TIDMZOL
RNS Number : 4106D
Zoltav Resources Inc
26 June 2019
26 June 2019
Zoltav Resources Inc.
("Zoltav" or the "Company")
Final Results for the Year Ended 31 December 2018
Zoltav (AIM: ZOL), the Russia-focused oil and gas exploration
and production company, announces final results for the year ended
31 December 2018.
Financial Summary
-- Revenues declined, in line with expectations as a result of
the natural production decline of the West Bortovoy fields, by 10%
to RUB 1.6 billion (USD 25.75 million) (2017: RUB 1.79 billion (USD
30.68 million))
-- Total cost of sales was 2% lower at RUB 1.12 billion (USD
17.86 million) (2017: RUB 1.15 billion (USD 19.71 million))
-- Gross profit decreased by 23% to RUB 496 million (USD 7.91
million) (2017: RUB 644 million (USD 11.04 million))
-- Operational and G&A costs increased by 12% to RUB 208
million (USD 3.32 million) (2017: RUB 185 million (USD 3.17
million)), mostly driven by hiring experienced senior geotechnical
personnel and equipment
-- Operating profit decreased by 30% to RUB 313 million (USD
4.99 million) (2017: RUB 450 million (USD 7.71 million))
-- Profit before tax was significantly improved at RUB 156
million (USD 2.49 million) (2017: unadjusted loss of RUB 1.43
billion (USD 24.51 million) including the RUB 1.69 billion (USD
29.34 million) one-off impairment allowance for the Koltogor
Licences in 2017 ("Koltogor Impairment"))
-- Net profit was significantly improved at RUB 90 million (USD
1.44 million) (2017: net loss of RUB 1.27 billion (USD 21.76
million) including the Koltogor Impairment
-- EBITDA decreased by 15% to RUB 751 million (USD 11.98
million) (2017: RUB 888 million (USD 15.22 million))
-- Net cash generated from operating activities decreased by 16%
to RUB 613 million (USD 8.83 million) (2017: RUB 728 million (USD
12.64 million))
-- Total cash at 31 December 2018 was RUB 261 million (USD 3.76
million) (31 December 2017: RUB 287 million (USD 4.98 million))
Note: USD comparisons are provided in the above Financial
Summary for illustrative purposes only and are calculated using an
exchange rate of:
2018: 1 USD = 62.7078 RUB
As at 31 December 2018: 1 USD = 69.4706 RUB
2017: 1 USD = 58.3529 RUB
As at 31 December 2017: 1 USD = 57.6002 RUB
Operational Summary
-- Average net daily production (sold to customers) in 2018 was:
o 33 mmcf/d (0.94 mmcm/d) of gas (2017: 40.4 mmcf/d (1.1
mmcm/d))
o 301 bbls/d (38 t/d) of oil and condensate (2017: 337 bbls/d
(43 t/d))
-- Overall in 2018, Zoltav produced:
o 12.0 bcf (341 mmcm) of gas or 2.0 mmboe (274 mtoe) (2017: 14.8
bcf (418 mmcm) or 2.5 mmboe (335 mtoe))
o 109,807 bbls (13,988 t) of oil and condensate: (2017: 122,962
bbls (15,663 t))
-- Western Gas Plant continued to be operated efficiently with
only one, scheduled, 48-hour maintenance shutdown
-- New well-head compressor installed on the Karpenskoye field,
offsetting production decline on three wells
-- Reprocessing and reinterpretation of historic seismic in
2018-19 has resulted in improved view of level of reserve depletion
in currently producing West Bortovoy fields - drilling programme
commenced in May 2019 to reverse production decline
-- Long-term plans focused on connecting East Bortovoy fields to
Western Gas Plant - technical and economic feasibility study
commenced in 2018 - final investment decision anticipated by
end-2019
-- Strengthening of technical team with appointments of former
Bashneft and TNK-BP technical executives, Yuri Krasnevsky, as
Director for Geology and Field Development, Andrei Zabolotnov, as
Deputy Director for Field Development, and Vasily Fomichev, as
Deputy Director for Geology
Lea Verny, Independent Non-executive Chairman, commented:as
"Long-term plans are focused on connecting the eastern Bortovoy
fields to the Western Gas Plant. Preliminary evaluation indicates
that connecting these fields and expanding the plant's capacity is
the most favourable option. A technical and economic feasibility
study is underway, and we look forward to reporting further
progress in due course.
The natural production decline from existing well stock on the
western Bortovoy fields continued at a slower rate in 2018 than
predicted. The new geotechnical team has been developing geological
and hydrodynamic models to efficiently plan for further development
wells needed to increase production from the western fields again.
A drilling programme has commenced, and management is aiming to
reverse the production decline from the western fields by Q1
2020."
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 7390
Lea Verny, Non-executive Chairman 0234
(via Vigo Communications)
SP Angel Corporate Finance LLP (Nomad Tel. +44 (0)20 3470
and Joint Broker) 0470
John Mackay / Jeff Keating / Soltan Tagiev
Panmure Gordon (Joint Broker) Tel. +44 (0)20 7886
Charles Lesser / James Stearns 2500
Vigo Communications Tel. +44 (0)20 7390
Ben Simons / Simon Woods 0234
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 sq km 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
in the west of the Licence, a processing plant and significant
exploration prospectivity. It holds proven plus probable reserves
under the Society of Petroleum Engineers' Petroleum Resources
Management System of 750 bcf of gas and 3.8 mmbbls of oil and
condensate.
In 2018, Zoltav produced 12.0 bcf (341 mmcm) of gas or 2.0 mmboe
(274 mtoe) and 66,558 bbls (7,715 t) of oil and condensate.
The Company is currently evaluating strategies to commercialise
the eastern fields of the Bortovoy Licence.
For further information on Zoltav, or to sign up for our news
alert service, visit: www.zoltav.com.
Glossary
bbl Barrel
bbls Barrels
bbls/d Barrels per day
bcf Billion cubic feet
bcm Billion cubic metres
boepd Barrels of oil equivalent per
day
CPR Competent Person's Report
mcf Thousand cubic feet
mcm Thousand cubic metres
mmboe Million barrels of oil equivalent
mmcf Million cubic feet
mmcf/d Million cubic feet per day
mmcm Million cubic metres
mmcm/d Million cubic metres per day
mtoe Thousand tonnes of oil equivalent
MW Megawatt
PRMS Petroleum Resources Management
System
t Tonnes
t/d Tonnes per day
toepd Tonnes of oil equivalent per
day
Chairman's statement
During 2018 and early 2019, we invested significantly in our
geotechnical and management team as we review the full range of
commercial opportunities on the Bortovoy Licence. Our commitment to
realising the greater potential of the licence through the further
development of existing and prospective new resources is reflected
in the deep experience and calibre of the individuals who have been
recruited. They include Yuri Krasnevsky, who joined as Director for
Geology and Field Development in 2018 with over 30 years of
experience in geological exploration and production in Russia; and
Tigran Tagvoryan, who joined as Chief Executive Officer earlier
this year with significant senior level project development,
finance management and infrastructure experience within Russian
supermajor oil and gas businesses.
The new geotechnical team, led by Mr Krasnevsky, concluded that
the 341 sq km of 3D seismic data acquired in 2017-2018 over the
Mokrousovskoye block was sufficient to evaluate the Devonian
horizon opportunity on the west of the Bortovoy Licence.
Interpretation of the data identified a prospective gas field in
the Devonian structure and a prospective gas field in the Permian
structure. Both opportunities would require the commitment of
substantial resources towards exploration well drilling and
infrastructure. These opportunities will be considered as part of
the broader Bortovoy mid- to long -term exploration programme which
is being developed and for which the Company intends to allocate a
proportion of EBITDA in the future.
Since his arrival in 2018, Mr Krasnevsky has been reshaping
Zoltav's vision of the opportunity in the eastern fields of the
Bortovoy Licence. Approximately 70% of the Bortovoy Licence 2P gas
reserves lie undeveloped in the east of the licence, with a number
of Soviet wells having been drilled there. In particular, Mr
Krasnevsky is focusing on the easternmost, substantial,
Nepryakhinskoye field, potentially shrinking the number of wells
that would be required to produce the field's reserves efficiently
from 14 vertical wells to two horizontal wells. This would, if
found feasible, significantly improve the economics of all
previously considered options for developing East Bortovoy.
Preliminary evaluation indicates that connecting the eastern
fields to the existing Western Gas Plant, and expanding the plant's
capacity, is the most favourable option among others (which include
constructing a second gas plant on the east of the licence or
relocating the existing gas plant from the west to the east).
While any development plans for East Bortovoy remain subject to
completing the feasibility study, management considers that the
opportunity may have a good prospect of attracting project
financing to build the necessary infrastructure to connect most of
the Bortovoy Licence existing reserves and fill an expanded gas
plant capacity for at least a decade. In light of this opportunity,
the Company has committed RUB 150 million towards this feasibility
study (a small portion of which was expended in 2018 but the
majority of which will be expended in the current year) to mitigate
project risks prior to making a final investment decision, which
management aims to make this year.
The natural production decline from existing well stock on the
western Bortovoy fields continued at a slower rate in 2018 than
predicted and declined by 18% compared to 2017. The new
geotechnical team has been developing geological and hydrodynamic
models to efficiently plan for further development wells needed to
increase production from the western fields. A drilling programme
is now underway, beginning with Zhdanovskoye Well 103, a sidetrack
with a 500 m horizontal ending, which was spudded in May 2019 and
will be followed by a series of further sidetrack wells. Through
this programme, management is aiming to reverse the production
decline from the western fields by Q1 2020.
Despite the 18% production decline in 2018, improving sales
prices and efficient plant operation resulted in revenues for 2018
declining by only 10% to RUB 1.6 billion (2017: RUB 1.79 billion)
with a 15% decrease in EBITDA to RUB 751 million (2017: RUB 888
million), mainly caused by costs associated with hiring very
experienced geotechnical personnel and associated equipment.
I am pleased to say the Company made a significantly improved
net profit in 2018 of RUB 90 million (2017: net loss of RUB 1.27
billion (including a one-off RUB 1.69 billion impairment allowance
made in respect of the Koltogor Licences in 2017)).
I look forward to reporting further progress on the exciting
activities which are underway on the Bortovoy Licence.
Lea Verny
Non-executive Chairman
25 June 2019
Review of operations
Production
Production through Zoltav's Western Gas Plant on the Bortovoy
Licence, Saratov, averaged 5,802 boepd (792 toepd) during 2018, an
18% decline when compared to 7,075 boepd (965 toepd) in 2017. The
natural production decline from existing well stock continued at a
slower rate than predicted, primarily due to Zhdanovskoye Well 8
remaining on production throughout 2018 and the well head
compressor having been put into operation on the Karpenskoye
field.
Average net daily production (sold to customers) during 2018 was
33 mmcf/d (0.94 mmcm/d) of gas and 301 bbls/d (38 t/d) of oil and
condensate (2017: 40.4 mmcf/d (1.1 mmcm/d) of gas and 337 bbls/d
(43 t/d) of oil and condensate).
Overall in 2018, the Company produced:
- Natural gas: 12.0 bcf (341 mmcm) or 2.0 mmboe (274 mtoe)
(2017: 14.8 bcf (418 mmcm) or 2.5 mmboe (335 mtoe)
- Oil and condensate: 109,807 bbls (13,988 t) (2017: 122,962 bbls (15,663 t)
The Western Gas Plant continued to be operated efficiently
throughout 2018 with only one, scheduled, 48-hour maintenance
shutdown. The current well stock producing from the two currently
producing Permian fields (Zhdanovskoye and Karpenskoye) consists of
eleven gas wells and two oil wells working via artificial lift. The
well stock is in natural production decline. A development
programme is underway to reverse the production decline.
Development
Bortovoy
Based on well logs and previous geophysical studies, the new
geotechnical team has implemented a development work programme for
West Bortovoy.
In the short term, this included the installation during late
summer 2018 of a new well-head compressor on the Karpenskoye field,
offsetting the production decline on three wells.
In the medium-term, the reprocessing and reinterpretation of
historic seismic data to present day standards has resulted in an
improved view of the level of reserve depletion in the Zhdanovskoye
and Karpenskoye fields. This has allowed a drilling programme of
sidetrack wells on existing well stock to be developed. Six wells
are currently slated. Four have been approved by management and the
first of these, Zhdanovskoye Well 103 (with a 500 m horizontal
ending), was spudded in May 2019. It will be followed by
Karpenskoye Well 5D. Both wells are expected to be put on
production before year-end, adding at least 11 mmcf/d (0.3 mmcm/d)
of gas and 3% more daily condensate production. Through this
programme, management is aiming to reverse the production decline
from the western fields by Q1 2020.
Long-term plans are focused on connecting East Bortovoy - where
approximately 70% of the Bortovoy Licence 2P reserves of 750 bcf
(21.2 bcm) (based on the 2014 CPR) lie undeveloped - to the Western
Gas Plant; and on further exploration within the licence (a
programme of which is currently being developed).
Approximately RUB 150 million has been budgeted to re-enter and
evaluate production rates, gas composition and well conditions of
existing Soviet wells on the Pavlovskoye, Lipovskoye and
Nepryakhinskoye fields. To date, the Company has re-entered and
tested six wells with two remaining in the programme. All wells
tested in line with or better than management expectations based on
Soviet flow rate data. Data acquired will contribute to the
technical and economic feasibility study required to address
uncertainties (including cost, pipeline corridor and parameters,
and Western Gas Plant capacity expansion) before making a final
investment decision, which management now aims to make before the
end of this year.
During 2018, the Company also completed all technical
requirements to gain access to the energy network, allowing the
Company to sell unused electricity from three power generating
units at the Western Gas Plant (up to 1.2 MW) which is expected to
generate approximately RUB 1.8 million per month of additional
income from March 2019.
Koltogor
The Koltogor Licences in the Khantiy Mansisk Autonomous Okrug,
Western Siberia are not currently a focus of investment. The
Company continues to monitor the activities of the Bazhen
Technology Centre, launched by Gazprom Neft, which is focusing on
the development of independent skills and technologies for the
cost-effective development of hydrocarbons in the Bazhenov
formation; as well as actively exploring potential routes to
monetise these 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
Management considers the optimum time for commissioning a
further reserve evaluation under PRMS would be after the connection
of the easternmost Nepryakhinskoye field to the Western Gas Plant,
should a final investment decision be taken in due course to do
this.
Note on 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
Revenue
The Group's revenues in 2018 decreased by 10% to RUB 1.6
billion, compared to RUB 1.79 billion in 2017.
Approximately 80% of revenue was derived from gas sold to
Mezhregiongaz, a Gazprom subsidiary, at the transfer point on entry
to the Central Asia - Centre gas pipeline system. The gas prices
are fixed in a contract with Mezhregiongaz and are subject to
indexation. The Russian Government approved a 3.4% gas price
increase from 21 August 2018 and accordingly the Company signed an
addendum to its contract with Mezhregiongaz resulting in an average
price increase to RUB 3,773 per mcm compared to RUB 3,657 per mcm
in 2017.
The remaining revenue was from oil and condensate sold directly
at the Western Gas Plant through a tender process to a small number
of different buyers. Favourable market prices during 2018 and a
diversified portfolio of buyers positively impacted average oil and
condensate prices which were RUB 2,891/bbl (RUB 22,691/t) in 2018
compared to RUB 2,097/bbl (RUB 16,458/t) in 2017.
Cost of sales and G&A costs
The Group's operational and G&A costs increased by 11% to
RUB 208 million (2017: RUB 185 million), mostly driven by hiring
senior geotechnical personnel and buying licences for geological
software.
Total cost of sales was RUB 1,119 million (2017: RUB 1,147
million). This comprised RUB 343 million of mineral extraction tax
(2017: RUB 372 million), RUB 438 million of depreciation and
depletion of assets (2017: RUB 437 million) and RUB 338 million of
other cost of sales which remained flat.
Other expenses decreased by 58% to RUB 15 million (2017: RUB 35
million).
Operating profit
Zoltav achieved an operating profit for 2018 of RUB 313 million,
compared to RUB 450 million in 2017.
EBITDA decreased by 15% to RUB 751 million (2017: RUB 888).
Finance costs of RUB 177 million (2017: RUB 226 million) are
mainly represented by decreased interest on the remaining RUB 1.26
billion loan facility.
Profit before tax
Zoltav generated RUB 156 million of profit before tax, compared
to an unadjusted loss of RUB 1.43 billion in 2017 (RUB 252 million
profit after deducting the 2017 one-off impairment allowance made
for the Koltogor Licences).
Taxation
Production based tax for the period was RUB 343 million (2017:
RUB 372 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 is slightly increased, mainly
because of oil price growth, to RUB 27/mcf or RUB 955/mcm (2017:
RUB 24/mcf or RUB 849/mcm).
The income tax charge for the year was RUB 65 million (2017: RUB
163 million as tax asset).
Net profit
The Company made a significant improvement in net profit in 2018
of RUB 90 million (2017: net loss of RUB 1.27 billion (including a
one-off RUB 1.69 billion impairment allowance made in respect of
the Koltogor Licences in 2017)).
Cash
Net cash generated from operating activities was RUB 613 million
(2017: RUB 728 million).
The Bortovoy Licence operating subsidiary, Diall Alliance,
successfully serviced its credit facility with PJSC Sberbank and
repaid a further RUB 300 million of the principal amount (RUB 1.26
billion at 31 December 2018) according to its schedule. The Company
remains in line with the covenants of its credit facility agreement
and is benefitting from lower interest rates.
Total cash at the end of the period was RUB 261 million (2017:
RUB 287 million).
To balance investment cash outflow in 2019, Zoltav has
refinanced the Sberbank loan facility to alter the repayment
schedule and to secure a preferential interest rate. The deal was
signed with Promsvyazbank on 13 May 2019 with a RUB 1.32 billion
limit and a floating rate of Russian Central Bank rate + 1.6%, and
a six-month grace period (aligned with the Company's West Bortovoy
drilling schedule) on principal repayment.
Kirill Suetov
Chief Financial Officer
25 June 2019
Independent auditor's report
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
2018, and the consolidated statement of comprehensive income,
consolidated statement of changes in equity and consolidated
statement of cash flows for 2018, 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 2018
and its consolidated financial performance and its consolidated
cash flows for 2018 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 each matter below, our description of how our audit
addressed the 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 these matters. 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 matters below, provide the basis for our audit
opinion on the accompanying consolidated financial statements.
Key audit matters How our audit addressed the key
audit matter
Recognition and measurement of tax risks provisions
Recognition and measurement of With the involvement of our tax
tax risks provisions was one of specialists we
the matters of most significance * analyzed tax legislation and court practice of
in our audit, because of significant jurisdictions where the Group companies operate,
management judgement involved
in respect of tax legislation
treatment. * discussed with management and Group internal tax
Information about tax risks provisions specialists judgmental areas,
and uncertainty related to tax
legislation treatment is disclosed
in notes 11 and 28.4 to the consolidated * received replies on certain tax matters from the
financial statements. Group external councils and analyzed them,
* analysed the related disclosures provided in the
Group consolidated financial statements.
Estimation of gas reserves and
resources at Bortovoy license
field
This matter to be one of most We assessed the assumptions used
significance in the audit, because by the Group to estimate volumes
the estimate of gas reserves at of gas reserves and resources
Bortovoy license field has a significant at Bortovoy license field and
impact on depreciation, depletion compared them with current macroeconomic
and amortization (DD&A) charges, forecasts and the Group's plans.
impairment of property, plant We also compared gas production,
and equipment and exploration for which the Group adjusts its
and evaluation assets test results gas reserves to calculate DD&A
and decommissioning provision with internal production reports
calculation. As the last external and sales volumes. We compared
estimation of gas reserves for gas estimation report data with
Bortovoy license field was made information used by the Group
in 2014, the estimation of gas to analyze non-current assets
reserves as of the end of 2018 for impairment, to calculate DD&A
required significant management's and updated estimates of reserves
estimation. and resources to the estimates
Information about estimation of included in the consideration
gas reserves and resources is of impairment, depreciation, depletion
disclosed in note 3.4 of the notes and decommissioning provision.
to the consolidated financial
statements, section critical accounting
estimates and judgements.
Other information included in the Annual Report for 2018
Other information consists of the information included in the
Annual Report for 2018, 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 Board of Directors 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.
Board of Directors is responsible for overseeing the Group's
financial reporting process.
Auditor's responsibilities for the audit of the consolidated
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 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 Board of Directors 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 Board of Directors with a statement that we have
complied with relevant ethical requirements regarding independence,
and to communicate with them 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 Board of Directors, 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
25 June 2019
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 2018
(in '000s of Russian rubles, unless otherwise stated)
Note 2018 2017
----- ------------ ------------
Revenue from contracts with customers 5 1,614,809 1,790,524
Cost of sales 6 (1,118,827) (1,146,812)
------------ ------------
Gross profit 495,982 643,712
Administrative and selling expenses 7 (207,785) (184,948)
Other income 9 39,525 27,005
Other expenses 9 (14,963) (35,301)
------------ ------------
Operating profit 312,759 450,468
Impairment of exploration and evaluation assets 12 - (1,685,632)
Finance income 10 20,178 27,960
Finance costs 10 (177,399) (225,741)
------------ ------------
Profit/(loss) before tax 155,538 (1,432,945)
Income tax (expense) / benefit 11 (65,409) 162,967
------------ ------------
Profit/(loss) for the year attributable to owners of the parent being total
comprehensive
income 90,129 (1,269,978)
============ ============
RUB RUB
------------ ------------
Earnings/(loss)per share attributable to owners
of the parent
Basic 20 0.63 (8.95)
Diluted 20 0.63 (8.95)
The accompanying notes are an integral part of these
consolidated financial statements.
Kirill Suetov
Chief Financial Officer
25 June 2019
Consolidated statement of financial position as at 31 December
2018
(in '000s of Russian rubles, unless otherwise stated)
As at
31 December As at 31 December
Note 2018 2017
Assets
Non-current assets
Exploration and evaluation assets 12 3,477,513 3,259,353
Property, plant and equipment 13 3,666,836 4,007,302
Total non-current assets 7,144,349 7,266,655
Current assets
Inventories 14 23,469 20,877
Trade and other receivables 15 176,498 152,574
Other current non-financial assets 15 14,389 11,400
Cash and cash equivalents 16 260,636 286,754
Total current assets 474,992 471,605
Total assets 7,619,341 7,738,260
Equity and liabilities
Share capital 17 970,218 970,218
Share premium 5,498,009 5,498,009
Other reserves 1,343,566 1,366,172
Accumulated losses (2,450,253) (2,562,988)
Total equity 5,361,540 5,271,411
Non-current liabilities
Borrowings 22 692,498 1,253,014
Decommission provision 23 390,428 386,152
Other payables 68,081 62,771
Deferred tax liabilities 24 316,329 270,836
Total non-current liabilities 1,467,336 1,972,773
Current liabilities
Trade and other payables 25 97,405 93,857
Contract liabilities 2.4 7,274 -
Finance lease liability - 1,666
Other taxes payables 19 96,281 89,381
Borrowings 22 570,400 309,172
Income tax payable 19,105 -
Total current liabilities 790,465 494,076
Total liabilities 2,257,801 2,466,849
Total equity and liabilities 7,619,341 7,738,260
The accompanying notes are an integral part of these
consolidated financial statements.
Consolidated statement of cash flows for the year ended 31
December 2018
(in '000s of Russian rubles, unless otherwise stated)
Note 2018 2017
Cash flows from operating activities
Profit/ (loss) before tax 155,538 (1,432,945)
Adjustments for:
Depreciation and depletion 12,13 445,263 440,387
Impairment of exploration and evaluation assets 12 - 1,685,632
Finance costs 10 177,399 225,741
Finance income 10 (20,178) (27,960)
Loss on disposal of property, plant and equipment, net of income from sale of
property, plant
and equipment 9 (3,465) 28,652
Write-off of accounts receivable and other current assets, expected credit loss 9 4,010 1,908
Change in the estimates of decommissioning and environmental restoration provision (25,964) (13,448)
Other income and expenses (2,073) 708
Operating cash inflows before working capital changes 730,530 908,675
(Increase)/decrease in inventories (410) 1,590
Change in trade and other receivables and other current non-financial assets (29,429) 23,430
Decrease in trade and other payables and contract liabilities 28,540 (16,372)
Change in other tax payables 6,900 (29,119)
Net cash from operating activities before income tax and interests 736,131 888,204
Interest received 18,684 28,316
Interest paid 22 (140,835) (188,660)
Income tax paid (811) (85)
Net cash from operating activities 613,169 727,775
Cash flows from investing activities
Proceeds from sale of property, plant and equipment 7,927 14,633
Capital expenditure on exploration and evaluation activities (224,669) (132,635)
Purchase of property, plant and equipment (121,619) (317,063)
Net cash used in investing activities (338,361) (435,065)
Cash flows from financing activities
Repayment of obligations under finance leases (1,892) (39)
Repayment of borrowings 22 (300,000) (300,000)
Net cash used in financing activities (301,892) (300,039)
Net change in cash and cash equivalents (27,084) (7,329)
Net foreign exchange difference 966 (171)
Cash and cash equivalents at the beginning of the year 286,754 294,254
Cash and cash equivalents at the end of the year 16 260,636 286,754
The accompanying notes are an integral part of these
consolidated financial statements.
Consolidated statement of changes in equity for the year ended
31 December 2018
(in '000s of Russian rubles, unless otherwise stated)
Attributable to owners of the Parent
Employee
share-based
Share Share Capital compensation Accumulated Total
Note capital premium reserve reserve losses equity
---------------------- ----- --------- --------- --------- -------------- ------------ -----------
At 1 January
2017 970,218 5,498,009 1,343,566 85,775 (1,356,179) 6,541,389
Employee share-based
compensation 21 - - - (63,169) 63,169 -
Transactions
with owners - - - (63,169) 63,169 -
Loss for the
year - - - - (1,269,978) (1,269,978)
Total comprehensive
income - - - - (1,269,978) (1,269,978)
At 31 December
2017 970,218 5,498,009 1,343,566 22,606 (2,562,988) 5,271,411
At 1 January
2018 970,218 5,498,009 1,343,566 22,606 (2,562,988) 5,271,411
Employee share-based
compensation 21 - - - (22,606) 22,606 -
Transactions
with owners - - - (22,606) 22,606 -
Profit for the
year - - - - 90,129 90,129
Total comprehensive
income - - - - 90,129 90,129
At 31 December
2018 970,218 5,498,009 1,343,566 - (2,450,253) 5,361,540
The accompanying notes are an integral part of these
consolidated financial statements.
Notes to the consolidated financial statements
(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 2018 and 2017
----------------------------------- ------------------------ -------------------- ---------------------------------
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.
Russia continues economic reforms and development of its legal,
tax and regulatory frameworks as required by a market economy. The
future stability of the Russian economy is largely dependent upon
these reforms and developments and the effectiveness of economic,
financial and monetary measures undertaken by the government.
The Russian economy has been negatively impacted by sanctions
imposed on Russia by a number of countries. The Rouble interest
rates remained high. 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.
2. Accounting policy
2.1 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 3.
2.2 Change in presentation of financial statements
In its consolidated financial statements for 2018 the Group
changed presentation of the cost of sales line in the consolidated
statement of comprehensive income. In its consolidated financial
statements for 2017 the Group disclosed depreciation, mineral
extraction tax and other cost of sales in its consolidated
statement of comprehensive income, also the Group disclosed cost of
sales combination in separate Cost of sales note. In 2018 this
information is disclosed only in Cost of sales note.
2.3 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 315,473 as at 31
December 2018. For mitigation factors, please, see Note 27.1.
2.4 Disclosure of impact of new and future accounting standards
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 2018. The Group
has not early adopted any other standard, interpretation or
amendment that has been issued but is not yet effective.
Effective
for annual
periods beginning
New/revised standards and Interpretations Adopted in on
2018 or after
------------------------------------------------------------ -------------------
1 January
IFRS 15 Revenue from Contracts with Customers 2018
1 January
IFRS 9 Financial Instruments 2018
Amendments to IFRS 2: Classification and Measurement 1 January
of Share-based Payment Transactions 2018
Amendments to IFRS 4: Applying IFRS 9 Financial Instruments 1 January
with IFRS 4 Insurance Contracts 2018
1 January
Amendments to IAS 40: Transfers of Investment Property 2018
IFRIC 22 Foreign Currency Transactions and Advance 1 January
Consideration 2018
Clarifications to IFRS 15 Revenue from Contracts with 1 January
Customers 2018
1 January
Annual Improvements to IFRS Standards 2014-2016 Cycle 2017 /
(issued on 8 December 1 January
2016) 2018
IFRS 9 Financial Instruments: Classification and Measurement
IFRS 9 Financial Instruments replaces IAS 39 Financial
Instruments: Recognition and Measurement for annual periods
beginning on or after 1 January 2018, bringing together all three
aspects of the accounting for financial instruments: classification
and measurement; impairment; and hedge accounting. IFRS 9 does not
have any significant impact on the Company's financial
statements.
A reconciliation between the carrying amounts under IAS 39 to
the balances reported under IFRS 9 as at 1 January 2018 is as
follows:
IAS 39 measurement IFRS 9
---------------------------- -----------------
Category Amount Category Amount
---------------------------------- ---------------- ---------- --------------- ------------
Financial assets
Trade and other receivables Amortised cost 152,574 Amortised cost 152,574
Total assets 152,574 152,574
Non-financial liabilities
Borrowings Amortised cost 1,614,108 Amortised cost 1,614,108
Trade and other payables Amortised cost 93,857 Amortised cost 93,857
Obligation under finance leasing Amortised cost 1,666 Amortised cost 1,666
Other non-current payables Amortised cost 63,328 Amortised cost 63,328
Total liabilities 1,772,959 1,772,959
IFRS 15 Revenue from Contracts with Customers
IFRS 15 supersedes IAS 11 Construction Contracts, IAS 18 Revenue
and related Interpretations and it applies, with limited
exceptions, to all revenue arising from contracts with its
customers. IFRS 15 establishes a five-step model to account for
revenue arising from contracts with customers and requires that
revenue be 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.
IFRS 15 requires entities to exercise judgement, taking into
consideration all of the relevant facts and circumstances when
applying each step of the model to contracts with their customers.
The standard also specifies the accounting for the incremental
costs of obtaining a contract and the costs directly related to
fulfilling a contract. In addition, the standard requires extensive
disclosures.
The Group adopted IFRS 15 using the modified retrospective
method of adoption with the date of initial application of 1
January 2018. Under this method, the standard can be applied either
to all contracts at the date of initial application or only to
contracts that are not completed at this date. The Group elected to
apply the standard to all contracts as at 1 January 2018.
The cumulative effect of initially applying IFRS 15 is
recognised at the date of initial application. Therefore, the
comparative information was not restated and continues to be
reported under IAS 11, IAS 18 and related Interpretations.
The effect of adopting IFRS 15 is, as follows:
(i) Advances received from customers
Before the adoption of IFRS 15, the Group presented advances
received from customers as Trade and other payables in the
statement of financial. Under IFRS 15, the Group reclassified these
advances from Trade and other payables (current) to Contract
liabilities (current) as at 1 January 2018. This change explains
the increase of contract liabilities as of 31 December 2018
comparing to 31 December 2017.
The other new standards and amendments applied for the first
time in 2018 did not have a material impact on the annual
consolidated financial statements of the Group.
New accounting pronouncements
A number of new and amended standards were not effective for the
year ended 31 December 2018 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
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
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
1 January
Amendment to IFRS 3 Business Combinations 2020*
1 January
Amendments to IAS 1 and IAS 8: Definition of Material 2020*
Amendments to References to the Conceptual Framework 1 January
in IFRS Standards 2020*
1 January
IFRS 17 Insurance Contracts 2021*
*Subject to EU endorsement
Except for IFRS 16, from the application of the standards issued
but not yet effective the Group expects no significant effect on
its consolidated financial statements.
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. The
standard includes two recognition exemptions for lessees - leases
of 'low-value' assets (e.g., personal computers) and short-term
leases (i.e., leases with a lease term of 12 months or less). At
the commencement date of a lease, a lessee will recognise a
liability to make lease payments (i.e., the lease liability) and an
asset representing the right to use the underlying asset during the
lease term (i.e., the right-of-use asset). Lessees will be required
to separately recognise the interest expense on the lease liability
and the depreciation expense on the right-of-use asset.
Lessees will be also required to remeasure the lease liability
upon the occurrence of certain events (e.g., a change in the lease
term, a change in future lease payments resulting from a change in
an index or rate used to determine those payments). The lessee will
generally recognise the amount of the remeasurement of the lease
liability as an adjustment to the right-of-use asset.
Lessor accounting under IFRS 16 is substantially unchanged from
today's accounting under IAS 17. Lessors will continue to classify
all leases using the same classification principle as in IAS 17 and
distinguish between two types of leases: operating and finance
leases.
Transition to IFRS 16
IFRS 16 is effective for annual periods beginning on or after 1
January 2019. The Group plans to adopt IFRS 16 using the modified
retrospective approach. Under this approach the comparatives will
not be restated. Lease liabilities and right of-use assets will be
recognised at the date of transition to IFRS 16 with corresponding
effect recorded in retained earnings. Modified retrospective
approach assumes recognition of lease liability discounted using
incremental borrowing rate at the date of transition and allows the
Group to elect how to measure right-of-use assets on lease-by-lease
basis:
-- At amount as if IFRS 16 had been applied from lease commencement;
-- At amount equal to liability (adjusted for accruals and prepayments).
--
The Group elects to apply the standard to contracts that were
previously identified as leases applying IAS 17 and IFRIC 4. The
Group will therefore not apply the standard to contracts that were
not previously identified as containing a lease applying IAS 17 and
IFRIC 4.
The Group elects to use the exemptions proposed by the
standard:
-- On lease contracts for which the lease terms ends within 12
months as of the date of initial application;
-- On lease contracts for which the underlying asset is of low value;
-- On initial application initial direct costs will be excluded
from the measurement of the right-of-use asset;
-- For all classes of underlying assets each lease component and
any associated non-lease components will be accounted as a single
lease component.
In summary the impact of IFRS 16 adoption is expected to be, as
follows:
As at
1 January
2019
-----------
Assets
Property, plant and equipment (right-of-use
assets) 27,445
Liabilities
Lease liabilities (non-current) 24,101
Lease liabilities (current) 3,344
2.5 Basis of consolidation
The consolidated financial statements comprise the financial
statements of the Group and its subsidiaries as at 31 December
2018. 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.
2.6 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.
2.7 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.
2.8 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.
2.9 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.
2018 2017
-------- --------
RUB/USD as at 31 December 69.4706 57.6002
RUB/USD average for the year ended 31 December 62.7078 58.3529
2.10 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 apitalized on a licence by licence basis and are
apitalized 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.
2.11 Property, plant and equipment
i) 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.
ii) 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 licenses
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.
iii) 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.
iv) 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 the 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
2.12 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.
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.
2.13 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.
2.14 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
From 1 January 2018, the Group classifies all of its financial
assets based on the business model for managing the assets and the
assets contractual terms, measured at either: amortised cost, fair
value through other comprehensive income (FVOCI), and fair value
through profit or loss (FVPL). Before 1 January 2018 the Group
classified its financial assets as loans and receivables (amortised
cost), FVPL, available-for-sale, held-to-maturity.
The classification of financial assets at initial recognition
depends on the financial asset's contractual cash flow
characteristics and the Group's business model for managing them.
With the exception of trade receivables that do not contain a
significant financing component, the Group initially measures a
financial asset at its fair value plus, in the case of a financial
asset not at fair value through profit or loss, transaction costs.
Trade receivables that do not contain a significant financing
component are measured at the transaction price determined under
IFRS 15.
The Group's business model for managing financial assets refers
to how it manages its financial assets in order to generate cash
flows. The business model determines whether cash flows will result
from collecting contractual cash flows, selling the financial
assets, or both.
For purposes of subsequent measurement, financial assets are
classified in four categories:
-- Financial assets at amortised cost (debt instruments)
-- Financial assets at fair value through OCI with recycling of
cumulative gains and losses (debt instruments)
-- Financial assets designated at fair value through OCI with no
recycling of cumulative gains and losses upon derecognition (equity
instruments)
-- Financial assets at fair value through profit or loss
Financial assets at amortised cost
This category is the only relevant to the Group as of 31
December 2018. The Group measures financial assets at amortised
cost if both of the following conditions are met:
-- The financial asset is held within a business model with the
objective to hold financial assets in order to collect contractual
cash flows
And
-- The contractual terms of the financial asset give rise on
specified dates to cash flows that are solely payments of principal
and interest on the principal amount outstanding
Financial assets at amortised cost are subsequently measured
using the effective interest (EIR) method and are subject to
impairment. Gains and losses are recognised in profit or loss when
the asset is derecognised, modified or impaired.
The Group's financial assets at amortised cost includes trade
and other receivables, cash and cash equivalents.
Before 1 January 2018, receivables were non-derivative financial
assets with fixed or determinable payments that were not quoted in
an active market. They were not entered into with the intention of
immediate or short-term resale and were not classified as trading
securities or designated as investment securities
available-for-sale. Such assets were carried at amortised cost
using the effective interest method. Gains and losses were
recognised in profit or loss when the loans and receivables were
derecognised or impaired, as well as through the amortisation
process.
Impairment of financial assets
At each balance sheet date the Group recognises a loss allowance
for expected credit losses (ECL) on a financial assets measured at
amortised cost. The loss allowance for financial asset at amortised
cost is recognised in profit or loss in correspondence with a
balance sheet account reducing the carrying amount of the financial
asset.
Expected credit losses for banks are determined based on credit
rating and relevant probability of default. For receivables, the
Company applies a simplified approach in calculating ECLs.
Therefore, the Company does not track changes in credit risk, but
instead recognises a loss allowance based on lifetime ECLs at each
reporting date. The Company has established a provision matrix that
is based on its historical credit loss experience, adjusted for
forward-looking factors specific to the debtors and the economic
environment.
Financial liabilities
Initial recognition and measurement
Financial liabilities are classified, at initial recognition, as
financial liabilities at fair value through profit or loss, loans
and borrowings, payables, or as derivatives designated as hedging
instruments in an effective hedge, as appropriate.
All financial liabilities are recognised initially at fair value
and, in the case of loans and borrowings and payables, net of
directly attributable transaction costs.
The Group's financial liabilities include trade and other
payables, loans and borrowings including bank overdrafts.
Subsequent measurement
The measurement of financial liabilities depends on their
classification, as described below:
Loans and borrowings
This is the only category relevant to the Group as of 31
December 2018. 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 comprehensive income.
2.15 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.
2.16 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.
2.17 Revenue recognition
The Group is in the business of exploration and sale of natural
gas and oil products. Revenue from contracts with customers is
ecognized when control of the goods or services is transferred to
the customer at an amount that reflects the consideration to which
the Group expects to be entitled in exchange for those goods.
i) Sale of goods
Revenue from the sale of gas, and oil condensate is ecognized at
the point in time when control of the asset is transferred to the
customer. The normal credit term is 30 days.
ii) Interest income
Interest income is ecognized on a time-proportion basis using
the effective interest method.
iii) Contract liabilities
A contract liability is the obligation to transfer goods or
services to a customer for which the Group has received
consideration (or an amount of consideration is due) from the
customer. If a customer pays consideration before the Group
transfers goods or services to the customer, a contract liability
is ecognized when the payment is made or the payment is due
(whichever is earlier). Contract liabilities are ecognized as
revenue when the Group performs under the contract.
2.18 Mineral extraction tax (MET)
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.
2.19 Current and deferred income tax
The tax expense for the period comprises current and deferred
tax. Tax is tilizedd in the statement of comprehensive income,
except to the extent that it relates to items tilizedd in other
comprehensive income or directly in equity. In this case the tax is
also tilizedd 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 tilizedd, 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 tilized or the deferred income
tax liability is settled.
Deferred income tax assets are tilizedd to the extent that it is
probable that future taxable profit will be available against which
the temporary differences can be tilized.
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.
2.20 Employee benefits
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.
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.
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.
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.
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 21 to the financial statements.
3. 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:
3.1 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.
3.2 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, licenses 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 license
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.
3.3 Impairment of assets
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
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.
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.
3.4 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 2018 and
2017 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 license 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 license grant have been met.
3.5 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 2018, there
are no non-compliance issues that will have an adverse effect on
the financial position or operating results of the Group.
3.6 Provision for expected credit losses of trade receivables and contract assets
The Group uses a provision matrix to calculate ECLs for trade
receivables. The provision
rates are based on days past due for groupings of various
customer segments that have similar loss patterns (i.e., by product
type, customer type and rating).
The provision matrix is initially based on the Group's
historical observed default rates. The Group will calibrate the
matrix to adjust the historical credit loss experience with
forward-looking information. For instance, if forecast economic
conditions (i.e., gross domestic product) are expected to
deteriorate over the next year which can lead to an increased
number of defaults in the sector, the historical default rates are
adjusted. At every reporting date, the historical observed default
rates are updated and changes in the forward-looking estimates are
analysed.
The assessment of the correlation between historical observed
default rates, forecast economic conditions and ECLs is a
significant estimate. The amount of ECLs is sensitive to changes in
circumstances and of forecast economic conditions. The Group's
historical credit loss experience and forecast of economic
conditions may also not be representative of customer's actual
default in the future. The information about the ECLs on the
Group's receivables is disclosed in Note 27.
4. 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.
-- 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.
-- 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 below.
-- 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 2018 31 December 2017
Carrying Carrying
Fair value value Fair value value
Financial assets
Trade and other receivables 176,498 176,498 152,574 152,574
Total assets 176,498 176,498 152,574 152,574
Financial liabilities
Borrowings 1,270,477 1,262,898 1,614,108 1,562,186
Trade and other payables 97,405 97,405 93,857 93,857
Contract liabilities 7,274 7,274 - -
Obligation under
finance leasing -- - 1,666 1,666
Other non-current
payables 68,679 68,081 63,328 62,771
Total liabilities 1,443,835 1,435,658 1,772,959 1,720,480
The fair value of borrowings and other non-current payables is
based on cash flows discounted using a market rate of 9.33% (2017:
9.34%). 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.
5. Revenue from contracts with customers
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 from contracts with customers comprises sale of the
following products:
2018 2017
---------- ----------
Gas sales 1,287,680 1,528,637
Condensate sales 160,976 142,445
Oil sales 156,426 115,358
Sulphur sales 9,727 4,084
---------- ----------
Total revenue from contracts with customers 1,614,809 1,790,524
========== ==========
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.
6. Cost of sales
2018 2017
---------- ----------
Depreciation and depletion 438,213 437,160
Mineral extraction tax 342,676 371,620
Wages and salaries 111,877 108,422
Materials and supplies 61,890 69,029
Other taxes and charges 61,536 50,096
Repair and maintenance 37,009 37,928
Compensation benefits to operating personnel 16,539 13,739
Other 49,087 58,818
---------- ----------
Total cost of sales 1,118,827 1,146,812
========== ==========
7. Administrative and selling expenses
2018 2017
-------- --------
Wages and salaries including director's
fee 137,515 131,774
Accountancy, legal and consulting services 34,185 14,335
Depreciation 7,050 3,227
Audit services 6,142 2,268
Rent expense 4,991 6,081
Travelling 3,058 3,259
Insurance 2,206 2,094
Office expenses 1,030 1,773
Field development costs 619 13,268
Computers and software 579 809
Other 10,410 6,060
-------- --------
Total administrative, selling expense 207,785 184,948
======== ========
8. Salaries and other employee benefits
2018 2017
-------- --------
Salaries and other employee benefits 265,931 253,935
-------- --------
Total 265,931 253,935
======== ========
Salaries and other employee benefits are included in other cost
of sales and administrative and selling expenses.
Average monthly number of employees for the year (including
executive directors):
2018 2017
---------- ----------
Employees Employees
---------- ----------
Administrative 55 58
Operating 177 181
---------- ----------
Total 232 239
========== ==========
9. Other income and expenses
2018 2017
Change in decommissioning and environmental
restoration provision 25,964 13,448
Net income from sale of property, plant
and equipment 4,917 2,017
Penalties received - 11,367
Net foreign exchange difference - 173
Income from services 3,783 -
Write-off of accounts payables and other -
current liabilities 3,342
Other 1,519 -
--------- ---------
Other income 39,525 27,005
========= =========
Write-off of accounts receivable and other
current assets, ELC accrual (5,616) (1,908)
Charitable contributions (2,417) (1,255)
Penalties paid (2,412) -
Loss on disposal of property, plant and
equipment (1,452) (30,669)
Bank charges (899) (181)
Net foreign exchange difference (409) -
Other (1,758) (1,288)
--------- ---------
Other expenses (14,963) (35,301)
========= =========
10. Finance income and finance costs
2018 2017
---------- ----------
Finance income
Interest on bank deposits 20,178 27,960
---------- ----------
Total finance income 20,178 27,960
========== ==========
Finance costs
Interest on borrowings (Note 22) (141,547) (190,897)
Unwinding of the discount on decommissioning
and environmental restoration provision
(Note 23) (29,841) (29,884)
Unwinding of the discount on recognition
non-current payables (5,311) (4,896)
Other finance costs (700) (64)
---------- ----------
Total finance costs (177,399) (225,741)
========== ==========
11. Income tax (expense)/benefit
The tax charge for the year comprises:
2018 2017
--------- --------
Deferred tax (expense)/benefit (45,493) 163,052
Current tax expense (811) (85)
Tax risk provisions (19,105) -
--------- --------
Total income tax (expense)/benefit (65,409) 162,967
========= ========
Reconciliation between theoretical and actual taxation charge is
provided below.
2018 2017
--------- ------------
Profit/(loss) before income tax 155,538 (1,432,945)
--------- ------------
Theoretical tax (charge)/benefit at applicable
income tax rate of 20% (2017: 20%) (31,108) 286,589
Effect of different foreign tax rates (5,390) (6,278)
Effect of unrecognised deferred tax assets (5,246) (108,715)
Tax effect of expenses not deductible for
tax purposes (4,560) (8,629)
Tax risk provisions (19,105) -
--------- ------------
Total income tax (expense)/benefit (65,409) 162,967
========= ============
The Group's income was subject to tax at the following tax
rates:
2018 2017
------ ------
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.
12. Exploration and evaluation assets
Exploration and evaluation works
Sub-soil capitalised, including
licences seismic works Total
Balance at 1 January 2017 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
Additions - 216,252 216,252
Change in the estimates of decommissioning
provision - 3,138 3,138
Amortization (218) (1,012) (1,230)
Balance at 31 December 2018 1,037,510 2,440,003 3,477,513
dditions during 2018, 2017 are mostly represented by seismic
works at North Mokrousovskoye field.
In management's opinion, as at 31 December 2018 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
on the Bortovoy gas field. As a result, the forecasted amount of
investments in the development of the Koltogor oil field cannot be
confirmed. Accordingly, the probability of the Koltogor oil field
developments becomes uncertain. The Group recognised an impairment
loss of the total book value of exploration and evaluation assets
of the Koltogor oil field as of 31 December 2017. As of 31 December
2018 the uncertainty regarding the Koltogor oil field development
is still in place.
13. Property, plant and equipment
Construction
Oil and Motor Other equipment work in
gas assets vehicles and furniture progress Total
------------ ---------- ---------------- ------------- ------------
Cost at 1 January 2017 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
Additions 86,230 3,085 2,157 31,965 123,437
Reclassification 28,002 - - (28,002) -
Transfer to inventory
and other receivables - - - (9,849) (9,849)
Change in the estimates
of decommissioning
provision (5,559) - - - (5,559)
Disposals (7,456) (4,274) (299) (1,475) (13,504)
Cost at 31 December
2018 5,303,261 16,886 9,821 61,221 5,391,189
------------ ---------- ---------------- ------------- ------------
Accumulated depreciation,
depletion and impairment
Balance at 1 January
2017 (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)
Depreciation and depletion (440,673) (2,775) (585) - (444,033)
Disposals 4,537 4,231 274 - 9,042
Balance at 31 December
2018 (1,704,913) (14,032) (5,408) - (1,724,353)
------------ ---------- ---------------- ------------- ------------
Net book value at 1
January 2017 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
============ ========== ================ ============= ============
Net book value at 31
December 2018 3,598,348 2,854 4,413 61,221 3,666,836
============ ========== ================ ============= ============
14. Inventories
31 December 31 December
2018 2017
------------ ------------
Natural gas and hydrocarbon liquids (at
lower of cost and net realisable value) 10,107 7,119
Materials and supplies (at cost) 13,362 13,758
------------ ------------
Total inventories 23,469 20,877
============ ============
Materials and supplies mainly comprised of liquid feedstock and
maintenance parts.
15. Trade and other receivables and other current non-financial assets
31 December 31 December
2018 2017
------------ ------------
Trade receivables, gross 175,672 151,855
Other accounts receivable, gross 3,222 1,635
Expected credit loss (2,396) (916)
Total trade and other receivables 176,498 152,574
============ ============
Prepayments 13,065 11,173
VAT receivable 782 72
Other taxes prepaid 542 155
------------ ------------
Total other current non-financial assets 14,389 11,400
============ ============
Trade and other receivables are non-interest bearing and are
generally on terms of 30 - 45 days. In 2018, 1,480 (2017: 916) was
recognised as provision for expected credit losses on trade and
other receivables.
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.
Set out below is the movement in the allowance for expected
credit losses of trade and other receivables:
31 December 2018 31 December 2017
---------------- ----------------
As at 1 January under IAS 39 (-)
The opening balance in the provision
for expected credit losses on 1
January 2018 under IFRS 9 (916)
----------------
Provision for expected credit losses (1,480) (916)
As at 31 December (2,396)
---------------- ----------------
As at 31 December under IAS 39 (916)
----------------
The information about the credit exposures are disclosed in Note
27.
16. 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 and impairment losses
related to cash and cash equivalents are disclosed in Note 27.
17. Share capital
Number of
ordinary Nominal value, Nominal value,
At 31 December 2018 and 2017 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
18. 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 2018 and 2017.
19. Other taxes payable
31 December 31 December
2018 2017
VAT 53,296 37,627
Mineral extraction tax 21,271 32,119
Property tax 8,598 10,010
Other taxes 13,116 9,625
Total 96,281 89,381
20. 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. As of 31
December 2018 and 2017 share options gave antidilutive effect on
loss per share.
2018 2017
------- -------------
Profit/(loss) attributable to owners of
the Company -
Basic and diluted 90,129 (1,269,978)
Number of Number of
shares shares
------------ ------------
Weighted average number of shares for calculating
basic earnings per share 141,955,386 141,955,386
Antidilutive potential ordinary shares -
share options 6,103 202,500
Weighted average number of shares for calculating
diluted earnings per share 141,961,489 142,157,886
RUB RUB
----- -------
Basic earnings/(loss) per share 0.63 (8.95)
Undiluted earnings/(loss) per share 0.63 (8.95)
21. Share-based payments
21.1 Share options
At 31 December 2018, the Company has no outstanding share
options (31 December 2017: 202,500).
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 2018 31 December 2017
--------------------------- --------------------------
Option exercise Option exercise
Grant date Number price (pence) Number price (pence)
----------------- -------- ----------------- -------- ----------------
11 January 2008 - - 202,500 445
- 202,500
=========================== ========
All share options expired as of 31 December 2018.
21.2 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:
2018 2017
Weighted Weighted
average exercise average exercise
Number price (pence) Number price (pence)
Outstanding at 1
January 202,500 445 202,500 445
Expired 202,500 445 - -
Outstanding at 31
December - - 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.
21.3 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:
2018 2017
----------------------------- ------------------------------
Weighted Weighted
average exercise average exercise
Number price (pence) Number price (pence)
-------- ------------------- ---------- ------------------
Outstanding at 1
January - - 1,750,000 20
Expired - - 1,750,000 20
-------- ------------------- ---------- ------------------
Outstanding at 31
December - - - -
======== =================== ========== ==================
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.
22. Borrowings
2018 2017
---------- ----------
Non-revolving credit facility - liability, as at 1 January 1,562,186 1,859,949
Including current liability 309,172 311,160
Interest accrued 141,547 190,897
Interest paid (140,835) (188,660)
Repayment (300,000) (300,000)
Non-revolving credit facility, as at 31 December 1,262,898 1,562,186
========== ==========
Including current liability 570,400 309,172
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 November 2018 the Group concluded additional agreement,
where the interest rate was resettled as 9.27% 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 2018 and 31 December 2017. 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 2018 amounted to 2,556,825 (31
December 2017: 2,775,473).
The outstanding principal amount of the facility as of 31
December 2018 was 1,260,000 (31 December 2017: 1,560,000). The
credit facility debt is measured at amortised cost, using the
effective interest method.
23. Decommission 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.
2018 2017
--------- --------
Provision as at 1 January 386,152 359,153
Additions 2,820 770
Unwinding of discount 29,841 29,884
Change in estimate of decommissioning and environmental restoration provision (28,385) (3,655)
Provision as at 31 December 390,428 386,152
========= ========
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 2018 was
5.28% in 2019, decreasing to 3.64% in 2036 (as of 31 December 2017:
3.77% in 2018, decreasing to 3.64% 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 2018, the discount rate varies from 8.72% to 8.75% (as of
31 December 2017: from 7.62% to 7.79%) depending on expected period
of abandonment and site restoration for each gas and oil
fields.
24. Deferred tax liabilities
Movements in temporary differences during the year:
31 December 2018 Recognised in profit or loss 31 December 2017
----------------- ----------------------------- -----------------
Decommissioning provision 46,617 1,235 45,382
Other current assets and liabilities 15,524 4,089 11,435
Tax loss carry-forwards 317,365 18,187 299,178
----------------- ----------------------------- -----------------
Deferred tax assets 379,506 23,511 355,995
----------------- ----------------------------- -----------------
Exploration and evaluation assets (402,561) (46,777) (355,784)
Property, plant and equipment (292,574) (22,924) (269,650)
Borrowings (700) 697 (1,397)
----------------- ----------------------------- -----------------
Deferred tax liabilities (695,835) (69,004) (626,831)
----------------- ----------------------------- -----------------
Net deferred tax liabilities (316,329) (45,493) (270,836)
================= ============================= =================
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)
================= ============================= =================
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 601,033 (2017: 595,787). 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.
25. Trade and other payables
31 December 31 December
2018 2017
------------ ------------
Current trade payables 46,850 64,052
Payables to employees 40,173 24,310
Accrued expenses 10,382 5,495
------------ ------------
Total current payables 97,405 93,857
============ ============
Non-current other payables 68,081 62,771
------------ ------------
Total non-current payables 68,081 62,771
============ ============
26. 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-cancellable and cancellable 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 8,548 (2017: 9,639).
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
2018 2017
------------ ------------
Within one year 3,129 3,002
In two to five years 14,518 14,496
More than five years 30,699 32,518
------------ ------------
Total 48,346 50,016
============ ============
27. 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.
27.1 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 315,473
as at 31 December 2018. The Group plans to cover liquidity gap by
cash inflows from operating activity in 2019. As described in note
30 in May 2019 the Group refinanced its loan obligation from
Sberbank PJSC and received additional financing.
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:
Total Less than 1-3 years Over
1 year 3 years
Financial liabilities as at 31 December 2018
Borrowings 1,391,101 653,980 737,121 -
Trade and other payables 179,094 97,405 81,689 -
Total 1,570,195 751,385 818,810 -
Total Less than 1-3 years Over
1 year 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 2,049,007 548,161 1,282,464 218,382
27.2 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.
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.
27.3 Credit risk
Credit risk is the risk that a counterparty will not meet its
obligations under a financial instrument or customer contract,
leading to a financial loss. The Group is exposed to credit risk
from its operating activities (primarily trade receivables) and
from its financing activities, including deposits with banks and
financial institutions, foreign exchange transactions and other
financial instruments.
Customer credit risk is managed by each business unit subject to
the Group's established policy, procedures and control relating to
customer credit risk management. Credit quality of a customer is
assessed based on a credit rating scorecard and individual credit
limits are defined in accordance with this assessment. Outstanding
customer receivables are regularly monitored
The Group is largely dependent on one customer (Gazprom
Mezhregiongaz Saratov LLC) for a significant portion of revenues.
Gazprom Mezhregiongaz Saratov LLC accounted for 79.7% and 85.4% of
the Group's total revenue in 2018 and 2017 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 BBB-. 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.
An impairment analysis is performed at each reporting date using
a provision matrix to measure expected credit losses. The provision
rates are based on days past due for groupings of various customer
segments with similar loss patterns (i.e., by product type,
customer type and rating). The calculation reflects the
probability-weighted outcome, the time value of money and
reasonable and supportable information that is available at the
reporting date about past events, current conditions and forecasts
of future economic conditions. Generally, trade receivables are
written-off if past due for more than one year and are not subject
to enforcement activity. The Group does not hold collateral as
security.
Set out below is the information about the credit risk exposure
on the Group's trade and other receivables using a provision
matrix:
31 December 2018
Days past due
-------- -------- ----------------- ----------
45-180 180-360
Total Current days days >360 days
-------- -------- ------- -------- ----------
Expected credit
loss rate 0% - 100% 100%
Estimated total
gross carrying
amount at default 178,894 176,498 - 1,480 916
Expected credit
loss 2,396 - - 1,480 916
31 December 2017
Days past due
-------- -------- ----------------- ----------
45-180 180-360
Total Current days days >360 days
-------- -------- ------- -------- ----------
Expected credit
loss rate 0% - 100% 0%
Estimated total
gross carrying
amount at default 153,490 152,574 - 916 -
Expected credit
loss 916 - - 916 -
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 2018 cash was held mainly
with Agricultural Bank, Bank Rossiysky Capital and Sberbank.
31 December 31 December
2018 2017
Ba1.ru, Moody's 191,251 -
Ba2.ru, Moody's - 163,328
ruBBB, Expert RA 50,000 -
ruBBB-, Expert RA - 115,000
Ba 3.ru, Moody's 10,945 -
Ba3.ru, Moody's 49 105
Other 8,391 8,321
Total cash and cash equivalents 260,636 286,754
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 2018 and 31 December
2017.
28. Commitments and contingencies
28.1 Capital commitments
Capital expenditure contracted for at the end of the reporting
period but not yet incurred at 31 December 2018 was 29,984, net of
VAT (31 December 2017: 483,042, net of VAT).
28.2 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.
28.3 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.
No provision for litigations was accrued as at 31 December 2017
or 31 December 2018.
28.4 Taxation
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 Group'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 2018, 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, since 2019, the total VAT rate
is increased to 20%.
The Russian tax authorities continue to actively cooperate with
the tax authorities of foreign countries in the international
exchange of tax information, which makes the activities of
companies on an international scale more transparent and requires
detailed study in terms of confirming the economic purpose of the
organization of the international structure in the framework of tax
control procedures.
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.
In addition, tax authorities have the right to charge additional
tax liabilities and penalties on the basis of the rules established
by transfer pricing legislation, if the price/profitability in
controlled transactions differs from the market level. The list of
controlled transactions mainly includes transactions concluded
between related parties. Requirements for tax control of prices and
preparation of transfer pricing documentation apply to cross-border
transactions between related parties (without applying any
threshold), individual transactions in the field of foreign trade
in goods of world exchange trade and transactions with companies
located in low-tax jurisdictions, as well as transactions between
related parties in the domestic market in some cases.
Tax authorities may carry out a price/profitability check in
controlled transactions and, in case of disagreement with the
prices applied by the Group in these transactions, may additionally
charge additional tax liabilities if the Group is unable to justify
the market nature of pricing in these transactions by providing
transfer pricing documentation (national documentation) in
accordance with the requirements of the legislation.
Management believes that it has provided adequately for tax
liabilities based on its interpretations of applicable 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.
28.5 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.
29. Related party transactions
During the period there were no operations with related parties,
except for key management remunerations. Key management comprises
members of the Board of Directors.
The remuneration of key management comprised of salary and
bonuses in the amount 8,956 (2017: 17,451) resulting from the
reduction of Company's and Zoltav Resources LLC's Board of
Directors members' remuneration.
30. Events after the reporting date
On 13 May 2019 the Group signed a credit line agreement with
Promsvyasbank PJSC. Credit line limit is 1,320,000. The purpose of
the credit line - refinancing the loan from Sberbank PJSC and
financing of current activities. Interest rate equals Russian Key
rate plus margin 1.6%. Payment terms depend on the amount of credit
line used, final payment is no later than 29 April 2024.
31. 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 SEEFAIFUSESM
(END) Dow Jones Newswires
June 26, 2019 02:00 ET (06:00 GMT)
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