JKX Oil & Gas plc JKX Oil & Gas plc JKX Oil & Gas plc Annual Report Annual Report 2016 2016 The Strategic Report (published with this All the details document) covers a business overview, (including the Chairman’s and Chief Executive’s statements), the Company’s strategy, (objective, business model and strategic priorities) and performance review, you’ll need to track (Regional operations update, Financial Review, Corporate Social Responsibility and Risk summary). our progress GOVERNANCE FINANCIAL STATEMENTS Our responsibilities Our performance The Board is committed to the highest Our Group and parent company standards of governance principles and financial statements reflect JKX’s boardroom behaviour. challenging and transformational year. P33 P80 JKX Oil & Gas plc 6 Cavendish Square, London W1G 0PD +44 (0)20 7323 4464 JKX Oil & Gas plc Annual Report JKX Oil & Gas plc Annual Report In this report Governance Financial statements Designed and produced by DB&CO www.dbandco.co.uk, Board composition 34 Group in association with Robson Dowry and Ability Software Consultants. Board photography by Larry Bray and Harriet Birt. Corporate governance 36 Independent Auditors’ Report 74 Printed in the UK by Pureprint Group Ltd. Audit Committee Report 45 Consolidated income statement 80 Directors’ Remuneration Report 51 Consolidated statement of comprehensive income 81 Paper, Mohawk Everyday Digital uncoated items are manufactured with wind Directors’ report – other disclosures 69 Consolidated statement of financial position 82 power by offsetting emissions from purchased electricity with Renewable Energy Consolidated statement of changes in equity 83 Certificates (RECs) from Green-e certified wind power projects. Mohawk Everyday Digital items are certified by the Rainforest Alliance. Consolidated statement of cash flows 84 FSC certification ensures responsible use of forest resources. Notes to the consolidated financial statements 85 Company Independent Auditors’ Report 121 Company statement of financial position 123 Company statement of changes in equity 124 Notes to the Company financial statements 125 In the Strategic Report The Strategic Report (published with this document) covers a business overview, (including the Chairman’s and Chief Executive’s statements), the Company’s strategy, (objective, business model and strategic priorities) and performance review (Regional operations update, Financial Review, Corporate Social Responsibility and Risk summary). 33 JKX Oil & Gas plc Annual Report 2016 OVERVIEW Governance and our performance 2016 began with major changes at the board level, and considerable uncertainty with regards to our future. In the face of this uncertainty, we have built a Board and senior management team with extensive experience of working at the highest levels in Ukraine and Russia, and we enter 2017 with optimism. The Governance section on pages 34 to 73 demonstrates the Board’s commitment to the highest standards of governance, transparency and engagement with all of the Company’s shareholders and stakeholders. JKX’s financial performance presented in the Group financial statements on pages 80 to 120 reflects a year of challenging transformation. This was a necessary step to restore shareholder value to JKX, which the Board has committed to shareholders to achieve through transparent communication, by increasing efficiency and production, and by reducing needless costs. Paul Ostling Non Executive Chairman 34 JKX Oil & Gas plc Annual Report 2016 GOVERNANCE Board composition Paul Ostling Non Executive Chairman Appointed – 28 January 2016 Experience – worked at Ernst & Young for 30 years working with major entities listed on the New York and London Stock Exchanges and holding senior management positions including Global Executive partner from 1995 to 2003 and Global Chief Operating Officer from 2003 to 2007. In addition, for 15 years, he was one of several partners leading the development and coordination of the firm's operations throughout Russia, Ukraine, the CIS and Eastern Europe. From 2007 to 2012, Paul served as chairman of the audit committee of Mobile TeleSystems OJSC (NYSE). Other board and leadership roles include: Brunswick Rail (2012 to 2016), Uralkali (2011 to present), PromSvyazBank (2008 to 2010), UralChem (2008 to 2011) and DME Ltd (Domodedovo) (2011 to 2012), Kungur Oilfield Equipment & Services (2007 to 2012, Chief Executive 2007 to2009). In 2011, Paul was named "Independent Director of the Year" by the Association of Independent Directors in Russia. Paul is a proficient Russian speaker. Tom Reed Chief Executive Appointed – 28 January 2016 Experience – was a founder and Chief Financial Officer of FTSE-listed Ruspetro plc from December 2011 to February 2015, which included a period as acting Chief Executive from July to December 2013. For a number of years Tom worked as a private equity investor and M&A advisor in Moscow and in Russia, Ukraine and other CIS countries on the origination, trading and structuring of equity, derivatives and distressed debt. In addition, he served as an advisor to VR Capital from 2001 to 2007 and to Raven Russia from 2005 to 2007. Tom is a member of the Society of Petroleum Engineers and speaks fluent Russian. Russell Hoare Chief Financial Officer Appointed – 28 January 2016 Experience – has more than 15 years’ experience working in Russia, Ukraine and Eastern Europe holding a variety of CFO roles. This includes acting as CFO from 2011 to 2016 at Russ Outdoor, the leading out-of-home advertising company in Russia, with assets across Russia and Ukraine. In addition, he spent 10 years in News Corporation, based between London and Moscow, with responsibility for many of the company's media assets in Russia and Eastern Europe. Russell has more than 10 years’ experience of managing the financial operations of Ukrainian businesses and working with local government and authorities in addition to serving as an internal auditor with LASMO plc, a London-based oil and gas exploration company with emerging market assets. Russell qualified as a UK Chartered Accountant with Arthur Andersen in 1996. Vladimir Tatachuk Non Executive Director Appointed – 28 January 2016 Experience – has been the Chairman and Chief Executive Officer at Proxima Capital Group since 2013. From 2011 to 2013 Mr Tatarchuk served as First Deputy Chairman of the Executive Board and Head of Corporate-Investment Banking at Alfa Bank. From 1998 to 2011 he held many posts at Alfa Bank including Head of Corporate Banking, Co- Head of Corporate-Investment Banking, Deputy Chairman of the Executive Board, Deputy Head of Corporate Finance and Vice President, and also served on the Board of Directors of Alfa Bank in Ukraine. Mr Tatarchuk holds a degree in law from the Lomonosov Moscow State University and a diploma in executive management from the leading international business school INSEAD. 35 JKX Oil & Gas plc Annual Report 2016 Vladimir Rusinov Non Executive Director Appointed – 28 January 2016 Experience – joined Proxima Capital Group in 2015 as Managing Director. Prior to that Mr Rusinov worked at leading Russian and international investment banks for 20 years with a particular focus on oil and gas in Russia and the CIS, including as Managing Partner at VNR Capital, an investment banking advisory firm, Managing Director and Head of Oil and Gas at Renaissance Capital, Director at ABN AMRO Oil and Gas Group, Vice President in the European Energy & Power Group at Merrill Lynch and an associate in M&A, Corporate Finance and European Energy & Power Departments at Goldman Sachs International. Mr Rusinov holds a MA (Hons) Degree in International Economics from Kiev State University and MBA Degree from Nijenrode Business University, the Netherlands School of Business. Bernie Sucher Non Executive Director Appointed – 1 April 2016; resigned and reappointed 28 June 2016 Experience – is currently Chairman of UFG Asset Management. Previous experience includes leading Merrill Lynch's re-entry into Russia, becoming country head of Bank of America, co-founding the investment bank Troika Dialog and working with Cresvale, Goldman Sachs, and EF Hutton in New York, London, Hong Kong, and Tokyo. Bernie holds a BA from the University of Michigan and is a graduate of Columbia University's Senior Executive Program. Bernie is the Senior Independent Director, the Chairman of the Remuneration Committee and a member of the Nomination and Audit Committees. Alan Bigman Non Executive Director Appointed – 1 April 2016; resigned and reappointed 28 June 2016 Experience – is currently a director of Sanchez Production Partners and is co-founder and Director of VTX Energy LLC in the United States. Previously, he served as Chief Financial Officer of LyondellBasell Industries, a leading global chemicals company, and held senior management positions at TNK-BP and SUAL. Alan obtained a Masters of Business Administration degree with High Distinction from Harvard Business School in June 1996 and a BA magna cum laude from Yale University in May 1989. Alan is Chairman of the Audit Committee and a member of the Nomination and Remuneration Committees. 36 JKX Oil & Gas plc Annual Report 2016 GOVERNANCE Corporate governance Governance principles The Company has a premium listing on the London Stock Exchange and is subject to the Listing Rules of the UK Listing Authority. The Board is committed to applying the principles of the UK Corporate Governance Code (‘the Code’) and relevant institutional shareholder guidelines. This section explains in more detail how