TIDMZOL
RNS Number : 7976O
Zoltav Resources Inc
22 May 2018
22 May 2018
Zoltav Resources Inc.
("Zoltav" or the "Company")
Final Results for the Year Ended 31 December 2017
Zoltav (AIM: ZOL), the Russia-focused oil and gas exploration
and production company, announces final results for the year ended
31 December 2017.
Financial Highlights
-- Revenues from production declined, in line with expectations,
by 10% to RUB 1.79 billion (USD 30.68 million) (2016: RUB 1.99
billion (USD 29.69 million))
-- EBITDA increased by 5% to RUB 888 million (USD 15.22 million)
(2016: RUB 846 million (USD 12.62 million))
-- EBITDA margin increased to 50% (2016: 43%)
-- Total cost of sales remained steady at RUB 1.15 billion (USD
19.71 million) (2016: RUB 1.15 billion (USD 17.16 million))
-- G&A costs reduced significantly by 38% to RUB 185 million
(USD 3.17 million) (2016: RUB 299 million (USD 4.46 million)),
mostly achieved through administrative staff reduction, cutting
non-strategic costs and maintenance optimisation
-- Operating profit increased by 2% to RUB 450 million (USD 7.71
million) (2016: RUB 441 million (USD 6.58 million))
-- Impairment allowance for RUB 1.69 billion (USD 29.34 million)
taken in respect of the Koltogor Licences for which development is
currently on hold, leading to a loss before tax of RUB 1.43 billion
(USD 24.51 million) (2016: RUB 197 million (USD 2.94 million))
-- Net loss including the impairment allowance for the Koltogor
Licences was RUB 1.27 billion (USD 21.76 million) (2016: RUB 97
million net profit (USD 1.45 million))
-- Net profit excluding the impairment allowance for the
Koltogor Licences increased significantly by 87% to RUB 182 million
(USD 3.12 million) (2016: RUB 97 million net profit (USD 1.45
million))
-- Reduced borrowings further through repayment of RUB 300
million of PJSC Sberbank debt (USD 5.21 million) - reducing the
principal amount to RUB 1.56 billion (USD 27.08 million) at 31
December 2017 (RUB 1.86 billion (USD 30.66 million) as at 31
December 2016)
-- Net cash generated from operating activities increased by 1%
to RUB 728 million (USD 12.64 million) (2016: RUB 719 million (USD
11.85 million))
-- Total cash at 31 December 2017 was RUB 286 million (USD 4.97
million) (31 December 2016: RUB 294 million (USD 4.85 million))
-- The Group has sufficient liquidity to fund its current
seismic programme and entered into an agreement after the year-end
with its two largest shareholders for their provision of an
unsecured loan facility of up to an aggregate USD 12 million in
further support of the exploration programme
Note: USD comparisons are provided in the above Financial
Highlights for illustrative purposes only and are calculated using
an exchange rate of:
2017: 1 USD = 58.3529 RUB
As at 31 December 2017: 1 USD = 57.6002 RUB
2016: 1 USD = 67.0349 RUB
As at 31 December 2016: 1 USD = 60.6569 RUB
Operational Highlights - Bortovoy Licence
-- Net production declined, in line with expectations, by 13% to
2.6 mmboe in 2017 (2016: 3 mmboe), made up of:
o Natural gas: 14.8 bcf (418 mmcm) or 2.5 mmboe (335.5 mtoe)
(2016: 16.8 bcf (475.8 mmcm) or 2.8 mmboe (381.9 mtoe))
o Oil and condensate: 122,962 bbls (15,663 t) (2016: 163,967
bbls (20,888 t))
-- Average net daily production was 7,075 boe/d (965 toe/d)
(2016: 8,118 boe/d (1,108 toe/d)), made up of:
o Natural gas: 40.4 bcf/d (1.15 mmcm/d) (2016: 46.0 bcf/d (1.3
mmcm/d))
o Oil and condensate: 337 bbls/d (43 t/d) (2016: 449 bbls/d (57
t/d))
-- High focus on operational efficiency maintained including the
reduction of planned plant shutdowns through use of improved
chemical agents for the treatment of gas and the re-use of light
fractions of hydrocarbons which were previously flared
-- Strategic decision to transition operational emphasis from
production to exploration, while continuing to generate cash from
Permian fields already in production - management believes there is
potential to yield substantial additional reserves and production
from Carbonian and Devonian horizons
-- Considerable 3D seismic programme over the Carbonian and
Devonian (and prospective Permian) structures in the North Mokrous
area of the Mokrousovskoye block undertaken in 2017 - preliminary
interpretation of the first 180 sq km now complete
Operational Highlights - Koltogor Licences
-- Koltogor Licences are not currently a focus of investment as
the company is channeling capex into the exploration programme on
the Bortovoy Licence
Corporate Highlights
-- Board and management changes
o Lea Verny, previously Independent Non-executive Director,
replaced Marcus Rhodes as Independent Non-executive Chairman on 22
March 2017
o Marcus Rhodes, previously Independent Non-executive Chairman
and subsequently Senior Independent Director, did not stand for
re-election at the Annual General Meeting on 23 May 2017
o Eduard Sleyn appointed as Group CEO on 15 May 2017
o Kirill Suetov appointed as Group Director of Finance on 1
January 2017
Lea Verny, Independent Non-executive Chairman, commented:
"Despite the anticipated decline in production revenues, our
rigorous commitment to cost and operational efficiencies, including
the limitation of plant shut-downs through the application of new
and improved chemical processes in the gas treatment unit, enabled
the Company to achieve a 5% increase in EBITDA to RUB 888 million
(USD 15.22 million) (2016: RUB 846 million) (USD 12.62
million)).
We took the strategic decision in 2017 to transition the
operational emphasis of the Company from production to exploration,
while continuing to generate cash from the Permian fields already
in production. Zoltav believes there is potential to yield
substantial additional reserves and production from the Carbonian
and Devonian horizons at Bortovoy which, if proven, would have a
transformational impact on the size of the Bortovoy asset.
A considerable 3D seismic acquisition programme was undertaken
in these horizons in 2017 and the exploration programme has
continued to gather pace in the year to date including with the
preliminary interpretation of data and the strengthening of the
technical team in support of the work programme. We look forward to
reporting further progress as the programme advances."
The full annual report is available to download from the
Investor Relations section of the Company's website at
www.zoltav.com.
Enquiries:
Zoltav Resources Inc. Tel. +44 (0)20 7830 9704
Lea Verny, Non-executive Chairman (via Vigo Communications)
SP Angel Corporate Finance LLP (Nomad Tel. +44 (0)20 3470 0470
and Joint Broker)
John Mackay, Jeff Keating, Soltan Tagiev
Panmure Gordon (Joint Broker) Tel. +44 (0)20 7886 2500
Adam James or Tom Salvesen
Vigo Communications Tel. +44 (0)20 7830 9704
Ben Simons or Kate Rogucheva zoltav@vigocomms.com
Market Abuse Regulation (MAR) Disclosure
Certain information contained in this announcement would have
been deemed inside information for the purposes of Article 7 of
Regulation (EU) No 596/2014 until the release of this
announcement.
About Zoltav
Zoltav is an oil and gas exploration and production company
focused on Russia.
Zoltav holds the Bortovoy Licence in the Saratov region of South
Western Russia, a 3,215 square kilometre area along the northern
margin of the Pre-Caspian basin, one of the largest hydrocarbon
basins in the CIS.
The Bortovoy Licence contains a number of productive gas fields,
a processing plant and significant exploration prospectivity. It
holds Proved plus Probable reserves of 750 bcf of gas and 3.8
mmbbls of oil and condensate. In 2017, the Bortovoy Licence
produced 14.8 bcf of natural gas and 122,962 bbls of oil and
condensate for sale (approximately 2.6 mmboe in total).
An exploration programme is underway on the Bortovoy Licence to
assess the resource potential of the deeper Carbonian and Devonian
structures.
Zoltav also holds the Koltogor E&P Licence, a 528 square
kilometre area in the Khantiy-Mansisk Autonomous Okrug of Western
Siberia. Development activities on the Koltogor Licences are
currently on hold.
For further information on Zoltav or to sign up for our news
alert service visit: www.zoltav.com.
Financial report
Chairman's statement
Zoltav entered an exciting new phase in 2017 which has continued
to gather pace in the year to date.
Management took the strategic decision in 2017 to transition the
operational emphasis of the Company from production to exploration,
while continuing to generate cash from the Permian fields already
in production. Zoltav believes there is potential to yield
substantial additional reserves and production from the Carbonian
and Devonian horizons at Bortovoy which, if proven, would have a
transformational impact on the size of the Bortovoy asset. The
availability of modern seismic imaging, drilling and production
technologies has enabled the Company to develop a work programme
targeting these deeper structures which lie approximately
3,500-5,000 m below surface.
A considerable 3D seismic acquisition programme was undertaken
in 2017 over the Carbonian and Devonian (and also prospective
Permian) structures in the North Mokrous area of the Mokrousovskoye
block, and has continued into 2018, using first-class contractors
to acquire, process and interpret data. Preliminary interpretation
of the first 180 sq km has been completed, with encouraging results
announced in March 2018; and up to a further 536 sq km of 3D
seismic data (of which 140 sq km has been completed in the year to
date prior to the autumn weather pause) is anticipated to be
acquired through the remainder of this year. Sufficient
interpretation of these data is expected to be completed in time to
allow for the positioning and drilling of the first Devonian
exploration well, on North Mokrous, now expected in Q1 2019.
In support of the Company's work programme, we were delighted to
announce earlier this month the recruitment of a team of highly
accomplished former Bashneft and TNK-BP technical executives, led
by Yuri Krasnevsky who became Zoltav's Director for Geology and
Field Development. They and the rest of the technical staff and
consultants are focused on growing the resource and production
potential of the Bortovoy Licence.
In the Permian Basin, the horizon from which gas and oil is
currently produced on the Bortovoy Licence, varying reservoir
thickness and underperforming wells on the Karpenskoye and
Zhdanovskoye fields in 2017 caused management to suspend the
drilling programme in this structure until the interpretation of
high quality 3D seismic data is completed - and additional 3D
seismic data is acquired - during the course of 2018.
As a result of the suspension of the Permian Basin drilling
programme, revenues from production declined in 2017, in line with
management's expectations, by 10% to RUB 1.79 billion (2016: RUB
1.99 billion); while the net production(1) from the Western Gas
Plant was an average of 7,075 boe/d (965 toe/d) in 2017, a decline
of approximately 13% compared to 8,118 boe/d (1,108 toe/d) in
2016.
Despite this, however, as a result of Zoltav's rigorous
commitment to cost and operational efficiencies, including the
limitation of plant shut-downs through the application of new and
improved chemical processes in the gas treatment unit, the Company
was able to achieve a 5% increase in EBITDA(2) to RUB 888 million
(2016: RUB 846 million). The EBITDA margin increased to 50%
compared to 43% in 2016. Net cash flow from operating activities
increased slightly to RUB 728 million (2016: RUB 719 million).
In light of the strategic shift to capital intensive exploration
at Bortovoy, development activities on the Koltogor Licences in
Western Siberia remain on hold. As a result, the Company made an
allowance in the 2017 accounts for the full impairment of this
asset (RUB 1.69 billion), which caused a net loss of RUB 1.27
billion (2016: RUB 97 million net profit). Excluding this non-cash
item, the Company generated a much-improved net profit of RUB 182
million (an increase of 87%).
Efficient procurement, cost-cutting initiatives and zero-based
budgeting allowed Zoltav to generate impressive cost savings across
the business, notably a 38% decrease (RUB 114 million) in
administrative and operating expenses and a 75% decrease (RUB 107.6
million) in other expenses of non-operating companies of the Group.
These cost reductions in 2017 are mostly recurring and accordingly
this positions the Company very attractively to leverage the
benefits of a future increase in production.
Notwithstanding the anticipated decline in production revenues
through 2018 as a result of the suspension of the Permian Basin
drilling programme, the Company remains in good financial health,
servicing its debt commitments and advancing this exciting
exploration programme targeting the deeper structures - a programme
in support of which, as announced in April 2018, the Company's two
largest shareholders have decided to provide an unsecured loan
facility of up to an aggregate US$ 12 million.
We look forward to reporting further progress as the exploration
programme progresses.
Lea Verny
Non-executive Chairman
21 May 2018
Note:
(1) Net production is the volume actually sold to customers. It
comprises all extracted hydrocarbons, less own consumption and
losses. The Company uses net production volumes throughout the 2017
annual report instead of the previously used total extracted
volumes.
(2) The Company historically calculates consolidated EBITDA as
Operating profit added back with Depreciation, Depletion and
Amortization
Review of operations
Production
Production from Zoltav's Western Gas Plant on the Bortovoy
Licence, Saratov, averaged 7,075 boe/d (965 toe/d) during 2017, a
decline of 13% when compared to 8,118 boe/d (1,108 toe/d) in 2016.
This comprised average production of 40.4 bcf/d (1.15 mmcm/d) of
natural gas and 337 bbls/d (43 t/d) of oil and condensate (2016:
46.0 bcf/d (1.3 mmcm/d) of natural gas and 449 bbls/d (57 t/d) of
oil and condensate).
Overall in 2017, the Company produced 2.6 mmboe (2016: 3 mmboe)
of gas and liquids, made up of:
- Natural gas: 14.8 bcf (418 mmcm) or 2.5 mmboe (335.5 mtoe)
(2016: 16.8 bcf (475.8 mmcm) or 2.8 mmboe (381.9 mtoe))
- Oil and condensate: 122,962 bbls (15,663 t) (2016: 163,967 bbls (20,888 t))
The decline in production volumes during 2017 resulted from the
underperformance of certain wells, as announced in the Company's
half-year report in September 2017. Karpenskoye Well 117 was shut
down in early January 2017 due to water cut; the newly drilled
Zhdanovskoye Well 108 was put on production in March 2017 and is
delivering materially lower gas production than initially
anticipated; the newly drilled Zhdanovskoye Well 30 sidetrack, as
announced in October 2017, was unsuccessful and is contributing
lower than expected volumes; and water intrusion occurred on
Zhdanovskoye Well 8 resulting in the anticipated shutdown of this
well in July 2018.
The negative impact of these wells caused an aggregate reduction
in production in 2017 of 2.75 bcf (77.9 mmcm) of natural gas and
9,908 bbls (1,626 t) of condensate.
Notwithstanding the performance of these wells, the Company's
remaining well stock of 13 continued to produce in line with normal
well production profiles.
Zoltav maintained its high focus on operational efficiency to
eliminate the impact on profitability arising from the decline in
production. For example, the use of new and improved chemical
agents for the treatment of gas enabled the Company to reduce
planned plant shutdowns by two during the year and save on the
associated downtime. Furthermore, Zoltav undertook a programme to
modernise the propane compressor cooling system to reduce the
temperature during the summer months and thereby reduce the dew
point. This enabled the Company to produce additional condensate
and improved the quality of the product. For the first time, Zoltav
installed sucker-rod pumping units on Karpenskoye Wells 17 and 5D
for the secondary recovery of heavy oil, adding 4,286 bbls (546 T)
of oil production. To further drive operational efficiencies during
the year, Zoltav implemented a system of individual goal-setting
for middle-chain technical staff and incentives for bringing
additional ideas for operational excellence. This resulted, for
example, in a successful scheme to re-use light fractions of
hydrocarbons which were previously flared, resulting in an increase
in liquids available for sale.
Zoltav is establishing plans to set up a well-head compressor on
the Karpenskoye field by July 2018, giving rise to an estimated
128,843 boe (17,567 toe) of additional production annually.
Exploration and development
Bortovoy
As a result of the significant variation in reservoir thickness
encountered in the Permian Basin in the Western Fields of the
Bortovoy Licence, and operational difficulties encountered with
certain wells, management took the decision in October 2017 to
suspend the drilling programme in this horizon until the
interpretation of high quality 3D seismic data is completed - and
additional 3D seismic data is acquired - during the course of
2018.
In parallel, management took the decision to divert capex for
the remainder of 2017 and 2018 to an exploration programme
targeting the deeper Devonian and Carbonian structures in the west
of the Bortovoy Licence, which lie approximately 3,500-5,000 m
below surface and which, if proven, would have a transformational
impact on the size and production profile of the Bortovoy
asset.
A 3D seismic acquisition programme was undertaken in 2017 over
the Carbonian and Devonian (and also prospective Permian)
structures in the North Mokrous area of the Mokrousovskoye block
and has continued in the year to date. Preliminary interpretation
of the first 180 sq km has been completed, with encouraging results
announced in March 2018; and up to a further 536 sq km of 3D
seismic data (of which 140 sq km has been completed in the year to
date prior to the autumn weather pause) is anticipated to be
acquired through the remainder of 2018. Sufficient interpretation
of these data is expected to be completed in time to allow for the
positioning and drilling of the first Devonian exploration well, on
North Mokrous, now expected in Q1 2019.
In support of the work programme, the Company announced in May
2018 the recruitment of former Bashneft and TNK-BP technical
executives, led by Yuri Krasnevsky who became Zoltav's Director for
Geology and Field Development.
Koltogor
The Koltogor Licences in the Khantiy Mansisk Autonomous Okrug,
Western Siberia are not currently a focus of investment, as the
Company is channeling capex into the exploration programme on the
Bortovoy Licence. Management notes, however, the activity of the
Bazhen Technology Centre launched by Gazprom Neft in 2017 in the
same region as the Koltogor Licence. The centre is focusing on the
development of advanced independent skills and technologies
required for the cost-effective development of hydrocarbons in the
Bazhenov formation, in which management believes there is potential
in the Koltogor Licences.
Group Reserves under PRMS as per latest report of DeGolyer and
MacNaughton (May 2014):
Proved and
Proved Probable probable Possible
------- --------- ----------- ---------
Bortovoy Licence
Gas bcf 352.9 396.8 749.7 640.0
Oil & liquids mmbbls 2.0 1.8 3.8 2.4
Gas, oil and liquids mmboe 62.0 69.2 131.2 111.2
Koltogor Licences
Gas bcf 0.5 23.5 24.0 55.7
Oil mmbbls 1.6 73.5 75.1 174.0
Total mmboe 1.7 77.5 79.2 183.5
Total
Gas bcf 353.4 420.3 773.7 695.7
Oil & liquids mmbbls 3.6 75.3 78.9 176.4
Gas, oil and liquids mmboe 63.7 146.7 210.4 294.7
The Company is planning a re-evaluation of reserves under PRMS
following completion of the exploration programme currently ongoing
on the Bortovoy Licence.
Conversion rates
Tonnes of crude oil produced are translated into barrels using
conversion rates reflecting oil density from each of the fields.
Crude oil and liquid hydrocarbons expressed in barrels are
translated from tonnes using a conversion rate of 7.85 barrels per
tonne. Translations of cubic feet to cubic metres are made at the
rate of 35.3 cubic feet per cubic metre. Translations of barrels of
crude oil and liquid hydrocarbons into barrels of oil equivalent
("boe") are made at the rate of 1 barrel per boe and of cubic feet
into boe at the rate of 290 cubic feet per boe.
Financial review
Management continued to focus throughout 2017 on challenging
non-strategic costs, analysing capital expenditures and operating
efficiently. As a result, and despite the production decline,
Zoltav was able to achieve a 5% increase in EBITDA to RUB 888
million (2016: RUB 846 million).
Revenue
The Group's revenues in 2017 decreased by 10% to RUB 1.79
billion, compared to RUB 1.99 billion in 2016, as a result of the
decline in production.
85% of revenue was derived from gas sold to Mezhregiongaz, a
Gazprom subsidiary, at the transfer point on entry to the Central
Asia - Center gas pipeline system. The gas prices are fixed in a
contract with Mezhregiongaz and are subject to indexation. The
Russian Government approved a 3.9% gas price increase from 1 July
2017 and accordingly the Company signed an addendum to its contract
with Mezhregiongaz. We anticipate that a further increase of 2% in
gas price indexation will be approved by the Russian Government in
June 2018 which will further benefit the Company.
The remaining revenue was from oil and condensate sold to a
small number of different buyers either directly at the Western Gas
Plant or via a petroleum storage depot with access to the railway.
The sale price is set through a tender process starting each month
following the publication of the Rosneft tender results, which
influence domestic oil prices. In 2017, Zoltav started to sell
heavy oil produced from Karpenskoye Wells 17 and 5D and priced on a
formula linked to Brent quotes on Cortes (part of Thomson
Reuters).
Oil prices were favourable in 2017 and Zoltav sold liquid
products above the market, according to our net back calculations
for oil in our region and with our qualities. The Company began
diversifying its portfolio of buyers to reduce dependence on its
main purchaser in 2016. These factors resulted in a positive impact
on average oil and condensate sales prices which were RUB 2,100/bbl
(RUB 16,500/t) in 2017 compared to RUB 1,700/bbl (RUB 13,200/t) in
2016.
Cost of sales and G&A costs
Total cost of sales was RUB 1.15 billion (2016: RUB 1.15
billion). This comprised RUB 371.6 million of mineral extraction
tax (2016: RUB 406.5 million), RUB 437.2 million of depreciation
and depletion of assets (2016: RUB 404.7 million) and RUB 338
million of other cost of sales (2016: RUB 344 million).
The Group's operational and G&A costs decreased by 38% to
RUB 185 million (2016: RUB 299 million), while other expenses
decreased by 75% to RUB 35 million (2016: RUB 143 million), mostly
achieved through administrative staff reduction of 20%, cutting
non-strategic costs and maintenance optimisation. Examples of
material cost savings achieved in the year, include:
-- containing the expenses of non-operational entities to a
minimum and reducing the cost of administrative personnel - RUB 115
million saving;
-- changing the contractor for heavy compressor parts and services - RUB 15 million saving;
-- shutting down Heavy Compressor 1540 and redirecting its
associated gas flow, allowing the Company to avoid associated
maintenance costs; and turning off two out of three power
generating units which were also maintenance heavy - RUB 12.8
million saving;
-- switching to improved chemical agents for the treatment of
gas, enabling the Company to reduce planned plant shutdowns by two
during the year and save on the associated downtime - RUB 5 million
saving;
-- changing the methanol flow and regeneration unit and making
the system 'closed-loop' with minimal waste and minimising the
procurement of external methanol - RUB 4.6 million saving;
-- renegotiating contractual terms for the renting of land plots - RUB 4 million saving; and
-- identifying a Russian substitute for an expensive foreign
catalyst which was previously used in the sulphur production unit -
RUB 2.4 million saving.
Other cost of sales is mainly operating expenses of Diall
Alliance, the Bortovoy operating company, which decreased by 2% to
RUB 338 million (2016: RUB 344.1 million) despite the expiration of
a property tax incentive which was granted by the Saratov regional
tax authority during gas plant construction (annual property tax
increased from RUB 16.8 million to RUB 47.1 million).
Operating profit
Zoltav achieved an operating profit for 2017 of RUB 450 million,
compared to RUB 441 million in 2016.
Finance costs of RUB 225 million (2016: RUB 268 million) are
mainly represented by interest on the remaining RUB 1.56 billion
Sberbank facility. The Company is negotiating terms which
management believes will reduce finance costs in 2018.
Profit before tax
Zoltav generated a RUB 1.43 billion loss, compared to RUB 197
million profit in 2016, due to an impairment allowance amounting to
RUB 1.69 billion in respect of the Koltogor Licences for which
development activities are currently on hold.
Taxation
Production based tax for the period was RUB 372 million (2016:
RUB 407 million) which is recognised in the cost of sales. The MET
tax formula is based on multi-component gas composition, average
gas prices and reservoir complexity and maturity. The effective MET
rate applicable for the period was flat at RUB 24/mcf or RUB
849/mcm (2016: RUB 23/mcf or RUB 810/mcm).
In addition to production taxes, the Group was subject to a 2.2%
property tax which is based on the net book value of Russian assets
calculated for property tax purposes. Property tax on the major
part of the Bortovoy operating company's assets, including the
Western Gas Plant, is paid at a reduced tax rate of 0.1%, in line
with tax incentives for regional investment projects. There was no
clear legal instruction regarding the maturity of a tax incentive
previously referred to in the Company's half-year report, resulting
from management's inquiries with the tax authority. Accordingly,
the Company recognised an additional tax charge in the amount of
RUB 28 million during the year.
Net profit
As noted above, the Company made an allowance in the 2017
accounts for the full impairment of the Koltogor Licences (RUB 1.69
billion), which caused a net loss of RUB 1.27 billion (2016: RUB 97
million net profit). Excluding this non-cash item, the Company
generated a much-improved net profit of RUB 182 million (an
increase of 87%).
Cash
Net cash generated from operating activities was RUB 728 million
(2016: RUB 719 million).
Diall Alliance successfully serviced its credit facility with
PJSC Sberbank and repaid a further RUB 300 million of the principal
amount (RUB 1,860 million at 31 December 2016) according to its
schedule. The Company remains in line with the covenants of its
credit facility agreement.
Zoltav has sufficient liquidity to fund its current seismic
programme and announced in April that the Board of Directors
approved an agreement with its two largest shareholders for their
provision of an unsecured loan facility of up to an aggregate US$12
million in further support of the exploration programme.
Total cash at the end of the period was RUB 286.75 million
(2016: RUB 294 million).
Kirill Suetov
Chief Financial Officer
21 May 2018
Independent auditor's report on the consolidated financial
statements of Zoltav Resources Inc. and its subsidiaries
To the Shareholders and Board of Directors of Zoltav Resources
Inc.
Opinion
We have audited the consolidated financial statements of Zoltav
Resources Inc. and its subsidiaries (the Group), which comprise the
consolidated statement of financial position as at 31 December
2017, and the consolidated statement of comprehensive income,
consolidated statement of changes in equity and consolidated
statement of cash flows for 2017, and notes to the consolidated
financial statements, including a summary of significant accounting
policies.
In our opinion, the accompanying consolidated financial
statements present fairly, in all material respects, the
consolidated financial position of the Group as at 31 December 2017
and its consolidated financial performance and its consolidated
cash flows for 2017 in accordance with International Financial
Reporting Standards (IFRSs).
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (ISAs). Our responsibilities under those
standards are further described in the Auditor's responsibilities
for the audit of the consolidated financial statements section of
our report. We are independent of the Group in accordance with the
International Ethics Standards Board for Accountants' Code of
Ethics for Professional Accountants (IESBA Code) together with the
ethical requirements that are relevant to our audit of the
consolidated financial statements in the Russian Federation, and we
have fulfilled our other ethical responsibilities in accordance
with these requirements and the IESBA Code. We believe that the
audit evidence we have obtained is sufficient and appropriate to
provide a basis for our opinion.
Key audit matters
Key audit matters are those matters that, in our professional
judgment, were of most significance in our audit of the
consolidated financial statements of the current period. These
matters were addressed in the context of our audit of the
consolidated financial statements as a whole, and in forming our
opinion thereon, and we do not provide a separate opinion on these
matters. For the matter below, our description of how our audit
addressed this matter is provided in that context.
We have fulfilled the responsibilities described in the
Auditor's responsibilities for the audit of the consolidated
financial statements section of our report, including in relation
to this matter. Accordingly, our audit included the performance of
procedures designed to respond to our assessment of the risks of
material misstatement of the consolidated financial statements. The
results of our audit procedures, including the procedures performed
to address the matter below, provide the basis for our audit
opinion on the accompanying consolidated financial statements.
Impairment of exploration and evaluation assets
In 2017 the Group recognized an We assessed facts and circumstances
impairment of exploration and suggesting that the carrying amount
evaluation assets of Koltogor of exploration and evaluation
oil field. We considered this assets may exceed their recoverable
matter to be of most significance amount. We analysed necessary
in our audit due to significance budgeted expenditure on further
of the amount of impairment charge exploration for and evaluation
and significant judgment involved of mineral resources in Koltogor
in its assessment, especially oil field. We analyzed the possibility
in respect of sources of financing of the Group to finance Koltogor
of Koltogor oil field development. oil field development. We assessed
Information on impairment of exploration possible sources of financing
and evaluation assets is disclosed and management plans in respect
in Note 11 to the consolidated of future development.
financial statements.
Other information included in the Annual Report for 2017
Other information consists of the information included in the
Annual Report for 2017, other than the consolidated financial
statements and our auditor's report thereon. Management is
responsible for the other information.
Our opinion on the consolidated financial statements does not
cover the other information and we do not express any form of
assurance conclusion thereon.
In connection with our audit of the consolidated financial
statements, our responsibility is to read the other information
and, in doing so, consider whether the other information is
materially inconsistent with the consolidated financial statements
or our knowledge obtained in the audit or otherwise appears to be
materially misstated. If, based on the work we have performed, we
conclude that there is a material misstatement of this other
information, we are required to report that fact. We have nothing
to report in this regard.
Responsibilities of management and the Audit Committee for the
consolidated financial statements
Management is responsible for the preparation and fair
presentation of the consolidated financial statements in accordance
with IFRSs, and for such internal control as management determines
is necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether due to
fraud or error.
In preparing the consolidated financial statements, management
is responsible for assessing the Group's ability to continue as a
going concern, disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless
management either intends to liquidate the Group or to cease
operations, or has no realistic alternative but to do so.
The Audit Committee is responsible for overseeing the Group's
financial reporting process.
Auditor's responsibilities for the audit of the financial
statements
Our objectives are to obtain reasonable assurance about whether
the consolidated financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue
an auditor's report that includes our opinion. Reasonable assurance
is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs will always detect a material
misstatement when it exists. Misstatements can arise from fraud or
error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these
consolidated financial statements.
As part of an audit in accordance with ISAs, we exercise
professional judgment and maintain professional skepticism
throughout the audit. We also:
-- Identify and assess the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error,
design and perform audit procedures responsive to those risks, and
obtain audit evidence that is sufficient and appropriate to provide
a basis for our opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting
from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal
control.
-- Obtain an understanding of internal control relevant to the
audit in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Group's internal control.
-- Evaluate the appropriateness of accounting policies used and
the reasonableness of accounting estimates and related disclosures
made by management.
-- Conclude on the appropriateness of management's use of the
going concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events
or conditions that may cast significant doubt on the Group's
ability to continue as a going concern. If we conclude that a
material uncertainty exists, we are required to draw attention in
our auditor's report to the related disclosures in the consolidated
financial statements or, if such disclosures are inadequate, to
modify our opinion. Our conclusions are based on the audit evidence
obtained up to the date of our auditor's report. However, future
events or conditions may cause the Company Group to cease to
continue as a going concern.
-- Evaluate the overall presentation, structure and content of
the consolidated financial statements, including the disclosures,
and whether the consolidated financial statements represent the
underlying transactions and events in a manner that achieves fair
presentation.
-- Obtain sufficient appropriate audit evidence regarding the
financial information of the entities or business activities within
the Group to express an opinion on the consolidated financial
statements. We are responsible for the direction, supervision and
performance of the group audit. We remain solely responsible for
our audit opinion.
We communicate with the Audit Committee regarding, among other
matters, the planned scope and timing of the audit and significant
audit findings, including any significant deficiencies in internal
control that we identify during our audit.
We also provide the Audit Committee with a statement that we
have complied with relevant ethical requirements regarding
independence, and to communicate with it all relationships and
other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
From the matters communicated with the Audit Committee, we
determine those matters that were of most significance in the audit
of the consolidated financial statements of the current period and
are therefore the key audit matters. We describe these matters in
our auditor's report unless law or regulation precludes public
disclosure about the matter or when, in extremely rare
circumstances, we determine that a matter should not be
communicated in our report because the adverse consequences of
doing so would reasonably be expected to outweigh the public
interest benefits of such communication.
The partner in charge of the audit resulting in this independent
auditor's report is T.L. Okolotina.
T.L. Okolotina
Partner
Ernst & Young LLC
21 May 2018
Details of the audited entity
Name: Zoltav Resources Inc.
Record made in the Registar of Companies, Cayman Islands on 18
November 2003, Registration Number 130605.
Address: PO Box 10008, Willow House, Cricket Square, Grand
Cayman KY1-1001, Cayman Islands.
Details of the auditor
Name: Ernst & Young LLC
Record made in the State Register of Legal Entities on 5
December 2002, State Registration Number 1027739707203.
Address: Russia 115035, Moscow, Sadovnicheskaya naberezhnaya,
77, building 1.
Ernst & Young LLC is a member of Self-regulated organization
of auditors "Russian Union of auditors" (Association) ("SRO RUA").
Ernst & Young LLC is included in the control copy of the
register of auditors and audit organizations, main registration
number 11603050648.
Consolidated statement of comprehensive income for the year
ended 31 December 2017
(in '000s of Russian rubles, unless otherwise stated)
Note 2017 2016
----- ------------ ------------
Revenue 4 1,790,524 1,989,430
------------ ------------
Cost of sales
Mineral extraction tax (371,620) (406,499)
Depreciation and depletion (437,160) (404,684)
Other cost of sales (338,032) (344,104)
------------ ------------
Total cost of sales 5 (1,146,812) (1,155,287)
------------ ------------
Gross profit 643,712 834,143
Operating, administrative and selling expenses 6 (184,948) (299,346)
Other income 8 27,005 49,076
Other expenses 8 (35,301) (142,860)
------------ ------------
Operating profit 450,468 441,013
Impairment of exploration and evaluation assets 11 (1,685,632) -
Finance income 9 27,960 24,409
Finance costs 9 (225,741) (267,985)
------------ ------------
(Loss)/profit before tax (1,432,945) 197,437
Income tax benefit/(expense) 10 162,967 (100,336)
------------ ------------
(Loss)/profit for the year attributable to owners of the parent being total
comprehensive
income (1,269,978) 97,101
============ ============
RUB RUB
------------ ------------
(Loss)/earnings per share attributable to owners
of the parent
Basic 19 (8.95) 0.68
Diluted 19 (8.95) 0.67
Kirill Suetov
Chief Financial Officer
21 May 2018
Consolidated statement of financial position as at 31 December
2017
(in '000s of Russian rubles, unless otherwise stated)
As at
31 December As at 31 December
Note 2017 2016
Assets
Non-current assets
Exploration and evaluation assets 11 3,259,353 4,788,314
Property, plant and equipment 12 4,007,302 4,211,254
------------- ------------------
Total non-current assets 7,266,655 8,999,568
------------- ------------------
Current assets
Inventories 13 20,877 18,830
Trade and other receivables 14 152,574 172,294
Other current non-financial assets 14 11,400 15,186
Cash and cash equivalents 15 286,754 294,254
------------- ------------------
Total current assets 471,605 500,564
------------- ------------------
Total assets 7,738,260 9,500,132
============= ==================
Equity and liabilities
Share capital 16 970,218 970,218
Share premium 5,498,009 5,498,009
Other reserves 1,366,172 1,429,341
Accumulated losses (2,562,988) (1,356,179)
Total equity 5,271,411 6,541,389
------------- ------------------
Non-current liabilities
Borrowings 21 1,253,014 1,548,789
Provisions 22 386,152 359,153
Other payables 24 62,771 57,874
Deferred tax liabilities 23 270,836 433,888
------------- ------------------
Total non-current liabilities 1,972,773 2,399,704
------------- ------------------
Current liabilities
Borrowings 21 309,172 311,160
Finance lease liability 1,666 -
Other tax payables 18 89,381 118,500
Trade and other payables 24 93,857 129,379
------------- ------------------
Total current liabilities 494,076 559,039
------------- ------------------
Total liabilities 2,466,849 2,958,743
------------- ------------------
Total equity and liabilities 7,738,260 9,500,132
============= ==================
Consolidated statement of cash flows for the year ended 31
December 2017
(in '000s of Russian rubles, unless otherwise stated)
Note 2017 2016
----- ------------ ----------
Cash flows from operating activities
(Loss)/profit before tax (1,432,945) 197,437
Adjustments for:
Depreciation and depletion 12 440,387 408,939
Impairment of exploration and evaluation assets 11 1,685,632 -
Finance costs 9 225,741 267,985
Finance income 9 (27,960) (24,409)
Loss on disposal of property, plant and equipment, net of income from sale of
property, plant
and equipment 8 28,652 86,624
Write-off of accounts receivable and other current assets, accounts receivable bad
debt provision
accrual 8 1,908 26,986
Change in the estimates of decommissioning and environmental restoration provision (13,448) (34,076)
Other income and expenses 708 11,317
------------ ----------
Operating cash inflows before working capital changes 908,675 940,803
Decrease/(increase) in inventories 1,590 (6,162)
Change in trade and other receivables and other current non-financial assets 23,430 (19,022)
Decrease in trade and other payables (16,372) (22,298)
Increase in other tax payables (29,119) 27,834
------------ ----------
Net cash from operating activities before income tax and interests 888,204 921,155
Interest received 28,316 25,158
Interest paid 21 (188,660) (227,138)
Income tax paid (85) (105)
------------ ----------
Net cash from operating activities 727,775 719,070
------------ ----------
Cash flows from investing activities
Proceeds from sale of property, plant and equipment 14,633 -
Capital expenditure on exploration and evaluation activities (132,635) (56,048)
Purchase of property, plant and equipment (317,063) (436,416)
------------ ----------
Net cash used in investing activities (435,065) (492,464)
------------ ----------
Cash flows from financing activities
Repayment of obligations under finance leases (39) -
Repayment of borrowings 21 (300,000) (360,000)
------------ ----------
Net cash used in financing activities (300,039) (360,000)
------------ ----------
Net change in cash and cash equivalents (7,329) (133,394)
Net foreign exchange difference (171) (902)
Cash and cash equivalents at the beginning of the year 294,254 428,550
------------ ----------
Cash and cash equivalents at the end of the year 15 286,754 294,254
============ ==========
Consolidated statement of changes in equity for the year ended
31 December 2017
(in '000s of Russian rubles, unless otherwise stated)
Attributable to owners of the Parent
-----------------------------------------------------------------------------
Employee
share-based
Share Share Capital compensa-tion Accumulated Total
Note capital premium reserve reserve losses equity
------ --------- ---------- ---------- --------------- ------------ -----------
At 1 January
2016 970,218 5,498,009 1,343,566 85,775 (1,453,28) 6,444,288
--------- ---------- ---------- --------------- ------------ -----------
Profit for the
year - - - - 97,101 97,101
--------- ---------- ---------- --------------- ------------ -----------
Total comprehensive
income - - - - 97,101 97,101
--------- ---------- ---------- --------------- ------------ -----------
At 31 December
2016 970,218 5,498,009 1,343,566 85,775 (1,356,17) 6,541,389
========= ========== ========== =============== ============ ===========
At 1 January
2017 970,218 5,498,009 1,343,566 85,775 (1,356,17) 6,541,389
--------- ---------- ---------- --------------- ------------ -----------
Employee share-based
compensation
(Note 19) - - - (63,169) 63,169 -
--------- ---------- ---------- --------------- ------------ -----------
Transactions
with owners - - - (63,169) 63,169 -
--------- ---------- ---------- --------------- ------------ -----------
Loss for the
year - - - - (1,269,978) (1,269,97)
--------- ---------- ---------- --------------- ------------ -----------
Total comprehensive
income - - - - (1,269,97) (1,269,97)
--------- ---------- ---------- --------------- ------------ -----------
At 31 December
2017 970,218 5,498,009 1,343,566 22,606 (2,562,98) 5,271,411
========= ========== ========== =============== ============ ===========
Notes to the consolidated financial statements for the year
ended 31 December 2017
(in '000s of Russian rubles, unless otherwise stated)
1. Background
1.1 The Company and its operations
Zoltav Group (the Group) comprises Zoltav Resources Inc. (the
Company), together with its subsidiaries:
Share of the Company in a
subsidiary as of 31 December
Name Place of incorporation Function 2017 and 2016
----------------------------------- ------------------------ -------------------- ---------------------------------
CenGeo Holdings Limited
(hereinafter "CenGeo Holdings") Cyprus Holding company 100%
CJSC SibGeCo (hereinafter
"SibGeCo") Russia Operating company 100%
Royal Atlantic Energy (Cyprus)
Limited (hereinafter "Royal") Cyprus Holding company 100%
Diall Alliance LLC (hereinafter
"Diall") Russia Operating company 100%
Zoltav Resource LLC Russia Management company 100%
The Company was incorporated in the Cayman Islands on 18
November 2003. The principal activities of the Company and its
subsidiaries is the acquisition, exploration, development and
production of hydrocarbons in the Russian Federation. The Company's
shares are listed on the Alternative Investment Market of the
London Stock Exchange.
1.2 Russian business environment
The Group's operations are primarily located in the Russian
Federation.
The Russian Federation displays certain characteristics of an
emerging market. Its economy is particularly sensitive to oil and
gas prices. The legal, tax and regulatory frameworks continue to
develop and are subject to frequent changes and varying
interpretations. The Russian economy was growing in 2017, after
overcoming the economic recession of 2015 and 2016. The economy is
negatively impacted by low oil prices, ongoing political tension in
the region and international sanctions against certain Russian
companies and individuals. The financial markets continue to be
volatile.
The combination of the above resulted in reduced access to
capital, a higher cost of capital and uncertainty regarding
economic growth, which could negatively affect the Group's future
financial position, results of operations and business prospects.
Management believes it is taking appropriate measures to support
the sustainability of the Group's business in the current
circumstances.
1.3 Basis of preparation
The consolidated financial statements of the Group have been
prepared in accordance with International Financial Reporting
Standards (IFRS), as adopted by the European Union (EU),
International Financial Reporting Interpretations Committee (IFRIC)
interpretations, and the Companies Act 2006 applicable to companies
reporting under IFRS. The consolidated financial statements have
been prepared under the historical cost convention, as modified by
the revaluation of financial assets and financial liabilities
(including derivative instruments) at fair value through profit or
loss.
The preparation of financial statements in conformity with IFRS
requires the use of certain critical accounting estimates. It also
requires management to exercise its judgement in the process of
applying the Group's accounting policies. The areas involving a
higher degree of judgement or complexity, or areas where
assumptions and estimates are significant to the consolidated
financial statements are disclosed in Note 2.
1.4 Going concern
The consolidated financial statements have been prepared on a
going concern basis as the Directors have concluded that the Group
will continue to have access to sufficient funds in order to meet
its obligations as they fall due for at least the foreseeable
future as explained further in the Directors Report. The Group's
current liabilities exceed current assets by 22,471 as at 31
December 2017. For mitigation factors, please, see Note 26.1.
1.5 Disclosure of impact of new and future accounting standards
a) Adoption of new and amended standards
In the preparation of these consolidated financial statements,
the Group followed the same accounting policies and methods of
computation as compared with those applied in the previous year,
except for the adoption of new standards and interpretations and
revision of the existing standards as of 1 January 2017. The Group
has not early adopted any other standard, interpretation or
amendment that has been issued but is not yet effective.
Although these new standards and amendments applied for the
first time in 2017, they did not have a material impact on the
annual consolidated financial statements of the Group.
Effective
for annual
periods beginning
New/revised standards and Interpretations Adopted in on
2017 or after
--------------------------------------------------------- -------------------
Annual improvements to IFRSs 2014-2016 cycle
Amendments to IFRS 12 Disclosure of Interests in Other
Entities: Clarification of the scope of disclosure 1 January
requirements in IFRS 12 2017
1 January
Amendments to IAS 7: Disclosure Initiative 2017
Amendments to IAS 12: Recognition to Deferred Tax Assets 1 January
for Unrealised Losses 2017
b) New accounting pronouncements
A number of new and amended standards were not effective for the
year ended 31 December 2017 and have not been applied in these
consolidated financial statements.
Effective
for annual
periods beginning
Standards issued but not yet effective in the European on
Union or after
------------------------------------------------------------- -------------------
1 January
Amendments to IAS 40 - Transfers of Investment Property 2018
Amendments to IFRS 4 - Applying IFRS 9 Financial Instruments 1 January
with IFRS 4 Insurance Contracts 2018
1 January
Annual improvements to IFRSs 2014-2016 cycle 2018
1 January
IFRS 9 Financial Instruments 2018
1 January
IFRS 15 Revenue from Contracts with Customers 2018
Clarification to IFRS 15 Revenue from Contracts with 1 January
Customers 2018
IFRIC 22 Foreign Currency Transactions and Advance 1 January
Consideration 2018
Amendments to IFRS 2 - Classification and Measurement 1 January
of Share-based Payment Transactions 2018
1 January
IFRS 16 Leases 2019
Amendments to IFRS 9: Prepayment Features with Negative 1 January
Compensation 2019
1 January
Annual improvements to IFRSs 2015-2017 cycle 2019*
1 January
IFRS 17 Insurance Contracts 2021*
1 January
IFRIC 23 Uncertainty over Income Tax Treatments 2019*
Amendments to IAS 28: Long-term Interests in Associates 1 January
and Joint Ventures 2019*
Amendments to IAS 19: Plan Amendment, Curtailment or 1 January
Settlement 2019*
Amendments to References to the Conceptual Framework 1 January
in IFRS Standards 2020*
* Subject to EU endorsement.
IFRS 9 Financial Instruments: Classification and Measurement
In July 2014, the IASB issued the final version of IFRS 9
Financial Instruments which reflects all phases of the financial
instruments project and replaces IAS 39 Financial Instruments:
Recognition and Measurement and all previous versions of IFRS 9.
The standard introduces new requirements for classification and
measurement, impairment, and hedge accounting. IFRS 9 is effective
for annual periods beginning on or after 1 January 2018, with early
application permitted. Retrospective application is required, but
comparative information is not compulsory.
a) Classification
Loans as well as trade receivables are held to collect
contractual cash flows and are expected to give rise to cash flows
representing solely payments of principal and interest. The Group
analysed the contractual cash flow characteristics of those
instruments and concluded that they meet the criteria for amortised
cost measurement under IFRS 9. Therefore, reclassification for
these instruments is not required.
b) Impairment
IFRS 9 requires the Group to now use an expected credit loss
model for its trade receivables measured at amortised cost and cash
in banks, either on a 12-month or lifetime basis. The Group expects
to apply the simplified approach and record lifetime expected
losses on all trade receivables measured at amortised cost and cash
in banks. Given the short-term nature of these assets, the Group
considered these changes had insignificant impact.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 was issued in May 2014 and establishes a new five-step
model that will apply to revenue arising from contracts with
customers. Under IFRS 15 revenue is recognised at an amount that
reflects the consideration to which an entity expects to be
entitled in exchange for transferring goods or services to a
customer.
The principles in IFRS 15 provide a more structured approach to
measuring and recognizing revenue. The new revenue standard is
applicable to all entities and will supersede all current revenue
recognition requirements under IFRS. Either a full or modified
retrospective application is required for annual periods beginning
on or after 1 January 2018 with early adoption permitted. Given the
basic terms of revenue contracts, reliable customers and absence of
significant finance component in sales, the Group preliminary
assessed that the impact of IFRS 15 will not be significant. Final
evaluation has not been completed yet.
IFRS 16 Leases
IFRS 16 was issued in January 2016 and it replaces IAS 17
Leases, IFRIC 4 Determining whether an Arrangement contains a
Lease, SIC-15 Operating Leases - Incentives and SIC-27 Evaluating
the Substance of Transactions Involving the Legal Form of a Lease.
IFRS 16 sets out the principles for the recognition, measurement,
presentation and disclosure of leases and requires lessees to
account for all leases under a single on-balance sheet model
similar to the accounting for finance leases under IAS 17.
IFRS 16 is effective for annual periods beginning on or after 1
January 2019. Early application is permitted, but not before an
entity applies IFRS 15. A lessee can choose to apply the standard
using either a full retrospective or a modified retrospective
approach. The standard's transition provisions permit certain
reliefs.
In 2018, the Group will continue to assess the potential effect
of IFRS 16 on its financial statements.
From application of the other standards issued but not yet
effective the Group expects no effect on its consolidated financial
statements.
1.6 Basis of consolidation
The consolidated financial statements comprise the financial
statements of the Group and its subsidiaries as at 31 December
2017. Control is achieved when the Group is exposed, or has rights,
to variable returns from its involvement with the investee and has
the ability to affect those returns through its power over the
investee.
Specifically, the Group controls an investee if, and only if,
the Group has:
-- Power over the investee (i.e., existing rights that give it
the current ability to direct the relevant activities of the
investee);
-- Exposure, or rights, to variable returns from its involvement with the investee;
-- The ability to use its power over the investee to affect its returns.
Generally, there is a presumption that a majority of voting
rights results in control. To support this presumption and when the
Group has less than a majority of the voting or similar rights of
an investee, the Group considers all relevant facts and
circumstances in assessing whether it has power over an investee,
including:
-- The contractual arrangement(s) with the other vote holders of the investee;
-- Rights arising from other contractual arrangements;
-- The Group's voting rights and potential voting rights.
The Group re-assesses whether or not it controls an investee if
facts and circumstances indicate that there are changes to one or
more of the three elements of control. Consolidation of a
subsidiary begins when the Group obtains control over the
subsidiary and ceases when the Group loses control of the
subsidiary. Assets, liabilities, income and expenses of a
subsidiary acquired or disposed of during the year are included in
the consolidated financial statements from the date the Group gains
control until the date the Group ceases to control the
subsidiary.
When necessary, adjustments are made to the financial statements
of subsidiaries to bring their accounting policies into line with
the Group's accounting policies. All intra-group assets and
liabilities, equity, income, expenses and cash flows relating to
transactions between members of the Group are eliminated in full on
consolidation.
A change in the ownership interest of a subsidiary, without a
loss of control, is accounted for as an equity transaction.
If the Group loses control over a subsidiary, it derecognises
the related assets (including goodwill), liabilities and components
of equity, while any resultant gain or loss is recognised in profit
or loss. Any investment retained is recognised at fair value.
1.7 Acquisitions, asset purchases and disposals
Transactions involving the purchases of an individual field
interest, or a group of field interests, that do not qualify as a
business combination are treated as asset purchases, irrespective
of whether the specific transactions involved the transfer of the
field interests directly or the transfer of an incorporated entity.
Accordingly, no goodwill or deferred tax gross up arises. The
purchase consideration is allocated to the assets and liabilities
purchased on an appropriate basis. Proceeds from the disposal are
applied to the carrying amount of the specific intangible asset or
development and production assets disposed of and any surplus is
recorded as a gain on disposal in the statement of comprehensive
income.
1.8 Business combinations
Business combinations are accounted for using the acquisition
method. The cost of an acquisition is measured as the aggregate of
the consideration transferred, which is measured at acquisition
date fair value, and the amount of any non-controlling interests in
the acquiree. For each business combination, the Group elects
whether to measure the non-controlling interests in the acquiree at
fair value or at the proportionate share of the acquiree's
identifiable net assets. Acquisition-related costs are expensed as
incurred and included in administrative expenses.
When the Group acquires a business, it assesses the financial
assets and liabilities assumed for appropriate classification and
designation in accordance with the contractual terms, economic
circumstances and pertinent conditions as at the acquisition date.
This includes the separation of embedded derivatives in host
contracts by the acquiree.
Any contingent consideration to be transferred by the acquirer
will be recognised at fair value at the acquisition date.
Contingent consideration classified as an asset or liability that
is a financial instrument and within the scope of IAS 39 Financial
Instruments: Recognition and Measurement is measured at fair value
with the changes in fair value recognised in the statement of
profit or loss.
Goodwill is initially measured at cost being the excess of the
aggregate of the consideration transferred and the amount
recognised for non-controlling interests and any previous interest
held over the net identifiable assets acquired and liabilities
assumed. If the fair value of the net assets acquired is in excess
of the aggregate consideration transferred, the Group re-assesses
whether it has correctly identified all of the assets acquired and
all of the liabilities assumed and reviews the procedures used to
measure the amounts to be recognised at the acquisition date. If
the reassessment still results in an excess of the fair value of
net assets acquired over the aggregate consideration transferred,
then the gain is recognised in profit or loss.
After initial recognition, goodwill is measured at cost less any
accumulated impairment losses. For the purpose of impairment
testing, goodwill acquired in a business combination is, from the
acquisition date, allocated to each of the Group's cash-generating
units that are expected to benefit from the combination,
irrespective of whether other assets or liabilities of the acquiree
are assigned to those units.
Where goodwill has been allocated to a cash-generating unit
(CGU) and part of the operation within that unit is disposed of,
the goodwill associated with the disposed operation is included in
the carrying amount of the operation when determining the gain or
loss on disposal. Goodwill disposed in these circumstances is
measured based on the relative values of the disposed operation and
the portion of the cash-generating unit retained.
1.9 Segment reporting
Segment reporting follows the Group's internal reporting
structure.
Operating segments are defined as components of the Group where
separate financial information is available and reported regularly
to the chief operating decision maker ("CODM"), which is determined
to be the Board of Directors of the Company. The Board of Directors
decides how to allocate resources and assesses operational and
financial performance using the information provided.
The CODM receives monthly IFRS-based financial information for
the Group and its development and production entities. The Group
has other entities that engage as either head office or in a
corporate capacity, or as holding companies. Management has
concluded that, due to the application of aggregation criteria,
separate financial information for segments is not required. No
geographic segmental information is presented, as all of the
companies' operating activities are based in the Russian
Federation.
Management has therefore determined that the operations of the
Group comprise one operating segment and the Group operates in only
one geographic area - the Russian Federation.
1.10 Foreign currency translation
a) Functional and presentation currency
The functional currency of the Group entities is the Russian
ruble ("RUB"), the currency of the primary economic environment in
which the Group operates.
The presentation currency is RUB, which the Board considers more
representative for users of these consolidated financial statements
to better assess the performance of the Group.
b) Transactions and balances
Transactions in foreign currencies are initially recorded by the
Group's entities at their respective functional currency spot rates
at the date the transaction first qualifies for recognition.
Monetary assets and liabilities denominated in foreign
currencies are translated at the functional currency spot rates of
exchange at the reporting date.
Differences arising on the settlement or translation of monetary
items are recognised in profit or loss.
Non-monetary items that are measured in terms of historical cost
in a foreign currency are translated using the exchange rates at
the dates of the initial transactions.
c) Group companies
Loans between Group entities and related foreign exchange gains
or losses are eliminated upon consolidation.
Any goodwill arising on the acquisition of a foreign operation
and any fair value adjustments to the carrying amounts of assets
and liabilities on the acquisition are treated as assets and
liabilities of foreign operation and translated at the spot rate of
exchange at the reporting date.
The period-end exchange rates and the average exchange rates for
the respective reporting periods are indicated below.
2017 2016
-------- --------
RUB/USD as at 31 December 57.6002 60.6569
RUB/USD average for the year ended 31 December 58.3529 67.0349
1.11 Exploration and evaluation assets
The Company and its subsidiaries apply the successful efforts
method of accounting for Exploration and Evaluation ("E&E")
costs, in accordance with IFRS 6 Exploration for and Evaluation of
Mineral Resources. Costs are accumulated on a field-by-field
basis.
a) Drilling, seismic and other costs
Costs directly associated with an exploration well, including
certain geological and geophysical costs, and exploration and
property leasehold acquisition costs, are capitalised until the
reserves are evaluated. If it is determined that a commercial
discovery has not been achieved, these costs are charged to expense
after the conclusion of appraisal activities. Exploration costs
such as geological and geophysical that are not directly related to
an exploration well are expensed as incurred.
Capital expenditure is recognised as property, plant and
equipment or intangible assets in the financial statements in
accordance with the nature of the expenditure and the stage of
development of the associated field, i.e. exploration, development,
or production. Once commercial reserves are found, exploration and
evaluation assets are tested for impairment and transferred to
development property, plant and equipment or intangible assets. No
depreciation or amortisation is charged during the exploration and
evaluation phase.
b) Sub-soil licences
Costs incurred prior to the award of oil and gas licences,
concessions and other exploration rights are expensed in profit or
loss. Costs incurred on the acquisition of a licence interest are
initially capitalised on a licence by licence basis and are
capitalised within exploration and evaluation assets and held
un-depleted until the exploration phase of the licence is complete
or commercial reserves have been discovered at which time the costs
are transferred to development assets as part of property, plant
and equipment - oil and gas assets.
1.12 Property, plant and equipment
a) Property, plant and equipment - oil and gas assets
Oil and gas assets are stated at cost less accumulated depletion
or accumulated depreciation and, where relevant, impairment
costs.
Expenditure on the construction, installation or completion of
infrastructure facilities such as platforms and pipelines, as well
as on the drilling of development wells into commercially proved
reserves, is capitalised within property, plant and equipment. When
development is completed on a specific field, it is transferred to
producing assets within property, plant and equipment. No
depreciation or amortisation is charged during the development
phase.
Development and production assets are accumulated generally on a
field by field basis and represent the cost of developing the
commercial reserves discovered and bringing them into production,
together with E&E expenditures incurred in finding commercial
reserves and transferred from intangible E&E assets as
described above. The cost of development and production assets also
includes the cost of acquisitions and purchases of such assets,
directly attributable overheads, any costs directly attributable to
bringing the asset into operation, and the cost of recognising
provisions for future restoration and decommissioning, if any.
Major facilities may be capitalised separately if they relate to
more than one field or to the licence area as a whole. Subsequent
expenditure is capitalised only if it either enhances the economic
benefits of the development/production asset or replaces part of
the existing development/ production asset. Any costs remaining
associated with the part replaced are expensed. Directly attributed
overheads are capitalised where they relate to specific exploration
and development activities.
i) Depletion
Oil and gas properties in production, including wells and
directly related pipeline costs, are depreciated using the
unit-of-production method. Sub-soil licences and other licences
capitalised as part of oil and gas properties in production are
amortised also using the unit-of-production method.
Unit-of-production rates are based on proved reserves of the field
concerned, which are oil, gas and other mineral reserves estimated
to be recovered from existing facilities using current operating
methods. The unit-of-production rate for the amortisation of field
development costs takes into account expenditures incurred to
date.
ii) Depreciation
Major oil and gas facilities that have a shorter useful life
than the lifetime of the related fields are depreciated on a
straight-line basis over the expected useful life of the facility.
Depreciation of items of such assets is calculated using the
straight-line method to allocate their cost to their residual
values over their estimated useful lives:
Buildings and constructions 15-30 years
Machinery and equipment 5 years
The asset's residual values and useful lives are reviewed, and
adjusted as appropriate, at the end of each reporting period.
b) Property, plant and equipment - other business and corporate assets
Property, plant and equipment are stated at cost less
accumulated depreciation and impairment losses. The cost of an
asset comprises its purchase price and any directly attributable
costs of bringing asset to the working condition and to the
location for its intended use. Subsequent costs are included in the
asset's carrying amount or recognised as a separate asset, as
appropriate, only when it is probable that future economic benefits
associated with the item will flow to the Group and the cost of the
item can be measured reliably. All other costs, such as repairs and
maintenance are charged to the income statement during the
financial period in which they are incurred.
The gain or loss arising from a retirement or disposal is
determined as the difference between the sales proceeds and the
carrying amount of the assets, and is recognised in the income
statement.
Depreciation is provided on buildings and facilities, motor
vehicles, office equipment and furniture at rates calculated to
write off the cost, less estimated residual value, evenly over the
asset's expected useful life.
For depreciation purposes, useful lives are estimated as
follows:
Other equipment and furniture 5 years
Motor vehicles 5 years
1.13 Impairment of non-current assets
i) Impairment indicators
The Group assesses, at each reporting date, whether there is an
indication that an asset may be impaired. If any indication exists,
or when annual impairment testing for an asset is required, the
Group estimates the asset's recoverable amount. An asset's
recoverable amount is the higher of an asset's or CGU's fair value
less costs of disposal and its value in use. The recoverable amount
is determined for an individual asset, unless the asset does not
generate cash inflows that are largely independent of those from
other assets or groups of assets. When the carrying amount of an
asset or CGU exceeds its recoverable amount, the asset is
considered impaired and is written down to its recoverable
amount.
In assessing value in use, the estimated future cash flows are
discounted to their present value using a pre-tax discount rate
that reflects current market assessments of the time value of money
and the risks specific to the asset. In determining fair value less
costs of disposal, recent market transactions are taken into
account. If no such transactions can be identified, an appropriate
valuation model is used. These calculations are corroborated by
valuation multiples, quoted share prices for publicly traded
companies or other available fair value indicators.
The Group bases its impairment calculation on detailed budgets
and forecast calculations, which are prepared separately for each
of the Group's CGUs to which the individual assets are allocated.
These budgets and forecast calculations generally cover a period of
five years. A long-term growth rate is calculated and applied to
project future cash flows after the fifth year.
Impairment losses of continuing operations are recognised in the
statement of profit or loss in expense categories consistent with
the function of the impaired asset, except for properties
previously revalued with the revaluation taken to OCI. For such
properties, the impairment is recognised in OCI up to the amount of
any previous revaluation.
For assets excluding goodwill, an assessment is made at each
reporting date to determine whether there is an indication that
previously recognised impairment losses no longer exist or have
decreased. If such indication exists, the Group estimates the
asset's or CGU's recoverable amount. A previously recognised
impairment loss is reversed only if there has been a change in the
assumptions used to determine the asset's recoverable amount since
the last impairment loss was recognised. The reversal is limited so
that the carrying amount of the asset does not exceed its
recoverable amount or the carrying amount that would have been
determined, net of depreciation, had no impairment loss been
recognised for the asset in prior years. Such reversal is
recognised in the statement of profit or loss unless the asset is
carried at a revalued amount, in which case the reversal is treated
as a revaluation increase.
ii) Calculation of recoverable amount
The recoverable amount of assets is the greater of their value
in use and fair value less costs to sell. In assessing value in
use, the estimated future cash flows are discounted to their
present value using a pre-tax discount rate that reflects current
market assessments of the time value of money and the risks
specific to the asset.
iii) Cash generating units
For an asset that does not generate cash inflows largely
independent of those from other assets, the recoverable amount is
determined for the cash generating unit to which the asset belongs.
The Group's cash generating units are the smallest identifiable
groups of assets that generate cash inflows that are largely
independent of the cash inflows from other assets or groups of
assets.
For the purposes of assessing impairment, exploration and
evaluation assets subject to testing are grouped with existing cash
generating units of production fields that are located in the same
geographical region. For development and production assets the cash
generating unit applied for impairment test purposes is generally
the field. For shared infrastructure a number of field interests
may be grouped together where surface infrastructure is used by
several fields in order to process production for sale.
iv) Reversals of impairment
An impairment loss is reversed to the extent that the factors
giving rise to the impairment charge are no longer prevalent. An
impairment loss is reversed only to the extent that the asset's
carrying amount does not exceed the carrying amount that would have
been determined, net of depletion, depreciation or amortisation, if
no impairment loss had been recognised.
Taxes on income in the interim periods are accrued using the tax
rate that would be applicable to expected total annual profit or
loss.
1.14 Inventories
Unsold natural gas and hydrocarbon liquids and sulphur in
storage are stated at the lower of cost of production or net
realisable value. Net realisable value is the estimated selling
price in the ordinary course of business, less the estimated costs
of completion and selling expenses.
Materials and supplies inventories include chemicals necessary
for production activities and spare parts for the maintenance of
production facilities. Materials and supplies inventories are
recorded at cost and are carried at amounts which do not exceed the
expected recoverable amount from use in the normal course of
business. Cost of inventory is determined on a weighted average
basis. Cost of finished goods comprises direct materials and, where
applicable, direct labour plus attributable overheads based on a
normal level of activity and other costs associated in bringing
inventories to their present location and condition, but excludes
borrowing costs.
1.15 Financial instruments
A financial instrument is any contract that gives rise to a
financial asset of one entity and a financial liability or equity
instrument of another entity. Financial assets and financial
liabilities are recognised when, and only when, the Group becomes a
party to the contractual provisions of the instrument. Financial
assets and financial liabilities are initially measured at fair
value. Transaction costs that are directly attributable to the
acquisition or issue of financial assets and financial liabilities
(other than financial assets and financial liabilities at fair
value through profit or loss) are added to or deducted from the
fair value of the financial assets or financial liabilities, as
appropriate, on initial recognition. Transaction costs directly
attributable to the acquisition of financial assets or financial
liabilities at fair value through profit or loss are recognised
immediately in the statement of comprehensive income.
a) Financial assets
The Group classifies its financial assets into one of the
following categories: financial assets at fair value through profit
or loss and loans and receivables.
Regular purchases of financial assets are recognised on the
trade date. Management determines the classification of its
financial assets at initial recognition depending on the purpose
for which the financial assets were acquired and, where allowed and
appropriate, re-evaluates this designation at every reporting date.
The accounting policies adopted for each category are:
Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss include
financial assets held for trading and financial assets designated
upon initial recognition at fair value through profit or loss.
Financial assets are classified as held for trading if they are
acquired for the purpose of selling in the near term, or if they
are part of a portfolio of identified financial instruments that
are managed together and for which there is evidence of a recent
pattern of short-term profit-taking.
Financial assets may be designated at initial recognition at
fair value through profit or loss if the following criteria are
met:
-- The designation eliminates or significantly reduces the
inconsistent treatment that would otherwise arise from measuring
the assets or recognising gains or losses on them on a different
basis; or
-- The assets are part of a group of financial assets which are
managed and their performance is evaluated on a fair value basis,
in accordance with a documented risk management strategy and
information about the group of financial assets is provided
internally on that basis to the key management personnel.
Subsequent to initial recognition, the financial assets included
in this category are measured at fair value, with changes in fair
value recognised in the statement of comprehensive income. Fair
value is determined by reference to active market transactions or
using a valuation technique where no active market exists. Fair
value gains or losses do not include any dividend or interest
earned on these financial assets. Dividend and interest income is
recognised on an accruals basis.
Other receivables
Other receivables are non-derivative financial assets with fixed
or determinable payments that are not quoted in an active market.
They are initially measured at fair value and subsequently measured
at amortised cost using the effective interest method, less any
impairment losses. Amortised cost is calculated taking into account
any discount or premium on acquisition and includes fees that are
an integral part of the effective interest rate and transaction
cost.
Impairment losses on other receivables are provided for when
objective evidence is received that the Group will not be able to
collect amounts due to it in accordance with the original terms of
the receivables. The amount of the loss is measured as the
difference between the asset's carrying amount and the present
value of estimated future cash flows, excluding future credit
losses that have not been incurred, discounted at the financial
asset's original effective interest rate (i.e. the effective
interest rate computed at initial recognition). The amount of the
loss is recognised in the statement of comprehensive income for the
period in which the impairment occurs.
Objective evidence of impairment of individual financial assets
includes observable data that comes to the attention of the Group
about one or more of the following loss events:
-- Significant financial difficulty of the debtor;
-- A breach of contract, such as default or delinquency in interest or principal payments;
-- It becoming probable that the debtor will enter bankruptcy or
other financial reorganisation; and
-- Significant changes in the technological, market, economic or
legal environment that have an adverse effect on the debtor.
Loss events in respect of a group of financial assets include
observable data indicating that there is a measurable decrease in
the estimated future cash flows from the group of financial assets.
Such observable data includes but is not limited to adverse changes
in the payment status of debtors in the group, and national or
local economic conditions that correlate with defaults on the
assets in the group.
If, in a subsequent period, the amount of the impairment loss
decreases and the decrease can be related objectively to an event
occurring after the impairment was recognised, the previously
recognised impairment loss is reversed to the extent that it does
not result in a carrying amount of the financial asset exceeding
what the amortised cost would have been had the impairment not been
recognised at the date the impairment is reversed.
The amount of the reversal is recognised in OCI in the period in
which the reversal occurs.
b) Financial liabilities and equity
Financial liabilities and equity instruments issued by the Group
are classified according to the substance of the contractual
arrangements entered into and the definitions of a financial
liability and an equity instrument. An equity instrument is any
contract that evidences a residual interest in the assets of the
Group after deducting all of its liabilities. The accounting
policies adopted in respect of financial liabilities and equity
instruments are set out below.
Other financial liabilities
Other financial liabilities include trade and other payables and
are recognised initially at fair value and subsequently measured at
amortised cost, using the effective interest method.
Equity instruments
Equity instruments issued by the Group are recorded at the
proceeds received, net of direct issue costs.
c) Derecognition
Financial assets are derecognised when the rights to receive
cash flows from the assets expire, or the financial assets are
transferred and the Group has transferred substantially all the
risks and rewards of ownership of the financial assets. On
derecognition of a financial asset, the difference between the
asset's carrying amount and the sum of the consideration received
and the cumulative gain or loss that had been recognised directly
in equity is recognised in the statement of comprehensive
income.
For financial liabilities, they are removed from the balance
sheet when the obligation specified in the relevant contract is
discharged, cancelled or expires. The difference between the
carrying amount of the financial liability derecognised and the
consideration paid is recognised in the statement of comprehensive
income.
1.16 Cash and cash equivalents
Cash and short-term deposits in the statement of financial
position comprise cash at banks and on hand and short-term deposits
with a maturity of three months or less, which are subject to an
insignificant risk of changes in value. For the purpose of the
consolidated statement of cash flows, cash and cash equivalents
consist of cash and short-term deposits, as defined above, net of
outstanding bank overdrafts as they are considered an integral part
of the Group's cash management.
1.17 Borrowings
After initial recognition, interest-bearing loans and borrowings
are subsequently measured at amortised cost using the EIR method.
Gains and losses are recognised in profit or loss when the
liabilities are derecognised as well as through the EIR
amortisation process. Amortised cost is calculated by taking into
account any discount or premium on acquisition and fees or costs
that are an integral part of the EIR. The EIR amortisation is
included as finance costs in the statement of profit or loss.
1.18 Provisions
Provisions are recognised when the Group has a present
obligation (legal or constructive) as a result of a past event, and
it is probable that an outflow of economic benefits will be
required to settle the obligation and a reliable estimate of the
amount of the obligation can be made. Where the time value of money
is material, provisions are stated at the present value of the
expenditure expected to settle the obligation.
All provisions are reviewed at each reporting date and adjusted
to reflect the current best estimate.
Where it is not probable that an outflow of economic benefits
will be required, or the amount cannot be estimated reliably, the
obligation is disclosed as a contingent liability, unless the
probability of outflow of economic benefits is remote. Possible
obligations, whose existence will only be confirmed by the
occurrence or non-occurrence of one or more future uncertain events
not wholly within the control of the Group are also disclosed as
contingent liabilities unless the probability of outflow of
economic benefits is remote.
A provision for decommissioning is made for the cost of
decommissioning assets at the time when the obligation to
decommission arises. Such provision represents the estimated
discounted liability 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.
Provisions for environmental restoration, restructuring costs
and legal claims are recognised when: the group has a present legal
or constructive obligation as a result of past events; it is
probable that an outflow of resources will be required to settle
the obligation; and the amount has been reliably estimated.
Restructuring provisions comprise lease termination penalties and
employee termination payments. Provisions are not recognised for
future operating losses.
Where there are a number of similar obligations, the likelihood
that an outflow will be required in settlement is determined by
considering the class of obligations as a whole. A provision is
recognised even if the likelihood of an outflow with respect to any
one item included in the same class of obligations may be
small.
Provisions are measured at the present value of the expenditures
expected to be required to settle the obligation using a pre-tax
rate that reflects current market assessments of the time value of
money and the risks specific to the obligation. The increase in the
provision due to passage of time is recognised as interest
expense.
1.19 Share capital, share premium and capital reserves
Ordinary shares are classified as equity. Share capital is
determined using the nominal value of shares that have been issued.
Any transaction costs associated with the issuing of shares are
deducted from the share premium (net of any related income tax
benefit) to the extent they are incremental costs directly
attributable to the equity transaction. Any discount on the issue
of ordinary shares is deducted from the share premium account.
The share premium is recognised on the difference between the
par value of a share and its selling price.
The capital reserve brought forward arose on the disposal of all
the subsidiaries to its former holding company (Crosby Capital
Limited), reverse acquisition of Crosby Capital Limited and on a
group reorganization during the years ended 31 December 2010, 31
December 2004 and 31 December 2000 respectively.
1.20 Revenue recognition
Revenue, which is the fair value of consideration received or
receivable, is recognised when it is probable that economic
benefits will flow to the Group and when the revenue can be
measured reliably. Revenue is shown net of value added tax,
returns, rebates and discounts and after eliminating sales within
the Group. The following criteria must also be met before revenue
is recognised:
i) Sale of goods
Revenue from the sale of oil, gas, and condensate is recognised
when significant risks and rewards pass to the customer.
ii) Interest income
Interest income is recognised on a time-proportion basis using
the effective interest method.
1.21 Mineral extraction tax
In the Russian Federation MET is payable on the extraction of
hydrocarbons, including natural gas, crude oil and condensate, and
is levied based on quantities of natural resources extracted
multiplied by the applicable MET rate for the product and field in
question. MET is a production based tax (as opposed to income) and
is accrued as a tax on production and recorded within cost of
sales.
1.22 Current and deferred income tax
The tax expense for the period comprises current and deferred
tax. Tax is recognised in the statement of comprehensive income,
except to the extent that it relates to items recognised in other
comprehensive income or directly in equity. In this case the tax is
also recognised in other comprehensive income or directly in
equity, respectively.
The current income tax charge is calculated on the basis of the
tax laws enacted or substantively enacted at the end of the
reporting period in the countries where the Company's subsidiaries
operate and generate taxable income. Management periodically
evaluates positions taken in tax returns with respect to situations
in which applicable tax regulation is subject to interpretation. It
establishes provisions where appropriate on the basis of amounts
expected to be paid to the tax authorities.
Deferred income tax is recognised, using the liability method,
on temporary differences arising between the tax bases of assets
and liabilities and their carrying amounts in the consolidated
financial statements. However, deferred income tax is not accounted
for if it arises from the initial recognition of an asset or
liability in a transaction other than a business combination that
at the time of the transaction affects neither accounting nor
taxable profit or loss. Deferred income tax is determined using tax
rates (and laws) that have been enacted or substantively enacted by
the end of the reporting period and are expected to apply when the
related deferred income tax asset is realised or the deferred
income tax liability is settled.
Deferred income tax assets are recognised to the extent that it
is probable that future taxable profit will be available against
which the temporary differences can be utilised.
Deferred income tax assets and liabilities are offset when there
is a legally enforceable right to offset current tax assets against
current tax liabilities and when the deferred income tax assets and
liabilities relate to income taxes levied by the same taxation
authority on either the same taxable entity or different taxable
entities where there is an intention to settle the balances on a
net basis.
1.23 Employee benefits
a) Retirement benefit schemes
No pension contributions were payable in the year. The Group
participated only in defined contribution pension schemes and paid
contributions to independently administered funds on a mandatory or
contractual basis. The assets of these schemes are held separately
from those of the Group in independently administered funds. The
retirement benefit schemes are generally funded by payments from
employees and by the relevant company. The Group has no further
payment obligations once the contributions have been paid. The
contributions are recognised as an employee benefit expense on an
accruals basis.
b) Share-based employee compensation
The Group operates equity-settled share-based compensation plans
to remunerate its Directors and key management.
All services received in exchange for the grant of any
share-based compensation are measured at their fair values. These
are indirectly determined by reference to the fair value of the
share options and warrants awarded. Their value is appraised at the
grant date and excludes the impact of any non-market vesting
conditions.
All share-based compensation is ultimately recognised as an
expense in the statement of comprehensive income unless it
qualifies for recognition as an asset, with a corresponding credit
to the employee share-based compensation reserve in equity. If
vesting periods or other vesting conditions apply, the expense is
allocated over the vesting period, based on the best available
estimate of the number of share options expected to vest.
Non-market vesting conditions are included in assumptions about the
number of options that are expected to become exercisable.
Estimates are subsequently revised if there is any indication that
the number of share options expected to vest differs from previous
estimates. No adjustment to expense recognised in prior periods is
made if fewer share options ultimately are exercised than
vested.
Upon exercise of share options or warrants the proceeds received
net of any directly attributable transaction costs up to the
nominal value of the shares issued are allocated to share capital
and the amount previously recognised in the employee share-based
compensation reserve will be transferred out with any excess being
recorded as share premium.
When the share options or warrants have vested and then lapsed,
the amount previously recognised in the employee share-based
compensation reserve is transferred to retained earnings or
accumulated losses.
c) Bonus plans
The Group recognises a liability and an expense for bonuses
where contractually obliged or where there is a past practice that
has created a constructive obligation.
d) Social obligations
Wages, salaries, contributions to the Russian Federation state
pension and social insurance funds, paid annual leave, sick leave
and bonuses are accrued in the year in which the associated
services are rendered by the employees of the Group.
e) Valuations of share options or warrants granted
Estimating fair value for share-based payment transactions
requires determination of the most appropriate valuation model,
which depends on the terms and conditions of the grant. This
estimate also requires determination of the most appropriate inputs
to the valuation model, including the expected life of the share
option or appreciation right, volatility and dividend yield, and
making assumptions about them. The fair value of share options or
warrants granted was calculated using the Black-Scholes Pricing
Model, which requires the input of highly subjective assumptions,
including the volatility of the share price. Because changes in
subjective input assumptions can materially affect the fair value
estimate, in the opinion of the Directors of the Group the existing
model will not always necessarily provide a reliable single measure
of the fair value of the share options. Details of the inputs are
set out in Note 19 to the financial statements.
2. Critical accounting estimates and judgements
The preparation of consolidated financial statements in
conformity with IFRS requires management to make judgements,
estimates and assumptions that affect the application of accounting
policies and the reported amounts of assets, liabilities, income
and expenses. Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing
basis. Revisions to accounting estimates are recognised in the year
in which the estimates are revised and in any future years
affected. The estimates and assumptions that have a significant
risk of causing a material adjustment to the carrying amounts of
assets and liabilities within the next financial year are discussed
below:
2.1 Income taxes
The Group is subject to income and other taxes. Significant
judgement is required in determining the provision for income tax
and other taxes due to the complexity of tax legislation of the
Russian Federation. The taxation system in the Russian Federation
continues to evolve and is characterised by frequent changes in
legislation, as well as official pronouncements and court decisions
which are sometimes contradictory and subject to varying
interpretation by different tax authorities. Taxes are subject to
review and investigation by a number of authorities which have the
authority to impose severe fines, penalties and interest charges. A
tax year remains open for review by the tax authorities during the
three subsequent calendar years; however, under certain
circumstances a tax year may remain open longer.
Deferred tax assets are recognised to the extent that it is
probable for each subsidiary to generate enough taxable profits to
utilise deferred income tax recognised. Significant management
judgement is required to determine the amount of deferred tax
assets recognised, based upon the likely timing and the level of
future taxable profits. Management prepares cash-flow forecasts to
support the recoverability of deferred tax assets. Cash flow models
are based on a number of assumptions relating to oil prices,
operating expenses, production volumes, etc. These assumptions are
consistent with those used by independent reserve engineers.
Management also takes into account uncertainties related to future
activities of the subsidiaries and going concern considerations.
When significant uncertainties exist, deferred tax losses are not
recognised even if the recoverability of these is supported by cash
flow forecasts. Refer to further details in Note 22.
2.2 Provision for decommissioning and environmental restoration
This provision is significantly affected by changes in
technology, laws and regulations which may affect the actual cost
of decommissioning and environmental restoration to be incurred at
a future date. The estimate is also impacted by the discount rates
used in the provisioning calculations. The discount rates used are
the Russian government bond rates.
Under the current levels of enforcement of existing legislation,
management believes there are no significant liabilities in
addition to amounts which are already accrued and which would have
a material adverse effect on the financial position of the
Group.
The Group's exploration, development and production activities
involve the use of wells, related equipment and operating sites.
Generally, licences and other regulatory acts require that such
assets be decommissioned upon the completion of production.
According to these requirements, the Group is obliged to
decommission wells, dismantle equipment, restore the sites and
perform other related activities. The Group's estimates of these
obligations are based on current regulatory or licence
requirements, as well as actual dismantling and other related
costs. These liabilities are measured by the Group using the
present value of the estimated future costs of decommissioning of
these assets. The discount rate is reviewed at each reporting date
and reflects risk free rate. The Group adjusts specific cash flows
for risk.
2.3 Impairment of assets
a) Exploration and evaluation
An impairment exercise will be performed at the end of the
exploration and evaluation process.
When, at the end of the exploration and evaluation stage,
commercial reserves are determined to exist in respect of a
particular field, the Group performs an impairment test in relation
to costs capitalised. Where reserves are determined in sufficient
quantity to justify development, the associated assets are
transferred to property, plant and equipment.
If no potentially commercial hydrocarbons are discovered, the
exploration asset is written off through the statement of profit or
loss and other comprehensive income as a dry hole. If extractable
hydrocarbons are found and, subject to further appraisal activity
(e.g., the drilling of additional wells), it is probable that they
can be commercially developed, the costs continue to be carried as
an intangible asset while sufficient/continued progress is made in
assessing the commerciality of the hydrocarbons. Costs directly
associated with appraisal activity undertaken to determine the
size, characteristics and commercial potential of a reservoir
following the initial discovery of hydrocarbons, including the
costs of appraisal wells where hydrocarbons were not found, are
initially capitalised as an intangible asset.
b) Development and production
When the fields enter the production phase, the recoverable
amounts of cash-generating units and individual assets will be
determined based on the higher of value-in-use calculations and
fair values less costs to sell. These calculations will require the
use of estimates and assumptions. It is reasonably possible that
the oil price assumption may change which may then impact the
estimated life of the field and may then require a material
adjustment to the carrying value of long-term assets.
The Group monitors internal and external indicators of
impairment relating to its tangible and intangible assets. There
were no such indicators of possible impairment identified during
the reporting years covered by these consolidated financial
statements.
2.4 Evaluation of reserves and resources
Estimates of proved reserves are used in determining the
depletion and amortization charge for the period and assessing
whether any impairment charge or reversal of impairment is required
for development and producing assets. As of 31 December 2017 and
2016 proved reserves were estimated by reference to an independent
international oil and gas engineering firm report dated 22 May
2014, by reference to available geological and engineering data,
and only include volumes for which access to market is assured with
reasonable certainty.
When the fields enter the development and production phase,
estimates of reserves are inherently imprecise, require the
application of judgments and are subject to regular revision,
either upward or downward, based on new information such as from
the drilling of additional wells and changes in economic factors,
including product prices, contract terms or development plans.
Changes to the Group's estimates of proved reserves affect
prospectively the amounts of the depletion and amortization charge,
decommissioning assets and provisions where changes in reserve
estimates cause the estimated useful lives of assets to be
revised.
Depletion is provided for based on the production profile on a
field by field basis, which may exceed the existing licence period.
Licence extensions are generally awarded by the licence authorities
in Russia as a matter of course, provided that production plans
demonstrate that additional time is required to economically
produce at the field and that the development and production
requirements of the initial licence grant have been met.
2.5 Sub-soil licences
The Group is subject to periodic reviews of its activities by
governmental authorities in Russia with respect to the requirements
of its sub-soil licences, and seeks amendments to the licences when
supported by the results of ongoing exploration and development
activities. The requirements under the licences are subject to
interpretation and enforcement policies of the relevant
authorities. In management's opinion, as of 31 December 2017, there
are no non-compliance issues that will have an adverse effect on
the financial position or operating results of the Group.
3. Determination of fair value
Fair values have been determined for measurement and/or
disclosure purposes based on the following methods. When
applicable, further information about the assumptions made in
determining fair values is disclosed in the notes specific to that
asset or liability.
3.1 Other receivables
The fair value of other receivables is estimated as the present
value of future cash flows, discounted at the market rate of
interest at the reporting date. This fair value is determined for
disclosure purposes.
3.2 Non-derivative financial liabilities
Fair value, which is determined for disclosure purposes, is
calculated based on the present value of future principal and
interest cash flows, discounted at the market rate of interest at
the reporting date. Fair value of the non-derivative financial
assets is disclosed in Note 3.3 to the financial statements.
3.3 Assets and liabilities not measured at fair value but for
which fair value is disclosed
Fair values analysed by level in the fair value hierarchy of
assets and liabilities of the Group not measured at fair value are
as follows:
31 December 2017 31 December 2016
----------------------- -----------------------
Carrying Carrying
Fair value value Fair value value
----------- ---------- ----------- ----------
Financial assets
Trade and other receivables 152,574 152,574 172,294 172,294
Total assets 152,574 152,574 172,294 172,294
=========== ========== =========== ==========
Financial liabilities
Borrowings 1,614,108 1,562,186 1,851,695 1,859,949
Trade and other payables 93,857 93,857 129,379 129,379
Obligation under
finance leasing 1,666 1,666 - -
Other non-current
payables 63,328 62,771 59,967 57,874
----------- ---------- ----------- ----------
Total liabilities 1,771,437 1,720,480 2,038,832 2,047,202
=========== ========== =========== ==========
The fair value of borrowings and other non-current payables is
based on cash flows discounted using a market rate of 9.34% (2016:
11.93%). The fair values of borrowings and other non-current
payables are within level 2 of the fair value hierarchy. The fair
value of trade and other receivables is within level 3
hierarchy.
4. Revenue
The Group's operations comprise one class of business being oil
and gas exploration, development and production and all revenues
are from one geographic region, the Saratov Region in the Russian
Federation. Companies incorporated outside of Russia provide
support to the operations in Russia.
Revenue is primarily from the sale of three products:
2017 2016
---------- ----------
Gas sales 1,528,637 1,708,103
Oil sales 115,358 137,982
Condensate sales 142,445 136,968
Sulphur sales 4,084 6,377
---------- ----------
Total sales 1,790,524 1,989,430
========== ==========
All gas sales are made to one customer, Gazprom Mezhregiongaz
Saratov LLC, under a long-term contract effective until 31 December
2020 with terms reviewed annually. Condensate and oil are sold to
local buyers. The sales of all products are denominated in RUB.
5. Cost of sales
2017 2016
---------- ----------
Depreciation and depletion 437,160 404,684
Mineral extraction tax 371,620 406,499
Wages and salaries 108,422 108,238
Materials and supplies 69,029 95,310
Other taxes and royalties 50,096 21,204
Repair and maintenance 37,928 39,750
Compensation benefits to operating personnel 13,739 16,812
Other 58,818 62,790
---------- ----------
Total cost of sales 1,146,812 1,155,287
========== ==========
6. Operating, administrative and selling expenses
2017 2016
-------- --------
Wages and salaries including director's
fee 131,774 215,868
Field development costs 13,268 397
Accountancy, legal and consulting services 14,335 39,023
Rent expense 6,081 13,691
Travelling 3,259 1,996
Audit services 2,268 9,848
Depreciation 3,227 4,255
Insurance 2,094 2,888
Office expenses 1,773 3,187
Computers and software 809 2,218
Other 6,060 5,975
-------- --------
Total operating, administrative, selling
expense 184,948 299,346
======== ========
7. Salaries and other employee benefits
2017 2016
-------- --------
Salaries and other employee benefits 253,935 340,918
-------- --------
Total 253,935 340,918
======== ========
Salaries and other employee benefits are included in other cost
of sales and operating, administrative and selling expenses.
Average monthly number of employees for the year (including
executive directors):
2017 2016
---------- ----------
Employees Employees
---------- ----------
Administrative 58 83
Operating 181 184
---------- ----------
Total 239 267
========== ==========
8. Other income and expenses
2017 2016
--------- ----------
Change in decommissioning and environmental
restoration provision 13,448 34,076
Penalties received 11,367 15,000
Net income from sale of property, plant
and equipment 2,017 -
Net foreign exchange difference 173 -
--------- ----------
Other income 27,005 49,076
========= ==========
Loss on disposal of property, plant and
equipment (30,669) (86,624)
Write-off of accounts receivable and other
current assets, accounts receivable bad
debt provision accrual (1,908) (26,986)
Charitable contributions (1,255) (3,122)
Bank charges (181) (1,034)
Penalties paid - (11,810)
Net foreign exchange difference - (7,982)
Loss on financial assets at fair value through
profit or loss - (4,020)
Other (1,288) (1,282)
--------- ----------
Other expenses (35,301) (142,860)
========= ==========
9. Finance income and finance costs
Finance income 2017 2016
---------------------------------------------- ---------- ----------
Interest on bank deposits 27,960 24,409
---------- ----------
Total finance income 27,960 24,409
========== ==========
Finance costs
Interest on borrowings (Note 20) (190,897) (228,538)
Unwinding of the discount on decommissioning
and environmental restoration provision
(Note 21) (29,884) (35,898)
Unwinding of the discount on recognition
non-current payables (4,896) (3,549)
Other finance costs (64) -
---------- ----------
Total finance costs (225,741) (267,985)
========== ==========
10. Income tax benefit/(expense)
The tax charge for the year comprises:
2017 2016
-------- ----------
Deferred tax benefit/(expense) 163,052 (100,231)
Current tax expense (85) (105)
-------- ----------
Total income tax benefit/(expense) 162,967 (100,336)
======== ==========
Reconciliation between expected and actual taxation charge is
provided below.
2017 2016
------------ ----------
(Loss)/profit before income tax (1,432,945) 197,437
------------ ----------
Theoretical tax benefit/(charge) at applicable
income tax rate of 20% (2016: 20%) 286,589 (39,467)
Effect of different foreign tax rates (6,278) (27,357)
Effect of unrecognised deferred tax assets (108,715) (21,422)
Tax effect of expenses not deductible for
tax purposes (8,629) (12,090)
------------ ----------
Total income tax benefit/(expense) 162,967 (100,336)
============ ==========
The Group's income was subject to tax at the following tax
rates:
2017 2016
------ ------
The Russian Federation 20.0% 20.0%
The Republic of Cyprus 12.5% 12.5%
Cayman Islands 0% 0%
The Group is subject to Cayman income tax, otherwise the
majority of the Group's operations are located in the Russian
Federation. Thus 20% tax rate is used for theoretical tax charge
calculations.
11. Exploration and evaluation assets
Exploration and evaluation works
Sub-soil capitalised, including
licences seismic works Total
------------ ------------------------------------------- ------------
Balance at 1 January 2016 2,101,062 2,589,304 4,690,366
Additions 86,962 23,478 110,440
Transfer to property, plant and equipment - (1,217) (1,217)
Change in the estimates of decommissioning
provision - (11,275) (11,275)
------------ ------------------------------------------- ------------
Balance at 31 December 2016 2,188,024 2,600,290 4,788,314
============ =========================================== ============
Additions 14,597 136,564 151,161
Transfer from property, plant and equipment - 978 978
Change in the estimates of decommissioning
provision - 4,532 4,532
Impairment (1,164,893) (520,739) (1,685,632)
------------ ------------------------------------------- ------------
Balance at 31 December 2017 1,037,728 2,221,625 3,259,353
============ =========================================== ============
dditions during 2017 are mostly represented by seismic works at
the North Mokrousovskoye field (during 2016: exploration and
production licence acquisition at the West Koltogor oil field).
In management's opinion, as at 31 December 2017 there were no
non-compliance issues in respect of the licences that would have an
adverse effect on the financial position or the operating results
of the Group.
Impairment
In 2017 the Group revised its investment strategy with a primary
focus on exploration and further development of the Deep Devonian
structure on the Bortovoy Licence. As a result, the forecasted
amount of investments in the development of the Koltogor Licences
cannot be confirmed. Accordingly, the probability of the Koltogor
Licences' development becomes uncertain. The Group recognised an
impairment loss of the total book value of exploration and
evaluation assets of the Koltogor Licences as of 31 December
2017.
12. Property, plant and equipment
Construction
Oil and Motor Other equipment work in
gas assets vehicles and furniture progress Total
------------ ---------- ---------------- ------------- ------------
Cost at 1 January 2016 4,542,928 17,245 7,711 257,826 4,825,710
Additions 93,761 - 244 281,460 375,465
Reclassification 205,009 - - (205,009) -
Transfer from exploration
and evaluation assets 1,217 - - - 1,217
Transfer to inventory - - - (2,902) (2,902)
Change in the estimates
of decommissioning
provision (1,913) - - (3,320) (5,233)
Disposals (15,540) - - (78,131) (93,671)
------------ ---------- ---------------- ------------- ------------
Cost at 31 December
2016 4,825,462 17,245 7,955 249,924 5,100,586
Additions 171,739 8,193 82 99,060 279,074
Reclassification 265,311 - - (265,311) -
Transfer from exploration
and evaluation assets - - - (978) (978)
Transfer to inventory (947) - - (2,690) (3,637)
Change in the estimates
of decommissioning
provision 5,261 - - - 5,261
Disposals (64,782) (7,363) (74) (11,423) (83,642)
Cost at 31 December
2017 5,202,044 18,075 7,963 68,582 5,296,664
------------ ---------- ---------------- ------------- ------------
Accumulated depreciation,
depletion and impairment
Balance at 1 January
2016 (473,797) (9,475) (4,168) - (487,440)
Depreciation and depletion (401,790) (6,641) (508) - (408,939)
Disposals 7,047 - - - 7,047
------------ ---------- ---------------- ------------- ------------
Balance at 31 December
2016 (868,540) (16,116) (4,676) - (889,332)
Depreciation and depletion (434,755) (5,137) (495) - (440,387)
Disposals 34,518 5,765 74 - 40,357
Balance at 31 December
2017 (1,268,777) (15,488) (5,097) - (1,289,362)
------------ ---------- ---------------- ------------- ------------
Net book value at 1
January 2016 4,069,131 7,770 3,543 257,826 4,338,270
============ ========== ================ ============= ============
Net book value at 31
December 2016 3,956,922 1,129 3,279 249,924 4,211,254
============ ========== ================ ============= ============
Net book value at 31
December 2017 3,933,267 2,587 2,866 68,582 4,007,302
============ ========== ================ ============= ============
13. Inventories
31 December 31 December
2017 2016
------------ ------------
Natural gas and hydrocarbon liquids (at
lower of cost and net realisable value) 7,119 6,047
Materials and supplies (at cost) 13,758 12,783
------------ ------------
Total inventories 20,877 18,830
============ ============
Materials and supplies mainly comprised liquid feedstock and
maintenance parts.
14. Trade and other receivables and other current non-financial assets
31 December 31 December
2017 2016
------------ ------------
Trade receivables, gross 151,855 169,915
Other accounts receivable, gross 1,635 2,379
Allowance for doubtful accounts (916) -
Total trade and other receivables 152,574 172,294
============ ============
Prepayments 11,173 12,783
VAT receivable 72 2,403
Other taxes prepaid 155 -
------------ ------------
Total other current non-financial assets 11,400 15,186
============ ============
As of 31 December 2017 trade and other receivables in the amount
152,574 (31 December 2016: 172,294) were neither past due, nor
impaired. As of 31 December 2017 trade and other receivables in the
amount of 916 (31 December 2016: 0) were past due and impaired.
Prepayments are advance payments for services to be rendered
within the next twelve months.
Current VAT receivable is expected to be recovered within the
next twelve months.
15. Cash and cash equivalents
Cash and cash equivalents consist of cash at bank and the
majority of cash held is denominated in RUB.
The Group's exposure to credit risk related to cash and cash
equivalents are disclosed in Note 27.
16. Share capital
Number of
ordinary Nominal value, Nominal value,
At 31 December 2017 and 2016 shares USD'000 RUB'000
---------------------------------- ------------ --------------- ---------------
Authorised (par value of USD
0.20 each) 250,000,000 50,000 1,708,672
Issued and fully paid (par value
of USD 0.20 each) 141,955,386 28,391 970,218
17. Dividends
In accordance with the relevant legislation applicable to the
Group, the Group's distributable reserves are limited to the
balance of retained earnings as recorded in the Company's statutory
financial statements prepared in accordance with International
Financial Reporting Standards. No dividends were declared or paid
in 2017 and 2016.
18. Other taxes payable
31 December 31 December
2017 2016
------------ ------------
VAT payable 37,627 67,769
Mineral extraction tax 32,119 35,647
Property tax 10,010 4,711
Other taxes payable 9,625 10,373
------------ ------------
Total 89,381 118,500
============ ============
19. Earnings per share
Basic earnings per share is calculated by dividing the profit
attributable to owners of the Company by the weighted average
number of ordinary shares in issue during the year.
Diluted earnings per share is calculated by adjusting the
weighted average number of ordinary shares outstanding to assume
conversion of all dilutive potential ordinary shares. During the
year ended 31 December 2017 share options had an antidilutive
effect on the loss per share. During the year ended 31 December
2016 share options had a dilutive effect on the earnings per
share.
2017 2016
------------ --------
(Loss)/profit attributable to owners of
the Company -
Basic and diluted (1,269,978) 97,101
Number of Number of
shares shares
------------ ------------
Weighted average number of shares for calculating
basic earnings per share 141,955,386 141,955,386
Antidilutive/dilutive potential ordinary
shares - share options 202,500 1,952,500
Weighted average number of shares for calculating
diluted earnings per share 142,157,886 143,907,886
RUB RUB
------- -----
Basic (loss)/earnings per share (8.95) 0.68
Antidiluted/diluted (loss)/earnings per
share (8.95) 0.67
20. Share-based payments
20.1 Share options
At 31 December 2017, the Company had a total of 202,500
outstanding share options (31 December 2016: 1,952,500).
Options which are lapsed or are cancelled prior to their
exercise date are deleted from the register of outstanding options
and are available for re-use.
31 December 2017 31 December 2016
-------------------------- ----------------------------
Option exercise Option exercise
Grant date Number price (pence) Number price (pence)
------------------ -------- ---------------- ---------- ----------------
11 January 2005 - - - -
23 March 2006 - - - -
23 February 2007 - - - -
11 January 2008 202,500 445 202,500 445
31 October 2012 - - 1,750,000 20
-------- ----------
202,500 1,952,500
======== ==========
No share options were granted during the year ended 31 December
2017.
20.2 Initial share options
The Company adopted an employee Share Option Scheme on 4 March
2005 (the "Share Option Scheme") in order to incentivise key
management and staff at that time. The following share options were
granted to former employees and directors of the Company under the
Initial Share Option Scheme adopted on 4 March 2005 ("Initial Share
Options") and are still in existence:
2017 2016
---------------------------- ----------------------------
Weighted Weighted
average exercise average exercise
Number price (pence) Number price (pence)
-------- ------------------ -------- ------------------
Outstanding at 1
January 202,500 445 202,500 445
Outstanding at 31
December 202,500 445 202,500 445
======== ================== ======== ==================
Share options granted under the Initial Share Option Scheme were
exercisable as follows:
-- The first 30% of the options between the first and tenth anniversary of the grant date;
-- The next 30% of the options between the second and tenth anniversary of the grant date; and
-- The remaining options between the third and tenth anniversary of the grant date.
Equity-settled share-based payments are measured at fair value
(excluding the effect of non market-based vesting conditions) as
determined through use of the binomial option pricing model, at the
grant date. The fair value determined at the grant date of the
equity-settled share-based payments is expensed on a straight-line
basis over the vesting period, based on the Company's estimate of
shares that will eventually vest.
The binomial option pricing model is applied to the granting of
share options in respect of calculating the fair values. Key inputs
to the model are as follows:
Share options
-------------------------------------------------
11 January 23 March 23 February 11 January
2005 2006 2007 2008
----------- --------- ------------ -----------
Share price at grant 20.75p 93.25p 36.25p 22.25p
Option exercise price 21.15p 95.20p 32.65p 22.25p
Expected life of
option 10 years 10 years 10 years 10 years
Expected volatility 60-65% 60-65% 60-65% 60-65%
Expected dividend
yield 5.0% 5.0% 5.0% 5.0%
Volatility has been based on the historical trading performance
of the Company and comparable companies. The risk free rate has
been determined based on 10-year government bonds.
20.3 Directors share options
Share options granted to certain existing Directors of the
Company on 31 October 2012 ("Directors Share Options") were
exercisable at any time between the commencement of the option
period and third anniversary of the grant date. Share options
granted under this scheme were as follows:
2017 2016
------------------------------ ------------------------------
Weighted Weighted
average exercise average exercise
Number price (pence) Number price (pence)
---------- ------------------ ---------- ------------------
Outstanding at 1
January 1,750,000 20 1,750,000 20
Expired 1,750,000 20 - -
---------- ------------------ ---------- ------------------
Outstanding at 31
December - - 1,750,000 20
========== ================== ========== ==================
During 2014 the exercisable period of the remaining options was
extended from 30 October 2015 to 30 October 2017. As of 31 December
2017 all Directors Share options have expired.
The Black-Scholes formula is the option pricing model applied to
the grant of share options in respect of calculating the fair
values. Key inputs to the model are as follows:
31 October
Share options 2012
------------------------------- -----------
Share price at grant 3.45p
Option exercise price 1.00p
Expected life of option 3 years
Expected volatility 216.1%
Expected dividend yield 0.0%
Risk free rate 0.49%
Fair value per share option 3.342p
Exchange rate used (USD: GBP) 1.62525
Volatility has been based on the Company's trading performance
from 1 January 2011. The risk free rate has been determined based
on 5-year government bonds.
21. Borrowings
2017 2016
---------- ----------
Non-revolving credit facility - liability, as at 1 January 1,859,949 2,218,549
Including current liability 311,160 373,378
Interest accrued 190,897 228,538
Interest paid (188,660) (227,138)
Repayment (300,000) (360,000)
Non-revolving credit facility, as at 31 December 1,562,186 1,859,949
========== ==========
Including current liability 309,172 311,160
In 2014, the Group entered into non-revolving credit facility
agreement with Sberbank of Russia OJSC with a maximum facility
amount of 2,400,000. Contractual currency is RUB. The facility was
drawn down in full in 2014. The maturity date is 30 April 2021,
being the 7-year anniversary of the facility entered into. The
Group is obliged to repay the principal amount of the loan in 24
tranches commencing on 11 May 2015 and on a quarterly basis from
then on with a final repayment tranche payable on the maturity
date. The interest rate is fixed and contracted as 10.98% per
annum. In October 2017 the Group concluded additional agreement,
where the interest rate was resettled as 10.73% per annum. Sberbank
may unilaterally amend the interest rate in the event of increases
in the refinancing rate of the Central Bank of Russia. The Group
paid an upfront commission on the facility of 1% of the facility
amount (24,000) and there is a drawdown charge of 0.25% per year on
the balance of the facility not drawn by the Group within the
established timeframe. The Group has the option to prepay the loan
in whole or in part at any time, subject to the payment of a fee.
The Group provided certain warranties and representations to
Sberbank in the agreement. The agreement contains certain loan
covenants and events of default which are customary for a facility
of this type. The Group was in compliance with all covenants as of
31 December 2017 and 31 December 2016. The loan is secured by the
Group, such security being granted pursuant to various pledge and
mortgage deeds entered into by the Group on or about the date of
the Sberbank Facility. The carrying value of property, plant and
equipment pledged as of 31 December 2017 amounted to 2,775,473 (31
December 2016: 2,901,916).
The outstanding principal amount of the facility as of 31
December 2017 was 1,560,000 (31 December 2016: 1,860,000). The
credit facility debt is measured at amortised cost, using the
effective interest method.
Additionally the Group entered into 100,000 revolving loan
facility on 13 December 2017. The interest is 10,5% for disbursed
amount and 0,5% for remaining part of the limit. The maturity date
is 12 December 2018. There were no drawings in 2017.
22. Decommissioning and environmental restoration provision
The decommissioning and environmental restoration provision
represents the net present value of the estimated future
obligations for abandonment and site restoration costs which are
expected to be incurred at the end of the production lives of the
gas and oil fields which is estimated to be within 20 years.
2017 2016
-------- ---------
Provision as at 1 January 359,153 358,000
Additions 770 15,839
Unwinding of discount 29,884 35,898
Change in estimate of decommissioning and environmental restoration provision (3,655) (50,584)
Provision as at 31 December 386,152 359,153
======== =========
This provision has been created based on the Group's internal
estimates. Assumptions based on the current economic environment
have been made which the directors believe are a reasonable basis
upon which to estimate the future liability. These estimates are
reviewed regularly to take into account any material changes to the
assumptions. However, actual decommissioning costs will ultimately
depend upon future market prices for the necessary dismantlement
works required, which will reflect market conditions at the
relevant time. Furthermore, the timing is likely to depend on when
the fields cease to produce at economically viable rates. This in
turn will depend upon future oil prices and future operating costs,
which are inherently uncertain.
The provision reflects two liabilities: one is to dismantle the
property, plant and equipment assets and the other is to restore
the environment. The decommissioning part of the provision is
reversed when an oil well is abandoned and corresponding
capitalised costs are expensed. The environmental part of the
provision is reversed when the expenses on restoration are actually
incurred.
The provision is reversed when the corresponding capitalised
costs directly attributable to an exploration and evaluation asset
are expensed as it is determined that a commercial discovery has
not been achieved and the restoration of the corresponding
environment has been completed.
The Group reviews the application of inflation rates used for
the provision estimation each half-year end. The inflation rate
used in the estimation of the provision as of 31 December 2017 was
3.77% in 2017, decreasing to 3.64% in 2036 (as of 31 December 2016:
5.8% in 2017, decreasing to 4.0% in 2036). The discount rates used
to determine the decommissioning and environmental restoration
provision are based on Russian government bond rates. As of 31
December 2017 discount rate varies from 7.62% to 7.79% (as of 31
December 2016: from 8.53% to 8.57%) depending on expected period of
abandonment and site restoration for each gas and oil fields.
23. Deferred tax liabilities
Movements in temporary differences during the year:
31 December 2017 Recognised in profit or loss 31 December 2016
----------------- ----------------------------- -----------------
Decommissioning provision 45,382 1,014 44,368
Other current assets and liabilities 11,435 1,895 9,540
Tax loss carry-forwards 299,178 111 299,067
----------------- ----------------------------- -----------------
Deferred tax assets 355,995 3,020 352,975
----------------- ----------------------------- -----------------
Exploration and evaluation assets (355,784) 220,659 (576,443)
Property, plant and equipment (269,650) (61,472) (208,178)
Borrowings (1,397) 845 (2,242)
----------------- ----------------------------- -----------------
Deferred tax liabilities (626,831) 160,032 (786,863)
----------------- ----------------------------- -----------------
Net deferred tax liabilities (270,836) 163,052 (433,888)
================= ============================= =================
31 December 2016 Recognised in profit or loss 31 December 2015
----------------- ----------------------------- -----------------
Decommissioning provision 44,368 2,023 42,345
Other current assets and liabilities 9,540 (4,599) 14,139
Tax loss carry-forwards 299,067 (18,046) 317,113
----------------- ----------------------------- -----------------
Deferred tax assets 352,975 (20,622) 373,597
----------------- ----------------------------- -----------------
Exploration and evaluation assets (576,443) (15,525) (560,918)
Property, plant and equipment (208,178) (65,195) (142,983)
Borrowings (2,242) 1,111 (3,353)
----------------- ----------------------------- -----------------
Deferred tax liabilities (786,863) (79,609) (707,254)
----------------- ----------------------------- -----------------
Net deferred tax liabilities (433,888) (100,231) (333,657)
================= ============================= =================
Deferred income tax assets are not fully recognised for
impairment of exploration and evaluation assets and tax losses
mainly carried forward for SibGeCo to the extent that the
utilisation of the related tax benefit through future taxable
profits is not probable. The Group has not recognised deferred
income tax assets of 591,346 (2016: 482,631) The Group has tax
losses that are available indefinitely for offsetting against
future taxable profits of the companies in which the losses
arose.
Management assessed that recognised deferred tax assets will be
fully offset against future taxable profits in 2020-2026.
24. Trade and other payables
31 December 31 December
2017 2016
------------ ------------
Current trade payables 64,052 93,143
Payables to employees 24,310 20,512
Accrued expenses 5,495 15,724
------------ ------------
Total current payables 93,857 129,379
============ ============
Non-current other payables 62,771 57,874
------------ ------------
Total non-current payables 62,771 57,874
============ ============
25. Operating leases
Operating lease payments are mainly rentals by the Group of
land, office space and equipment required for use on a temporary
basis. Leases are normally signed on a short term basis of one to
two years with options to extend.
Non-cancelable and cancelable operating lease payments
recognised within cost of sales and operating, administrative and
selling expenses in the consolidated statement of comprehensive
income for the year amounted to 9,639 (2016: 32,953).
At the reporting date the Group's outstanding commitments for
future minimum lease payments under non-cancellable leases fall due
as follows:
31 December 31 December
2017 2016
------------ ------------
Within one year 3,002 2,598
In two to five years 14,496 11,405
More than five years 32,518 27,141
------------ ------------
Total 50,016 41,144
============ ============
26. Financial instruments and financial risk management
The Group has exposure to the following risks from its use of
financial instruments:
-- Liquidity risk;
-- Market risk;
-- Credit risk.
This note presents information about the Group's exposure to
each of the above risks, the Group's objectives, policies and
processes for measuring and managing risk, and the Group's
management of capital. Further quantitative disclosures are
included throughout these consolidated financial statements.
The Group's risk management policies deal with identifying and
analysing the risks faced by the Group, setting appropriate risk
limits and controls, and monitoring risks and adherence to limits.
Risk management policies and systems are reviewed regularly to
reflect changes in market conditions and the Group's activities.
The Group, through its internal policies, aims to develop a
disciplined and constructive control environment in which all
employees understand their roles and obligations.
26.1 Liquidity risk
Liquidity risk is the risk that the Group will not be able to
meet its financial obligations as they fall due. The Group monitors
the risk of cash shortfalls by means of current liquidity planning.
The Group's approach to managing liquidity is to ensure, as far as
possible, that it will always have sufficient liquidity to meet its
liabilities when due, under both normal and stressed conditions,
without incurring unacceptable losses or risking damage to the
Group's reputation. This approach is used to analyse payment dates
associated with financial assets, and also to forecast cash flows
from operating activities. The contractual maturities of financial
liabilities are presented including estimated interest
payments.
The Group's current liabilities exceed current assets by 22,471
as at 31 December 2017. The Group plans to cover liquidity gap by
cash inflows from operating activity in 2018. For additional
liquidity risk mitigation as of 31 December 2017 the Group has
unused borrowing facility in the amount of 100,000 (see Note
20).
With all the above the Group management considers the liquidity
risk as low.
The table below summarises the maturity profile of the Group's
financial liabilities based on contractual undiscounted
payments:
Less than Over
Total 1 year 1-3 years 3 years
----------- ---------- ----------- ---------
Financial liabilities as at 31 December 2017
Borrowings 1,871,795 452,638 1,282,464 136,693
Trade and other payables 175,546 93,857 - 81,689
Obligations under finance lease 1,666 1,666 - -
----------- ---------- ----------- ---------
Total 2,047,341 548,161 1,282,464 218,382
=========== ========== =========== =========
Less than Over
Total 1 year 1-3 years 3 years
----------- ---------- ----------- ---------
Financial liabilities as at 31 December 2016
Borrowings 2,357,003 487,329 1,124,968 744,706
Trade and other payables 211,068 129,379 - 81,689
----------- ---------- ----------- ---------
Total 2,568,071 616,708 1,124,968 826,395
=========== ========== =========== =========
26.2 Market risk
Market risk includes interest risk and foreign currency exchange
rate risk.
a) Interest risk
The Group has exposure to interest risk since the Group's
subsidiary, Diall Alliance LLC, entered into a non-revolving credit
facility agreement with Sberbank and, according to the terms of the
agreement, Sberbank may unilaterally amend the interest rate in the
event of increases in refinancing rates of the Central Bank of
Russia. Sberbank had not amended the interest rate by the reporting
date.
b) Foreign currency exchange rate risk
The Group does not have any significant exposure to foreign
currency risk, as no significant sales, purchases or borrowings are
denominated in a currency other than the functional currency.
The Group's operations are carried in the Russian Federation,
where all of its revenue, costs and financing from both Sberbank
and intra-group lending are denominated in RUB. As a result there
is no exposure at the operating subsidiary level to foreign
currency exchange risk movements.
26.3 Credit risk
Credit risk arises principally from the Group's financial
investments, trade and other receivables and cash and cash
equivalents. It is the risk that the value of the Group's
investments will not be recovered and the risk that the
counterparty fails to discharge its obligation in respect of the
Group's trade and other receivables and cash balances. The maximum
exposure to credit risk equals the carrying value of these items in
the financial statements.
The Group is largely dependent on one customer (Gazprom
Mezhregiongaz Saratov LLC) for a significant portion of revenues.
Gazprom Mezhregiongaz Saratov LLC accounted for 85.4% and 85.6% of
the Group's total revenue in 2017 and 2016 respectively. The loss
or the insolvency of this customer for any reason, or reduced sales
of the Group's principal product, could significantly reduce the
Group's ongoing revenue and/or profitability, and could materially
and adversely affect the Group's financial condition. The credit
rating assigned to Gazprom by Standard & Poor's is BB+. To
manage credit risk and exposure to the loss of the key customer,
the Group has entered into a long-term contract with Gazprom
Mezhregiongaz Saratov LLC, effective till 31 December 2020. As for
the smaller customers, the Group imposes minimum credit standards
that the customers must meet before and during the sales
transaction process.
Credit risk related to cash and cash equivalents is reduced by
placing funds with banks with acceptable credit ratings.
To limit exposure to credit risk on cash and cash equivalents
management's policy is to hold cash and cash equivalents in
reputable financial institutions. During 2017 cash was held mainly
with Sberbank, Bank Rossiysky Capital and Gazprom Bank.
31 December 31 December
2017 2016
------------ ------------
Ba2.ru, Moody's 163,328 291,683
ruBBB-, Expert RA 115,000 -
Ba3.ru, Moody's 105 -
Other 8,321 2,571
------------ ------------
Total cash and cash equivalents 286,754 294,254
============ ============
Capital management
The Group considers its capital and reserves attributable to
equity shareholders to be the Group's capital. In managing its
capital, the Group's primary long-term objective is to provide a
return for its equity shareholders through capital growth. Going
forward, the Group may seek additional investment funds and also
maintain a gearing ratio that balances risks and returns at an
acceptable level, while maintaining a sufficient funding base to
enable the Group to meet its working capital needs. Details of the
Group's capital are disclosed in the interim statement of changes
in equity.
There have been no significant changes to management's
objectives, policies or processes in the period, nor has there been
any change in what the Group considers to be capital.
The Group companies are in compliance with externally imposed
capital requirements as of 31 December 2017 and 31 December
2016.
27. Commitments and contingencies
27.1 Capital commitments
Capital expenditure contracted for at the end of the reporting
period but not yet incurred at 31 December 2017 was 483,042, net of
VAT (31 December 2016: 249,723, net of VAT).
27.2 Insurance
The insurance industry in the Russian Federation is in a
developing state and many forms of insurance protection common in
other parts of the world are not generally available. The Group's
insurance currently includes cover for damage to or loss of assets,
third-party liability coverage (including employer's liability
insurance), in each case subject to excesses, exclusions and
limitations. However, there can be no assurance that such insurance
will be adequate to cover losses or exposure to liability, or that
the Group will continue to be able to obtain insurance to cover
such risks. Until the Group obtains adequate insurance coverage
there is a risk that the loss or destruction of certain assets
could have a material adverse effect on the Group's operations and
financial position.
27.3 Litigation
The Group has been involved in a number of court proceedings
(both as a plaintiff and as a defendant) arising in the normal
course of business. In the opinion of management there are no
current legal proceedings or other claims outstanding which could
have a material adverse effect on the results of operations,
financial position or cash flows of the Group and which have not
been accrued or disclosed in these financial statements.
As at 31 December 2016, the Group was engaged in litigation
proceedings as a defendant. During 2017 the litigation was lost by
the Group, provision created in the amount 3,454 as of 31 December
2016 was used in 2017. No provision for litigations was accrued as
at 31 December 2017.
27.4 Taxation contingencies
Russian tax, currency and customs law allows for various
interpretations and is subject to frequent changes. Management's
interpretation of legislation as applied to the Company's
transactions and activities may be challenged by regional or
federal authorities.
The Group operates in a number of foreign jurisdictions besides
Russian Federation. The Group includes companies established
outside the Russian Federation that are subject to taxation at
rates and in accordance with the laws of jurisdictions in which the
companies of the Group are recognised as tax residents. Tax
liabilities of foreign companies of the Group are determined on the
basis that foreign companies of the Group are not tax residents of
the Russian Federation, nor do they have a permanent representative
office in the Russian Federation and are therefore not subject to
income tax under Russian law, except for income tax deductions at
the source.
In 2017, there was further implementation of mechanisms aimed at
avoiding tax evasion using low-tax jurisdictions and aggressive tax
planning structures. In particular, these changes included the
definition of the concept of beneficial ownership, the tax
residence of legal entities at the place of actual activities, as
well as the approach to taxation of controlled foreign companies in
the Russian Federation.
In addition, the concept of tax benefits for all taxes levied on
the territory of the Russian Federation was legislatively
established, with a focus on the presence of a business objective
in the conduct of business operations, as well as confirmation of
the fulfillment of obligations under the agreements concluded by
the parties to the contract, or by the person to whom these
obligations were transferred under a contract or law. This
adjustment significantly changes the concept of recognizing the
fact that taxpayers receive unreasonable tax benefits, which will
have a significant impact on the prevailing judicial practice. At
the same time, the practical mechanism for applying this rule has
not yet been fully resolved, and judicial practice on the changes
introduced is not formed.
These changes and recent trends in applying and interpreting
certain provisions of Russian tax law indicate that the tax
authorities may take a tougher stance in interpreting legislation
and reviewing tax returns. The tax authorities may thus challenge
transactions and accounting methods that they have never challenged
before. As a result, significant taxes, penalties and fines may be
accrued. It is not possible to determine the amounts of
constructive claims or evaluate the probability of a negative
outcome. Tax audits may cover a period of three calendar years
immediately preceding the audited year. Under certain
circumstances, the tax authorities may review earlier tax
periods.
These circumstances may create tax risks in the Russian
Federation that are substantially more significant than in other
countries. Management believes that it has provided adequately for
tax liabilities based on its interpretations of applicable Russian
tax legislation, official pronouncements and court decisions.
However, the interpretations of the relevant authorities could
differ and the impact on these consolidated financial statements if
the authorities were successful in enforcing their interpretations
could be significant.
27.5 Environmental matters
The Group's operations are in the upstream oil and gas industry
in the Russian Federation and its activities may have an impact on
the environment. The enforcement of environmental regulations in
the Russian Federation is evolving and the enforcement stance of
government authorities is continually being reconsidered. The Group
periodically evaluates its obligations related thereto. The outcome
of environmental liabilities under proposed or future legislation,
or as a result of stricter interpretation and enforcement of
existing legislation, cannot reasonably be estimated at present,
but could be material.
Under the current levels of enforcement of existing legislation,
management believes there are no significant liabilities in
addition to amounts already accrued as a part of the
decommissioning provision and which would have a material adverse
effect on the financial position or results of the Group.
28. Related party transactions
During the period there were no operations with related parties,
except for key management remunerations. Key management comprises
Board of Directors members.
The remuneration of key management comprised salary and bonuses
in the amount of17,451 (2016: 57,175) resulting from the reduction
of the Company's and Zoltav Resources LLC's Board of Directors
members' remuneration.
29. Events after the reporting date
On 3 April 2018 the Group agreed preferential terms for the
unsecured loan facility of up to an aggregate US$ 12 million
provided by the two largest shareholders. The loan's purpose is to
finance the exploration programme on Bortovoy. The loan was
approved by the Board of Directors and an appropriate announcement
was made.
30. Availability of annual report and financial statements and General Meeting
Copies of the Group's annual report and consolidated financial
statements will be sent to Registered Shareholders but may not be
sent to holders of Depository Interests. The annual report and
financial statements will be available for inspection at the
Group's registered office and may also be viewed on the Group's
website at: www.zoltav.com. Notice of a General Meeting will be
sent to shareholders in due course.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR SEFEFFFASESI
(END) Dow Jones Newswires
May 22, 2018 02:01 ET (06:01 GMT)
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