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JKX Oil & Gas Plc Annual Report 2014

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JKX Oil & Gas Plc Annual Report 2014 JKX Annual 2014 Report Oil plc & Gas 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.
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