REG - Enwell Energy PLC - 2021 Audited Results
29/06/2022 07:00
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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
€ 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
m³/d cubic metres per day
Mboe thousand barrels of oil equivalent
Mm³ 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
18.9 17.6 681 641 295 295 4,237 3,960
MEX-GOL & SV
2.6 2.9 26 32 - - 493 581
VAS
21.5 20.5 707 673 295 295 4,730 4,541
Total
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 150 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 km², 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 km² 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 + Possible (3P)
(1P) (2P)
121.9 Bscf / 3.5 Bm(3) 218.3 Bscf / 6.2 Bm(3) 256.5 Bscf / 7.3 Bm(3)
Gas
4.3 MMbbl / 514 Mtonne 7.9 MMbbl / 943 Mtonne 9.2 MMbbl / 1,098 Mtonne
Condensate
2.8 MMbbl / 233 Mtonne 5.0 MMbbl / 418 Mtonne 5.8 MMbbl / 491 Mtonne
LPG
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 (1C) Contingent Resources (2C) Contingent Resources (3C)
14.7 Bscf / 0.42 Bm(3) 38.3 Bscf / 1.08 Bm(3) 105.9 Bscf / 3.00 Bm(3)
Gas
1.17 MMbbl / 144 Mtonne 2.8 MMbbl / 343 Mtonne 6.6 MMbbl / 812 Mtonne
Condensate
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 + Possible (3P)
(1P) (2P)
9,114 MMscf / 258 MMm(3) 15,098 MMscf / 427 MMm(3) 18,816 MMscf / 533 MMm(3)
Gas
205 Mbbl / 25 Mtonne 346 Mbbl / 42 Mtonne 401 Mbbl / 48 Mtonne
Condensate
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 (1C) Contingent Resources (2C) Contingent Resources (3C)
- - 2,912 MMscf / 83 MMm(3)
Gas
- - 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 / 672 MMm(3) 38,079 MMscf / 1,078 MMm(3) 62,293 MMscf / 1,764 MMm(3) 41,291 MMscf / 1,169 MMm(3)
Gas
3. SC Licence
The Group's estimates of the remaining Reserves and Contingent Resources 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 + Possible (3P)
(1P) (2P)
17.20 Bscf / 0.49 Bm(3) 65.16 Bscf / 1.85 Bm(3) 85.03 Bscf / 2.41 Bm(3)
Gas
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 (1C) Contingent Resources (2C) Contingent Resources (3C)
8.56 Bscf / 0.24 Bm(3) 14.18 Bscf / 0.40 Bm(3) 81.16 Bscf / 2.30 Bm(3)
Gas
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 50% 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: $19.0
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 $73.9 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 €52 ($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 27% 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 Ukraine and there is currently a serious Although the Group has no assets in Crimea, it does have assets in the areas
and ongoing military conflict within Ukraine. This conflict is having a huge of conflict in the east of Ukraine, and the conflict has disrupted its
impact on Ukraine and its population, with significant destruction of operations in those areas. The Group has suspended all field operations at the
infrastructure and buildings in the areas of conflict, as well as damage in VAS field and SC licence area, and is only undertaking limited field and
other areas of Ukraine. The conflict is resulting in significant casualties production operations at the MEX-GOL and SV fields. At the MEX-GOL and SV
and has caused a huge humanitarian catastrophe and refugee influx into fields, inventories of hydrocarbons are being maintained at minimum levels. At
neighbouring countries. The conflict is also impacting the fiscal and economic the sites where operations are suspended, there are no staff on site, except
environment in Ukraine, as well as the financial stability and banking system for necessary security staff. Where possible, all other staff work remotely
in Ukraine, including restrictions on the transfer of funds outside Ukraine. and have been supplied with all necessary devices and software to facilitate
The conflict is an escalation of the previous Regional Conflict risk faced by remote working. Additionally, the Group aims to maintain the significant
the business, a dispute that has been going on since 2014 in parts of eastern majority of its cash resources outside Ukraine (being 77% as at 24 June 2022).
Ukraine, and since that time Russia has continued to occupy Crimea. The The Group continues to monitor the situation and endeavours to protect its
current conflict is also having a significant adverse effect on the Ukrainian assets and safeguard its staff and contractors.
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 as such the Group is exposed to greater The Group minimises this risk by continuously monitoring the market in Ukraine
regulatory, economic and political risks than it would be in other and by maintaining a strong working relationship with the Ukrainian regulatory
jurisdictions. Emerging economies are generally subject to a volatile authorities. The Group also maintains a significant proportion of its cash
political and economic environment, which makes them vulnerable to market holdings in international banks outside Ukraine.
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 been under great strain in recent years due The creditworthiness and potential risks relating to the banks in Ukraine are
to the weak level of capital, low asset quality caused by the economic regularly reviewed by the Group, but the geopolitical and economic events in
situation, currency depreciation, changing regulations and other economic Ukraine over recent years have significantly weakened the Ukrainian banking
pressures generally, and so the risks associated with the banks in Ukraine sector. This has been exacerbated by the current military conflict in Ukraine.
have been significant, including in relation to the banks with which the Group In light of this, the Group has taken and continues to take steps to diversify
has operated bank accounts. This situation was improving moderately following its banking arrangements between a number of banks in Ukraine. These measures
remedial action by the National Bank of Ukraine, but the current military are designed to spread the risks associated with each bank's creditworthiness,
conflict has significantly affected such improvements, and the National Bank and the Group endeavours to use banks that have the best available
of Ukraine has imposed a number of restrictive measures designed to protect creditworthiness. Nevertheless, and despite the recent improvements, the
the banking system, including restrictions of the transfer of funds outside Ukrainian banking sector remains weakly capitalised and so the risks
Ukraine (albeit that the Group aims to maintain the significant majority of associated with the banks in Ukraine remain significant, including in relation
its cash resources outside Ukraine (being 77% as at 24 June 2022). In to the banks with which the Group operates bank accounts. As a consequence,
addition, Ukraine continues to be supported by funding from the International the Group also maintains a significant proportion of its cash holdings in
Monetary Fund, and has requested further funding support from the international banks outside Ukraine.
International Monetary Fund.
Geopolitical environment in Ukraine
Although there were some improvements in recent years, there has not been a The Group continually monitors the market and business environment in Ukraine
final resolution of the political, fiscal and economic situation in Ukraine, and endeavours to recognise approaching risks and factors that may affect its
and the current military conflict has had a severe detrimental effect on the business. In addition, the involvement of Smart Holding (Cyprus) Limited, as
economic situation in Ukraine. The ongoing effects of this are difficult to an indirect major shareholder with extensive experience in Ukraine, is
predict and likely to continue to affect the Ukrainian economy and potentially considered helpful to mitigate such risks. However, the invasion of Ukraine
the Group's business. This situation is currently affecting the Group's creates material challenges in planning future investment and operations. The
production and field operations, and the ongoing instability is disrupting the Group is limiting its operational activities to minimise risk to its staff and
Group's development and operational planning for its assets. contractors, and to limit its financial exposure.
Climate change
Any near and medium-term continued warming of the Planet can have potentially The Group's plans include: assessing, reducing and/or mitigating its emissions
increasing negative social, economic and environmental consequences, in its operations; and identifying climate change-related risks and assessing
generally, globally and regionally, and specifically in relation to the Group. the degree to which they can affect its business, including financial
The potential impacts include: loss of market; and increased costs of implications. The HSE Committee, which was established in 2020, is
operations through increasing regulatory oversight and controls, including specifically tasked with overseeing measuring, benchmarking and mitigating the
potential effective or actual loss of licences to operate. As a diligent Group's environmental and climate impact, which will be reported on in future
operator aware of and responsive to its good stewardship responsibilities, the periods. At this stage, the Group does not consider climate change to have any
Group not only needs to monitor and modify its business plans and operations material implications on the Group's financial statements, including
to react to changes, but also to ensure its environmental footprint is as accounting estimates.
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 nature, conducts activities which can cause The Group maintains QHSE policies and requires that management, staff and
health, safety, environmental and security incidents. Serious incidents can contractors adhere to these policies. The policies ensure that the Group meets
not only have a financial impact but can also damage the Group's reputation Ukrainian legislative standards in full and achieves international standards
and the opportunity to undertake further projects. The military conflict in to the maximum extent possible. As a consequence of the COVID-19 pandemic the
Ukraine poses significant risks to field operations, by way of potential Group has implemented processes and controls intended to ensure protection of
threat to the lives of employees and contractors, and damage to equipment and all our stakeholders and minimise any disruption to our business. As a
infrastructure. 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 are generally associated with the oil and The Group has well qualified and experienced technical management staff to
gas industry. For example, the Group's ability to pursue and develop its plan and supervise operational activities. In addition, the Group engages with
projects and undertake development programmes depends on a number of suitably qualified local and international geological, geophysical and
uncertainties, including the availability of capital, seasonal engineering experts and contractors to supplement and broaden the pool of
conditions, regulatory approvals, gas, oil, condensate and LPG prices, expertise available to the Group. Detailed planning of development activities
development costs and drilling success. As a result of these uncertainties, it is undertaken with the aim of managing the inherent risks associated with oil
is unknown whether potential drilling locations identified on proposed and gas exploration and production, as well as ensuring that appropriate
projects will ever be drilled or whether these or any other potential drilling equipment and personnel are available for the operations, and that local
locations will be able to produce gas, oil or condensate. In addition, contractors are appropriately supervised.
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 are generally characterised by In recent years, the Group has engaged external technical consultants to
declining production rates which vary depending upon reservoir characteristics undertake a comprehensive review and re-evaluation study of the MEX-GOL and SV
and other factors. Future production of the Group's gas and condensate fields in order to gain an improved understanding of the geological aspects of
reserves, and therefore the Group's cash flow and income, are highly dependent the fields and reservoir engineering, drilling and completion techniques, and
on the Group's success in operating existing producing wells, drilling new the results of this study and further planned technical work are being used by
production wells and efficiently developing and exploiting any reserves, and the Group in the future development of these fields. The Group has established
finding or acquiring additional reserves. The Group may not be able to an ongoing relationship with such external technical consultants to ensure
develop, find or acquire reserves at acceptable costs. The experience gained that technical management and planning is of a high quality in respect of all
from drilling undertaken to date highlights such risks as the Group targets development activities on the Group's fields.
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 of the Group's gas and condensate fields The Group's technical management staff, in consultation with its external
in Ukraine is susceptible to appraisal, development and operational risk. This technical consultants, carefully plan and supervise development and
could include, but is not restricted to, delays in the delivery of equipment operational activities with the aim of managing the risks associated with the
in Ukraine, failure of key equipment, lower than expected production from further development of the Group's fields in Ukraine. This includes detailed
wells that are currently producing, or new wells that are brought on-stream, review and consideration of available subsurface data, utilisation of modern
problematic wells and complex geology which is difficult to drill or geological software, and utilisation of engineering and completion techniques
interpret. The generation of significant operational cash is dependent on the developed for the fields. With regards to operational activities, the Group
successful delivery and completion of the development and operation of the ensures that appropriate equipment and personnel are available for the
fields. The military conflict in Ukraine is impacting planning and operations, and that operational contractors are appropriately supervised. In
implementation of development and operations at the Group's fields. addition, the Group performs a review of indicators of impairment 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 reservoirs in the Group's fields, the The utilisation of detailed sub-surface analysis, careful well planning and
technical difficulty of drilling or re-entering wells in the Group's fields is engineering design in designing work programmes, along with appropriate
high, and this and the equipment limitations within Ukraine, can result in procurement procedures and competent on-site management, aims to minimise
unsuccessful or lower than expected outcomes for wells. these risks.
Maintenance of facilities
There is a risk that production or transportation facilities can fail due to The Group's facilities are operated and maintained at standards above the
non-adequate maintenance, control or poor performance of the Group's Ukrainian minimum legal requirements. Operations staff are experienced and
suppliers. 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 funds are available to meet the Group's The Group maintains adequate cash reserves and closely monitors forecasted and
development obligations to commercialise the Group's oil and gas assets. Since actual cash flow, as well as short and longer-term funding requirements. The
a significant proportion of the future capital requirements of the Group is Group aims to maintain the significant majority of its cash resources outside
expected to be derived from operational cash generated from production, Ukraine (being 77% as at 24 June 2022). The Group does not currently have any
including from wells yet to be drilled, there is a risk that in the longer loans outstanding, internal financial projections are regularly made based on
term insufficient operational cash is generated, or that additional funding, the latest estimates available, and various scenarios are run to assess the
should the need arise, cannot be secured. The military conflict in Ukraine has robustness of the Group's liquidity. However, as the risk to future capital
disrupted production operations at the Group's fields, and consequently funding is inherent in the oil and gas exploration and development industry
reduced anticipated cash flows from those fields, and this has increased the and reliant in part on future development success, it is difficult for the
risk regarding sufficiency of capital for development. In addition, the Group to take any other measures to further mitigate this risk, other than
conflict may disrupt the sales market for hydrocarbons that are produced. tailoring its development activities to its available capital funding from
Currently, however, hydrocarbon prices are very high, which is ameliorating time to time.
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, an emerging market, where certain inappropriate The Group maintains anti-bribery and corruption policies in relation to all
business practices may, from time to time occur, such as corrupt business aspects of its business, and ensures that clear authority levels and robust
practices, bribery, appropriation of property and fraud, all of which can lead approval processes are in place, with stringent controls over cash management
to financial loss. and the tendering 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 from the sale of its Ukrainian gas, The Group sells a proportion of Its hydrocarbon production through offtake
condensate and LPG production. These revenues are subject to commodity price arrangements, which include pricing formulae so as to ensure that it achieves
volatility and political influence. A prolonged period of low gas, condensate market prices for its products, as well utilising the electronic market
and LPG prices may impact the Group's ability to maintain its long-term platforms in Ukraine to achieve market prices for its remaining products.
investment programme with a consequent effect on its growth rate, which in However, hydrocarbon prices in Ukraine are implicitly linked to world
turn may impact the Company's share price or any shareholder returns. Lower hydrocarbon prices and so the Group is subject to external price trends. In
gas, condensate and LPG prices may not only decrease the Group's revenues per January 2022, the Ukrainian Government imposed temporary partial gas price
unit, but may also reduce the amount of gas, condensate and LPG which the regulations until 30 April 2022, designed to support the production of certain
Group can produce economically, as would increases in costs associated with designated food products. Whilst an unhelpful interference in the functioning
hydrocarbon production, such as subsoil taxes and royalties. The overall of the deregulated gas supply market in Ukraine, in its stated form and
economics of the Group's key assets (being the net present value of the future duration, this temporary scheme is not a material risk to the Company and its
cash flows from its Ukrainian projects) are far more sensitive to long term cash generation, and has now expired.
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, the 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 Ukrainian Hryvnia significantly devalued The Group's sales proceeds are received in Ukrainian Hryvnia, and the majority
against major world currencies, including the US Dollar, where it has fallen of the capital expenditure costs for the current investment programme will be
from UAH8.3/$1.00 on 1 January 2014 to UAH27.3/$1.00 on 31 December 2021. This incurred in Ukrainian Hryvnia, thus the currency of revenue and costs are
devaluation has been a significant contributor to the imposition of banking largely matched. In light of the previous devaluation and volatility of the
restrictions by the National Bank of Ukraine over recent years. In addition, Ukrainian Hryvnia against major world currencies, and since the Ukrainian
the geopolitical events in Ukraine over recent years and the current military Hryvnia does not benefit from the range of currency hedging instruments which
conflict in Ukraine are likely to continue to impact the valuation of the are available in more developed economies, the Group has adopted a policy
Ukrainian Hryvnia against major world currencies. Further devaluation of the that, where possible, funds not required for use in Ukraine be retained on
Ukrainian Hryvnia against the US Dollar will affect the carrying value of the deposit in the United Kingdom and Europe, principally in US Dollars.
Group's assets.
Counterparty and credit risk
The challenging political and economic environment in Ukraine and current The Group monitors the financial position and credit quality of its
military conflict means that businesses can be subject to significant contractual counterparties and seeks to manage the risk associated with
financial strain, which can mean that the Group is exposed to increased counterparties by contracting with creditworthy contractors and customers.
counterparty risk if counterparties fail or default in their contractual Hydrocarbon production is sold on terms that limit supply credit and/or title
obligations to the Group, including in relation to the sale of its hydrocarbon transfer until payment is received.
production, resulting in financial loss to the Group.
Financial markets and economic outlook
The performance of the Group is influenced by global economic conditions and, The Group's sales proceeds are received in Ukrainian Hryvnia and a significant
in particular, the conditions prevailing in the United Kingdom and Ukraine. proportion of investment expenditure is made in Ukrainian Hryvnia, which
The economies in these regions have been subject to volatile pressures in minimises risks related to foreign exchange volatility. However, hydrocarbon
recent periods, with the global economy having experienced a long period of prices in Ukraine are implicitly linked to world hydrocarbon prices and so the
difficulty, the COVID pandemic, and more particularly the current military Group is subject to external price movements. The Group holds a significant
conflict in Ukraine. This has led to extreme foreign exchange movements in proportion of its cash reserves in the United Kingdom and Europe, mostly in US
the Ukrainian Hryvnia, high inflation and interest rates, and increased credit Dollars, with reputable financial institutions. The financial status of
risk relating to the Group's key counterparties. counterparties is carefully monitored to manage 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 where the right to production can be challenged The Group ensures compliance with commitments and regulations relating to its
by State and non-State parties. During 2010, this manifested itself in the production licences through Group procedures and controls or, where this is
form of a Ministry Order instructing the Group to suspend all operations and not immediately feasible for practical or logistical considerations, seeks to
production from its MEX-GOL and SV production licences, which was not resolved enter into dialogue with the relevant Government bodies with a view to
until mid-2011. In 2013, new rules relating to the updating of production agreeing a reasonable time frame for achieving compliance or an alternative,
licences led to further challenges being raised by the Ukrainian authorities mutually agreeable course of action. Work programmes are designed to ensure
to the production licences held by independent oil and gas producers in that all licence obligations are met and continual interaction with Government
Ukraine, including the Group. In March 2019, a Ministry Order was issued bodies is maintained in relation to licence obligations and commitments.
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 skilled management as well as technical The Group periodically reviews the compensation and contractual terms of its
expertise and administrative staff. The loss of service of critical members staff. In addition, the Group has developed relationships with a number of
from the Group's team could have an adverse effect on the business. The technical and other professional experts and advisers, who are used to provide
current military conflict in Ukraine has meant that, as far as possible, the specialist services as required. As a result of the military conflict, only
Group's staff have needed to move away from areas of conflict and work essential staff are located at site, and all other staff are working remotely,
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
2021 2020
Note $000 $000
Revenue 5 121,353 47,251
Cost of sales 6 (47,422) (31,511)
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
2021 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:
1,611 (15,050)
Equity - foreign currency translation
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
2021 2020
Note $000 $000
Assets
Non-current assets
Property, plant and equipment 18 87,418 65,662
Intangible assets 19 12,340 12,232
Right-of-use assets 20 1,008 512
Corporation tax receivable - 9
Deferred tax asset 25 361 167
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
Retained earnings/(Accumulated losses) 249,740 (356,641)
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 Share Merger Capital contributions reserve Foreign exchange reserve* Retained earnings/(Accumulated losses) Total equity
up share capital premium reserve
account
$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 - - - - (15,050) - (15,050)
- exchange differences
- re-measurements of post-employment benefit obligations - - - - - (73) (73)
Total comprehensive income/(expense) - - - - (15,050) 3,115 (11,935)
As at 31 December 2020 28,115 555,090 (3,204) 7,477 (105,222) (356,641) 125,615
Called Share Merger Capital contributions reserve Foreign exchange reserve* Retained earnings/(Accumulated losses) Total equity
up share capital premium reserve
account
$000 $000 $000 $000 $000 $000 $000
As at 1 January 2021 28,115 555,090 (3,204) 7,477 (105,222) (356,641) 125,615
Profit for the year - - - - - 51,119 51,119
Other comprehensive income - - - - 1,611 - 1,611
- exchange differences
- 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 2021 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
2021 2020
Note $000 $000
Operating activities
Cash generated from operations 30 77,646 23,764
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 (26,292) (12,749)
equipment
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 and other intangible assets (539) (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 consolidated 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 2023)
(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 2021 were $1:UAH27.3 (2020: $1:UAH28.3), $1:£0.741 (2020:
$1:£ 0.736), $1:€0.883 (2020: $1:€0.814), and the average rates for the
year were $1:UAH27.3 (2020: $1:UAH27.0), $1:£0.727 (2020: $1:£ 0.779),
$1:€0.845 (2020: $1:€0.876)
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 $10,912,000 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.
Ukraine United 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.
Ukraine United Total
Kingdom
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
26 3
Tax compliance services
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) 119
108 1,856
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: 19.00%) 12,652 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 from 1 April 2023 1,168 -
Disallowed expenses and non-taxable income 12,038 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 Development and Production assets Oil and Gas Exploration and Evaluation Assets Other fixed Total Oil and Gas Development and Production assets Oil and Gas Exploration and Evaluation Assets Other fixed assets Total
Ukraine assets Ukraine
Group $000 $000 $000 $000 $000 $000 $000 $000
Cost
At the beginning of the year 135,966 2,362 2,217 140,545 143,127 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 differences 4,898 (85) 77 4,890 (24,331) (422) (526) (25,279)
At the end of the year 163,170 10,110 2,631 175,911 135,966 2,362 2,217 140,545
Accumulated depreciation and impairment
At the beginning of the year 73,816 - 1,067 74,883 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 differences 2,735 - 41 2,776 (13,109) - (169) (13,278)
At the end of the year 87,070 - 1,423 88,493 73,816 - 1,067 74,883
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 reserve rights Exploration and evaluation intangible assets Other intangible assets Total Mineral reserve rights Exploration and evaluation intangible assets Other intangible assets Total
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 139 168
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) (358)
Interest expense (included in finance cost) (169) (126)
Expense relating to short-term leases (included in cost of sales and (142) (139)
administrative expenses)
Expense relating to variable lease payments not included in lease liabilities (8,765) (3,101)
(included in cost of sales)
Expense relating to lease payments for land under wells not included in lease (64) (71)
liabilities (included in cost of sales)
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 subsidiary undertakings Loans to subsidiary 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 2021 31 December 2020
$000 $000
Discount rate (increase)/decrease by 1% (641)/676 (810)/867
Change in gas price increase/(decrease) by 10% 3,388/(3,411) 2,879/(2,880)
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 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total
(12-months ECL) (lifetime ECL for SICR) (lifetime ECL for credit (12-months ECL) (lifetime ECL for SICR) (lifetime ECL for credit 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 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Totall
(12-months ECL) (lifetime ECL for SICR) (lifetime ECL for credit (12-months ECL) (lifetime ECL for SICR) (lifetime ECL for credit 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 of Country of operation Principal activity % of shares held
incorporation
Regal Petroleum Corporation Limited 3(rd) Floor, Charter Place, 23-27 Seaton Place, St Helier, Jersey, JE4 0WH Jersey Ukraine Oil & Natural Gas Extraction 100%
Regal Group Services Limited 16 Old Queen Street, London, SW1H 9HP United Kingdom United Kingdom Service Company 100%
Regal Petroleum (Jersey) Limited 3(rd) Floor, Charter Place, 23-27 Seaton Place, St Helier, Jersey, JE4 0WH Jersey United Kingdom Holding Company 100%
Regal Petroleum 162 Shevchenko Str., Yakhnyky Village, Lokhvytsya District, Poltava Region, Ukraine Ukraine Service Company 100%
37212
Corporation (Ukraine) Limited
LLC Prom-Enerho Produkt 3 Klemanska Str., Kiev, 02081 Ukraine Ukraine Oil & Natural Gas Extraction 100%
LLC Arkona Gas-Energy 162 Shevchenko Str., Yakhnyky Village, Lokhvytsya District, Poltava Region, Ukraine Ukraine Exploration and Evaluation for Oil and Natural Gas 100%
37212
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 amount Life-time ECL Carrying amount Basis
$000 $000 $000
Trade receivables from related parties 5% 5,015 (7) 5,008 financial position of related party
Trade receivables - credit impaired 100% 132 (132) - number of days the asset past due
Trade receivables - other 0.21% 161 - 161 historical credit losses experienced
Other financial receivables 0.48% 200 (1) 199 individual default rates
Total trade and other receivables for which individual approach for ECL is 5,508 (140) 5,368
used
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 amount Life-time ECL Carrying amount Basis
$000 $000 $000
Trade receivables from related parties 5% 1,804 (3) 1,801 financial position of related party
Trade receivables - credit impaired 100% 127 (127) - number of days the asset past due
Trade receivables - other 0.21% 5 - 5 historical credit losses experienced
Other financial receivables 0.42% 1,053 (3) 1,050 individual default rates
Total trade and other receivables for which individual approach for ECL is 2,989 (133) 2,856
used
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 140 133
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 7,283 - -
12,323
87,780 60,993 63,299 38,619
Other short-term investments
Demand deposits and term deposits with maturity of more than 3 months but less 4,762 - - -
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:
Cash at bank and on hand Demand deposits and term deposits with maturity less than 3 months Demand deposits and term deposits with maturity more than 3 months Total cash and cash equivalents and other short-term 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
Cash at bank Demand deposits and term deposits with maturity less than 3 months Demand deposits and term deposits with maturity more than 3 months Total cash and cash equivalents and other short-term investments
and on hand
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 2021 31 December 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 2021 31 December 2020
$000 $000
Discount rate (increase)/decrease by 1% (723)/860 (948)/1,143
Change in average cost of well restoration increase/ (decrease) by 10% 353/(353) 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 £50,000.
The main Corporation Tax rate is increased to 25% and will apply to companies
with profits in excess of £250,000. 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
(Increase)/decrease in receivables (4,463) 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
97,910 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 2021 31 December 2020
$000 $000
Increase/(decrease) by 10% 23/(23) 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 2021 On demand and less than 1 month From 1 to 3 months From 3 to 12 months From 12 months to 5 years More than 5 years Total
$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 2020 On demand and less than 1 month From 1 to 3 months From 3 to 12 months From 12 months to 5 years More than 5 years Total
$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 interest payments 1,177 2,265 134 2,860 539 6,975
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:
Currency Total Floating rate financial assets Fixed rate financial assets Total Floating rate financial assets Fixed rate financial assets
2021 2021 2021 2020 2020 2020
$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:
2021 2020
$000 $000
Group
In one year or less 6,148 3,576
6,148 3,576
2021 2020
$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:
2021 2020
$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 FZGZVZRGGZZZRecent news on Enwell Energy
See all newsREG - Enwell Energy PLC - Quarterly Operations Update
AnnouncementREG - Enwell Energy PLC - Reinstatement of Suspension of VAS Licence
AnnouncementREG - Enwell Energy PLC - Board Changes
AnnouncementREG - Enwell Energy PLC - Re-suspensions of MEX-GOL and SV Licences
AnnouncementREG - Enwell Energy PLC - Quarterly Operations Update
Announcement