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Diversifying investments....leveraging growth opportunities

ARAB PETROLEUM INVESTMENTS CORPORATION

AnnualReport2013

التقريـرالسـنوي

2013

CORPORATE OVERVIEW 02FINANCIAL SUMMARY & BUSINESS HIGHLIGHTS 04 BOARD OF DIRECTORS 06 EXECUTIVE MANAGEMENT 08CHAIRMAN’S STATEMENT 10CHIEF EXECUTIVE AND GENERAL MANAGER’S REPORT 14BUSINESS REVIEW 18ECONOMIC RESEARCH AND POLICY ANALYSIS 26CORPORATE SOCIAL RESPONSIBILITY 27CORPORATE GOVERNANCE & RISK MANAGEMENT REVIEW 28APICORP’S REVIEW OF MENA ENERGY INVESTMENT 34CONSOLIDATED FINANCIAL STATEMENTS 46

CONTENTS

ARAB PETROLEUM INVESTMENTS CORPORATION

HEAD OFFICE

PO Box 9599Dammam 31423Kingdom of Saudi Arabia

Tel: (+966) 13 847 0444Fax: (+966) 13 847 0011 / 0022Telex: 870068 APIC SJ

BAHRAIN BANKING BRANCH

Almoayyed Tower, 26th FloorRoad 2832, Block 428Seef DistrictPO Box 18616ManamaKingdom of Bahrain

Tel: (+973) 17 563 777Fax: (+973) 17 581 337

Website: www.apicorp-arabia.comEmail: [email protected]

AN ENDURING CONTRIBUTIONSince its establishment, APICORP has made a significant contribution to the region’s energy industry. It has invested, as an equity owner, around US$ 0.5 billion in 22 oil and gas joint-venture projects worth over US$ 16 billion; and has contributed US$ 10.5 billion towards direct and syndicated energy finance transactions valued in excess of US$ 130 billion.

22 projectsTotal number of oil and gas JV projects in which APICORP has invested as an equity owner

US$ 16 billionTotal value of projects

US$ 0.5 billionAPICORP’s contribution

US$ 130 billionTotal value of direct and syndicated energy finance transactions

US$ 10.5 billionAPICORP’s contribution

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Annual Report 2013 CORPORATE OVERVIEW

MISSIONAPICORP’s mission is to contribute to the development and the transformation of the Arab hydrocarbon and energy industries through equity and debt financing, advisory and research.

We will measure our success by our ability to:• Be the partner of choice of oil and gas and

energy-related companies, both public and private;

• Be recognised as a world-class professional institution and the leading source of research on the Arab hydrocarbon and energy industries.

We will achieve our vision by:• Profitably complementing the offering of

private sector financial institutions;• Attracting and retaining the best professionals

in the industry;• Pioneering solutions for our clients;• Maintaining a portfolio of activities weathering

the cyclicality of the industry;• Nurturing a performance culture throughout

the Company.

Arab Petroleum Investments Corporation (APICORP) is a multilateral development bank established on 23 November 1975 under the terms of an agreement signed by the ten Member States of the Organization of Arab Petroleum Exporting Countries (OAPEC).

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SHAREHOLDERS

17% UAE 3% Bahrain 5% Algeria 17% Saudi Arabia 3% Syria 10% Iraq 10% Qatar 17% Kuwait 15% Libya 3% Egypt

APICORP is wholly owned by the member states of the Organisation of Arab Petroleum Exporting Countries (OAPEC)

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Annual Report 2013 FINANCIAL SUMMARY AND BUSINESS HIGHLIGHTS

TAQAAcquired new 6% stake in Industrialization and Energy Services Company (TAQA).

EMethanexIncreased existing stake by 10% in Egyptian Methanex Methanol Company (EMethanex).

APICORP Petroleum Shipping Fund Acquired five medium-range petroleum vessels, which have been chartered for a five-year period.

ASRYSecured financial advisory mandate from the Arab Shipbuilding & Repair Yard (ASRY).

BUSINESS HIGHLIGHTS

Total Assets 2013 US$ Miliion

5,67

5

13

5,07

8

12

4,63

0

11

4,31

2

10

4,11

9

09

1,80

6

1,30

9

1,21

9

1,14

1

1,00

2

Shareholders’ Equity 2013 US$ Miliion

13 12 11 10 0911

2.06

108.

89

105.

35

95.2

0

58.5

4

Net Income 2013 US$ Miliion

13 12 11 10 09

During the year, APICORP maintained its track record of sustainable financial performance. The financial results of 2013 mark five consecutive years of profitable growth since 2009.

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+92%Net Income 2009 to 2013

Trade Finance InsuranceSigned two new agreements for insurance cover for letters of credit with ICIEC and DHAMAN.

Moody’s RatingAPICORP’s foreign currency issuer rating of Aa3 for long-term debt and Prime-1 for short-term debt, with a stable outlook, was re-affirmed in 2013.

International ForumSuccessfully hosted the 2nd Annual APICORP Energy Symposium, which was held in Kuwait.

New StrategyBoard of Directors approved APICORP’s new 5-year growth strategy for 2014-2018.

+80%+38%Total Assets 2009 to 2013

Shareholders’ Equity 2009 to 2013

Aa3Moody’sSeptember 2013

COMPOUND ANNUAL GROWTH RATE

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Annual Report 2013

For the State of KuwaitShaikh Talal Naser A. Al-Sabah(Chairman, Audit & Compensation Committee)

BOARD OF DIRECTORS

For the Kingdom of Saudi ArabiaDr. Aabed Bin Abdulla Al-SaddounChairman of the Board

For LibyaMr. Khaled Amr Al-GunselDeputy Chairman of the Board

The Board of Directors is composed of 10 members representing the 10 members states. The membership of the Board of Directors shall be by nomination of each member state.

For the United Arab EmiratesDr. Matar Hamed AL- Neyadi(Deputy Chairman, Audit & Compensation Committee)

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For the Kingdom of BahrainMr. Mahmood Hashim Al-Kooheji

For the Democratic and Popular Republic of AlgeriaMr. Farid Baka(Member, Audit & Compensation Committee)

For the Syrian Arab RepublicH.E. Eng. Suleiman Al-Abbas

For the State of QatarMr. Mohamed Khalid Al-Ghanem(Member, Audit & Compensation Committee)

For the Republic of IraqMr. Hilal Ali Ismail

For the Arab Republic of EgyptEngineer Sherin Ahmed Mohamed

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Annual Report 2013 EXECUTIVE MANAGEMENT

Ahmad Bin Hamad Al-Nuaimi Chief Executive and General Manager

Dr. Raed Al-Rayes Deputy Chief Executive & General Manager

Nicolas Thévenot Executive Vice President, Project &Trade Finance Department

Anthony Bridgens Senior Vice President, Projects Department

Hesham Farid Executive Vice President, Treasury & Capital Markets Department

Ayman Zeyada Head, Financial Control Department

Ali Hassan Fadel General Counsel & BOD Secretary

Suresh Mergu Senior Vice President, Risk Management Department

Mohammed H. Al Mubarak Head, Operations Department

Mohamed El Khouly Head, Information Systems Department

G. Richard Sherlock Head, Business Solutions Unit

Sami Al Sunaid Head, Administration & Human Resources Department

Richard Burnell Manager, APICORP Bahrain Banking Branch

Ali Aissaoui Senior Economics Advisor

Talal Khalil Senior Technical Advisor

Dr. Abdulaziz S. Alidi Business Development Consultant to CE&GM

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Annual Report 2013 CHAIRMAN’S STATEMENT

On behalf of the Board of Directors, it is my privilege to present the 38th annual report and consolidated financial statements of the Arab Petroleum Investments Corporation (APICORP) for the year ended 31 December 2013.

Dr. Aabed Bin Abdulla Al-Saddoun Chairman of the Board

The IMF forecasts the global economy to grow to 3.7% in 2014, with real GDP for the MENA region predicted to increase to 3.3%.

We expect MENA energy capital investment to increase to US $765 billion over the five-year period 2014 to 2018.

1

2

Global Economic Growth2014 forecast

3.7%MENA Real GDP Growth2014 forecast

3.3%MENA Energy Capital Investment2014-2018 forecast

US$ 765bn

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APICORP posted record financial results for 2013, with net income increasing to a new high of US$ 112.06 million from US$ 108.89 million in 2012. As at 31 December 2013, total assets had grown by 11.8% to US$ 5.67 billion; while total shareholders’ equity stood at US$ 1.81 billion, a 38% increase from the end of 2012. This increase was due to successfully securing new investments, plus the revaluation of certain of the Corporation’s unlisted direct equity investments to a fair market value, which resulted in the portfolio’s book value increasing from US$ 318 million to US$ 823 million.

These financial results reflect another year of successful business performance across all our core activities. Additionally, in September 2013, Moody’s re-affirmed the Corporation’s foreign currency issuer rating of Aa3 for long-term debt, and Prime-1 for short-term debt, with a stable outlook. The agency stated that the ratings reflect APICORP’s strong capital adequacy position, its high-quality asset portfolio, and its strong shareholder support.

The Board of Directors recommends no dividend to be paid for the year 2013. In accordance with the Corporation’s statutes, 10% of the profit for the year has been transferred to the statutory reserve. The remaining profit will be transferred to retained earnings to support future business growth, subject to approval by the shareholders at the General Assembly.

During 2013, we further enhanced APICORP’s corporate governance and risk management frameworks, and continued to uphold our commitment to corporate social responsibility. The Corporation also enhanced its thought leadership profile with the successful hosting of the second annual APICORP Energy Symposium, and the continued dissemination of its highly regarded economic research and policy-oriented analysis.

In the aftermath of the 2008 global financial crisis, our current five-year strategy has served the Corporation well. However, we are now operating in a new economic and business environment, and face a new set of challenges, especially in the MENA region. Accordingly, the Board of Directors has approved a new five-year strategy. The overarching objectives of the new strategy are to gradually develop an energy private equity and project development business; maintain a significant direct equity investment portfolio with active portfolio management; and continue to grow and strengthen the project and trade finance business. This will enable us to significantly optimize shareholder value and develop new future business opportunities, while maintaining a prudent balance between growth and risk.

Looking ahead, the Board of Directors is optimistic about the new growth opportunities for APICORP. In its most recent five-year forecast, which spans the period of our new strategy, the IMF predicts the global economy to grow from 3.7% in 2014 to 4.7% in 2018, and the MENA region’s real GDP to improve from 3.3% in 2014 to 4.6% in 2018. Notwithstanding a slow global recovery, uncertain markets and continuing regional turmoil, we expect MENA energy capital investment to rise moderately from US$ 740 billion to $765 billion for the same five-year period.

In conclusion, I would like to extend the Board’s sincere appreciation to the Governments of the Member States for their enduring loyalty and support. With great honor, I also express my gratitude to the Government of the Custodian of the Two Holy Mosques, the Kingdom of Saudi Arabia, for the special care it continues to bestow upon the Corporation.

Dr. Aabed A. Al-SaadounChairman of the Board of Directors

Annual Report 2013

Diversifying investments in new oil, gas and utility sectors

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In 2013, APICORP acquired a 5.86% stake in the Saudi-based Industrialization & Energy Services Company (TAQA), a holding company with seven subsidiaries and affiliates engaged in diverse activities including drilling, geophysical surveying, specialized oil field services, offshore platform fabrication, seamless pipe manufacturing, and industrial gas production. The Company has a particular focus on the oil and gas, petrochemicals, electricity, water, and metals, mining and minerals sectors. This acquisition illustrates the Corporation’s strategic objective to broaden its investment activities to cover new oil, gas and utility sectors that will boost the region’s midstream and downstream capabilities.

Paid-up capital

SAR 2bn Owned by Saudi Government

45%

APICORP share

5.86% Subsidiaries and affiliates

7

Core strategic sectors

5

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Annual Report 2013 CHIEF EXECUTIVE AND GENERAL MANAGER’S REPORT

I am pleased to report that our initiatives to capture new business opportunities, strengthen our core capabilities, and plan the next phase of the Corporation’s strategic growth, were successfully implemented during 2013.

Ahmad Bin Hamad Al-Nuaimi Chief Executive and General Manager

APICORP posted record financial results for 2013, with net income increasing to a new high of US$ 112.06 million.

Total assets grew to US$ 5.67 billion, while total shareholders’ equity rose to US$ 1.81 billion.

1

2Net Income 2013US$ millions

112.06

Total Equity 2013US$ billion

1.81Total Assets 2013US$ billion

5.67

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Economic backgroundThe global economy, whose underlying dynamics are still adjusting, strengthened during 2013. The IMF has revised favorably its forecast for global economic growth from 3.0% in 2013 to 3.7% in 2014. This revision spells the end of the steady decline experienced by the world economy since 2010. The major factors behind this stronger growth include lesser drag from fiscal consolidation, gradual recovery of the financial system, and increased investor confidence.In contrast, 2013 was another troubled period for much of the MENA region. Since the onset of the Arab uprisings three years ago, several countries have been in turmoil, and as a result, the outlook for the region as a whole has been clouded with numerous concerns. The region’s real GDP is expected to increase from 2.4% in 2013 to 3.3% in 2014. However, the future outlook for the MENA region depends on the extent to which social unrest and political uncertainties recede, and on governments pursuing and achieving more inclusive socio-economic reform agenda.

Sustainable profitabilityDespite this testing backdrop, APICORP maintained its track record of sustainable financial performance. The financial results of 2013 mark five consecutive years of profitable growth since 2009. During this period, net income has almost doubled from US$ 58.5 million to US$ 112.06 million and total assets have increased by 38% from US$ 4.1 billion to US$ 5.6 billion. Shareholders’ equity has grown by 80% from US$ 1.0 billion to US$ 1.8 billion, due to both organic growth and revaluation of certain unlisted direct equity investments to a fair market value.

Investment diversificationAs part of its strategy, the Corporation seeks to broaden its investment and financing activities to cover new oil, gas and utility sectors; and to support projects that will boost the region’s midstream and downstream capabilities, which are crucial for Arab countries to maximize economic benefits from energy resources. In 2013, APICORP acquired a 6% stake in the Saudi-based Industrialization & Energy Services Company (TAQA), which is a diversified holding company with interests in drilling, geophysical surveying, specialized oil field services, offshore platform fabrication, seamless pipe manufacturing, and industrial gas production.

The Corporation also increased its holding from 7% to 17% in the Egyptian Methanex Methanol Company (EMethanex), which is the Egyptian joint-venture operation of Methanex Corporation, the global leader in the supply, distribution and marketing of methanol. Located in Damietta, Egypt, the state-of-the-art EMethanex facility is among the most energy-efficient methanol plants in the world. With a design capacity of 1.3 million tonnes per year, the plant supplies both local and international methanol markets. Also during 2013, the capital of the APICORP Petroleum Shipping Fund was fully invested with the acquisition of five medium- range petroleum vessels, which have been chartered for a five-year period. Dividend income generated by the direct equity investment portfolio was US$ 73.37 million in 2013.

Since its establishment, APICORP has made a significant contribution to the region’s energy industry. It has invested, as an equity owner, around US$ 0.5 billion in 22 oil and gas joint-venture projects worth over US$ 16 billion; and has contributed US$ 10.5 billion towards direct and syndicated energy finance transactions valued in excess of US$ 130 billion.

Business growthThe Corporation’s project and trade finance business posted another strong performance in 2013, with net total income growing to an historical high of US$ 66.7 million, and net loan assets increasing to US$ 2.92 billion. As a result of the agreement signed with JP Morgan in 2012, APICORP now offers a complete suite of trade finance products and services, comprising letters of credit (LCs) and letters of guarantee, and the handling of export LCs, including advising, negotiation and confirmation. Also during the year, the Corporation introduced residual value guarantees in relation to the APICORP Petroleum Shipping Fund.

During 2013, total income from the APICORP’s treasury and capital markets business increased to US$ 37.9 million; while at the end of the year, total assets stood at US$ 1.75 billion. The total market value of investments in the fixed income securities portfolio at the end of 2013 increased to US$ 1.15 billion, and continued to be focused on strong credits with an average portfolio rating of ‘A’. The Corporation’s liquidity position remained healthy, with liquid assets sufficient to cover a period of 12 months as of 31 December, 2013, while its capital adequacy ratio at the end of the year was a strong 28.7%, considerably higher than Basel III final requirements of 13%.

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Annual Report 2013 CHIEF EXECUTIVE AND GENERAL MANAGER’S REPORT continued

Leading the debateAs part of its mission, APICORP aspires to be recognized as the leading source of research on the Arab hydrocarbon and energy industries. The timely and broad dissemination of the Corporation’s research findings through its monthly Economic Commentary has confidently added value to the region’s economic and energy policy debate; while the annual Review of Energy Investments in the Arab/MENA world has established itself as a trusted source of analysis and insight in the field. Repetition of the review year-on-year has made trend studies possible, thus offering a useful tool for policy analysis. In addition, the second annual APICORP Energy Symposium provided a forum for international speakers and delegates from the regional and global energy industry to debate emerging trends and the outlook for MENA energy markets.

The way forwardFollowing Board approval of APICORP’s new five-year strategy, a Strategy Implementation Program Management Office (PMO) is to be established. The PMO will provide coordination and support to the Board of Directors, Management and cross-functional implementation teams in facilitating the smooth and effective introduction of the strategy, which will guide APICORP’s growth and development through to 2018. In addition, plans are being developed to ensure the alignment of the Corporation’s governance model with the objectives of the new strategy.

AcknowledgmentsI would like to take this opportunity to thank the outgoing Deputy General Manager, Mr. Nabeel Ali Al-Adansi, for his invaluable contribution during the term of his office, and wish him well in his future endeavors. In turn, I welcome Dr. Raed Al-Rayes as the new Deputy Chief Executive and General Manager. Bringing with him extensive experience in investment and commercial banking, Dr. Al-Rayes will be closely involved in the implementation of APICORP’s new five-year strategy.

Finally, I express my sincere appreciation to the Board of Directors for their guidance and encouragement; to our clients and business partners for their loyalty and cooperation; and to the management team and staff for their commitment and professionalism, and their contribution to yet another successful year for APICORP.

Ahmad bin Hamad Al-NuaimiChief Executive & General Manager

APICORP STRATEGY 2014 – 2018

The overarching objectives of APICORP’s new five-year strategy are to gradually develop an energy private equity and project development business; maintain a significant direct equity investment portfolio with active portfolio management; and continue to grow and strengthen the project and trade finance business. This will enable the Corporation to significantly optimize shareholder value and develop new future business opportunities, while maintaining a prudent balance between growth and risk.

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Annual Report 2013 BUSINESS REVIEWDIRECT EQUITY INVESTMENTS

DIRECT EQUITY INVESTMENTS

Despite market conditions continuing to be challenging in 2013, with many MENA countries still in recovery mode, APICORP was successful in growing its portfolio of available-for-sale direct equity investments (see table). The diversified portfolio comprises seven petrochemical companies, three oil and gas service companies, one gas products company, and one petroleum products storage company, which are located in five Arab countries.

The Corporation acquired a 5.86% stake in the Saudi-based Industrialization & Energy Services Company (TAQA), a holding company with subsidiaries and affiliates engaged in drilling, geophysical surveying, specialized oil field services, offshore platform fabrication, seamless pipe manufacturing, and industrial gas production. APICORP also increased its holding in the Egyptian Methanex Methanol Company (EMethanex) from 7% to 17%. EMethanex is a major producer of methanol, with a nameplate capacity of 1.3 million tons per year.

In addition, the APICORP Petroleum Shipping Fund, which was launched in 2012, was fully invested during the first quarter of 2013; and produced revenue flows and paid dividends during the course of the year, in line with the Fund’s business model. The objective of this first-of-its-kind US$ 150 million Sharia-compliant fund, which is co-managed by Tufton Oceanic, is to leverage growth opportunities in the petroleum tanker charter market. The fund is aimed at helping oil and gas companies grow their business while also generating regular yield and returns for the equity investors. In this scenario, the fund helps companies meet their requirements for petroleum products transportation without burdening their balance sheets.

In 2013, APICORP revalued certain investments (including Ibn Zhar and EMethanex) using internationally-accepted industry valuation models. Accordingly, the total book value increased to US$ 823 million from US$ 318. Dividend income generated by the direct equity investment portfolio was US$ 73.37 million in 2013 compared with US$ 74.47 million the previous year.

US$ 73.37 millionDividend income generated by the direct equity investment portfolio in 2013

Direct Equity Portfolio by Company Category

PetrochemicalsOil and gas servicesGas productsPetroleum products storage

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BUSINESS REVIEW DIRECT EQUITY INVESTMENTS continued

SUMMARY OF APICORP’S DIRECT EQUITY INVESTMENTS AS AT 31 DECEMBER 2013:

Company Paid-upCapital

APICORPShare

Other Major Shareholders Main Activities/ Overview of 2013 Operations

Arab Drilling and Workover Company (ADWOC), Libyawww.adwoc.com

LD 60million

20% • Arab Petroleum Services Co. (APSCO), Libya

• First Energy Bank (FEB), Bahrain

Main Activities: Drilling and related operations in the Arab world. Owns a fleet of 10 drilling and 7 work over rigs.

Overview of 2013 operations:Company is recovering rapidly post the Libyan crisis. Most of the rigs came back in operation and operated with a high utilization rate.

Arab Company for Detergent Chemicals (ARADET), Iraqwww.aradetco.com

ID 36million

32% • Government of the Republic of Iraq

• Government of the Kingdom of Saudi Arabia

• Government of the State of Kuwait

• Arab Mining Company, Amman, Jordan

• The Arab Investment Co., Saudi Arabia

Main Activities: Production and marketing of linear alkyl benzene (LAB) and byproducts. Current effective capacity: 42,000 tons of LAB (and 2,000 tons of Toluene)

Overview of 2013 operations:Due to the crisis in Syria - the major market of LAB for ARADET - the company focused on marketing of the intermediary products (BTX) in the local market.

Tankage Mediterranee (TANKMED), Tunisiawww.tankmed.com

TD 30 million

20% • Tunisian Petro Enterprise (ETAP) • National Oil Dist. Co. (SNDP)• Bank of Tunisia/Saudi (Stusid) • Bank of Tunisia/Kuwait (BTKD)

Main Activities: Storage and handling of petroleum products at La Skhira terminal. Total capacity: 535,000 CBM

Overview of 2013 operations:The expansion project was completed. During 2013, operations remained normal.

Arab Geophysical Exploration Services Company (AGESCO), Libyawww.agesco-ly.com

LD 35million

16.67% • Arab Petroleum Services Co. (APSC), Libya

• National Oil Company (NOC), Libya

Main Activities: Providing seismic services for the oil and gas industry in the Arab world, mainly Libya. Company owns two fully equipped 3-D seismic crews.

Overview of 2013 operations:Company returning to profitability post Libyan crisis. Its crews operated at high utilization levels during 2013.

Saudi European Petrochemical Company (IBN ZAHR), Saudi Arabiawww.sabic.com

SR 1,025 million

10% • Saudi Basic Industries Corp. (SABIC), Saudi Arabia

• Ecofuel, Italy

Main Activities: Production and marketing of MTBE and PolyPropylene (PP). Current capacity: MTBE - 1.3 million tons; PP- 1.14 million tons.

Overview of 2013 operations:IBN Zahr achieved record production of PP during 2013. The overall capacity utilization also remained very high.

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Annual Report 2013 BUSINESS REVIEW DIRECT EQUITY INVESTMENTS continued


APICORPShare


The Arabian Industrial Fibers Company (IBN RUSHD), Saudi Arabiawww.sabic.com

SR 8,510 million

3.45% • Saudi Basic Industries Corp. (SABIC), Saudi Arabia

• Public Investments Fund, Saudi Arabia

• Other institutions

Main Activities: Production and marketing of aromatics, PTA and polyester fibers. Current capacity: PET - 330,000 tons; PTA - 350,000 tons

Overview of 2013 operations:Ibn Rushd is working on a major expansion project to double the PTA capacity and add another 400,000 tons of PET resin capacity.

Alexandria Fiber Company(AFCO), Egyptwww.adityabirla.com

US$ 48.3 million

10% • Birla Group Companies • Sidi Kerir Petrochemical • Saudi Egyptian Industrial

Investment Company

Main Activities: Production and marketing of acrylic fibers. Current capacity 36,000 tons

Overview of 2013 operations:No improvement in performance and continued losses due to weak business model. APICORP has taken full provision on this investment.

Yanbu National Petrochemical Company (YANSAB), Saudi Arabiawww.yansab.com.sa

SR 5,625 million

1.32% • Saudi Basic Industries Corp. (SABIC), Saudi Arabia

• Saudi Public• Other institutions and individuals

Main Activities: Production and marketing of poly ethylene, ethylene glycol, poly propylene and other by-products. Current Capacities of final products: PP: 400,000 tonsEthylene Glycol : 700,000 tonsHigh Poly-Ethylenes : 900,000 tons

Overview of 2013 operations:Strong operational and financial performance. Company paid its first dividend of SR 1/share interim dividend and announced SR 2/share final dividend.

Egyptian Methanex Methanol Company (EMethanex), Egyptwww.methanex.com

US$ 215million

17% • Methanex Corporation, Canada• Egyptian Petrochemicals Holding

Company (Echem), Egypt• Egyptian Natural Gas Holding

Company (Egas), Egypt• Egyptian Natural Gas Company

(GASCO), Egypt

Main Activities: Production and marketing of methanol, with current design capacity of 1.3 million tons of methanol per year

Overview of 2013 operations:EMethanex achieved a strong operational performance during the year despite difficult macro-economic environment.

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BUSINESS REVIEW DIRECT EQUITY INVESTMENTS continued


APICORPShare


Misr Oil Processing Company (MOPCO), Egypt www.mopco-eg.com

LE 1,992million

3.03% • Egyptian Petrochemicals Holding Company (Echem), Egypt

• Agrium, Canada• National Investments Bank,

Egypt• Egyptian Natural Gas Holding

Company (Egas), Egypt• Egyptian Natural Gas Company

(GASCO), Egypt• Other institutions and individuals

Main Activities: Production and marketing of ammonia and urea. Current capacity: 635,000 tons (Line 3 operational since July 2008)

Overview of 2013 operations:Line 3 operated normally, however, the expansion project (i.e. Line 1 and 2) - which is about 85% complete remains suspended. After expansion, the total capacity is expected to reach 2 million tons.

The Egyptian Bahraini Gas Derivative Company (EBGDCO), Egypt www.danagas.com

US$ 25 million

20% • Egyptian Natural Gas Holding Company (Egas), Egypt

• Danagas, Bahrain

Main Activities: Recovery and marketing of propane and butane. Current capacity: 126,200 tons of Propane (and 16,200 tons of Butane)

Overview of 2013 operations:Continued to operate during the year in difficult macro environment at below budgeted levels.

The Industrialization and Energy Services Company (TAQA), Saudi Arabiawww.taqa.com

SR 2 billion 5.86% • Public Investments Fund, Saudi Arabia

• Others

Main Activities: A holding company having investments in various subsidiaries and affiliates in the energy and related sectors (drilling, geophysical, oil field services, seamless pipe manufacturing, industrial gases, etc.)

Overview of 2013 operations:Strong performance during the year. Company seeking a capital increase from SR 2 billion to SR 5 billion in 2014.

APICORP Petroleum Shipping Fund (APSF), Cayman Island

US$ 35.8 million

94% • Tufton Oceanic Middle East (TOME), as (Investment Manager)

Main Activities: Owning and leasing MR product tankers.

Overview of 2013 operations:Became fully operational by acquiring and chartering five MR product tankers for a period of 5 years.

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Annual Report 2013 BUSINESS REVIEW PROJECT AND TRADE FINANCE

PROJECT AND TRADE FINANCE

Despite persistent unfavorable market conditions during 2013, APICORP continued to demonstrate its ability to increase profitability and preserve the high quality of its loan portfolio. Total income generated by project and trade finance activities grew to an historical high of US$ 66.7 million compared with US$ 63.6 million the previous year. At the end of 2013, net loan assets increased to US$ 2.92 billion from US$ 2.89 billion at the end of 2012.

Lending ActivityAPICORP played a pivotal role in several major transactions conducted during 2013 in project finance as well as in structured commodity trade finance (see table). Project finance activity in the GCC maintained some momentum during the year, while in the rest of the Arab region, no project finance transactions were launched. In contrast, trade finance activity remained very dynamic, both on a funded and non-funded basis, providing opportunities to APICORP to enhance visibility and secure high-quality short-term assets at attractive yields with prominent energy traders.

New Products and ServicesThe back office documentary credit processing arrangement, which was signed with JP Morgan in 2012, enabled APICORP to boost its trade finance activities during 2013. The Corporation now offers a complete suite of trade finance products and services, comprising letters of credit (LCs) and letters of guarantee; and the handling of export LCs, including advising, negotiation and confirmation. APICORP has also broadened its range of structured trade finance products to include transactional and inventory financings, borrowing base facilities, and prepayment facilities, in addition to arranging pre-export financings. Also during the year, the Corporation introduced residual value guarantees in relation to the APICORP Petroleum Shipping Fund.

In addition, APICORP entered into two agreements for insurance cover of risks regarding the issuance and confirmation of letters of credit. One master agreement was signed with the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC), a member of the Islamic Development Bank (IDB) Group; while another was signed with the Arab Investment & Export Credit Guarantee Corporation (Dhaman). These master agreements will contribute to the growth of APICORP’s trade finance business.

Financial AdvisoryFinancial advisory opportunities remained scarce in 2013, due to the continued cautiousness of sponsors and developers. However, in addition to the financial advisory services extended to APICORP ventures, the Corporation secured a financial advisory mandate from the Arab Shipbuilding & Repair Yard (ASRY), which is owned by several OAPEC member states.

Total income generated by project and trade finance activities 2013

US$ 66.7 million

Net loan assets at end-2013

US$ 2.92 billion

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BUSINESS REVIEW continued

APICORP’S MAIN PROJECT & TRADE FINANCE TRANSACTIONS IN 2013

Client Main Sponsors Amount and Type of Facility

Date of signing

APICORP Role

APICORP Petroleum Shipping Fund

• APICORP• Tufton

US$ 50 million Residual Value Guarantee

Jan 2013 Structuring Bank

Gulf Refining Company (GRC)

• Al Ain Capital LLC• Mazrui International LLC• Puma Energy ME BV

US$ 98 million Term Loan Facility

Mar 2013 Arranger and Offshore Security Agent

SAMREF • Saudi Aramco• Mobil Yanbu Refining Company

US$ 1,000 million Term Murabaha Islamic Facility

May 2013 Mandated Lead Arranger

Sadara Chemical Company

• Saudi Aramco• The Dow Chemical Company

US$ 1,100 millionDollar Commercial FacilitySAR 1,630 million SAR Commercial Letter of Credit Facility

Jun 2013 Mandated Lead Arranger

KEMYA • SABIC• Exxon Chemical Arabia

US$ 1,000 million + SAR 750 million Term Loan Facility

Jul 2013 Mandated Lead Arranger, Local Murabaha Facility Investment Agent

Gunvor • Gunvor Group Limited US$ 400 million borrowing base revolving facility

Jul 2013 Mandated Lead Arranger

KUFPEC • Kuwait Petroleum Corporation


Jul 2013 Mandated Lead Arranger

Emirates Aluminium (EMAL)

• Mubadala Development Company• Dubai Aluminium

US$ 450 million Revolving Credit Working Capital Facility

Nov. 2013 Mandated Lead Arranger

Mercuria • Mercuria Energy Group Limited

US$ 1,000 million Revolving Credit Facility


Nghi Son Refinery and Petrochemical Company (NSRP)

• Kuwait Petroleum Europe (KPE)• Idemitsu Kosan Co. (Idemitsu)• Vietnam Oil and Gas Group (PetroVietnam)• Mitsui Chemicals Inc. (Mitsui)



Gunvor • Gunvor Group Limited US$ 1,515 million Revolving Credit Facility

Dec. 2013 Lead Arranger

Trafigura • Trafigura Beheer B.V. US$ 380 million Senior Secured and Committed Facility

Dec. 2013 Mandated Lead Arranger

Vitol • Vitol Holding B.V. US$ 135 million Uncommitted Trade Finance Credit

Dec. 2013 Structuring Bank

APICORP24

Annual Report 2013 BUSINESS REVIEW TREASURY & CAPITAL MARKETS

TREASURY & CAPITAL MARKETS

The global economy exhibited a stable but slower growth trajectory in 2013, with most developed countries appearing to have overcome their most pressing fiscal problems.

The Eurozone managed to contain its sovereign debt issue and reverse the recession; and the US succeeded in navigating through another fiscal crisis, while the Federal Reserve decided to begin the reduction of its quantitative easing program during the latter part of the year. Despite the improving economic backdrop and rising asset prices, acute risks still remain and could return to trouble the financial markets. Concerns regarding the easing of the Fed’s tapering program and its impact on global emerging markets and currencies, political turmoil in the Middle East and Eastern Europe, and slower Chinese growth and problems in its money markets, still persist, and have the potential to increase volatilities in the fragile global banking system.

During 2013, the Corporation’s treasury and capital markets business achieved a higher gross income growth than the previous year, with total income increasing to US$ 37.9 million from US$ 31.5 million in 2012. At the end of the year, total assets stood at US$ 1,754 million compared to US$ 1,762 million at the end of 2012. APICORP’s liquidity, measured by cash, placements including reverse repos, amounted to US$ 571 million against US$ 809 million in 2012. The total market value of investments in the fixed income securities portfolio at the end of 2013 increased to US$ 1,146 million from US$ 922 million at the end of the previous year, and continues to be focused on strong credits with an average portfolio rating of ‘A’. As at 31 December 2013, the Corporation’s medium-term borrowings, including outstanding bonds of US$ 532.5 million maturing in 2015, stood at US$ 1.53 billion.

APICORP’s foreign banking branch in Bahrain continued to complement all the treasury and capital markets activities of the Corporation’s head office during 2013. APICORP continues to place emphasis on further expanding and diversifying its funding base, which is vital for financing core activities and maintaining sufficient liquidity levels.

US$ 37.9 millionTotal income generated by treasury and capital markets activities 2013

US$ 571 millionLiquidity measured by cash, placements and investments in securities at end-2013

During 2013, APICORP enhanced its thought leadership profile with the successful hosting of the second annual APICORP Energy Symposium, and the continued dissemination of its highly regarded economic research and policy-oriented analysis. We also continued to uphold our commitment to corporate social responsibility.

APICORP 25

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Annual Report 2013 ECONOMIC RESEARCH AND POLICY ANALYSIS

As part of its mission, APICORP aspires to be recognized as the leading source of research on the Arab hydrocarbon and energy industries. The Economics & Research Department is dedicated to the study of economic and policy issues relevant to the Corporation’s growth and diversification strategy. To address and discuss these issues, the department continued to focus on three separate but interdependent areas in 2013:

1. The scanning of the Corporation’s business environment and trends in the context of the lingering aftermath of the global and European financial crises, highlighting their impacts on economic growth, money and credit markets, as well as oil and natural gas markets.

2. A thorough update – three years after the onset of the Arab uprisings and the turmoil it has created in parts of the region – of APICORP’s in-house “perceptual mapping” of the energy investment climate in the Arab/MENA world.

3. An extension of the review of the Arab/MENA energy investment outlook to incorporate the major constraints and challenges facing company-investors and policy makers, including rising project costs, scarcity of natural gas for domestic fuel and feedstock, and the difficult access to funding.

During 2013, APICORP continued to ensure that the highest standards of economic research and policy analysis are maintained through the following activities:

1. APICORP’s annual Review of Energy Investments in the Arab/MENA World has established itself as a trusted source of analysis and insight in the field. Repetition of the review year-on-year has made trend studies possible, thus offering a useful tool for policy analysis.

2. The timely and broad dissemination of the Corporation’s research findings through its monthly Economic Commentary (see box), has confidently added value to the region’s economic and energy policy debate.

3. The uptake of APICORP’s research through numerous presentations of findings in international forums (see Corporate Social Responsibility) has contributed to shaping and influencing some of the key policy issues that are relevant to the Corporation’s shareholders.

2013 ISSUES OF APICORP’S ECONOMIC COMMENTARY

• ‘APICORP’s Review of MENA Energy Investment - Supporting the Transition’, January 2013.• ‘AIG Symposium: Thoughts on In Amenas’, February 2013.• ‘Between a Rock and a Hard Place: Egypt’s New Natural Gas Supply Policy’, March 2013.• ‘MENA Power Sector: Catching Up… But Far From There Yet’, April-May 2013.• ‘Saudi Arabia’s Economic Diversification: Progress in the Context of the GCC and Challenges’, SPECIAL

EDITION, June 2013.• ‘Algeria’s Natural Gas Policy: Beware of the Egypt Syndrome!’ July 2013.• ‘Algeria’s Energy Price Subsidies: Policy Conundrum and Political Dilemma’, August 2013. • ‘Modeling OPEC Fiscal Break-even Oil Prices: New Findings and Policy Insights’, September-October 2013.• ‘Investment for Energy: Looking Beyond Conventional Determinants’, November 2013.• ‘MENA Lingering Turmoil and its Effect on Energy Investment Climate: A Reassessment’, December 2013.

APICORP 27

A commitment to corporate social responsibility underpins all activities of APICORP. Whether it is ensuring a high standard of accountability at all levels of the organization, or being sensitive to community and social concerns, sustainable development is important to the Corporation’s business.

Environmental, social and governance issues are important considerations when evaluating new projects. APICORP supports polytechnic institutes in some of the shareholding countries which provide technical and vocational training to meet the needs of the petroleum services industry, and promote the nationalization process in these countries. The Corporation also aims to support empowerment of the new generation through various sponsorship and scholarship vehicles. APICORP supports and takes part in many social, cultural and charitable activities. Achieving business growth while also contributing to the welfare and progress of the communities where the Corporation operates are important corporate priorities.

APICORP aspires to be recognized as the leading source of research on the Arab hydrocarbon and energy industries. In this respect, APICORP makes available its extensive economic research and policy analysis to the public domain totally free of charge. Reports issued in 2013 are listed under the Economic Research and Policy Analysis section of this Business Review.

As part of its commitment to disseminate its research findings, add value to the debate, and contribute to shaping and influencing key policy issues, APICORP research staff actively participate in industry conferences, workshops and symposiums, either as a speaker or moderator (see table). In addition, the Corporation sponsors the annual APICORP Energy Symposium, which provides a forum for delegates from the international and regional energy industry to discuss emerging trends and the outlook for MENA energy markets.

Main speakers at the 2013 symposium included Dr. Roberto Sieber, Chief Economist and Global Head - Market Analysis, at Hess Energy Trading Company; Dr. Basam Fattouh, Director of the Oil & Middle East Programme, Oxford Institute for Energy Studies; and Dr. Hakim Darbouche, Commercial Adviser, OMV Exploration & Production. Moderated by Mr. Ali Aissaoui, the sessions addressed the three critical themes of oil markets and prices; the implications of the US shale oil revolution for Middle East producers; and factors shaping domestic gas pricing policies in MENA.

It should be noted that APICORP intends to establish a Social Responsibility Unit during the first half of 2014 to be able to organize its current and future social responsibility activities.

APICORP PARTICIPATION IN REGIONAL & INTERNATIONAL INDUSTRY CONFERENCES AND EVENTS DURING 2013

• Winter Meeting of the Arab Energy Club - Bahrain• IIF MENA Regional Economic Forum - Dubai• KPMG 3rd GCC Energy Conference - Abu Dhabi• Energy Workshop organized by Chatham House - London• 2nd Brookings Doha Energy Forum - Qatar• 4th AIG Symposium - Algeria• International Energy Forum (IEF) - Saudi Arabia

CORPORATE SOCIAL RESPONSIBILITY

APICORP is committed to establishing and maintaining the highest standards of corporate governance and risk management, in line with regional and international benchmarks and industry best practice. This entails protecting the rights and interests of all stakeholders, enhancing shareholder value, and achieving organizational efficiency.

CORPORATE GOVERNANCE & RISK MANAGEMENT REVIEW

APICORP 28

Annual Report 2013

APICORP 29

CORPORATE GOVERNANCE & RISK MANAGEMENT REVIEW continued

OWNERSHIP

APICORP is wholly owned by the 10 Member States of the Organization of Arab Petroleum Exporting Countries (OAPEC):

• United Arab Emirates 17%• Bahrain 3%• Algeria 5%• Saudi Arabia 17%• Syria 3%• Iraq 10%• Qatar 10%• Kuwait 17%• Libya 15%• Egypt 3%

BOARD OF DIRECTORS

Shareholders’ RepresentativesEach shareholder is represented by a member on the Board of Directors. The shareholders also nominate a representative to attend the General Assembly meeting which usually takes place every year. The Board of Directors works closely with Management on all issues concerning the Corporation. Main communication channels include the annual general assembly, annual report, corporate website, and regular announcements in the appropriate media. To ensure disclosure of relevant information to shareholders on a timely basis, the Corporation publishes its annual report and financial information on its website.

Role and responsibilitiesThe Board of Directors is accountable to the shareholders for the creation and delivery of strong sustainable financial performance and long-term shareholder value. The Board is empowered to resolve all matters specified under Article 23 of APICORP’s Establishing Agreement and Statute.

CompositionThe Board of Directors is composed of 10 Members representing the 10 Member States:• Dr. Aabed Al-Saadoun (Saudi Arabia) - Chairman• Mr. Khaled Amr Al-Qunsul (Libya) - Deputy Chairman• Dr. Matar Al-Neyadi (UAE) - Member• Mr. Mahmood Hashim Al-Kooheji (Bahrain) - Member• Mr. Farid Baka (Algeria) - Member• Engr. Suleiman Al-Abbas (Syria) - Member• Mr. Hilal Ali Ismail (Iraq) - Member• Mr. Mohamed Khalid Al-Ghanem (Qatar) - Member• Sheikh Talal Naser Al-Sabah (Kuwait) - Member• Engr. Sherin Ahmed Mohammed (Egypt) - MemberThe membership of the Board of Directors shall be by nomination of each Member State, and for a term of four years starting from the date of a member’s election by the General Assembly.

The Board of Directors usually meets at least four times a year, with each Board meeting preceded by a meeting of the Audit, Risk and Compensation Committee.

BOARD COMMITTEESAudit Risk and Compensation Committee The Board of Directors is assisted by the Audit, Risk and Compensation Committee, which is responsible for ensuring and maintaining oversight of the Corporation’s financial activities and reporting system; internal controls and risk management framework; audit functions, and legal and compliance requirements. The Committee is also tasked to recommend to the Board of Directors the remuneration and rewards policy of the Corporation, and ensure that Human Resources policies and practices are in line with applicable laws and regulations, and the obligations of the Corporation. The Committee consists of four appointed members of the Board of Directors:

• Sheikh Talal Naser Al-Sabah (Kuwait) - Chairman• Dr. Matar Al-Neyadi (UAE) - Deputy Chairman• Mr. Farid Baka (Algeria) - Member • Mr. Mohammed Khaled Al-Ghanem (Qatar) -

Member

Code of ConductAPICORP requires that management and all employees meet the highest level of ethical standards in all dealings on behalf of the Corporation, and maintain confidentiality of information and documents concerning APICORP and its clients.

Annual Report 2013

APICORP30

GOVERNANCE CONTROL FUNCTIONSComplianceAPICORP has in place a Compliance Charter to ensure compliance with all regulations and laws of its Member States, as well as with the Corporation’s Establishing Agreement and Statute.

Anti-Money LaunderingAPICORP has a Policy on Anti-Money Laundering (AML) and Know Your Customer (KYC) to protect the Corporation, and assist it in its AML/KYC activities and combating the financing of terrorism activities (CFT). This Policy follows the AML/KYC/CFT guidelines and rules of the Central Bank of Bahrain, which govern APICORP’s Banking Branch in Bahrain.

Internal AuditAPICORP has engaged KPMG to conduct the internal audit of all activities of the Corporation, and report its findings to the Audit Committee.

External AuditAPICORP has engaged Deloitte &Touche to conduct the external audit of the Financial Statements of the Corporation, and report its findings to the Audit Committee and the Board.

Risk ManagementRisk management is an inherent part of APICORP’s business, and risk management is essential to the Corporation’s success. Risk management is the control function to manage principal business risks by establishing appropriate controls, monitoring and reporting processes.

The Risk Management Committee is responsible for developing and monitoring APICORP’s risk management policies. Risk management policies have been established to identify and analyse the risks faced by the Corporation; set appropriate risk limits and controls; and monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and APICORP’s activities. Through its training and management standards and procedures, the Corporation aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations.The Risk Management Department is responsible for ensuring and maintaining effective enterprise wide risk management, as contained in the Risk Charter; together with all risk management policies, risk exposure thresholds, rating models, and related manuals.


Detailed information regarding Risk Management is covered by the Notes to the Consolidated Financial Statements of this Annual Report.

APICORP 31

Capital AdequacyThe Corporation’s policy is to maintain a strong capital base to sustain the future development of the business. As at 31 December 2013, APICORP’s capital adequacy ratio (qualifying capital) was a strong 28.7%, considerably higher than Basel III final requirement of 13%.

Risk ExposureAPICORP is inter-alia exposed to the following prime risks:• Credit Risk• Liquidity Risk• Operational Risk

Credit RiskCredit risk is the risk that a borrower or counterparty will be unable or unwilling to meet a commitment entered into with the Corporation, causing a financial default or loss to APICORP. It arises from the lending, treasury and other activities undertaken by the Corporation. Policies and procedures have been established for the control, monitor and manage all credit risks.

Liquidity RiskLiquidity risk is the risk that APICORP will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset. Liquidity risk management ensures that funds are available at all times to meet the funding requirements of the Corporation and also to sustain liquidity shocks from future market disruptions.

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 outlined in the risk charter to identify and control the various operational risks.

ManagementThe Board delegates the authority for the day-to-day management of the Corporation to the Chief Executive and General Manager, who is supported by a Deputy Chief Executive & General Manager, and an experienced and well-qualified Executive Management Team.

Management CommitteesAPICORP has established six management committees to assist in its daily business operations. The committees have Board-approved Charters which detail their respective mandates and responsibilities.

• Executive Management Committee• Credit Committee• Investment Committee• Asset & Liability Committee• Risk Management Committee• Tenders & Bids Committee


28.7%Capital Adequacy Ratio

Annual Report 2013

Leveraging growth opportunities in the petroleum tanker charter market

APICORP 33

The landmark US$ 150 million Shariah-compliant APICORP Petroleum Shipping Fund is the Corporation’s first investment fund, and the first in the region targeted at a specific vessel category. The Fund has acquired and chartered five medium-range (MR) petroleum product tankers, which will be employed over five years in the regional and international tanker market.

Aimed at helping oil and gas companies meet their requirements for petroleum products transportation without burdening their balance sheets, this new Fund supports the Corporation’s strategy to diversify its business activities into new midstream sectors, as well as tapping promising new growth avenues in the industry.

APICORP share

94%Medium-range petroleum product tankers

5 MR1stFund of its kind in the region

Capitalization

US$ 150mnBareboat charter structure

5-year

1stInvestment fund by APICORP

The year 2013 was another troubled period for much of the MENA region. Since the onset of the arab uprisings three years ago, several countries have been in turmoil. As a result, the outlook for the region as a whole has been clouded with numerous questions and no certitudes; while unfolding developments have continued to dampen the region’s investment climate and business environment.

APICORP’S REVIEW OF MENA ENERGY INVESTMENT: AN UNEVEN AND STILL CHALLENGING OUTLOOK

APICORP34

Annual Report 2013

The year 2013 has been another troubled period for much of the Middle East and North Africa (MENA).1

Since the onset of the Arab uprisings three years ago, several countries have been in turmoil. As a result, the outlook for the region as a whole has been clouded with numerous questions and no certitudes.

These unfolding developments have continued to dampen MENA investment climate and business environment. However, they have not invalidated our framework analysis of energy investment and financing, which continue to be underpinned by growth, interest rates and energy prices. This commentary reviews in three parts the resulting outlook. The first part provides the economic and markets context for the review. The second discusses the scope and structure of MENA medium-term energy investment, while the third part highlights some of the expected constraints and policy challenges, and provides an update on funding issues. CONTEXT OF THE ECONOMY AND MARKETSGlobal and MENA economiesNot unexpectedly, the IMF, which reviews every six months the world’s economic trends and occasionally brings them up to date, has revised favorably its forecast. According to the January 2014 update,2 the global economy, whose underlying dynamics are still adjusting, has strengthened remarkably. World growth is forecast to increase from 3.0% in 2013 to 3.7% in 2014 and 3.9% in 2015. This revision spells the end of the steady decline experienced by the world economy since 2010. The major factors behind these stronger growth rates include lesser drag from fiscal consolidation, gradual recovery of the financial

system, and increased investors’ confidence.

Altogether, however, the recovery remains uneven. Growth in emerging markets and developing economies is forecast to increase from 4.7% in 2013 to 5.1% in 2014 and 5.4% in 2015; and that in advanced economies from 1.3% in 2013 to 2.2% in 2014 and 2.3% in 2015. With China’s transitory rebound and emerging economies’ vulnerability to capital outflows, the drive for global growth is shifting to the advanced economies. Nevertheless, while the US economic recovery appears to be firmly underway, in Europe the upturn from recession is being impeded by the weaknesses of its southern periphery.

MENA is among the few regions which have experienced significant revisions to their economic forecasts. With uncertain political conditions, the region’s growth is expected to increase from 2.4% in 2013 to only 3.3% in 2014, and accelerate to 4.8% in 2015. This forecast is underpinned in large part by the assumption of decreasing bifurcation between oil-exporting and oil-importing countries.

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Figure 1: Trends in Regional Economic Growth

1 MENAisheredefinedtoincludetheArabworldandIran.2 IMF,“IstheTideRising?”-AnUpdateoftheWEO,21January2014.

APICORP’S REVIEW OF MENA ENERGY INVESTMENT

APICORP 35

Except Libya, most of the former have shown stronger growth, largely the result of sustained petroleum revenues and high public spending. Whether or not the region’s economy will live up to the growth forecast for 2015 and beyond, depends on the extent to which social unrests and political uncertainties recede. It also depends on governments pursuing and achieving more inclusive socio-economic reform agendas.

Money and credit markets Since first hinted at in May 2013 ‘tapering’, i.e. the gradual reduction of the US Federal Reserve’s quantitative easing (QE), has been the focus and worry of financial markets around the world. Particularly as the suggestion to unwind the money stimulus triggered a series of currency depreciations in key emerging markets, whilst portfolio investors were pulling capital out of assets deemed riskier. But there is little evidence thus far of any significant impact on the cost of US dollar funding, apart from US interest rates briefly drifting upward when the taper’s first step was implemented in December.

Whether or not the reversal of the Fed’s QE policy should be understood as a monetary tightening is a matter of interpretation. Until the Fed communicates less ambiguously its new policy, our perception is that its highly accommodative monetary policy is likely to remain long after its bond-purchasing program ends and the economic recovery strengthens. This has been made clear when the US central bank signified that it would not increase federal funds rates any time soon. And even clearer when it specifically reiterated that it will keep the target range for its benchmark rate at the prevailing low range of 0% to 0.25% until US unemployment falls well under the Fed’s threshold of 6.5%, and so long as inflation remains contained.

Meanwhile, liquidity should not be a major concern. At the time of writing (Jan 2014) the spread between the Libor and the overnight indexed swap (OIS is the expectation of the Fed funds effective rate), which measures the relative funding stress in the money markets, has not deviated from the 2013 flat trend of about 15 bps (Figure 2).

Certainly, central banks’ QEs have helped stabilize the money market, but they can hardly be said to have benefited the real economy. Commercial banks, through which monetary policies are implemented, have largely failed to support growth by providing much needed low-cost credit. Instead, they have focused efforts on rebuilding their capital reserves to mitigate persistent financial market uncertainty and the requirements of Basel III. Those involved in MENA were further witnessing adverse political developments and geopolitical tensions, which dampened their risk appetite. In this context, capital inflows to the region – the bulk in dollar-denominated debt – have collapsed after lenders significantly reduced their exposure or completely pulled out. Bank loans, for instance, nearly halved from $101bn in 2010 to $55bn in 2012. They recovered slightly to the value of $71 billion in 2013, due to the increasing involvement of local banks and export credit agencies (ECAs). Even though access to the local and regional bond/sukuk markets has grown in recent years, the financing gap has remained substantial. As discussed further in later sections, external funding for the large-scale, capital-intensive MENA energy sector has witnessed a similar declining pattern, and is only now slowly recovering.

APICORP’S REVIEW OF MENA ENERGY INVESTMENT continued

Figure 2: Trends in Daily Libor-OIS spreads

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APICORP Research Using Bloomberg database

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APICORP36

Annual Report 2013

APICORP 37

Oil and natural gas markets Increased oil production from Saudi Arabia, Iraq and more significantly from shale formations in North America, has helped mitigate the loss of Iranian and Libyan oil. In the face of relatively weak demand, associated with slower global economic growth thus far, oil prices would have softened considerably if not for geopolitical uncertainty. Accordingly, the value of the OPEC basket of crudes settled at $106 per barrel in 2013, somewhat below the recent trend, and slightly less than the last three-year average of $108 per barrel (Figure 3).Looking ahead, a major determinant of prices will be the capacity of OPEC to accommodate increased production from Libya, Iraq and Iran, should a deal on the latter’s nuclear program succeed. Agreeing on a common policy response will be considerably difficult if non-OPEC production, led by the US, Canada and Brazil, increases substantially as anticipated, and global oil demand fails to grow as steadily as expected. In any case, a lower call on OPEC oil and hence a higher spare capacity will exert further pressure on oil prices, most likely driving them well below the current OPEC output-weighted average fiscal break-even price of $105 per barrel.3

In the more complex and fragmented natural gas market, prices have failed to converge as long anticipated. For not only have they deviated from oil parity, but they have also been diverging along different regional paths (Figure 4).The greater potential for arbitrage that the US shale-based LNG exports would create from 2016 onward is unlikely to make a difference to the price outlook within our medium-term time frame. Therefore, we continue to expect prices to evolve between $4 to $6/MBtu in the liberalized North American markets with abundant domestic supplies, and no export sales before 2016. In Europe, as a result of markdowns on oil-indexed pipeline gas imports, prices are likely to reach parity with those at trading hubs at some $10 to $12/MBtu. Finally, in the tight Asian market, prior to Australian LNG export projects completion in 2015, LNG import prices under long-term JCC-linked contracts and for spot deals are expected to remain within a range of $15-$18/MBtu.

Figure 3: Trends in the Monthly Value of OPEC Basket Price

Figure 4: Trends in Monthly Natural Gas Prices


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2011 2013: Market tightening then stabilizing just above OPEC’s new fiscal break even price

European oil- indexed contract priceJapan average LNG priceBrent crudeJapan- Korea marker (JKM)National balancing point (UK- NBP)US Henry HubEuropean oil- indexed contract price after concessions (estimated)

3 “ModelingOPECFiscalBreak-evenOilPrices:NewFindingsandPolicyInsights’,APICORP’sEconomicCommentary,September-October2013.

APICORP Research using OPEC database,

as of Jan 2014

MENA ENERGY INVESTMENT OUTLOOKOverviewThe prospects for further development of oil and gas resources, particularly from shale formations, tar sands and frontier deep-water areas, will not diminish MENA’s pivotal role in supplying global markets. Accordingly, and factoring in growth of renewables and nuclear, the region’s total energy investment could amount to more than $4 trillion (in dollars of the year 2013), representing a little more than 10% of global energy investment through to 2035.4 However, while the long-term investment potential appears significant, the medium-term outlook presents many challenges, including:

• Poor and deteriorating investment climate in the countries that have experienced uprisings, as well as Iraq;

• Conservative depletion policies, as in the case of Qatar’s long-standing North Field moratorium;

• Enduring international sanctions on the region’s biggest holder of combined oil and gas reserves, i.e. Iran;

• Durable loss of production due to armed conflict and resulting damage to infrastructure, as in the case of Syria; and

• Last but far from least, is the difficulty to access financing to various degrees across countries.

Despite this constraining environment, we expect MENA energy capital investment to add up to $765bn for the five-year period 2014-18. Compared to past assessments, which have been systematically revised to reflect the full scale and scope of the power sector,

investment appears keeping on the rise, driven mainly by a catch-up effect and unrelenting rising costs. Indeed, for reasons discussed in later sections, our ‘average project cost’ index, which has been subdued in the wake of the global financial crisis, has continued its uptrend. However, the current amount of investment should not be considered as particularly high, since it is comparable to the nominal peak identified in 2009 when completing the 2010-14 review (Figure 5).

Geographical patternInvestment has fallen below potential in countries where investment decisions and project implementation have been hampered by continuing turmoil. This has somewhat distorted the geographical pattern of investment (Figure 6). A little more than three-quarters of energy capital investment continues to be shared by seven countries among the biggest holders of oil and gas reserves which have not faced such turmoil.5 These exclude Libya but include Iraq, notwithstanding its heightened tensions. In Saudi Arabia, investment is projected to reach $173bn, mostly engendered by Saudi Aramco, SABIC and its affiliates, as well as Saudi Electricity Company (SEC), since stand-alone domestic private investors have continued to struggle to secure feedstock or attract capital. The UAE has established itself for the third consecutive review as the region’s second-largest investor, with projects worth $113bn.

MENA apparently shelved (LS)MENA actual requirements (LS)Average project cost” index (RS)

Figure 5: Rolling Five-Year Reviews of MENA Energy Investment

(Series revised to reflect the full scope and scale of the power sector)

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4 ThesefiguresareinferredfrompastIEA’sfindingsandareexpectedtobevalidatedinaforthcomingWEO2014SpecialReportonglobalenergysectorinvestmentto2035,tobereleasedon3June.

5 ThebiggestMENAholdersofcombinedoilandnaturalgasreservesindecreasingsizeare:Iran(51.8billiontons),SaudiArabia(43.9),Qatar(25.1),Iraq(23.4),UAE(18.5),Kuwait(15.6),Libya(7.7)andAlgeria(5.6)(sourceofdata:BPStatisticalReviewofWorldEnergy,June2013).


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Annual Report 2013

APICORP 39

Pending further implementation decisions, Algeria has jumped up the region’s rankings, overtaking both Qatar and Iran as the third potential investor. As investment readiness has gained momentum following the return of good governance to Sonatrach, capital requirements – largely the result of catch-up investment and early steps in shale gas – have reached $82bn. Finally, despite moving up the ranking ahead of Qatar and Kuwait, Iraq with $69bn worth of capital requirements is still far below its potential. Finally, tighter international sanctions, and the complete retreat of foreign companies, have ended up taking a toll on Iran’s elusive energy investment program, which has tentatively been put at $61bn pending further progress on nuclear talks and the easing of international sanctions.

In Iraq, the reaffirmation of the vital need to achieve full development of the oil and natural gas sectors has yet to be translated into coherent policies and actions. In particular, the Iraqi Federal Government (IFG) has yet to pass a long-awaited package of hydrocarbon legislation. This will hardly be possible if IFG and the Kurdistan Regional Government (KRG) fail to come up with a complete and thorough understanding of their pending oil issues. Furthermore, IFG needs to alleviate many constraints, including infrastructure bottlenecks and institutional weaknesses, and develop better solutions to counter aggravated security threats.

Under-investment, which has been particularly apparent in Kuwait, is now the case in Qatar as well. In Kuwait, government policy has often been at odds with parliamentary politics, and efforts to align the two have been repeatedly frustrated. Only recently has the long-delayed giant al-Zour refinery reached final investment decision and is being implemented. The portfolio of major upstream projects has also been moved from the back burner; but the front-

end engineering design of key components require updating. In contrast, Qatar’s stagnation stems from a long-standing moratorium on further development of the North Field, which some have thought of as policy inertia rather than a policy aimed at preventing too-rapid depletion. As a result, and despite a shift in emphasis on enhancing oil recovery and expanding the petrochemical industry, energy investment in Qatar has lost momentum.

As already noted, investment has been affected to different degrees in countries still facing political uncertainty. This is particularly the case of Egypt, Libya and Yemen, where investors have adopted a wait-and-see attitude. Unless supported during what is likely to be a protracted and difficult transition, capacity expansion in these countries will be back-ended towards the end of the review period. Much more critical is the case of Syria, where investment has come to a complete halt, and is unlikely to resume as long as the civil war continues. In any case, investment in this country is expected to be mostly in repairs, rehabilitation and recovery of destroyed or seriously-damaged energy infrastructure.

Sectoral patternCapturing the full scope and scale of the power sector, and adjusting for the inclusion of the transport and distribution (T&D) systems, has reshaped the sectorial distribution of investment. As a result, each of the oil, gas and power value chains now accounts for about a third of the region’s total (Figure 7). In the hydrocarbon sector, the gas downstream link has declined as a result of Qatar’s moratorium on further development of the North Field, and the consequent pause in its LNG and GTL expansion program. In contrast, in the oil downstream link, investment has been sustained, driven mostly by Saudi Arabia.


Figure 6: Country Pattern across Previous and Current Reviews

Saudi ArabiaUAE

AlgeriaIraqIran

QatarKuwait

LibyaEgyptOman

BahrainMoroccoLebanon

TunisiaSudan* Jordan

SyriaYemen

Mauritania

0 30 60 90 120 150 1802013- 17 Review2014- 18 Review

APICORP Research using internal database* Sudan: North & South

US$ Billion

BOX 1: MENA POWER SECTOR : CATCHING UP… BUT FAR FROM THERE YET (*)Fast-growing electricity demand and lagging supply have led to chronic power shortages across many MENA countries. In the context of lingering turmoil in parts of the region, bridging a widening demand-supply gap through increased supplies is now perceived as politically and socially desirable. Without active demand-side management entailing serious cuts in subsidies, this will lead to a capacity growth of 8.4% per year, which translates into a five-year increment of 140 GW for the period 2014-2018.

2012* installed capacity

(GW)

2012* electricity

production(TWh)

Medium- term annual

growth(%)

2012-18 capacity addition

(GW)

2014-18 capital

requirements (G$)

Maghreb 1 33.6 131.0 9.1 19.4 23.3Mashreq 2 61.9 271.1 8.7 34.0 44.4GCC 3 117.4 505.8 8.7 65.9 72.9Rest of Arab World 4 4.5 14.5 6.3 1.7 2.2Iran 50.1 234.3 6.5 18.5 24.1MENA Total 267.5 1156.7 8.4 139.5 166.9

* 2012: estimates1 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 Rest of Arab world includes Sudan and Yemen, but excludes Comoros, Djibouti and Somalia for lack of data.

Compilations and projections by APICORP Research

Taking account of the associated investment in T&D, the capital required for the whole sector will be in the order of $283bn, 59% of which will be in new generation capacity.

(Total Investment in MENA Power Sector for the Period 2014-2018 ($bn

Investment in $bnGeneration

(G)Transmission

(T)Distribution

(D)Total(T,D)

Total(G,T,D)

Maghreb 1 23.3 5.2 12.8 18.0 41.3Mashreq 2 44.4 7.6 21.7 29.3 73.7GCC 3 72.9 12.4 35.7 48.1 121.0Rest of Arab World 4 2.2 0.5 1.2 1.7 3.9Iran 24.1 5.3 13.3 18.6 42.7MENA Total 166.9 31.0 84.7 115.7 282.6

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 Rest of Arab world includes Sudan and Yemen, but excludes Comoros, Djibouti and Somalia for lack of data.Compilations and projections by APICORP Research

This huge sectoral investment offers great opportunities but also raises major challenges. As elaborated in the main text, we have identified three issues in particular that should feature prominently on policy agendas. The first results from the perception, in the wake of the Arab uprisings, of a deteriorating investment climate in most parts of the region. The second stems from the scarcity of natural gas in apparently well-endowed countries. The third follows from the inadequacy of internal and external financing. These issues cannot be resolved without supportive policies in the corresponding areas: first, by improving the investment climate and providing assurances critical to regaining private investment momentum; second, by providing the power generation sector with stable and affordable fuel options; and third, fiscal space permitting, by increasing state budget funding of public utilities, which have become the investors of last resort. Otherwise, utilities will seldom catch up, no matter how pressured they are.

(*)Summaryfrom“MENAPowerSector:CatchingUp…ButFarFromThereYet’,APICORPEconomicCommentary,April-May2013.


APICORP40

Annual Report 2013

APICORP 41

Much more impressive is investment in power. Notwithstanding rapid expansion, power supply has fallen short of needs in recent years. To catch up with unmet demand, medium-term capacity growth, which has been worked out on a country-by-country basis, is expected to accelerate during the current review period. As detailed in Box 1, this will require investment of about $283bn representing 37% of total energy investment. New generation capacity accounts for 59% of investment in power; the remainder 41% will be needed for the T&D system.

MENA total energy investment, as previously summarized, will not be fully realized without addressing perennial constraints, prominent among which are cost, fuel/feedstock and funding. These constraints, which have proved to be far beyond the scope and resources of any individual investor-company, continue to pose considerable policy challenges.

CONSTRAINTS AND POLICY CHALLENGES Cost inflationCost inflation remains one of the most important factors

driving the increase in energy investment. All research-oriented institutions have established that the costs of energy projects have been soaring (Figure 8). The IEA, for example, has found that the upstream investment cost has doubled during the past decade or so, due largely to rising costs of input factors (construction material, industrial equipment, skilled personnel and oil field services). CERA has established the same for power generation projects, with the nuclear generation component rising even higher. But as shown in Figure 8, APICORP has established that, in the context of MENA, the cost of an “average energy project” has more than tripled since 2003. Our focus has been on the main cost components of EPC contracts. In addition to the cost of input factors highlighted by the IEA and CERA, these include contractors’ margins, project risk premiums and the cost of what we have dubbed ‘excessive largeness’. The latter stems from the documented fact that large-scale projects tend to incur significant delays and cost overruns. Average energy project costs would have certainly quadrupled during the last decade, if not for the dampening effect of the global financial crisis. The likelihood is that costs will continue rising beyond normal inflation.

Figure 7: Sectoral Pattern Across All Reviews

Figure 8: Trends in Energy Project Costs

2005- 09 Review2006- 10 Review2007- 11 Review2008- 12 Review2009- 13 Review

2010- 14 Review2011- 15 Review2012- 16 Review2013- 17 Review2014- 18 Review

APICORP’s AEPCICERA NA PCCI - With NuclearCERA NA PCCI - Without NuclearIEA’s UICI

Inde

x

300

250

200

150

100

50

0

350

300

250

200

150

100

50

0

US

$ B

illio

n

Oil

upst

ream O

il m

idst

ream

Oil-

base

d R

efini

ng- P

etro

ch

Gas

up

stre

am Gas

m

idst

ream

LNG

- GTL

Gas

- bas

ed

Pet

roch

/Fer

til

Pow

er

sect

or

IEA’s UICI: Upstream Investment Cost Index (2000=100) APICORP’s AEPCI: Average Energy Project Cost Index, (2003=100) CERA’s NA PCCI: North American Power Capital Cost Index (2000=100)

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012


Source: IEA, CERA & APICORP Research

AP

ICO

RP

Res

earc

h

Feedstock availabilityThe next challenge is the supply of feedstock and fuel, primarily ethane to the petrochemical industry and natural gas to the power sector. Our findings confirm and extend previous results showing that on aggregate, MENA proved reserves are substantial, and their combined dynamic life is a little beyond the traditional 30-year strategic planning horizon for exploration and development (E&D). However, reserve depletion in more than half our large sample of gas-endowed countries has critically neared - if not already reached - the point that warrants drastic actions to curb demand, and support a more vigorous supply response (Figure 9).6 This appears to be the case of Iraq, Yemen, the UAE, Tunisia, Saudi Arabia, Kuwait, Libya and Bahrain. While the case of Iraq underscores the urgent need to limit gas flaring, that of Bahrain suggests that the country is using more gas than it could possibly afford from domestic sources.

Financing uncertainties Financing is at the core of corporate strategies and investment decisions. It is basically determined by the structure of capital requirement, which we have established to be 33% debt and 67% equity for MENA energy investment as a whole (Figure 10).

Equity, which is a dominant feature of the upstream and midstream industry, is sourced internally either through retained earnings or more importantly through state budget allocations. It has so far been easily provided due to sustained high oil prices. Looking ahead, equity can hardly be secured for key MENA countries if the value of the OPEC basket of crudes falls durably below the current OPEC output-weighted average fiscal break-even price of $105/bbl.

6 ‘MENANaturalGasEndowmentIsLikelyToBeMuchGreaterThanCommonlyAssumed’,APICORPEconomicCommentary,December2012.


Figure 9: Figure 9: Distances to Optimal Natural Gas Supply Pattern

Figure 10: MENA Energy Capital Structure and Financing

Bahrain

Libya

Kuwait

Saudi Arabia

Tunisia

UAE

Yemen

Iraq

Syria

Egypt

Oman

Iran

Algeria

QatarDistance to OST <0%Distance to OST [0- 10%]Distance to OST >10%

AP

ICO

RP

Res

earc

h

Source: APICORP Research 2014

INVESTING(Empirical)

FINANCING(Conceptual)Resulting capital

requirements (C)and leverage (L=D:E)

Cap

ital r

equi

red

Inte

rnal

sou

rces

Ext

erna

l sou

rces

-10% -5% 0% 5% 10%

15%

20%

UpstreamC = $222bnL = 0:100

Retained earnings

State budgetallocation

Common stocks

Bonds/Sukuk

Mediumand long

term loans

MidstreamC = $38bnL = 0:100

DownstreamC = $226bnL = 60:40

Power GenC = $166bnL = 70:30

Power T&DC = $113bnL = 0:100

Aggregatecapital

requiredand capitalstructure

C = 765bnL = 33:67

APICORP 42

Annual Report 2013

As hinted at earlier in the outlook for oil and gas markets, the likelihood is that oil prices risk receding on lower demand for OPEC oil and resulting higher spare capacity. However, the risks facing key MENA oil-producing countries will differ depending on their position on the fiscal cost curve. The higher their fiscal cost, the more money is squeezed out of the energy sector.

In contrast to equity, debt is a dominant part of the downstream industry and is sourced externally. Despite the recent relative success of issuance of bonds and sukuk, predominantly in the GCC, external financing of energy investment continues to rely heavily on the syndicated loans market, which has suffered the successive shocks of the global and European financial crises (Figure 11). Even with greater involvement of export credit agencies (ECAs) and local commercial banks, this market will hardly fully recover without international banks staying committed to their long-term engagement in the region. Meanwhile, meeting the potential debt requirement suggested in Figure 10 will be a significant challenge.

Conclusions Notwithstanding a slow global recovery, uncertain markets and continuing regional turmoil, MENA energy investment for the five-year period 2014-2018 is slightly higher than that of the previous review. The resultant cumulative capital requirement of $765bn is driven mostly by unrelenting escalating costs and a catch-up effect, with the latter particularly evident in the power sector. A little more than three-quarters of energy capital investment continues to be located in seven countries among the region’s biggest holders of oil and gas reserves. Clearly, the geographical pattern has favored countries that have been relatively

shielded from the turmoil. In the others, investment is likely to be back-ended. The review has also highlighted serious constraints and policy challenges. In addition to the deteriorating investment climate which forms the backdrop of our assessment, three issues continue to confront company-investors and policymakers: rising costs, scarcity of ethane and natural gas supply, and funding limitations. Of the three, the latter remains the most critical. Given the structure of capital investment stemming from the review, internal financing could tighten if oil prices decline durably below OPEC’s fiscal break-even price, which currently stands at $105/bbl. External financing, which comes predominantly in the form of dollar-denominated loans, will also be challenging as long as the region’s loan market has not fully recovered.

In the face of more pressing social demands, MENA governments may not be able to bridge the funding gap. Going forward, policy makers in the region should focus their commitment on improving the investment climate and the enabling environment for business. Obviously, this is particularly the case of countries that have witnessed a wave of social and political unrest and, therefore, are in greatest need to attract back investors to the energy industry.


Figure 11: Trends in MENA Energy Sector External Financing

APICORP Research using Dealogic & GBSA databases - Jan 201460

50

40

30

20

10

0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Stock salesBond & Sukuk (2009 nil; data not available before) Bank Loans

Issu

e va

lue

(US

$ bn

)

APICORP 43

Profile, Shareholders, Missiona and Vision

APICORP44

Annual Report 2013

Boosting the region’s midstream and downstream capabilities

APICORP 45

Profile, Shareholders, Missiona and Vision

In 2013, APICORP increased its shareholding in the Egyptian Methanex Methanol Company (EMethanex) from 7% to 17%. EMethanex is a major producer of methanol, with a current design capacity of 1.3 million tons per year. One of the most versatile compounds ever developed, methanol is the basis for hundreds of chemicals and thousands of products, and is the second most transported commodity in the world.

This investment underlines the Corporation’s strategic objective to support oil, gas and energy projects that will boost the region’s midstream and downstream capabilities, which are crucial for Arab countries to maximize economic benefits from energy resources.

APICORP share

17% Chemical derivatives

100s

Chemical formula

CH3OH

Paid-up capital

US$ 125m Annual design capacity

1.3m tons Products and applications

1000s

CONSOLIDATED FINANCIAL STATEMENTS

APICORP46

Annual Report 2013

ConsolidatedFinancial Statements2013

APICORP 47

CONTENTS INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS 48CONSOLIDATED STATEMENT OF FINANCIAL POSITION 49CONSOLIDATED STATEMENT OF INCOME 50CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 51CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 52CONSOLIDATED STATEMENT OF CASH FLOWS 54SIGNIFICANT ACCOUNTING POLICIES 55NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 65

(US$000)

APICORP48

Annual Report 2013 INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS

(US$000)

APICORP 49

CONSOLIDATED STATEMENT OF FINANCIAL POSITIONas at 31 December 2013

Note 2013 2012

ASSETSCash and cash equivalents 24,904 17,326Placements with banks 1 545,872 792,147Trading securities 2 - 41Available-for-sale securities 3 1,183,464 952,129Available-for-sale direct equity investments 4 822,607 318,002Syndicated and direct loans 5 2,923,135 2,897,046Property, equipment and vessels 6 135,375 71,470Other assets 7 39,806 29,414

TOTAL ASSETS 5,675,163 5,077,575

LIABILITIES AND EQUITYLIABILITIESDeposits from banks 8 440,576 692,819Deposits from corporates 1,561,201 1,057,429Deposits from shareholders 105,476 104,476Securities sold under agreements to repurchase 171,983 354,603Other liabilities 9 62,765 80,732Bank term financing 10 993,916 946,274Bonds issued 11 532,514 532,010

Total liabilities 3,868,431 3,768,343

EQUITY Share capital 23 750,000 750,000Legal reserve 162,500 151,100General reserve 194,426 96,495Available-for-sale investments fair value reserve 597,044 212,513Retained earnings 100,605 97,931Total equity attributable to shareholders of the Corporation 1,804,575 1,308,039Non-controlling interests 2,157 1,193

Total equity (page 52) 1,806,732 1,309,232

TOTAL LIABILITIES AND EQUITY 5,675,163 5,077,575

OFF-BALANCE SHEET EXPOSURES 12 675,870 536,089

The consolidated financial statements, which consist of pages 49 to 92, were approved by the Board of Directors on 8 March 2014 and signed on its behalf by:

Dr. Aabed Al-SaadounChairman

Ahmad Bin Hamad Al NuaimiChief Executive and General Manager

(US$000)

APICORP50

Annual Report 2013 CONSOLIDATED STATEMENT OF INCOMEfor the year ended 31 December 2013

The consolidated financial statements consist of pages 49 to 92.

Note 2013 2012

Interest income 109,084 104,729Interest expense (66,221) (64,523)Net interest income 14 42,863 40,206

Net fee income 15 2,935 1,076Dividend income 16 73,368 74,474Loss on trading securities 17 (1) (12)Gain on sale of available-for-sale portfolio 18 10,308 11,372Other income 21 20,349 4,120Total income 149,822 131,236

Operating expenses 19 (38,603) (30,857)Impairment reversals 20 838 8,512

PROFIT FOR THE YEAR 112,057 108,891

Profit for the year attributable to:Shareholders of the Corporation 112,005 108,931Non-controlling interest 52 (40)

112,057 108,891

Per share information 23Basic and diluted earnings per share US$ 149 US$ 145Net asset value per share US$ 2,406 US$ 1,744

(US$000)

APICORP 51

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOMEFor the year ended 31 December 2013

2013 2012

Profit for the year 112,057 108,891

Other comprehensive income

Items that may be reclassified subsequently to statement of income:

Transferred to statement of income on sale of available-for-sale securities (3,780) (2,680)Transferred to statement of income on sale of available-for-sale direct equity investments (5,597) (8,080)Net change in fair value of available-for-sale securities 11,346 29,064Change in fair value of available-for-sale direct equity investments 382,562 7,019

Total other comprehensive income for the year 384,531 25,323

Total comprehensive income for the year 496,588 134,214

Total comprehensive income for the year attributable to:Shareholders of the Corporation 496,536 134,254Non-controlling interests 52 (40)

496,588 134,214


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APICORP54

Annual Report 2013 CONSOLIDATED STATEMENT OF CASH FLOWSFor the year ended 31 December 2013


2013 2012

OPERATING ACTIVITIESInterest received 105,604 99,254Interest paid (68,803) (55,553)Proceeds (new) placements with banks 246,275 (148,534)Drawdowns of syndicated and direct loans (1,002,017) (3,609,869)Repayments of syndicated and direct loans 975,298 3,487,176Fees received 3,294 1,409Fees paid (359) (333)Operating expenses paid (28,916) (15,649)Other income received 7,783 5,007Other receipts 12,257 17,783Net cash from (used in) operating activities 250,416 (219,309)

INVESTING ACTIVITIESProceeds from sale of available-for-sale securities 101,759 54,997Purchase of available-for-sale securities (345,377) (183,645)Purchase of available-for-sale direct equity investments (131,232) -Dividends received 74,168 74,474Proceeds from sale of available-for-sale direct equity investments 12,666 12,998Purchase of property, equipment and vessels (70,527) (47,537)Net cash used in investing activities (358,543) (88,713)

FINANCING ACTIVITIESDeposits from banks, net (252,243) 29,304Deposits from corporates, net 505,772 (156,639)Deposits from shareholders - 1,050Securities sold under agreement to repurchase, net (182,620) (83,174)Bank term financing (net) 44,796 544,603Dividend paid - (27,900)

Net cash from financing activities 115,705 307,244

Net increase/(decrease) in cash and cash equivalents for the year 7,578 (778)Cash and cash equivalents at beginning of the year 17,326 18,104

Cash and cash equivalents at 31 December 24,904 17,326

(US$000)

APICORP 55

Arab Petroleum Investments Corporation (“APICORP” or 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 therefrom, 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 Corporation’s authorised capital is US $ 2,400 million, subscribed capital is US $ 1,500 million and issued & paid up capital is US $ 750 million, whereas the remainder of US $ 750 million is callable capital.

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

Authorisedcapital

Subscribedcapital

Issued andfully paid

Callablecapital Percentage

United Arab Emirates 408,000 255,000 127,500 127,500 17%Kingdom of Bahrain 72,000 45,000 22,500 22,500 3%Democratic and Popular Republic of Algeria 120,000 75,000 37,500 37,500 5%Kingdom of Saudi Arabia 408,000 255,000 127,500 127,500 17%Syrian Arab Republic 72,000 45,000 22,500 22,500 3%Republic of Iraq 240,000 150,000 75,000 75,000 10%State of Qatar 240,000 150,000 75,000 75,000 10%State of Kuwait 408,000 255,000 127,500 127,500 17%Libya 360,000 225,000 112,500 112,500 15%Arab Republic of Egypt 72,000 45,000 22,500 22,500 3%

2,400,000 1,500,000 750,000 750,000 100%

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, direct equity investments in projects and in an close-ended fund. These activities are funded by shareholders’ equity, medium-bank term financing, deposits from government, corporate and short-term deposits from banks.

The Corporation has set up the APICORP Petroleum Shipping Fund Limited (“the Fund” or “the subsidiary”), a 5 year close-ended fund. The Fund is established for the purposes of investment in a series of IMO II/III MR Tankers (“commercial marine vessels”). The Fund is 94% owned by the Corporation. Assets and liabilities and results of operations of the Fund have been included in the consolidated financial statements of the Corporation. The Fund has a 100% subsidiary (the ‘Charter Company’), a special purpose vehicle to act as a conduit for leasing of ships and has also set up 100% special purpose entities (SPEs) to own the vessels for the beneficial interest of the Fund.

SIGNIFICANT ACCOUNTING POLICIESFor the year ended 31 December 2013

APICORP56

Annual Report 2013

A GENERALA-1 Statement of compliance

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS).

The principal accounting policies applied in the preparation of these consolidated financial statements have been consistently applied to all the presented years, unless otherwise stated.

A-2 Basis of preparationThe consolidated financial statements have 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.

Historical cost is generally based on the fair value of the consideration given.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Group takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date.

The consolidated financial statements include the financial statements of APICORP and its subsidiaries (together the “Group”).

The Group’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.

i. Basis of ConsolidationSubsidiariesThe consolidated financial statements comprises the financial statements of the Corporation and entities (including special purpose entities) controlled by the Corporation and its subsidiaries. Control is achieved when the Corporation:

- has power over the investee;- is exposed, or has rights, to variable returns from its involvement with the investee; and- has the ability to use its power to affect its returns.

Special purpose entities (SPEs) are entities that are created to accomplish a narrow and well-defined objective such as the acquisition of shipping vessels and the execution of a specific borrowing or investment transaction. An SPE is consolidated if, based on an evaluation of the substance of its relationship with the Corporation and the risks and rewards transferred by the SPE, the Corporation concludes that it controls the SPE. The assessment of whether the Corporation has control over an SPE is carried out at inception and normally no further reassessment of control is carried out in the absence of changes in the structure or terms of the SPE, or additional transactions between the Corporation and the SPE.

The Corporation reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above.

When the Corporation has less than a majority of the voting rights of an investee, it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Corporation considers all relevant facts and circumstances in assessing whether or not the Corporation’s voting rights in an investee are sufficient to give it power, including:

- the size of the Corporation’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders;

- potential voting rights held by the Corporation, other vote holders or other parties;- rights arising from other contractual arrangements; and- any additional facts and circumstances that indicate that the Corporation has, or does not have, the current

ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders’ meetings.

Consolidation of a subsidiary begins when the Corporation obtains control over the subsidiary and ceases when the Corporation loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of profit or loss and other comprehensive income from the date the Corporation gains control until the date when the Corporation ceases to control the subsidiary.


APICORP 57


A General (continued)A-2 Basis of preparation (continued)

Profit or loss and each component of other comprehensive income are attributed to the owners of the Corporation and to the non-controlling interests. Total comprehensive income of subsidiaries is attributed to the owners of the Corporation and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. In the event of change in ownership interest in a subsidiary, but the Company does not ceases to have a control then impact of such change is classified in equity.

When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies.

All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation.

When the Group loses control of a subsidiary, a gain or loss is recognised in profit or loss and is calculated as the difference between

- the aggregate of the fair value of the consideration received and the fair value of any retained interest and - the previous carrying amount of the assets (including goodwill), and liabilities of the subsidiary and any non-

controlling interests.

All amounts previously recognised in other comprehensive income in relation to that subsidiary are accounted for as if the Group had directly disposed of the related assets or liabilities of the subsidiary (i.e. reclassified to profit or loss or transferred to another category of equity as specified/permitted by applicable IFRSs). The fair value of any investment retained in the former subsidiary at the date when control is lost is regarded as the fair value on initial recognition for subsequent accounting under IAS 39, when applicable, the cost on initial recognition of an investment in an associate or a joint venture.

ii. Standards and Interpretations effective for the current yearThe following new and revised standards and interpretations have been adopted in the current year with no material impact on the disclosures and amounts reported for the current and prior years but may affect the accounting for future transactions or arrangements:

• Amendments to IFRS 7 Financial Instruments: Disclosures enhancing disclosures about offsetting of financial assets and liabilities. The amendments to IFRS 7 require entities to disclose information about rights of offset and related arrangements (such as collateral posting requirements) for financial instruments under an enforceable master netting agreement or similar arrangement.

• New and revised Standards on Consolidation, Joint Arrangements, Associates and Disclosures;

In May 2011, a package of five standards on consolidation, joint arrangements, associates and disclosures was issued comprising IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities, IAS 27 (as revised in 2011) Separate Financial Statements and IAS 28 (as revised in 2011) Investments in Associates and Joint Ventures. Subsequent to the issue of these standards, amendments to IFRS 10, IFRS 11 and IFRS 12 were issued to clarify certain transitional guidance on the first-time application of the standards.

• IFRS 13 Fair Value Measurement establishes a single source of guidance for fair value measurements and disclosures about fair value measurements and is applicable for both financial and non-financial items.

• Amendments to IAS 1 - Presentation of Other Comprehensive Income. The amendments introduce new terminology, whose use is not mandatory, for the statement of comprehensive income and income statement. The amendments retain the option to present profit or loss and other comprehensive income in either a single statement or in two separate statements. However, items of other comprehensive income are required to be grouped into those that will and will not subsequently be reclassified to profit or loss with tax on items of other comprehensive income required to be allocated on the same basis.

• Amendments to IFRS 7 Financial Instruments: Disclosures enhancing disclosures about offsetting of financial assets and liabilities.

APICORP58

Annual Report 2013

A General (continued)A-2 Basis of preparation (continued)

iii. Standards and Interpretations in issue not yet effectiveManagement has not early applied the following new standards, amendments and interpretations that have been issued but not yet effective:

Effective for annual periods beginning on or after

• IFRS 9 Financial Instruments. The requirements of IFRS 9 represent a significant change from the classification and measurement requirements in IAS 39 Financial Instruments: Classification and Measurement in respect of financial assets. The most significant effect of IFRS 9 regarding the classification and measurement of financial liabilities relates to the accounting for changes in fair value of a financial liability (designated as at fair value through profit or loss) attributable to changes in the credit risk of the issuer.

Mandatory effective date to be determined by the IASB

• Amendments to IAS 32 Financial Instruments: Presentation relating to application guidance on the offsetting of financial assets and financial liabilities.

January 1, 2014

• Amendments to IFRS 7 Financial Instruments: Disclosures relating to disclosures about the initial application of IFRS 9.

When IFRS 9 is first applied

• Amendments to IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosures of Interests in Other Entities and IAS 27 Separate Financial Statements relating to exception from the requirement to consolidate subsidiaries for eligible Investment Entities

January 1, 2014

• IFRIC 21 Levies. January 1, 2014

• Amendment to IAS 36: Impairment of Assets relating to the disclosure of information about the recoverable amount of impaired assets if the amount is based on fair value less cost of disposal.

January 1, 2014

• Amendments to IAS 39: Novation of Derivatives and Continuation of Hedge Accounting.

January 1, 2014

• Amendments to IFRS 9: Financial Instruments relating to general hedge accounting

When IFRS 9 is first applied

• Amendments to standards resulting from the Annual Improvements cycle 2010-2012

July 1, 2014

• Amendments to standards resulting from the Annual Improvements cycle 2011-2013

July 1, 2014

The Management anticipate that all of the above Standards and Interpretations as applicable, will be adopted in the Group’s financial statements in future periods and that the adoption of those Standards and Interpretations will have no material impact on the financial statements of the Group in the period of initial application.

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, denominated in foreign currencies, are translated into US dollars at rates prevailing at the reporting 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.


APICORP 59


B FINANCIAL INSTRUMENTSFinancial assets and financial liabilities are recognised when a group entity becomes a party to the contractual provisions of the instruments.

Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition.

B-1 Financial Assets Classification

The Group classifies financial assets to the following IAS 39 categories:

Financial assets are classified into available-for-sale’ (AFS) financial assets, trading securities and loans and receivables.

The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace.

Trading securities are those that the Group acquires or incurs principally for the purpose of gains over the near-term or if it is a 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 Group or held to maturity. Available-for-sale investments include certain debt securities, equity securities and managed funds.

AFS equity investments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of such unquoted equity investments are measured at cost less any identified impairment losses at the end of each reporting period.

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and the Group does not intend to sell immediately or in the near term.

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.

MeasurementFinancial assets are initially measured at fair value plus direct 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. 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.

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 statement of income.

AmortizationWhere 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.

APICORP60

Annual Report 2013

B FINANCIAL INSTRUMENTS (continued)B-1 Financial Assets (continued) Fair value measurement principles

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. For financial assets traded in active markets, fair value is based on their quoted closing bid market prices or dealer price quotations at the reporting 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.

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 Group tests control to ensure that continuing involvement on the basis of any retained powers of control does not prevent derecognition).

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 or a group of financial association is impaired only 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 financial asset or group of financial assets that can be estimated reliably.

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

The Group 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 assets 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 Group 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 statement of income 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 statement of income, then the impairment loss is reversed, with the amount of the reversal recognised in statement of income.

Assets classified as available-for-sale In case of equity investments 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.

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 statement of income, 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 statement of income, the impairment loss is reversed through the statement of income.


APICORP 61


B FINANCIAL INSTRUMENTS (continued)B-2 Financial Liabilities Initial recognition and measurement

The Group has the following non-derivative financial liabilities: deposits from banks, deposits from corporates, deposits from shareholders, bank term financing, financing received under repurchase agreements for securities and bonds issued. Financial liabilities are initially recognized, on the trade date at which the Group becomes a part to 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.

Borrowing costs directly attributable to the acquisition of qualifying assets are capitalised as part of the cost of those assets. Other borrowing costs are recognised as an expense in the year in which they are incurred.

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

De-recognitionFinancial liabilities are derecognised when the Group’s contractual obligations are discharged, cancelled or expire.

C 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 from the acquisition date, which are subject to insignificant risk of fluctuation in their realisable value.

D REPURCHASE AND RESALE AGREEMENTSAssets sold with a simultaneous commitment to repurchase at a specified future date (repos) are not derecognised, as the Group 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 statement of financial position. 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.

E PROPERTY, EQUIPMENT AND VESSELSE-1 Recognition and Measurement

Items of property, equipment and vessels are stated at cost less accumulated depreciation and impairment losses, if any. Where items of property, equipment and vessels comprise significant components having different useful lives, these components are accounted for as separate items of property, equipment and vessels.

Any gain or loss on disposal of an item of property, equipment and vessels (calculated as the difference between the net proceeds from disposal and the carrying amount of the item) is recognised within other income in the statement of income.

E-2 Subsequent expenditureExpenditure incurred subsequently to replace a major component of an item of property, equipment and vessels 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, equipment and vessels. All other expenditure, for example on maintenance and repairs, is expensed in the statement of income as incurred.

E-3 DepreciationDepreciation is charged to the statement of income on a straight-line basis over the estimated useful lives of the items of property, equipment and vessels. Land is not depreciated.

The estimated useful lives of the Group’s property, equipment and vessels are as follows:• Buildings 40 years• Computers, Furniture & Equipment 5 to 10 years• Vessels 25 years from the date built

The property, equipment and vessels residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. The effects of any revision of the residual value, useful life and depreciation method are included in statement of income for the year in which the changes arise.

APICORP62

Annual Report 2013

E PROPERTY, EQUIPMENT AND VESSELS (continued)E-4 Impairment of non-financial assets

The carrying amounts of the non-financial assets are reviewed for impairment (or reversal of impairment) at each reporting date, and whenever there is indication that the assets may have changed in value. If any such indications exist, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss or reversal of impairment loss (if any).

Recoverable amount is the higher of fair value less costs to sell and value in use. If the recoverable amount of an asset is estimated to be less than its carrying value, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised immediately in statement of income.

Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, although the increased carrying amount cannot exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised immediately in statement of income.

F EMPLOYEES’ END OF SERVICE BENEFITSThe Group 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 reporting 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. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial assets and liabiliites. When calculating the effective interest rate, the Group 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 recognized in the statement of income when the Group’s right to receive payment is established.

G-3 Fee incomeFee income arises from financial services provided by the Group 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 analogous 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 Other incomeRent income is recognised in the statement of income on a time apportionment basis. Bareboat charter income is recognised on straight-line basis over the period of the contractual lease term. Call option premiums in the form of a flat fee are treated as an advance and amortized to income over the charter period.

H 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 Group holds derivative financial instruments to hedge its foreign currency and interest rate risk exposures.

The Group 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 Group 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 Group 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 the statement of income as incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for as described below.


APICORP 63


H DERIVATIVE FINANCIAL INSTRUMENTS (Continued)H-1 Fair value hedges

When 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 statement of income, changes in the fair value of the derivative are recognised immediately in statement of income 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 statement of income as part of the recalculated effective interest rate of the item over its remaining life.

H-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 statement of income as a component of other income.

H-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 Group and counterparty when appropriate.

I FINANCIAL GUARANTEEFinancial guarantees are contracts that require the Group 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 to settle the liability when a payment under the guarantee has become probable.

J CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTYThe preparation of the consolidated 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.

J-1 Critical judgements in applying accounting policiesIn the process of applying the Group’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 consolidated financial statements:

Impairment of available-for-sale investmentsThe Group 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.

Operating leasesThe Group has entered into a bareboat charter hire agreement for its vessels. The management considers that not all significant risks and rewards incidental to ownership of the vessels have been transferred to the lessee at the inception, during or at the end of the charter hire agreement, and accordingly, has classified the lease of the vessels as an operating lease. In determining significant risks and rewards of ownership, the management considered, among others, the significance of the lease term as compared with the estimated useful life of the vessels as well as the attractiveness or otherwise of a purchase option given to the sub-bareboat charter.

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J CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY (Continued)Residual value of the commercial marine vesselsThe depreciable amount of the commercial marine vessels comprise of the cost of the vessel less an estimated residual value. Industry steel price will be used to determine the residual value of the vessel as at each reporting date. Changes in industry steel price could impact the residual value of the vessel; thereby having an impact on the depreciation charge in subsequent reporting periods

J-2 Key sources of estimation uncertaintyThe key assumptions concerning the future and other key sources of estimation uncertainty at the reporting 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:

Impairment losses on loans and advances

The Group 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 Group 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.

Collective impairment provisions on loans and advances

In addition to specific provisions against individually significant loans and advances, the Group 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.

Fair value measurement Some of the Group’s assets and liabilities are measured at fair value for financial reporting purposes. In estimating the fair value of an asset or a liability, the Group uses market-observable data to the extent it is available. Where Level 1 inputs are not available, the Group’s Projects Department perform the valuation. The Group’s Projects Department works closely to establish the appropriate valuation techniques and inputs to the model.

K PROVISIONSThe Group 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.

L 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 Group, and as may be resolved by the General Assembly, on the recommendation of the Board of Directors.

M OFFSETTING FINANCIAL INSTRUMENTSFinancial assets and liabilities are offset and the net amount reported in the statement of financial position where there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously.

N OPERATING LEASESLeases, where substantially all risk and rewards incidental to ownership are retained by the owner are classified as operating lease. Rental income/expense from operating leases is recognised in statement of comprehensive income on a straight line basis over the lease period.


(US$000)

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 31 December 2013

1 PLACEMENTS WITH BANKS

2013 2012

With Islamic financial institutions 54,467 89,957With conventional financial institutions 437,432 428,733Reverse repurchase agreements 52,343 265,073Margin call accounts on securities sold under agreements to repurchase 1,630 8,384

545,872 792,147

Reverse repurchase agreements: The Group enters into collateralised placement transactions (Reverse repurchase agreements) in the ordinary course of its financing activities. At 31 December 2013, the fair value of securities that had been obtained as collateral under resale agreements was US$ 54,459 (2012: 269,689). These transactions are conducted under the terms that are usual and customary to standard securities lending and borrowings activities.

2. TRADING SECURITIES

2013 2012

Listed equity - 41

3. AVAILABLE-FOR-SALE SECURITIES

2013 2012

Fixed-rate bonds 921,187 734,684Floating-rate bonds 194,618 158,611Structured notes 29,781 28,970Managed funds 3,805 8,407Listed equities 34,073 21,457

1,183,464 952,129

Movement on allowance for impairment:Balance at 01 January 1,030 6,848Net reversal for the year (1,064) (1,024)Fair value changes 253 206Write off of impaired investments - (5,000)

Balance at 31 December 219 1,030

Securities sold under agreements to repurchase: The Group 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 2013, the fair value of available-for-sale securities that had been pledged as collateral under repurchase agreements was US$ 191,735 (2012: US$ 393,981). These transactions are conducted under the terms that are usual and customary to standard securities borrowings and lending activities.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 31 December 2013(US$000)

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4. AVAILABLE-FOR-SALE DIRECT EQUITY INVESTMENTS

2013 2012

Unlisted equities - (see below)Kingdom of Saudi Arabia

Saudi European Petro Co. (Ibn Zahr) 464,476 142,219The Industrialization and Energy Services Company (TAQA) 46,832 -

Republic of IraqArab Company for Detergent Chem (Aradet) 5,120 5,120

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

Arab Republic of EgyptAlexandria Fiber Co. SAE (AFC) - 2,150Egyptian Methanex Methanal Co. 107,642 15,603MISR Oil Processing Company SAE 33,911 33,911Egyptian Bahraini Gas Derivative Co. 5,000 5,000

Non-shareholder countriesTankage Mediterranee (Tankmed), Tunisia 1,112 1,112

676,373 217,395

Listed equities - carried at fair valueKingdom of Saudi Arabia

Yanbu National Petrochemical Company (Yansab) 146,234 100,607822,607 318,002

Movements during the year:

Balance at 1 January 318,002 324,284Additions during the year 131,232 -Sold during the year (see below) (7,039) (10,451)Impairment during the year (2,150) (2,850)Change in fair value during the year 382,562 7,019

Balance at 31 December 822,607 318,002

Movements on allowance for impairment

Balance at 01 January 93,382 90,532Impairment charge for the year 2,150 2,850Impairment reversal on sale for the year(see below) (4,166) -


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.


(US$000)

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4. AVAILABLE-FOR-SALE DIRECT EQUITY INVESTMENTS (Continued)During the year, the Group sold a partial stake in Yanbu National Petrochemical Company (Yansab) which resulted in a profit of US$ 6,897 thousand (2012: US$ 10,622 thousand).

During the year, the Group sold 100% of its holding in Oriental Petrochemical Co. amounting to US $ 4,166 thousand which was fully impaired. The disposal resulted in an impairment reversal of US$ 4,166 thousand and a profit of US$ 611 thousand.

Commitments - uncalled share capital 2013 2012

At the beginning of the year 11,130 51,130Commitments fulfilled /expired (6,481) (40,000)Commitments at 31 December 4,649 11,130

Commitments - Guarantees

At the beginning of the year 14,000 14,000Additional commitments during the year 5,300 -Commitments at 31 December 19,300 14,000

Companies in which the Group holds 20% or more of the equity are not treated as associates under IAS 28 - Investments in Associates because the Group’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 Group intends to exit these investments principally by means of strategic buy outs by an existing shareholder or through initial public offerings. The investment committee regularly evaluates exit opportunities. Accordingly, these investments are classified as available-for-sale assets.

As of 31 December 2013, all the Group’s shares in Egyptian Bahraini Gas Derivative Co. of US $ 5,000 thousand are pledged as security in favour of a bank to guarantee a loan issued to Egyptian Bahraini Gas Derivative Co.

5. SYNDICATED AND DIRECT LOANS

2013 2012

Unimpaired loans- Islamic 855,910 825,582- Conventional 2,117,411 2,121,082Unamortized participation and upfront fees (60,039) (61,821)Collective impairment allowance (12,924) (12,324)Impaired loansNon-performing loans (see below) 68,408 68,408Performing loans 30,224 30,174Allowance for specific impairments (34,355) (32,555)Dividends due to Government of Iraq, offset against defaulted loans (see below) (41,500) (41,500)

2,923,135 2,897,046

Impaired loans to companies fully owned by Government of IraqAs a result of the 1990-1991 second Gulf war, certain Government of Iraq controlled companies defaulted on loans amounting to US $ 51,848 thousand (2012: US $ 51,848 thousands) from the Corporation.

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 statement of financial position up to 2003.


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5. SYNDICATED AND DIRECT LOANS (Continued)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 due to the Government of Iraq, against the principal amounts of the defaulted loans due from Government of Iraq controlled companies.

Accordingly dividends of US $ 41,500 thousand (2012: US $ 41,500 thousand) due to the Government of Iraq (a shareholder in APICORP) have not been paid.

Since the beginning of default during 1990-92, the Corporation had kept memorandum record for contractual interest and fee on the defaulted Iraqi loans. Total contractual uncharged interest and fee on these impaired Iraqi loans amounts to US $ 136,937 thousands (2012: US $ 135,480 thousands).

2013 2012

Unimpaired loans movement during the yearOutstanding at 01 January 2,946,664 2,826,234

Draw-downs on new and existing loans 999,864 3,609,869Repayments during the year (975,298) (3,487,176)Reclassified as impaired - (3,289)Exchange rate movements 2,091 1,026

Unimpaired loans outstanding at 31 December 2,973,321 2,946,664

Undrawn loan commitments and guaranteesAt 01 January 510,959 344,836

Additional underwriting and commitment during the year 1,323,913 4,074,512Drawdowns during the year (999,864) (3,609,869)Expired commitments and other movements - net (183,087) (298,520)

Undrawn commitments at 31 December 651,921 510,959

Allowance for Specific impairment:At 01 January 32,555 44,809

Charge for the year 1,800 1,800Reversal of Specific impairment allowance - (9,554)Recovering of unpaid dividends due to the Government of Iraq - (4,500)

Balance at 31 December - net 34,355 32,555

Allowance for collective impairment

Balance at 01 January 12,324 10,264Additional allowance during the year 600 2,060



(US$000)

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6. PROPERTY, EQUIPMENT AND VESSELS

Land Building Vessels

Computers, Furniture & Equipment Total

CostBalance at 1 January 2012 4,004 55,491 - 15,665 75,160 Additions - 28 47,061 448 47,537 Balance at 31 December 2012 4,004 55,519 47,061 16,113 122,697 Additions - - 70,193 334 70,527 Balance at 31 December 2013 4,004 55,519 117,254 16,447 193,224

Accumulated DepreciationBalance at 1 January 2012 - 35,408 - 12,920 48,328 Depreciation for the year - 1,885 233 781 2,899 Balance at 31 December 2012 - 37,293 233 13,701 51,227 Depreciation for the year - 1,714 4,246 662 6,622 Balance at 31 December 2013 - 39,007 4,479 14,364 57,850

Carrying AmountBalance at 31 December 2013 4,004 16,512 112,775 2,084 135,375

Balance at 31 December 2012 4,004 18,226 46,828 2,412 71,470

During the year, the Group purchased a further three commercial marine vessels for US $ 69 million. All the five vessels have been leased to HETCO in the capacity of bareboat charterer for a non-cancellable period of 5 years. The bareboat charterer has entered into a Call Option Agreement affording it the right to buy the vessel declarable at any time but not exercisable before the 1st anniversary of the acquisition of the relevant vessel (the relevant “Exercise Date”). These vessels are mortgaged against the term loan facilities taken (note 10).

7. OTHER ASSETS

2013 2012

Accrued interest receivable 20,963 18,014Employee loans and advances 1,761 1,232Derivatives at fair value (note 13) 14,764 1,820Advance for purchase of assets - 4,845Miscellaneous receivables and advance payments 2,318 3,503

39,806 29,414

8. DEPOSITS FROM BANKS

2013 2012

Short-term deposits from conventional banks Non US dollar currencies 157,066 317,200

Short-term Murabaha financing from Islamic financial institutionsUS dollar currency 241,100 183,074Other currencies 42,410 192,545

440,576 692,819


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9. OTHER LIABILITIES

2013 2012

Accrued interest payable 18,804 21,385Dividend payable to shareholders 5,850 12,600Employees’ end of service benefits 10,898 9,629Accrued expenses 7,903 8,418Derivatives at fair value (note 13) 12,775 26,396Call liabilities 4,683 1,130Other payables 1,852 1,174

62,765 80,732

Movement on employees’ end of service benefitsBalance as at 1 January 9,629 8,121

Charge for the year 1,815 1,640Paid during the year (546) (132)

Balance as at 31 December 10,898 9,629

10. BANK TERM FINANCING

2013 2012

SAR 2,500 million loan 2012 - 2015 - fully drawn 666,667 666,667SAR 500 million loan 2012 - 2017 - fully drawn 133,333 133,333SAR 440 million loan 2012 - 2017 - fully drawn 117,333 117,333US$ 105 million loan 2012 - 2018 - fully drawn (see below) 81,362 34,371Unamortised front-end fee (4,779) (5,430)

993,916 946,274

The Corporation borrows at margins ranging from 80 basis points to 88 basis points (2012: 80 basis points to 88 basis) over the Saudi riyal interbank offered rate.

The Corporation’s bank 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$ 800 million.

During 2012, the subsidiary of the Group obtained a total line of credit amounting to US$ 105,000 thousand. Total draw down during availability period was US $ 86,309 thousand. The facility is borrowed at 3 months LIBOR plus margin of 3.25% (2012: 3 months LIBOR plus margin of 3.25%).

11. BONDS ISSUED

2013 2012

US$ 533 million bonds 2010 - 2015 - fully drawn 533,333 533,333Interest rate: Saudi riyal interbank offered rate plus 110 basis points

Unamortised front-end fee (819) (1,323)532,514 532,010

The Bonds are subject to following financial covenants, with which the Group 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.


(US$000)

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12. OFF-BALANCE SHEET EXPOSURES

2013 2012

Commitments to underwrite and fund loans (refer note 5) 651,921 510,959Commitments to subscribe capital to available-for-sale direct equity investments (refer note 4) 4,649 11,130Guarantees to bank on loans of investee companies (refer note 4) 19,300 14,000

675,870 536,089

13. DERIVATIVE FINANCIAL INSTRUMENTSFair value hedges The Group 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 Group uses derivatives, not designated in qualifying accounting hedge relationship, to manage its exposure to market risks. The Group enters into foreign exchange forward contracts to manage 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 Group as at 31 December are provided below:

2013 2012Asset Liabilities Asset Liabilities

Interest rate swaps (Fair value hedges) 11,670 12,012 405 23,798Foreign exchange contracts (Other derivatives held for risk management) 3,094 763 1,415 2,598At 31 December 14,764 12,775 1,820 26,396

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

2013 2012

Interest rate swaps (Fair value hedges) 824,448 617,144Foreign exchange contracts (Other derivatives held for risk management) 2,262,079 2,472,111At 31 December 3,086,527 3,089,255

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


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14 NET INTEREST INCOME

Interest income 2013 2012

Cash and bank balances 4 24Placements with banks - Islamic 1,670 2,485Placements with banks - Conventional 7,038 8,941Available-for-sale securities (net) 34,457 28,664Syndicated and direct loans - Islamic 12,664 13,440Syndicated and direct loans - Conventional 41,959 40,558Amortisation of loan participation and upfront fees 11,292 10,617Total interest income 109,084 104,729

Interest expense Deposits from banks and other cost - Conventional (3,322) (4,601)Deposits from banks and other cost - Islamic (3,566) (4,881)Securities sold under agreement to repurchase deposits (1,312) (2,399)Deposits from corporates & shareholders (14,532) (15,480)Interest rate swaps (11,164) (8,991)Bank term financing (18,182) (14,952)Bonds issued (11,211) (10,765)Amortisation of bank term financing front - end fees (2,774) (2,310)Unpaid dividends (158) (144)Total interest expense (66,221) (64,523)

Net interest income 42,863 40,206

15 NET FEE INCOME

2013 2012

Fee incomeUnderwriting and arranging services - 120Agency, advisory and other services 3,294 1,241Fee from securities lending activities - 48

3,294 1,409

Fee expenseCustody fees and other charges paid to banks (359) (333)Net fee income 2,935 1,076

16 DIVIDEND INCOME

2013 2012

Available-for-sale securities 1,147 793Available-for-sale direct equity investments 72,221 73,681

73,368 74,474

17 LOSS ON TRADING SECURITIES

2013 2012

Net loss on revaluation (1) (12)(1) (12)


(US$000)

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18 GAIN ON SALE OF AVAILABLE-FOR-SALE PORTFOLIO

2013 2012

Available-for-sale direct equity investments 7,508 10,622Available-for-sale securities 2,800 750

10,308 11,372

19 OPERATING EXPENSES

2013 2012

Staff costs 16,908 15,469Employees’ end of service benefits 1,692 1,640Premises costs, including depreciation 9,795 4,627Equipment and communications costs 2,401 1,513Key Management’s & Board benefits, fees and expense 4,435 3,881Donations 300 300Consultancy and legal fee 1,485 1,432Other corporate expenses 1,587 1,995

38,603 30,857

20 IMPAIRMENT REVERSALS

2013 2012

Charge for the yearSyndicated and direct loans (note 5):

Specific impairment allowance 1,800 1,800Collective impairment allowance 600 2,060

Available-for-sale direct equity investments (note 4) 2,150 2,8504,550 6,710

Less: recoveriesSyndicated and direct loans (note 5)

Government of Iraq - reversal through unpaid dividend - (4,500)Specific impairment allowance reversals - (9,554)Interest expense on unpaid dividend (note 14) (158) (144)

Available-for-sale direct equity investments (note 4) (4,166) -Available-for-sale securities (note 3) (1,064) (1,024)

(5,388) (15,222)

Net impairment reversals (838) (8,512)

21 OTHER INCOME

2013 2012

Exchange gains/(losses) 1,748 (898)Fair value hedge ineffectiveness 115 11Rent - head office building and housing compound 2,640 2,395Bareboat charter income (see below) 12,567 645Miscellaneous income 3,279 1,967

20,349 4,120


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21 OTHER INCOME (Continued)As at December 31, the future minimum lease payments under non-cancellable leases are receivable as follows:

2013 2012

Less than one year 13,676 7,992Between one and five years 44,176 21,926

22 APPROPRIATIONS

2013 2012

Legal reserve 11,400 11,000Dividends to equity holders - 45,000General Reserve 97,931 94,854

23 SHARE CAPITAL AND PER SHARE INFORMATIONThe calculation of earnings per share at 31 December 2013 was based on the profit of US$ 112,005 thousand (2012: US$ 108,931 thousand) and a weighted average number of shares of 750 thousand outstanding as at 31 December 2013 (2012: based on 750 thousand shares). The calculation of net asset value per share at 31 December 2013 was based on the net assets of US$ 1,804,575 thousand as at 31 December 2012: (2012: US$ 1,308,039 thousand) and a weighted number of shares of 750 thousand outstanding as at 31 December 2013 (2012: based on 750 thousand shares).

24 RELATED PARTY TRANSACTIONSAPICORP’s principal related parties are its shareholders. Although the Group does not transact any commercial business directly with the shareholders themselves, it is engaged in financing activities with companies, which are either controlled by the shareholder governments or over which they have significant influence.

Loans to related parties 2013 2012

Loans outstanding at 31 December - gross 1,918,617 1,930,868Allowance for specific impairments outstanding at 31 December (10,348) (10,348)Dividends due to Government of Iraq, offset against defaulted loans at 31 December (41,500) (41,500)Commitments to underwrite and fund loans at 31 December 486,282 315,568

Interest from loans during the year 27,618 33,250 Loan fees received during the year 7,820 7,091

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 Group may, or may not, be a leader. No loans to related parties were written off in 2013 and 2012.


(US$000)

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24 RELATED PARTY TRANSACTIONS (Continued)

Available-for-sale direct equity investments in related parties 2013 2012

Investments 822,607 318,002Commitments to invest 4,649 11,130Guarantees as shareholder 19,300 14,000Dividends received during the year 72,221 73,681

OthersDeposits from corporates 1,036 450,084Deposits from shareholders 105,476 104,476Dividend payable to shareholders 5,850 12,600Interest expense on deposits from corporates during the year 12,696 9,855Interest expense on deposits from shareholders during the year 1,000 1,004

Balances due to key management 762 494

For key management’s compensation, refer note 19.

25 CAPITAL ADEQUACYThe risk asset ratio at 31 December is as follows:

2013 2012

Carrying valuesOn-balance sheet assets (page 49) 5,675,163 5,077,575Off-balance sheet exposures (note 12) 675,870 536,089

6,351,033 5,613,664

Risk-weighted exposuresOn-balance sheet assets 4,751,235 3,858,976 Off-balance sheet exposures 412,360 536,089Total risk-weighted exposures 5,163,595 4,395,065

Capital adequacy ratio

Tier - 1 capital: share capital, legal & general reserves and retained earnings 1,207,531 1,096,719

Tier - 2 capital: Investments fair value reserve & collective impairment allowance 274,492 98,360

Qualifying capital 1,482,023 1,195,079

Capital base expressed as a percentage of total risk-weighted exposures:

Qualifying capital 28.70% 27.2%

Tier 1 capital 23.39% 24.9%

The Group’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 Group 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 Group manages / monitors its capital based on the capital adequacy ratios prescribed by Basel Committee. The Group has complied with all externally imposed capital requirements throughout the year (note 10 and 11). There have been no material changes in the Group’s management of capital during the year.


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26 FINANCIAL INSTRUMENTS AND RISK MANAGEMENTFinancial risk management objectivesThe Group’s Board of Directors has overall responsibility for the establishment and oversight of the Group’s risk management framework. The Board of Directors has established the Group Risk Management committee, which is responsible for developing and monitoring Group risk management policies.

The Group’s risk management policies are established to identify and analyses the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group’s activities. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations.

The Group Audit Committee oversees how management monitors compliance with the Group’s risk management policies and procedures, and reviews the adequacy of the risk management framework in relation to the risks faced by the Group, The Group Audit Committee is assisted in its oversight role by Internal Audit. Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Group Audit Committee.

Credit risk managementCredit risk is the risk that a borrower or counter-party of the Group will be unable or unwilling to meet a commitment that it has entered into with the Group, causing a financial loss to the Group. It arises from the lending, treasury and other activities undertaken by the Group. 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 the Group’s exposure to credit risk.

The Group 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 GCC countries, 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)

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26 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Continued)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-salesecurities (note 3)

2013 2012 2013 2012 2013 2012

Impaired individuallyGrade F 68,408 68,408 - - - -Grade E 17,745 - - - - -Grade D - - - - - -Grade C 12,479 30,174 - - - -

Gross amount 98,632 98,582 - - - -Unpaid dividends and interest due to Government of Iraq (41,500) (41,500) Allowance for impairment (34,355) (32,555) - - - -Carrying amount 22,777 24,527 - - - -Past due but not impairedGross amount - - - - - -Allowance for impairments - - - - - -Carrying amount - - - - - -Neither past due nor impairedAccounts without renegotiable terms

Grade B 12,864 14,406 - - - -Grade A 2,960,457 2,932,258 - - - -

Allowance for impairments - - - - - -Accounts with renegotiable terms -

Grade B - - - - - -Grade A - - - - - -

Subtotal neither past due nor impaired 2,973,321 2,946,664 - - - -Bank placements in OECD countries (see below) Rated A- - - 60,975 339,073 - -Banks placement in non-OECD countries

Rated A to AA - - 400,000 397,220 - -Rated B to BB - - 84,897 55,854 - -Not Rated - - - - - -

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

Rated A to AA - - - - 600,994 490,196Rated B to BB - - - - 283,468 200,500

Governments and public sector Rated A to AA - - - - 32,825 20,055Rated B to BB - - - - 60,485 43,700Others sectorsRated A to AA - - - - 167,814 167,814Rated B to BB - - - - - -Subtotal total 2,996,098 2,971,191 545,872 792,147 1,145,586 922,265Collective impairment allowance (12,924) (12,324) - - - -Unamortised participation and commitment (60,039) (61,821) - - - -Total carrying amount on 31 December 2,923,135 2,897,046 545,872 792,147 1,145,586 922,265

* OECD (Organisation for Economic Co-operation and Development countries)


APICORP78

Annual Report 2013

26 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Continued)Credit risk management (continued)The Group monitors concentration of credit risk by sector and by geographic location. An analysis of concentration of risk at the reporting date is shown below (also refer note 32 and 33).

Syndicated and directloans (note 5)

Placements withbanks (note 1)


2013 2012 2013 2012 2013 2012

Concentration of credit risk by sector

Oilfield production development services 564,289 464,399 - - 3,411 2,301Floating production, storage and offloading Facilities 204,714 190,825 - - - -Liquefied Natural Gas (LNG) Plants 39,393 11,580 - - 33,519 22,500Petroleum and petrochemicals 683,806 744,919 - - 48,394 49,013Maritime transportation 38,459 48,865 - - - -Refineries 591,558 512,204 - - - -Power generation 295,196 251,092 - - 4,602 -Other petroleum 502,969 670,412 - - - 194Banks and financial institutions 2,751 2,750 545,872 792,147 17,193 13,387Governments and public sector - - - - 993,425 787,899Other industries - - - - 45,042 46,971

Carrying amount on 31 December 2,923,135 2,897,046 545,872 792,147 1,145,586 922,265

Syndicated and directloans (note 5)

Placements withbanks (note 1)


2013 2012 2013 2012 2013 2012

Concentration of credit risk by location

Kingdom of Saudi Arabia 1,187,479 1,244,120 132,670 135,000 173,286 139,997State of Qatar 821,894 869,248 215,104 269,709 191,279 209,066Other Gulf Cooperation Council states 502,914 398,789 138,757 48,422 607,404 446,154Egypt and North Africa 182,810 147,713 - - - -Total Arab World 2,695,097 2,659,870 486,531 453,131 971,969 795,217Europe 99,897 177,565 51,804 310,455 81,036 81,495Asia Pacific 128,141 59,204 7,537 28,561 - -United States - 407 - - 92,581 45,553

Carrying amount on 31 December 2,923,135 2,897,046 545,872 792,147 1,145,586 922,265

Liquidity risk and funding managementLiquidity risk is the risk that Group will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset. Liquidity risk management ensures that funds are available at all times to meet the funding requirements of the Group.

The Group’s liquidity management policies are designed to ensure that even under adverse conditions, the Group has access to adequate funds to meet its obligations, and to service it core investment and lending 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 Group also ensures availability of bank term financing at competitive rates, at all times to meet long term funding requirements of the Group. During 2008, the Group also obtained, from its existing shareholders, a total line of credit amounting to US$ 1 billion. This line of credit is available to the Group to draw funds from its shareholders, if required. At 31 December 2013 unutilised funding from this credit line was US $894,524 thousand (2012: US $895,524 thousand).


(US$000)

APICORP 79

26 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Continued)Liquidity risk and funding management (Continued)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)

Up to 3 months 1 year 5 years Contractual Carrying 2013 3 months to 1 year to 5 years and over Outflows value

Liabilities Deposits from banks (120,264) (324,447) - - (444,711) (440,576)Deposits from corporates (723,528) (846,527) - - (1,570,055) (1,561,201)Deposits from shareholders (105,562) - - - (105,562) (105,476)Securities sold under agreement to repurchase (275) - (171,983) - (172,258) (171,983)Bank term financing (3,243) (9,768) (1,060,448) - (1,073,459) (993,916)Bond (2,616) (8,000) (544,107) - (554,723) (532,514)

(955,488) (1,188,742) (1,776,538) - (3,920,768) (3,805,666)

Derivative instruments:Interest rate swaps (9,425) (24,197) (87,458) (31,144) (152,224) (12,012)

Forward exchange contracts (1,681,463) (576,372) - - (2,257,835) (763)Off-balance sheet exposures (103,662) (126,396) (298,699) (147,113) (675,870) (675,870)

(1,794,550) (726,965) (386,157) (178,257) (3,085,929) (688,645)

Up to 3 months 1 year 5 years Contractual Carrying 2012 3 months to 1 year to 5 years and over Outflows Value

Liabilities Deposits from banks (580,633) (118,364) - - (698,997) (692,819)Deposits from corporates (874,186) (187,919) - - (1,062,105) (1,057,429)Deposits from shareholders (31,684) (73,169) - - (104,853) (104,476)Securities sold under agreement to repurchase (143,440) (213,170) - - (356,610) (354,603)Bank term financing (4,542) (15,539) (985,657) (20,079) (1,025,817) (946,274)Bond (2,757) (8,423) (555,754) - (566,934) (532,010)

(1,637,242) (616,584) (1,541,411) (20,079) (3,815,316) (3,687,611)

Derivative instrumentsInterest rate swaps (4,217) (24,747) (61,115) (23,500) (113,579) (23,798)Forward exchange contracts (2,032,500) (456,187) - - (2,488,687) (2,598)Off-balance sheet exposures (146,159) (147,870) (186,400) (55,661) (536,090) (536,089)

(2,182,876) (628,804) (247,515) (79,161) (3,138,356) (562,485)


APICORP80

Annual Report 2013

26 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Continued)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 Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return on risk.

The Group 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.

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 Group’s funding, and interest rates for both are normally linked to LIBOR. The Group’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 Group’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 Group’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 Group’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 statement of financial position) is as follows:

100 bp parallel increase 25 bp parallel decreaseProfit/loss Equity Profit/loss Equity

At 31 December 2013 1,036 (56) (259) 55At 31 December 2012 1,073 (80) (321) 31

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

2013 2012

Fixed rate instrumentsFinancial assets 921,187 734,684Financial liabilities (824,448) (617,144)

96,739 117,540

Variable rate instrumentsFinancial assets 3,756,188 3,876,774Financial liabilities (3,805,666) (3,687,611)

(49,478) 189,163


(US$000)

APICORP 81

26 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Continued)

Market risk management (Continued)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 the Group to undue risks. Currently there is no trading in foreign exchange. The Group’s net currency exposures are set out in note 31. The Group’s exposures in the currencies other than US $ is also hedged by entering into forward contracts. An analysis of the Group’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% strengthening of US $ 5% weakening of US $

At 31 December 2013EUR 234 (234)GBP (319) 319CHF 2 (2)KWD 36 (36)JPY 13 (13)EGP 52 (52)

At 31 December 2012 5% strengthening of US $ 5% weakening of US $

EUR 1,236 (1,236)GBP (318) 318CHF 2 (2)KWD 55 (55)JPY 3 (3)EGP (45) 45

Equity prices risk is the risk that Groups 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. Group’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 Group. 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.


APICORP82

Annual Report 2013

27 EFFECTIVE INTEREST RATESThe weighted average effective interest rates of the Group’s financial instruments at the reporting date were:

2013 2012

Interest-bearing financial assetsFixed-rate bonds 4.65% 4.66%Floating-rate bonds 1.21% 1.38%Structured notes 0.00% 0.00%Placements with banks 1.25% 1.58%Syndicated and direct loans 1.64% 1.67%

US dollar denominated 1.63% 1.66%Non-dollar 1.87% 1.92%

Interest-bearing financial liabilitiesDeposits from banks 1.11% 1.37%

US dollar denominated 1.22% 1.34%Non-dollar - Euros, Swiss francs and Saudi riyals 0.97% 1.38%

Deposits from corporates 1.01% 1.22%Deposits from shareholders 0.92% 0.96%Securities sold under agreement to repurchase 0.62% 0.81%Bank term financing 2.01% 2.07%Bonds issued 2.15% 2.16%

US$ LIBOR at 31 December was:One-month 0.17% 0.21%Three-month 0.25% 0.31%Six-month 0.35% 0.51%


(US$000)

APICORP 83

28 FAIR VALUE HIERARCHY AND CATEGORIESValuation of financial instrumentsThe Group measures fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements:

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date;

Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and

Level 3 inputs are unobservable inputs for the asset or liability.

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:

2013 Level 1 Level 2 Level 3 Total

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

Fixed-rate bonds 921,187 - - 921,187Floating-rate bonds 194,618 194,618Structured notes 29,781 - - 29,781Managed funds 3,805 - - 3,805Listed equities 34,073 - - 34,073

Available-for-sale direct equity 146,234 464,476 154,475 765,185

Derivative financial assets - 14,764 - 14,764

Total 1,329,698 479,240 154,475 1,963,413

Derivative financial liabilities - 12,775 - 12,775

2012 Level 1 Level 2 Level 3 Total

Trading securities 41 - - 41Available-for-sale securitiesFixed-rate bonds 734,684 - - 734,684Floating-rate bonds 158,611 - - 158,611Structured notes 28,970 - - 28,970Managed funds 8,407 - - 8,407Listed equities 21,457 - - 21,457Available-for-sale direct equity 100,607 - - 100,607

Derivative financial assets - 1,820 - 1,820

1,052,777 1,820 - 1,054,597

Derivative financial liabilities - 26,396 - 26,396


APICORP84

Annual Report 2013

28 FAIR VALUE INFORMATION HIERARCHY AND CATEGORIES (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).

2013

Fair value through

profitor loss

Loans and receivables

AFS investments

Others at amortised

costCarrying amount

Fairvalues

Cash and bank balances - 24,904 - - 24,904 24,904Placements with banks - 545,872 - - 545,872 545,872Trading securities - - - - - -Available for sale securities - - 1,183,464 - 1,183,464 1,183,464Available-for-sale direct equity (see below) - - 822,607 - 822,607 822,607Syndicated and direct loans (Fair value - based on discounted cash flows at current market prices) - - - 2,923,135 2,923,135 3,027,755Other assets 14,764 1,761 - - 16,525 16,525Total assets 14,764 572,537 2,006,071 2,923,135 5,516,507 5,621,127

Deposits from banks - - - 440,576 440,576 440,576Deposits from corporates - - - 1,561,201 1,561,201 1,561,201Deposits from shareholders - - - 105,476 105,476 105,476Securities sold under agreement to repurchase - - - 171,983 171,983 171,983Other liabilities 12,775 - - 1,852 14,627 14,627Bank term financing (Fair value - based on current market rates for similar remaining maturity) - - - 993,916 993,916 993,916Bonds issued(Fair value - based on current market rates for similar remaining maturity) - - - 532,514 532,514 532,514

Total liabilities 12,775 - - 3,807,518 3,820,293 3,820,293

Certain 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 Group on the investee companies.


(US$000)

APICORP 85

28 FAIR VALUE INFORMATION HIERARCHY AND CATEGORIES (Continued)

2012

Fair value through

profitor loss

Loans and receivables

AFS investments

Others at amortised

cost Carrying amount

Fairvalues

Cash and bank balances - 17,326 - - 17,326 17,326Placements with banks - 792,147 - - 792,147 792,147Trading securities 41 - - - 41 41Available for sale securities - - 952,129 - 952,129 952,129Available-for-sale direct equity - - 318,002 - 318,002 318,002Syndicated and direct loans (Fair value - based on discounted cash flows at current market prices) - - - 2,897,046 2,897,046 3,012,640Other assets 1,820 9,580 - - 11,400 11,400Total assets 1,861 819,053 1,270,131 2,897,046 4,988,091 5,103,685

Deposits from banks - - - 692,819 692,819 692,819Deposits from corporate - - - 1,057,429 1,057,429 1,057,429Deposits from shareholders - - - 104,476 104,476 104,476Securities sold under agreement to repurchase - - - 354,603 354,603 354,603Other liabilities 26,396 - - 19,756 46,152 46,152Bank term financing (Fair value - based on current market rates for similar remaining maturity) - - - 946,274 946,274 946,274Bonds issued(Fair value - based on current market rates for similar remaining maturity) - - - 532,010 532,010 532,010Total liabilities 26,396 - - 3,707,367 3,733,763 3,733,763

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 Group on the investee companies.


APICORP86

Annual Report 2013

28 FAIR VALUE INFORMATION HIERARCHY AND CATEGORIES (Continued)Fair value of the Group’s financial assets and financial liabilities that are measured at fair value on a recurring basis, some of the Group’s financial assets and financial liabilities are measured at fair value at the end of each reporting period. The following table gives information about how the fair values of these financial assets and financial liabilities are determined (in particular, the valuation technique(s) and inputs used).

Financialassets/financial liabilities

Fair value as at

Fair value hierarchy

Valuation technique(s)

and key input(s)

Significant unobservable

input(s)

Relationship of

Unobservable inputs to fair

value2013 2012

1) Interest rate swap (refer note 13)

Asset 11,670

Liabilities12,012

Asset 405Liabilities23,798

Level 2

Discounted cash flow. Future cash

flow estimated based on forward interest rates from observable yield curves at the end of the reporting

period) and contract interest rates, discounted

at a rate that reflects the credit

risk of various counter parties

N/A N/A

2) Foreign currency forward contracts (refer note 13)

Asset 3,094

Liabilities763

Asset 1,415

Liabilities2,598

Level 2

Discounted cash flow. Future

cash flows are estimated based

on forward exchange rates

(from observable forward exchange rates at the end of the reporting

period) and contract forward rates, discounted

at a rate that reflects the credit

risk of various counterparties.

N/A N/A


(US$000)

APICORP 87

28 FAIR VALUE INFORMATION HIERARCHY AND CATEGORIES (Continued)

Financialassets/financial liabilities

Fair value as at

Fair value hierarchy

Valuation technique(s)

and key input(s)

Significant unobservable

input(s)

Relationship of Unobservable inputs to fair

value2013 2012

3) Available-for-sale direct equity investments (refer note 4)

Saudi European Petro Co. (Ibn Zahr)

Asset 464,476

Asset 142,219 Level 2 EV/EBITDA

Multiple method

Discount for lack of

marketability determined

by reference to the

share price of listed entities

in similar industries

The higher the discount, the lower the

fair value.

Available-for-sale direct equity investments (refer note 4)

Egyptian Methanex

Methanal Co. Asset

107,643

Asset 15,603 Level 3 Recent

Transaction



by reference to the




fair value.

Available-for-sale direct equity investments (refer note 4)

The Industrialization

and Energy Services Company

(TAQA) Asset 46,832

Asset Nil Level 3 Recent Transaction



by reference to the




fair value.

The movement in level 3 investments represents change in fair value during the year.


APICORP88

Annual Report 2013

29 MATURITY PROFILE OF ASSETS AND LIABILITIESThe maturity profile of the Group’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.

2013Up to 3 months

3 monthsto 1 year

1 yearto 5 years

5 yearsand over Total

ASSETSCash and cash equivalents 24,904 - - - 24,904Deposits with banks 462,014 83,858 - - 545,872Trading securities - - - - -Available-for-sale securities - 162,796 646,025 374,643 1,183,464Available-for-sale direct equity investments - - - 822,607 822,607Syndicated and direct loans 114,271 366,108 1,244,321 1,198,435 2,923,135Property, equipment and vessels - - - 135,375 135,375Other assets 18,056 10,081 1,113 10,556 39,806Total assets 619,245 622,843 1,891,459 2,541,616 5,675,163

LIABILITIES AND EQUITYDeposits from banks (120,025) (320,551) - - (440,576)Deposits from corporate (721,825) (839,376) - - (1,561,201)Deposits from shareholders (105,476) - - - (105,476)Securities sold under agreement to repurchase - - (171,983) - (171,983)Other liabilities (14,691) (26,324) (6,354) (15,396) (62,765)Bank term financing (977) (2,931) (990,008) - (993,916)Bond 126 378 (533,018) - (532,514)Equity - - - (1,804,575) (1,804,575)Non-controlling Interest - - - (2,157) (2,157)Total liabilities and equity (962,868) (1,188,804) (1,701,363) (1,822,128) (5,675,163)Maturity gap (343,623) (565,961) 190,096 719,488 -

Cumulative maturity gap (343,623) (909,584) (719,488) - -

2012Total assets 876,672 343,723 2,019,040 1,838,140 5,077,575Total liabilities and equity (1,650,950) (605,547) (1,455,818) (1,365,260) (5,077,575)

Maturity gap (774,278) (261,824) 563,222 472,880 -

Cumulative maturity gap (774,278) (1,036,102) (472,880) - -


(US$000)

APICORP 89

30 REPRICING PROFILE OF FINANCIAL ASSETS AND LIABILITIESThe repricing profile of the Group’s interest bearing financial assets and liabilities at 31 December was as follows:

2013Up to 3 months

3 monthsto 1 year

1 yearto 5 years

More than5 years Total

ASSETSPlacements with banks 462,011 83,861 - - 545,872Available for sale securitiesFloating-rate bonds 158,618 36,000 - - 194,618

Structured notes - - 29,781 - 29,781Syndicated and direct loansUS$ denominated 1,885,535 995,030 - 44,220 2,924,785Non US$ denominated - 78,758 - - 78,758

LIABILITIESDeposits from banks

US$ denominated (3,100) (238,000) - - (241,100)Non US$ denominated (116,925) (82,551) - - (199,476)

Deposits from corporate (721,824) (839,377) - - (1,561,201)

Deposits from shareholders (105,476) - - - (105,476)Securities sold under agreement to repurchase (171,983) - - - (171,983)Bank term financing (800,000) (198,695) - - (998,695)Bonds issued (533,333) - - - (533,333)Interest rate sensitivity gap 53,523 (164,974) 29,781 44,220 (37,450)Cumulative Gap 53,523 (111,451) (81,670) (37,450)

2012Up to 3 months

3 monthsto 1 year

1 yearto 5 years

More than5 years Total

ASSETSPlacements with banks 792,147 - - - 792,147Available for sale securities

Fixed-rate bondsFloating-rate bonds 158,671 - - - 158,671Structured notes 28,970 28,970

Syndicated and direct loansUS$ denominated 1,876,138 990,213 - 18,620 2,884,971Non US$ denominated - 91,867 - - 91,687

LIABILITIESDeposits from banks

US$ denominated (121,652) (61,422) - - (183,074)Non US$ denominated (454,278) (55,467) - - (509,745)

Deposits from corporate (870,936) (186,493) - - (1,057,429)Deposits from shareholders (31,657) (72,819) - - (104,476)Securities sold under agreement to repurchase (143,403) (211,200) - - (354,603)Bank term financing (818,371) (133,333) - - (951,704)Bonds issued (533,333) - - - (533,333)Interest rate sensitivity gap (146,674) 361,346 28,970 18,620 262,262Cumulative Gap (146,674) 214,672 243,642 262,262 -


APICORP90

Annual Report 2013

31 CURRENCY EXPOSURESThe Group’s currency exposures at 31 December were as follows:

AssetsLiabilitiesand equity

2013Net

Exposure

2012Net

exposure

ASSETS, LIABILITIES AND EQUITYUnited States dollar 3,504,201 (3,519,696) (15,495) (104,946)Euro 23,406 (18,731) 4,675 24,716 Other OECD currencies (see below) 51 (6,147) (6,096) (6,278)Arab currenciesGCC (see below) 2,147,505 (2,131,629) 15,876 87,406 Egypt and North Africa - 1,040 1,040 (898)

5,675,163 (5,675,163) - -

COMMITMENTS AND GUARANTEES 2013 2012

United States dollar 675,870 536,089

Other OECD currenciesThe other member countries of the Organisation for Economic Co-operation and Development, excluding the United States and the 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.

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

2013 2012

Euro EUR 1=US$ 1.3812 1.3221Saudi riyal SAR 1=US$ 0.2666 0.2666Swiss franc CHF 1=US$ 1.1260 1.0887British pound GBP 1=US$ 1.6478 1.6264Egyptian pound EGP 1=US$ 0.1441 0.1570

Since the Group’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)

APICORP 91

32 INDUSTRY DISTRIBUTION OF ASSETS AND LIABILITIES The industry distribution of the Group’s assets and liabilities was as follows:

2013 2012

ASSETSPetroleum and petrochemicals

Refineries 591,558 512,204Oilfield production development and services 639,619 491,588Floating production, storage and offloading facilities 239,921 193,375Liquefied natural gas (LNG) plants 84,308 42,803Petrochemical plants 1,501,589 1,117,139Maritime transportation 121,413 50,324Power generation 301,258 252,215Other petroleum 516,363 679,778

Total petroleum and petrochemicals 3,996,029 3,339,426

Banks and financial institutions 604,728 826,009Other industries 49,679 106,468Governments and public sector institutions 1,024,727 805,672

Total assets at 31 December 5,675,163 5,077,575

LIABILITIES AND EQUITYBanks and financial institutions 2,997,033 2,810,216Other petroleum and petrochemicals 336,054 422,680Government and public sector institutions 535,344 535,447Equity 1,806,732 1,309,232Total liabilities and equity at 31 December 5,675,163 5,077,575

COMMITMENTS AND GUARANTEESPetroleum and petrochemicals

Refineries 61,400 40,000Oilfield production development and services 193,203 222,840Petrochemicals plants 218,249 67,348Maritime transportation 48,067 13,090Power generation 100,756 123,672Other petroleum 54,195 69,139

Total commitments and guarantees at 31 December 675,870 536,089


APICORP92

Annual Report 2013

33 GEOGRAPHICAL DISTRIBUTION OF RISK The geographical distribution of risk of the Group’s assets and liabilities, after taking into account insurance and third-party guarantees, was as follows:

2013 2012

ASSETSKingdom of Saudi Arabia 2,231,951 1,824,472State of Qatar 1,219,209 1,361,562Other Gulf Cooperation Council states 1,279,473 901,299Other Middle East states 5,120 5,120Egypt and North Africa 348,066 230,116Total Arab World 5,083,819 4,322,569

Europe 231,426 561,823Asia Pacific 136,141 90,437United States 66,322 48,126Other North and South America 157,455 54,620Total assets 5,675,163 5,077,575

LIABILITIES AND EQUITYKingdom of Saudi Arabia 2,602,201 2,638,980State of Qatar 261,180 279,330Other Gulf Cooperation Council states 1,865,415 1,355,768Other Middle East states 276,860 211,970Egypt and North Africa 492,110 380,957Total Arab World 5,497,766 4,867,005

Europe 2,935 34,644Asia Pacific 173,346 173,664United States 1,116 446Other North and South America - 1,816Total liabilities and equity 5,675,163 5,077,575

COMMITMENTS AND GUARANTEESKingdom of Saudi Arabia 231,209 111,060State of Qatar 47,899 66,362Other Gulf Cooperation Council states 106,764 85,435Other Middle East states - 15,000Egypt and North Africa 80,834 84,100Total Arab World 466,706 361,957

Europe 52,593 125,588Asia Pacific 101,990 40,016United States -Other North and South America 54,581 8,528

675,870 536,089

annual رـيرقتلا report يونـسلا 2013 - apicorp ar 2013 english.pdfannual report 2013...

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