitation by h.E. the Saudi Oil and Mineral Resources Minister, APICORP participated OPEC 59th Anniversary as one of the sponsors, and also as one of the main speakers in the “International Energy Symposium” which were held in Riyadh on the occasion of OPEC’s 50th Anniversary.

18-20 October Saudi Arabia

A delegation lead by APICORP’s Chief Executive and General Manager, took part in the 5th Forum of the Gulf Union for Petrochemicals and Chemicals that took place in Dubai.

7-9 December UAE

CONFERENCES AND SEMINARS 2010

FiNANciAL STATEMENTSFor the year end 31 December 2010


2010 Financial Statements Independent Auditors’ Report to the Shareholders 38 Statement of Financial Position 39 Statement of Income 40 Statement of Comprehensive Income 41 Statement of Changes in Equity 42 Statement of Cash Flows 44 The Formation, Status and Activities of APICORP 45 SignificantAccountingPoliciesAppliedintheFinancialStatements 46 Notes to the Financial Statements 55

CONTENTS


(US$000)

Apicorp Annual Report 2010 39

Note 2010 2009ASSETSCash and cash equivalents 15,392 28,860Placements with banks 1 439,873 464,918Trading securities 2 61 63Available-for-sale securities 3 903,292 622,383Available-for-sale direct equity investments 4 365,634 338,854Syndicated and direct loans 5 2,541,968 2,621,330Property and equipment 6 29,263 32,070Other assets 7 16,140 10,622

TOTAL ASSETS 4,311,623 4,119,100

LIABILITIESDeposits from banks 8 770,385 930,749Deposits from corporates 804,261 757,091Deposits from shareholders 222,276 370,438Securities sold under agreement to repurchase 408,289 385,368Other liabilities 9 34,869 24,671Term financing 10 399,547 649,148Bonds 11 531,018 -

Total liabilities 3,170,645 3,117,465

EQUITY Share capital 550,000 550,000Legal reserve 129,600 120,000General reserve 161,061 108,425Available-for-sale investments fair value reserve 214,737 170,574Retained earnings 85,580 52,636

Total equity (page 42) 1,140,978 1,001,635

TOTAL LIABILITIES AND EQUITY 4,311,623 4,119,100

OFF-BALANCE SHEET EXPOSURES 12 371,366 356,818

The financial statements, which consist of pages 45 to 82, were approved by the Board of Directors on 20 April 2011 and signed on their behalf by:

Abdullah A. Al Zaid Ahmed Bin Hamad Al NuaimiChairman Chief Executive and General Manager

STATEmEnT of finAnciAl poSiTionas at 31 December 2010

(US$000)

40 Apicorp Annual Report 2010

Note 2010 2009

Interest income 60,580 69,667Interest expense ( 43,731) (55,771)Net interest income 14 16,849 13,896

Net fee income 15 1,802 1,412Dividend income 16 67,048 59,501Loss on trading securities 17 (2) (35)Gain on sale of available-for-sale securities 18 32,697 104Other income 21 843 7,158Total income 119,237 82,036

Operating expenses 19 (25,849) (21,958)Impairment reversals / (charge) 20 1,746 (1,542)

PROFIT FOR THE YEAR 95,180 58,536

Per share information 23Basic and dilluted earning per share US$173 US$106Net asset value per share US$2,075 US$1,821

STATEmEnT of incomEfor the year ended 31 December 2010

The financial statements consist of pages 45 to 82

(US$000)


2010 2009

Profit for the year 95,180 58,536

Other comprehensive incomeTransferred to statement of income on sale of available-for-sale securities (7,693) -Net change in fair value of available-for-sale securities 18,280 4,354Change in fair value of available-for-sale direct equity investments 33,576 43,995

Other comprehensive income for the year 44,163 48,349

Total comprehensive income for the year 139,343 106,885

STATEmEnT of comprEhEnSivE incomEfor the year ended 31 December 2010


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(US$000)


2010 2009OPERATING ACTIVITIES

Interest received 59,670 71,820Interest paid (42,026) (55,746)Maturity of/ (new) placements with banks 25,045 (237,300)Draw downs of syndicated and direct loans (468,334) (651,626)Repayments of syndicated and direct loans 544,346 405,130Fees received 2,041 1,458Fees paid (2,515) (128)Operating expenses paid (22,045) (19,613)Other income received 2,245 1,734Other receipts 3,130 12,031

Cash generated/(used in) from operating activities 101,557 (472,240)

2010 2009INVESTING ACTIVITIES

Proceeds from sale of available-for-sale securities 196,200 524,245Purchase of available-for-sale securities (453,967) (526,905)Purchase of available-for-sale direct equity investments (4,200) (12,010)Dividends received from available-for-sale direct equity investments 66,342 59,067Proceeds from sale of available-for-sale direct equity investments 36,000 -Purchase of property and equipment (298) (801)

Cash (used in)/generated from investing activities (159,923) 43,596

2010 2009FINANCING ACTIVITIES

Proceeds of deposits from banks (160,364) (457,892)Proceeds from deposits from corporates 47,170 324,757(Repayments)/proceeds from deposits from shareholders (148,162) 355,438Proceeds from securities sold under agreement to repurchase 22,921 225,810Repayment of term financing (250,000) -Issue of bonds 533,333 -

Cash generated from financing activities 44,898 448,113

2010 2009

Net (decrease)/increase in cash and cash equivalents for the year (13,468) 19,469Cash and cash equivalents at the beginning of the year 28,860 9,391

Cash and cash equivalents at 31 December (page 39) 15,392 28,860


STATEmEnT of cASh floWSfor the year ended 31 December 2010


Arab Petroleum Investments Corporation (APICORP - the Corporation) is an Arab joint stock company established on 23 November 1975 in accordance with an international agreement signed and ratified by the ten member states of the Organization of Arab Petroleum Exporting Countries (OAPEC). The agreement defines the objectives of the Corporation as:

- participation in financing petroleum projects and industries, and in fields of activity which are derived there from, ancillary to, associated with, or complementary to such projects and industries; and

- giving priority to Arab joint ventures which benefit the member states and enhance their capabilities to utilise their petroleum resources and to invest their funds to strengthen their economic and financial development and potential.

Domicile and taxationThe Corporation is an international entity, and operates from its registered head office in Dammam, Kingdom of Saudi Arabia. The establishing agreement states that APICORP is exempt from taxation in respect of its operations in the member states.

Share capitalThe capital is denominated in shares of US$ 1,000 and is owned by the governments of the ten OAPEC states as follows:

Percentage AuthorisedCapital

Issued and fullypaid

17%204,00093,500United Arab Emirates3%36,00016,500Kingdom of Bahrain5%60,00027,500Democratic and Popular Republic of Algeria

17%204,00093,500Kingdom of Saudi Arabia3%36,00016,500Syrian Arab Republic

10%120,00055,000Republic of Iraq10%120,00055,000State of Qatar17%204,00093,500State of Kuwait15%180,00082,500Socialist Peoples’ Libyan Arab Jamahiriya3%36,00016,500Arab Republic of Egypt

100%1,200,000550,000

Activities

APICORP is independent in its administration and the performance of its activities, and operates on a commercial basis with the intention of generating net income. It operates from its registered head office in Dammam, Kingdom of Saudi Arabia and its Banking Unit in Manama, Kingdom of Bahrain.

Currently the Corporation’s project-financing activities take the form of loans and direct equity investments in projects. These activities are funded by shareholders’ equity, medium-term financing, deposits from government, corporate and short-term deposits from banks.

formATion, STATUS AnD AcTiviTiES of Apicorp

(US$000)


A gEnErAl

A-1 Statement of complianceThe financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS).

A-2 Basis of preparationThe principal accounting policies applied in the preparation of these financial statements have been consistently applied to all the presented years, unless otherwise stated.

APICORP’s functional and presentation currency is United States dollars (US $) because it is a supranational organisation with its capital and the majority of its transactions and assets denominated in that currency.

The financial statements haven been prepared on the historical cost convention except for the measurement at fair value of trading securities, available-for-sale securities, certain available-for-sale direct equity investments and derivative financial instruments.

The preparation of the financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. Information about critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements is included in the notes K and L.

i) Standards, amendments and interpretations issued and effective on or after 1 January 2010

improvements to ifrS (April 2009)Improvements to IFRS issued in April 2009 contained numerous amendments to IFRS that the IASB considers non-urgent but necessary. ‘Improvements to IFRS’ comprise amendments that result in accounting changes to presentation, recognition or measurement purposes, as well as terminology or editorial amendments related to a variety of individual IFRS standards. The amendments are effective for annual periods beginning on or after 1 January 2010 with earlier adoption permitted. There were no material changes to the current accounting policies of the Corporation as a result of these amendments.

ii) Standard and interpretations issued but not yet effective The following new / amended IFRS’s and interpretations have been issued that are not yet mandatory for adoption by the Corporation.

ifrS 9 ‘financial instruments’

Standard issued November 2009 (IFR9 (2009))IFRS 9 (2009) “Financial Instruments” is the first standard issued as part of a wider project to replace IAS 39 “Financial instruments: recognition and measurement”. IFRS 9 (2009) retains and simplifies the mixed measurement model and establishes two primary measurement categories for financial assets: amortised cost and fair value. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. The guidance in IAS 39 on impairment and hedge accounting continues to apply. The 2009 standard did not address financial liabilities.

SignificAnT AccoUnTing policiES


SignificAnT AccoUnTing policiES

A-2 Basis of preparation (continued)

Standard issued October 2010 (IFR9 (2010))IFRS 9 (2010) adds the requirements related to the classification and measurement of financial liabilities, and derecognition of financial assets and liabilities to the version issued in November 2009. It also includes those paragraphs of IAS 39 dealing with how to measure fair value and accounting for derivatives embedded in a contract that contains a host that is not a financial asset, as well as the requirements of IFRIC 9 “reassessment of Embedded Derivatives”.

The Corporation is yet to assess IFRS9’s full impact on the financial statements of the Corporation.However, initial indications are that it may affect the Corporation’s accounting for its debt available-for-sale financial assets, as IFRS 9 only permits the recognition of fair value gains and losses in other comprehensive income if they relate to equity investments that are not held for trading. Fair value gains and losses on available-for-sale debt investments, for example, will therefore have to be recognised in profit or loss.

While adoption of IFRS 9 is mandatory from 1 January 2013, earlier adoption is permitted. Prior periods need not be restated if an entity adopts the standard for reporting periods beginning before 1 January 2012.

IAS 24(Revised) “Related Party Disclosures”It was issued in November 2009 and is mandatory for periods beginning on or after 1 January 2011. The revised standard clarifies and simplifies the definition of a related party and removes the requirement for government-related entities to disclose details of all transactions with the government and other government-related entities. When the revised standard will be applied, the Corporation will need to disclose transactions between its associates. The Corporation is currently putting systems in place to capture the necessary information.

Improvements to IFRSs (2010)Improvements to IFRS issued in 2010 contained numerous amendments to IFRS that the IASB considers non-urgent but necessary. ‘Improvements to IFRS’ comprise amendments that result in accounting changes to presentation, recognition or measurement purposes, as well as terminology or editorial amendments related to a variety of individual IFRS standards. The amendments are effective for the Corporation’s 2011 annual financial statements with earlier adoption permitted. No material changes to accounting policies are expected as a result of these amendments.

iii) Early adoption of standardsThe Corporation did not early adopt new or amended standards in 2010.

A-3 Foreign currency transactionsTransactions in currencies other than US dollars (foreign currencies) are translated at the exchange rates ruling at the date of the transaction. All monetary assets and liabilities, except trading equities (non-monetary), denominated in foreign currencies, are translated into US dollars at rates prevailing at the balance sheet date. Differences arising from changes in exchange rates are recognised in the statement of income.

Available-for-sale equity investments (non-monetary assets) denominated in foreign currencies that are stated at fair value are translated to US dollars at prevailing exchange rates. Differences arising from changes in rates are included in the fair value reserve in equity. All other non-monetary assets and liabilities are stated at the historical rates of exchange.

Share capital originally contributed in Saudi Riyals is maintained at the historical rates of exchange.


B finAnciAl ASSETS

B-1 ClassificationThe Corporation allocates financial assets to the following IAS 39 categories:

Trading securities are those that the Corporation acquires or incurs principally for the purpose of gains over the near-term or if it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking. These consist of listed equity securities.

Available-for-sale investments are non-derivative financial assets that are not classified as held for trading or loans provided by the Corporation or held to maturity. Available-for-sale investments include certain debt securities, managed funds and direct equity investments.

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market.

B-2 recognitionAvailable-for-sale and held for trading financial assets are recognised on a trade date basis.

Loans are recognised on the day on which they are drawn down by the borrower.

B-3 measurementFinancial assets are measured initially recognised at fair value plus transaction costs except for financial assets held for trading where transaction costs are recognised in the statement of income. Subsequent to initial recognition, all trading and available-for-sale investments are re-measured to fair value, except in case of certain unlisted available-for-sale direct equity investments, where a reliable measure of fair value is not available and hence are carried at cost less impairment allowances, if any.

Gains and losses arising from a change in the fair value of trading securities and derivative instruments not designated as an accounting hedge are recognised in the statement of income in the period in which it arises.

Gains and losses arising from changes in the fair value of available-for-sale financial assets are recognised in other comprehensive income and presented in a fair value reserve as a separate component of equity. When the assets are sold, collected or otherwise disposed of, or are impaired, the cumulative gain or loss previously recognised in other comprehensive income, and presented in the fair value reserve in equity, is transferred to the profit or loss.

Loans are subsequently measured at amortised cost using the effective interest method, less allowance for impairment, if any. The unamortised portion of deferred participation and upfront fees received is deducted from the carrying values of the loans.

B-4 AmortisationWhere financial assets, mainly bonds, have been purchased at a premium or a discount, the premiums and discounts are amortised, using the effective interest method, through the statement of income over the period from the date of purchase to the date of maturity.

B-5 fair value measurement principlesFor financial assets traded in active markets, fair value is based on their quoted closing bid market prices or dealer price quotations at the balance sheet date without any deduction for transaction costs. For investments in managed funds, the net asset values quoted by the fund managers are considered representative of fair value of those investments.

SignificAnT AccoUnTing policiES (continued)


B-6 De-recognitionFinancial assets are derecognised when the contractual rights to receive the cash flows from these assets have ceased to exist or the assets have been transferred and substantially all the risks and rewards of ownership of the assets are also transferred (that is, if substantially all the risks and rewards have not been transferred, the Corporation tests control to ensure that continuing involvement on the basis of any retained powers of control does not prevent derecognition).

B-7 impairmentAll financial assets that are not carried at fair value through profit or loss are assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably.

Assets carried at amortised cost

Objective evidence that financial assets are impaired can include default or delinquency by a borrower, restructuring of an amount due to the Corporation on terms that the Corporation would not consider otherwise, indications that a borrower or an issuer will enter bankruptcy, the disappearance of an active market for a security.

The Corporation considers evidence of impairment, for loans and other financial assets carried at amortised cost, at both a specific asset and collective level. All individually significant financial assets are assessed for specific impairment. All individually significant loans found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Assets that are not individually significant are collectively assessed for impairment by grouping together assets with similar risk characteristics. In assessing collective impairment the Corporation uses historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management’s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends.

An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. Losses are recognised in profit or loss and reflected in an allowance account against receivables. If an asset has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract.

Interest on the impaired asset continues to be recognised through the unwinding of the discount.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment loss was recognised in profit or loss, then the impairment loss is reversed, with the amount of the reversal recognised in profit or loss.

Assets classified as available-for-sale

In case of equity investment classified as available-for-sale, a significant or prolonged decline in the fair value of security below its cost is objective evidence of impairment.

Debt instruments, classified as available-for-sale, are considered as impaired, if objective evidence indicates that a loss event has occurred after the initial recognition of the instrument, and that the loss event had a negative effect on the estimated future cash flows of that instrument that can be estimated reliably



B-7 Impairment (continued)

If any such evidence exists for available-for-sale financial assets, the cumulative loss, measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss, is removed from equity and recognised in the income statement. Impairment losses recognised in the statement of income on equity instruments are reversed directly through comprehensive income. For debt instruments classified as available-for-sale, if in a subsequent period, the fair value increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through the statement of income.

c finAnciAl liABiliTiES

c-1 initial recognition and measurementThe Corporation has the following non-derivative financial liabilities: deposits from banks, deposits from corporate, term financing and financing received under repurchase agreements for securities. Financial liabilities are initially recognized, on the trade date at which the Corporation becomes a part of the contractual provisions of the instrument, at fair value, representing the proceeds received net of premiums, discounts and transaction costs that are directly attributable to the financial liability.

c-2 Subsequent measurementAll financial liabilities are classified as non-trading liabilities and are measured at amortised cost using the effective interest rate method.

c-3 DerecognitionFinancial liabilities are derecognised when the Corporation’s contractual obligations are discharged, cancelled or expire.

D cASh AnD cASh EqUivAlEnTSFor the purpose of the statement of cash flows, cash and cash equivalents comprise cash balances on hand and bank balances with original maturities of less than 3 months, which are subject to insignificant risk of fluctuation in its realisable value.

E rEpUrchASE AnD rESAlE AgrEEmEnTS

Assets sold with a simultaneous commitment to repurchase at a specified future date (repos) are not derecognised, as the Corporation retains all or substantially all the risks and rewards of the transferred assets. Amounts received under these agreements are treated as liabilities and the difference between the sale and repurchase price treated as interest expense using the effective interest method.

Assets purchased with a corresponding commitment to resell at a specified future date (reverse repos) are not recognised in the balance sheet. Amounts paid under these agreements are treated as assets and the difference between the purchase and resale price treated as interest income using the effective interest method.

f propErTy AnD EqUipmEnT

F-1 ClassificationItems of property and equipment are stated at cost less accumulated depreciation and impairment losses, if any.

Where an item of property and equipment comprises significant components having different useful lives, these components are accounted for as separate items of property and equipment. No borrowing costs have been capitalised.



f-2 Subsequent expenditureExpenditure incurred subsequently to replace a major component of an item of property and equipment that is accounted for separately is capitalised. Other subsequent expenditure is capitalised only when it increases the future economic benefits expected to accrue from the item of property and equipment.

All other expenditure, for example on maintenance and repairs, is expensed in the statement of income as incurred.

f-3 DepreciationDepreciation is charged to the statement of income on a straight-line basis over the estimated useful lives of the items of property and equipment, and of the major components that are accounted for separately. Land is not depreciated.

The estimated useful lives of the Corporation’s property and equipment are as follows: Head office building (civil works and other major components) 20 to 40 years Head office building (finishes, systems and equipment) 5 to 20 years Housing compound buildings (including new extension) 15 years Housing compound equipment, furniture and fittings 5 to 10 years Office furniture, equipment and computer hardware (and related software) 3 to 10 years Office fit outs capitalized at Bahrain branch are depreciated over un-expired period of lease or 5 years,

whichever is less.

The property and equipment residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

g incomE rEcogniTiong-1 interest income and expenses

Interest income and interest expense for all interest-bearing financial instruments are recognised within “interest income” and “interest expense” in the statement of income using the effective interest rate method. When calculating the effective interest rate, the Corporation estimates future cash flows considering all contractual terms of the financial instrument, but not future credit losses. Fees, including loan origination less any early redemption fees are included in the calculation of the effective interest rate to the extent that they are considered to be an integral part of the effective interest rate.

g-2 Dividend incomeDividend income is recognised in the statement of income when the Corporation’s right to receive is established.

g-3 fee incomeFee income arises from financial services provided by the Corporation including project and structured finance transactions, for example advising on underwriting and arranging syndicated loan facilities, and is recognised when the service is provided.

Fees that are analagous to interest and are considered to be part of the overall yield on loans, specifically participation and upfront fees are initially deferred and then amortised over the lives of the related loans. The amortised income is included in interest income.

g-4 rent incomeRent income is recognised in the statement of income on a time apportionment basis.



h EmployEES’ EnD of SErvicE BEnEfiTSThe Corporation provides end of service benefits to its employees. The entitlement to these benefits is based upon the employees’ final salary and length of service subject to the completion of a minimum service period. Provision for the unfunded commitment (which is a defined benefit scheme under IAS 19) has been made by calculating the liability, had all the employees left at the balance sheet date.

i DErivATivE finAnciAl inSTrUmEnTSDerivative financial instruments are contracts, the value of which is derived from one or more underlying financial instruments and include interest rate swaps and forward currency contracts. The Corporation holds derivative financial instruments to hedge its foreign currency and interest rate risk exposures.

The Corporation designates interest rate swaps (“hedging instruments”) as fair value hedges to hedge the interest rate risk on its fixed income securities (“hedged items”) classified as available-for-sale securities. On initial designation of the hedge, the Corporation formally documents the relationship between the hedging instruments and hedged items, including the risk management objectives and strategy in undertaking the hedge transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship. The Corporation makes an assessment, both at the inception of the hedge relationship as well as on an ongoing basis, whether the hedging instruments are expected to be “highly effective” in offsetting the changes in the fair value of the respective hedged items during the period for which the hedge is designated, and whether the actual results of each hedge are within a range of 80-125 percent.

Derivatives are recognised initially at fair value; attributable transaction costs are recognised in profit or loss as incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for as described below.

i-1 fair value hedgesWhen a derivative is designated as the hedging instrument in a hedge of the change in fair value of a recognised asset or liability or a firm commitment that could affect profit or loss, changes in the fair value of the derivative are recognised immediately in profit or loss together with changes in the fair value of the hedged item that are attributable to the hedged risk (in the same line item in the statement of income as the hedged item).

If the hedging derivative expires or is sold, terminated, or exercised, or the hedge no longer meets the criteria for fair value hedge accounting, or the hedge designation is revoked, hedge accounting is discontinued prospectively. Any adjustment up to that point to a hedged item for which the effective interest method is used, is amortised to profit or loss as part of the recalculated effective interest rate of the item over its remaining life.

i-2 other non-trading derivativesWhen a derivative is not held for trading, and is not designated in a qualifying hedge relationship, all changes in its fair value are recognised immediately in profit or loss as a component of other income.

i-3 fair valueThe fair value of forward exchange contracts is estimated by discounting the difference between the contractual forward price and the current forward price for the residual maturity of the contract using Zero Coupon curve (based on LIBOR). The fair value of interest rate swaps is determined by discounting estimated future cash flows based on the terms and maturity of each contract and the same Zero Coupon curve at the measurement date. Fair values recognized reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the Corporation and counterparty when appropriate.



J finAnciAl gUArAnTEEFinancial guarantees are contracts that require the Corporation to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. Financial guarantee liabilities are recognised initially at their fair value, and the initial fair value is amortised over the life of the financial guarantee. The financial guarantee liability is subsequently carried at the higher of this amortised amount and the present value of any expected payment when a payment under the guarantee has become probable.

K JUDgEmEnTSIn the process of applying the Corporation’s accounting policies, management has made the following judgments, apart from those involving estimations, which have the most significant effect on the amounts recognised in the financial statements:

impairment of available-for-sale investmentsThe Corporation considers available for sale equity investments that are at fair value, as impaired, when there has been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is “significant” or “prolonged” requires considerable judgment. In addition, objective evidence for impairment may be deterioration in the financial health of the investee, industry and sector performance, changes in technology and operational and financing cash flows.

l ESTimATion UncErTAinTyThe key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below:

l-1 impairment losses on loans and advancesThe Corporation reviews its loans portfolio at every reporting period to assess whether a provision for impairment should be recorded in the statement of income. In particular, considerable judgment by Corporation is required in the estimation of the amount and timing of future cash flows when determining the level of provisions required. Such estimates are necessarily based on assumptions about several factors involving varying degrees of judgment and uncertainty, and actual results may differ resulting in future changes to such provisions.

l-2 collective impairment provisions on loans and advancesIn addition to specific provisions against individually significant loans and advances, the Corporation also makes a collective impairment provision against loans and advances which although not specifically identified as requiring a specific provision have a greater risk of default than when originally granted. The amount of the provision is based on the historical loss pattern for loans within each category and is adjusted to reflect current economic changes. The loans are categorised based on various credit risk characteristics of the loans.

m proviSionSThe Corporation recognizes a provision when it has a present legal or constructive obligation as a result of past events; it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated.



n lEgAl AnD gEnErAl rESErvESUnder Article 35 of APICORP’s establishment agreement and statute, 10% of annual net income is to be transferred to a legal reserve until such reserve equals the paid up share capital. The legal reserve is not available for distribution.Article 35 also permits the creation of other reserves such as a general reserve. The general reserve may be applied as is consistent with the objectives of the Corporation, and as may be resolved by the General Assembly, on the recommendation of the Board of Directors.


(US$000)


1. plAcEmEnTS WiTh BAnKS

2010 2009

With Islamic financial institutions 15,000 35,000With conventional financial institutions 417,936 428,000Margin call accounts on securities sold under agreements to repurchase 6,937 1,918

439,873 464,918

2. TrADing SEcUriTiES

20092010

6361Listed equity

3. AvAilABlE-for-SAlE SEcUriTiES

20092010

179,015442,108Fixed-rate bonds281,338279,014Floating-rate bonds 119,998150,000U.S treasury bills34,81625,855Structured notes 7,2162,822Managed funds

-3,493Listed equity

622,383903,292

Movement in allowance for impairment:55,50644,346 Opening balance / charge

-(46) Net (reversal) for the year(11,160)(155) Write back on realisation of investments

-(25,000) Write off of impaired investments

44,34619,145 Allowanceforspecificimpairmentat31December

Securities sold under agreements to repurchase: The Corporation enters into collateralised borrowing transactions (repurchase agreements) in the ordinary course of its financing activities. Collateral is provided in the form of securities held within the available-for-sale portfolio. At 31 December 2010, the fair value of available-for-sale securities that had been pledged as collateral under repurchase agreements was US$ 442,863 (2009: US$ 469,023). These transactions are conducted under the terms that are usual and customary to standard lending and securities borrowings and lending activities.

noTES To ThE finAnciAl STATEmEnTSfor the year ended 31 December 2010

(US$000)



4. AvAilABlE-for-SAlE DirEcT EqUiTy invESTmEnTS

2010 2009Unlisted equities – carried at cost less impairmentKingdom of Bahrain

Bahrain National Gas Co. (Banagas) 11,491 11,491Kingdom of Saudi Arabia

Saudi European Petro Co. (Ibn Zahr) 142,219 142,219Republic of Iraq

Arab Company for Detergent Chem (Aradet) 5,120 5,120Socialist Peoples’ Libyan Arab Jamahiriya

Arab Drilling and Workover Co. (Adwoc) 11,686 11,686 Arab Geophysical Exploration Svcs Co. (Agesco) 594 594

Arab Republic of Egypt Alexandria Carbon Black Co. - 10,996 Alexandria Fiber Co. SAE (AFC) 4,550 4,550 Oriental Petrochemicals Co. 6,151 6,151 Egyptian Methanex Methanal Co. 31,248 27,048 MISR Oil Processing Company SAE 33,911 33,911 Egyptian Bahraini Gas Derivative Co. 5,000 5,000

Non-shareholder countries Tankage Mediterranee (Tankmed), Tunisia 1,112 1,112

listed equities – carried at fair valueKingdom of Saudi Arabia

Yansab Petrochemical Complex (YANSAB) 112,552 78,976

365,634 338,854

movements during the year:

Balance at the beginning of the year 338,854 282,848Additions during the year 4,200 12,010Sold during the year (10,996)Change in fair value during the year 33,576 43,996

Balance at 31 December 365,634 338,854

Movementsinallowanceforspecificimpairment

At the beginning of the year 86,490 86,490Impairment charge for the year - -

Allowanceforspecificimpairmentat31December 86,490 86,490

(US$000)



4 Available-for-sale direct equity investments (continued)

2010 2009commitments – uncalled share capitalAt the beginning of the year 18,690 30,200Additional commitments during the year - 500Commitments fulfilled (4,200) (12,010)

commitments at 31 December 14,490 18,690

commitments – guaranteesAt the beginning of the year - -Additional commitments during the year 14,000 -

commitments at 31 December 14,000 -

Companies in which the Corporation holds 20% or more of the equity are not treated as associates under IAS 28 - Investments in Associates because APICORP’s philosophy is that it should act in a fiduciary and advisory capacity and not exercise significant influence over the management and operations of the companies. These investments primarily include private equity investments in closely held project companies where the Corporation intends to exit these investments principally by means of strategic buy outs by an existing shareholder or through initial public offerings. Investment committee regularly evaluates exit opportunities. Accordingly, these investments are classified as available-for-sale assets.

Unquoted available-for-sale direct equity investments are carried at cost in the absence of reliable measure of fair value. The fair value of these investments cannot be reliably measured due to lack of information from the investee companies, which is primarily due to lack of influence of the Corporation on the investee companies.

As of 31 December 2010, all APICORP’s shares in Egyptian Bahraini Gas Derivative Co. of US$ 5,000 thousand are pledged as security in favour of another bank to guarantee a loan issued to Egyptian Bahraini Gas Derivative Co.

(US$000)


5. SynDicATED AnD DirEcT loAnS

2010 2009Unimpaired loans

- Islamic 604,530 566,951 - Conventional 1,953,431 2,055,325

Unamortised participation and upfront fees (9,333) (8,133)Collective impairment allowance (6,660) (6,660)

2,541,968 2,607,483

Impaired loans Non-performing loans (see below) 17,149 17,345 Performing loans - 15,397 Allowance for specific impairments (17,149) (18,895)

- 13,847

2,541,968 2,621,330

impaired (non-performing) loans – fully providedIraqi companies fully owned by Government of Iraq 51,848 51,848Dividends and interest due to Government of Iraq, offset against defaulted loans (51,259) (51,063)Net Iraqi loans, after dividends offset (see below) 589 785Others 16,560 16,560

Total impaired (non-performing) loans at 31 December 17,149 17,345

impaired loans to companies fully owned by government of iraq

As a result of the 1990-1991 second Gulf war, certain Government of Iraq controlled companies defaulted on loans from the Corporation. Consequently, since 1992 dividends (and non contractual accrued interest thereon) due to the Government of Iraq (a shareholder in APICORP) have not been paid.

With effect from 1998, the Corporation reduced impairment allowances against the defaulted loans by the amount of the unpaid dividends, while still carrying the dividends as liabilities in the balance sheet up-to 2003.

In May 2003, APICORP Board of Directors adopted a resolution authorizing management, in cases where no settlement is reached, to set-off bad debts owed to the Corporation by companies and public corporations fully owned by any of APICORP’s shareholder governments, against accounts held by the Corporation belonging to such bodies and governments including dividends, provided all legal requirements are satisfied and complied with.

Accordingly, and until negotiation is undertaken with the Government of Iraq, the Corporation starting from 2003, has made a primary offset of the unpaid dividends (and non contractual accrued interest thereon) due to the Government of Iraq, against the principal amounts of the defaulted loans due from Government of Iraq controlled companies.

Since the beginning of default during 1990-92, the Corporation has kept memorandum record for contractual interest and fee on the defaulted Iraqi loans. The total contractual overdue interest and fee on these impaired Iraqi loans as at 31 December 2010 amounts to US $ 127,160 thousand (2009: US $ 123,215 thousand).


(US$000)


5 Syndicated and direct loans (continued)

2010 2009Unimpaired loans movement during the yearOutstanding at the beginning of the year 2,622,276 2,391,064Draw-downs on new and existing loans 468,334 651,626Repayments during the year (544,346) (405,130)Reclassified as (impaired)/performing 15,397 (15,397)Exchange rate movements (3,700) 113

Unimpaired loans outstanding at 31 December 2,557,961 2,622,276

Undrawn loan commitments and guaranteesAt the beginning of the year 338,128 977,624Additional underwriting and commitment during the year 542,613 40,000Drawdowns during the year (468,334) (651,626)Expired commitments and other movements - net (69,531) (27,870)

Undrawn commitments at 31 December 342,876 338,128

AllowanceforspecificimpairmentsAt the beginning of the year

Allowance for specific impairments – gross 69,958 68,408 Less: Unpaid dividends and interest due to Government of Iraq (51,063) (50,756)

18,895 17,652

Write-downs (note 20) - 1,550

Reversals of write-downs (note 20) - Unpaid dividends and interest due to the Government of Iraq (196) (307) - Specific impairment allowance reversals on recovery (1,550) -

Net (reduction)/chargein the year (1,746) 1,243

Allowance for specific impairments at 31 December – gross 68,408 69,958Unpaid dividends and interest due to the Government of Iraq (51,259) (51,063)

Allowanceforspecificimpairmentsat31December-net 17,149 17,625

Allowance for collective impairment

At the beginning of the year 6,660 6,361Additional allowance during the year - 299

Allowance for collective impairments at 31 December - net 6,660 6,660


(US$000)


6. propErTy AnD EqUipmEnT

2010 2009

Land at Rakah – head office building and housing compound 4,004 4,004Head office building, equipment, decor and furnishings 36,758 36,656Housing compound buildings, equipment, decor and furnishings 30,433 30,326Computer hardware and other office equipment 1,059 983Computer systems software 908 908Bahrain Banking unit office equipment, decor and furnishings 1,540 1,526

Total cost at 31 December 74,702 74,403Accumulated depreciation (45,439) (42,333)

29,263 32,070

movements during the yearNet carrying value at the beginning of the year 32,070 34,174Additions at cost Head office building, operating equipment, decor & furnishings 102 202 Housing compound buildings, equipment, decor & furnishings 107 25 Computer systems software – acquisition & implementation 76 32 Other 14 542

Depreciation charge (3,106) (2,905)

Net carrying value at 31 December 29,263 32,070

7. oThEr ASSETS

2010 2009

Accrued interest receivables 10,594 6,785Employee loans and advances 649 711Derivatives at fair value (see note 13) 3,629 2,256Miscellaneous receivables and advance payments 1,268 870

16,140 10,622

8. DEpoSiTS from BAnKS

2010 2009Short-term deposits from conventional banks US dollar 95,800 98,350 Other currencies 230,288 356,876Short-term Murabaha financing from Islamic financial institutions US dollar 134,800 287,460 Other currencies 309,497 188,063

770,385 930,749


(US$000)


9. oThEr liABiliTiES

2010 2009

Accrued interest payable 12,777 11,268Employees’ end of service benefits 7,642 6,605Accrued expenses 2,156 2,270Derivatives at fair value (see note 13) 11,316 3,714Other payables 978 814

34,869 24,671

Movementinemployees’endofservicebenefits

Movementinemployees’endofservicebenefits Balance as at 1 January 6,605 6,924 Charge for the year 1,148 910 Paid during the year (111) (1,229)

Balance as at 31 December 7,642 6,605

10. TErm finAncing

2010 2009

US$ 250 million loan 2005-2010 – fully repaid - 250,000 Interest rate – US$ LIBOR plus 37.5 basis pointsUS$ 400 million loan 2008 – 2012 – fully drawn 400,000 400,000 Interest rate: US$ LIBOR plus 28.5 basis pointsUnamortised front-end fee (453) (852)

399,547 649,148

The term financing are subject to following financial covenants, with which the Corporation has complied: The ratio of total shareholders’ funds to total assets shall at all times be equal to or greater than 16.67%; and The amount of total shareholders’ funds shall at all times be greater than US$ 500 million.

11. BonDS

2010 2009

US$ 533 million bonds 2010 – 2015 – fully drawn 533,333 - Interest rate: Saudi riyal interbank rate plus 110 basis pointsUnamortised front-end fee (2,315) -

531,018 -


(US$000)


11 Bonds (continued)

The Bonds are subject to following financial covenants, with which the Corporation has complied: The ratio of total shareholders’ funds to total assets shall at all times be equal to or greater than 16.67%; and The amount of total shareholders’ funds shall at all times be greater than US$ 550 million.

12. off-BAlAncE ShEET EXpoSUrES

2010 2009

Commitments to underwrite and fund loans (see note 5) 342,876 338,128Commitments to subscribe capital to available-for-sale direct equity investments (see note 4) 14,490 18,690

Guarantees to bank on loans of investee companies 14,000 -

371,366 356,818

In 2010, the Corporation registered APICORP Petroleum Shipping Fund Limited (the “Fund Company”) with an authorised capital of US$ 50 thousand in teh Cayman Islands. The Fund Company was created to provide petroleum shipping services. As at 31 December 2010 the share capital of the Fund Company was uncalled.

13. DErivATivE finAnciAl inSTrUmEnTS

Fair value hedges The Corporation uses interest rate swaps to hedge its exposure to changes in fair value, of certain investments in fixed rate bonds, attributable to changes in market interest rate. Fair values of the interest rate swap agreements are estimated based on the prevailing market rates of interest.

Other derivatives held for risk management The Corporation uses derivatives, not designated in qualifying accounting hedge relationship, to manage its exposure to market risks. The Corporation enters into foreign exchange forward contracts to hedge against foreign exchange fluctuations. Fair values of the forward currency contracts are estimated based on the prevailing market rates of interest and forward rates of the related foreign currencies, respectively.

The fair values of derivative financial instruments held by the Corporation as at 31 December are provided below:

2010 2009

Asset Liabilities Asset Liabilities

Interest rate swap (Fair value hedges) 2,559 9,002 1,765 950Foreign exchange contracts (Other derivatives held for risk management)

1,070 2,314 491 2,764

At 31 December 3,629 11,316 2,256 3,714


(US$000)


13 Derivative financial instruments (continued)

The notional amount of derivative financial instruments held by the Corporation as at 31 December are provided below:

2010 2009

Interest rate swap (Fair value hedges) 337,020 159,986Foreign exchange contracts (Other derivatives held for risk management) 1,547,415 555,163

At 31 December 1,884,435 715,149

The contractual maturity analysis of the derivative instruments are included as part of liquidity risk information in note 26.

14. nET inTErEST incomE

20092010interest income

2512Cash and bank balances166224Placements with banks – Islamic

2,3145,526 – Conventional 10,38220,288Available-for-sale securities – coupon interest(1,105)(1,738)Available-for-sale securities – amortisation of premium10,4877,748Syndicated and direct loans – Islamic40,98727,235 – Conventional

6,4111,285 Amortisation of loan participation and upfront fees

69,66760,580Total interest income

interest expense(8,989)(5,237)Deposits from banks and other cost– Conventional

(16,013)(6,013) – Islamic(5,691)(4,788)Securities sold under agreement to repurchase deposits

(15,378)(16,334)Deposits from corporates & shareholders(1,330)(5,911)Interest rate SWAP (7,480)(2,888)Term financing

-(1,848)Bonds(583)(516)Amortisation of term financing front-end fees(307)(196)Unpaid dividends

(55,771)(43,731)Total interest expense

13,89616,849net interest income


(US$000)


15. nET fEE incomE

2010 2009fee incomeUnderwriting and arranging services 30 106Agency, advisory and other services 1,933 1,204Fee from securities lending activities 39 230

2,002 1,540fee expenseCustody fees and other charges paid to banks (200) (128)

net fee income 1,802 1,412

16. DiviDEnD incomE

20092010

-14Trading securities59,50167,034Available-for-sale direct equity investments

59,50167,048

17. loSS on TrADing SEcUriTiES

20092010

(35)(2)Net loss on revaluation

(35)(2)

18. gAin on SAlE of AvAilABlE-for-SAlE SEcUriTiES

20092010

-32,454Available-for-sale direct equity investments104243Managed funds

10432,697


(US$000)


19. opErATing EXpEnSES

20092010

(11,450)(14,918)Staff costs(875)(1,104)Employees’ end of service benefits

(4,422)(4,704)Premises costs, including depreciation(2,277)(1,025)Equipment and communications costs(1,958)(2,210)Key Management’s & Board benefits, fees and expens

(35)(44)Key Management’s post employment benefits(302)(404)Donations(327)(645)Consultancy(312)(795)Other corporate expenses

(21,958)(25,849)

20. impAirmEnT loSSES

20092010Write-downs Syndicated and direct loans (note 5)

(1,550)- Specific impairment allowance(299)- Collective impairment allowance

(1,849)-reversals of write-downs

Syndicated and direct loans (note 5)307196 Government of Iraq – reversal through unpaid dividend

-1,550 Specific impairment allowance reversals on recovery-46Available-for-sale securities (note 3)

3071,792

(1,542)1,792Net impairment losses

21. oThEr incomE

20092010

2,146(1,373)Exchange (losses)/gains(22)(29)Fair value hedge ineffectiveness

1,6602,056Rent – head office building and housing compound3,374189Miscellaneous income

7,158843


(US$000)


22. propoSED AppropriATionS of profiT

20092010

5,9009,600Legal reserve52,63685,580Retained earnings

58,53695,180

23. pEr ShArE informATion

The calculation of earnings per share at 31 December 2010 was based on the profit of US$ 95,180 thousand (2009: US$ 58,536 thousand) and a weighted average number of shares of 550 thousand outstanding as at 31 December 2010 (2009: 550 thousand shares). The calculation of net asset value per share at 31 December 2010 was based on the net assets of US$ 1,140,978 thousand as at 31 December 2010: (2009: US$ 1,001,635 thousand) and a weighted average number of shares of 550 thousand outstanding as at 31 December 2010 (2009: 550 thousand shares).

24. rElATED pArTy TrAnSAcTionS

APICORP’s principal related parties are its shareholders. Although the Corporation does not transact any commercial business directly with the shareholders themselves, it does finance companies, which are either controlled by the shareholder governments or over which they have significant influence.

2010 2009loans to related partiesLoans outstanding at 31 December – gross 1,714,062 1,950,012Allowance for specific impairments outstanding at 31 December (589) (785)Dividends & interest due to Government of Iraq, offset againstdefaulted loans at 31 December (51,259) (51,063)

Commitments to underwrite and fund loans at 31 December 280,794 239,759

Interest from loans during the year 22,937 37,780Loan fees received during the year 1,061 1,512

Loans to related parties are made at prevailing market interest rates and subject to normal commercial negotiation as to terms. The majority of loans to related parties are syndicated, which means that participation and terms are negotiated by a group of arrangers, of which the Corporation may, or may not, be a leader. No loans to related parties were written off in 2010 and 2009.


(US$000)


24 Related party transactions (continued)

2010 2009Available-for-sale direct equity investments in related parties

Investments at 31 December 365,634 338,854Commitments to invest at 31 December 14,490 (18,690)Guarantees as shareholders at 31 December 14,000 -Dividends received during the year 67,034 59,501

Deposits from related parties

Deposits from banks at 31 December - -Deposits from corporates at 31 December 682,395 634,667Deposits from shareholders 222,276 370,438Interest expense on related parties deposits from corporates during the year 8,255 4,503Interest expense on related parties deposits from shareholders during the year 7,555 2,335

Balances due to key management 199 155

For key management’s compensation, see note 19.

25. cApiTAl ADEqUAcy AnD mAnAgEmEnT

The risk asset ratio at 31 December 2009 is as follows:

2010 2009carrying values On-balance sheet assets (page 39) 4,311,623 4,119,100 Off-balance sheet exposures (note 12) 371,366 356,818

4,682,989 4,475,918

risk-weighted exposures On-balance sheet assets 3,110,396 3,568,494 Off-balance sheet exposures 371,366 356,818

Total risk-weighted exposures 3,481,762 3,925,312

capital adequacy ratioTier – 1 capital: share capital, legal & general reserves and retained earnings 926,241 831,061Tier – 2 capital: Investments fair value reserve & collective impairment allowance 90,099 177,234

qualifying capital 1,016,340 1,008,295capital base expressed as a percentage of total risk-weighted exposures: Qualifying capital 29.2% 25.7%

Tier 1 capital 26.6% 21.2%


(US$000)


25 Capital Adequacy and Management (continued)

The Corporation’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The impact of the level of capital on shareholders’ return is also recognized and the Corporation recognises the need to maintain a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position. The Corporation manages / monitors its capital based on the capital adequacy ratios prescribed by Basel Committee.

The Corporation has complied with all externally imposed capital requirements throughout the year (note 10 and 11). There have been no material changes in the Corporation’s management of capital during the year.

26. finAnciAl inSTrUmEnTS AnD riSK mAnAgEmEnT

financial instrumentsA financial instrument is any contract that gives rise to both a financial asset in one enterprise and a financial liability or equity instrument in another enterprise. APICORP’s financial assets are principally trading securities, available-for-sale securities, placements with banks, syndicated and direct loans, available-for-sale direct equity investments and certain other assets.

Financial liabilities consist of commitments to lend and invest in equity, deposits from banks, term financing, certain other liabilities and guarantees.

These financial instruments expose APICORP to varying degrees of market risk (including currency, interest rate and price risks), credit risk and liquidity risk. credit risk managementCredit risk is the risk that a borrower or counter-party of APICORP will be unable or unwilling to meet a commitment that it has entered into with the Corporation, causing a financial loss to the Corporation. It arises from the lending, treasury and other activities undertaken by the Corporation. Policies and procedures have been established for the control and monitoring of all such exposures.

Proposed loans and available-for-sale direct equity investments are subject to systematic investigation, analysis and appraisal before being reviewed by the Credit Committee (consisting of the General Manager and Senior Managers of the Corporation), which makes appropriate recommendations to the Board of Directors, who have the ultimate authority to sanction commitments. These procedures, plus the fact that most of the loans are backed by sovereign guarantees and commitments and export credit agency cover, limit APICORP’s exposure to credit risk.

The Corporation faces a credit risk on undrawn commitments because it is potentially exposed to loss in an amount equal to the total unused commitments. However the eventual loss, if any, will be considerably less than the total unused commitments, since most commitments to extend credit are contingent upon borrowers maintaining specified credit standards. All loan commitments, whether drawn or undrawn, are subject to systematic monitoring so that potential problems may be detected early and remedial action taken.

Treasury activities are controlled by means of a framework of limits and external credit ratings. Dealing in marketable securities is primarily restricted to United States and major European stock exchanges. Dealings are only permitted with approved internationally rated banks, brokers and other counter-parties. Securities portfolios and investing policies are reviewed from time to time by the Assets and Liabilities Committee (“ALCO”).


(US$000)


26 Financial instruments and risk management – Credit risk management (continued)

The maximum exposure to credit risk on cash and bank balances is their carrying amount. Details of credit risk exposure on other financial instruments are as follows:

Syndicated and direct loans (note 5)

placements with banks (note 1)

Available-for-sales securities (note 3)

2010 2009 2010 2009 2010 2009

Impaired non performing Grade F 68,408 68,408 - - - -

Grade E - - - - - -

Gross amount 68,408 68,408 - - - -

Unpaid dividends and interest due to Government of Iraq

(51,259) (51,063) - - - -

Allowance for impairment (17,149) (17,345) - - - -

Carrying amount - - - - - -

Impaired performing Grade D - - - - - -

Grade C - 15,397 - - - -

Gross amount - 15,397 - - - -

Allowance for impairments - (1,550) - - - -

Carrying amount - 13,847 - - - -

Neither past due nor impaired Grade B 340,961 186,083 - - - -

Grade A 2,187,480 2,285,255 - - - -

Accounts with renegotiable terms - -

Grade B - 58,990 - - - -

Grade A 29,520 91,948 - - - -

Subtotal neither past due nor impaired 2,557,961 2,622,276 - - - -

Placements with banks in Organisation for Economic Co-operation and Development countries (OECD)

- - 57,937 149,918 - -

Placements with banks in non-OECD countries

- - 381,936 315,000 - -

Externally rated (investment-grade) available-for-sale investments

- - - - 896,977 615,167

Subtotal total 2,557,961 2,636,123 439,873 464,918 896,977 615,167

Collective impairment allowance (6,660) (6,660) - - - -

Unamortised participation and commitment

(9,333) (8,133) - - - -

Total carrying amount at 31 Dec 2,541,968 2,621,330 439,873 464,918 896,977 615,167


(US$000)


26 Financial instruments and risk management – Credit risk management (continued)

The Corporation monitors concentration of credit risk by sector and by geographic location. An analysis of concentration of risk at reporting date is shown below (also see note 32 and 33).


Placements with banks (note 1)

Available-for-salesecurities (note 3)

2010 2009 2010 2009 2010 2009concentration of credit risk by sector

Oilfield production development services

211,578 - - - 25,277 -

Floating production, storage and offloading Facilities

250,183 - - - - -

Liquefied Natural Gas (LNG) Plants - - - - 22,211 -

Petroleum and petrochemicals 495,190 1,527,664 - - 49,279 24,123

Fertilizer plants - 477,850 - - - -

Maritime transportation - 288,688 - - - -

Refineries 390,308 - - - - -

Power generation 332,602 201,479 - - - -

Other petroleum 862,107 - - - - -

Banks and financial institutions - - 439,873 464,918 - -

Governments and public sector - - - - 780,210 576,070

Other industries - 125,649 - - 20,000 14,974

carrying amount at 31 Dec 2,541,968 2,621,330 439,873 464,918 896,977 615,167


Placements with banks (note 1)

Available-for-salesecurities (note 3)

2010 2009 2010 2009 2010 2009concentration of credit risk by location

Kingdom of Saudi Arabia 941,028 955,666 - - 107,089 39,112

State of Qatar 671,025 643,970 132,497 150,000 144,878 92,517

Other Gulf Cooperation Council states

383,636 419,247 249,439 165,000 368,666 303,123

Egypt and North Africa 254,601 293,117 - - - -

Total Arab World 2,250,290 2,312,000 381,936 315,000 620,633 434,752 Western Europe 126,892 105,660 51,000 148,000 49,850 19,707

Asia Pacific Rim 6,697 - - - - -

United States 158,089 203,670 6,937 1,918 226,494 160,708

carrying amount at 31 Dec 2,541,968 2,621,330 439,873 464,918 896,977 615,167


(US$000)


26 Financial instruments and risk management (continued) Liquidity risk and funding management (continued)

functions. This is achieved by the application of prudent but flexible controls, which provide security of access to liquidity without undue exposure to increased costs from the liquidation of assets or to bid aggressively for deposits.

As part of liquidity management the Corporation also ensures availability of term financing at a competitive rates, at all times to meet long term funding requirements of the Corporation. During 2008, the Corporation also obtained, from its existing shareholders, a total line of credit amounting to US$ 1 billion. This line of credit is available to the Corporation to draw funds from its shareholders, if required. At 31 December 2010 unutilized funding from this credit line was US$ 777,724 thousand (2009: 629,562 thousand).

Daily liquidity position is monitored and regular stress testing is conducted under a variety of scenarios covering both normal and more severe market conditions. All liquidity policies are subject to review and approval by ALCO. Liquidity controls are provided for an adequately diversified deposit base in terms of maturities and the range of counter-parties. The asset and liability maturity profile based on estimated repayment terms is set out in note 29.

Contractual maturities of financial liabilities (including interest)

2010 Up to3 months

3 monthsto 1 year

1 yearto 5 years

5 yearsand over

ContractualOutflows

Carryingvalue

LiabilitiesDeposits from banks (620,806) (154,522) - - (775,328) (770,385)

Deposits from corporates (611,706) (196,371) - - (808,077) (804,261)

Deposits from shareholders (102,538) (123,141) - - (225,679) (222,276)

Securities sold underagreement to repurchase

(388,974) (20,496) - - (409,470) (408,289)

Term financing (572) (1,749) (401,258) (403,579) (399,547)

Bond (2,446) (7,472) (573,059) - (582,977) (531,018)

(1,727,042) (503,751) (974,317) - (3,205,110) (3,135,776)

Derivative instruments:Interest rate swaps (2,462) (15,144) (56,373) (17,653) (91,601) 6,443

Forward exchange contracts

(1,264,261) (283,154) - - (1,547,415) (1,244)

Off-balance sheet exposures

(53,960) (173,854) (134,874) (8,678) (371,366) (371,366)

(1,320,683) (472,122) (191,247) (24,331) (2,010,382) (379,053)


(US$000)


26 Financial instruments and risk management (continued)

2009 Up to3 months

3 monthsto 1 year

1 yearto 5 years

5 yearsand over

ContractualOutflows

Carryingvalue

LiabilitiesDeposits from banks (300,420) (78,128) - - (378,548) (930,749)

Deposits from corporates (728,957) (30,532) - - (759,489) (757,091)

Deposits from shareholders (201,154) (175,184) - - (376,338) (370,438)Securities sold under agreement to repurchase

(336,895) (51,616) - - (388,511) (385,368)

Term financing (802) (251,511) (402,656) - (654,969) (649,148)

(1,568,228) (586,971) (402,656) - (2,557,855) (3,092,794)

Derivative instrumentsInterest rate swaps (1,031) (3,150) (16,052) (1,365) (21,598) (815)

Forward exchange contracts (455,892) (99,271) - - (555,163) (2,273)

Off-balance sheet exposures (56,230) (103,324) (87,045) (110,219) (356,818) (356,818)(2,081,381) (792,716) (505,753) (111,584) (3,491,434) (358,276)

market risk managementMarket risk is the risk that changes in market factors, such as interest rate, equity prices and foreign exchange rates will affect the Corporation’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 optimizing the return on risk.

APICORP holds (but currently does not actively trade) debt and equity securities. Treasury activities are controlled by the Assets and Liabilities Committee and are also subject to a framework of Board-approved currency, industry and geographical limits and ratings by agencies including Standard & Poor’s.

Market risk management (continued)The principal risk to which non-trading portfolios are exposed is the risk of loss from fluctuations in the future cash flows or fair values of financial instrument because of a change in market interest rates, foreign exchange rates and equity prices.Interest rate risk: Syndicated and direct loans are normally denominated in United States dollars, as is the Corporation’s funding, and interest rates for both are normally linked to LIBOR. The Corporation’s exposure to interest rate fluctuations on certain financial assets and liabilities is also hedged by entering into interest rate swap agreements.Exposure to interest rate risk is restricted by permitting only a limited mismatch between the re-pricing of the main components of the Corporation’s assets and liabilities. The re-pricing profile of assets and liabilities is set out in note 30.The management of interest rate risk against interest rate gap limits is supplemented by monitoring the sensitivity of the Corporation’s financial assets and liabilities to various standard and non-standard interest rate scenarios. Standard scenarios that are considered on a periodic basis include a 100 basis point (bp) parallel fall or rise in all yield curves worldwide. An analysis of sensitivity of the Corporation’s statement of income and equity to an increase or decrease in market interest rates (assuming no asymmetrical movement in yield curves and a constant balance sheet position) is as follows:


(US$000)



100 bp parallel increase 100 bp parallel increase

Profit/loss Equity Profit/loss Equity

At 31 December 2010 6,975 (91) (1,744) 23

At 31 December 2009 4,726 (54) (4,726) 54

At reporting date the interest rate profile of Corporation’s interest bearing financial instruments was:

Fixed rate instruments 2010 2009

Financial assets 442,108 179,015 Financial liabilities (337,020) (159,986)

105,088 19,029Variable rate instruments Financial assets 3,789,122 3,689,602 Financial liabilities (3,135,776) (3,093,646)

653,346 595,956

currency risk is minimised by regular review of exposures to currencies other than United States dollars to ensure that no significant positions are taken, which may expose APICORP to undue risks. Currently there is no trading in foreign exchange. The Corporation’s net currency exposures are set out in note 31. The Corporation’s exposures in the currencies other than US $ is also hedged by entering into forward contracts. An analysis of the Corporation’s statement of income sensitivity to 5% strengthening or 5% weakening of US $ against major un-pegged foreign currencies is shown below. This analysis assumes that all other variables, in particular interest rates, remain same.

5% weakening of US $5% strengthening of US $

At 31 December 2010

(100)100EUR330(330)GBP(49)49CHF117(117)EGP(1)1KWD(3)3JPY

At 31 December 2009

164164EUR324(324)GBP(32)32CHF19(19)EGP


(US$000)



Equity prices risk is the risk that Corporations quoted equity investments will depreciate in value due to movements in the quoted equity prices. The overall authority of equity prices risk management is vested in ALCO. Periodical listed equity prices movements are reviewed by executive management and ALCO. Corporation’s exposure to listed equities is insignificant hence sensitivity to equity prices risk is not significant.

operational riskOperational risk is the risk of unexpected losses resulting from inadequate or failed internal controls or procedures, systems failures, fraud, business interruption, compliance breaches, human error, management failure or inadequate staffing.

A framework and methodology has been developed to identify and control the various operational risks. While operational risk cannot be entirely eliminated, it is managed and mitigated by ensuring that the appropriate infrastructure, controls, systems, procedures, and trained and competent people are in place throughout the Corporation. A strong internal audit function makes regular, independent appraisals of the control environment in all identified risk areas. Adequately tested contingency arrangements are also in place to support operations in the event of a range of possible disaster scenarios.

27.EffEcTivE inTErEST rATES

The weighted average effective interest rates of the Corporation’s financial instruments at the balance sheet date were:

2010 2009Interest-bearing financial assetsFixed-rate bonds ( Gross) 4.89% 5.17%Floating-rate bonds 0.92% 0.82%Structured notes - 0.15%Placements placed with banks 2.71% 0.88%Syndicated and direct loans 1.33% 1.30%

US dollar denominated 1.33% 1.28%Non-dollar – mainly denominated in euros 1.32% 1.62%

Interest-bearing financial liabilitiesDeposits from banks 1.27% 1.50%

US dollar denominated 1.45% 1.57%Non-dollar – Euros, Swiss francs and Saudi riyals 1.04% 1.34%

Deposits from corporates 1.31% 1.30%Deposits from shareholders 2.21% 2.20%Securities sold under agreement to repurchase 0.86% 1.00%Term financing 0.57% 0.58%Bonds 1.83% -

US$ LIBOR AT 31 December was:One-month 0.26% 0.23%Three-month 0.30% 0.25%Six-month 0.46% 0.42%


(US$000)


28. fAir vAlUE hiErArchy AnD cATEgoriES

ValuationoffinancialinstrumentsThe Corporation measures fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements:

Level 1: quoted prices (unadjusted) in active markets for identical assets and liabilities

Level 2: Valuation techniques based on observable inputs, either directly (i.e. as prices) or indirectly (i.e. as derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data.

Level 3: Valuation techniques using significant unobservable inputs. This category includes all instruments where the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted market prices for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instruments.

The table below analyses financial instruments, measured at fair value as at the end of the year, by level in the fair value hierarchy into which the fair value measurement is categorized:

2010 level 1 level 2 level 3 Total

Trading securities 61 - - 61Available-for-sale securities

Fixed-rate bonds 442,108 - - 442,108Floating-rate bonds 279,014 - - 279,014U.S treasury bills 150,000 - - 150,000Structured notes 25,855 - - 25,855Managed funds 2,822 - - 2,822Listed equities 3,493 - - 3,493

Available-for-sale direct equity 112,552 - - 112,552Derivative financial assets - 3,629 - 3,629

1,015,905 3,629 - 1,019,534Derivative financial liabilities - (11,316) - (11,316)


(US$000)


28 Fair value information (continued)

The table below set outs the allocation of financial assets and liabilities into various IAS 39 categories and the carrying amounts and fair values of the financial assets and liabilities (excluding interest).

2010

fair value through profitor

loss

loans & receivables

AfS investments

others at amotised

cost

carryingamount

fairvalues

Cash and bank balances - 15,392 - - 15,392 15,392Placements with banks 439,873 - - 439,873 439,873Trading securities 61 - - 61 61Available for sale securities 903,292 903,292 903,292Available-for-sale direct equity** - - 365,634 - 365,634 365,634Syndicated and direct loans (Fair value - based on discounted cash flows at current market prices)

- - - 2,541,968 2,541,968 2,573,225

Other assets 3,629 649 - 4,278 4,278

Total assets 3,629 455,914 1,268,926 2,541,968 4,270,498 4,301,755

Deposits from banks - - - 770,385 770,385 770,385Deposits from corporates - - - 804,261 804,261 804,261Deposits from shareholders - - - 222,276 222,276 222,276Securities sold under agreement to repurchase

- - - 408,289 408,289 408,289

Other liabilities 11,316 - - 978 12,294 12.294Term financing (Fair value - based on current market rates for similar remaining maturity)

- - - 399,547 399,547 398,074

Bonds (Fair value - based on current market rates for similar remaining maturity)

- - - 531,018 531,018 529,378

Total liabilities 11,316 - - 3,136,754 3,148,070 3,144,957

** Unquoted available-for-sale direct equity investments are carried at cost in the absence of reliably measure of fair value. The fair value of these investments cannot be reliably measured due to lack of information from the investee companies, which is primarily due to lack of influence of the Corporation on the investee companies.


(US$000)


28 Fair value information (continued)

2009

fair value through profitor

loss

loans & receivables

AfS investments

others at amotised

cost

carryingamount

fairvalues

Cash and bank balances - 28,860 - - 28,860 28,860Placements with banks - 464,918 - - 464,918 464,918Trading securities 63 - - - 63 63Available for sale securities - - 622,383 - 622,383 622,383Available-for-sale direct equity** - - 338,854 - 338,854 338,854

Syndicated and direct loans (Fair value - based on discounted cash flows at current market prices)

- 2,621,330 - - 2,621,330 2,652,766

Other assets 2,256 711 - - 2,967 2,967

Total assets 2,319 3,115,819 961,237 - 4,079,375 4,110,811

Deposits from banks - - - 930,749 930,749 930,749Deposits from corporates - - - 757,091 757,091 757,091Deposits from shareholders - - - 370,438 370,438 370,438

Securities sold under agreement to repurchase

- - - 385,368 385,368 385,368

Term financing (Fair value - based on current market rates for similar remaining maturity)

- - - 649,148 649,148 647,177

Other liabilities 3,714 - - 814 4,528 4,528

Total liabilities 3,714 - - 3,093,608 3,097,322 3,095,351

** Unquoted available-for-sale direct equity investments are carried at cost in the absence of reliably measure of fair value. The fair value of these investments cannot be reliably measured due to lack of information from the investee companies, which is primarily due to lack of influence of the Corporation on the investee companies.


(US$000)


29. mATUriTy profilE of ASSETS AnD liABiliTiES

The maturity profile of the Corporation’s assets and liabilities, based on management’s estimate of its realizations, is set out below. The apparent significant short-term mismatch between maturities of assets and liabilities is substantially reduced in practice because the majority of deposits from banks are routinely rolled over on maturity.

2010 Up to3 months

3 monthsto 1 year

1 year to 5 years

5 years and over Total

ASSETSCash and cash equivalents 15,392 - - - 15,392Deposits with banks 390,118 49,755 - - 439,873Trading securities 61 - - - 61Available-for-sale securities 152,970 104,808 460,303 185,211 903,292Available-for-sale direct equity investments

- - - 365,634 365,634Syndicated and direct loans 37,152 400,042 1,222,311 882,463 2,541,968Property and equipment - - - 29,263 29,263Other assets 8,979 4,602 - 2,559 16,140

Total assets 604,672 559,207 1,682,614 1,465,130 4,311,623

LIABILITIES AND EQUITYDeposits from banks (618,751) (151,634) - - (770,385)Deposits from corporate (609,218) (195,043) - - (804,261)Deposits from shareholders (102,276) (120,000) - - (222,276)Securities sold under agreement to repurchase

(387,884) (20,405) - - (408,289)

Other liabilities (15,386) (3,408) (2,000) (14,075) (34,869)Term financing 81 248 (399,876) - (399,547)Bond 118 362 (531,498) - (531,018)Equity - - - (1,140,978) (1,140,978)

Total liabilities and equity (1,733,316) (489,880) (933,374) (1,155,053) (4,311,623)

Maturity gap (1,128,316) 69,327 749,240 310,077 -

Cumulative maturity gap (1,128,316) (1,059,317) (310,077) - -

2009Total assets 720,253 35,393 876,297 2,487,157 4,119,100Total liabilities and equity (2,027,114) (681,912) (402,744) (1,007,330) (4,119,100)

Maturity gap (1,306,861) (646,519) 473,553 1,479,827 -

Cumulative maturity gap (1,306,861) (1,953,380) (1,479,827) - -


(US$000)


30. rEpricing profilE of finAnciAl ASSETS AnD liABiliTiES

The repricing profile of the Corporation’s interest bearing financial assets and liabilities at 31 December was as follows:

2010 Up to3 months

3 monthsto 1 year

1 year to 5 years


ASSETSPlacements with banks 439,873 - - - 439,873Available for sale securities Floating-rate bonds 279,014 - - - 279,014Syndicated and direct loans US$ denominated 1,594,138 865,740 - - 2,459,878 Non US$ denominated 70,566 27,517 - - 98,083

LIABILITIESDeposits from banks US$ denominated (215,300) (15,300) - - (230,600) Non US$ denominated (403,452) (136,333) - - (539,785)Deposits from corporate (609,218) (195,043) - - (804,261)Deposits from shareholders (102,276) (120,000) - - (222,276)Securities sold under agreement to repurchase

(387,884) (20,405) - - (408,289)Term financing (400,000) - - - (400,000)Bonds (533,333) - - - (533,333)

interest rate sensitivity gap (267,872) 406,176 - - 138,304

cumulative gap (267,872) 138,304 138,304 138,304 -

2009 Up to3 months

3 monthsto 1 year

1 year to 5 years


ASSETSPlacements with banks 464,918 - - - 464,918Available for sale securities Fixed-rate bonds - - - - - Floating-rate bonds 281,338 - - - 281,338 Structured notes 9,566 - - - 9,566Syndicated and direct loans US$ denominated 2,401,339 181,140 - - 2,582,479 Non US$ denominated 123,602 - - - 123,602

LIABILITIESDeposits from banks US$ denominated (335,810) (50,000) - - (385,810) Non US$ denominated (418,939) (126,000) - - (544,939)Deposits from corporate (726,994) (30,097) - - (757,091)Deposits from shareholders (200,438) (170,000) - - (370,438)Securities sold under agreement to repurchase

(333,971) (51,397) - - (385,368)

Term financing (650,000) - - - (650,000)

Interest rate sensitivity gap 614,611 (246,354) - - 368,257

Cumulative Gap 614,611 368,257 368,257 368,257 -


(US$000)


31. cUrrEncy EXpoSUrES

The Corporation’s currency exposures at 31 December were as follows:

AssetsLiabilitiesand equity

2010 2009Net

ExposureNet

Exposure

ASSETS, LIABILITIES AND EQUITYUnited States dollar 3,452,772 (3,014,278) 438,494 (59,096)Euro 128,468 (126,472) 1,996 3,272

Other OECD currencies (see below) 29,432 (35,006) (5,574) (5,788)Arab currencies

GCC (see below) 700,936 (1,133,517) (432,581) 61,588Egypt and North Africa 15 (2,350) (2,335) 24

4,311,623 (4,311,623) - -

2010 2009COMMITMENTS AND GURANTEES

United States dollar 358,545 332,463Euro 12,821 24,355

371,366 356,818

other oEcD currenciesThe other member countries of the Organisation for Economic Co-operation and Development, excluding the United States and the twelve European Monetary Union countries are: Australia, Canada, Czech Republic, Denmark, Hungary, Iceland, Japan, Mexico, New Zealand, Norway, Poland, South Korea, Sweden, Switzerland, Turkey and the United Kingdom.

gccThe member states of the Gulf Co-operation Council are: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. Their currencies except for Kuwait are pegged against the United States dollar.

SignificantexchangeratesThe following year-end rates have been used in translating other currencies to United States dollars:

2010 2009

Euro EUR 1=US$ 1.3387 1.4327Saudi riyal SAR 1=US$ 0.2666 0.2666Swiss franc CHF 1=US$ 1.0700 1.0390British pound GBP 1=US$ 1.5612 1.5888Egyptian pound EGP 1=US$ 0.1723 0.1822

Since the Corporation’s net foreign currency exposures to currencies other then US dollar and GCC currencies is not significant, the sensitivity of fluctuation in the currencies will not be significant.


(US$000)


32. inDUSTry DiSTriBUTion of ASSETS AnD liABiliTiES

The industry distribution of the Corporation’s assets and liabilities was as follows:

2010 2009ASSETSPetroleum and petrochemicals

Refineries 390,308 341,563Oilfield production development and services 266,427 282,662Floating production, storage and offloading facilities 253,006 326,727Liquefied natural gas (LNG) plants 39,624 17,150Petrochemical plants 889,471 812,077Maritime transportation 1,767 1,638Power generation 333,353 319,804Other petroleum 876,830 965,467

Total petroleum and petrochemicals 3,050,786 3,067,088

Banks and financial institutions 455,850 471,424Other industries 20,714 3,475Governments and public sector institutions 784,273 577,113

Total assets at 31 December 4,311,623 4,119,100

LIABILITIES AND EQUITYBanks and financial institutions 2,351,798 2,800,174Other petroleum and petrochemicals 285,083 317,291Government and public sector institutions 532,764 -Shareholders 1,140,978 1,001,635

Total liabilities and equity at 31 December 4,311,623 4,119,100

COMMITMENTS AND GUARANTEESPetroleum and petrochemicals

Refineries 38,022 -Oilfield production development and services 71,183 50,642Petrochemicals plants 42,787 76,751Maritime transportation 36,500 75,000Power generation 2,592 17,044Other petroleum 180,282 137,381

Total commitments and guarantees at 31 December 371,366 356,818


(US$000)


33. gEogrAphicAl DiSTriBUTion of riSK

The geographical distribution of risk of the Corporation’s assets and liabilities, after taking into account insurance and third-party guarantees, was as follows:

2010 2009ASSETSKingdom of Saudi Arabia 1,351,482 1,305,237State of Qatar 951,754 888,881Other Gulf Cooperation Council states 1,015,600 911,290Other Middle East states 5,122 5,254Egypt and North Africa 357,450 395,806

Total Arab World 3,681,408 3,506,468

Western Europe 222,907 287,025Asia Pacific Rim 6,753 48United States 381,259 325,559Other North and South America 19,296

Total assets 4,311,623 4,119,100

LIABILITIES AND EQUITYKingdom of Saudi Arabia 1,685,610 1,269,075State of Qatar 244,177 358,841Other Gulf Cooperation Council states 1,230,070 1,031,158Other Middle East states 184,398 182,594Egypt and North Africa 353,569 324,100

Total Arab World 3,697,824 3,165,768

Western Europe 603,799 880,275Asia Pacific Rim 10,000 26,000United States - 47,057

Total liabilities and equity 4,311,623 4,119,100

COMMITMENTS AND GUARANTEESKingdom of Saudi Arabia 102,873 101,806State of Qatar 15,925 63,151Other Gulf Cooperation Council states 118,197 83,619Egypt and North Africa 68,337 63,887

305,332 312,463Total Arab WorldWestern Europe 32,851 44,355Asia Pacific Rim 33,183 -

371,366 356,818

34. corrESponDing figUrESThe corresponding figures for the year 2009 have been regrouped in order to conform to the presentation for current year. Such reclassifications do not affect previously reported profit or equity.


Documents

in an everchanging marketplace - APICapic.com/files/AR-2010/Annual_Report_2010_English.pdf · 2018-11-19 · Iraq 10% Arab Petroleum Investments Corporation (APICORP) is an inter