The Essence of Investment - APICORP · 2018-11-19 · negative impact that these investments may be...

Annual Report 2008

The Essence of Investment

2 APICORP Annual Report 2008

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

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

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

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

1APICORP Annual Report 2008

APICORP Shareholders 2Mission and Vision 3Financial Summary 3Board of Directors 4Executive Management 5Chairman’s Statement 6 Annual Review of the Arab Macro-economic and Energy Investment Outlooks The Oil Market Crisis 10 Impact of the Arab/MENA Macro-economic Outlook 11 Impact on Arab/MENA Energy Investment Outlook 12 Financing Options and Challenges 14 Conclusions and Policy Recommendations 15

Board of Directors’ Report: APICORP Activities in 2008 Project and Trade Finance 17 Project Finance 17 Trade Finance 18 Advisory 19 Direct Equity Investments 21 APICORP Equity Participations 25 Treasury & Capital Markets Activities in 2008 28 The Department of Economics & Research 29 Conferences and Seminars 2008 30 2008 Financial Statements 31 Independent Auditors’ Report to the Shareholders 32 Balance Sheet 33 Income Statement 34 Statement of Changes in Equity 35 Statement of Cash Flows 36 Formation, Status and Activities of APICORP 37 Significant Accounting Policies 38 Notes to the Financial Statements 43

CONTENTS


APICORP

5% 15% 3% 17%

3%10%

17%3%10%

17%

Arab Petroleum Investments Corporation (APICORP) is an inter Arab joint stock company established in 23 November 1975 in accordance with an international agreement between the governments of ten member states of the Organisation of Arab Petroleum Exporting Countries (OAPEC).

APICORP’S SHAREHOLDERSAPICORP is wholly owned by member states of (OAPEC) as listed on the map below:

APICORPThe Pioneer Financial Institution of the Arab Oil and Gas Industry


APICORP’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• Bethepartnerofchoiceofoilandgasandenergy-relatedcompanies,bothpublic and private;• Berecognizedasaworld-classprofessionalinstitutionandtheleadingsourceof research on the Arab hydrocarbon and energy industries

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

MISSION AND VISION

Financial Summary 2006-2008

NET INCOME US$ million

TOTAL ASSETS US$ million

SHAREHOLDER’S EQUITY US$ million

2006

2006

2006

2007

2007

2007

2008

2008

2008

897

894,

750

1,02

0

2,60

0,00

0

3,57

3,35

7

3,56

3,80

2

27,6

10

79.7

51.0


BOARD OF DIRECTORS

Naser Mohamed Al-SharhanFor the United Arab Emirates

(Member of the Audit Committee)

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

Mahmood Hashim Al-KoohejiFor the Kingdom of Bahrain

(Chairman of the Audit Committee)

Farid BakaFor the Democratic and Popular

Republic of Algeria(Member of the Audit Committee)

Deputy Chairman of the BoardMohamed Ali Al-Huweij

For the Socialist Peoples’ Libyan Arab Jamahiriya

Chairman of the BoardAbdullah A. Al-Zaid

For the Kingdom of Saudi Arabia

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


H.E. Eng. Sameh FahmiFor the Arab Republic of Egypt

Ibrahim Ben A. Al-MannaieFor the State of Qatar


*Hassan M. Habib Al-RufaieFor the Republic of Iraq

*Fayadh Hassan Nima as from April 2009.


ExECuTIVE MANAgEMENT

AHMAD BIN HAMAD AL-NuAIMIChief Executive and General Manager

PROJECTS DEPARTMENT

DR. ABDuLAZIZ S. ALIDIExecutive Vice President

TALAL KHALILSenior Vice PresidentBusiness DevelopmentMediterranean Arab Countries

IRFAN SAYED ALISenior Vice PresidentGCC Business Group

PROJECT & TRADE FINANCE DEPARTMENT

NICOLAS THEVENOTExecutive Vice President

BASSAM AL-TAMIMISenior Vice PresidentNAAM Business Group

ZIA uL RAB SIDDIQuIVice PresidentGCC Business Group

SAMI AL-SuNAIDVice President, Trade Finance

KAMEL ALI BuKHAMSINVice President, Trade Finance

RAJESH RAMANATHANVice President, GCC Business Group

VINIT MAHESHWARIVice President, GCC Business Group

OWAIS ZuBAID AHMEDVice President, GCC Business Group

TREASuRY & CAPITAL MARKETS DEPARTMENT

HESHAM FARIDActing Executive Vice President

RICHARD BuRNELLVice PresidentMoney Markets & Foreign Exchange

FAIQ HuSSAINVice President, MM, FX and Arbitrage

DHAFER AL-MASKATIVice PresidentCorporate & Financial Institutions

RAVI KuMARVice President, Portfolio Management

FINANCIAL CONTROL DEPARTMENT

AYMAN F. ZEYADAHead

KHALED YOuSEFAccounts and Control Manager

MOHAMED SuBA’AFinancial Accounting Manager

MOHAMED AL-MuBARAKOperations Manager

AHMED ABu AL SHAMATPayroll and Accounts Payable, Manager

KAMRAN KHANFinancial & Management Accounts,Manager

LEgAL DEPARTMENT

ALI HASSAN FADELGeneral Counsel

ADMINISTRATION

SAMIR EL gHONAIMYBoard of Directors and General Assembly Affairs, Manager

MAHDI AL-MADHIPublic Affairs Manager

HuMAN RESOuRCES

ABDuLAZIZ A. AL-NAIMIHuman Resources Manager

INFORMATION SYSTEMS DEPARTMENT

MOHAMMED I. EL-KHOuLYHead

MOHAMED MAS’ADEHBanking & Financial Applications, Manager

ECONOMIC & RESEARCH DEPARTMENT

ALI AISSAOuIHead

WICHAI TuRONgPuNManager

gLOBAL MARKETINg &PROJECT COORDINATION

NAJWA AL-TuNISIHead

RISK MANAgEMENT uNIT

SuRESH MERguHead


CHAIRMAN’S STATEMENT

The Financial Markets TurmoilThe continuing financial turmoil, ignited by the subprime mortgage credit crisis in the United States, which then led to thedestabilizationof theentirefinancialsystemworldwide,has moved into a more severe phase. Following the collapse of Lehman Brothers, and in spite of the drastic measures taken by Governments and their Central Banks to prevent further bank failures and to restore confidence, the markets remain in turmoil, reflecting heightened fears of a prolonged global recession.

Financial ResultsAPICORP’s operations in 2007 reported a net income of US$ 27.6 million, compared to US$ 79.7 million. Total assets stood at US$3.56 billion compared to US$ 3.57 billion at the end of December 2007, while total shareholder’s equity were US$ 895 million compared to US$ 1.02 Billion in 2007.

The fall in the Corporation’s financial results was a result of the financial crisis that spilled over the world’s financial markets. Being a financial institution, APICORP’s is not immune from the crisis, and like all financial institutions have exposures to other financial institutions both in Arab region or worldwide. As a result, some of our investment portfolios were affected resulting in the allocation of provisions to meet the potential negative impact that these investments may be faced with.

It is my pleasure to present to you, on behalf of the Board of Directors of Arab Petroleum Investments Corporation (APICORP), the 33rd Annual Report on the Corporation’s activities and financial results for the year ended 31 December 2008.


Dividend PayableIn accordance with the Corporation’s statutes, 10% of the net profit has been transferred to the Legal Reserve. And in view of the ensuing financial crisis, the Board of Directors sanctioned that future dividends distribution for the coming three years shall be suspended in support of the Corporation’s balance sheet.

Direct Equity InvestmentsIn accordance with APICORP’s mission, by the end 31 December 2008, APICORP held direct equity investments in 14 Arab joint venture projects, situated in 6 Arab countries. The operations of these investments cover a wide spectrum of activities such as seismic services, drilling and related services, storage of petroleum products, extraction of LPG and marketing of petroleum products to name a few. The total value of APICORP’s direct equity investments on 31st December 2008 was US$ 283 million, while the portfolio’s net profit for the same period, before provisions, was US$ 58 million.

Project and Trade FinanceAfter three years of remarkable activity, the project finance market was faced with a severe deceleration in the first half of 2008, followed by a complete stop in the summer. That was a result of the convergence of several factors, chief among which was the credit crunch, the high project costs and the unprecedented volatility of the petroleum product prices.

In spite of the drop in the number of project finance transactions concluded during 2008, total project and trade finance revenues maintained their previous year’s levels. For three years running, project and trade finance activities at the Corporation set up another record in 2008 with a net income close to US$30 million, compared to US$23.9 million and US$18.8 million in 2007 and 2006 respectively.

APICORP continued to play its active and instrumental role in the financing of oil, gas and petrochemical projects that were progressed in the Arab region during 2008, including its significant role as a regional player in the power generation projects in spite of the volatility the world’s financial markets currently being experienced at the moment.

Economic and Research DepartmentThe Economic and Research Department at APICORP is dedicated to the study of economic and policy issues relevant to the Corporation’s business development and growth strategy through the scanning of its economic environment and trends. In addition, the review of Energy Investments in the Arab and MENA region has become an authoritative source in the field and elevating its external profile and strengthened the Corporation’s relationship with similar industry, research centre’sandspecializedmedia.

On behalf of the Board of Directors, I would like to record my deep thanks and appreciations to APICORP’s management and staff for their efforts, dedication and perseverance that have direct impact in the Corporation’s aspiration towards the achievement of its objectives. I would also like to record my deep thanks and appreciations to the governments of the member states, for their everlasting support and fruitful cooperation. At the end, and with great honour, I would like to express my deep thanks and gratitude to the government of the Custodian of the Two Holy Mosques, Kingdom of Saudi Arabia, for the special care it provided the Corporation with.

Abdullah A. Al-ZaidChairman of the Board of Directors


ANNuAL REVIEW OF THE ARAB MACRO-ECONOMIC AND ENERgY INVESTMENT OuTLOOKS

HEIgHTENED RISK IN THE MIDST OF A DuAL CRISIS

The subprime-mortgage-induced credit crisis that began in the United States has moved into a protracted and more severe phase. In spilling over to other sectors and spreading worldwide the crisis has thrown the global economy into what is feared to be a deep and severe recession. The Arab/MENA economies would have been more resilient if not for the subsequent collapse of oil prices. The credit market crisis and that of the oil market have now combined to heighten the downside risks to both the region’s macro-economic and energy investment outlooks.

A great deal of analyses and interpretations of the credit market crisis have accumulated and continue to be added. They mostly trace the origins of the crisis to the bursting of the US house price bubble in the summer of 2007 and attribute its rootstomortgagelendingsecuritization.Securitizationisthefinancialprocessbywhichilliquidassets,typicallyloans,aretransformed into tradable asset-backed securities. Investment banks purchase in bulk loans from local credit originators, poolandsegmentthemintostructuredcollateralizedobligations,enhancetheircreditworthinesswiththehelpofthecredit rating agencies, move them off-balance sheet and trade them into open financial markets. This process worked fairly well until the subprime defaults started to disrupt actual cashflow to investors, ultimately dislocating the linkage between US borrowers and global capital markets.

As the subprime problems spread to other forms of credits, major banks and financial institutions reported huge losses, and some of them filed for bankruptcy protection. The collapse of Wall Street investment bank Lehman Brothers in mid-September 2008 eventually eroded what little confidence and trust was left in the financial system.

More than anything else, what the credit crisis has highlighted are much broader and larger structural issues. These

3-m

onth

bas

is p

oint

s

Onset of the credit crisis August 2007

Lehman’s bankruptcy Mid-Sep 2008

400

300

200

100

0Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08 Jan 09

APICORP ResearchUsing Bloomberg database (as of 31 Jan 2009)


include pervasive under-pricing of risk, massive credit expansion, excessive use of leverage by investment banks and hedge funds, and uncontrolled and unregulated growth of derivatives and other complex financial products. The crisis has also underscored significant risk management weaknesses and vulnerabilities within the banking industry.

To be sure, drastic actions have been taken to prevent further bank failures and restore confidence into the financial system. Central banks have extended liquidity provisions beyond conventions and have aggressively eased monetary policies. Treasury departments have embarked on plans to bail out shaky financial institutions and have committed to purchasing troubled assets from banks and guaranteeing interbank lending. Ultimately, sovereign wealth funds from the periphery have been called upon to assist in the rescue effort, notwithstanding serious impairment of their own assets.

Thesewide-rangingpolicyactionsorintendedmeasureshavesofarhadlittleimpact.Thebestillustrationofastillfrozencredit market is that of the evolution of spreads between term London Inter-bank offer rates (US Dollar Libor) and the anticipated US Federal Reserve overnight index swap (OIS) (Figure below). This is a key measure of risk and liquidity in the money market. In normal times such a spread is below 10 basis points (bps). Although current spreads have fallen back to their pre-Lehman levels of around 85 bps, they are still too high to infer any momentous improvement in the market.

In the Arab/MENA world the most immediatly measurable impact of the crisis is a significant contraction of capital inflows. As shown in the Figure below, the combined bonds issuance and project finance loans to the region, which have peakedin2007,havefallenwellbelowtheir2006level.Asamatteroffact,thetotalshownfor2008isthatrealizedduringthefirstninemonthsoftheyear,sincetherewerevirtuallynocapitalinflowsinpost-Lehmancreditfreeze.Shouldthis trend continue into 2009, it would have lasting effects on the region’s economy.

MENA debt issuance

2005 2006 2007 2008

Bond issuance

US$

mill

ion

200

150

100

50

02002 2003 2004

Project finance loans

APICORP ResearchUsing IMF database (for bonds)& Dealogic loanware (for loans)


Assumed critical fiscal & investment threshold $60-70 billion

140 100

80

60

40

20

120

100

80

60

40

20

0 0

Jan

99

Jan

00

Jan

01

Jan

02

Jan

03

Jan

04

Jan

05

Jan

06

Jan

07

Jan

08

Jan

09

$/bl (left scale)€/bl (right scale)

THE OIL MARKET CRISIS

The credit market crisis has concealed another crisis, that of the oil market. Until the summer of 2008, when oil prices reached an all time high of $147/bl on the New York Mercantile Exchange (Nymex), it was believed that large scale involvement of investment banks, on behalf of commodity futures investors, had led to a serious market dislocation. In acontextofreducedscopeforarbitragebetweenphysicalandfuturesmarkets,boththeOrganizationofthePetroleumExporting Countries (OPEC) and the U.S. Commodity Futures Trading Commission (CFTC) refrained from drawing boundaries of tolerable market behavior. Instead, they indulged in a sterile debate over whether speculation or fundamentals were driving up oil prices.

Central to this controversy was the concern that neither institution wanted to be held responsible for the surge in oil prices. As international pressure mounted, however, Saudi Arabia moved in to cushion the physical market with extra crude. Simultaneously, but on a different plane, CFTC focused its scrutiny on swap dealers and commodity index traders in a move to shed light on the activity of investment banks and improve transparency and control of the futures market. With some success : the 2008 summer oil price bubble burst. But prices have since fallen steeper than oil market analysts anticipated and much lower than oil producers expected .

In an effort to shore up prices, OPEC has implemented two production cuts agreed in September and December 2008. But this has only prevented its reference basket price from falling under an average monthly of $40/bl (Figure below). A level far below the producers’ critical fiscal and investment threshold that APICORP Research estimates in the range of $60 to 70/bl.1


APICORP ResearchUsing OPEC monthly database


IMPACT ON THE ARAB/MENA MACRO-ECONOMIC OuTLOOK

Top-down institutional macroeconomic forecasters have increasingly been criticized for being “behind the curve” (aphrase used to refer to one’s inability to anticipate changes and act swiftly). Not only did it take some time for the IMF torecognizethespilloverofthecreditcrisistotherealeconomy,butitwentthroughtworevisionsofitsOctober2008forecastsbeforeacknowledgingwhatmanybottom-upforecastershadalreadyanticipated.“Wenowexpecttheglobaleconomytocometoavirtualhalt”statestheIMFSurveyof28January2009.

The IMF’s revised growth forecast points to a much below trend rate of 3.9% in 2009 and 4.7% in 2010 for the Arab/MENA region. This contrasts with our own forecast of 4% for the period 2009-2013, which assumes lower growth for 2009 and 2010, but moderate fiscal and current account deficits. Furthermore, whatever the macroeconomic scenarios are, recent trends of rising inflation and decreasing unemployment are reversing. This will put unemployment back at the core of policy concerns.

1 Under an alternative investment framework, such a price signal can be worked out as the unit present value of future fiscal petroleum revenue streams. For further details seeAPICORP’sEconomicCommentaryVol3No11-12Nov-Dec2008–“ShapingLongTermOilPriceExpectationsForInvestment:IsItWorkable?IsItAchievable?”,areprint from an earlier commentary published in the Middle East Economic Survey (MEES 50:51 dated 17 December 2007) .

Source: IMF Revised World Growth, 28 January 2009

12

10

8

6

4

2

0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Em-AsiaAll DCsMENAWorld% Real GDP Growth


IMPACT ON ARAB/MENA ENERgY INVESTMENT OuTLOOK

Against a backdrop of collapsing global growth, scarce and high-cost credits and depressed oil prices, our 2009-2013 review of energy investments in the Arab world points to a significant capping of their potential. This stems from the shelving or postponement, beyond the 5-year review period, of a substantial number of initially planned projects, mostly downstream in the oil and gas supply chains. As a result, actual capital requirements are projected at US450 billion, falling short by 19% of potential.

Reflecting the distribution pattern of petroleum reserves in the region, 69% of these investments are located in the Gulf Cooperation Council (GCC) area, and a little more than half continue to be shouldered by Saudi Arabia, Qatar and the United Arab Emirates. In addition to the deteriorating economic and credit environment highlighted above, the GCC area faces specific challenges since nearly all Gulf countries have experienced to one degree or another gas supply shortfalls. As a result, the availability of high-quality and low-cost feedstock adds further uncertainty to the investment outlook.


Saudi Arabia

Qatar

uAE

Algeria

Kuwait

Egypt

Oman

Libya

Iraq

Syria

Bahrain

Yemen

Tunisia

Morocco

Sudan

Jordan

Lebanon

Mauritania

0 30 60 90 120 150 180

APICORP Research

Actually in progress Apparently shelved

US$ billion


On the sector level, the oil supply chain (including the oil-based integrated refinery-petrochemical link) accounts for the biggest share of 48% of the expected US$450 billion actual capital investment requirements. The gas supply chain (includingthegas-basedpetrochemicalandfertilizerlinks)accountsfor35%.Theremaining17%ofrequirementsarethose of the oil-or-gas- fuelled power generation sector.

The associated capital structure is more complex to determine, particularly in a context of an unprecedented credit crisis. The industry would normally prefer retaining enough earnings to fund upstream and midstream activities. By contrast, it tends to rely more on debt for downstream activities. Most recent trends have continued to point to an average equity-debt ratio of 30:70 in the oil-based refining/petrochemical sectors. In the gas-based downstream sector, the ratio is set at 40:60 to factor in higher feedstock risks. Finally, in the power sector, the ratio is put back at 30:70 to reflect expected reduced leverage in the IPP- IWPP sector. Under these conservative assumptions, the resulting capital structure for the period 2009-13 is likely to be 57% equity and 43% long-term debt (Table below).

APICORP Research

Arab worldActual Capital

uS$ billionCapital Structure Equity Debt

Oil supply chain

Upstream 83 18% 100% 0%

Midstream 12 3% 100% 0%

Downstream 115 26% 35% 65%

Gas supply

Upstream 54 12% 90% 10%

Midstream 13 3% 100% 0%

Downstream 96 21% 40% 60%

Power link

Generation 77 17% 30% 70%

Total 450 100% 57% 43%


FINANCINg OPTIONS AND CHALLENgES

The trend towards more equity-weighted structure is likely to be more pronounced in the future. Whatever the structure, however, funding both equity and debt is expected to be extremely challenging. On the one hand, low oil prices will hamper project sponsors’ capacity to fund the upstream and associated midstream through retained earnings. On the other hand, funding prospects for the still highly leveraged downstream will be uncertain. The annual volume of debt of US$39 billion, resulting from the above actual requirements and the corresponding capital structure, is comparable to the all-time record achieved in the loan market at its peak in 2006. These amounts would hardly be met should current credit-market conditions persist. Not only has the cost of borrowing soared as a result of an upward re- pricing of risks (Figure below), but credit standards have been severely tightened.

In this context, and more than at any time before, project sponsors’ credit ratings, which measure their ability to service debt, will be closely monitored, as well as the sovereign ceilings that bind them. Regrettably, not all countries in the region have sought a rating. Among the fifteen Arab petroleum- producing countries only eight have been listed, seven of which with investment grades. The fewer countries in the GCC area that have managed to keep their upper ratings, willbeabletoraisedebtatrelativelylowcostandlessstringentterms,oncethecreditmarketsstabilize.

Impact of the war on Iraq

180

160

140

120

100

80

200

60

30

20

10

40

02002 2003 2004 2005 2006 2007 2008

Energy project finance loans (US$ billion) All - in pricing above $Libor (Bps)

APICORP ResearchUsing Dealogic loanware database

US$

bill

ion

Basi

s Po

ints



CONCLuSIONS AND POLICY RECOMMENDATIONS

The economic crisis has broadened and spread to gradually engulf the Arab/MENA world. Current trends in the credit and oil markets have combined to heighten risks, mostly relating to the availability and cost of funding. As a result, not only may the economic outlook deteriorate substantially, but the energy investment potential is likely to be capped further.

Accordingly, our main policy recommendations fall within four areas. First Arab governments should make up for shrinking foreign capital inflows by reallocating internally the net assets invested offshore by their sovereign wealth funds.Secondly,inprovidingliquidityandsupportingtherecapitalizationofpan-Arabfinancinginstitutions,theyshouldtarget those contributing to the development of the petroleum industry, which remains a powerful economic lever, as well as those focusing on job-creating sectors. Thirdly, in reviewing their investment strategies, public and private project sponsorsshouldexcludefromany“optiontowait”economicallyviableinfrastructureenergyprojects.Finally,Thebestpolicy response to risk aversion, and the resulting higher capital cost, is to reduce perceived risks. In this regard, our perceptual mapping, demonstrates that consistent efforts should be made to catch up with the GCC are in improving the overall investment climate.

To complement the above limited number of sovereign ratings, APICORP Research has developed a perceptual mapping of the energy investment climate that encompasses all Arab petroleum-producing countries. The mapping, which combines three attributes, namely investment potential, country risk, and the enabling environment, highlights the strength of key GCC countries (Figure below). Despite the challenges highlighted earlier, the GCC area appears better placed to expedite project gestation and implementation and ensure a rapid resumption of energy investments, once the dual crisis is over.

CRA Sovereign Rating

Investment grade

Speculative grade

Not rated

APICORP Research


BOARD OF DIRECTORS REPORTAPICORP ACTIVITIES IN 2008PROJECT AND TRADE FINANCE


PROJECT AND TRADE FINANCE

After three years of hectic activity, the project finance market has been marked in 2008 by a severe deceleration in the first half of the year followed by a complete stop by Summer. This is the outcome of the convergence of several forces. Indeed, in addition to the effects of the credit crunch, the energy industry in the region has been facing additional challenges: unavailability of feedstock like ethane, persistence of high project costs, uncertainties with regard to the world demand for petroleum products and finally the unprecedented volatility of petroleum product prices.

Accordingly, the number of Project Finance transactions progressed in 2008 has amounted to 9 against 16 in 2007. The number of trade finance transactions on the other hand has remained stable.

Such a reduction in the number of transactions in 2008 has not impacted negatively the revenue stream, as a large portion of the transactions booked since 2005 was still in the drawdown phase. Furthermore, the trend of higher pricings on loans that had emerged in second half of 2007 accentuated in 2008.

As a consequence, for the third consecutive year, 2008 set up another historical record for the project and trade finance activities at APICORP with a net income close to US$ 30 million of which around US$ 10 million in fees. In comparison, the net income generated by the project and trade finance activities at APICORP in 2007 and 2006 had amounted respectively to US$ 23.9 million and US$ 18.8 million. Our asset growth has continued, but at a slightly lower pace, to reach US$ 2.4 billion against US$ 1.9 billion at the end of 2007 and US$ 1.3 billion at the end of 2006.

Therefore, in a context of an unprecedented financial market turmoil, the Corporation has continued to play an instrumental role in the financing of most of the entrepreneurial and viable oil, gas and petrochemical projects launched in the Arab World in 2008, confirming accordingly its position as the prominent regional player in the financing of the Arab energy industry, committed to support that industry in times of hell and high water.

PROJECT FINANCE

Project Finance has remained in 2008 the main segment of the Corporation’s lending activities. As evidenced by the table below, the Corporation has consolidated further its leading role in the arrangement of most of the landmark financings that took place in the Arab hydrocarbon industry in 2008.

Client Main sponsorsAmount and

Type of FacilityDate of signing

Purpose APICORP role

Pacific Star Saudi Private SectorUS$ 180 millionShip finance

March 2008Very Large Gas Carriers (VLGCs)

Joint Lead Arranger

Saudi Polymers SIIG & ChevronPhillipsUS$ 1.9 billionLimited recourse

April 2008Greenfield petrochemical project

Mandated Lead Arranger

Saudi KayanSABIC, Al-Kayan Petrochemical Co.

US$ 6 billionLimited recourse

May 2008Greenfield petrochemical project


Maaden Maaden, SABICUS$ 3,963 millionLimited recourse

June 2008Greenfieldfertilizerproject



TRADE FINANCE

In2008,theeffortsmadesince2005torevitalizeandexpandtheTradeFinanceactivityoftheCorporationhasbeenpursued, as shown in the sample of the deals provided below.

BOARD OF DIRECTORS REPORTAPICORP ACTIVITIES IN 2008PROJECT AND TRADE FINANCE




EMALDubai Aluminium Co.Mubadala Development Co.

US$ 6,605 millionLimited recourse

June 2008 Aluminium smelter Arranger

NakilatQatar PetroleumTransport Co.Private Sector

US$ 1,500 millionCorporate facility

July 2008LNG vessels acquisition


Orascom Sawiris familyUS$ 950 millionCorporate facility

July 2008 Acquisition of EFC Arranger

Boubyan

National Investments CompanyAl Ghanim GroupAl Dabbous Group

US$ 100 millionCorporate facility

August 2008General corporate purposes

Arranger

Ras Girtas Power

Qatar PetroleumQEWCSuezTractebelMitsui

US$ 1,391 millionLimited recourse

August 2008Power and water project





MidorEgyptian General Petroleum Corporation

US$ 925 millionConventional

March 2008 Oil processing Participant

Egyptian General Petroleum Corporation (EGPC)

Arab Republic of EgyptUS$ 400 millionConventional

March 2008Petroleum products imports

Participant

Egyptian General Petroleum Corporation (EGPC)

Arab Republic of EgyptCo-financed with IDB

US$ 100 millionIslamic

March 2008Petroleum products imports

Joint Underwriter


ADVISORY

TheCorporationhasremainedcommittedtoprovidespecializedadvisoryservicesinthefieldofstructuredfinanceforthe hydrocarbon industry within the region, but on a selective basis. Two advisory assignments, Hasdrubal in Tunisia and Asry in Bahrain, were completed with success in 2008. The Corporation has been able to build over the recent years a very good track record that is very encouraging for the future.




Société Anonyme Marocaine de L’Industrie et du Raffinage (SAMIR)

Corral Petroleum HoldingHolmarcom GroupPublic


April 2008Petroleum and petroleum products purchase

Participant

Commercial International Bank S.A.E

Listed on the Egyptian stock market

US$ 78.5 million L/C confirmation

June 2008 Oil field acquisition Participant

Société Anonyme Marocaine de L’Industrie et du Raffinage (SAMIR)

Corral Petroleum HoldingHolmarcom GroupPublic

US$ 300 millionUnfunded - Conventional

June 2008Petroleum and petroleum products purchase

Participant

Independent Petroleum Group, SAK

Listed on the Kuwaiti stock market


July 2008General corporate purposes

Participant

MidorEgyptian General Petroleum Corporation

US$ 825 millionConventional

October 2008

Oil processing Participant

AMPTC OAPECUS$ 75 millionL/C

On-going Oil tradingStructuring bank

Holborn European Marketing Company

OilinvestUS$ 350 million Conventional

On-going Oil trading Participant


BOARD OF DIRECTORS REPORTAPICORP ACTIVITIES IN 2008DIRECT EQuITY INVESTMENTS


DIRECT EQuITY INVESTMENTS

The total investment of APICORP encompasses nine petrochemical, three Oil & Gas services and two gas products companies in six Arab countries with a total value of US$ 283 million at the end of 2008. Five petrochemical companies and one gas product are located in Egypt. Saudi Arabia hosts IBN ZAHR, IBN RUSHD and YANSAB petrochemical companies. The Seismic and drilling companies are situated in Libya. The remaining three companies are stationed in Bahrain, Iraq and Tunis. The products and services of these companies include the following:

•SeismicservicesanddrillingofwellsforOil&Gas.•ExtractionofLPG,NGL.•StorageofPetroleumPrasandNitrogenfertilizers

The range of the products from the projects in Saudi Arabia, Iraq and in Egypt consists of: Methanol, Ethylene Glycol, Polyethylene, Polypropylene, Methyl Tertiary Butyl Ether (MTBE), Aromatics(BTX),LinearAlkylBenzene(LAB),CarbonBlack,NitrogenFertilizers(AmmoniaandUrea) and synthetic fibers (Polyester, Acrylic).

A brief summary on each of direct equity investment is provided below:

(1) Bahrain National gas Company (BANAgAS) APICORP share: 12.5%

BANAGAS was established in 1978 to extract and market LPG and light naphtha from associated gas. Total production in 2008 was around 77 thousand tons of propane, 85 thousand tons of Butane and 181 thousand tons of light naphtha. At the end of 2008, BANAGAS reported a net income of BD 19.6 million (versus BD 15.8 million in 2007).

(2) Arab Drilling & Workover Company (ADWOC) APICORP share: 20%

ADWOC was established in 1978 to provide drilling and related operation services in Libya and nearby Arab markets. At the end of 2008, the net income declared was US$ 27.3 million versus US$ 19.9 million in 2007.

(3) Arab Company For Detergent Chemicals (ARADET) APICORP share: 32%

ARADETwasestablishedin1981toproduce50,000tons/yroflinearalkylbenzene(LAB).The LAB complex at Baiji, in operation since 1987, also includes an aromatics line with acapacityof30,000tons/yrofbenzeneandToluene.TheAlkylationunitwasrestartedin mid of December 2008 after a 15 months shutdown period due to excessive and repetitive power failure resulting in high production costs and, therefore, ARADET recorded a net loss for 2008 of US$ 1.61 million compared to the net loss of US$ 1.34 million at the end of 2007.

4) Tankage Méditerranée (TANKMED) APICORP share: 20%

TANKMED was established in 1984 to provide storage services for petroleum products at La Skhira terminal in Tunisia. TANKMED’s total storage capacity stands at 300,000 cubic meters.Asattheendof2008,TANKMEDmaintainedacapacityutilizationrateof96.4%,and achieving a net income of TD 4.04 million compared to the budgeted figure of TD 3.0 million, i.e. higher by 35%, while the net income at the end of 2007 was TD 4.3 million.


(5) Arab geophysical Exploration Services Company (AgESCO) APICORP share: 16.67%

AGESCO was established in 1985 to provide advanced seismic services in Libya and the Arab world. The company maintains three seismic crews and was able to achieve operation rate in 2008 which resulted in operating revenues of LD 54.05 million compared to LD 63.87 million in 2007. As at the end of 2008, AGESCO recorded a net profit of around LD 5.8 million compared to LD 14.63 million in 2007.

(6) The Saudi European Petrochemical Company (IBN ZAHR) APICORP share: 10%

IBN ZAHR, established in 1985 in Jubail, can produce 1.3 million tons/yr of methyl tertiary butyl ether (MTBE), a gasoline octane booster and 640,000 tons/yr polypropylene, which has recently increased to 1.3 million tons/yr. In 2008, MTBE production was 1.63 million tons and polypropylene output totaled to about 638,000 tons. At end 2008, IBN ZAHR reported a net income of SR 2,258 million versus a net income of SR 2,267 million in 2007.

(7) Alexandria Carbon Black Company (ACBC) APICORP share: 12%

ACBC was established in 1993 to produce and market carbon black, an oil based material. ACBC has a design capacity of about 210,000 tons/yr. The company, as at the end of 2008, produced over 231.2 thousand tons of Carbon Black and posted a net income of about US$ 15.0 million compared to a budgeted figure of US$ 44.6 million, and US$ 46.8 million in 2007.

(8) The Arabian Industrial Fibers Company (IBN RuSHD) APICORP share: 3.45%

IBN RUSHD was established in 1993 in Yanbu on the west of Saudi Arabia. IBN RUSHD is an integrated petrochemical complex composed of three plants for the production of aromatics (730,000 tons/yr), purified terephthalic acid (PTA 350,000 tons/yr) and polyester (146,000 tons/yr). In the beginning of 2008, Saudi Public Investment Fund has entered to the company’s shareholders list with a share of 33.51% and therefore, the paid up capital of the company has been increased to SR 8,510 million resulting APICORP’s share portion to be decreased to 3.45% from 8.3%. As at the end of 2008, IBN RUSHD recorded a net loss of SR 1178 million versus a net loss of SR 698.6 million for the last year 2007.

(9) Oriental Petrochemicals Company (OPC) APICORP share: 14%

OPC was established in 1996 with an initial capacity of 120,000 tons/yr polypropylene that later can be expanded to 162,000 tons/yr. The company announced the successful commissioning of its plant at the beginning of 2002, and since then it has become the main producer and supplier of polypropylene in the local market. At the end of 2008, the company’s produced around 159 thousand and marketed around 143 thousand of polypropylene, however, due to the high inventory levels, OPC has declared a net loss of around L.E 78.6 million, versus a net income of L.E 30 million for the year 2007.

10) Alexandria Acrylic Fibers Company (AFCO) APICORP share: 10%

AFCO was established late 2003 in Egypt, and its plant which was completed in late 2005

BOARD OF DIRECTORS REPORTAPICORP ACTIVITIES IN 2008DIRECT EQuITY INVESTMENTS


has a nameplate capacity of 18,000 t/yr. Currently the plant is under expansion to 54,000 t/yr. AFCO produces poly acrylic fibers, which is used mainly in manufacturing carpets and blankets. AFCO produced 17,566 tons in 2008 versus 16,621 tons in 2007. Because of the global financial crisis and due to the decrease in the prices during the 4th quarter of 2008, the company’s recorded a net loss of around L.E 36 million, compared to a net loss of L.E. 15.3 million in 2007.

11) Yanbu National Petrochemical Company (YANSAB) APICORP share: 1.57%

YANSAB was established in early 2005 by SABIC with a paid up capital of SR 5,625 million, of which SABIC owns 55%, SABIC partners in IBN RUSHD and TAIF own 10%, and the remainder percentage was offered to the Saudi public. Currently, the company has become listed on the Saudi Stock Market (Tadawul). YANSAB is expected to start up in the second quarter of 2009. The complex will produce 900,000 tons per year of polyethylenes 700,000 tons per year of ethylene glycols, 400,000 tons per year of poly propylene, in addition to some other by products. At the end of 2008, YANSAB recorded a non-operational net loss of SR 25.6 million compared to SR 30.4 million in 2007.

12) Egyptian Methanol Company (E-Methanex) APICORP share: 7%

Metanex Corporation, Egyptian Petrochemicals Holding Company (ECHEM), Egyptian Natural Gas Holding Company (EGAS), Egyptian Natural Gas Company (GASCO) and APICORP established E-Methanex in 2005 with a paid up capital of US $ 420 million to build a US $ 950 million cost methanol production facility in Damietta, Egypt with a nameplate capacity of 1.28 million tons per year. As of the end of January 2009, the project achieved around 74.8% cumulative actual progress verse 75.3% planned. The start of commercial operation is planned in April 2010.

13) Misr Oil Processing Company (MOPCO) APICORP share: 3%

MOPCO general assembly has officially approved the acquisition merger with EAgrium, and therefore, the equity paid up capital of MOPCO will be doubled from L.E 996 million to L.E 1,992 million and as a result, APICORP’s share decreased from 7% to 3%. Construction works are expected to resume during April 2009 and the project is expected to be started commercially by the end of the 1st quarter of 2011.

MOPCO expansion project consists of two identical and integrated units with a capacity of 400 thousand t/y Ammonia and 635 thousand t/y Urea each. After completion, MOPCO complexfornitrogenousfertilizerswillhaveatotalcapacityof1.2milliont/yand1.9million t/y of Ammonia and Urea respectively.

14) The Egyptian Bahraini gas Derivatives Company (EBgDCO) APICORP share: 20%

The Egyptian Natural Gas Company, DANAGAZ of Bahrain and APICORP established EBGDCO in 2007 in Egypt with a share capital of US $ 25 million. The objective of the company will be to construct a US $ 80 million facility for propane and butane recovery from associated natural gas. The plant will be located at Ras Shakair on the Red Sea. The company was registered at the end of 2007. Construction works are expected to resume during June 2009 and the project is expected to be started commercially by the beginning of 2011.


BOARD OF DIRECTORS REPORTAPICORP ACTIVITIES IN 2008APICORP EQuITY PARTICIPATIONSas at 31 December 2008


Company NamePaid-up Capital

Participation Other Major Shareholders Activities

Bahrain National gas Company(BANAgAS)Bahrain

BD 8million

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

Chevron Asia Pacific Company

Extraction and marketing of LPG and condensates from associated gas.

Arab Drilling and Workover Company (ADWOC)Libyan Arab Jamahiriya

LD 60million

20% Arab Petroleum Services Co. (APSC), Libya

Santa Fe, USA

Drilling and related operations in the Arab world.

Arab Company for Detergent Chemicals (ARADET)Iraq

ID 36 million

32% Government of the Republic of Iraq

Government of the Kingdom of Saudi Arabia

Government of the State of Kuwait

Arab Mining Company, Amman

The Arab Investment Co., Saudi Arabia

Production and marketing of linear alkylbenzeneandtheexcess of intermediary products

Tankage Mediterranee (TANKMED)Tunisia

TD 13.2 million

20% I’Entreprise Tunisienne d’Activities Petrolieres (ETAP), Tunisia

National Oil Distribution Company (SNDP)

Societe Tuniso Seoudienne d’Investissement et de Développement (STUSID)

Banque Tunisio-Koweitienne de Développement (BTKD)

Storing, trans-shipping and handling petroleum and petrochemical products at La Skhirra terminal.

Arab geophysical Exploration Services Company (AgESCO)Libyan Arab Jamahiriya

LD 19 million

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

National Oil Co., Libya

Providing advanced seismic services in the Arab world.

Saudi European Petrochemical Company (IBN ZAHR)Saudi Arabia

SR 1,025 million

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

Ecofuel, Italy

Production of gasoline octane booster MTBE, and Polypropylene (PP).




Alexandria Carbon Black Company (ACBC)Egypt

US $ 16.205 million

12% Indian Industrial Investment Group (BIRLA), India

Transport and Engineering Company (El Nesser Tire Co.), Egypt

Al-Nasr Coke Company, Egypt

Saudi Egyptian Industrial Investment Company, Egypt

International Finance Corporation (IFC), USA

Continental Carbon Company, USA

Production and marketing of carbon black.

The Arabian Industrial Fibers Company (IBN RuSHD)Saudi Arabia

SR 8,510 million

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

Public Investments Fund, Saudi Arabia

GIC, Kuwait

Saudi Pharmaceuticals Co., Saudi Arabia

SAFCO, Saudi Arabia

Others

Production of Aromatics, PTA and Polyester Fibers.

Oriental Petrochemical Company (OPC)Egypt

LE 120 million

14% Oriental Weavers Group, Egypt

Arab International Investments Co., Libya

Al-Ahli Bank, Egypt

Egyptian Petrochemicals Co., Egypt

Misr Insurance Co., Egypt

Production and marketing of Polypropylene.

Alexandria Acrylic Fibers Company (AFCO)Egypt

LE 286.55 million

10% Alexandria Carbon Black Co., Egypt

Thai Carbon Black Public Co., Ltd. Thailand

Thai Rayon Public Co., Ltd. Thailand

Thai Acrylic Fiber Public Co., Ltd. Thailand

Sidikerir Petrochemicals Co., Egypt

Saudi Egyptian Industrial Investment Co., Egypt

Production and marketing of Acrylic Fibers

as at 31 December 2008

BOARD OF DIRECTORS REPORT APICORP ACTIVITIES IN 2008 APICORP EQuITY PARTICIPATIONS




Yanbu National Petrochemical Company (Yansab)*Saudi Arabia

SR 5,625 million

1.57% SABIC

SABIC Partners in Ibn Rushd and Taif

Saudi Public

Others

Production and marketing of PE, EG, PP and other by products

Egyptian Methanex Methanol Company (EMethanex)*Egypt

US $ 420

million

7% Methanex Corporation, Canada

Egyptian Petrochemicals Holding

Company (Echem), Egypt

Egyptian Natural Gas Holding

Company (Egas), Egypt

Egyptian Natural Gas Company

(GASCO), Egypt

Production and marketing of Methanol

Misr Oil Processing Company & Fertilizer Company(MOPCO)* Egypt

LE 1,992million

3% Egyptian General Petroleum Corporation, Egypt

Agrium, Canada

National Investments Bank, Egypt

Egyptian Petrochemicals Holding Company (Echem), Egypt

Egyptian Natural Gas Holding

Company (Egas), Egypt

Egyptian Natural Gas Company (GASCO), Egypt

Al Nasr Petroleum Company, Egypt

Others

Production and marketing of Ammonia and Urea

The Egyptian Bahraini gas Derivative Company (EBgDCO)**Egypt

US $ 25 million

20% The Egyptian Natural Gas Holding Company (Egas)

Danagas, UAE

Fractionation of natural gas liquids (NGL) to recover Propane and Butane.

*Under construction**Under formation


2008 has been a very challenging year for the global financial sector due to the adverse impact of the ongoing subprime crisis. Both international as well as regional financial institutions have not been immuned from the effects of the extreme volatilities in the global money, credit and capital markets and the slowing economic conditions.

APICORP’s strategyduring2008wasonprioritizing liquiditymanagementandminimizing riskgiven thechallengingmarket and economic environment. Treasury & Capital Markets assets as at 31st December 2008 stood at US$ 854 million compared to US$ 1,275.5 million as at 31st December 2007. The Treasury & Capital Markets achieved a gross income of US$ 38.4 million, compared to US $ 47.8 million for the year 2007. The income was affected partly due to ongoing negative impact of the credit crisis and also due to decline in overall treasury assets. As at end 31st December 2008, APICORP’s liquidity measured by cash, placements and investment in treasury securities amounted to comfortable US$ 388 million.

The events following the unprecedented market turmoil in September 2008 adversely impacted some of our investment portfolios and resulted in making provisions and revaluation losses on certain securities and funds. As at end 31st December 2008, Fixed Income securities portfolio has a high standard of credit profile with an average of AA rating.

The foreign branch of APICORP which started its operations as an Investment Bank in Bahrain during last quarter of 2006 complements all the Treasury & Capital Markets activities of APICORP’s head office. We continue to place emphasis to further increasing and diversifying our funding sources, which are vital to finance our core activities and maintain sufficient liquidity levels.

BOARD OF DIRECTORS REPORT APICORP ACTIVITIES IN 2008 TREASuRY & CAPITAL MARKETS ACTIVITIES IN 2008


The Economics & Research Department, which was established at the end of 2007 on the foundation of a former Research Unit, is dedicated to the study of economic and policy issues relevant to APICORP’s business development and growth strategy.

To address these issues, we focused on three separate but interdependent areas in 2008 :

(i) the scanning of the Corporation’s economic environment and trends, highlighting the potential impact of the global credit market crisis and that of the subsequent downturn of the international oil market;(ii) theenhancementofourin-housecountryriskmethodologyandtheassociated“perceptualmapping”oftheenergy investment climate in the Arab (MENA) world; (iii) the regular publication of our Economic Commentary on current global and regional economic and financial issues to convey our research findings to a broader audience.

Furthermore, our Review of Energy Investments in the Arab/MENA world has become an authoritative source of informed analysis in the field. Repetition of the review every year, since 2003, has made trend studies possible, thus offering analysts a useful tool for policy formulation.

Both the Economic Commentary and the Review of Energy Investments have greatly contributed to elevating APICORP’s externalprofileandhelpedstrengthenourrelationshipwithsimilarindustry,researchcentresandspecializedmedia.

BOARD OF DIRECTORS REPORT APICORP ACTIVITIES IN 2008 THE DEPARTMENT OF ECONOMICS & RESEARCH


CONFERENCES AND SEMINARS 2008

# Title Date Venue

1 Chatham House’s Conference on Middle East Energy 4 – 5 February London

2 The Paris Oil & Gas Club, 11 April Paris

3 MEED Project Finance Conference 26 – 27 February Bahrain

4 Advanced Oil & Gas Finance and Accounting Conference 26 – 28 April Dubai

5 The Arab Economic Forum 2-3 May Beirut

6 4th Annual Middle East Project Finance Forum 26 – 28 May Abu Dhabi

7 Middle East Petrochemicals 2008 – MEED Conference 16 – 17 June Bahrain,

8 Seminar on Junior E&P Companies 5 – 17 October London

9 The Arab Energy Club 17 October Bahrain

10The Fleming Gulf’s Annual Investments in Oil, Gas And Petrochemicals

20 – 21 Oct Dubai

11 The Oxford Energy Policy Club, 15 November London

12 4th Algeria Energy Week (SEA4) 15 – 19 Nov Algeria

13 NSCSA Bankers Meeting 4 December Dubai


FINANCIAL STATEMENTSfor the year end 31 December 2008

Auditors’ Report to the Shareholders 32

Primary statements Balance sheet 33 Income statement 34 Statement of changes in equity 35 Statement of cash flows 36

Introduction The formation, status and activities of APICORP 37

Significant Accounting Policies applied in the financial statements 38-42

Notes of the Financial Statements 43-64

INDEPENDENT AuDITORS’ REPORT TO THE SHAREHOLDERSArab Petroleum Investments CorporationDammam, Saudi Arabia 03 April 2009

Report on the financial statementsWehaveauditedtheaccompanyingfinancialstatementsofArabPetroleumInvestmentsCorporation(“theCorporation”/“APICORP”),which comprise the balance sheet as at 31 December 2008, and the income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Responsibility of the Board of Directors and the Management for the financial statementsThe Board of Directors and the Management of the Corporation are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatements, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditors’ responsibilityOur responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal controls relevant to the Corporation’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal controls. An audit also includes evaluating the appropriateness of accounting principles used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of the Corporation as at 31 December 2008, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

KPMG Fakhro, a registered partnership under Bahrain law, is a member of KPMG International, a Swiss cooperative.


Notes 2008 2007

ASSETS

Cash and cash equivalents 9,391 15,510Trading securities 1 98 50,822Available-for-sale securities 2 616,940 817,648Available-for-sale direct equity investments 3 282,848 343,266Deposits with banks 4 227,618 391,575Syndicated and direct loans 5 2,371,196 1,892,499Property and equipment 6 34,174 36,518Other assets 7 21,537 25,519 TOTAL ASSETS 3,563,802 3,573,357

LIABILITIES

Deposits from banks 8 1,388,641 1,342,906Deposits from corporate 447,334 294,730Securities sold under agreement to repurchase 159,558 225,557Term financing 9 648,590 648,033Other liabilities 10 24,929 41,728 Total liabilities 2,669,052 2,552,954

EQuITY

Share capital 550,000 550,000Legal reserve 114,100 111,300General reserve 66,539 66,539Available-for-sale fair value reserve 122,225 255,488Retained earnings 41,886 37,076 Total equity (page 35) 894,750 1,020,403 TOTAL LIABILITIES AND EQuITY 3,563,802 3,573,357

OFF-BALANCE SHEET ExPOSuRES 11 1,008,317 1,051,857

The financial statements, which consist of pages 33 to 64, were approved by the Board of Directors on 3rd April 2009 and signed on its behalf by:

Abdullah A. Al-Zaid Chairman

Ahmad Bin Hamad Al Nuaimi Chief Executive and General Manager

BALANCE SHEETas at 31 December 2008 (US$000)


INCOME STATEMENTfor the year ended 31 December 2008 (US$000)

Notes 2008 2007

Interest income 134,763 153,703 Interest expense (104,488) (112,935) Net interest income 12 30,275 40,768 Fee income 6,659 3,625Fee expense (114) (180) Net fee income 13 6,545 3,445 Dividend income 14 57,988 31,649(Loss) / gain on trading securities 15 (3,893) 6,686Gain on available-for-sale securities 16 2,982 6,039Gain on available-for-sale direct equity investments 17 - 5,433Impairments losses /(reversals) 18 (45,368) 7,982General administrative expenses 19 (23,553) (22,296)Other income 20 2,634 33 PROFIT FOR THE YEAR 27,610 79,739

Appropriation of net income

Legal reserve 2,800 8,200General reserve - 51,539Dividend to shareholders - 20,000Retained earnings 24,810 -

27,610 79,739

Per uS$ 1,000 share information

• Earnings(basedonweightedaveragenumberofsharesoutstanding) uS$ 50 US$ 145

• Actualdividends - US$36

• Netassetvalue uS$ 1,627 US$ 1,855

The financial statements consists of pages 33 to 64.


35A

PIC

OR

P A

nn

ua

l R

ep

ort

20

08

Bala

nce

at 1

Janu

ary

550,

000

111,

300

66,5

39

5,36

9 25

0,11

9 25

5,48

8 37

,076

1,

020,

403

Tran

sfer

to

inco

me

stat

emen

t on

impa

irmen

t

- -

- (1

,782

) -

(1,7

82)

-

(1,7

82)

Fair

valu

e ch

ange

s

- -

- (5

6,14

5)

(90,

017)

(1

46,1

62)

- (1

46,1

62)

Tran

sfer

to

inco

me

stat

emen

t on

sal

e of

inve

stm

ent

-

- -

14,6

81

- 14

,681

-

14,6

81

Tota

l inc

ome

and

expe

nse

reco

gnis

ed d

irect

ly in

equ

ity

-

-

-

(43,

246)

(9

0,01

7)

(133

,263

) 37

,076

(1

33,2

63)

Div

iden

d de

clar

ed fo

r 20

07 (

see

page

33)

- -

- -

- -

(20,

000)

(2

0,00

0)

Profi

t fo

r th

e ye

ar (

see

page

33)

- -

- -

- -

27,

610

2

7,61

0

Tran

sfer

to

lega

l res

erve

- 2,

800

- -

- -

(2,8

00)

-

Bal

ance

at

31 D

ecem

ber

550,

000

114,

100

66,5

39

(37,

877)

16

0,10

2 12

2,22

5 41

,886

89

4,75

0

AFS

Fai

r va

lue

rese

rve

2008

Shar

eCa

pita

lLe

gal

rese

rve

Gen

eral

re

serv

eSe

curi

ties

Dir

ect

equi

ty

inve

stm

ents

Tota

lRe

tain

ed

earn

ings

Tota

l

Bala

nce

at 1

Janu

ary

550,

000

103,

100

15,0

00

6,19

0 18

5,14

9 19

1,33

9 37

,076

89

6,51

5

Tran

sfer

to

inco

me

stat

emen

t on

sal

e of

inve

stm

ent

-

- -

(6,0

39)

(3,8

05)

(9,8

44)

- (9

,844

)

Fair

valu

e ch

ange

s

- -

- 5,

218

68,7

75

73,9

93

- 73

,993

Tota

l inc

ome

and

expe

nse

reco

gnis

ed d

irect

ly in

equ

ity

-

- -

(821

) 64

,970

64

,149

-

64,1

49

Div

iden

d de

clar

ed fo

r 20

06 (

see

page

33)

- -

- -

- -

(20,

000)

(2

0,00

0)

Profi

t fo

r th

e ye

ar (

see

page

33)

- -

- -

- -

79,7

39

79,7

39

Tran

sfer

to

lega

l res

erve

- 8,

200

- -

- -

(8,2

00)

-

Tran

sfer

to

Gen

eral

res

erve

- -

51,5

39

- -

- (5

1,53

9)

-

Bal

ance

at

31 D

ecem

ber

550,

000

111,

300

66,5

39

5,36

9 25

0,11

9 25

5,48

8 37

,076

1,

020,

403

2007STAT

EMEN

T O

F CH

AN

gES

IN E

Qu

ITY

for

the

year

end

ed 3

1 D

ecem

ber

2008

(U

S$00

0)

The

finan

cial

sta

tem

ents

con

sist

s of

pag

es 3

3 to

64.


2008 2007

CASH FLOWS FROM OPERATINg ACTIVITIES Interest received 144,918 150,237Interest paid (111,163) (108,446)Receipts from trading activities, net 46,832 19,588Decrease / (increase) in deposits with banks 163,957 (46,575)Syndicated and direct loans drawn down (1,145,135) (1,237,502)Syndicated and direct loans repayments and prepayments 665,279 654,435Recovery from guarantee 4,000 5,000Fees received 6,659 3,628Fees paid (114) (180)Operating expenses paid (21,368) (18,564)Other income received 9 14(Payments) /receipts from other operating assets and liabilities, net (7,753) 10,446

Cash flows from operating activities (253,879) (567,919)

CASH FLOWS FROM INVESTINg ACTIVITIES Sale of available-for-sale securities 204,918 469,079Purchase of available-for-sale securities (100,462) (696,963)Sale of available-for-sale direct equity investments - 6,494Purchase of available-for-sale direct equity investments (29,599) (24,226)Dividends recieved from available-for-sale direct equity investments 57,979 31,635Sale of investment property - 2,697Rent received 986 886Purchase of property and equipment (402) (962)

Cash flows from investing activities 133,420 (211,360)

CASH FLOWS FROM FINANCINg ACTIVITIES Increase in deposits 45,735 187,238Increase deposits from corporate 152,604 289,730(Decrease) / increase in securities sold under agreement to repurchase (65,999) 225,557Term financing drawn down - 400,000Term financing repayment and prepayment - (300,000)Dividends paid (18,000) (18,000)

Cash flows from financing activities 114,340 784,525

Net (Decrease) / increase in cash and cash equivalents for the year (6,119) 5,246 Cash and cash equivalents at the beginning of the year 15,510 10,264 Cash and cash equivalents at 31 December (see page 33) 9,391 15,510

STATEMENT OF CASH FLOWSfor the year ended 31 December 2008 (US$000)

The financial statements consists of pages 33 to 64.


FORMATION, STATuS AND ACTIVITIES OF APICORP

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

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

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

Domicile and taxation

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

Share capital

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

Issued and fully paid

Authorised capital

Percentage

United Arab Emirates 93,500 204,000 17%

Kingdom of Bahrain 16,500 36,000 3%

Democratic and Popular Republic of Algeria 27,500 60,000 5%

Kingdom of Saudi Arabia 93,500 204,000 17%

Syrian Arab Republic 16,500 36,000 3%

Republic of Iraq 55,000 120,000 10%

State of Qatar 55,000 120,000 10%

State of Kuwait 93,500 204,000 17%

Socialist Peoples’ Libyan Arab Jamahiriya 82,500 180,000 15%

Arab Republic of Egypt 16,500 36,000 3%

550,000 1,200,000 100%

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


A gENERAL

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

A-2 Basis of preparationAPICORP’s functional and presentation currency is United States dollars (US $) because it is a supranational organisation with its capital and the majority of its transactions and assets denominated in that currency.

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

The preparation of financial statements in conformity with the IFRS, requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Corporation’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in notes J and K.

These accounting policies have been applied consistently to all periods presented in the financial statements.

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 balance sheet date. Differences arising from changes in exchange rates are recognised in the income statement.

Available-for-sale 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. Capital expenditure on property and equipment is stated at the historical rates of exchange.

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

B FINANCIAL ASSETS AND LIABILITIES

B-1 ClassificationTrading securities are those that the Corporation purchased principally for the purpose of gains over the short-term. These consist of listed equity securities.

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

Loans arise when the Corporation provides money to a borrower, other than those created with the intention of gains over the short-term. Loans comprise deposits with banks, syndicated and direct loans.

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

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

B-3 MeasurementFinancial assets are measured initially at fair value plus transaction costs except for financial assets held for trading where transaction costs are recognised in the income statement. 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.

SIgNIFICANT ACCOuNTINg POLICIES


SIgNIFICANT ACCOuNTINg POLICIES (continued)

B Financial Assets and Liabilities (continued)

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

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

B-5 Fair value measurement principlesThe fair value of financial instruments is based on their quoted market price at the balance sheet date without any deduction for transaction costs. Financial assets, for which there is no quoted market price or other appropriate methods from which to derive fair value are stated at cost less impairment allowances, if any.

B-6 Subsequent measurementGains and losses arising from changes in the fair value of available-for-sale financial assets are recognised directly 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 recognised in equity is transferred to the income statement.

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 income statement in the period in which it arises.

B-7 De-recognitionA financial asset is derecognised when the Corporation loses control over the contractual rights attached to that asset. This occurs when the rights are realised, expire or are surrendered. A financial liability is derecognised when the contract obligations are discharged or cancelled or expires.

B-8 ImpairmentFinancial assets are reviewed at each balance sheet date to determine whether there is objective evidence of impairment. If any such indication exists, the assets’ recoverable amounts are estimated. The recoverable amount of an equity instrument is its fair value. The recoverable amount of loans and debt instruments remeasured to fair value is calculated as the present value of the related expected future cash flows discounted at the current market rate of interest for such an instrument.

Where a financial asset remeasured to fair value directly through equity is impaired, and a write-down was previously recognised directly in equity, the write-down is transferred to the income statement and is recognised as part of the impairment loss. Any subsequent additional impairment loss is also recognised in the income statement. Similarly the increase in the fair value of financial asset, previously been recognised in equity is reversed to the extent, it is impaired except for debt securities, where the reversal of impairment is through the income statement.

Allowances for Loans uncollectibility (impairment) consist of:

- Specific allowances for individual loans. Objective evidence that financial assets are impaired can include default or delinquency by a borrower, restructuring of a loan or advance by the Corporation on terms that the Corporation would not otherwise consider, indications that a borrower will enter bankruptcy, other observable data relating to a group of assets such as adverse changes in the payment status of borrowers, or economic conditions that correlate with defaults in the Corporation.

- Collective impairment allowances. Loans not found to be individually impaired are grouped on similar credit characteristics. Each group is collectively evaluated for impairment. In assessing collective impairment the Corporation uses statistical modelling of 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 modelling. Default rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual outcomes to ensure that they remain appropriate.


B Financial Assets and Liabilities (continued)

Increases and decreases in allowances for uncollectibility are recognised in the income statement. When a loan is known to be uncollectible, and the final loss has been determined, the loan is written off after receiving specific approval to do so from the Board of Directors.

If in a subsequent period the amount of impairment loss decreases, and the decrease is due to a change in estimates, or can be linked objectively to an event occurring after the write-down, the write-down is reversed through the income statement.

B-9 Financial Liabilities

Initial recognition and measurementFinancial liabilities are intially recognised at fair value, representing the proceeds received net of premiums, discounts and transaction costs that are directly attributable to the financial liability.

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

DerecognitionFinance liabilities are derecognised when the obligation is discharged, cancelled or expires.

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.

D REPuRCHASE AND RESALE AgREEMENTSAssets sold with a simultaneous commitment to repurchase at a specified future date (repos) are not derecognised. As the Corporations 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 yield method.

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

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

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

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

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

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



E Property and Equipment (continued) The estimated useful lives of the Corporation’s property and equipment are as follows:•Headofficebuilding(civilworksandothermajorcomponents) 20to40years•Headofficebuilding(finishes,systemsandequipment) 5to20years•Housingcompoundbuildings(includingnewextension) 15years(from2000)•Housingcompoundequipment,furnitureandfittings 5to10years•Officefurniture,equipmentandcomputerhardware(andrelatedsoftware) 3to10years•OfficefitoutscapitalizedatBahrainbrancharedepreciatedoverun-expiredperiodofleaseor5yearswhicheverisless.

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

F INVESTMENT PROPERTYThe Corporation’s investment property is carried at fair value. Fair value is determined by an independent, professional property valuator based on open market prices. Any gain or loss arising from a related change in fair value is recognised in income statement.

g INCOME RECOgNITIONg-1 Interest income and expensesInterest income and interest expense for all interest-bearing financial instruments except those classified as held-for-tradingare recognisedwithin“interest income”and“interestexpense” in the incomestatementusing theeffectiveinterest rate method. Fees, including loan origination less and early redemption fees are included in the calculation of the effective interest rate to the extent that they are considered to be an integral part of the effective interest rate.

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

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

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

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

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

I DERIVATIVE FINANCIAL INSTRuMENTSDerivative financial instruments are contracts, the value of which is derived from one or more underlying financial instruments and include interest rate swap and forward currency contracts.

Derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at their fair value. The fair value of a derivative is the equivalent to its prevailing market rates or is based on broker quotes. Derivatives with positive market values are disclosed as assets and derivatives with negative market values are disclosed as liabilities in the balance sheet. Any gains or losses arising from changes in fair value on derivative instruments are recognised directly in the income statement in period in which it arises.



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

J-1 Classification of investmentsManagement decides on acquisition of an investment whether it should be classified as trading or available-for-sale, which is based on the intention of the management.

J-2 Impairment of investmentsThe Corporation considers quoted available-for-sale investments 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 whatis“significant”or“prolonged”requiresconsiderablejudgment.ForAFSinvestmentsthatarecarriedatcostlessimpairment, corporation considers among other factors, the evidence of deterioration in the financial health of the investee, industry and sector performance, changes in technology and operational and financing cash flows.

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

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

K-2 Collective impairment provisions on loans and advancesIn addition to specific provisions against individually significant loans and advances, the Corporation also makes a collective impairment provision against loans and advances which although not specifically identified as requiring a specific provision have a greater risk of default than when originally granted. This collective provision is based on any deterioration in the internal grade of the loan, since it was granted. The amount of the provision is based on the historical loss pattern for loans within each grade and is adjusted to reflect current economic changes.

These internal grading take into consideration factors such as any deterioration in country risk, industry, technological obsolescence, as well as identified structural weaknesses or deterioration in cash flows.

L NEW INTERNATIONAL FINANCIAL REPORTINg STANDARDS AND INTERPRETATIONS ISSuED BuT NOT YET EFFECTIVEDuring the year the following relevant standards and interpretations were issued:•IAS1-PresentationofFinancialStatements(effective1January2009)•AmendmenttoIAS39-FinancialInstruments:RecognitionandMeasurement-EligibleHedgedItems(effective1July2009)

The adoption of these standards and interpretations are not expected to have material impact on the financial statements.

M LEgAL AND gENERAL RESERVESUnder Article 35 of APICORP’s establishment agreement and statute, 10% of annual net income is to be transferred to a legal reserve until such reserve equals the paid up share capital. The legal reserve is not available for distribution.

Article 35 also permits the creation of other reserves such as a general reserve. The general reserve may be applied as is consistent with the objectives of the Corporation, and as may be resolved by the General Assembly, on the recommendation of the Board of Directors.



NOTES TO THE FINANCIAL STATEMENTSfor the year ended 31 December 2008 (US$000)

1. TRADINg SECuRITIES 2008 2007

Listed equities 98 600Listed managed funds - 50,222

98 50,822

2. AVAILABLE-FOR-SALE SECuRITIES 2008 2007

Fixed-rate bonds 189 383Floating-rate bonds 306,272 339,993U.S. treasury bills 29,999 99,057U.S. treasury notes 121,162 110,411Structured notes 108,801 151,927Managed funds 50,517 115,877

616,940 817,648

Allowance for specific impairment at 31 December 55,506 -

Securities sold under agreements to repurchase: The Corporation enters into collateralised borrowing transactions (repurchase agreements) in the ordinary course of its financing activities. Collateral is provided in the form of securities held within the available-for-sale portfolio. At 31 December 2008, the fair value of available-for-sale that had been pledged as collateral under repurchase agreements was US$ 302,020 (2007: US$ 261,120). These transactions are conducted under the terms that are usual and customary to standard lending and securities borrowing & lending activities.

3. AVAILABLE-FOR-SALE DIRECT EQuITY INVESTMENTS

unlisted investments – carried at cost less impairment 2008 2007Kingdom of Bahrain

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

Saudi European Petro Co. (Ibn Zahr) 142,219 142,219Arabian Industrial Fibers Co. (Ibn Rushd) - -

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

Socialist Peoples’ Libyan Arab Jamahiriya Arab Drilling and Workover Co. (Adwoc) 11,686 11,686Arab Geophysical Exploration Svcs Co. (Agesco) 594 594

Arab Republic of Egypt Alexandria Carbon Black Co. 10,996 10,996Alexandria Fiber Co. SAE (AFC) 4,550 4,550Oriental Petrochemicals Co. 6,151 6,151Egyptian Methanex Methanal Co. 18,788 7,099MISR Oil Processing Company SAE 33,911 16,750Egyptian Bahraini Gas Derivative Co. 1,250 500

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

Listed investments – carried at fair value Kingdom of Saudi Arabia

Yansab Petrochemical Complex (YANSAB) 34,980 124,998

282,848 343,266


3. Available-for-sale direct equity investments (continued)

During the Year Corporation received shares in MISR Oil Processing Company SAE as part of a share swap agreement entered into by the share holders of Egyptian Agrium product Company and MISR Oil Processing Company. The registration and other legal formulates are in process at 31 December 2008.

Movements in the year 2008 2007

Net carrying value at the beginning of the year 343,266 256,731Additions during the year 29,599 24,226Disposal during the year - (4,866)Net (decrease) / increase in fair value in the year (90,017) 68,775Impairment charge for the year - (1,600) Net carrying value at 31 December 282,848 343,266

Movements in allowance for specific impairment At the beginning of the year 86,490 84,890Impairment charge for the year - 1,600 Allowance for specific impairment at 31 December 86,490 86,490

Commitments – uncalled share capital At the beginning of the year 64,699 26,478Expired commitments during the year - 62,447Additional commitments during the year (4,900) -Commitments fulfilled (29,599) (24,226) Commitments at 31 December 30,200 64,699

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

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

4. DEPOSITS WITH BANKS 2008 2007Deposits with banks

Murabaha with Islamic financial institutions 27,768 20,000Deposits with conventional financial institutions 199,850 371,575

227,618 391,575



5. SYNDICATED AND DIRECT LOANS 2008 2007unimpaired loans

- Islamic 432,993 429,985- Conventional 1,958,071 1,456,613

Unamortised participation and upfront fees (13,507) (13,108)Collective impairment allowance (6,361) (6,020) 2,371,196 1,867,470Impaired loans

Non-performing loans ( see below) 17,652 21,262Performing loans - 27,898Allowance for specific impairments (17,652) (24,131)

- 25,029 2,371,196 1,892,499 Impaired (non-performing) loans – Fully provided Iraqi companies fully owned by Government of Iraq 51,848 51,848Dividends & interest due to Government of Iraq, offset against defaulted loans (50,756) (47,146)Net Iraqi loans, after dividends offset (see below) 1,092 4,702Others 16,560 16,560 Total impaired (non-performing) loans at 31 December 17,652 21,262

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 from the Corporation. Consequently, since 1992 dividends (and non contractual accrued interest thereon) due to the Government of Iraq (a shareholder in APICORP) have not been paid.

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

InMay2003,APICORPBoardofDirectorsadoptedaresolutionauthorizingmanagement,incaseswherenosettlementis reached, to set-off bad debts owed to the Corporation by companies and public corporations fully owned by any of APICORP’s shareholder governments, against accounts held by the Corporation belonging to such bodies and governments including dividends, provided all legal requirements are satisfied and complied with.

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

Since the beginning of default during 1990-1992, the Corporation has kept memorandum record for contractual interest and fee on the defaulted Iraqi loans. The total contractual overdue interest and fee on these impaired Iraqi loans as at 31 December 2008 amounts to US$ 117,100 thousand (2007: US$ 107,800 thousand).




5. Syndicated and direct loans (continued) 2008 2007unimpaired loans movement during the year Outstanding at the beginning of the year 1,886,598 1,291,957Draw-downs on new and existing loans 1,145,135 1,237,502Repayments and prepayments received (665,279) (650,660)Reclassified as performing (impaired) 27,898 -Exchange rate movements (Euro and Swiss franc-denominated loans) (3,288) 7,799 unimpaired loans outstanding at 31 December 2,391,064 1,886,598

undrawn loan commitments and guarantees At the beginning of the year 984,586 710,511Additional underwriting and commitment during the year 844,584 1,667,224Drawdowns during the year (1,145,135) (1,237,502)Expired commitments and other movements - net 293,589 (155,647) undrawn commitments at 31 December 977,624 984,586 Allowance for specific impairmentsAt the beginning of the year

Allowance for specific impairments – gross 71,277 72,598Less: Unpaid dividends and interest due to Government of Iraq (47,146) (42,764)

24,131 29,834Write-downs (see note 18) - 79Reversals of write-downs (see note 18)

- Unpaid dividends & interest due to the Government of Iraq (3,610) (4,382)- Partial recoveries / reversals (2,869) (1,400)

Net reduction in the year (6,479) (5,703) Allowance for specific impairments at 31 December – gross 68,408 71,277Unpaid dividends and interest due to the Government of Iraq (50,756) (47,146)

Allowance for specific impairments at 31 December - net 17,652 24,131

Allowance for collective impairment At the beginning of the year (6,020) 4,316(Additional) /reversal allowance during the year - net (341) 1,704

Allowance for collective impairment at 31 December (6,361) 6,020



6. PROPERTY AND EQuIPMENT 2008 2007

Land at Rakah – head office building and housing compound 4,003 4,003Head office building, equipment, decor and furnishings 38,454 38,415Housing compound buildings, equipment, decor & furnishings 28,371 28,275Computer hardware and other office equipment 882 771Computer systems software 908 869Bahrain Banking unit office equipment, decor & furnishings 984 868

Total cost at 31 December 73,602 73,201

Accumulated depreciation (39,428) (36,683) 34,174 36,518

Movements during the year Net carrying value at the beginning of the year 36,518 38,300Additions at cost

Head office building, operating equipment, decor & furnishings 39 176Housing compound buildings, equipment, decor & furnishings 96 154Computer systems software – acquisition & implementation 150 100Other 116 569

Depreciation charge (2,745) (2,744)Disposals at net carrying value – mostly fully depreciated - (37)

Net carrying value at 31 December 34,174 36,518

7. OTHER ASSETS 2008 2007 Accrued interest receivables 14,455 24,403Employee loans and advances 789 911Derivatives fair values instruments (see note 11) 6,000 -Miscellaneous receivables and advance payments 293 205 21,537 25,519

8. DEPOSITS FROM BANKS 2008 2007

Short-term US dollar deposits from conventional banks 331,850 506,125Short-term non-US dollar deposits from conventional banks 247,736 333,219Short-term US dollar Murabaha financing from Islamic financial institutions 483,824 133,179Short-term non-US dollar Murabaha financing from Islamic financial institutions 325,231 370,383

1,388,641 1,342,906



9. TERM FINANCINg 2008 2007

US$ 250 million loan 2005-2010 – fully drawn 250,000 250,000Interest rate – US$ LIBOR plus 37.5 basis points

US$ 400 million loan 2007 – 2012 – fully drawn 400,000 400,000Interest rate: US$ LIBOR plus 28.5 basis points

Unamortised front-end fees for all current facilities (1,410) (1,967) 648,590 648,033

The loans are subject to similar financial covenants, with which the Corporation has complied:

•Theratiooftotalshareholders’fundstototalassetsshallatalltimesbeequaltoorgreaterthan20%;and•Theamountoftotalshareholders’fundsshallatalltimesbegreaterthanUS$500million.

10. OTHER LIABILITIES 2008 2007 Accrued interest payable 12,880 21,722Employees’ end of service benefits 6,924 6,334Accrued expenses 4,135 4,405Derivatives fair values instruments - 8,743Other payables 990 524

24,929 41,728

Movement in employee retirement benefits

The movement on the provision is as follows: Balance at 1 January 6,334 6,330Charge for the year 1,201 653Paid during the year (611) (649) Balance at 31 December 6,924 6,334

11. OFF-BALANCE SHEET ExPOSuRES 2008 2007 Commitments to underwrite and fund loans (see note 5) 977,624 984,586Commitments to subscribe capital to available-for-sale direct equity investments 30,200 64,699Contracted capital expenditure commitments 493 -

1,008,317 1,049,285

Derivative financial instruments

The Corporation uses derivatives, not designated in a qualifying accounting hedge relationship, to manage its exposure to market risks. The Company enters into interest rate swap agreements to hedge the exposure to interest rate risks on deposits placed with banks. The Company also enters into forward currency contract to hedge against foreign exchange fluctuations. Fair values of the interest rate swap agreements and forward currency contracts are estimated based on the prevailing market rates of interest and forward rates of the related foreign currencies, respectively.



11. Off-balance sheet exposures (continued)

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

Fair value (gain) / loss Notional Amount

2008 2007 2008 2007

Interest rate swap - 1,115 - 63,885

Forward exchange contract (6,000) 7,628 556,516 234,526

204,000

At 31 December (6,000) 8,743 556,516 298,411

The contractual maturity analysis of the derivative instruments are included as part of liquidity risk information in note 23.

12. NET INTEREST INCOME

Interest income 2008 2007

Cash and bank balances 376 290Deposits with banks – Islamic 578 287 – Conventional 15,401 18,002Available-for-sale securities – coupon interest 20,601 29,421Available-for-sale securities – amortisation of premium 193 838Syndicated and direct loans – Islamic 19,909 14,695 – Conventional 73,873 85,854Amortisation of loan participation and upfront fees 3,832 4,316

Total interest income 134,763 153,703

Interest expense Deposits from banks – Conventional (42,887) (48,694) – Islamic (21,851) (25,590)Deposits from corporate (14,528) (800)Term financing (23,030) (34,828)Amortisation of term financing front-end fees (582) (641)Unpaid dividends (1,610) (2,382)

Total interest expense (104,488) (112,935)

Net interest income 30,275 40,768

13. NET FEE INCOME 2008 2007Fee income Fee income derived from the Corporation’s lending activities: Underwriting and arranging services 3,708 1,765Agency, advisory and other services 2,256 1,725Fee from securities lending activities 695 135 6,659 3,625Fee expense Custody fees and other charges paid to banks (114) (180) Net fee income 6,545 3,445



14. DIVIDEND INCOME 2008 2007Dividend income from:

Trading securities 9 14Available-for-sale direct equity investments 57,979 31,635

57,988 31,64915. gAIN / (LOSS) ON TRADINg SECuRITIES 2008 2007

Net (losses) / gains on sale (3,880) 3Net (losses) / gains on revaluation (13) 6,683 (3,893) 6,686

16. gAIN / (LOSS) ON SALE OF AVAILABLE-FOR-SALE SECuRITIES 2008 2007

Bonds and structured notes 1,100 (4)Managed funds 1,882 6,043 2,982 6,03917. gAIN / (LOSS) ON SALE OF AVAILABLE-FOR-SALE DIRECT EQuITY INVESTMENTS 2008 2007

Gains on sale of available-for-sale direct equity - 5,433

18. IMPAIRMENT LOSSES / (REVERSALS) 2008 2007Write-downs Syndicated and direct loans (see note 5)

Specific impairment allowance - (79)Collective impairment allowance (341) (1,704)

Available-for-sale securities (see note 2) (55,506) -Available-for-sale direct equity investments (see note 3) - (1,600) (55,847) (3,383)

Reversals of write-downs Syndicated and direct loans (see note 5)

Government of Iraq – reversal through unpaid dividend 3,610 4,382Specific impairment allowance reversals on recovery 2,869 1,400

Recovery from Aradet, Iraq (see below) 4,000 5,000Others - 583 10,479 11,365 Net impairment (losses) / Reversals (45,368) 7,982

Payments under guarantees - Aradet, IraqFollowing the lifting of the United Nations sanctions against Iraq, APICORP was successful in negotiating terms for the settlement of amounts paid on behalf of Aradet under guarantees. The balance due till date, under the 2005 settlement agreement of guarantees was duly received and the related provisions were released, since this balance was fully provided in previous years and the recovery relating to this balance is recognised in income statement.



19. gENERAL AND ADMINISTRATIVE ExPENSES 2008 2007

Human resources costs 15,215 14,405Employees’ end of sevice benefits 1,081 -Premises costs, including depreciation 2,775 2,696Equipment and communications costs 1,252 1,055Key Management’s benefits, fees and expense 1,849 1,719Key Management’s post employment benefits 120 73Donations 315 305Consultancy 53 1,123Other corporate expenses 893 920

23,553 22,29620. OTHER INCOME 2008 2007 Exchange (losses) / gains (5,467) 7,185Derivatives fair values changes 7,115 (8,743)Rent – head office building and housing compound 986 889Gains on disposal of investment property - 702

2,634 33

21. RELATED PARTY TRANSACTIONS

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

Loans to related parties 2008 2007 Loans outstanding at 31 December – gross 1,863,487 1,553,793Allowance for specific Impairments outstanding at 31 December (1,092) (4,702)Dividends & interest due to Government of Iraq, offset against defaulted loans (50,756) (47,146)at 31 December Commitments to underwrite and fund loans at 31 December (540,366) (910,977) Interest income from loans during the year 72,797 102,033Loan fees received during the year 5,133 10,363

Loans to related parties are made at ruling market interest rates and subject to normal commercial negotiation as to terms. The majority of loans to related parties are syndicated, which means that participation and terms are negotiated by a group of arrangers, of which the Corporation may, or may not, be a member. No loans to related parties were written off in 2008-2007.

Available-for-sale direct equity investments in related parties 2008 2007

Investments at 31 December 261,151 313,971Commitments to invest at 31 December 30,200 26,799Dividends received during the year 55,811 30,321


21. Related party transactions (continued)

Related parties deposits from corporate 2008 2007

Deposits from banks at 31 December 47,000 -Deposits from corporate at 31 December 242,764 294,730Interest expense on related parties deposits from banks during the year 2,534 -Interest expense on related parties deposits from corporate during the year 6,455 800

Balances due to key management 120 73

For key management’s compensation see note 19

22. CAPITAL ADEQuACY AND MANAgEMENT The risk asset ratio at 31 December, calculated in accordance with the capital adequacy of the Basel I Committee on Banking Supervision, is as follows: 2008 2007Carrying values

On-balance sheet assets (see page 33) 3,563,802 3,573,357Off-balance sheet exposures (see note 11) 1,008,317 1,051,857

4,572,119 4,625,214

Risk-weighted exposures On-balance sheet assets 3,085,375 2,891,206Off-balance sheet exposures 993,217 1,053,422 Total risk-weighted exposures 4,078,592 3,944,628

Capital adequacy ratioTier – 1 capital: share capital, legal & general reserves and retained earnings 772,525 764,915Tier – 2 capital: Investments fair value reserve & collective impairment allowance 128,585 261,508

Qualifying capital 901,110 1,026,423

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

Qualifying capital 22.1% 26.0% Tier 1 capital 19.0% 19.4%

The Corporation’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and tosustainfuturedevelopmentofthebusiness.Theimpactofthelevelofcapitalonshareholders’returnisalsorecognizedand the Corporation recognises the need to maintain a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position. The Corporation manages / monitors its capital based on the capital adequacy ratios prescribed by Basel Committee.

The Corporation has complied with all externally imposed capital requirements throughout the year (see note 9). There have been no material changes in the Corporation’s management of capital during the year.



23. FINANCIAL INSTRuMENTS AND RISK MANAgEMENT

Financial instruments

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

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

These financial instruments expose APICORP to varying degrees of market risk (including currency, interest rate and price risks), credit risk and liquidity risk.

Credit risk management

Credit risk is the risk that a borrower or counter-party of APICORP will be unable or unwilling to meet a commitment that it has entered into with the Corporation. It arises from the lending, treasury and other activities undertaken by the Corporation. Policies and procedures are in place 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), 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 export credit agency cover, limit APICORP’s exposure to excessive credit risk.

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

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



23. Financial instruments and 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 & direct loan Deposits with banks Available for Sales (note 5) (note 4) securities (note 2)

2008 2007 2008 2007 2008 2007

Carrying amount on 31 December 2,371,196 1,892,499 227,618 391,575 565,423 701,771

Individually impaired Impaired non performing

Grade F (see note 5) 68,408 68,408 - - - -Grade E - - - - - -

Gross amount 68,408 68,408 - - - -Allowance for impairment (68,408) (68,408) - - - -Carrying on amount on 31 December - - - - - -Impaired performing

Grade D - - - - - -Grade C - 27,898 - - - -

Gross amount - 27,898 - - - -Allowance for impairments - (2,869) - - - -Carrying amount on 31 December - 25,029 - - - -Past due but not impaired

Grade C+ - - - - - -Neither past due nor impaired

Grade B - - - - - -Grade A 2,391,064 1,758,985 - - - -

Includes accounts with renegotiable terms - -Grade B - - - - - -Grade A - 127,613 - - - -

Loans & Advances to banks in Organisation for Economic Co-operation and Development countries (OECD) - - 122,850 93,527 - -Loans & Advances to banks in non-OECD countries - - 104,768 298,048 - -Externally rated ( investment grade ) AFS investments - - - - 565,423 701,771Gross amount 2,391,064 1,886,598 227,618 391,575 565,423 701,771Collective impairment allowance (6,361) (6,020) - - - -Unamortised participation and commitment (13,507) (13,108) - - - -Net neither past due nor impaired 2,371,196 1,867,470 227,618 391,575 565,423 701,771

Total carrying amount on 31 December 2,371,196 1,892,499 227,618 391,575 565,423 701,771




The Corporation monitors concentration of credit risk by sector and by geographic location. An analysis of concentration of risk at reporting date is shown below (also see note 29 and 30). Syndicated & direct loan Deposits with banks Available for Sales (note 5) (note 4) securities (note 2)

2008 2007 2008 2007 2008 2007


Concentration of credit risk by sector Petroleum and petrochemicals 1,473,391 1,196,009 - - 21,329 21,716Fertilizerplants 416,425 379,697 - - - -Maritime transportation 265,235 168,920 - - - -Power generation 139,839 122,139 - - - -Banks and financial institutions - - 227,618 391,575 - 445,933Governments and public sector - - - - 533,984 209,468Other industries 76,306 25,734 - - 10,110 24,654


Syndicated & direct loan Deposits with banks Available for Sales (note 5) (note 4) securities (note 2)


Concentration of credit risk by location Kingdom of Saudi Arabia 733,497 418,952 - 45,280 48,583 49,048State of Qatar 538,009 385,222 25,000 30,000 18,119 20,378Other Gulf Cooperation Council states 401,446 329,898 79,768 222,768 217,730 244,814Other Middle East states - 28,318 - - - -Egypt and North Africa 349,928 382,127 - - - -Total Arab World 2,022,880 1,544,517 104,768 298,048 284,432 314,240Western Europe 123,895 115,762 112,000 93,527 62,888 15,676Asia Pacific Rim - 4,374 - - - -United States 224,421 200,000 10,850 - 218,103 278,439Other North and South America - 27,846 - - - 93,416


Liquidity risk and funding management

Liquidity risk is the risk of being unable to raise funds at a reasonable price to meet commitments when they fall due, or to take advantage of investment opportunities when they arise. Liquidity risk management ensures that funds are available at all times to meet the funding requirements of the Corporation.

APICORP’s liquidity management policies are designed to ensure that even under adverse conditions, the Corporation 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 Corporation also ensures availability of Term financing at a competitive rates, at all times to meet long term funding requirements of the Corporation.

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 26.



23. Financial instruments and risk management (continued) Liquidity risk and funding management (continued)

Contractual maturities of financial liabilities (including interest):

2008Up to

3 months3 months To 1 year

1 year To 5 years

5 years And over

Contractual Outflows

Carrying value

Liabilities Deposits from banks (1,106,473) (325,958) - - (1,432,431) (1,388,641)Deposits from corporates (385,476) (72,641) - - (458,117) (447,334)Securities sold under REPO (79,787) (82,365) - - (162,152) (159,558)Term financing (1,864) (14,435) (675,485) - (691,784) (648,590) (1,573,600) (495,399) (675,485) - (2,744,484) (2,644,123) Derivative instruments (337,579) (218,783) - - (556,362) 6,000 Off-balance sheet exposures (221,468) (396,840) (372,437) (17,572) (1,008,317) (1,008,317) (2,132,647) (1,111,022) (1,047,922) (17,572) (4,309,163) (3,646,440)

2007Up to


1 year To 5 years

5 years And over

Contractual Outflows

Carrying value

Liabilities Deposits from banks (1,099,839) (369,444) - - (1,469,283) (1,342,906)Deposits from corporates (65,623) (131) - - (65,754) (294,730)Securities sold under REPO (184,788) (58,301) - - (243,089) (225,557)Term financing (12,844) (26,240) (789,667) - (828,751) (648,033) (1,363,094) (454,116) (789,667) - (2,606,877) (2,511,226) Derivative instruments (32,809) (218,519) - - (251,328) (8,743)Off-balance sheet exposures (75,923) (222,119) (749,130) (4,686) (1,051,858) (1,051,857) (1,471,826) (894,754) (1,538,797) (4,686) (3,910,063) (3,571,826)

Market risk management

Market risk is the risk that changes in market factors, such as interest rate, equity prices and foreign exchange rates will affect the Corporation’s income or the value of its holdings of financial instruments. The objective of market risk managementistomanageandcontrolmarketriskexposureswithinacceptableparameters,whileoptimizingthereturnon risk.

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

The principal risk to which non-trading portfolios are exposed is the risk of loss from fluctuations in the future cash flows or fair values of financial instrument because of a change in market interest rates, foreign exchange rates and equity prices.

Interest rate risk: Syndicated and direct loans are normally denominated in United States dollars, as is the Corporation’s funding, and interest rates for both are normally linked to LIBOR. The Corporation’s exposure to interest rate fluctuations on certain financial assets is also hedged by entering into interest rate swap agreements.




Market risk management (continued)

Exposure to interest rate risk is restricted by permitting only a limited mismatch between the re-pricing of the main components of the Corporation’s assets and liabilities. The re-pricing profile of assets and liabilities is set out in note 27.

The management of interest rate risk against interest rate gap limits is supplemented by monitoring the sensitivity of the Corporation’s financial assets and liabilities to various standard and non-standard interest rate scenarios. Standard scenarios that are considered on a periodic basis include a 100 basis point (bp) parallel fall or rise in all yield curves worldwide. An analysis of the Corporation’s income statement sensitivity to an increase or decrease in market interest rates (assuming no asymmetrical movement in yield curves and a constant balance sheet position) is as follows:

100 bp parallel increase 100 bp parallel decrease

At 31 December 2008 2,360 (2,360)

At 31 December 2007 166 (166)

Currency risk is minimised by regular review of exposures to currencies other than United States dollars to ensure that no significant positions are taken which may expose APICORP to undue risks. Currently there is no trading in foreign exchange. The Corporation’s net currency exposures are set out in note 28. The Corporation’s exposures in the currencies other than US $ is also hedged by entering into forward contracts.

An analysis of the Corporation’s income statement 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 $ against OECD currencies

5% weakening of US $ against OECD currencies

At 31 December 2008 EUR (574) 574GBP (133) 133CHF 79 (79)EGP (19) 19

At 31 December 2007 EUR (375) 375GBP (185) 185CHF 95 (95)EGP (28) 28

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




Market risk management (continued)

Operational risk

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

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

24. EFFECTIVE INTEREST RATES

The weighted average effective interest rates of the Corporation’s financial instruments at the balance sheet date were: 2008 2007Interest-bearing financial assets Fixed-rate bonds 3.37% 3.48%Floating-rate bonds 3.20% 5.49%US Treasury Notes 3.41% 3.79%Structured notes 2.18% 6.00%Deposits placed with banks 2.19% 5.02%Syndicated and direct loans 2.91% 5.78%

US dollar denominated 2.86% 5.85%Non-dollar – mainly denominated in euros 3.86% 4.48%

Interest-bearing financial liabilities Deposits from banks 3.82% 5.29%

US dollar denominated 3.57% 5.31%Non-dollar – Euros, Swiss francs and Saudi riyals 4.29% 5.25%

Term financing 2.47% 5.40%

uS$ LIBOR AT 31 December was: One-month 0.44% 4.63%Three-month 1.43% 4.73%Six-month 1.75% 4.73%



25. FAIR VALuE INFORMATION

The table below set outs the Corporations’ classification of each class of financial assets and liabilities and fair values (excluding interest).

TradingLoans &

receivablesAFS

investments

Others at amortised

cost

Carrying amount

Fair values

2008

Cash and bank balances - 9,391 - - 9,391 9,391Trading securities 98 - - - 98 98 Available-for-sale securities - - 616,940 - 616,940 616,940 Available-for-sale direct equity (see note 3) - - 282,848 - 282,848 282,848 Deposits with banks - 227,618 - - 227,618 227,618 Syndicated and direct loans(Fair value -based on discounted cash flows at current market prices) - 2,371,196 - - 2,371,196 2,486,547Other Assets - 789 - - 789 789 Total assets 98 2,608,994 899,788 - 3,508,880 3,624,231 Deposits from banks - - - (1,388,641) (1,388,641) (1,388,641)Deposits from corporate - - - (447,334) (447,334) (447,334)Securities sold under agreement to repurchase - - - (159,558) (159,558) (159,558)Term financing (Fair value - based on current market rates for similar remaining maturity) - - - (648,590) (648,590) (637,574)Other liabilities - - - (990) (990) (990) Total liabilities - - - (2,645,113) (2,645,113) (2,634,097)

2007

Cash and bank balances - 15,510 - - 15,510 15,510Trading securities 50,822 - - - 50,822 50,822Available-for-sale securities - - 817,648 - 817,648 817,648Available-for-sale direct equity - - 343,266 - 343,266 343,266 Deposits with banks - 391,575 - - 391,575 391,575Syndicated and direct loans (Fair value - based on discounted cash flows at current market prices) - 1,890,486 - - 1,890,486 1,929,699Other Assets - 911 - - 911 911Total assets 50,822 2,298,482 1,160,914 - 3,510,218 3,549,431 Deposits from banks - - - (1,342,906) (1,342,906) (1,342,906)Deposits from corporate - - - (294,730) (294,730) (294,730)Securities sold under agreement to repurchase - - - (225,557) (225,557) (225,557)Term financing (Fair value - based on current market rates for similar remaining maturity) - - - (648,033) (648,033) (630,449)Other liabilities - - - (524) (524) (524)

Total liabilities - - - (2,511,750) (2,511,750) (2,494,166)



26. MATuRITY PROFILE OF ASSETS AND LIABILITIES

The maturity profile of the Corporation’s assets and liabilities, based on contractual repayment arrangements and in certaincasesmanagement’sjudgmentofitsrealizations,issetoutbelow.Theapparentsignificantshort-termmismatchbetween maturities of assets and liabilities is substantially reduced in practice because the majority of deposits from banks are routinely rolled over on maturity.

2008Up to


1 year To 5 years

5 yearsAnd over

Total

ASSETS Cash and bank balances 9,391 - - - 9,391Trading securities - - - 98 98Available-for-sale securities 90,088 147,988 203,689 175,175 616,940Available-for-sale direct equity investments - - - 282,848 282,848Deposits with banks 227,618 - - - 227,618Syndicated and direct loans 44,394 85,068 703,960 1,537,774 2,371,196Property and equipment - - - 34,174 34,174Other assets 3,429 9,515 158 8,435 21,537 Total assets 374,920 242,571 907,807 2,038,504 3,563,802

LIABILITIES AND EQUITY Deposits from banks (1,097,082) (291,559) - - (1,388,641)Deposits from corporates (376,007) (71,327) - - (447,334)Securities sold under agreements to repurchase (78,949) (80,609) - - (159,558)Term financing 139 418 (649,147) - (648,590)Other liabilities (14,266) (5,998) (1,731) (2,934) (24,929)Equity - - - (894,750) (894,750) Total liabilities and equity (1,566,165) (449,075) (650,878) (897,684) (3,563,802) Maturity gap (1,191,245) (206,504) 256,929 1,140,820 -

Cumulative maturity gap (1,191,245) (1,397,749) (1,140,820) - -

2007 Total assets 398,989 325,722 1,247,513 1,601,133 3,573,357Total liabilities and equity (1,405,766) (495,421) (650,180) (1,021,990) (3,573,357) Maturity gap (1,006,777) (169,699) 597,333 579,143 -

Cumulative maturity gap (1,006,777) (1,176,476) (579,143) - -



27. REPRICINg PROFILE OF FINANCIAL ASSETS AND LIABILITIESThe reporting profile of the Corporation’s interest bearing financial assets and liabilities at 31 December was as follows:

2008Up to


1 year To 5 years

5 yearsAnd over

Total

ASSETS Available for sale securities

Fixed-rate bonds - 189 - - 189Floating-rate bonds 306,272 - - - 306,272US treasury notes 60,088 61,074 - - 121,162Structured notes 14,504 68,596 - 25,701 108,801

Deposits with banks 227,618 - - - 227,618Syndicated and direct loans

US$ denominated 1,589,876 712,510 - 68,408 2,370,794Euro and Swiss francs 86,366 2,313 - - 88,679

LIABILITIES Deposits from banks

US$ denominated (736,374) (79,300) - - (815,674)Saudi riyal and Euro (360,707) (212,260) - - (572,967)

Deposits from corporate (376,007) (71,327) - - (447,334)Securities sold under REPO (78,949) (80,609) - - (159,558)Term financing (648,590) - - - (648,590) Interest rate sensitivity gap 84,097 401,186 - 94,109 579,392 Cumulative gap 84,097 485,283 485,283 579,392

2007

ASSETS Available for sale securities

Fixed-rate bonds - - 383 - 383Floating-rate bonds 281,771 58,222 - - 339,993US treasury notes - - 110,411 - 110,411Structured notes 58,618 93,309 - - 151,927

Deposits with banks 326,575 65,000 - - 391,575Syndicated and direct loans

US$ denominated 1,166,620 702,936 - - 1,869,556Euro and Swiss francs 87,938 25,410 - - 113,348

LIABILITIES Deposits from banks

US$ denominated (705,353) (138,382) - - (843,735)Saudi riyal and Euro (396,238) (102,933) - - (499,171)

Deposits from corporate (97,035) (197,695) - - (294,730)Securities sold under REPO (182,348) (43,209) - - (225,557)Term financing (648,033) - - - (648,033) Interest rate sensitivity gap (107,485) 462,658 110,794 - 465,967

Cumulative gap (107,485) 355,173 465,967 465,967



28. CuRRENCY ExPOSuRES

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

AssetsLiabilities

and equity2008

Net Exposure2007

Net Exposure

ASSETS, LIABILITIES AND EQUITY United States dollar 2,804,975 (2,872,980) (68,005) 422,777Euro 229,455 (240,929) (11,474) 17,543Other OECD currencies (see below) 54,747 (55,834) (1,087) 7,331Arab currencies -

GCC (see below) 474,601 (393,653) 80,948 (433,039)Other Middle East - -Egypt and North Africa 24 (406) (382) (14,612)

3,563,802 (3,563,802) - -

COMMITMENTS AND GURANTEES United States dollar 962,265 1,047,208Euro 28,420 -Arab currencies – GCC (see below) 17,632 4,649 1,008,317 1,051,857

Other OECD currenciesThe other member countries of the Organisation for Economic Co-operation and Development, excluding the United States andthetwelveEuropeanMonetaryUnioncountriesare:Australia,Canada,CzechRepublic,Denmark,Hungary,Iceland,Japan,Mexico,NewZealand,Norway,Poland,SouthKorea,Sweden,Switzerland,TurkeyandtheUnitedKingdom.

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: 2008 2007 Euro EUR 1=US$ 1.4124 1.4749Saudi riyal US$ 1=SAR 3.7500 3.7500Swiss franc US$ 1=CHF 1.0525 1.2163Egyptian pound US$ 1=EGP 5.5250 5.5300

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



29. INDuSTRY DISTRIBuTION OF ASSETS AND LIABILITIES

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

2008 2007ASSETS Petroleum and petrochemicals

Refineries 218,932 166,170Oilfield production development and services 317,045 327,617Floating production, storage and offloading facilities 30,380 8,555Pipelines and distribution - 5,846Gas-to-liquids plants 33,827 36,241Liquefied natural gas plants 371,250 284,059Petrochemical plants 750,618 691,949Fertilizerplants 416,425 398,218Maritime transportation 267,638 172,694Power generation 140,017 123,659Other petroleum 117,477 57,467

Total petroleum and petrochemicals 2,663,609 2,272,475

Banks and financial institutions 166,104 406,737Banks and financial institutions – managed funds 51,517 166,099Other industries 150,782 62,883Governments and public sector institutions 531,790 665,163 Total assets at 31 December 3,563,802 3,573,357

LIABILITIES AND EQUITY Banks and financial institutions 2,648,537 2,541,693Other industries 20,515 11,261Shareholders 894,750 1,020,403

Total liabilities and equity at 31 December 3,563,802 3,573,357

COMMITMENTS AND GUARANTEES Petroleum and petrochemicals

Refineries 61,662 29,700Oilfield production development and related services 151,081 176,542Floating production, storage and offloading facilities 18,162 39,959Liquefied natural gas plants 61,012 161,883Petrochemicals plants 205,174 236,568Fertilizerplants 211,540 169,465Maritime transportation 114,750 86,560Power generation 83,662 69,519Other petroleum 54,639 81,661

Total petroleum and petrochemical 961,682 1,051,857

Other industries 46,635 -Governments and public sector institutions - - Total commitments and guarantees at 31 December 1,008,317 1,051,857



30. gEOgRAPHICAL DISTRIBuTION OF RISK

The geographical distribution of risk of the Corporation’s assets and liabilities, after taking into account insurance and third-party guarantees, was as follows: 2008 2007ASSETS Kingdom of Saudi Arabia 1,065,192 820,701State of Qatar 582,713 440,097Other Gulf Cooperation Council states 724,276 815,476Other Middle East states 5,211 33,525Egypt and North Africa 442,056 445,736 Total Arab World 2,819,448 2,555,535 Western Europe 293,923 328,420Asia Pacific Rim - 4,378United States 450,431 563,538Other North and South America - 121,486 Total assets 3,563,802 3,573,357

LIABILITIES AND EQUITY

Kingdom of Saudi Arabia 879,243 980,132State of Qatar 289,269 185,562Other Gulf Cooperation Council states 1,306,741 881,273Other Middle East states 133,445 149,604Egypt and North Africa 267,100 351,658 Total Arab World 2,875,798 2,548,229 Western Europe 613,040 951,309Asia Pacific Rim 26,000 26,000United States 48,964 47,819 Total liabilities and equity 3,563,802 3,573,357

COMMITMENTS AND GUARANTEES Kingdom of Saudi Arabia 422,053 419,547State of Qatar 216,016 187,774Other Gulf Cooperation Council states 151,317 177,569Egypt and North Africa 172,112 190,653 Total Arab World 961,498 975,543 Western Europe 46,819 76,314Asia Pacific Rim - - 1,008,317 1,051,857


Date post:	25-Mar-2020
Category:	Documents
Upload:	others
View:	0 times
Download:	0 times

The Essence of Investment - APICORP · 2018-11-19 · negative impact that these investments may be...

Documents