JKX Oil & Gas plc Oil Report 2014 Annual JKX
JKX Oil & Gas plc Annual Report 2014
JKX Oil & Gas plc, 6 Cavendish Square, London W1G 0PD +44 (0)20 7323 4464
Welcome to our 2014 Report and Accounts.
We want to be recognised as one of the leading independent upstream exploration and production companies in central and eastern Europe.
The Company’s commitment to Ukraine and Russia is currently being tested with heightened levels of political risk and the commercial uncertainties noted on page 12. The region continues to offer development opportunities in the medium to long term. In the short to medium term, the Company is focusing on maintaining its liquidity by minimising capital expenditure and operating costs in Ukraine and Russia. Inside:
Strategic report Governance
Overview Board composition 82 Our business – at a glance 4 Corporate governance 84 Market overview 8 Audit Committee Report 92 Performance summary 13 Directors’ Remuneration Chairman’s statement 14 Report 98 Directors’ report – Strategy other disclosures 116 Chief Executive’s statement 17 Strategic priorities 20 Priority 1 22 Priority 2 26 Priority 3 30 Financial statements
Performance Independent auditors’ report – Group 122 Performance in 2014 34 Group fi nancial statements 128 Financial review 36 Independent auditors’ Operational review 42 report – Company 171 Principal risks and how Company fi nancial we manage them 48 statements 173 Corporate Social Responsibility 62 JKX Oil & Gas plc Annual Report 2014
2 Strategic report Governance Financial statements 2-79 80-119 120-182 3
Strategic report
Overview Our business – at a glance 4 Market overview 8 Performance summary 13 Chairman’s statement 14
Strategy Chief Executive’s statement 17 Strategic priorities 20 Priority 1 22 Priority 2 26 Priority 3 30
Performance Performance in 2014 34 Financial review 36 Operational review 42 Principal risks and how we manage them 48 Corporate Social Responsibility 62 JKX Oil & Gas plc Annual Report 2014
4 Our business – at a glance
What we do We are an upstream oil and gas exploration and production company with significant oil and gas assets in Ukraine and southern Russia.
Where we operate Our head office is in London which employs 25 staff. Our operational areas are shown below:
Ukraine Russia Staff 629 Staff 257 Fields 6 Fields 1
Wells 51 Moscow Wells 5 Production 4,810 boepd Production 5,109 boepd Reserves 28.9 MMboe Reserves 68.8 MMboe
Russia Kiev Ukraine Elizavetovskoye Poltava
Novo-Nikolaevskoye Complex
KoshekhablskoyeKoshekhablskoye Maikop Caspian Sea Black Sea Strategic report Governance Financial statements 2-79 80-119 120-182 5
Strategic objective Strategic priorities Our objective is to maximise long term shareholder value. 1 2 3 To achieve that we have Profi table Oil and gas Operating safely three strategic and responsibly priorities: production reserves growth growth
Production volumes (boepd) Group reserves (MMboe) Lost Time Injuries
9,731 9,919 93.8 94.2 97.7 8,218
0.84 0 0
2012 2013 2014 2012 2013 2014 2012 2013 2014
2014 Group analysis
Production
-$ Russia 52% 9,919 boepd Ukraine 48%
Reserves
Russia 70% 97.7MMboe Ukraine 30%
Revenue
Russia 19% $146.2m Ukraine 81% JKX Oil & Gas plc Annual Report 2014
6 Our business – at a glance
Our business model Our business model is driven by our three strengths which set us apart:
Investment Strength -$ Benefi t We invest in exploration and development of oil and gas elds
Operational and
organisational
analysis and First to move excellence Visionary marketplace subsurface expertise
GOVERNANCECash Sustainable generative low cost operations production Return Sales +$ +$ Cash is reinvested to achieve We generate revenue from sales of our three strategic priorities oil, gas, condensate and LPG
Stakeholder management Strategic report Governance Financial statements 2-79 80-119 120-182 7
Strength Visionary marketplace Operational and Stakeholder analysis and organisational excellence management subsurface expertise
Allows us to explore for We have over 20 years We build long-term, new oil and gas reserves experience of operating trusting relationships and develop oil and gas in eastern and central with local staff, production. Our local Europe. authorities, customers knowledge and on the and other stakeholders Our Ukrainian and ground intelligence is which provide our Russian companies supported by our strong, business with a stable are led by a native established relationships platform in a volatile General Director who in the oil and gas emerging market. is empowered to build a industry. stable business platform We sell our gas under Our subsurface expertise through investment long-term contracts to in Ukraine, Russia and in a locally employed reputable customers London is supported workforce. improving the reliability by the latest western of our revenue streams. Strong western technologies. governance standards are applied to our local operations through close working relationships between the Board and our management teams in Ukraine and Russia.
Benefi t First to move Sustainable low cost Cash generative production operations
Ukraine and southern We use skilled expatriate We use our extensive Russia are signifi cant teams to support local operational experience net consumers of oil and employees. We sell our and continuous gas. A signifi cant gas oil and gas at our own improvement to our demand gap will remain local processing facilities. corporate governance for the foreseeable across all operations to future. effectively manage and mitigate risk.
Strategic priority 1 1 3 Profi table Profi table Operating safely production growth production growth and responsibly
2 3 Oil and gas Operating safely reserves growth and responsibly JKX Oil & Gas plc Annual Report 2014
8 Market overview – Ukraine
Why are we here? Because of the huge demand for energy in Ukraine Due to lack of investment and availability of the and the lack of local supply. latest exploration and production technology, there remain good opportunities to develop additional oil Ukraine continues to be a significant net consumer and gas reserves in Ukraine. of oil and gas mainly relying on expensive imports from Russia. A significant demand gap will remain in Ukraine for the foreseeable future.
Our commercial advantage Oil and gas demand Our licence areas and major pipelines
Annual gas production- Annual oil production-consumption POLTAVA consumption gap in Ukraine (Bcf) gap in Ukraine (‘000bpd)
1,856 Elizatetovskoye 1,800 300 268 field
1,200 200
694 600 100 75 Novo-Nikolaevskoye Complex
0 20 km Gas production (Bcf) 1 Oil production (’000 bpd) 1 Gas consumption (Bcf) 1 Oil consumption (’000 bpd) 1
JKX invested in Ukraine 20 years ago to help meet the Annual oil and gas demand in Ukraine is three times demand gap and was rewarded with licences covering more than the country is presently producing. some of the best oil and gas fields in Ukraine. Our six producing fields and two Gas Processing Facilities (‘GPFs’) are located in the Poltava region of Ukraine. 1 Source: USA Energy Information Administration
Gas pricing and Net back analysis realisations Gas realisations in Ukraine Netback analysis of Ukranian oil sales Netback analysis of Ukranian gas sales in 2014 (at $60/bbl) (at $10 /Mcf) $10 2014 2013 2014 2013 Production Production Production Production costs costs costs costs per Mcf $4.67 (8%) $6.21 (10%) $1.17 (12%) $1.29 (13%) Production Production Production Production taxes taxes taxes taxes Gas prices in Ukraine $23.05 (38%) $23.82 (40%) $3.55 (35%) $2.36 (24%) are regulated. The Net margin Net margin Net margin Net margin maximum price at which $32.28 (54%) $29.97 (50%) $5.28 (53%) $6.35 (63%) we can sell our gas is set monthly by NKRE (electricity regulator) in Hryvna and takes into account the tariff being charged by Russia and Production costs Production taxes Net the current Hryvna/USD exchange rate. On 2 August 2014 the Ukrainian government increased gas production taxes to 55% In recent years, the (from 28%) and oil production taxes to 45% (from 39%) initially for 3 months but now high gas price has extended until 31 December 2015. This was proposed to cover the costs of the conflict with encouraged significant Russia. The netback on our gas and oil sold in Ukraine is approximately $5.28/Mcf investment from non- (based on $10/Mcf) and $32.28/bbl (based on $60/bbl). state companies. Strategic report Governance Financial statements 2-79 80-119 120-182 9
Our business assets in Ukraine
Novo-Nikolaevskoye Complex Novo-Nikolaevskoye Complex project life cycle
1995 2014 2032 20 Total project life cycle years of commercial Molchanovskoye production Ignatovskoye
Novo-Nikolaevskoye
Rudenkovskoye
Zaplavskoye
Our Novo-Nikolaevskoye Complex reserves comprise five distinct fields producing in to one GPF. In addition we have a Liquefied Petroleum Gas (‘LPG’) facility which converts some of our gas into LPG for sale into the expanding Ukrainian market.
Elizavetovskoye field Elizatetovskoye field project life cycle
1 1995 2014 2018 year of commercial production
Our Elizavetovskoye field and GPF, which are only 45km from our Novo-Nikolaevskoye Complex, began commercial production in 2014.
Our investment Ukrainian reserves Reserves reassessment Our investment and production in Ukrainian reserves split Ukrainian reserves Ukraine 1 January 31 December Investment ($m) Oil 2014 Revisions Production 2014 Production (MMboe) Gas Oil MMbbl 3.1 (0.0) (0.3) 2.8 120 5,000 Gas Bcf 180.1 (15.2) (8.4) 156.5 4,000 Oil + Gas MMboe 33.1 (2.5) (1.7) 28.9 3,000 60 Total 2P reserves 2,000
1,000 90% Gas 28.9 MMboe 2000 2007 2014 We have invested in At the end of 2014, our During the year our estimation of remaining 2P reserves Ukrainian oil and gas 2P reserves in Ukraine decreased by 15.2 Bcf of gas (total 2.5 MMboe). Our development for 21 comprised 156.5 Bcf of reserves were independently reviewed by DeGolyer & years. We have produced gas and 2.8 MMbbl of oil MacNaughton. and sold gas, oil and (total 28.9 MMboe). condensate locally for the past 20 years. JKX Oil & Gas plc Annual Report 2014
10 Market overview – southern Russia
Why are we here? Because of the huge demand for energy in southern investment into gas fields is in the development Russia and the lack of local supply. of the Yamal peninsula gas fields which are more than 4,000km north of our gas reserves at In southern Russia, gas demands are partially met Koshekhablskoye, Adygea, southern Russia. by transporting gas long distances (at high cost) from production centres in the north of Russia. In 2014 our Koshekhablskoye field produced 11.1 Bcf of gas and this is expected to grow. In Russia, historical Gazprom gas fields are now all in decline. To replace lost production, most
Our commercial advantage Gas demand Forecast gas demand
Krasnodar-Adygea region Southern Russia regional gas annual production-consumption consumption forecast (Bcm)³ gap (Bcf) 385 +9.26 20 Russia Western Siberia oil and gas basin +5.09 15
4,000 km+ 10 +0.34 +1.66 106
5 Ukraine
0 Gas production (Bcf) 1 Koshekhablskoye Three Rostov Stavropol Krasnodar Black Sea Gas consumption (Bcf) 2 Republics & Adygea of Northern Caucasus Koshekhablskoye gas field is located in Annual industrial the Republic of Adygea, southern Russia consumption of gas in the By 2030 By 2020 2010 where gas resource is scarce, and there Krasnodar and Adygea are high transportation costs from regions is more than four Russia’s main gas production area in the times gas production. far north, some 4,000km away. In southern Russia, due to a rapid Sources for supply and demand industrialisation of the region, by 2020 figures: 1 Rosnedra gas demands are expected to double. 2 Central Dispatching Unit of the Energy Sector (TsDU TEK) 3 Source: ERTA consult 2010
Gas realisations Net back analysis Russian gas realisations Southern Russia netback analysis gas (at $2.7/Mcf) ($ per Mcf) 2014 2013 4.00
Production costs Production costs 3.00 $1.18 (44%) $1.41 (52%)
Production taxes Production taxes 2.00 $0.33 (12%) $0.30 (11%)
1.00 Net margin Net margin $1.18 (44%) $0.99 (37%)
2007 2014
The average increase in Russian gas prices since 2007 Production costs Production taxes Net has been 18%. There was no official increase in the regulated maximum industrial price in 2014, however the The gas production tax rate in southern Russia is 12% Group was successful in achieving a 4.2% increase in the which is approximately one third of the rate in Ukraine. gas sales price from our buyer. Strategic report Governance Financial statements 2-79 80-119 120-182 11
Our business asset in southern Russia
Koshekhablskoye project life cycle
Koshekhablskoye project life cycle 2.8 2012 2014 2060 years of Total project life cycle commercial production
In 2007 we purchased the licence to rehabilitate and develop the Koshekhablskoye field in order to participate in the rapidly growing independent gas market.
Our investment Russian reserves Reserves reassessment Our investment and production Russian reserves split Russian reserves in southern Russia
Investment ($m) Oil 1 January 31 December Production (MMboe) Gas 2014 Revisions Production 2014 5,000 Oil MMbbl 0.6 0.1 (0.0) 0.7 120 4,000 Gas Bcf 361.0 58.9 (11.1) 408.8 3,000 Oil + Gas MMboe 60.7 9.9 (1.9) 68.8
2,000 60 Total 2P reserves 1,000 99% Gas 68.8 MMboe 2000 2007 2014
We have worked over At the end of 2014, During the year our estimation of remaining 2P reserves five existing wells, after production, our increased by 58.9 Bcf of gas and 0.1 MMbbl of oil installed a state-of- assessment of 2P oil and (total 9.9 MMboe). Our reserves were independently the-art Gas Processing gas reserves in Russia reviewed by DeGolyer & MacNaughton. Facility and expanded comprised 0.7 MMbbl of processing capacity to oil and 408.8 Bcf of gas 60 MMcfd (approximately (total 68.8 MMboe). 10,000 boepd). JKX Oil & Gas plc Annual Report 2014
12 Market overview – latest developments
Future strategy Southern Russia gas market
The Company’s commitment to Ukraine and Russia is Industrial output in Russia has declined in 2013 and currently being tested with heightened levels of political 2014 and with this decline there has been a proportionate risk and the commercial uncertainties noted below. reduction in domestic gas demand. The region continues to offer development opportunities However the south of Russia is defying the general trend in the medium to long term, in the short to medium term, and in the Krasnodar region, where YGE gas is used the Company is focusing on maintaining its liquidity by in a broad range of industrial outlets, there has been a minimising capital expenditure and operating costs in sustained increase in gas demand in recent years. Ukraine and Russia. The Sochi effect Part of the reason for this is the population growth (and Ukrainian gas market hence energy demands) of Sochi – initially as an Olympic Venue, but more latterly as an expanding city and a favoured tourist destination. Ukrainian government decrees During the second half of 2014, three Ukrainian Gas is used locally in cement production, steel government decrees were issued without warning and construction, glass manufacturing, heating and air with immediate legal effect which: conditioning – all of which is now abundant in Sochi. • directed major industrial gas buyers to acquire their Growth of the agricultural sector gas solely from the Ukraine state-owned gas company The south of Russia enjoys a climate similar to the from 1 December 2014 through to 28 February 2015; north of Italy and with fertile soils and local fertiliser • increased the rate of gas production tax to 55% manufacturing, is experiencing a rapid expansion in (from 28%), initially for 3 months but now extended intensive agriculture under glass. until 31 December 2015; and Within the Republic of Adygea only a few kilometres from • implemented currency restrictions, initially until our gas production site, a long established agricultural 1 December 2014 but later extended to 2 March 2015. enterprise growing a range of vegetables and cut flowers is doubling its area under glass from 20 to 40 Hectares These decrees have had, and continue to have, a (approximately 90 acres). significant adverse financial impact on independent gas producing companies in Ukraine. This sizeable enterprise supplies fresh products by air on a daily basis to the hotels, restaurants and supermarket Throughout the period of these significant gas sales chains in Moscow, St Petersburg and elsewhere in Russia. restrictions imposed on private companies in Ukraine, the Group’s gas sales in Ukraine reduced to approximately All greenhouses are heated and all irrigation water is 50% of its production capacity and necessitated a shut-in pre-heated using gas boilers. of a proportionate level of gas production. We are in discussions to become a local supplier of gas Furthermore, the effective doubling of the rate of for this expanding endeavour which would broaden our gas production tax has made gas sales in Ukraine customer base and could improve our gas realisations. only marginally profitable after streamlining of the The growing demand for domestic agricultural products organisation (see below). has been strengthened by recent Russian imposed Impact on our Ukrainian operations in 2015 sanctions on American and European agricultural In 2015 strategic changes have been made to streamline products. The food halls in Moscow and St Petersburg are the organisation in the most practical way possible, now filled exclusively by Russian fruit and vegetables. commensurate with the need to make significant cuts Impact on our Russian operations in 2015 in production, but without compromising safety and Despite the growth in opportunities in the gas market reliability. This has resulted in staff and cost reductions in southern Russia, the combination of Russian Rouble in all key operational and administrative areas with the currency devaluation and a minimal gas tariff increase potential to swiftly restore production to near-normal in the near term has reduced the projected returns on our levels. Russian project. The criteria for further investment in Ukraine is an More recently Russia’s credit rating downgrading to ability for the Company to exchange and repatriate sub-investment grade and the threat of currency controls dividends, the commitment to maintain an open gas has a negative effect on our plans to expand our current market for independent producers and a production licence portfolio there. tax regime which permits producers to generate commensurate returns with the risks that they are taking. Until such time as the aforementioned conditions return, further investment in Ukraine will be minimised. Strategic report Governance Financial statements 2-79 80-119 120-182 13 Performance summary
Key financials
2014 2013 Revenue $146.2m $180.7m Operating profit before exceptionals $11.6m $9.2m Pre-tax exceptional charges $72.5m nil (includes a non-cash impairment charge of $69.1m) Loss after exceptionals $79.5m profit of $6.5m Loss per share 46.21 cents earnings 3.78 cents Operating cash flow $58.4m $74.8m Capital expenditure $42.3m $64.4m Cash resources and undrawn bank facilities $38.9m $40.9m
Operating highlights
2014 2013 Average oil and gas production increased by 2% 9,919 boepd 9,731 boepd New Elizavetovskoye field development in Ukraine brought on-stream Stable gas production maintained in Russia Obtained control of Hernad licences and Hajdunanas production facility in Hungary Agreement to drill two exploration wells in Slovakia Group 2P reserves increased to 97.7 MMboe, a reserves replacement ratio of 196%
“Despite the increasingly challenging political and commercial environment over the past year, we made good operational progress which resulted in achieving our production target for 2014. Although we are encouraged by the lifting of restrictions on gas sales to industrial customers in Ukraine, we expect the performance of both our Ukrainian and Russian subsidiaries to remain under pressure for 2015. Our focus will be on cash conservation and asset protection, but with our solid production assets and reserves we have the potential to make significant increases in production once existing tensions ease.”
Dr Paul Davies Chief Executive JKX Oil & Gas plc Annual Report 2014
14 Chairman’s statement
Notwithstanding the operating difficulties encountered, significant progress was made by your Company in 2014 with the new development of the Elizavetovskoye field being brought on-stream in Ukraine and stable gas production from the Koshekhablskoye field in Russia being maintained. Also, we have been able to complete a favourable asset swap in Hungary which gives the Company control and operatorship of both the Hajdunanas production facility and the Hernad licence areas. Finally, agreement has been reached with our partners in Slovakia to drill two exploration wells in our licence in the first half of this year. Oil, gas and LPG realisations in Ukraine fell during the period, exacerbated by a significant weakening of the Hryvna/US Dollar exchange rate. However, Ukraine remains a large gas importer and the cost of imported gas, whether directly from Russia or by reverse flow from Europe, should underpin the level of realisations JKX can achieve from domestic gas production in the future. Gas realisations in Russia were impacted during the year by the weakening of the Rouble/US Dollar exchange rate. Although the effect of western Nigel Moore Chairman sanctions is not having a significant impact on our ongoing operations, the overall state of the Russian Solid production performance in a difficult economy will probably result in limited escalation political environment of domestic gas prices in US dollar terms. Your Company has succeeded in In line with the rest of our industry, we also suffered from the dramatic fall in international achieving its production targets in oil prices in the latter part of 2014. We continue 2014 despite a deteriorating political to monitor the impact of all of these commercial and commercial environment in challenges to our business model closely and are modifying our operating cost base accordingly. its main operating locations. The overall operating environment in Strategy Ukraine in particular has worsened Your Company’s commitment to eastern and central Europe is currently being tested with heightened since my mid-year statement levels of political risk and commercial uncertainty with the introduction of punitive in our chosen emerging market economies. rates of production tax, foreign Although we believe that the region continues to offer development opportunities in the medium exchange controls and government to long term, we are constraining deployment imposed restrictions on sales of of capital in the area until the investment the Company’s gas production to environment improves. industrial customers. In Ukraine, we have experienced an unusual combination of aggressive fiscal demands and operating restrictions by the government on our well-established operations. We are vigorously lobbying the Ukrainian Government, the UK Government, the EU and various multi-lateral Strategic report Governance Financial statements 2-79 80-119 120-182 15
agencies to restore a positive investment climate quarter of the reporting period with two further for independent oil and gas producers. We believe development wells subsequently added. Two that the recent counter-intuitive actions of the appraisal wells were drilled and completed in the current Ukrainian Government in halting foreign Novo-Nikolaevskoye Complex, together with a investment in the upstream oil and gas industry number of well workovers. should be reversed as part of conditions attached to The Koshekhablskoye field in Russia continued to the large western financing package being provided produce at approximately 80% of nominal plant by the IMF and western governmental institutions. capacity despite tubing failures early in 2014. Rig The growth in the independent gas sector in Russia mobilisation began at the year-end to perform the has slowed, in parallel with an apparent move remedial works required. away by the Russian Government from its medium- An independent reserve review of our licence term goal of European net-back parity for domestic portfolio by DeGolyer & MacNaughton as of gas pricing. Political east-west tensions and the 31 December 2014 concluded that we have again imposition of sanctions by the west are undoubtedly increased our 2P reserve base. After a total 2014 a significant contributory factor. Our Russian production of 3.6 MMboe, the Group 2P reserves subsidiary continues to benefit from a stable, albeit increased to 97.7 MMboe (a reserves replacement flat, commercial market for gas sales in Rouble ratio of 196%). terms and a constructive rapport with the state regulatory authorities. Your Board Despite the recent fall in international oil prices, The Board has remained unchanged with five our exploration and appraisal prospects in Hungary independent non-executive members and four and Slovakia remain attractive. Politically and executive members. commercially, both economies are robust and we believe our licence positions warrant continued Dividend investment in 2015. The Board is monitoring closely the Company’s liquidity and cash flow in this period of geopolitical JKX is justly proud of its excellent record for health, uncertainty and falling energy prices. It has safety, environmental matters and community concluded that it is not appropriate to recommend liaison (‘HSEC’). Although the environmental a dividend at this time. The Board will continue to incident frequency rate in 2014 was again well review its dividend policy going forward. below the industry benchmark, we failed to maintain the high standards of accident prevention Outlook that we have achieved in each of the previous nine Our wholly-owned operating subsidiary, Poltava years. We will endeavour to maintain our strong Petroleum Company (‘PPC’), is located in central health and safety culture across the Group going Ukraine, 200 miles south-east of Kiev. Our wholly- forward, and seek to again exceed the standards of owned operating subsidiary, Yuzhgazenergie our industry in this critical area. (‘YGE‘), is located in the southern Russian Republic of Adygea. Although the political situation Performance between Ukraine and Russia has deteriorated Group operations in Russia and Ukraine during further since my mid-year statement, there have the year resulted in a modest rise in both been no physical disruptions to JKX’s operations in production and operating profit before exceptional either of these locations. However, the commercial charges. These increases were below our earlier performance of both subsidiaries is under pressure expectations primarily due to tubing failures in and I expect will remain so for the rest of this year. two of our five production wells in Russia, but also because of shut-in of a proportion of our production In Ukraine, the unfavourable investment climate capacity in Ukraine in December as a result of (including the introduction of punitive rates of government imposed restrictions on sales of our production tax, foreign exchange controls and gas production to industrial customers; these government imposed restrictions on sale of our gas restrictions were lifted at the end of February 2015. production during the three months to 28 February 2015) has forced the Company to severely curtail In Ukraine, the new Elizavetovskoye field its planned 2015 capital investment programme development was brought on-stream in the first JKX Oil & Gas plc Annual Report 2014
16 Chairman’s statement in Ukraine until the economic parameters for investment improve. The unfavourable investment climate includes risks which, if realised, may impact the going concern status of the Company and is addressed in note 2 to the financial statements. I will inform shareholders promptly of changes to the Ukrainian Government’s position with regard to foreign investors. We have begun international arbitration proceedings against Ukraine under the Energy Charter Treaty and the bilateral investment treaties between Ukraine and the United Kingdom and the Netherlands respectively. In these proceedings, JKX is seeking, among other things, compensation for losses suffered due to Ukraine’s treaty violations. The Company has already been granted an Emergency Award under the Energy Charter Treaty, but has not yet received financial relief for this in Ukraine. In Russia, production is anticipated to be maintained at current levels until the first of the tubing replacements in the Koshekhablskoye field is completed. This is anticipated to be in the third quarter of 2015. In Hungary, the Company anticipates securing a number of production permits encompassing its most promising discoveries within its Hernad licences (JKX: 100%) during the second half of 2015. In Slovakia, the Company plans to participate in drilling two exploration wells (JKX: 25%) during the first half of 2015. Finally, I must acknowledge the work of our dedicated staff, particularly in Poltava, during this very difficult time. I am proud of their commitment to the Company and its goals. I would also like to extend my thanks to our loyal shareholders for their continuing support.
Nigel Moore Chairman Strategic report Governance Financial statements 2-79 80-119 120-182 17 Chief Executive’s statement
Average oil and gas production for the year increased by 2% to 9,919 boepd (2013: 9,731 boepd), despite an increasingly challenging political and commercial environment. Group revenue for the year was 19% lower at $146.2m (2013: $180.7m) and reflected lower oil and gas realisations in Ukraine and Russia, lower LPG realisations in Ukraine and significantly lower oil and condensate production in Ukraine. Operating profit before exceptional charges increased by 26% to $11.6m (2013: $9.2m), despite the significant rise in Ukrainian production tax levels in the second half of the year. This tax increase approximately halved the pre-exceptional operating profit figure. An impairment charge of $69m on the carrying value of our oil and gas assets has been made in the results to reflect the impact of lower international oil prices and reduced domestic gas realisations in the near to medium term. Approximately two-thirds of this charge relates to gas assets in the Koshekhablskoye field in Russia as a result of our reduced expectations of the level of near term increases in the regulated gas price. Dr Paul Davies Chief Executive Our progress Maintaining liquidity in a rapidly changing In Ukraine, two additional development wells were environment drilled and completed in the Elizavetovskoye field, making a total of three wells currently in production Our performance on the field. Two new appraisal wells were drilled Following start-up of production and completed in the Novo-Nikolaevskoye Complex, with a third well drilled but completed in 2015. from the new Elizavetovskoye field Five well-workovers were also completed in 2014. development in Ukraine at the Ukraine production averaged 4,810 boepd in the beginning of 2014, appraisal and reporting period. development drilling continued Good progress was made during the year on securing and extending our Ukrainian licence throughout the year in both the position. In the third quarter, the existing 5-year Elizavetovskoye field and the Novo- Elizavetovskoye exploration licence was converted Nikolaevskoye Complex. Production to a 20-year production licence. In the fourth quarter, the Zaplavskoye exploration licence was from the Koshekhablskoye field extended and renewed for a further five years. in Russia was maintained at In southern Russia, production from the approximately 80% of nominal Koshekhablskoye field was constrained at around plant capacity throughout the year. 30 MMcfd from three production wells only. Tubing No drilling or work-overs were problems in two additional wells resulted in production levels below expectations over the period. undertaken on our Hungary and A Russian operated rig has been mobilised to the Slovakia licences in the period. field and is currently preparing to commence the tubing replacement programme. The programme for the first well is expected to be completed in JKX Oil & Gas plc Annual Report 2014
18 Chief Executive’s statement the third quarter of the year. Russia production During 2014, we have further enhanced our averaged 5,109 boepd in the reporting period. internal control and risk management processes to ensure they are embedded across all operations Completion of the evaluation of our large in the Group. Regular scheduled revision of our Georgievskoye exploration licence has shown risk register and review of our procedures are that the few leads identified are deep and, in the fundamental to this process, with continued current commercial environment, uneconomic to oversight at Board level. Existing policies and drill. Consequently, the licence was relinquished at procedures are followed so that we comply with the the end of the year. UK Bribery Act and its guidance. Progress has been made in 2014 on the Company’s licence positions in Hungary and Slovakia. In Outlook Hungary, the Company exchanged its 25% interest We were focused last year on driving forward in the Sarkad production licence for an increased our development programmes in Ukraine and (100%) interest in the Hajdunanas production Russia with the goal of achieving a rising level licence and production facility, and the two Hernad of Group production over the short to medium exploration licences. In Slovakia, the Company is term. However, the political events in 2014 meant participating (JKX: 25%) in two exploration wells that we have had to reformulate our strategy for scheduled to be drilled in the Medzilaborce licence 2015 to one of sustainability of operations, cash in the first half of 2015. conservation and asset protection. In Ukraine, our immediate focus for JKX is Our organisation maintaining and optimising our operations to Our Ukrainian subsidiary, PPC, continued to ensure we are capable of delivering maximum demonstrate its strong organisational and technical production of oil, gas and LPG from the existing ability throughout 2014, with the start-up and well stock at the lowest cost. We are encouraged subsequent development of the new Elizavetovskoye that the restrictions on sales to industrial customers field development, ongoing development and field have recently been lifted, and that currently we do optimisation of the Novo-Nikolaevskoye Complex not need to shut-in production. Capital expenditure and retention and extension of our production and in Ukraine is budgeted at the minimum required licence positions. PPC is currently facing a difficult to maintain existing operations for the rest of the year with the need to reduce operating costs and year; no further drilling is planned in 2015 and the staffing to reflect the severe reduction in the 2015 Skytop drilling rig has been demobilised. Further capital expenditure budget. exploration and development drilling prospects Our Russian subsidiary, YGE, has matured as can only be considered if production tax levels an organisation over the year with an impressive significantly reduce from the current elevated levels, range of technical capability and expertise, notably foreign exchange controls are eased and the overall in the area of plant operation and optimisation. investment climate improves. The forthcoming tubing replacement programme In Russia, we anticipate maintaining production on HP/HT wells of more than 5,000m depth will from the current three producing wells at around be demanding and place additional pressures on 80% of nominal plant capacity, with periodic acid the organisation to complete the work successfully stimulations as required. In parallel, the tubing within tight budget constraints. replacement programme on well-27 will proceed with completion scheduled for the third quarter. Managing our risks Plant modifications to increase throughput capacity We are very conscious that a wide spectrum of to 60 MMcfd are scheduled to coincide with the risk is intrinsic to our industry. The last year has annual plant shut-down in late May and should demonstrated its particular relevance in the areas provide sufficient capacity to handle the additional of the world where we operate, with technical production from well-27 when it comes back risk always accompanied by elevated political and on-stream later in the year. commercial uncertainty. We continue to expend considerable resources and expertise in managing In Hungary, we are developing a work programme risk, and seek to provide our personnel with to restart production from the Hajdunanas field research, methodology and tools to manage risk and to secure production permits within our efficiently and effectively. Hernad exploration licences. I hope to provide Strategic report Governance Financial statements 2-79 80-119 120-182 19
an update on progress in the third quarter. Furthermore, we are scheduled to drill two wells in one of our Slovakia exploration licences in the first half of the year, and anticipate reporting results in the third quarter. Your Company has solid production assets with substantial independently verified 2P reserves, the potential to significantly increase production and the organisation and personnel committed to growing shareholder value. I remain hopeful that an early easing of the political tension between Ukraine and Russia will allow your Company to resume its production growth trajectory for the benefit of all its shareholders. I must thank all employees for their dedication to our common goals. The Board, management and employees extend their gratitude to our shareholders for their belief and support of the Company.
Dr Paul Davies Chief Executive JKX Oil & Gas plc Annual Report 2014
20 Strategic priorities
Performance dashboard Our performance dashboard for our three strategic priorities provides a snapshot of our progress in 1 2014, our focus through 2015 and the associated Profi table production growth risks. On the following pages (22 through 33) we provide more detail on the dashboard information. Progress • Ukrainian production up 3% to 4,810 boepd • Elizavetovskoye field development on-stream contributing an additional 1,511 boepd • Russian production maintained at 5,109 boepd • Gas realisations maintained at $5.74/Mcf ($9.93/Mcf in Ukraine, $2.60/Mcf in Russia) • Production costs reduced to $8.70/boe
Focus 2015 and beyond • 2015 capital investment programme suspended in Ukraine • Ukrainian government-imposed restrictions on gas sales and a punitive rate of gas production tax limits opportunities for production growth • Tubing replacement at well-27 at Koshekhablskoye field to increase production • Expansion of the GPF capacity in Russia to 60 MMcfd
Risks • Further Ukrainian government-imposed decrees making future investment uneconomic • Decline in production in Ukraine due to lack of investment • Tubing replacements at Koshekhablskoye field are deep and technically complex • Gas prices in Russia and Ukraine are controlled by their respective governments
Performance measures
Production volumes 9,919 boepd 2%
Gas realisations $5.74 per Mcf 15%
Return on average capital employed (23.0)%
Production costs $8.70 per boe 37% Strategic report Governance Financial statements 2-79 80-119 120-182 21
2 3 Oil and gas reserves growth Operating safely and responsibly
Progress Progress • Reserves replacement ratio of 196% • An All Injury Frequency Rate of 0.99 After 2014 production: • Lost Time Injuries of 0.84 • Russian reserves increased by 9.9 MMboe to • An Environmental Incident Frequency Rate 68.8 MMboe of 0.71 • Novo-Nikolaevskoye Complex reserves increased by 1.5 MMboe to 26.5 MMboe Focus 2015 and beyond • To exceed internal and industry targets for • Elizavetovskoye reserves down to 2.4 MMboe AIFR, LTI and EIFR Focus 2015 and beyond • An AIFR of 0.40 or below • Investment in Ukraine to expand reserves is • LTI of 0.25 or below currently suspended pending more favourable • EIFR of 0.70 or below economic parameters • Maintain OHSAS 18001, ISO 14001 and • Russian reserves could expand through appraisal ISO 9001 accreditations of the deeper Callovian horizons Risks Risks • Containment of hydrocarbons and other • The Ukrainian government control the economic hazardous materials which are frequently used parameters for investment • Ensuring that all staff and contractors comply • If future oil and gas prices are predicted to with approved rules, standards and regulations remain low, reserves could be reduced at all times • The wells to the Callovian horizon at Koshekhablskoye are deep and complex Performance measures
Performance measures All Injury Frequency Rate (‘AIFR’) 0.99 Reserves
97.7 MMboe Lost Time Injuries (‘LTI’) 0.84 Reserves replacement ratio 196% Environmental Incident Frequency Rate (‘EIFR’) 0.71 JKX Oil & Gas plc Annual Report 2014
22 Strategic priorities 1 Profi table production growth
The Elizavetovskoye development took less than 12 months to complete and added 8.9 MMcfd of gas to production
Visionary
marketplace analysis and subsurface expertise
Vladimir Taran – Operations Manager, Poltava Petroleum Company
Our business model – see page 6 Strategic report Governance Financial statements 2-79 80-119 120-182 23
Why is profitable production growth important? We produce our oil, gas and condensate from fields in Ukraine and southern Russia where demand for oil and gas significantly exceeds the local supply. All the oil and gas, and condensate that we produce we sell locally. In Ukraine, some of our gas and condensate production is converted into LPG and sold into the expanding Ukrainian LPG market. This increases overall revenues from the gas produced. Profitable production growth from our fields will increase our revenue, profits and shareholder value. Our future production profile underpins the value of the Group. 99% and 72% of our production in Russia and Ukraine, respectively, is gas. Our gas production is limited by the performance of our gas reservoirs and also by the processing capacity of the three Gas Processing Facilities (‘GPFs’) at our Koshekhablskoye field in Russia, and the Novo-Nikolaevskoye Complex and Elizavetovskoye fields in Ukraine.
How we go about it are not in place (see page 12), most of our gas Flexibility production in Ukraine is sold to Shell. We own and control 100% of all our producing Transferable knowledge fields therefore we have the flexibility to regularly Our low cost operating model using local reprioritise field developments to grow Group employment and expertise has been learnt from production in the most effective way. 20 years of operating in Ukraine. This experience Local expertise and knowledge is transferable across central and Our highly skilled local Russian and Ukrainian eastern Europe. technical teams are experts in local laws and regulations which ensure that we can quickly obtain the permits required to continue with Our expertise in local laws and planned field developments. Having this expertise regulations ensures that we in-house ensures efficient day-to-day drilling, development and construction operations at develop our assets quickly and minimum cost. efficiently. In 2014 at the Elizavetovskoye field in Ukraine, we drilled three new wells, doubled the gas processing capacity at the new GPF and converted Long term sales contracts to our exploration licence into a 20 year production licence. reputable customers. Stability The gas markets in which we can sell our gas in Ukraine and Russia are broadly regulated 20 years of low cost production by Government. We maximise stability and in Ukraine is transferable. predictability within these markets by selling our gas under long term contracts to reputable customers. For example, when gas sales restrictions JKX Oil & Gas plc Annual Report 2014
24 Strategic priorities
Progress in 2014 Performance measures We increased Group production by 2% in 2014 to 9,919 boepd (5,109 boepd in Russia; 4,810 boepd in Ukraine). Production costs reduced by 37% at Production volumes 9,731 9,919 $8.70/boe mainly as a result of Hryvna and Rouble 8,218 devaluations; gas realisations also reduced to 9,919 $5.74/Mcf. boepd Ukraine 2%
In Ukraine, production increased by 3% to 2012 2013 2014 4,810 boepd, gas realisations reduced to $9.93/Mcf, as did production costs at $7.65/bopd. Gas realisations 10.55 At our Elizavetovskoye field, three new wells were 6.73 drilled and brought onto production during 2014, $5.74 5.74 contributing an additional 1,511 boepd (8.9 MMcfd of gas and 20 bopd). per Mcf 15% We completed the production facility upgrade in its Elizavetovskoye field and were awarded a 20-year 2012 2013 2014 production licence for the field. The upgrade doubled the GPF capacity to 30 MMcfd Production costs 13.71 (approximately 5,000 boepd) and doubled the 8.79 8.70 condensate yield from the production stream. $8.70 Continuous development drilling at our mature per boe fields in the Novo-Nikolaevskoye Complex 37% maintained production at 3,277 boepd. 2012 2013 2014 Russia In Russia, production was maintained at Return on capital employed 5,109 boepd and our local gas price improved 4.2% on 1 July 2014. In 2014 work continued to expand (23.0)% 1.3 the capacity of our Russian GPF by a further 20% 2012 2014 taking the nominal processing capacity to close to 2013 60 MMcfd (approximately 10,000 boepd). (2.2) The certification and licencing of the expansion plant continues and we are confident that it will be achieved in 2015. (23.0) Unfortunately tubing failures in two of our five wells (well-5 and well-27) during Q1 2014 have constrained production in the period to approximately 30 MMcfd (70% of capacity). A rig is on location to complete the tubing replacement operation which is expected to restore production in Q3 2015. Strategic report Governance Financial statements 2-79 80-119 120-182 25
Outlook for 2015 and beyond Production in 2015 is expected to increase following the installation of new tubing in well-27 in Russia, the costs of which are covered by insurance proceeds. Replacing the tubing to restore production from the suspended well-5 will be completed as soon as practicable, and will further increase plateau production from the Koshekhablskoye field. In Ukraine, our investment programme is currently suspended (see page 12). Without investment, gas, oil, condensate and LPG production in Ukraine will decline. If the investment programme restarts, we expect the decline in the mature fields at the Novo- Nikolaevskoye Complex to be more than offset by increasing production from our Elizavetovskoye field. Gas realisations are anticipated to remain at current levels in Ukraine through 2015, with Rouble-denominated gas realisations in Russia expected to remain flat and to decrease in US$- terms if the Rouble devalues further. Risks Ukraine Further investment in Ukraine to increase our production is currently suspended due to the punitive rate of gas production tax introduced by the government. Production growth is therefore not possible until the economic parameters for investment improve in Ukraine. Russia In Russia, tubing replacements at our wells are complex and the chances of success are reduced due to the depth of the wells and the high temperatures and high pressures at which they operate. Accessing reserves from the underlying Callovian reservoir at Koshekhablskoye field to enhance production will also require deep and technically complex wells. These wells may only be commercial with higher local gas prices and a strengthening of the Rouble against the US$. The Russian gas prices are controlled by the government and therefore may not increase in line with current expectations. In addition, the Rouble could weaken against the US$ and both of these factors could reduce the value of future projects in Russia and their net returns. JKX Oil & Gas plc Annual Report 2014
26 Strategic priorities 2 Oil and gas reserves growth
We focus on geologies that we know best to boost reserves from existing assets
Visionary
marketplace analysis and subsurface expertise
Dmitriy Makarov – Senior Geophysicist, Poltava Petroleum Company Our business model – see page 6 Strategic report Governance Financial statements 2-79 80-119 120-182 27
Why is oil and gas reserves growth important? Production from our oil and gas reserves in Ukraine and southern Russia will continue to generate cash to fund future development and exploration in the region. The reserves replacement ratio measures the amount of new oil and gas reserves we have discovered during the year compared with what we have produced from existing reserves. Our ability to replenish and grow our reserves base is a good indicator of the success of our exploration and appraisal programme.
How we go about it To ensure we can continue to grow our oil and gas In addition the UK team oversee the day-to- reserves we maintain a balance of investment in: day technical challenges that arise at our fields and support the Group’s business development • exploration activities with technical due diligence when new • appraisal and opportunities arise. • development projects. We regularly use independent engineering firms Exploration includes acquiring new oil and gas to estimate our reserves and resources which exploration and production licences when they provides a certain level of assurance over our own arise in the region and continuing with our assessments. exploration programme across our existing portfolio We share technical knowledge and resources of licences. We continue to screen a lot of potential between our projects in Ukraine and Russia. opportunities in central and eastern Europe that fit with the Company’s strategy. We continue to focus on geographies and geologies that we understand in central and eastern Europe. Our three technical teams in Our three technical teams in London, Poltava London, Poltava (Ukraine) (Ukraine) and Maikop (southern Russia) all have and Maikop (southern Russia) important roles to get the highest quality results all have important roles from subsurface. which combine to achieve the Our UK-based technical team focus on refining the Group’s short, medium and long term plans best subsurface analysis and to maximise value from existing reserves and to performance. increase the reserves in our licence areas. This requires applying the latest Western technologies to interpret the subsurface data and production results. We use this to regularly reschedule our drilling targets and field development plans to maximise our cash flows and chances of success. JKX Oil & Gas plc Annual Report 2014
28 Strategic priorities
Progress in 2014 Performance measures Our 2P reserves have increased to 97.7 MMboe (Russia 68.8 MMboe; Ukraine 28.9 MMboe). Reserves 93.8 94.2 97.7 Our reserves replacement ratio increased to 196%. In Russia, the reserves increase was mainly due 97.7 MMboe to our reassessment of the most recent production data from the Koshekhablskoye field. 4%
In Ukraine, the reserves decreased following 2012 2013 2014 disappointing production rates from the third well E-303 at our Elizavetovskoye field, which was drilled to the deeper G sands reservoirs. Reserves replacement 208 196 ratio Outlook for 2015 and beyond 112 Future reserves replacement in Ukraine requires 196% capital investment and our planned 2015 capital investment programme is currently suspended until the economic parameters for investment 2012 2013 2014 improve. Should our investment programme recommence, reserves could be expanded at our Elizavetovskoye field through more testing of the different horizons and through exploration drilling on prospects at our Novo-Nikolaevskoye Complex fields and, in particular, on the Zaplavskoye exploration licence. In Russia, reserves could be expanded through the appraisal of the deeper Callovian horizons at our Koshekhableskoye field. Risks Ukraine The calculations to measure oil and gas reserves require an estimate of expected future oil and gas prices. If a prolonged period of low oil and gas prices is forecast, the commercial returns from development projects reduce, which can reduce the reserves assessments. The Ukrainian government control the economic parameters for investment and therefore it is difficult to predict whether these will improve in the foreseeable future to allow commercial rates of return for investments into oil and gas projects. Russia Wells to the Callovian horizon are deep, complex and expensive, and will require significant technical analysis in advance to de-risk the project. Strategic report Governance Financial statements 2-79 80-119 120-182 29
Our business model – see page 6
Operational and
organisational
excellence
Strong local networks provide essential services at short notice
Our subsidiary in Ukraine, Poltava Petroleum Company, is licensed by the Government to design and control all our engineering, drilling and construction activities. JKX Oil & Gas plc Annual Report 2014
30 Strategic priorities 3 Operating safely and responsibly
20 years of building relations in the region means valuable insight and transferable low cost operating skills
Operational
excellence,stakeholder and management
Local schools benefit from our success through our charitable projects. Our business model – see page 6 Strategic report Governance Financial statements 2-79 80-119 120-182 31
Why is operating safely and responsibly important? At the year end, our Russian and Ukrainian operations employed 257 and 622 personnel, respectively. Our London office has 25 staff. This puts people as a top priority for the Board. We work in environments that are challenging and hazardous by nature. As well as operating efficiently, it is vital that we also operate safely and responsibly. Our behaviour impacts on our employees, our shareholders, the wider community and the environment. Our performance in the society in which we operate, and the environment, have become a critical part of measuring our overall performance.
How we go about it People We aim to attract and retain the best people, supporting them with appropriate HSECQ systems We have 879 staff in Ukraine and supporting the local communities in which we operate. We attract the best people by offering and Russia of which more than attractive remuneration packages and working 98% are local people. environments, by providing daily challenges, and opportunities for personal development. We have over 850 staff in Ukraine and Russia We provide local taxes, of which more than 98% are local people. This employment and stability. provides us with a deeper understanding of local cultures which we respect and work with to get the best from our staff. We aim to invest in, and Ensuring the welfare and human rights of our employees is an important consideration in our day- improve, the communities in to-day activity, both in the UK and internationally. which we operate. We use the United Nations rights frameworks as guiding principles throughout our Code of Conduct, our employment practices and our relationships with suppliers, wherever we do business. Community We aim to invest in, and improve, the communities in which we operate. We do this by providing local taxes, local employment and stability, which are highly valued by employees, local communities and governments. Environment We operate an Environmental Management System (‘EMS’) accredited to ISO 14001 to reduce our impact on the environment. Our EMS requires ongoing training to staff and promoting a thorough understanding of our environmental policy to our business partners and suppliers. JKX Oil & Gas plc Annual Report 2014
32 Strategic priorities
Progress in 2014 Performance measures During 2014 our performance against our health and safety targets resulted in: All Injury Frequency 0.99 • an All Injury Frequency Rate (‘AIFR’) of 0.991, Rate (‘AIFR’) the target set was 0.40; 2 • Lost Time Injuries (‘LTI’) frequency rate of 0.84, 0.99 0.25 the target set was 0.25. 0.12
This year we have not achieved the high standards 2012 2013 2014 of accident prevention achieved in each of the last nine years. Lost Time Injuries (‘LTI’) A Root Cause Analysis was carried out for each of the incidents with the lessons learned distributed across the Group. 0.84 0.84 We measure our environmental performance using Environment Incident Frequency Rate (‘EIFR’). 0 0 2012 2013 2014 In 2014 our EIFR3 was 0.71 which exceeded our target set of 0.80. Environmental Incident 0.75 0.71 Outlook for 2015 and beyond Frequency rate (‘EIFR’) We expect to maintain our strong Health and Safety culture throughout the Group and exceed 0.71 0.24 our industry AIFR and LTI performance targets. Our internal AIFR and LTI performance targets for 2015 are set at 0.40 and 0.25 respectively, well 2012 2013 2014 below the industry benchmarks. Our internal EIFR performance target has been set at 0.70 for 2015. Greenhouse Gas Emissions We will continue to invest in local training and skills development and appropriate community Scope 1 – direct emissions development projects and will maintain a regular dialogue with local stakeholders and authorities 317,441 tonnes CO2e regarding our future plans. We will maintain our OHSAS 18001 Health & Safety accreditation, our ISO 14001 Environmental Scope 2 – indirect emissions accreditation and our ISO 9001 Quality tonnes CO e Management accreditation. 827 2
1 The AIFR, representing the health and safety incidents per 200,000 hours worked, is Intensity ratio a direct measure of safety performance. 2 The LTI represents the number of lost time or recordable incidents per 200,000 hours worked and is a direct measure of safety performance. tonnes CO e / MMboe of production 3 The EIFR is the number of environmental incidents per 200,000 hours worked. 88 2 Strategic report Governance Financial statements 2-79 80-119 120-182 33
Risks JKX people – data Development and monetisation of our oil and gas reserves, exposes us to a wide range of significant Staff by region health, safety, security and environmental risks. 906 Russia 257 On a daily basis, there is a risk of the loss of Ukraine 622 containment of hydrocarbons and other hazardous Rest of the world 27 material, as well as the risk of fires, explosions or other incidents. Continuous improvement of our procedures and our identification and recording systems is needed Staff: Male/Female to mitigate our health, safety and environmental risks, and these need to be subject to regular Male 81% 170 external audit. Female 19% Russia 736 The tubing replacements planned at our Koshekhablskoye field are to repair wells that are deep, high temperature and high pressure, Directors and Senior Managers so are inherently difficult and require significant planning to de-risk the safety and success of Directors1 9 the project. 13 Senior managers2 4
Directors and Senior Managers, Male/Female
1 Male 92% Female 8%
12
1 Company Directors consist of the Company’s Board as detailed on pages 82 and 83. 2 Senior Managers are directors of subsidiary companies or who otherwise have responsibility for planning, directing or controlling the activities of the company or a strategically significant part of it. JKX Oil & Gas plc Annual Report 2014
34 Performance in 2014
Total Second half First half Total PRODUCTION SUMMARY 2014 2014 2014 2013 Production Oil (Mbbl) 368 178 190 494 Gas (Bcf) 19.5 9.6 9.9 18.4 Oil equivalent (Mboe) 3,620 1,787 1,833 3,552
Daily production Oil (bopd) 1,008 967 1,049 1,352 Gas (MMcfd) 54 53 55 50 Oil equivalent (boepd) 9,919 9,715 10,126 9,731
Total Second half First half Total 2014 2014 2014 2013 OPERATING RESULTS $m $m $m $m Revenue Oil 34.0 14.8 19.2 44.9 Gas 102.3 52.0 50.3 120.2 Liquefied petroleum gas 9.5 4.7 4.8 13.9 Other 0.4 0.4 0.0 1.7 146.2 71.9 74.3 180.7
Cost of sales Operating costs (31.5) (15.6) (15.9) (48.7) Depreciation, depletion and amortisation – oil and gas assets (32.4) (12.7) (19.7) (55.3) Production based taxes (45.5) (27.9) (17.6) (41.8) Exceptional item – provision for impairment of oil and gas assets (69.1) (69.1) - - Exceptional item – well control operations (3.5) (0.2) (3.3) - (182.0) (125.5) (56.5) (145.8)
Write off of exploration and evaluation costs - - - (1.5) Total cost of sales (182.0) (125.5) (56.5) (147.3) Gross profit before exceptional item 36.8 15.7 21.1 33.4
Gross (loss)/profit after exceptional item (35.8) (53.6) 17.8 33.4
Operating expenses Administrative expenses (19.5) (9.4) (10.1) (24.1) Loss on foreign exchange (5.7) (0.4) (5.3) (0.1) Profit from operations before exceptional items 11.6 5.8 5.8 9.2
(Loss)/profit from operations after exceptional items (60.9) (63.3) 2.4 9.2 Strategic report Governance Financial statements 2-79 80-119 120-182 35
Total Second half First half Total EARNINGS 2014 2014 2014 2013 Net (loss)/profit ($m) (79.5) (88.0) 8.5 6.5 Net (loss)/profit before exceptional item ($m) (7.0) (18.2) 11.2 6.5 Basic weighted average number of shares in issue (m) 172 172 172 172 (Loss)/earnings per share before exceptional item (basic, cents) (12.76) (19.26) 6.50 3.78 (Loss)/earnings per share after exceptional item (basic, cents) (46.21) (51.16) 4.95 3.78 Pre-exceptional earnings before interest, tax, depreciation and 46.0 20.3 25.7 66.2 amortisation ($m)1
Total Second half First half Total REALISATIONS 2014 2014 2014 2013 Oil (per bbl) $88.80 $84.56 $92.39 $92.12 Gas (per Mcf) $5.74 $5.84 $5.64 $6.73 LPG (per tonne) $807 $806 $808 $898
Total Second half First half Total COST OF PRODUCTION ($/boe) 2014 2014 2014 2013 Production costs (excluding exceptional item) $8.70 $8.73 $8.67 $13.71 Depreciation, depletion and amortisation $8.93 $7.08 $10.72 $15.62 Production based taxes $12.57 $15.62 $9.60 $11.77
Total Second half First half Total CASH FLOW 2014 2014 2014 2013 Cash generated from operations ($m) 58.4 27.3 31.1 74.8 Operating cash flow per share (cents) 33.9 15.9 18.0 43.5
Total Second half First half Total STATEMENT OF FINANCIAL POSITION 2014 2014 2014 2013 Total cash2 ($m) 25.9 25.9 28.5 25.9 Borrowings ($m) 36.4 36.4 33.4 32.2 Net debt3 ($m) (10.5) (10.5) (4.9) (6.3) Net (debt)/cash to equity (%) (3.8) (3.8) (1.0) 0.0 Return on average capital employed (%)4 (23.0) (25.2) 3.5 1.3
Increase in property, plant and equipment/intangible assets ($m) Ukraine 35.4 18.9 16.5 41.7 Russia 5.3 1.1 4.2 20.2 Other 1.6 0.9 0.7 2.5 Total 42.3 20.9 21.4 64.4
1 Earnings before interest, tax, depreciation and amortisation (‘EBITDA’) is a non-IFRS measure and calculated using Loss from operations of $60.9m (2013: $9.2m profit) and adding back depletion, depreciation, amortisation and exceptional items of $106.9m (2013: $57.0m). EBITDA is an indicator of the Group’s ability to generate operating cash flow that can fund its working capital needs, service debt obligations and fund capital expenditures. 2 Total cash is Cash and cash equivalents plus Restricted cash. 3 Net debt is Total cash less Borrowings. 4 Return on average capital employed is the annualised profit/(loss) for the period divided by average capital employed. JKX Oil & Gas plc Annual Report 2014
36 Financial review
Production Gas production in 2014 increased as a result of the investment and drilling programme of the last two years which was funded with the proceeds of the convertible bond placement in Q1 2013. Unfortunately, gas production in Russia remained constrained for most of the year as two out of five wells in the portfolio were shut-in from January 2014 due to tubing connection failures. Tubing replacement operations are underway for the first of these two wells with a return to production anticipated in Q3 2015. In Ukraine, oil and gas production volumes from our mature Novo-Nikolaevskoye fields continued to follow a natural decline profile with our new Elizavetovskoye field development providing predominantly additional gas production. In Ukraine, the split of gas and oil production for 2014 was at 80% / 20% (2013: 71% / 29%). 99% of production in Russia was gas (2013: 99%).
Revenue Group revenues in 2014 by region comprised: Ukraine $118.8m and Russia $27.4m (2013: Ukraine Cynthia Dubin Finance Director $151.0m, Russia $28.9m and Hungary $0.8m).
Results for the year The Group recorded a loss for the year of $79.5m Group revenues (2013: profit $6.5m) after exceptional charges of 2014 2013 Change % $72.5m which comprised: ($m) ($m) ($m) Change
• a non-cash impairment charge of $69.1m Ukraine 118.8 151.0 (32.2) (21.3%) (2013: nil) for the Group’s oil and gas assets in Russia 27.4 28.9 (1.5) (5.2%) Ukraine, Russia and Hungary; and Hungary - 0.8 (0.8) (100%) • an exceptional charge of $3.5m as a result of Total 146.2 180.7 (34.5) (19.1%) one-off costs incurred in Russia to kill well-27. Loss for the year before exceptional charges was $22.0m (2013: profit $6.5m). Ukrainian revenues
2014 2013 Change ($m) ($m) ($m)
Gas 75.7 91.3 (15.6) Oil 33.2 44.1 (10.9) Liquefi ed Petroleum Gas (‘LPG’) 9.5 13.9 (4.4) Other 0.4 1.7 (1.3) Total 118.8 151.0 (32.2)
Lower Ukrainian gas revenue was primarily the result of a reduction in realisations, while the reduction in Ukrainian oil revenues was mainly due to lower production. Strategic report Governance Financial statements 2-79 80-119 120-182 37
Average Group sales volume declined by 3.2% Liquefied Petroleum Gas (‘LPG’) sales to 9,188 boepd (2013: 9,489 boepd), with 48.8% Gas production volumes from the Novo- (4,482 boepd) sold in Ukraine and 51.2% Nikolaevskoye Complex decreased by 27.8%, and (4,706 boepd) attributable to Russia. directly affected LPG production and sales. The $4.4m (31.7%) decline in LPG revenues was due Realisations to lower production volumes combined with a reduction in the domestic market price, resulting 2014 2013 from increased competition through both imports Ukraine and other domestically produced supplies. Gas ($/Mcf) 9.93 11.96 Oil ($/bbl) 90.79 91.03 Significant new gas production in Ukraine came LPG ($/tonne) 807 898 on-stream from the Elizavetovskoye field which is Russia remote from the LPG plant location at the Novo- Gas ($/Mcf) 2.60 2.77 Nikolaevskoye Complex and therefore did not Hungary impact LPG production. Gas ($/Mcf) N/A 11.74 Average LPG realisations reduced approximately Group 10% to $807/tonne (2013: $898/tonne) with the Gas ($/Mcf) 5.74 6.73 Ukrainian plant contributing $9.5m (2013: $13.9m) Oil ($/bbl) 88.80 92.12 LPG ($/tonne) 807 898 to Group revenue in the reporting period. Loss from operations Gas sales Loss from operations was $60.9m which included Whilst Ukrainian gas sales volumes were exceptional charges of $72.5m. stable year on year, gas prices declined 17.0% Profit from operations before exceptional charges over the period from $11.96/Mcf to $9.93/Mcf was $11.6m (2013: $9.2m) which was the result due to lower market prices achieved as a result of $34.5m decrease in revenues to $146.2m (2013: of reduced import prices and the devaluation $180.7m), a decrease in cost of sales by $37.9m and of the Hryvna from UAH8.0/$ to UAH15.8/$. an increase in other costs by $1m. Whilst the Ukrainian state regulator makes periodic adjustments for Hryvna/$ exchange Total cost of sales for the year (before exceptional rate fluctuations, there is a time lag between charges) decreased by $37.9m to $109.4m (2013: devaluation and adjustments to the official $147.3m) mainly due to decreases in: industrial gas tariff. • Russian operating costs of $4.5m Our gas realisations in Russia increased by 4.2% • Ukrainian operating costs of $3.6m from 1 July 2014; however, due to the devaluation • Ukrainian oil and gas inventory movements and of the Russian Rouble in 2014 from RR32.73/$ to product purchases of $8.3m RR56.26/$, average gas realisations dropped by • depreciation, depletion and amortisation (‘DD&A’) 6.1% from $2.77/Mcf to $2.60/Mcf. charge of $23.0m The combination of lower realisations in Russia • Rest of World costs of $2.2m and Ukraine resulted in an overall average • offset by an increase in production based taxes of reduction in gas realisations of 14.7% to $5.74/Mcf $3.7m, predominantly related to Ukraine. (2013: $6.73/Mcf ). The decrease in Russian operating costs of $4.5m is Oil sales largely due to reduced spending on raw materials Reduction in oil sales was driven by a 28.6% and supplies following significant purchases decline in volumes rather than realisations, as made in 2013, lower field support activities and Ukrainian oil realisations held relatively firm at costs, and lower property tax payments due to $90.79/bbl (2013: $91.03/bbl), due to local demand the reduced value of the Russian assets used for for oil offsetting international oil price trends to property tax purposes. Additionally, the Rouble yield only a small diminishment in our realisation. devaluation from RR32.73/$ to RR56.26/$ reduced the US Dollar reported cost base for Russia throughout the year. JKX Oil & Gas plc Annual Report 2014
38 Financial review
Ukrainian operating costs decreased by $3.6m, which devalued significantly against the US mainly due to the devaluation of the Hryvna from Dollar; UAH8.0/$ to UAH15.8/$. • the share option charge of $1.3m; Ukrainian sales from inventory and product • legal and professional fees of $1.4m; purchases decreased by $8.3m to $1.1m (2013: • offset by a $1.1m increase in various other cost $9.4m), as a result of production meeting sales categories. demand throughout the year, thus obviating the need to purchase additional gas to meet sales The Group’s exchange losses increased by $5.6m to commitments. $5.7m (2013: $0.1m) due to the Rouble and Hryvna devaluations previously noted. The DD&A charge reduced by $23.0m mainly due to the upward revision of reserves at Ignatovskoye, Other taxation – Ukraine Molchanovskoye, Novo-Nikolaevskoye and On 1 April 2014, the Ukrainian government Elizavetovskoye fields in Ukraine at the end of increased production tax rates for gas from 25% 2013 which led to lower 2014 DD&A rates in $/boe to 28%. This rate is then applied to the actual as the cost of amortising our oil and gas assets is average import price for gas as communicated by now spread over a larger reserve base. The Group’s the Ministry of Economic Development and Trade DD&A rate reduced to $8.93/boe (2013: $15.62/boe). of Ukraine. The oil tax rate at this time remained constant at 39%. Rest of World cost savings are mainly as a result of reduced exploration and evaluation costs written off On 1 August 2014, the Ukrainian government during the year which were $1.5m lower at $0.02m passed emergency budget legislation to increase (2013: $1.5m). the gas production tax rate from 28% to 55% of the maximum gas price published monthly by the Production taxes Ministry of Economy. Oil tax rates also increased Production based taxes for the Group increased from 39% to 45% from 1 August 2014. by $3.7m to $45.5m (2013: $41.8m), mainly as a Other taxation – Russia result of higher oil and gas production tax rates in A new mineral extraction tax (‘MET’) formula Ukraine (see ‘Other Taxation – Ukraine’ section for approved in September 2013 was implemented details). The material increase in production tax from 1 July 2014. The new formula is based on rates in August 2014 and the resultant financial gas prices, gas production as a share of total effect was somewhat offset by lower amounts of tax hydrocarbon output and complexity of gas reservoirs due as a result of reduced gas sales prices, lower oil (depletion rates, depth of the producing horizons production and the devaluation of the Hryvna. and geographical location of producing fields). Average gas production tax in Ukraine increased In addition to production taxes, we are subject from $99.60/Mcm to $124.40/Mcm whilst average to a 2.2% property tax which is based on the net oil production tax decreased from $36.14/bbl to book value of our Russian assets as calculated for $34.90/bbl. property tax purposes. This amounted to $2.5m in Average gas production tax in Russia increased 2014 (2013: $3.7m). The figure is included in other from $10.90/Mcm to $11.39/Mcm in 2014 due to cost of sales in the consolidated income statement. implementation of a new Mineral Extraction Tax regime (see ‘Other Taxation – Russia’), contributing Finance costs to the Group’s effective gas production tax increase Finance costs are largely represented by the from $46.51/Mcm to $60.20/Mcm. Although not convertible bond interest at $3.1m (2013: $3.6m). material to the Group, this increase together with The $9.1m gain on movement in the fair value of the increase in Ukraine resulted in production tax the derivative liability represents the change in fair on a boe basis of$12.57/boe (2013: $11.77/boe). value of the conversion option associated with the convertible bond since its completion on The Group’s administrative costs decreased by 19 February 2013. The bonds have a conversion $4.6m to $19.5m (2013: $24.1m) during the year. option which becomes more valuable to the bond Reduction in costs is largely due to decreases in: holder as the Company’s share price nears or • Group staff costs of $3.0m mainly driven by costs exceeds the fixed conversion strike price incurred in local currencies (Hryvna and Rouble) (76.29 pence). As the Company’s share price has Strategic report Governance Financial statements 2-79 80-119 120-182 39
decreased from 71.50 pence as at 31 December 2013 In Ukraine, the corporate tax rate for 2014 was to 12.00 pence at 31 December 2014, a credit has 18% and remains at this level for 2015. been recognised that represents the decrease in fair value of the potential liability of the Company to Loss for the year after tax settle any conversion options that may be exercised The result for the year, after exceptional charges in future periods. of $57.6m (net of deferred tax effect on exceptional charges), was a loss of $79.5m (2013: profit of Earnings per share $6.5m). On a pre-exceptional basis, loss for the year Basic loss per share before exceptional items were was $22.0m (2013: profit $6.5m). 12.76 cents (2013: earnings 3.78 cents) in line with On a pre-exceptional basis, the $28.5m change is the pre-exceptional loss. the combined result of: Basic loss per share after exceptional items was • a $34.5m decrease in revenues mainly due to 46.21 cents (2013: earnings 3.78 cents) reflecting reduced Ukrainian gas realisations; the Group loss after exceptional items net of their related tax effects of $57.6m (2013: nil). • a decrease in cost of sales of $37.9m to $109.4m (2013: $147.3m) as a result of reduced charges Taxation related to sales from inventory in Ukraine, a The total tax charge for the year was $25.8m (2013: decrease in Ukrainian production taxes and a credit $2.5m) comprising a current tax charge of decrease in DD&A charges; $9.5m (2013: $8.6m), a deferred tax charge before • an increase in foreign exchange losses of $5.6m; exceptional items of $31.3m (2013: credit $11.1m) • a net decrease in administrative and net finance and a deferred tax credit of $15.0m in respect of charges of $5.8m; exceptional items (2013: nil). • a $0.2m gain from the Hungarian asset swap; The current tax charge comprises: • a $11.0m change in the fair value impact of the • a foreign exchange loss of $5.7m Hryvna- derivative attached to the convertible bond; and based prepaid tax of the prior year, following • a $43.3m increase in the total taxation charge. devaluation of the currency; • a $4.7m charge in respect of our Ukrainian profit Exceptional charges for the year (2013: $8.6m), which has reduced as Exceptional charges of $72.5m in the year consist of: a result of lower profitability in Ukraine; • $3.5m charge relating to well control operations • a $0.9m credit in respect of Hungarian and in Russia (see note 5 to the financial statements); UK tax. • an $69.1m impairment charge against our oil and The total deferred tax charge of $16.3m (2013: gas assets. $11.1m credit) comprises: The impairment charge for the year of $69.1m • $31.4m charge reflecting the derecognition of the comprises: Russian deferred tax asset in respect of losses • $46.3m in respect of Russian oil and gas assets carried forward to future periods (2013: $11.1m mainly as a result of our lower expectations for credit) and the related foreign exchange loss on near term increases in the regulated gas price in the balance due to Rouble devaluation. Under the domestic gas market; Russian tax law corporate tax losses expire after • $10.0m in respect of our Hungarian oil and gas 10 years and following our reduced expectations assets due to the sharp decline in international of the level of near term increases in the oil and gas prices; regulated gas price in Russia, forecast profits in the near term do not reflect the Company being • $12.8m in respect of our Elizavetovskoye field in able to utilise these losses; Ukraine mainly as a result of the 71% decline in assessed 2P reserves at the end of the year. • $15.0m credit (2013: nil) relating to impairments to our oil and gas assets; and See note 5 to the financial statements for full • $0.1m net credit for changes in other short impairment disclosures. term timing differences and the related foreign exchange effects. JKX Oil & Gas plc Annual Report 2014
40 Financial review
Cash flows IG-140 and IG-141 at our Novo-Nikolaevskoye The Group generated cash from operations was Complex, and the work-over of wells on the mature lower at $58.4m (2013: $74.8m), mainly due to fields using the Skytop N-75 and TW-100 rigs lower production in Ukraine and lower gas sales respectively. These projects all comprise part realisations in both Ukraine and Russia. In of the investment programme outlined at the parallel, both the Hryvna and Rouble devalued beginning of 2013 to increase production from our sharply against the US dollar through the year and existing production licences and new appraisal we experienced sudden and significant increases opportunities. to production tax rates in Ukraine from August Net cash inflow from financing activities decreased onwards. Financial resources were mainly spent dramatically to $1.4m (2013: inflow $19.2m), on new drilling and work-over projects to maintain comprised mainly of the $1.5m of cash inflow from future production levels. the working capital facility provided by Credit Interest and bond charges paid were $1.1m higher Agricole. The 2014 decline is explained by the at $3.3m (2013: $2.2m) because of a full year’s $37.8m of bond proceeds received in 2013 which interest payment on the bonds and less interest was offset by the repayment of the Credit Agricole expense paid to Credit Agricole for the working capital facility ($15.0m) and $4.0m for the purchase capital facility. of employee trust shares. Corporation tax paid was 52% lower at $7.6m To assist with Group liquidity, the Company (2013: $15.9m), predominantly due to lower purchased $8.7m of selected Ukrainian government profitability in Ukraine and the utilisation of US$ treasury bills in October 2014 with a fixed prepaid tax in Ukraine at the end of last year. coupon and which matured in January and February 2015. Net cash generated from operating activities was lower at $47.5m (2013: $56.7m) as a result of the Cash $16.4m reduction in cash from operations and a Cash at the end of the year (excluding restricted $1.1m increase in interest payments offset by a cash) was $25.4m (2013: $25.7m). This resulted reduction of $8.4m in Ukrainian corporation tax from a cash balance at the beginning of the year of payments. $25.7m (2013: $12.0m) enhanced by an increase in Investment in property plant and equipment in cash and cash equivalents during the year of $7.0m 2014 was $21.5m lower than the prior year at (2013: $14.3m increase), before the negative effects $40.0m (2013: $61.5m). of foreign exchange on cash balances of $7.3m (2013: decrease $0.6m). Investment in Russian plant and equipment accounted for $4.8m (2013: $20.2m) of the Group’s Liquidity capital spend in the year, representing 12.2% The Group employs a number of financial (2013: 31.6%) of the total for the year. The 2014 instruments to manage the liquidity associated cost mainly relates to work-over activity and with the Group’s operations. These include cash acidisation of wells to maintain the performance of and cash equivalents, together with receivables and the wells throughout the year. payables that arise directly from our operations. At the end of the year, the carrying value of the Separate from these, the main financial instrument Group’s oil and gas assets in Russia was $115.4m of the Group is the $40 million guaranteed (2013: $286.3m) after an impairment of $46.3m unsubordinated convertible bond which was placed (2013: nil). The focus of the ongoing and future in Q1 2013 with institutional investors which work is to increase the Russian plant capacity by a matures in 2018. The bonds have an annual coupon minimum of 50% to 60 MMcfd and have a suite of of 8 per cent per annum payable semi-annually in producing wells which fill this capacity, in addition arrears. The bonds terms and conditions contain to providing a level of redundancy during periods of an annual put option each February until maturity. well intervention. None of the bondholders exercised their option to Capital expenditure in Ukraine during 2014 was put 10% of the outstanding principal of the bonds $35.4m (2013: $41.7m). Our Ukrainian capital in February 2014. Bonds with a principal amount investments included completion of Elizavetovskoye of $4m were redeemed on 19 February 2015 in wells E301, E302 and E303, appraisal wells NN80, addition to an early redemption premium of $0.2m Strategic report Governance Financial statements 2-79 80-119 120-182 41
in accordance with the terms and conditions of The Company is focusing on maintaining its the bond. Further information on the terms and liquidity by minimisation of capital expenditure conditions of the bonds is included in notes 13 and and reduction of operating costs in Ukraine and 14 to the financial statements. Russia. However, a limited amount of financial resources will be spent in 2015 to progress The Group renewed the Credit Agricole working development of our Slovakian and Hungarian capital facility in Q2 2014 and continues to benefit assets with a view to maintaining appraisal and from the flexibility that this financing provides development programmes in these locations. our Ukrainian subsidiary, in particular to manage its working capital needs. The facility is available until 30 June 2015 with the maximum facility reducing to $10 million and $5 million on 30 April 2015 and 30 May 2015, respectively. Drawings of Cynthia Dubin Finance Director $1.5m were outstanding at 31 December 2014. In addition, and as noted above, as a consequence of Ukrainian currency controls and in order to maintain liquidity across the Group, the Company purchased Ukrainian government US$ treasury bills with a fixed coupon and short maturity dates.
Dividends No dividends have been paid or proposed during the year, and the Board will not be recommending the payment of a dividend at the forthcoming AGM.
Outlook The Company’s financial position has been severely impacted by the deteriorating economic conditions in Ukraine and Russia. The ramifications are significant. The criteria for further investment in Ukraine is an ability to exchange and repatriate dividends, currency stability, continuation of an open gas market for independent producers and a production tax regime which permits producers to generate commensurate returns with the risks taken. Although the Company has made a significant investment in Ukraine over the last 20 years, the Board currently considers it prudent to minimise further capital investment in Ukraine until such time as the aforementioned conditions return. In Russia, the combination of currency devaluation and a minimal gas tariff increase in the near term has reduced the projected returns on our Russian project. The Board also considers that the recent downgrading of the country to sub-investment grade and the threat of currency controls has a negative effect on our plans to expand our current licence portfolio there. Consequently, ongoing capital expenditure in Russia is limited to the re-instatement of production from well-27 which the Company expects to be funded from insurance proceeds. JKX Oil & Gas plc Annual Report 2014
42 Operational review
2014 saw start-up of production in the Elizavetovskoye gas field and steady production in the Novo-Nikolaevskoye group of fields in Ukraine, and constrained production from the Koshekhablskoye field in Russia. Production levels were adversely affected in the second half of the year due to production tax increases in Ukraine which significantly reduced funds available for investment.
Group production In 2014, production in Ukraine from the Novo- Nikolaevskoye group of fields was supplemented by the start-up of the Elizavetovskoye gas field at the beginning of the period. Unfortunately, Ukrainian production was constrained in the fourth quarter by government restrictions on access to our industrial customer base. Production from the Koshekhablskoye field in Russia remained steady through the period. No oil and gas was produced by the Hajdunanas field in Hungary in 2014. Group average production in 2014 was 9,919 boepd, comprising 53.4 MMcfd of gas and 1,003 bpd of oil and condensate, a 1.5% increase on the average for Martin Miller Technical Director 2013.
Asset life cycle
Licence area 2P reserves Country Exploration Appraisal Development Production MMboe
UKRAINE Ignatovskoye Molchanovskoye North Molchanovskoye Main Novo-Nikolaevskoye Rudenkovskoye 28.9 Molchanovskoye Wedge Zone Elizavetovskoye Zaplavskoye
RUSSIA Koshekhablskoye Oxfordian Koshekhablskoye Callovian 68.8
HUNGARY Hajdunanas Gorbehaza Turkeve*
SLOVAKIA Svidnik** Medzilaborce** Snina**
JKX has 100% interest in its licences except for the following: * JKX has a 50% interest in this licence area ** JKX has a 25% interest in this licence area Strategic report Governance Financial statements 2-79 80-119 120-182 43
Ukraine
Dnieper-Donets POLTAVA Basin Kiev Ukraine
Elizavetovskoye field Russia
Black Sea
Soyuz pipeline Dnieper-Donets Ukraine licence areas and Basin border major pipelines
Novo-Nikolaevskoye Complex Gas pipeline Gas/oil fi eld 0 20 km Licence area Roads
Novo-Nikolaevskoye licences an untested downthrown fault block on the west flank of the Ignatovskoye field with the final 400 Production metres section in the Visean carbonate reservoir Average production from the Novo-Nikolaevskoye being drilled close to horizontal. The well was group of fields in 2014 was 3,277 boepd comprising completed in the first quarter of 2015 using a pre- 14.1 MMcfd of gas and 932 bpd of oil and drilled liner and then an acid squeeze. Gas lift condensate, a 28% decrease on the average for 2013. is being used to bring oil to the surface and the Development drilling and other well activity well continues to clean up. The low permeability The Skytop N-75 rig moved to the Novo- suggests that the reservoir in this fault block Nikolaevskoye area to start drilling operations in has not undergone the same degree of diagenetic mid-March while the TW-100 workover rig was change as the main field fault block. active throughout the period, carrying out five re- • Recompletions using the TW-100 rig in period completions, one well repair and six abandonments. included wells M-170 and IG-129 to allow for • Appraisal well NN-80 was drilled to a depth additional perforations in the Devonian sandstone of 1,794m and targeted the upper V-15 Visean and the Tournaisian T2 sandstone respectively. sandstone in the Novo-Nikolaevskoye field. Initial In addition, well NN-09 was recompleted for gas results were considerably above expectations with lift, NN74 was recompleted to produce the V15 a flow rate of 4.98 MMcfd and 51 bcpd. Production Visean sandstone and additional perforations has since stabilised at around 1 MMcfd with were made in IG-141. 8 bcpd. • A pilot waterflood project on Ignatovskoye was • Appraisal well IG-141 was drilled to a depth of kicked off in 2012 with the injection of produced 2,802m and targeted the Devonian sandstone water into the Visean carbonate reservoir well in a downthrown fault block on the northern IG-126 and was boosted by the injection of flank of the Ignatovskoye field. Initial flow rates excess water from the Rudenkovskoye R-103 exceeded expectations, but decline was rapid and frac operation in 2013. The aim of the project the well, after additional perforations, is now was to verify fault barriers and establish which producing around 30 bopd. wells were in direct communication. Well IG-138 reacted positively and it was evident that, once • Appraisal well IG-140 was drilled to a total pressure had been partially restored in the fault measured depth of 3,200 metres (2,354m TVD) in JKX Oil & Gas plc Annual Report 2014
44 Operational review
block, production was rising slowly reaching Drilling and development activity almost three times its historical low point on The Skytop rig drilled well E-301 at the end of natural decline. Water breakthrough in the third 2013 and the well was completed in early 2014. The quarter of 2014 led to a reduction in oil production second well E-302 was completed in March and the from the well and confirmed the model. An third well E-303 was completed in September. additional 10 metres of perforation were added • Both E-301 and E-302 were completed in the near the top of the reservoir at the end of the Permian A2 carbonate reservoir and are each period giving a further boost to oil production. producing at stabilised rates of around 5 MMcfd • Work continues on planning for the and 10 bpd condensate. Molchanovskoye North sandstone reservoir • The third well E-303 on the field targeted the waterflood with a pilot project being prepared. deeper Carboniferous G7 to G12 sandstone • Wells M-163, M-164, M-168, M-170 and M-205 reservoirs and was drilled to a total depth of on the Molchanovskoye field were plugged and 4,406 metres. It was initially completed in the abandoned along with IG-107 and IG-129 on the G7-12 sandstone reservoirs only. Production Ignatovskoye field, well NN-75 on the from the deeper reservoirs, whilst steady, is not Novo-Nikolaevskoye field and the Zaplavskoye economic in the current punitive production Z-05 exploration well. tax regime in Ukraine. Consequently, following • A smaller diameter velocity string was installed additional perforations in the shallower A2 within the production tubing of the multi-fracced carbonate reservoir and acid treatment, comingled well R-103 in the Rudenkovskoye field using a production with the G7-12 sandstone reservoirs coiled tubing unit. The velocity string aids fluid was 5.2 MMcfd of gas with 18 bpd of condensate. recovery and minimises the risk of liquid loading • The 145 sq. km 3D seismic programme was which may inhibit gas production, particularly in completed in early March and interpretation the lower frac zones. This has proved moderately completed in August with the data being used successful and is now being supplemented by a to refine further drilling locations and aid the gas lift system. updating of the field reserves. • Wireline operations have focussed on the clearance • The early production facility (‘EPF’) was of wax and salt build-up in the production tubing completed at the end of 2013 and took first gas of many wells. A more aggressive programme in from the E301 well in January 2014. It has the period has yielded improved oil production subsequently been upgraded with the doubling of above expectations. its capacity from 15 MMcfd to 30 MMcfd to cater Production facilities for the recently revised hydrocarbon dew point Operations at the main production facility and the specifications in the export pipeline. Compression LPG plant continued smoothly through the year. has now also been installed to ensure maximum Work continues on plant optimisation, re-routing possible input to the export line. flowlines to reduce back pressure, and wax clearance of flowlines to enhance production from Zaplavskoye exploration licence activity the available well stock. Following the earlier success of the two exploration wells Z-04 and Z-05 in the northwest of the licence, Elizavetovskoye field attention has been focussed on identifying new Elizavetovskoye production licence prospects in the area using data from the recent The Elizavetovskoye gas field commenced production 3D seismic acquisition programme and logs from in January 2014. A new production licence covering the historic well stock. Amplitude analysis of an area of 70.8 square kilometres was awarded the Visean sandstones has already contributed in the third quarter. It is valid for 20 years and to good development drilling and recompletion replaces the existing 5-year exploration licence results in the Novo-Nikolaevskoye field, and on- which had been due to expire at the fourth quarter. going amplitude studies indicate further potential for Visean V25/26 sandstone traps in addition Production to more conventional Devonian sandstone and Average production from the Elizavetovskoye field in Visean carbonate structural closures. Up to seven the period was 1,511 boepd comprising 8.9 MMcfd of new prospects or leads have been identified with gas and 20 bpd of condensate. There was no prospective resources ranging from 5 to 60 Bcf production in 2013. Strategic report Governance Financial statements 2-79 80-119 120-182 45
unrisked with the aim of working these up for The Ukrainian authorities have extended the future drilling. licence term by a further five years with an area to the south of the licence being relinquished and an The Zaplavskoye exploration licence surrounds area to the west of the licence added. The licence four of the Company’s adjoining production licences area now totals 173 square kilometres and is valid in Poltava on their western, southern and eastern until 31 December 2019. sides and was due to expire at the end of 2014.
Russia
Ukraine Russia
Rostov-on-Don Krasnodar REPUBLIC OF ADYGEA
Maikop
Black Sea Koshekhablskoye field
Koshekhablskoye licence KURGANINSK area and major pipeline
Gas pipeline Gas fi eld 0 10 km Licence area Roads
Koshekhablskoye licence Early in the period, it was observed that pressure had started to build in the annulus of well-27 and Production there appeared to be communication with the Average production from the Koshekhablskoye field casing annuli. The well was diverted to the flare in 2014 was 5,109 boepd comprising 30.3 MMcfd pit to minimise the pressure on the casing and a of gas and 51 bpd of condensate, a 1% increase on coiled tubing unit mobilised to kill the well. This the average for 2013. The production figures are operation was completed successfully in the second steady, but are below expectations due to the loss quarter and a rig is now on location preparing of predicted additional production from well-27 and to restore the pressure integrity of the well and well-05 in the period. replace the tubing. Completion and restoration of Workover and well stimulation activity production is expected in the third quarter of 2015. Production from crestal well-20 in the period At the same time, drifting of the tubing in the ranges from 15-20 MMcfd, subject to routine acid newly completed well-05 indicated an obstacle at treatment, while production from the north flank around 2,600m which appeared to be a joint of well-25 ranges from 10-15 MMcfd. Both wells have damaged tubing. The well was suspended and the benefited from coiled tubing acid treatments and tubing will be replaced as soon as practicable. it appears that a 4 to 6 month cycle of treatment is the most cost effective. The deep east flank Facilities well-15, originally thought to have been tight, now The Gas Processing Facility (‘GPF’) has been cycles from 0.9-1.5 MMcfd with fluid build-up being operating comfortably within its current design cleared periodically. capacity of 40 MMcfd. JKX Oil & Gas plc Annual Report 2014
46 Operational review
The plant performance has been reviewed and work Hernad licences is underway to increase the capacity to 60 MMcfd. Exploration and appraisal This entails changes to some of the vessels, replace- JKX now holds a 100% equity interest in the two ment of some valves and pipework and improvements Hernad licences in the northern Pannonian Basin. to the operating procedures. A Russian design Although these are due for relinquishment in 2015, institute has been contracted to prepare the the Company is in discussion with the Hungarian submissions for government approval which is authorities with the aim of obtaining a number scheduled for the second quarter of 2015. Plant of mining plots, which are effectively production modifications are currently scheduled for late May. licences, to permit further appraisal of the most Licence obligations promising discoveries in the licences. The obligation to re-enter and sidetrack well-09 to Sarkad I Mining Plot re-drill the full Callovian reservoir sequence and, if successful, test the Callovian V unit has been JKX has transferred its 25% interest in the deferred until 2017. 15.6 sq. km farm-in area around the Nyekpuszta-2 gas condensate discovery well to its joint venture Georgievskoye exploration licence partner, in exchange for 100% ownership of the Hernad/Hajdunanas licences. Our wholly-owned Russian subsidiary, Yuzhgazenergie LLC (‘YGE’), was awarded the Turkeve IV Mining Plot 170.7 sq. km Georgievskoye exploration licence in The Turkeve IV Mining Plot (JKX 50%) of 10 sq. km 2012. The largest part of the licence lies adjacent has been approved for the productive area around to, and immediately south of the Koshekhablskoye the Ny-7 well. The operator continues to look for production licence but a significant part of it also an economic solution to produce from the Ny-7 well runs to the northwest of the Koshekhablskoye field where the high CO content has prevented direct as well as covering the western and eastern flanks 2 access to the pipeline network. of the field.
Recovery, reprocessing and interpretation of all Slovakia the existing 2D seismic is complete, the original Exploration 3D cube has been reprocessed and evaluation of JKX continues to hold a 25% equity interest in the data is complete. Disappointingly, the few leads the Svidnik, Medzilaborce and Snina exploration identified are deep and, under current economic licences in the Carpathian fold belt in north east conditions, uneconomic to drill. Consequently the Slovakia. Following a change in operator, the decision to relinquish the licence has been made. Cierne-1 exploration well has been deferred. A programme of magneto-telluric geophysical Hungary surveys combined with seismic re-interpretation Licences has led to the identification of a number of In November 2014 JKX exchanged its 25% shallower prospects across the licences and drilling beneficial interest in a 15.6 sq km section of the is planned on two of these in the first half of 2015. Sarkad Mining Plot for a further 50% interest in the Hernad I & II Exploration Licences and the Bulgaria Hajdunanas IV Mining Plot. JKX now operates Exploration these three licences with 100% equity and is JKX’s withdrawal from the Provadia licence developing a work programme to restart production became effective in January 2014 and the Company and complete exploration activities. no longer has any licence interests in Bulgaria. Hajdunanas field Production
Production from the Hajdunanas and Gorbehaza Martin Miller Technical Director fields (JKX now 100%) was suspended in 2013. JKX has taken full ownership of the licences in an asset swap and is currently preparing plans for further development of the Hajdunanas field. Strategic report Governance Financial statements 2-79 80-119 120-182 47
Reserves
Total 2P reserves Russia 70% Ukraine 30% 97.7MMboe
Reserves replacement ratio
Group reserves have increased by 7.1 MMboe, after Group production 196% of 3.6 MMboe
Total remaining reserves as at 31 December 2014
31 December 2013 Revisions Production 31 December 2014
Total Oil MMbbl 3.7 0.1 (0.4) 3.4 Gas Bcf 542.9 41.9 (19.5) 565.3 Oil + Gas MMboe 94.2 7.1 (3.6) 97.7
Ukraine Oil MMbbl 3.1 (0.0) (0.3) 2.8 Gas Bcf 180.1 (15.2) (8.4) 156.5 Oil + Gas MMboe 33.1 (2.5) (1.7) 28.9
Russia Oil MMbbl 0.6 0.1 (0.0) 0.7 Gas Bcf 361.0 58.9 (11.1) 408.8 Oil + Gas MMboe 60.7 9.9 (1.9) 68.8
Hungary Oil MMbbl 0.1 (0.1) 0.0 0.0 Gas Bcf 1.8 (1.8) 0.0 0.0 Oil + Gas MMboe 0.4 (0.4) 0.0 0.0
At 31 December 2014 we updated our estimation of the Group’s proved and probable reserves. The estimations have been reviewed by an independent engineer, DeGolyer & MacNaughton. JKX Oil & Gas plc Annual Report 2014
48 Principal risks and how we manage them
Our framework of internal controls is supported by a culture that promotes good risk management Risk Committee work in 2014 processes and which underpins the success of delivering on our strategic priorities; we continue to At the Group level, work continued with the Audit Committee to review the overall process of business develop our risk management systems on that basis. risk management and to validate the risk register. This resulted in increasing the analysis and mitigation plans Responsibilities for the highest risks. The Board is responsible for the Group’s system of In addition the Risk Committee introduced Risk Velocity internal control and risk management systems and as a factor in grading the identified risks which is for reviewing their effectiveness. explained as part of our Risk management framework below. Risk management process At the subsidiary company level: A risk management process, which involves the Risk • we established local Risk Committees at our operations Committee, has been in place throughout 2014 and in Ukraine and Russia and provided local training to up to the date of approval of this Annual Report. implement regular Risk Committee meetings there. This pushed down the risk identification and The process is designed to manage rather than management process to our local Ukrainian and eliminate the risk of failure to achieve business Russian operations and ensured greater visibility objectives, and can only provide reasonable, not between the risks associated with delivering the Board’s absolute, assurance against material misstatement strategic priorities and our activities on the ground; or loss. • we incorporated the output from our Ukrainian and Russian Risk Committee meetings, including Risk Committee their updated Risk Registers, into the Group’s Risk Committee meetings; and The Risk Committee assists the Executive Directors • representatives from our Ukrainian and Russian Risk in the operation and implementation of the risk Committees attended each of the Group Risk Committee management process, and provides a source of meetings to expand on the risks identified locally and assurance to the Audit Committee that the process is their related mitigation plans. operating effectively. This approach aims to actively manage risk in a transparent and accountable way.
The Risk Committee meets at least three times Strategic objectives (reminder) a year and reports into each Audit Committee meeting. 1 2 3 Risk assessment Profi table Oil and gas Operating safely The Board monitors the risk profile of the Group production growth reserves growth and responsibly using four risk categories: 1. External 2. Financial 3. Strategic 4. Operational The Board acknowledges that it will be subject to residual risk in pursuit of achieving its strategic priorities even after mitigating actions. Strategic report Governance Financial statements 2-79 80-119 120-182 49
Risk profiles of our principal risks HIGH
The graph represents our current A,B assessment of the potential impact and F A,B likelihood of occurrence of each of the K principal risks noted below. I I J L H J G D F C 2013 2014 C
Potential impact Potential E
LOW HIGH Likelihood of occurrence and risk velocity
What is the risk Risk KPIs Change Strategic Responsibility Page profile affected from objective 2013 impacted External risks < Geopolitical – Ukraine A Return on average capital employed 1,2 The Board 52 < Geopolitical – Group B Return on average capital employed 1,2 The Board 52
Tax legislation C Production costs I 1 Chief Executive 54 Return on average capital employed < Commodity prices D Gas realisations 1 Finance Director 54 < Foreign exchange exposure E Return on average capital employed 1 Finance Director 56
Financial risks < Liquidity F Return on average capital employed 1,2 Finance Director 56
Strategic risks
Over exposure to a single market G Return on average capital employed I 1,2 Chief Executive 58
Investment decisions H Return on average capital employed I 1,2 The Board 58
Operational risks
Reservoir performance I Production volumes I 1,2 Technical Director 58 Reserves < Reserves replacement J Reserves replacement ratio 2 Technical Director 60
Environmental, asset integrity K All Injury Frequency Rate I 3 Chief Executive 60 and safety incidents Lost Time Injuries Environmental Incident Frequency Rate
Bribery and corruption L Return on average capital employed I 1 The Board 60 JKX Oil & Gas plc Annual Report 2014
50 Principal risks and how we manage them
Risk management framework The Board has completed a robust assessment The key elements of the risk management process of the most significant risks and uncertainties are as follows: which could impact the business model, long- term performance, solvency or liquidity, and the Risk identification – risks faced by the Group are results are summarised below. Also presented identified by senior management and risk owners, is an assessment of the likelihood of each risk who periodically review the risks to ensure that the occurring, its potential impact should it occur, the risk management processes and controls in their Key Performance Indicators (‘KPIs’) and strategic area are appropriate and effective, and that new priorities most affected as each risk increases, risks are identified. how each risk is being managed or mitigated and Risk assessment – the consequence and likelihood whether the overall business risk has increased or of each risk materialising is assessed. Risk decreased since the last Annual Report. registers are used to document the risks identified, the level of severity of its impact, and probability of 2014 risk update occurrence, ownership and mitigation measures for The principal risks facing the Group have each risk. increased from those detailed in the 2013 Annual Report, mainly due to events in Ukraine and the During the year, the Risk Committee built in a decline in international oil prices. Our overall Risk Velocity measure into its assessment of the assessment of those risks has changed in 2014 as impact of each risk. Risk Velocity is the time to follows: impact and is as an estimate of the time frame within which a risk may occur. • Geopolitical risk has increased significantly in Ukraine as the heightened political tensions in Risks are then logged with reference to the region and the military conflict in the east of consequence rating, multiplied by the likelihood Ukraine continue. The military conflict has not plus velocity rating as shown below: impacted the Group’s operations to date but the situation continues to be closely monitored.
Risk assessment table
Impact
Likelihood + Insignificant Minor Moderate Major Catastrophic velocity
Highly Very Very LOW MED HIGH HIGH HIGH likely high high
Likely High High LOW MED MED HIGH HIGH
Possible Medium Medium LOW MED MED MED HIGH
Unlikely Low Low LOW LOW MED MED MED
Very Very Rare LOW LOW LOW LOW LOW low low Likelihood Velocity
High risk Medium risk Low risk Strategic report Governance Financial statements 2-79 80-119 120-182 51
• In an attempt to fund Ukraine’s deficit, its denominated prepaid tax and a devaluation of the external debt and the ongoing military conflict, Group’s net assets of $130.3m in the statement of the government issued three decrees in the comprehensive income.Continued volatility in the second half of 2014 which were issued without Rouble and Hryvna will affect the US$ value of warning and were effective immediately for a future profits, assets and cash flows of the Group, number of months. These had the effect of: and may impact future investment decisions in – doubling the rate of gas production tax until Russia and Ukraine. 31 December 2015; • Reserves replacement risk has increased this – implementing currency restrictions, initially year as the decline in international oil and until 1 December 2014, and subsequently gas prices has resulted in previously identified extended to 2 March 2015 and again to 3 June reserves becoming uneconomic at lower oil 2015; and prices. In addition, key projects planned that may have materially enhanced the Group’s – directing major industrial gas buyers to acquire reserves and production at the Elizavetovskoye their gas solely from the Ukraine state-owned and Rudenkovskoye fields in Ukraine, and at gas company from 1 December 2014 to our deeper Callovian reserves in Russia, may no 28 February 2015. longer be commercial due to the local investment • The associated risk to the Group’s future gas parameters, combined with lower future oil and sales volumes, prices and taxes in Ukraine has gas price expectations. therefore increased as a result of these decrees The principal risks set out in the following tables which remain in place and continue to have a are not set out in any order of priority, are likely significant adverse financial impact on the Group to change and do not comprise all the risks and and liquidity. uncertainties that the Group faces. • As a result of the decrees, the Board has suspended its planned 2015 capital investment programme in Ukraine until the economic parameters for investment improve, which increases the risk of declining production from our mature fields there. • In addition the commodity price risk has increased following the halving of global oil prices during 2014. We sell the oil that we produce at prices determined by the global oil market. The price at which we can sell our gas in Ukraine is set quarterly according to the Russia-Ukraine gas border price which in turn is based on the price of a basket of oil-related products. The reduction in global oil prices has therefore reduced the regulated gas price in Ukraine at which we can sell our gas. • Foreign exchange risk has increased following the continued gradual devaluation of the Ukrainian Hryvna through 2014 and, more recently, the sharp devaluation of the Russian Rouble. As a result, in US$ terms, the Group’s operating costs and Russian gas sales value decreased, in addition the Group reported a foreign exchange loss of $5.7m in the income statement, a $5.7m foreign exchange loss in the current tax charge related to the revaluation of the Hryvna- JKX Oil & Gas plc Annual Report 2014
52 Principal risks and how we manage them
What is the risk? Likelihood Impact Change KPI + Velocity from 2013 affected
External risks
Geopolitical – Ukraine
Description: 81% of the Group’s revenues and all of its profits from operations are derived < Return on from its activities in Ukraine. HIGH HIGH average capital Increased political and social tensions started in 2013 in Ukraine and have continued in employed 2014 and 2015. Military conflict has continued through 2014 in the east of Ukraine. The Group’s facilities are located in the Poltava region which is in the centre of the country. Operationally the Group has been unaffected to date. Ukraine has a high current account deficit funded by foreign borrowings, while foreign reserves were reported to be at their lowest level for a decade, reported to be at less than US$7 billion as of 21 January and will probably need additional external financial support in 2015. In an attempt to fund the deficit, the external debt and the ongoing military conflict, in the second half of the year, three government decrees were issued without warning and that were effective immediately (see page 12), and which remain in place. These decrees continue to have a significant adverse financial impact on the Group and its liquidity (see Liquidity Risk page 56). Impact: If the country does not peacefully resolve the current conflict as well as secure additional financing, there is a risk it may default on its obligations and/or introduce new decrees to increase government funds from independent companies in Ukraine. This would reduce the Group’s profits and cash flows.
Geopolitical – Group
Description: Most of the Group’s operations and more than 97% of our oil and gas assets < Return on are located in Ukraine and Russia and the gas that we produce is sold into their domestic HIGH HIGH average markets. capital employed Both countries display emerging market characteristics. This means that the legislation is constantly evolving as the government attempt to manage the economies and business practices regarding taxation, banking operations and foreign currency transactions. Other risks inherent in conducting business in an emerging market economy include, but are not limited to, volatility in the financial markets and the general economy. Impact: The Group’s operations and financial position may be adversely affected by these uncertainties. Strategic report Governance Financial statements 2-79 80-119 120-182 53
Strategic How do we manage it? Responsibility Further priority information impacted
To date, our operations have not been directly impacted by the unrest in Ukraine or the The Board Chairman’s 1 military conflict in the east. statement Profi table P14 production The combination of Ukrainian Government-imposed restrictions on selling its gas to growth industrial clients, the punitive rate of gas production tax and the foreign exchange controls has required the Group to suspend its planned 2015 capital investment programme in Ukraine until the economic parameters for investment improve (see page 12). 2 The Board frequently reviews announcements by national and local governments in Oil and Ukraine and Russia on their future plans with regard to certain economic factors, in gas reserves growth particular those that impact future oil and gas prices and related costs and taxes. The Group engages established legal, tax and accounting advisers to assist the Group in complying with applicable statutory, employment and environmental regulation and laws, and to ensure its tax and duty obligations are properly assessed and paid when due. We also take all reasonable measures to reduce and limit our commercial exposure in Russia and Ukraine through the use of, for example, careful selection of contracting parties, advanced payments and careful cash management.
The Board and management recognise the constant need for expert advice to ensure full The Board 1 compliance with local and international regulations and laws. Profi table production Our strategy is to employ skilled local staff working in the countries of operation and growth provide them with on-going training opportunities. We ensure that good relationships are maintained with all key stakeholders in our significant assets in Ukraine and Russia through regular dialogue and on-going 2 communications locally. Oil and gas reserves growth JKX Oil & Gas plc Annual Report 2014
54 Principal risks and how we manage them
What is the risk? Likelihood Impact Change KPI + Velocity from 2013 affected
Tax legislation Description: The Group is exposed to changes in local tax laws, particularly in Ukraine. — Production MED MED costs In Ukraine, PPC has at times sought clarification of their status regarding a number of production related taxes. PPC continues to defend itself in court against action initiated by Return on the tax authorities regarding production related taxes for certain periods through to average 31 December 2010 (see note 27 to the financial statements). capital employed The Group is exposed to the Russian mineral extraction tax (‘MET’), calculated using production volumes. MET rates are changed periodically by the Russian government to encourage new investment but also to support the government’s financial needs. The Ukrainian and Russian governments are playing an increasingly active role in the oil and gas industry in regulation, protectionism and increased taxation. Emerging markets sometimes bring in new tax laws which are subject to varying interpretations and changes, which may be applied retrospectively. Other risks include a weak judicial system that is susceptible to outside influence. Impact: Management’s interpretation of tax legislation may at times not coincide with that of the tax authorities. As a result, the tax authorities in the countries of operation may challenge transactions which could result in additional taxes, penalties and fines which could have a material adverse effect on the Group’s financial position and results of operations.
Commodity prices
Description: We are exposed to international oil and gas price movements and political < Gas developments in Russia and Ukraine. MED MED realisations In Russia and Ukraine, all our gas is sold in local industrial markets and the government control the gas prices at which we can sell our gas. In Ukraine, the regulated gas price is set quarterly and is based on a border price determined by a long-term gas purchase contract between Ukraine and Russia, which in turn is based on the price of a basket of oil-related products. Following a temporary reduction in gas prices charged by Gazprom (Russia) in December 2013, the regulated industrial gas price in Ukraine was reduced by 10% for Q1 2014 but the discount was removed in Q2 2014. In addition oil prices halved during 2014 and remain low, at levels not experienced since 2009 which has reduced the regulated gas price in Ukraine. We sell the oil that we produce at prices determined by the global oil market. The Group’s policy is not to hedge commodity price exposure on oil, gas, LPG or condensate and therefore any change in prices will have a direct effect on the Group’s trading results. Impact: A period of low oil and/or gas prices has led to impairment of the Group’s oil and gas assets (see note 5 to the financial statements) and may impact the Group’s ability to support its long-term capital investment programme (see Liquidity Risk below) and reduce shareholder returns including dividends and share price. Previous oil and gas price increases have resulted in increased local taxes, cost inflation and more onerous terms for access and to produce resources. As a result, increased oil and gas prices may not improve the Group results. Strategic report Governance Financial statements 2-79 80-119 120-182 55
Strategic How do we manage it? Responsibility Further priority information impacted
The Board continues to receive legal advice that the case against PPC regarding Chief Financial 1 calculation and payment of various production related taxes to 31 December 2010 has little Executive review Profi table legal merit under Ukrainian law for legal and technical reasons and the three year statute P36 production of limitation. In addition the Company has commenced international arbitration growth proceedings against Ukraine under the Energy Charter Treaty to recover Rental Fees of more than $180m paid by PPC since 2011 (see note 27 to the financial statements). The Group takes regular advice on tax matters from Ukraine tax experts to comply with all known requirements and to actively defend its legal position. The Group maintains a transparent and open relationship with local, regional and national tax authorities in Ukraine and Russia. The Group’s financial information does not include any adjustments to reflect the possible future effects on the recoverability, and classification of assets or the amounts or classifications of liabilities that may result from these tax uncertainties.
Except during the period when our gas sales were restricted by the Ukrainian government Finance Strategic 1 (from 1 December 2014 to 28 February 2015), most of our gas sold in Ukraine is sold to Director report Profi table Shell through market related contracts. This minimises exposure to abrupt price P8-12 production movements, ensuring sales are as closely matched as possible, in terms of timing and growth volume, to production. The balance of oil and gas production in Ukraine is sold by way of auctions, conducted with a frequency aimed to achieve as close as practicable the aforementioned matching principle. In Russia, we sell our gas to a local gas trading company through a gas sales contract which remains in place through 2015. The sales price was negotiated using current and expected future oil and gas prices and production volumes. The Group does not usually enter into hedge agreements unless required for borrowing purposes as may occur from time to time. The Board continues to monitor announcements by governments in Ukraine and Russia regarding the gas price charged by Gazprom (Russia) to Ukraine, its impact on the Ukrainian industrial gas price and its sustainability. In Russia, there was no official increase in the regulated maximum industrial price in 2014, however the Group was successful in achieving a 4.2% increase in the gas sales price from our buyer. This is equivalent to the increase in the price of gas to Russian consumers. JKX Oil & Gas plc Annual Report 2014
56 Principal risks and how we manage them
What is the risk? Likelihood Impact Change KPI + Velocity from 2013 affected
Foreign exchange exposure
Description: The Group operates internationally and is exposed to foreign exchange risk < Return on arising from various currency exposures, primarily with respect to Ukrainian Hryvna and HIGH LOW average the Russian Rouble. capital employed The US Dollar is the currency which influences the majority of the Group’s revenues and capital costs. Although a proportion of costs are incurred in US Dollars, most operating costs are influenced by the local currencies of the countries where the Group operates, principally Ukrainian Hryvna and Russian Rouble. During the year, the Hryvna and Rouble devalued by 97% and 72% respectively, against the US Dollar. The average exchange rate for the Hryvna and Rouble for 2014 was UAH11.4/$ and RR36.6/$ compared to UAH8.1/$ and RR31.5/$ in 2013. As a result, the Group’s operating costs in US$ terms including the cost of production, operating and general admin costs decreased however the Group reported a foreign exchange loss of $5.7m in the income statement as a result of the devaluation of the Rouble and Hryvna, and a $5.7m loss in the current tax charge as a result of the revaluation of the Hryvna-denominated prepaid tax at the local subsidiary. The devaluation in the Rouble reduced the carrying value of the assets held in Russia, resulting in the Group’s net assets decreasing by $130.3m. Impact: Appreciation of the Ukrainian Hryvna or depreciation of the Russian Rouble against the US Dollar or prolonged periods of exchange rate volatility may adversely affect the Group’s business results.
Financial risks
Liquidity
Description: 81% of the Group’s revenues and all of its profits from operations are derived < Return on from its activities in Ukraine. HIGH HIGH average capital The Ukrainian Government issued a decree on 29 November 2014 directing major employed industrial buyers to acquire their gas solely from the Ukraine state-owned gas company Naftogaz during the three month period to 28 February 2015. The Group’s gas sales in Ukraine reduced to approximately 50% of production capacity whilst the sales restriction remained in force and necessitated the shut-in of a proportionate level of gas production. In addition, an increase in Ukrainian gas production tax from 28% to 55% has been incorporated into the Ukrainian tax code for 2015, and currency control restrictions in Ukraine were extended to 3 June 2015 (see note 37 to the Group financial statements). The Board has now suspended its planned 2015 capital investment programme in Ukraine until the economic parameters for investment improve. Suspending investment in appraisal and development activities in Ukraine and shutting-in gas production will have a significant adverse impact on the Group’s future oil and gas production, sales, profits, cash flow, liquidity and working capital and has resulted in the delay and cancellation of capital projects. Future capital investments in exploration, appraisal and development activities become more difficult to predict and finance as they are driven by the results of the Group’s reduced ongoing exploration and development programmes. Impact: The risks relating to currency restrictions and restrictions to gas sales imposed by the Ukrainian Government are material uncertainties that may cast significant doubt on the Group’s ability to meet its financial obligations as they fall due and continue as a going concern. In addition, deviations in the timing and quantum of exploration and development expenditures can expose the Group to funding challenges. Unplanned well remediation activity at our Russian field can increase capital expenditure and reduces revenue whilst the wells remain suspended thereby reducing available funds for investment in other projects. Strategic report Governance Financial statements 2-79 80-119 120-182 57
Strategic How do we manage it? Responsibility Further priority information impacted
Foreign exchange risk arises in the Group from commercial transactions, financing Finance Financial 1 arrangements and assets and liabilities denominated in foreign currencies and net Director review Profi table investments in foreign operations. P36 production growth We attempt to match, as far as practicable, receipts and payments in the same currency and also follow a range of commercial policies to minimise exposures to foreign exchange gains and losses. These include minimising exposure to the Hryvna denominated sales, which continue to account for more than 80% of Group revenues, and the Rouble-based operating and capital costs. All our gas sales and most of our costs in Russia are denominated in Roubles which mitigates the Group’s exposure to any Rouble/US Dollar fluctuations, however the recent devaluation of the Rouble has reduced the value of Group revenues and costs which are reported in US$. The Group’s normal policy is not to hedge foreign exchange risk but to continually monitor internal and external guidance on expected future currency exchange movements and manage the currency of the Group’s major cash flows and holdings to minimise our potential exposure.
Liquidity risk has increased significantly during the year due to the Ukrainian government Finance Financial 1 decrees restricting our sales, doubling our production taxes and implementing currency Director review Profi table controls (see note 2 to the Group financial statements). P36 production growth The Board manages liquidity risk by attempting to maintain an adequate level of liquidity in the form of readily available cash or committed credit facilities at all times. The Group finances current exploration and development activities with existing cash 2 balances and operating cash flow generated from the sale of gas, condensate, LPG and Oil and crude oil production. gas reserves growth The Group also has a $15m working capital facility with Credit Agricole which currently expires in June 2015. Management monitors rolling forecasts of the Group’s liquidity on the basis of expected cash flow to ensure that any remedial action can be taken with as much lead time as possible. In 2015 the Board made immediate strategic changes to streamline the organisation in the most practical way possible, and without compromising safe, reliable operations. A downsizing programme has commenced with staff and cost reductions in all key operational and administrative areas. This exercise will continue should the need arise and the Company believes further cost reductions can be identified. Through these reductions, the Group maintains a competitive cost base, which enables it to produce and remain profitable during periods of declining commodity prices. The timing and nature of almost all of the Group’s exploration and development activities are discretionary and therefore the Group prioritises these activities according to the available finance. Following successful streamlining of the organisation and a cost reduction programme, as well as the availability of additional courses of action should the need arise, the Directors believe that the Company remains a going concern. Our options for additional debt financing are limited by our Ukrainian focus and our current shareholder base. JKX Oil & Gas plc Annual Report 2014
58 Principal risks and how we manage them
What is the risk? Likelihood Impact Change KPI + Velocity from 2013 affected
Strategic risks
Over exposure to a single market
Description: Our portfolio extends to 12 licences or licence interests in four different Return on countries and the Group’s focus continues to be our projects in Russia and Ukraine. MED MED — average capital We own 100% of all our oil and gas assets in Ukraine and Russia. employed Our strategy is focused on the development of these two wholly-owned production bases and exploration portfolios. The Group’s success in monetising its Ukrainian and Russian assets underpins the Group’s long-term value. Impact: All of the risks and rewards associated with the commercialisation of our Ukrainian and Russian licences are attributable to the Group alone and therefore the Group is vulnerable to the impact of any changes in the Russian and Ukrainian operating and economic environments.
Investment decisions
Description: Our growth is dependent on us investing in the best options from our Return on portfolio of oil and gas assets, which are potentially value accretive to the Company and MED MED — average can reduce future operating risk. capital employed In addition the Board continues to seek value enhancing production and exploration acquisitions through our business development activity. Impact: Ineffective investment modelling, selection and development could lead to investing in projects which may not be accretive to earnings, overpaying for assets, loss of value and higher capital expenditure.
Operational risks
Reservoir performance
Description: The hydrocarbon reservoirs that we operate in Ukraine and Russia generate Production the cash flow that underpins the Group’s growth. These reservoirs may not perform as MED MED — volumes expected, exposing the Group to lower profits and less cash to fund planned development. Production from our mature fields at the Novo-Nikolaevskoye Complex in Ukraine require a high level of maintenance to maintain production at recent levels. Production from our shallower wells at the Elizavetovskoye field has been higher than originally anticipated. Production from the well drilled in 2014 to the deeper reservoir was steady, but not economic in the current punitive production tax regime; the well was successfully completed to the shallower carbonate reservoir. In Russia, acidization of wells and other well maintenance procedures to increase stabilised production continued through the year however well integrity issues arose requiring two wells to be shut-in. Impact: Accurate reservoir performance forecasts from fields in Ukraine and Russia are critical in achieving the desired economic returns. These performance forecasts are also used to determine the availability and allocation of funds for investment into the exploration for, or development of, other oil and gas reserves and resources. Strategic report Governance Financial statements 2-79 80-119 120-182 59
Strategic How do we manage it? Responsibility Further priority information impacted
The Board produces an annual business plan supported by a rigorous budgeting procedure The Board Chief 1 which is reviewed monthly against current information. Executive’s Profi table statement Periodically the Board updates the Group’s 3-Year Plan to ensure that the plan remains production P17 growth relevant and material risks, including asset concentration, and sensitivities have been considered. Commercial production from our Russian gas plant diversified our producing assets, 2 which spread the geographical risk away from the previously very high concentration Oil and which was solely in Ukraine. gas reserves growth We continue to proactively seek and investigate value-enhancing production and exploration acquisitions and farm-outs/ins through our business development managers across central and eastern Europe. We have regular, open and transparent communications with all stakeholders to ensure there is a clear understanding of the Group strategy, its risks and the potential rewards.
The Board reviews, prioritises and approves all significant investment decisions after The Board Chairman’s 1 careful consideration and uses financial modelling and technical analysis from our statement Profi table specialist in-house teams to prioritise its investment opportunities. The net present values P14 production and internal rates of return for each project are considered as part of the review process. growth In Ukraine, the key investment decisions during the year have been the balancing of new investment in development projects to enhance our short-term production against the 2 sudden deterioration in economic parameters for investment due to government decrees Oil and (see page 12). gas reserves growth In addition, the Rouble devaluation and lower than expected gas price increase in Russia in 2014 requires the Company to prepare more detailed analysis of potential returns from investments prior to approving well maintenance and other capital expenditure to increase stabilised production.
The design and construction of our Elizavetovskoye wells, plant and processing facilities Technical Operational 1 was completed by industry specialists and after months of planning by our drilling, Director review Profi table construction and subsurface teams. The monitoring of the Elizavetovksoye field P42 production performance continues on a daily basis with production data being analysed by our growth in-house technical expertise. This could support further field development, when more favourable economic parameters for investment in Ukraine return. 2 Our processing of the Elizavetovskoye field data from our first well has resulted in Oil and production rates from our second well being in excess of expectations. gas reserves growth Using our specialist engineers, we anticipate that tubing replacement at well-27 in Russia to resolve well integrity problems will be completed Q3 2015; this should restore plateau production to levels achieved through 2013. Our subsurface specialists and industry-recognised personnel are part of the daily monitoring and reservoir management process of our fields in Ukraine and Russia. Our London-based in-house team of drilling, engineering and subsurface experts continue to be closely involved in the remediation work in Russia, well prioritisation on mature fields in Ukraine and our other field development plans. Our team is supported by skilled and experienced local technical teams, in addition to external consultants, when necessary; this interaction is key to mitigating our reservoir performance risk. JKX Oil & Gas plc Annual Report 2014
60 Principal risks and how we manage them
What is the risk? Likelihood Impact Change KPI + Velocity from 2013 affected
Reserves replacement
Description: Future oil and gas production depends on our ability to access new reserves. < Reserves Future reserves replacement depends on geological success through exploration and MED HIGH replacement appraisal work and/or asset acquisitions through negotiations with governments and ratio other owners of reserves. The decline in international oil and gas prices has resulted in previously identified reserves becoming uneconomic at lower prices. Key projects previously planned in Ukraine that could have materially enhanced the Group’s reserves and production may no longer be commercial due to increases in production tax rates and sales restrictions imposed, combined with lower future oil and gas price expectations. In Russia, the investment required to materially grow reserves there will be dependent on an improvement to the local regulated gas prices and the Rouble-US$ exchange rate. Impact: Prolonged low oil and gas prices, failures in exploration and lack of asset transactions to access new potential reserves could slow our oil and gas production and replacement of reserves.
Environmental, asset integrity or safety incidents
Description: We are exposed to a wide range of significant health, safety, security and All Injury environmental risks influenced by the geographic range, operational diversity and LOW HIGH — Frequency technical complexity of our oil and gas exploration and production activities. Rate During 2014, a pressure build in the annulus of well-27 at the Koshekablskoye field in Lost Time Russia required a coiled tubing unit to be mobilised to kill the well. The operation was Injuries completed successfully. Environmental Impact: Technical failure, accidents, natural disasters and other adverse conditions where Incident we operate, which could lead to injury, loss of life, damage to the environment, loss of Frequency containment of hydrocarbons and other hazardous material, as well as the risk of fires Rate and explosions. Failure to manage these risks effectively, could result in and/or loss of certain facilities, with the associated loss of production, or costs associated with mitigation, recovery, compensation and fines. Poor performance in mitigating these risks could also result in damaging publicity for the Group.
Bribery and corruption
Description: The UK Bribery Act places onerous requirements on UK companies to Return on demonstrate the effectiveness of their anti-bribery measures. MED HIGH — average capital Impact: Failing to implement adequate systems to prevent bribery and corruption could employed result in prosecution of the Company and its officers. Strategic report Governance Financial statements 2-79 80-119 120-182 61
Strategic How do we manage it? Responsibility Further priority information impacted
The Board manages this risk using proactive project planning on existing licences and Technical Chief 2 through extensive business development activity across central and eastern Europe. Director Executive’s Oil and statement Assuming the economic parameters for investment in Ukraine improve, key projects that gas reserves P17 growth may enhance the Group reserves and production include the assessment of our prospects on the Zaplavskoye exploration licence and the full development of our Rudenkovskoye field. The Ukrainian projects are only likely to add to Group reserves if tax rates are reduced to normal levels. In Russia the assessment of our deeper Callovian reserves could materially increase Group reserves. We use experienced and skilled business development managers for each of the regions in which we operate to identify and pursue new potential opportunities to build our reserves and cash flow. For exploration, effective peer reviews by our various technical staff and thorough diligence on new opportunities mitigates some of the risk of failure.
We treat health, safety and the environment as a priority of the Board and have a London- Chief Corporate 3 based HSECQ manager who reports directly to the Chief Executive Officer. Executive Social Operating Responsibility Supported by the Board, the Group HSECQ manager is responsible for maintaining a safely and P62 responsibly strong culture of health, safety and environmental awareness in all our operational and business activities. The HSECQ Manager reports to the Board on a monthly basis with details of our performance. Our locations in Ukraine, Russia and Hungary all have a dedicated HSECQ Team of local employees, led by an HSECQ Manager who reports to the HSECQ Director for that particular region. All locations have HSE Management Systems modelled on the ISO 9000 series, OHSAS 18001 and ISO 14001. These locations are regularly visited and reviewed by the Group HSECQ manager. The Board participate in an annual review of the Group’s HSECQ performance and the planning of continuous improvement initiatives and objectives for the coming year. Appropriate insurances are maintained to manage the Group’s financial exposure to any unexpected adverse events arising out of the normal operations.
We prohibit bribery and corruption in any form by all employees and by those working for The Board Corporate 1 and/or connected with the business. Social Profi table Responsibility Our Group Compliance Manager is responsible for anti-bribery and corruption matters production P62 growth and, with the support of the Board, to implement an Annual Compliance Plan. The compliance programme includes components which recognise the requirements of the UK Bribery Act 2010 and which focus on training, monitoring, risk management and due diligence. We annually refresh our Global Code of Conduct and Statement of Ethics which is compliant with the UK Bribery Act and its guidance and communicate this throughout the Group. Employees are expected to report actual, attempted or suspected bribery to their line managers or through our independently managed confidential reporting process, which is available to all employees as well as third parties. We will continue to regularly review the operation and impact of the Group’s policies and procedures to ensure a consistent application of the Global Code of Conduct in all business activities and throughout the supply chain processes. JKX Oil & Gas plc Annual Report 2014
62 Corporate Social Responsibility (‘CSR’) review
Our understanding JKX is committed to understanding, monitoring and managing the social, environmental and economic impact to enable it to contribute to society’s wider goal of sustainable development. The Company’s aim is to demonstrate these responsibilities through its actions and within its corporate policies. JKX has developed a deep sense of purpose which is reflected in its core values. CSR requires accountability by all leaders, individuals, organisations, stakeholders, customers, and community members. Responsible leaders must have the highest integrity and a deep understanding of sustainable development. They must remain committed to building enduring organisations in association with others.
The Engineering and Construction (‘E&C’) department at Poltava Petroleum Company being awarded ISO 9001 accreditation From left to right: Alex Krivenko, PPC Operations Manager; Sergey Ryzhiy, E&C Foreman; Oksana Leshchenko, E&C Lead Engineer/Quality Officer; Andrey Pruglo, E&C Lead Engineer; Dmitriy Fefelov, Bureau Veritas Certification Commercial Manager; Aleksandr Lysenko, Bureau Veritas Certification Lead Auditor and Consultant Strategic report Governance Financial statements 2-79 80-119 120-182 63
Our vision for environmental and social impact means that What we do has an impact on the people who work to achieve long-term success, the Company must for, and with us, on the planet as a whole and on continue looking towards the ‘triple bottom line’ – the communities of which we are part. profit, people and planet. CSR can positively impact these three elements and is therefore aligned with The aim is to ensure that our operations have the our business strategy. most positive effect, while reducing any negative effects to the absolute minimum. For JKX, Our CSR achievements in 2014 CSR is about doing business ethically and in an environmentally and socially responsible manner. Environmental Incident Frequency Rate ISO 26000 provides guidance on how businesses and (‘EIFR’) of 0.71 organisations can operate in a socially responsible way that contributes to the health and welfare Maintained our ISO 9001 Quality of society. The standard has been implemented Management accreditation across JKX and the Company has joined the Global Reporting Initiative on Sustainability Reporting, Being recognised with an International the international guidance on social responsibility. Corporate Social Responsibility Silver Award at the International CSR Excellence Awards Our approach 2014 Our approach is to act responsibly and with integrity, conducting our global business as Maintaining our ISO 14001 Environmental a responsible employer, corporate citizen and accreditation neighbour, and to maintain commitment and sustainability by: Maintaining our OHSAS 18001 Health and Our approach is action to create alignment and to Safety accreditation maintain commitment and sustainability by: Established and maintained the recording and • Reducing the impact of unemployment monitoring process for our greenhouse gas • Engaging in Continuous Professional reporting requirements Development • Addressing inequality in recruitment, pay and Prepared and submitted our annual report to promotion the Carbon Disclosure Project • Creating healthier, happier and more productive Prepared and submitted our annual report to employees the Global Reporting Initiative • Supporting charities and communities • Helping local people into work Implemented the requirements of ISO 26000 • Improving impact on the environment guidance on social responsibility • Acknowledging the International Labour Prepared and submitted our annual Global Organisation Health & Safety principles Reporting Initiative report on sustainability • Developing a globally responsible mind-set throughout the Group Carried out enhanced risk assessment training for overseas staff Our impact CSR forms the basis for doing business and Completed enhanced stakeholder management building an entity to which both the public and procedures staff can relate. The philosophy of making a difference is evident through the various local projects we get involved in which enables us to give back to the different communities we work with. While economics is important, the global landscape is changing. The increasing concern JKX Oil & Gas plc Annual Report 2014
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Our CSR process is Board led growth, open communication, and transparent CSR is led by Dr Paul Davies, the Chief Executive financial accounting. Officer who: • Customer and product: Fostering loyalty by • Provides leadership and guidance investing in customer relationship management, and product and service innovation that focuses • Sets the strategy and objectives on technologies and systems to deliver in • Ensures that human and financial resources are economic manner over the long-term. available to achieve objectives • Governance and stakeholder: Setting the • Reviews management performance highest standards of corporate governance and • Identifies our values and standards stakeholder engagement, including corporate • Ensures that the Company’s obligations to codes of conduct and public reporting. shareholders and other stakeholders are • Human: Managing human resources to maintain understood and met workforce capabilities and employee satisfaction through best-in-class organisational learning The Group’s Health, Safety, Environment, and knowledge management practices, and Community and Quality (‘HSECQ’) Manager remuneration and benefit programs. reports directly to the CEO and is responsible for creating and maintaining the HSECQ CSR policies, procedures and standards Management System, which sets the framework Compliance with all local laws and regulations is for the management of the Group’s non-financial fundamental and we aim to exceed them where impacts. possible. Our partners are expected to reach the The Board is provided with quarterly updates same standards. relating to the major CSR issues. Environment, social, governance and other risks A management review of all HSECQ systems is facing the Company are included in the JKX Risk carried out every year. A full Board level review of Register and KPI’s are agreed each year. progress was completed in December 2014 and our Our policies and standards cover: plans for 2015 were agreed. • Safety reporting and incident management Local responsibility • Exposure hours In both Ukraine and Russia we have fully trained • Occupational health provision and record keeping HSECQ teams which deliver a high standard of HSECQ management and reporting. Our teams • Environmental reporting and incident report to the General Director of the local operating management including climate change company and to the Group HSECQ Manager. • Behavioural based safety programmes Within each operating company a nominated • Continuing Professional Development and individual has executive responsibility for implementation implementing HSECQ management systems. Local • Human resources practices, covering areas such staff received extensive training in risk assessment as equal opportunities in 2014 and, where operational requirements have • Handling of charitable requests required enhanced skills, HSECQ management • Local community relations staff have been replaced. These representatives have the added benefit of bringing a deep • Reference to the International Labour knowledge of local culture, regulations and working Organisation practices to the Company. • Reporting to local Russian, Ukrainian and UK authorities Our CSR Objectives • Risk management programmes • Strategy: Integrating long-term economic, • Business sustainability environmental, and social aspects in business strategies while maintaining global • Anti-bribery and corruption competitiveness and technical excellence. • Business ethics • Financial: Meeting shareholders’ demands for • Equality and Diversity sound financial returns, long-term economic • Human Rights Strategic report Governance Financial statements 2-79 80-119 120-182 65
• Employee surveys CSR targets and achievements • Fair Employment Practices Our strategy for 2014 has been to continue consolidating our existing systems for managing • Setting annual targets and objectives our HSECQ aims and objectives.
Targets 2014 Achievements 2014 Targets 2015
Keep our AIFR to 0.40 or below The AIFR was 0.99 (2013: 0.25) per 200,000 hours worked Keep our AIFR to 0.40 or below and exceed the IOGP Continue to beat the performance 4.95 (2013: 1.25) injuries per million hours worked, the performance benchmark benchmark set by the 2014 IOGP perf ormance benchmark was 1.74 per million International Association of Oil & hours for 2014 Gas Producers (‘IOGP’)
Environmental Incident Frequency Exceeded target EIFR of 0.70 or below Rate (‘EIFR’) of 0.80 per 200,000 EIFR of 0.71 hours worked
Maintain ISO 9001 accreditation Achieved Maintain ISO 9001 accreditation
Maintain ISO 14001 accreditation Achieved Maintain ISO 14001 accreditation for JKX Oil & Gas plc
Maintain OHSAS 18001 Achieved Maintain OHSAS 18001 accreditation for JKX Oil & Gas plc accreditation
Complete OHSAS 18001 The first assessment has been rescheduled for Q2 2015 Complete OHSAS 18001 accreditation for our Ukrainian accreditation for PPC subsidiary Poltava Petroleum Company (‘PPC’)
ISO 9001 accreditation for PPC Achieved Evaluate assessors recommendations and apply to the PPC Management System
Continue to improve our Progress made, improving levels of communication with Continue to update and improve Stakeholder engagement and local stakeholders, their interests forming part of the our Stakeholder Engagement and Community Liaison Plan decision-making process for all our significant Community Liaison Plan in all operations locations
Continue to improve local Achieved Improve our Risk Management engagement in our Group Risk and Assessment activities across Risk management strategy has been updated and a Risk Management Systems and the Group Committee established at our operations in Ukraine and reporting into our Group Risk Russia supported by staff training in risk identification Register and mitigation
Continue to improve incident Achieved Continue to improve incident reporting, using safety moments, reporting, using safety moments, 47 incidents were reported in 2014 (2013: 97) which workshops, site campaigns, workshops, site campaigns, included near-miss reports, unsafe acts and hazards training sessions, toolbox talks training sessions, tool-box talks and briefings and briefings
Continues overleaf JKX Oil & Gas plc Annual Report 2014
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Targets 2014 Achievements 2014 Targets 2015
Further improve Emergency Achieved Further improve ER Response (‘ER’) arrangements arrangements and plans with During 2014 we have improved ER in Ukraine and Russia and plans with simulated simulated exercises, drills and and continued with regular ER drills and observations of exercises, drills and training in training in each of our the process. Plans have been established which include each of our operational areas operational areas during 2015 rescue of personnel and actions to minimise damage and business disruption
Update the Carbon Management Ensure the initial assessment of our Carbon The performance report is Plan and reports Management Submission by the Carbon Disclosure included in this Annual Report, Project is confirmed for Q3 2015 with improvements planned for 2015 (see page 72)
Comply with the Greenhouse Gas Achieved The baseline measurement is (‘GHG’) Emissions (Directors’ included in this Annual Report, An independent company, Tru-Cost, has been engaged to Reports) Regulations 2014 with improvements planned for analyse and report our GHGs 2015 (see page 72) All emissions sources that are owned, operated or controlled by the Group are included in our report
Carry out a Management Training Identified current competencies within the JKX Senior Revise current arrangements Needs Analysis Management Team including Directors, and have with improvements planned for proposed a program of Continuing Professional 2015 Development including Corporate Governance and Environmental matters Strategic report Governance Financial statements 2-79 80-119 120-182 67
Health and safety
Our approach The Company’s Health, Safety, Environment, Community and Quality (‘HSECQ’) philosophies are embodied in its Policy Statements, which are endorsed by the Board and communicated to all employees and business partners; they represent the Company’s commitment to a safe and healthy, incident free, working environment and its collective responsibility to prevent damage to the environment, its employees and neighbours. We will never knowingly compromise our health, safety, environmental or quality standards to meet our operational objectives.
All Injury Frequency Rate (‘AIFR’) 2014 HSECQ statistical analysis for 2014
6.00
5.00 Fatal Accident Case 1
4.00 Lost Time Injuries 6 3.00 Medical Treatment / 2.00 Restricted Work Cases 0
1.00 Near miss / Loss / Hazards / Property 47 Damage / Unsafe Act or Conditions
2002 2004 2006 2008 2010 2012 2014
Health and safety statistics The industry benchmark set by the International In 2014, JKX implemented and communicated Association of Oil & Gas Producers (‘IOGP’) is an its improved HSECQ policy at all operations AIFR of 1.74 per million hours worked. During worldwide. 2014 JKX had 4.95 health and safety incidents per million hours worked. The policy represents a clear statement of core principles and the approach to health and safety The commitment to reporting all incidents management at all group companies. continued to improve during 2014, with the number of reported incidents demonstrating that The priority is to ensure that all staff and all statistics are captured, whether positive or contractors work in a safe environment, where negative. effective systems of work are maintained and appropriate procedures and processes are followed. With more than 900 employees during 2014, we reported 47 incidents. Continuous improvement to health and safety Annual HSECQ targets are set for all levels within the organisation. During 2014 the AIFR was 0.99 per 200,000 hours worked, with 84 days away from work recorded. JKX Oil & Gas plc Annual Report 2014
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Safety statistics for 2014 Supervisors are selected for their familiarity with This year JKX did not match the normally high the regions where we operate, as well as for their standards of accident prevention achieved in the expertise. They understand and are sensitive to last 9 years. We sadly suffered a fatality during local working practices and culture, and work to cement unloading operations and in addition, enhance the education and training of local staff there were six recorded lost time injuries. A Root and contractors alike. Cause Analysis was carried out for each of these We make the best use of our resources by sharing incidents with the lessons learned distributed expertise between our operating companies across the Group. in Russia and Ukraine, and we have a strong Measurement and analysis of our safety statistics collaborative environment where everybody is carried out on a monthly basis with results contributes to analyse the risks and develop communicated to senior management of all group mitigating strategies in order to minimise it. companies and the Board. Before drilling commences, we follow industry Employees are included in structured training best practice to identify and address the inherent and behavioural programs which promote open risks in each drilling or workover operation. This discussion and annual employee surveys regarding ensures that: their perception of the health and safety culture. • health, safety and environment issues are clearly We have a clear Safety Management System, which identified and assessed; provides a comprehensive and systematic vision of our objectives. • regulatory requirements and JKX standards will be met; Each site has its own HSECQ Management • risks have been removed or mitigated according System identifying all major hazards and risks to a structured, systematic process, with any to personnel specific to the unique nature of the remaining risks demonstrated to be both country of operation. tolerable and as low as reasonably practicable; In occupational health, the drug and alcohol policy • critical safety items and procedures are identified continues to be successful throughout the Group to manage remaining risks; with no instances of breaches noted. The policy • a comprehensive environmental management applies to all our staff and contractors and forbids plan has been developed; the possession and/or use of defined prohibited substances which includes drugs and alcohol. Our • social, health, and environmental benefits and policy also clarifies our testing and inspection opportunities are identified; and procedures. • personnel roles and responsibilities are indicated. We have a Lead Drilling Engineer based in our Drilling risks London office who is responsible for the planning, We recognise that the safety and efficiency of our reviewing and authorising of Group drilling drilling operations depends on the performance operations, which significantly strengthens our of our employees and contractors. We mainly use capability to identify and manage drilling risk. local staff on our drilling rigs, with decades of local experience. These are supported by expatriate A written daily drilling update is provided to JKX supervisors who provide additional expertise management for all our operations which includes and oversight. This has enabled us to define and all drilling progress and issues to date, and manage drilling risk more clearly using Western expectations for the following 24 hours. methodologies. In addition, when drilling and/or workovers are in Drilling employees and contractors all have the progress, there is a daily operations call between necessary training and certification in well safety our managers in London and key operational and well control, and all personnel have the staff in Russia and/or Ukraine, as appropriate, to authority to stop any job that they deem unsafe. discuss latest developments and agree immediate actions. Strategic report Governance Financial statements 2-79 80-119 120-182 69
Health and safety risk management Consistent Hazard Assessment Processes JKX is proud to maintain its OHSAS 18001 Health In both Russia and Ukraine, we continued to & Safety accreditation, which is now accompanied carry out risk management studies using our by ISO 14001 Environmental accreditation and proven Hazard and Operability (‘HAZOP’), Hazard ISO 9001 Quality Management accreditation. Identification (‘HAZID’) and As Low as Reasonably These are all internationally-recognised Practical (‘ALARP’) methodologies. specifications for occupational health and safety environmental and quality management systems We have developed an integrated assessment monitored by experienced auditors biannually process for the safety assurance of development to ensure compliance to the internationally proposals which are potentially hazardous. These recognised standards. assessments combined with the essential features of the JKX Safety Management Programme The list below is a sample of 3rd party inspection complete the safety circle. activities in 2014. A report of all inspections is available on request. Health and safety training • Carpathian Expert and Technical Centre – Each location has a health and safety training industrial safety inspection budget which has been established after the • Ukrexpert – industrial safety inspection Training Needs Analysis has been carried out, which includes legally required training from • Sanzhary District Service of the Board of State the host country’s health and safety regulations. Service of Ukraine for Emergency Situations in Additional training is provided according to Poltava region operational requirements. • Ukraine – Ministry for Emergency Response (3 inspections) • Territorial Administration of the State Mining and Industrial Supervision in Poltava region – industrial safety inspection (3 inspections) • State Inspection for Land Transport of Ukraine • State Emergency Service of Ukraine • Ministry of Emergency Situations (Civil Defence and Emergency Situations) • Ministry of Emergency Situations (State Firefighting Service Administration) • Rosprirodnadzor (Federal Service for Supervision of Natural Resource Usage) • Rospotrebnadzor (Federal Service on Customers’ Rights Protection and Human Well-being Surveillance) JKX Oil & Gas plc Annual Report 2014
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Environmental Management System The JKX Environmental Management System is a comprehensive, systematic, planned and documented management process. It includes the organisational structure, planning and resources for developing, implementing and maintaining a policy for environmental protection. We strive to reduce impact on the environment, conserve energy, recycle resources and eliminate environmental pollution, while placing a high priority on preserving the environment.
Our approach We enhance environmental awareness among JKX is proud to have maintained ISO 14001 employees by providing environmental training Environmental Management accreditation in 2014. and promoting a thorough understanding of our ISO 14001 is the principal management system environmental policy. standard which specifies the requirements for the In 2014, we continued to make good progress and formulation and maintenance of an Environmental are pleased to continue the ongoing work with The Management System. Carbon Disclosure Project. Our impact The Environmental Report for 2014 on the Group’s JKX complies with all relevant environmental annual performance, in conjunction with TruCost, requirements, including environmental laws and has identified reduction measure targets for the regulations and industry guidelines. 2015 campaign.
Environmental objectives Achievements 2014 Targets 2015
Reducing emissions Continuously monitored Continuous monitoring In managing emissions • on-site fuel consumption measured Robust monitoring is vital. Improved throughout the exploration, and more efficiently monitoring will be carried out before, during production of oil and gas, the and after operations to detect contaminants in • Greenhouse Gas (‘GHG’) emission levels Company adopts the principle of groundwater and potential leakages into the recorded and analysed through latest reducing emissions. In particular, atmosphere. Revised and updated emission software and reporting “reduced emissions completions” reduction strategies for 2015 are likely to (‘REC’) or “green completions” • purchased electricity records improved include: are assessed at all stages • purchased heating/cooling records • current carbon footprint reduction methods improved identify opportunities for a 5% reduction in C0 emissions • release/leakage of other chemicals 2 causing greenhouse gas emissions • identification of technical requirements for recorded, reported and analysed more efficient monitoring and recording • fugitive emissions assessed and • estimated emission reduction through any recorded proposed interventions • fuel used for vehicles reduction by • estimated cost for the interventions journey management • estimated savings from the intervention (e.g. • official travel of staff reduced through reduced energy use, reduced travel costs, and reduced offset costs) • responsibility for implementation • implementation schedule • quantitative objectives and targets Strategic report Governance Financial statements 2-79 80-119 120-182 71
Environmental objectives Achievements 2014 Targets 2015
The Greenhouse Gas Emissions We have complied with our obligations to Continue to comply and improve GHG recording Regulations 2014 record and report our annual Greenhouse and reporting Gas (‘GHG’) emissions in this Annual Report (see page 72)
Zero discharge of chemicals to Achieved in 2014 Continuous monitoring land or surface waters Continuously monitored
Restored habitat and hydrological Achieved in 2014 Continuous monitoring regime to pre-construction state Continuously monitored as soon as reasonably practical
Establish group-wide and Production operations may adversely affect Develop the policy in line with the Convention site-level Biodiversity Action Plan site level ecosystems, cause pollution in on Biological Diversity – key principles include (BAP) surrounding areas and allow access to protection of biological diversity within previously undisturbed areas protected areas, and the sustainable use of biological resources continue to develop and monitor progress throughout 2015
No loss of containment of product Achieved in 2014 Continuous monitoring Continuously monitored
Reduction in water use Recycling water from drilling operations Continue to improve the measurement of water has helped us to reduce the use of this use and its recycling from our drilling valuable resource in 2014 operations and aim to reduce water usage by 5% annually
Consulting with Stakeholders Achieved in 2014 Our approach in 2015 will: (local communities, workforce, • Established Stakeholder Management • measure return on community investment to NGOs and government agencies) Plans both the Company and the community to implement and monitor supply chain initiatives for emissions • Risk assessed the Stakeholder Priority • use outcome and impact indicators to reduction levels measure the quantity and quality of change • Openly communicated with stakeholders • track changes in community perceptions to about their respective concerns gain real-time feedback on performance • Adopted processes and modes of • use participatory methods of monitoring and behaviour that are sensitive to the evaluation to build trust and local ownership concerns and capabilities of each of outcomes stakeholder • proactively communicate the value generated by the Group to internal and external audiences
Reduce waste to landfill We have continued to improve the recording Improvement opportunities being considered and measurement of the waste sent to for 2014 include: landfill during 2014 • improving waste segregation efforts • further engagement with the local communities on recycling initiatives where economic and practical • update of our purchasing policy to encourage use of regular supplies which are recyclable • improve monitoring of waste and recycling and reduce waste to landfill by 5% annually JKX Oil & Gas plc Annual Report 2014
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Environmental performance in 2014
Carbon Disclosure Project 2014 scores Environmental Incident Frequency Rate (‘EIFR’) 2014 Company 2014 score 2013 score
8.00 British Gas (BG Group) 94 89 Wood Group 93 82
Shell 90 90 6.00 Cairn Energy 85 80 Petrofac 83 77 4.00 BP 80 80 AMEC 78 75 Afren 77 37 2.00 Tullow 76 72 JKX Oil & Gas 71 50 Premier Oil 58 66 2007 2008 2009 2010 2011 2012 2013 2014 Heritage Oil 57 18 Hunting 52 49 The EIFR Target for 2014 was not to exceed 0.80 Lamprell 38 25 environmental incidents per 200,000 hours worked; we Caracal 33 – achieved 0.71. Essar – 33 Recordable incidents are classified using a qualitative A.R.M – – risk assessment process based on the maximum reasonable consequence and the likelihood of an incident EnQuest – – occurring is an indicator of environmental safety J Fisher & Sons – – performance. Ophir Energy – –
We again made good progress and we were pleased to GHG emissions by scope continue the ongoing work with The Carbon Disclosure Project.
Reproduced by kind permission of the Carbon Disclosure Project Scope 1 – direct emissions
317,441 tonnes CO2e
Scope 2 – indirect emissions
827 tonnes CO2e
Intensity ratio
88 tonnes CO2e / MMboe of production Strategic report Governance Financial statements 2-79 80-119 120-182 73
Greenhouse Gas (‘GHG’) emissions reporting As required by our ISO 9001 certification, All emissions sources owned, operated or controlled operating procedures, our prequalification process by the Group are included in our reporting. and Stakeholder Management Plans ensure that major suppliers, products and services are Our approach evaluated for their environmental compliance and At our operational sites in Poltava, Ukraine, and commitment. Koshekhablskoye, Russia, our terminals are self- sufficient and can maintain operations without the Outlook need for grid electricity therefore improving the The Energy Savings Opportunity Scheme (‘ESOS) security of supply. is now law in the UK. The Company will complete mandatory energy efficiency audits which will We used the Greenhouse Gas Protocol methodology require measuring energy consumption to identify for compiling our GHG data. areas of significant consumption, responding to GHG emissions by scope recommendations to decrease consumption and The GHG Protocol categorises direct and indirect reporting to the Environment Agency. GHG emissions as follows: Also planned for 2015 is the enhancement • Scope 1: all direct GHG emissions of the JKX Code of Conduct to include more • Scope 2: indirect GHG emissions from specific policies, procedures and guidelines for consumption of purchased electricity, heat or purchasing and contracting activities undertaken steam. by Group companies to reduce our impact on the environment. The table opposite discloses our Scope 1 and 2 GHG emissions and an emissions intensity ratio of tonnes CO2 per million barrels of oil equivalent that we produced in 2014. The Greenhouse Gas Protocol methodology has been used for compiling the GHG data which includes the following material GHGs: CO2, N2O and CH4.
Our other environmental initiatives Global Reporting Initiative (‘GRI’) The GRI Reporting Framework is intended to provide a generally accepted framework for reporting on an organisation’s economic, environmental, and social performance. The Framework consists of the Sustainability Reporting Guidelines, the Indicator Protocols, Technical Protocols, and the Sector Supplements. During the year we reported according to the GRI’s Sustainability Reporting Guidelines.
Supply chain management At the heart of our sustainable supply chain is a policy of localising supply by fabricating, manufacturing and sourcing as much as possible as close to the point of use by using indigenous companies. Our achievements During 2014 some advances were made in our Supply Chain Initiative, and this will continue in 2015 with a more focused approach to procurement and supply. JKX Oil & Gas plc Annual Report 2014
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Employment By creating employment JKX makes a contribution to reducing poverty and promoting economic and social development.
Our strategy is to employ local staff and provide them with ongoing training.
Our approach 622 personnel (2013: 618) at the production site and We provide career development, international at our Poltava office. opportunities, a non-discriminatory workplace and The London office has 25 employees (2013: 25). competitive remuneration within a decentralised culture. Our decentralised model is underpinned Employment policies by a robust governance framework and empowers The Company’s employment policies aim to local management to make key business decisions attract the best people in the belief that a diverse locally. and inclusive culture is a key factor in being a Staff training and skills development is an essential successful business. It remains committed to component of our employment proposition and equality of opportunity in all of its employment assists people to secure decent and productive jobs. practices. It selects employees for appointment, career development and promotion based solely on Our achievements the skills and attributes which are relevant to the JKX employs more than 900 staff in five different job and which are in accordance with the laws of countries which puts people as a top priority, and the country concerned. this is strongly reflected in our approach to people We use a long-term, career-oriented approach that matters and management. begins with global recruitment of outstanding At year-end, Yuzhgazenergie LLC, our Russian talent and continues with development from subsidiary, employed 257 staff (2013: 272) at our within through a wide range of assignments and Koshekhablskoye production facilities and our experiences. Maikop administrative office. Our Ukrainian subsidiary, Poltava Petroleum Company, employed Strategic report Governance Financial statements 2-79 80-119 120-182 75
JKX Health and Safety culture survey 2014
100 Good 80-100% 80
60 Acceptable 50-80%
40 Cumulative scores (%) scores Cumulative 20 Not acceptable 0-50% 0 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 Training & Safe work Consultation Reporting safety Management Injury management supervision procedures commitment & return to work
Diversity and equality good current local practices and which reward Access to work opportunities is based on merit, collective and individual abilities and personal equality, fairness and need, and no one is treated performance less favourably on the basis of their sex, racial or • providing a working environment, development ethnic origin, colour, religion, disability, marital opportunities and incentives to promote team effort status, sexuality or age. and commitment to the performance of the Group This approach ensures that diversity and equality • referencing the International Labour Organisation is reflected in all our policies, practices and to verify standards and best practice. procedures, where practicable. Our Group-wide values of Integrity, Teamwork, JKX will not tolerate any form of discrimination Excellence and Respect, are essential in helping to – either direct or indirect. Acts of discrimination, guide our employees in the way that they behave. prejudice, harassment and victimisation which occur within the workplace or within the Employee feedback communities in which we work is not tolerated. A health and safety employee satisfaction survey was carried out again in 2014 to obtain feedback Employee engagement from staff on our health and safety culture and We aim to communicate openly with our employees. success in applying group health and safety policy. The survey was in the form of a questionnaire Operating across a number of different countries, which was translated and completed on an cultures and environments, we have a decentralised anonymous basis by a range of employees from management structure, with employment policies different locations across the Group. designed to suit the needs of individual locations. The results of the 2014 employee satisfaction survey Each Group company complies with certain key show that there have been perceived improvements principles, including: in management commitment and consultation • providing safe and healthy working conditions for during 2014. These areas will be the focus of our all employees work in 2015. • creating an open, challenging, rewarding and participative environment which, through Sharing our expertise development and training, aims to maximise the JKX commenced commercial gas production in talent, skills and abilities of all employees Russia in 2012. Three years later we continue to transfer knowledge, people, operational expertise • communicating to provide the fullest possible and ways of working from our Ukrainian operations understanding of our goals, directions and to southern Russia to improve the efficiency of our performance of the business operations. • providing compensation and benefits which reflect JKX Oil & Gas plc Annual Report 2014
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Community
Our approach JKX is committed to engaging with the community to share the benefits of our success at our operating plants.
During the year we assisted with improvements to school facilities that were local to our Russian operations.
Community engagements Assistance in our local communities Various activities are conducted to improve In practical terms, our community support relations with local communities through frequently involves using the Company’s plant and participation in forums established by local machinery – as well as manpower – to provide authorities and residents’ associations, or by much-needed assistance. creating such forums. Working with the local authorities, we deployed Employees from all over the Group take part available vehicles including our fire engines, in cleaning up areas around our plants and personnel and safety equipment on a number of the neighbourhood. The number of employees occasions during the year. participating in these clean-up activities is In addition, during the year, we assisted increasing year by year. communities local to our operations in Ukraine by We contribute to improving local education by providing the use of our cranes, trucks, excavators conducting plant tours, and providing employment and road clearing equipment to assist in a number and work experience, and we contribute to raising of small isolated tasks which benefited the local environmental awareness by actively participating community. in various environmental events in regions.
Strategic report Governance Financial statements 2-79 80-119 120-182 77
Charitable donations Our stakeholder engagement Each operation has a limited budget for good JKX works closely with outside interest groups and causes and we handle charitable donations at a maintains an open-door policy to better understand local level. local issues and avoid problems. Locally, donations from the Group during 2014 We consult widely on our business proposals before amounted to: making final decisions. We have recently reviewed our stakeholder engagement and implemented an • Ukraine $245,457 (2013: $208,266) improved system which focusses on: • Russia $105,809 (2013: $137,502) • customers and communities • Georgia $2,160 (2013: $1,907) • business customers Subject to management approval, staff may be • environment given additional time off in order to join in certain charity related activities. • services and planning • stakeholder feedback surveys. Local charitable projects These consultations with stakeholders feed into The financial aid is allocated to qualifying the business planning process to ensure that organisations using a formal applications process. stakeholders’ needs are prioritised in our business Applications for funding are made to our local plan. companies specifying how funds will be used. A full list of charitable donations is available. Our performance Below is a sample of charity projects that are local We continued to make progress by improving our to our operations and that we have supported stakeholder communications in Poltava, Ukraine, during the year. and in Koshekhablskoye, Russia. Ukraine The mapping of stakeholders was carried out in • Provision of a water facility upgrade for the 2014 by creating an Influence-Interest-Matrix to Nekhvoroshcha agricultural communal services identify our key stakeholders. • Provision of economic support for facilities in This stakeholder involvement strategy is of key Sokolova Balka village importance to the Company and we are planning to • Financial aid to disabled persons in Sokolova further develop the skills of staff and employees to Balka village continually improve our stakeholder management • Help to refugees from the East of Ukraine in capabilities. Novy Sanzhary district Outlook • Purchase of products, accessories and materials Internal and external stakeholder surveys were for the Sokolova Balka village school and conducted in 2014 to understand whether we were kindergarten meeting stakeholder and customer expectations. Russia The results of the surveys were discussed with • Assisted with the repair to buildings and senior management and reviewed as part to the the improvement of school facilities in the JKX Annual Management Review. Koshekhablskoye District • Assisted and coordinated the local response as a result of flooding in Koshekhablskoye rural areas • Assisted with improvement and clean-up of the grounds surrounding Koshekhablskoye Hospital • Assisted with improvement and clean-up of various local community areas in the Koshekhablskoye District JKX Oil & Gas plc Annual Report 2014
78 Corporate Social Responsibility review
Quality
ISO 9001 accreditation Investor engagement The Company was accredited to ISO 9001 JKX seeks to enhance shareholder value through in March 2013. The Company’s Integrated responsible and effective communication with its Management System has ISO 14001, OHSAS shareholders through various channels (see page 90). 18001 and ISO 9001 accreditations. The Chief Executive Officer is responsible for The Construction and Engineering departments maintaining our ongoing relations with the investor in our Ukrainian subsidiary, Poltava Petroleum and shareholder community, acting as the primary Company, achieved accreditation to ISO 9001 in point of contact for members of this community. January 2015 after meeting the requirements of In 2014 the Board carried out various meetings the standards as assessed by Bureau Veritas. with potential and existing investors and with Achieving ISO 9001 accreditation ensures that the wider investment community through analyst the quality management systems that JKX has presentations and other events. adopted work to improve the efficiency of business We communicate the latest relevant company and are not just a set of procedures. information and future investor events through our External assessors and an internal resource website at www.jkx.co.uk. are used to carry out regular audits of the management system. The support of the Board and senior management has been the driver of this management system, so that all areas of the organisation are aware of the importance of the ISO accreditation process.
Outlook A new version of ISO 9001 is expected in 2015, which will be a complete revision of the standard. We are planning to hold practical workshops to support the organisation to get acquainted with the new standard. Strategic report Governance Financial statements 2-79 80-119 120-182 79 JKX Oil & Gas plc Annual Report 2014
80 Strategic report Governance Financial statements 2-79 80-119 120-182 81
Governance
Board composition 82 Corporate governance 84 Audit Committee Report 92 Directors’ Remuneration Report 98 Directors’ report – other disclosures 116 JKX Oil & Gas plc Annual Report 2014
82 Board composition
The Group is led by an experienced board of directors consisting of a Non-Executive Chairman, the Chief Executive Officer, three further Executive Directors and four independent Non-Executive Directors.
2 4 6 8
5 7 9 1 3
1) Dr Paul Davies Relevant experience Board composition Chief Executive (65) − Advisor to major international Year appointed – 1998 companies on various corporate Executive Directors Key biographical data finance activities Board responsibility Non-Executive Directors − Civil engineer, PhD in Structural Mechanics − Non-Executive Director 5 4 − Co-founder of the JP Kenny − Chairman of the Audit Committee Group of Companies (forerunner − Member of the Remuneration of JKX Oil & Gas plc) Committee Relevant experience 3) Peter Dixon − Extensive experience of business Commercial Director (60) in the former Soviet Union Year appointed – 2007 Board expertise − Oil and gas engineering, exploration and production Key biographical data projects − 15 years working in geophysical Russia and Ukraine roles within Schlumberger Board responsibility 1 − Joined JKX in 1995 as Asset Financial − Chief Executive Officer 1 Manager for Ukraine 3 − Stewardship of the Group and its Energy − General Director of Poltava 1 business Engineering Petroleum Company for 3 years − Developing an appropriate 3 Geology business strategy for Board Relevant experience approval − Significant experience in the − Leadership to the Executive team upstream oil and gas industry in and subsidiary Directors the former Soviet Union − Investor relations − In-depth knowledge of working in Ukraine and Russia 2) Richard Murray Board responsibility Non-Executive Director (66) − Commercial Director Year appointed – 2013 − Trading of oil, gas and Key biographical data condensate − Chartered Accountant − New business development − Audit partner at Ernst & Young with more than 35 years of service Strategic report Governance Financial statements 2-79 80-119 120-182 83
4) Cynthia Dubin Relevant experience The Vitec Group plc and Ascent of Babcock International Group Finance Director (53) − 30 years experience in oil and Resources plc PLC and Lloyd’s of London Year appointed – 2011 gas sector Relevant experience Relevant experience Key biographical data − Extensive experience of the gas − Previously a London-based − More than 30 years experience in − Investment banker and power business in Russia partner of Ernst & Young from oil and gas sector − Co-founder and Chief Financial and Ukraine 1973 to 2003 − Significant FTSE-listed company Officer of Canamens Energy Board responsibility − Extensive financial experience in experience Limited − Non-Executive Director international oil and gas and Board responsibility − Finance Director for EMEA at − Member of the Audit Committee mining groups − Senior Independent Director Edison Mission Energy − FTSE-listed company experience − Chairman of the Remuneration 6) Martin Miller Relevant experience Board responsibility Committee Technical Director (67) − Significant project finance and − Chairman of the Board − Member of the Audit Committee Year appointed – 2007 banking experience − Chairman of the Nomination Key biographical data 9) Lord Oxford Board responsibility Committee − Geologist, Chartered Engineer Non-Executive Director (62) − Finance Director − Member of the Remuneration − Senior positions with Mobil Year appointed – 1997 − Financial management of the Committee and BP Group − Leadership of the Board Key biographical data − Joined JKX in 1994 as Chief − City relationships ensuring cohesion between the − Joined the Foreign Office in 1980 Geologist − Risk management, IT and Executive and Non-Executive − Counsellor at the British Embassy − Non-Executive Director of facilities Directors in Kiev from 1992 to 1997 Independent Resources plc − Director of Hansa Trust PLC 8) Dipesh Shah, OBE 5) Alastair Ferguson Relevant experience Relevant experience Non-Executive Director (61) Non-Executive Director (57) − 40 years of experience working in − Unrivalled knowledge and Year appointed – 2008 Year appointed – 2011 the oil and gas industry experience of doing business in Key biographical data Board responsibility Key biographical data Ukraine − Former President of New Gas − Technical Director − Former CEO of several − FTSE-listed company experience businesses in BP and the UK Projects, Upstream, TNK-BP − Subsurface and technical teams Board responsibility Atomic Energy Authority − Former Executive Vice-President − Drilling and operations − Non-Executive Director − Former Chairman of Viridian of Gas & Power with TNK-BP − Member of the Nominations 7) Nigel Moore Group plc − Senior positions with BP Committee − Non-Executive Director JSC Chairman (71) − Non-Executive Director at KazMunaiGas Exploration Year appointed – 2007 Thames Water, Canaccord Genuity Group Inc, The Crown Production Key biographical data Estate and Marguerite Fund − Chartered Accountant − Former Non-Executive Director − Non-Executive Director of Hochschild Mining plc, JKX Oil & Gas plc Annual Report 2014
84 Corporate governance
Governance principles The Company has a premium listing on the London Role of the Board Stock Exchange, and is therefore subject to the The Board provides leadership to the Group. Listing Rules of the UK Listing Authority. The Key matters reserved for the consideration and the Board is committed to applying the principles of approval of the Board are: the UK Corporate Governance Code (‘the Code’) • setting and monitoring Group strategy; and relevant institutional shareholder guidelines. • review of Group business plans, trading performance This section explains in more detail how we have and costs; applied these provisions. • review and approval of the annual operating and capital JKX’s Group-wide policies and procedures provide expenditure budgets a framework for governance and are underpinned • approval of capital investment projects across the Group; by the Group’s Code of Conduct. Good governance • examination of acquisition opportunities, divestment is taken seriously throughout the JKX Group and possibilities and significant financial and operational the Board set the tone and take the lead to ensure issues; that good practice flows throughout the Group. • remuneration policy (through the Remuneration Committee); During 2014, we continued to strengthen our • appointments to the Board (through the Nominations internal controls and risk management processes Committee) and senior management, Committee and we continue to embed an effective risk membership and remuneration for Directors and senior management culture at all our operations. management; • review and approval of the Company’s financial Board effectiveness statements (through the Audit Committee); • setting any interim dividend and recommendation of the How the Board functions final dividend; and The effective working of the Board is crucial to • ensuring that the significant business risks are actively the long-term prospects and strategic objectives of monitored and managed using robust control and risk management systems. the Company. This is achieved through strong and open working relationships between the Directors. All other authorities are delegated by the Board, supported by appropriate controls, to the Chief Executive The principal matters reserved for the Board are Officer on behalf of senior management. set out in the table opposite. Day-to-day operational decisions are managed by the Executive Directors, led by the Chief Executive. The Board has six scheduled meetings each year, Monthly Board reporting and arranges additional meetings if the need The Group provides the Board with consolidated arises. monthly management reports 10 working days after the month end. The reports outline all During 2014, in addition to the six scheduled material operational, financial, commercial and meetings there were two unscheduled Board strategic developments. meetings (2012: five). In addition, the Board meets at least annually to consider strategy in depth as The monthly financial reports consolidate all well as reviewing the strategic objectives at each of financial information from all parts of the Group its Board meetings. and include actual performance against budget and forecast for oil and gas production, sales and costs. The Chairman, in consultation with the Executive Directors, sets the agenda for Board meetings. These reports provide the Board with the latest All Directors receive comprehensive documentation information on receivables, cash, cash flow forecast prior to each meeting on the matters to be and the implications of key sensitivities including discussed. changes in production, commodity prices, production taxes and exchange rates. These monthly reports In addition to Board meetings, the Non-Executive ensure that members remain properly briefed on the Directors met twice during 2014 in private session, performance and financial position of the Group. with an open agenda to discuss the current issues affecting the Group. Strategic report Governance Financial statements 2-79 80-119 120-182 85
Board meeting documents Board composition, independence and commitment Prior to each set of meetings the Executive Throughout 2014, the Board comprised: Directors ensure that all the relevant papers and • a Non-Executive Chairman; other information is delivered at least five working days in advance of the meeting date so that all • four Executive Directors and; Directors have the necessary time to review in • four Non-Executive Directors. detail the latest information. There were no changes to the Board during 2014. Support for Directors The Board has reviewed the independence of each The Board has adopted a policy whereby Directors Non-Executive Director. None of the Non-Executive may, in the furtherance of their duties, seek Directors who served during the year had any independent professional advice at the Company’s material business or other relationship with the expense. During 2014, no Director sought Group, and there were no other matters that were independent legal advice pursuant to the policy. likely to affect their independence of character and judgement. Each Director has the benefit of a deed of indemnity from the Company and its subsidiaries It is the Board’s view that the Non-Executive in respect of claims made and liabilities incurred, Directors have sufficient time to fulfil their in either case arising out of the bona fide discharge commitments to the Company and no Executive by the director of his or her duties. The Company Director holds a Non-Executive Directorship, or has also arranged appropriate insurance cover Chairmanship, in a FTSE 100 company. in respect of legal action against Directors of the Company and its subsidiaries. Board skills, experience and responsibilities The Directors have extensive knowledge and Committees of the Board experience of the oil and gas industry including The Board has three committees to assist the expertise in geology, engineering and financial Board by focusing on specialist areas, which are matters. In addition the Board has significant ultimately accountable to it. These comprise: experience of working in central and eastern Europe, particularly Ukraine and Russia, which is • the Audit Committee vital for JKX to achieve its strategic goals. Director • the Nominations Committee key biographical details, relevant experience and • the Remuneration Committee responsibilities are provided on pages 82 and 83. The Board committees meet independently and The Non-Executive Directors bring a broad range provide feedback to the main Board through their of skills, experience and expertise which allows chairmen. them to challenge effectively, independently and constructively the performance of the Executive Board and their strategy. Committee memberships in 2014 Board diversity Audit Remuneration Nomination Committee Committee Committee The Board comprises eight men (89%) and one woman (11%). Nigel Moore Gender is only one aspect of diversity, and there Dipesh Shah OBE are many other attributes and experience that Lord Oxford can improve the Board’s ability to act effectively. Alastair Ferguson Our policy is to search for the highest quality Richard Murray people with the most appropriate experience for Chairman Member the requirements of the business, be they men or women. The Board supports the longer term aspirations The roles and activities of each of these committees of Lord Davies’ report regarding gender diversity during the year are noted on pages 92, 98 and 88. on appointment of directors to boards and will maintain its practice of embracing diversity in all its forms, but has chosen not to set any measurable JKX Oil & Gas plc Annual Report 2014
86 Corporate governance objectives. Details of our current gender diversity effective immediately, and which continue to have a statistics are set out on page 33. significant adverse financial impact on the Group. In these circumstances, the Chairman is firmly of Senior Independent Director the view that all Directors are fully committed to Dipesh Shah is the Senior Independent Director respond to this situation and does not consider it (‘SID’). Dipesh is available for discussions with appropriate to make changes at Board level at this other Non-Executive Directors who may have time. concerns which they believe have not been properly considered by the Board as a whole. He also acts External evaluation as an alternative point of contact for the Executive As the Company is outside of the FTSE 350 there Directors, if required, in addition to the normal is no requirement for an externally-facilitated channels of the Chairman and Chief Executive evaluation of the Board at least every three years. Officer. Following a number of changes to Board A key responsibility of the SID is to ensure he is responsibilities during 2012 and the appointment of available to shareholders if they have concerns Richard Murray on 1 January 2013, the Board will that have not been resolved by contact through the consider the relevance of an externally facilitated normal channels of Chairman, Chief Executive evaluation during 2015. Officer or other Executive Directors, or where such contact is inappropriate. Development of the Board All Directors are provided opportunities for further Board evaluation development and training updates and, during The effectiveness and performance of the Board is the year, the Chairman discusses a development vital to our continuing success. plan with each Director. In addition to the regular updates on governance, legal and regulatory 2014 evaluation process matters, the Board also receives detailed briefings The process of evaluating the performance of from advisers and at their seminars on a variety the Directors, the Board and its committees of topics that are relevant to the Group and its was undertaken through one to one interviews strategy. The annual Board evaluation includes a conducted by the Chairman with all other review of governance where the Directors have an Board members. This was followed by the Senior opportunity to assess their effectiveness and that of Independent Director reviewing the performance of the Board as a whole. the Chairman with the other Board members. These reviews centred around: Board activities • the composition of the Board and Committees Attendance at meetings and the skill-sets required to fulfil their In addition to six scheduled Board meetings, responsibilities; there were two other meetings to deal with ad-hoc • identifying scope for innovation to generate procedural matters relating to granting formal enhanced shareholder value; approvals that did not necessarily require full • searching for improvements to the risk attendance. management process and governance; and When a Director is unable to participate in a • the scheduling of presentations from senior meeting either in person or remotely because of personnel focused on the Company’s key business another engagement they are provided with the areas. briefing materials and the Chairman will solicit The Board as a whole evaluated its own their views on key items of business ahead of time, performance by consolidating and discussing the in order that these can be presented at the meeting reviews set out above. and influence the debate. Throughout 2014, the Board and individual The number of meetings of the Board and its Directors have managed the Group through very committees during 2014 and individual attendance difficult circumstances with the crisis in Ukraine. by director is shown on the following page: In the second half of the year, three government decrees were issued without warning and that were Strategic report Governance Financial statements 2-79 80-119 120-182 87
Scheduled Board and Committee meetings attendance in 2014
Audit Remuneration Nomination Board Committee Committee Committee
Number of meetings 61 3 3 1 Attendance: Nigel Moore 6/6 – 3/3 1/1 Dr Paul Davies 6/6 – – – Cynthia Dubin 6/6 – – – Martin Miller 6/6 – – – Peter Dixon 6/6 – – – Dipesh Shah2 OBE 6/6 2/3 3/3 – Lord Oxford 5/6 – – 1/1 Alastair Ferguson 6/6 3/3 – – Richard Murray 6/6 3/3 3/3 –
1 In addition to the six scheduled meetings, two unscheduled meeting were convened at short notice to deal with procedural matters. All Directors were given notice of the meeting and some of them were unable to attend due to prior commitments which could not be rearranged. Both meetings were attended by Messrs Moore, Davies, Miller, Dixon and Mrs Dubin, one of the meetings was also attended by Messrs Murray and Ferguson. 2 Due to illness, Dipesh Shah was not able to attend one Audit Committee meeting.
Senior management from across the Group, and • where applicable, reports from the Nominations advisers, attend some of the meetings for the Committee, Audit Committee and Remuneration discussion of specific items in greater depth. This Committee. is important to the Board as it further enhances In addition to the standing agenda items and the Board’s understanding of operations and the annual Board responsibilities in respect of Group implementation of strategy. reporting, other topics covered by the Board during During 2014 the General Directors of both of our the year included: significant operating subsidiaries in Ukraine • the political and economic developments in and Russia attended Board meetings to lead on Ukraine and managing the associated risks to important issues specific to their operations. our operations; Board’s work during 2014 • responding to the three Ukrainian government The Chairman, in consultation with his fellow decrees on doubling of gas production taxes, Directors, sets the agenda for Board meetings. currency controls and gas sales restrictions, and managing the impact on the Group; The Board uses a rolling agenda of strategy, • managing the Group’s liquidity following the finance, operations, commercial matters, corporate Ukrainian government decrees; governance and compliance. All Directors have the authority to add any item to the Board agenda. • prioritisation, review and approval of significant capital expenditure in Russia and Ukraine and At each of the six scheduled Board meetings during changes to expenditure plans; the year matters considered include: • the European Union sanctions against Russia, • the Chief Executive’s report on strategic, HSECQ the impact on the Group’s operations and our and performance matters; response; • the Finance Director’s report which includes the • protecting the Company and shareholders from latest available management accounts; arrangements and actions of two significant • the Technical Director’s operations and shareholders and dealing with legal proceedings exploration update; brought against the Company by those shareholders. • the Commercial Director’s report on oil, gas and condensate prices, macroeconomic issues and business development activity; and JKX Oil & Gas plc Annual Report 2014
88 Corporate governance
Restrictions on voting rights the Board’s purpose, which is expected to be heard On 29 May 2013 the Chairman wrote to in May 2015. Pending the outcome of that appeal, shareholders explaining why the Board of JKX Eclairs and Glengary will be entitled to attend considered that Eclairs Group Ltd (‘Eclairs’) in and vote at any general meeting of the Company, collaboration with Glengary Overseas Limited however where Eclairs’ and/or Glengary’s votes (‘Glengary’), who together own 38.9 per cent of would be determinative of a resolution, the voting the issued share capital of the Company, were figures for that resolution will be announced on acting only in their own interests and not in the two bases – one including the votes cast by Eclairs interests of all shareholders. In addition, the exact and Glengary and the other excluding these votes – nature of the relationship between the owners of but the resolutions will not be declared or minuted Eclairs and Glengary was unclear and the Board pending the Supreme Court decision. had reasonable cause to believe that information provided by them in response to requests from JKX Re-electing your Board for particulars of their respective interests was The Board contains a broad range of experience false or materially incorrect. and skills from a variety of industries and advisory roles, which fully complement each other and have On 31 May 2013, the Board issued restriction continued to be extremely important to JKX during notices to each of: (a) Eclairs, their shareholders 2014. and nominees in respect of 47,287,027 shares in JKX (representing 27.5 per cent of the issued share As the Company is outside of the FTSE 350 there capital of the Company) held by nominees on behalf is no requirement for all Board members to be of Eclairs; and (b) Glengary, their shareholders and subject to annual re-election by shareholders. In nominees in respect of the 19,656,344 shares in accordance with the Articles of Association Cynthia JKX (representing 11.4 per cent of the issued share Dubin, Alastair Ferguson and Dipesh Shah will capital of the Company) held by nominees on behalf stand for re-election at the 2015 Annual General of Glengary. Meeting. Subsequently Eclairs and Glengary and their Full biographies of all the Directors can be found nominees initiated Court proceedings against the on pages 82 and 83 and in the Notice of AGM. Company in respect of the validity of the restriction notices. On 30 August 2013, the High Court held Nomination Committee that, in deciding to issue the restriction notices, the The role of the Nomination Committee is to review Board had acted in good faith with the intention the structure, size, skills and composition of the of protecting the Company and its shareholders as Company Board and the Boards of companies a whole and that the Board had reasonable cause owned by JKX Oil & Gas plc. The Committee to believe that information provided by Eclairs also considers succession planning and suitable and Glengary in response to requests from JKX nominations for appointments to the Boards, and for particulars of their respective interests in makes appropriate recommendations based on JKX was false or materially incorrect. However, qualifications and experience. The Committee the Court ruled that the Board’s power to restrict meets as often as it determines is appropriate and Eclairs and Glengary from exercising their voting generally meets at least once a year and more rights as shareholders could be used only for the frequently if required. No appointments were made limited purpose of extracting information from the to the Board during 2014 (2013: none). shareholders. Membership and process JKX appealed against the High Court’s finding The Nomination Committee comprises two regarding the Board’s power to restrict Eclairs and Non-Executive Directors. During the year the Glengary from exercising their voting rights and Committee comprised Lord Oxford and Nigel Moore on 13 May 2014 the Court of Appeal allowed JKX’s (Chairman). The Nomination Committee met once appeal and did not disturb any other parts of the during 2014 (2013: none) to review the structure, judgment. In consequence, the restrictions imposed size and composition of the Board and consider by the Board on Eclairs and Glengary are wholly succession planning. valid. The Chairman ensures that any new Directors Eclairs and Glengary were given permission to are provided with a full induction on joining the appeal to the Supreme Court limited to the issue of Board. The letters of appointment of each Non- Strategic report Governance Financial statements 2-79 80-119 120-182 89
Executive Director are available for inspection at Oxford continues to make a unique and unrivalled the registered office of the Company. contribution to the Board and it is anticipated he will be up for re-election at the 2017 AGM. Succession planning The Board is responsible for succession planning In considering that the Company is, other than as for directorships and key management roles. This noted above, in full compliance, the Board notes requires performance and talent assessment, that excluding the Chairman, independent Non- to ensure that able successors for key roles Executive Directors comprise 50% of the Board are identified and then provided with suitable as the Board considers that the four other Non- opportunities through career and personal Executive Directors are wholly independent. development plans. It is crucial that we remunerate The Executive Directors have undertaken a review our most talented people fairly and properly, of the independence of each of the Non-Executive such that they are more likely to stay in our Directors and Chairman. The review addressed employment. During the year, the Remuneration the matters highlighted at Section B.1.1 of the Committee reviewed the status of our succession Code, which could appear to affect a Director’s planning. That Committee’s views were judgment. In undertaking the review, one specific summarised to the Board. matter addressed was that Lord Oxford has served on the Board for more than nine years. Remuneration Committee Following the review, the Executive Directors do Details of the work of the Remuneration Committee not consider that this matter in any way influences is given in the Remuneration report on pages 98 to the independent judgment of Lord Oxford. 115. Accordingly the Executive Directors believe each Compliance of the Non-Executive Directors and Chairman to be independent in accordance with Section B 1.1 of the Code both during the period under review and Compliance with the UK Corporate subsequently. Governance Code The Board believes the Company has been in full In addition the Board supports the continued compliance with the provisions set out in the UK appointment of Lord Oxford as a Non-Executive Corporate Governance Code, with the following Director because of his unrivalled knowledge and minor exceptions: experience of doing business in Ukraine. B.2.3. The terms of appointment of the Non- Internal control and risk management Executive Directors are set out in their service The Board is responsible for identifying and contracts, which for Nigel Moore is dated 13 evaluating the major business risks faced by the July 2012, for Lord Oxford is dated 1 January Company and for determining and monitoring 2002, for Dipesh Shah is dated 1 June 2008, for the appropriate course of action to manage these Alastair Ferguson is dated 1 November 2011 and risks. The Audit Committee reviews the Company’s for Richard Murray is dated 1 January 2013 and internal control processes and risk management includes a termination notice of three months by systems and reports its conclusions to the Board. either party. However, the service contracts are for an indefinite term, not a finite term, subject The Board has reviewed, for the year under review to re-election on an as required basis. The Board and up to the date of approval of the 2014 Annual continues to believe this is appropriate given Report, the effectiveness of the Company’s systems the Company size, Non-Executive skill set, and of internal control and risk management and has evaluation of performance and independence on an concluded that the Company’s procedures, policies ongoing basis with regards to Non-Executives. The and systems are appropriate and suitable to enable Company continues to believe the unspecified term the Board to safeguard shareholders’ investment is reasonable. and the Company’s assets, and comply with Turnbull Guidance. B.7.1. Non-Executive Directors who have served longer than nine years should be subject to annual In addition, the Board has carried out a robust re-election. Lord Oxford has served on the Board assessment of the principal risks facing the for more than nine years and was re-elected a Company, including those that would threaten its Director at the last AGM on 4 June 2014. Lord business model, future performance, solvency or JKX Oil & Gas plc Annual Report 2014
90 Corporate governance liquidity. Details of the principal risks and how Whistleblowing they are managed or mitigated is included on pages The Board reviews the arrangements by which 48 to 61. employees can raise any concerns they may have about workplace fraud or mismanagement Further information on internal control and risk with local management on a confidential basis. management is set out in the Audit Committee Whistleblowing incidents are taken very seriously Report on page 92. by the Board. Budgetary process As part of the Board’s commitment to support our Each year the Board reviews and approves employees in the work place, we have a confidential the Group’s annual budget with key risk areas process for reporting “Concerns at Work”. This is a identified. The preparation of the annual Group confidential service for reporting delicate matters budget is a multi-stage comprehensive process led that sometimes arise in the work place. by the Finance Director who works closely with In addition this service forms part of the Company’s local finance directors for operating subsidiaries in commitment to comply with best practice under the Russia and Ukraine and other senior management UK Bribery Act. As disclosed in our Anti-Bribery with specific responsibilities for our Hungarian, and Corruption policy, all individuals who work on Slovakian and other operations. behalf of the Group have a responsibility to help Performance is monitored through the monthly detect, prevent and report instances not only of reporting to the Board of variances from the bribery but also of any other suspicious activity or budget. Relevant action is taken by the Board wrongdoing. throughout the year based on updated forecasts Employees are expected to make complaints to which are prepared using current information on their line managers or, if this is not appropriate, the key risk areas and sensitivities. through our independently managed confidential reporting process, which is available to all Investment appraisal employees as well as third parties. For each capital intensive project there is a rigorous project analysis and risk and return Complaints made under the confidential reporting appraisal completed using technical, financial, service are sent to the Finance Director and are commercial, and operational specialists across the investigated in the first instance prior to a decision Group. being taken about further steps. Feedback is provided to the person making the complaint, if We have a subsurface technical team in our necessary. London Head Office to monitor, assess, appraise and oversee all ongoing Group projects and The Board is absolutely committed to ensuring that potential opportunities. Having this expertise all employees have a safe, reliable, and confidential in-house improves our ability to quickly identify the way of reporting any suspicious activity. potential risks, rewards and value in new capital intensive opportunities and efficiently utilise the Communication with shareholders available resources to maximise returns from our Communication with shareholders is a high priority portfolio of oil and gas assets. for the Board. Capital investment is regulated by the budgetary A number of formal communication channels are process, our automated authorisation for used to account to shareholders for the performance expenditure (‘AFE’) system and pre-defined of the Group, which include the Annual Report, authorisation levels. AGMs and periodic reports to the London Stock Exchange. For expenditure beyond specified levels, detailed written proposals are submitted to the Board. Presentations given at appropriate intervals to representatives of the investor community are Using our AFE system Group capital expenditures available to all shareholders to download from are reviewed monthly on a project-by-project basis the Group’s website (www.jkx.co.uk). Less formal by the Finance Director and overruns, actual or processes include contacts with institutional foreseen, are investigated, and approved by the shareholders for which the Board as a whole takes Board where appropriate. responsibility. Strategic report Governance Financial statements 2-79 80-119 120-182 91
Extensive information about the Group’s activities Going concern is provided in the Annual Report and the Half- The Board closely monitors and manages its yearly Report which are provided to shareholders. liquidity risk using cash flow forecasts which are regularly produced and applies sensitivities The Chief Executive and Finance Director had for different scenarios including, but not limited a number of meetings with institutional and to, changes in oil and gas prices, changes in other shareholders during the year, as did the Rouble and Hryvna exchange rates, changes to Chairman. In addition, in April through June 2014 production and other tax rates in relation to the the Chairman sent three letters to shareholders Group’s producing assets, increased operating and to update them on the Group’s progress and other capital expenditure and delays to additional future important matters affecting them and the Group. revenue. Where practicable, the Board maintains an open Capital and operating costs are based on approved relationship with the Group’s major shareholders, budgets and latest forecasts in the case of 2015 and communicates directly with them, offering the and current development plans in the case of 2016. opportunity to meet in order that their views on the In addition, the Directors have made enquiries Group can be understood. into and considered the Ukrainian and Russian Enquiries from individuals on matters relating to business environments and future expectations their shareholding and the business of the Group regarding country and currency risks that the are welcomed and are dealt with in an informative Group may encounter. and timely manner. Shareholders are encouraged At the date of this report, there is a combination to attend the Annual General Meeting to discuss of circumstances which results in the existence of the progress of the Group. a material uncertainty that may cast significant doubt about the Group’s and Company’s ability Conflicts of interest to continue as a going concern. The combination The Company complies with the provisions on of circumstances giving rise to the material conflicts of interest in the Companies Act 2006. uncertainty is discussed in note 2 to the financial The Company has in place procedures for the statements. After making enquiries and disclosure and review of any conflicts, or potential considering the circumstances discussed in conflicts, of interest which the Directors may note 2 to the financial statements, the Directors have and for the authorisation of such conflicting have, at the time of approving the financial matters by the Board. In deciding whether to statements, a reasonable expectation that the authorise a conflict or potential conflict the Company and Group will have adequate resources Directors must have regard to their general duties to continue in operational existence for the under the Companies Act 2006. The procedure foreseeable future. Thus they continue to adopt the operates to ensure the disclosure of conflicts, going concern basis of accounting in preparing the and for the consideration and if appropriate, the financial statements. authorisation of them by non-conflicted Directors. The authorisation of a conflict matter, and On behalf of the Board the terms of authorisation, may be reviewed at any time by the Board. The Nomination Committee supports the Board in this process, both by reviewing requests from Directors for authorisations of situations of actual or Nigel Moore Chairman potential conflict and making recommendations 19 March 2015 to the Board and by reviewing any situations of actual or potential conflict that have been previously authorised by the Board, and making recommendations regarding whether the authorisation remains appropriate. JKX Oil & Gas plc Annual Report 2014
92 Audit Committee Report
Audit Committee
Members Committee Number member of meetings since in 2014
Richard Murray (as Chairman) January 2013 3/3 Dipesh Shah1 OBE June 2008 2/3 Alastair Ferguson November 2011 3/3
1 Due to illness, Dipesh Shah was not able to attend one Audit Committee meeting.
Dear Shareholder
2014 has been a very challenging year for the Group with the political and economic developments in Ukraine and Russia adversely affecting the Group. The decrees announced by the Ukrainian government in the second half of the year had a material adverse financial impact on the Group and necessitated that the Board undertake an immediate review of capital and operational expenditure. This swift response to the unfolding crisis was aimed at maintaining an operating capability whilst protecting the Group’s cash resources. In particular, the focus on liquidity has been effective in ensuring that the group remains solvent and that it continues to be appropriate to prepare the Financial Statements on a going concern basis. The consequences of the decline in the Russian and Ukrainian economies has been central to the Committee’s work in 2014, with particular focus on cash management and liquidity issues, the valuation of the Group’s assets (including the impairment reviews undertaken by management) and an ongoing review of the results of the cost cutting programme. In these circumstances, the Committee has considered it appropriate that the Annual Report and Accounts should contain detailed disclosures setting out the challenges, risks and actions taken by management. In addition, you will note that our Auditors have understandably drawn attention, in their Report, to the uncertainties that lie beyond the control of management, as an ‘Emphasis of Matter’ paragraph. In addition the Committee’s role continues to be that of ensuring that the Group’s governance, financial risk management and financial reporting processes provide the requisite assurance framework. The report that follows, expands on the matters that I have referred to above and we have detailed three such issues which relate to the financial statements. Each of these issues was reviewed as part of the year end audit and at the half year review and this section of our report is designed to provide you with an understanding as to how the Committee’s review and oversight process has been conducted. In 2015, in addition to matters which coincide with key events in our financial reporting calendar and supporting the internal audit programme, the Committee will continue to support the development of a sound risk management culture and the improvement of risk management processes across the Group. In accordance with the governance requirements the Committee has assessed the Annual Report, on behalf of the Board, and has advised the Board that, in the Committee’s opinion, the Annual Report taken as a whole is fair, balanced and understandable.
Yours faithfully
Richard Murray Chairman of the Audit Committee 19 March 2015 Strategic report Governance Financial statements 2-79 80-119 120-182 93
Together with the collective financial and Role of the Audit Committee commercial skills and experience of the other Committee members the Committee has the The Audit Committee has delegated authority from the Board set out in its written terms of reference, available appropriate experience to fulfil its responsibilities on the Company’s website, which were last reviewed by and oversee the activities of the Company’s auditors. the Board in June 2014. The principal objectives of the Audit Committee are: Attendance at meetings • to monitor the integrity of the financial statements of The Audit Committee met three times during the the Group and regulatory announcements, and to review year (2013: six). any significant financial reporting judgements; The Committee’s meetings are always attended • to monitor the adequacy and effectiveness of the Group’s internal control, risk management and financial by the Chief Executive, the Finance Director, reporting processes; the lead partner of our external auditors, and by • to provide the Board with an independent assessment of certain senior managers who are responsible for the Group’s accounting affairs and financial position; specific topics, such as risk management, financial • to provide the Board with assurance that the Annual control, and internal compliance procedures. Other Report and Accounts are presented in a manner that Directors are invited to attend the meetings from is fair, balanced and understandable, so as to enable time to time when appropriate. shareholders to assess the Group’s performance, business model and strategy; The Committee Chairman maintains contact with • to recommend the (re-)appointment of the external those other attendees throughout the year. Twice auditors to the Board and annually assesses their during the year (2013: twice), the Committee met independence, objectivity, effectiveness, quality, with the external auditors to discuss matters which remuneration and terms of engagement, as well the auditors and Audit Committee may wish to as ensuring that the policy with regard to their appointment for non-audit services is appropriately raise without Executive Directors being present. applied. Thereafter, the Committee provides a recommendation to the Board regarding the auditors The Committee’s activities during 2014 appointment to be put to the shareholders in the The Committee has an annual work plan, developed forthcoming annual general meeting; and from its terms of reference, with standing items • to monitor the adequacy and effectiveness of the internal that the Committee considers at each meeting in audit function and the Risk Committee and to review addition to any specific matters arising and topical any significant matters arising. items on which the Committee has chosen to focus. The work of the Audit Committee during the year principally fell under three main areas and is Composition of the Audit Committee summarised on the following page. During 2014, the Audit Committee was chaired by Richard Murray, a Chartered Accountant and Significant issues considered by the Audit a former audit partner with Ernst & Young LLP. Committee The Board has determined that Richard Murray After discussion with management and the has considerable recent and relevant financial external auditors, the Committee determined that experience through his previous and current roles. the key risk of misstatement in relation to the In addition, Richard maintains a regular pattern of Group’s 2014 financial statements related to: attendance at relevant seminars and courses. • The going concern basis of accounting; The Committee also includes two other Independent • The carrying value of the Group’s Oil and Gas Non-Executive Directors, Dipesh Shah and Alastair assets; and Ferguson, providing it with an appropriate balance • The Group’s exposure to production-related taxes between those individuals with a financial or in Ukraine. accounting background and those with wider experience of the oil and gas sector in which we These issues were discussed with management and operate. In practice, the Committee achieves its the external auditors at the time the Committee objectives by a process of regular interaction with reviewed and agreed the auditors’ Group Audit management and the external auditors, as well as Plan, during the review of the half year interim by reviewing the work of Internal Audit and the financial statements in July 2014 and at the Risk Committee, and other advisory firms. conclusion of the audit of these financial statements. JKX Oil & Gas plc Annual Report 2014
94 Audit Committee Report
Internal controls and risks External auditors Accounting, tax & financial reporting
• Considered reports from KPMG in • Considered and approved the audit • Reviewed the half year and annual relation to their audits and assessment approach and scope of the audit work to financial statements and the of the control environment in Russia and be undertaken by the external auditors significant financial reporting Ukraine and the fees for the same judgements made therein • Considered reports from the external • Reviewed auditor’s reports on their • Considered the liquidity risk and the auditors on their assessment of the audit findings at the half year review basis for preparing the Group half control environment and at the year end yearly and full year accounts on a going concern basis and reviewed the • Considered feedback from both of these • Reviewed and updated the policy related disclosures in the Annual reports as submitted by local and Group governing non-audit services Report management • Considered the independence of the • Reviewed the external auditor’s • Reviewed Risk Committee reports, auditors and their effectiveness, taking report on audit and accounting which required management to identify into account: judgements, including consideration risks and evaluate them, and ensured (a) non-audit work undertaken by the of relevant accounting standards and appropriate mitigating controls were external auditors and compliance with underlying assumptions agreed and implemented the policy; (b) FRC guidance; • Reviewed disclosures in the Annual • Approved the scope of the internal audit (c) feedback from a survey targeted at Report in relation to internal controls, programme for the year various stakeholders; and risk management, principal risks and • Considered the effectiveness of the (d) the Committee’s own Assessment uncertainties and the work of the internal audit function Committee • Considered the recommendations in the • Assessed the effectiveness of the UK Corporate Governance Code • Received a corporate governance Group’s internal control environment regarding the tender of the external update relating to changes to the UK audit contract Corporate Governance Code • Assessed the effectiveness of the Group’s Anti-Bribery and Corruption • Considered and approved letters of Annual Plan representation issued to the external auditors
Misstatements The Chairman of the Risk Committee reports to Management reported to the Committee that they the Audit Committee and the Board at relevant were not aware of any material or immaterial meetings on matters it has reviewed and material misstatements made intentionally to achieve a changes to the Group’s risk environment, in particular presentation. The auditors reported the addition to making recommendations when misstatements that they had found in the course of appropriate. their work to the Committee and confirmed that no Following each Risk Committee meeting, the material amount remained unadjusted. Committee reviews the minutes, the latest Risk Register and related output and challenge the Internal control and risk management Group’s high-rated risks and the mitigating actions The Audit Committee monitors the integrity of the identified by each risk owner. An updated list of financial statements and related announcements, principal risks is included within the Strategic reviews the Company’s internal control processes Report on pages 2 to 79. and risk management systems, and reports its conclusions to the Board. The Committee regularly For each high-rated risk the Committee reviews reviews the effectiveness of the Company’s systems the Group’s current level of exposure and considers of internal control and risk management. the appropriateness of the mitigating actions being taken by management. The Risk Committee, which comprises the Finance Director and senior management, assists the The Committee was comfortable with the processes Board in discharging their responsibility to review in place for risk management. on an ongoing basis the risks potentially facing Additional information on risk management is the Group, their potential impact, the strategies included in the risks section on pages 48 to 51. available to mitigate those risks and the costs of such mitigation. The Risk Committee met three times in 2014. Strategic report Governance Financial statements 2-79 80-119 120-182 95
Matters considered Response
The impact of political and economic uncertainty in Ukraine on the going concern basis of accounting
In the second half of 2014, three government decrees were The Committee has been in discussion throughout the year issued without warning and were effective immediately for a with management and the external auditors (PwC) in order to number of months. The decrees had the effect of: assess the impact of government decrees and economic difficulties in Ukraine on our people, operations and assets • doubling the rate of gas production tax; located in that territory. • implementing currency restrictions until 2 December 2014, The Committee received reports prepared by management subsequently extended to 2 March 2015 and again to 3 June outlining their assessment of the ability of the Group to 2015; and continue as a going concern, subject to the reprioritisation of • directing major industrial gas buyers to acquire their gas capital expenditure and the cost reduction programme, and solely from the Ukraine state-owned gas company through to challenged the appropriateness of the key assumptions used. 28 February 2015. The Committee was also fully briefed on discussions between All three of these decrees have had a significant adverse the Board, local management and advisors regarding the financial impact on the Group. potential for further unforeseen decrees in Ukraine affecting the Group and the likelihood of current decrees in place being The majority of the Group’s revenues, profits and cash flow from extended. operations are currently derived from its oil and gas production in Ukraine. In addition, PwC provided a detailed report on this issue to the Committee. The audit opinion, provided by them, includes an Accordingly, the Group’s going concern assessment is sensitive ‘emphasis of matter’ paragraph referencing specific risks to the realisations that we achieve from our oil and gas sales in relating to further legislation from the Ukrainian government Ukraine our ability to have access to the market for our gas and affecting the energy industry, material deterioration of our oil the amount of cash that we are permitted to repatriate to the UK. and gas realisations and the extension of currency controls Under guidelines set out by the UK Financial Reporting Council through 2016 which represent material uncertainties. Whilst it the Board is required to consider whether the going concern is unclear whether any or all of these risks will be realised, if basis is the appropriate basis of preparation for the Financial realised, they may cast significant doubt about the Group’s Statements, and furthermore, is required to include appropriate ability to meet its obligations as they fall due and continue as a disclosure of any significant considerations or uncertainties going concern. relevant to the going concern assumption. The Committee has advised the Board that, on the basis of management’s reasonable expectations as to the likely outcome and impact of these risks, including consideration of mitigating measures, the Group has adequate resources to continue in operational existence for the foreseeable future and therefore the going concern basis is the appropriate basis of preparation for the 2014 financial statements. However, this notwithstanding, the Committee has advised the Board that the current political and economic uncertainties that exist, particularly those relating to market access, oil and gas realisations and currency restrictions, together represent a material uncertainty which should be, and is, appropriately disclosed in the financial statements (see note 2 to the Group financial statements).
Continues overleaf JKX Oil & Gas plc Annual Report 2014
96 Audit Committee Report
Matters considered Response
The carrying value of the Group’s oil and gas assets
As more fully explained in note 5 to the accounts, JKX’s oil and The Committee received reports from management outlining gas assets are grouped into cash generating units (‘CGUs’) for the basis for each of the key assumptions used, and these the purpose of assessing the recoverable amount. Each period assumptions were reviewed by the Committee to ensure these assets are reviewed for indications of impairment. If any reasonableness and consistency e.g. with the Group’s 2015 assets are considered to have been impaired, the carrying value Budget which is approved by the Board. In addition, this area is is adjusted downwards by an appropriate amount, with a a prime source of audit focus and accordingly our auditors corresponding charge made to the Income Statement. provide detailed reporting to the Committee. Management also brought to the attention of the Committee the sensitivity An impairment review necessarily involves the use of analysis disclosed in note 5 to the financial statements. assumptions such as long-term production forecasts, gas prices, production-related taxes, capital expenditure, discount The Committee agreed that, on the basis of the evidence rates, and other macroeconomic assumptions underlying the available, the projected future cash flows from the Group’s valuation process. This is particularly challenging in relation to CGUs adequately supported the carrying value of the the Group’s interests in Ukraine and southern Russia due to the associated oil and gas assets after impairment, and noted that lower medium term visibility of gas prices which are set by the full disclosure of the key assumptions (including a sensitivity respective governments and are vulnerable to unexpected analysis in note 5) had been appropriately disclosed in the short-term political manoeuvering. financial statements.
The Group’s exposure to production-related taxes in Ukraine
In recent years, the Group has been in receipt of a number of The Committee addressed this issue, as in previous periods, unexpected claims for additional taxes, mainly retrospective in by reviewing reports from senior management and examining nature, all of which have been strongly contested by the degree to which these are supported by professional advice management and which have been/are being contested in the from external legal and other advisory firms. This is also an Law Courts of Ukraine. area of elevated audit risk and accordingly the Committee received detailed verbal and written reporting from PwC on The outcome of legal challenges concerning additional these matters. production tax liabilities in Ukraine for the period to 31 December 2010 is underpinned by a range of judgements Having reviewed these reports and submissions, the (see note 27). Committee was satisfied that no provision was required for these tax claims. Furthermore the Committee noted that the disclosures made in note 27 to the Financial Statements appropriately reflected the uncertainties that necessarily persist.
Internal audit development of the internal audit programme During the year, KPMG were retained to build which is intended to ensure that the necessary on their prior year assessment on the adequacy of processes and controls are firmly embedded within the Group’s procedures and controls in Russia and our organisation making the control environment Ukraine as well as providing assistance with the stronger and more efficient. development of a Group internal audit function. External audit KPMG’s assessment of our processes and controls The Audit Committee maintains an objective allowed management to prioritise the work and professional relationship with the Company’s programme so as to address the recommendations auditors, PricewaterhouseCoopers LLP (‘PwC’), made by them, thereby strengthening the financial who have been auditors to the Group since 2006, and operating controls in these key operating and meets in private session with them on a subsidiaries. periodic basis. Our internal audit function continued to develop PwC were reappointed as the Company’s auditors in 2014 with KPMG building on their work of the in 2011 following a competitive tender process. The prior year in addition to assessing and testing audit partner rotated in 2013. PwC are required to management’s responses to their previous findings. rotate the audit partner responsible for the Group The Audit Committee is fully supportive of the audit every five years. Strategic report Governance Financial statements 2-79 80-119 120-182 97
The Audit Committee are fully supportive of the Reappointment of Auditors Code’s requirement that the audit should be put During the year the performance of the auditor was out to tender at least once in every ten years. formally assessed by the Committee in conjunction Any decision to open the external audit to tender with the senior management team. In making within ten years is taken on the recommendation this assessment the Committee focussed on the of the Audit Committee based on the results of the robustness of the audit, the quality of delivery of annual performance review. audit services and the quality of the auditor’s staff. Having reviewed the capability and effectiveness Non-audit services of PwC’s performance during the year, and having During the year the Committee reviewed and satisfied itself as to their continuing independence updated their policy governing the engagement of and objectivity within the context of applicable the external auditor to provide non-audit services. regulatory requirements and professional The policy precludes PwC from providing certain standards, the Committee has invited the Board to services such as valuation work or the provision of recommend the reappointment of PwC as auditor accounting services and also sets a presumption at the forthcoming AGM and a resolution to that that the external auditor should only be engaged effect will appear in the notice of the AGM. for non-audit services where there is no legal or practical alternative supplier. In such instances, the continued objectivity and independence of the auditors in their capacity of auditor is an objective of the Group. Under the policy, the Committee has delegated authority to the Finance Director for the approval of non-audit services from PwC of up to $20,000 per project and an aggregate amount of not more than $50,000 in any year. Decisions above these thresholds must be referred to the Audit Committee for pre-approval of the services and be supported by appropriate documentation detailing management’s reasons for selecting PwC. In addition to the statutory audit fee, PwC and member firms charged the Group $112,000 for audit-related assurance services in 2014 in connection with statutory and regulatory filings and a further $5,000 for other non-audit services, primarily staff training and development and tax advice. Further details of the fees paid, for both audit and non-audit services, can be found in note 23 to the consolidated financial statements. The Committee is satisfied that the quantum of the non-audit services provided by PwC is such that the objectivity and independence of the external auditor has not been compromised. JKX Oil & Gas plc Annual Report 2014
98 Directors’ Remuneration Report – Annual Statement
Remuneration Committee
Members Committee Number member of meetings since in 2014
Dipesh Shah OBE (as Chairman) 1 June 2008 3/3 Nigel Moore 26 June 2007 3/3 Richard Murray 17 January 2013 3/3
Dear Shareholder
On behalf of the Board of Directors, I am pleased to present the Directors’ Remuneration Report for the year ending 31 December 2014 for which we will be seeking your approval at the Annual General Meeting on Wednesday, 3 June 2015. Throughout 2014, the Board and individual Directors have been working under extremely challenging circumstances given the geo-political situation in Ukraine and Russia. Moreover, in the second half of the year in Ukraine, three government decrees were issued without warning which were with immediate effect, and which continue to have a significant adverse financial impact on the Group. Management have devoted intense and exceptional effort on a daily basis to mitigate the impact of such difficult circumstances. The Committee has reviewed performance and incentive plan outcomes in the light of such actions whilst remaining cognisant of the financial circumstances facing the Company. In these challenging times, it is particularly important for the success of our strategy that we attract and continue to retain the best people with appropriate skills at every level. The Company has built a team which is highly experienced in the region, a considerable benefit in the present circumstances. Our remuneration structure and underlying philosophy continues to be robust and focused on ensuring alignment of Executive and senior management with shareholder interests, and encouraging delivery of the Company’s strategic objectives.
Remuneration Committee’s work in 2014 Each year the Committee has a full agenda ensuring the directors’ remuneration policy is in line with evolving corporate governance requirements, and is appropriate to drive the right behaviours and to reward sustainable company value. Details of the Committee’s work during 2014 is set out on page 105. The Committee values engagement with key investors. In recent years, we have written to investors regarding our remuneration policy, and investor views were sought again during 2013 prior to formulating proposals for changes to the remuneration policy; the new remuneration policy was approved at the AGM in June 2014 and is summarised in this report.
Remuneration in 2014 Executive Directors salaries were increased by an average of 3.5% in January 2014 which compared with an average of 4.5% increase awarded to other UK-based staff. Based on the strategic, financial and health and safety performance criteria established by the Committee for 2014, the Executive Directors could have received bonuses totalling 43.4% of their base pay in cash. As a result of the financial circumstances facing the Company at this time, the Committee has determined that bonuses achieved by Executive Directors, in respect of the 2014 financial year, will be deferred into JKX shares. The applicable number of deferred shares will be awarded later in 2015 and will be subject to a 12 month Strategic report Governance Financial statements 2-79 80-119 120-182 99
holding period and clawback in accordance with the Directors’ Remuneration Policy (see page 102). The number of deferred shares to be awarded to each Executive Director will be determined by the share price on the date of award, but will not exceed that implied by the share price on the date the Committee determined that the bonuses would be deferred (11 March 2015). The Committee’s decision on the quantum of deferred shares to be awarded will be reported in the 2015 Annual Report. TSR and EPS performance targets for the 2012 Performance Share Plan (‘PSP’) and Discretionary Share Option Scheme (‘DSOS’) awards, respectively, were not met, and consequently no long-term incentives vest for performance to 31 December 2014. Details of the remuneration decisions for the reporting year are covered in the Annual Report on Remuneration.
Remuneration in 2015 The Committee annually examines the evolution of remuneration practices and policy. Changes proposed by The Committee at the AGM in June 2014 were approved and will remain in place for the next three years. No salary increases were awarded for 2015 across the organisation, including to Executive Directors and Non-Executive Directors. Annual bonuses in 2015 will be based on a similar performance framework as in 2014 using a range of strategic, financial and health and safety targets. Half of the weighting will be apportioned to financial targets. Under the Performance Share Plan approved at the 2014 AGM, awards would normally be granted of nil cost options which equate to 150% of the base salary for each of the Executive Directors. For 2015, the Committee has decided to restrict the grant to 100% of base pay with performance conditions that reflect the approved Remuneration Policy.
Remuneration disclosure This report complies with the requirements of the Large and Medium sized Companies and Groups Regulations 2008 as amended in 2013, the provisions of the UK Corporate Governance Code (September 2012) and the Listing Rules. As with last year, this Report is split into two parts: the Policy Report and the Directors’ annual remuneration report: • Our Directors’ Remuneration Policy (pages 100 to 104) is unchanged from that approved by shareholders at the June 2014 AGM, and we have therefore provided a summary in order to provide context. The full Policy Report, as approved by shareholders, can be found in our 2013 Annual Report available on our website. • The Directors’ annual remuneration report (pages 105 to 115) sets out details of how our remuneration policy has been applied for the year ended 31 December 2014. This section is subject to an advisory shareholder vote. These sections work together to give you full and transparent disclosure of the Company’s intention and operation of Directors’ remuneration. At the AGM on 3 June 2015, the Directors’ annual remuneration report will be put to an advisory shareholder vote.
Yours faithfully
Dipesh J Shah OBE; FRSA Chairman of the Remuneration Committee 19 March 2015 JKX Oil & Gas plc Annual Report 2014
100 Future policy – Directors’ Remuneration Policy
Summary of Directors’ Remuneration Policy Reward principles The Remuneration Policy for Executive Directors The principles of JKX’s remuneration policy are to: and Non-Executive Directors was approved by • pay an appropriate level of total remuneration in shareholders at the June 2014 AGM and took effect relation to company and individual performance from 1 January 2015. Below we provide a summary and with reference to peer group companies; including the Remuneration policy table, and terms and conditions for members of the Board. The full • ensure that there is an appropriate link between policy report, as approved by shareholders, can be performance and reward; found in last year’s remuneration report, a copy • award annual bonuses which reflect the of which can be found on the Company’s website achievement of short term financial and strategic at http://www.jkx.co.uk/investor-centre/investor- objectives as well as personal performance; and download-centre.aspx • ensure that long-term incentives are linked to Reward policies Total Shareholder Return (‘TSR’) and to the The Company aims to ensure that total delivery of Strategic Plan targets including the remuneration is set at an appropriate level relative achievement of strategic objectives. to peer group comparator companies, those Each element of remuneration has a specific role in being UK-based oil and gas companies which are achieving the objectives of the remuneration policy primarily quoted on the London Stock Exchange and aligning the interests of Executive Directors or AIM. The main components of remuneration with the interests of shareholders. The combined for Executive Directors and senior management potential remuneration from the annual bonus and are basic annual salary; pension and benefits long-term incentives ensures that the balance of (including non-contributory health insurance, life the Executive remuneration package is weighted assurance and income protection); an annual bonus towards at risk performance pay with a higher scheme linked to short-term financial and strategic weighting on long-term remuneration. objectives; and long-term incentives linked to the delivery of long-term shareholder value. More than 97% of JKX staff are based outside of the UK, primarily in the Ukraine and Russia. The main objectives of JKX’s remuneration policy The Committee takes into account remuneration are to: conditions elsewhere in the Company, and • enable the Company to recruit, retain and particularly for those employees based in the motivate individuals with the skills, capabilities UK, in formulating the Executive Director and experience to achieve its stated objectives; remuneration policy. • strengthen teamwork by enabling all employees A summary of the Directors’ remuneration policy is to share in the success of the business; and provided in the table opposite. • ensure alignment of Executive, senior management and shareholder interests. Strategic report Governance Financial statements 2-79 80-119 120-182 101
Executive Director Remuneration Policy table
Base salary
Purpose and link To attract and retain talent by ensuring base salaries reflect individual performance and market to strategy factors.
Operation Base salaries are reviewed annually on 1 January, with reference to the individual’s role, experience and performance; salary levels at relevant UK sector comparators1; and the range of salary increases applying across the Group.
Opportunity Any base salary increases are applied in line with the outcome of the annual review. It is not anticipated that salary increases for Executive Directors will exceed those of the UK-based workforce over the period over which this policy will apply. Where increases are awarded in excess of the UK employee population, the Committee will provide clear rationale in the relevant year’s Annual Report on Remuneration.
Performance metrics Business and individual performance are considerations in setting base salary.
Pension
Purpose and link To provide competitive retirement benefits. to strategy
Operation The Company makes a contribution to the pension scheme of the individual’s choice. At their option, Executive Directors may either have equivalent contributions made to their personal pension schemes or cash in lieu of pension or a combination of both.
Opportunity Executive Directors are eligible to receive an annual contribution equivalent to 15% of base salary.
Performance metrics Not performance related.
Benefits
Purpose and link to To provide competitive benefits. strategy
Operation Executive Directors receive benefits which consist primarily of life assurance, income protection and private medical cover, although can include any such benefits that the Committee deems appropriate.
Opportunity Benefits values vary by role and are reviewed periodically relative to market circumstances. The cost of the benefits provided changes in accordance with market conditions and will, therefore, determine the maximum amount that would be paid in the form of benefits during the Policy Period. The Committee retains the discretion to approve a higher cost in exceptional circumstances (e.g. relocation) or in circumstances where factors outside the company’s control have changed materially (e.g. increases in insurance premiums).
Performance metrics Not performance related.
1 Comparator companies used to assess market pay competitiveness have historically included UK-based oil and gas companies listed on the London Stock Exchange or AIM. The Committee reviews comparator companies periodically to ensure they remain appropriate and retains the discretion to adjust the reference group or companies as appropriate. JKX Oil & Gas plc Annual Report 2014
102 Future policy – Directors’ Remuneration Policy
Annual bonus
Purpose and link To incentivise the achievement of short-term financial and strategic objectives. to strategy
Operation Performance measures, targets and weightings are set at the start of the year according to strategic priorities. At the end of the year, the Remuneration Committee determines the extent to which the targets have been achieved, with any bonus payments delivered in cash. For Executive Directors, the Committee has the discretion to mandate the deferral of a proportion (up to 100%) of the annual bonus in JKX shares, to be held for a minimum of 1 year. Deferred shares will be subject to clawback provisions in the event of gross misconduct, material misstatement, or in any other circumstance that the Committee considers appropriate.
Opportunity For Executive Directors, the maximum annual bonus opportunity is 100% of base salary, with target bonus set at 40% of maximum. For Threshold level performance, the annual bonus will be between 0% to 20% of base salary.
Performance metrics Performance is assessed annually based on challenging budget and stretch targets for financial and business performance. The measures selected may vary each year depending on business context and strategy, and measures will be weighted appropriately according to business priorities. Under normal circumstances, financial measures will make up at least half of the total bonus opportunity. The Committee has discretion to adjust the formulaic bonus outcomes both upwards and downwards within the plan limits (including down to zero) to ensure alignment of pay with the underlying performance of the business, e.g., in the event of a target being significantly missed or unforeseen circumstances outside of management control. Further details of the measures, weightings and targets applicable are provided on page 107.
Performance Share Plan (‘PSP’)
Purpose and link To incentivise strong long-term financial performance and superior longer term returns to to strategy shareholders relative to peers.
Operation The Remuneration Committee has the ability to grant awards of nil-cost options annually to Executive Directors, conditional on Group performance over a period of at least three years. The sale of vested PSP awards is subject to meeting shareholding requirements (see notes to the Policy Table). Award levels and performance conditions will be reviewed from time to time to ensure they remain appropriate and no less stretching than the first cycle. Clawback applies on unvested PSP shares in the event of gross misconduct, material misstatement, or in any other circumstance that the Committee considers appropriate.
Opportunity The PSP provides for an award up to a normal aggregate limit of 150% of salary for Executive Directors, with an overall limit of 200% of salary in exceptional circumstances. The Committee has the discretion to authorise a payment, in cash or shares, equal to the value of dividends which would have accrued on vested shares during the vesting period.
Performance metrics Vesting of PSP awards is subject to continued employment and the Company’s performance over a 3-year performance period. If no entitlement has been earned at the end of the relevant performance period, awards will lapse. From 2015, PSP awards will be based on a number of financial and strategic measures, which may include , but not be limited to: • TSR • Earnings per Share (‘EPS’) • Other financial measures (e.g. ROCE, Profit before tax, cash resources) • Strategic and operational measures (e.g. production, reserves) In addition, awards are subject to an underpin such that for any awards to vest, the Remuneration Committee must satisfy themselves that health and safety performance has been satisfactory over the performance period. Each measure can be applied a weighting of between 0% and 50%. The Committee has the discretion to adjust the performance measures and weightings in advance of making an award to ensure that they continue to be linked to the delivery of Company strategy. Strategic report Governance Financial statements 2-79 80-119 120-182 103
Performance metrics – Under each measure, threshold performance will result in up to 25% of maximum vesting for that continued element. The vesting level will increase on a sliding scale to 100% vesting for stretch levels of performance. Vesting of PSP awards will be deferred in whole or in part for a period of up to two years following the end of a three year vesting period. The Company’s policy from 2015 will be for awards to vest 50% after 3 years with 25% required to be held until the end of 4 years, and 25% until the end of 5 years. As under the annual bonus, the Committee has discretion to adjust the formulaic PSP outcomes within the plan limits to ensure alignment of pay with performance, i.e. to ensure the outcome is a true reflection of the performance of the company. Details of the targets to be used in PSP grants for 2014 are included in the Annual Report on Remuneration on page 109.
Discretionary Share Option Scheme (‘DSOS’) The future policy proposed from 2015 does not envisage the grant of any DSOS awards.
Purpose and link To incentivise superior long-term financial and share price performance. to strategy
Operation The Remuneration Committee has the ability to grant awards of market-value options annually to Executive Directors and senior managers, conditional on Group performance over a period of at least three years. Subject to the approval of the new PSP, the Committee will not grant awards under the DSOS beyond 2014. Details of outstanding DSOS awards, and awards for 2014, are included in the Annual Report on Remuneration on page 115.
Opportunity The DSOS allows for awards up to an aggregate limit of 200% of salary in exceptional circumstances.
Performance metrics Where granted, DSOS awards will be subject to performance conditions. Details of the targets applying to DSOS awards will be included in the Annual Report on Remuneration, where applicable.
Non-Executive Director fees
Function To attract and retain Non-Executive Directors of the highest calibre with broad commercial and other experience relevant to the Company.
Operation Fee levels are reviewed annually, with any adjustments effective 1 January in the year following review. The fees paid to the Chairman and Non-Executive Directors are determined by the Board. Additional fees are payable for acting as Senior Independent Director and as Chairman of the Audit and Remuneration Committees, and for individual membership of such Committees. Fee levels are benchmarked against comparable companies in the sector as well as FTSE-listed companies of similar size and complexity. Time commitment and responsibility are taken into account when reviewing fee levels.
Opportunity Non-Executive Director fee increases are applied in line with the outcome of the annual fee review. Fees for the year commencing 1 January 2015 are set out in the Annual Report on Remuneration. Fee levels will be next reviewed during 2015, with any increase effective 1 January 2016. It is expected that increases to Non-Executive Director fee levels will be in line with salaried UK-based employees over the life of the policy. In the event that there is a material misalignment with the market or a change in the complexity, responsibility or time commitment required to fulfil a non-executive role, the Board has discretion to make an appropriate adjustment to the fee level.
Performance metrics None JKX Oil & Gas plc Annual Report 2014
104 Future policy – Directors’ Remuneration Policy
Executive Director service contracts, including arrangements for early termination, are carefully considered by the Committee. The Committee considers appointments of indefinite term and with a notice period of one year to be appropriate.
Executive Director service contracts
Date Notice of contract Period1
Dr Paul Davies 1 January 2007 12 months Cynthia Dubin 14 November 2011 12 months Peter Dixon 1 July 2007 12 months Martin Miller 1 July 2007 12 months
1 The notice period is 12 months by the Company or the individual
Payments from existing awards Executive Directors are eligible to receive payment from any award made prior to the approval and implementation of the remuneration policy detailed in last year’s Remuneration Report, i.e. before 1 January 2015. Details of these awards are disclosed in the Annual Report on Remuneration, and include existing awards made under the DSOS.
Clawback For the avoidance of doubt, the Committee has discretion to operate clawback as a mechanism to reduce unvested or deferred incentives in the event of a material misstatement in the annual financial statements, gross misconduct, or any other circumstances that the Committee deems appropriate. Strategic report Governance Financial statements 2-79 80-119 120-182 105 Directors’ Remuneration Report – Annual Report on Remuneration
The following section provides details of how a part in any discussion regarding his own JKX’s remuneration policy was implemented remuneration. during the financial year ending 31 December None of the Committee has any personal financial 2014. In accordance with the Committee’s terms of interest except as a shareholder (as detailed on reference and the Group’s remuneration policy, the page 114), which, given the level of holdings, the Committee determines Executive Directors’ actual Board accepts does not impair independence, remuneration for the year. and no conflicts of interests arise from cross- directorships or day-to-day involvement in running Members and process the Group. The Remuneration Committee currently comprises three independent Non-Executive Directors and Advisers is chaired by Dipesh Shah (Senior Independent The Committee retains Kepler Associates (‘Kepler’) Director). as its independent executive remuneration The Committee meets at least twice a year, to advisers. The Committee undertakes due diligence assist the Board in determining the remuneration periodically to ensure that Kepler remains arrangements and contracts of the Directors and independent and that the advice provided is senior employees. The Committee met three times impartial and objective. Their total fees for the during 2014 (2013: three). provision of remuneration services in 2014 were £24,295 on the basis of time and materials. Kepler The Remuneration Committee has reviewed provides no other services to the Group. Kepler is a the Code, specifically Section D that addresses signatory to the Remuneration Consultants Group the level, make up and procedural aspects of Code of Conduct, details of which can be found at remuneration. The Remuneration Committee www.remunerationconsultantsgroup.com. considers that it complies with all the provisions and practices identified. Attendance at meetings When required, the Chief Executive attends Committee meetings; however no Director plays
Remuneration Committee
Dipesh Shah OBE Nigel Moore Richard Murray (as Chairman)
Role of the Committee
Establishes the overall principles of Determines the remuneration of Recommends the participation in, and remuneration for Directors of all Group Executive Directors and Senior operation of, the Company’s long-term companies Management, communicates this to the incentive plans. The full terms of stakeholders in the annual report reference are available from the Company Secretary
Activities during 2014 In addition to regular topics, the Committee engaged in specific matters including:
Review and Approval of Confirmation of Review and Review and Review the approval of executive salary lapse of share approval of approval of the application and payments to be levels for 2014 option awards performance allocation of, and appropriateness made under the made in 2011 due targets for the performance of current 2013 Annual to failure to 2014 Annual conditions remuneration Bonus Scheme achieve vesting Bonus Scheme applicable to, policies criteria in 2014 performance shares and share option awards made in 2014 JKX Oil & Gas plc Annual Report 2014
106 Directors’ Remuneration Report – Annual Report on Remuneration
Single figure of total remuneration for Executive Directors (audited) The table below sets out a single figure for the total remuneration received by each Director for the year ended 31 December 2014 and the prior year:
Dr Paul Davies Cynthia Dubin Martin Miller Peter Dixon
2014 2013 2014 2013 2014 2013 2014 2013 Notes £000 £000 £000 £000 £000 £000 £000 £000
1 Salary 423 409 298 288 226 218 226 218 2 Benefits 9 7 5 3 4 2 6 4 3 Annual bonus* 184 252 129 177 98 134 98 134 4 DSOS – – – – – – – – 5 PSP – – – – – – – – 6 Pension contribution 61 61 45 43 29 28 34 33 Total remuneration 677 729 477 511 357 382 364 389
* The Committee has determined that the Executive Directors shall have no entitlement to receive a bonus in respect of the 2014 financial year and that the bonus shall be deferred into JKX shares. The Committee has agreed with each Executive Director that the Company will award the applicable number of deferred shares later in 2015. Full details of the deferred shares will be reported in the 2015 Annual Report. 1) Salary: amount earned for the year 2) Benefits: the taxable value of benefits received in the year, including life assurance, income protection and private medical cover 3) Annual Bonus: this is the total bonus based on performance during the year which for 2014 is to be deferred into shares, subject to clawback 4) DSOS: no awards vested on performance to 31 December 2014 (2013: none) 5) PSP: no awards vested on performance to 31 December 2014 (2013: none) 6) Pension: annual contribution by the Group to directors’ pension plans or cash in lieu
Single figure of total remuneration for Non-Executive Directors (audited) Prior to 2014, the Non-Executive fees were last increased at the end of 2011 for application in 2012. The table below sets out a single figure for the total remuneration received by each Director for the year ended 31 December 2014 and the prior year:
Nigel Moore Dipesh Shah Lord Oxford Alastair Ferguson Richard Murray
2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000
Fees 158 150 74 70 47 45 53 50 63 60 Total remuneration 158 150 74 70 47 45 53 50 63 60
Incentive outcomes for the year ended and for senior management. 31 December 2014 (audited) In 2014, the Maximum bonus opportunity for Executive Directors was 100% of base salary and Annual Bonus Scheme target bonus was 40% of base salary. For senior The Annual Bonus Scheme for 2014 applied to managers target bonuses ranged between 12% and Executive Directors and certain senior management 20%, and maximum bonus opportunity ranged including senior staff in Poltava Petroleum between 30% and 60%. Company (‘PPC’) and Yuzhgazenergie (‘YGE’). Bonuses are based on both Group and individual The Annual Bonus Scheme performance conditions performances against objectives determined by the and Achievements for 2014 were as shown as in the Committee at the beginning of the year and are table opposite. designed to reward short-term performance. The To earn the maximum level of bonus requires scheme is discretionary and annual awards are not the maximum to be met or exceeded for each pensionable. performance measure and all of the strategic The performance conditions for each financial year objectives to be met. are derived from the Company’s Annual Budget The Remuneration Committee considers these and Strategic Plan and have been approved by the performance measures as the key drivers and Board. In order to encourage teamwork across the indicators of both short and long-term performance Group the weighting applied to each performance and value creation. condition was identical for each Executive Director Strategic report Governance Financial statements 2-79 80-119 120-182 107
Element Weighting 2014 2014 2014 % of to overall Performance measures Performance targets Achievement bonus bonus achieved
Strategic 40% Increases in production Based on quantifiable Above minimum 10.1% Plan targets figures to limit threshold but below subjectivity as far as target possible New reserves and resources Exceeded target but from existing and new licences below stretch target
Financial 50% Adjusted Pre-Tax Profit Targets established Below minimum 30.0% targets against each measure threshold with a sliding scale Adjusted return on Average between threshold and Exceeded stretch Capital Employed maximum target Minimum rolling cash Exceeded stretch resources target
Health 10% Lost Time Injury Frequency LTIF=0.25 Below target 3.3% and safety Rate (‘LTIF’) targets All Injury Frequency Rate AIFR=0.40 Below target (‘AIFR’)
Environmental Incident EIFR=0.80 Exceeded target Frequency Rate (‘EIFR’)
Total 100% 43.4%
Given the close link between these targets and on the quantum of deferred shares to be awarded JKX’s longer-term strategy, the Committee has will be reported in the 2015 Annual Report. deemed that the targets remain commercially sensitive and will not be published at this time. Scheme interests awarded in 2014 (audited) The Committee will disclose these bonus targets The Company operated two long-term incentive when they cease to be commercially sensitive which plans during 2014: is expected to be in 2017. • the 2010 Discretionary Share Option Scheme On the basis of the 2014 results above, bonuses (‘DSOS’) and achieved are 43.4% of basic salary for Executive • the 2010 Performance Share Plan (‘PSP’) Directors, and of between 13.0% and 26.0% of basic salary for senior management. As a result of both of which were approved by shareholders at the financial circumstances facing the Company the 2010 and 2014 Annual General Meetings, at this time, all bonuses have been deferred. The respectively. Committee has determined that bonuses achieved The approved future policy does not envisage the by Executive Directors, in respect of the 2014 grant of any DSOS awards from 2015 onwards. financial year, will be deferred into JKX shares. The PSP provides nil-cost options for Executive The applicable number of deferred shares will be Directors and the DSOS provides market value awarded later in 2015 and will be subject to a 12 options for Executive Directors and senior month holding period and clawback in accordance management. In the aggregate, the market value with the Directors’ Remuneration Policy. The of shares that may be granted in any financial number of deferred shares to be awarded to each year under the DSOS and the PSP together cannot Executive Director will be determined by the share exceed 300% of basic salary for any Executive. price on the date of award, but will not exceed that implied by the share price on the date the In any ten year period, the number of Shares which Committee determined that the bonuses would be may be placed under Option, or issued: deferred (11 March 2015). The Committee’s decision JKX Oil & Gas plc Annual Report 2014
108 Directors’ Remuneration Report – Annual Report on Remuneration
• may not exceed five per cent of the Company’s Options vest at the end of a 3-year performance ordinary share capital if issued under the period, subject to achievement of 3-year Earnings discretionary employees’ share scheme; and per Share (‘EPS’) growth targets. For the purposes • may not exceed ten per cent of the Company’s of the DSOS, EPS will be adjusted for any changes ordinary share capital if issued under the other in tax (production and corporate) rates. Executives employees’ share schemes. will therefore not be rewarded (or penalised) for subsequent reductions (or increases) in these As at 31 December 2014, the maximum available tax rates, which the Remuneration Committee shares under the Company’s 5% and 10% limits considers are outside of their control. was 1.0 million (2013: 0.3 million) and 9.6 million (2013: 8.9 million) shares respectively, out of an The performance targets are reviewed on an annual issued share capital of 172.1 million shares. basis at the start of each 3-year performance cycle to ensure their continued appropriateness. The 2010 Discretionary Share Option Scheme (‘DSOS’) Remuneration Committee determined that for The normal maximum grant of Options in 2014 grants 25% of the options would vest for EPS any financial year under the DSOS is 100% of growth of 5% p.a. and all of the options would vest basic salary. In exceptional circumstances the for EPS growth of 10% p.a. (and on a straight-line Committee has the discretion to grant options with basis in between these points), in line with the a face value of up to 200% of basic salary. To date, performance conditions for 2013 grants. awards have not exceeded 100% of salary. The Committee has total discretion as to the For 2014 awards under the DSOS, Paul Davies application of the Rules of the 2010 DSOS, and in and Cynthia Dubin received a grant of options of the event of a change of control, the Committee 100% of salary, and Peter Dixon and Martin Miller retains discretion to determine the treatment of received grants of 80% of salary. unvested unapproved options.
Vesting schedule for the DSOS Vesting schedule for the PSP
100% 100% es vesting % of shar % of options vesting 25% 25%
0% 0% Threshold Maximum Index Index + 10% p.a.
3 year EPS growth p.a. JKX’s 3 year TSR vs. Index 50% based on relevant FTSE market capitalisation Index and 50% based on FTSE All-Share Oil & Gas Producers Index
2014 awards under the DSOS Market Shares over price at date End of which awards of award/ performance Executive Director Date of grant granted exercise price Face value period
Dr Paul Davies 28-Mar-14 707,900 £0.5975 £422,970 31-Dec-16 Cynthia Dubin 28-Mar-14 498,700 £0.5975 £297,973 31-Dec-16 Martin Miller 28-Mar-14 302,600 £0.5975 £180,804 31-Dec-16 Peter Dixon 28-Mar-14 302,600 £0.5975 £180,804 31-Dec-16 Strategic report Governance Financial statements 2-79 80-119 120-182 109
2014 awards under the PSP
Shares over Market End of which awards price at date performance Executive Director Date of grant granted of award Face value period
Dr Paul Davies 28-Mar-14 707,900 £0.5975 £422,970 31-Dec-16 Cynthia Dubin 28-Mar-14 498,700 £0.5975 £297,973 31-Dec-16 Martin Miller 28-Mar-14 302,600 £0.5975 £180,804 31-Dec-16 Peter Dixon 28-Mar-14 302,600 £0.5975 £180,804 31-Dec-16
2010 Performance Share Plan (‘PSP’) give a fairer result for both management and The normal maximum award of nil-cost options shareholders. in any financial year under the PSP is 100% of a participant’s basic salary for awards up to and Change of control including 2014. From 2015 onwards, grants under In the event of a change of control, any outstanding the DSOS will cease, in accordance with our policy, PSP or DSOS awards will be pro-rated for time and a normal limit of 150% of salary will apply and performance. The Committee may in its under the PSP. In exceptional circumstances the absolute discretion waive time pro-rating of the Committee has the discretion to make awards of up award and retains discretion to determine the to 200% of a participant’s basic salary. treatment of unvested awards. In the event of a change of control, JKX awards may alternatively To date, awards have never exceeded 100% of be exchanged for new equivalent awards in the salary. Maximum award opportunities in 2014 acquirer, where appropriate. were 100% of salary for Paul Davies and Cynthia Dubin, and 80% of salary for Peter Dixon and 2012 PSP and DSOS vesting Martin Miller. Options granted in 2012 under the DSOS, in accordance with the terms noted above, are subject PSP awards vest based on 3-year TSR performance to a 3-year performance target of EPS growth of relative to a relevant FTSE market capitalisation 22.5% p.a. for maximum vesting with threshold index (the FTSE SmallCap for 2014 awards) and vesting at 7.5% (on a straight-line basis between FTSE All-Share Oil & Gas Producers index with these points). 3-year EPS growth to 31 December half of the award being assessed against each 2014 did not reach the threshold vesting target index. Each part of the award will be based on therefore all DSOS awards granted in 2012 will performance relative to the relevant index, with lapse in 2015. 25% vesting for performance in line with the index. Vesting would increase on a straight-line basis PSP awards granted in 2012 vest based on a 3-year between 25% and 100% for index out-performance TSR performance as described above, with TSR of up to 10% p.a. Historically, this has been broadly assessed relative to the FTSE250 index and FTSE equivalent to upper quartile performance. All-Share Oil & Gas Producers index. The TSR for In addition, the Committee must be satisfied the 3-year period to 31 December 2014 was below that the recorded TSR is a genuine reflection of the performance of both indexes and therefore all the underlying performance of the Company over PSP awards granted in 2012 will lapse in 2015. the performance period. There is no retesting of performance targets. TSR performance is measured using percentage out-performance rather than a ranking approach since it is less sensitive to the TSR of individual comparators, and uses a 12-month averaging period due to the volatility of the Company’s share price and the long-term nature of the Company’s investments. Whilst noting market practice is typically to use a shorter averaging period, the Table Committee feel that 12-month averaging would JKX Oil & Gas plc Annual Report 2014
110 Directors’ Remuneration Report – Annual Report on Remuneration
Executive Director remuneration for 2015 Executive Director base salary 2014 Salary 2015 Salary % increase Base salary Dr Paul Davies £423,000 £423,000 nil An Executive Director’s basic salary and the other fixed elements of pay are determined by Cynthia Dubin £298,000 £298,000 nil the Committee at the beginning of the year. The Martin Miller £226,000 £226,000 nil individual salaries and benefits of Executive Peter Dixon £226,000 £226,000 nil Directors were reviewed taking into account individual performance and market factors, with reference to independent and objective research is confident there will be no adverse impact on that provides up-to-date information on a the Company of such disclosure. At this time the comparator group of UK companies operating in the Committee believes that disclosure of the targets in independent oil and gas sector. three years time is appropriate. In recognition of the financial circumstances facing Long-Term Incentive Plans the Company, the Committee did not increase basic For 2015, the Committee intends to grant PSP salaries with effect from 1 January 2015: awards to Executive Directors in line with the framework stated in the policy noted on page 102. Similarly, no salary increase was awarded to the Under the Performance Share Plan approved at the UK employees (2013: 4.5%). 2014 AGM, awards would normally be granted of nil Pension and benefits cost options which equate to 150% of the base salary The Company will make a contribution equivalent for each of the Executive Directors. For 2015, the to 15% of basic salary to the pension scheme of the Committee has decided to restrict the grant to 100% individual’s choice. of base pay with performance conditions that reflect the approved Remuneration Policy. At their option, Executive Directors may either have contributions of the same amounts made to Non-Executive Director remuneration their personal pension schemes or cash in lieu All Non-Executive Directors have specific terms of of pension at the stated rate, or a combination of engagement and their remuneration is determined pension contributions and cash in lieu at the stated by the Board within the limits set by the Articles rate, subject to normal statutory deductions. of Association. Non-Executive Directors service Benefits provided to Executive Directors includes contracts are for an indefinite term, not a finite life assurance, which is also provided for senior term as recommended by Section B.2.3 of the Code, managers, for a sum assured of four times subject to re-election on an as required basis. base salary; income protection (¾ base salary The Board continues to believe these terms are deferred for 13 weeks); and private medical cover appropriate given the Company size, the Non- (AXA PPP) is offered to all Company employees Executive skill set, including experience of natural and provides medical cover for them and their resources and the geographical regions in which the dependents, on a non-contributory basis). Company operates, and the continuing evaluation Annual Bonus Scheme of performance and independence. In the event of The performance related annual bonus for the early termination, the Non-Executive Directors’ 2015 financial year will operate on the same basis as in 2014, and in line with the stated future remuneration policy. Bonuses will continue to Non-Executive Director service contracts be based on Strategic Plan targets, financial targets, and health and safety targets with similar Date Notice of contract Period weightings as in 2013. The performance targets set by the Committee Nigel Moore 13 July 2012 3 months require Executive Directors to deliver significant Lord Oxford 1 January 2002 3 months stretch performance. Given the close link between Dipesh Shah 1 June 2008 3 months these targets and JKX’s longer-term strategy, Alastair Ferguson 1 November 2011 3 months targets remain commercially sensitive and will not Richard Murray 1 January 2013 3 months be published until such time that the Committee Strategic report Governance Financial statements 2-79 80-119 120-182 111
contracts provide for compensation of three months Non-Executive Director fees base fee. 2014 2015 % increase
The Non-Executive Directors are paid a base fee Chairman of the Company £157,5001 £157,5001 nil for carrying out their duties and responsibilities Board membership fee £47,250 £47,250 nil as Directors, and fees for membership and, Senior Independent Director £10,500 £10,500 nil where applicable, chairmanship of each of the remuneration, nomination and audit committees. Committee chairman – Audit £10,500 £10,500 nil The fees were last increased by 5% at the end of – Remuneration £10,500 £10,500 nil 2013 and based on a per annum rate (in Sterling) Committee membership which was compared to published material – Audit £5,250 £5,250 nil £5,250 concerning Non-Executive Director fees in similar – Remuneration £5,250 nil size companies and comparable companies in the 1 The Chairman’s fee includes amounts for Chairman of the Nomination Committee sector. and membership of the Remuneration Committee
These fees were reviewed at the year end and no excludes part-time employees and is based on increase has been awarded from their 2014 level. a consistent set of all UK employees, i.e. the Non-Executive Directors’ fees for 2014 and 2015 same individuals appear in the 2013 and 2014 are as in the table opposite. populations. A comparison with UK employees is Non-Executive Directors cannot participate in used as most of the Group’s senior management any of the Company’s share schemes nor are they are based in the UK; all other Group staff are eligible to join the Company’s pension benefit employed in Ukraine and Russia which have arrangements. different economies from the UK driving their remuneration levels and practices. Exit payments made in the year (audited) No exit payments were made during the year. Relative importance of spend on pay The table below show shareholder distributions Payments to past directors (audited) (i.e. dividends and share buybacks) and total No payments were made to past directors in the employee pay expenditure for the financial years year. ended 31 December 2013 and 31 December 2014, along with the percentage change in both. Percentage change in CEO remuneration The table below shows the percentage change in 2014 2013 Year-on-year $’000 CEO remuneration from the prior year compared to $’000 change the average percentage change in remuneration for All-employee remuneration 19,193 23,914 (19.7 %) UK employees. Distributions to shareholders – – – The CEO’s remuneration includes base salary, taxable benefit and annual bonus. The analysis
Percentage change in CEO remuneration
CEO All UK employees
2014 2013 % change % change £000 £000 2013-14 2013-14
Base salary 423 409 3.5% 4.5% Taxable benefits 9 7 28% 28%1 Annual bonus 1842 252 (27%)2 (36%) 2 Total 6162 668 (8 %)2 (3%)
1 Reflects increase in premiums. No additional benefits were provided. 2 The calculations are based on the full value of the bonus earned. As previously noted, the Committee will determine later in 2015 the extent to which these bonuses may become payable and, in respect of Executive Directors, the extent to which deferred shares will be awarded, depending on the financial circumstances of the Company at the time. JKX Oil & Gas plc Annual Report 2014
112 Directors’ Remuneration Report – Annual Report on Remuneration
6-year – JKX vs FTSE All Share Index and 10-year – JKX vs FTSE All Share Index and FTSE All-Share Oil & Gas producers FTSE All-Share Oil & Gas producers
200 400
175 350
150 300
125 250
100 200
75 150
50 100
25 50
31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 2008 2009 2010 2011 2012 2013 2014 2004 2006 2008 2010 2012 2014
JKX JKX FTSE All-Share Index FTSE All-Share Index FTSE All-Share Oil and Gas Producers Index FTSE All-Share Oil and Gas Producers Index
Review of past performance The table below details the Chief Executive’s ‘single The following graphs show the Company’s TSR figure’ remuneration over a 6-year period. An performance compared to the performance of the investment of £100 in the Company on 31 December FTSE All-Share and FTSE All-Share Oil & Gas 2008 was worth £6.79 at 31 December 2014 (same Producers Index indices over a 6-year and 10-year investment on 31 December 2008 was worth £40.46 period. These indices have been chosen as suitable at 31 December 2013). The calculation of the return broad comparators against which the Company’s assumes dividends are reinvested to purchase shareholders may judge their relative returns additional equity. given that the Company is a member of the FTSE All-Share and continue to be part of the FTSE All-Share Oil & Gas Producers Index.
Chief Executive’s ‘single fi gure’ remuneration over a 6-year period 2009 2010 2011 2012 2013 2014
CEO single figure of remuneration (£’000) 596 529 519 620 729 677 STI award rates against maximum opportunity 64.2% 40.0% 43.3%1 33.4% 61.5% 43.4%2 LTI award rates against maximum opportunity 0% 0% 0% 0% 0% 0%
1 At the request of the Remuneration Committee, half of the 2011 Annual Bonus earned was deferred into Performance Share Options at nil-cost and were subject to claw back and performance conditions being met. One third of the deferred options granted became exercisable on 31 March 2012 and the balance of the options lapsed. 2 The calculations are based on the full value of the bonus earned. As previously noted, the Committee will determine later in 2015 the extent to which the deferred shares will be awarded, depending on the financial circumstances of the Company at the time. Strategic report Governance Financial statements 2-79 80-119 120-182 113
Shareholder voting at the Annual General Meeting Where shareholders voted against the Annual At last year’s Annual General Meeting held on Report on Remuneration, the Committee notes 4 June 2014, the votes on each resolution had to that this was in part due to the recommended be counted and presented including and excluding vote against the governance report issued by the restriction notices served upon shareholders Institutional Shareholder Services Inc (‘ISS’) in Eclairs Group Ltd (‘Eclairs’) and Glengary May 2014. ISS expressed the concern that the Overseas Limited (‘Glengary’) and their nominees, Committee had granted DSOS awards in 2013 at who together own 38.89 per cent of the issued the normal maximum level, whereas it had reduced share capital of the Company, pending the court’s awards in the 2012 when performance targets were judgment on the validity of the restriction notices revised. The Committee considered carefully the (see page 88). targets to ensure an achievable level of stretch and believes these were reasonable. The Directors’ Remuneration Policy which comes into effect on 1 January 2015 received the Nevertheless, the Committee has responded to following votes from shareholders and has been feedback from shareholders regarding this matter presented including and excluding the impact of and, in light of the prevailing share price, has the restriction notices (as shown in the first table restricted the grant of PSP awards to Executive below). Directors to 100% of base pay in 2015, which equates to two-thirds of the normal maximum The Annual Report on Remuneration received the opportunity. following votes from shareholders and has been presented including and excluding the impact of The Committee values, and would encourage, the restriction notices (as shown in the second table direct feedback from shareholders. below).
Shareholder voting on Directors’ Remuneration Policy Total number of votes Total number of votes excluding votes subject % of including votes subject % of to restriction notices votes cast to restriction notices votes cast
For 84,771,713 99.56% 84,771,713 80.88% Against 377,105 0.44% 20,033,549 19.12% Total votes cast (for and against, excluding withheld votes) 85,148,818 100 % 104,805,262 100 % Votes witheld1 85,133 0.10% 85,133 0.08% Total votes (for, against and withheld) 85,233,951 104,890,395
1 A withheld vote is not a vote in law and is not counted in the calculation of votes cast “for” and “against” a resolution
Shareholder voting on the Directors’ Remuneration Report Total number of votes Total number of votes excluding votes subject % of including votes subject % of to restriction notices votes cast to restriction notices votes cast
For 43,547,310 53.45% 43,547,310 43.06 % Against 37,929,307 46.55% 57,585,751 56.94 % Total votes cast (for and against, excluding withheld votes) 81,476,617 100 % 101,133,061 100 % Votes witheld1 3,757,334 4.6% 3,757,334 3.7% Total votes (for, against and withheld) 85,233,951 104,890,395
1 A withheld vote is not a vote in law and is not counted in the calculation of votes cast “for” and “against” a resolution JKX Oil & Gas plc Annual Report 2014
114 Directors’ Remuneration Report – Annual Report on Remuneration
Executive Directors’ shareholding requirements Unvested share awards, including shares held in (audited) connection with compulsory bonus deferrals, are In 2010, the Committee introduced executive share not taken into account in applying this test. The ownership guidelines of 100% of basic salary for table below shows the position at 31 December 2014, Executive Directors which can be built up over a based on that day’s closing middle market price of reasonable period of time from appointment. an ordinary share of the Company of 12 pence: No specific value per share was designated for the calculation.
Shares Options
Vested but Unvested and subject to subject to Vested Shareholding Current Owned holding period / performance but not requirement shareholding Requirement outright deferral conditions exercised % salary/fee % salary/fee met? Executive Directors Dr Paul Davies 3,663,105 – 3,080,400 90,000 100% 104% Yes Cynthia Dubin 40,000 – 2,169,200 – 100% 2% No Martin Miller 202,303 – 1,315,000 33,500 100% 11% No Peter Dixon 175,482 – 1,315,000 16,750 100% 9% No Non-Executive Directors Nigel Moore 29,000 Dipesh Shah 10,490 Lord Oxford 94,000 Alastair Ferguson – Richard Murray –
Since 31 December 2014, there have been no changes in the Directors’ interests in shares owned outright.
This report was approved by the Board of Directors on 19 March 2015 and signed on its behalf by
Dipesh J Shah OBE; FRSA Chairman of the Remuneration Committee Strategic report Governance Financial statements 2-79 80-119 120-182 115
Directors’ share options
Options Options Options Number of granted exercised lapsed Number of Date from options at during during during options at Exercise Market which Expiry 1 Jan 2014 period period period 31 Dec 2014 price price exercisable date
Dr Paul Davies (b) 17-Mar-05 90,000 – – – 90,000 £1.515 £1.515 17-Mar-08 17-Mar-15 (c) 31-Mar-11 122,900 – – 122,900 – £3.150 £3.150 31-Mar-14 31-Mar-21 (c) 31-Mar-11 122,900 – – 122,900 – £0.000 £3.150 31-Mar-14 31-Mar-21 (d)* 28-Mar-12 252,200 – – – 252,200 £0.000 £1.578 28-Mar-15 28-Mar-22 (d)** 06-Jun-12 252,200 – – – 252,200 £0.975 £0.975 06-Jun-15 06-Jun-22 (e) 09-Apr-13 580,100 – – – 580,100 £0.000 £0.705 09-Apr-16 09-Apr-23 (e) 09-Apr-13 580,100 – – – 580,100 £0.705 £0.705 06-Jun-16 06-Jun-23 (f) 28-Mar-14 – 707,900 – – 707,900 £0.000 £0.598 28-Mar-17 28-Mar-24 (f) 28-Mar-14 – 707,900 – – 707,900 £0.598 £0.598 28-Mar-17 28-Mar-24 2,000,400 1,415,800 – 245,800 3,170,400
Peter Dixon (b) 17-Mar-05 16,750 – – 16,750 £1.515 £1.515 17-Mar-08 17-Mar-15 (c) 31-Mar-11 52,300 – – 52,300 – £3.150 £3.150 31-Mar-14 31-Mar-21 (c) 31-Mar-11 52,300 – – 52,300 – £0.000 £3.150 31-Mar-14 31-Mar-21 (d)* 28-Mar-12 107,500 – – – 107,500 £0.000 £1.578 28-Mar-15 28-Mar-22 (d)** 06-Jun-12 107,500 – – – 107,500 £0.975 £0.975 06-Jun-15 06-Jun-22 (e) 09-Apr-13 247,400 – – – 247,400 £0.000 £0.705 09-Apr-16 09-Apr-23 (e) 09-Apr-13 247,400 – – – 247,400 £0.705 £0.705 06-Jun-16 06-Jun-23 (f) 28-Mar-14 – 302,600 – – 302,600 £0.000 £0.598 28-Mar-17 28-Mar-24 (f) 28-Mar-14 – 302,600 – – 302,600 £0.598 £0.598 28-Mar-17 28-Mar-24 831,150 605,200 – 104,600 1,331,750
Martin Miller (a) 18-Mar-04 82,500 – – 82,500 – £0.680 £0.680 18-Mar-07 18-Mar-14 (b) 17-Mar-05 33,500 – – – 33,500 £1.515 £1.515 17-Mar-08 17-Mar-15 (c) 31-Mar-11 52,300 – – 52,300 – £3.150 £3.150 31-Mar-14 31-Mar-21 (c) 31-Mar-11 52,300 – – 52,300 – £0.000 £3.150 31-Mar-14 31-Mar-21 (d)* 28-Mar-12 107,500 – – – 107,500 £0.000 £1.578 28-Mar-15 28-Mar-22 (d)** 06-Jun-12 107,500 – – – 107,500 £0.975 £0.975 06-Jun-15 06-Jun-22 (e) 09-Apr-13 247,400 – – – 247,400 £0.000 £0.705 09-Apr-16 09-Apr-23 (e) 09-Apr-13 247,400 – – – 247,400 £0.705 £0.705 06-Jun-16 06-Jun-23 (f) 28-Mar-14 – 302,600 – – 302,600 £0.000 £0.598 28-Mar-17 28-Mar-24 (f) 28-Mar-14 – 302,600 – – 302,600 £0.598 £0.598 28-Mar-17 28-Mar-24 930,400 605,200 – 187,100 1,348,500
Cynthia Dubin (d)* 28-Mar-12 177,400 – – – 177,400 £0.000 £1.578 28-Mar-15 28-Mar-22 (d)** 06-Jun-12 177,400 – – – 177,400 £0.975 £0.975 06-Jun-15 06-Jun-22 (e) 09-Apr-13 408,500 – – – 408,500 £0.000 £0.705 09-Apr-16 09-Apr-23 (e) 09-Apr-13 408,500 – – – 408,500 £0.705 £0.705 09-Apr-16 09-Apr-23 (f) 28-Mar-14 – 498,700 – – 498,700 £0.000 £0.598 28-Mar-17 28-Mar-24 (f) 28-Mar-14 – 498,700 – – 498,700 £0.598 £0.598 28-Mar-17 28-Mar-24 1,171,800 997,400 – – 2,169,200
* Based on performance to 31 December 2014 these awards are expected to laspe in full in March 2015 ** Based on performance to 31 December 2014 these awards are expected to laspe in full in June 2015
(a) 2001 Share Options Scheme in respect 2004 (b) 2001 Share Options Scheme in respect 2005 (c) 2010 DSOS/PSP in respect 2010. Awards based on the same performance measures and targets as 2011 awards. (c) 2010 DSOS/PSP in respect 2011 (d) 2010 DSOS/PSP in respect 2012. Awards are based on the same performance measures and targets as 2013 awards. (e) 2010 DSOS/PSP in respect 2013 (f) 2010 DSOS/PSP in respect 2014 Table JKX Oil & Gas plc Annual Report 2014
116 Directors’ report – other disclosures
This information is required to be presented by requirements of the job can be adequately fulfilled law. The UKLA’s Disclosure & Transparency Rules by such persons. (‘DTRs’) and Listing Rules (‘LRs’) also require us Should an existing employee become disabled, it to make certain disclosures. is in the Group’s policy wherever practicable to The Corporate Governance Report, the Audit provide continuing employment under normal Committee Report and the Strategic report form terms and conditions and to provide training and part of this information. Disclosures elsewhere career development and promotion. in the Annual Report and Accounts are cross- referenced where appropriate. Taken together, they Greenhouse gas emissions fulfil the combined requirements of company law, The disclosures concerning greenhouse gas the DTRs and LRs. emissions required by law are included in the Corporate Social Responsibility review on page 72. Legal form JKX Oil & Gas plc is a company incorporated in Policy on derivatives and financial instruments England & Wales, with company number 3050645. The Group’s objectives and policies on financial The principal activities of the Group are oil and gas risk management, and information on the Group’s exploration, appraisal, development and production. exposures to foreign exchange, commodity price It conducts very limited business activities on its and liquidity risks can be found on pages 52 to 61 own account, and trades principally through its and in note 15 to the financial statements. subsidiary undertakings in various jurisdictions. Shares in JKX Oil & Gas plc Annual General Meeting Details of movements in share capital during The Annual General Meeting of the Company will the year are set out in note 17 to the financial be held at 11am on Wednesday 3 June 2015 at statements. The Company has one class of the premises of The Kings Fund, 11-13 Cavendish Ordinary Share which carries no right to fixed Square, London, W1G 0AN. income. Each share carries the right to one vote at General Meetings of the Company. There are no At the AGM, individual shareholders are given significant restrictions on the transfer of securities. the opportunity to put questions to the Chairman, the chairmen of the Audit, Nominations and Treasury shares Remuneration Committees and to other members In 2014 the Company did not purchase in the of the Board. The voting results are announced via market any of its own ordinary 10p shares, to be the London Stock Exchange as soon as practicable held as treasury shares. At 31 December 2014, after the meeting. The announcement is also made 402,771 (2013: 402,771) shares continued to be on the Company’s corporate website. held as treasury shares representing 0.23% (2013: Notice of the 2015 AGM and matters of Ordinary 0.23%) of the shares then in issue. Business and those proposed as Special Business, together with explanatory notes, will be sent to Restrictions on voting shareholders at least 20 working days before the No member shall, unless the Directors otherwise meeting. determine, be entitled in respect of any share held by him/her to vote either personally or by Political and charitable contributions proxy at a shareholders’ meeting or to exercise any In line with Group policy, the Group did not make other right conferred by membership in relation any political contributions during the year (2013: to shareholders’ meetings if any call or other sum nil). The Group made charitable contributions of presently payable by him/her to the Company in $353,426 (2012: $347,675) for local educational, respect of that share remains unpaid. In addition, health and village infrastructure initiatives in no member shall be entitled to vote if he/she has Ukraine and Russia, details of which can be found been served with a notice after failing to provide on page 77. the Company with information concerning interests in those shares required to be provided under the Disabled employees Companies Act. The Group gives full consideration to applications for employment from disabled persons where the Strategic report Governance Financial statements 2-79 80-119 120-182 117
Appointment and replacement of Directors existing authority expires at the conclusion of the The number of Directors shall not be less than two 2015 AGM. nor more than ten. Directors and their interests Directors may be appointed to the Board by A full list of the individuals who were Directors shareholders by ordinary resolution or by the of the Company during the financial year ended Board. A Director appointed by the Board holds 31 December 2014 can be found on page 82. office only until the next following AGM and is then eligible for election by shareholders but is not The Directors and their interests at the beginning taken into account in determining the Directors and end of the year in the shares of the Company, or the number of Directors who are to retire by all beneficially held, were as shown in the table on rotation at that meeting. the following page. Details of Directors’ remuneration and share Amendment of Articles of Association options are shown in the Remuneration Report on Any amendments to the Articles may be made in pages 98 to 115. There were no contracts existing accordance with the provisions of the Companies during or at the end of the year in which a Director Act by way of special resolution. was, or is, materially interested. Authority to allot shares The share capital structure is listed in note 17 At the AGM on 4 June 2014, authority was given to in the notes to the financial statements and the the Directors to allot new ordinary shares up to a significant holdings are listed below. nominal value of: Directors’ indemnities (a) £5,724,104, representing approximately one As permitted by the Articles of Association, the third (33.33%) of the Company’s existing Directors have the benefit of an indemnity which issued share capital (excluding shares held in is a qualifying third party indemnity provision treasury); and as defined by Section 234 of the Companies Act (b) £11,448,209, representing approximately two 2006. The indemnity was in force throughout the thirds (66.67%) of the Company’s existing last financial year and is currently in force. The issued share capital, less the nominal amount of Company also purchased and maintained throughout any shares issued under part (a), in connection the financial year Directors’ and Officers’ liability with a pre-emptive offer by way of a rights issue insurance in respect of itself and its Directors. to shareholders. In addition the Directors were authorised to issue Change of control (significant contracts) shares in connection with a rights issue or other The Company is not party to any significant pre-emptive offer and otherwise to issue shares agreements that take effect, alter or terminate for cash up to a maximum nominal amount of upon a change of control following a takeover £860,629, representing approximately 5% of the except for the $40m convertible bond dated 19 issued share capital of the Company. February 2013, which could become repayable following a relevant change of control. There are Both of these authorities expire at the conclusion of no agreements between the Company and any the 2015 AGM. Director or its employees that would provide compensation for loss of office or employment Authority to purchase shares resulting from a change of control following In certain circumstances, it may be advantageous a takeover bid, except that provisions of the for the Company to purchase its own ordinary Company’s share schemes may cause options and shares and the Company seeks authority on an awards granted under such schemes to vest in annual basis to renew the Directors’ limited those circumstances. All of the Company’s share authority to purchase the Company’s ordinary schemes contain provisions relating to a change shares in the market. of control. Outstanding options and awards would At the AGM on 4 June 2014, authority was given to normally vest and become exercisable for a limited the Directors to make on-market purchases of up period of time upon a change of control following to 17,172,313 ordinary shares at set minimum and a takeover, reconstruction or winding up of the maximum prices. The Company did not repurchase Company (not being an internal reorganisation), any of its ordinary shares during 2014 and the subject at that time to rules concerning the JKX Oil & Gas plc Annual Report 2014
118 Directors’ report – other disclosures satisfaction of any performance conditions. There Other disclosures are a number of other agreements that take effect, Certain information that is required to be included alter or terminate upon a change of control of the in the Directors’ Report can be found elsewhere in Company such as commercial contracts, finance this document as referred to below, each of which agreements and property lease arrangements. is, to the extent not in this report, incorporated by None of these is considered to be significant in reference. terms of their likely impact on the business of the Group as a whole. Dividends No dividends has been paid or proposed for the Events after the reporting date year ended 31 December 2014 and the Board will Events after the reporting date are discussed in not be recommending the payment of a dividend at note 37 to the financial statements. the forthcoming AGM.
Substantial shareholders Going concern At 31 December 2014 and at 6 March 2015, the The going concern statement can be found on Company had received notification from the page 91. following institutions of interests in excess of 3% of the total number of voting rights of the Company:
Substantial shareholders
31 December 2014 6 March 2015 31 December 2014 % of total 6 March 2015 % of total Number of shares voting rights Number of shares voting rights
Eclairs Group Limited 47,287,027 27.47% 47,287,027 27.47% Proxima Capital Group – – 21,531,889 12.51% Glengary Overseas Ltd 19,656,344 11.42% 19,656,344 11.42% Aberforth Partners 11,961,128 6.95% 11,961,128 6.95% Interneft Ltd 11,368,460 6.60% 11,368,460 6.60% Neptune Invest & Finance Corp – – 7,160,345 4.16% Norges Bank Investment Management 6,842,470 3.98% 6,804,226 3.95% Blackrock Inc 5,466,153 3.18% 5,466,153 3.18%
Director shareholdings
1 January 2014 31 December 2014 6 March 2015 Ordinary Share Ordinary Share Ordinary Share Number Number Number
Nigel Moore 29,000 29,000 29,000 Dr Paul Davies1 3,632,272 3,663,105 3,663,105 Cynthia Dubin 40,000 40,000 40,000 Peter Dixon 163,179 175,482 175,482 Martin Miller 190,000 202,303 202,303 Dipesh Shah2 10,490 10,490 10,490 Lord Oxford 94,000 94,000 94,000 Alastair Ferguson – – – Richard Murray (appointed 1 January 2013) – – –
1 Dr Paul Davies’ interest is partly indirect with 1,975,000 ordinary shares held in trust, the beneficiary of which is the family of Dr Paul Davies. Of the remaining ordinary shares 1,000 are held by Mr D Davies, the son of Dr Paul Davies with the balance held directly by Dr Paul Davies. 2 Dipesh Shah’s interest is held by members of his immediate family. Strategic report Governance Financial statements 2-79 80-119 120-182 119
Future developments within the Group Directors’ responsibilities statement The Strategic report starting on page 2 contains details of likely future developments within the The Directors are responsible for preparing the Annual Report, the Directors’ Remuneration Report and the Group. financial statements in accordance with applicable law and regulations. Profit Company law requires the Directors to prepare financial Details of the Company’s profit for the year ended statements for each financial year. Under that law the 31 December 2014 can be found on page 180. Directors have prepared the Group financial statements in accordance with International Financial Reporting Capitalised interest Standards (‘IFRSs’) as adopted by the European See Group financial statements note 22. Union, and the parent company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Long term incentive schemes Standards and applicable law). Under company law the See pages 100 to 115 of the Directors’ Directors must not approve the financial statements Remuneration Report. unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company Directors’ responsibilities and of the profit or loss of the Group for that period. In preparing these financial statements, the Directors are Each of the Directors, whose names and functions required to: are listed on pages 82 and 83, confirm that, to the • select suitable accounting policies and then apply them best of their knowledge: consistently; • the Group financial statements, which have been • make judgements and accounting estimates that are prepared in accordance with IFRSs as adopted reasonable and prudent; by the EU, give a true and fair view of the assets, • state whether IFRSs as adopted by the European Union liabilities, financial position and profit of the and applicable UK Accounting Standards have been Group; followed, subject to any material departures disclosed and explained in the Group and parent company • the Directors’ report contained in the Annual financial statements respectively; and Report includes a fair review of the development • prepare the financial statements on the going concern and performance of the business and the position basis unless it is inappropriate to presume that the of the Group, together with a description of the Company will continue in business. principal risks and uncertainties that it faces; The Directors are responsible for keeping adequate • the annual report and financial statements, accounting records that are sufficient to show and explain taken as a whole is fair, balanced and the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the understandable and provides the information Company and the Group and enable them to ensure that necessary for shareholders to assess the the financial statements and the Remuneration Report company’s performance, business model and comply with the Companies Act 2006 and, as regards strategy; the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding • so far as the Director is aware, there is no the assets of the Company and the Group and hence for relevant audit information of which the taking reasonable steps for the prevention and detection Company’s auditors are unaware; and of fraud and other irregularities. • he or she has taken all the steps that he or The Directors are responsible for the maintenance she ought to have taken as a Director in and integrity of the Company’s website. Legislation in order to make himself or herself aware of any the United Kingdom governing the preparation and dissemination of financial statements may differ from relevant audit information and to establish legislation in other jurisdictions. that the Company’s auditors are aware of that information.
By order of the Board
Capita Company Secretarial Services Limited Company Secretary 19 March 2015 JKX Oil & Gas plc Annual Report 2014
120 Strategic report Governance Financial statements 2-79 80-119 120-182 121
Financial statements
Independent Auditors’ Report – Group 122 Group fi nancial statements 128 Independent Auditors’ Report – Company 171 Company fi nancial statements 173 JKX Oil & Gas plc Annual Report 2014
122 Independent Auditors’ Report to the members of JKX Oil & Gas plc
Report on the group financial statements
Our opinion In our opinion, JKX Oil & Gas plc’s group financial statements (the “financial statements”): • give a true and fair view of the state of the group’s affairs as at 31 December 2014 and of its profit and cash flows for the year then ended; • have been properly prepared in accordance with International Financial Reporting Standards (“IFRSs”) as adopted by the European Union; and • have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the IAS Regulation.
Emphasis of matter – Going concern In forming our opinion on the financial statements, which is not modified, we have considered the adequacy of the disclosure made in note 2 to the financial statements concerning the group’s ability to continue as a going concern which indicates the existence of material uncertainties, which, if realised, may adversely impact the group’s ability to service its potential Bondholder put option payments in February 2016. The uncertainties relate to the risk that: (i) currency restrictions will be extended through 2016 such that the group is unable to repatriate cash from Ukraine; (ii) the Ukrainian government implements new decrees restricting access to the market for the Group’s gas; and (iii) gas or oil realisations deteriorate materially. These risks, as explained in note 2 to the financial statements, indicate the existence of material uncertainties which may cast significant doubt about the group’s ability to continue as a going concern. The financial statements do not include the adjustments that would result if the group was unable to continue as a going concern.
What we have audited JKX Oil & Gas plc’s financial statements comprise: • the Consolidated statement of financial position as at 31 December 2014; • the Consolidated income statement and Consolidated statement of comprehensive income for the year then ended; • the Consolidated statement of cash flows for the year then ended; • the Consolidated statement of changes in equity for the year then ended; and • the notes to the financial statements, which include a summary of significant accounting policies and other explanatory information. The financial reporting framework that has been applied in the preparation of the financial statements is applicable law and IFRSs as adopted by the European Union. Certain disclosures required by the financial reporting framework have been presented elsewhere in the JKX Oil & Gas plc Annual Report 2014 rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited.
Our audit approach Overview
Materiality Audit scope Areas of focus
Materiality We analysed the volatility in the industry The three reporting units at • Russia and Ukraine – carrying for the last five years and concluded that which full scope audit value of oil and gas assets. the overall group materiality shall be procedures were performed • Going concern. based on 5% of five year average profit represented 99% of Group’s • Taxation in Ukraine – Audit scope before tax adjusted for the exceptional revenue. Specific audit production taxes. items as defined in accounting policies in procedures on certain note 3. We applied additional haircut to balances and transactions • Accounting for Hungary asset Areas of acknowledge ongoing uncertainty in were performed at a further swap. focus Ukraine and Russia to arrive to the overall five reporting units. • Fraud in revenue recognition. materiality of $2.2m, which is consistent • Risk of management override with the prior year materiality. of internal controls. Strategic report Governance Financial statements 2-79 80-119 120-182 123
The scope of our audit and our areas of focus We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) (“ISAs (UK & Ireland)”). We designed our audit by determining materiality and assessing the risks of material misstatement in the financial statements. In particular, we looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the directors that represented a risk of material misstatement due to fraud. The risks of material misstatement that had the greatest effect on our audit, including the allocation of our resources and effort, are identified as “areas of focus” in the table below. We have also set out how we tailored our audit to address these specific areas in order to provide an opinion on the financial statements as a whole, and any comments we make on the results of our procedures should be read in this context. This is not a complete list of all risks identified by our audit.
Area of focus How our audit addressed the area of focus
Russia and Ukraine – carrying value of oil and gas assets We evaluated the directors’ discounted cash flow forecasts which support the carrying value of the Russia and Ukraine oil Refer to page 92 (Audit Committee Report), page 140-141 and gas assets. The key assumption in the Russian cash flow (Critical accounting estimates and assumptions) and page forecast is the predicted change in the regulated gas price, 144-151 (Property, plant & equipment). which is set by the Russian Government. Management assumed Oil and gas assets in Russia and Ukraine total $283.9m after inflationary increases in the regulated price beyond the period impairment charge recognised, which together represents of its current sales contract, which expires in June 2016. We 97.1% of the Group’s total oil and gas assets. As well as the considered wider macro-economic factors in Russia in material nature of the balance, we focused on this area due to determining that inflationary increases in the regulated price the fall in the Brent oil price in the latter part of the year, and are within the expected range. Management’s production the numerous challenges experienced at the Group’s Russian forecasts, another key assumption, were reconciled to the and Ukrainian operations during the year. This included the 31 December 2014 independent reserves report prepared by sales restrictions in force in Ukraine and the increase in DeGolyer and MacNaughton (“D&M”). We understood the key production tax rates, the requirement to kill well 27 in Russia, inputs to this report, and tested these where applicable, and and the overall deterioration in the political and economic assessed the competence, independence and objectivity of situation in Ukraine which has impacted the Group’s profitability these experts and noted no issues. In addition, we challenged and increased the yield on sovereign bonds in these countries, management on the production forecast for well 27, given this which is a proxy for risk free rate. These difficulties resulted in well was killed early in 2014. Forecast production from this well an impairment loss of $46.3m being booked by management on is underpinned by a planned workover in 2015, which we its Russian Cash Generating Unit (“CGU”) and a further $12.8m consider is achievable based on management’s timeline. Other loss on its Elizavetovskoye CGU in Ukraine. In arriving at these capital expenditure assumptions were assessed and found to be impairment losses, and supporting the carrying value of other in accordance with our expectations. oil and gas assets, there are a number of complex and In Ukraine, the key assumptions in management’s cash flow subjective judgements made by management including forecast relate to production taxes, future sales prices and estimates of future commodity prices, production levels and production levels. Management assumed a reduction in the gas capex requirements. production tax rate from 55% to 28% from 1 January 2016. We challenged management on this, given the 55% rate was included in the new tax code applicable in Ukraine from 1 January 2015. There is no consensus in Ukraine regarding the expectation of production tax rates beyond 2015, and predicting this with any certainty is problematic. Management disclosed this assumption in note 5 of the financial statements, which we consider is appropriate in highlighting this key uncertainty. Management’s forecast oil and gas prices were benchmarked against a consensus forecast from leading analysts, and we also considered actual realised prices in 2014 when compared with the Brent price in determining management’s assumptions are within the expected range. Consistent with our approach to Russian assets, we reconciled forecast production to the D&M report with no issues noted. For both Russia and Ukraine we assessed management’s discount rates, based on each CGU’s weighted average cost of capital, and found these to be within an acceptable range.
Continues overleaf JKX Oil & Gas plc Annual Report 2014
124 Independent Auditors’ Report to the members of JKX Oil & Gas plc
Area of focus How our audit addressed the area of focus
Russia and Ukraine – carrying value of oil and gas assets We also considered the adequacy of management’s disclosure Continued of key judgements and sensitivities in relation to their impairment assessment in note 5. These were deemed to be in line with provisions of IFRSs.
Going concern We obtained management’s cash flow forecast which supports their use of the going concern basis of accounting. We tested the Refer to page 92 (Audit Committee Report) and page 132 (Basis integrity of this model and reviewed key assumptions such as of Preparation). forecast sales revenue and operating costs for consistency with 81% of the Group’s revenues were derived from its operations in impairment models (discussed above). Ukraine in 2014. During 2014, the political and economic Following the lifting of gas sales restrictions in Ukraine from situation in Ukraine deteriorated significantly. The government 1 March 2015, the key uncertainty in management’s going introduced several measures which have directly impacted the concern assessment concerns the reduction in gas production Group’s ability to generate positive cash flow from its Ukrainian tax rate from 55% to 28%, discussed in detail above. operations, including the introduction of an emergency tax on Management also assumed no cash outflow in relation to its gas production, restrictions on the sales of gas to industrial ongoing dispute with the Ukraine tax authorities regarding customers and restrictions on repatriation of dividends from non-payment of oil and gas rentals (discussed below), and the country. These measures have impacted the Group’s conversely no cash inflow is assumed from management’s financial performance in 2014 and are expected to continue to claim against the Ukraine Government under the Energy negatively impact the Group for the remainder of 2015 also. Charter Treaty. This position is considered acceptable, based on Along with continuing losses from the Group’s Russian our assessment of the likelihood of a cash outflow in relation to operations, this has increased the risk the Group will not be the rental payments dispute discussed below. We have able to continue as a going concern for the foreseeable future. challenged management on the likelihood of certain other In arriving at their conclusion that the Group can continue as a downside sensitivities. These include the Group losing its final going concern, the directors have made a number of appeal in the shareholder litigation dispute to be heard in 2015, judgemental assumptions about future cash flows. resulting in a requirement to pay for legal expenses. Based on management’s assessment and discussions with the Group’s solicitors, we consider the likelihood of this outcome is sufficiently remote. Other downside sensitivities which we considered include a continuation of current production tax rates in Ukraine beyond 2015, and reductions in forecast production levels as a result of well failures. Altering these assumptions simultaneously would result in the Group running out of cash during the period under consideration, however we have concluded the likelihood of all these events occurring is not probable. From our work performed, it is clear there are material uncertainties, which may affect the Group’s ability to continue as a going concern, with the outcome over the next 18 months dependent on a number of external factors outside the Group’s control. We have therefore considered the adequacy of management’s disclosure of material uncertainties, included in note 2. We concluded these are sufficient to inform the users of the financial statements about the risks facing the Group. An Emphasis of Matter paragraph is included in our opinion to highlight these uncertainties. Our conclusion on going concern is below.
Taxation in Ukraine – production taxes We updated our understanding of events that have occurred during 2014 in relation to the ongoing dispute with the Ukraine Refer to page 92 (Audit Committee Report) and page 164-166 tax authorities, including meeting with the Group’s solicitors (Taxation). and reviewing correspondence with the tax authorities. We The Group is subject to a number of challenges by the tax concur with management’s assessment that the risk of outflow authorities in Ukraine concerning additional production related in relation to the 2007 dispute is possible, on the basis the taxes for periods from January to March 2007 and April to Group’s wholly owned Ukrainian subsidiary, Poltava Petroleum December 2010. The total assessments for these periods are Corporation (“PPC”), was successful in the Kharkiv UAH75.2m ($4.7m) and UAH153.3m ($9.7m) respectively. The Administrative Court in July 2013. However, the sudden Group has not recognised a provision in relation to these scheduling of an appeal hearing in the High Administrative uncertain tax positions on the basis they believe the risk of a Court in Kiev does increase the exposure of the risk to possible. cash outflow is not probable, although management consider We challenged management on their assessment of a likely the risk of outflow in relation to 2010 is possible and thus a cash outflow in relation to the 2010 dispute as “possible”, rather contingent liability has been disclosed in note 27. We have than “probable”, after PPC lost its appeal in the Kharkiv focused on this area due to the potential material impact on the Administrative Court in June 2014 and the tax authorities filed a Strategic report Governance Financial statements 2-79 80-119 120-182 125
Area of focus How our audit addressed the area of focus
financial statements and because the decision on whether to claim in the Poltava District Administrative Court in September recognise a provision in the financial statements is 2014 seeking to recover the tax debt. Management consider the judgemental. likelihood remains below the level of probable as they have challenged the ruling in the High Administrative Court in Kiev, although no hearing date has been set. As discussed in note 27 of the financial statements, the Group has commenced legal action against the Ukraine Government for breaches of the Energy Charter Treaty. The Group is seeking recovery of $180m of overpaid rental payments from the period 2011-2014. We concur with the disclosures provided by management in relation to both cases.
Hungary asset swap We evaluated management’s discounted cash flow forecasts which formed the basis for their assessment of fair value of Refer to page 169 (Business Combinations). assets acquired and consideration given under IFRS 3. The key The Group accounted for its asset swap with Hungarian Horizon estimate in these models was the forecast production, as the Energy Ltd (“HHE”) as a business combination under IFRS 3. assets exchanged have contingent resources only, meaning Determining the fair value of assets and liabilities acquired, and there is a lack of certainty about existence of economically consideration given, is an estimate and subject to a number of recoverable hydrocarbons. We also benchmarked assumptions including ascribing value to the potential economic management’s forecast commodity prices against a broker benefits inherent in each exploration license. These consensus forecast and found their assumptions to be in line assumptions could have a material impact on the financial with our expectations. In obtaining comfort over management’s statements, making this an area of focus. fair values, we also considered the value of other market transactions for similar assets to determine whether management’s values fell within an acceptable range. We noted no significant differences.
How we tailored the audit scope We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the geographic structure of the group, the accounting processes and controls, and the industry in which the group operates. The Group is structured along four operating segments being the Ukraine, Russia, Rest of World and the UK as set out in note 4. The Group financial statements are a consolidation of 36 reporting units, comprising the Group’s operating businesses and centralised functions within these segments. In establishing the overall approach to the Group audit, we determined the type of work that needed to be performed at the reporting units by us, as the Group engagement team, or component auditors from other PwC network firms operating under our instruction. Where the work was performed by component auditors, we determined the level of involvement we needed to have in the audit work at those reporting units to be able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the Group financial statements as a whole. Accordingly, of the Group’s 36 reporting units, we identified three which, in our view, required an audit of their complete financial information, either due to their size or their risk characteristics. Specific audit procedures on certain balances and transactions were performed at a further three reporting units. Because the Group includes a number of relatively small reporting units, this gave us coverage of 99% of consolidated revenue. This, together with additional procedures performed at the Group level, gave us the evidence we needed for our opinion on the Group financial statements as a whole. Materiality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: JKX Oil & Gas plc Annual Report 2014
126 Independent Auditors’ Report to the members of JKX Oil & Gas plc
Overall group materiality $2.2 million (2013: $2.2 million)
How we determined it 5% of five year average profit before tax adjusted for the exceptional items as defined in accounting policies in note 3
Rationale for benchmark applied We did this to take account of the volatility that has impacted JKX Oil & Gas plc’s results and the nature of the exceptional items
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above $111,000 (2013: $111,000) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons. Going concern Under the Listing Rules we are required to review the directors’ statement, set out on page 91, in relation to going concern. We have nothing to report having performed our review. As noted in the directors’ statement, the directors have concluded that it is appropriate to prepare the financial statements using the going concern basis of accounting. The going concern basis presumes that the group has adequate resources to remain in operation, and that the directors intend it to do so, for at least one year from the date the financial statements were signed. As outlined in note 2 to the financial statements, there is a material uncertainty which may cast significant doubt about the group’s ability to continue as a going concern, which is triggered by conditions outlined in the emphasis of matter paragraph. As part of our audit we have concluded that the directors’ use of the going concern basis is appropriate. However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the group’s ability to continue as a going concern.
Other required reporting Consistency of other information Companies Act 2006 opinion In our opinion, the information given in the Strategic Report and Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. ISAs (UK & Ireland) reporting
Under ISAs (UK & Ireland) we are required to report to you if, in our opinion:
• information in the Annual Report is: We have no exceptions to report arising – materially inconsistent with the information in the audited financial statements; or from this responsibility. – apparently materially incorrect based on, or materially inconsistent with, our knowledge of the group acquired in the course of performing our audit; or – otherwise misleading.
• the statement given by the directors on page 119, in accordance with provision C.1.1 We have no exceptions to report arising of the UK Corporate Governance Code (“the Code”), that they consider the Annual from this responsibility. Report taken as a whole to be fair, balanced and understandable and provides the information necessary for members to assess the group’s performance, business model and strategy is materially inconsistent with our knowledge of the group acquired in the course of performing our audit.
• the section of the Annual Report on page 92 to 97, as required by provision C.3.8 of We have no exceptions to report arising the Code, describing the work of the Audit Committee does not appropriately from this responsibility. address matters communicated by us to the Audit Committee. Strategic report Governance Financial statements 2-79 80-119 120-182 127
Adequacy of information and explanations received Under the Companies Act 2006 we are required to report to you if, in our opinion, we have not received all the information and explanations we require for our audit. We have no exceptions to report arising from this responsibility.
Directors’ remuneration Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of directors’ remuneration specified by law are not made. We have no exceptions to report arising from this responsibility.
Corporate governance statement Under the Listing Rules we are required to review the part of the Corporate Governance Statement relating to the parent company’s compliance with ten provisions of the UK Corporate Governance Code. We have nothing to report having performed our review.
Responsibilities for the financial statements and the audit Our responsibilities and those of the directors As explained more fully in the Statement of Directors’ responsibilities, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
What an audit of financial statements involves An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: • whether the accounting policies are appropriate to the group’s circumstances and have been consistently applied and adequately disclosed; • the reasonableness of significant accounting estimates made by the directors; and • the overall presentation of the financial statements. We primarily focus our work in these areas by assessing the directors’ judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements. We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Other matters
We have reported separately on the parent company financial statements of JKX Oil & Gas plc for the year ended 31 December 2014. That report includes an emphasis of matter.
Alison Baker (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 19 March 2015 JKX Oil & Gas plc Annual Report 2014
128 Group financial statements
Consolidated income statement for the year ended 31 December
2014 2013 Note $000 $000
Revenue 4 146,206 180,738 Cost of sales Production based taxes 20 (45,519) (41,803) Exceptional item – provision for impairment of oil and gas assets 5 (69,062) – Write off of exploration and evaluation costs 5(b) – (1,452) Exceptional item – well control operations 5(a) (3,471) – Other cost of sales (63,847) (104,048) Total cost of sales 20 (181,899) (147,303)
Gross (loss)/profit (35,693) 33,435 Administrative expenses (19,536) (24,129) Loss on foreign exchange (5,673) (142) Profit from operations before exceptional items 11,631 9,164 (Loss)/profit from operations after exceptional items (60,902) 9,164 Finance income 21 1,094 377 Finance costs 22 (3,197) (3,625) Fair value movement on derivative liability 14 9,072 (1,957) Net result arising from business combinations 35 222 – (Loss)/profit before tax 27 (53,711) 3,959 Taxation – current 27 (9,511) (8,590) Taxation – deferred – before the exceptional items (31,270) 11,132 – on the exceptional items 14,961 – Total taxation 27 (25,820) 2,542 (Loss)/profit for the year attributable to equity shareholders of the parent company (79,531) 6,501
Basic (loss)/earnings per 10p ordinary share (in cents) – before exceptional items 29 (12.76) 3.78 – after exceptional items (46.21) 3.78 Diluted (loss)/earnings per 10p ordinary share (in cents) – before exceptional items (12.76) 3.72 – after exceptional items (46.21) 3.72
Consolidated statement of comprehensive income for the year ended 31 December 2014 2013 $000 $000
(Loss)/profit for the year (79,531) 6,501
Comprehensive income to be reclassified to profit or loss in subsequent periods when specific conditions are met Currency translation differences (130,327) (25,031) Other comprehensive loss for the year, net of tax (130,327) (25,031) Total comprehensive loss attributable to: Equity shareholders of the parent (209,858) (18,530) Strategic report Governance Financial statements 2-79 80-119 120-182 129
Consolidated statement of financial position as at 31 December
2014 2013 Note $000 $000 ASSETS Non-current assets Property, plant and equipment 5(a) 292,474 465,616 Intangible assets 5(b) 7,932 18,927 Other receivable 6 3,966 4,414 Deferred tax assets 28 21,048 34,783 325,420 523,740 Current assets Inventories 8 4,124 6,041 Trade and other receivables 9 10,018 27,687 Restricted cash 10 559 198 Cash and cash equivalents 10 25,384 25,682 Held to maturity financial investments 11 2,700 – 42,785 59,608 Total assets 368,205 583,348 LIABILITIES Current liabilities Trade and other payables 12 (16,225) (24,391) Borrowings 13 (5,590) (4,000) (21,815) (28,391) Non-current liabilities Provisions 19 (3,988) (3,967) Other payables (3,966) (4,414) Borrowings 13 (30,837) (28,166) Derivatives 14 (1,037) (10,109) Deferred tax liabilities 28 (25,214) (17,380) (65,042) (64,036) Total liabilities (86,857) (92,427) Net assets 281,348 490,921
EQUITY Share capital 17 26,666 26,666 Share premium 97,476 97,476 Other reserves 18 (153,268) (22,941) Retained earnings 310,474 389,720 Total equity 281,348 490,921
These financial statements on pages 128 to 170 were approved by the Board of Directors on 19 March 2015 and signed on its behalf by:
Dr Paul Davies Director Cynthia Dubin Director JKX Oil & Gas plc Annual Report 2014
130 Group financial statements
Consolidated statement of changes in equity
Attributable to equity shareholders of the parent
Share Share Retained Other reserves Total capital premium earnings (note 18) equity $000 $000 $000 $000 $000 At 1 January 2013 26,657 97,476 385,676 2,090 511,899 Profit for the year – – 6,501 – 6,501 Exchange differences arising on translation of overseas – – – (25,031) (25,031) operations Total comprehensive income/(loss) attributable to equity – – 6,501 (25,031) (18,530) shareholders of the parent
Transactions with equity shareholders of the parent Issue of ordinary shares (note 17) 9 – – – 9 Share-based payment charge – – 1,544 – 1,544 Treasury shares1 – – (4,001) – (4,001) Total transactions with equity shareholders of the parent 9 – (2,457) – (2,448) At 31 December 2013 26,666 97,476 389,720 (22,941) 490,921
At 1 January 2014 26,666 97,476 389,720 (22,941) 490,921 Loss for the year – – (79,531) – (79,531) Exchange differences arising on translation of overseas – – – (130,327) (130,327) operations Total comprehensive loss attributable to equity shareholders – – (79,531) (130,327) (209,858) of the parent
Transactions with equity shareholders of the parent Share-based payment charge – – 285 – 285 Total transactions with equity shareholders of the parent – – 285 – 285 At 31 December 2014 26,666 97,476 310,474 (153,268) 281,348
1 Shares held by JKX Employee Benefit Trust (note 16).
Share premium represents the amounts received by the Company on the issue of its shares which were in excess of the nominal value of the shares. Retained earnings represent the cumulative net gains and losses recognised in the statement of comprehensive income less any amounts reflected directly in other reserves. Strategic report Governance Financial statements 2-79 80-119 120-182 131
Consolidated statement of cash flows for the year ended 31 December
2014 2013 Note $000 $000 Cash flows from operating activities Cash generated from operations 31 58,411 74,814 Interest paid (3,345) (2,217) Income tax paid (7,579) (15,937) Net cash generated from operating activities 47,487 56,660
Cash flows from investing activities Increase in held-to-maturity investments (2,700) – Interest received 771 251 Purchase of intangible assets (338) (404) Purchase of property, plant and equipment (39,986) (61,472) Cash acquired from business combination 35 362 – Net cash used in investing activities (41,891) (61,625)
Cash flows from financing activities Restricted cash (93) 389 Repayment of borrowings – (14,951) Funds received from borrowings (net of costs) 1,522 37,789 Purchase of employee trust shares – (4,001) Net cash generated from financing activities 1,429 19,226
Increase in cash and cash equivalents in the year 7,025 14,261 Cash and cash equivalents at 1 January 25,682 12,042 Effect of exchange rates on cash and cash equivalents (7,323) (621) Cash and cash equivalents at 31 December 10 25,384 25,682 JKX Oil & Gas plc Annual Report 2014
132 Notes to the consolidated financial statements
1. General information JKX Oil & Gas plc (the ultimate parent of the Group hereafter, ‘the Company’) is a public limited company listed on the London Stock Exchange which is domiciled and incorporated in England and Wales under the UK Companies Act. The registered number of the Company is 03050645. The registered office is 6 Cavendish Square, London, W1G 0PD and the principal place of business is disclosed in the introduction to the Annual Report. The principal activities of the Company and its subsidiaries, (the ‘Group’), are the exploration for, appraisal and development of oil and gas reserves.
2. Basis of preparation The Group’s financial statements have been prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as adopted by the European Union, IFRS Interpretations Committee (‘IFRS IC’) interpretations and the Companies Act 2006 applicable for Companies reporting under IFRS and therefore the consolidated financial statements comply with Article 4 of the EU IAS Regulations. The Group’s financial statements have been prepared under the historical cost convention, as modified for derivative instruments held at fair value through profit or loss. The principal accounting policies adopted by the Group are set out below. Going concern The majority of the Group’s revenues, profits and cash flow from operations are currently derived from its oil and gas production in Ukraine, rather than Russia. During 2014 and early 2015, three Ukrainian government decrees were issued without warning and with immediate legal effect which: • increased the rate of gas production tax payments on oil and gas from 39% and 28% to 45% and 55% respectively; • instituted currency restrictions, initially until 1 December 2014 but later extended to 2 March 2015 and subsequently to 3 June 2015; and • directed major industrial gas buyers to acquire their gas solely from the Ukraine state-owned gas company from 1 December 2014 through to 28 February 2015. These decrees have had (and two continue to have) a significant adverse financial impact on the Group, along with the decline in international oil prices which have fallen precipitously since June 2014. As a result the Board has taken steps to streamline the organisation in the most practical way possible but without compromising safety and reliability. It has minimised capital expenditure and reduced operating costs through staff reductions in all key operational and administrative areas. Nonetheless, the Board is maintaining a reduced operational capability in Ukraine such that, if the production tax rates are restored to normal levels and the currency restrictions are not extended, then the Group’s planned investment programme in Ukraine can be swiftly restored. The Directors have concluded that it is necessary to draw attention to the material uncertainties relating to the risk: (i) that currency restrictions will extended through 2016 such that the Group is unable to repatriate cash from Ukraine; (ii) of the Ukrainian government implementing new decrees restricting access to the market for our gas; and (iii) of our gas or oil realisations deteriorating materially. It is unclear whether any or all of these risks will be realised. These specific risks, which represent material uncertainties, may cast doubt about the Group’s ability to meet its obligations as they fall due and continue as a going concern. The Group has a significant obligation of $10 million which may become payable pursuant to its $40 million Convertible Bond (see notes 13 and 14 to the Group financial statements) in February 2016 if Bondholders exercise their put option at that time. However the Directors believe that there is a reasonable basis to mitigate the effects of such eventualities through further operational and cash management measures. Based on the Group’s cash flow forecasts, the Directors believe that the combination of its current cash balances, expected future production and resulting net cash flows from operations, the implemented/planned cost reductions as well as the availability of additional courses of action should the need arise, provide a reasonable expectation that the Group and Company will continue in operational existence for the foreseeable future. For these reasons, they continue to adopt the going concern basis of accounting in preparing these financial statements. The financial statements do not include the adjustments that would result if the Group and Company were unable to continue as a going concern. Adoption of new and revised standards The disclosed policies have been applied consistently by the Group for both the current and previous financial year with the exception of the new standards adopted. Strategic report Governance Financial statements 2-79 80-119 120-182 133
The EU IFRS financial information has been drawn up on the basis of accounting policies consistent with those applied in the financial statements for the year to 31 December 2013, except for the following:
• IAS 28 (revised 2011), ‘Investments in Associates and Joint Ventures’ • IAS 27 (2011) ‘Separate Financial Statements’ • IFRS 10, ‘Consolidated Financial Statements’ • IFRS 11, ‘Joint Arrangements’ • IFRS 12, ‘Disclosures of Interests in Other Entities’ • Amendments to IAS 32 ‘Financial instruments: Presentation’ – ‘ Offsetting Financial Assets and Financial Liabilities’ • Transition Guidance (Amendments to IFRS 10, IFRS 11 and IFRS 12) • Amendment to IAS 36, ‘Impairment of assets’ on recoverable amount disclosures
Below is a list of new and revised IFRSs that are not yet mandatorily effective (but allow early application) for the year ending 31 December 2014:
Effective for annual periods beginning on or after • IAS 19 ‘Employee Benefits’ (Amendments) 01-Jul-14 • Annual Improvements to IFRSs 2010-2012 Cycle 01-Jul-14 • Annual Improvements to IFRSs 2011-2013 Cycle 01-Jul-14 • Annual Improvements to IFRSs 2014 Cycle 01-Jan-16 • IFRS 14 ‘Regulatory Deferral Accounts’ 01-Jan-16 • IAS 16 ‘Property, Plant and Equipment’ (Amendments) 01-Jan-16 • IAS 38 ‘Intangible Assets’ (Amendments) 01-Jan-16 • IFRS 11 ‘Joint arrangements’ (Amendments) 01-Jan-16 • IAS 27 ‘Separate financial statements’ (Amendments) 01-Jan-16 • IFRS 10 ‘Consolidated financial statements’ (Amendments) 01-Jan-16 • IAS 28 ‘Investments in associates and joint ventures’ (Amendments) 01-Jan-16
3. Significant accounting policies Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31 December each year. All intragroup balances, transactions, income and expenses and profits or losses, including unrealised profits arising from intragroup transactions, have been eliminated on consolidation. 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 consolidated financial statements include all the assets, liabilities, revenues, expenses and cash flows of the Companies and their subsidiaries after eliminating intragroup transactions as noted above. Uniform accounting policies are applied across the Group. Interests in joint venture agreements A joint venture is a contractual arrangement whereby the Group and other parties undertake an economic activity that is subject to joint control. Where a Group company undertakes its activities under joint venture arrangements directly, the Group’s shares of jointly controlled assets and any liabilities incurred jointly with other venturers are recognised in the financial statements of the relevant company and classified according to their nature. Liabilities and expenses incurred directly in respect of interests in jointly controlled assets are accounted for on an accrual basis. Income from the sale or use of the Group’s share of the output of jointly controlled assets, and its share of joint venture expenses, are recognised when it is probable that the economic benefits associated with the transactions will flow to/from the Group and their amount can be measured reliably. Joint venture arrangements which involve the establishment of a separate entity in which each venturer has an JKX Oil & Gas plc Annual Report 2014
134 Notes to the consolidated financial statements interest are referred to as jointly controlled entities (‘JCE’). The Group reports its interests in jointly controlled entities using proportionate consolidation – the Group’s share of the assets, liabilities, income and expenses of jointly controlled entities are combined with the equivalent items in the consolidated financial statements on a line- by-line basis. Where the Group transacts with its jointly controlled entities, unrealised profits and losses are eliminated to the extent of the Group’s interest in the joint venture. Foreign currencies All amounts in these financial statements are presented in thousands of US dollars, unless otherwise stated. The presentation currency of the Group is the US Dollar based on the fact that the Group’s primary transactions originate in, or are dictated by, the US Dollar, these being, amongst others, oil sales and procurement of rigs and drilling services. Each entity in the Group is measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). Foreign currency transactions are translated into functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. On consolidation of subsidiaries and JCEs with a non US Dollar presentation currency, their statements of financial position are translated into US Dollar at the closing rate and income and expenses at the average monthly rate. All resulting exchange differences arising in the period are recognised in other comprehensive income, and cumulatively in the Group’s translation reserve. Such translation differences are reclassified to profit or loss in the period in which any such foreign operation is disposed of. Subsidiaries within the Group hold monetary intercompany balances for which settlement is neither planned nor likely to occur in the foreseeable future and thus this is considered to be part of the Group’s net investment in the relevant subsidiary. An exchange difference arises on translation in the company income statement which on consolidation is recognised in equity, only being recognised in the income statement on the disposal of the net investment. The major exchange rates used for the revaluation of the closing statement of financial position at 31 December 2014 were $1:£0.6 (2013: $1:£0.6), $1:15.77 Hryvna (2013: $1:8.0 Hryvna), $1:56.26 Roubles (2013: $1:32.73 Roubles), $1:259.29 Hungarian Forint (2013: $1:215.8 Hungarian Forint). Goodwill and fair value adjustments arising on acquisition are treated as assets/liabilities of the foreign entity and translated at the closing rate. Property, plant and equipment and other intangible assets Property plant and equipment comprises the Group’s tangible oil and gas assets together with computer equipment, motor vehicles and other equipment and are carried at cost, less any accumulated depreciation and accumulated impairment losses. Cost includes purchase price and construction costs for qualifying assets, together with borrowing costs where applicable, in accordance with the Group’s accounting policy. Depreciation of these assets commences when the assets are ready for their intended use. Oil and gas assets Exploration, evaluation and development expenditure is accounted for under the ‘successful efforts’ method. The successful efforts method means that only costs which relate directly to the discovery and development of specific oil and gas reserves are capitalised. Exploration and evaluation costs are valued at costs less accumulated impairment losses and capitalised within intangible assets. Development expenditure on producing assets is accounted for in accordance with IAS 16, ‘Property, plant and equipment’. Costs incurred prior to obtaining legal rights to explore are expensed immediately to the income statement. All lease and licence acquisition costs, geological and geophysical costs and other direct costs of exploration, evaluation and development are capitalised as intangible assets or property plant and equipment according to their nature. Intangible assets are not amortised and comprise costs relating to the exploration and evaluation of properties which the Directors consider to be unevaluated until reserves are appraised as commercial, at which time they are transferred to property plant and equipment following an impairment review and are depreciated accordingly. Where properties are appraised to have no commercial value, the associated costs are treated as an impairment loss in the period in which the determination is made. Strategic report Governance Financial statements 2-79 80-119 120-182 135
Costs related to hydrocarbon production activities are depreciated on a field by field unit of production method based on commercial proved plus probable reserves of the production licence, except in the case of assets whose useful life differs from the lifetime of the field, which are depreciated on a straight-line basis over their anticipated useful life of up to 10 years. The calculation of the ‘unit of production’ depreciation takes account of estimated future development costs and is based on current period end unescalated price levels. Changes in reserves and cost estimates are recognised prospectively. Other assets Depreciation is charged so as to write off the cost, less estimated residual value, over their estimated useful lives, using the straight-line method, for the following classes of assets: Motor vehicles – 4 years Computer equipment – 3 years Other equipment – 5 to 10 years The estimated useful lives of property plant and equipment and their residual values are reviewed on an annual basis and, if necessary, changes in useful lives are accounted for prospectively. Assets under construction are not subject to depreciation until the date on which the Group makes them available for use. The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the income statement for the relevant period. Business combinations The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed and equity instruments issued by the Group in exchange for control of the acquiree. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the criteria for recognition under IFRS 3 (revised) are recognised at their fair value at the acquisition date. In a business combination achieved in stages, the previously held equity interest in the acquiree is re-measured at its acquisition date fair value and the resulting gain or loss, if any, is recognised in the income statement. Acquisition costs are expensed. Goodwill is recognised as an asset and is initially measured at cost being the excess of the cost of the business combination over the Group’s share in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. Impairment losses on goodwill are not reversed. On disposal of a subsidiary or jointly controlled entity, the attributable amount of unamortised goodwill, which has not been subject to impairment, is included in the determination of the profit or loss on disposal. Impairment of property, plant and equipment and intangible assets Whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, the Group reviews the carrying amounts of its property, plant and equipment and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. Individual assets are grouped together as a cash-generating unit for impairment assessment purposes at the lowest level at which their identifiable cash flows, that are largely independent of the cash flows of the other Groups assets, can be determined. If any such indication of impairment exists the Group makes an estimate of its recoverable amount. The recoverable amount is the higher of fair value less costs of disposal and value in use. Where the carrying amount of an individual asset or a cash-generating unit exceeds its recoverable amount, the asset/cash-generating unit is considered impaired and is written down to its recoverable amount. Fair value less costs of disposal is determined by discounting the post-tax cash flows expected to be generated by the cash-generating unit, net of associated selling costs, and takes into account assumptions, market participants would use in estimating fair value. In assessing the value in use, the estimated future cash flows are adjusted for the risks specific to the asset/ cash-generating unit and are discounted to their present value that reflects the current market indicators. Where an impairment loss subsequently reverses, the carrying amount of the asset/cash-generating unit 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 (cash-generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately. JKX Oil & Gas plc Annual Report 2014
136 Notes to the consolidated financial statements
JKX Employee Benefit Trust The JKX Employee Benefit Trust was established in the year to hold ordinary shares purchased to satisfy various new share scheme awards made to the employees of the Company which will be transferred to the members of the scheme on their respective vesting dates subject to satisfying the performance conditions of each scheme. The trust has been consolidated in the Group financial statements in accordance with IFRS 10. The cost of shares temporarily held by the trusts are reflected as treasury shares and deducted from equity. Financial instruments Financial assets and financial liabilities are recognised in the consolidated statement of financial position when the Group becomes party to the contractual provisions of the instrument. Derivative financial instruments The Group may use derivative financial instruments (derivatives) primarily to hedge its risks associated with oil price fluctuations relating to certain firm commitments and forecasted transactions. Any such derivatives are initially recorded at fair value on the date at which the contract is entered into and subsequently re-measured at fair value on subsequent reporting dates. A financial asset or liability is derecognised when the obligation under the asset or liability is discharged, cancelled or expires. The purpose for which a derivative is used is established at inception. To qualify for hedge accounting, the derivative must be ’highly effective’ in achieving its objective and this effectiveness must be documented at inception and throughout the period of the hedge relationship. The hedge must be assessed on an ongoing basis and determined to have been ’highly effective’ throughout the financial reporting periods for which the hedge was designated. For the cash flow hedge, the portion of the gains and losses on the hedging instrument that is determined to be an effective hedge is taken to equity and the ineffective portion, as well as any change in time value, is recognised in the consolidated income statement. The gains and losses taken to equity are subsequently transferred to the consolidated income statement during the period in which the hedged transaction affects the consolidated income statement or if the hedge is subsequently deemed to be ineffective. Gains or losses on derivatives that do not qualify for hedge accounting treatment (either from inception or during the life of the instrument) are taken directly to the consolidated income statement in the period. Convertible bonds due 2018 The net proceeds received from the issue of convertible bonds at the date of issue have been split between two elements: the host debt instrument classified as a financial liability in Borrowings, and the embedded derivative. The fair value of the embedded derivative has been calculated first and the residual value is assigned to the host debt liability. The difference between the proceeds of issue of the convertible bonds and the fair value assigned to the embedded derivative, representing the value of the host debt instrument, is included as Borrowings and is not remeasured. The host debt component is then carried at amortised cost and the fair value of the embedded derivative is determined at inception and at each reporting date with the fair value changes being recognised in profit or loss. Issue costs are apportioned between the host debt element (included in Borrowings) and the derivative component of the convertible bond based on their relative carrying amounts at the date of issue. The interest expense on the component included in Borrowings is calculated by applying the effective interest method, with interest recognised on an effective yield basis. Borrowings Borrowings are initially measured at fair value, net of transaction costs and are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period. Strategic report Governance Financial statements 2-79 80-119 120-182 137
Trade and other receivables Trade and other receivables are recognised initially at fair value and are subsequently measured at amortised cost, reduced by any provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due. Indicators of impairment would include financial difficulties of the debtor, likelihood of the debtor’s insolvency, default in payment or a significant deterioration in credit worthiness. Any impairment is recognised in the income statement within ‘Administrative expenses’. Loans and receivables Loans and receivables, comprising trade and other receivables, and cash and cash equivalents, are non-derivative financial instruments which have a fixed or easily determinable value. They are recognised at cost, less any provisions for impairment in their value. Cash and cash equivalents Cash and cash equivalents comprise cash in hand and current balances with banks and similar institutions, which are readily convertible to known amounts of cash. Cash equivalents are short-term with an original maturity of less than 3 months. Restricted cash Restricted cash is disclosed separately on the face of the statement of financial position and denoted as restricted when it is not under the exclusive control of the Group. Government treasury bills Government treasury bills are securities with maturity of up to 4 months issued by the National Bank of Ukraine with a fixed coupon rate. Treasury bills are recognised as ‘Held-to-maturity financial investments.’ Held-to-maturity financial investments The government US$ treasury bills issued by the National Bank of Ukraine are non-derivative financial assets with fixed payments and fixed maturity that are intended to be held to maturity. Held-to-maturity financial investments are measured at amortised cost using the effective interest rate method less impairment. Interest income and discounts and premiums on held-to-maturity securities are recognised as ‘Interest and similar income’ in the consolidated income statement. Trade and other payables Trade and other payables are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest rate method if the time value of money is significant. Financial liabilities and equity Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Equity instruments issued by the Company are recorded at the proceeds received net of direct issue costs. Inventories Inventory is comprised of produced oil and gas or certain materials and equipment that are acquired for future use. The oil and gas is valued at the lower of average production cost and net realisable value; the materials and equipment inventory is valued at purchase cost. Cost comprises direct materials and, where applicable, direct labour costs plus attributable overheads based on a normal level of activity and other costs associated in bringing the inventories to their present location and condition. Cost is calculated using the weighted average method. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution and any provisions for obsolescence. Taxation Income tax expense represents the sum of the current tax payable and deferred tax. The current tax payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the reporting date. JKX Oil & Gas plc Annual Report 2014
138 Notes to the consolidated financial statements
Tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity or in other comprehensive income, in which case the tax is also dealt with in equity or other comprehensive income respectively. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax base used in the computation of taxable profit. 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 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. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the asset to be recovered. Any such reduction shall be reversed to the extent that it becomes probable that sufficient taxable profit will be available. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised based on tax rates and laws substantively enacted by the reporting date. Deferred tax assets and liabilities are offset when there exists a legal and enforceable right to offset and they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Segmental reporting Operating segments are reported in a manner consistent with the internal reporting provided to the Chief Operating Decision Maker. The Chief Operating Decision Maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Executive and Non-Executive Directors of the Group that make the strategic decisions. Share options The group operates a number of equity-settled, share-based compensation plans, under which the Company receives services from Executive Directors and Senior Management as consideration for equity instruments (options) of the group. The fair value of the services received from Executive Directors and Senior Management in exchange for the grant of the options is recognised as an expense. The total amount to be expensed is determined by reference to the fair value of the options granted: • including any market performance conditions; (for example, the Company’s share price); • excluding the impact of any service and non-market performance vesting conditions (for example, profitability, sales growth targets and remaining an employee of the entity over a specified time period); and • including the impact of any non-vesting conditions (for example, the requirement for employees to save). Non-market performance and service conditions are included in assumptions about the number of options that are expected to vest. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. In addition, in some circumstances employees may provide services in advance of the grant date and therefore the grant date fair value is estimated for the purposes of recognising the expense during the period between service commencement period and grant date. At the end of each reporting period, the group revises its estimates of the number of options that are expected to vest based on the non-market vesting conditions. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity. When the options are exercised, the company issues new shares or shares held by the JKX Employee Benefit Trust. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium. The grant by the Company of options over its equity instruments to the employees of subsidiary undertakings in the group is treated as a capital contribution. The fair value of employee services received, measured by reference to the grant date fair value, is recognised over the vesting period as an increase to investment in subsidiary undertakings, with a corresponding credit to equity in the parent entity financial statements. Strategic report Governance Financial statements 2-79 80-119 120-182 139
The social security contributions payable in connection with the grant of the share options is considered an integral part of the grant itself, and the change will be treated as a cash-settled transaction. The rules regarding the scheme are described in the Remuneration Report on pages 98 and 115 and in note 26 on share based payments. Bonus scheme The Group operates a bonus scheme for its Directors and employees. The scheme has three performance conditions: 1. financial objectives; 2. key strategic objectives and 3. safety performance conditions. The bonus payments are made annually, normally in January of each year and the costs are accrued in the period to which they relate. Pension costs The Group contributes to the individual pension scheme of the qualifying employees’ choice. Contributions are charged to the income statement as they become payable. The Group has no further payment obligations once the contributions have been paid. Decommissioning Provision is made for the cost of decommissioning assets at the time when the obligation to decommission arises. Such provision represents the estimated discounted liability (the discount rate used currently being at 10%, (2013: 10%)) for costs which are expected to be incurred in removing production facilities and site restoration at the end of the producing life of each field. A corresponding item of property, plant and equipment is also created at an amount equal to the provision. This is subsequently depreciated as part of the capital costs of the production facilities. Any change in the present value of the estimated expenditure attributable to changes in the estimates of the cash flow or the current estimate of the discount rate used are reflected as an adjustment to the provision and the property, plant and equipment. The unwinding of the discount is recognised as a finance cost. Revenue recognition Sales of oil and gas products are recognised when the significant risks and rewards of ownership have passed to the buyer and it can be reliably measured. This generally occurs when the product is physically transferred into a vessel, pipe or other delivery mechanism. Revenue from other services are recognised when the services have been performed. Revenue is measured at the fair value of the consideration received, excluding discounts, rebates, value added tax (‘VAT’) and other sales taxes or duty. Revenue resulting from the production of oil and natural gas from properties in which the Group has an interest with other producers is recognised on the basis of the Group’s working interest (entitlement method). Gains and losses on derivative contracts are reported on a net basis in the consolidated income statement. Interest income is recognised as the interest accrues, by reference to the net carrying amount at the effective interest rate applicable. Share capital and treasury shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from share premium, net of any tax effects. When share capital recognised as equity is repurchased, the amount of the consideration paid, which includes directly attributable costs, net of any tax effects, is recognised as a deduction from share premium. Repurchased JKX Oil & Gas plc shares are classified as treasury shares in shareholders’ equity and are presented in the reserve for own shares. The consideration paid, including any directly attributable incremental costs is deducted from equity attributable to the Company’s equity holders until the shares are cancelled or reissued. When treasury shares are sold or reissued subsequently, the amount received is recognised as an increase in equity, and the resulting surplus or deficit on the transaction is presented in share premium. No gain or loss is recognised in the financial statements on the purchase, sale, issue or cancellation of treasury shares. Leasing Rentals payable under operating leases are charged to the income statement on a straight-line basis over the term of the relevant lease. Under operating leases, the risks and rewards of ownership are retained by the lessor. The Group has no finance leases. Dividends Interim dividends are recognised when they are paid to the Company’s shareholders. Final dividends are recognised when they are approved by shareholders. Exceptional items Exceptional items comprise items of income and expense, including tax items, that are material in amount JKX Oil & Gas plc Annual Report 2014
140 Notes to the consolidated financial statements and unlikely to recur and which merit separate disclosure in order to provide an understanding of the Group’s underlying financial performance. Examples of events giving rise to the disclosure of material items of income and expense as exceptional items include, but are not limited to, impairment events, disposals of operations or individual assets, litigation claims by or against the Group and the restructuring of components of the Group’s operations. See note 5 for further details. Critical accounting estimates and assumptions The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. a) Recoverability of oil and gas assets and intangible oil and gas costs (note 5) Costs capitalised as oil and gas assets in property, plant and equipment, and intangible assets are assessed for impairment when circumstances suggest that the carrying value may exceed its recoverable value. As part of this assessment, management has carried out an impairment test (ceiling test) on the oil and gas assets classified as property, plant and equipment. This test compares the carrying value of the assets at the reporting date with the expected discounted cash flows from each project. For the discounted cash flows to be calculated, management has used a production profile based on its best estimate of proven and probable reserves of the assets and a range of assumptions, including an internal oil and gas price profile benchmarked to mean analysts’ consensus and a discount rate which, taking into account other assumptions used in the calculation, management considers to be reflective of the risks. This assessment involves judgement as to (i) the likely commerciality of the asset, (ii) proven, probable and possible (‘3P’) reserves which are estimated using standard recognised evaluation techniques (iii) future revenues and estimated development costs pertaining to the asset, (iv) the discount rate to be applied for the purposes of deriving a recoverable value and (v) the value ascribed to contingent resources associated with the asset. b) Carrying value of intangible exploration and evaluation expenditure (note 5 (b)) The amounts for intangible exploration and evaluation assets represent the costs of active exploration projects the commerciality of which is unevaluated until reserves can be appraised. Where a project is sufficiently advanced the recoverability of intangible exploration assets is assessed by comparing the carrying value to estimates of the present value of projects. The present values of intangible exploration assets are inherently judgemental. Exploration and evaluation costs will be written off to the income statement unless commercial reserves are established or the determination process is not completed and there are no indications of impairment. The outcome of ongoing exploration, and therefore whether the carrying value of exploration and evaluation assets will ultimately be recovered, is inherently uncertain. c) Depreciation of oil and gas assets (note 5) Oil and gas assets held in property, plant and equipment are mainly depreciated on a unit of production basis at a rate calculated by reference to proved plus probable reserves and incorporating the estimated future cost of developing and extracting those reserves. Future development costs are estimated using assumptions as to the numbers 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. d) Taxation (notes 27 and 28) Tax provisions are recognised when it is considered probable that there will be a future outflow of funds to the tax authorities. In this case, provision is made for the amount that is expected to be settled. The provision is updated at each reporting date by management by interpretation and application of known local tax laws with the assistance of established legal, tax and accounting advisors. These interpretations can change over time depending on precedent set and circumstances in addition new laws can come into effect which can conflict with others and, therefore, are subject to varying interpretations and changes which may be applied retrospectively. A change in estimate of the likelihood of a future outflow or in the expected amount to be settled would result in a charge or credit to income in the period in which the change occurs. Deferred tax assets are recognised only to the extent it is considered probable that those assets will be recoverable. This involves an assessment of when those deferred tax assets are likely to reverse, and a judgement as to whether or not there will be sufficient taxable profits available to offset the tax assets when they do reverse. This requires assumptions regarding future profitability and is therefore inherently uncertain. To the extent assumptions regarding future profitability change, there can be an increase or decrease in the level of deferred tax assets recognised that can result in a charge or credit in the period in which the change occurs. Tax provisions are based on enacted or substantively enacted laws. To the extent that these change there would be Strategic report Governance Financial statements 2-79 80-119 120-182 141
a charge or credit to income both in the period of charge, which would include any impact on cumulative provisions, and in future periods. e) Derivatives (note 14) Under the terms of the placing of the $40m of guaranteed unsubordinated convertible bonds (see note 13), at the option of the Company, any conversion notice can be settled in cash rather than shares. The Cash Alternative Amount is based on the Volume Weighted Average Price of the Company’s shares prior to the conversion notice. In addition there are other terms and conditions attached to the bond which, together with the Cash Alternative Amount, are classified as a derivative financial instrument (see note 14). This derivative financial instrument was measured at inception at its fair value and changes in its fair value through to the reporting date are recorded each period in the Consolidated income statement. The fair value is computed based on the conversion price of each bond as well as directly observable market information, including the Company’s share price and historic volatility. The assumptions used are only an estimate of how the Company’s future share price may change and are, therefore, subjective. Changes in these assumptions could materially impact the internally computed fair value of the derivative resulting in corresponding impact on income or loss in the Consolidated income statement.
4. Segmental analysis The Group has one single class of business, being the exploration for, evaluation, development and production of oil and gas reserves. Accordingly the reportable operating segments are determined by the geographical location of the assets. There are four (2013: four) reportable operating segments which are based on the internal reports provided to the Chief Operating Decision Maker (‘CODM’). Ukraine and Russia segments are involved with production and exploration; the ‘Rest of World’ are involved in exploration, development and production and the UK is the home of the head office and purchases material, capital assets and services on behalf of other segments. The ‘Rest of World’ segment comprises operations in Hungary and Slovakia. Transfer prices between segments are set on an arm’s length basis in a manner similar to transactions with third parties. Segment revenue, segment expense and segment results include transfers between segments. Those transfers are eliminated on consolidation. Segment results and assets include items directly attributable to the segment. Segment assets consist primarily of property, plant and equipment, inventories and receivables. Capital expenditures comprise additions to property, plant and equipment and intangible assets. JKX Oil & Gas plc Annual Report 2014
142 Notes to the consolidated financial statements
Segmental analysis
UK Ukraine Russia Rest of world Sub total Eliminations Total 2014 $000 $000 $000 $000 $000 $000 $000 External revenue Revenue by location of asset: – Oil – 33,150 873 14 34,037 – 34,037 – Gas – 75,741 26,526 – 102,267 – 102,267 – Liquefied petroleum gas – 9,542 – – 9,542 – 9,542 – Management services/other – 360 – – 360 – 360 – 118,793 27,399 14 146,206 – 146,206
Inter segment revenue: – Management services/other 15,687 – – – 15,687 (15,687) – 15,687 – – – 15,687 (15,687) – Total revenue 15,687 118,793 27,399 14 161,893 (15,687) 146,206
Profit before tax (Loss)/profit from operations (6,631) 17,392 (58,026) (13,503) (60,768) (134) (60,902) Finance income 1,094 – 1,094 Finance cost (3,197) – (3,197) Fair value adjustment on acquisition 222 – 222 Fair value movement on derivative liability 9,072 – 9,072 (53,577) (134) (53,711)
Assets Property, plant and equipment 1,452 168,513 115,375 7,134 292,474 – 292,474 Intangible assets – – – 7,932 7,932 – 7,932 Other receivable – – 3,966 – 3,966 – 3,966 Deferred tax – 7,520 13,527 1 21,048 – 21,048 Inventories – 2,108 2,016 – 4,124 – 4,124 Trade and other receivables 631 6,480 1,254 1,653 10,018 – 10,018 Restricted cash 6 – – 553 559 – 559 Cash and cash equivalents 12,105 526 5,891 6,862 25,384 – 25,384 Held to maturity financial investments – – – 2,700 2,700 – 2,700 Total assets 14,194 185,147 142,029 26,835 368,205 – 368,205
Total liabilities (38,164) (35,428) (10,232) (3,033) (86,857) – (86,857) Non cash expense (other than depreciation and 340 1,143 3,288 1,186 5,957 – 5,957 impairment) Exceptional item – well control operations – – 3,471 – 3,471 – 3,471 Exceptional item – provision for impairment of oil – 12,800 46,262 10,000 69,062 – 69,062 and gas assets Increase in property, plant and equipment and 321 35,382 5,263 1,311 42,277 – 42,277 intangible assets Depreciation, depletion and amortisation 803 23,179 9,227 1,181 34,390 – 34,390 Strategic report Governance Financial statements 2-79 80-119 120-182 143
UK Ukraine Russia Rest of world Sub total Eliminations Total 2013 $000 $000 $000 $000 $000 $000 $000 External revenue Revenue by location of asset: – Oil – 44,067 761 74 44,902 – 44,902 – Gas – 91,339 28,090 811 120,240 – 120,240 – Liquefied petroleum gas – 13,888 – – 13,888 – 13,888 – Management services/other – 1,708 – – 1,708 – 1,708 – 151,002 28,851 885 180,738 – 180,738
Inter segment revenue: – Management services/other 14,627 – – – 14,627 (14,627) – – Equipment 84 – – – 84 (84) – 14,711 – – – 14,711 (14,711) –
Total revenue 14,711 151,002 28,851 885 195,449 (14,711) 180,738
Profit before tax: (Loss)/profit from operations (17,226) 38,876 (7,020) (5,136) 9,494 (330) 9,164 Finance income 377 – 377 Finance cost (3,625) – (3,625) Fair value movement on derivative liability (1,957) – (1,957) 4,289 (330) 3,959
Assets Property, plant and equipment 1,753 169,110 286,305 8,448 465,616 – 465,616 Intangible assets – – – 18,927 18,927 – 18,927 Other receivable – – 4,414 – 4,414 – 4,414 Deferred tax – 3,347 31,436 – 34,783 – 34,783 Inventories – 3,377 2,664 – 6,041 – 6,041 Trade and other receivables 645 11,169 11,210 4,663 27,687 – 27,687 Restricted cash 6 – – 192 198 – 198 Cash and cash equivalents 14,996 6,696 3,115 875 25,682 – 25,682 Total assets 17,400 193,699 339,144 33,105 583,348 – 583,348
Total liabilities (48,091) (18,672) (21,300) (4,364) (92,427) – (92,427) Non cash expense (other than depreciation and 1,238 504 290 – 2,032 – 2,032 impairment) Write off of exploration and evaluation costs – – – 1,452 1,452 – 1,452 Increase in property, plant and equipment and 1,161 41,627 20,227 1,358 64,373 – 64,373 intangible assets Depreciation, depletion and amortisation 675 44,205 11,188 1,079 57,147 – 57,147
2014 2013 Major customers $000 $000
1 Ukraine 46,461 68,600
There is 1 (2013: 1) customer in the Ukraine that exceeds 10% of the Group’s total revenues. JKX Oil & Gas plc Annual Report 2014
144 Notes to the consolidated financial statements
5. (a) Property, plant and equipment
Oil and gas assets
Oil and gas Oil and gas fields Gas field fields Other Ukraine Russia Hungary assets Total 2014 $000 $000 $000 $000 $000 GROUP Cost At 1 January 522,127 375,529 32,788 21,711 952,155 Additions during the year* 35,382 5,263 244 1,051 41,940 Additions relating to stepped acquisition (see note 35) – – 3,182 – 3,182 Foreign exchange equity adjustment – (157,088) – (919) (158,007) Disposal of property, plant and equipment – (186) – (1,276) (1,462) At 31 December 557,509 223,518 36,214 20,567 837,808
Accumulated depreciation, depletion and amortisation and provision for impairment At 1 January 353,017 89,224 27,448 16,850 486,539 Depreciation on disposals of property, plant and equipment – (25) – (1,368) (1,393) Exceptional item – provision for impairment of oil and 12,800 46,262 3,733 – 62,795 gas assets Foreign exchange equity adjustment – (36,545) – (452) (36,997) Depreciation charge for the year 23,179 9,227 – 1,984 34,390 At 31 December 388,996 108,143 31,181 17,014 545,334
Carrying amount At 1 January 169,110 286,305 5,340 4,861 465,616
At 31 December 168,513 115,375 5,033 3,553 292,474
* Finance costs that have been capitalised within oil and gas properties during the year total $3.0m (2013: $1.7m), at a weighted average interest rate of 18.0 per cent (2013: 18.0 per cent).
Oil and gas fields in Ukraine and Russia does not include any items under construction (2013: $6.3m and nil). Exceptional item – well control operations During the year, due to unexpected pressure building in the annulus of well 27 at our Koshekhablskoye field in Russia, the well was diverted to the flare pit and a coiled tubing unit was mobilised to kill the well. This operation was completed successfully. The cost of these well control operations was $3.5m which has been charged to the income statement during the year. Exceptional item – provision for impairment of oil and gas assets At the reporting date impairment triggers were noted in respect of our oil and gas assets in Ukraine, Russia and Hungary. Impairment tests were completed resulting in impairments of $69.1m comprised of $12.8m in respect of our Ukrainian oil and gas fields, $46.3m in respect of our Russian gas field, $3.7m in respect of our Hungarian oil and gas fields and $6.3m in respect of our Hungarian exploration and evaluation costs (see note 5 (b)). Full impairment disclosures for each of the impairment tests are made in notes 5 (c), (d), (e) and (f). Strategic report Governance Financial statements 2-79 80-119 120-182 145
Oil and gas assets
Oil and gas Oil and gas fields Gas field fields Other Ukraine Russia Hungary assets Total 2013 $000 $000 $000 $000 $000 GROUP Cost At 1 January 479,253 378,087 32,477 20,053 909,870 Additions during the year* 41,627 20,227 311 1,802 63,967 Foreign exchange equity adjustment – (22,785) – (125) (22,910) Disposal of property, plant and equipment (246) – – (19) (265) Reclassification 1,493 – – – 1,493 At 31 December 522,127 375,529 32,788 21,711 952,155
Accumulated depreciation, depletion and amortisation and provision for impairment At 1 January 308,946 78,447 27,350 15,252 429,995 Depreciation on disposals of property, plant and equipment (134) – – (19) (153) Foreign exchange equity adjustment – (411) – (39) (450) Depreciation charge for the year 44,205 11,188 98 1,656 57,147 At 31 December 353,017 89,224 27,448 16,850 486,539
Carrying amount At 1 January 170,307 299,640 5,127 4,801 479,875
At 31 December 169,110 286,305 5,340 4,861 465,616 JKX Oil & Gas plc Annual Report 2014
146 Notes to the consolidated financial statements
5. (b) Intangible assets: exploration and evaluation expenditure
Rest Ukraine Hungary of World Total 2014 $000 $000 $000 $000 GROUP Cost At 1 January 1,308 11,144 14,138 26,590 Additions during the year – 102 237 339 Write off of unsuccessful exploration and evaluation costs – (15) – (15) Additions relating to stepped acquisition (see note 35) – 1,316 – 1,316 Exceptional item – provision for impairment of Hungarian – (6,267) – (6,267) assets (note 5(f)) Disposal relating to stepped acquisition (see note 35) – (5,512) – (5,512) Effect of exchange rates on intangible assets – – (856) (856) At 31 December 1,308 768 13,519 15,595
Provision against oil and gas assets At 1 January and 31 December 1,308 – 6,355 7,663
Carrying amount At 1 January – 11,144 7,783 18,927
At 31 December – 768 7,164 7,932
Rest Ukraine Hungary of World Total 2013 $000 $000 $000 $000 GROUP Cost At 1 January 2,801 12,371 13,628 28,800 Additions during the year – 225 181 406 Write off of unsuccessful exploration costs – (1,452) – (1,452) Effect of exchange rates on intangible assets – – 329 329 Reclassification (1,493) – – (1,493) At 31 December 1,308 11,144 14,138 26,590
Provision against oil and gas assets At 1 January and 31 December 1,308 – 6,355 7,663
Carrying amount At 1 January 1,493 12,371 7,273 21,137
At 31 December – 11,144 7,783 18,927
The amounts for intangible exploration and appraisal assets represent costs incurred on active exploration and appraisal projects. In 2013, the write off of exploration and evaluation costs comprises seismic data costs of $1.4m in Hungary and exploration costs of $0.1m in respect of our Turkeve licence in Hungary. The total write off of unsuccessful exploration and evaluation costs of $1.5m was recognised in cost of sales in 2013. Strategic report Governance Financial statements 2-79 80-119 120-182 147
5. (c) Impairment test for property, plant and equipment A review was undertaken at the reporting date of the carrying amounts of property, plant and equipment to determine whether there was any indication of a trigger that may have led to these assets suffering an impairment loss. Following this review impairment triggers were noted in relation to the Ukrainian assets (see note 5 (d)), Yuzhgazenergie LLC (‘YGE’) in Russia (see note 5 (e)) and the Hungarian assets (see note 5 (f)). As there is no readily available market for the Group’s oil and gas properties, fair value is derived as the net present value of the estimated future cash flows arising from the continued use of the assets, incorporating assumptions that a typical market participant would take into account. The value in use of an oil and gas property is generally lower than its fair value less costs of disposal (‘FVLCD’) as value in use reflects only those cash flows expected to be derived from the asset in its current condition. FVLCD includes appraisal and development expenditure that a market participant would consider likely to enhance the productive capacity of an asset and optimise future cash flows. Consequently, the Group determines recoverable amount based on FVLCD using a discounted cash flow (‘DCF’) methodology. The DCF was derived by estimating discounted after tax cash flows for each CGU based on estimates that a typical market participant would use in valuing such assets. The impairment tests compared the recoverable amount of the respective CGUs noted below to the respective carrying values of their associated assets. The estimates of FVLCD meet the definition of level three fair value measurements as they are determined from unobservable inputs.
5. (d) Impairment test for the Ukrainian oil and gas assets The Ukrainian government issued decrees in the second half of 2014 which directed major industrial gas buyers to acquire their gas solely from the Ukraine state-owned gas company from 1 December 2014 through to 28 February 2015 and increased the rate of gas production tax to 55% (from 28%), initially for 3 months but now extended until 31 December 2015. These factors, combined with the sharp decline in international oil prices and a 71% reduction in the assessed 3P reserves for the Elizavetovskoye field constituted an impairment trigger and accordingly an impairment test was undertaken. Poltava Petroleum Company (‘PPC’), a wholly owned subsidiary of JKX, holds 100% interest in five production licences (Ignatovskoye, Molchanovskoye, Rudenkovskoye, Novo-Nikolaevskoye, Elizavetovskoye) and one exploration licence (Zaplavskoye) in the Poltava region of Ukraine. The Ignatovskoye, Molchanovskoye, Rudenkovskoye, Novo-Nikolaevskoye production licences contain one or more distinct fields which, together with the Zaplavskoye exploration licence, form the Novo-Nikolaevskoye Complex (‘NNC’). The Elizavetovskoye production licence is located 45km from the Novo-Nikolaevskoye Complex and has its own gas production facilities. Ukrainian Cash Generating Units (‘CGUs’) In respect of the Group’s Ukraine assets the NNC forms a single CGU as these contain oil and gas fields which are serviced by a single processing facility and do not have separately identifiable cash inflows. In addition they have commonality of facilities, personnel and services. The Elizavetovskoye licence also has its own separate processing facilities and separately identifiable cash flows and therefore is a distinct CGU for the purpose of the impairment test. In accordance with IAS 36, the impairment review was been undertaken in US$ being the currency in which future cash flows from NNC and Elizavetovskoye will be generated. Key assumptions – NNC and Elizavetovskoye The key assumptions used in the impairment testing were: • Production profiles: these were based on the latest available information provided by independent reserve engineers, DeGolyer & MacNaughton, at 31 December 2014. Such information included 3P reserves for NNC and Elizavetovskoye of 27.4 MMboe and 2.5 MMboe, respectively. • Economic life of field: it was assumed that NNC will be successful in extending the licence term beyond its current 2024 expiration to the economic life of the field (expected to be around 2032). The economic life of the Elizavetovskoye field is currently expected to be around 2018. • Gas prices: the gas price is based on the forecast expected maximum gas price set monthly by NKRE (electricity regulator). For the next three years, gas prices were based on Ukrainian gas market price expectations which are mainly influenced by European gas prices, the Russian-Ukrainian border price, and international oil prices. JKX Oil & Gas plc Annual Report 2014
148 Notes to the consolidated financial statements
Thereafter gas prices were increased at 2.8%. • Oil prices: the Company used a forward price curve for the next five years and an increase of 2.8% per annum thereafter. • Production taxes: for 2015, the Company has assumed production tax rates of 55% for gas and 45% for oil which were introduced by the government as an emergency measure in 2014 and have been extended through to 31 December 2015. From 1 January 2016, the Company has assumed that these rates will reduce to normalised levels of 28% and 39% for gas and oil, respectively. • Capital and operating costs: these were based on current operating and capital costs in Ukraine for both projects. Estimates were provided by third parties and supported by estimates from our own specialists, where necessary. • Post tax nominal discount rate of 17.2%. This was based on a Capital Asset Pricing Model analysis consistent with that used in previous impairment reviews Based on the key assumptions set out above: • NNC’s recoverable amount exceeds its carrying value by $42.6m and therefore NNC’s oil and gas assets were not impaired however there has been a significant erosion of the headroom from the prior year; and • the Elizavetovskoye field was impaired by $12.8m after significant erosion of the headroom from the prior year. The main driver of the impairment has been the reduction in Elizavetovskoye’s 3P reserves to 2.5 MMboe (2013: 8.7 MMboe) and the increase in gas production tax rates. Any impairment is dependent on judgement used in determining the most appropriate basis for the assumptions and estimates made by management, particularly in relation to the key assumptions described above. Sensitivity analysis to likely and potential changes in key assumptions has therefore been provided below. The impact on the impairment calculation of applying different assumptions to gas prices, production volumes, production tax rates, future capital expenditure and post-tax discount rates, all other inputs remaining equal, would be as follows: Sensitivity analysis for the NNC and the Elizavetovskoye field NNC Elizavetovskoye Increase/(decrease) in Increase/(decrease) in impairment headroom impairment of $12.8m of $42.6m for NNC for Elizavetovskoye CGU CGU $m $m Impact if regulated gas price: increased by 10% 25.2 (4.4) reduced by 10% (25.2) 4.4 Impact if gas production volumes: increased by 10% 32.4 (4.4) decreased by 10% (32.4) 4.4 Impact if future capital expenditure: increased by 20% (26.3) 3.1 decreased by 20% 26.3 (3.1) Impact if post-tax discount rate: increased by 1 percentage point to 18.2% (9.0) 0.2 decreased by 1 percentage point to 16.2% 9.7 (0.2)
5. (e) Impairment test for Yuzhgazenergie LLC (‘YGE’), Russia Following the 2007 acquisition of YGE in Russia, a technical and environmental re-evaluation of YGE’s Koshekhablskoye gas field redevelopment was undertaken by the Group. The re-evaluation resulted in a revised development plan and production profile. The development plan and production profile have continued to be refined since that time. For purposes of testing for impairment triggers of YGE’s non-current assets, the Company took account of developments since the last test for impairment in 2013, based on the assessment of FVLCD. In previous estimates, the Company assumed net-back convergence with European gas prices occurring in 2023, which was in line with the Russian government’s stated intention, after applying to increase gas sector tariffs annually by 10% to achieve this. The domestic gas market in Russia has deteriorated significantly during 2014 and the prospects for a significant improvement in the domestic gas market in the near term have receded rapidly. The economic recession in Russia, the devaluation of the Rouble, the sharp decline in international oil prices Strategic report Governance Financial statements 2-79 80-119 120-182 149
and the declining gas demand in Europe and Russia have conspired to create a short term gas oversupply within Russia and a cessation of any political appetite for achieving net-back parity with European gas prices. This revision to our estimate of the future increases in Russian gas prices constituted an impairment trigger. Accordingly an impairment test was undertaken. In accordance with IAS 36, the impairment review was been undertaken in Russian Roubles. Key Assumptions – YGE The key assumptions used in the impairment testing were: • Production profiles: these were based on the latest available information provided by independent reserve engineers, DeGolyer & MacNaughton, at 31 December 2014. Such information included 3P reserves for YGE of 68.3 MMboe. • Economic life of field: it was assumed that YGE will be successful in extending the licence term beyond its current 2026 expiration to the economic life of the field (expected to be around 2047). The discounted cash flow methodology used has not taken account of any opportunities that may exist to extract reserves in a shorter timeframe by investing to increase the current plant capacity. • Gas prices: for 2015 these were based on the gas sales agreement that the Company had negotiated with Kubangazifikatziya for the forecast gas production in 2015. The gas price is expected to remain at the same level through to 1 July 2016. • Gas prices: from 1 July 2016 and annually thereafter, the gas prices have been increased by Rouble inflation of between 4.3% and 8.0% through to 2021, and 5.1% thereafter. • Gas prices: historically, gas prices in the Adygea Region are higher than the average gas price across all regions in Russia as a result of the vast transportation distances from Russia’s main producing regions. The Company has assumed that Adygean gas prices will remain higher than the average price across Russia. • Capital and operating costs: these were based on current operating and capital costs in Russia, project estimates provided by third parties and supported by estimates from our own specialists, where necessary. • Post tax nominal Rouble discount rate of 15.2%. This was based on a Capital Asset Pricing Model analysis consistent with that used in previous impairment reviews. Based on the key assumptions set out above YGE was impaired by $46.3m. The main driver of the impairment has been the revision to the expected increase in Adygean gas prices. Any impairment is dependent on judgement used in determining the most appropriate basis for the assumptions and estimates made by management, particularly in relation to the key assumptions described above. Sensitivity analysis to likely and potential changes in key assumptions has therefore been provided below. The impact on the impairment calculation of applying different assumptions to gas prices, production, future capital expenditure and post-tax discount rates, all other inputs remaining equal, would be as follows: Sensitivity Analysis for YGE Increase/(decrease) in impairment of $46.3m for Yuzhgazenergie LLC CGU $m Impact if Adygean gas price: Increased by 10% (28.8) Reduced by 10% 27.8 Impact if gas production volumes: Increased by 10% (27.8) Decreased by 10% 26.8 Impact if future capital expenditure: Increased by 20% 15.7 Decreased by 20% (15.7) Impact if post-tax discount rate: Increased by 1 percentage point to 16.2% 9.6 Decreased by 1 percentage point to 14.2% (10.8) JKX Oil & Gas plc Annual Report 2014
150 Notes to the consolidated financial statements
5. (f) Impairment test for Hungarian oil and gas assets Hungarian property, plant and equipment – HHE North Kft (‘HHN’) The Company holds a 100% interest in two Hernad licences through its wholly owned Hungarian subsidiary, HHE North Kft (‘HHN’). Hernad I licence which contains two suspended wells which experienced an unexpected decline in production rates in 2013. A full impairment review of the Hernad field was completed at the end of 2013 and no impairment was noted (see below). Hungarian property, plant and equipment – Turkeve Through its wholly owned Dutch subsidiary, JKX Hungary BV, the Company holds a 50% interest in the Turkeve IV Mining Plot of 10 sq. km (‘Turkeve’) on which the Ny-7 well encountered gas. Hungarian intangible assets: exploration and evaluation expenditure – Tiszavasvári-6 The Hernad licences also contain the Tiszavasvári-6 discovery well (‘TZ-6’), which, due to the early stage of appraisal, is classified as an exploration and appraisal asset and recognised within intangible assets. During the second half of 2014, there was a sharp decline in international oil prices. In addition, due to the absence of a firm work programme at year end to develop the Hungarian reserves, the estimated reserves at the Group’s Hungarian oil and gas fields were reclassified as contingent resources. These factors constituted an impairment trigger and accordingly an impairment test was undertaken. Hungarian Cash Generating Units (‘CGUs’) HHN forms a single CGU as it holds the two suspended oil and gas wells which are serviced by a single processing facility and which do not have separately identifiable cash inflows. In addition they have commonality of facilities, personnel and services. The development of the Turkeve field and the TZ-6 discovery require their own distinct processing facilities. Once these discoveries are developed, they will have separately identifiable cash flows and therefore are two separate CGUs for the impairment test of the Hungarian oil and gas assets. In accordance with IAS 36, the impairment reviews for the Hungarian assets have been undertaken in US$ being the currency in which future cash flows from HHN, Turkeve and TZ-6 will be generated. Key Assumptions – HHN, Turkeve and TZ-6 The key assumptions used in the impairment testing in 2014 were: • Production profiles: these were based on the latest available information provided by our reserve engineers which included contingent resources of 0.6 MMboe for HHN, 0.3 MMboe (net to JKX) for Turkeve and 4.6 MMboe for TZ-6. • Oil and gas prices: these were based on current prices being realised and short term price curves derived from expectations in the Hungarian oil and gas market. • Capital and operating costs: these were based on project estimates provided by third parties and the partner and operator of our Hungarian assets. The post tax discount rate of 10% was applied. This was based on a Capital Asset Pricing Model analysis for our Hungarian assets. Accordingly the impairment review is dependent on judgement used in determining the most appropriate basis for the assumptions and estimates made by management, particularly in relation to the key assumptions described above. Sensitivity analysis to likely and potential changes in key assumptions has therefore been provided below. Based on the key assumptions set out above: • HHN was impaired by $2.7m; • Turkeve was impaired by $1.0m; and • TZ-6 was impaired by $6.3m. The main driver of the impairments to Turkeve and TZ-6 has been the decline in expected future oil and gas prices. The impact on the impairment calculation of applying different assumptions to production, oil and gas prices and future capital and operating costs, all other inputs remaining equal, would be follows: Strategic report Governance Financial statements 2-79 80-119 120-182 151
HHN Turkeve TZ-6 Increase/(decrease) in Increase/(decrease) in Increase/(decrease) in impairment of $2.7m impairment of $1.0m impairment of $6.3m for HHN CGU for Turkeve CGU for TZ-6 CGU $m $m $m Impact if oil and gas production: Increased by 10% (0.9) (0.3) (0.5) Decreased by 10% 0.9 0.3 0.5 Impact if oil and gas prices: Increased by 10% (0.9) (0.3) (0.5) Decreased by 10% 0.9 0.3 0.5 Impact if future capital and operating costs: Increased by 20% 1.2 0.2 1.0 Decreased by 20% (1.2) (0.2) (1.0)
HHE North Kft (‘HHN’), Hungary – 2013 impairment disclosures During 2013, the two producing Hungarian wells on our Hernad field experienced an unexpected decline in production rates: • well Hn-1, stopped production in late 2012 and attempts to recommence production during 2013 have been unsuccessful; • well Hn-2 was restarted in February 2013 but had eventually stopped producing by the end of the year. The unexpected decline in production from these two wells was considered to constitute an impairment trigger and a full impairment test was undertaken in respect of our oil and gas assets relating to the Hernad field. The test compared the recoverable amount of the Hernad field Cash Generating Unit (‘CGU’), which contained these two wells and which is held by HHN, the subsidiary which holds our Hungarian assets, to the carrying value of the CGU. The estimate of recoverable amount was based on FVLCD, derived by estimating discounted after tax cash flows for the CGU based on estimates that a typical market participant would use in valuing such assets. In accordance with IAS 36, the impairment review was undertaken in US$ being the functional currency of our Hungarian operations. The key assumptions used in the impairment testing in 2013 were: • Production profiles: these were based on the latest available information provided by our reserve engineers based on reserve information from the operator and external engineers, such information included 3P reserves of 0.3 MMboe • Oil and gas prices: these were based on current prices being realised and short term price curves derived from expectations in the Hungarian oil and gas market • Capital and operating costs: these were based on project estimates provided by third parties and the partner and operator of our Hungarian assets. The post tax discount rate of 10% was applied. This was based on a Capital Asset Pricing Model analysis for our Hungarian assets. Accordingly the impairment review is dependent on judgement used in determining the most appropriate basis for the assumptions and estimates made by management, particularly in relation to the key assumptions described above. Sensitivity analysis to likely and potential changes in key assumptions has therefore been reviewed below. Based on the key assumptions set out above HHN’s recoverable amount exceeds its carrying value by $1.0m and therefore HHN’s oil and gas assets in respect of the Hernad field were not impaired. The impact on the impairment calculation of applying different assumptions to production, oil and gas prices and future capital and operating costs, all other inputs remaining equal, would be as follows:
Increase/(decrease) in impairment headroom of $1.0m for Hernad CGU $m Impact if oil and gas production: Increased by 10% 1.0 Decreased by 10% (1.0) Impact if oil and gas prices: Increased by 10% 1.0 Decreased by 10% (1.0) Impact if future capital and operating costs: Increased by 10% (0.6) Decreased by 10% 0.6 JKX Oil & Gas plc Annual Report 2014
152 Notes to the consolidated financial statements
6. Other receivable Other receivables consist of VAT recoverable as a result of expenditures incurred in Russia. The receivable is expected to be recovered between two and five years (2013: two and five years).
7. Investments The net book value of unlisted investments comprises: 2014 2013 $000 $000
Cost At 1 January and 31 December 5,617 5,617
Accumulated impairment At 1 January and 31 December 5,617 5,617
Carrying amount At 31 December – –
Full provision was made against investments in 2007 which comprise an investment in a Ukrainian oil and gas company. At the end of 2007 there were no clear development plans relating to the investment and this continues to be the position at 31 December 2014. The investment reflects a 10% holding of the Company’s ordinary share capital.
8. Inventories 2014 2013 $000 $000 Warehouse inventory and materials 2,994 3,363 Oil and gas inventory 1,130 2,678 4,124 6,041
9. Trade and other receivables 2014 2013 $000 $000 Trade receivables 3,116 2,705 Other receivables 1,043 3,087 VAT receivable 274 12,423 Prepayments 5,585 9,472 10,018 27,687
As of 31 December 2014, there were no trade receivables which were impaired (2013: nil). At this date there were no trade receivables past due (2013: nil). There is no difference between the carrying value of trade and other receivables and their fair value. The carrying amounts of the Group’s trade and other receivables are denominated in the following currencies:
2014 2013 $000 $000 US Dollar 415 2,894 Sterling 20 622 Euros 763 1,787 Hungarian Forints 446 22 Ukrainian Hryvna 1,266 11,168 Russian Roubles 1,247 11,194 4,157 27,687 Strategic report Governance Financial statements 2-79 80-119 120-182 153
10. Cash and cash equivalents 2014 2013 $000 $000 Cash 19,186 19,375 Short term deposits 198 6,307 Government treasury bills 6,000 – Cash and cash equivalents 25,384 25,682 Restricted cash 559 198 Total 25,943 25,880
Short term deposits comprise amounts which are held on deposit, but are readily convertible to cash. Ukrainian government US$ treasury bills of $6.0m matured on 7 January 2015. Restricted cash Included in Restricted cash is $0.6m (2013: $0.2m) held in Hungary at K & H Bank Zrt, which is deposited in accordance with the Hungarian Mining Act to cover potential compensation for any land damage and the costs of recultivation, including environmental damage of the waste management facilities.
11. Held-to-maturity financial investments 2014 2013 $000 $000 Government treasury bills 2,700 –
In October 2014, the Company purchased selected Ukrainian government US$ treasury bills with a fixed coupon which matured on 11 February 2015 and which were classified as held-to-maturity financial investments. At the reporting date, the fair value of the held-to-maturity securities amounted to US$3.3m (2013: nil).
12. Trade and other payables 2014 2013 $000 $000 Trade payables 1,694 5,210 Other payables 1,416 2,925 Other taxes and social security costs 4,780 3,910 VAT payable 1,797 1,136 Accruals 6,538 11,210 16,225 24,391
Included within other payables in 2013 is an amount of $2.5m relating to the Group’s share of a payable of HHE North Kft (‘HHN’) that is unsecured, bears interest based on LIBOR plus a mark-up and was expected to be repaid within 12 months of the reporting date.
13. Borrowings 2014 2013 $000 $000 Current Convertible bonds due 2018 4,068 4,000 Credit facility 1,522 – Term-loans repayable within one year 5,590 4,000
Non-current Convertible bonds due 2018 30,837 28,166
Convertible bonds due 2018 On 19 February 2013 the Company successfully completed the placing of $40m of guaranteed unsubordinated convertible bonds with institutional investors which are due 2018 raising cash of $37.2m net of issue costs. JKX Oil & Gas plc Annual Report 2014
154 Notes to the consolidated financial statements
The Bonds have an annual coupon of 8 per cent per annum payable semi-annually in arrears. The Bonds are convertible into ordinary shares of the Company at any time from 1 April 2013 up until seven days prior to their maturity on 19 February 2018 at a conversion price of 76.29 pence per Ordinary Share, unless the Company settles the conversion notice by paying the Bondholder the Cash Alternative Amount (see below). Interest, after the deduction of issue costs and the inclusion of the redemption premium, will be charged to the income statement using an effective rate of 18.0%. Cash Alternative Amount At the option of the Company, the conversion notice in respect of the Bonds can be settled in cash rather than shares, the Cash Alternative Amount payable is based on the Volume Weighted Average Price of the Company’s shares prior to the conversion notice. Credit facility On 31 March 2011, Poltava Petroleum Company (‘PPC’), our subsidiary in Ukraine, entered into a reducing credit facility agreement with Crédit Agricole CIB (France) secured by indemnity provided by the parent company, JKX Oil & Gas plc. The credit facility is for a maximum of Ukrainian Hryvna equivalent of $15.0m. The facility was renewed on 27 June 2014 and is available until 30 June 2015 (2013: 30 June 2014) with the maximum facility reducing to $10.0m and $5.0m on 30 April 2015 and 30 May 2015 respectively. All provisions contained in the credit facility documentation have been negotiated on normal commercial and customary terms for such finance arrangements. The interest is calculated at prevailing Crédit Agricole CIB (France) bank rate plus a margin.
14. Derivatives
2014 2013 Non-current derivative financial instruments $000 $000 At the beginning of the year/on completion of the Bond (19 February 2013) 10,109 8,152 Fair value movement during the year – Net (gain)/loss (9,072) 1,957 At the end of the year 1,037 10,109
Convertible bonds due 2018 – embedded derivatives Coupon Makewhole Upon conversion of a Bond prior to the 19 February 2015 the Company is required to pay an amount of interest equal to the aggregate interest which would have been payable on the principal amount of the Bond if such Bond had been outstanding until 19 February 2015. Bondholder Put Option Bondholders have the right to require the Company to redeem the following number of Bonds on the following dates together with accrued and unpaid interest to (but excluding) such dates:
Redemption Date Maximum number of Bonds to be redeemed 19 February 2015 10% of the Bonds, having an aggregate principal amount of $4,000,000 19 February 2016 25% of the Bonds, having an aggregate principal amount of $10,000,000 19 February 2017 all outstanding Bonds
Current liabilities include $4.1m (2013: $4.0m) in respect of the put option available to bondholders on 19 February 2015. Bonds with a principal amount of $4m were redeemed on 19 February 2015 in addition to an early redemption premium of $0.2m in accordance with the terms and conditions of the bond. None of the bondholders exercised their option to put 10% of the outstanding principal of the bonds on 19 February 2014. Company Call Option The Company can redeem the Bonds early in full but not in part at their principal amount together with accrued interest at any time on or after 19 February 2017 if the Volume Weighted Average Price of the Company’s shares over a specified period equal or exceed 130 per cent of the principal amount of the Bonds; or if the aggregate principal amount of the bonds outstanding is less than 15% of the aggregate principal amount originally issued. Strategic report Governance Financial statements 2-79 80-119 120-182 155
Fixed exchange rate The Sterling-US Dollar exchange rate is fixed at £1/$1.5809 for the conversion and other features.
15. Financial instruments Fair values of financial assets and financial liabilities – Group Set out below is a comparison by category of carrying amounts and fair values of the Group’s financial instruments. Fair value is the amount at which a financial instrument could be exchanged in an arm’s length transaction. Where available, market values have been used (this excludes short term assets and liabilities). Book value Fair value Book and fair value
2014 2014 2013 $000 $000 $000 Financial assets Cash and cash equivalents and restricted cash (note 10) – classified as loans 25,943 25,943 25,880 and receivables Trade receivables (note 9) – classified as loans and receivables 3,116 3,116 2,705 Other receivables (note 9) – classified as loans and receivables 1,043 1,043 3,087 Held-to-maturity financial investments (note 11) – classified as loans 2,700 3,262 – and receivables Financial liabilities Trade payables (note 12) – carried at amortised cost 1,694 1,694 5,210 Other payables (note 12) – carried at amortised cost 1,416 1,416 2,925 Borrowings – credit facility (note 12) 1,522 1,522 – Borrowings – convertible bonds due 2018 (note 13) – carried at amortised cost 4,068 4,068 4,000 Borrowings – convertible bonds due 2018 (note 13) – carried at amortised cost 30,837 30,837 28,166 Derivatives – fair value through profit or loss (note 14) 1,037 1,037 10,109
Financial liabilities measured at amortised cost are carried at $40.6m (2013: $40.3m). The Group’s borrowings at 31 December 2014 relate entirely to the convertible bonds due 2018.
Fair value hierarchy Derivatives At the year end the Group’s derivative financial instrument related to various embedded derivatives within the convertible bonds due 2018 (note 14). The value of the derivative was calculated at inception and the reporting date using the Monte Carlo simulation methodology and Black-Scholes formula, respectively, and the Company’s historic share price and volatility, treasury rates and other estimations. As it was derived from inputs that are not from observable market data it was been grouped into Level 3 within the fair value measurement hierarchy. The main assumptions used in valuation of the derivative conversion option as at 31 December 2014 were: • underlying share price of: £0.120 (31 December 2013: £0.7150); • £/US$ spot rate of 1.5577 (31 December 2013: £1/$1.6557); • historic volatility of 70.7% (31 December 2013: 38.1%); • risk free rate based on 3.14 year (31 December 2013: 4.14 year) US Treasury rate of 0.897% (31 December 2013: 0.879%). A 10% increase/decrease in Company’s historic share price volatility would have resulted in a reduction in the fair value gain for the year of $0.3m (31 December 2013: increase in fair value loss of $3.1m) and an increase in the fair value gain of $0.2m (31 December 2013: decrease in the fair value loss of $3.2m) respectively, assuming that all other variables remain constant. Held-to-maturity financial investments Held-to-maturity securities were grouped into Level 1 as market prices were available at the reporting date for the treasury bills from the National Bank of Ukraine benchmark. JKX Oil & Gas plc Annual Report 2014
156 Notes to the consolidated financial statements
Credit risk – Group The Group has policies in place to ensure that sales of products are made to customers with appropriate credit worthiness. The Group limits credit risk by assessing creditworthiness of potential counterparties before entering into transactions with them and continuing to evaluate their creditworthiness after transactions have been initiated. Where appropriate, the use of prepayment for product sales limits the exposure to credit risk. There is no difference between the carrying amount of trade and other receivables and the maximum credit risk exposure. The maximum financial exposure due to credit risk on the Group’s financial assets, representing the sum of cash and cash equivalents, trade receivables, held to maturity financial investments and other current assets, as at 31 December 2014 was $32.8m (2013: $31.7m). Capital management – Group The Directors determine the appropriate capital structure of the Group specifically, how much is raised from shareholders (equity) and how much is borrowed from financial institutions (debt) in order to finance the Group’s business strategy. The Group’s policy as to the level of equity capital and reserves is to ensure that it maintains a strong financial position and low gearing ratio which provides financial flexibility to continue as a going concern and to maximise shareholder value. The capital structure of the Group consists of shareholders’ equity together with net debt. The Group’s funding requirements are met through a combination of debt, equity and operational cash flow. Net debt Net debt comprises: borrowings disclosed in note 13 and total cash in note 10 and excludes derivatives. Equity attributable to the shareholders of the Company comprises issued capital, other reserves and retained earnings (see Consolidated statement of changes in equity). The capital structure of the Group is as follows: 2014 2013 $000 $000 Current liabilities (note 13) (5,590) (4,000) Convertible bonds due 2018 – Non-current liability (note 13) (30,837) (28,166) Total cash (note 10) 25,943 25,880 Government treasury bills (note 11) 2,700 – Net debt (7,784) (6,286)
Total shareholders’ equity 281,348 490,921
Following the issue of $40m of convertible bonds in February 2013, the primary capital risk to the Group is the level of indebtedness. The convertible bond includes a financial covenant which limits the Group’s indebtedness (excluding the bonds themselves and the $15.0m Credit Agricole facility) in respect of any new borrowings (in addition to the bond amount) to three times 12-month free cash flow based on the most recently published consolidated financial statements. During the year the Group has complied with this financial covenant. Liquidity risk – Group The treasury function is responsible for liquidity, funding and settlement management under policies approved by the Board of Directors. Liquidity needs are monitored using regular forecasting of operational cash flows and financing commitments. The Group maintains a mixture of cash and cash equivalents and committed facilities in order to ensure sufficient funding for business requirements. Significant restrictions Cash and short-term deposits held in Ukraine are subject to local exchange control regulations. These regulations provide for restrictions on exporting capital from Ukraine (see note 37). Cash and short term deposits included within the consolidated financial statements to which these restrictions apply is $0.5m (2013: no restrictions). The following tables set out details of the expected contractual maturity of non-derivative financial liabilities. The tables include both interest and principal cash flows on an undiscounted basis. To the extent that interest flows are floating rate, the undiscounted amount is derived from interest rate curves at the reporting date. The maturity analysis for Convertible bonds due 2018 is based on the earliest Put dates for the relevant portions of the Bonds (see note 13) of 19 February 2014, 2015, 2016 and 2017. None of the Bonds were put on 19 February 2014. Strategic report Governance Financial statements 2-79 80-119 120-182 157
Within 3 3 months 1-2 2-3 3-4 months -1year years years years Group – 31 December 2014 $000 $000 $000 $000 $000 Maturity of financial liabilities Trade payables (note 12) 1,694 – – – – Other payables (note 12) 1,416 – – – – Borrowings – credit facility (note 12) – 1,522 – – – Borrowings – Convertible bonds due 2018 5,829 1,428 13,339 30,180 –
Group – 31 December 2013 Maturity of financial liabilities Trade payables (note 12) 5,210 – – – – Other payables (note 12) 2,925 – – – – Borrowings – Convertible bonds due 2018 5,740 1,428 6,976 13,118 25,687
Interest rate risk profile of financial assets and liabilities – Group The Group is exposed to interest rate risk principally in relation to the balance outstanding on the credit facility with Crédit Agricole CIB (France) where interest is calculated at prevailing Crédit Agricole CIB (France) bank rate plus a margin. At the year end, there were balances of $1.5m outstanding on this facility (2013: $nil). Fixed rate interest is charged on the Group’s convertible bond (see note 13). The interest rate profile of the other financial assets and liabilities of the Group as at 31 December is as follows (excluding short-term assets and liabilities, non-interest bearing):
Within 1 year Group – Year ended 31 December 2014 $000 Floating rate Short term deposits (note 10) 198 Other receivables (note 9) 1,043 Other payables (note 12) (1,416)
Group – Year ended 31 December 2013 Floating rate Short term deposits (note 10) 6,307 Other receivables (note 9) 3,087 Other payables (note 12) (2,925)
Floating rate financial assets comprise cash deposits placed on money markets at call, seven day and monthly rates.
Within 1 year Group – Year ended 31 December 2014 $000 Fixed rate Government treasury bills (note 10) 6,000 Held-to-maturity financial investments (note 11) 2,700
Fixed rate financial assets comprise Ukrainian government US$ treasury bills which matured on 7 January 2015 (note 10) and 11 February 2015 (note 11). Interest rate sensitivity – Group The sensitivity analysis below has been determined based on the exposure to interest rates on our short term deposits at the reporting date. If interest rates had been 1 per cent higher/lower and all other variables were held constant, the Group’s profit after tax and net assets for the year ended 31 December 2014 would increase/decrease by $51,000 (2013: $49,000). 1 per cent is the sensitivity rate used as it best represents management’s assessment of the possible change in interest rates that could apply to the Group. JKX Oil & Gas plc Annual Report 2014
158 Notes to the consolidated financial statements
Foreign currency exposures – Group The table below shows the extent to which the Group has monetary assets and liabilities in currencies other than the functional currency of the operating company involved. These exposures give rise to the net currency gains and losses recognised in the income statement. As at 31 December the asset/(liability) foreign currency exposures were: 2014 2013 $000 $000 US Dollar – (1,141) Sterling 333 1,810 Euros 590 418 Hungarian Forints 1,091 1,545 Ukrainian Hryvna (3,064) (5,946) Bulgarian Leva 11 6,548 Russian Roubles 33 148 Canadian Dollar 29 – Total net (977) 3,382
Foreign currency sensitivity – Group The Group is mainly exposed to the currency fluctuations of Ukraine (Hryvna), Russia (Rouble) and UK (Sterling). The sensitivity analysis principally arises on money market deposits and working capital items held at the reporting date. The following table details the Group’s sensitivity to a 10 per cent increase and decrease in the US Dollar against Sterling and 30 per cent against Hryvna and Rouble, all other variables were held constant. Due to the significant foreign currency fluctuation in Ukraine and Russia 30 per cent has been used to calculate sensitivity for Hryvna and Rouble. 30 per cent and 10 per cent are the sensitivity rates that best represents management’s assessment of the possible change in the foreign exchange rates affecting the Group. A positive number below indicates an increase in profit and equity when the US Dollar weakens against the relevant currency. For a strengthening of the US Dollar against the relevant currency, there would be an equal and opposite impact on the profit and other equity, and the balances below would be negative.
Hryvna Rouble Sterling
2014 2013 2014 2013 2014 2013 $000 $000 $000 $000 $000 $000 Profit/(loss) for the year and equity 30 per cent/10 per cent strengthening of the US Dollar 707 405 (8) (4) (30) (110) 30 per cent/10 per cent strengthening of the US Dollar (707) (405) 8 4 30 110
Commodity risk and sensitivity – Group The Group’s earnings are exposed to the effect of fluctuations in oil, gas and condensate prices and the risks relating to their fluctuation in are discussed on page 55, together with the discussion of financial risk factors. The Group’s oil, gas and condensate is sold to local trading companies through market related contracts. The Group is a price taker and does not enter into commodity hedge agreements unless required for borrowing purposes which may occur from time to time. Therefore no sensitivity analysis has been prepared on the exposure to oil, gas or condensate prices for outstanding monetary items at the 31 December 2014 as there is no impact on any outstanding amounts.
16. JKX Employee Benefit Trust In 2013, JKX Employee Benefit Trust was established and acquired 5,000,000 of shares in JKX Oil & Gas plc at a cost of $4.0m for the purpose of making awards under the Group’s employee share schemes and these shares have been classified in the statement of financial position as treasury shares within equity. None of these shares were used in 2014 (2013: nil) to settle share options, therefore at the year end JKX Employee Benefit Trust held 5,000,000 shares in JKX Oil & Gas plc (2013: 5,000,000). Strategic report Governance Financial statements 2-79 80-119 120-182 159
17. Share capital Equity share capital, denominated in Sterling, was as follows:
2014 2014 2014 2013 2013 2013 Number £000 $000 Number £000 $000 Authorised Ordinary shares of 10p each 300,000,000 30,000 – 300,000,000 30,000 – Allotted, called up and fully paid Opening balance at 1 January 172,125,916 17,212 26,666 172,070,477 17,207 26,657 Exercise of share options – – – 55,439 5 9 Closing balance at 31 December 172,125,916 17,212 26,666 172,125,916 17,212 26,666
Of which the following are shares held in treasury: Treasury shares held at 1 January and 402,771 40 77 402,771 40 77 31 December
The Company did not purchase any treasury shares during 2014 (2013: none) and no treasury shares were used in 2014 (2013: none) to settle share options. There are no shares reserved for issue under options or contracts. As at 31 December 2014 the market value of the treasury shares held was $0.1m (2013: $0.5m).
18. Other reserves Foreign Capital currency Merger redemption translation reserve reserve reserve Total $000 $000 $000 $000 At 1 January 2013 30,680 587 (29,177) 2,090 Exchange differences arising on translation of overseas operations – – (25,031) (25,031) At 31 December 2013 30,680 587 (54,208) (22,941)
At 1 January 2014 30,680 587 (54,208) (22,941) Exchange differences arising on translation of overseas operations – – (130,327) (130,327) At 31 December 2014 30,680 587 (184,535) (153,268)
Merger reserve was created on 30 May 1995 when JKX Oil & Gas plc acquired the issued share capital of JP Kenny Exploration & Production Limited for the issue of ordinary shares and represents the difference between the fair value of consideration given for the shares and the nominal value of those instruments. Capital redemption reserve relates to the buy-back of shares in 2002, there have been no additional share buy-backs since this time. Foreign currency translation reserve includes movements that relate to the retranslation of the subsidiaries whose functional currencies are not the US Dollar. During 2014, the Russian Rouble (‘RR’) devalued by approximately 72% from RR32.72/$ to RR56.26/$. A significant portion of the currency translation differences of US$130.2m included in the Consolidated statement of comprehensive income arose on the translation of property, plant and equipment denominated in RR (see note 5 (a)). JKX Oil & Gas plc Annual Report 2014
160 Notes to the consolidated financial statements
19. Provisions Ukraine Russia Hungary Total 2014 2014 2014 2014 Provision for site restoration $000 $000 $000 $000 At 1 January 1,902 1,636 429 3,967 Foreign exchange adjustment – 109 (44) 65 Wells restored (286) – – (286) Revision in estimates (131) – – (131) Unwinding of discount (note 22) 30 109 – 139 Provision related to stepped acquisition of Hungary (note 35) – – 234 234 At 31 December 1,515 1,854 619 3,988
The provision in respect of Ukraine represents the present value of the well and site restoration costs that are expected to be incurred up to 2034 (2013: 2027). The Russia provision results from the decommissioning of 12 wells (2013:12) and removal of plant as required by the license obligation. Decommissioning is due to take place from 2015 to 2048 (2013: 2014 to 2060). The provisions are made using the Group’s internal estimates that management believe form a reasonable basis for the expected future costs of decommissioning. Contingent liability As disclosed on page 88 of the 2014 Annual Report, the Company has been involved in Court proceedings since July 2013 with two dissident shareholders. The shareholders have appealed to the Supreme Court contesting the Appeal Court ruling made in May 2014 in favour of the Company. If the Supreme Court upholds/overturns the Appeal Court ruling, the Company will potentially recover/ pay out approximately $3.0m of legal expenses incurred during the process. The Company expects the Supreme Court’s decision in 2015. A contingent liability in respect of Ukrainian production taxes is explained in note 27.
20. Cost of sales 2014 2013 $000 $000 Operating costs 31,466 48,691 Depreciation, depletion and amortisation 32,381 55,357 Production based taxes 45,519 41,803 109,366 145,851
Exceptional item – provision for impairment of oil and gas assets (note 5) 69,062 – Exceptional Item – well control operations (note 5 (a)) 3,471 1,452 181,899 147,303
The cost of inventories (calculated by reference to production costs) expensed in cost of sales in 2014 was $109.3m (2013: $145.6m).
21. Finance income 2014 2013 $000 $000 Interest income on deposits 634 218 Interest income from government treasury bills 323 – Other 137 159 1,094 377 Strategic report Governance Financial statements 2-79 80-119 120-182 161
22. Finance costs 2014 2013 $000 $000 Bank interest payable 145 98 Borrowing costs 5,938 4,700 Unwinding of discount on site restoration (note 19) 139 519 6,222 5,317
Less: finance costs capitalised at 18.0% (2013: 18.0%*) (3,025) (1,692) 3,197 3,625
* Tax relief on capitalised interest is $0.7m (2013: $0.4m)
23. Profit from operations – analysis of costs by nature Profit from operations derives solely from continuing operations and is stated after charging the following:
2014 2013 $000 $000 Depreciation – other assets 1,984 1,656 Depreciation, depletion and amortisation – oil and gas assets 32,406 55,357 Staff costs (net of $0.5m (2013: $0.8m) capitalised, note 25) 21,995 29,093 Foreign exchange loss 5,673 142 Operating lease payments: – property lease rentals 1,101 1,075 – plant and equipment 1,560 861
During the year the Group (including its overseas subsidiaries) obtained the following services from the Company’s auditors as detailed below: 2014 2013 Company auditors’ remuneration $000 $000 Audit of the parent company and consolidated financial statements 284 279 Fees payable to company’s auditors for other services: – Audit of the Company’s subsidiaries 176 150 – Audit related assurance services 112 110 – Taxation advisory services – 26 – Other non-audit services 5 8 577 573
24. Obligations under leases At the reporting date, the Group’s aggregate future minimum commitments under non-cancellable operating leases are as follows:
2014 2013 $000 $000 Within one year 811 718 In the second to fifth years inclusive 2,116 2,233 After five years 970 1,575 3,897 4,526
Operating lease primarily relate to rentals payable by the Group for certain of its office premises and staff accommodation. JKX Oil & Gas plc Annual Report 2014
162 Notes to the consolidated financial statements
25. Staff costs 2014 2013 $000 $000 Wages and salaries 19,193 23,914 UK social security costs 352 920 Other pension costs 2,665 3,515 Share based payments (equity-settled) (note 26) 285 1,544 22,495 29,893
Staff costs are shown gross and $0.5m (2013: $0.8m) was capitalised, representing time spent on exploration and development activities. During the year, the average monthly number of employees was: 2014 2013 $000 $000 Management/operational 847 847 Administration support 60 74 907 921
Included within management/operational are 4 (2013: 4) Directors on service contracts. Further details of the Directors and their remuneration are included on pages 98 to 115 which form part of these financial statements.
26. Share-based payments Share options Share options are granted to Executive Directors and senior management based on performance criteria. The scheme rules are described in the Directors’ Remuneration Report and repeated below. All share-based payments are equity settled. At 31 December 2014, there were outstanding options under various employee share option schemes, exercisable during the years 2015 to 2024 (2013: 2014 to 2023), to acquire 10,854,700 (2013: 6,549,300) shares of the Company at prices ranging from £0.00 to £3.15 per share (2013: £0.00 to £3.15). The vesting period for 10,854,700 of the share options is 3 years, with an exercise period of 7 years making a 10 year maximum term. The following table illustrates the number and weighted average exercise prices (‘WAEP’) of, and movements in, share options during the year.
2014 2014 2013 2013 Number WAEP Number WAEP Outstanding as at 1 January 6,549,300 65.12p 3,499,863 110.37p Granted during the year 4,974,700 37.99p 4,198,900 45.60p Lapsed during the year (669,300) 177.48p (767,000) 150.35p Surrendered during the year – – (327,024) 109.97p Exercised during the year – – (55,439) – Outstanding at 31 December 10,854,700 45.75p 6,549,300 65.12p
Exercisable at 31 December 158,000 151.50p 240,500 122.86p
For the share options outstanding as at 31 December 2014, the weighted average remaining contractual life is 8.5 years (2013: 8.5 years). During the year share options were granted in accordance with the share option schemes, the Discretionary Share Option Scheme (‘DSOS’) and the Performance Share Plan (‘PSP’), which were introduced in 2010. They reflect the best practice aspects recommended by the Association of British Insurers following the publication of their guidelines in March 2001 (the ‘ABI Guidelines’). Strategic report Governance Financial statements 2-79 80-119 120-182 163
2014 Share Option Schemes DSOS The DSOS is made up of two parts. Options to acquire ordinary shares in the Company granted under Part A are ‘Approved Options’ and options to acquire Shares granted under Part B of the DSOS are ‘Unapproved Options’. No consideration shall be payable for the grant of an Option. 3,162,900 (2013: 2,715,500) options were granted under DSOS in 2014. The weighted average exercise price of options granted under DSOS is 59.75p (2013: 70.5p). For these options to vest there has to be an increase in the Group’s Earnings Per Share (‘EPS’) growth over the performance period measured over the 3 consecutive calendar years commencing from the date the options were granted. The weighted average fair value of options granted during the year under the DSOS was 24.01p per option (2013: 18.01p). PSP PSP are granted solely to Executive Directors. Executive Directors will receive awards under the 2010 Performance Share Plan in the form of nil cost options. No consideration is required to be paid for the grant or exercise of an Option. 1,811,800 (2013: 1,483,400) options were granted under PSP in 2014. The PSP options provide a conditional right to acquire shares at nil cost subject to the satisfaction of the performance conditions and continued employment with the Group. For these options to vest a comparison is performed between the Group’s TSR against the FTSE 250 index (half the options) and the All-Share Oil & Gas Producers index (other half of options). The weighted average fair value of options granted during the year under the PSP was 26.00p per option (2013: 18.01p). Fair value of share options granted The fair value of options granted under the DSOS is estimated as at the date of grant using a variance of the Binomial model, taking into account terms and conditions upon which the options are granted, which includes the performance condition related to the Company’s earnings per share directly. No dividends are paid on shares under the scheme prior to exercise. The fair value of options granted under the PSP is estimated as at the date of grant using a variant of the Monte Carlo model, taking into account the terms and conditions upon which the options are granted, which includes the performance condition related to the TSR directly. No dividends are paid on shares under the scheme prior to exercise. The total share based payment charge for the year was $0.3m (2013: $1.5m). The following table lists the inputs to the model used for the options granted in the years ended 31 December 2014 and 31 December 2013. The expected future volatility has been determined by reference to the historical volatility.
2014 2013 2014 2013 DSOS DSOS PSP PSP Dividend yield 0.0% 0.0% 0.0% 0.0% Expected share price volatility 43% 44% 44% 44% Risk free interest rate 1.5% 1.0% 1.2% 0.3% Exercise price 59.75p 70.5p 0.0p 0.0p Expected life of option (years) 3.9 4.3 3.0 3.0 Weighted average share price 24.1p 66.92p 26.0p 66.92p
Bonus scheme The full details of the bonus performance criteria for Directors and senior employees and the bonus earned is explained in the Remuneration Report on pages 98 to 115.
JKX Oil & Gas plc Annual Report 2014
164 Notes to the consolidated financial statements
27. Taxation 2014 2013 Analysis of tax on profit $000 $000 Current tax UK – current tax (1,400) – Overseas – current year 10,911 8,590 Current tax total 9,511 8,590
Deferred tax Overseas – current year 16,309 (11,132) Deferred tax total 16,309 (11,132)
Total taxation 25,820 (2,542)
Factors that affect the total tax charge The total tax charge for the year of $25.8m (2013: $2.5m credit) is higher (2013: lower) than the average rate of UK corporation tax of 21.5% (2013: 23.25%). The differences are explained below:
2014 2013 Total tax reconciliation $000 $000
(Loss)/profit before tax (53,711) 3,959 Tax calculated at 21.5% (2013: 23.25%) (11,548) 920 Other fixed asset differences 141 (3,051) Net change in unrecognised losses carried forward 38,456 1,807 Other differences (55) (606) Permanent foreign exchange differences (4,629) (534) Effect of tax rates in foreign jurisdictions (811) (1,004) Other non-deductible expenses 3,420 224 Recognition of prior year losses (949) (558) Total excluding impact of change in tax rates, tax losses of prior year not previously recognised and 24,025 (2,802) impairment and write down of fixed assets Effect of changes in tax rates 1,747 336 Impairment of oil and gas assets/write off of exploration costs 48 (76) Total tax charge/(credit) 25,820 (2,542)
The current tax charged in the year of $9.5m mainly relates to Ukrainian corporation tax and foreign exchange losses on local prepaid tax which has arisen in the Group subsidiary, Poltava Petroleum Company. Taxes charged on production of hydrocarbons in Ukraine and Hungary are included in cost of sales (note 20). The standard rate of corporation tax in the UK changed from 23% to 21% with effect from 1 April 2014. Accordingly, the Company’s profits for this accounting year are taxed at an effective rate of 21.5%. Factors that may affect future tax charges A significant proportion of the Group’s income will be generated overseas. Profits made overseas will not be able to be offset by costs elsewhere in the Group. This could lead to a higher than expected tax rate for the Group. The UK corporation tax rate changes announced in the 2012 Autumn Statement and March 2013 Budget were substantively enacted as part of the Finance Bill 2013 on 2 July 2013. These include reductions to the main rate of UK corporation tax to 21% for the financial year commencing 1 April 2014 and 20% for the financial year commencing 1 April 2015. The impact of the rate reduction is not expected to have a material impact on provided and unprovided UK current or deferred taxation. The corporation tax rate in Ukraine for 2014 was 18% (2013: 19%). Strategic report Governance Financial statements 2-79 80-119 120-182 165
Taxation in Ukraine – production taxes Since Poltava Petroleum Company’s (‘PPC’s’) inception in 1994 the Company has operated in a regime where conflicting laws have often existed, including in relation to effective taxes on oil and gas production. Various laws and regulations have existed and have implied a number of variable rates. In 1994, PPC entered into a licence agreement with the Ukrainian State Committee on Geology and the Utilisation of Mineral Resources (‘the Licence Agreement’) which set out expressly in the Licence Agreement that PPC would pay royalties on production at a rate of only 5.5% even in the event that existing tax rates were amended or new taxes introduced so as to adversely affect the economic benefit to be derived by PPC or the Company. Pursuant to the Licence Agreement, PPC was granted an exploration licence and four 20-year production licences, each in respect of a particular field. In 2004, PPC’s production licences were renewed and extended until 2024. New licence agreements were also signed to reflect this change and PPC’s operations continued as before. The Company and PPC have continued to invest in Ukraine on the basis that PPC would pay royalties on production at a rate of only 5.5%. In December 1994, a new fee on the production of gas (known as a ‘Rental Payment’ or ‘Rental Fee’) was introduced in Ukrainian law. On 30 December 1995, PPC was issued a letter by the Ministry of Economy, the Ministry of Finance and the State Committee for the Oil and Gas Industry (‘the Exemption Letter’), which establish a zero rent payment rate for oil and natural gas produced in Ukraine by PPC. Based on the Exemption Letter, therefore, PPC did not expect to pay any Rental Fees. Rental Fee Demands and Changes in Law since 2003 Since 2003, however, in violation of the Exemption Letter, the Ukrainian authorities have repeatedly demanded payment of a Rental Fee from PPC. The first such demand was issued in 2003, but was held to be invalid by the Ukrainian Court of Appeal. Two further demands were made of PPC in 2007 for UAH75m (approximately $4.7m at the year end rate of UAH15.77/$) and in 2010 for UAH153m (approximately $9.7m at the year end rate of UAH15.77/$) for Rental Fees for the periods from January to March 2007 and from August 2010 to December 2010, respectively. PPC has challenged both of these demands and appeals are currently pending before the Ukrainian Higher Administrative Court (the highest court in Ukraine for administrative matters). The Company continues to receive legal advice that the claims against PPC regarding payment of Rental Fees to 31 December 2010 has little legal merit under Ukrainian law for legal and technical reasons, on the basis of tax audits completed and the three year statute of limitation. No provision has been made for the possible future liabilities that may result from these tax uncertainties. Recovery of Rental Fees paid since 2011 In 2011, new laws were enacted which established new mechanisms for the determination of the Rental Fee. Notwithstanding the Exemption Letter, PPC began, in January 2011, to pay the Rental Fee in order to avoid further issues with the Ukrainian authorities and without prejudice to its right to challenge the validity of the demands. Since 2011, however, Ukraine has effected legislative changes that have incrementally increased Rental Fee rates. The first increase came into effect on 1 January 2013, when the Rental Fee was combined with another type of production tax, and the combined rate applicable to PPC was raised to 25%. Next, in April 2014, this rate was increased to 28%. Finally and most drastically, in an increase which came into effect on 3 August 2014, the rate applicable to PPC was increased to 55%. Since 2011, the Rental Fees been paid by PPC have amounted to more than $180m. These charges have been recorded in cost of sales in each of the accounting periods to which they relate. International arbitration proceedings The Company and its wholly-owned Ukrainian and Dutch subsidiaries have commenced arbitration proceedings against Ukraine under the Energy Charter Treaty, the bilateral investment treaties between Ukraine and the United Kingdom and the Netherlands, respectively. In these proceedings, the Company is seeking compensation for the losses it has suffered from Ukraine’s treaty violations, including Ukraine’s failure to treat the Company’s investments in a ‘fair and equitable’ manner and failing to comply with commitments made by Ukraine in respect of the Company’s investments. In particular, the Company is seeking repayment of more than $180m in rental fees that PPC has paid on production of oil and gas in Ukraine since 2011. JKX Oil & Gas plc Annual Report 2014
166 Notes to the consolidated financial statements
In support of the Company’s claims against Ukraine under the Energy Charter Treaty, an Emergency Arbitrator appointed under the Arbitration Rules of the Stockholm Chamber of Commerce issued an Emergency Award on 14 January 2015 ordering Ukraine to refrain from imposing royalties on the production of gas by Poltava Petroleum Company, the Company’s Ukrainian subsidiary, in excess of the rate of 28% (as opposed to the 55% rate that is currently applicable under Ukrainian law). The Emergency Award is binding on Ukraine under international law; however, since Ukraine has, thus far, refused to comply with the Award, the Company has applied to have it recognised and enforced by the Ukrainian courts. In addition, the Company will seek orders from the Tribunal constituted under the Energy Charter Treaty to compel Ukraine to comply with the Award. No adjustment has been made to recognise any possible future benefit to the Company that may result from these arbitration proceedings.
28. Deferred tax Assets Liabilities Net
2014 2013 2014 2013 2014 2013 Provided deferred taxation – net $000 $000 $000 $000 $000 $000 Fixed asset differences 13,090 – (25,214) (17,380) (12,124) (17,380) Other temporary differences 7,958 3,347 – – 7,958 3,347 Tax losses – 31,436 – – – 31,436 Net deferred tax (liability)/asset recognised 21,048 34,783 (25,214) (17,380) (4,166) 17,403
A deferred tax liability of $21.9m (2013: $7.9m) arises in respect of PPC’s activities, and $3.3m (2013: $9.4m) in respect of YGE’s activities. No deferred tax asset (2013: $nil) has been recognised in respect of brought forward UK losses. No deferred tax asset has been recognised in respect of Yuzhgaznergie LLC (2013: $31.4m) in respect of Russian tax losses as insufficient future taxable profits are forecast against which these losses can be utilised before they expire. Deferred tax assets are recognised only to the extent it is considered probable that those assets will be recoverable. This involves an assessment of when those deferred tax assets are likely to reverse, and a judgement as to whether or not there will be sufficient taxable profits available to offset the tax assets when they do reverse. This requires assumptions regarding future profitability and is therefore inherently uncertain. To the extent assumptions regarding future profitability change, there can be an increase or decrease in the level of deferred tax assets recognised which can result in a charge or credit in the year in which the change occurs.
1 January Exchange (Charge)/credit 31 December 2014 differences in the year 2014 Movement on the deferred tax account in 2014 $000 $000 $000 $000 Deferred tax liabilities Fixed assets differences (17,380) 5,253 3 (12,124) Deferred tax assets Other temporary differences 3,347 (1,012) 5,623 7,958 Net change in recognised losses carried forward 31,436 (9,501) (21,935) – 34,783 (10,513) (16,312) 7,958 Net deferred tax movement 17,403 (5,260) (16,309) (4,166)
1 January (Charge)/credit 31 December 2013 in the year 2013 Movement on the deferred tax account in 2013 $000 $000 $000 Deferred tax liabilities Fixed assets differences (16,427) (953) (17,380) Deferred tax assets Other temporary differences 3,274 73 3,347 Net change in recognised losses carried forward 19,424 12,012 31,436 22,698 12,085 34,783 Net deferred tax movement 6,271 11,132 17,403 Strategic report Governance Financial statements 2-79 80-119 120-182 167
The deferred tax assets in respect of Russian and Ukrainian corporation tax have been recognised with due consideration of the tax rate effective on the expected unwinding of those temporary differences.
2014 2013 Unprovided deferred taxation $000 $000 Tax losses (43,209) (9,875) Fixed asset differences (3,012) (3,197) Other temporary differences (100) (172) (46,321) (13,244)
$124.8m (2013: $157.2m) of the tax losses will expire principally between 2017 and 2024 (2013: 2017 and 2023). The deductible temporary differences do not expire under current tax legislation. Deferred tax assets have not been recognised in respect of the unprovided deferred taxation items because it is not probable that future taxable profit will be available to utilise these deductible temporary differences.
29. (Loss)/earnings per share The calculation of the basic and diluted (loss)/earnings per share attributable to the owners of the parent is based on the weighted average number of shares in issue during the year of 172,125,916 (2013: 172,108,553) and the (loss)/profit for the relevant year. Loss before exceptional item in 2014 of $21,959,036 (2013 earnings: $6,501,000) is calculated from the 2014 loss of $79,531,000 (2013 earnings: $6,501,000) and adding back exceptional items of $72,532,964 (2013: nil) less the related deferred tax on the exceptional items of $14,961,000 (2013: nil). The diluted earnings per share for the year is based on 172,125,916 (2013: 174,464,053) ordinary shares calculated as follows:
2014 2013 (Loss)/earnings $000 $000 (Loss)/earnings for the purpose of basic and diluted earnings per share (profit for the year attributable to the owners of the parent): Before exceptional item (21,959) 6,501 After exceptional item (79,531) 6,501
Number of shares 2014 2013
Basic weighted average number of shares 172,125,916 172,108,553 Dilutive potential ordinary shares: Share options – 2,355,500 Weighted average number of shares for diluted earnings per share 172,125,916 174,464,053
In accordance with IAS 33 (Earnings per share) the effects of antidilutive potential have not been included when calculating dilutive loss per share for the year end 31 December 2014 (2013: nil). 33,165,609 (2013: 28,792,122) potentially dilutive ordinary shares associated with the convertible bonds (note 13) have been excluded as they are antidilutive in 2014, however they could be dilutive in future periods. There were 10,854,700 (2013: 6,549,300) outstanding share options at 31 December 2014, of which 3,637,200 (2013: 2,355,500) had a potentially dilutive effect. All of the Group’s equity derivatives were anti-dilutive for the year ended 31 December 2014.
30. Dividends No interim dividend was paid for 2014 (2013: nil). In respect of the full year 2014, the directors do not propose a final dividend (2013: no final dividend paid). JKX Oil & Gas plc Annual Report 2014
168 Notes to the consolidated financial statements
31. Reconciliation of profit from operations to net cash inflow from operations
2014 2013 $000 $000 (Loss)/profit from operations (60,902) 9,164 Depreciation, depletion and amortisation 34,390 57,013 Impairment of property, plant and equipment/intangible assets 69,062 1,452 Share-based payment costs 285 1,544 Cash generated from operations before changes in working capital 42,835 69,173 Decrease in operating trade and other receivables 20,836 16,277 Decrease in operating trade and other payables (8,182) (13,529) Increase in inventories 2,922 2,893 Cash generated from operations 58,411 74,814
32. Capital commitments Under the work programmes for the Group’s exploration and development licenses the Group had committed $8.0m to future capital expenditure on drilling rigs and facilities at 31 December 2014 (2013: $5.2m).
33. Related party transactions The transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation. Amounts owed by and to joint ventures are disclosed in note 36. Key management personnel are considered to comprise only the Directors. The remuneration of Directors during the year was as follows:
2014 2013 $000 $000 Short-term employee benefits 3,3831 3,470 Post-employment benefits 271 258 Share-based payments 295 1,139 3,949 4,867
1 Includes $0.819m in respect of bonus awards for 2014 which are to be deferred in shares. The Remuneration Committee will determine later this year whether any or all of the shares will vest, depending on the financial circumstances facing the Company at the time.
Further information about the remuneration of individual Directors, together with the Directors’ interests in the share capital of JKX Oil & Gas plc, is provided in the audited part of the Remuneration Report on pages 98 to 115. Share-based payments represents the expenses arising from share-based payments included in the income statement, determined based on the fair value of the related awards at the date of grant (note 26). Subsidiary undertakings and jointly controlled entities The Company’s principal subsidiary undertakings including the name, country of incorporation and proportion of ownership interest for each are disclosed in note B to the Company’s separate financial statements which follow these consolidated financial statements. Transactions between subsidiaries and between the Company and its subsidiaries are eliminated on consolidation. HHE North Kft, a Hungarian registered company, is the only entity where the Group recognises its share of assets and liabilities; refer to note 36 for further details.
34. Audit exemptions for subsidiary companies The Group has elected to take advantage of the full extent of the exemptions available under Section 479A of the Companies Act 2006. As a result, statutory financial statements will not be audited for the following UK entities: JKX Services Limited, JKX Bulgaria Limited, JKX Georgia Ltd, JKX Turkey Ltd, JKX (Ukraine) Limited, Baltic Energy Trading Ltd, EuroDril Limited, JP Kenny Exploration & Production Limited, Page Gas Ltd, Trans- European Energy Services Limited. Strategic report Governance Financial statements 2-79 80-119 120-182 169
35. Business combinations On 20 November 2014, the Group acquired the remaining 50% of the share capital of HHE North Kft (‘HHN’), a Hungarian registered company in exchange for 25% of share in Sarkad Licence. The Group now holds 100% of the equity share capital of HHN, holding the Hernad I and Hernad II Licences and the Gorbehaza well interests. The following table summarises the consideration paid for HHN, the fair value of assets acquired, liabilities assumed at the acquisition date.
$000 Purchase consideration at 20 November: Fair value of 25% interest in the Sarkad licence 4,626 Purchase consideration to be settled in cash 272 Cash acquired (721) Fair value of existing interest at acquisition date 4,178 Total purchase consideration 8,355
Recognised amounts of identifiable assets acquired and liabilities assumed: Property, plant and equipment 8,999 Restricted cash 556 Trade and other receivables 448 Trade and other payables (1,181) Long-term liabilities – decommissioning provision (467) Total identifiable net assets acquired 8,355
Gain on stepped acquisition: Book value of existing 50% working interest 3,956 Fair value of existing 50% working interest1 4,178 Gain on stepped acquisition recognised 222
1 The fair value of existing working interest is calculated based upon the consideration for the outstanding ordinary shares excluding amounts attributed to the acquisition of non-controlling interests.
As a result of the acquisition, the 50% previously held equity interest in HHN was required to be re-measured at fair value as at the acquisition date (IFRS 3), resulting in a gain of $0.2m. This gain has been included within the net gain arising from business combinations line in the consolidated income statement. Acquisition-related costs of $0.4m have been charged to administrative expenses in the consolidated income statement for the year ended 31 December 2014. No revenue contributed by HHN has been included in the consolidated income statement since 20 November 2014. HHN also contributed a loss of $0.9m over the same period. Had HHN been consolidated from 1 January 2014, the consolidated statement of comprehensive income would have included revenue of $0.01m and a loss of $1.9m. In 2015, HHE North Kft changed its name to Riverside Energy Kft.
36. Joint ventures HHN was set up for the purpose of holding the Hernad I and Hernad II Licences. On 20 November 2014 the Company increased its holding in HHN from 50% to 100% (see note 35) taking full control and therefore HHN has been consolidated from that date. The following amounts represent that share of the revenue and expenses of HHN for the year ended 31 December 2013, and to the period ending 20 November 2014: JKX Oil & Gas plc Annual Report 2014
170 Notes to the consolidated financial statements
Period to 20 November 2014 2013 $000 $000 Revenue 14 885 Expenses 863 2,949 Loss after tax (849) (2,064)
Share of assets and liabilities of HHN at 31 December 2013: Non-current assets Property, plant and equipment 15,831
Current assets Cash and cash equivalents 423 Other current assets 389 812
Current liabilities Trade and other payables (1,872) Short term loan (5,289) Non-current liabilities Other non-current liabilities (273)
37. Events after the reporting date Ukrainian Government gas sales restrictions removed The Ukrainian Government issued a decree on 29 November 2014 directing major industrial buyers to acquire their gas solely from the Ukraine state-owned gas company Naftogaz during the three-month period 1 December 2014 to 28 February 2015. This resulted in the Company’s Ukrainian subsidiary being forced to shut-in a proportion of its oil and gas production during this period. In February 2015, the Company received confirmation from the Ukrainian state gas distributor that 100% of its nominations for March delivery of gas to industrial customers have been accepted. The Company has now returned all wells in its Ukrainian fields to full production. National Bank of Ukraine (‘NBU’) strengthens its currency control restrictions Temporary capital controls established by the NBU on 1 December 2014 remain in place in an attempt by the Ukrainian government to safeguard the economy and protect foreign exchange reserves in the short term. On 4 March 2015 a number of new NBU Resolutions were implemented with immediate effect (NBU No. 160 dated 3 March 2015; Resolution of the NBU No. 161 dated 3 March 2015; Resolution of the NBU No. 154 dated 2 March 2015). The Resolutions extended the currency control restrictions implemented in Ukraine on 1 December 2014 and introduced additional measures which have the impact of restricting the remittance of funds to foreign investors under certain conditions and bans the transfer of Hryvna to purchase Ukrainian government bonds. The restrictions are effective until 3 June 2015. International arbitration proceedings in respect of production taxes The Company and its wholly-owned Ukrainian and Dutch subsidiaries commenced arbitration proceedings against Ukraine under the Energy Charter Treaty, the bilateral investment treaty between the United Kingdom and Ukraine and the bilateral investment treaty between the Netherlands and Ukraine. See note 27 for further information. Strategic report Governance Financial statements 2-79 80-119 120-182 171 Independent Auditors’ Report to the members of JKX Oil & Gas plc
Report on the parent company financial statements
Our opinion In our opinion, JKX Oil & Gas plc’s parent company financial statements (the “financial statements”): • give a true and fair view of the state of the parent company’s affairs as at 31 December 2014; • have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and • have been prepared in accordance with the requirements of the Companies Act 2006.
Emphasis of matter – Going concern In forming our opinion on the financial statements, which is not modified, we have considered the adequacy of the disclosure made in note A to the financial statements concerning the group’s ability to continue as a going concern which indicates the existence of material uncertainties, which, if realised, may adversely impact the group’s ability to service its potential Bondholder put option payments in February 2016. The uncertainties relate to the risk that: (i) currency restrictions will be extended through 2016 such that the group is unable to repatriate cash from Ukraine; (ii) the Ukrainian government implements new decrees restricting access to the market for the Group’s gas; and (iii) gas or oil realisations deteriorate materially. These risks, as explained in note A to the financial statements, indicate the existence of material uncertainties which may cast significant doubt about the group’s ability to continue as a going concern. The financial statements do not include the adjustments that would result if the group was unable to continue as a going concern. JKX Oil & Gas plc’s financial statements comprise: • the Company balance sheet as at 31 December 2014; and • the notes to the financial statements, which include a summary of significant accounting policies and other explanatory information. Certain required disclosures have been presented elsewhere in the Annual Report, rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited. The financial reporting framework that has been applied in the preparation of the financial statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).
Other required reporting
Consistency of other information Companies Act 2006 opinion In our opinion, the information given in the Strategic Report and Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. ISAs (UK & Ireland) reporting Under International Standards on Auditing (UK and Ireland) (“ISAs (UK & Ireland)”) we are required to report to you if, in our opinion, information in the Annual Report is: • materially inconsistent with the information in the audited financial statements; or • apparently materially incorrect based on, or materially inconsistent with, our knowledge of the company acquired in the course of performing our audit; or • otherwise misleading. We have no exceptions to report arising from this responsibility.
Adequacy of accounting records and information and explanations received Under the Companies Act 2006 we are required to report to you if, in our opinion: • we have not received all the information and explanations we require for our audit; or • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • the financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns. JKX Oil & Gas plc Annual Report 2014
172 Independent Auditors’ Report to the members of JKX Oil & Gas plc
We have no exceptions to report arising from this responsibility.
Directors’ remuneration Directors’ remuneration report – Companies Act 2006 opinion In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006. Other Companies Act 2006 reporting Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of directors’ remuneration specified by law are not made. We have no exceptions to report arising from this responsibility.
Responsibilities for the financial statements and the audit
Our responsibilities and those of the directors As explained more fully in the Statement of Directors’ responsibilities, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
What an audit of financial statements involves We conducted our audit in accordance with ISAs (UK & Ireland). An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: • whether the accounting policies are appropriate to the parent company’s circumstances and have been consistently applied and adequately disclosed; • the reasonableness of significant accounting estimates made by the directors; and • the overall presentation of the financial statements. We primarily focus our work in these areas by assessing the directors’ judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements. We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Other matters
We have reported separately on the group financial statements of JKX Oil & Gas plc for the year ended 31 December 2014. That report includes an emphasis of matter.
Alison Baker (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 19 March 2015 Strategic report Governance Financial statements 2-79 80-119 120-182 173 Company financial statements
Company balance sheet – UK GAAP as at 31 December
2014 2013 Note $000 $000 FIXED ASSETS Tangible assets 67 107 Investments B 8,269 8,269 8,336 8,376 CURRENT ASSETS Debtors – amounts falling due within one year C 58,289 47,225 Debtors – amounts falling due after more than one year – Amounts owed by group undertakings C 368,519 548,874 Cash at bank and in hand E 11,649 12,630 438,457 608,729 Creditors – amounts falling due within one year F (115,881) (106,159) Net current assets 322,576 502,570
Total assets less current liabilities 330,912 510,946
Amounts falling due after more than one year Derivative financial instruments F (1,037) (10,109) Creditors – amounts falling due after more than one year F (39,140) (40,552) Net assets 290,735 460,285
CAPITAL AND RESERVES Called–up share capital G 26,666 26,666 Share premium account G 97,476 97,476 Other reserves G (503) (503) Profit and loss account G 167,096 336,646 Total shareholders’ funds G 290,735 460,285
These financial statements on pages 173 to 182 were approved by the Board of Directors on 19 March 2015 and signed on its behalf by:
Dr Paul Davies Director Cynthia Dubin Director JKX Oil & Gas plc Annual Report 2014
174 Notes to the Company financial statements
A. Presentation of the financial statements Basis of preparation The financial statements have been prepared under the historical cost convention, as modified for financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss and in accordance with the Companies Act 2006 and applicable accounting standards in the United Kingdom. Going concern The majority of the Group’s revenues, profits and cash flow from operations are currently derived from its oil and gas production in Ukraine, rather than Russia. During 2014 and early 2015, three Ukrainian government decrees were issued without warning and with immediate legal effect which: • increased the rate of gas production tax payments on oil and gas from 39% and 28% to 45% and 55% respectively; • instituted currency restrictions, initially until 1 December 2014 but later extended to 2 March 2015 and subsequently to 3 June 2015; and • directed major industrial gas buyers to acquire their gas solely from the Ukraine state-owned gas company from 1 December 2014 through to 28 February 2015. These decrees have had (and two continue to have) a significant adverse financial impact on the Group, along with the decline in international oil prices which have fallen precipitously since June 2014. As a result the Board has taken steps to streamline the organisation in the most practical way possible but without compromising safety and reliability. It has minimised capital expenditure and reduced operating costs through staff reductions in all key operational and administrative areas. Nonetheless, the Board is maintaining a reduced operational capability in Ukraine such that, if the production tax rates are restored to normal levels and the currency restrictions are not extended, then the Group’s planned investment programme in Ukraine can be swiftly restored. The Directors have concluded that it is necessary to draw attention to the material uncertainties relating to the risk: (i) that currency restrictions will extended through 2016 such that the Group is unable to repatriate cash from Ukraine; (ii) of the Ukrainian government implementing new decrees restricting access to the market for our gas; and (iii) of our gas or oil realisations deteriorating materially. It is unclear whether any or all of these risks will be realised. These specific risks, which represent material uncertainties, may cast doubt about the Group’s ability to meet its obligations as they fall due and continue as a going concern. The Group has a significant obligation of $10 million which may become payable pursuant to its $40 million Convertible Bond (see notes 13 and 14 to the Group financial statements) in February 2016 if Bondholders exercise their put option at that time. However the Directors believe that there is a reasonable basis to mitigate the effects of such eventualities through further operational and cash management measures. Based on the Group’s cash flow forecasts, the Directors believe that the combination of its current cash balances, expected future production and resulting net cash flows from operations, the implemented/planned cost reductions as well as the availability of additional courses of action should the need arise, provide a reasonable expectation that the Company will continue in operational existence for the foreseeable future. For these reasons, they continue to adopt the going concern basis of accounting in preparing these financial statements. The financial statements do not include the adjustments that would result if the Company were unable to continue as a going concern. The Company’s principal accounting policies are summarised below and have been applied consistently throughout the year and the preceding year. Tangible assets Tangible fixed assets are stated at historic purchase cost less accumulated depreciation. Cost includes the original purchase price of the asset and the costs attributable to bringing the asset to its working condition for its intended use. Depreciation is calculated to write off the cost of tangible fixed assets, less their residual values, over their expected useful lives using the straight line basis as follows: Fixtures and fittings – five to ten years Computer equipment and software – three years Investments Investments are initially measured at historic cost, including transaction costs, and stated at cost less impairment losses. The Company assesses investments for impairment whenever events or changes in circumstances indicate that the carrying value of an investment may not be recoverable. If any such indication of impairment exists, the Company makes an estimate of its recoverable amount. Where the carrying amount of an investment exceeds its recoverable amount, the investment is considered impaired and is written down to its recoverable amount. Strategic report Governance Financial statements 2-79 80-119 120-182 175
Foreign currencies Transactions in foreign currencies are initially recorded at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the rates of exchange ruling at the balance sheet date, with a corresponding charge or credit to the profit and loss account. Non-monetary items are measured in terms of historical cost in foreign currency and are translated using the exchange rates of the original transaction. The presentation and functional currency of the Company is the US Dollar. The US$/£ exchange rate used for the revaluation of the closing balance sheet at 31 December 2014 was $1/£0.6 (2013: $1/£0.6). Share based payments The Company operates a number of equity-settled, share-based compensation plans, under which the Company receives services from Executive Directors and Senior Management as consideration for equity instruments (options) of the Company. The fair value of the services received from Executive Directors and Senior Management in exchange for the grant of the options is recognised as an expense. The total amount to be expensed is determined by reference to the fair value of the options granted: • including any market performance conditions; (for example, the Company’s share price); • excluding the impact of any service and non-market performance vesting conditions (for example, profitability, sales growth targets and remaining an employee of the entity over a specified time period); and • including the impact of any non-vesting conditions (for example, the requirement for employees to save). Non-market performance and service conditions are included in assumptions about the number of options that are expected to vest. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. In addition, in some circumstances employees may provide services in advance of the grant date and therefore the grant date fair value is estimated for the purposes of recognising the expense during the period between service commencement period and grant date. At the end of each reporting period, the Company revises its estimates of the number of options that are expected to vest based on the non-market vesting conditions. It recognises the impact of the revision to original estimates, if any, in the profit and loss, with a corresponding adjustment to equity. When the options are exercised, the Company issues new shares or shares held by the JKX Employee Benefit Trust. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium. The grant by the Company of options over its equity instruments to the employees of subsidiary undertakings in the group is treated as a capital contribution. The fair value of employee services received, measured by reference to the grant date fair value, is recognised over the vesting period as an increase to investment in subsidiary undertakings, with a corresponding credit to equity in the parent entity financial statements. The social security contributions payable in connection with the grant of the share options is considered an integral part of the grant itself, and the change will be treated as a cash-settled transaction. The rules regarding the scheme are described in the Remuneration Report on pages 98 and 115 and in note I on share based payments. JKX Employee Benefit Trust The JKX Employee Benefit Trust was established in 2013 to hold ordinary shares purchased to satisfy various new share scheme awards made to the employees of the Company which will be transferred to the members of the scheme on their respective vesting dates subject to satisfying the performance conditions of each scheme. The trust has been consolidated in the Group financial statements in accordance with IFRS 10. The cost of shares temporarily held by the trusts are reflected as treasury shares and deducted from equity. Leasing Rentals payable under operating leases are charged to the profit and loss account on a straight-line basis over the term of the relevant lease. The Company has no finance leases. Financial instruments Financial assets and financial liabilities are recognised on the Company’s balance sheet when the Company becomes party to the contractual provisions of the instrument. JKX Oil & Gas plc Annual Report 2014
176 Notes to the Company financial statements
Derivative financial instruments The Company accounts for derivative financial instruments in line with FRS 29 – ‘Financial Instruments: Disclosures’ and FRS 26 – ‘Financial Instruments: Recognition and Measurement’. Any such derivative was initially recorded at fair value on the date at which the contract was entered into and subsequently re-measured at fair value on subsequent reporting dates. A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expires. Fair value is the amount for which a financial asset, liability or instrument could be exchanged between knowledgeable and willing parties in an arm’s length transaction. It is determined by reference to quoted market prices adjusted for estimated transaction costs that would be incurred in an actual transaction, or by the use of established estimation techniques such as option pricing models and estimated discounted values of cash flows. Convertible bonds due 2018 The fair value of the embedded derivative associated with the convertible bond has been calculated at inception and changes in the fair value at each reporting date are recognised in profit or loss. Cash at bank and in hand Cash at bank and in hand comprise cash in hand and current balances with banks and similar institutions, which are readily convertible to known amounts of cash. Cash is short-term with an original maturity of less than 3 months, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Restricted cash Restricted cash is disclosed separately in the notes and denoted as restricted when it is not under the exclusive control of the Company. Financial liabilities and equity Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities. Equity instruments issued by the Company are recorded at the proceeds received net of direct issue costs. Dividends Interim dividends are recognised when they are paid to the Company’s shareholders. Final dividends are recognised when they are approved by shareholders. Treasury shares The consideration paid for shares repurchased by the Company and held as treasury shares is recognised as a reduction in shareholders’ funds through the profit and loss account reserve. No gain or loss is recognised in the profit and loss account. Related parties The Company is exempt under the terms of Financial Reporting Standard 8, Related Party Transactions, from disclosing related party transactions with wholly owned entities of the JKX Group. Cash flow statement The Company financial statements are included within the publicly available consolidated financial statements of the Group. Consequently, the Company has not presented a cash flow statement. Tax Current tax, including UK corporation tax and foreign 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 Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events have occurred at that date that will result in an obligation to pay more, or a right to pay less or to receive more tax. The exception to this is that deferred tax assets are recognised only to the extent that the Directors consider that it is more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted. Strategic report Governance Financial statements 2-79 80-119 120-182 177
Deferred tax is measured on an undiscounted basis at the tax rates that are expected to apply in the periods in which timing differences reverse, based on tax rates and laws enacted or substantively enacted at the balance sheet date.
B. Fixed asset investments The net book value of unlisted fixed asset investments comprises: 2014 2013 $000 $000 Cost At 1 January 8,269 117 Additions – 8,152 At 31 December 8,269 8,269
Net book amount
At 31 December 8,269 8,269
During 2012, JKX Oil & Gas (Jersey) Limited was incorporated in Jersey as a wholly-owned subsidiary. Its sole activity is to hold the bonds that completed in February 2013 and which provided finance for the JKX Group of companies (see note 13 to the Group Financial Statements). At 31 December 2014, the principal subsidiary undertakings of JKX Oil & Gas plc were:
% held Country of (ordinary shares) incorporation and area of operation
EuroDril Limited Oil & gas exploration, production and services 100.00 UK
JKX Oil & Gas (Jersey) Limited Finance 100.00 Jersey
Riverside Energy Kft Oil & gas exploration and production 100.00 Hungary
JKX Services Limited* Services 100.00 UK
Poltava Petroleum Company Oil & gas exploration and production 100.00 Ukraine
Yuzhgazenergie LLC Oil & gas exploration, production and services 100.00 Russia
* Held directly by JKX Oil & Gas plc. All other companies are held through subsidiary undertakings.
In the opinion of the Directors the carrying value of the investments is supported by their underlying net assets.
C. Debtors 2014 2013 $000 $000
Amounts falling due within one year Amounts owed by group undertakings 58,209 47,075 Other debtors 8 31 Prepayments and accrued income 72 119 58,289 47,225 Amounts falling due after more than one year Amounts owed by group undertakings 368,519 548,874 $97.5m (2013: $549.0m) owed by subsidiary undertakings bears interest based on LIBOR plus a mark-up and is not secured. $271.0m (2013: nil) owed by subsidiary undertakings bears no interest as these loans were classified as quasi-equity. During the year the Company recognised a provision for impairment of $129.2m (2013: $nil) related to intercompany loan receivables from various subsidiaries, of which, $11.1m (2013: $nil) and $118.1m (2013: $nil) relate to amounts falling due within one year and after more than one year respectively. Following recent impairments to some of the assets held by subsidiaries (see note 5), the Company expects that the carrying value of the intercompany loan receivable may not be recoverable as these entities may not generate sufficient future profits from the impaired assets to settle the amounts owing and accordingly, these amounts have been provided for. JKX Oil & Gas plc Annual Report 2014
178 Notes to the Company financial statements
D. Deferred tax
2014 2013 $000 $000 At 1 January – 615 Profit and loss account transfers – (615) At 31 December – –
2014 2013 Unprovided deferred tax $000 $000
Accelerated capital allowances 3 2 Other timing differences 60 125 63 127
Neither the deductible timing differences nor the tax losses expire under current tax legislation. Deferred tax assets have not been recognised in respect of the unprovided deferred taxation items because it is not probable that future taxable profit will be available to utilise these deductible timing differences. The UK corporation tax rate changes announced in the 2012 Autumn Statement and March 2013 Budget were substantively enacted as part of the Finance Bill 2013 on 2 July 2013. These include reductions to the main rate of UK corporation tax to 21% for the financial year commencing 1 April 2014 and 20% for the financial year commencing 1 April 2015. The impact of the rate reduction is not expected to have a material impact on provided and unprovided UK deferred taxation.
E. Cash and cash equivalents 2014 2013 $000 $000 Cash at bank and in hand 11,643 12,624 Restricted cash 6 6 Total 11,649 12,630
F. Creditors 2014 2013 $000 $000 Amounts falling due within one year Amounts owed to group undertakings 114,828 101,825 Corporation tax – 1,520
Other creditors 530 – Accruals and deferred income 523 2,814 115,881 106,159
Amounts falling due after more than one year Derivative financial instruments 1,037 10,109 Amounts owed to group undertakings 39,140 40,552 Strategic report Governance Financial statements 2-79 80-119 120-182 179
In 1 year or less, or on demand 2-5 years 31 December 2014 $000 $000 Maturity of financial liabilities Amounts owed to group undertakings 114,828 39,140
31 December 2013 Maturity of financial liabilities Amounts owed to group undertakings 101,825 40,552
Non-current derivative financial instruments Convertible bonds due 2018 – embedded derivatives On 19 February 2013 the Company successfully completed the placing of $40m of guaranteed unsubordinated convertible bonds with institutional investors which are due 2018 raising cash of $37.2m net of issue costs. The Company’s wholly-owned direct subsidiary, JKX Oil & Gas (Jersey) Limited holds the bonds raised to finance the JKX Group. The Company unconditionally guaranteed all the performance conditions including the conversion option. The Bonds have an annual coupon of 8 per cent per annum payable semi-annually in arrears. The Bonds are convertible into ordinary shares of the Company at any time from 1 April 2013 up until seven days prior to their maturity on 19 February 2018 at a conversion price of 76.29 pence per Ordinary Share, unless the Company settles the conversion notice by paying the Bondholder the Cash Alternative Amount (see below). Interest, after the deduction of issue costs and the inclusion of the redemption premium, will be charged to the income statement using an effective rate of 18.0%. Cash Alternative Amount At the option of the Company, the conversion notice in respect of the Bonds can be settled in cash rather than shares, the Cash Alternative Amount payable is based on the Volume Weighted Average Price of the Company’s shares prior to the conversion notice. Coupon Makewhole Upon conversion of a Bond prior to the 19 February 2015 the Company is required to pay an amount of interest equal to the aggregate interest which would have been payable on the principal amount of the Bond if such Bond had been outstanding until 19 February 2015. Bondholder Put Option Bondholders have the right to require the Company to redeem the following number of Bonds on the following dates together with accrued and unpaid interest to (but excluding) such dates:
Redemption Date Maximum number of Bonds to be redeemed 19 February 2016 25% of the Bonds, having an aggregate principal amount of $10,000,000 19 February 2017 all outstanding Bonds Company Call Option The Company can redeem the Bonds early in full but not in part at their principal amount together with accrued interest at any time on or after 19 February 2017 if the Volume Weighted Average Price of the Company’s shares over a specified period equal or exceed 130 per cent of the principal amount of the Bonds; or if the aggregate principal amount of the bonds outstanding is less than 15% of the aggregate principal amount originally issued. Fixed exchange rate The Sterling-US Dollar exchange rate is fixed at £1/$1.5809 for the conversion and other features. JKX Oil & Gas plc Annual Report 2014
180 Notes to the Company financial statements
G. Called up share capital and reconciliation of movements in shareholders’ funds Share capital, denominated in Sterling, was as follows:
2014 2014 2014 2013 2013 2013 Number £000 $000 Number £000 $000 Authorised Ordinary shares of 10p each 300,000,000 30,000 300,000,000 30,000 Allotted, called up and fully paid Opening balance at 1 January 172,125,916 17,212 26,666 172,070,477 17,207 26,657 Exercise of share options – – – 55,439 5 9 Closing balance at 31 December 172,125,916 17,212 26,666 172,125,916 17,212 26,666
Of which the following are shares held in treasury: Treasury shares held at 1 January and 402,771 40 77 402,771 40 77 31 December
The Company purchased no treasury shares during 2014 (2013: none). There were no treasury shares used in 2014 (2013: none) to settle share options. There are no shares reserved for issue under options or contracts. As at 31 December 2014 the market value of the treasury shares held was $0.1m (2013: $0.5m). Movements in the shareholders’ funds during the year were as follows:
Share Total Called up premium Other Profit and shareholders’ share capital account reserves loss account1 funds $000 $000 $000 $000 $000 At 1 January 2013 26,657 97,476 (503) 322,573 446,203 Share option charge – – – 1,544 1,544 Profit for the financial year – – – 16,530 16,530 Issue of ordinary shares 9 – – – 9 Treasury shares1 – – – (4,001) (4,001) At 31 December 2013 26,666 97,476 (503) 336,646 460,285
At 1 January 2014 26,666 97,476 (503) 336,646 460,285 Share option charge – – – 285 285 Loss for the financial year – – – (169,835) (169,835) At 31 December 2014 26,666 97,476 (503) 167,096 290,735
1 Shares held by JKX Employee Benefit Trust. Foreign Capital Currency Redemption Translation Reserve reserve Total Other reserves $000 $000 $000
At 1 January 2014 and 31 December 2014 (587) (1,090) (503)
H. Profit and loss The Company has elected to take the exemption under section 408 of the Companies Act 2006, to not present the parent company profit and loss account. The net loss for the parent company was $169.8m (2013: $16.5m profit). The foreign currency translation reserve comprises differences arising from the retranslation of the Company balance sheet from £ Sterling into US Dollars in 2006.
I. Share-based payments Share options Share options are granted to Executive Directors and senior management based on performance criteria. The scheme rules are described in the Directors’ Remuneration Report and repeated below. All share-based payments are equity settled. Strategic report Governance Financial statements 2-79 80-119 120-182 181
At 31 December 2014, there were outstanding options under various employee share option schemes, exercisable during the years 2015 to 2024 (2013: 2014 to 2023), to acquire 10,854,700 (2013: 6,549,300) shares of the Company at prices ranging from £0.00 to £3.15 per share (2013: £0.00 to £3.15). The vesting period for 10,854,700 of the share options is 3 years, with an exercise period of 7 years making a 10 year maximum term. The following table illustrates the number and weighted average exercise prices (‘WAEP’) of, and movements in, share options during the year. 2014 2014 2013 2013 Number WAEP Number WAEP Outstanding as at 1 January 6,549,300 65.12p 3,499,863 110.37p Granted during the year 4,974,700 37.99p 4,198,900 45.60p Lapsed during the year (669,300) 177.48p (767,000) 150.35p Surrendered during the year – – (327,024) 109.97p Exercised during the year – – (55,439) – Outstanding at 31 December 10,854,700 45.75p 6,549,300 65.12p
Exercisable at 31 December 158,000 151.50p 240,500 122.86p
For the share options outstanding as at 31 December 2014, the weighted average remaining contractual life is 8.5 years (2013: 8.5 years). During the year share options were granted in accordance with the share option schemes, the Discretionary Share Option Scheme (‘DSOS’) and the Performance Share Plan (‘PSP’), which were introduced in 2010. They reflect the best practice aspects recommended by the Association of British Insurers following the publication of their guidelines in March 2001 (the ‘ABI Guidelines’). 2014 Share Option Schemes DSOS The DSOS is made up of two parts. Options to acquire ordinary shares in the Company granted under Part A are ‘Approved Options’ and options to acquire Shares granted under Part B of the DSOS are ‘Unapproved Options’. No consideration shall be payable for the grant of an Option. 3,162,900 (2013: 2,715,500) options were granted under DSOS in 2014. The weighted average exercise price of options granted under DSOS is 59.75p (2013: 70.5p). For these options to vest there has to be an increase in the Group’s Earnings Per Share (‘EPS’) growth over the performance period measured over the 3 consecutive calendar years commencing from the date the options were granted. The weighted average fair value of options granted during the year under the DSOS was 24.01p per option (2013: 18.01p). PSP PSP are granted solely to Executive Directors. Executive Directors will receive awards under the 2010 Performance Share Plan in the form of nil cost options. No consideration is required to be paid for the grant or exercise of an Option. 1,811,800 (2013: 1,483,400) options were granted under PSP in 2014. The PSP options provide a conditional right to acquire shares at nil cost subject to the satisfaction of the performance conditions and continued employment with the Group. For these options to vest a comparison is performed between the Group’s TSR against the FTSE 250 index (half the options) and the All-Share Oil & Gas Producers index (other half of options). The weighted average fair value of options granted during the year under the PSP was 26.00p per option (2013: 18.01p). Fair value of share options granted The fair value of options granted under the DSOS is estimated as at the date of grant using a variance of the Binomial model, taking into account terms and conditions upon which the options are granted, which includes the performance condition related to the Company’s earnings per share directly. No dividends are paid on shares under the scheme prior to exercise. The fair value of options granted under the PSP is estimated as at the date of grant using a variant of the Monte Carlo model, taking into account the terms and conditions upon which the options are granted, which includes the performance condition related to the TSR directly. No dividends are paid on shares under the scheme prior to exercise. The total share based payment charge for the year was $0.3m (2013: $1.5m). JKX Oil & Gas plc Annual Report 2014
182 Notes to the Company financial statements
The following table lists the inputs to the model used for the options granted in the years ended 31 December 2014 and 31 December 2013. The expected future volatility has been determined by reference to the historical volatility.
2014 2013 2014 2013 DSOS DSOS PSP PSP Dividend yield 0.0% 0.0% 0.0% 0.0% Expected share price volatility 43% 44% 44% 44% Risk free interest rate 1.5% 1.0% 1.2% 0.3% Exercise price 59.75p 70.5p 0.0p 0.0p Expected life of option (years) 3.9 4.3 3.0 3.0 Weighted average share price 24.10p 66.92p 26.0p 66.92p
Bonus scheme The full details of the bonus performance criteria for Directors and senior employees and the bonus earned is explained in the Remuneration Report on pages 98 to 115.
J. Auditors’ remuneration 2014 2013 $000 $000 Audit services Fees payable to the Company’s auditors for the audit of the parent company 40 40
K. Directors’ remuneration The remuneration of the Directors is disclosed in the audited section of the Remuneration Report on pages 98 to 115, which form part of these financial statements.
L. Dividends No interim dividend was paid for 2014 (2013: nil). In respect of the full year 2014, the directors do not propose a final dividend (2013: no final dividend paid).
M. Operating lease commitments At the reporting date, the Company has annual lease agreements in respect of properties for which the payments extend over a number of years. 2014 2013 $000 $000 Annual commitments under non-cancellable operating leases expiring: After five years – land and buildings 529 556 183 General information
Glossary Directors and advisers
2P reserves Proved plus probable Directors 3P reserves Proved, probable and possible Nigel Moore P50 Reserves and/or resources estimates Dr Paul Davies that have a 50 per cent probability of Cynthia Dubin being met or exceeded Martin Miller Peter Dixon AFE Authorisation For Expenditure Dipesh Shah OBE AIFR All Injury Frequency Rate Lord Oxford Bcf Billion cubic feet Alastair Ferguson Bcm Billion cubic metres Richard Murray bcpd Barrel of condensate per day Company Secretary boe Barrel of oil equivalent Capita Company Secretarial Services Limited boepd Barrel of oil equivalent per day bopd Barrel of oil per day Registered office bpd Barrel per day 6 Cavendish Square, London W1G 0PD bwpd Barrels of water per day Registered in England Number: 3050645 cfpd Cubic feet per day EPF Early Production Facility Registrars GPF Gas Processing Facility Equiniti HHN HHE North Kft Aspect House, Spencer Road Hryvna The lawful currency of Ukraine Lancing, West Sussex BN99 6DA HSECQ Health, Safety, Environment, Solicitors Community and Quality Allen & Overy LLP KPI Key Performance Indicator One Bishops Square, London E1 6AD LIBOR London InterBank Offered Rate LPG Liquefi ed Petroleum Gas Principal bankers LTI Lost Time Injuries Bank of Scotland plc The Mound, Edinburgh EH1 1YZ Mbbl Thousand barrels Mboe Thousand barrels of oil equivalent Independent auditors Mcf Thousand cubic feet PricewaterhouseCoopers LLP MMcfd Million cubic feet per day Chartered Accountants and Statutory Auditors MMbbl Million barrels 1 Embankment Place, London WC2N 6RH
MMboe Million barrels of oil equivalent Financial advisors PPC Poltava Petroleum Company Smith Square Partners LLP Roubles The lawful currency of Russia 21 St James’s Square, London SW1Y 4JZ sq. km Square kilometre Stockbrokers TD Total depth Stifel Nicolaus Europe Limited $ United States Dollars 150 Cheapside, London EC2V 6ET UAH Ukranian Hryvna US United States VAT Value Added Tax YGE Yuzhgazenergie LLC
Conversion factors 6,000 standard cubic feet of gas = 1 boe JKX Oil & Gas plc Annual Report 2014
184 Notes 185
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JKX Oil & Gas plc Annual Report 2014
JKX Oil & Gas plc, 6 Cavendish Square, London W1G 0PD +44 (0)20 7323 4464