TIDMRPT
RNS Number : 2902J
Regal Petroleum PLC
09 April 2020
9 April 2020
REGAL PETROLEUM PLC
2019 AUDITED RESULTS
Regal Petroleum plc (the "Company", and with its subsidiaries,
the "Group"), the AIM-quoted (RPT) oil and gas exploration and
production group, today announces its audited results for the year
ended 31 December 2019.
Highlights
Ukraine Operations
-- Aggregate average daily production from the MEX-GOL, SV and
VAS fields over the year to 31 December 2019 of 4,263 boepd
(2018: 3,391 boepd), an increase of nearly 26%
-- Aggregate average daily production from the MEX-GOL, SV and
VAS fields for Q4 2019 of 4,776 boepd (Q4 2018: 4,139 boepd),
representing an increase of over 15%, largely as a result
of the significant contribution from the MEX-119 well in Q4
2019
-- Reserves upgrade at VAS field announced in August 2019, nearly
doubling proved plus probable (2P) reserves to 3.145 MMboe
(from 1.80 MMboe)
-- MEX-119 well successfully completed and brought on production
in October 2019
Finance
-- Revenue for the year ended 31 December 2019 of $55.9 million
(2018: $66.1 million), down 15% as a function of weakened
gas prices in the year
-- Gross profit for the year of $23.5 million (2018: $34.2 million),
down 31%
-- Operating profit for the year of $21.1 million (2018: $66.4
million, including a one-off reversal of impairment item of
$36.1 million relating to impairment reversal of oil and gas
development and production assets)
-- Cash generated from operations during the year of $24.6 million
(2018: $36.3 million), down 32%
-- Net profit for the year of $12.2 million (2018: $54.3 million,
included a one-off reversal of impairment item of $36.1 million
relating to impairment reversal of oil and gas development
and production assets)
-- Average realised gas, condensate and LPG prices in Ukraine
were all lower, particularly gas prices, for the year to 31
December 2019 at $219/Mm(3) (UAH5,729/Mm(3) ), $58/bbl and
$55/bbl respectively (2018: $312/Mm(3) (UAH8,528/Mm(3) ) gas,
$72/bbl condensate and $64/bbl LPG)
-- Cash and cash equivalents up 17% at $62.5 million at 31 December
2019 (31 December 2018: cash and cash equivalents of $53.2
million), with cash and cash equivalents at 7 April 2020 of
$55.2 million, held as $18.5 million equivalent in Ukrainian
Hryvnia and $36.7[ ] million equivalent predominantly in US
Dollars, Euros and Pounds Sterling
Outlook
-- Development work planned for 2020 at MEX-GOL and SV fields
includes: completion of the SV-54 well; commencement of a
new well, SV-25; planning for a further new well or sidetracking
of an existing well in the SV field; investigating workover
opportunities for existing wells; installation of further
compression equipment; and continued investment in gas processing
facilities, pipeline network and other infrastructure
-- Development work planned for 2020 at the VAS field includes:
planning for a new well to explore the VED prospect within
the VAS licence area; installation of compression equipment;
and continued investment in gas processing facilities, pipeline
network and other infrastructure
-- Commencement of planning for development of the SC field operated
by Arkona
-- 2020 development programme expected to be funded from existing
cash resources and operational cash flow
-- As of the date of this announcement, the global economy, and
global social dynamics, are in a state of disruption and uncertainty
as result of the COVID-19 pandemic. The Board and management
continue to monitor the evolving situation and take any steps
necessary to protect our staff, stakeholders and business
alike. As of the date hereof, there has been no operational
disruption linked to the COVID-19 pandemic, and no material
impact is currently envisaged on the Group's prospects. However,
the Board and management remain acutely aware of the risks,
and are taking action to mitigate them where possible, with
the safety of individuals and communities being paramount.
To this end, we have joined with other Ukrainian businesses
to acquire medical equipment and supplies for donation to
the Ukrainian State, with our share of the pre-emptive initiative
being $2 million.
Sergii Glazunov, CEO, commented: "2019 was a strong operational
year for Regal Petroleum. Record production from the MEX-GOL, SV
and VAS fields helped offset the impact of lower gas prices
experienced in the year, and the Board believes that the
acquisition of LLC Arkona Gas-Energy in March of this year will
bolster our production capacity following completion of initial
drilling planned to commence in the next twelve months.
We are looking forward to further progressing our development
programme in the new financial year and continuing to improve
production rates and revenue streams in the future. We are watching
closely the unprecedented developments of the current COVID-19
pandemic, and although we have seen no material impact so far, we
have taken and will keep taking actions to ensure the safety of our
employees and local communities."
The Annual Report and Financial Statements for 2019, together
with the Notice of Annual General Meeting, will be posted to
shareholders and published on the Company's website during May/June
2020.
This announcement contains inside information for the purposes
of Article 7 of EU Regulation 596/2014.
For further information, please contact:
Regal Petroleum plc Tel: 020 3427 3550
Chris Hopkinson, Chairman
Sergii Glazunov, Chief Executive Officer
Bruce Burrows, Finance Director
Strand Hanson Limited Tel: 020 7409 3494
Rory Murphy / Richard Tulloch
Arden Partners plc Tel: 020 7614 5900
Ruari McGirr / Dan Gee-Summons (Corporate
Finance)
Simon Johnson (Corporate Broking)
Citigate Dewe Rogerson Tel: 020 7638 9571
Louise Mason-Rutherford / Elizabeth
Kittle
Dmitry Sazonenko, MSc Geology, MSc Petroleum Engineering, Member
of AAPG, SPE and EAGE, Director of the Company, has reviewed and
approved the technical information contained within this press
release in his capacity as a qualified person, as required under
the AIM Rules.
Definitions
Arkona LLC Arkona Gas-Energy
bbl barrel
bbl/d barrels per day
Bm(3) thousands of millions cubic metres
boe barrels of oil equivalent
boepd barrels of oil equivalent per day
Bscf thousands of millions scf
Company Regal Petroleum plc
D&M DeGolyer and MacNaughton
Group Regal Petroleum plc and its subsidiaries
km kilometre
km(2) square kilometre
LPG liquefied petroleum gas
MEX-GOL Mekhediviska-Golotvshinska
m(3) cubic metres
m(3)/d cubic metres per day
Mboe thousand barrels of oil equivalent
Mm(3) thousand cubic metres
MMbbl million barrels
MMboe million barrels of oil equivalent
MMm(3) million cubic metres
MMscf million scf
MMscf/d million scf per day
Mtonnes thousand tonnes
% per cent
QCA Code Quoted Companies Alliance Corporate Governance
Code 2018
QHSE quality, health, safety and environment
SC Svystunivsko-Chervonolutskyi
scf standard cubic feet measured at 20 degrees
Celsius and one atmosphere
SV Svyrydivske
Tscf trillion scf
$ United States Dollar
UAH Ukrainian Hryvnia
VAS Vasyschevskoye
VED Vvdenska
Chairman's Statement
I am delighted to introduce the preliminary results of the
Group. This year has been a strong year for the Group, with good
progress in the development of the MEX-GOL, SV and VAS gas and
condensate fields in north-eastern Ukraine and a solid financial
performance during the year. Drilling of the MEX-119 development
well was successfully completed and brought on production in
October 2019, with very strong flow rates.
At the MEX-GOL and SV fields, production was reasonably stable
during 2019, with higher production volumes compared with the 2018
year, and at the VAS field production was also steady, and
significantly higher than during 2018 following the hook-up of the
VAS-10 well in November 2018.
Aggregate average daily production from the MEX-GOL, SV and VAS
fields during 2019 was approximately 4,263 boepd, which compares
with an aggregate daily production rate of approximately 3,391
boepd during 2018, an increase of nearly 26%.
The Group delivered a robust financial performance for the year
ended 31 December 2019 on the back of record levels of production
and despite a significant drop in the average gas price in the
period, a function of weakened European gas prices. During 2019,
the Group achieved a net profit of $12.2 million (2018: $54.3
million). Continued strong profitability, despite the weakened gas
price, has enabled the Group to further enhance its balance sheet,
with a 17% increase in closing cash resources, being a total of
$62.5 million at 31 December 2019 (2018: $53.2 million).
The fiscal and economic situation in Ukraine was reasonably
stable during 2019, with a better economic outlook, GDP growth,
reduced inflation and stability in the Ukrainian Hryvnia exchange
rates. Nevertheless, Ukraine retains residual risk of fiscal and
economic stress, and we remain vigilant.
The Ukrainian Government has implemented a number of reforms in
the oil and gas sector in recent years, which include the
deregulation of the gas supply market in late 2015, and more
recently, reductions in the subsoil tax rates relating to oil and
gas production and a simplification of the regulatory procedures
applicable to oil and gas exploration and production activities in
Ukraine.
The deregulation of the gas supply market, supported by
electronic gas trading platforms and improved pricing transparency,
has meant that the market gas prices in Ukraine now broadly
correlate with the imported gas prices. During 2019, gas prices
trended lower, reflecting a similar trend in European gas prices,
and were lower than in 2018. Similarly, condensate and LPG prices
were also lower by comparison with last year.
New Acquisition
As announced on 24 March 2020, the Group has acquired the entire
issued share capital of LLC Arkona Gas-Energy ("Arkona") for total
consideration of up to $8.63 million, subject to satisfaction of
certain conditions. Arkona holds a 100% interest in the
Svystunivsko-Chervonolutskyi ("SC") exploration licence in
north-eastern Ukraine, some 15 km east of the SV field. The SC
licence was granted in May 2017, with a duration of 20 years, and
is prospective for gas and condensate. As with the productive
reservoirs in the SV field, the prospective reservoirs in this
licence are Visean, at depths between 4,600 - 6,000 metres. We
believe that our existing knowledge of the subsurface geology in
the area will enable us to quickly progress our development
planning for this licence, and we hope to be able to commence
drilling operations on the licence within 12 months.
Board and Management Changes
In June 2019, Bruce Burrows was appointed as Finance Director of
the Company, having previously been a non-executive Director, and
Oleksiy Zayets was appointed as Chief Financial Officer of the
Company's Ukrainian operations.
COVID-19 Virus
We are closely monitoring the current volatility in global
financial markets, and the implications on the operational,
economic and social environment within which we work caused by the
COVID-19 pandemic, coupled with the recent sharp decline in oil
prices. As of the date hereof, there has been no operational
disruption linked to the COVID-19 pandemic, and no material impact
is currently envisaged on the Group's prospects. However, the Board
and management remain acutely aware of the risks, and are taking
action to mitigate them where possible. This is a rapidly evolving
situation and we are working to not only protect our staff and
stakeholders but to minimise disruption to our business. Our supply
chain is not materially exposed to countries currently most
affected by the pandemic, and we hold good inventories of critical
spares for our field operations. We have reassessed our medium-term
forecasts based on current pricing and are highly confident we have
the resources to continue to deliver on our plans. Of course, we
cannot be certain of the duration of the pandemic's impact but will
remain focussed on monitoring and protecting our business through
the period of uncertainty. In protecting our stakeholders
interests, we are conscious of our wider obligations to the
communities, and country, in which we operate. Accordingly, we have
acted, alongside other corporate entities in Ukraine, to directly
acquire critical equipment and supplies from Chinese suppliers to
donate to the Ukrainian State to assist its efforts to manage the
pandemic in Ukraine. We have allocated $2 million to this
initiative.
Outlook
Whilst there are still challenges in the business environment in
Ukraine, the situation is improving gradually. After the steady
operational performance during 2019, and the increased production
output during the year, we are eagerly awaiting the results of the
SV-54 development well, which are expected in the third quarter of
2020. We are also looking forward to achieving further successes in
the development activities planned for 2020 and delivering a
steadily increasing production and revenue stream in the
future.
In conclusion, on behalf of the Board, I would like to thank all
of our staff for the continued dedication and support they have
shown during the year and especially during the current COVID-19
pandemic.
Chris Hopkinson
Chairman
Chief Executive Officer's Statement
Introduction
The Group continued its good progress at its Ukrainian fields
during 2019, with development activity at the MEX-GOL and SV fields
including the successful drilling of the MEX-119 development well,
which came on production in October 2019, the successful workover
of the MEX-106 well to renew the production tubing, and hydraulic
fracturing operations at the MEX-120 well. In addition, work
continued to refine the geological model of the fields, upgrade the
gas processing facilities and pipeline network, and undertake
remedial work on existing wells.
At the VAS field, acquisition of the remaining coverage of 3D
seismic over the field was completed in early 2019 and the data
acquired was processed and interpreted. However, a decline in
production rates from the VAS-10 well impacted overall production
at the VAS field during the fourth quarter of 2019, and as a
result, compression equipment was installed at the well.
Overall production was steady during 2019, and significantly
higher than in 2018, with a substantial boost in the fourth
quarter, once the MEX-119 well came on production.
Quality, Health, Safety and Environment ("QHSE")
The Group is committed to maintaining the highest QHSE standards
and the effective management of these areas is an intrinsic element
of the overall business ethos. Through strict enforcement of the
Group's QHSE policies, together with regular management meetings,
training and the appointment of dedicated safety professionals, the
Group strives to ensure that the impact of its business activities
on its staff, contractors and the environment is as low as is
reasonably practicable. The Group reports safety and environmental
performance in accordance with industry practice and
guidelines.
I am pleased to report that during 2019, a total of 413,419
man-hours of staff and contractor time were recorded without a Lost
Time Incident occurring. The total number of safe man-hours now
stands at over 2,954,500 man-hours without a Lost Time Incident. No
environmental incidents were recorded during the year.
Production
The average daily production of gas, condensate and LPG from the
MEX-GOL, SV and VAS fields for the year ended 31 December 2019 was
as follows:-
Field Gas Condensate LPG Aggregate
(MMscf/d) (bbl/d) (bbl/d) boepd
2019 2018 2019 2018 2019 2018 2019 2018
------ ----- ------ ------ ------ ------ ------ ------
MEX-GOL
& SV 14.8 12.0 577.8 436.2 274.4 225.0 3,391 2,717
------ ----- ------ ------ ------ ------ ------ ------
VAS 4.4 3.3 61.9 49.9 - - 872 674
------ ----- ------ ------ ------ ------ ------ ------
Total 19.2 15.3 639.7 486.1 274.4 225.0 4,263 3,391
------ ----- ------ ------ ------ ------ ------ ------
Production rates were higher in 2019 when compared with 2018,
predominantly due to the success of the MEX-119 well in the fourth
quarter of 2019.
The Group's average daily production for the period from 1
January 2020 to 31 March 2020 from the MEX-GOL and SV field was
17.3 MMscf/d of gas, 659 bbl/d of condensate and 280 bbl/d m(3)/d
of LPG (3,904 boepd in aggregate) and from the VAS field was 3.1
MMscf/d of gas and 34 bbl/d of condensate (604 boepd in
aggregate).
Operations
The much improved fiscal and economic conditions in Ukraine,
coupled with reasonable stability in the Ukrainian Hryvnia,
reductions in the subsoil tax rates and improvements in the
regulatory procedures in the oil and gas sector in Ukraine over the
last year, gave the Board the confidence to continue the Group's
development programme at its Ukrainian fields during 2019. However,
lower realised gas prices impacted revenues, following a general
decline in gas prices in Europe.
The Group continued to refine its geological subsurface models
of the MEX-GOL, SV and VAS fields, in order to enhance its
strategies for the further development of the fields, including the
timing and level of future capital investment required to exploit
the hydrocarbon resources.
At the MEX-GOL and SV fields, the MEX-119 development well was
spudded in February 2019 and drilled to a depth of 4,822 metres,
which was slightly shallower than its planned depth, after the
targeted horizons were encountered. The well targeted production
from the B-20 reservoirs in the Visean formation. One interval, at
a drilled depth of 4,804 - 4,816 metres, was perforated, and after
successful testing, the well was hooked-up to the gas processing
facilities. The well has demonstrated excellent production rates
and is currently producing at approximately 4.8 MMscf/d of gas and
216 bbl/d of condensate (1,058 boepd in aggregate).
The Group continues to operate each of the SV-2 and SV-12 wells
under joint venture agreements with NJSC Ukrnafta, the majority
State-owned oil and gas producer. Under the agreements, the gas and
condensate produced from the respective wells is sold under an
equal net profit sharing arrangement between the Group and NJSC
Ukrnafta, with the Group accounting for the hydrocarbons produced
and sold from the wells as revenue, and the net profit share due to
NJSC Ukrnafta being treated as a lease expense in cost of sales.
Both of these wells have proven to be strong producers since being
brought back on production.
At the MEX-106 well, a successful workover was undertaken to
renew the production tubing, which boosted production from this
well, and at the MEX-120 well, hydraulic fracturing operations were
undertaken, following which the well was lifted using coiled
tubing, but only modest flows of gas and condensate were recovered
and the well is now under observation. In addition, the Group
upgraded the gas processing facilities and pipeline network, and
undertook remedial work on existing wells.
Drilling of the SV-54 well has been completed, with the well
having reached a final depth of 5,322 metres. Completion operations
have now commenced and these are scheduled to be concluded by the
end of the second quarter of 2020, and, subject to successful
testing, production hook-up is anticipated during the third quarter
of 2020. The well is a development well, with its primary targets
being the B-22 and B-23 horizons in the Visean formation.
At the VAS field, interpretation of the 3D seismic data acquired
last year was completed and integrated into the geological model
for the field. Planning is continuing for a new well to explore the
VED prospect within the VAS licence area. However, a decline in
production rates from the VAS-10 well impacted overall production
at the VAS field during the fourth quarter, and as a result,
compression equipment was installed to increase production from
this well, with a longer term plan to undertake a workover of the
well to access an alternative reservoir horizon.
In March 2019 (see announcement made on 12 March 2019), a
regulatory issue arose when the State Service of Geology and
Subsoil of Ukraine issued an order for suspension (the "Order") of
the production licence for the VAS field. Under the applicable
legislation, the Order would lead to a shut-down of production
operations at the VAS field, but the Group has issued legal
proceedings to challenge the Order, and has obtained a ruling
suspending operation of the Order pending a hearing of the
substantive issues. The Group does not believe that there are any
grounds for the Order, and intends to pursue its challenge to the
Order through the Ukrainian Courts.
Reserves Update
In early 2019, the Group commissioned DeGolyer and MacNaughton
("D&M") to prepare an updated assessment of the remaining
reserves and resources at the VAS field as at 31 December 2018 in
order to provide an update since the previous reserves estimation
undertaken by Senergy (GB) Limited ("Senergy") as at 1 January
2016.
The updated assessment of 1.895 MMboe of proved (1P) and 3.145
MMboe of proved + probable (2P) reserves resulted in a material
increase in these categories of remaining reserves from the 2016
Senergy estimates, which were 0.66 MMboe and 1.80 MMboe
respectively. These increases reflect a higher level of confidence
in the understanding of the subsurface at the field as a result of
the new data obtained since 2016. Further details of the D&M
assessment are set out in the Company's announcement dated 21
August 2019. Over and above the increase in reserves themselves,
the Group is tailoring its field development programme for the VAS
fields, which is envisaged to include increased development
activity, production and cash flow in future periods.
New Acquisitions
As announced on 24 March 2020, the Group has acquired the entire
issued share capital of LLC Arkona Gas-Energy for total
consideration of up to $8.63 million, with $4.3 million subject to
the satisfaction of certain conditions as set out therein. Arkona
holds a 100% interest in the Svystunivsko-Chervonolutskyi ("SC")
exploration licence, which is located in the Poltava region in
north-eastern Ukraine. The SC licence has an area of 97 km(2) , and
is approximately 15 km east of the SV field. The licence was
granted in May 2017 with a duration of 20 years. The licence is
prospective for gas and condensate, and has been the subject of
exploration since the 1980s, with 5 wells having been drilled on
the licence since then, although none of these wells are currently
on production. As with the productive reservoirs in the SV field,
the prospective reservoirs in the licence are Visean, at depths
between 4,600 - 6,000 metres.
According to the recorded information on the Ukrainian State
Balance of Natural Resources as at 1 January 2020, the licence has
hydrocarbon reserves, in the category of C(1) and C(2) under the
Ukrainian classification, DKZ, of approximately 38.0 MMboe (4.9
Bm(3) of gas and 0.86 Mtonnes of condensate). It should be noted,
however, that whilst the Group's review of existing technical data
for the licence is considered supportive of such assessment of
hydrocarbon reserves, such hydrocarbon reserves have not been
verified by an independent reserves assessor and do not correspond
to the SPE/WPC/AAPG/SPEE Petroleum Resources Management System
("PRMS") standard for classification and reporting.
We believe that our existing knowledge of the subsurface geology
in the area will enable us to quickly progress our development
planning for this licence, and we envisage that this will include
the commencement of a new well within the next 12 months, with
drilling and completion operations expected to take up to a further
12 months.
As announced on 1 April 2020, the Memorandum of Understanding
(the "Memorandum") for the potential acquisition of PJSC Science
and Production Concern Ukrnaftinvest , announced on 26 November
2019, expired and was consequently terminated as a result of the
parties to the Memorandum, being (1) the Company and (2) Ms Lidiia
Chernysh and Bolaso Investments Limited, being unable to reach a
final agreement for such potential acquisition. The provisions
relating to such termination set out in the Memorandum are now
applicable, and these include the refund of the deposit of $0.5
million previously paid under the Memorandum.
Outlook
During 2020, the Group will continue to develop the MEX-GOL, SV
and VAS fields, as well as commence work of the development
planning for the SC licence . At the MEX-GOL and SV fields, the
development programme includes completing the drilling and
production hook-up of the SV-54 development well (which is
scheduled for Q4 2020), commencing a new well, SV-25, in the SV
field, which is planned to be spudded later in the year, planning
for a further well or sidetracking of an existing well in the SV
field, investigating workover opportunities for other existing
wells, installation of further compression equipment, further
upgrading of the gas processing facilities and pipeline network,
and remedial and upgrade work on existing wells, pipelines and
other infrastructure.
At the VAS field, planning for the proposed new well to explore
the VED prospect within the VAS licence area is continuing, and
upgrades to the gas processing facilities, pipeline network and
other infrastructure are planned.
There has also been encouraging recent legislation relating to
the oil and gas sector in Ukraine, demonstrating the Ukrainian
Government's stated intention to promote and support the domestic
oil and gas production industry. These measures include reductions
in the subsoil taxes applicable to the production of hydrocarbons,
which became effective for gas production from new wells drilled
after 1 January 2018 and came into effect for condensate production
from all wells from 1 January 2019. Furthermore, new legislation
was introduced last year to simplify a number of the regulatory
procedures relating to oil and gas exploration and production
activities in Ukraine.
These measures, and the general improvement in the business
climate in Ukraine, are encouraging and supportive of the
independent oil and gas producers in Ukraine.
Finally, I would like to add my thanks to all of our staff for
the continued hard work and dedication they have shown over what
has been a successful year for the Group, and to especially
recognise their continuing efforts and professionalism during the
current COVID-19 pandemic.
Sergii Glazunov
Chief Executive Officer
Overview of Assets
We operate three fields, and recently acquired a further field,
in the Dnieper-Donets basin in north-eastern Ukraine.
Our fields have high potential for growth and longevity for
future production - a strong foundation for success.
MEX-GOL and SV fields
The MEX-GOL and SV fields are held under two adjacent production
licences, but are operated as one integrated asset, and have
significant gas and condensate reserves and potential resources of
unconventional gas.
Production Licences
We hold a 100% working interest in, and are the operator of, the
MEX-GOL and SV fields. The production licences for the fields were
granted to the Group in July 2004 with a duration of 20 years, and
it is intended to apply to extend the licences under the applicable
regulations in Ukraine in order to fully develop the remaining
reserves. The economic life of these fields extend to 2038 and 2042
respectively pursuant to the most recent reserves and resources
assessment by DeGolyer and MacNaughton ("D&M") as at 31
December 2017.
The two licences, located in Ukraine's Poltava region, are
adjacent and extend over a combined area of 269 km(2),
approximately 200 km east of Kyiv.
Geology
Geologically, the fields are located towards the middle of the
Dnieper-Donets sedimentary basin which extends across the major
part of north-eastern Ukraine. The vast majority of Ukrainian gas
and condensate production comes from this basin. The reservoirs
comprise a series of gently dipping Carboniferous sandstones of
Visean age inter-bedded with shales at around 4,700 metres below
the surface, with a gross thickness between 800 and 1,000
metres.
Analysis suggests that the origin of these deposits ranges from
fluvial to deltaic, and much of the trapping at these fields is
stratigraphic. Below these reservoirs is a thick sequence of shale
above deeper, similar, sandstones at a depth of around 5,800
metres. These sands are of Tournasian age and offer additional gas
potential. Deeper sandstones of Devonian age have also been
penetrated in the fields.
Reserves
The development of the fields began in 1995 by the Ukrainian
State company Chernihivnaftogasgeologiya ("CNGG"), and shortly
after this time, the Group entered a joint venture with CNGG in
respect of the exploration and development of these fields.
The fields have been mapped with 3D seismic, and a geological
subsurface model has been developed and refined using data derived
from high-level reprocessing of such 3D seismic and new wells
drilled on the fields.
The assessment undertaken by D&M as at 31 December 2017
estimated proved plus probable (2P) reserves attributable to the
fields of 50.0 MMboe, with 3C contingent resources of 25.3
MMboe.
VAS field
The VAS field is a smaller field with interesting potential. The
field has assessed proved plus probable reserves in excess of 3
MMboe and substantial contingent and prospective resources, as well
as potential resources of unconventional gas.
Production Licence
We hold a 100% working interest in, and are the operator of, the
VAS field. The production licence for the field was granted in
August 2012 with a duration of 20 years. The economic life of the
field extends to 2032 pursuant to the most recent reserves and
resources assessment by D&M as at 31 December 2018.
The licence extends over an area of 33.2 km(2) and is located 17
km south-east of Kharkiv, in the Kharkiv region of Ukraine. The
field was discovered in 1981, and the first well on the licence
area was drilled in 2004.
The Group acquired this project in July 2016.
Geology
Geologically, the field is located towards the middle of the
Dnieper-Donets sedimentary basin in north-east Ukraine. The field
is trapped in an anticlinal structure broken into several faulted
blocks, which are gently dipping to the north, stretching from the
north-east to south-west along a main bounding fault. The gas is
located in Carboniferous sandstones of Bashkirian, Serpukhovian and
Visean age.
The productive reservoirs are at depths between 3,370 and 3,700
metres depth.
Reserves
The fields have been mapped with 3D seismic, and a geological
subsurface model has been developed and refined using data derived
from such 3D seismic and new wells drilled on the field.
The assessment undertaken by D&M as at 31 December 2018
estimated proved plus probable (2P) reserves of 3.1 MMboe, with
contingent resources of 0.6 MMboe, and prospective resources of 7.7
MMboe in the VED area of the field. The next well planned on the
field is designed to explore the VED area of the field.
Overview of Reserves
1. MEX-GOL and SV fields
The Group's estimates of the remaining Reserves and Resources at
the MEX-GOL and SV fields are derived from an assessment undertaken
by D&M, as at 31 December 2017 (the "MEX-GOL-SV Report"), which
was announced on 31 July 2018. During the period from 1 January
2018 to 31 December 2019, the Group has produced 2.2 MMboe from
these fields.
The MEX-GOL-SV Report estimated the remaining Reserves as at 31
December 2017 in the MEX-GOL and SV fields as follows:-
Proved Proved + Probable Proved + Probable
(1P) (2P) + Possible (3P)
121.9 Bscf / 3.5 218.3 Bscf / 6.2 256.5 Bscf / 7.3
Gas Bm(3) Bm(3) Bm(3)
----------------- ------------------ ------------------
4.3 MMbbl / 514 7.9 MMbbl / 943 9.2 MMbbl / 110
Condensate Mtonne Mtonne Mtonne
----------------- ------------------ ------------------
2.8 MMbbl / 233 5.0 MMbbl / 418 5.8 MMbbl / 491
LPG Mtonne Mtonne Mtonne
----------------- ------------------ ------------------
27.8 MMboe 50.0 MMboe 58.6 MMboe
Total
----------------- ------------------ ------------------
The MEX-GOL-SV Report estimated the Contingent Resources as at
31 December 2017 in the MEX-GOL and SV fields as follows:-
Contingent Resources Contingent Resources Contingent Resources
(1C) (2C) (3C)
14.7 Bscf / 0.42 38.3 Bscf / 1.08 105.9 Bscf / 3.00
Gas Bm(3) Bm(3) Bm(3)
--------------------- --------------------- ---------------------
1.17 MMbbl / 144 2.8 MMbbl / 343 6.6 MMbbl / 812
Condensate Mtonne Mtonne Mtonne
--------------------- --------------------- ---------------------
3.8 MMboe 9.6 MMboe 25.3 MMboe
Total
--------------------- --------------------- ---------------------
2. VAS field
The Group's estimates of the remaining Reserves and Resources at
the VAS field and the Prospective Resources at the VED prospect are
derived from an assessment undertaken by D&M as at 31 December
2018 (the "VAS Report"), which was announced on 21 August 2019.
During the period from 1 January 2019 to 31 December 2019, 0.3
MMboe were produced from the field.
The VAS Report estimates the remaining Reserves as at 31
December 2018 in the VAS field as follows:-
Proved Proved + Probable Proved + Probable
(1P) (2P) + Possible (3P)
9,114 MMscf / 258 15,098 MMscf / 18,816 MMscf /
Gas MMm(3) 427 MMm(3) 533 MMm(3)
--------------------- --------------------- ------------------
205 Mbbl / 25 Mtonne 346 Mbbl / 42 Mtonne 401 Mbbl / 48
Condensate Mtonne
--------------------- --------------------- ------------------
1.895 MMboe 3.145 MMboe 3.890 MMboe
Total
--------------------- --------------------- ------------------
The VAS Report estimates the Contingent Resources as at 31
December 2018 in the VAS field as follows:-
Contingent Resources Contingent Resources Contingent Resources
(1C) (2C) (3C)
2,912 MMscf /
Gas 0 0 83 MMm(3)
--------------------- --------------------- ---------------------
Condensate 0 0 74 Mbbl / 9 Mtonne
--------------------- --------------------- ---------------------
The VAS Report estimates the Prospective Resources as at 31
December 2018 in the VED prospect as follows:-
Low (1U) Best (2U) High (3U) Mean
23,721 MMscf 38,079 MMscf 62,293 MMscf 41,291 MMscf
Gas / 672 MMm(3) / 1,078 MMm(3) / 1,764 MMm(3) / 1,169 MMm(3)
-------------- ---------------- ---------------- ----------------
Finance Review
The Group delivered a very solid financial performance in 2019,
enabled by a record level of gas production, and despite a
significant drop in average gas realisations. Net profit for the
year was $12.2 million (2018: $54.3 million including the $36.1
million benefit of a one-off reversal of impairment of oil and gas
development and production assets).
Gross profit for the year ended 31 December 2019 was $23.5
million (2018: $34.2 million). The 31% drop in gross profit
year-on-year is almost entirely a result of weakened gas prices in
the year (average realisations of $219/Mm(3) compared to $312/Mm(3)
in 2018), with condensate and LPG sales up 7.5% and 5.5%
respectively, and cost of sales up a modest 1.7% year-on-year.
Revenue for the year, derived from the sale of the Group's
Ukrainian gas, condensate and LPG production, was $55.9 million
(2018: $66.1 million). The gas price-driven fall in revenue also
impacted cash generated from operations during the year, which was
32% lower at $24.6 million (2018: $36.3 million) predominantly, as
noted, as a result of lower gas prices and despite the higher
production volumes achieved in the year.
The average realised gas, condensate and LPG prices during the
2019 year were $219/Mm(3) (UAH5,729/Mm(3) ), $58/bbl and $55/bbl
respectively (2018: $312/Mm(3) (UAH8,528/Mm(3) ), $72/bbl and
$64/bbl respectively).
During the period from 1 January 2020 to 7 April 2020, the
average realised gas, condensate and LPG prices were $158/Mm(3)
(UAH3,961/Mm(3) ), $47/bbl and $43/bbl respectively. The current
realised gas price is $128/Mm(3) (3,469/Mm(3) ).
As noted above, 2019 saw a significant drop in averaged realised
gas prices, having the singularly greatest impact on our 2019
performance. Since the deregulation of the gas supply market in
Ukraine in October 2015, the market price for gas has broadly
correlated to the price of imported gas, which generally reflects
trends in European gas prices. Gas prices are also subject to
seasonal variation. During the 2019 year, gas prices were
depressed, as a combined result of lower international prices
reducing the price of imported gas, and the unseasonally warm
2019/20 winter. Condensate and LPG prices were also lower than in
2018.
Cost of sales for the year ended 31 December 2019 was marginally
higher at $32.4 million (2018: $31.9 million). Whilst broadly
consistent with last year, there were some significant intra-total
movements: production taxes declined by 22% as a result of reduced
gas revenues, in turn a function of the reduced gas prices as noted
above; a 19% increase in rent expense, a function of increased
production; staff costs increased by 19% as a function of a
maturing employment market in Ukraine and associated salary
inflation; and a new transmission tariff for use of the Ukrainian
gas system of UAH91.87/Mm(3) of gas was introduced and applicable
to oil and gas producers in Ukraine, including the Group, resulting
in a $673,000 (2018: nil) charge in the period.
New legislation relating to the oil and gas sector in Ukraine
has been introduced over the last year, and in this regard, with
effect from 1 January 2019, the subsoil tax rates, as included in
cost of sales, applicable to condensate production were reduced
from 45% to 31% for condensate produced from deposits above 5,000
metres and from 21% to 16% for condensate produced from deposits
below 5,000 metres.
Administrative expenses for the year were higher at $7.4 million
(2018: $5.7 million), primarily as a result of: an 18% increase in
payroll and related taxes, consistent with the maturing employment
market as noted above; a 150% increase in depreciation of fixed
assets as a result of additions, and the implementation of IFRS 16
from 1 January 2019, whereby the Group now calculates the expense
by depreciation of the right-to-use assets and interest expense on
the liability over the lease term; and a 94% increase in other
expenses primarily in relation to increased costs for managing gas
transportation and storage, and marketing.
The tax charge for the year reduced by 23% to $9.6 million
(2018: $12.5 million charge) and comprises a current tax charge of
$4.8 million (2018: $6.5 million charge) and a deferred tax charge
of $4.8 million (2018: $6.0 million charge). The material reduction
in the deferred tax charge results from the $5.5 million 2018
deferred tax charge being incurred as a result of the reversal of
the impairment of the carrying value of the Group's MEX-GOL and SV
development and production asset, and the reversal of the
impairment of intra-group loans receivable by the Company.
The Group derecognised a deferred tax asset of $ 2 . 1 million
at 31 December 2019 (31 December 2018: $2.1 million ). In the
period the opening balance deferred tax asset of $2.1 million in
relation to UK tax losses carried forward was charged to the Income
Statement because the Group does not expect to be able to utilise
unrecognised UK losses carried forward in the foreseeable future.
In addition, a deferred tax liability relating to the development
and production asset at the MEX-GOL and SV fields of $2.3 million
(31 December 2018: deferred tax asset $0.8 million) is recognised
on the tax effects of the temporary differences of the provision
for decommissioning and the carrying value relating of these
assets, and their tax bases.
A deferred tax liability relating to the development and
production asset at the VAS field of $0.2 million (31 December
2018: $0.5 million) was recognised at 31 December 2019 on the tax
effect of the temporary differences between the carrying value of
the development and production asset at the VAS field, and its tax
base.
A significant increase in capital investment to $17.7 million
reflects the expenditure on oil and gas development assets during
the year (2018: $9.6m), following the field studies and revised
development plans undertaken by the Group over recent periods. The
carrying value of the Group's assets was reviewed at year end as a
result of the significant drop in gas prices during the year, which
did not result in any impairment of assets.
Cash and cash equivalents held at 31 December 2019 were up 17%
at $62.5 million (31 December 2018: $53.2 million). The Group's
cash and cash equivalents balance at 7 April 2020 was $55.2
million, held as to $18.5 million equivalent in Ukrainian Hryvnia
and the balance of $36.7 million equivalent predominantly in US
Dollars, Euros and Pounds Sterling.
Between early 2014 and 2018, the Ukrainian Hryvnia devalued
significantly against the US Dollar, falling from UAH8.3/$1.00 on 1
January 2014 to UAH27.7/$1.00 on 31 December 2018, which resulted
in substantial foreign exchange translation losses for the Group
over that period, and in turn adversely impacted the carrying value
of the MEX-GOL and SV asset due to the translation of two of the
Group's subsidiaries from their functional currency of Ukrainian
Hryvnia to the Group's presentation currency of US Dollars.
However, during 2019, the Ukrainian Hryvnia strengthened materially
against the US Dollar averaging UAH25.8/$1.00 during the period
(average rate during 2018: UAH27.2/$1.00). The total foreign
exchange gain in the period was $3.5 million (2018: $0.5 million).
In the later part of Q1 2020 however, global financial markets have
become extremely volatile as a combined function of a significant
fall in oil prices and the effects of the COVID-19 pandemic, and
the Ukrainian Hryvnia has weakened against the US Dollar with the
exchange rate at 7 April 2020 being UAH27.2/$1.00. Further
devaluation of the Ukrainian Hryvnia against the US Dollar may
affect the carrying value of the Group's assets in the future.
Cash from operations has funded the capital investment during
the year, and the Group's current cash position and positive
operating cash flow are the sources from which the Group plans to
fund the development programmes for its assets in 2020 and beyond.
This is coupled with the fact that the Group is currently
debt-free, and therefore has no debt covenants that may otherwise
impede the ability to implement contingency plans if domestic
and/or global circumstances dictate. This flexibility and ability
to monitor and manage development plans and liquidity is a
cornerstone of our planning, and underpins our assessments of the
future.
The Group manages its revenue, cash from operations and
production volumes as key performance indicators. The achieved
results for 2019 were as follows:
-- revenue of $55.9 million (2018: $66.1 million)
-- cash from operations of $24.6 million (2018: $36.8 million)
-- daily production volumes from the MEX-GOL and SV fields for
the year of 14.8 MMscf/d of gas, 577.8 bbl/d of condensate
and 274.4 bbl/d of LPG (3,391 boepd in aggregate) (2018: 12.0
MMscf/d of gas, 436.2 bbl/d of condensate and 225.0 bbl/d
of LPG (2,717 boepd in aggregate))
-- daily production volumes from the VAS field for the year of
4.4 MMscf/d of gas and 61.9 bbl/d of condensate (872 boepd
in aggregate) (2018: 3.3 MMscf/d of gas and 49.9 bbl/d of
condensate (674 boepd in aggregate))
-- aggregate production volumes from the MEX-GOL and SV fields
for the year of 5,417 MMscf/d of gas, 210,894 bbl/d of condensate
and 100,168 bbl/d of LPG, equating to a combined total oil
equivalent of 1,237,695 boe (2018: 4,394 MMscf/d of gas, 159,203
bbl/d of condensate and 82,127 bbl/d of LPG (992,880 boe in
aggregate))
-- aggregate production volumes from the VAS field for the year
of 1,589 MMscf/d of gas and 22,603 bbl/d of condensate, equating
to a combined total oil equivalent of 318,254 boe (2018: 1,221
MMscf/d of gas and 18,206 bbl/d of condensate (245,392 boe
in aggregate))
-- Lost Time Incidents of zero (2018: zero).
Principal Risks
The Group has a risk evaluation methodology in place to assist
in the review of the risks across all material aspects of its
business. This methodology highlights external, operational and
technical, financial and corporate risks and assesses the level of
risk and potential consequences. It is periodically presented to
the Audit Committee and the Board for review, to bring to their
attention potential risks and, where possible, propose mitigating
actions. Key risks recognised and mitigation factors are detailed
below:-
Risk Mitigation
External risks
-----------------------------------------------
Risk relating to Ukraine
-----------------------------------------------
Ukraine is an emerging market and The Group minimises this risk by
as such the Group is exposed to continuously monitoring the market
greater regulatory, economic and in Ukraine and by maintaining a
political risks than it would be strong working relationship with
in other jurisdictions. Emerging the Ukrainian regulatory authorities.
economies are generally subject The Group also maintains a significant
to a volatile political and economic proportion of it cash holdings in
environment, which makes them vulnerable international banks outside Ukraine.
to market downturns elsewhere in
the world and could adversely impact
the Group's ability to operate
in the market.
-----------------------------------------------
Regional conflict
-----------------------------------------------
Ukraine continues to have a strained As the Group has no assets in Crimea
relationship with Russia, following or the areas of conflict in the
Ukraine's agreement to join a free east of Ukraine, nor do its operations
trade area with the European Union, rely on sales or costs incurred
which resulted in the implementation there, the Group has not been directly
of mutual trade restrictions between affected by the conflict. However,
Russia and Ukraine on many key the Group continues to monitor the
products. Further, the conflict situation and endeavours to procure
in parts of eastern Ukraine has its equipment from sources in other
not been resolved to date, and markets. The disputes and interruption
Russia continues to occupy Crimea. to the supply of gas from Russia
This conflict has put further pressure has indirectly encouraged Ukrainian
on relations between Ukraine and Government support for the development
Russia, and the political tensions of the domestic production of hydrocarbons
have had an adverse effect on the since Ukraine imports a significant
Ukrainian financial markets, hampering proportion of its gas, which has
the ability of Ukrainian companies resulted in legislative measures
and banks to obtain funding from to improve the regulatory requirements
the international capital and debt for hydrocarbon extraction in Ukraine.
markets. This strained relationship
between Russia and Ukraine has
also resulted in disputes and interruptions
in the supply of gas from Russia.
-----------------------------------------------
Banking system in Ukraine
-----------------------------------------------
The banking system in Ukraine has The creditworthiness and potential
been under great strain in recent risks relating to the banks in Ukraine
years due to the weak level of are regularly reviewed by the Group,
capital, low asset quality caused but the geopolitical and economic
by the economic situation, currency events since 2013 in Ukraine have
depreciation, changing regulations significantly weakened the Ukrainian
and other economic pressures generally, banking sector. In light of this,
and so the risks associated with the Group has taken and continues
the banks in Ukraine have been to take steps to diversify its banking
significant, including in relation arrangements between a number of
to the banks with which the Group banks in Ukraine. These measures
has operated bank accounts. However, are designed to spread the risks
following remedial action imposed associated with each bank's creditworthiness,
by the National Bank of Ukraine, and the Group endeavours to use
Ukraine's banking system has improved banks that have the best available
moderately. Nevertheless, Ukraine creditworthiness. Nevertheless,
continues to be supported by funding and despite the recent improvements,
from the International Monetary the Ukrainian banking sector remains
Fund. weakly capitalised and so the risks
associated with the banks in Ukraine
remain significant, including in
relation to the banks with which
the Group operates bank accounts.
As a consequence, the Group also
maintains a significant proportion
of its cash holdings in international
banks outside Ukraine.
-----------------------------------------------
Geopolitical environment in Ukraine
-----------------------------------------------
Although there have been some improvements The Group continually monitors the
in recent years, there has not market and business environment
been a final resolution of the in Ukraine and endeavours to recognise
political, fiscal and economic approaching risks and factors that
situation in Ukraine and its ongoing may affect its business. In addition,
effects are difficult to predict the involvement of Lovitia Investments
and likely to continue to affect Limited, as an indirect major shareholder
the Ukrainian economy and potentially with extensive experience in Ukraine,
the Group's business. Whilst not is considered helpful to mitigate
materially affecting the Group's such risks.
production operations, the instability
has disrupted the Group's development
and operational planning for its
assets.
-----------------------------------------------
Climate change
-----------------------------------------------
Any near and medium-term continued The Group's plans include: assessing,
warming of the Planet can have reducing and/or mitigating its emissions
potentially increasing negative in its operations ; and identifying
social, economic and environmental climate change-related risks and
consequences, generally globally assessing the degree to which they
and regionally, and specifically can affect its business, including
in relation to the Group. The potential financial implication.
impacts include: loss of market;
and increased costs of operation
through increasing regulatory oversight
and controls, including potential
effective or actual loss of licence
to operate. As a diligent operator
aware and responsive to its good
stewardship responsibilities, the
Group not only needs to monitor
and modify its business plans and
operations to react to changes,
but also to ensure its environmental
footprint is as minimal as it can
practicably be in managing the
hydrocarbon resources the Group
produces.
-----------------------------------------------
Operational and technical risks
-----------------------------------------------
Quality, Health, Safety and Environment
("QHSE")
-----------------------------------------------
The oil and gas industry, by its The Group maintains QHSE policies
nature, conducts activities which and requires that management, staff
can cause health, safety, environmental and contractors adhere to these
and security incidents. Serious policies. The policies ensure that
incidents can not only have a financial the Group meets Ukraine legislative
impact but can also damage the standards in full and achieves international
Group's reputation and the opportunity standards to the maximum extent
to undertake further projects. possible. As a consequence of the
As evidenced by events in Q1 2020, COVID-19 pandemic the Group is re-visiting
pandemics also pose a risk to operations, processes and controls intended
by potential illness and threat to ensure protection of all our
to life of employees and contractors, stakeholders and minimise any disruption
and the associated disruptions to our business. Whilst possible
in staffing levels, operations to only a limited extent in field
and supply chain. operations, we have invested in
technology that will allow many
staff to work just as effectively
from remote locations.
-----------------------------------------------
Industry risks
-----------------------------------------------
The Group is exposed to risks which The Group has well qualified and
are generally associated with the experienced technical management
oil and gas industry. For example, staff to plan and supervise operational
the Group's ability to pursue and activities. In addition, the Group
develop its projects and development engages with suitably qualified
programmes depends on a number local and international geological,
of uncertainties, including the geophysical and engineering experts
availability of capital, seasonal and contractors to supplement and
conditions, regulatory approvals, broaden the pool of expertise available
gas, oil, condensate and LPG prices, to the Group. Detailed planning
development costs and drilling of development activities is undertaken
success. As a result of these uncertainties, with the aim of managing the inherent
it is unknown whether potential risks associated with oil and gas
drilling locations identified on exploration and production, as well
proposed projects will ever be as ensuring that appropriate equipment
drilled or whether these or any and personnel are available for
other potential drilling locations the operations, and that local contractors
will be able to produce gas, oil are appropriately supervised.
or condensate. In addition, drilling
activities are subject to many
risks, including the risk that
commercially productive reservoirs
will not be discovered. Drilling
for hydrocarbons can be unprofitable,
not only due to dry holes, but
also as a result of productive
wells that do not produce sufficiently
to be economic. In addition, drilling
and production operations are highly
technical and complex activities
and may be curtailed, delayed or
cancelled as a result of a variety
of factors.
-----------------------------------------------
Production of hydrocarbons
-----------------------------------------------
Producing gas and condensate reservoirs In 2016, the Group engaged external
are generally characterised by technical consultants to undertake
declining production rates which a comprehensive review and re-evaluation
vary depending upon reservoir characteristics study of the MEX-GOL and SV fields
and other factors. Future production in order to gain an improved understanding
of the Group's gas and condensate of the geological aspects of the
reserves, and therefore the Group's fields and reservoir engineering,
cash flow and income, are highly drilling and completion techniques,
dependent on the Group's success and the results of this study and
in operating existing producing further planned technical work is
wells, drilling new production being used by the Group in the future
wells and efficiently developing development of these fields. The
and exploiting any reserves, and Group has established an ongoing
finding or acquiring additional relationship with such external
reserves. The Group may not be technical consultants to ensure
able to develop, find or acquire that technical management and planning
reserves at acceptable costs. The is of a high quality in respect
experience gained from drilling of all development activities on
undertaken to date highlights such the Group's fields.
risks as the Group targets the
appraisal and production of these
hydrocarbons.
-----------------------------------------------
Risks relating to further development
and operation of the Group's gas
and condensate fields in Ukraine
-----------------------------------------------
The planned development and operation The Group's technical management
of the Group's gas and condensate staff, in consultation with its
fields in Ukraine is susceptible external technical consultants,
to appraisal, development and operational carefully plan and supervise development
risk. This could include, but is and operational activities with
not restricted to, delays in delivery the aim of managing the risks associated
of equipment in Ukraine, failure with the further development of
of key equipment, lower than expected the Group's fields in Ukraine. This
production from wells that are includes detailed review and consideration
currently producing, or new wells of available subsurface data, utilisation
that are brought on-stream, problematic of modern geological software, and
wells and complex geology which utilisation of engineering and completion
is difficult to drill or interpret. techniques developed for the fields.
The generation of significant operational With operational activities, the
cash is dependent on the successful Group ensures that appropriate equipment
delivery and completion of the and personnel is available for the
development and operation of the operations, and that operational
fields. contractors are appropriately supervised.
In addition, the Group performs
a review of its oil and gas assets
for impairment on an annual basis,
and considers whether an assessment
of its oil and gas assets by a suitably
qualified independent assessor is
appropriate or required.
-----------------------------------------------
Drilling and workover operations
-----------------------------------------------
Due to the depth and nature of The utilisation of detailed sub-surface
the reservoirs in the Group's fields, analysis, careful well planning
the technical difficulty of drilling and engineering design in designing
or re-entering wells in the Group's work programmes, along with appropriate
fields is high, and this and the procurement procedures and competent
equipment limitations within Ukraine, on-site management, aims to minimise
can result in unsuccessful or lower these risks.
than expected outcomes for wells.
-----------------------------------------------
Maintenance of facilities
-----------------------------------------------
There is a risk that production The Group's facilities are operated
or transportation facilities can and maintained at standards above
fail due to non-adequate maintenance, the Ukraine minimum legal requirements.
control or poor performance of Operations staff are experienced
the Group's suppliers. and receive supplemental training
to ensure that facilities are properly
operated and maintained. Service
providers are rigorously reviewed
at the tender stage and are monitored
during the contract period.
-----------------------------------------------
Financial risks
-----------------------------------------------
Exposure to cash flow and liquidity
risk
-----------------------------------------------
There is a risk that insufficient The Group maintains adequate cash
funds are available to meet the reserves and closely monitors forecasted
Group's development obligations and actual cash flow, as well as
to commercialise the Group's oil short and longer-term funding requirements.
and gas assets. Since a significant The Group does not currently have
proportion of the future capital any loans outstanding, internal
requirements of the Group is expected financial projections are regularly
to be derived from operational made based on the latest estimates
cash generated from production, available, and various scenarios
including from wells yet to be are run to assess the robustness
drilled, there is a risk that in of the liquidity of the Group. However,
the longer term insufficient operational as the risk to future capital funding
cash is generated, or that additional is inherent in the oil and gas exploration
funding, should the need arise, and development industry and reliant
cannot be secured. in part on future development success,
it is difficult for the Group to
take any other measures to further
mitigate this risk, other than tailoring
its development activities to its
available capital funding from time
to time.
-----------------------------------------------
Ensuring appropriate business practices
-----------------------------------------------
The Group operates in Ukraine, The Group maintains anti-bribery
an emerging market, where certain and corruption policies in relation
inappropriate business practices to all aspects of its business,
may, from time to time occur, such and ensures that clear authority
as corrupt business practices, levels and robust approval processes
bribery, appropriation of property are in place, with stringent controls
and fraud, all of which can lead over cash management and the tendering
to financial loss. and procurement processes. In addition,
office and site protection is maintained
to protect the Group's assets.
-----------------------------------------------
Hydrocarbon price risk
-----------------------------------------------
The Group derives its revenue principally The Group sells a proportion of
from the sale of its Ukrainian its hydrocarbon production through
gas, condensate and LPG production. long-term offtake arrangements,
These revenues are subject to commodity which include pricing formulae so
price volatility and political as to ensure that it achieves market
influence. A prolonged period of prices for its products, as well
low gas, condensate and LPG prices utilising the electronic market
may impact the Group's ability platforms in Ukraine to achieve
to maintain its long-term investment market prices for its remaining
programme with a consequent effect products. However, hydrocarbon prices
on growth rate, which in turn may in Ukraine are implicitly linked
impact the share price or any shareholder to world hydrocarbon prices and
returns. Lower gas, condensate so the Group is subject to external
and LPG prices may not only decrease price trends.
the Group's revenues per unit,
but may also reduce the amount
of gas, condensate and LPG which
the Group can produce economically,
as would increases in costs associated
with hydrocarbon production, such
as subsoil taxes and royalties.
The overall economics of the Group's
key assets (being the net present
value of the future cash flows
from its Ukrainian projects) are
far more sensitive to long term
gas, condensate and LPG prices
than short-term price volatility.
However, short-term volatility
does affect liquidity risk, as,
in the early stage of the projects,
income from production revenues
is offset by capital investment.
-----------------------------------------------
Currency risk
-----------------------------------------------
Since the beginning of 2014 , the The Group's sales proceeds are received
Ukrainian Hryvnia significantly in Ukrainian Hryvnia, and the majority
devalued against major world currencies, of the capital expenditure costs
including the US Dollar, where for the current investment programme
it has fallen from UAH8.3/$1.00 will be incurred in Ukrainian Hryvnia,
on 1 January 2014 to UAH27.7/$1.00 thus the currency of revenue and
on 31 December 2018. It did, though, costs are largely matched. In light
strengthen significantly in 2019 of the previous devaluation and
to UAH23.7/$1.00 on 31 December volatility of the Ukrainian Hryvnia
2019. This devaluation through against major world currencies,
to 2018 was a significant contributor and since the Ukrainian Hryvnia
to the imposition of the banking does not benefit from the range
restrictions by the National Bank of currency hedging instruments
of Ukraine over recent years. In which are available in more developed
addition, the geopolitical events economies, the Group has adopted
in Ukraine over recent years, are a policy that, where possible, funds
likely to continue to impact the not required for use in Ukraine
valuation of the Ukrainian Hryvnia be retained on deposit in the United
against major world currencies. Kingdom and Europe, principally
Further devaluation of the Ukrainian in US Dollars.
Hryvnia against the US Dollar will
affect the carrying value of the
Group's assets.
-----------------------------------------------
Counterparty and credit risk
-----------------------------------------------
The challenging political and economic The Group monitors the financial
environment in Ukraine means that position and credit quality of its
businesses can be subject to significant contractual counterparties and seeks
financial strain, which can mean to manage the risk associated with
that the Group is exposed to increased counterparties by contracting with
counterparty risk if counterparties creditworthy contractors and customers.
fail or default in their contractual Hydrocarbon production is sold on
obligations to the Group, including terms that limit supply credit and/or
in relation to the sale of its title transfer until payment is
hydrocarbon production, resulting received .
in financial loss to the Group.
-----------------------------------------------
Financial markets and economic
outlook
-----------------------------------------------
The performance of the Group is The Group's sales proceeds are received
influenced by global economic conditions in Ukrainian Hryvnia and a significant
and, in particular, the conditions proportion of investment expenditure
prevailing in the United Kingdom is made in Ukrainian Hryvnia , which
and Ukraine. The economies in these minimises risks related to foreign
regions have been subject to volatile exchange volatility. However, hydrocarbon
pressures in recent periods, with prices in Ukraine are implicitly
the global economy having experienced linked to world hydrocarbon prices
a long period of difficulties, and so the Group is subject to external
and more particularly the events price movements. The Group holds
that have occurred in Ukraine over a significant proportion of its
recent years. This has led to extreme cash reserves in the United Kingdom
foreign exchange movements in the and Europe, mostly in US Dollars,
Ukrainian Hryvnia , high inflation with reputable financial institutions.
and interest rates, and increased The financial status of counterparties
credit risk relating to the Group's is carefully monitored to manage
key counterparties. counterparty risks. Nevertheless,
the risks that the Group faces as
a result of these risks cannot be
predicted and many of these are
outside of the Group's control.
-----------------------------------------------
Corporate risks
-----------------------------------------------
Ukraine production licences
-----------------------------------------------
The Group operates in a region The Group ensures compliance with
where the right to production can commitments and regulations relating
be challenged by State and non-State to its production licences through
parties. During 2010, this manifested Group procedures and controls or,
itself in the form of a Ministry where this is not immediately feasible
Order instructing the Group to for practical or logistical considerations,
suspend all operations and production seeks to enter into dialogue with
from its MEX-GOL and SV production the relevant Government bodies with
licences, which was not resolved a view to agreeing a reasonable
until mid-2011. In 2013, new rules time frame for achieving compliance
relating to the updating of production or an alternative, mutually agreeable
licences led to further challenges course of action. Work programmes
being raised by the Ukrainian authorities are designed to ensure that all
to the production licences held licence obligations are met and
by independent oil and gas producers continual interaction with Government
in Ukraine, including the Group, bodies is maintained in relation
which may result in requirements to licence obligations and commitments.
for remediation work, financial
penalties and/or the suspension
of such licences, which, in turn,
may adversely affect the Group's
operations and financial position.
In March 2019, a Ministry Order
was issued instructing the Group
to suspend all operations and production
from its VAS production licence.
The Group is challenging this Order
through legal proceedings, during
which production from the licence
is continuing, but this matter
remains unresolved. All such challenges
affecting the Group have thus far
been successfully defended through
the Ukrainian legal system. However,
the business environment is such
that these types of challenges
may arise at any time in relation
to the Group's operations, licence
history, compliance with licence
commitments and/or local regulations.
In addition, production licences
in Ukraine are issued with and/or
carry ongoing compliance obligations,
which if not met, may lead to the
challenge and/or loss of a licence.
-----------------------------------------------
Extension of MEX-GOL and SV licences
-----------------------------------------------
The Group's production licences The Group monitors legislation in
for the MEX-GOL and SV fields currently Ukraine which is likely to affect
expire in 2024. However, in the its licences and the obligations
estimation of its reserves, it associated therewith, and ensures
is assumed that licence extensions that its licence compliance obligations
will be granted in accordance with are monitored and maintained as
current Ukrainian legislation and such compliance is a likely to be
that consequently the fields' development a factor in the extension of the
will continue until the end of licences in 2024.
the fields' economic life in 2038
for the MEX-GOL field and 2042
for the SV field. Despite such
legislation, it is possible that
licence extensions will not be
granted, which would affect the
achievement of full economic field
development and consequently the
carrying value of the Group's MEX-GOL
and SV asset in the future .
-----------------------------------------------
Risks relating to key personnel
-----------------------------------------------
The Group's success depends upon The Group periodically reviews the
skilled management as well as technical compensation and contractual terms
expertise and administrative staff. of its staff. In addition, the Group
The loss of service of critical has developed relationships with
members from the Group's team could a number of technical and other
have an adverse effect on the business. professional experts and advisers,
who are used to provided specialist
services as required.
-----------------------------------------------
Consolidated Income Statement
2019 2018
Note $000 $000
Revenue 6 5 5 , 931 66,098
(3 2 , (31, 8 75
Cost of sales 7 415 ) )
------------------------------------------ ---- --------- ---------
Gross profit 2 3 , 516 34, 2 23
(5,7 09
Administrative expenses 8 (7,396) )
Reversal of impairment of property, plant
and equipment 18 - 34,469
Other operating gains , (net) 11 4, 973 3,387
------------------------------------------ ---- --------- ---------
Operating profit 21, 093 66 , 370
Finance income 12 3,487 641
Finance costs 13 (450) (140)
Net impairment gains on financial assets 32 60
Other losses (net) 14 (2,394) (140)
------------------------------------------ ---- --------- ---------
Profit before taxation 21 , 768 66, 7 91
(9, 569 ( 12,485
Income tax expense 15 ) )
------------------------------------------ ---- --------- ---------
Profit for the year 12,199 54,306
------------------------------------------ ---- --------- ---------
Earnings per share (cents)
Basic and diluted 17 3.8c 16.9c
------------------------------------------ ---- --------- ---------
The Notes set out on below are an integral part of these
consolidated financial statements.
Consolidated Statement of Comprehensive Income
2019 201 8
$000 $000
Profit for the year 12,199 54,306
Other comprehensive income/(expense):
Items that may be subsequently reclassified
to profit or loss:
Equity - foreign currency translation 12 ,089 (1,329)
Items that will not be subsequently reclassified
to profit or loss:
Re-measurements of post-employment benefit
obligations 165 (142)
Total other comprehensive income/( expense) 1 2 ,254 (1,471)
Total comprehensive income for the year 24,453 52,835
-------------------------------------------------- -------- -------
Company Statement of Comprehensive Income
Note 2019 2018
$000 $000
( 17 , 507
(Loss)/Profit for the year 1 6 ) 12,057
------------------------------------- ---- ---------- ------
Total comprehensive (expense)/income ( 17 , 507
for the year ) 12,057
------------------------------------- ---- ---------- ------
The Notes set out below are an integral part of these
consolidated financial statements.
Consolidated Balance Sheet
201 9 201 8
Note $000 $000
Assets
Non-current assets
Property, plant and equipment 18 70,052 50,1 92
Intangible assets 1 9 5,197 4,880
Right-of-use assets 20 940 -
Prepayment for shares 500 -
Corporation tax receivable 10 27
Deferred tax asset 27 - 3,283
------------------------------ ---- ------------- -----------
76,699 58,382
Current assets
Inventories 2 2 4,813 1,605
Trade and other receivables 23 10,937 10 , 130
Cash and cash equivalents 24 62,474 53,222
------------------------------ ---- ------------- -----------
78,224 64,9 57
Total assets 154,923 12 3 , 339
------------------------------ ---- ------------- -----------
Liabilities
Current liabilities
Trade and other payables 2 5 (3,968) (4,836)
Lease liabilities 20 (454) -
Corporation tax payable (2,221) (1,297)
(6,643) (6,133)
Net current assets 71,581 58, 8 24
------------------------------ ---- ------------- -----------
Non-current liabilities
Provision for decommissioning 2 6 (7,447) (3,137)
Lease liabilities 20 (515) -
Defined benefit liability (480) (468)
Deferred tax liability 2 7 (2,288) ( 504 )
(10,730) (4, 10 9 )
Total liabilities (17,373) (10,242)
------------------------------ ---- ------------- -----------
Net assets 137,550 113,097
------------------------------ ---- ------------- -----------
Equity
Called up share capital 2 8 28,115 28,115
Share premium account 555,090 555,090
Foreign exchange reserve 2 9 ( 90 , 1 72 ) (102, 261 )
Other reserves 29 4,273 4,273
Accumulated losses (359,756) (372, 120 )
Total equity 137,550 113,097
------------------------------ ---- ------------- -----------
The Notes set out below are an integral part of these
consolidated financial statements.
Consolidated Statement of Changes in Equity
Called Share Merger Capital Foreign Accumulated Total equity
up share premium reserve contributions exchange losses
capital account reserve reserve*
$000 $000 $000 $000 $000 $000 $000
As at 1 January
201 8 28,115 555,090 (3,204) 7,477 (100,932) (426,178) 60,368
Change in
accounting policy - - - - - (106) (106)
------------------ -------------- -------- -------- ------------- ------------- -------------- ------------
Retained total
equity at the
beginning of the
financial year 28,115 555,090 (3,204) 7,477 (100,932) (426,284) 60,262
Profit for the
year - - - - - 54,306 54,306
Other
comprehensive
expense
- exchange
differences - - - - ( 1,329 ) - ( 1,329)
- re -
measurements of
post-employment
benefit
obligations - - - - - (142) (142)
------------------ -------------- -------- -------- ------------- ------------- -------------- ------------
Total
comprehensive
income/(expense) - - - - ( 1,329 ) 54,164 52,835
------------------ -------------- -------- -------- ------------- ------------- -------------- ------------
As at 31 December
201 8 28,115 555,090 (3,204) 7,477 (102, 261 ) (372,120) 113,097
------------------ -------------- -------- -------- ------------- ------------- -------------- ------------
Called Share Merger Capital Foreign Accumulated Total equity
up share premium reserve contributions exchange losses
capital account reserve reserve*
$000 $000 $000 $000 $000 $000 $000
As at 1 January
201 9 28,115 555,090 (3,204) 7,477 (102,261) (372,120) 113,097
Profit for the
year - - - - - 12,199 12,199
Other
comprehensive
income
- exchange
differences - - - - 12,089 - 12,089
- re -
measurements of
post-employment
benefit
obligations - - - - - 165 165
------------------ -------------- -------- -------- ------------- ------------- -------------- ------------
Total
comprehensive
income - - - - 12,089 12,364 24,453
------------------ -------------- -------- -------- ------------- ------------- -------------- ------------
As at 31 December
201 9 28,115 555,090 (3,204) 7,477 (90,172) (359,756) 137,550
------------------ -------------- -------- -------- ------------- ------------- -------------- ------------
* Predominantly as a result of exchange differences on non-monetary assets and liabilities
where the subsidiaries' functional currency is not the US Dollar.
The Notes set out below are an integral part of these
consolidated financial statements.
Consolidated Cash Flow Statement
2019 2018
Note $000 $000
Operating activities
2 4 ,
Cash generated from operations 3 1 6 01 36,342
Equipment rental income 26 8
Income tax paid (3,963) (6,316)
Interest received 4,783 3,038
------------------------------------------------------- ---- ------- --------
2 5 , 33, 07
Net cash inflow from operating activities 4 47 2
------------------------------------------------------- ---- ------- --------
Investing activities
Disposal of subsidiary (7) -
(1 9
, 050
Purchase of property, plant and equipment ) (10,001)
Prepayment for shares (500) -
Purchase of intangible assets (124) (95)
Proceeds from sale of property, plant and equipment 16 74
Proceeds from disposal of other short-term investments - 16,000
------------------------------------------------------- ---- ------- --------
(1 9
, 6 65
Net cash (outflow)/inflow from investing activities ) 5,97 8
------------------------------------------------------- ---- ------- --------
Financing activities
Payment of principal portion of lease liabilities (488) -
------------------------------------------------------- ---- ------- --------
Net cash outflow from financing activities (488) -
------------------------------------------------------- ---- ------- --------
Net increase in cash and cash equivalents 5 , 294 39,050
Cash and cash equivalents at beginning of year 53,222 14,249
Change in accounting policies 4 - (9)
ECL of cash and cash equivalents (7) (13)
Effect of foreign exchange rate changes 3,965 (55)
Cash and cash equivalents at end of year 24 62,474 53,222
------------------------------------------------------- ---- ------- --------
The Notes set out below are an integral part of these
consolidated financial statements.
Notes forming part of the financial statements
1. Statutory Accounts
The financial information set out above does not constitute the
Company's statutory accounts for the year ended 31 December 2019 or
2018, but is derived from those accounts. The Auditor has reported
on those accounts, and its reports were unqualified and did not
contain statements under sections 498(2) or (3) of the Companies
Act 2006.
The statutory accounts for 2019 will be delivered to the
Registrar of Companies following the Company's Annual General
Meeting.
While the financial information included in this preliminary
announcement has been prepared in accordance with International
Financial Reporting Standards as adopted by the European Union
("IFRS"), this announcement does not itself contain sufficient
information to comply with IFRS. The Company expects to distribute
the full financial statements that comply with IFRS in May/June
2020.
2. General Information and Operational Environment
Regal Petroleum plc (the "Company") and its subsidiaries (the
"Group") is a gas, condensate and LPG production group.
The Company is a public limited company quoted on the AIM Market
of London Stock Exchange plc and incorporated in England and Wales
under the Companies Act 2006. The Company's registered office is at
16 Old Queen Street, London, SW1H 9HP , United Kingdom and its
registered number is 4462555. The principal activities of the Group
and the nature of the Group's operations are set out above.
As of 3 1 December 2019 and 2018, the Company's immediate parent
company was Pelidona Services Limited, which is 100% owned by
Lovitia Investments Limited, which is 100% owned by Mr Vadym
Novynskyi. Accordingly, the Company was ultimately controlled by Mr
Vadym Novynskyi.
The Group's gas, condensate and LPG extraction and production
facilities are located in Ukraine. The ongoing political and
economic instability in Ukraine, which commenced in late 2013, has
led to a deterioration of Ukrainian State finances, volatility of
financial markets, illiquidity on capital markets, higher inflation
and a depreciation of the national currency against major foreign
currencies, although there have been some gradual improvements
recently.
In 2019, the Ukrainian economy was showing signs of
stabilisation after years of political and economic tensions. The
year-on-year inflation rate in Ukraine decreased to 4.1% during
2019 (as compared to 9.8% in 2018 and 13.7% in 2017), while GDP
continued to grow at an estimated 3.5% (after 3.3% growth in
2018).
After several years of devaluation, in 2019 the Ukrainian
currency strengthened and during the year, appreciated by 14% (as
at 31 December 2019, the official National Bank of Ukraine ("NBU")
exchange rate of the Ukrainian Hryvnia against the US Dollar was
UAH23.69/$1.00, compared to UAH27.69/$1.00 as at 31 December 2018).
Among the key factors attributable to the strengthening of the
Hryvnia were strong revenues of agricultural exporters, tight
Hryvnia liquidity, growth in remittances from labour migrants and
high demand for government debt instruments.
With effect from April 2019, the NBU launched a cycle of easing
of monetary policy and a gradual decrease of its discount rate, for
the first time in two years, from 18% in April 2019 to 11% in
January 2020, which was justified by a sustained trend of inflation
deceleration.
In December 2018, the International Monetary Fund ("IMF")
approved a stand-by assistance ("SBA") 14-month programme for
Ukraine, totalling $3.9 billion. In December 2018, Ukraine had
already received $2 billion from the IMF and the European Union
("EU"), as well as $750 million credit guarantees from the World
Bank. The approval of the IMF programme significantly increased
Ukraine's chances of meeting its foreign currency obligations in
2019, and thus has supported the financial and macroeconomic
stability of the country. Continued cooperation with the IMF is
dependent on Ukraine's success in implementing policies and reforms
that underpin a new IMF-supported programme.
In 2020, Ukraine faces major public debt repayments, which will
require mobilisation of substantial domestic and external financing
in an increasingly challenging financing environment for emerging
markets.
The events which led to annexation of Crimea by the Russian
Federation in February 2014 and the conflict in the east of Ukraine
which started in spring 2014 have not been resolved to date. The
relationships between Ukraine and the Russian Federation have
remained strained.
Ukraine held presidential elections in March-April 2019, and
parliamentary elections in July 2019. Amid these double elections,
the degree of uncertainty including in respect of the future
direction of structural reforms in 2020 remains very high. Despite
certain improvements in 2019, the final resolution and the ongoing
effects of the political and economic situation in Ukraine are
difficult to predict but they may have further severe effects on
the Ukrainian economy and the Group's business.
Further details of risks relating to Ukraine can be found within
the Principal Risks section above.
3. Accounting Policies
The principal accounting policies applied in the preparation of
these consolidated financial statements are set out below. These
policies have been consistently applied to all the years presented,
unless otherwise stated.
Basis of Preparation
The Group has prepared its consolidated financial statements and
the Company's financial statements under International Financial
Reporting Standards ("IFRSs") and interpretations issued by the
IFRS Interpretations Committee ("IFRS IC") , as adopted by the
European Union. The financial statements have been prepared in
accordance with the Companies Act 2006 as applicable to companies
using IFRS. These consolidated financial statements are prepared
under the historical cost convention as modified by the certain
financial instruments measured in accordance with the requirements
of IFRS 9 Financial instruments. The principal accounting policies
applied in the preparation of the consolidated financial statements
are set out below. Apart from the accounting policy changes
resulting from the adoption of IFRS 16 effective from 1 January
2019, these policies have been consistently applied to all the
periods presented, unless otherwise stated (refer to Note 4).
The preparation of financial statements in conformity with IFRS
requires the use of certain critical accounting estimates. It also
requires management to exercise its judgement in the process of
applying the Group's accounting policies. The areas involving a
higher degree of judgement or complexity, or areas where
assumptions and estimates are significant to the consolidated
financial statements are disclosed in Note 5.
Going Concern
Based on the positive operational and financial performance of
the Group and for the reasons outlined in the Principal Risks
section above, the Directors have a reasonable expectation that the
Group has adequate resources to continue in operational existence
for the foreseeable future regarded as at least 12 months after the
date of signing of these financial statements. Accordingly, the
going concern basis has been adopted in preparing its consolidated
financial statements and the Company's financial statements for the
year ended 31 December 2019. T he use of this basis of accounting
takes into consideration the Company's and the Group's current and
forecast financing position, additional details of which are
provided in the Principal Risks section above. The Group does not
foresee any positive or negative impact on its operations as a
result of Brexit. As a consequence of the COVID-19 pandemic the
Group is re-visiting processes and controls intended to ensure
protection of all its stakeholders and minimise any disruption to
its business.
New and amended standards adopted by the Group
A number of new or amended standards became applicable for the
current reporting period. The Group had to change its accounting
policies as a result of the adoption of IFRS 16 Leases.
The impact of the adoption of the leasing standard and the new
accounting policies are disclosed in Note 4 below.
The following amended standards became effective from 1 January
2019, but did not have any material impact on the Group:
-- IFRIC 23 "Uncertainty over Income Tax Treatments" (issued
on 7 June 2017 and effective for annual periods beginning
on or after 1 January 2019).
-- Prepayment Features with Negative Compensation - Amendments
to IFRS 9 (issued on 12 October 2017 and effective for annual
periods beginning on or after 1 January 2019).
-- Amendments to IAS 28 "Long-term Interests in Associates and
Joint Ventures" (issued on 12 October 2017 and effective for
annual periods beginning on or after 1 January 2019).
-- Annual Improvements to IFRSs 2015-2017 cycle -- amendments
to IFRS 3, IFRS 11, IAS 12 and IAS 23 (issued on 12 December
2017 and effective for annual periods beginning on or after
1 January 2019).
-- Amendments to IAS 19 "Plan Amendment, Curtailment or Settlement"
(issued on 7 February 2018 and effective for annual periods
beginning on or after 1 January 2019).
Impact of standards issued but not yet applied by the Group
Certain new standards and interpretations have been issued that
are mandatory for the annual periods beginning on or after 1
January 2020 or later, and which the Group has not early
adopted.
I) Sale or Contribution of Assets between an Investor and its
Associate or Joint Venture - Amendments to IFRS 10 and IAS
28 (issued on 11 September 2014 and effective for annual periods
beginning on or after a date to be determined by the IASB)
These amendments address an inconsistency between the
requirements in IFRS 10 and those in IAS 28 in dealing with the
sale or contribution of assets between an investor and its
associate or joint venture. The main consequence of the amendments
is that a full gain or loss is recognised when a transaction
involves a business. A partial gain or loss is recognised when a
transaction involves assets that do not constitute a business, even
if these assets are held by a subsidiary.
II) IFRS 17 "Insurance Contracts"(issued on 18 May 2017 and effective
for annual periods beginning on or after 1 January 2021)
IFRS 17 replaces IFRS 4, which has given companies dispensation
to carry on accounting for insurance contracts using existing
practices. As a consequence, it was difficult for investors to
compare and contrast the financial performance of otherwise similar
insurance companies. IFRS 17 is a single principle-based standard
to account for all types of insurance contracts, including
reinsurance contracts that an insurer holds. The standard requires
recognition and measurement of groups of insurance contracts at:
(i) a risk-adjusted present value of the future cash flows (the
fulfilment cash flows) that incorporates all of the available
information about the fulfilment cash flows in a way that is
consistent with observable market information; plus (if this value
is a liability) or minus (if this value is an asset) (ii) an amount
representing the unearned profit in the group of contracts (the
contractual service margin). Insurers will be recognising the
profit from a group of insurance contracts over the period they
provide insurance coverage, and as they are released from risk. If
a group of contracts is or becomes loss-making, an entity will be
recognising the loss immediately.
III) Amendments to the Conceptual Framework for Financial Reporting
(issued on 29 March 2018 and effective for annual periods
beginning on or after 1 January 2020)
The revised Conceptual Framework includes a new chapter on
measurement; guidance on reporting financial performance; improved
definitions and guidance -- in particular the definition of a
liability; and clarifications in important areas, such as the roles
of stewardship, prudence and measurement uncertainty in financial
reporting.
IV) Definition of a business - Amendments to IFRS 3 (issued on
22 October 2018 and effective for acquisitions from the beginning
of annual reporting period that starts on or after 1 January
2020)
The amendments revise definition of a business. A business must
have inputs and a substantive process that together significantly
contribute to the ability to create outputs. The new guidance
provides a framework to evaluate when an input and a substantive
process are present, including for early stage companies that have
not generated outputs. An organised workforce should be present as
a condition for classification as a business if are no outputs. The
definition of the term 'outputs' is narrowed to focus on goods and
services provided to customers, generating investment income and
other income, and it excludes returns in the form of lower costs
and other economic benefits. It is also no longer necessary to
assess whether market participants are capable of replacing missing
elements or integrating the acquired activities and assets. An
entity can apply a 'concentration test'. The assets acquired would
not represent a business if substantially all of the fair value of
gross assets acquired is concentrated in a single asset (or a group
of similar assets). The amendments are prospective and the Group
will apply them and assess their impact from 1 January 2020.
V) Definition of materiality - Amendments to IAS 1 and IAS 8
(issued on 31 October 2018 and effective for annual periods
beginning on or after 1 January 2020)
The amendments clarify the definition of material and how it
should be applied by including in the definition guidance that
until now has featured elsewhere in IFRS. In addition, the
explanations accompanying the definition have been improved.
Finally, the amendments ensure that the definition of material is
consistent across all IFRS Standards. Information is material if
omitting, misstating or obscuring it could reasonably be expected
to influence the decisions that the primary users of general
purpose financial statements make on the basis of those financial
statements, which provide financial information about a specific
reporting entity.
VI) Interest rate benchmark reform - Amendments to IFRS 9, IAS
39 and IFRS 7 (issued on 26 September 2019 and effective
for annual periods beginning on or after 1 January 2020)
The amendments were triggered by replacement of benchmark
interest rates such as LIBOR and other inter-bank offered rates
('IBORs'). The amendments provide temporary relief from applying
specific hedge accounting requirements to hedging relationships
directly affected by the IBOR reform. Cash flow hedge accounting
under both IFRS 9 and IAS 39 requires the future hedged cash flows
to be 'highly probable'. Where these cash flows depend on an IBOR,
the relief provided by the amendments requires an entity to assume
that the interest rate on which the hedged cash flows are based
does not change as a result of the reform. Both IAS 39 and IFRS 9
require a forward-looking prospective assessment in order to apply
hedge accounting. While cash flows under IBOR and IBOR replacement
rates are currently expected to be broadly equivalent, which
minimises any ineffectiveness, this might no longer be the case as
the date of the reform gets closer. Under the amendments, an entity
may assume that the interest rate benchmark on which the cash flows
of the hedged item, hedging instrument or hedged risk are based, is
not altered by IBOR reform. IBOR reform might also cause a hedge to
fall outside the 80-125% range required by retrospective test under
IAS 39. IAS 39 has therefore been amended to provide an exception
to the retrospective effectiveness test such that a hedge is not
discontinued during the period of IBOR-related uncertainty solely
because the retrospective effectiveness falls outside this range.
However, the other requirements for hedge accounting, including the
prospective assessment, would still need to be met. In some hedges,
the hedged item or hedged risk is a non-contractually specified
IBOR risk component. In order for hedge accounting to be applied,
both IFRS 9 and IAS 39 require the designated risk component to be
separately identifiable and reliably measurable. Under the
amendments, the risk component only needs to be separately
identifiable at initial hedge designation and not on an ongoing
basis. In the context of a macro hedge, where an entity frequently
resets a hedging relationship, the relief applies from when a
hedged item was initially designated within that hedging
relationship. Any hedge ineffectiveness will continue to be
recorded in profit or loss under both IAS 39 and IFRS 9. The
amendments set out triggers for when the reliefs will end, which
include the uncertainty arising from interest rate benchmark reform
no longer being present. The amendments require entities to provide
additional information to investors about their hedging
relationships that are directly affected by these uncertainties,
including the nominal amount of hedging instruments to which the
reliefs are applied, any significant assumptions or judgements made
in applying the reliefs, and qualitative disclosures about how the
entity is impacted by IBOR reform and is managing the transition
process.
Unless otherwise described above, the new standards and
interpretations are not expected to affect significantly the
Group's consolidated financial statements.
Exchange differences on intra-group balances with foreign
operation
The Group has certain inter-company monetary balances of which
the Company is the beneficial owner. These monetary balances are
payable by a subsidiary that is a foreign operation and are
eliminated on consolidation.
In the consolidated financial statements, exchange differences
arising on such payables because the transaction currency differs
from the subsidiary's functional currency are recognised initially
in other comprehensive income if the settlement of such payables is
continuously deferred and is neither planned nor likely to occur in
the foreseeable future.
In such cases, the respective receivables of the Company are
regarded as an extension of the Company's net investment in that
foreign operation, and the cumulative amount of the abovementioned
exchange differences recognised in other comprehensive income is
carried forward within the foreign exchange reserve in equity and
is reclassified to profit or loss only upon disposal of the foreign
operation.
When the subsidiary that is a foreign operation settles its
quasi-equity liability due to the Company, but the Company
continues to possess the same percentage of the subsidiary, i.e.
there has been no change in its proportionate ownership interest,
such settlement is not regarded as a disposal or a partial
disposal, and therefore cumulative exchange differences are not
reclassified.
The designation of inter-company monetary balances as part of
the net investment in a foreign operation is re-assessed when
management's expectations and intentions on settlement change due
to a change in circumstances.
Where, because of a change in circumstances, a receivable
balance, or part thereof, previously designated as a net investment
into a foreign operation is intended to be settled, the receivable
is de-designated and is no longer regarded as part of the net
investment.
In such cases, the exchange differences arising on the
subsidiary's payable following de-designation are recognised within
finance costs / income in profit or loss, similar to foreign
exchange differences arising from financing.
Foreign exchange gains and losses not related to intra-group
balances are recognised on a net basis as other gains or
losses.
Basis of Consolidation
The consolidated financial statements incorporate the financial
information of the Company and entities controlled by the Company
(and its subsidiaries) made up to 31 December each year.
Subsidiaries
Subsidiaries are all entities (including structured entities)
over which the Group has control. The Group controls an entity when
the Group is exposed to, or has rights to variable returns from its
involvement with the entity and has the ability to affect those
returns through its power over the entity. Subsidiaries are fully
consolidated from the date on which control is transferred to the
Group. They are deconsolidated from the date that control
ceases.
The Group applies the acquisition method to account for business
combinations. The consideration transferred for the acquisition of
a subsidiary is the fair value of the assets transferred, the
liabilities incurred to the former owners of the acquiree and the
equity interests issued by the Group. The consideration transferred
includes the fair value of any asset or liability resulting from a
contingent consideration arrangement. Identifiable assets acquired
and liabilities and contingent liabilities assumed in a business
combination are measured initially at their fair values at the
acquisition date. The Group recognises any non-controlling interest
in the acquiree on an acquisition-by-acquisition basis at the
non-controlling interest's proportionate share of the recognised
amounts of the acquiree's identifiable net assets.
Acquisition-related costs are expensed as incurred.
If the business combination is achieved in stages, the
acquisition date carrying value of the acquirer's previously held
equity interest in the acquiree is re-measured to fair value at the
acquisition date; any gains or losses arising from such
re-measurement are recognised in profit or loss.
Any contingent consideration to be transferred by the Group is
recognised at fair value at the acquisition date. Subsequent
changes to the fair value of the contingent consideration that is
deemed to be an asset or liability is recognised in accordance with
IFRS 9 in profit or loss .
Inter-company transactions, balances and unrealised gains on
transactions between Group companies are eliminated. Unrealised
losses are also eliminated. When necessary, amounts reported by
subsidiaries have been adjusted to conform with the Group's
accounting policies.
Segment reporting
The Group's only class of business activity is oil and gas
exploration, development and production. The Group's primary
operations are located in Ukraine, with its head office in the
United Kingdom. The geographical segments are the basis on which
the Group reports its segment information to management. Operating
segments are reported
in a manner consistent with the internal reporting provided to the Board of Directors.
Commercial Reserves
Proved and probable oil and gas reserves are estimated
quantities of commercially producible hydrocarbons which the
existing geological, geophysical and engineering data show to be
recoverable in future years from known reservoirs. Proved reserves
are those quantities of petroleum that, by analysis of geoscience
and engineering data, can be estimated with reasonable certainty to
be commercially recoverable from known reservoirs and under defined
technical and commercial conditions. Probable reserves are those
additional reserves which analysis of geoscience and engineering
data indicate are less likely to be recovered than proved reserves
but more certain to be recovered than possible reserves. The proved
and probable reserves conform to the definition approved by the
Petroleum Resources Management System.
Oil and Gas Exploration/Evaluation and Development/Produc tion
Assets
The Group applies the successful efforts method of accounting
for oil and gas assets, having regard to the requirements of IFRS 6
Exploration for and Evaluation of Mineral Resources.
Exploration costs are incurred to discover hydrocarbon
resources. Evaluation costs are incurred to assess the technical
feasibility and commercial viability of the resources found.
Exploration, as defined in IFRS 6 Exploration and evaluation of
mineral resources, starts when the legal rights to explore have
been obtained. Expenditure incurred before obtaining the legal
right to explore is generally expensed; an exception to this would
be separately acquired intangible assets such as payment for an
option to obtain legal rights.
Expenditures incurred in exploration activities should be
expensed unless they meet the definition of an asset. An entity
recognises an asset when it is probable that economic benefits will
flow to the entity as a result of the expenditure. The economic
benefits might be available through commercial exploitation of
hydrocarbon reserves or sales of exploration findings or further
development rights. Exploration and evaluation ("E&E") assets
are recognised within property, plant and equipment in single field
cost centres.
The capitalisation point is the earlier of:
(a) the point at which the fair value less costs to sell of the
property can be reliably determined as higher than the total
of the expenses incurred and costs already capitalised (such
as licence acquisition costs); and
(b) an assessment of the property demonstrates that commercially
viable reserves are present and hence there are probable
future economic benefits from the continued development and
production of the resource.
E&E assets are reclassified from Exploration and Evaluation
when evaluation procedures have been completed. E&E assets that
are not commercially viable are written down. E&E assets for
which commercially viable reserves have been identified are
reclassified to Development and Production assets. E&E assets
are tested for impairment immediately prior to reclassification out
of E&E.
Once an E&E asset has been reclassified from E&E, it is
subject to the normal IFRS requirements. This includes impairment
testing at the cash-generating unit ("CGU") level and
depreciation.
Abandonment and Retirement of Individual Items of Property,
Plant and Equipment
Normally, no gains or losses shall be recognised if only an
individual item of equipment is abandoned or retired or if only a
single lease or other part of a group of proved properties
constituting the amortisation base is abandoned or retired as long
as the remainder of the property or group of properties
constituting the amortisation base continues to produce oil or gas.
Instead, the asset being abandoned or retired shall be deemed to be
fully amortised, and its costs shall be charged to accumulated
depreciation, depletion or amortisation. When the last well on an
individual property (if that is the amortisation base) or group of
properties (if amortisation is determined on the basis of an
aggregation of properties with a common geological structure)
ceases to produce and the entire property or group of properties is
abandoned, a gain or loss shall be recognised. Occasionally, the
partial abandonment or retirement of a proved property or group of
proved properties or the abandonment or retirement of wells or
related equipment or facilities may result from a catastrophic
event or other major abnormality. In those cases, a loss shall be
recognised at the time of abandonment or retirement.
I ntangible Assets other than Oil and Gas Assets
Intangible assets other than oil and gas assets are stated at
cost less accumulated amortisation and any provision for
impairment. These assets represent exploration licences.
Amortisation is charged so as to write off the cost, less estimated
residual value on a straight-line basis of 20-25% per annum.
Depreciation, Depletion and Amortisation
All expenditure carried within each field is amortised from the
commencement of commercial production on a unit of production
basis, which is the ratio of gas production in the period to the
estimated quantities of commercial reserves at the end of the
period plus the production in the period, generally on a field by
field basis. In certain circumstances, fields within a single
development area may be combined for depletion purposes. Costs used
in the unit of production calculation comprise the net book value
of capitalised costs plus the estimated future field development
costs necessary to bring the reserves into production.
Impairment
At each balance sheet date, the Group reviews the carrying
amount of oil and gas development and production assets to
determine whether there is any indication that those assets have
suffered an impairment loss. This includes exploration and
appraisal costs capitalised which are assessed for impairment in
accordance with IFRS 6. If any such indication exists, the
recoverable amount of the asset is estimated in order to determine
the extent of the impairment loss.
For oil and gas development and production assets, the
recoverable amount is the greater of fair value less costs to
dispose and value in use. In assessing value in use, the estimated
future cash flows are discounted to their present value using an
expected weighted average cost of capital. If the recoverable
amount of an asset is estimated to be less than its carrying
amount, the carrying amount of the asset is reduced to its
recoverable amount. Impairment losses are recognised as an expense
immediately.
Should an impairment loss subsequently reverse, the carrying
amount of the asset is increased to the revised estimate of its
recoverable amount, but so that the increased carrying amount does
not exceed the carrying amount that would have been determined had
no impairment loss been recognised for the asset in prior years. A
reversal of an impairment loss is recognised as income
immediately.
Decommissioning Provision
Where a material liability for the removal of existing
production facilities and site restoration at the end of the
productive life of a field exists, a provision for decommissioning
is recognised. The amount recognised is the present value of
estimated future expenditure determined in accordance with local
conditions and requirements. The cost of the relevant property,
plant and equipment is increased with an amount equivalent to the
provision and depreciated on a unit of production basis. Changes in
estimates are recognised prospectively, with corresponding
adjustments to the provision and the associated fixed asset. The
unwinding of the discount on the decommissioning provision is
included within finance costs.
Property, Plant and Equipment other than Oil and Gas Assets
Property, plant and equipment other than oil and gas assets
(included in Other fixed assets in Note 18) are stated at cost less
accumulated depreciation and any provision for impairment.
Depreciation is charged so as to write off the cost of assets on a
straight-line basis over their useful lives as follows:
Useful lives in years
Buildings and constructions 10 to 20 years
Machinery and equipment 2 to 5 years
Vehicles 5 years
Office and other equipment 4 to 12 years
Spare parts and equipment purchased with the intention to be
used in future capital investment projects are recognised as oil
and gas development and production assets within property, plant
and equipment .
Right-of-use assets
The Group leases various offices, equipment, wells, land.
Contracts may contain both lease and non-lease components. The
Group allocates the consideration in the contract to the lease and
non-lease components based on their relative stand-alone
prices.
Assets arising from a lease are initially measured on a present
value basis.
Right-of-use assets are measured at cost comprising the
following:
-- the amount of the initial measurement of lease liability,
-- any lease payments made at or before the commencement date
less any lease incentives received,
-- any initial direct costs, and
-- costs to restore the asset to the conditions required by lease
agreements.
Right-of-use assets are generally depreciated over the shorter
of the asset's useful life and the lease term on a straight-line
basis. If the Group is reasonably certain to exercise a purchase
option, the right-of-use asset is depreciated over the underlying
assets' useful lives. Depreciation on the items of the right-of-use
assets is calculated using the straight-line method over their
estimated useful lives as follows:
Useful lives in years
Land 40 to 50 years
Wells 10 to 20 years
Properties:
Buildings and constructions 10 to 20 years
Machinery and equipment 2 to 5 years
Vehicles 5 years
Office and other equipment 4 to 12 years
Inventories
Inventories typically consist of materials, spare parts and
hydrocarbons, and are stated at the lower of cost and net
realisable value. Cost of finished goods is determined on the
weighted average bases. Cost of other than finished goods inventory
is determined on the first in first out basis. Net realisable value
represents the estimated selling price less all estimated costs of
completion and costs to be incurred in marketing, selling and
distribution.
Revenue Recognition
Revenue is income arising in the course of the Group's ordinary
activities. Revenue is recognised in the amount of transaction
price. Transaction price is the amount of consideration to which
the Group expects to be entitled in exchange for transferring
control over promised goods or services to a customer, excluding
the amounts collected on behalf of third parties.
Revenue is recognised net of indirect taxes and excise
duties.
Sales of gas, condensate and LPG are recognised when control of
the good has transferred, being when the goods are delivered to the
customer, the customer has full discretion over the goods, and
there is no unfulfilled obligation that could affect the customer's
acceptance of the goods. Delivery occurs when the goods have been
shipped to the specific location, the risks of obsolescence and
loss have been transferred to the customer, and either the customer
has accepted the goods in accordance with the contract, the
acceptance provisions have lapsed, or the Group has objective
evidence that all criteria for acceptance have been satisfied.
A receivable is recognised when the goods are delivered as this
is the point in time that the consideration is unconditional
because only the passage of time is required before the payment is
due.
The Group normally uses standardised contracts for the sale of
gas, condensate and LPG, which define the point of control
transfer. The price and quantity of each sale transaction are
indicated in the specifications to the sales contracts.
The control over gas is transferred to a customer when the
respective act of acceptance is signed by the parties to a contract
upon delivery of gas to the point of sale specified in the
contract, normally being a certain point in the Ukrainian gas
transportation system. Acts of acceptance of gas are signed and the
respective revenues are recognised on a monthly basis.
The control over condensate and LPG is transferred to a customer
when the respective waybill is signed by the parties to a contract
upon shipment of goods at the point of sale specified in the
contract, which is normally the Group's production site.
Foreign Currencies
The Group's consolidated financial statements and those of the
Company are presented in US Dollars. The functional currency of the
subsidiaries which operate in Ukraine is Ukrainian Hryvnia. The
remaining entities have US Dollars as their functional
currency.
The functional currency of individual companies is determined by
the primary economic environment in which the entity operates,
normally the one in which it primarily generates and expends cash.
In preparing the financial statements of the individual companies,
transactions in currencies other than the entity's functional
currency ("foreign currencies") are recorded at the rates of
exchange prevailing on the dates of the transactions. At each
balance sheet date, monetary assets and liabilities that are
denominated in foreign currencies are retranslated at the rates
prevailing on the balance sheet date. Foreign exchange gains and
losses resulting from the settlement of such transactions and from
the translation at year-end exchange rates of monetary assets and
liabilities denominated in foreign currencies are recognised in the
Income Statement. Non-monetary assets and liabilities carried at
fair value that are denominated in foreign currencies are
translated at the rates prevailing at the date when the fair value
was determined. Non-monetary items which are measured in terms of
historical cost in a foreign currency are not retranslated. Gains
and losses arising on retranslation are included in net profit or
loss for the period, except for exchange differences arising on
balances which are considered long term investments where the
changes in fair value are recognised directly in other
comprehensive income .
On consolidation, the assets and liabilities of the Group's
subsidiaries which do not use US Dollars as their functional
currency are translated into US Dollars as follows:
(a) assets and liabilities for each Balance Sheet presented are
translated at the closing rate at the date of that Balance
Sheet;
(b) income and expenses for each Income Statement are translated
at average monthly exchange rates (unless this average is
not a reasonable approximation of the cumulative effect of
the rates prevailing on the transaction dates, in which case
income and expenses are translated at the rate on the dates
of the transactions); and
(c) all resulting exchange differences are recognised in other
comprehensive income.
The principal rates of exchange used for translating foreign
currency balances at 31 December 2019 were $1:UAH 23 . 7 (201 8 :
$1:UAH 27 . 7 ), $1:GBP0. 8 (201 8 : $1:GBP0. 8 ), $1:EUR0. 9 (201
8 : $1:EUR0. 9 ).
None of the Group's operations are considered to use the
currency of a hyperinflationary economy, however this is kept under
review.
Pensions
The Group contributes to a local government pension scheme in
Ukraine and defined benefit plans. The Group has no further payment
obligations towards the local government pension scheme once the
contributions have been paid.
Defined benefit plans define an amount of pension benefit that
an employee will receive on retirement, usually dependent on one or
more factors such as age, years of service and compensation.
The Group companies participate in a mandatory Ukrainian
State-defined retirement benefit plan, which provides for early
pension benefits for employees working in certain workplaces with
hazardous and unhealthy working conditions. The Group also provides
lump sum benefits upon retirement subject to certain conditions.
The early pension benefit (in the form of a monthly annuity) is
payable by employers only until the employee has reached the
statutory retirement age. The pension scheme is based on a benefit
formula which depends on each individual member's average salary,
his/her total length of past service and total length of past
service at specific types of workplaces ("list II" category).
The liability recognised in the Balance Sheet in respect of
defined benefit pension plans is the present value of the defined
benefit obligation at the end of the reporting period less the fair
value of plan assets. The defined benefit obligation is calculated
annually by independent actuaries using the projected unit credit
method. The present value of the defined benefit obligation is
determined by discounting the estimated future cash outflows using
interest rates of high-quality corporate bonds that are denominated
in the currency in which the benefits will be paid, and that have
terms to maturity approximating to the terms of the related pension
obligation. Since Ukraine has no deep market in such bonds, the
market rates on government bonds are used.
The current service cost of the defined benefit plan, recognised
in the Income Statement in employee benefit expense, except where
included in the cost of an asset, reflects the increase in the
defined benefit obligation resulting from employee service in the
current year, benefit changes curtailments and settlements.
Past-service costs are recognised immediately in the I ncome
Statement.
The net interest cost is calculated by applying the discount
rate to the net balance of the defined benefit obligation and the
fair value of plan assets. This cost is included in employee
benefit expense in the Income Statement.
Actuarial gains and losses arising from experience adjustments
and changes in actuarial assumptions are charged or credited to
equity in other comprehensive income in the period in which they
arise.
Taxation
The tax expense represents the sum of the current tax and
deferred tax.
Current tax, including UK corporation and overseas tax, is
provided at amounts expected to be paid (or recovered) using the
tax rates and laws that have been enacted or substantively enacted
by the balance sheet date.
Deferred tax is the tax expected to be payable or recoverable on
differences between the carrying amounts of assets and liabilities
in the financial statements and the corresponding tax bases used in
the computation of taxable profit, and is accounted for using the
balance sheet liability method. Deferred tax liabilities are
generally recognised for all taxable temporary differences and
deferred tax assets are recognised to the extent that it is
probable that taxable profits will be available against which
deductible temporary differences can be utilised. Such assets and
liabilities are not recognised if the temporary difference arises
from goodwill or from the initial recognition (other than in a
business combination) of other assets and liabilities in a
transaction that affects neither the tax profit nor the accounting
profit.
Deferred tax liabilities are recognised for taxable temporary
differences arising on investments in subsidiaries and associates,
and interests in joint ventures, except where the Group is able to
control the reversal of the temporary difference and it is probable
that the temporary difference will not reverse in the foreseeable
future.
Deferred tax is calculated at the tax rates which are expected
to apply in the period when the liability is settled or the asset
is realised. Deferred tax is charged or credited in the Income
Statement, except when it relates to items charged or credited
directly to equity, in which case the deferred tax is also dealt
with in equity.
Other taxes which include recoverable value added tax, excise
tax and custom duties represent the amounts receivable or payable
to local tax authorities in the countries where the Group
operates.
Value added tax
Output value added tax related to sales is payable to tax
authorities on the earlier of (a) collection of receivables from
customers or (b) delivery of goods or services to customers. Input
VAT is generally recoverable against output VAT upon receipt of the
VAT invoice. The tax authorities permit the settlement of VAT on a
net basis. VAT related to sales and purchases is recognised in the
consolidated statement of financial position on a gross basis and
disclosed separately as an asset and a liability. Where provision
has been made for expected credit losses ("ECL") of receivables,
the impairment loss is recorded for the gross amount of the debtor,
including VAT.
Financial Instruments
Financial instruments - key measurement terms . Fair value is
the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date. The best evidence of fair
value is the price in an active market. An active market is one in
which transactions for the asset or liability take place with
sufficient frequency and volume to provide pricing information on
an ongoing basis.
Fair value of financial instruments traded in an active market
is measured as the product of the quoted price for the individual
asset or liability and the number of instruments held by the
entity. This is the case even if a market's normal daily trading
volume is not sufficient to absorb the quantity held and placing
orders to sell the position in a single transaction might affect
the quoted price.
A portfolio of financial derivatives or other financial assets
and liabilities that are not traded in an active market is measured
at the fair value of a group of financial assets and financial
liabilities on the basis of the price that would be received to
sell a net long position (i.e. an asset) for a particular risk
exposure or paid to transfer a net short position (i.e. a
liability) for a particular risk exposure in an orderly transaction
between market participants at the measurement date. This is
applicable for assets carried at fair value on a recurring basis if
the Group: (a) manages the group of financial assets and financial
liabilities on the basis of the Group's net exposure to a
particular market risk (or risks) or to the credit risk of a
particular counterparty in accordance with the Group's documented
risk management or investment strategy; (b) it provides information
on that basis about the group of assets and liabilities to the
Group's key management personnel; and (c) the market risks,
including duration of the Group's exposure to a particular market
risk (or risks) arising from the financial assets and financial
liabilities are substantially the same.
Valuation techniques such as discounted cash flow models or
models based on recent arm's length transactions or consideration
of financial data of the investees are used to measure fair value
of certain financial instruments for which external market pricing
information is not available. Fair value measurements are analysed
by level in the fair value hierarchy as follows: (i) level one are
measurements at quoted prices (unadjusted) in active markets for
identical assets or liabilities, (ii) level two measurements are
valuations techniques with all material inputs observable for the
asset or liability, either directly (that is, as prices) or
indirectly (that is, derived from prices), and (iii) level three
measurements are valuations not based on solely observable market
data (that is, the measurement requires significant unobservable
inputs). Transfers between levels of the fair value hierarchy are
deemed to have occurred
Transaction costs are incremental costs that are directly
attributable to the acquisition, issue or disposal of a financial
instrument. An incremental cost is one that would not have been
incurred if the transaction had not taken place. Transaction costs
include fees and commissions paid to agents (including employees
acting as selling agents), advisors, brokers and dealers, levies by
regulatory agencies and securities exchanges, and transfer taxes
and duties. Transaction costs do not include debt premiums or
discounts, financing costs or internal administrative or holding
costs.
Amortised cost ("AC") is the amount at which the financial
instrument was recognised at initial recognition less any principal
repayments, plus accrued interest, and for financial assets less
any allowance for ECL. Accrued interest includes amortisation of
transaction costs deferred at initial recognition and of any
premium or discount to the maturity amount using the effective
interest method. Accrued interest income and accrued interest
expense, including both accrued coupon and amortised discount or
premium (including fees deferred at origination, if any), are not
presented separately and are included in the carrying values of the
related items in the consolidated statement of financial
position.
The effective interest method is a method of allocating interest
income or interest expense over the relevant period, so as to
achieve a constant periodic rate of interest (effective interest
rate) on the carrying amount. The effective interest rate is the
rate that exactly discounts estimated future cash payments or
receipts (excluding future credit losses) through the expected life
of the financial instrument or a shorter period, if appropriate, to
the gross carrying amount of the financial instrument. The
effective interest rate discounts cash flows of variable interest
instruments to the next interest repricing date, except for the
premium or discount which reflects the credit spread over the
floating rate specified in the instrument, or other variables that
are not reset to market rates. Such premiums or discounts are
amortised over the whole expected life of the instrument. The
present value calculation includes all fees paid or received
between parties to the contract that are an integral part of the
effective interest rate. For assets that are purchased or
originated credit impaired ("POCI") at initial recognition, the
effective interest rate is adjusted for credit risk, i.e. it is
calculated based on the expected cash flows on initial recognition
instead of contractual payments.
Financial instruments - initial recognition . F inancial
instruments at fair value through profit or loss ("FVTPL") are
initially recorded at fair value. All other financial instruments
are initially recorded at fair value adjusted for transaction
costs. Fair value at initial recognition is best evidenced by the
transaction price. A gain or loss on initial recognition is only
recorded if there is a difference between fair value and
transaction price which can be evidenced by other observable
current market transactions in the same instrument or by a
valuation technique whose inputs include only data from observable
markets. After the initial recognition, an ECL allowance is
recognised for financial assets measured at AC and investments in
debt instruments measured at fair value through other comprehensive
income ("FVOCI"), resulting in an immediate accounting loss.
All purchases and sales of financial assets that require
delivery within the time frame established by regulation or market
convention ("regular way" purchases and sales) are recorded at
trade date, which is the date on which the Group commits to deliver
a financial asset. All other purchases are recognised when the
entity becomes a party to the contractual provisions of the
instrument.
Financial assets - classification and subsequent measurement -
measurement categories. The Group classifies financial assets in
the following measurement categories: FVTPL, FVOCI and AC. The
classification and subsequent measurement of debt financial assets
depends on: (i) the Group's business model for managing the related
assets portfolio and (ii) the cash flow characteristics of the
asset. The Group's financial assets include cash and cash
equivalents, trade and other receivables, loans to subsidiary
undertakings, all of which are classified as AC in accordance with
IFRS 9.
Financial assets - classification and subsequent measurement -
business model. The business model reflects how the Group manages
the assets in order to generate cash flows - whether the Group's
objective is: (i) solely to collect the contractual cash flows from
the assets ("hold to collect contractual cash flows",) or (ii) to
collect both the contractual cash flows and the cash flows arising
from the sale of assets ("hold to collect contractual cash flows
and sell") or, if neither of (i) and (ii) is applicable, the
financial assets are classified as part of "other" business model
and measured at FVTPL.
Business model is determined for a group of assets (on a
portfolio level) based on all relevant evidence about the
activities that the Group undertakes to achieve the objective set
out for the portfolio available at the date of the assessment.
Factors considered by the Group in determining the business model
include past experience on how the cash flows for the respective
assets were collected.
The Group's business model for financial assets is to collect
the contractual cash flows from the assets ("hold to collect
contractual cash flows").
Financial assets - classification and subsequent measurement -
cash flow characteristics. Where the business model is to hold
assets to collect contractual cash flows or to hold contractual
cash flows and sell, the Group assesses whether the cash flows
represent solely payments of principal and interest ("SPPI").
Financial assets with embedded derivatives are considered in their
entirety when determining whether their cash flows are consistent
with the SPPI feature. In making this assessment, the Group
considers whether the contractual cash flows are consistent with a
basic lending arrangement, i.e. interest includes only
consideration for credit risk, time value of money, other basic
lending risks and profit margin.
Where the contractual terms introduce exposure to risk or
volatility that is inconsistent with a basic lending arrangement,
the financial asset is classified and measured at FVTPL. The SPPI
assessment is performed on initial recognition of an asset and it
is not subsequently reassessed.
Financial assets - reclassification. Financial instruments are
reclassified only when the business model for managing the
portfolio as a whole changes. The reclassification has a
prospective effect and takes place from the beginning of the first
reporting period that follows after the change in the business
model. The Group did not change its business model during the
current and comparative period and did not make any
reclassifications.
Financial assets impairment - credit loss allowance for ECL. The
Group assesses, on a forward-looking basis, the ECL for debt
instruments measured at AC and FVOCI and for the exposures arising
for contract assets. The Group measures ECL and recognises Net
impairment losses on financial and contract assets at each
reporting date. The measurement of ECL reflects: (i) an unbiased
and probability weighted amount that is determined by evaluating a
range of possible outcomes, (ii) time value of money and (iii) all
reasonable and supportable information that is available without
undue cost and effort at the end of each reporting period about
past events, current conditions and forecasts of future
conditions.
Debt instruments measured at AC and contract assets are
presented in the consolidated statement of financial position net
of the allowance for ECL. For loan commitments and financial
guarantees, a separate provision for ECL is recognised as a
liability in the consolidated statement of financial position.
The Group applies a three stage model for impairment, based on
changes in credit quality since initial recognition. A financial
instrument that is not credit-impaired on initial recognition is
classified in Stage 1. Financial assets in Stage 1 have their ECL
measured at an amount equal to the portion of lifetime ECL that
results from default events possible within the next 12 months or
until contractual maturity, if shorter ("12 Months ECL"). If the
Group identifies a significant increase in credit risk ("SICR")
since initial recognition, the asset is transferred to Stage 2 and
its ECL is measured based on ECL on a lifetime basis, that is, up
until contractual maturity but considering expected prepayments, if
any ("Lifetime ECL"). If the Group determines that a financial
asset is credit-impaired, the asset is transferred to Stage 3 and
its ECL is measured as a Lifetime ECL. For financial assets that
are purchased or originated credit-impaired ("POCI Assets"), the
ECL is always measured as a Lifetime ECL.
Financial assets - write-off. Financial assets are written-off,
in whole or in part, when the Group exhausted all practical
recovery efforts and has concluded that there is no reasonable
expectation of recovery. The write-off represents a derecognition
event. The Group may write-off financial assets that are still
subject to enforcement activity when the Group seeks to recover
amounts that are contractually due, however, there is no reasonable
expectation of recovery.
Financial assets - derecognition. The Group derecognises
financial assets when (a) the assets are redeemed or the rights to
cash flows from the assets otherwise expire or (b) the Group has
transferred the rights to the cash flows from the financial assets
or entered into a qualifying pass-through arrangement whilst (i)
also transferring substantially all the risks and rewards of
ownership of the assets or (ii) neither transferring nor retaining
substantially all the risks and rewards of ownership but not
retaining control.
Financial assets - modification. If the modified terms are
substantially different, the rights to cash flows from the original
asset expire and the Company derecognises the original financial
asset and recognises a new asset at its fair value. The date of
renegotiation is considered to be the date of initial recognition
for subsequent impairment calculation purposes, including
determining whether a SICR has occurred. Any difference between the
carrying amount of the original asset derecognised and fair value
of the new substantially modified asset is recognised in profit or
loss, unless the substance of the difference is attributed to a
capital transaction with owners. If the modified asset is not
substantially different from the original asset and the
modification does not result in derecognition. The Group
recalculates the gross carrying amount by discounting the modified
contractual cash flows by the original effective interest rate (or
credit-adjusted effective interest rate for POCI financial assets),
and recognises a modification gain or loss in profit or loss.
Financial liabilities - measurement categories. Financial
liabilities are classified as subsequently measured at AC, except
for (i) financial liabilities at FVTPL: this classification is
applied to derivatives, financial liabilities held for trading
(e.g. short positions in securities), contingent consideration
recognised by an acquirer in a business combination and other
financial liabilities designated as such at initial recognition and
(ii) financial guarantee contracts and loan commitments. The
Group's financial liabilities include trade and other payables, all
of which are classified as AC in accordance with IFRS 9.
Financial liabilities - derecognition. Financial liabilities are
derecognised when they are extinguished (i.e. when the obligation
specified in the contract is discharged, cancelled or expires).
Trade Receivables
Trade receivables are amounts due from customers for goods sold
in the ordinary course of business. If collection is expected in
one year or less, they are classified as current assets. If not,
they are presented as non-current assets.
Trade receivables are recognised initially at fair value and
subsequently measured at amortised cost using the effective
interest method.
Prepayments
Prepayments are carried at cost less provision for impairment. A
prepayment is classified as non-current when the goods or services
relating to the prepayment are expected to be obtained after one
year, or when the prepayment relates to an asset which will itself
be classified as non-current upon initial recognition. Prepayments
to acquire assets are transferred to the carrying amount of the
asset once the Group has obtained control of the asset and it is
probable that future economic benefits associated with the asset
will flow to the Group. Other prepayments are written off to profit
or loss when the services relating to the prepayments are received.
If there is an indication that the assets, goods or services
relating to a prepayment will not be received, the carrying value
of the prepayment is written down accordingly and a corresponding
impairment loss is recognised in profit or loss for the year.
Investments in subsidiaries
Investments made by the Company in its subsidiaries are stated
at cost in the Company's financial statements and reviewed for
impairment if there are indications that the carrying value may not
be recoverable.
Loans issued to subsidiaries
Loans issued by the Company to its subsidiaries are initially
recognised in the Company's financial statements at fair value and
are subsequently carried at amortised cost using the effective
interest method, less credit loss allowance. Net change in credit
losses and foreign exchange differences on loans issued are
recognised in the Company's statement of profit or loss in the
period when incurred.
Trade Payables
Trade payables are obligations to pay for goods or services that
have been acquired in the ordinary course of business from
suppliers. Accounts payable are classified as current liabilities
if payment is due within one year or less. If not, they are
presented as non-current liabilities.
Trade payables are recognised initially at fair value and
subsequently measured at amortised cost using the effective
interest method.
Lease liabilities
Liabilities arising from a lease are initially measured on a
present value basis. Lease liabilities include the net present
value of the following lease payments:
-- fixed payments (including in-substance fixed payments), less
any lease incentives receivable,
-- variable lease payment that are based on an index or a rate,
initially measured using the index or rate as at the commencement
date,
-- the exercise price of a purchase option if the Group is reasonably
certain to exercise that option, and
-- payments of penalties for terminating the lease, if the lease
term reflects the Group exercising that option.
Extension and termination options are included in a number of
property and equipment leases across the Group. These terms are
used to maximise operational flexibility in terms of managing
contracts. Extension options (or period after termination options)
are only included in the lease term if the lease is reasonably
certain to be extended (or not terminated). Lease payments to be
made under reasonably certain extension options are also included
in the measurement of the liability.
The lease payments are discounted using the interest rate
implicit in the lease. If that rate cannot be readily determined,
which is generally the case for leases of the Group, the Group's
incremental borrowing rate is used, being the rate that the Group
would have to pay to borrow the funds necessary to obtain an asset
of similar value in a similar economic environment with similar
terms and conditions.
To determine the incremental borrowing rate, the Group:
-- where possible, uses recent third-party financing received
by the individual lessee as a starting point, adjusted to
reflect changes in financing conditions since third party
financing was received,
-- uses a build-up approach that starts with a risk-free interest
rate adjusted for credit risk, and
-- makes adjustments specific to the lease, e.g. term, country,
currency and collateral.
The Group is exposed to potential future increases in variable
lease payments based on an index or rate, which are not included in
the lease liability until they take effect. When adjustments to
lease payments based on an index or rate take effect, the lease
liability is reassessed and adjusted against the right-of-use
asset.
Lease payments are allocated between principal and finance
costs. The finance costs are charged to profit or loss over the
lease period so as to produce a constant periodic rate of interest
on the remaining balance of the liability for each period.
Payments associated with short-term leases and all leases of
low-value assets are recognised on a straight-line basis as an
expense in profit or loss. Short-term leases are leases with a
lease term of 12 months or less.
Operating lease
Where the Group is a lessor in a lease which does not transfer
substantially all the risks and rewards incidental to ownership to
the lessee (i.e. operating lease), lease payments from operating
leases are recognised as other income on a straight-line basis.
Equity Instruments
Ordinary shares are classified as equity. Equity instruments
issued by the Company and the Group are recorded at the proceeds
received, net of direct issue costs. Any excess of the fair value
of consideration received over the par value of shares issued is
recorded as share premium in equity.
Cash and Cash Equivalents
Cash and cash equivalents comprise cash on hand and deposits
held at call with banks and other short - term highly liquid
investments which are readily convertible to a known amount of cash
with no significant loss of interest. Cash and cash equivalents are
carried at amortised cost. Interest income that relates to cash and
cash equivalents on current and deposit accounts is disclosed
within operating cash flow.
Other short-term investments
Other short-term investments include current accounts and
deposits held at banks, which do not meet cash and cash equivalents
definition. Current accounts and deposits held at banks, which do
not meet cash and cash equivalents definition are measured
initially at fair value and subsequently carried at amortised cost
using the effective interest method. Interest received on other
short-term investments is disclosed within operating cash flow.
The Group classifies its financial assets as at amortised cost
only if both of the following criteria are met:
-- the asset is held within a business model whose objective
is to collect the contractual cash flows, and
-- the contractual terms give rise to cash flows that are solely
payments of principal and interest.
Interest income
Interest income is recognised as it accrues, taking into account
the effective yield on the asset. Interest income on current bank
accounts and on demand deposits or term deposits with the maturity
less than three months recognised as part of cash and cash
equivalents is recognised as other operating income. Interest
income on term deposits other than those classified as cash and
cash equivalents is recognised as finance income.
4. Changes in accounting policies
This note explains the impact of the adoption of IFRS 16 Leases
on the Group's financial statements and also discloses the new
accounting policies that have been applied from 1 January 2019.
The Group has adopted IFRS 16 retrospectively from 1 January
2019, but has not restated comparatives for the 2018 reporting
period, as permitted under the specific transitional provisions in
the standard. The reclassifications and the adjustments arising
from the new leasing rules are therefore recognised in the opening
balance sheet on 1 January 2019.
Adjustments recognised on adoption of IFRS 16
2019
$000
Operating lease commitments disclosed as at 31 December 2018 1,884
Discounted using the lessee's incremental borrowing rate at the date of initial
application (667)
(Less): short-term leases recognised on a straight-line basis as expense (85)
(Less): low-value leases recognised on a straight-line basis as expense (10)
--------------------------------------------------------------------------------- ------
Lease liability recognised as at 1 January 2019 1,122
--------------------------------------------------------------------------------- ------
Of which are:
Current lease liabilities 371
Non-current lease liabilities 751
--------------------------------------------------------------------------------- ------
On adoption of IFRS 16, the Group recognised lease liabilities
in relation to leases which had previously been classified as
'operating leases' under the principles of IAS 17 Leases. These
liabilities were measured at the present value of the remaining
lease payments, discounted using the lessee's incremental borrowing
rate as of 1 January 2019. The weighted average lessee's
incremental borrowing rate applied to the lease liabilities on 1
January 2019 was 19.8% for contracts denominated in Ukrainian
Hryvnia and 7.4% for contracts denominated in US Dollars.
Right-of-use assets were measured at the amount equal to the
lease liability, adjusted by the amount of any prepaid or accrued
lease payments relating to that lease recognised in the balance
sheet as at 31 December 2018. There were no onerous lease contracts
that would have required an adjustment to the right-of-use
assets
at the date of initial application.
The recognised right-of-use assets relate to the following types
of assets:
31 Dec 19 1 Jan 19
$000 $000
Properties 423 595
Land 299 311
Wells 218 216
940 1,122
The change in accounting policy affected the following items in
the balance sheet on 1 January 2019:
-- right-of-use assets - increase by $1,122,000
-- lease liabilities - increase by $1,122,000.
Practical expedients applied
In applying IFRS 16 for the first time, the Group has used the
following practical expedients permitted by the standard:
-- the use of a single discount rate to a portfolio of leases
with reasonably similar characteristics;
-- reliance on previous assessments on whether leases are onerous;
-- the accounting for operating leases with a remaining lease
term of less than 12 months as at 1 January 2019 as short-term
leases;
-- the exclusion of initial direct costs for the measurement
of the right-of-use asset at the date of initial application;
and
-- the use of hindsight in determining the lease term where the
contract contains options to extend or terminate the lease.
The Group has also elected not to reassess whether a contract
is, or contains a lease at the date of initial application.
Instead, for contracts entered into before the transition date, the
Group relied on its assessment made applying IAS 17 and IFRIC 4
Determining whether an Arrangement contains a Lease.
The Group's leasing activities and how these are accounted
for
The Group leases various wells, offices, equipment and land.
Rental contracts are typically made for fixed periods of 1 to 25
years but may have extension options as described in (ii) below.
Lease terms are negotiated on an individual basis and contain a
wide range of different terms and conditions. The lease agreements
do not
impose any covenants, but leased assets may not be used as security for borrowing purposes.
Until 1 January 2019, leases of property, plant and equipment
were classified as either finance or operating leases. Payments
made under operating leases (net of any incentives received from
the lessor) were charged to profit or loss on a straight-line basis
over the period of the lease.
From 1 January 2019, leases are recognised as a right-of-use
asset and a corresponding liability at the date at which the leased
asset is available for use by the Group. Each lease payment is
allocated between the liability and finance cost. The finance cost
is charged to profit or loss over the lease period so as to produce
a constant periodic rate of interest on the remaining balance of
the liability for each period. The right-of-use asset is
depreciated over the shorter of the asset's useful life and the
lease term on a straight-line basis.
Assets and liabilities arising from a lease are initially
measured on a present value basis. Lease liabilities include the
net present value of the following lease payments:
-- fixed payments (including in-substance fixed payments), less
any lease incentives receivable;
-- variable lease payment that are based on an index or a rate;
-- the exercise price of a purchase option if the lessee is reasonably
certain to exercise that option; and
-- payments of penalties for terminating the lease, if the lease
term reflects the lessee exercising that option.
The lease payments are discounted using the interest rate
implicit in the lease. If that rate cannot be determined, the
lessee's incremental borrowing rate is used, being the rate that
the lessee would have to pay to borrow the funds necessary to
obtain an asset of similar value in a similar economic environment
with similar terms and conditions.
Right-of-use assets are measured at cost comprising the
following:
-- the amount of the initial measurement of lease liability;
-- any lease payments made at or before the commencement date
less any lease incentives received;
-- restoration costs.
Payments associated with short-term leases and leases of
low-value assets are recognised on a straight-line basis as an
expense in profit or loss. Short-term leases are leases with a
lease term of 12 months or less.
(i) Variable lease payments
Estimation uncertainty arising from variable lease payments
Some property leases contain variable payment terms that are
linked to the volume of production. For wells, up to 100 per cent
of lease payments are on the basis of variable payment terms.
Variable payment terms are used for a variety of reasons, including
minimising the fixed costs base for wells under reconstruction.
Variable lease payments that depend on the volume of production are
recognised in profit or loss in the period in which the condition
that triggers those payments occurs.
(ii) Extension and termination options
Extension and termination options are included in a number of
property and equipment leases across the Group. These terms are
used to maximise operational flexibility in terms of managing
contracts.
Critical judgements in determining the lease term
In determining the lease term, management considers all facts
and circumstances that create an economic incentive to exercise an
extension option, or not exercise a termination option. Extension
options (or periods after termination options) are only included in
the lease term if the lease is reasonably certain to be extended
(or not terminated).
The assessment is reviewed if a significant event or a
significant change in circumstances occurs which affects this
assessment and that is within the control of the lessee.
(iii) Residual value guarantees
The Group does not provide residual value guarantees in relation
to equipment leases.
5. Critical Accounting Estimates and Judgments
The Group makes estimates and judgments concerning the future.
The resulting accounting estimates will, by definition, seldom
equal the related actual results. The estimates and judgments which
have a risk of causing material adjustment to the carrying amounts
of assets and liabilities within the next financial year are
discussed below.
Recoverability of Oil and Gas Development and Production Assets
in Ukraine
According to the Group's accounting policies, costs capitalised
as assets are assessed for impairment at each balance sheet date if
impairment indicators exist. In assessing whether an impairment
loss has occurred, the carrying value of the asset or
cash-generating unit ("CGU") is compared to its recoverable amount.
The recoverable amount is the greater of fair value less costs to
dispose and value in use and is determined for an individual asset,
unless the asset does not generate cash inflows that are largely
independent of those from other assets or groups of assets. If the
recoverable amount of an asset is estimated to be less than its
carrying amount, the carrying amount of the asset is reduced to its
recoverable amount and the respective impairment loss is recognised
as an expense immediately. A previously recognised impairment loss
is reversed only if there has been a change in the estimates used
to determine the asset's recoverable amount since the last
impairment loss was recognised. If that is the case, the carrying
amount of the asset is increased to its recoverable amount, but so
that the increased carrying amount does not exceed the carrying
amount that would have been determined, net of depreciation, had no
impairment loss been recognised for the asset in prior years. Such
reversals are recognised as income immediately.
The valuation method used for determination of recoverable value
in use is based on unobservable market data, which is within Level
3 of the fair value hierarchy.
MEX-GOL and SV gas and condensate fields
The impairment assessment carried out at 31 December 2019 has
not resulted in an impairment loss. Further details of this
assessment, including the sensitivity to the above assumptions, are
set out in Note 18.
VAS gas and condensate field
Following the successful outcome of the VAS-10 well and the
subsequent revision of the field development plan for the VAS field
in 2019, the Group considered it appropriate to undertake a
reassessment of the reserves and resources at the VAS field.
Accordingly, the Group engaged independent petroleum consultants
DeGolyer and MacNaughton ("D&M") to prepare an updated estimate
of remaining reserves and resources as of 31 December 2018. The
revised field development plan for this field prepared in 2019
assumes an increase in the number of new wells from one to three
wells. The final report issued by D&M in August 2019 provided
an estimate of the Group's proved plus probable ("2P") reserves of
3.1 MMboe. The report represents a significant increase in the
remaining reserves and resources in this field since the previous
estimation undertaken by Senergy (GB) Limited as at 1 January 2016
(1.8 MMboe). The increase in 2P reserves caused the revision of the
expected economic life of the field from 2024 to 2028. Further
details of this reserves update are set out in the Company's
announcement made on 21 August 2019.
The impairment assessment carried out at 31 December 2019 has
not resulted in an impairment loss. Further details of this
assessment, including the sensitivity to the above assumptions, are
set out in Note 18.
Depreciation of Oil and Gas Development and Production
Assets
Development and production assets held in property, plant and
equipment are depreciated on a unit of production basis at a rate
calculated by reference to proven and probable reserves at the end
of the period plus the production in the period, and incorporating
the estimated future cost of developing and extracting those
reserves. Future development costs are estimated using assumptions
about the number of wells required to produce those reserves, the
cost of the wells, future production facilities and operating
costs, together with assumptions on oil and gas realisations, and
are revised annually. The reserves estimates used are determined
using estimates of gas in place, recovery factors, future
hydrocarbon prices and also take into consideration the Group's
latest development plan for the associated development and
production asset. Additionally, the latest development plan and
therefore the inputs used to determine the depreciation charge,
assume that the current licences for the MEX-GOL and SV fields,
which are due to expire in July 2024, can be extended until the end
of the economic life of the fields.
In light of the revision of the field development plan for the
VAS field and the re-assessment of the 2P reserves at this field
performed in 2019 by D&M as described above, the Group has
revised the estimate of 2P reserves and future cost of developing
and extracting those reserves used for the depletion and
amortisation calculation. The effect of the change in estimates
made in the current reporting period was appropriately recognised
in profit or loss in the period of the change and amounted to a
decrease of $283,000 in the depletion charge of property, plant and
equipment (the depletion charge decreased by $1,504,600 due to the
increase in 2P reserves and increased by $1,787,000 due to the
increase in future capital expenditure) and a decrease of $338,000
in amortisation of mineral reserves for the year 2019.
Provision for Decommissioning
The Group has decommissioning obligations in respect of its
Ukrainian assets. The full extent to which the provision is
required depends on the legal requirements at the time of
decommissioning, the costs and timing of any decommissioning works
and the discount rate applied to such costs.
A detailed assessment of gross decommissioning cost was
undertaken on a well-by-well basis using local data on day rates
and equipment costs. The discount rate applied on the
decommissioning cost provision at 31 December 2019 was 3.68% (31
December 2018: 8.14%). The discount rate is calculated in real
terms based on the yield to maturity of Ukrainian Government bonds
denominated in the currency in which the liability is expected to
be settled and with the settlement date that approximates the
timing of settlement of decommissioning obligations.
The change in estimate applied to calculate the provision as at
31 December 2019 resulted from the revision of the estimated costs
of decommissioning (increase of $711,000 in provision), the
decrease in the discount rate applied (increase of $2,430,000 in
provision) and the extension of the economic life of the VAS field
as a result of the revision of the field development plan in 2019
(decrease of $289,000 in provision). The decrease in discount rate
at 31 December 2019 resulted from the decrease in Ukrainian
Eurobonds yield and the respective decrease of country risk
premium. The costs are expected to be incurred by 2038 on the
MEX-GOL field, by 2042 on the SV field, and by 2028 on the VAS
field (31 December 2018: by 2038 on the MEX-GOL field, by 2042 on
the SV field and 2024 on the VAS field respectively), which is the
end of the estimated economic life of the respective fields. If the
costs on the MEX-GOL and SV fields were to be incurred at the
current expiry of the production licences in 2024, the provision
for decommissioning at 31 December 2019 would be $11,564,000 (31
December 2018: $6,268,000).
Net Carrying Amount of Inter-Company Loans Receivable by the
Company from a Subsidiary
The Company has certain inter-company loans receivable from a
subsidiary, which are eliminated on consolidation. For the purpose
of the Company's financial statements, these receivable balances
are carried at amortised cost using the effective interest method,
less credit loss allowance. Measurement of lifetime expected credit
losses on inter-company loans is a significant judgment that
involves models and data inputs including forward-looking
information, current conditions and forecasts of future conditions
impacting the estimated future cash flows that are expected to be
recovered, time value of money, etc. In previous years, significant
impairment charges were recorded against the carrying amount of the
loans issued to subsidiaries as the present value of estimated
future cash flows discounted at the original effective interest
rate was less than carrying amount of the loans, and the resulting
impairment losses were recognised in profit or loss in the
Company's financial statements.
For the purpose of assessment of the credit loss allowance as at
31 December 2019, the Company considered all reasonable and
supportable forward looking information available as of that date
without undue cost and effort, which includes a range of factors,
such as estimated future net cash flows to be generated by the
subsidiaries operating in Ukraine, upcoming planned changes in the
Group's structure, cash flow management and planned debt
structuring between Group entities. All these factors have
significant impact on the amounts subject to repayment on the
loans. The estimated future discounted cash flows generated by the
subsidiaries operating in Ukraine are considered as a primary
source of repayment on the loans. For the purpose of this
assessment, these cash flows were taken for a period of five years,
as management believes there is no reasonably available information
to build reliable expectations and demonstrate the ability to
settle the loans in a longer perspective, especially in light of
the anticipated changes in the Group's legal structure. As of 31
December 2019, the present value of future net cash flows to be
generated by the subsidiaries operating in Ukraine during 2020 -
2024, adjusted for the subsidiaries' working capital as at 31
December 2019 and estimated amounts reserved by the Group for
investment projects in the 5-year horizon was calculated. The
decrease in the net present value of future net cash flows as at 31
December 2019 in comparison with 31 December 2018 was affected by
the significant decrease in gas prices forecast and the revision of
the field development plan for the VAS field in 2019 that included
drilling of new wells in the 2021-2023 years. The resulting amount,
net of the carrying value of the Company's investments in
subsidiaries, was compared to the carrying value of the loans
issued to subsidiaries as at 31 December 2019. As such, the Company
has recorded $15,450,000 of loss, being the net change in credit
loss allowance for loans issued to subsidiaries in the Company's
statement of profit or loss for the year ended 31 December
2019.
As with any economic forecast, the projections and likelihoods
of occurrence are subject to a high degree of inherent uncertainty,
and therefore the actual outcomes may be significantly different to
those projected. The Company considers these forecasts to represent
its best estimate of the possible outcomes.
Exchange Differences on Intra-group Balances with Foreign
Operations
As at 31 December 2018, a Group subsidiary, Regal Petroleum
Corporation (Ukraine) Limited, planned to settle $9,000,000 of
intra-group liability, however $20,616,000 was settled in the
period. A further amount of $4,600,000 is planned to be settled by
the end of 2020. As such, a foreign exchange difference of $3, 487
,000 accumulated on the intra-group balance of $170,223,000 since
the date of de-designation of this balance as part of the Company's
net investment in the foreign operation up to 31 December 2019 was
recognised in profit or loss in these consolidated financial
statements. No reclassification of the foreign exchange difference
accumulated in equity prior to de-designation was made as there has
been no change in the Company's proportionate ownership interest in
the foreign operation and therefore no disposal or partial disposal
of the foreign operation. There were no changes in management's
plans or intentions regarding the payment of intra-group balances
not settled as at 31 December 2019, other than the above-mentioned
amount of $4,600,000, and as such, a foreign exchange difference
related to the balance designated as net investment in a foreign
operation was recognised in other comprehensive income in the
Company Statement of Comprehensive Income for the year ended 31
December 2019.
Recognition of Deferred Tax Asset
The recognition of deferred tax assets is based upon whether it
is more likely than not that sufficient and suitable taxable
profits will be available in the future against which the reversal
of temporary differences can be deducted. This requires judgement
for forecasting future profits. Further details of the deferred tax
assets recognised can be found in Note 27.
6. Segmental Information
In line with the Group's internal reporting framework and
management structure, the key strategic and operating decisions are
made by the Board of Directors, who review internal monthly
management reports, budget and forecast information as part of this
process. Accordingly, the Board of Directors is deemed to be the
Chief Operating Decision Maker within the Group.
The Group's only class of business activity is oil and gas
exploration, development and production. The Group's operations are
located in Ukraine, with its head office in the United Kingdom.
These geographical regions are the basis on which the Group reports
its segment information. The segment results as presented represent
operating profit before depreciation, amortisation and impairment
of non-current assets.
Ukraine United Kingdom Total
2019 2019 2019
$000 $000 $000
Revenue
Gas sales 38,345 - 38,345
Condensate sales 13,724 - 13,724
Liquefied Petroleum Gas sales 3,862 - 3,862
------------------------------ -------- -------------- --------
Total revenue 55,931 - 55,931
Segment result 33,218 (1,935) 31,283
Depreciation and amortisation
of non-current assets (10,190) - (10,190)
Operating profit 21,093
Segment assets 114,722 42,408 157,130
Capital additions* 17,672 - 17,672
*Comprises additions to property, plant and equipment (Note
18)
There are no inter-segment sales within the Group and all
products are sold in the geographical region in which they are
produced. The Group is not significantly impacted by seasonality.
Revenue is recognised at a point in time.
United
Ukraine Kingdom Total
2018 2018 2018
$000 $000 $000
Revenue
Gas sales 49,668 - 49,668
Condensate sales 12,772 - 12,772
Liquefied Petroleum Gas sales 3,658 - 3,658
------------------------------------ --------- -------- ---------
Total revenue 66,098 - 66,098
Segment result 41,311 (1,509) 39,802
Depreciation and amortisation ( 7 , 901
of non-current assets (7,9 01 ) - )
Reversal of impairment of property,
plant and equipment 34,469 - 34,469
Operating profit 66,370
Segment assets 95,782 27,557 123,339
Capital additions* 9 ,552 - 9, 552
During 2019, the Group was selling all of its gas production to
its related party, LLC Smart Energy ("Smart Energy"). Smart Energy
has oil and gas operations in Ukraine and is part of the PJSC
Smart-Holding Group, which is ultimately controlled by Mr Vadym
Novynskyi, who through an indirect 82.65% majority shareholding,
ultimately controls the Group. This arrangement came about in 2017
as a consequence of the Ukrainian Government introducing a number
of new provisions into the Ukrainian Tax Code over the last two
years, including transfer pricing regulations for companies
operating in Ukraine. The introduction of the new regulations has
meant that there is an increased regulatory burden on affected
companies in Ukraine who must prepare and submit reporting
information to the Ukrainian Tax Authorities. Due to the corporate
structure of the Group, a substantial proportion of its gas
production is produced by a non-Ukrainian subsidiary of the Group,
which operates in Ukraine as a branch, or representative office as
it is classified in Ukraine. Under the current tax regulations,
this places additional regulatory obligations on each of the
Group's potential customers who may be less inclined to purchase
the Group's gas and/or may seek discounts on sales prices. As a
result of discussions between the Company and Smart Energy, Smart
Energy agreed to purchase all of the Group's gas production and to
assume responsibility for the regulatory obligations under the
Ukrainian tax regulations. Furthermore, Smart Energy has agreed to
combine the Group's gas production with its own gas production, and
to sell such gas as combined volumes, which is intended to result
in higher sales prices due to the larger sales volumes. At the
commencement of this sales arrangement, in order to cover Smart
Energy's sales, administration and regulatory compliance costs, the
Group sold its gas to Smart Energy at a discount of 0.5% to the gas
sales prices achieved by Smart Energy, who sold the combined
volumes in line with market prices. Due to changes in the
regulatory regime in Ukraine, which has increased the burden of
administration and regulatory compliance obligations involved in
the sale of gas, and in order to ensure that the Group is compliant
with current transfer pricing regulations in Ukraine, the Group and
Smart Energy agreed in 2019 to increase the discount on the price
at which the Group sells its gas to Smart Energy from 0.5% to 2%.
The terms of sale for the Group's gas to Smart Energy are (i)
payment for one third of the estimated monthly volume of gas by the
20(th) of the month of delivery, and (ii) payment of the remaining
balance by the 10th of the month following the month of
delivery.
*Comprises additions to property, plant and equipment (Note
18)
7. Cost of Sales
2019 2018
$000 $000
Production taxes 11,636 14,902
Depreciation of property, plant and equipment 9,102 6,8 63
Rent expenses 5,317 4,474
Staff costs (Note 10) 2,450 2,084
Cost of inventories recognised as an expense 1,158 1,414
Transmission tariff for Ukrainian gas system 673 -
Amortisation of mineral reserves 510 804
Other expenses 1,569 1,334
---------------------------------------------- ------ ------
32,415 31,875
New legislation relating to the oil and gas sector in Ukraine
has been introduced over the last year, and in this regard, with
effect from 1 January 2019, the subsoil tax rates applicable to
condensate production were reduced from 45% to 31% for condensate
produced from deposits above 5,000 metres and from 21% to 16% for
condensate produced from deposits below 5,000 metres.
From 1 January 2019, a transmission tariff for use of the
Ukrainian gas system of UAH91.87 per 1000 m(3) of gas was
introduced.
Due to implementation of IFRS 16 from 1 January 2019 the Group
has changed its policy for accounting for rent expenses. Instead of
rent expenses the Group recognises depreciation of the right-of-use
assets and interest expense on the liability over the lease term.
However some property leases contain variable payment terms that
are linked to the volume of production. Variable lease payments
that depend on the volume of production are recognised in profit or
loss in the period in which the condition that triggers those
payments occurs. Also payments associated with short-term leases
and leases of low-value assets are recognised on a straight-line
basis as an expense in profit or loss.
8. Administrative Expenses
201 9 201 8
$000 $000
Staff costs (Note 10) 4,282 3,620
Consultancy fees 869 509
Depreciation of other fixed assets 449 180
Auditors' remuneration 327 403
Rent expenses 138 323
Amortisation of other intangible assets 129 54
Other expenses 1,202 6 20
---------------------------------------------------- ------ ------
7,396 5,709
201 9 201 8
$000 $000
Audit of the Company and subsidiaries 119 166
Audit of subsidiaries in Ukraine 108 95
Audit related assurances services - interim review 28 70
---------------------------------------------------- ------ ------
Total assurance services 255 331
Tax compliance services 24 33
Legal services 12 25
Tax advisory services 36 14
Total non-audit services 72 72
---------------------------------------------------- ------ ------
Total audit and other services 327 403
All amounts shown as Auditors' remuneration in 2019 and 2018
were payable to the Group Auditors, PricewaterhouseCoopers LLP and
other member firms of PricewaterhouseCoopers LLP.
9. Remuneration of Directors
201 9 201 8
$000 $000
Directors' emoluments 977 810
---------------------- ----- -----
The emoluments of the individual Directors were as follows:
Total Total
Emoluments emoluments
2019 2018
$000 $000
Executive Directors:
Sergii Glazunov 448 437
Bruce Burrows 206 -
Non-executive Directors:
Chris Hopkinson 128 133
Alexey Pertin 57 60
Yuliia Kirianova 57 60
Dmitry Sazonenko 57 15
Bruce Burrows 24 60
Philip Frank - 45
977 810
Bruce Burrows was appointed as Finance Director in June 2019,
and is paid GBP276,000 per annum. Prior to his appointment as
Finance Director, Mr Burrows was Non-Executive Director and was
paid GBP45,000 per annum for the period from January 2019 to May
2019.
The emoluments include base salary, bonuses and fees. According
to the Register of Directors' Interests, no rights to subscribe for
shares in or debentures of the Group companies were granted to any
of the Directors or their immediate families during the financial
year, and there were no outstanding options to Directors.
10. Staff Numbers and Costs
Number of employees
2019 2018
Group
Management / operational 144 146
Administrative support 69 66
------------------------- ---------- ---------
213 212
The average monthly number of employees on a full time
equivalent basis during the year (including Executive Directors)
was as follows:
The aggregate staff costs of these employees were as
follows:
2019 2018
$000 $000
Wages and salaries 5,874 4,969
Pension costs 772 661
Social security costs 86 74
6,732 5,704
11. Other operating gains, (net)
2019 2018
$000 $000
Interest income on cash and cash equivalents 4,751 3,024
Contractor penalties applied 15 225
Gain on sales of current assets - 26
Other operating income, net 207 112
4 ,973 3,387
12. Finance Income
During 2019, the Group recorded interest income of $nil (2018:
$153,000) from placement of cash on long-term deposit accounts and
recognised foreign exchange gains less losses of $ 3,487 ,000
(2018: $488,000).
13. Finance Costs
During 2019, the Group recorded an unwinding of discount on
lease liabilities of $177,000 (2018: nil) and unwinding of a
discount on provision for decommissioning of $273,000 (2018:
$140,000) (Note 26).
14. Other losses, (net)
2019 2018
$000 $000
Foreign exchange losses 1,508 84
Unconfirmed tax credit on VAT 473 -
Charitable donations 107 96
Other income/(losses), net 306 (40)
2,394 140
15. Income tax expense
a) Income tax expense and (benefit):
2019 2018
$000 $000
Current tax
Overseas - current year 4,768 6 ,478
Deferred tax ( Note 27)
UK - current year 3,211 5,519
UK - prior year 1,996 821
Overseas - current year (406) (333)
Income tax expense 9,569 12,485
b) Factors affecting tax charge for the year:
The tax assessed for the year is different from the blended rate
of corporation tax in the UK of 19.00%. The expense for the year
can be reconciled to the profit as per the Income Statement as
follows:
2019 2018
$000 $000
Profit before taxation 21,768 66, 7 91
--------------------------------------------------- ------ --------
Tax charge at UK tax rate of 19.00% (2018: 19.00%) 4,136 12,6 90
Tax effects of:
Lower foreign corporate tax rates in Ukraine
(18%) (242) (5 8 )
Disallowed expenses and non-taxable income 3,598 543
Changes in tax losses previously not recognised
as deferred tax asset 81 (1,511)
Adjustments in respect of prior periods 1,996 821
--------------------------------------------------- ------ --------
Total tax expense for the year 9,569 12,485
The tax effect of d isallowed expenses and non-taxable income
are mainly represented by foreign exchange differences of Regal
Petroleum Corporation (Ukraine) Limited and the difference in
capital allowances allowed under Ukrainian and UK taxation.
The tax effect losses not recognised as deferred tax assets are
mainly represented by accumulated losses of Regal Petroleum
Corporation (Ukraine) Limited.
16. Profit for the Year
The Company has taken advantage of the exemption allowed under
section 408 of the Companies Act 2006 and has not presented its own
Income Statement in these financial statements. The Group profit
for the year includes Parent Company loss after tax of $17,507,000
for the year ended 31 December 2019 (2018: profit $12,057,000).
17. Earnings per Share
The calculation of basic profit per ordinary share has been
based on the profit for the year and 320,637,836 (2018:
320,637,836) ordinary shares, being the weighted average number of
shares in issue for the year. There are no dilutive
instruments.
18. Property, Plant and Equipment
201 9 201 8
Oil and
Gas Oil and
Development Oil and Gas Oil and
and Gas Development Gas
Production Exploration Other and Production Exploration Other
assets and Evaluation fixed assets and Evaluation fixed
Ukraine Assets assets Total Ukraine Assets assets Total
Group $000 $000 $000 $000 $000 $000 $000 $000
Cost
At beginning of 104, 107,
year 809 1,259 1,293 361 101,927 - 1,104 103,031
Additions 16,132 962 578 17,672 7,967 1,259 326 9,5 52
Change in
decommissioning
provision 3,207 - - 3,207 ( 6 6) - - ( 6 6)
Disposals (130) - (17) (147) (23) - (125) (148)
Write-off of
assets - - - - (6,328) - - (6,328)
Exchange 1,3 3
differences 19,109 350 249 19,708 2 - (12) 1, 320
------------------ ------------- -------------- ------- ------- -------------- -------------- ------- --------
At end of year 143,127 2,571 2,103 147,801 104, 809 1,259 1,293 107, 361
------------------ ------------- -------------- ------- ------- -------------- -------------- ------- --------
Accumulated depreciation and
impairment
At beginning of 56, 5 57, 8 7 ,
year 67 - 60 2 1 69 591 - 47 8 88,069
Charge for year 9,983 - 237 10,220 6, 818 - 169 6,9 87
Reversal of
impairment - - - - (36,117) - - (36,117)
Impairment
charged
for individual
assets - - - - 1,648 - - 1,648
Disposals (85) - (15) (100) (7) - (42) (49)
Write-off of
assets - - - - (6,328) - - (6,328)
Exchange ( 3
differences 10,337 - 123 10,460 2 , 962 - ) 2 , 959
------------------ ------------- -------------- ------- ------- -------------- -------------- ------- --------
56, 5 57, 1
At end of year 76,802 - 947 77,749 67 - 60 2 69
------------------ ------------- -------------- ------- ------- -------------- -------------- ------- --------
Net book value
at
beginning of
year 48,242 1,259 691 50,192 14,336 - 626 14,962
------------------ ------------- -------------- ------- ------- -------------- -------------- ------- --------
Net book value
at
end of year 66,325 2,571 1,156 70,052 48,242 1,259 691 50,192
------------------ ------------- -------------- ------- ------- -------------- -------------- ------- --------
During the 2019 year, the Group completed the acquisition of new
3D seismic over the VAS field which will assist in the evaluation
of the VAS licence, and particularly the VED area of the licence.
Since the valuation procedures have not yet been completed for the
VED area, the costs of the seismic over this area were capitalised
within property, plant and equipment as exploration and evaluation
assets.
In accordance with the Group's accounting policies, oil and gas
development and production assets are tested for impairment at each
balance sheet date. The Group determines the recoverable amount of
its oil and gas development and production assets based on a Fair
Value Less Costs of Disposal ("FVLCD") approach using a discounted
cash flow methodology, where the cash flows are derived based on
estimates that a typical market participant would use in valuing
such assets.
The impairment assessment carried out at 31 December 2019 has
not resulted in an impairment loss.
The key assumptions on which the Group has based its
determination of FVLCD for its oil and gas development and
production assets and to which these CGU's recoverable amounts are
most sensitive are described below:
(i) Commodity prices - the model assumes gas prices of $170/Mm3
(UAH4,030/Mm3) in 2020 increasing to $265/Mm3 (UAH6,290/Mm3)
during 2021 - 2042 for the MEX-GOL and SV gas and condensate
fields and to $252/Mm3 (UAH5,970/Mm3) during 2021 - 2028
for the VAS gas and condensate field. The prices were estimated
based on the price of recent Group transactions, Central
European hub futures and the forecast of natural gas price
dynamics for Europe published by the World Bank.
(ii) Discount rate - reflects the current market assessment of
the time value of money and risks specific to the assets.
The discount rate has been determined as the post-tax weighted
average cost of capital based on observable inputs and inputs
from third party financial analysts. For 2020 and onwards,
the discount rate applied is 11.3% (15.1% during previous
measurement of the recoverable amount as at 31 December 2018).
The discount rate and future cash flows are determined in
real terms, i.e. they do not take into account the impact
of the estimated commodity price index during the period
of projection.
(iii) Production levels and Reserves, MEX-GOL and SV fields - production
levels at the MEX-GOL and SV fields are derived from the
estimate of remaining proven plus probable reserves of 50.0
MMboe assessed in the report prepared by D&M as at 31 December
2017. This report includes estimated production volumes,
including from new wells, over the remaining economic life
of the MEX-GOL and SV fields. The estimated production is
based on the Group's revised field development plan, which
includes the drilling of 24 new wells. Estimating oil and
gas reserves is a complex process requiring the knowledge
and experience of reservoir engineers. The quality of the
estimate of proved plus probable reserves depends on the
availability, completeness, and accuracy of data needed to
develop the estimate, including production history available,
and on the experience and judgement of the reservoir engineer.
Estimates of proved plus probable reserves inevitably change
over time as additional data become available and are taken
into account. The magnitude of changes in these estimates
can be substantial.
(iv) Production levels and Reserves, VAS field - production levels
at the VAS field are derived from the estimate of remaining
proven plus probable reserves of 3.1 MMboe assessed in the
report prepared by D&M as at 31 December 2018. The estimated
production is based on the Group's revised field development
plan, which includes the drilling of three new wells. The
quality of the estimate of proved plus probable reserves
depends on the availability, completeness, and accuracy of
data needed to develop the estimate, including production
history available, and on the experience and judgement of
the reservoir engineer. Estimates of proved plus probable
reserves inevitably change over time as additional data become
available and are taken into account. The magnitude of changes
in these estimates can be substantial.
(v) Production taxes - for existing wells, the Group assumed
production tax rates of 29% for gas and 45% for condensate
extracted from deposits up to depths of 5,000 metres and
14% for gas and 21% for condensate extracted from deposits
deeper than 5,000 metres. From 1 January 2019, production
tax rates for condensate produced from all wells was reduced
from 45% to 31% for condensate produced from deposits above
5,000 metres and from 21% to 16% for condensate produced
from deposits below 5,000 metres. For new wells drilled after
1 January 2018, production tax rates were reduced to 12%
for gas produced from deposits at depths above 5,000 metres
and to 6% for gas produced from deposits below 5,000 metres,
effective for the period 2018 - 2022.
(vi) Capital expenditures, MEX-GOL and SV gas and condensate fields
- management assumed that most capital expenditures are to
be incurred during 2020 - 2026. A capital expenditure allowance
of $625,000 per year is assumed for maintenance of the development
and producing assets of the MEX-GOL and SV gas and condensate
fields.
(vii) Capital expenditures, VAS gas and condensate fields - management
assumed that most capital expenditures are to be incurred
during 2020-2023. A capital expenditure allowance of $290,000
per year is assumed for maintenance of the development and
producing assets of the VAS gas and condensate field.
(viii) Life of field, MEX-GOL and SV fields - the current licences,
which are due to expire in 2024, can be extended under applicable
legislation in Ukraine until the end of the economic life
of the field, which is assessed to be 2038 for the MEX-GOL
field and 2042 for the SV field, based on the assessment
contained in the D&M reserves report. No application for
such an extension has been made at the date of this report,
but the Group considers the assumption to be reasonable based
on its intention to seek such extensions in due course and
that the Group is legally entitled to request such extensions.
However, if the extensions were not granted, it would result
in a further reduction of $239,050,000 in the recoverable
amount.
(viii) Life of field, VAS field - according to the D&M reserves
report, the economic life of the VAS field is limited to
2028. However, after additional drilling on the VED area
of the licence, management plans to undertake a further reserves
assessment.
The Group's discounted cash flow model for the VAS field in
Ukrainian Hryvnia, flexed for sensitivities, produced the following
results:
Recoverable Net book Headroom
amount value* / (Shortfall)
$000 $000 $000
------------------------------------------ ------------ --------- ---------------
13, 0
31 December 2019 13,800 00 8 00
Sensitivities:
13, 0 ( 2 , 4
1. 10% reduction in gas price 10,600 00 00)
13, 0
2. 10% increase in gas price 16,900 00 3, 9 00
13, 0
3. Breakeven gas price $ 169 /Mm(3) 13,590 00 590
4. Breakeven flow rates 21 Mm (3) 13, 0
/day for all wells 13,500 00 500
5. Breakeven discount rate 1 1,5 13, 0
% 13,640 00 6 40
*Net book value of the VAS asset is derived from property, plant
and equipment, mineral reserve rights and other intangible assets
(Note 19).
The Group's discounted cash flow model for the MEX-GOL and SV
fields in Ukrainian Hryvnia is not sensitive.
19. Intangible Assets
2019 2018
Mineral Mineral Other
reserve Other intangible reserve intangible
rights assets Total rights assets Total
Group $000 $000 $000 $000 $000 $000
Cost
At beginning of year 6,709 330 7,039 6,618 257 6,875
Additions - 137 137 - 107 107
Disposals - - - - (36) (36)
Exchange differences 1,134 105 1,239 91 2 93
----------------------- -------- ---------------- ----- -------- ----------- ------
At end of year 7,843 572 8,415 6,709 330 7,039
----------------------- -------- ---------------- ----- -------- ----------- ------
Accumulated amortisation and impairment
At beginning of year 1,965 194 2,159 1,161 124 1,285
Charge for year 509 130 639 804 105 909
Disposals - - - - (35) (35)
Exchange differences 377 43 420 - - -
----------------------- -------- ---------------- ----- -------- ----------- ------
At end of year 2,851 367 3,218 1,965 194 2,159
----------------------- -------- ---------------- ----- -------- ----------- ------
Net book value at
beginning of year 4,744 136 4,880 5,457 133 5,590
----------------------- -------- ---------------- ----- -------- ----------- ------
Net book value at
end of year 4,992 205 5,197 4,744 136 4,880
----------------------- -------- ---------------- ----- -------- ----------- ------
Intangible assets consist mainly of the hydrocarbon production
licence (Mineral reserve rights) relating to the VAS field which is
owned by LLC Prom-Enerho Produkt. The Group amortises this
intangible asset using the straight-line method over the term of
the economic life of the VAS field until 2028. The economic life of
the VAS field was extended as a result of the new assessment of 2P
reserves, as described in Note 5.
In accordance with the Group's accounting policies, intangible
assets are tested for impairment at each balance sheet date as part
of the impairment testing of the Group's oil and gas development
and production assets. Pursuant to the results of the impairment
tests performed, there is no impairment of the Group's intangible
assets as at 31 December 2019 (Note 18).
20. Leases
This note provides information for leases where the Group is a
lessee.
Amount recognised in the balance sheet:
31 Dec 19 1 Jan 19*
$000 $000
Right-of-use assets
Properties 423 595
Land 299 311
Wells 218 216
-------------------- --------- ---------
940 1,122
31 Dec 19 1 Jan 19*
$000 $000
Lease liabilities
Current 454 371
Non-current 515 751
------------------ --------- ---------
969 1,122
* For adjustments recognised on adoption of IFRS 16 on 1 January
2019, please refer to Note 4.
Additions to the right-of-use assets during the 2019 financial
year were $170,000 .
Amounts recognised in the statement of profit or loss:
2019
$000
Depreciation charge
Properties (297)
Land (16)
Wells (39)
--------------------------------------------------------- -------
(352)
Interest expense (included in finance cost) (177)
Expense relating to short-term leases (included in cost
of sales and administrative expenses) (123)
Expense relating to leases of low-value assets that -
are not shown above as short-term leases (included in
cost of sales and administrative expenses)
Expense relating to variable lease payments not included
in lease liabilities (included in cost of sales and
administrative expenses) (5,283)
Expense relating to lease payments for land under wells
not included in lease liabilities (included in cost
of sales) (49)
The total cash outflow for leases in 2019 was $7,934,000.
21. Investments and Loans to Subsidiary Undertakings
Shares in Loans to
subsidiary subsidiary
undertakings undertakings Total
$000 $000 $000
Company
At 1 January 2018 17,279 38,225 55,504
Additions including accrued interest - 6,301 6,301
Repayment of interests and loans - (4,200) (4,200)
Reversal of impairment of loans
to subsidiary - 10,923 10,923
Exchange differences - (3,697) (3,697)
------------------------------------- ------------- ------------- --------
At 31 December 2018 17,279 47,552 64,831
------------------------------------- ------------- ------------- --------
At 1 January 2019 17,279 47,552 64,831
Additions including accrued interest - 3,162 3,162
Repayment of interests and loans - (20,616) (20,616)
Impairment of loans to subsidiary - (15,450) (15,450)
Exchange differences - (467) (467)
------------------------------------- ------------- ------------- --------
At 31 December 2019 17,279 14,181 31,460
------------------------------------- ------------- ------------- --------
The Company has recorded a loss of $15,450,000, being the net
change in credit loss allowance for loans issued to subsidiaries in
the Company's statement of profit or loss for the year ended 31
December 2019 (Note 5).
The table presented below discloses the changes in the gross
carrying amount and credit loss allowance between the beginning and
the end of the reporting period for loans to subsidiary
undertakings carried at amortised cost and classified within a
three stage model for impairment assessment as at 31 December
2019:
Credit loss allowance Gross carrying amount
Stage Stage Stage Total Stage Stage Stage Total
1 2 3 1 2 3
---------- ---------
(12-months (lifetime (lifetime (12-months (lifetime (lifetime
ECL) ECL ECL for ECL) ECL for ECL for
for credit SICR) credit
SICR) impaired) impaired)
----------------- ----------- ----------- ---------- ---------- ----------- ---------- ---------- ---------
$000 $000 $000 $000 $000 $000 $000 $000
(1 93
At 1 January , 386 2 40 240
2019 - - ) (193,386) - - , 938 , 938
----------------- ----------- ----------- ---------- ---------- ----------- ---------- ---------- ---------
Movements with
impact on credit
loss allowance
charge for the
period:
Transfers:
- to - - - - - - - -
credit-impaired
(from Stage 1
and Stage 2 to
Stage 3)
(
Modification of ( 42,733 42,733
loans - - 42,733 42,733 - - ) )
Additions
including
accrued
interest - - (3,572) (3,572) - - 6,734 6,734
Payment of
interest - - - - - - (7,221) (7,221)
Repayment of
loans - - - - - (13,395) (13,395)
Exchange 2,60 2,60
difference - - 3 3 - - (3,070) (3,070)
Changes to ECL
measurement
model
assumptions - - (15,450) (15,450) - - - -
----------------- ----------- ----------- ---------- ---------- ----------- ---------- ---------- ---------
Total movements
with impact on
credit loss
allowance
charge for the
period - - 26,314 26,314 - - (59,685) (59,685)
----------------- ----------- ----------- ---------- ---------- ----------- ---------- ---------- ---------
At 31 December
2019 - - (167,072) (167,072) - - 181,253 181,253
----------------- ----------- ----------- ---------- ---------- ----------- ---------- ---------- ---------
ECL - Expected credit losses
SICR - Significant increase in credit risk
On 22 July 2019, the loans to a subsidiary were assigned to the
Company on different terms which is considered to be a modification
of the financial assets. The gross carrying amount of loans was
recalculated as the present value of the modified contractual cash
flows that are discounted at the financial asset's original
effective interest rate. As a result of modification the gross
carrying amount of the loan and credit loss allowance decreased by
$42,733,000.
The table presented below discloses the changes in the gross
carrying amount and credit loss allowance between the beginning and
the end of the reporting period for loans to subsidiary
undertakings carried at amortised cost and classified within a
three stage model for impairment assessment as at 31 December
2018:
Credit loss allowance Gross carrying amount
Stage Stage Stage Total Stage Stage Stage Total
1 2 3 1 2 3
--------------- --------
(12-months (lifetime (lifetime (12-months (lifetime (lifetime
ECL) ECL ECL for ECL) ECL for ECL for
for credit SICR) credit
SICR) impaired) impaired)
----------------- ------------------ ------------- -------------------- --------------- ---------------- ---------- ---------- --------
$000 $000 $000 $000 $000 $000 $000 $000
At 1 January
2018 - - (191,678) (191,678) - - 229,903 229,903
----------------- ------------------ ------------- -------------------- --------------- ---------------- ---------- ---------- --------
Movements with
impact on credit
loss allowance
charge for the
period:
Transfers:
- to - - - - - - - -
credit-impaired
(from Stage 1
and Stage 2 to
Stage 3)
Other movement* - - (12,578) (12,578) - - 12,578 12,578
Additions
including
accrued
interest - - (2,883) (2,883) - - 9,184 9,184
Payment of
interest - - - - - - (1,400) (1,400)
Repayment of
loans (2,800) (2,800)
Exchange
difference - - 2,830 2,830 - - (6,527) (6,527)
Changes to ECL
measurement
model
assumptions - - 10,923 10,923 - - - -
----------------- ------------------ ------------- -------------------- --------------- ---------------- ---------- ---------- --------
Total movements
with impact on
credit loss
allowance
charge for the
period - (1,708) (1,708) - - 11,035 11,035
----------------- ------------------ ------------- -------------------- --------------- ---------------- ---------- ---------- --------
At 31 December
2018 - - (193,386) (193,386) - - 240,938 240,938
----------------- ------------------ ------------- -------------------- --------------- ---------------- ---------- ---------- --------
ECL - Expected credit losses
SICR - Significant increase in credit risk
*Gross up movement carrying amount of loans and credit loss
allowance
Subsidiary undertakings
At 31 December 2019, the Company's subsidiary undertakings, all
of which are included in the consolidated financial statements,
were:
Registered address Country of Country of operation Principal activity % of shares held
incorporation
Regal Petroleum 26 New Street, St
Corporation Helier, Jersey, Oil & Natural Gas
Limited JE2 3RA Jersey Ukraine Extraction 100%
16 Old Queen
Regal Group Street, London,
Services Limited SW1H 9HP United Kingdom United Kingdom Service Company 100%
26 New Street, St
Regal Petroleum Helier, Jersey,
(Jersey) Limited JE2 3RA Jersey United Kingdom Holding Company 100%
162 Shevchenko
Str., Yakhnyky
Village,
Regal Petroleum Lokhvytsya
Corporation District, Poltava
(Ukraine) Limited Region, 37212 Ukraine Ukraine Service Company 100%
LLC Prom-Enerho 3 Klemanska Str., Oil & Natural Gas
Produkt Kiev, 02081 Ukraine Ukraine Extraction 100%
The Parent Company, Regal Petroleum plc, holds direct interests
in 100% of the share capital of Regal Petroleum (Jersey) Limited
and Regal Group Services Limited, with all other companies owned
indirectly by the Parent Company. Regal Petroleum Corporation
Limited is controlled through its 100% ownership by Regal Petroleum
(Jersey) Limited. Regal Petroleum Corporation (Ukraine) Limited is
controlled through its 100% ownership by Regal Petroleum (Jersey)
Limited and Regal Group Services Limited, and LLC Prom-Enerho Produ
kt is controlled through its 100% ownership by Regal Petroleum
Corporation (Ukraine) Limited.
Regal Group Services Limited, company number 5252958, has taken
advantage of the subsidiary audit exemption allowed under section
479A of the Companies Act 2006 for the year ended 31 December
2019.
22. Inventories
Group
2019 2018
$000 $000
Current
Materials and spare parts 1,791 1,4 37
Finished goods 3,022 1 68
-------------------------- ------- --------
4,813 1,6 05
Inventories consist of materials, spare parts and finished
goods. Materials and spare parts are represented by spare parts
that were not assigned to any new wells as at 31 December 2019,
production raw materials and fuel at the storage facility. Finished
goods as at 31 December 2019 consist of produced gas held in
underground gas storage facilities and condensate and LPG held at
the processing facility prior to sale (2018: consist of produced
condensate and LPG held at the processing facility prior to sale).
The gas sales price in Ukraine has been lower, particularly in the
second half of 2019, reflecting the lower prices in Europe. As a
result the Group delayed sales and built up inventory to nearly
22.6 MMm(3) at the end of December 2019, which inventory was sold
in the first quarter of 2020.
All inventories are measured at the lower of cost or net
realisable value. There was no write down of inventory as at 31
December 2019 or 2018.
23. Trade and Other Receivables
Group Company
2019 2018 2019 2018
$000 $000 $000 $000
Trade receivables 2,881 5,012 - -
Other financial receivables 1,718 202 - -
Less credit loss allowance (155) (99) - -
---------------------------------- -------- -------- --------- ---------
Total financial receivables 4 , 444 5,115 - -
Prepayments and accrued
income 5,959 4 , 771 8 64
Other receivables 534 244 93 7 4
---------------------------------- -------- -------- --------- ---------
Total trade and other receivables 10,937 10,130 1 01 138
Due to the short-term nature of the trade and other receivables,
their carrying amount is assumed to be the same as their fair
value. All trade and other financial receivables, except those
provided for, are considered to be of high credit quality.
At 31 December 2019, the Group's total trade receivables
amounted to $2, 726 ,000 and 100% were denominated in Ukrainian
Hryvnia (31 December 2018: $4,918,000 and 100% were denominated in
Ukrainian Hryvnia). Further description of financial receivables is
disclosed in Note 32.
The majority of the trade receivables are from a related party,
LLC Smart Energy, that purchases all of the Group's gas production
(see Note 34). The applicable payment terms are payment for one
third of the estimated monthly volume of gas by the 20(th) of the
month of delivery, and payment of the remaining balance by the 10th
of the month following the month of delivery. The trade receivables
were paid in full after the end of the period.
Prepayments and accrued income mainly consist of prepayments of
$3,987,000 relating to the development of the SV field and
$1,094,000 relating to the development of the VAS field (31
December 2018: $3,988,000 relating to the development of the
MEX-GOL field).
Analysis by credit quality of financial trade and other
receivables and expected credit loss allowance as at 31 December
2019 is as follows:
Loss rate Gross carrying Life-time Carrying Basis
amount ECL amount
$000 $000 $000
Trade receivables financial position
from related of related
parties 5 % 2,644 (3) 2,641 party
number of days
Trade receivables the asset past
- credit impaired 100% 152 (152) - due
historical
Trade receivables credit losses
- other 0. 36 % 85 (0) 85 experienced
Other financial individual
receivables 0.92%-2.05% 1,718 (0) 1,718 default rates
Total trade
and other
receivables
for which
individual
approach for
ECL is used 4 , 599 (155) 4 , 444
ECL - Expected credit losses
Analysis by credit quality of financial trade and other
receivables and expected credit loss allowance as at 31 December
2018 is as follows:
Loss rate Gross carrying Life-time Carrying Basis
amount ECL amount
$000 $000 $000
Trade receivables financial position
from related of related
parties 5 % 4,918 (7) 4,911 party
number of days
Trade receivables the asset past
- credit impaired 100% 92 (92) - due
historical
Trade receivables credit losses
- other 0. 36 % 2 (0) 2 experienced
Other financial individual
receivables 0.92%-2.05% 202 (0) 202 default rates
Total trade and
other receivables
for which individual
approach for
ECL is used 5,214 (99) 5,115
ECL - Expected credit losses
The following table explains the changes in the credit loss
allowance for trade and other receivables under the simplified ECL
model between the beginning and the end of the annual period:
2019 2018
$000 $000
Trade receivables
Balance at 1 January 99 152
New originated or purchased 3 7
Financial assets derecognised during the
period - (3)
Changes in estimates and assumptions 30 (59)
Foreign exchange movements 23 2
------------------------------------------ ----- -----
Balance at 31 December 155 99
24. Cash and Cash Equivalents and Other Short-term
Investments
Group Company
2019 2018 2019 2018
$000 $000 $000 $000
Cash and Cash Equivalents
Cash at bank 28,089 24,462 23,656 23,990
Demand deposits and term deposits
with maturity less than 3 months 34,385 24,791 18,015 -
Short-term government bonds - 3,969 - -
62,474 53,222 41,671 23,990
Cash at bank earns interest at fluctuating rates based on daily
bank deposit rates. Demand deposits are made for varying periods
depending on the immediate cash requirements of the Group and earn
interest at the respective short-term deposit rates. The terms and
conditions upon which the Group's demand deposits are made allow
immediate access to all cash deposits, with no significant loss of
interest.
The credit quality of cash and cash equivalents balances and
other short-term investments may be summarised based on Moody's
ratings as follows at 31 December:
Demand deposits
and term deposits
with maturity
Cash at bank less than 3 Short-term government Total cash and
and on hand months bonds cash equivalents
2019 2019 2019 2019
$000 $000 $000 $000
A- to A+
rated 23,655 18,015 - 41,670
B- to B+
rated 2 8,048 - 8,050
Unrated 4,432 8,322 - 12,754
28,089 34,385 - 62,474
Demand deposits
and term deposits
with maturity
Cash at bank less than 3 Short-term government Total cash and
and on hand months bonds cash equivalents
2018 2018 2018 2018
$000 $000 $000 $000
A- to A+
rated 23,948 - - 23,948
B- to B+
rated 62 7,492 3,969 11,523
Unrated 452 17,299 - 17,751
24,462 24,791 3,969 53,222
For cash and cash equivalents, the Group assessed ECL based on
the Moody's rating for rated banks and based on the sovereign
rating of Ukraine defined by Fitch as "B" as of 31 December 2019
for non-rated banks. Based on this assessment, the Group concluded
that the identified impairment loss was immaterial.
25. Trade and Other Payables
2019 2018
$000 $000
Accruals and other payables 2,418 2,314
Taxation and social security 1,092 2,312
Trade payables 277 105
Advances received 181 105
3,968 4 , 836
The carrying amounts of trade and other payables are assumed to
be the same as their fair values, due to their short-term nature.
Financial payables are disclosed in Note 32.
26. Provision for Decommissioning
2019 2018
$000 $000
Group
At beginning of year 3,137 3,027
Amounts provided/(utilised) 355 (16)
Unwinding of discount 273 140
Change in estimate 2, 852 (50)
Effect of exchange difference 830 36
------------------------------ ------ ------
At end of year 7, 447 3,137
The provision for decommissioning is based on the net present
value of the Group's estimated liability for the removal of the
Ukraine production facilities and well site restoration at the end
of production life.
2019 2018
$000 $000
Deferred tax asset recognised on tax
losses - Company and Group
At beginning of year 2,134 2 , 567
Charged to Income Statement - current
year (2,134) (433)
----------------------------------------------------- ------- --------
At end of year - 2,134
2019 2018
$000 $000
Deferred tax (liability)/asset recognised
relating to oil and gas development and
production assets and provision for decommissioning
- Group
At beginning of year 1,149 6,694
Charged to Income Statement - current
year (1,077) (5,086)
Charged to Income Statement - prior year (1,996) (821)
Effect of exchange difference (217) 362
----------------------------------------------------- ------- --------
At end of year (2,141) 1,149
2019 2018
$000 $000
Deferred tax liability recognised relating
mainly to oil and gas development and
production assets - Group
At beginning of year (504) (820 )
Credited to Income Statement - current
year 406 333
Effect of exchange difference (49) (1 7 )
----------------------------------------------------- ------- --------
At end of year (147) (50 4 )
The non-current provision of $ 7 , 447 ,000 (31 December 2018:
$3,137,000) represents a provision for the decommissioning of the
Group's MEX-GOL, SV and VAS production facilities, including site
restoration.
The change in estimates applied to calculate the provision as at
31 December 2019 is explained in Note 5.
The principal assumptions used are as follows:
31 December 2019 31 December 2018
Discount rate , % 3 . 68% 8 . 14 %
Average cost of restoration per well , $000 406 3 57
--------------------------------------------- ----------------- -----------------
The sensitivity of the restoration provision to changes in the
principal assumptions is presented below:
31 December 2019 31 December 201 8
$000 $000
Discount rate ( increase ) /decrease by 1% (1,086)/1,319 (313)/371
Change in average cost of restoration increase/ ( decrease ) by 1 0 % 523/(523) 219 /( 219 )
----------------------------------------------------------------------- ----------------- ------------------
27. Deferred Tax
At 31 December 2019, the Group derecognised a deferred tax asset
of $ 2 , 134 ,000 due to losses expected in the foreseeable future.
There was a further $85 million (31 December 2018: $85 million) of
unrecognised UK tax losses carried forward for which no deferred
tax asset has been recognised. These losses can be carried forward
indefinitely, subject to certain rules regarding capital
transactions and changes in the trade of the Company.
The deferred tax asset relating to the Group's provision for
decommissioning at 31 December 2019 of $326,000 (31 December 2018:
$161,000) was recognised on the tax effect of the temporary
differences on the Group's provision for decommissioning at the
MEX-GOL and SV fields, and its tax base. The deferred tax liability
relating to the Group's oil and gas development and production
assets at 31 December 2019 of $2, 467 ,000 (31 December 2018
deferred tax asset of $ 988 ,000) was recognised on the tax effect
of the temporary differences between the carrying value of the
Group's oil and gas development and production assets at the
MEX-GOL and SV fields, and its tax base.
The deferred tax asset relating to the Group's provision for
decommissioning at 31 December 2019 of $329,000 (31 December 2018:
$271,000) was recognised on the tax effect of the temporary
differences on the Group's provision for decommissioning at the VAS
field, and its tax base. The deferred tax liability relating to the
Group's oil and gas development and production assets at 31
December 2019 of $ 476 ,000 (31 December 2018: $775,000) was
recognised on the tax effect of the temporary differences between
the carrying value of the Group's oil and gas development and
production asset at the VAS field, and its tax base.
The impact of the UK losses surrendered to the Ukrainian
operating subsidiary in relation to losses was $4,649,000 for 2015
. There were no UK losses surrendered for the years ended 31
December 2016-2019.
Losses accumulated in a Ukrainian subsidiary service company of
UAH2,762,352,984 ($116,622,885) at 31 December 2019 and
UAH2,856,563,453 ($103,168,745) at 31 December 2018 mainly
originated as foreign exchange differences on inter-company loans
and for which no deferred tax asset was recognised as this
subsidiary is not expected to have taxable profits to utilise these
losses in the future.
As at 31 December 2019 and 2018, the Group has not recorded a
deferred tax liability in respect of taxable temporary differences
associated with investments in subsidiaries as the Group is able to
control the timing of the reversal of those temporary differences
and does not intend to reverse them in the foreseeable future.
UK Corporation tax change
In the Spring Budget 2020, the UK Government announced that from
1 April 2020 the corporation tax rate would remain at 19% (rather
than reducing to 17%, as previously enacted). This new law was
substantively enacted on 17 March 2020 and has no significant
impact on the financial statement as the proposal to keep the rate
at 19% had not been substantively enacted at the balance sheet
date, and therefore its effects are not included in these financial
statements.
28. Called Up Share Capital
2019 2018
Number $000 Number $000
Allotted, called up and
fully paid
Opening balance at 1 January 320,637,836 28,115 320,637,836 28,115
Issued during the year - - - -
------------------------------- ----------------- -------- ----------- -----------------
Closing balance at 31 December 320,637,836 28,115 320,637,836 28,115
There are no restrictions over ordinary shares issued.
29. Other Reserves
The holders of ordinary shares are entitled to receive dividends
as declared and are entitled to one vote per share at general
meeting of shareholders. Distributable reserves are limited to the
balance of retained earnings. The share premium reserves are not
available for distribution by way of dividends.
Other reserves, the movements in which are shown in the
statements of changes in equity, comprise the following:
Capital contributions reserve
The capital contributions reserve is non-distributable and
represents the value of equity invested in subsidiary entities
prior to the Company listing.
Merger reserve
The merger reserve represents the difference between the nominal
value of shares acquired by the Company and those issued to acquire
subsidiary undertakings. This balance relates wholly to the
acquisition of Regal Petroleum (Jersey) Limited and that company's
acquisition of Regal Petroleum Corporation Limited during 2002.
Foreign exchange reserve
Exchange reserve movement for the year attributable to currency
fluctuations. This balance predominantly represents the result of
exchange differences on non-monetary assets and liabilities where
the subsidiaries' functional currency is not the US Dollar.
30. Operating Lease Arrangements
The Group leases various offices, equipment, wells, land under
non-cancellable operating leases.
From 1 January 2019, the Group has recognised right-of-use
assets for these leases, except for short-term and low-value leases
(see Note 20 ).
2019 2018
Group and Company $000 $000
Amounts payable due:
- Within one year - 492
- After one year - 1,392
---------------------- ---- -----
- 1,884
Group Company
2019 2018 2019 2018
$000 $000 $000 $000
Lease payments under operating
leases recognised as an expense
for the year - 4,797 - 125
--------------------------------- -------- -------- --------- ---------
31. Reconciliation of Operating Profit to Operating Cash
Flow
201 9 201 8
$000 $000
Group
Operating profit 21,093 66,370
Impairment/(Reversal of impairment) of property,
plant and equipment - (34,469)
Depreciation and amortisation 10,190 7,901
Less interest income recorded within operating
profit (4,751) (3,024)
Fines and penalties received (236) (225)
Gain on sales of current assets, net (27) (26)
Reversal of loss allowance on other financial
assets (46) (18)
Loss/(gain) from write off of non-current assets 47 (21)
Increase/(decrease) in provisions 67 (11)
( 3 , 208
Increase in inventory ) (76)
Decrease/(increase) in receivables 2,340 (2,487)
I ncrease in payables (868) 2,428
Cash generated from operations 2 4 ,6 01 36,342
2019 2018
$000 $000
Company
Operating (loss)/profit (15,016) 9,374
Interest received (3,162) -
Movement in provisions (including impairment
of subsidiary loans) 15,450 (10,923)
(Decrease)/increase in receivables (453) 4 09
(Increase)/decrease in payables 159 7
--------------------------------------------- -------- --------
Cash used in operations (3,022) (1,133)
32. Financial Instruments
Capital Risk Management
The Group's objectives when managing capital are to safeguard
the Group's and the Company's ability to continue as a going
concern in order to provide returns for shareholders and benefits
for other stakeholders and to maintain an optimal capital structure
to reduce the cost of capital.
The Group defines its capital as equity. The primary source of
the Group's liquidity has been cash generated from operations.
In order to maintain or adjust the capital structure, the Group
may adjust the amount of dividends paid to shareholders, return
capital to shareholders, issue new shares or sell assets.
The capital structure of the Group consists of equity
attributable to the equity holders of the parent, comprising issued
share capital, share premium, reserves and retained deficit.
There are no capital requirements imposed on the Group.
The Group's financial instruments comprise cash and cash
equivalents and various items such as debtors and creditors that
arise directly from its operations. The Group has bank accounts
denominated in British Pounds, US Dollars, Euros and Ukrainian
Hryvnia. The Group does not have any external borrowings. The main
future risks arising from the Group's financial instruments are
currently currency risk, interest rate risk, liquidity risk and
credit risk.
The Group's financial assets and financial liabilities, measured
at amortised cost, which approximates their fair value comprise the
following:
Financial Assets
2019 2018
$000 $000
Group
Cash and cash equivalents 62,474 53 , 222
Trade and other receivables 4,444 5,115
Prepayment for shares 500 -
67,418 58,337
2019 2018
$000 $000
Company
Cash and cash equivalents 41,671 23,990
Loans to subsidiary undertakings 14,181 47,552
Prepayment for shares 500 -
56,352 71 , 542
Financial Liabilities
2019 2018
$000 $000
Group
Lease liabilities 969 -
Trade payables 277 105
Accruals 1,018 1,284
----------------------- ------ ------
2,264 1,389
2019 2018
$000 $000
Company
Accruals 256 97
----------------------- ------ ------
256 97
All assets and liabilities of the Group where fair value is
disclosed are level 2 in the fair value hierarchy and valued using
the current cost accounting technique.
Currency Risk
The functional currencies of the Group's entities are US Dollars
and Ukrainian Hryvnia. The following analysis of net monetary
assets and liabilities shows the Group's currency exposures.
Exposures comprise the monetary assets and liabilities of the Group
that are not denominated in the functional currency of the relevant
entity.
2019 2018
Currency $000 $000
British Pounds 301 256
Euros 33 112
Net monetary assets less liabilities 334 368
The Group's exposure to currency risk at the end of the
reporting period is not significant due to immaterial balances of
monetary assets and liabilities denominated in foreign
currencies.
Interest Rate Risk Management
The Group is not exposed to interest rate risk on financial
liabilities as none of the entities in the Group have any external
borrowings. The Group does not use interest rate forward contracts
and interest rate swap contracts as part of its strategy.
The Group is exposed to interest rate risk on financial assets
as entities in the Group hold money market deposits at floating
interest rates. The risk is managed by fixing interest rates for a
period of time when indications exist that interest rates may move
adversely.
The Group's exposure to interest rates on financial assets and
financial liabilities are detailed in the liquidity risk section
below.
Interest Rate Sensitivity Analysis
The sensitivity analysis below has been determined based on
exposure to interest rates for non-derivative instruments at the
balance sheet date. A 0.5% increase or decrease is used when
reporting interest rate risk internally to key management personnel
and represents management's assessment of a reasonably possible
change in interest rates.
If interest rates earned on money market deposits had been 0.5%
higher / lower and all other variables were held constant, the
Group's:
-- profit for the year ended 31 December 2019 would increase
by $ 159 , 000 in the event of 0.5% higher interest rates
and decrease by $159, 000 in the event of 0.5% lower interest
rates (profit for the year ended 31 December 2018 would increase
by $92,000 in the event of 0.5% higher interest rates and
decrease by $92,000 in the event of 0.5% lower interest rates).
This is mainly attributable to the Group's exposure to interest
rates on its money market deposits; and
-- other equity reserves would not be affected (2018: not affected).
Interest payable on the Group's liabilities would have an
immaterial effect on the profit or loss for the year.
Liquidity Risk
The Group's objective throughout the year has been to ensure
continuity of funding. Operations have primarily been financed
through revenue from Ukrainian operations.
Details of the Group's cash management policy are explained in
Note 24.
Liquidity risk for the Group is further detailed under the
Principal Risks section above.
Credit Risk
Credit risk principally arises in respect of the Group's cash
balance. For balances held outside Ukraine, where $41.7 million of
the overall cash and cash equivalents is held (31 December 2018:
$24 million), the Group only deposits cash surpluses with major
banks of high quality credit standing (Note 2 4 ). As at 31
December 2019, the remaining balance of $20.8 million of cash and
cash equivalents was held in Ukraine (31 December 2018: $29.3
million). In September 2019 Standard & Poor's upgraded
Ukraine's sovereign credit rating from "B-/B" to 'B', Outlook
Stable. There is no international credit rating information
available for the specific banks in Ukraine where the Group
currently holds its cash and cash equivalents.
After several years of devaluation, the Ukrainian currency
strengthened during 2019. With effect from April 2019, the National
Bank of Ukraine ("NBU") launched a cycle of easing of monetary
policy and a gradual decrease of its discount rate, for the first
time in two years, from 18% in April 2019 to 11% in January 2020,
which was justified by a sustainable trend of inflation
deceleration.
Nevertheless the Group has taken steps to diversify its banking
arrangements between a number of banks in Ukraine, and increased
the quality of cash placed with UK and European banking
institutions. These measures are designed to spread the risks
associated with each bank's creditworthiness.
Interest Rate Risk Profile of Financial Assets
The Group had the following cash and cash equivalent and other
short-term investments balances which are included in financial
assets as at 31 December with an exposure to interest rate
risk:
Floating Fixed Floating Fixed
rate rate rate rate
financial financial financial financial
Currency Total assets assets Total assets assets
2019 2019 2019 2018 2018 2018
$000 $000 $000 $000 $000 $000
Euros 30 30 - 44 44 -
British Pounds 257 257 - 215 215 -
Ukrainian Hryvnia 17,881 - 17,881 25,264 - 25,264
US Dollars 44,306 44,306 - 27,699 23,730 3,969
62,474 44,593 17,881 53,222 23,989 29,233
Cash deposits included in the above balances comprise short-term
deposits.
As at 31 December 2019, cash and cash equivalents of the Company
of $42 million were held in US Dollars at a floating rate (2018:
$24 million).
Interest Rate Risk Profile of Financial Liabilities
As at 31 December 2019 and 2018, the Group had no interest
bearing financial liabilities at the year end.
Maturity of Financial Liabilities
The maturity profile of financial liabilities, on an
undiscounted basis, is as follows:
2019 2018
$000 $000
Group
In one year or less 2,264 1,389
--------------------- ----- -----
2,264 1,389
2019 2018
$000 $000
Company
In one year or less 256 97
--------------------- ----- -----
256 97
Borrowing Facilities
As at 31 December 2019 and 2018, the Group did not have any
borrowing facilities available to it.
Fair Value of Financial Assets and Liabilities
The fair value of all financial instruments is not materially
different from the book value.
33. Contingencies and Commitments
Amounts contracted in relation to the Group's 201 9 investment
programme in the MEX-GOL , SV and VAS fields in Ukraine, but not
provided for in the financial statements at 31 December 201 9 ,
were $2,306 ,000 (2018: $2,607,000).
During 2010 - 2019, the Group has been in dispute with the
Ukrainian tax authorities in respect of VAT receivables on imported
leased equipment, with a disputed liability of up to UAH8,487,000
($302,000) inclusive of penalties and other associated costs. There
is a level of ambiguity in the interpretation of the relevant tax
legislation, and the position adopted by the Group has been
challenged by the Ukrainian tax authorities, which has led to legal
proceedings to resolve the issue. The Group had been successful in
three court cases in respect of this dispute in courts of different
levels. On 20 September 2016, a hearing was held in the Supreme
Court of Ukraine of an appeal of the Ukrainian tax authorities
against the decision of the Higher Administrative Court of Ukraine,
in which the appeal of the Ukrainian tax authorities was upheld. As
a result of this appeal decision, all decisions of the lower courts
were cancelled, and the case was remitted to the first instance
court for a new trial. On 1 December 2016 and 7 March 2017
respectively, the Group received positive decisions in the first
and second instance courts, but further legal proceedings may
arise. Since, at the end of the year, the Group had been successful
in previous court cases in respect of this dispute in courts of
different levels, the date of the next legal proceedings has not
been set and as management believes that adequate defences exist to
the claim, no liability has been recognised in these consolidated
financial statements for the year ended 31 December 2019 (31
December 2018: nil).
On 12 March 2019 the Group announced the publication of an Order
for suspension (the "Order") by the State Service of Geology and
Subsoil of Ukraine affecting the production licence for its VAS gas
and condensate field. The Group is confident there are no
violations of the terms of the licence or in relation to the
operational activities of the Group that would justify the Order or
the suspension of the licence. The Group has issued legal
proceedings in the Ukrainian Courts to challenge the validity of
the Order, and in these proceedings, on 18 March 2019, the Court
made a ruling on interim measures to suspend the Order pending
hearings of the substantive issues of the case to be held
subsequently. The effect of this ruling is that the suspension of
operational activities at the VAS licence is deferred until the
result of the legal proceedings is determined. These legal
proceedings are continuing through the Ukrainian Court system and
the ultimate outcome is not yet known. However, the Group considers
that the Order is groundless and that the outcome of the legal
proceedings challenging the Order will ultimately be in favour of
the Group, and consequently, the Group does not expect any negative
effect on its operations in respect of this matter.
34. Related Party Disclosures
Key management personnel of the Group are considered to comprise
only the Directors. Details of Directors' remuneration are
disclosed in Note 9.
During the year, Group companies entered into the following
transactions with related parties who are not members of the
Group:
2019 2018
$000 $000
Sale of goods / services 38,417 49 ,691
Purchase of goods / services 963 508
Amounts owed by related parties 2,649 4, 912
Amounts owed to related parties 137 35
---------------------------------
All related party transactions were with subsidiaries of the
ultimate Parent Company, and primarily relate to the sale of gas
(see Note 6 for more details), the rental of office facilities and
a vehicle and the sale of equipment. The amounts outstanding were
unsecured and will be settled in cash.
As of 31 December 2019, the Company's immediate parent company
was Pelidona Services Limited, which is 100% owned by Lovitia
Investments Limited, which is 100% owned by Mr Vadym Novynskyi.
Accordingly, the Company was ultimately controlled by Mr Vadym
Novynskyi.
The Group operates bank accounts in Ukraine with a related party
bank, Unex Bank, which is ultimately controlled by Mr Vadym
Novynskyi. There were the following transactions and balances with
Unex Bank during the year:
2019 2018
$000 $000
Interest income - 1
Bank charges 1 21
Closing cash balance (as at 31 December) 1 20
The bank charges represent cash transit fees.
At the date of this annoucement, none of the Company's
controlling parties prepare s consolidated financial statements
available for public use.
35. Post Balance Sheet Events
In March 2020 oil prices declined to levels not seen since 2016,
and approximately two thirds lower than levels in 2018, as Saudi
Arabia declared a "price war" on Russia. This added additional
stress to financial markets already suffering amid concerns over
the evolving situation with the Coronavirus (COVID-19) pandemic,
which is a non-adjusting event. As a result, abnormally large
volatility is being witnessed in commodity markets. The scale and
duration of these developments remain uncertain but could impact
Group's earnings, cash flow and financial condition.
On 24 March 2020, the Company completed the acquisition of a
100% shareholding interest in LLC Arkona Gas-Energy ("Arkona")
pursuant to an acquisition agreement between (1) the Company and
(2) Igor Mychko, Oleksandr Neschchotnyy, Dmitro Volonets and Oleg
Olkhovoy (the "Sellers")). Akrona is the holder of the
Svystunivsko-Chervonolutskyi ("SC") exploration licence in
north-eastern Ukraine. The aggregate consideration for this
acquisition is up to $8,630,000, comprising: (i) a first tranche of
$4,315,000 (less certain adjustments for debt liabilities) paid on
completion; (ii) a second tranche of $2,157,500 payable on
satisfaction of certain conditions; and (iii) a third tranche of
$2,157,500 payable in 12 months from the date of payment of the
second tranche, provided that if the conditions for payment of the
second tranche are not satisfied, then neither the second tranche
nor the third tranche shall become payable. Further details can be
found in the announcement dated 24 March 2020.
36. Accounting policies before 1 January 2019
Accounting policies applicable to the comparative period ended
31 December 2018 that were amended by IFRS 16, Leases, are as
follows.
Operating leases
Where the Group is a lessee in a lease which does not transfer
substantially all the risks and rewards incidental to ownership
from the lessor to the Group, the total lease payments are charged
to profit or loss for the year on a straight-line basis over the
lease term. The lease term is the non-cancellable period for which
the lessee has contracted to lease the asset together with any
further terms for which the lessee has the option to continue to
lease the asset, with or without further payment, when at the
inception of the lease it is reasonably certain that the lessee
will exercise the option.
Finance lease liabilities
Where the Group is a lessee in a lease which transferred
substantially all the risks and rewards incidental to ownership to
the Group, the assets leased are capitalised in property, plant and
equipment at the commencement of the lease at the lower of the fair
value of the leased asset and the present value of the minimum
lease payments. Each lease payment is allocated between the
liability and finance charges so as to achieve a constant rate on
the finance balance outstanding. The corresponding rental
obligations, net of future finance charges, are included in
borrowings. The interest cost is charged to profit or loss over the
lease period using the effective interest method. The assets
acquired under finance leases are depreciated over their useful
life or the shorter lease term, if the Group is not reasonably
certain that it will obtain ownership by the end of the lease
term.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
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