TIDMENW
RNS Number : 5533Q
Enwell Energy PLC
29 June 2022
29 June 2022
ENWELL ENERGY PLC
2021 AUDITED RESULTS
Enwell Energy plc ("Enwell Energy" or the "Company", and
together with its subsidiaries, the "Group"), the AIM-quoted (AIM:
ENW) oil and gas exploration and production group, today announces
its audited results for the year ended 31 December 2021.
2021 Highlights
Operational
-- Aggregate average daily production of 4,730 boepd (2020: 4,541
boepd), an increase of approximately 4.2%
-- SV-25 appraisal well successfully completed and brought on
production in February 2021
-- SV-31 development well successfully completed and brought
on production in May 2022
-- No significant disruption to the Group's operations arising
from the COVID-19 pandemic to date
Financial
-- Revenue of $121.4 million (2020: $47.3 million), up 157% as
a result of significantly higher gas prices and increased
production rates
-- Gross profit of $73.9 million (2020: $15.7 million), up 371%
-- Operating profit of $66.2 million (2020: $9.8 million), up
576%
-- Cash generated from operations of $77.6 million (2020: $23.8
million), up 226% as a result of significantly higher gas
prices and increased production rates
-- Net profit of $51.1 million (2020: $3.2 million), up 1,497%
-- Cash, cash equivalents and short-term investments of $92.5
million as at 31 December 2021 (2020: $61.0 million), and
of $76.5 million as at 24 June 2022
-- Average realised gas, condensate and LPG prices in Ukraine
were much higher, particularly gas prices, at $432/Mm3 (UAH11,677/Mm3),
$69/bbl and $80/bbl respectively (2020: $136/Mm3 (UAH3,618/Mm3)
gas, $46/bbl condensate and $46/bbl LPG)
-- Reduction of capital completed through the cancellation of
the Company's entire share premium account which has created
distributable reserves, thereby enabling the possibility of
the Company making distributions to shareholders in the future
Outlook
-- The Russian invasion of Ukraine in February 2022 has had a
significant impact on all aspects of life in Ukraine, including
the Group's business and operations, with all field operations
being suspended from 24 February to 15 March 2022, after which
production operations and some field activities resumed at
the MEX-GOL and SV fields, while all operations remain suspended
at the VAS field and SC licence area. The scale and duration
of disruption to the Group's business is currently unknown,
and there remains significant uncertainty about the outcome
of the conflict in Ukraine.
-- The Russian invasion of Ukraine in February 2022 has had a
significant impact on all aspects of life in Ukraine, including
the Group's business and operations, with all field operations
being suspended from 24 February to 15 March 2022, after which
production operations and some field activities resumed at
the MEX-GOL and SV fields, while all operations remain suspended
at the VAS field and SC licence area. The scale and duration
of disruption to the Group's business is currently unknown,
and there remains significant uncertainty about the outcome
of the conflict in Ukraine.
-- The Group retains the majority (77% as at 24 June 2022) of
its cash outside Ukraine, which enhances the Group's ability
to navigate the current risk environment for the foreseeable
future, and provides a material buffer to any further disruptions
to the Group's operations.
-- Subject to the Group's ability to operate safely, development
work planned for 2022:
at the MEX-GOL and SV fields includes: a workover of the
SV-29 well to test alternative horizons; and drilling of
two new wells at the MEX-GOL field
at the SC licence includes: completing the drilling of
the SC-4 well; processing and interpretation of the recently
acquired 150 km2 of 3D seismic; and planning for the development
of the licence area
at the VAS field includes: planning for a new well to explore
the VED prospect within the VAS licence area; and maintenance
of the gas processing facilities, flow-line network and
other field infrastructure
-- 2022 development programme expected to be funded from existing
cash resources and operational cash flow
Sergii Glazunov, CEO, commented : "While 2021 was an extremely
strong operational year for Enwell Energy, these achievements are
entirely overshadowed by the ongoing military conflict in Ukraine.
The conflict is having a huge impact on all aspects of life in
Ukraine. Although operations at our VAS field are currently
suspended, we were able to restart production at our MEX-GOL and SV
fields, and this is testament to the diligence and fortitude of our
operational team. We are also hoping to complete the drilling of
the SC-4 well on our SC licence area in the near future.
Continuing to operate in the current environment is extremely
challenging, and the safety and well-being of our staff is
paramount, but, subject to that, we will endeavour to continue our
operations and make our best contribution to the economy in
Ukraine."
The Annual Report and Financial Statements for 2021 will be
posted to shareholders and published on the Company's website by 30
June 2022, and a formal Notice of Annual General Meeting will
follow later during July 2022.
This announcement contains inside information for the purposes
of Article 7 of EU Regulation No. 596/2014, which forms part of
United Kingdom domestic law by virtue of the European Union
(Withdrawal) Act 2018, as amended.
For further information, please contact:
Enwell Energy plc Tel: 020 3427
3550
Chris Hopkinson, Chairman
Sergii Glazunov, Chief Executive Officer
Bruce Burrows, Finance Director
Strand Hanson Limited Tel: 020 7409
3494
Rory Murphy / Matthew Chandler
Arden Partners plc Tel: 020 7614
5900
Ruari McGirr / Elliot Mustoe (Corporate
Finance)
Simon Johnson (Corporate Broking)
Citigate Dewe Rogerson Tel: 020 7638
9571
Ellen Wilton
Dmitry Sazonenko, MSc Geology, MSc Petroleum Engineering, Member
of AAPG, SPE and EAGE, Director of the Company, has reviewed and
approved the technical information contained within this
announcement in his capacity as a qualified person, as required
under the AIM Rules for Companies.
Glossary
AAPG American Association of Petroleum Geologists
Arkona LLC Arkona Gas-Energy
bbl barrel
bbl/d barrels per day
Bm(3) thousands of millions of cubic metres
boe barrels of oil equivalent
boepd barrels of oil equivalent per day
Bscf thousands of millions of scf
Company Enwell Energy plc
D&M DeGolyer and MacNaughton
EUR Euro
Group Enwell Energy plc and its subsidiaries
km kilometre
km(2) square kilometre
LPG liquefied petroleum gas
MEX-GOL Mekhediviska-Golotvshinska
m(3) cubic metres
m(3)/d cubic metres per day
Mboe thousand barrels of oil equivalent
Mm(3) thousand cubic metres
MMbbl million barrels
MMboe million barrels of oil equivalent
MMm(3) million cubic metres
MMscf million scf
MMscf/d million scf per day
Mtonnes thousand tonnes
% per cent.
QCA Code Quoted Companies Alliance Corporate Governance
Code 2018
QHSE quality, health, safety and environment
SC Svystunivsko-Chervonolutskyi
scf standard cubic feet measured at 20 degrees
Celsius and one atmosphere
SPE Society of Petroleum Engineers
SPEE Society of Petroleum Evaluation Engineers
SV Svyrydivske
Tscf trillion scf
$ United States Dollar
UAH Ukrainian Hryvnia
VAS Vasyschevskoye
VED Vvdenska
WPC World Petroleum Council
Chairman's Statement
I present the 2021 Annual Report and Financial Statements with
very mixed emotions this year. While the Group achieved an
excellent performance during 2021, and avoided any significant
operational disruption as a result of the COVID-19 pandemic, the
invasion of Ukraine by Russia in February 2022 has created a very
different and worrying outlook in respect of both the current and
future situation in Ukraine, and I am greatly saddened to observe
the terrible events occurring there.
The invasion has had a significant impact on all aspects of life
in Ukraine, including the Group's business and operations, with all
field operations being suspended from 24 February to 15 March 2022,
after which production operations and some limited field activities
resumed at the MEX-GOL and SV fields, while all operations remain
suspended at the VAS field and SC licence area. The scale and
duration of disruption to the Group's business is currently
unknown, and there remains significant uncertainty about the
outcome of the ongoing conflict in Ukraine.
During 2021, the Group continued to make good progress in the
development of the MEX-GOL, SV and VAS gas and condensate fields
and SC licence in north-eastern Ukraine, and has delivered an
exceptional financial performance. The SV-25 appraisal well was
completed and brought on production in February 2021, and the SV-31
development well was completed and brought on production in May
2022. Drilling of the SV-29 development well was completed and two
horizons in the V-22 Visean formation were perforated and tested,
but while there were intermittent gas flows, stabilised production
was not achieved and so alternative horizons will be perforated and
tested when possible. The SC-4 appraisal well was nearing its
target depth when operations were suspended.
Aggregate average daily production from the MEX-GOL, SV and VAS
fields during 2021 was 4,730 boepd, which compares favourably with
an aggregate daily production rate of 4,541 boepd during 2020, an
increase of approximately 4.2%. However, issues with water ingress
at the MEX-109 and SV-2 wells in Q4 2021, meant that these wells
were taken offline and workover operations were underway when field
operations were suspended due to the invasion. The loss of
production from these wells had a material impact on production
rates in Q4 2021. At the VAS field production was steady, but lower
than during 2020, after a decline in production from the VAS-10
well.
Largely as a result of the dramatic rise in gas prices during
the year, the Group's net profit increased hugely to $51.1 million
(2020: $3.2 million) as did operating profit to $66.2 million
(2020: $9.8 million) and cash generated from operations to $77.6
million (2020: $23.8 million).
This significant level of cash generation enabled the Group to
progress its multiple work programmes across its broadened asset
portfolio, with approximately $43.0 million invested during the
year (2020: $17.1 million).
During 2021, the fiscal and economic environment in Ukraine
largely remained stable, despite the effects of the COVID-19
pandemic resulting in a contraction in GDP and an increase in the
rate of inflation, and Ukrainian Hryvnia exchange rates also
remained steady. However, the invasion of Ukraine has naturally had
a huge impact on the fiscal and economic situation in Ukraine, and
future fiscal and economic uncertainties will continue until an
acceptable resolution of the conflict occurs.
The Ukrainian Government has implemented a number of reforms in
the oil and gas sector in recent years, which include the
deregulation of the gas supply market in late 2015, and
subsequently, reductions in the subsoil tax rates relating to oil
and gas production and a simplification of the regulatory
procedures applicable to oil and gas exploration and production
activities in Ukraine.
The deregulation of the gas supply market, supported by
electronic gas trading platforms and improved pricing transparency,
has meant that Ukrainian market gas prices broadly correlated with
imported gas prices. During 2021, gas prices recovered
significantly, reflecting a similar trend in European gas prices.
Similarly, condensate and LPG prices were also much higher by
comparison with last year.
However, in Q1 2022, the Ukrainian Government imposed two
material measures on oil and gas producers. Firstly, in January
2022 temporary partial gas price regulations were imposed until 30
April 2022, designed to support the production of certain
designated food products, further details of which were set out in
the Company's announcement dated 17 January 2022. Secondly, changes
to the subsoil production tax rates applicable to gas production
were introduced with effect from 1 March 2022, pursuant to which
the tax rates were linked to gas prices, the incentive rates for
new wells were extended for a further 10 years and improvements
were made to the regulatory environment. In addition, an excise tax
applicable to LPG sales was cancelled in February 2022, and the VAT
rate applicable to condensate and LPG sales was reduced in March
2022. Further details were set out in the Company's announcement
dated 13 April 2022.
Outlook
The invasion of Ukraine by Russia means that there is a
catastrophic humanitarian situation in Ukraine, as well as extreme
challenges to the fiscal, economic and business environment. These
circumstances mean that it is extremely difficult to plan future
investment and operational activities at the Group's fields, but
subject to it being safe to do so, the Group is hoping to undertake
further development activities during 2022 and beyond in order to
continue the development of its fields. However, in doing so, the
Group is taking and will take all measures available to protect and
safeguard its personnel and business, with the safety and wellbeing
of its personnel and contractors being paramount. The Group retains
the majority (77% as at 24 June 2022) of its cash outside Ukraine,
which enhances the Group's ability to navigate the current risk
environment for the foreseeable future, and provides a material
buffer to any further disruptions to the Group's operations. This
has enabled the Board to reach the opinion that the Group has
sufficient resources to navigate the current risk environment for
the foreseeable future.
In conclusion, on behalf of the Board, I would like to thank all
of our staff for the continued dedication and support they showed
during the 2021 year, especially in the midst of the COVID-19
pandemic, and even more so, for their remarkable fortitude since
the invasion of Ukraine in February 2022.
Chris Hopkinson
Chairman
Chief Executive's Statement
Introduction
The Group continued to make good progress at its Ukrainian
fields during 2021, with development activity at the MEX-GOL and SV
fields including successes with the SV-25 appraisal well, which
came on production in February 2021, and the SV-31 development
well, which came on production in May 2022. Drilling of the SV-29
development well was also completed, and, although the well
produced gas flows on test, a stabilised flow rate was not
established and so it is planned to test alternative horizons when
possible. In addition, upgrades to the gas processing facilities,
flow-line network and remedial activity on existing wells were
undertaken.
At the VAS field, planning for a proposed new well to explore
the VED prospect within the VAS licence area has continued, and
upgrades to the flow-line network and other infrastructure were
undertaken.
The Group also commenced work on the SC licence, with the
spudding of the SC-4 appraisal well in August 2021, although the
drilling operations were subsequently suspended due to the Russian
invasion of Ukraine. However, the acquisition of 150 km(2) of 3D
seismic over the 2021-2022 winter period was completed and the
acquired seismic data is now being processed and interpreted.
Overall production continued its upward trend during the year,
being approximately 4.2% higher than in 2020, although production
rates declined in Q4 2021 following water ingress at the MEX-109
and SV-2 wells, causing these wells to be shut in pending workover
operations designed to remedy the water ingress issues.
Quality, Health, Safety and Environment ("QHSE")
The Group is committed to maintaining the highest QHSE standards
and the effective management of these areas is an intrinsic element
of its overall business ethos. The Group's QHSE policies and
performance are overseen by the Health, Safety and Environment
Committee. Through strict enforcement of the Group's QHSE policies,
together with regular management meetings, training and the
appointment of dedicated safety professionals, the Group strives to
ensure that the impact of its business activities on its staff,
contractors and the environment is as low as is reasonably
practicable. The Group reports safety and environmental performance
in accordance with industry practice and guidelines.
I am pleased to report that during 2021, a total of 840,807
man-hours of staff and contractor time were recorded without a Lost
Time Incident occurring. The total number of safe man-hours now
stands at over 4,292,623 man-hours without a Lost Time Incident. No
environmental incidents were recorded during the year.
Production
The average daily production of gas, condensate and LPG from the
MEX-GOL, SV and VAS fields for the year ended 31 December 2021 is
shown below.
Field Gas Condensate LPG Aggregate
(MMscf/d) (bbl/d) (bbl/d) boepd
2021 2020 2021 2020 2021 2020 2021 2020
------ ----- ------ ----- ----- ----- ------ ------
MEX-GOL
& SV 18.9 17.6 681 641 295 295 4,237 3,960
------ ----- ------ ----- ----- ----- ------ ------
VAS 2.6 2.9 26 32 - - 493 581
------ ----- ------ ----- ----- ----- ------ ------
Total 21.5 20.5 707 673 295 295 4,730 4,541
------ ----- ------ ----- ----- ----- ------ ------
Production rates were higher in 2021 when compared with 2020,
predominantly due to the contribution of the SV-25 well, which
commenced production in February 2021.
The Russian invasion of Ukraine in February 2022 meant that the
Group suspended all field operations for the period from 24
February to 15 March 2022, after which production operations and
some field activities resumed at the MEX-GOL and SV fields, while
all operations remain suspended at the VAS field and SC licence.
The VAS field is located near Kharkiv in north-eastern Ukraine,
which has experienced significant military activity, and so
resumption of production at this field is not anticipated in the
immediate future. However, plans are being made to complete the
drilling of the SC-4 well at the SC licence in the near future. As
a result of the disruptions to operations caused by the invasion,
the Group's average daily production for the 2022 year to date has
been materially affected. However, production is currently
continuing at the MEX-GOL and SV fields at a rate of approximately
2,500 boepd.
Operations
Notwithstanding the impact of the COVID-19 pandemic during 2020
and 2021, over those periods, there had been relatively stable
fiscal and economic conditions in Ukraine, as well as reductions in
the subsoil tax rates and improvements in the regulatory procedures
in the oil and gas sector in Ukraine. However, the Russian invasion
of Ukraine in February 2022 has caused huge disruption to the
fiscal and economic conditions in Ukraine since then. During 2021,
the strong recovery in gas prices in Europe fed through to the
Group's realised prices in Ukraine, and provided a significant
boost to the Group's revenues and profitability during the
year.
During 2021, the Group continued to refine its geological
subsurface models of the MEX-GOL, SV and VAS fields, in order to
enhance its strategy for the further development of such fields,
including the timing and level of future capital investment
required to exploit the hydrocarbon resources.
At the MEX-GOL and SV fields, the drilling of the SV-25
appraisal well was completed in February 2021, having been drilled
to a final depth of 5,320 metres. One interval, at a drilled depth
of 5,184 - 5,190 metres, within the V-22 Visean formation was
perforated, and after successful testing, the well was hooked-up to
the gas processing facilities.
In August 2021, the drilling of the SV-29 development well was
completed, having been drilled to a final depth of 5,450 metres.
Two intervals, at drilled depths of 5,246 - 5,249 metres and 5,228
- 5,232 metres respectively, within the V-22 Visean formation, were
perforated, and, while intermittent gas flows were achieved, a
stabilised flow from these intervals was not established. It is
therefore planned to perforate and test two alternative intervals
in the V-19 and V-20 Visean formations when possible.
In May 2022, the SV-31 development well was completed, with the
well having reached a final depth of 5,240 metres. One interval, at
a drilled depth of 5,210 - 5,219 metres, within the V-22 Visean
formation was perforated, and, after initial testing, the well was
hooked up to the gas processing facilities. The well is currently
producing at approximately 2.54 MMscf/d of gas and 117 bbl/d of
condensate (563 boepd in aggregate).
The Group continued to operate each of the SV-2 and SV-12 wells
under joint venture agreements with NJSC Ukrnafta, the majority
State-owned oil and gas producer. Under the agreements, the gas and
condensate produced from the respective wells is sold under an
equal net profit sharing arrangement between the Group and NJSC
Ukrnafta, with the Group accounting for the hydrocarbons produced
and sold from the wells as revenue, and the net profit share due to
NJSC Ukrnafta being treated as a lease expense in cost of sales.
However, during Q4 2021, the SV-2 well experienced water ingress
and consequently had to be taken off production. A workover of this
well was commenced to remove and replace the production string, but
this work was suspended as a result of the Russian invasion of
Ukraine.
In addition, in Q4 2021, the MEX-109 well also experienced water
ingress and as a result was taken off production. A workover of the
well was commenced, and steps were taken to seal the source of the
water ingress, but again the work was suspended as a result of the
Russian invasion, and the well is currently under observation.
The shut-ins of the SV-2 and MEX-109 wells impacted overall
production rates and, depending on the duration and outcome of the
requisite remedial works, could potentially have a material impact
on the Group's future overall production volumes.
Finally, at the MEX-GOL and SV fields, the upgrades to the gas
processing facilities have been completed. These works involved an
upgrade of the LPG extraction circuit, an increase to the flow
capacity of the facilities, and a significant increase to the
liquids tank storage capacity, which are designed to improve
overall plant efficiencies, improve the quality of liquids produced
and boost recoveries of LPG, while reducing environmental
emissions.
At the VAS field, a successful workover of the VAS-10 well was
undertaken to access an alternative production horizon, which
improved production rates from the VAS field.
In March 2019 (as set out in the Company's announcement made on
12 March 2019), a regulatory issue arose when the State Service of
Geology and Subsoil of Ukraine issued an order for suspension (the
"Order") of the production licence for the VAS field. Under the
applicable legislation, the Order would lead to a shut-down of
production operations at the VAS field, but the Group has issued
legal proceedings to challenge the Order, and has obtained a ruling
suspending operation of the Order pending a hearing of the
substantive issues. The Group does not believe that there are any
grounds for the Order, and intends to pursue its challenge to the
Order through the Ukrainian Courts.
Arkona Acquisition and SC Exploration Licence
As announced on 24 March 2020, the Group acquired the entire
issued share capital of LLC Arkona Gas-Energy ("Arkona") for a
total consideration of up to $8.63 million, of which $4.32 million
was subject to the satisfaction of certain conditions. Following
satisfaction of the requisite conditions, and by agreement between
the parties to the acquisition agreement, further payments
totalling $2.6 million (net of an indemnity liability) have been
paid, and the balance of the consideration of $1.6 million is
subject to the remaining conditions and contractual provisions.
Arkona holds a 100% interest in the Svystunivsko-Chervonolutskyi
("SC") exploration licence, which is located in the Poltava region
in north-eastern Ukraine. The SC licence covers an area of 97 km(2)
, and is approximately 15 km east of the SV field. The licence was
granted in May 2017 with a duration of 20 years. The licence is
prospective for gas and condensate, and has been the subject of
exploration since the 1980s, with 5 wells having been drilled on
the licence since then, although none of these wells are currently
on production. As with the productive reservoirs in the SV field,
the prospective reservoirs in the licence area are Visean, at
depths between 4,600 - 6,000 metres.
However, PJSC Ukrnafta, the majority State-owned oil and gas
producer, issued legal proceedings against Arkona, in which PJSC
Ukrnafta made claims of irregularities in the procedures involved
in the grant of the SC licence to Arkona in May 2017. In early July
2020, the First Instance Court in Ukraine made a ruling in favour
of PJSC Ukrnafta, which found that the grant of the SC licence was
irregular, but this ruling was overturned by the Appellate
Administrative Court in September 2020, and a final appeal to the
Supreme Court of Ukraine was determined in favour of Arkona in
February 2021. Further information is set out in the Company's
announcements dated 3 July 2020, 31 July 2020, 30 September 2020,
23 November 2020 and 11 February 2021.
During early 2021, the Group engaged independent petroleum
consultants, DeGolyer and MacNaughton, to prepare an assessment of
the remaining reserves and contingent resources attributable to the
SC licence as at 1 January 2021, in accordance with the March 2007
(as revised in June 2018) SPE/WPC/AAPG/SPEE Petroleum Resources
Management System standard for classification and reporting. Their
assessment estimated the proved and probable (2P) reserves
attributable to the SC licence at 12.1 MMboe. The assessment is
consistent with the Group's proposed field development plan for the
SC licence, which includes the drilling of the SC-4 well and the
acquisition of 150 km(2) of 3D seismic, and the construction of a
gas processing plant. Development is then planned to continue with
the drilling of a further six wells to recover the reserves and
resources in the SC licence. Due to their targeted depths, the
wells are each likely to take up to 12 months to complete, and are
planned to be drilled consecutively over the next eight years.
Further information on DeGolyer and MacNaughton's assessment can be
found in the Company's announcement dated 2 June 2021.
At the SC licence, the SC-4 well had nearly reached its target
depth of 5,565 metres, when drilling was suspended as a result of
the Russian invasion of Ukraine. The well is primarily an appraisal
well, targeting production from the V-22 horizon, as well as
exploring the V-16 and V-21 horizons, in the Visean formation. In
addition , the acquisition of 1 50 km(2) of 3D seismic has been
completed, and processing and interpretation of the acquired
seismic data is now being undertaken.
Outlook
The Russian invasion of Ukraine in February 2022 has caused
significant disruption to Ukraine as a whole and to the Group's
business activities, and until there is a satisfactory resolution
to the conflict, the disruption and uncertainty are likely to
continue. However, and subject to it being safe to do so, during
2022, the Group plans to continue to develop the MEX-GOL, SV and
VAS fields, as well as moving forward with the appraisal and
development of the SC licence area . At the MEX-GOL and SV fields,
the development programme includes a workover of the SV-29
development well, to access alternative horizons in the Visean
formation, drilling of two further wells in the MEX-GOL field,
installation of further compression equipment, and remedial and
upgrade work on existing wells, the flow-line network and pipelines
and other infrastructure.
At the VAS field, planning for the proposed new well to explore
the VED prospect within the VAS licence area will continue, and
upgrades to the gas processing facilities, pipeline network and
other infrastructure are planned.
At the SC licence, drilling of the SC-4 well is planned to be
completed, the recently acquired 3D seismic will be processed and
interpreted and planning for the construction of gas processing
facilities will continue.
Finally, I would like to add my thanks to all of our staff for
the continued hard work and dedication they have shown over the
course of 2021, and to especially recognise their continuing
efforts and professionalism in the face of the extremely
challenging current situation in Ukraine.
Sergii Glazunov
Chief Executive Officer
Overview of Assets
We operate four fields in the Dnieper-Donets basin in
north-eastern Ukraine. Our fields have high potential for growth
and longevity for future production - a strong foundation for
success.
MEX-GOL and SV fields
The MEX-GOL and SV fields are held under two adjacent production
licences, but are operated as one integrated asset, and have
significant gas and condensate reserves and potential resources of
unconventional gas.
Production Licences
We hold a 100% working interest in, and are the operator of, the
MEX-GOL and SV fields. The production licences for the fields were
granted to the Group in July 2004 with an initial duration of 20
years, and the duration of these licences have recently been
extended to 2044 in order to fully develop the remaining reserves.
The economic life of these fields extend to 2038 and 2042
respectively pursuant to the most recent reserves and resources
assessment by DeGolyer and MacNaughton ("D&M") as at 31
December 2017.
The two licences, located in Ukraine's Poltava region, are
adjacent and extend over a combined area of 253 km(2),
approximately 200 km east of Kyiv.
Geology
Geologically, the fields are located towards the middle of the
Dnieper-Donets sedimentary basin which extends across the major
part of north-eastern Ukraine. The vast majority of Ukrainian gas
and condensate production comes from this basin. The reservoirs
comprise a series of gently dipping Carboniferous sandstones of
Visean age inter-bedded with shales at around 4,700 metres below
the surface, with a gross thickness of between 800 and 1,000
metres.
Analysis suggests that the origin of these deposits ranges from
fluvial to deltaic, and much of the trapping at these fields is
stratigraphic. Below these reservoirs is a thick sequence of shale
above deeper, similar, sandstones at a depth of around 5,800
metres. These sands are of Tournasian age and offer additional gas
potential. Deeper sandstones of Devonian age have also been
penetrated in the fields.
Reserves
The development of the fields began in 1995 by the Ukrainian
State company Chernihivnaftogasgeologiya ("CNGG"), and shortly
after this time, the Group entered a joint venture with CNGG in
respect of the exploration and development of these fields.
The fields have been mapped with 3D seismic, and a geological
subsurface model has been developed and refined using data derived
from high-level reprocessing of such 3D seismic and new wells
drilled on the fields.
The assessment undertaken by D&M as at 31 December 2017
estimated proved plus probable (2P) reserves attributable to the
fields of 50.0 MMboe, with 3C contingent resources of 25.3
MMboe.
VAS field
The VAS field is a smaller field with interesting potential. The
field has assessed proved plus probable reserves in excess of 3
MMboe and substantial contingent and prospective resources, as well
as potential resources of unconventional gas.
Production Licence
We hold a 100% working interest in, and are the operator of, the
VAS field. The production licence for the field was granted in
August 2012 with a duration of 20 years. The economic life of the
field extends to 2032 pursuant to the most recent reserves and
resources assessment by D&M as at 31 December 2018.
The licence extends over an area of 33.2 km(2) and is located 17
km south-east of Kharkiv, in the Kharkiv region of Ukraine. The
field was discovered in 1981, and the first well on the licence
area was drilled in 2004.
Geology
Geologically, the field is located towards the middle of the
Dnieper-Donets sedimentary basin in north-east Ukraine. The field
is trapped in an anticlinal structure broken into several faulted
blocks, which are gently dipping to the north, stretching from the
north-east to south-west along a main bounding fault. The gas is
located in Carboniferous sandstones of Bashkirian, Serpukhovian and
Visean age.
The productive reservoirs are at depths between 3,370 and 3,700
metres.
Reserves
The field has been mapped with 3D seismic, and a geological
subsurface model has been developed and refined using data derived
from such 3D seismic and new wells drilled on the field.
The assessment undertaken by D&M as at 31 December 2018
estimated proved plus probable (2P) reserves of 3.1 MMboe, with 3C
contingent resources of 0.6 MMboe, and prospective resources of 7.7
MMboe in the VED area of the field. The next well planned on the
field is designed to explore the VED area of the field.
SC Licence
The SC licence area is located near to and has similar
characteristics to the SV field, and is prospective for gas and
condensate.
Exploration Licence
We hold a 100% working interest in, and are the operator of, the
SC licence. The licence was granted in May 2017 with a duration of
20 years.
The licence extends over an area of 97 km(2) , and is located in
the Poltava region in north-eastern Ukraine, approximately 15 km
east of the SV field.
Geology
Geologically, the field is located towards the middle of the
Dnieper-Donets sedimentary basin which extends across the major
part of north-eastern Ukraine. The vast majority of Ukrainian gas
and condensate production comes from this basin. The reservoirs
comprise a series of gently dipping Carboniferous sandstones of
Visean age inter-bedded with shales at depth between 4,600 and
6,000 metres.
Resources
The licence is prospective for gas and condensate, and has been
the subject of exploration since the 1980s, with five wells having
been drilled on the licence since then, although none of these
wells are currently on production.
The assessment undertaken by D&M as at 1 January 2021
estimated proved plus probable (2P) reserves of 12.1 MMboe, with 3C
contingent resources of 15.0 MMboe.
Overview of Reserves
1. MEX-GOL and SV fields
The Group's estimates of the remaining Reserves and Resources at
the MEX-GOL and SV fields are derived from an assessment undertaken
by D&M, as at 31 December 2017 (the "MEX-GOL-SV Report"), which
was announced on 31 July 2018. During the period from 1 January
2018 to 31 December 2021, the Group has produced 5.2 MMboe from
these fields.
The MEX-GOL-SV Report estimated the remaining Reserves as at 31
December 2017 in the MEX-GOL and SV fields as follows:
Proved Proved + Probable Proved + Probable
(1P) (2P) + Possible (3P)
121.9 Bscf / 3.5 218.3 Bscf / 6.2 256.5 Bscf / 7.3
Gas Bm(3) Bm(3) Bm(3)
----------------- ------------------ ------------------
4.3 MMbbl / 514 7.9 MMbbl / 943 9.2 MMbbl / 1,098
Condensate Mtonne Mtonne Mtonne
----------------- ------------------ ------------------
2.8 MMbbl / 233 5.0 MMbbl / 418 5.8 MMbbl / 491
LPG Mtonne Mtonne Mtonne
----------------- ------------------ ------------------
27.8 MMboe 50.0 MMboe 58.6 MMboe
Total
----------------- ------------------ ------------------
The MEX-GOL-SV Report estimated the Contingent Resources as at
31 December 2017 in the MEX-GOL and SV fields as follows:
Contingent Resources Contingent Resources Contingent Resources
(1C) (2C) (3C)
14.7 Bscf / 0.42 38.3 Bscf / 1.08 105.9 Bscf / 3.00
Gas Bm(3) Bm(3) Bm(3)
--------------------- --------------------- ---------------------
1.17 MMbbl / 144 2.8 MMbbl / 343 6.6 MMbbl / 812
Condensate Mtonne Mtonne Mtonne
--------------------- --------------------- ---------------------
3.8 MMboe 9.6 MMboe 25.3 MMboe
Total
--------------------- --------------------- ---------------------
2. VAS field
The Group's estimates of the remaining Reserves and Resources at
the VAS field and the Prospective Resources at the VED prospect are
derived from an assessment undertaken by D&M as at 31 December
2018 (the "VAS Report"), which was announced on 21 August 2019.
During the period from 1 January 2019 to 31 December 2021, 0.7
MMboe were produced from the field.
The VAS Report estimated the remaining Reserves as at 31
December 2018 in the VAS field as follows:
Proved Proved + Probable Proved + Probable
(1P) (2P) + Possible (3P)
9,114 MMscf / 258 15,098 MMscf / 18,816 MMscf /
Gas MMm(3) 427 MMm(3) 533 MMm(3)
--------------------- --------------------- ------------------
205 Mbbl / 25 Mtonne 346 Mbbl / 42 Mtonne 401 Mbbl / 48
Condensate Mtonne
--------------------- --------------------- ------------------
1.895 MMboe 3.145 MMboe 3.890 MMboe
Total
--------------------- --------------------- ------------------
The VAS Report estimated the Contingent Resources as at 31
December 2018 in the VAS field as follows:
Contingent Resources Contingent Resources Contingent Resources
(1C) (2C) (3C)
- - 2,912 MMscf /
Gas 83 MMm(3)
--------------------- --------------------- ---------------------
- - 74 Mbbl / 9 Mtonne
Condensate
--------------------- --------------------- ---------------------
The VAS Report estimated the Prospective Resources as at 31
December 2018 in the VED prospect as follows:
Low (1U) Best (2U) High (3U) Mean
23,721 MMscf 38,079 MMscf 62,293 MMscf 41,291 MMscf
Gas / 672 MMm(3) / 1,078 MMm(3) / 1,764 MMm(3) / 1,169 MMm(3)
-------------- ---------------- ---------------- ----------------
3 . SC Licence
The Group's estimates of the remaining Reserves and Contingent R
esources at the SC Licence are derived from an assessment
undertaken by D&M as at 1 January 2021 (the "SC Report"), which
was announced on 2 June 2021.
The SC Report estimated the remaining Reserves as at 1 January
2021 in the SC licence area as follows:
Proved Proved + Probable Proved + Probable
(1P) (2P) + Possible (3P)
17.20 Bscf / 0.49 65.16 Bscf / 1.85 85.03 Bscf / 2.41
Gas Bm(3) Bm(3) Bm(3)
--------------------- --------------------- ---------------------
145 Mbbl / 16 Mtonne 548 Mbbl / 61 Mtonne 716 Mbbl / 80 Mtonne
Condensate
--------------------- --------------------- ---------------------
3.2 MMboe 12.1 MMboe 15.7 MMboe
Total
--------------------- --------------------- ---------------------
The SC Report estimated the Contingent Resources as at 1 January
2021 in the SC licence area as follows:
Contingent Resources Contingent Resources Contingent Resources
(1C) (2C) (3C)
8.56 Bscf / 0.24 14.18 Bscf / 0.40 81.16 Bscf / 2.30
Gas Bm(3) Bm(3) Bm(3)
--------------------- --------------------- ---------------------
72 Mbbl / 8 Mtonne 119 Mbbl / 13 Mtonne 682 Mbbl / 75 Mtonne
Condensate
--------------------- --------------------- ---------------------
1.6 MMboe 2.6 MMboe 15.0 MMboe
Total
--------------------- --------------------- ---------------------
Finance Review
The Group's financial performance in 2021 was exceptional when
compared to previous periods, with the net profit for the year of
$51.1 million being an approximate 15-fold increase on 2020 (2020:
$3.2 million). The dramatic improvement is primarily a result of
the Group's achievement of record levels of production coinciding
with the very significant increase during the period in pricing of
the Group's primary product, natural gas.
Aggregate production for the year was up approximately 4% at
4,730 boepd (2020: 4,541 boepd).
Rarely has natural gas, and its pricing, been more of a focus of
public attention, with the sizeable global rise in the commodity's
pricing being well documented throughout the latter part of 2021.
These global and European price increases were also experienced in
Ukraine, and underpinned the 218% rise in average gas price
realisations in the period at $432/Mm(3) (UAH11,677/Mm(3) ), with
condensate and LPG average sales prices also up by 50% and 74% at
$69/bbl and $80/bbl respectively (2020: $136/Mm(3) (UAH3,618/Mm(3)
), $46/bbl and $46/bbl respectively).
Revenue for the year, derived from the sale of the Group's
Ukrainian gas, condensate and LPG production, was up at $121.4
million (2020: $47.3 million). Most notably, within this total, the
revenue from gas sales alone was up approximately 197% at $95.8
million (2020: $32.3 million).
During the period from 1 January 2022 to 31 May 2022, the
average realised gas, condensate and LPG prices were $1,201/Mm(3)
(UAH34,613/Mm(3) ), $105/bbl and $151/bbl respectively.
Cost of sales for the year was up approximately 5 0 % at $47. 4
million (2020: $31.5 million). The major contributor to this
increase is the material rise in the revenue-related costs of taxes
and well rental (with their direct link to commodity prices), up
approximately 130% at a combined $28.7 million (2020: $12.5
million). Excluding these tax expenses directly related to
commodity prices, the residual cost of sales is consistent at $18.
7 million (2020: $1 9 . 0 million). The impact of the above noted
increase in well rental costs is also evidenced in the increase in
operating expenditure per boe, which also increased as a direct
result of such well rental costs increase, from $9.50/boe in 2020
to $13.60/boe in 2021.
Gross profit for the year was dramatically higher at $7 3 . 9
million (2020: $15.7 million).
The subsoil tax rates applicable to gas production were stable
during the 2021 year at 29% for gas produced from deposits at
depths shallower than 5,000 metres and 14% for gas produced from
deposits deeper than 5,000 metres, but reductions in the subsoil
rates applicable to new wells and to condensate production were
applicable, under which (i) for new wells drilled after 1 January
2018, the subsoil tax rates were reduced from 29% to 12% for gas
produced from deposits at depths shallower than 5,000 metres and
from 14% to 6% for gas produced from deposits deeper than 5,000
metres for the period between 2018 and 2022, and (ii) with effect
from 1 January 2019 and applicable to all wells, the subsoil tax
rates for condensate were reduced from 45% to 31% for condensate
produced from deposits shallower than 5,000 metres and from 21% to
16% for condensate produced from deposits deeper than 5,000
metres.
However, with effect from 1 March 2022, changes to the subsoil
production tax rates applicable to gas production were introduced.
These changes modified the applicable tax rates based on gas
prices, extended the incentive rates for new wells for a further 10
years and made improvements to the regulatory environment. The
legislation which introduced these changes also included provisions
that these rates will not be increased for 10 years.
The new subsoil production tax rates applicable to gas
production are as follows:
(i) when gas prices are up to $150/Mm(3) , the rate for wells
drilled prior to 1 January 2018 ("old wells") is 14.5% for gas
produced from deposits at depths shallower than 5,000 metres and 7%
for gas produced from deposits deeper than 5,000 metres, and for
wells drilled after 1 January 2018 ("new wells") is 6% for gas
produced from deposits at depths shallower than 5,000 metres and 3%
for gas produced from deposits deeper than 5,000 metres;
(ii) when gas prices are between $150/Mm(3) and $400/Mm(3) , the
rate for old wells is 29% for gas produced from deposits at depths
shallower than 5,000 metres and 14% for gas produced from deposits
deeper than 5,000 metres, and for new wells is 12% for gas produced
from deposits at depths shallower than 5,000 metres and 6% for gas
produced from deposits deeper than 5,000 metres;
(iii) when gas prices are more than $400/Mm(3) , for the first
$400/Mm(3) , the rate for old wells is 29% for gas produced from
deposits at depths shallower than 5,000 metres and 14% for gas
produced from deposits deeper than 5,000 metres, and for new wells
is 12% for gas produced from deposits at depths shallower than
5,000 metres and 6% for gas produced from deposits deeper than
5,000 metres, and for the difference between $400/Mm(3) and the
actual price, the rate for old wells is 65% for gas produced from
deposits at depths shallower than 5,000 metres and 31% for gas
produced from deposits deeper than 5,000 metres, and for new wells
is 36% for gas produced from deposits at depths shallower than
5,000 metres and 18% for gas produced from deposits deeper than
5,000 metres.
The tax rates applicable to condensate production were unchanged
and so remain at 31% for condensate produced from deposits
shallower than 5,000 metres and 16% for condensate produced from
deposits deeper than 5,000 metres, for both old and new wells.
In addition, the excise tax of EUR52 ($59) per thousand litres
applicable to LPG sales was cancelled entirely with effect from 24
February 2022, and the VAT rate applicable to condensate and LPG
sales was reduced to 7% (from 20%) with effect from 18 March
2022.
Finally, in early 2022, the Ukrainian Government imposed
temporary and partial gas price regulation to support the
production of certain food products through the supply of gas at
regulated prices to the producers of such products. Under this
scheme, all independent gas producers in Ukraine were required to
sell up to 20% of their natural gas production for the period until
30 April 2022 at a price set as the cost of sales of the relevant
gas producer (based on established accounting rules) for such gas,
plus a margin of 24%, plus existing subsoil production taxes (the
"Regulated Price"). This gas was then sold to specified producers
of designated socially important food products at the Regulated
Price, so as to reduce the energy costs of such producers during
the period through to 30 April 2022. The designated products were
certain types of flour, milk (with up to 2.5% fat), bread, eggs,
chicken and sunflower oil, for sale in the Ukrainian domestic
market. This temporary scheme has now concluded. Further details
are set out in the Company's announcement dated 17 January
2022.
Administrative expenses for the year were 7. 7 % higher at $8.4
million (2020: $7.8 million), primarily as a net result of: a 2 7 %
decrease in consultancy fees mainly due to the level of legal and
advisory costs associated with the acquisition activity in 2020 not
having been repeated; and an 11% increase in payroll and related
taxes, consistent with further increases in staff levels and salary
inflation.
Finance costs for the year were approximately 43 % lower at $0.8
million (2020: $1.4 million), mainly due to realised net foreign
exchange gains during 2021, as opposed to the net losses incurred
in 2020.
Other losses in the year reduced by 95% in the period, a result
of the non-recurring nature of the charitable donation in 2020 of
$2.0 million for the supply of COVID-19-related medical equipment
for Ukrainian authorities .
The tax charge for the year increased by a significant 370% to
$15.5 million (2020: $3.3 million charge) mainly due to the
material increase in profit before tax, and comprised a current tax
charge of $13.3 million (2020: $3.0 million charge) and a deferred
tax charge of $1 million (2020: $0.3 million charge).
A deferred tax asset relating to the Group's provision for
decommissioning as at 31 December 2021 of $ 0.5 million (2020: $0.2
million) was recognised on the tax effect of the temporary
differences of the Group's provision for decommissioning at the
MEX-GOL and SV fields, and its tax base. A deferred tax liability
relating to the Group's development and production assets at the
MEX-GOL and SV fields as at 31 December 2021 of $5.7 million (2020:
$2.9 million) was recognised on the tax effect of the temporary
differences between the carrying value of the Group's development
and production asset at the MEX-GOL and SV fields, and its tax
base.
A deferred tax asset relating to the Group's provision for
decommissioning as at 31 December 2021 of $ 0.3 million (2020: $0.3
million) was recognised on the tax effect of the temporary
differences on the Group's provision on decommissioning at the VAS
field, and its tax base. A deferred tax liability relating to the
Group's development and production assets at the VAS field as at 31
December 2021 of $0.5 million (2020: $0.2 million) was recognised
on the tax effect of the temporary differences between the carrying
value of the Group's development and production asset at the VAS
field, and its tax base.
Capital investment of $ 32.2 million reflects the investment in
the Group's oil and gas development and production assets during
the year (2020: $18.2 million), primarily relating to the drilling
of the SV-25, SV-29, SV-31 and SC-4 wells. A review of any
indicators of impairment of the carrying value of the Group's
assets was undertaken at the year end but this review did not
reveal any such indicators.
With the material increase in commodity prices during the
period, and Q4 2021 in particular, trade and other receivables were
up 173% to $13.1 million (2020: $4.8 million). The $5.2 million of
trade receivables included in the year-end balance have been paid
in full in 2022.
Cash, cash equivalents and short-term investments held as at 31
December 2021 were 52% higher at $92.5 million (2020: $61.0
million), the increase being a result of the significant increase
in sales receipts in the period for the reasons noted above. The
Group's cash and cash equivalents balance as at 24 June 2022 was
$76.5 million, held as to $17.4 million equivalent in Ukrainian
Hryvnia and the balance of $59.1 million equivalent predominantly
in US Dollars, Euros and Pounds Sterling.
During 2021, the Ukrainian Hryvnia was stable against the US
Dollar, strengthening modestly from UAH28.3/$1.00 on 31 December
2020 to UAH27.3/$1.00 on 31 December 2021. The impact of this was
$1.6 million of foreign exchange gain (2020: $15 million of foreign
exchange loss). Increases and decreases in the value of the
Ukrainian Hryvnia against the US Dollar affect the carrying value
of the Group's assets.
Cash from operations has funded the capital investment during
the year, and the Group's current cash position and positive
operating cash flow are the sources from which the Group plans to
fund the development programmes for its assets in 2022 and beyond.
This is coupled with the fact that the Group is currently
debt-free, and therefore has no debt covenants that may otherwise
impede its ability to implement contingency plans if domestic
and/or global circumstances dictate. This flexibility and ability
to monitor and manage development plans and liquidity is a
cornerstone of our planning, and underpins our assessments of the
future. With monetary resources at the end of the year of $92.5
million ($63.5 million of which was held outside Ukraine), and
annual running costs of less than $ 8 million, the Group remains in
a very strong position, notwithstanding the impact of the current
conflict in Ukraine, as well as any local or global shocks that may
occur to the industry and/or the Group.
On 25 February 2021, the Company completed a reduction of its
share capital through the cancellation of its entire share premium
account. This reduction of capital creates distributable reserves
of the Company, which potentially enables the Company to make
distributions to its shareholders in the future, subject to the
Company's financial performance. However, the Company is not
indicating any commitment, and does not have any current intention,
to make any distributions to shareholders.
Bruce Burrows
Finance Director
Principal Risks and How We Manage Them
The Group has a risk evaluation methodology in place to assist
in the review of the risks across all material aspects of its
business. This methodology highlights external, operational and
technical, financial and corporate risks and assesses the level of
risk and potential consequences. It is periodically presented to
the Audit Committee and the Board for review, to bring to their
attention potential risks and, where possible, propose mitigating
actions. Key risks recognised and mitigation factors are detailed
below:-
Risk Mitigation
External risks
----------------------------------------------
Military conflict in Ukraine
----------------------------------------------
On 24 February 2022, Russia invaded Although the Group has no assets
Ukraine and there is currently in Crimea, it does have assets in
a serious and ongoing military the areas of conflict in the east
conflict within Ukraine. This conflict of Ukraine, and the conflict has
is having a huge impact on Ukraine disrupted its operations in those
and its population, with significant areas. The Group has suspended all
destruction of infrastructure and field operations at the VAS field
buildings in the areas of conflict, and SC licence area, and is only
as well as damage in other areas undertaking limited field and production
of Ukraine. The conflict is resulting operations at the MEX-GOL and SV
in significant casualties and has fields. At the MEX-GOL and SV fields,
caused a huge humanitarian catastrophe inventories of hydrocarbons are
and refugee influx into neighbouring being maintained at minimum levels.
countries. The conflict is also At the sites where operations are
impacting the fiscal and economic suspended, there are no staff on
environment in Ukraine, as well site, except for necessary security
as the financial stability and staff. Where possible, all other
banking system in Ukraine, including staff work remotely and have been
restrictions on the transfer of supplied with all necessary devices
funds outside Ukraine. The conflict and software to facilitate remote
is an escalation of the previous working. Additionally, the Group
Regional Conflict risk faced by aims to maintain the significant
the business, a dispute that has majority of its cash resources outside
been going on since 2014 in parts Ukraine (being 77% as at 24 June
of eastern Ukraine, and since that 2022). The Group continues to monitor
time Russia has continued to occupy the situation and endeavours to
Crimea. The current conflict is protect its assets and safeguard
also having a significant adverse its staff and contractors.
effect on the Ukrainian financial
markets, hampering the ability
of Ukrainian companies and banks
to obtain funding from the international
capital and debt markets. The conflict
has disrupted the Group's business
and operations, causing the suspension
of field operations, albeit recommenced
in March 2022 at the MEX-GOL and
SV fields, and has also impacted
the supply of materials and equipment
and the availability of contractors
to undertake field operations.
At present, the conflict is ongoing
and the scope and duration of the
conflict is uncertain.
----------------------------------------------
Risk relating to Ukraine
----------------------------------------------
Ukraine is an emerging market and The Group minimises this risk by
as such the Group is exposed to continuously monitoring the market
greater regulatory, economic and in Ukraine and by maintaining a
political risks than it would be strong working relationship with
in other jurisdictions. Emerging the Ukrainian regulatory authorities.
economies are generally subject The Group also maintains a significant
to a volatile political and economic proportion of its cash holdings
environment, which makes them vulnerable in international banks outside Ukraine.
to market downturns elsewhere in
the world and could adversely impact
the Group's ability to operate
in the market. Furthermore, the
military conflict in Ukraine is
impacting the fiscal and economic
environment, the financial and
banking system, and the economic
stability of Ukraine. As a result,
Ukraine will require financial
assistance and/or aid from international
financial agencies to provide economic
support and assist with the reconstruction
of infrastructure and buildings
damaged in the conflict.
----------------------------------------------
Banking system in Ukraine
----------------------------------------------
The banking system in Ukraine has The creditworthiness and potential
been under great strain in recent risks relating to the banks in Ukraine
years due to the weak level of are regularly reviewed by the Group,
capital, low asset quality caused but the geopolitical and economic
by the economic situation, currency events in Ukraine over recent years
depreciation, changing regulations have significantly weakened the
and other economic pressures generally, Ukrainian banking sector. This has
and so the risks associated with been exacerbated by the current
the banks in Ukraine have been military conflict in Ukraine. In
significant, including in relation light of this, the Group has taken
to the banks with which the Group and continues to take steps to diversify
has operated bank accounts. This its banking arrangements between
situation was improving moderately a number of banks in Ukraine. These
following remedial action by the measures are designed to spread
National Bank of Ukraine, but the the risks associated with each bank's
current military conflict has significantly creditworthiness, and the Group
affected such improvements, and endeavours to use banks that have
the National Bank of Ukraine has the best available creditworthiness.
imposed a number of restrictive Nevertheless, and despite the recent
measures designed to protect the improvements, the Ukrainian banking
banking system, including restrictions sector remains weakly capitalised
of the transfer of funds outside and so the risks associated with
Ukraine (albeit that the Group the banks in Ukraine remain significant,
aims to maintain the significant including in relation to the banks
majority of its cash resources with which the Group operates bank
outside Ukraine (being 77% as at accounts. As a consequence, the
24 June 2022). In addition, Ukraine Group also maintains a significant
continues to be supported by funding proportion of its cash holdings
from the International Monetary in international banks outside Ukraine.
Fund, and has requested further
funding support from the International
Monetary Fund.
----------------------------------------------
Geopolitical environment in Ukraine
----------------------------------------------
Although there were some improvements The Group continually monitors the
in recent years, there has not market and business environment
been a final resolution of the in Ukraine and endeavours to recognise
political, fiscal and economic approaching risks and factors that
situation in Ukraine, and the current may affect its business. In addition,
military conflict has had a severe the involvement of Smart Holding
detrimental effect on the economic (Cyprus) Limited, as an indirect
situation in Ukraine. The ongoing major shareholder with extensive
effects of this are difficult to experience in Ukraine, is considered
predict and likely to continue helpful to mitigate such risks.
to affect the Ukrainian economy However, the invasion of Ukraine
and potentially the Group's business. creates material challenges in planning
This situation is currently affecting future investment and operations.
the Group's production and field The Group is limiting its operational
operations, and the ongoing instability activities to minimise risk to its
is disrupting the Group's development staff and contractors, and to limit
and operational planning for its its financial exposure.
assets.
----------------------------------------------
Climate change
----------------------------------------------
Any near and medium-term continued The Group's plans include: assessing,
warming of the Planet can have reducing and/or mitigating its emissions
potentially increasing negative in its operations ; and identifying
social, economic and environmental climate change-related risks and
consequences, generally, globally assessing the degree to which they
and regionally, and specifically can affect its business, including
in relation to the Group. The potential financial implications. The HSE
impacts include: loss of market; Committee, which was established
and increased costs of operations in 2020, is specifically tasked
through increasing regulatory oversight with overseeing measuring, benchmarking
and controls, including potential and mitigating the Group's environmental
effective or actual loss of licences and climate impact, which will be
to operate. As a diligent operator reported on in future periods. At
aware of and responsive to its this stage, the Group does not consider
good stewardship responsibilities, climate change to have any material
the Group not only needs to monitor implications on the Group's financial
and modify its business plans and statements, including accounting
operations to react to changes, estimates.
but also to ensure its environmental
footprint is as minimal as it can
practicably be in managing the
hydrocarbon resources the Group
produces.
----------------------------------------------
Operational and technical risks
----------------------------------------------
Quality, Health, Safety and Environment
("QHSE")
----------------------------------------------
The oil and gas industry, by its The Group maintains QHSE policies
nature, conducts activities which and requires that management, staff
can cause health, safety, environmental and contractors adhere to these
and security incidents. Serious policies. The policies ensure that
incidents can not only have a financial the Group meets Ukrainian legislative
impact but can also damage the standards in full and achieves international
Group's reputation and the opportunity standards to the maximum extent
to undertake further projects. possible. As a consequence of the
The military conflict in Ukraine COVID-19 pandemic the Group has
poses significant risks to field implemented processes and controls
operations, by way of potential intended to ensure protection of
threat to the lives of employees all our stakeholders and minimise
and contractors, and damage to any disruption to our business.
equipment and infrastructure. As a consequence of the current
military conflict in Ukraine, operations
at the VAS field and SC licence
area are currently suspended entirely,
and only limited field and production
operations are continuing at the
MEX-GOL and SV fields. Only essential
staff are located at site, and all
other staff are working remotely,
either from areas away from the
conflict areas or outside Ukraine.
The Group has invested in technology
that allows many staff to work just
as effectively from remote locations.
----------------------------------------------
Industry risks
----------------------------------------------
The Group is exposed to risks which The Group has well qualified and
are generally associated with the experienced technical management
oil and gas industry. For example, staff to plan and supervise operational
the Group's ability to pursue and activities. In addition, the Group
develop its projects and undertake engages with suitably qualified
development programmes depends local and international geological,
on a number of uncertainties, including geophysical and engineering experts
the availability of capital, seasonal and contractors to supplement and
conditions, regulatory approvals, broaden the pool of expertise available
gas, oil, condensate and LPG prices, to the Group. Detailed planning
development costs and drilling of development activities is undertaken
success. As a result of these uncertainties, with the aim of managing the inherent
it is unknown whether potential risks associated with oil and gas
drilling locations identified on exploration and production, as well
proposed projects will ever be as ensuring that appropriate equipment
drilled or whether these or any and personnel are available for
other potential drilling locations the operations, and that local contractors
will be able to produce gas, oil are appropriately supervised.
or condensate. In addition, drilling
activities are subject to many
risks, including the risk that
commercially productive reservoirs
will not be discovered. Drilling
for hydrocarbons can be unprofitable,
not only due to dry holes, but
also as a result of productive
wells that do not produce sufficiently
to be economic. In addition, drilling
and production operations are highly
technical and complex activities
and may be curtailed, delayed or
cancelled as a result of a variety
of factors.
----------------------------------------------
Production of hydrocarbons
----------------------------------------------
Producing gas and condensate reservoirs In recent years, the Group has engaged
are generally characterised by external technical consultants to
declining production rates which undertake a comprehensive review
vary depending upon reservoir characteristics and re-evaluation study of the MEX-GOL
and other factors. Future production and SV fields in order to gain an
of the Group's gas and condensate improved understanding of the geological
reserves, and therefore the Group's aspects of the fields and reservoir
cash flow and income, are highly engineering, drilling and completion
dependent on the Group's success techniques, and the results of this
in operating existing producing study and further planned technical
wells, drilling new production work are being used by the Group
wells and efficiently developing in the future development of these
and exploiting any reserves, and fields. The Group has established
finding or acquiring additional an ongoing relationship with such
reserves. The Group may not be external technical consultants to
able to develop, find or acquire ensure that technical management
reserves at acceptable costs. The and planning is of a high quality
experience gained from drilling in respect of all development activities
undertaken to date highlights such on the Group's fields.
risks as the Group targets the
appraisal and production of these
hydrocarbons.
----------------------------------------------
Risks relating to the further
development and operation of the
Group's gas and condensate fields
in Ukraine
----------------------------------------------
The planned development and operation The Group's technical management
of the Group's gas and condensate staff, in consultation with its
fields in Ukraine is susceptible external technical consultants,
to appraisal, development and operational carefully plan and supervise development
risk. This could include, but is and operational activities with
not restricted to, delays in the the aim of managing the risks associated
delivery of equipment in Ukraine, with the further development of
failure of key equipment, lower the Group's fields in Ukraine. This
than expected production from wells includes detailed review and consideration
that are currently producing, or of available subsurface data, utilisation
new wells that are brought on-stream, of modern geological software, and
problematic wells and complex geology utilisation of engineering and completion
which is difficult to drill or techniques developed for the fields.
interpret. The generation of significant With regards to operational activities,
operational cash is dependent on the Group ensures that appropriate
the successful delivery and completion equipment and personnel are available
of the development and operation for the operations, and that operational
of the fields. The military conflict contractors are appropriately supervised.
in Ukraine is impacting planning In addition, the Group performs
and implementation of development a review of indicators of impairment
and operations at the Group's fields. of its oil and gas assets on an
annual basis, and considers whether
an assessment of its oil and gas
assets by a suitably qualified independent
assessor is appropriate or required.
----------------------------------------------
Drilling and workover operations
----------------------------------------------
Due to the depth and nature of The utilisation of detailed sub-surface
the reservoirs in the Group's fields, analysis, careful well planning
the technical difficulty of drilling and engineering design in designing
or re-entering wells in the Group's work programmes, along with appropriate
fields is high, and this and the procurement procedures and competent
equipment limitations within Ukraine, on-site management, aims to minimise
can result in unsuccessful or lower these risks.
than expected outcomes for wells.
----------------------------------------------
Maintenance of facilities
----------------------------------------------
There is a risk that production The Group's facilities are operated
or transportation facilities can and maintained at standards above
fail due to non-adequate maintenance, the Ukrainian minimum legal requirements.
control or poor performance of Operations staff are experienced
the Group's suppliers. and receive supplemental training
to ensure that facilities are properly
operated and maintained. Service
providers are rigorously reviewed
at the tender stage and are monitored
during the contract period.
----------------------------------------------
Financial risks
----------------------------------------------
Exposure to cash flow and liquidity
risk
----------------------------------------------
There is a risk that insufficient The Group maintains adequate cash
funds are available to meet the reserves and closely monitors forecasted
Group's development obligations and actual cash flow, as well as
to commercialise the Group's oil short and longer-term funding requirements.
and gas assets. Since a significant T he Group aims to maintain the
proportion of the future capital significant majority of its cash
requirements of the Group is expected resources outside Ukraine (being
to be derived from operational 77% as at 24 June 2022). The Group
cash generated from production, does not currently have any loans
including from wells yet to be outstanding, internal financial
drilled, there is a risk that in projections are regularly made based
the longer term insufficient operational on the latest estimates available,
cash is generated, or that additional and various scenarios are run to
funding, should the need arise, assess the robustness of the Group's
cannot be secured. The military liquidity. However, as the risk
conflict in Ukraine has disrupted to future capital funding is inherent
production operations at the Group's in the oil and gas exploration and
fields, and consequently reduced development industry and reliant
anticipated cash flows from those in part on future development success,
fields, and this has increased it is difficult for the Group to
the risk regarding sufficiency take any other measures to further
of capital for development. In mitigate this risk, other than tailoring
addition, the conflict may disrupt its development activities to its
the sales market for hydrocarbons available capital funding from time
that are produced. Currently, however, to time.
hydrocarbon prices are very high,
which is ameliorating the potential
reduction in cash flows, and the
Group's sales counterparties are
meeting their financial obligations.
----------------------------------------------
Ensuring appropriate business
practices
----------------------------------------------
The Group operates in Ukraine, The Group maintains anti-bribery
an emerging market, where certain and corruption policies in relation
inappropriate business practices to all aspects of its business,
may, from time to time occur, such and ensures that clear authority
as corrupt business practices, levels and robust approval processes
bribery, appropriation of property are in place, with stringent controls
and fraud, all of which can lead over cash management and the tendering
to financial loss. and procurement processes. In addition,
office and site protection is maintained
to protect the Group's assets.
----------------------------------------------
Hydrocarbon price risk
----------------------------------------------
The Group derives its revenue principally The Group sells a proportion of
from the sale of its Ukrainian Its hydrocarbon production through
gas, condensate and LPG production. offtake arrangements, which include
These revenues are subject to commodity pricing formulae so as to ensure
price volatility and political that it achieves market prices for
influence. A prolonged period of its products, as well utilising
low gas, condensate and LPG prices the electronic market platforms
may impact the Group's ability in Ukraine to achieve market prices
to maintain its long-term investment for its remaining products. However,
programme with a consequent effect hydrocarbon prices in Ukraine are
on its growth rate, which in turn implicitly linked to world hydrocarbon
may impact the Company's share prices and so the Group is subject
price or any shareholder returns. to external price trends. In January
Lower gas, condensate and LPG prices 2022, the Ukrainian Government imposed
may not only decrease the Group's temporary partial gas price regulations
revenues per unit, but may also until 30 April 2022, designed to
reduce the amount of gas, condensate support the production of certain
and LPG which the Group can produce designated food products. Whilst
economically, as would increases an unhelpful interference in the
in costs associated with hydrocarbon functioning of the deregulated gas
production, such as subsoil taxes supply market in Ukraine, in its
and royalties. The overall economics stated form and duration, this temporary
of the Group's key assets (being scheme is not a material risk to
the net present value of the future the Company and its cash generation,
cash flows from its Ukrainian projects) and has now expired.
are far more sensitive to long
term gas, condensate and LPG prices
than short-term price volatility.
However, short-term volatility
does affect liquidity risk, as,
in the early stage of the projects,
income from production revenues
is offset by capital investment.
In addition, t he military conflict
in Ukraine may disrupt the sales
market for hydrocarbons, although,
currently, hydrocarbon prices are
very high, and the Group's sales
counterparties are meeting their
financial obligations.
----------------------------------------------
Currency risk
----------------------------------------------
Since the beginning of 2014 , the The Group's sales proceeds are received
Ukrainian Hryvnia significantly in Ukrainian Hryvnia, and the majority
devalued against major world currencies, of the capital expenditure costs
including the US Dollar, where for the current investment programme
it has fallen from UAH8.3/$1.00 will be incurred in Ukrainian Hryvnia,
on 1 January 2014 to UAH27.3/$1.00 thus the currency of revenue and
on 31 December 2021. This devaluation costs are largely matched. In light
has been a significant contributor of the previous devaluation and
to the imposition of banking restrictions volatility of the Ukrainian Hryvnia
by the National Bank of Ukraine against major world currencies,
over recent years. In addition, and since the Ukrainian Hryvnia
the geopolitical events in Ukraine does not benefit from the range
over recent years and the current of currency hedging instruments
military conflict in Ukraine are which are available in more developed
likely to continue to impact the economies, the Group has adopted
valuation of the Ukrainian Hryvnia a policy that, where possible, funds
against major world currencies. not required for use in Ukraine
Further devaluation of the Ukrainian be retained on deposit in the United
Hryvnia against the US Dollar will Kingdom and Europe, principally
affect the carrying value of the in US Dollars.
Group's assets.
----------------------------------------------
Counterparty and credit risk
----------------------------------------------
The challenging political and economic The Group monitors the financial
environment in Ukraine and current position and credit quality of its
military conflict means that businesses contractual counterparties and seeks
can be subject to significant financial to manage the risk associated with
strain, which can mean that the counterparties by contracting with
Group is exposed to increased counterparty creditworthy contractors and customers.
risk if counterparties fail or Hydrocarbon production is sold on
default in their contractual obligations terms that limit supply credit and/or
to the Group, including in relation title transfer until payment is
to the sale of its hydrocarbon received .
production, resulting in financial
loss to the Group.
----------------------------------------------
Financial markets and economic
outlook
----------------------------------------------
The performance of the Group is The Group's sales proceeds are received
influenced by global economic conditions in Ukrainian Hryvnia and a significant
and, in particular, the conditions proportion of investment expenditure
prevailing in the United Kingdom is made in Ukrainian Hryvnia , which
and Ukraine. The economies in these minimises risks related to foreign
regions have been subject to volatile exchange volatility. However, hydrocarbon
pressures in recent periods, with prices in Ukraine are implicitly
the global economy having experienced linked to world hydrocarbon prices
a long period of difficulty, the and so the Group is subject to external
COVID pandemic, and more particularly price movements. The Group holds
the current military conflict in a significant proportion of its
Ukraine. This has led to extreme cash reserves in the United Kingdom
foreign exchange movements in the and Europe, mostly in US Dollars,
Ukrainian Hryvnia , high inflation with reputable financial institutions.
and interest rates, and increased The financial status of counterparties
credit risk relating to the Group's is carefully monitored to manage
key counterparties. counterparty risks. Nevertheless,
the overall exposure that the Group
faces as a result of these risks
cannot be predicted and many of
these are outside of the Group's
control.
----------------------------------------------
Corporate risks
----------------------------------------------
Ukrainian production licences
----------------------------------------------
The Group operates in a region The Group ensures compliance with
where the right to production can commitments and regulations relating
be challenged by State and non-State to its production licences through
parties. During 2010, this manifested Group procedures and controls or,
itself in the form of a Ministry where this is not immediately feasible
Order instructing the Group to for practical or logistical considerations,
suspend all operations and production seeks to enter into dialogue with
from its MEX-GOL and SV production the relevant Government bodies with
licences, which was not resolved a view to agreeing a reasonable
until mid-2011. In 2013, new rules time frame for achieving compliance
relating to the updating of production or an alternative, mutually agreeable
licences led to further challenges course of action. Work programmes
being raised by the Ukrainian authorities are designed to ensure that all
to the production licences held licence obligations are met and
by independent oil and gas producers continual interaction with Government
in Ukraine, including the Group. bodies is maintained in relation
In March 2019, a Ministry Order to licence obligations and commitments.
was issued instructing the Group
to suspend all operations and production
from its VAS production licence.
The Group is challenging this Order
through legal proceedings, during
which production from the licence
is able to continue (although the
Russian invasion has currently
caused production to be suspended),
but this matter remains unresolved.
In 2020, LLC Arkona Gas-Energy
("Arkona") faced a challenge from
PJSC Ukrnafta concerning the validity
of its SC production licence ,
which was ultimately resolved in
Arkona's favour by a decision of
the Supreme Court of Ukraine in
February 2021. All such challenges
affecting the Group have thus far
been successfully defended through
the Ukrainian legal system. However,
the business environment is such
that these types of challenges
may arise at any time in relation
to the Group's operations, licence
history, compliance with licence
commitments and/or local regulations.
In addition, production licences
in Ukraine are issued with and/or
carry ongoing compliance obligations,
which if not met, may lead to the
loss of a licence.
----------------------------------------------
Risks relating to key personnel
----------------------------------------------
The Group's success depends upon The Group periodically reviews the
skilled management as well as technical compensation and contractual terms
expertise and administrative staff. of its staff. In addition, the Group
The loss of service of critical has developed relationships with
members from the Group's team could a number of technical and other
have an adverse effect on the business. professional experts and advisers,
The current military conflict in who are used to provide specialist
Ukraine has meant that, as far services as required. As a result
as possible, the Group's staff of the military conflict, o nly
have needed to move away from areas essential staff are located at site,
of conflict and work remotely. and all other staff are working
remotely, either from areas away
from the conflict areas or outside
Ukraine. The Group has invested
in technology that allows many staff
to work just as effectively from
remote locations.
----------------------------------------------
Consolidated Income Statement
for the year ended 31 December 2021
202 1 2020
Note $000 $000
Revenue 5 121,353 47,251
(31, 511
Cost of sales 6 (47,422) )
-------------------------------------------- ----- --------- ---------
Gross profit 73,931 15, 740
Administrative expenses 7 (8,350) (7,791)
Other operating gains, (net) 10 654 1, 821
-------------------------------------------- ----- --------- ---------
Operating profit 66,235 9, 770
Finance income 11 1,394 -
Finance costs 12 (752) (1,418)
Net impairment (losses)/gains on financial
assets (177) 24
Other losses, (net) 13 (108) (1,856)
-------------------------------------------- ----- --------- ---------
Profit before taxation 66,592 6, 520
Income tax expense 14 (15,473) (3,332)
-------------------------------------------- ----- --------- ---------
Profit for the year 51,119 3, 188
-------------------------------------------- ----- --------- ---------
Earnings per share (cents)
Basic and diluted 16 15.9c 1.0c
-------------------------------------------- ----- --------- ---------
The Notes set out below are an integral part of these
consolidated financial statements.
Consolidated Statement of Comprehensive Income
for the year ended 31 December 2021
202 1 2020
$000 $000
Profit for the year 51,119 3, 188
Other comprehensive income/(expense):
Items that may be subsequently reclassified
to profit or loss:
Equity - foreign currency translation 1,611 (15,050)
Items that will not be subsequently
reclassified to profit or loss:
Re-measurements of post-employment benefit
obligations 172 (73)
Total other comprehensive income/(expense) 1,783 (15,123)
Total comprehensive income/(expense)
for the year 52,902 (11 , 935)
---------------------------------------------- ------- -----------
The Notes set out below are an integral part of these
consolidated financial statements.
Consolidated Balance Sheet
as at 31 December 2021
202 1 20 20
Note $000 $000
Assets
Non-current assets
Property, plant and equipment 18 87,418 65, 662
Intangible assets 1 9 12,340 12,232
Right-of-use assets 20 1,008 512
Corporation tax receivable - 9
Deferred tax asset 2 5 361 167
---------------------------------------- ----- ----------- -----------
101,127 78, 582
Current assets
Inventories 22 1,862 1,541
Trade and other receivables 23 13,059 4,847
Cash and cash equivalents 24 87,780 60,993
Other short-term investments 24 4,762 -
---------------------------------------- ----- ----------- -----------
107,463 67,381
Total assets 208,590 145, 963
---------------------------------------- ----- ----------- -----------
Liabilities
Current liabilities
Trade and other payables 25 (12,306) (6,641)
Lease liabilities 20 (455) (245)
Corporation tax payable (5,445) (1,062)
(18,206) (7,948)
Net current assets 89,257 59,433
---------------------------------------- ----- ----------- -----------
Non-current liabilities
Provision for decommissioning 26 (5,467) (6,819)
Lease liabilities 20 (648) (371)
Defined benefit liability (427) (530)
Deferred tax liability 27 (5,197) (2,705)
Other non-current liabilities (128) (1,975)
(11,867) (12,400)
Total liabilities (30,073) (20,348)
---------------------------------------- ----- ----------- -----------
Net assets 178,517 125, 615
---------------------------------------- ----- ----------- -----------
Equity
Called up share capital 28 28,115 28,115
Share premium account 17 - 555,090
Foreign exchange reserve 29 (103,611) (105,222)
Merger reserve 29 (3,204) (3,204)
Capital contributions reserve 29 7,477 7,477
(356, 641
Retained earnings/(Accumulated losses) 249,740 )
Total equity 178,517 125, 615
---------------------------------------- ----- ----------- -----------
The Notes set out below are an integral part of these
consolidated financial statements.
Consolidated Statement of Changes in Equity
for the year ended 31 December 2021
Called
up Share Capital Foreign Retained
share premium Merger contributions exchange earnings/(Accumulated
capital account reserve reserve reserve* losses) Total equity
$000 $000 $000 $000 $000 $000 $000
As at 1 January
2020 28,115 555,090 (3,204) 7,477 (90,172) (359,756) 137,550
Profit for the
year - - - - - 3, 188 3, 188
Other
comprehensive
expense
- exchange
differences - - - - (15,050) - (15,050)
- re-measurements
of
post-employment
benefit
obligations - - - - - (73) (73)
Total
comprehensive (1 1 , 935
income/( expense) - - - - (15,050) 3, 115 )
As at 31 December (356, 641
2020 28,115 555,090 (3,204) 7,477 (105,222) ) 125, 615
Called
up Share Capital Foreign Retained
share premium Merger contributions exchange earnings/(Accumulated
capital account reserve reserve reserve* losses) Total equity
$000 $000 $000 $000 $000 $000 $000
As at 1 January
202 ( 105 , 22 (35 6 , 641
1 28,115 555,090 (3,204) 7,477 2) ) 1 25 , 615
Profit for the
year - - - - - 51,119 51,119
Other
comprehensive
income
- exchange
differences - - - - 1,611 - 1,611
- re-measurements
of
post-employment
benefit
obligations - - - - - 172 172
Total
comprehensive
income/( expense) - - - - 1,611 51,291 52,902
Cancellation of
share
premium account
(Note
17) - (555,090) - - - 555,090 -
As at 31 December
202 1 28,115 - (3,204) 7,477 (103,611) 249,740 178,517
* Predominantly as a result of exchange differences on non-monetary assets and liabilities where
the subsidiaries' functional currency is not the US Dollar.
The Notes set out below are an integral part of these
consolidated financial statements.
Consolidated Cash Flow Statement
for the year ended 31 December 2021
202 1 20 20
Note $000 $000
Operating activities
2 3 ,7
Cash generated from operations 30 77,646 64
Charitable donations 13 (76) (2,077)
Income tax paid (8,959) (3,850)
Interest received 763 1,487
--------------------------------------------------- ----- --------- ---------
Net cash inflow from operating activities 69,374 19,324
--------------------------------------------------- ----- --------- ---------
Investing activities
Purchase of oil and gas development, production
and other property, plant and equipment (26,292) (12,749)
Purchase of oil and gas exploration and
evaluation assets (11,387) (4,154)
Purchase of financial instruments 24 (4,762) -
Purchase of oil and gas development, production (5 39
and other intangible assets ) (194)
Proceeds from return of prepayments for
shares 250 250
Proceeds from sale of property, plant and
equipment 10 4
Net cash outflow from investing activities (42,720) (16,843)
--------------------------------------------------- ----- --------- ---------
Financing activities
Payment of principal portion of lease liabilities (555) (543)
--------------------------------------------------- ----- --------- ---------
Net cash outflow from financing activities (555) (543)
--------------------------------------------------- ----- --------- ---------
Net increase in cash and cash equivalents 26,099 1,938
Cash and cash equivalents at the beginning
of the year 60,993 62,474
ECL* of cash and cash equivalents (6) (6)
Effect of foreign exchange rate changes 694 (3,413)
Cash and cash equivalents at the end of
the year 24 87,780 60,993
--------------------------------------------------- ----- --------- ---------
*ECL - Expected credit losses
The Notes set out below are an integral part of these
consolidated financial statements.
Notes forming part of the financial statements
1. Statutory Accounts
The financial information set out above does not constitute the
Company's statutory accounts for the year ended 31 December 2021 or
2020, but is derived from those accounts. The Auditor has reported
on those accounts, and its reports were unqualified and did not
contain statements under sections 498(2) or (3) of the Companies
Act 2006. The auditors' report on the Group financial statements
included a material uncertainty in respect of the Group's ability
to continue as a going concern as explained in the section "Going
Concern" in Note 3 below.
The statutory accounts for 2021 will be delivered to the
Registrar of Companies following publication.
While the financial information included in this preliminary
announcement has been prepared in accordance with UK-adopted
International Accounting Standards ("framework"), this announcement
does not itself contain sufficient information to comply with the
framework. The Company expects to distribute the full financial
statements that comply with UK-adopted International Accounting
Standards by 30 June 2022.
2. General Information and Operational Environment
Enwell Energy plc (the "Company") and its subsidiaries (the
"Group") is a gas, condensate and LPG production group.
The Company is a public limited company quoted on the AIM Market
operated by London Stock Exchange plc and incorporated in England
and Wales under the Companies Act 2006. The Company's registered
office is at 16 Old Queen Street, London, SW1H 9HP, United Kingdom
and its registered number is 4462555. The principal activities of
the Group and the nature of the Group's operations are set out
above.
As at 31 December 2021 and 2020, the Company's immediate parent
company was Smart Energy (CY) Limited, which is 100% owned by Smart
Holding (Cyprus) Limited, which is 100% owned by Mr Vadym
Novynskyi. Accordingly, the Company was ultimately controlled by Mr
Vadym Novynskyi.
The Group's gas, condensate and LPG extraction and production
facilities are located in Ukraine. Since 2013, there has been
ongoing political and economic instability in Ukraine, which has
led to a deterioration of Ukrainian State finances, volatility of
financial markets, illiquidity on capital markets, higher inflation
and a depreciation of the national currency against major foreign
currencies, although there had been some recent gradual
improvements.
Impact of the ongoing war in Ukraine
On 24 February 2022, Russia commenced a military invasion of
Ukraine. This was quickly followed by the enactment of martial law
by the Ukrainian President's Decree, approved by the Parliament of
Ukraine, and the corresponding introduction of related temporary
restrictions that impact, amongst other areas, the economic
environment and business operations in Ukraine.
Currently, four months after the initial military attack,
fighting continues in and around several major Ukrainian cities,
causing very significant numbers of reported military and civilian
casualties and significant dislocation of the Ukrainian population.
As of the date hereof, the Russian army has occupied territories in
the east and south of Ukraine, including the majority of the
Kherson, Zaporizhzhia, Luhansk and Donetsk regions. Russian attacks
have targeted and destroyed civilian infrastructure over wide areas
of Ukraine, including hospitals and residential complexes. The
invasion caused, and continues to cause, significant turbulence and
disruption to the social and economic environment in Ukraine, with
many businesses being forced to suspend their operations. According
to a projection published by the International Monetary Fund
("IMF") in April 2022, Ukrainian GDP may fall 35% in 2022.
On 3 June 2022, the National Bank of Ukraine ("NBU") increased
the key policy interest rate to 25%, which was aimed at suspending
price increases and strengthening the Ukrainian Hryvnia exchange
rate. The NBU has also introduced temporary restrictions on foreign
currency trades and limited the ability to perform cross-border
payments for non-critical imports and repayment of debt to foreign
creditors, apart from international institutions. The Ukrainian
Hryvnia exchange rate with the US Dollar was effectively fixed at
UAH29.25:$1.00 on the foreign exchange market to ensure the stable
operation of Ukraine's financial system. As a result, commercial
interbank quotes remain close to the officially imposed NBU
exchange rate. Despite the uncertainty and instability in the
general situation within Ukraine, the banking system remains
relatively stable, with sufficient liquidity even as martial law
continues, and banking services are available to both legal
entities and individual bank customers .
The Ukrainian Government is taking action to limit the negative
effects of the war on the Ukrainian economic environment during the
period of martial law and beyond, including but not limited to:
-- the Parliament of Ukraine has adopted a temporary easing of
the tax regime until the end of martial law, including the
suspension of tax audits and has cancelled penalties for violating
the tax law;
-- gasoline, heavy distillates, liquefied gas, oil and petroleum
are subject to VAT at a reduced rate of 7%, and the excise
tax rate for the imported fuel group of products' is set at
zero;
-- a number of measures were taken to limit prices for energy
resources, including prohibiting export of gas, setting a
level of electricity price on transactions a day ahead and
intraday markets; and
-- the Parliament of Ukraine passed a law ( 7038-d) to increase
the subsoil tax rate on natural gas production during martial
law. This law introduced a differentiated subsoil tax rate
on the production of natural gas depending on sale prices
for natural gas.
Additional financial support was received from a number of
international institutions, including from the IMF and European
Bank for Reconstruction and Development ("EBRD"), to support the
economy and the population. Such financial support is critical for
Ukraine to continue to service its debts in the foreseeable future,
including record high State debt repayments in 2022.
Given the fast-moving nature of the situation in Ukraine and the
unpredictability of the outcome, it is impracticable to assess the
full impact of the war on the economic environment.
Gas market developments
On 30 December 2021, the Cabinet of Ministers adopted Resolution
1433 and Resolution 1435, according to which all independent gas
producers in Ukraine (as identified by a Committee set up by the
Ukrainian Government (the "Committee")) were required to sell up to
20% of their natural gas production for the period until 30 April
2022 at a price set at the cost of sales of the relevant gas
producer (based on established accounting rules) for such gas, plus
a margin of 24%, plus existing production taxes (the "Regulated
Price"). This gas was then to be sold to specified producers of
designated socially important food products (as identified by the
Committee) at the Regulated Price to reduce the energy costs of
such producers during the period through to 30 April 2022. Although
the introduction of these measures pre-dated the military conflict
in Ukraine, their impact has coincided with the military conflict,
but nevertheless, the measures have not had a material financial
impact on the Group, given the modest volume of gas sold at
Regulated Prices and the reduced production during the applicable
period.
On 15 March 2022, the Ukrainian Parliament adopted the Law of
Ukraine 2139-IX "On amendments to the Tax Code of Ukraine and
certain legislative acts of Ukraine on the introduction of
differentiated rent (subsoil tax) for natural gas production",
which introduced changes to the subsoil production tax rates
applicable to natural gas production by modifying the applicable
rates based on gas prices, extending the incentive rates for new
wells for a further 10 years and making improvements to the
regulatory environment. These changes took effect on 1 March 2022,
and the legislation includes provisions that these rates will not
be increased for 10 years.
The new subsoil production tax rates are as follows:
(a) when gas prices are up to $150/Mm(3) , the rate for wells
drilled prior to 1 January 2018 ("old wells") is 14.5% for gas
produced from deposits at depths shallower than 5,000 metres and 7%
for gas produced from deposits deeper than 5,000 metres, and for
wells drilled after 1 January 2018 ("new wells") is 6% for gas
produced from deposits at depths shallower than 5,000 metres and 3%
for gas produced from deposits deeper than 5,000 metres;
(b) when gas prices are between $150/Mm(3) and $400/Mm(3) , the
rate for old wells is 29% for gas produced from deposits at depths
shallower than 5,000 metres and 14% for gas produced from deposits
deeper than 5,000 metres, and for new wells is 12% for gas produced
from deposits at depths shallower than 5,000 metres and 6% for gas
produced from deposits deeper than 5,000 metres;
(c) when gas prices are more than $400/Mm(3) , for the first
$400/Mm(3) , the rate for old wells is 29% for gas produced from
deposits at depths shallower than 5,000 metres and 14% for gas
produced from deposits deeper than 5,000 metres, and for new wells
is 12% for gas produced from deposits at depths shallower than
5,000 metres and 6% for gas produced from deposits deeper than
5,000 metres, and for the difference between $400/Mm(3) and the
actual price, the rate for old wells is 65% for gas produced from
deposits at depths shallower than 5,000 metres and 31% for gas
produced from deposits deeper than 5,000 metres, and for new wells
is 36% for gas produced from deposits at depths shallower than
5,000 metres and 18% for gas produced from deposits deeper than
5,000 metres.
Prior to the changes, the tax rate for old wells was 29% for gas
produced from deposits at depths shallower than 5,000 metres and
14% for gas produced from deposits deeper than 5,000 metres, and
for new wells was 12% for gas produced from deposits at depths
shallower than 5,000 metres and 6% for gas produced from deposits
deeper than 5,000 metres. The tax rates applicable to condensate
production were unchanged and remain at 31% for condensate produced
from deposits shallower than 5,000 metres and 16% for condensate
produced from deposits deeper than 5,000 metres, for both old and
new wells.
COVID-19 impact
The COVID-19 pandemic had a significant impact on the economic
environment in Ukraine and throughout the world. The rapid spread
of the COVID-19 coronavirus pandemic, and the restrictions
introduced to counteract the pandemic significantly impacted global
commodity and financial markets. The overall impact of COVID-19
will largely depend on the duration and extent of the effects of
the pandemic on the global and Ukrainian economies. Businesses in
Ukraine adapted to operating in new realities, arranging remote
work, supply and sale modes of operation. At the date hereof, based
on the available information, management believes that the
uncertainties attributable to COVID-19 do not represent a key risk
factor that may materially affect the liquidity and continuity of
the Group's operations.
Overall, the final resolution and the ongoing effects of the
military conflict and political and economic situation in Ukraine
are difficult to predict, but they may have further severe effects
on the Ukrainian economy and the Group's business.
As at 24 June 2022, the official NBU exchange rate of the
Ukrainian Hryvnia against the US Dollar was UAH29.25/$1.00,
compared with UAH27.23/$1.00 as at 31 December 2021.
Further details of risks relating to Ukraine can be found within
the Principal Risks section above.
3. Accounting Policies
The principal accounting policies applied in the preparation of
these consolidated financial statements are set out below. These
policies have been consistently applied to all the years presented,
unless otherwise stated.
Basis of Preparation
On 31 December 2020, IFRS as adopted by the European Union at
that date was brought into UK law and became UK-adopted
International Accounting Standards, with future changes being
subject to endorsement by the UK Endorsement Board. The Group and
Company transitioned to UK-adopted International Accounting
Standards on 1 January 2021. This change constitutes a change in
accounting framework. However, there is no impact on recognition,
measurement or disclosure in the period reported as a result of the
change in framework. The consolidated financial statements of the
Group and the financial statements of the Company have been
prepared in accordance with UK-adopted International Accounting
Standards and with the requirements of the Companies Act 2006 as
applicable to companies reporting under those standards.
These consolidated financial statements have been prepared in
accordance with UK-adopted International Accounting Standards under
the historical cost convention, as modified by the initial
recognition of financial instruments based on fair value, and by
the revaluation of financial instruments categorised at fair value
through profit or loss ("FVTPL") and at fair value through other
comprehensive income ("FVOCI"). The principal accounting policies
applied in the preparation of these consolidated financial
statements are set out below. Apart from the accounting policy
changes effective from 1 January 2021 these policies have been
consistently applied to all the periods presented, unless otherwise
stated.
The preparation of financial statements in conformity with
UK-adopted International Accounting Standards 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 4.
Going Concern
The Group's business activities, together with the factors
likely to affect its future operations, performance and position
are set out in the Chairman's Statement, Chief Executive's
Statement and Finance Review. The financial position of the Group,
its cash flows and liquidity position are set out in these
consolidated financial statements.
On 24 February 2022, Russia commenced a military invasion of
Ukraine. This was quickly followed by the enactment of martial law
by the Ukrainian President's Decree, approved by the Parliament of
Ukraine, and the corresponding introduction of related temporary
restrictions that impact the economic environment and business
operations in Ukraine.
The production assets of the Group are located in the central
and eastern part of the country (Poltava and Kharkiv regions) which
are controlled by the Ukrainian Government. Following a brief
period of suspension, production and field operations, as well as
construction work on upgrades to the gas processing facilities, at
the MEX-GOL and SV fields have recommenced. As of the date of
approval of these financial statements, no assets of the Group have
been damaged, and the Group continues to operate its MEX-GOL, SV
and SC assets in the Poltava region, while all production and field
operations at the VAS asset located in the Kharkiv region are
suspended. At the SC licence area, completion of the drilling of
the SC-4 well is planned shortly. No military activities have
occurred at the Group's field locations. The Gas Transmission
System Operator of Ukraine has maintained complete operational and
technological control over the operations of the Ukrainian Gas
Transmission System. However, as of the date of approval of these
financial statements, the military conflict has had, and continues
to have, a material impact on the production and sales levels of
the business and execution of the Group's 2022 budget.
The Group has no debt and funds its operations from its own cash
resources. Cash and cash equivalents were $76.5 million as at 24
June 2022, of which $58.8 million were held outside of Ukraine, in
currencies other than the Ukrainian Hryvnia. The Directors maintain
a significant level of flexibility to modify the Group's
development plans as may be required to preserve cash resources for
liquidity management. Absent the potential impact of the military
conflict in Ukraine, the Directors are satisfied that the Group and
the Company are a going concern and will continue their operations
for the foreseeable future.
In assessing the impact of the military conflict on the ability
of the Group and the Company to continue as a going concern, the
Directors have analysed a number of possible scenarios of economic
and military developments and the impact on the expected cash flows
of the Group and Company for 2022 and 2023. This includes
considering a possible (but in the view of the Directors, highly
unlikely) worst case scenario in which the Group has zero
production as a result of possible future military conflict
dictating field operations being completely shut-in, and all other
non-production related costs being maintained at current levels
with no reduction or mitigating actions as would otherwise be
possible. Even in this worst-case scenario, the Directors are
satisfied that the Group and the Company have sufficient liquid
resources to be able to meet their liabilities as they fall due and
to be able to continue as a going concern for the foreseeable
future.
In respect of the Group's operations, staff and assets in
Ukraine, the potential short and long-term impact of the future
development of the military conflict is inherently uncertain.
Accordingly, this creates a material uncertainty related to events
or conditions that may cast significant doubt on the Group's
ability to continue as a going concern because of the potential
impact on its ability to continue its operations for the
foreseeable future and realise its assets in the normal course of
business. The financial statements do not include the adjustments
that would result if the Group were unable to continue as a going
concern.
The Company is a UK-based investment holding company. The
Company had cash and cash equivalents of $58.8 million as at 24
June 2022, all of which are held outside of Ukraine, in US Dollars,
Pounds Sterling and Euros. The Directors are satisfied that the
Company is a going concern and will be able to continue its
operations for the foreseeable future, and there is no material
uncertainty in respect of its ability to do so.
New and amended standards adopted by the Group
The following amended standards became effective from 1 January
2021, but did not have a material impact on the Group's c
onsolidated or Company's financial statements :
-- Interest rate benchmark (IBOR) reform - phase 2 amendments
to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 (issued on 27
August 2020 and effective for annual periods beginning on
or after 1 January 2021);
-- COVID-19-Related Rent Concessions Amendment to IFRS 16 issued
on 28 May 2020 and effective for annual periods beginning
on or after 1 April 2021.
Impact of standards issued but not yet applied by the Group
Certain new standards and interpretations have been issued that
are mandatory for the annual periods beginning on or after 1
January 2022 or later, and which the Group has not early
adopted.
(a) Sale or Contribution of Assets between an Investor and its
Associate or Joint Venture - Amendments to IFRS 10 and IAS 28
(issued on 11 September 2014 and effective for annual periods
beginning on or after a date to be determined by the UK Endorsement
Board )
(b) IFRS 17 "Insurance Contracts" (issued on 18 May 2017 and
effective for annual periods beginning on or after 1 January 202 3
)
(c) Amendments to IFRS 17 and an amendment to IFRS 4 (issued on
25 June 2020 and effective for annual periods beginning on or after
1 January 2023)
(d) Classification of liabilities as current or non-current -
Amendments to IAS 1 (issued on 23 January 2020 and effective for
annual periods beginning on or after 1 January 2022)
(e) Classification of liabilities as current or non-current,
deferral of effective date - Amendments to IAS 1 (issued on 15 July
2020 and effective for annual periods beginning on or after 1
January 2023)
(f) Proceeds before intended use, Onerous contracts - cost of
fulfilling a contract, Reference to the Conceptual Framework -
narrow scope amendments to IAS 16, IAS 37 and IFRS 3, and Annual
Improvements to IFRSs 2018-2020 - amendments to IFRS 1, IFRS 9,
IFRS 16 and IAS 41 (issued on 14 May 2020 and effective for annual
periods beginning on or after 1 January 2022)
(g) Amendments to IAS 1 and IFRS Practice Statement 2:
Disclosure of Accounting policies (issued on 12 February 2021 and
effective for annual periods beginning on or after 1 January
2023)
(h) Amendments to IAS 8: Definition of Accounting Estimates
(issued on 12 February 2021 and effective for annual periods
beginning on or after 1 January 2023)
(i) Covid-19-Related Rent Concessions - Amendments to IFRS 16
(issued on 31 March 2021 and effective for annual periods beginning
on or after 1 April 2021)
(j) Deferred tax related to assets and liabilities arising from
a single transaction - Amendments to IAS 12 (issued on 7 May 2021
and effective for annual periods beginning on or after 1 January
2023)
These new standards and interpretations are not expected to
affect significantly the Group's consolidated financial
statements.
Exchange differences on intra-group balances with foreign
operation
The Group has certain inter-company monetary balances of which
the Company is the beneficial owner. These monetary balances are
payable by a subsidiary that is a foreign operation and are
eliminated on consolidation.
In the consolidated financial statements, exchange differences
arising on such payables because the transaction currency differs
from the subsidiary's functional currency are recognised initially
in other comprehensive income if the settlement of such payables is
continuously deferred and is neither planned nor likely to occur in
the foreseeable future.
In such cases, the respective receivables of the Company are
regarded as an extension of the Company's net investment in that
foreign operation, and the cumulative amount of the abovementioned
exchange differences recognised in other comprehensive income is
carried forward within the foreign exchange reserve in equity and
is reclassified to profit or loss only upon disposal of the foreign
operation.
When the subsidiary that is a foreign operation settles its
quasi-equity liability due to the Company, but the Company
continues to possess the same percentage of the subsidiary, i.e.
there has been no change in its proportionate ownership interest,
such settlement is not regarded as a disposal or a partial
disposal, and therefore cumulative exchange differences are not
reclassified.
The designation of inter-company monetary balances as part of
the net investment in a foreign operation is re-assessed when
management's expectations and intentions on settlement change due
to a change in circumstances.
Where, because of a change in circumstances, a receivable
balance, or part thereof, previously designated as a net investment
into a foreign operation is intended to be settled, the receivable
is de-designated and is no longer regarded as part of the net
investment.
In such cases, the exchange differences arising on the
subsidiary's payable following de-designation are recognised within
finance costs / income in profit or loss, similar to foreign
exchange differences arising from financing.
Foreign exchange gains and losses not related to intra-group
balances are recognised on a net basis as other gains or
losses.
Basis of Consolidation
The consolidated financial statements incorporate the financial
information of the Company and entities controlled by the Company
(and its subsidiaries) made up to 31 December each year.
Subsidiaries
Subsidiaries are all entities (including structured entities)
over which the Group has control. The Group controls an entity when
the Group is exposed to, or has rights to variable returns from its
involvement with the entity and has the ability to affect those
returns through its power over the entity. Subsidiaries are fully
consolidated from the date on which control is transferred to the
Group. They are deconsolidated from the date that control
ceases.
The Group applies the acquisition method to account for business
combinations. The consideration transferred for the acquisition of
a subsidiary is the fair value of the assets transferred, the
liabilities incurred to the former owners of the acquiree and the
equity interests issued by the Group. The consideration transferred
includes the fair value of any asset or liability resulting from a
contingent consideration arrangement. Identifiable assets acquired
and liabilities and contingent liabilities assumed in a business
combination are measured initially at their fair values at the
acquisition date. The Group recognises any non-controlling interest
in the acquiree on an acquisition-by-acquisition basis at the
non-controlling interest's proportionate share of the recognised
amounts of the acquiree's identifiable net assets.
Acquisition-related costs are expensed as incurred.
If the business combination is achieved in stages, the
acquisition date carrying value of the acquirer's previously held
equity interest in the acquiree is re-measured to fair value at the
acquisition date; any gains or losses arising from such
re-measurement are recognised in profit or loss.
Any contingent consideration to be transferred by the Group is
recognised at fair value at the acquisition date. Subsequent
changes to the fair value of the contingent consideration that is
deemed to be an asset or liability is recognised in accordance with
IFRS 9 in profit or loss.
Inter-company transactions, balances and unrealised gains on
transactions between Group companies are eliminated. Unrealised
losses are also eliminated. When necessary, amounts reported by
subsidiaries have been adjusted to conform with the Group's
accounting policies.
Segment reporting
The Group's only class of business activity is oil and gas
exploration, development and production. The Group's primary
operations are located in Ukraine, with its head office in the
United Kingdom. The geographical segments are the basis on which
the Group reports its segment information to management. Operating
segments are reported in a manner consistent with the internal
reporting provided to the Board of Directors.
Commercial Reserves
Proved and probable oil and gas reserves are estimated
quantities of commercially producible hydrocarbons which the
existing geological, geophysical and engineering data show to be
recoverable in future years from known reservoirs. Proved reserves
are those quantities of petroleum that, by analysis of geoscience
and engineering data, can be estimated with reasonable certainty to
be commercially recoverable from known reservoirs and under defined
technical and commercial conditions. Probable reserves are those
additional reserves which analysis of geoscience and engineering
data indicate are less likely to be recovered than proved reserves
but more certain to be recovered than possible reserves. The proved
and probable reserves conform to the definition approved by the
Petroleum Resources Management System.
Oil and Gas Exploration/Evaluation and Development/Production
Assets
The Group applies the successful efforts method of accounting
for oil and gas assets, having regard to the requirements of IFRS 6
Exploration for and Evaluation of Mineral Resources.
Exploration costs are incurred to discover hydrocarbon
resources. Evaluation costs are incurred to assess the technical
feasibility and commercial viability of the resources found.
Exploration, as defined in IFRS 6 Exploration and evaluation of
mineral resources, starts when the legal rights to explore have
been obtained. Expenditure incurred before obtaining the legal
right to explore is generally expensed; an exception to this would
be separately acquired intangible assets such as payment for an
option to obtain legal rights.
Expenditures incurred in the exploration activities are expensed
unless they meet the definition of an asset. The Group recognises
an asset when it is probable that economic benefits will flow to
the Group as a result of the expenditure. The economic benefits
might be available through commercial exploitation of hydrocarbon
reserves or sales of exploration findings or further development
rights. Exploration and evaluation ("E&E") assets are
recognised as either property, plant and equipment or intangible
assets, according to their nature, in single field cost
centres.
The capitalisation point is the earlier of:
(a) the point at which the fair value less costs to sell the
property can be reliably determined as being higher than the total
of the expenses incurred and costs already capitalised (such as
licence acquisition costs); and
(b) an assessment of the property demonstrates that commercially
viable reserves are present and hence there are probable future
economic benefits from the continued development and production of
the resource.
E&E assets are reclassified from Exploration and Evaluation
when evaluation procedures have been completed. E&E assets that
are not commercially viable are written down. E&E assets for
which commercially viable reserves have been identified are
reclassified to Development and Production assets. E&E assets
are tested for impairment immediately prior to reclassification out
of E&E.
Once an E&E asset has been reclassified from E&E, it is
subject to the normal IFRS requirements. This includes impairment
testing at the cash-generating unit ("CGU") level and
depreciation.
Abandonment and Retirement of Individual Items of Property,
Plant and Equipment
Normally, no gains or losses shall be recognised if only an
individual item of equipment is abandoned or retired or if only a
single lease or other part of a group of proved properties
constituting the amortisation base is abandoned or retired as long
as the remainder of the property or group of properties
constituting the amortisation base continues to produce oil or gas.
Instead, the asset being abandoned or retired shall be deemed to be
fully amortised, and its costs shall be charged to accumulated
depreciation, depletion or amortisation. When the last well on an
individual property (if that is the amortisation base) or group of
properties (if amortisation is determined on the basis of an
aggregation of properties with a common geological structure)
ceases to produce and the entire property or group of properties is
abandoned, a gain or loss shall be recognised. Occasionally, the
partial abandonment or retirement of a proved property or group of
proved properties or the abandonment or retirement of wells or
related equipment or facilities may result from a catastrophic
event or other major abnormality. In those cases, a loss shall be
recognised at the time of abandonment or retirement.
Intangible Assets other than Oil and Gas Assets
Intangible assets other than oil and gas assets are stated at
cost less accumulated amortisation and any provision for
impairment. These assets represent exploration licences.
Amortisation is charged so as to write off the cost, less estimated
residual value on a straight-line basis of 20-25% per annum.
Depreciation, Depletion and Amortisation
All expenditure carried within each field is amortised from the
commencement of commercial production on a unit of production
basis, which is the ratio of gas production in the period to the
estimated quantities of commercial reserves at the end of the
period plus the production in the period, generally on a field by
field basis. In certain circumstances, fields within a single
development area may be combined for depletion purposes. Costs used
in the unit of production calculation comprise the net book value
of capitalised costs plus the estimated future field development
costs necessary to bring the reserves into production.
Impairment
At each balance sheet date, the Group reviews the carrying
amount of oil and gas development and production assets to
determine whether there is any indication that those assets have
suffered an impairment loss. This includes exploration and
appraisal costs capitalised which are assessed for impairment in
accordance with IFRS 6. If any such indication exists, the
recoverable amount of the asset is estimated in order to determine
the extent of the impairment loss.
For oil and gas development and production assets, the
recoverable amount is the greater of fair value less costs to
dispose and value in use. In assessing value in use, the estimated
future cash flows are discounted to their present value using an
expected weighted average cost of capital. If the recoverable
amount of an asset is estimated to be less than its carrying
amount, the carrying amount of the asset is reduced to its
recoverable amount. Impairment losses are recognised as an expense
immediately. The valuation method used for determination of fair
value less cost of disposal is based on unobservable market data,
which is within Level 3 of the fair value hierarchy.
Should an impairment loss subsequently reverse, the carrying
amount of the asset is increased to the revised estimate of its
recoverable amount, but so that the increased carrying amount does
not exceed the carrying amount that would have been determined had
no impairment loss been recognised for the asset in prior years. A
reversal of an impairment loss is recognised as income
immediately.
Decommissioning Provision
Where a material liability for the removal of existing
production facilities and site restoration at the end of the
productive life of a field exists, a provision for decommissioning
is recognised. The amount recognised is the present value of
estimated future expenditure determined in accordance with local
conditions and requirements. The cost of the relevant property,
plant and equipment is increased with an amount equivalent to the
provision and depreciated on a unit of production basis. Changes in
estimates are recognised prospectively, with corresponding
adjustments to the provision and the associated fixed asset. The
unwinding of the discount on the decommissioning provision is
included within finance costs.
Property, Plant and Equipment other than Oil and Gas Assets
Property, plant and equipment other than oil and gas assets
(included in Other fixed assets in Note 18 are stated at cost less
accumulated depreciation and any provision for impairment.
Depreciation is charged so as to write off the cost of assets on a
straight-line basis over their useful lives as follows:
Useful lives in years
Buildings and constructions 10 to 20 years
Machinery and equipment 2 to 5 years
Vehicles 5 years
Office and other equipment 4 to 12 years
Spare parts and equipment purchased with the intention to be
used in future capital investment projects are recognised as oil
and gas development and production assets within property, plant
and equipment.
Right-of-use assets
The Group leases various offices, equipment, wells and land.
Contracts may contain both lease and non-lease components. The
Group allocates the consideration in the contract to the lease and
non-lease components based on their relative stand-alone
prices.
Assets arising from a lease are initially measured on a present
value basis.
Right-of-use assets are measured at cost comprising the
following:
-- the amount of the initial measurement of lease liability,
-- any lease payments made at or before the commencement date
less any lease incentives received,
-- any initial direct costs, and
-- costs to restore the asset to the conditions required by lease
agreements.
Right-of-use assets are generally depreciated over the shorter
of the asset's useful life and the lease term on a straight-line
basis. If the Group is reasonably certain to exercise a purchase
option, the right-of-use asset is depreciated over the underlying
assets' useful lives. Depreciation on the items of the right-of-use
assets is calculated using the straight-line method over their
estimated useful lives as follows:
Useful lives in years
Land 40 to 50 years
Wells 10 to 20 years
Properties:
Buildings and constructions 10 to 20 years
Machinery and equipment 2 to 5 years
Vehicles 5 years
Office and other equipment 4 to 12 years
Inventories
Inventories typically consist of materials, spare parts and
hydrocarbons, and are stated at the lower of cost and net
realisable value. Cost of finished goods is determined on the
weighted average bases. Cost of other than finished goods inventory
is determined on the first in first out basis. Net realisable value
represents the estimated selling price less all estimated costs of
completion and costs to be incurred in marketing, selling and
distribution.
Revenue Recognition
Revenue is income arising in the course of the Group's ordinary
activities. Revenue is recognised by the amount of the transaction
price. Transaction price is the amount of consideration to which
the Group expects to be entitled in exchange for transferring
control over promised goods or services to a customer, excluding
the amounts collected on behalf of third parties.
Revenue is recognised net of indirect taxes and excise
duties.
Sales of gas, condensate and LPG are recognised when control of
the good has transferred, being when the goods are delivered to the
customer, the customer has full discretion over the goods, and
there is no unfulfilled obligation that could affect the customer's
acceptance of the goods. Delivery occurs when the goods have been
shipped to the specific location, the risks of obsolescence and
loss have been transferred to the customer, and either the customer
has accepted the goods in accordance with the contract, the
acceptance provisions have lapsed, or the Group has objective
evidence that all criteria for acceptance have been satisfied.
A receivable is recognised when the goods are delivered as this
is the point in time that the consideration is unconditional
because only the passage of time is required before the payment is
due.
The Group normally uses standardised contracts for the sale of
gas, condensate and LPG, which define the point of control
transfer. The price and quantity of each sale transaction are
indicated in the specifications to the sales contracts.
The control over gas is transferred to a customer when the
respective act of acceptance is signed by the parties to a contract
upon delivery of gas to the point of sale specified in the
contract, normally being a certain point in the Ukrainian gas
transportation system. Acts of acceptance of gas are signed and the
respective revenues are recognised on a monthly basis.
The control over condensate and LPG is transferred to a customer
when the respective waybill is signed by the parties to a contract
upon shipment of goods at the point of sale specified in the
contract, which is normally the Group's production site.
Foreign Currencies
The Group's consolidated financial statements and those of the
Company are presented in US Dollars. The functional currency of the
subsidiaries which operate in Ukraine is Ukrainian Hryvnia. The
remaining entities have US Dollars as their functional
currency.
The functional currency of individual companies is determined by
the primary economic environment in which the entity operates,
normally the one in which it primarily generates and expends cash.
In preparing the financial statements of the individual companies,
transactions in currencies other than the entity's functional
currency ("foreign currencies") are recorded at the rates of
exchange prevailing on the dates of the transactions. At each
balance sheet date, monetary assets and liabilities that are
denominated in foreign currencies are retranslated at the rates
prevailing on the balance sheet date. Foreign exchange gains and
losses resulting from the settlement of such transactions and from
the translation at year-end exchange rates of monetary assets and
liabilities denominated in foreign currencies are recognised in the
Income Statement. Non-monetary assets and liabilities carried at
fair value that are denominated in foreign currencies are
translated at the rates prevailing at the date when the fair value
was determined. Non-monetary items which are measured in terms of
historical cost in a foreign currency are not retranslated. Gains
and losses arising on retranslation are included in net profit or
loss for the period, except for exchange differences arising on
balances which are considered long term investments where the
changes in fair value are recognised directly in other
comprehensive income.
On consolidation, the assets and liabilities of the Group's
subsidiaries which do not use US Dollars as their functional
currency are translated into US Dollars as follows:
(a) assets and liabilities for each Balance Sheet presented are
translated at the closing rate at the date of that Balance
Sheet;
(b) income and expenses for each Income Statement are translated
at average monthly exchange rates (unless this average is not a
reasonable approximation of the cumulative effect of the rates
prevailing on the transaction dates, in which case income and
expenses are translated at the rate on the dates of the
transactions); and
(c) all resulting exchange differences are recognised in other comprehensive income.
The principal rates of exchange used for translating foreign
currency balances as at 31 December 202 1 were $1:UAH2 7 . 3 (20 20
: $1:UAH28.3), $1:GBP0. 74 1 (20 20 : $1:GBP 0.736), $1:EUR0.8 8 3
(20 20 : $1:EUR0.81 4 ), and the average rates for the year were
$1:UAH27.3 (2020: $1:UAH27.0), $1:GBP0.727 (2020: $1:GBP 0.779),
$1:EUR0.845 (2020: $1:EUR0.876)
None of the Group's operations are considered to use the
currency of a hyperinflationary economy, however this is kept under
review.
Pensions
The Group contributes to a local government pension scheme in
Ukraine and defined benefit plans. The Group has no further payment
obligations towards the local government pension scheme once the
contributions have been paid.
Defined benefit plans define an amount of pension benefit that
an employee will receive on retirement, usually dependent on one or
more factors such as age, years of service and compensation.
The Group companies participate in a mandatory Ukrainian
State-defined retirement benefit plan, which provides for early
pension benefits for employees working in certain workplaces with
hazardous and unhealthy working conditions. The Group also provides
lump sum benefits upon retirement subject to certain conditions.
The early pension benefit (in the form of a monthly annuity) is
payable by employers only until the employee has reached the
statutory retirement age. The pension scheme is based on a benefit
formula which depends on each individual member's average salary,
his/her total length of past service and total length of past
service at specific types of workplaces ("list II" category).
The liability recognised in the Balance Sheet in respect of
defined benefit pension plans is the present value of the defined
benefit obligation at the end of the reporting period less the fair
value of plan assets. The defined benefit obligation is calculated
annually by independent actuaries using the projected unit credit
method. The present value of the defined benefit obligation is
determined by discounting the estimated future cash outflows using
interest rates of high-quality corporate bonds that are denominated
in the currency in which the benefits will be paid, and that have
terms to maturity approximating to the terms of the related pension
obligation. Since Ukraine has no deep market in such bonds, the
market rates on government bonds are used.
The current service cost of the defined benefit plan, recognised
in the Income Statement within the Cost of Sales in employee
benefit expense, except where included in the cost of an asset,
reflects the increase in the defined benefit obligation resulting
from employee service in the current year, benefit changes
curtailments and settlements. Past-service costs are recognised
immediately in the Income Statement.
The net interest cost is calculated by applying the discount
rate to the net balance of the defined benefit obligation and the
fair value of plan assets. This cost is included in employee
benefit expense in the Income Statement within the Cost of
Sales.
Actuarial gains and losses arising from experience adjustments
and changes in actuarial assumptions are charged or credited to
equity in other comprehensive income in the period in which they
arise.
Taxation
The tax expense represents the sum of the current tax and
deferred tax.
Current tax, including UK corporation and overseas tax, is
provided at amounts expected to be paid (or recovered) using the
tax rates and laws that have been enacted or substantively enacted
by the balance sheet date.
Deferred tax is the tax expected to be payable or recoverable on
differences between the carrying amounts of assets and liabilities
in the financial statements and the corresponding tax bases used in
the computation of taxable profit, and is accounted for using the
balance sheet liability method. Deferred tax liabilities are
generally recognised for all taxable temporary differences and
deferred tax assets are recognised to the extent that it is
probable that taxable profits will be available against which
deductible temporary differences can be utilised. Such assets and
liabilities are not recognised if the temporary difference arises
from goodwill or from the initial recognition (other than in a
business combination) of other assets and liabilities in a
transaction that affects neither the tax profit nor the accounting
profit.
Deferred tax liabilities are recognised for taxable temporary
differences arising on investments in subsidiaries and associates,
and interests in joint ventures, except where the Group is able to
control the reversal of the temporary difference and it is probable
that the temporary difference will not reverse in the foreseeable
future.
Deferred tax is calculated at the tax rates which are expected
to apply in the period when the liability is settled or the asset
is realised. Deferred tax is charged or credited in the Income
Statement, except when it relates to items charged or credited
directly to equity, in which case the deferred tax is also dealt
with in equity.
Other taxes which include recoverable value added tax, excise
tax and custom duties represent the amounts receivable or payable
to local tax authorities in the countries where the Group
operates.
Value added tax
Output value added tax related to sales is payable to tax
authorities on the earlier of (a) collection of receivables from
customers or (b) delivery of goods or services to customers. Input
VAT is generally recoverable against output VAT upon receipt of the
VAT invoice. The tax authorities permit the settlement of VAT on a
net basis. VAT related to sales and purchases is recognised in the
consolidated statement of financial position on a gross basis for
different entities of the Group and disclosed separately as an
asset and a liability. Where provision has been made for expected
credit losses ("ECL") of receivables, the impairment loss is
recorded for the gross amount of the debtor, including VAT.
Financial Instruments
Financial instruments - key measurement terms . Fair value is
the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date. The best evidence of fair
value is the price in an active market. An active market is one in
which transactions for the asset or liability take place with
sufficient frequency and volume to provide pricing information on
an ongoing basis.
Fair value of financial instruments traded in an active market
is measured as the product of the quoted price for the individual
asset or liability and the number of instruments held by the
entity. This is the case even if a market's normal daily trading
volume is not sufficient to absorb the quantity held and placing
orders to sell the position in a single transaction might affect
the quoted price.
A portfolio of financial derivatives or other financial assets
and liabilities that are not traded in an active market is measured
at the fair value of a group of financial assets and financial
liabilities on the basis of the price that would be received to
sell a net long position (i.e. an asset) for a particular risk
exposure or paid to transfer a net short position (i.e. a
liability) for a particular risk exposure in an orderly transaction
between market participants at the measurement date. This is
applicable for assets carried at fair value on a recurring basis if
the Group: (a) manages the group of financial assets and financial
liabilities on the basis of the Group's net exposure to a
particular market risk (or risks) or to the credit risk of a
particular counterparty in accordance with the Group's documented
risk management or investment strategy; (b) it provides information
on that basis about the group of assets and liabilities to the
Group's key management personnel; and (c) the market risks,
including duration of the Group's exposure to a particular
market risk (or risks) arising from the financial assets and
financial liabilities are substantially the same.
Valuation techniques such as discounted cash flow models or
models based on recent arm's length transactions or consideration
of financial data of the investees are used to measure fair value
of certain financial instruments for which external market pricing
information is not available. Fair value measurements are analysed
by level in the fair value hierarchy as follows: (i) level one are
measurements at quoted prices (unadjusted) in active markets for
identical assets or liabilities, (ii) level two measurements are
valuations techniques with all material inputs observable for the
asset or liability, either directly (that is, as prices) or
indirectly (that is, derived from prices), and (iii) level three
measurements are valuations not based on solely observable market
data (that is, the measurement requires significant unobservable
inputs).
Transaction costs are incremental costs that are directly
attributable to the acquisition, issue or disposal of a financial
instrument. An incremental cost is one that would not have been
incurred if the transaction had not taken place. Transaction costs
include fees and commissions paid to agents (including employees
acting as selling agents), advisers, brokers and dealers, levies by
regulatory agencies and securities exchanges, and transfer taxes
and duties. Transaction costs do not include debt premiums or
discounts, financing costs or internal administrative or holding
costs.
Fair value is the amount at which the financial instrument was
recognised at initial recognition, while amortised cost ("AC") is
the amount at which the financial instrument was subsequently
measured after the initial recognition less any principal
repayments, plus accrued interest, and for financial assets less
any allowance for ECL. Accrued interest includes amortisation of
transaction costs deferred at initial recognition and of any
premium or discount to the maturity amount using the effective
interest method. Accrued interest income and accrued interest
expense, including both accrued coupon and amortised discount or
premium (including fees deferred at origination, if any), are not
presented separately and are included in the carrying values of the
related items in the consolidated statement of financial
position.
The effective interest method is a method of allocating interest
income or interest expense over the relevant period, so as to
achieve a constant periodic rate of interest (effective interest
rate) on the carrying amount. The effective interest rate is the
rate that exactly discounts estimated future cash payments or
receipts (excluding future credit losses) through the expected life
of the financial instrument or a shorter period, if appropriate, to
the gross carrying amount of the financial instrument. The
effective interest rate discounts cash flows of variable interest
instruments to the next interest repricing date, except for the
premium or discount which reflects the credit spread over the
floating rate specified in the instrument, or other variables that
are not reset to market rates. Such premiums or discounts are
amortised over the whole expected life of the instrument. The
present value calculation includes all fees paid or received
between parties to the contract that are an integral part of the
effective interest rate. For assets that are purchased or
originated credit impaired ("POCI") at initial recognition, the
effective interest rate is adjusted for credit risk, i.e. it is
calculated based on the expected cash flows on initial recognition
instead of contractual payments.
Financial instruments - initial recognition . Financial
instruments at fair value through profit or loss ("FVTPL") are
initially recorded at fair value. All other financial instruments
are initially recorded at fair value adjusted for transaction
costs. Fair value at initial recognition is best evidenced by the
transaction price. A gain or loss on initial recognition is only
recorded if there is a difference between fair value and
transaction price which can be evidenced by other observable
current market transactions in the same instrument or by a
valuation technique whose inputs include only data from observable
markets. After the initial recognition, an ECL allowance is
recognised for financial assets measured at AC and investments in
debt instruments measured at fair value through other comprehensive
income ("FVOCI"), resulting in an immediate accounting loss.
All purchases and sales of financial assets that require
delivery within the time frame established by regulation or market
convention ("regular way" purchases and sales) are recorded at
trade date, which is the date on which the Group commits to deliver
a financial asset. All other purchases are recognised when the
entity becomes a party to the contractual provisions of the
instrument.
Financial assets - classification and subsequent measurement -
measurement categories. The Group classifies financial assets in
the following measurement categories: FVTPL, FVOCI and AC. The
classification and subsequent measurement of debt financial assets
depends on: (i) the Group's business model for managing the related
assets portfolio and (ii) the cash flow characteristics of the
asset. The Group's financial assets include cash and cash
equivalents, trade and other receivables, loans to subsidiary
undertakings, all of which are classified as AC in accordance with
IFRS 9.
Financial assets - classification and subsequent measurement -
business model. The business model reflects how the Group manages
the assets in order to generate cash flows - whether the Group's
objective is: (i) solely to collect the contractual cash flows from
the assets ("hold to collect contractual cash flows"), or (ii) to
collect both the contractual cash flows and the cash flows arising
from the sale of assets ("hold to collect contractual cash flows
and sell") or, if neither of (i) and (ii) is applicable, the
financial assets are classified as part of "other" business model
and measured at FVTPL.
Business model is determined for a group of assets (on a
portfolio level) based on all relevant evidence about the
activities that the Group undertakes to achieve the objective set
out for the portfolio available at the date of the assessment.
Factors considered by the Group in determining the business model
include past experience on how the cash flows for the respective
assets were collected.
The Group's business model for financial assets is to collect
the contractual cash flows from the assets ("hold to collect
contractual cash flows").
Financial assets - classification and subsequent measurement -
cash flow characteristics. Where the business model is to hold
assets to collect contractual cash flows or to hold contractual
cash flows and sell, the Group assesses whether the cash flows
represent solely payments of principal and interest ("SPPI").
Financial assets with embedded derivatives are considered in their
entirety when determining whether their cash flows are consistent
with the SPPI feature. In making this assessment, the Group
considers whether the contractual cash flows are consistent with a
basic lending arrangement, i.e. interest includes only
consideration for credit risk, time value of money, other basic
lending risks and profit margin.
Where the contractual terms introduce exposure to risk or
volatility that is inconsistent with a basic lending arrangement,
the financial asset is classified and measured at FVTPL. The SPPI
assessment is performed on initial recognition of an asset and it
is not subsequently reassessed.
Financial assets - reclassification. Financial instruments are
reclassified only when the business model for managing the
portfolio as a whole changes. The reclassification has a
prospective effect and takes place from the beginning of the first
reporting period that follows after the change in the business
model. The Group did not change its business model during the
current and comparative period and did not make any
reclassifications.
Financial assets impairment - credit loss allowance for ECL. The
Group assesses, on a forward-looking basis, the ECL for debt
instruments measured at AC and FVOCI and for the exposures arising
for contractual assets. The Group measures ECL and recognises Net
impairment losses on financial and contractual assets at each
reporting date. The measurement of ECL reflects: (i) an unbiased
and probability weighted amount that is determined by evaluating a
range of possible outcomes, (ii) time value of money and (iii) all
reasonable and supportable information that is available without
undue cost and effort at the end of each reporting period about
past events, current conditions and forecasts of future
conditions.
Debt instruments measured at AC and contractual assets are
presented in the consolidated statement of financial position net
of the allowance for ECL. For loan commitments and financial
guarantees, a separate provision for ECL is recognised as a
liability in the consolidated statement of financial position.
The Group applies a simplified approach for impairment of cash
and cash equivalents, other short-term investments and trade and
other receivables, by recognising lifetime expected credit losses
based on past default experience and credit profiles, adjusted as
appropriate for current observable data. For other financial assets
the Group applies a three stage model for impairment, based on
changes in credit quality since initial recognition. A financial
instrument that is not credit-impaired on initial recognition is
classified in Stage 1. Financial assets in Stage 1 have their ECL
measured at an amount equal to the portion of lifetime ECL that
results from default events possible within the next 12 months or
until contractual maturity, if shorter ("12 Months ECL"). If the
Group identifies a significant increase in credit risk ("SICR")
since initial recognition, the asset is transferred to Stage 2 and
its ECL is measured based on ECL on a lifetime basis, that is, up
until contractual maturity but considering expected prepayments, if
any ("Lifetime ECL"). If the Group determines that a financial
asset is credit-impaired, the asset is transferred to Stage 3 and
its ECL is measured as a Lifetime ECL. For financial assets that
are purchased or originated credit-impaired ("POCI Assets"), the
ECL is always measured as a Lifetime ECL.
Financial assets - write-off. Financial assets are written-off,
in whole or in part, when the Group has exhausted all practical
recovery efforts and has concluded that there is no reasonable
expectation of recovery. The write-off represents a derecognition
event. The Group may write-off financial assets that are still
subject to enforcement activity when the Group seeks to recover
amounts that are contractually due, however, there is no reasonable
expectation of recovery.
Financial assets - derecognition. The Group derecognises
financial assets when (a) the assets are redeemed or the rights to
cash flows from the assets otherwise expire or (b) the Group has
transferred the rights to the cash flows from the financial assets
or entered into a qualifying pass-through arrangement whilst (i)
also transferring substantially all the risks and rewards of
ownership of the assets or (ii) neither transferring nor retaining
substantially all the risks and rewards of ownership but not
retaining control.
Financial assets - modification. If the modified terms are
substantially different, the rights to cash flows from the original
asset expire and the Company derecognises the original financial
asset and recognises a new asset at its fair value. The date of
renegotiation is considered to be the date of initial recognition
for subsequent impairment calculation purposes, including
determining whether a SICR has occurred. Any difference between the
carrying amount of the original asset derecognised and fair value
of the new substantially modified asset is recognised in profit or
loss, unless the substance of the difference is attributed to a
capital transaction with owners. If the modified asset is not
substantially different from the original asset and the
modification does not result in derecognition. The Group
recalculates the gross carrying amount by discounting the modified
contractual cash flows by the original effective interest rate (or
credit-adjusted effective interest rate for POCI financial assets),
and recognises a modification gain or loss in profit or loss.
Financial liabilities - measurement categories. Financial
liabilities are classified as subsequently measured at AC, except
for (i) financial liabilities at FVTPL: this classification is
applied to derivatives, financial liabilities held for trading
(e.g. short positions in securities), contingent consideration
recognised by an acquirer in a business combination and other
financial liabilities designated as such at initial recognition and
(ii) financial guarantee contracts and loan commitments. The
Group's financial liabilities include trade and other payables ,
lease liabilities , all of which are classified as AC in accordance
with IFRS 9.
Financial liabilities - derecognition. Financial liabilities are
derecognised when they are extinguished (i.e. when the obligation
specified in the contract is discharged, cancelled or expires).
Trade Receivables
Trade receivables are amounts due from customers for goods sold
in the ordinary course of business. If collection is expected in
one year or less, they are classified as current assets. If not,
they are presented as non-current assets.
Trade receivables are recognised initially at fair value and
subsequently measured at amortised cost using the effective
interest method, less expected credit losses.
Prepayments
Prepayments are carried at cost less provision for impairment. A
prepayment is classified as non-current when the goods or services
relating to the prepayment are expected to be obtained after one
year, or when the prepayment relates to an asset which will itself
be classified as non-current upon initial recognition. Prepayments
to acquire assets are transferred to the carrying amount of the
asset once the Group has obtained control of the asset and it is
probable that future economic benefits associated with the asset
will flow to the Group. Other prepayments are written off to profit
or loss when the services relating to the prepayments are received.
If there is an indication that the assets, goods or services
relating to a prepayment will not be received, the carrying value
of the prepayment is written down accordingly and a corresponding
impairment loss is recognised in profit or loss for the year.
Investments in subsidiaries
Investments made by the Company in its subsidiaries are stated
at cost in the Company's financial statements and reviewed for
impairment if there are indications that the carrying value may not
be recoverable.
Loans issued to subsidiaries
Loans issued by the Company to its subsidiaries are initially
recognised in the Company's financial statements at fair value and
are subsequently carried at amortised cost using the effective
interest method, less credit loss allowance. Net change in credit
losses and foreign exchange differences on loans issued are
recognised in the Company's statement of profit or loss in the
period when incurred.
Trade and Other Payables
Trade payables are obligations to pay for goods or services that
have been acquired in the ordinary course of business from
suppliers. Accounts payable are classified as current liabilities
if payment is due within one year or less. If not, they are
presented as non-current liabilities.
Trade payables are recognised initially at fair value and
subsequently measured at amortised cost using the effective
interest method.
Lease liabilities
Liabilities arising from a lease are initially measured on a
present value basis. Lease liabilities include the net present
value of the following lease payments:
-- fixed payments (including in-substance fixed payments), less
any lease incentives receivable,
-- variable lease payments that are based on an index or a rate,
initially measured using the index or rate as at the commencement
date,
-- the exercise price of a purchase option if the Group is reasonably
certain to exercise that option, and
-- payments of penalties for terminating the lease, if the lease
term reflects the Group exercising that option.
Extension and termination options are included in a number of
property and equipment leases across the Group. These terms are
used to maximise operational flexibility in terms of managing
contracts. Extension options (or period after termination options)
are only included in the lease term if the lease is reasonably
certain to be extended (or not terminated). Lease payments to be
made under reasonably certain extension options are also included
in the measurement of the liability.
The lease payments are discounted using the interest rate
implicit in the lease. If that rate cannot be readily determined,
which is generally the case for leases of the Group, the Group's
incremental borrowing rate is used, being the rate that the Group
would have to pay to borrow the funds necessary to obtain an asset
of similar value in a similar economic environment with similar
terms and conditions.
To determine the incremental borrowing rate, the Group:
-- where possible, uses recent third-party financing received
by the individual lessee as a starting point, adjusted to
reflect changes in financing conditions since third party
financing was received,
-- uses a build-up approach that starts with a risk-free interest
rate adjusted for credit risk, and
-- makes adjustments specific to the lease, e.g. term, country,
currency and collateral.
The Group is exposed to potential future increases in variable
lease payments based on an index or rate, which are not included in
the lease liability until they take effect. When adjustments to
lease payments based on an index or rate take effect, the lease
liability is reassessed and adjusted against the right-of-use
asset.
Lease payments are allocated between principal and finance
costs. The finance costs are charged to profit or loss over the
lease period so as to produce a constant periodic rate of interest
on the remaining balance of the liability for each period.
Payments associated with short-term leases and all leases of
low-value assets are recognised on a straight-line basis as an
expense in profit or loss. Short-term leases are leases with a
lease term of 12 months or less.
Equity Instruments
Ordinary shares are classified as equity. Equity instruments
issued by the Company and the Group are recorded at the proceeds
received, net of direct issue costs. Any excess of the fair value
of consideration received over the par value of shares issued is
recorded as share premium in equity.
Cash and Cash Equivalents
Cash and cash equivalents comprise cash on hand and deposits
held at call with banks and other short-term highly liquid
investments which are readily convertible to a known amount of cash
with insignificant risk of change in value. Cash and cash
equivalents are carried at amortised cost. Interest income that
relates to cash and cash equivalents on current and deposit
accounts is disclosed within operating cash flow.
Other short-term investments
Other short-term investments include current accounts and
deposits held at banks, which do not meet the cash and cash
equivalents definition. Current accounts and deposits held at
banks, which do not meet the cash and cash equivalents definition
are measured initially at fair value and subsequently carried at
amortised cost using the effective interest method. Interest
received on other short-term investments is disclosed within
operating cash flow.
Interest income
Interest income is recognised as it accrues, taking into account
the effective yield on the asset. Interest income on current bank
accounts and on demand deposits or term deposits with the maturity
less than three months recognised as part of cash and cash
equivalents is recognised as other operating income. Interest
income on term deposits other than those classified as cash and
cash equivalents is recognised as finance income.
4. Significant Accounting Judgements and Estimates
The Group makes estimates and judgements concerning the future.
The resulting accounting estimates will, by definition, seldom
equal the related actual results. The estimates and judgements
which have a risk of causing material adjustment to the carrying
amounts of assets and liabilities within the next financial year
are discussed below.
Judgements
Acquisition of LLC Arkona Gas-Energy
The Group acquired control of LLC Arkona Gas-Energy ("Arkona")
on 24 March 2020. This acquisition required a determination to be
made as to whether the acquisition should be treated as a business
or asset acquisition. Following such determination, the transaction
has been treated as an asset acquisition as there were no employees
or production operations acquired. In applying the concentration
test under amended IFRS 3 Business Combinations, the fair value of
the acquired Svystunivsko-Chervonolutskyi licence ("SC Licence")
comprises the majority amount (more than 90%) of the consideration.
The SC Licence is classified as an exploration and evaluation
intangible asset at the acquisition date. The Group believes no
impairment indicators exist at the reporting date, and note the
following:
-- the SC Licence is valid until 18 May 2037; and
-- further exploration and evaluation plans are included in the Group's Budgets.
The following table provides the allocation of the fair value of
the consideration to Arkona's assets and liabilities at their
relative fair values at the date of acquisition:
$000
Property, plant and equipment 88
Trade and other receivables 35
Trade and other payables (291)
---------------------------------------------------------- ------
Net liabilities - at the acquisition date, excluding
licence (168)
---------------------------------------------------------- ------
Gross value of consideration (1st, 2nd and 3rd tranches) 8,469
---------------------------------------------------------- ------
Discounting effect (306)
---------------------------------------------------------- ------
Fair value of consideration (1st, 2nd and 3rd tranches) 8,163
---------------------------------------------------------- ------
Fair value of licence at the acquisition date 8,331
Under the terms of the sale and purchase agreement for Arkona,
the total consideration payable is $8,630,000 with payment divided
into three tranches. The first tranche of $4,315,000 was paid on 24
March 2020 upon completion of the acquisition of 100% of the issued
share capital of Arkona.
In March 2021, the Group paid the second tranche of the
consideration (net of an indemnity liability owned to the Group )
of $2,078,000.
In September 2021, the Group made an early payment of 25% of the
third tranche of the consideration totalling $539,000.
The remaining balance of the third tranche of the consideration
totalling $1,618,125 is subject to satisfaction of certain
conditions, including the favourable resolution of legal
proceedings brought by NJSC Ukrnafta against Arkona relating to the
SC Licence, the absence of any further legal claims or contractual,
warranty or indemnity claims, and the expiration of a further
period of time. The total consideration comprising the three
tranches estimated at the date of acquisition amounts to
$8,163,000. The outstanding amount is reflected in trade and other
payables.
Estimates
Depreciation of Oil and Gas Development and Production
Assets
Development and production assets held in property, plant and
equipment are depreciated on a unit of production basis at a rate
calculated by reference to proved and probable reserves at the end
of the period plus the production in the period, and incorporating
the estimated future cost of developing and extracting those
reserves. Future development costs are estimated using estimates
about the number of wells required to produce those reserves, the
cost of the wells, future production facilities and operating
costs, together with assumptions on oil and gas realisations, and
are revised annually. The reserves estimates used are determined
using estimates of gas in place, recovery factors, future
hydrocarbon prices and also take into consideration the Group's
latest development plan for the associated development and
production asset. The latest development plan and therefore the
inputs used to determine the depreciation charge for the MEX-GOL,
SV and VAS fields continue until the end of the economic life of
the fields, which is assessed to be 2038, 2042 and 2028
respectively, based on the assessment contained in the DeGolyer
& MacNaughton reserves report for these fields. The licences
for the MEX-GOL and SV fields have recently been extended until
2044. Were the estimated reserves at the beginning of the year to
differ by 10% from previous assumptions, the impact on depreciation
for the year ended 31 December 2021 would be to increase it by
$1,195,000 or decrease it by $975,000 (2020: increase by $1,165,000
or decrease by $953,000).
Provision for Decommissioning
The Group has decommissioning obligations in respect of its
Ukrainian assets. The full extent to which the provision is
required depends on the legal requirements at the time of
decommissioning, the costs and timing of any decommissioning works
and the discount rate applied to such costs.
A detailed assessment of gross decommissioning cost was
undertaken on a well-by-well basis using local data on day rates
and equipment costs. The discount rate applied on the
decommissioning cost provision as at 31 December 2021 was 6.29 %
(31 December 2020: 3.70%). The discount rate is calculated in real
terms based on the yield to maturity of Ukrainian Government bonds
denominated in the currency in which the liability is expected to
be settled and with the settlement date that approximates the
timing of settlement of decommissioning obligations. Increase of
the discount rate applied is caused by the growth of the Ukrainian
risk-free rate.
The change in estimate applied to calculate the provision as at
31 December 2021 resulted from the revision of the estimated costs
of decommissioning (increase of $398,000 in provision), an increase
in the discount rate applied (decrease of $2,188,000 in provision)
and change of the estimated economic life of the SV-10 well
(decrease of $259,000 in provision). The costs are expected to be
incurred by 2038 on the MEX-GOL field, by 2042 on the SV field, and
by 2028 on the VAS field, which is the end of the estimated
economic life of the respective fields (Note 26).
Net Carrying Amount of Inter-Company Loans Receivable and
Investments by the Company into a Subsidiary
The Company has certain inter-company loans receivable from a
subsidiary, which are eliminated on consolidation. For the purpose
of the Company's financial statements, these receivable balances
are carried at amortised cost using the effective interest method,
less credit loss allowance. Measurement of lifetime expected credit
losses on inter-company loans is a significant judgment that
involves models and data inputs including forward-looking
information, current conditions and forecasts of future conditions
impacting the estimated future cash flows that are expected to be
recovered, time value of money, etc. In previous years, significant
impairment charges were recorded against the carrying amount of the
loans issued to subsidiaries as the present value of estimated
future cash flows discounted at the original effective interest
rate was less than the carrying amount of the loans, and the
resulting impairment losses were recognised in profit or loss in
the Company's financial statements.
For the purpose of assessment of the credit loss allowance as at
31 December 2021, the Company considered all reasonable and
supportable forward-looking information available as at that date
without undue cost and effort, which includes a range of factors,
such as estimated future net cash flows to be generated by the
subsidiaries operating in Ukraine and cash flow management. All
these factors have a significant impact on the amounts subject to
repayment on the loans and investments. The estimated future
discounted cash flows generated by the subsidiaries operating in
Ukraine are considered as a primary source of repayment on the
loans and investments. As at 31 December 2021, the present value of
future net cash flows to be generated by the subsidiaries operating
in Ukraine during 2022 - 2026, adjusted for the subsidiaries'
working capital as at 31 December 2021 and estimated amounts
reserved by the Group for investment projects in the time horizon
was calculated.
The key assumptions used in the discounted cash flow model
are:
-- commodity prices - the model assumes gas prices of $725/Mm3
in 2022, decreasing to $514/Mm3 in 2023, $370/Mm3 in 2024
and $250/Mm3 in subsequent years;
-- discount rate applied is 12.6%, determined in real terms:
-- production levels and reserves at the beginning of year 2022
at the MEX-GOL and SV fields of 44.7 MMboe, at the VAS field
of 2.4 MMboe and at the SC licence area of 12.6 MMboe;
-- production taxes applicable to gas production at variable
rates under relevant legislation;
-- capital expenditure allowance for maintenance and development
of: MEX-GOL and SV fields at the level of $750,000 per year,
VAS field at the level of $250,000 per year and SC licence
area at the level of $100,000 per year;
-- future capital expenditures for a period of five years assumed
to be: for the MEX-GOL and SV fields at the level of $181,700,000,
VAS field at the level of $15,500,000 and SC licence area
at the level of $65,900,000;
-- future capital expenditures until the end of field life assumed
to be: for the MEX-GOL and SV fields at the level of $253,200,000,
VAS field at the level of $16,500,000 and SC licence area
at the level of $97,500,000;
-- life of field for the purpose of the assessment of loans -
cash flows were taken for a period of five years as management
believes there is no reasonably available information to build
reliable expectations and demonstrate the ability to settle
the loans over a longer perspective;
-- life of field for the purpose of the assessment of investments
- cash flows were taken for a period of the full economic
life of the respective CGUs.
The increase in the net present value of future net cash flows
as at 31 December 2021 in comparison with 31 December 2020 was
affected by the increase in gas prices forecast.
The resulting amount, net of the carrying value of the Company's
investments in subsidiaries and loans, was compared to the
discounted cash flows and net financial assets of the subsidiaries
as at 31 December 2021. As such, the Company has recorded $ 1
0,912,000 of income, being the net change in the expected credit
losses for loans issued to and investments in subsidiaries in the
Company's statement of profit or loss for the year ended 31
December 2021. The set off of the accumulated impairment of
$3,322,000 was due to the disposal of the fully impaired investment
in Regal Petroleum (Jersey) Limited (Note 21).
As with any economic forecast, the projections and likelihoods
of occurrence are subject to a high degree of inherent uncertainty,
and therefore the actual outcomes may be significantly different to
those projected. The Company considers these forecasts to represent
its best estimate of the possible outcomes.
5. Segmental Information
In line with the Group's internal reporting framework and
management structure, the key strategic and operating decisions are
made by the Board of Directors, who review internal monthly
management reports, budget and forecast information as part of this
process. Accordingly, the Board of Directors is deemed to be the
Chief Operating Decision Maker within the Group.
The Group's only class of business activity is oil and gas
exploration, development and production. The Group's operations are
located in Ukraine, with its head office in the United Kingdom.
These geographical regions are the basis on which the Group reports
its segment information. The segment results as presented represent
operating profit before depreciation, amortisation and impairment
of non-current assets.
United
Ukraine Kingdom Total
2021 2021 2021
$000 $000 $000
Revenue
Gas sales 95,813 - 95,813
Condensate sales 19,260 - 19,260
Liquefied Petroleum Gas sales 6,280 - 6,280
------------------------------- ----------- --------- -----------
Total revenue 121,353 - 121,353
Segment result 81,025 (2,832) 78,193
Depreciation and amortisation
of non-current assets (11,958) - (11,958)
Operating profit 66,235
Segment assets 144,941 63,649 208,590
Capital additions* 32,577 - 32,577
*Comprises additions to property, plant and equipment (Note
18)
There are no inter-segment sales within the Group and all
products are sold in the geographical region in which they are
produced. The Group is not significantly impacted by seasonality.
Revenue is recognised at a point in time.
During 2021, the Group was selling all of its gas production to
its related party, LLC Smart Energy ("Smart Energy"). Smart Energy
has oil and gas operations in Ukraine and is part of the PJSC
Smart-Holding Group, which is ultimately controlled by Mr Vadym
Novynskyi, who through an indirect 82.65% majority shareholding,
ultimately controls the Group. This arrangement came about in 2017
as a consequence of the Ukrainian Government introducing a number
of new provisions into the Ukrainian Tax Code over the previous two
years, including transfer pricing regulations for companies
operating in Ukraine. The introduction of the new regulations has
meant that there is an increased regulatory burden on affected
companies in Ukraine who must prepare and submit reporting
information to the Ukrainian Tax Authorities. Due to the corporate
structure of the Group, a substantial proportion of its gas
production is produced by a non-Ukrainian subsidiary of the Group,
which operates in Ukraine as a branch, or representative office as
it Is classified in Ukraine. Under the current tax regulations,
this places additional regulatory obligations on each of the
Group's potential customers who may be less inclined to purchase
the Group's gas and/or may seek discounts on sales prices. As a
result of discussions between the Company and Smart Energy, Smart
Energy agreed to purchase all of the Group's gas production and to
assume responsibility for the regulatory obligations under the
Ukrainian tax regulations. Furthermore, Smart Energy has agreed to
combine the Group's gas production with its own gas production, and
to sell such gas as combined volumes, which is intended to result
in higher sales prices due to the larger sales volumes. At the
commencement of this sales arrangement, in order to cover Smart
Energy's sales, administration and regulatory compliance costs, the
Group sold its gas to Smart Energy at a discount of 0.5% to the gas
sales prices achieved by Smart Energy, who sold the combined
volumes in line with market prices. Due to changes in the
regulatory regime in Ukraine, which has increased the burden of
administration and regulatory compliance obligations involved in
the sale of gas, and in order to ensure that the Group is compliant
with current transfer pricing regulations in Ukraine, the Group and
Smart Energy agreed in 2019 to increase the discount on the price
at which the Group sells its gas to Smart Energy from 0.5% to 2%.
The terms of sale for the Group's gas to Smart Energy are (i) for
35% of the monthly volume of gas by the 15th of the month following
the month of delivery, and (ii) payment of the remaining balance by
the end of that month.
United
Ukraine Kingdom Total
2020 2020 2020
$000 $000 $000
Revenue
Gas sales 32,309 - 32,309
Condensate sales 11,418 - 11,418
Liquefied Petroleum Gas sales 3,524 - 3,524
------------------------------- ----------- --------- -----------
Total revenue 47,251 - 47,251
Segment result 25,473 (3,053) 22,420
Depreciation and amortisation
of non-current assets (12,650) - (12,650)
Operating profit 9,770
Segment assets 106,587 39,376 145, 963
Capital additions* 18,167 - 18,167
*Comprises additions to property, plant and equipment (Note
18)
6. Cost of Sales
2021 2020
$000 $000
Production taxes 19,926 9,361
Depreciation of property, plant and equipment 10,669 11,546
Rent expenses 8,811 3,151
Staff costs (Note 9) 2,886 3,202
Cost of inventories recognised as an expense 1,708 1,227
Transmission tariff for Ukrainian gas system 880 824
Amortisation of mineral reserves 482 488
Other expenses 2,060 1,712
----------------------------------------------- -------- --------
47,422 31, 511
The increase in production taxes and rent expenses in 2021 is a
function of those charges being price-linked, with hydrocarbon
prices having risen significantly during the year. A transmission
tariff for use of the Ukrainian gas transit system of
UAH101.93/Mm(3) of gas was applicable to the Group (2020:
UAH101.93/Mm(3) ).
7. Administrative Expenses
2021 2020
$000 $000
Staff costs (Note 9) 5,019 4,521
Consultancy fees 923 1,271
Depreciation of other fixed assets 572 456
Auditors' remuneration 352 394
Amortisation of other intangible assets 235 160
Rent expenses 160 154
Other expenses 1,089 835
--------------------------------------------- ------- ------
8,350 7,791
2021 2020
$000 $000
Audit of the Company and subsidiaries 141 176
Audit of subsidiaries in Ukraine 124 123
Audit related assurances services - interim
review 48 47
--------------------------------------------- ------- ------
Total assurance services 313 346
Tax compliance services 26 3
Tax advisory services 13 45
Total non-audit services 39 48
--------------------------------------------- ------- ------
Total audit and other services 352 394
The amounts disclosed above were paid to PricewaterhouseCoopers
LLP in the UK and Ukraine, with the exception of $7,000 paid to
another audit firm in respect of the audit of a subsidiary in
Ukraine (2020: $47,000 in respect of the audit of a subsidiary in
Ukraine and tax advisory services).
8. Remuneration of Directors
2021 2020
$000 $000
Directors' emoluments 1,115 1,026
----------------------- ------ ------
The emoluments of the individual Directors were as follows:
Total Total
Emoluments emoluments
2021 2020
$000 $000
Executive Directors:
Sergii Glazunov 307 370
Bruce Burrows 484 354
Non-executive Directors:
Chris Hopkinson 138 128
Alexey Pertin 62 58
Yuliia Kirianova 62 58
Dmitry Sazonenko 62 58
1,115 1,026
The emoluments include base salary, bonuses and fees. According
to the Register of Directors' Interests, no rights to subscribe for
shares in or debentures of any Group companies were granted to any
of the Directors or their immediate families during the financial
year, and there were no outstanding options to Directors.
9. Staff Numbers and Costs
The average monthly number of employees during the year
(including Executive Directors) and the aggregate staff costs of
such employees were as follows:
Number of employees
2021 2020
Group
Management / operational 171 166
Administrative support 92 93
-------------------------- ---------- ----------
263 259
The prior year comparative numbers of employees were amended to
conform to the current year presentation. The number of employees
includes full-time and part-time employees.
2021 2020
$000 $000
Wages and salaries 6,785 6,664
Other pension costs 1,007 953
Social security costs 113 106
7,905 7,723
10. Other Operating Gains, (net)
2021 2020
$000 $000
Interest income on cash and cash equivalents 763 1,421
Contractor penalties applied 81 -
Gain on sales of current assets 16 26
Other operating (loss)/income, net ( 206 ) 374
654 1, 821
The prior year comparative costs were amended to conform to the
current year presentation.
11. Finance Income
During 2021, the Group recognised foreign exchange gains less
losses of $1,394,000 (2020: $nil). The net exposure in the previous
year was recognised as finance costs (Note 12).
12. Finance Costs
2021 2020
$000 $000
Unwinding of discount on financial liabilities 333 27
Unwinding of discount on provision for decommissioning
(Note 26) 250 234
Interest expense on lease liabilities 169 126
Foreign exchange losses less gains - 1,031
752 1,418
13. Other Losses, (net)
2021 2020
$000 $000
Charitable donations 76 2,077
Foreign exchange gains/(losses) 53 (340)
Other (gains)/losses, net (21) 1 19
108 1,85 6
Charitable donations for the year ended 31 December 2021
comprise contributions to the development of social infrastructure
of local communities (2020: charitable donations comprised the
supply of medical equipment and COVID-19 testing equipment to
Ukrainian authorities and charitable foundations).
14. Income Tax Expense
a) Income tax expense and (benefit):
2021 2020
$000 $000
Current tax
UK - current year 165 227
UK - prior year 10 328
Overseas - current year 13,130 2,770
Overseas - prior year - (329)
Deferred tax (Note 27)
UK - current year 2,367 640
Overseas - current year (199) (304)
Income tax expense 15,473 3,332
b) Factors affecting tax charge for the year:
The tax assessed for the year is different from the corporation
tax in the UK of 19.00%. The expense for the year can be reconciled
to the profit as per the Income Statement as follows:
2021 2020
$000 $000
Profit before taxation 66, 592 6,520
------------------------------------------------ ---------- ---------
Tax charge at UK tax rate of 19.00% (2020: 12,6
19.00%) 5 2 1,239
Tax effects of:
Lower foreign corporate tax rates in Ukraine
(18.00%) (2020: 18.00%) (685) (95)
Change in UK tax rate from 19% to 25% starting 1,168 -
from 1 April 2023
1 2 ,
Disallowed expenses and non-taxable income 038 22,648
Previously unrecognised tax losses used to
reduce income tax expense ( 9 ,875) (21,015)
Adjustments in respect of prior periods 175 555
------------------------------------------------ ---------- ---------
Total tax expense for the year 15,473 3,332
The tax effect of disallowed expenses and non-taxable income are
mainly represented by foreign exchange differences of Regal
Petroleum Corporation (Ukraine) Limited and the net change in
credit loss allowance for loans issued to subsidiaries and shares
in subsidiary undertakings.
The tax effect of losses not recognised as deferred tax assets
are mainly represented by accumulated losses of Regal Petroleum
Corporation (Ukraine) Limited.
15. Profit for the Year
The Company has taken advantage of the exemption allowed under
section 408 of the Companies Act 2006 and has not presented its own
Income Statement in these financial statements. The Parent Company
profit after tax was $ 16 , 330, 000 for the year ended 31 December
2021 (2020: profit after tax $59,454,000).
16. Earnings per Share
The calculation of basic earnings per ordinary share has been
based on the profit for the year and 320,637,836 (2020:
320,637,836) ordinary shares, being the weighted average number of
shares in issue for the year. There are no dilutive
instruments.
17. Reduction of Capital
On 25 February 2021, the Company completed a reduction of its
share capital through the cancellation of its entire share premium
account, thereby creating distributable reserves, which potentially
enables the Company to make distributions to its shareholders in
the future, subject to the Company's financial performance.
However, the Company is not indicating any commitment, and does not
have any current intention, to make any distributions to
shareholders.
18. Property, Plant and Equipment
2021 2020
Oil and
Gas Oil and Oil and Gas
Development Gas Development Oil and Gas
and Exploration and Exploration
Production and Other Production and Other
assets Evaluation fixed assets Evaluation fixed
Ukraine Assets assets Total Ukraine Assets assets Total
Group $000 $000 $000 $000 $000 $000 $000 $000
Cost
At the beginning
of the 2,21 140,54
year 135,966 2,362 7 5 143,127 2,571 2,103 147,801
Additions 24,289 7,763 524 32,576 17,241 213 713 18,167
Change in
decommissioning
provision (1,921) 70 - (1,851) 372 - - 372
Disposals (62) - (187) (249) (443) - (73) (516)
Exchange (52 6 (25,2
differences 4,898 (85) 77 4,890 (24,331) (422) ) 79 )
------------------ ------------ ------------- -------- -------- ------------- ------------- -------- ---------
At the end of 2,21 140,54
the year 163,170 10,110 2,631 175,911 135,966 2,362 7 5
------------------ ------------ ------------- -------- -------- ------------- ------------- -------- ---------
Accumulated depreciation and
impairment
At the beginning
of the 1,06 74,88
year 73,816 - 7 3 76,802 - 947 77,749
Charge for year 10,544 - 343 10,887 10, 450 - 319 10, 769
Disposals (25) - (28) (53) (327) - (30) (357)
Exchange (13,10 9
differences 2,735 - 41 2,776 ) - (169) (13,278)
------------------ ------------ ------------- -------- -------- ------------- ------------- -------- ---------
At the end of 1,06 74,88
the year 87,070 - 1,423 88,493 73,816 - 7 3
------------------ ------------ ------------- -------- -------- ------------- ------------- -------- ---------
Net book value at
the
beginning of the
year 62, 150 2,362 1,150 65, 662 66,325 2,571 1,156 70,052
------------------ ------------ ------------- -------- -------- ------------- ------------- -------- ---------
Net book value at
the
end of the year 76,100 10,110 1,208 87,418 62, 150 2,362 1,150 65, 662
------------------ ------------ ------------- -------- -------- ------------- ------------- -------- ---------
MEX-GOL, SV and VAS gas and condensate fields
In accordance with the Group's accounting policies, the oil and
gas development and producing assets are tested for impairment at
each balance sheet date if impairment indicators exist. As at 31
December 2021, no impairment indicators were identified by the
Group, and therefore no impairment test was performed for the
MEX-GOL, SV and VAS gas and condensate fields.
19. Intangible Assets
2021 2020
Mineral Exploration Other Total Mineral Exploration Other Total
reserve and intangible reserve and intangible
rights evaluation assets rights evaluation assets
intangible intangible
assets assets
Group $000 $000 $000 $000 $000 $000 $000 $000
Cost
At the beginning of the
year 6,570 8,286 616 15,472 7,843 - 572 8,415
Additions - 143 324 467 - 8,331 224 8,555
Disposals - (80) (212) (292) - - (85) (85)
Exchange differences 240 302 24 566 (1,273) (45) (95) (1,413)
-------------------------- --------------- ------------ ----------- ------- --------- ------------ ----------- ------------
At the end of the year 6,810 8,651 752 16,213 6,570 8,286 616 15,472
-------------------------- --------------- ------------ ----------- ------- --------- ------------ ----------- ------------
Accumulated amortisation
At the beginning of the
year 2,855 - 385 3,240 2,851 - 367 3,218
Charge for year 482 - 239 721 488 - 166 654
Disposals - - (212) (212) - - (85) (85)
Exchange differences 102 - 22 124 (484) - (63) (547)
-------------------------- --------------- ------------ ----------- ------- --------- ------------ ----------- ------------
At the end of the year 3,439 - 434 3,873 2,855 - 385 3,240
-------------------------- --------------- ------------ ----------- ------- --------- ------------ ----------- ------------
Net book value at the
beginning
of the year 3,715 8,286 231 12,232 4,992 - 205 5,197
-------------------------- --------------- ------------ ----------- ------- --------- ------------ ----------- ------------
Net book value at the end
of the year 3,371 8,651 318 12,340 3,715 8,286 231 12,232
-------------------------- --------------- ------------ ----------- ------- --------- ------------ ----------- ------------
Intangible assets consist mainly of the hydrocarbon production
licence relating to the VAS field which is held by one of the
Group's subsidiaries, LLC Prom-Enerho Produkt, and a hydrocarbon
exploration licence relating to the Svystunivsko-Chervonolutskyi
("SC") area which is held by LLC Arkona Gas-Energy. The Group
amortises the hydrocarbon production licence relating to the VAS
field using the straight-line method over the term of the economic
life of the VAS field until 2028. The hydrocarbon exploration
licence relating to the SC area is not amortised due to it being in
an exploration and evaluation stage.
In accordance with the Group's accounting policies, intangible
assets are tested for impairment at each balance sheet date as part
of the impairment testing of the Group's oil and gas development
and production assets if impairment indicators exist. As at 31
December 2021, no impairment indicators were identified.
20. Leases
This note provides information for leases where the Group is a
lessee.
Amount recognised in the balance sheet:
2021 2020
$000 $000
Right-of-use assets
Properties 627 108
Land 242 236
Wells 139 16 8
--------------------- ------ -----
1,008 512
2021 2020
$000 $000
Lease liabilities
Current 455 245
Non-current 648 371
------------------- ------ -----
1,103 616
After modification additions to the right-of-use assets during
the 2021 financial year were $820,000 (2020: $56,000).
Amounts recognised in the statement of profit or loss:
2021 2020
$000 $000
Depreciation charge
Properties (311) (308)
Land (15) (15)
Wells (34) (35)
------------------------------------------------- -------- --------
(360) (35 8 )
Interest expense (included in finance cost) (169) (126)
Expense relating to short-term leases (included
in cost of sales and administrative expenses) (142) (139)
Expense relating to variable lease payments
not included in lease liabilities (included
in cost of sales) (8,765) (3,101)
Expense relating to lease payments for land
under wells not included in lease liabilities
(included in cost of sales) (64) (71)
The comparative expense relating to lease payments for land
under wells not included in lease liabilities was amended to
conform to the current year presentation.
The total cash outflow for leases in 2021 was $10,217,000 (2020:
$3,456,000).
21. Investments and Loans to Subsidiary Undertakings
Shares in Loans to
subsidiary subsidiary
undertakings undertakings Total
$000 $000 $000
Company
As at 1 January 2020 17,279 14,181 31,460
-------------------------------------- -------------- -------------- ---------
Additions including accrued interest 8,163 4,336 12,499
Transfers 39,987 (39,987) -
Repayment of interest and loans - (4,318) (4,318)
(Impairment)/reversal of impairment (30,142) 87,264 57,122
Exchange differences - 1,352 1,352
-------------------------------------- -------------- -------------- ---------
As at 31 December 2020 35,287 62,828 98,115
-------------------------------------- -------------- -------------- ---------
Additions including accrued interest - 15,447 15,447
Disposal of shares in subsidiary (3,322) - (3,322)
Accumulated impairment on disposal
of shares in subsidiary 3,322 - 3,322
Repayment of interest and loans - (32,132) (32,132)
Reversal of impairment 3,240 7,672 10,912
Exchange differences - (4,916) (4,916)
-------------------------------------- -------------- -------------- ---------
As at 31 December 2021 38,527 48,899 87,426
-------------------------------------- -------------- -------------- ---------
The Company has recorded a credit of $7,672,000, being the net
change in expected credit losses for loans issued to subsidiaries
in the Company's statement of profit or loss for the year ended 31
December 2021 (Note 4). As at 31 December 2021, following a review
of the underlying cash flow forecasts of the subsidiaries and a
significant increase in gas prices forecast, management reassessed
the method of measurement of expected credit losses and use of the
downside scenario, calculating the ECL based on the sovereign
rating of Ukraine defined by Fitch as "B" as at 31 December 2021.
The cash flow forecast would be sensitive to a breakeven discount
rate of 26.00%, and a breakeven gas price of $348/Mm(3) .
The Company also recorded a credit of $3,240,000, being the net
change in credit loss allowance for shares in subsidiary
undertakings. The set off of the accumulated impairment of
$3,322,000 was due to the disposal of the fully impaired investment
in Regal Petroleum (Jersey) Limited.
The Company's discounted cash flow model used for the assessment
of the investments recoverability, flexed for sensitivities,
produced the following results:
31 December 31 December
2021 2020
$000 $000
Discount rate (increase)/decrease
by 1% (641)/676 ( 810 )/ 867
Change in gas price increase/(decrease) 3,388 /( 3,411 2,879 /( 2,880
by 10% ) )
----------------------------------------- ---------------- ---------------
The table presented below discloses the changes in the gross
carrying amount and credit loss allowance between the beginning and
the end of the reporting period for loans to subsidiary
undertakings carried at amortised cost and classified within a
three-stage model for impairment assessment as at 31 December
2021:
Credit loss allowance Gross carrying amount
Stage Stage Stage Total Stage Stage Stage Total
1 2 3 1 2 3
--------- ---------
(12-months (lifetime (lifetime (12-months (lifetime (lifetime
ECL) ECL ECL for ECL) ECL for ECL for
for credit SICR) credit
SICR) impaired) impaired)
---------------- ----------- ---------- ----------- --------- ----------- ---------- ----------- ---------
$000 $000 $000 $000 $000 $000 $000 $000
As at 1 January
2021 - - (20,375) (20,375) - - 83,203 83,203
---------------- ----------- ---------- ----------- --------- ----------- ---------- ----------- ---------
Movements with
impact on
credit
loss allowance
charge for the
year:
Modification of
loans - - (5,378) (5,378) - - 5,378 5,378
Additions
including
accrued
interest - - - - 12,276 - 3,171 15,447
Payment of
interest - - - - - - (3,134) (3,134)
Repayment of
loans - - - - - - (28,998) (28,998)
Exchange
difference - - 1,400 1,400 - - (6,316) (6,316)
Changes to ECL
measurement
model
assumptions (637) - 8,309 7,672 - - - -
---------------- ----------- ---------- ----------- --------- ----------- ---------- ----------- ---------
Total movements
with impact on
credit loss
allowance
charge for the
year (637) - 4,331 3,694 12,276 - (29,899) (17,623)
---------------- ----------- ---------- ----------- --------- ----------- ---------- ----------- ---------
As at 31
December
2021 (637) - (16,044) (16,681) 12,276 - 53,304 65,580
---------------- ----------- ---------- ----------- --------- ----------- ---------- ----------- ---------
ECL - Expected credit losses
SICR - Significant increase in credit risk
The table presented below discloses the changes in the gross
carrying amount and credit loss allowance between the beginning and
the end of the reporting period for loans to subsidiary
undertakings carried at amortised cost and classified within a
three-stage model for impairment assessment as at 31 December
2020:
Credit loss allowance Gross carrying amount
Stage Stage Stage Total Stage Stage Stage Totall
1 2 3 1 2 3
---------- ---------
(12-months (lifetime (lifetime (12-months (lifetime (lifetime
ECL) ECL ECL for ECL) ECL for ECL for
for credit SICR) credit
SICR) impaired) impaired)
------------------- ----------- ---------- ----------- ---------- ----------- ---------- ----------- ---------
$000 $000 $000 $000 $000 $000 $000 $000
As at 1 January
2020 - - (167,072) (167,072) - - 181,253 181,253
------------------- ----------- ---------- ----------- ---------- ----------- ---------- ----------- ---------
Movements with
impact on credit
loss allowance
charge for the
year:
Modification
of loans - - 72,412 72,412 - - (72,412) (72,412)
Additions
including
accrued interest - - - - - - 4,336 4,336
Transfers - - - - - - (39,987) (39,987)
Payment of
interest - - - - - - (4,318) (4,318)
Repayment of - - - - - - - -
loans
Exchange
difference - - (12,979) (12,979) - - 14,331 14,331
Changes to ECL
measurement model
assumptions - - 87,264 87,264 - - - -
------------------- ----------- ---------- ----------- ---------- ----------- ---------- ----------- ---------
Total movements
with impact on
credit loss
allowance
charge for the
year - - 146,697 146,697 - - (98,050) (98,050)
------------------- ----------- ---------- ----------- ---------- ----------- ---------- ----------- ---------
As at 31 December
2020 - - (20,375) (20,375) - - 83,203 83,203
------------------- ----------- ---------- ----------- ---------- ----------- ---------- ----------- ---------
ECL - Expected credit losses
SICR - Significant increase in credit risk
Subsidiary undertakings
As at 31 December 2021 and 2020, the Company's subsidiary
undertakings, all of which are included in the consolidated
financial statements, were:
Registered address Country Country Principal % of
of of operation activity shares
incorporation held
3(rd) Floor,
Charter Place,
Regal Petroleum 23-27 Seaton
Corporation Place, St Helier, Oil & Natural
Limited Jersey, JE4 0WH Jersey Ukraine Gas Extraction 100%
16 Old Queen
Regal Group Street, London, Service
Services Limited SW1H 9HP United Kingdom United Kingdom Company 100%
3(rd) Floor,
Charter Place,
23-27 Seaton
Regal Petroleum Place, St Helier, Holding
(Jersey) Limited Jersey, JE4 0WH Jersey United Kingdom Company 100%
162 Shevchenko
Regal Petroleum Str., Yakhnyky
Corporation Village, Lokhvytsya
(Ukraine) District, Poltava Service
Limited Region, 37212 Ukraine Ukraine Company 100%
LLC Prom-Enerho 3 Klemanska Str., Oil & Natural
Produkt Kiev, 02081 Ukraine Ukraine Gas Extraction 100%
162 Shevchenko Exploration
Str., Yakhnyky and Evaluation
Village, Lokhvytsya for Oil
LLC Arkona District, Poltava and Natural
Gas-Energy Region, 37212 Ukraine Ukraine Gas 100%
The Parent Company, Enwell Energy plc, holds direct interests in
100% of the share capital of Regal Petroleum Corporation Limited,
Regal Group Services Limited, Regal Petroleum (Jersey) Limited,
Regal Petroleum Corporation (Ukraine) Limited and LLC Arkona
Gas-Energy, and a 100% indirect interest in LLC Prom-Enerho Produkt
through its 100% shareholding in Regal Petroleum Corporation
(Ukraine) Limited, which owns all of the share capital of LLC
Prom-Enerho Produkt.
Regal Group Services Limited, company number 5252958, has taken
advantage of the subsidiary audit exemption allowed under section
479A of the Companies Act 2006 for the year ended 31 December
2021.
22. Inventories
Group
2021 2020
$000 $000
Current
Materials and spare parts 1,705 1,445
Finished goods 157 96
--------------------------- --------- -------
1,862 1,541
Inventories consist of materials, spare parts and finished
goods. Materials and spare parts are represented by spare parts
that were not assigned to any new wells, production raw materials
and fuel at the storage facility. Finished goods consist of
produced gas held in underground gas storage facilities and
condensate and LPG held at the processing facility prior to
sale.
As at 31 December 2021 allowances for impairment of materials
and spare parts amounted to $965,000 (31 December 2020:
$974,000).
All inventories are measured at the lower of cost or net
realisable value. There was no write down of inventory as at 31
December 2021 or 2020.
23. Trade and Other Receivables
Group Company
2021 2020 2021 2020
$000 $000 $000 $000
Trade receivables 5,308 1,936 - -
Other financial receivables 200 1,053 196 304
Less credit loss allowance (140) (133) - -
----------------------------- --------- ------- --------- ---------
Total financial receivables 5,368 2,856 196 304
Prepayments and accrued
income 5,231 1,387 28 55
Other receivables 2,460 604 75 76
----------------------------- --------- ------- --------- ---------
Total trade and other
receivables 13,059 4,847 299 435
Due to the short-term nature of the trade and other receivables,
their carrying amount is assumed to be the same as their fair
value. All trade and other financial receivables, except those
provided for, are considered to be of high credit quality.
As at 31 December 2021, the Group's total trade receivables, net
of expected credit losses amounted to $5,169,000 and 100% were
denominated in Ukrainian Hryvnia (31 December 2020: $1,806,000 and
100% were denominated in Ukrainian Hryvnia). Further description of
financial receivables is disclosed in Note 31.
The majority of the trade receivables are from a related party,
LLC Smart Energy, that purchases all of the Group's gas production
(see Note 4). The applicable payment terms, which were revised in
the period, are payment for 35% of the monthly volume of gas by the
15(th) of the month following the month of delivery, and payment of
the remaining balance by the end of that month (2020: the
applicable payment terms are payment for one third of the estimated
monthly volume of gas by the 20(th) of the month of delivery, and
payment of the remaining balance by the 10(th) of the month
following the month of delivery). The trade receivables were paid
in full after the end of the year.
Prepayments and accrued income mainly consist of prepayments of
$1,366,000 relating to the development of the SV field, $1,210,000
relating to the development of the MEX-GOL field and $2,284,000
relating to the development of the SC licence (31 December 2020: of
$926,000 relating to the development of the SV licence).
Analysis by credit quality of financial trade and other
receivables and expected credit loss allowance as at 31 December
2021 is as follows:
Loss rate Gross carrying Life-time Carrying Basis
amount ECL amount
$000 $000 $000
Trade receivables financial position
from related of related
parties 5% 5,015 (7) 5,008 party
number of days
Trade receivables the asset past
- credit impaired 100% 132 (132) - due
historical
Trade receivables credit losses
- other 0.21% 161 - 161 experienced
Other financial individual
receivables 0.48% 200 (1) 199 default rates
Total trade
and other receivables
for which individual
approach for
ECL is used 5,508 (140) 5,368
Analysis by credit quality of financial trade and other
receivables and expected credit loss allowance as at 31 December
2020 is as follows:
Loss rate Gross carrying Life-time Carrying Basis
amount ECL amount
$000 $000 $000
Trade receivables financial position
from related of related
parties 5% 1,804 (3) 1,801 party
number of days
Trade receivables the asset past
- credit impaired 100% 127 (127) - due
historical
Trade receivables credit losses
- other 0.21% 5 - 5 experienced
Other financial individual
receivables 0.42% 1,053 (3) 1,050 default rates
Total trade and
other receivables
for which individual
approach for
ECL is used 2,989 (133) 2,856
ECL - Expected credit losses
The following table explains the changes in the credit loss
allowance for trade and other receivables under the simplified ECL
model between the beginning and the end of the year:
2021 2020
$000 $000
Trade and other receivables
Balance as at 1 January 133 155
New originated or purchased 24 -
Financial assets derecognised during the
year (19) -
Changes in estimates and assumptions (3) 3
Foreign exchange movements 5 (25)
------------------------------------------ ----- -----
Balance as at 31 December 140 13 3
24. Cash and Cash Equivalents and Other short-term
investments
Group Company
2021 2020 2021 2020
$000 $000 $000 $000
Cash and Cash Equivalents
Cash at bank 75,457 53,710 63,299 38,619
Demand deposits and term deposits
with maturity of less than 3
months 12,323 7,283 - -
87,780 60,993 63,299 38,619
Other short-term investments
Demand deposits and term deposits 4,762 - - -
with maturity of more than 3
months but less than a year
----------------------------------- --------- ------- ------- -------
4,762 - - -
Cash at bank earns interest at fluctuating rates based on daily
bank deposit rates. Demand deposits are made for varying periods
depending on the immediate cash requirements of the Group and earn
interest at the respective short-term deposit rates. The terms and
conditions upon which the Group's demand deposits are made allow
immediate access to all cash deposits, with no significant loss of
interest.
The credit quality of cash and cash equivalents balances and
other short-term investments may be summarised based on Moody's
ratings as follows as at 31 December:
Demand deposits Demand deposits
and term deposits and term deposits Total cash
Cash at with maturity with maturity and cash equivalents
bank and less than 3 more than 3 and other short-term
on hand months months investments
2021 2021 2021 2021
$000 $000 $000
A- to A+
rated 63,290 - - 63,290
B- to B+
rated 900 8,660 4,762 14,322
Unrated 11,267 3,663 - 14,930
75,457 12,323 4,762 92,542
Demand deposits Demand deposits
and term deposits and term deposits Total cash
with maturity with maturity and cash equivalents
Cash at bank less than 3 more than 3 and other short-term
and on hand months months investments
2020 2020 2020 2020
$000 $000 $000 $000
A- to A+
rated 38,615 - - 38,615
B- to B+
rated 1 5,477 - 5,478
Unrated 15,094 1,806 - 16,900
53,710 7,283 - 60,993
For cash and cash equivalents and other short-term investments,
the Group assessed ECL based on the Moody's rating for rated banks
and based on the sovereign rating of Ukraine defined by Fitch as
"B" as at 31 December 2021 for non-rated banks. Based on this
assessment, the Group concluded that the identified impairment loss
was immaterial.
25. Trade and Other Payables
2021 2020
$000 $000
Taxation and social security 5 , 031 1,396
Trade payables 3,404 843
Accruals and other payables 3,354 4,037
Advances received 517 365
12,306 6,641
The carrying amounts of trade and other payables are assumed to
be the same as their fair values, due to their short-term nature.
Financial payables are disclosed in Note 31.
26. Provision for Decommissioning
2021 2020
$000 $000
Group
At the beginning of the year 6,819 7,447
Amounts provided 198 146
Unwinding of discount 250 234
Change in estimate (2,049) 226
Effect of exchange difference 249 (1,234)
------------------------------- --------- --------
At the end of the year 5,467 6,819
The provision for decommissioning is based on the net present
value of the Group's estimated liability for the removal of the
Ukrainian production facilities and well site restoration at the
end of production life.
The non-current provision of $5,467,000 (31 December 2020:
$6,819,000) represents a provision for the decommissioning of the
Group's MEX-GOL, SV, VAS and SC production and exploration
facilities, including site restoration.
The change in estimates applied to calculate the provision as at
31 December 2021 is explained in Note 4.
The principal assumptions used are as follows:
31 December 31 December
2021 2020
Discount rate 6.29% 3.70%
Average cost of restoration per well
($000) 348 342
-------------------------------------- ------------ ------------
The sensitivity of the restoration provision to changes in the
principal assumptions to the provision balance and related asset is
presented below:
31 December 31 December
2021 2020
$000 $000
Discount rate (increase)/decrease
by 1% (723)/860 (948)/1,143
Change in average cost of well restoration 353 /( 353
increase/ (decrease) by 10% ) 469/(469)
-------------------------------------------- ------------ ------------
27. Deferred Tax
2021 2020
$000 $000
Deferred tax (liability)/asset recognised
relating to oil and gas development
and production assets at the MEX-GOL-SV
fields and provision for decommissioning
At the beginning of the year (2,705) (2,141)
Charged to Income Statement - UK current
year (2,367) (640)
Charged to Income Statement - UK prior - -
year
Effect of exchange difference (125) 76
------------------------------------------- -------- --------
At the end of the year (5,197) (2,705)
2021 2020
$000 $000
Deferred tax asset/(liability) recognised
relating to development and production
assets at the VAS field and provision
for decommissioning
At the beginning of the year 167 (147)
Credited to Income Statement - overseas
current year 199 304
Effect of exchange difference (5) 10
------------------------------------------- -------- --------
At the end of the year 361 167
There was a further $76,433,000 (31 December 2020: $73,661,000)
of unrecognised UK tax losses carried forward for which no deferred
tax asset has been recognised. This amount includes $4, 065 , 000
of previous losses added during the period as a result of
finalisation of the tax return. These losses can be carried forward
indefinitely, subject to certain rules regarding capital
transactions and changes in the trade of the Company.
The deferred tax asset relating to the Group's provision for
decommissioning as at 31 December 2021 of $457,000 (31 December
2020: $170 , 000 ) was recognised on the tax effect of the
temporary differences of the Group's provision for decommissioning
at the MEX-GOL and SV fields, and its tax base. The deferred tax
liability relating to the Group's development and production assets
at the MEX-GOL and SV fields as at 31 December 2021 of $5,654,000
(31 December 2020: $2,875,000) was recognised on the tax effect of
the temporary differences between the carrying value of the Group's
development and production asset at the MEX-GOL and SV fields, and
its tax base. The deferred tax liability will be settled more than
twelve months after the reporting period.
The deferred tax asset relating to the Group's provision for
decommissioning as at 31 December 2021 of $315,000 (31 December
2020: $323,000) was recognised on the tax effect of the temporary
differences on the Group's provision on decommissioning at the VAS
field, and its tax base. The deferred tax asset relating to the
Group's development and production assets at the VAS field as at 31
December 2021 of $46,000 (31 December 2020: deferred tax liability
of $156,000) was recognised on the tax effect of the temporary
differences between the carrying value of the Group's development
and production asset at the VAS field, and its tax base. The
deferred tax assets are expected to be recovered more than twelve
months after the reporting period.
Losses accumulated in a Ukrainian subsidiary service company of
UAH 835,298,000 ($30,621,000) as at 31 December 2021 and UAH
1,763,494,000 ($62,370,000) as at 31 December 2020 mainly
originated as foreign exchange differences on inter-company loans
and for which no deferred tax asset was recognised as this
subsidiary is not expected to have taxable profits to utilise these
losses in the future.
As at 31 December 2021 and 2020, the Group has not recorded a
deferred tax liability in respect of taxable temporary differences
associated with investments in subsidiaries as the Group is able to
control the timing of the reversal of those temporary differences
and does not intend to reverse them in the foreseeable future.
UK Corporation tax change
The current Corporation tax rate of 19% generally applies to all
companies whatever their size. From 1 April 2023, this rate will
cease to apply and will be replaced by variable rates ranging from
19% to 25%. A small profits rate of 19% will apply to companies
whose profits are equal to or less than GBP50,000. The main
Corporation Tax rate is increased to 25% and will apply to
companies with profits in excess of GBP250,000. This had an impact
on the deferred tax liability and the income tax expense in the
amount of $1,168,000 (Note 14).
Double tax treaty
On 30 October 2019, the Parliament of Ukraine voted for
ratification of a Protocol changing the Double Tax Treaties between
Ukraine and the United Kingdom. The Protocol and the new Treaty
will enter into force upon completion of ratification formalities,
and for the purposes of withholding tax, commence applying from 1
January 2020. The Group accrues and pays withholding tax on current
amounts of interest at the moment when such interest accrues and is
paid.
28. Called Up Share Capital
2021 2020
Number $000 Number $000
Allotted, called up and
fully paid
Opening balance as at
1 January 320,637,836 28,115 320,637,836 28,115
Issued during the year - - - -
------------------------- ---------------- --------- -------------- --------
Closing balance as at
31 December 320,637,836 28,115 320,637,836 28,115
There are no restrictions over ordinary shares issued. The
Company is a public company limited by shares.
29. Other Reserves
The holders of ordinary shares are entitled to receive dividends
as declared and are entitled to one vote per share at any general
meeting of shareholders.
Other reserves, the movements in which are shown in the
statements of changes in equity, comprise the following:
Capital contributions reserve
The capital contributions reserve is non-distributable and
represents the value of equity invested in subsidiary entities
prior to the Company listing.
Merger reserve
The merger reserve represents the difference between the nominal
value of shares acquired by the Company and those issued to acquire
subsidiary undertakings. This balance relates wholly to the
acquisition of Regal Petroleum (Jersey) Limited and that company's
acquisition of Regal Petroleum Corporation Limited during 2002.
Foreign exchange reserve
Exchange reserve movement for the year attributable to currency
fluctuations. This balance predominantly represents the result of
exchange differences on non-monetary assets and liabilities where
the subsidiaries' functional currency is not the US Dollar.
30. Reconciliation of Operating Profit to Operating Cash Flow
2021 2020
$000 $000
Group
Operating profit 66,235 9, 770
Depreciation and amortisation 11,958 12, 679
Less interest income recorded within operating
profit (763) (1,421)
Fines and penalties received (81) (18)
Gain on sales of current assets, net ( 16 ) (31)
Net (gain)/loss on sale of non-current assets (16) 159
Change in working capital:
Increase in provisions (6) (55)
(Increase)/decrease in inventory (104) 2,499
(4,4 63
(Increase)/decrease in receivables ) 359
Increase/(decrease) in payables 4,902 (177)
Cash generated from operations 77,646 23,764
2021 2020
$000 $000
Company
Operating profit 11,591 58,018
Interest received (3,447) (4,336)
Change in working capital:
Movement in provisions (including impairment
of subsidiary loans) (10,912) (57,122)
Decrease/(increase) in receivables 136 (101)
(Decrease)/increase in payables (188) 13
---------- ---------
Cash used in operations (2,820) (3,528)
31. Financial Instruments
Capital Risk Management
The Group defines its capital as equity. As at 31 December 2021,
net assets were $178,517,000 (31 December 2020: $125,615,000). The
primary source of the Group's liquidity has been cash generated
from operations. The Group's objectives when managing capital are
to safeguard the Group's and the Company's ability to continue as a
going concern in order to provide returns for shareholders and
benefits for other stakeholders and to maintain an optimal capital
structure to reduce the cost of capital.
In order to maintain or adjust the capital structure, the Group
may adjust the amount of dividends paid to shareholders, return
capital to shareholders, issue new shares or sell assets.
On 25 February 2021, the Company completed a reduction of its
share capital through the cancellation of its entire share premium
account, thereby creating distributable reserves, which enables the
Company to make distributions to its shareholders in the future,
subject to the Company's financial performance. However, the
Company is not indicating any commitment, and does not have any
current intention, to make any distributions to shareholders.
The capital structure of the Group consists of equity
attributable to the equity holders of the parent, comprising issued
share capital, share premium, reserves and retained earnings.
There are no capital requirements imposed on the Group.
Financial Risk Management
The Group's financial instruments comprise cash and cash
equivalents and various items such as debtors and creditors that
arise directly from its operations. The Group has bank accounts
denominated in British Pounds, US Dollars, Euros and Ukrainian
Hryvnia. The Group does not have any external borrowings. The main
future risks arising from the Group's financial instruments are
currently currency risk, interest rate risk, liquidity risk and
credit risk.
The Group's financial assets and financial liabilities comprise
the following:
Financial Assets
2021 2020
$000 $000
Group
Cash and cash equivalents 87,780 60,993
Other short-term investments 4,762 -
Trade and other receivables 5,368 2,856
9 7 , 910 63,849
2021 2020
$000 $000
Company
Cash and cash equivalents 63,299 38,619
Loans to subsidiary undertakings 48,899 62,828
112,198 101,447
Financial Liabilities
2021 2020
$000 $000
Group
Lease liabilities 1,103 616
Trade and other payables 3,404 843
Other financial liabilities 2,244 4,336
6,751 5,795
2021 2020
$000 $000
Company
Trade and other payables 1,767 4,247
1,767 4,247
Financial assets and financial liabilities are measured at
amortised cost, which approximates their fair value as the
instruments are mostly short-term. Assets and liabilities of the
Group where fair value is disclosed are level 2 in the fair value
hierarchy and valued using the current cost accounting
technique.
Financial instruments that potentially subject the Group to
concentrations of credit risk consist primarily of cash and cash
equivalents and accounts receivable, and financial instruments that
potentially subject the Company to concentrations of credit risk
consist primarily of cash and cash equivalents and loans to
subsidiary undertakings.
Currency Risk
The functional currencies of the Group's entities are US Dollars
and Ukrainian Hryvnia. The following analysis of net monetary
assets and liabilities shows the Group's currency exposures.
Exposures comprise the monetary assets and liabilities of the Group
that are not denominated in the functional currency of the relevant
entity.
2021 2020
Currency $000 $000
British Pounds 275 232
US Dollars 234 1,806
Euros 9 5
Net monetary assets less liabilities 518 2,043
The Group's exposure to currency risk at the end of the
reporting period is not significant due to immaterial balances of
monetary assets and liabilities denominated in foreign
currencies.
The sensitivity of the exchange rate of US Dollars is presented
below:
31 December 31 December
2021 2020
$000 $000
2 3 /( 2 3
Increase/(decrease) by 10% ) 189/(189)
---------------------------- ------------ ------------
The prior year comparative figures were amended to conform to
the current year presentation.
Interest Rate Risk Management
The Group is not exposed to interest rate risk on financial
liabilities as none of the entities in the Group have any external
borrowings. The Group does not use interest rate forward contracts
and interest rate swap contracts as part of its strategy.
The Group is exposed to interest rate risk on financial assets
as entities in the Group hold money market deposits at floating
interest rates. The risk is managed by fixing interest rates for a
period of time when indications exist that interest rates may move
adversely.
The Group's exposure to interest rates on financial assets and
financial liabilities are detailed in the liquidity risk section
below.
Interest Rate Sensitivity Analysis
The sensitivity analysis below has been determined based on
exposure to interest rates for non-derivative instruments at the
balance sheet date. A 0.5% increase or decrease is used when
reporting interest rate risk internally to key management personnel
and represents management's assessment of a reasonably possible
change in interest rates.
If interest rates earned on money market deposits had been 0.5%
higher / lower and all other variables were held constant, the
Group's:
-- profit for the year ended 31 December 2021 would increase
by $136,000 in the event of 0.5% higher interest rates and
decrease by $136,000 in the event of 0.5% lower interest rates
(profit for the year ended 31 December 2020 would increase
by $97,000 in the event of 0.5% higher interest rates and
decrease by $97,000 in the event of 0.5% lower interest rates).
This is mainly attributable to the Group's exposure to interest
rates on its money market deposits; and
-- other equity reserves would not be affected (2020: not affected)
Interest payable on the Group's liabilities would have an
immaterial effect on the profit or loss for the year.
Liquidity Risk
The Group's objective throughout the year has been to ensure
continuity of funding. Operations have primarily been financed
through revenue from Ukrainian operations.
The table below shows liabilities by their remaining contractual
maturity. The amounts disclosed in the maturity table are the
contractual undiscounted cash flows including future interest. Such
undiscounted cash flows differ from the amount included in the
statement of financial position because the statement of financial
position amount is based on discounted cash flows and does not
include the interest that will be accrued in future periods.
When the amount payable is not fixed, the amount disclosed is
determined by reference to the conditions existing at the reporting
date. Foreign currency payments are translated using the spot
exchange rate at the end of the reporting period. The maturity
analysis of financial liabilities as at 31 December 2021 is as
follows:
As at 31 December On demand From From From 12 More Total
202 1 and less 1 to 3 to 12 months than 5
than 1 month 3 months months to 5 years years
$000 $000 $000 $000 $000 $000
Liabilities
Trade and other
payables 4,030 1,618 - - - 5,648
Lease liabilities 39 80 381 661 492 1,653
Other non-current
liabilities - - - 142 256 398
Total future
payments, including
future principal
and interest
payments 4,069 1,698 381 803 748 7,699
The maturity analysis of financial liabilities as at 31 December
2020 is as follows:
As at 31 December On demand From From 3 From 12 More Total
20 20 and less 1 to to 12 months than
than 1 month 3 months months to 5 years 5 years
$000 $000 $000 $000 $000 $000
Liabilities
Trade and other
payables 1,137 2,158 33 - - 3,328
Lease liabilities 40 80 101 291 539 1,051
Other non-current
liabilities - 27 - 2,569 - 2,596
Total future payments,
including future
principal and 1 , 1 7 2 ,26
interest payments 7 5 1 3 4 2 ,860 539 6, 9 75
Details of the Group's cash management policy are explained in
Note 24.
Liquidity risk for the Group is further detailed under the
Principal Risks section above.
Credit Risk
Credit risk principally arises in respect of the Group's cash
balance. For balances held outside Ukraine, where $63,299,000 of
the overall cash and cash equivalents is held (31 December 2020:
$38,619,000), the Group only deposits cash surpluses with major
banks of high quality credit standing (Note 24). As at 31 December
2021, the remaining balance of $29,243,000 of cash and cash
equivalents and other short-term investments was held in Ukraine
(31 December 2020: $22,374,000). As at 31 December 2021, Standard
& Poor's affirmed Ukraine's sovereign credit rating of 'B',
Outlook Stable. There is no international credit rating information
available for the specific banks in Ukraine where the Group
currently holds its cash and cash equivalents.
The Group has taken steps to diversify its banking arrangements
between a number of banks in Ukraine and increased the quality of
cash placed with UK and European banking institutions. These
measures are designed to spread the risks associated with each
bank's creditworthiness. Management considers the credit risk to be
immaterial.
Interest Rate Risk Profile of Financial Assets
The Group had the following cash and cash equivalent and other
short-term investments balances which are included in financial
assets as at 31 December with an exposure to interest rate
risk:
Floating Fixed
Floating Fixed rate rate
rate financial rate financial financial financial
Currency Total assets assets Total assets assets
202 1 202 1 202 1 20 20 20 20 20 20
$000 $000 $000 $000 $000 $000
Euros 9 9 - 5 5 -
British Pounds 275 275 - 232 232 -
Ukrainian Hryvnia 29,011 - 29,011 20,569 - 20,569
US Dollars 63,247 63,247 - 40,187 40,187 -
92,542 63,531 29,011 60,993 40,424 20,569
Cash deposits included in the above balances comprise term
deposits with maturity less than 3 months of $12,323,000 and term
deposits with maturity more than 3 months but less than a year of
$4,762,000 (2020: term deposits with maturity less than 3 months of
$7,283,000).
As at 31 December 2021, cash and cash equivalents of the Company
of $63,015,000 were held in US Dollars at a floating rate (2020:
$38,382,000).
Interest Rate Risk Profile of Financial Liabilities
As at 31 December 2021 and 2020, the Group had no interest
bearing financial liabilities at the year end.
Maturity of Financial Liabilities
The maturity profile of financial liabilities, on an
undiscounted basis, is as follows:
202 1 20 20
$000 $000
Group
In one year or less 6,148 3,576
6,148 3, 576
202 1 20 20
$000 $000
Company
In one year or less 1,767 2,395
1,767 2,395
Borrowing Facilities
As at 31 December 2021 and 2020, the Group did not have any
borrowing facilities available to it.
Fair Value of Financial Assets and Liabilities
The fair value of all financial instruments is not materially
different from the book value.
32. Contingencies and Commitments
Amounts contracted in relation to the Group's 2021 investment
programme in the MEX-GOL, SV, VAS and SC fields in Ukraine, but not
provided for in the financial statements at 31 December 2021, were
$3 , 101,000 related to Oil and Gas Exploration and Evaluation
assets and $2,674,000 related to Oil and Gas Development and
Production assets (2020: $9,052,000 for Oil and Gas Development and
Production assets).
Since 2010, the Group has been in dispute with the Ukrainian tax
authorities in respect of VAT receivables on imported leased
equipment, with a disputed liability of up to UAH 8,487,000
($302,000) inclusive of penalties and other associated costs. There
is a level of ambiguity in the interpretation of the relevant tax
legislation, and the position adopted by the Group has been
challenged by the Ukrainian tax authorities, which has led to legal
proceedings to resolve the issue. The Group had been successful in
three court cases in respect of this dispute in courts of different
levels. On 20 September 2016, a hearing was held in the Supreme
Court of Ukraine of an appeal of the Ukrainian tax authorities
against the decision of the Higher Administrative Court of Ukraine,
in which the appeal of the Ukrainian tax authorities was upheld. As
a result of this appeal decision, all decisions of the lower courts
were cancelled, and the case was remitted to the first instance
court for a new trial. On 1 December 2016 and 7 March 2017
respectively, the Group received positive decisions in the first
and second instance courts, but no appointment of hearings has been
settled yet. No liability has been recognised in these consolidated
financial statements for the year ended 31 December 2021 (31
December 2020: nil), as the Group has been successful in previous
court cases in respect of this dispute in courts of different
levels, the date of the next legal proceedings has not been set and
as management believes that adequate defences exist to the
claim.
On 12 March 2019, the Group announced the publication of an
Order for suspension (the "Order") by the State Service of Geology
and Subsoil of Ukraine affecting the production licence for its VAS
gas and condensate field. The Group is confident there are no
violations of the terms of the licence or in relation to the
operational activities of the Group that would justify the Order or
the suspension of the licence. The Group has issued legal
proceedings in the Ukrainian Courts to challenge the validity of
the Order, and in these proceedings, on 18 March 2019, the Court
made a ruling on interim measures to suspend the Order pending
hearings of the substantive issues of the case to be held
subsequently. The effect of this ruling is that the suspension of
operational activities at the VAS licence is deferred until the
result of the legal proceedings is determined. These legal
proceedings are continuing through the Ukrainian Court system and
the ultimate outcome is not yet known. However, the Group considers
that the Order is groundless and that the outcome of the legal
proceedings challenging the Order will ultimately be in favour of
the Group, and consequently, the Group does not expect any negative
effect on its operations in respect of this matter.
On 24 March 2020, the Company completed the acquisition of the
entire share capital of LLC Arkona Gas-Energy. In July 2020, legal
proceedings issued by NJSC Ukrnafta ("Ukrnafta"), as claimant,
against Arkona, as defendant, relating to a claim by Ukrnafta that
irregular procedures were followed in the grant of the
Svystunivsko-Chervonolutskyi exploration licence (the "Licence") to
Arkona in May 2017, were considered by the First Instance Court in
Ukraine. Ukrnafta also brought these proceedings against the State
Service of Geology and Subsoil of Ukraine ("SGS"). Ukrnafta was the
holder of a previous licence over a part of this area which expired
prior to the grant of the Licence. Both Arkona and SGS disputed
these claims. In the legal proceedings, the First Instance Court
made a ruling in favour of Ukrnafta which determined that the grant
of the Licence was irregular, and accordingly, the Licence would be
invalid. In August 2020, Arkona filed an appeal of this decision in
the Appellate Administrative Court in Kyiv, and on 29 September
2020, the Appellate Administrative Court ruled in favour of Arkona,
overturning the earlier decision of the First Instance Court. In
November 2020, Ukrnafta filed a further appeal in the Supreme Court
in Kyiv, appealing the ruling made by the Appellate Administrative
Court on 29 September 2020. In February 2021, the Supreme Court
delivered its decision and written judgement on this appeal, in
which the Supreme Court ruled that the arguments raised by Ukrnafta
in the appeal were not substantiated, and that the proceedings
against Arkona should be dismissed. The decision of the Supreme
Court represents the final appeal procedure in the Ukrainian
Courts, and accordingly, these legal proceedings against Arkona
have now been exhausted. Prior to the Company's acquisition of
Arkona, Ukrnafta had previously issued legal proceedings in 2018,
raising substantially the same claims, which proceeded through the
First Instance Court and Appellate Administrative Court, before a
final appeal was determined by the Supreme Court in October 2019,
in which Ukrnafta's claims were denied. In April 2021, an entity
named JV Boryslav Oil Company, which is 25.0999% owned by Ukrnafta,
issued a further legal claim, also claiming that irregular
procedures were followed in the grant of the Licence, which claim
was denied by the First Instance Court in July 2021 and by the
Appellate Administrative Court in October 2021. There was no
further appeal in this case and so the decision of the Appellate
Administrative Court is final. In September 2021, JV Boryslav Oil
Company issued a further legal claim, again claiming that irregular
procedures were followed in the grant of the Licence, against the
SGS and the State Commission of Ukraine for Mineral Resources
("SCP"), as defendants, with Arkona and Ukrnafta named as third
parties. In this claim, the First Instance Court made a ruling in
January 2022 in favour of JV Boryslav Oil Company, which has been
appealed to the Appellate Administrative Court, and this appeal is
expected to be determined in the near future. Pending the hearing
of this appeal, the ruling of the First Instance Court did not come
into force, and consequently, the Licence remains valid.
33. Related Party Disclosures
Key management personnel of the Group are considered to comprise
only the Directors. Details of Directors' remuneration are
disclosed in Note 8.
During the year, Group companies entered into the following
transactions with related parties who are not members of the
Group:
202 1 20 20
$000 $000
Sale of goods/services 95,342 32,074
Purchase of goods/services 1,099 890
Amounts owed by related parties 5,008 1,805
Amounts owed to related parties 912 202
--------------------------------- -------- -------
All related party transactions were with subsidiaries of the
ultimate Parent Company, and primarily relate to the sale of gas
(see Note 4 for more details), the rental of office facilities and
a vehicle and the sale of equipment. The amounts outstanding were
unsecured and will be settled in cash.
As at the date of this announcement, none of the Company's
controlling parties prepares consolidated financial statements
available for public use.
34. Post Balance Sheet Events
On 21 February 2022, the President of Russia announced the
recognition of independence of two regions of Ukraine: the
self-proclaimed Donetsk People's Republic and the Luhansk People's
Republic and ordered the deployment of troops to the two rebel-held
eastern regions. On 23 February 2022, the National Security and
Defence Council of Ukraine declared a state of emergency. On 24
February 2022, the President of Russia announced a "special
military operation" in Ukraine, which de facto represented a
declaration of war by the Russian Federation against Ukraine.
Russian troops immediately launched a military attack and invasion
of Ukraine, with missile strikes on major Ukrainian cities and
deployment of troops onto the territory of Ukraine, with the
consequent defence by Ukraine, and a wide range of military
engagements and activity. The President of Ukraine signed Decree
No. 64/2022 "On the imposition of martial law in Ukraine", which
was approved by the Ukrainian Parliament. Currently, the Ukrainian
army continues to actively resist, and in part push back the
invasion. At the same time, a very broad range of countries across
the world, imposed sanctions on Russia as a result of its invasion
of Ukraine, targeting the Russian economy, financial institutions
and a wide range of individuals. Moreover, various international
companies are suspending or terminating their activities in
Russia.
The final resolution and consequences of these events are hard
to predict, but they may have a further serious impact on the
Ukrainian economy and business of the Group. Management continues
to identify and mitigate, where possible, the impact on the Group,
but the majority of these factors are beyond their control,
including the duration and severity of conflict, as well as the
further actions of various governments and diplomacy.
In light of the Russian military action in Ukraine, on 24
February 2022, the Group shut-in and made safe its production and
drilling operations at all of its fields. Subsequently, on 11 March
2022, having taken a number of measures to ensure safe operations,
the Group commenced the partial restart of production operations at
its MEX-GOL and SV fields, and subsequently field operations have
been undertaken at those fields, including the completion of the
SV-31 well. More recently, plans have been made to complete the
drilling of the SC-4 well at the SC licence area. However, all
operations remain suspended at the VAS gas and condensate
field.
In January 2022, the Government of Ukraine imposed temporary and
partial gas price regulation to sustain production of certain food
products. Under this scheme, all independent gas producers in
Ukraine were required to sell up to 20% of their natural gas
production for the period until 30 April 2022 at a price set as the
cost of sales of the relevant gas producer (based on established
accounting rules) for such gas, plus a margin of 24%, plus existing
subsoil production taxes.
In March 2022, the Ukrainian Government enacted changes to the
subsoil production tax rates applicable to natural gas production
by modifying the applicable rates based on gas sales prices,
extending the incentive rates for new wells for a further 10 years
and making improvements to the regulatory environment. These
changes took effect on 1 March 2022, and the legislation includes
provisions that these rates will not be increased for 10 years. In
addition, the excise tax applicable to LPG sales was cancelled
entirely with effect from 24 February 2022, and the VAT rate
applicable to condensate and LPG sales was reduced to 7% (from 20%)
with effect from 18 March 2022.
The events described above constitute non-adjusting post balance
sheet events, and therefore they had no effect on the carrying
value of the assets and liabilities as at 31 December 2021. Any
impact on the carrying value of assets and liabilities will be
considered in the results for the six months ended 30 June
2022.
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END
FR FZGZVZRGGZZZ
(END) Dow Jones Newswires
June 29, 2022 02:00 ET (06:00 GMT)
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