Company number: 5966431
Caspian Sunrise plc
Annual report and financial statements
for the year ended
31 December 2017
Contents
Strategic Report
Chairman’s Statement
Directors’ report
Remuneration Committee Report
Report on Corporate Governance
Independent auditors’ report to the members of Caspian Sunrise plc
Consolidated Statement of Profit or Loss
Consolidated Statement of Other Comprehensive Income
Consolidated Statement of Changes in Equity
Parent Company Statement of Changes in Equity
Consolidated Statement of Financial Position
Parent Company Statement of Financial Position
Consolidated and Parent Company Statement of Cash Flows
Notes to the Financial Statements
4
8
15
17
19
21
25
26
27
28
29
30
31
32
2 Directors
Mr C Carver (Executive Chairman/Chief Financial Officer)
Mr K Oraziman (Chief Executive Officer)
Lord Limerick (Non Executive Director)
Company Secretary
Mr C Carver
Registered Office and Business address
5 New Street Square, London EC4A 3TW
Company Number 5966431
Nominated Adviser and Broker
WH Ireland Limited
Solicitors
Fladgate LLP
16 Great Queen Street,
London,
WC2B 5DG
Auditors
BDO LLP,
55 Baker Street,
London,
W1U 7EU
Share Register
Capital Registrars
Northern House,
Woodsome Park,
Fenay Bridge,
Huddersfield,
HD8 0LA
Principal Banker
HSBC Bank London
1-3 Bishopsgate,
London,
EC2N 3AQ
3
Strategic Report
The Directors present their strategic report on the Group for the year ended 31 December 2017.
The Company’s name was changed from Roxi Petroleum to Caspian Sunrise following shareholder approval of the Baverstock
Merger on 24 March 2017.
Introduction
This strategic report comprises: the Group's objectives; the strategy; the business model; and a review of the Group's business
using key performance indicators.
The Chairman's statement, which also forms the main part of the strategic review, contains a review of the development and
performance of the Group’s business during the financial year, and the position of the Group's business at the end of that year.
Additionally, a summary of the principal risks and uncertainties facing the business is set out in this strategic report immediately
before the Chairman's statement.
Objectives
The Group's objective is to create shareholder value from the development of oil and gas projects and associated activities.
The Group has a number of secondary objectives, including promoting the highest level of health and safety standards, developing
our staff to their highest potential and being a good corporate citizen in our chosen countries of operations.
Strategy
The Group's long-term strategy is to build an attractive portfolio of oil and gas exploration and production assets in Central Asia, and
in particular Kazakhstan where the board has the greatest experience. Additionally, the Group will seek to exploit associated
opportunities where the board believes it can add significant value and contribute towards the success of the Group as a whole.
At present the Group’s principal asset is its interest in BNG, which the Group will continue to develop. The proposed acquisition of
3A Best Group, as announced on 31 January 2018, for a consideration of $24 million represents our first acquisition since 2008.
Business model
BNG
On 27 October 2017, we announced that the licence at BNG which expires on 30 June 2018, had received approval from the
Kazakh authorities for renewal effective 1 July 2018 for an additional six years on an appraisal basis with the opportunity from that
date to apply to convert individual structures to full production status at the Company's timing. This is an approach that allows
income from oil sales based on world prices for the structures that are clearly commercial, but also provides the ability to develop
other structures for an additional six years.
For structures ready to move to full production status, such as the shallow MJF structure, we would expect to be able to double the
net income per barrel from sales under a full production licence. For structures not yet ready to move to full production status, such
as the deeper structures where we have yet to demonstrate the commerciality of each structure by the operation of several
commercial wells, we would be able to continue to explore and test. Otherwise we may have lost these areas had the whole BNG
licence moved straightaway to a full production basis.
The first structure to move to full production licence will be the MJF structure. The actual start date for the move to a full production
licence will depend on the speed with which the licensing authorities process our application and the speed with which new
regulations abolishing “production bonus payments” are enacted by the Kazakh authorities.
The pace at which we plan to drill further production wells on the MJF structure will depend on the Group’s finances at that time.
However, with each successful well on the MJF structure typically covering its drilling costs within a 90-day period, it is in the
Group’s interest to infill drill the planned 14 additional wells as soon as practical.
We expect Airshagyl to be the first of the deep structures to move to full production status once we have three deep wells flowing for
which we are targeting 2019. The next structure to be moved to a full production licence will be the Yelemes structure, again after at
least three deep wells on the structure flow. This is targeted for 2020.
Growth by acquisition
The Group will consider acquiring additional assets where the board believes they would increase shareholder value or provide
funding or infrastructure to develop the Group’s principal asset BNG. The Directors believe the Group is exceptionally well placed
through its local presence to increase shareholder value by opportunistic acquisitions of undervalued oil and gas assets.
3ABest Group
In January 2018, the Company announced the intention to acquire 100 per cent of the shares of 3ABest Group JSC, a company that
owns a 1,347 sq km Contract Area located close to the Caspian port city of Aktau in the Mangystau Province of Kazakhstan.
The indicated purchase price is $24 million and would be satisfied by the issue of approximately 148 million new Caspian Sunrise
shares at the proposed price of 12p per share. Caspian Sunrise would, by completing the acquisition of 3A Best Group, become
responsible for the outstanding work programme commitment represented by the drilling of one well to a depth of 3,000 meters at
an estimated cost of up to $2 million. 3A Best Group is owned by members of the existing concert party, including the Company's
CEO Kuat Oraziman and the former CFO Kairat Satylganov.
4
Strategic Report (continued)
The purchase of 3A Best Group is subject to further due diligence, the entering into of a definitive binding agreement, compliance
with the AIM Rules for related party transactions, the UK Takeover Code and the approval of the Company's Independent Directors.
Key performance indicators
The Non-Financial Key Performance Indicators are:
•
•
•
Operational (wells drilled at end of year) 2017: 16 (2016: 13)
Typical production (oil production at 31 December 2017) 2,208 bopd (2016: 1,300 bopd)
Reserves (mmbls) at 31 December 2017 P1 17.8 mmbls P2 28.8 mmbls (2016: P1 18.3 mmbls & P2 29.3) mmbls
Following the completion of the Baverstock Merger the Company now owns 99% interests in the BNG and Munaily Contract Areas.
Details of the wells drilled in the period under review are set out in the Chairman’s statement.
The Financial Key Performance Indicators are:
•
•
•
Revenue: $7.6 million (2016: $1.6 million)
Cash at bank: $1.5 million (2016: $0.4 million)
Total assets: $81.7 million (2016: $85.2 million)
Details of these Key Performance Indicators are provided on pages 25 and 29.
Reserves
Details of the Group's assets and reserves are set out in the Chairman's statement.
Financial
Cashflow from oil sales from our shallow wells even at domestic prices covers the Group’s General & Administrative costs and day
to day operational costs at its shallow structures. Under a full production licence based on current world prices we would expect
cash generated per barrel to at least double.
Once the three deep wells already drilled start to produce oil, their contributions will assist in funding further shallow and deep wells.
Each shallow well typically costs between $1.5 million and $2.0 million to drill and test and each deep well typically costs
approximately $10 million to drill and test. These estimates do not include the costs of additional or remedial work, such as that
taking place at the existing three deep wells A5, 801 & A6. Drilling wells at a faster rate than could be funded from oil sales, would
require additional funding, as would any acquisitions to be funded by cash.
As the deep wells come into production at BNG there will also be a requirement for investment in additional infrastructure to store,
treat and transport the oil. Our current estimate of such costs are approximately $40 million, much of which may be debt financed.
Other than advances provided by local oil traders the Group is essentially debt free.
The principal and other risks and uncertainties facing the business
The Company and the Group are subject to various risks relating to political, economic, legal, social, industry, business and financial
conditions. The following risk factors, which are not exhaustive, are particularly relevant to the Company and the Group's business
activities:
Financing risks
Despite the continued low price of rigs and crew, exploring for oil is still an expensive business.
However, the relatively low value of the Kazakh Tenge compared to the US$ reduces the costs of exploration and production as
most staff costs and some equipment costs are denominated in Kazakh Tenge. Even with domestic pricing cash from the sale of oil
from our shallow wells comfortably covers the day to day costs of operating the shallow wells and the Group’s General &
Administrative expenditure. Under world prices, which would apply once the planned production licence application is approved, the
Group forecasts indicate sufficient working capital is available to meet expenditures as a whole from production, including
completion of its planned drilling program.
In the event that the award of a production licence is delayed, the Group’s total cash flow from production is forecast to exceed the
cash flows for operating expenditure and drilling over the period as a whole. However, the Group would require additional working
capital during the period to meet certain payments under its licences and drilling and well repair expenditures owing to the timing of
such payments. The forecasts in this scenario include an anticipated increase in oil trader funding through advances for future
production, together with funding from a significant shareholder to meet its working capital requirements. The Group’s major
shareholder has provided a written undertaking to provide financial support as is required, which the Board are satisfied will be
available, given the history of financial support and having considered the shareholder’s ability to provide such funding.
Additional funding, if required for new wells, infrastructure and assets to accelerate development, is expected to be available from a
number of sources, including debt funding for much of the infrastructure spending, advances from local oil traders from the sale of
oil yet to be produced, industry funding in the form of partnerships with larger industry players, further support from existing
shareholders and if appropriate equity funding from financial institutions.
5
Strategic Report (continued)
The Group enters into contracts with oil traders to forward sell its production and receives advances as part of its operating
activities. The continued availability of such arrangements are important to working capital and, in the event the Group was unable
to continue to access these arrangements additional funding would be required. The risk is considered reduced given the growth in
production and oil price environment and is mitigated by maintaining strong relationships with the oil traders.
Refer to note 1.1 for further details on funding and going concern.
Exploration risk
Despite our successes with our shallow wells there is no assurance that the Group's future exploration activities will continue to be
successful. In particular the high pressure and high temperature encountered when drilling below the salt layer has proved
extremely difficult to control to allow prolonged flow tests to commence.
The Group seeks to reduce this risk by acquiring and evaluating 3D seismic information before committing to drill exploration and
appraisal wells. The Company also seeks to engage suitably skilled personnel either as employees or contractors to undertake
detailed assessments of the areas under exploration.
Environmental and other regulatory requirements
Existing and possible future environmental legislation, regulations and actions could cause additional expense, capital expenditures,
restrictions and delays in the activities of the Group, the extent of which cannot be predicted.
Before exploration and production can commence the Group must obtain regulatory approval and there is no assurance that such
approvals will be obtained. No assurance can be given that new rules and regulations will not be enacted or existing legislations will
not be applied in a manner, which could limit or curtail the Group's activities.
The Group employs staff experienced in the requirements of the Kazakh environmental authorities and seeks through their
experience to mitigate the risk of non-compliance with accepted best practice. The Group received confirmation from the Kazakh
authorities in October 2017 that its licence for BNG would be extended for 6 years effective 1 July 2018, as detailed above. The
extension remains subject to agreeing a new work program which has been submitted.
Operational risks
It is the nature of oil and gas operations that each project is long term. It can be many years before the exploration and evaluation
expenditures incurred are proven to be viable and can progress to reach commercial production.
To control these risks the Board arranges for the provision of technical support, directly or through appointed agents and also as
appropriate commissions technical research and feasibility studies both prior to entering into these commitments and subsequently
in the life of these projects.
In addition, operational risks include equipment failure, well blowouts, pollution, fire and the consequences of bad weather. Where
the Group is project operator, it takes an increased responsibility for ensuring that the Group is compliant with all relevant
legislation.
The Group endeavours to use competent people with appropriate skills to manage such risks at the appropriate levels within the
Group structure. Additionally, where appropriate the Group engages expert contractors.
Political risk
The Group operates primarily in Kazakhstan. The nature of the Group's investments requires the commitment of significant funding
to facilitate exploration and evaluation expenditure in Kazakhstan.
While the Group enjoys very good working relationships with the Kazakh regulatory authorities there can be no assurances that the
laws and regulations and their interpretation will not change in future periods and that, as a result, the Group’s activities would be
affected.
However, the Directors believe with the exceptionally high proportion of Kazakh nationals in key positions and the Group’s
prolonged experience of operating in Kazakhstan, it is as well placed as any internationally listed company operating in Kazakhstan
to avoid inadvertently falling foul of local regulations or customs.
Pricing risk
With the Group now producing oil its financial performance could be adversely affected by a fall in the price of oil.
World prices have increased in the period under review and subsequently. The bulk of the oil sold is from the BNG Contract Area
and under the terms of the current licence must be sold at domestic prices, which in recent months have typically been approaching
US$20 per barrel.
Under a full production licence oil sold will be based on world prices, currently in the region of $70 per barrel, and we estimate the
net price (after costs of production, treatment, storage & transportation and applicable taxes) would be approximately $40 per barrel.
6
Strategic Report (continued)
Exchange rate risk
The Group's income is denominated in US$ and its expenditure is denominated in US$ and Kazakh Tenge.
In the year under review the exchange rate movement was limited. However, in previous years the Tenge has suffered serious
depreciation against the US$, which has materially benefitted the Group. In the event the Kazakh Tenge is devalued further against
the US$ the Company benefits as income is unaffected but Tenge denominated costs fall when reported in US$.
However, the Group's presentational currency is the US$ such that the BNG assets recorded in Kazakh Tenge in its subsidiary’s
accounts are retranslated in to US$ for presentational purposes. Between 1 January 2015, and 31 December 2017 the Kazakh
Tenge devalued against the US$ from US$1:KZT181 to US$1:KZT332 resulting in an accounting reduction in the US$ carrying
value of our unproven oil and gas assets. The US$69.7million carrying value at 2017 would have been approximately US$128
million in the absence of such a devaluation.
Given the relative strengths of the US$ and the Kazakh Tenge the Group has decided not to seek to hedge this foreign currency
exposure.
7
Chairman's Statement
Introduction
In the year under review we reported progress in a number of areas. However, to date in 2018 progress has been slower than
expected.
On 1 June 2017, we completed the long-heralded merger with Baverstock resulting in the ownership of our flagship BNG asset
increasing from 58.41% to 99.0%. We also changed the name of the Company from Roxi Petroleum PLC to Caspian Sunrise PLC.
In October 2017, we announced that we have successfully extended our licence at BNG with effect from the planned renewal on
1 July 2018 to allow both continued appraisal for up to 6 years across the Contract Area and the move on a structure by structure
basis from appraisal status to full production licence, which would currently result in a doubling of the price received for oil produced
from such structures.
Operationally we drilled 3 shallow wells at the MJF structure (144,145 &146) a further well on a possible new structure (808), re-
entered another shallow well and got our first deep well A5 to flow long enough to start a 90-day flow test, in November 2017.
Disappointingly, weather delays and repeated equipment failures have limited progress in bringing our three deep wells into
continuous production to date in 2018.
A review of 2017
Baverstock merger
The major non-operational success of the past few years was in June 2017, with the completion of the merger with Swiss registered
Baverstock GmbH (the "Baverstock Merger").
Before the merger we owned 58.41% of the BNG and Munaily assets, which were acquired as part of the 2008 acquisition of
Eragon Petroleum Limited (the "Eragon Acquisition"). The remaining 41.59% was owned by four parties including Kuat Oraziman,
our CEO.
Under the terms of the Eragon Acquisition we were required to fund the first $100 million of the work programme costs for the
Eragon Assets (BNG, Galaz and Munaily) acquired under the Eragon Acquisition. We reached this $100 million (based on historic
exchange rates prior to devaluation) level in Q1 2015, from which date we had an obligation to fund 58.41% of further work
programme costs with Baverstock, the owner of the remaining interest in Eragon, having the obligation to fund the 41.59% balance.
As a company with shares quoted on AIM we had a far greater ability to meet these commitments than did Baverstock, which
comprises four separate quota-holders.
The disposal of Galaz & Company LLP for a headline price of $100 million in 2015 provided approximately $34 million of funding for
Caspian Sunrise and Baverstock, as we were both proportionally invested in Galaz & Company LLP. However, once the net
proceeds of sale had been fully utilised there was the risk that the pace of the development of BNG could be constrained by the
ability of Baverstock to fund its share.
A goal of the merger was to break down the dominant Baverstock shareholding into its four constituent parts. Kuat Oraziman and
Dosbol Zholdybayev have already extracted their shares from Baverstock, whose interest in Caspian Sunrise is now limited to only
the shares owned by Dae Han New Pharma Limited and Cody Star, two South Korean entities.
Licence renewal
In October 2017, we announced the early renewal of the licence for the BNG Contract Area which expires at the end of June 2018.
The existing licence is a two-year appraisal licence during which we must adhere to agreed work programme activities and any oil
produced from testing is treated as incidental to our main purpose of appraisal with the oil being sold at domestic prices, which have
ranged between $16 and $20 per barrel during the period under review.
Had we moved the whole Contract Area to a full production licence from July 2018, we would have lost the ability for further
appraisal activities on a large part of the BNG Contract Area, particularly on some of our unexplored deep prospects. This flows
from the requirement to have explored an area before being able to produce from it under a full production licence.
The terms of the licence from July 2018, subject to agreeing a work program with the Kazakh authorities, will be as a six-year
continuation of the current appraisal licence across the full area of the BNG Contract Area. Additionally, we will be able to move
structure by structure to a 25 year full production licence, where the majority of oil sold is by reference to world prices.
After deductions for tax, storage treatment and transport the net price expected under a full production licence is currently expected
to be some $40 per barrel.
Operational activity
During 2017 we drilled three shallow wells on the MJF structure (144, 145 & 146) and re-entered Soviet-era Shallow Well 54 on the
original South Yelemes structure.
We also worked extensively on our existing deep wells (A5, 801 & A6) to achieve continuous flow rates to facilitate testing and
reserve estimation.
8
Chairman's Statement (continued)
Shallow fields
The MJF structure was discovered in 2013 with the drilling of well 143 at the centre of the structure and extends to an area in
excess of 10 sq km (approximately seven times greater than Hyde Park in London).
The first three wells at the MJF structure were drilled between 2013 and 2016 comprising Wells 141, 142 and 143.
Well 144 was drilled to a depth of 2,500 meters. The well has tested without artificial stimulation at a typical flow rate of
approximately 700 bopd using a 7mm choke and with a peak flow rate of 899 bopd.
Well 145 was also drilled to a depth of 2,750 meters. The well has tested without artificial stimulation at a typical flow rate of 327
bopd with a peak rate of 396 bopd.
Wells 142 and 146 have been more difficult to produce from without the introduction of artificial stimulation. This stems from the high
levels of water in the well and signify these wells to be at the outer limits of the MJF structure.
It is not yet clear whether well 146 will be capable of production.
Well 142 was drilled to a depth of 2,500 meters and appears to have a base level of production of approximately 150 bopd and the
possibility of producing up to 300 bopd. If production at Well 146 is possible we believe it would be at levels between 150 and 300
bopd.
In aggregate the production expected from the six wells drilled on the MJF structure to date is, on a risked basis, in the region of
2,300 bopd.
At Well 54 on the South Yelemes structure we re-entered the well and tested an interval between 1,961 and 1,971 meters with a
view to establish whether horizontal drilling at this depth across the south Yelemes structure was worthwhile. Based on the results
found we do believe such drilling would likely be commercial and we intend in due course to undertake at least one horizontal drill.
Deep Wells
A5
Deep Well A5 was the first of the deep wells to be drilled and like deep Well A6 has been drilled on the Airshagyl structure.
The well was drilled in 2013 to a depth of 4,432 meters but following issues in drilling was completed on an open-hole basis and
suffered from being blocked with excess drilling fluid and debris from the reservoir flowing back into the under the high pressures
encountered.
After a number of attempts to get the well to flow we decided to rectify the blockage issue with a side tracked drilled from 4,082
meters at an angle of 15 degrees.
We announced in October 2017 that the well had flowed at the rate of 3,500 bopd and that we would move to the formal 90-day flow
test to provide information for reserve quantification purposes.
In the 15 days leading up to the formal flow test the well flowed at some 3,800 bopd using a 10 mm choke. The formal flow test
commenced in November 2017 but on 14 December 2017 we announced that the well had become partially blocked and that after
we reduced the choke size to 4mm, the flowed rate declined to some 1,000 bopd.
As the purpose of the formal flow 90-day test was to maximise reserves we decided to pause the test and clear out the well.
Weather delays in January and February and repeated coil tubing equipment failures resulted in slow process to date in 2018. We
have lost faith in the capacity of coil tubing to resolve the issue at Deep Well A5 and have mobilised a rig to pull out the string of drill
pipes. This is a more expensive although more certain method of removing the blockage, but one that would have been difficult to
carry out in the extreme weather in January and February.
Pressure in the well remains high at 300 bar at the wellhead, which suggests there is still good communication throughout the length
of the well.
801
Deep Well 801 was drilled in 2014 / 15 on the Yelemes structure. The well was drilled to a depth of 5,050 meters and as with Deep
Well A5 proved difficult to drill for reasons of high pressure and temperature under the salt layer. A 80-meter section of pipe became
stuck at depth of 4,700 meters which despite a number of attempts to extract it, remains in the well.
Following the success of the side-track on Deep Well A5 we decided to use the same technique on Deep Well 801 and drill a 450
meter side-track from a depth of 4,501 meters.
After weather delays in January and February work commenced on the side track. At the date of this report we have completed 132
meters of the planned 450 meter side track but expect to increase significantly the pace of drilling so that total depth should be
reached in Q2 2018, following which this well would be placed on a formal 90-day flow test.
9
Chairman's Statement (continued)
A6
Deep Well A6 was drilled on the Airshagyl structure in 2015. The well was drilled to a depth of 4,516 meters but given the
experience gained in drilling the earlier deep wells, the drilling phase proved easier although we encountered issues when drilling
through the salt layer.
We have twice attempted without success to perforate up to a 60-meter section of the 100-meter oil bearing interval, using different
contractors on each occasion.
After further investigation, it appears that both attempts by separate contractors to perforate the well’s casing failed completely and
that there has to date been no penetration of the casing to allow oil to flow. The issue being the extreme pressure in the well and the
reservoir and the consequent need for very powerful explosives.
We now plan to engage a specialist contractor to re-perforate the interval of interest but need to use drill pipes currently in use at
Deep Well 801.
Our Assets
BNG
BNG is by far the most important of our assets. The BNG Contract Area is located in the west of Kazakhstan 40 kilometres
southeast of Tengiz on the edge of the Mangistau Oblast, covering an area of 1,487 square kilometers of which 1,376 square
kilometres has 3D seismic coverage acquired in 2009 and 2010.
In January 2016, we announced that the area of the Contract Area was extended at a cost of US$2 million with the addition of 140.6
square kilometres to the northeast of the current block. The extended BNG Contract Area now covers 1,702 square kilometres.
There have also been areas relinquished to the State totalling 215 square kilometres on which we do not believe there are likely to
be any discoveries of oil.
The BNG Contract Area is similar in size to the area bounded by London’s M25 Motorway. It is a sparsely populated and arid region
highly successful in oil production, being only 40 kilometres from the world-renowned Tengiz field.
BNG is located close to existing oil separation facilities and close to the CPC export pipeline, which provides a relatively low-cost
option to export our oil when the licence terms permit and is expected to significantly reduce the funding required to bring BNG into
full field production. This, together with low lifting costs, is expected to place BNG in the bottom quartile as a low-cost producer.
Munaily
The Munaily field is located in the Atyrau Region approximately 70 kilometres southeast of the town of Kulsary. The field was
discovered in the 1940s and produced from 12 reservoirs in the Cretaceous through to the Triassic. Caspian Sunrise acquired 58.41
per cent interest of the 0.67 square kilometres rehabilitation block in 2008 and funded two wells and one well re-entry.
An agreement with a Chinese company to re-enter up to 24 wells drilled during Soviet times with the Chinese company bearing the
drilling costs and any incremental production being split between us on a 50:50 basis has not proved successful.
We are not currently producing from Munaily and are looking for a buyer for the Munaily Contract Area.
Beibars
In 2007, Caspian acquired a 50 per cent interest in Beibars Munai LLP, which operates the 167 square kilometre Beibars Contract
Area on the Caspian shoreline south of the city of Aktau. While acquiring 3D seismic in 2008, the licence was put under Force
Majeure when the acreage was allocated as a military exercise area (Polygon), by the Ministry of Defence.
We are in the process of formally relinquishing any interest in this asset.
Our Assets
Asset
As at 31 December 2017
As at 31 December 2016
BNG
Munaily
Beibars
Our wells
BNG
Munaily
Beibars
Total
%
99.00
99.00
0.00
%
58.41
58.41
50.00
As at 31 December 2017
15
1
N/A
As at 31 December 2016
12
1
Nil
16
13
Reserves and Resources
In January 2011, BNG engaged Gaffney Cline & Associates ("GCA") to undertake a technical audit of the BNG Contract Area and
subsequently Petroleum Geology Services ("PGS") to undertake depth migration work, based on the 3D seismic work carried out in
2009 and 2010.
10
Chairman's Statement (continued)
The work of GCA resulted in confirming total un-risked resources of 900 million barrels from 37 prospects and leads mapped from
the 3D seismic work undertaken in 2009 and 2010. The report of GCA also confirmed risked resources of 202 million barrels as well
as Most Likely Contingent Resources of 13 million barrels on South Yelemes.
The depth migration work that was carried out by PGS enabled Caspian Sunrise to gain a greater understanding of some of the
deeper prospects yet to be explored. Caspian Sunrise believes the greater potential exists in the pre-salt prospects and has plans to
drill further wells to validate this belief.
In September 2016 Gaffney Cline & Associates assessed the reserves attributable to the BNG shallow structures as set out below.
The reserves attributable to Munaily are taken from balances held by the Kazakh authorities.
BNG
Shallow (P1 mmbls)
Shallow (P2 mmbls)
Deep (P1 mmbls)
Deep (P2 mmbls)
Munaily (P1 mmbls)
Beibars
As at 31 December 2017
(99.0%)
17.8
28.8
0.0
0.0
1.2
N/A
As at 31 December 2016
(58.4%)
18.3
29.3
0.0
0.0
1.2
Nil
The above is based on 100% of each Contract Area.
Operator status
BNG Ltd LLP, of which Caspian Sunrise now owns 99%, has been the operator at BNG since 2011.
Funding
The Group has seen production increase at BNG which has funded continued drilling in 2017 and operating costs.
Even at domestic prices the cash generated from oil sales from our shallow wells covers the Group’s General & Administrative costs
and the drilling costs of two shallow wells at between $1.5 - $2.0 million each. Once the MJF structure moves to a full production
licence that income should be doubled for each barrel of oil produced and production cash flows are forecast to meet the Group’s
cash flow requirements.
In the event that the planned move to full production licence is delayed, additional funding as required due to the timing of drilling
compared to production cash generation and to meet payment obligations under the licences, is expected to be provided through
advances from oil traders for future production and through shareholder support.
The Group’s major shareholder has provided a written undertaking to provide financial support as is required.
Additional funding, if required, for new wells, infrastructure and assets to accelerate development over and above the level included
in the forecasts, is expected to be available from a number of sources, including debt funding for much of the infrastructure
spending, advances from local oil traders from the sale of oil yet to be produced, industry funding in the form of partnerships with
larger industry players, further support from existing shareholders and if appropriate, equity funding from financial institutions.
The cost for each deep well is typically between $10 - $12 million for the basic drilling. Once the three deep wells already drilled
start to produce oil their contributions will assist in funding further deep wells.
Drilling shallow and deep wells, at a faster rate than could be funded from oil sales from the existing shallow well production or deep
wells, would require additional funding, as would any acquisitions funded by cash.
As the deep wells come into production at BNG there will be a requirement for investment in additional infrastructure to store, treat
and transport the oil. Our current estimate of such costs are approximately $40 million, much of which could be debt financed.
The capitalisation of the US$10.1 million Vertom loan at the time of the Baverstock Merger, left the Group virtually free of external
debt with only short-term financing from local oil traders.
Dividends
No dividend has been declared for 2017. It remains an objective to commence paying dividends as soon as the Company’s finances
permit.
Financial statements
The Group incurred capitalised exploration costs of US$9.2 million in the year (2016: US$10.5 million), principally related to the
drilling programme at BNG. The margin from test production at BNG is deducted against the capitalised exploration costs and
totalled US$7.5 million (2016: US$1 million). Total assets fell by US$3.5million to US$81.7 million with cash balances increasing to
US$1.5 million (2016: US$0.4 million).
In June 2017, the Group completed its merger with Baverstock in which the Group issued 651,436,544 Ordinary Shares with a
market value of US$81.5 million to acquire and relinquished receivables of US$6.5 million as consideration for the acquisition of the
remaining 41% of Eragon Petroleum Limited. As a result of the transaction, the Group increased its controlling interest in BNG from
58.41% to 99%. As a result of the transaction, the Group recorded the difference between the net book value of the previous non-
controlling interest of US$6.6 million and the fair value of consideration paid of US$88.4 million as a reduction in retained earnings
under IFRS.
11
Chairman's Statement (continued)
During the year we capitalised a $10.1 million loan from Vertom, a company owned by our CEO Kuat Oraziman.
The Group generated revenue of US$7.6 million (2016: US$1.6 million) reflecting increased production and average realised oil
prices. General and Administrative costs fell to US$2.9 million (2016: US$3.1 million). Finance costs reduced from US$0.8 million to
US$0.2 million following the conversion of the Vertom loan to equity and settlement of other borrowings in 2016.
The Group generated a loss for the year of US$4.7 million (2016: US$5.4 million). The Group generated net cash flows from
operating activities of US$8.0 million and incurred cash outflows from investing activities of US$8.3 million related mainly to activity
at the BNG asset. During the period the Group received US$8.2 million in funding from a related party company controlled by Kuat
Oraziman and repaid US$7.0 million to Kuat Oraziman in settlement of the loan.
Tenge Depreciation
Since 2014 the Kazakh Tenge has depreciated against the US$, the presentational accounting currency of the Group, from
US$1:KZT181 to US$1:KZT332, although in the period under review and subsequently it has been relatively stable. Commercially
this is very much to the Group's advantage as all income and the value of our reserves are denominated in US$ and only costs are
denominated in Tenge.
However, as for previous years, the international accounting standards require that we translate assets, liabilities and results of our
Kazakh subsidiaries, which have a Tenge functional currency, into US$. Accordingly, the valuation of the Group’s assets of US$69.7
million is stated after currency related provisions on retranslation.
Impairment assessment
The carrying value of the Group's principle asset BNG has to date been based on implied valuations from a succession of financing
arrangements. It also reflects the impact of the depreciation of the Tenge against the US$ (see above).
Following the strengthening of the world oil price and the operational progress made during the period under review, albeit without
the desired breakthrough at a deeper well, the Caspian Sunrise board has concluded that no impairment to the carrying value of our
flagship asset, BNG would be appropriate.
Going Concern
Refer to note 1 of the financial statements.
Board composition and responsibilities
At the end of February 2018, after five years’ service, Kairat Satylganov, the CFO and one of our principal shareholders left the
board to focus on his other projects. We thank him for his invaluable contribution during a period when the fortunes of the Company
were transformed by drilling activity at BNG, much of which funded by his investment in the Company.
The senior management team now comprises:
•
•
•
Kuat Oraziman, CEO, who has overall responsibility for managing the Group's affairs in Kazakhstan;
Clive Carver, Executive Chairman and interim CFO, who is responsible for the Group's finances and its activities in the
UK, including the activities arising from Caspian Sunrise being a publicly listed company. They are supported by a team of
experienced professionals based in our Almaty office; and
Edmund Limerick, who is the Group's senior non-executive Director, and chairman of the Audit and Remuneration
committees.
Staffing
We have 95 employees based in Kazakhstan, the vast majority of whom are all of Kazakh nationals, who we thank once again for
their continued hard work and commitment.
Shareholders
We thank shareholders for their continued support.
We recognise that we have not delivered the operational success at our deep wells at BNG at the pace hoped for. Nevertheless, we
continue to believe in the merits of the BNG Contract Area’s shallow and deep structures. Additionally, we are taking the first steps
to take advantage of the relatively limited competition to acquire further Kazakh assets.
Social Programmes
Under Kazakh regulations part of our obligations under various work programmes on the assets in which we have an interest are
paid in the form of contributions to local social programmes. Caspian Sunrise is pleased to have assisted in the development of
these projects.
Environmental
No significant environmental issues have arisen at any of the properties acquired to date.
12
Chairman's Statement (continued)
Current trading
Cash from the pre-sale of oil to local oil traders from the production of oil from our shallow wells continues to fund the Group’s
General & Administrative costs and the day-to-day costs of operations at our shallow structures.
We remain focused on bringing the three deep wells drilled into production. This will significantly add to income and in due course to
reserves.
Prospects
Oil prices grew steadily during the period under review and have held up since. With much of our drilling costs payable in Kazakh
Tenge and the market for rigs still depressed, the climate for continued exploration remains positive.
The cashflow from existing production from our shallow structures is set to double once these structures have been moved onto a
full production basis.
Additionally, we will look to add significantly to the production from the MJF field by way of an extensive drilling programme over the
next 24 months, subject to funding.
With the proposed acquisition of 3ABest Group we are taking the first steps since 2008 in building a diverse portfolio of attractive
Kazakh assets.
We look forward to the future with confidence.
Clive Carver
Chairman
11 May 2018
13
Qualified Person & Glossary
Qualified person
Mr. Nurlybek Ospanov, the Company's Chief Geologist & Technical Director, who is a member of the Society of Petroleum
Engineers (“SPE”), has reviewed and approved the technical disclosures in this announcement.
Glossary
SPE – The Society of Petroleum Engineers
Bopd - barrels of oil per day.
Mmbs – million barrels.
Proven reserves
Proved reserves (P1) are those quantities of petroleum which, by analysis of geosciences and engineering data, can be estimated
with reasonable certainty to be commercially recoverable, from a given date forward, from known reservoirs and under defined
economic conditions, operating methods, and government regulations. If deterministic methods are used, the term reasonable
certainty is intended to express a high degree of confidence that the quantities will be recovered. If probabilistic methods are used,
there should be at least a 90% probability that the quantities actually recovered will equal or exceed the estimate.
Probable reserves
Probable reserves are those additional Reserves which analysis of geosciences and engineering data indicate are less likely to be
recovered than proved reserves but more certain to be recovered than possible reserves. It is equally likely that actual remaining
quantities recovered will be greater than or less than the sum of the estimated proved plus probable reserves (2P). In this context,
when probabilistic methods are used, there should be at least a 50% probability that the actual quantities recovered will equal or
exceed the 2P estimate.
Possible reserves
Possible reserves are those additional reserves which analysis of geosciences and engineering data indicate are less likely to be
recovered than probable reserves. The total quantities ultimately recovered from the project have a low probability to exceed the
sum of proved plus probable plus possible (3P), which is equivalent to the high estimate scenario. In this context, when probabilistic
methods are used, there should be at least a 10% probability that the actual quantities recovered will equal or exceed the 3P
estimate.
Contingent resources
Contingent resources are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known
accumulations, but the applied project(s) are not yet considered mature enough for commercial development due to one or more
contingencies. Contingent resources may include, for example, projects for which there are currently no viable markets, or where
commercial recovery is dependent on technology under development, or where evaluation of the accumulation is insufficient to
clearly assess commerciality. Contingent resources are further categorized in accordance with the level of certainty associated with
the estimates and may be sub-classified based on project maturity and/or characterized by their economic status.
Prospective resources
Prospective resources are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from
undiscovered accumulations. Potential accumulations are evaluated according to their chance of discovery and, assuming a
discovery, the estimated quantities that would be recoverable under defined development projects.
14
Directors' report
The Directors present their annual report on the operations of the Company and the Group, together with the audited financial
statements for the year ended 31 December 2017. The Strategic report forms part of the business review for this year.
Results and dividends
The consolidated statement of profit or loss is set out on page 25 and shows US$4.7 million loss for the year (2016: US$5.4 million).
The Directors do not recommend the payment of a dividend (2016: US$ nil). The position and performance of the Group is
discussed below and further details are given in the business review.
Events after the reporting period
Other than as disclosed in this annual report, including notes to the financial statements, there have been no material events
between 31 December 2017 and the date of this report, which are required to be brought to the attention of shareholders.
Employees
Staff employed by the Group are based primarily in Kazakhstan. The recruitment and retention of staff, especially at management
level, is increasingly important as the Group continues to build its portfolio of oil and gas assets.
As well as providing employees with appropriate remuneration and other benefits together with a safe and enjoyable working
environment, the Board recognises the importance of communicating with employees to motivate them and involve them fully in the
business. For the most part, this communication takes place at a local level but staff are kept informed of major developments
through email updates. They also have access to the Company's website.
The Company has taken out full indemnity insurance on behalf of the Directors and officers.
Health, safety and environment
It is the Group's policy and practice to comply with health, safety and environmental regulations and the requirements of the
countries in which it operates, to protect its employees, assets and environment.
Charitable and Political donations
During the year the Group made no charitable or political donations.
Directors and Directors' interests
The Directors of the Group and the Company who served throughout the year were:
Clive Carver
Kuat Oraziman
Kairat Satylganov (resigned February 2018)
Edmund Limerick
Directors’ interests
Director
Clive Carver
Kuat Oraziman*
Kairat Satylganov
Edmund Limerick**
Number of shares
Number of shares
As at 31 December 2017
As at December 2016
nil
37,285,330
175,682,697
2,235,000
nil
374,408,033
205,428,656
2,235,000
* Following the completion of the merger in June 2017 between Company and Baverstock and the associated conversion of $10.1
million debt to equity at a price of 10p per share, Kuat Oraziman was interested in 763,706,614 shares representing 45.74 per cent
of the total issued share capital of the Company.
On 10 November 2017, it was announced that Kuat Oraziman had agreed to gift the majority of his Caspian Sunrise shares to his
two adult children, who, following the gifts, are interested in 354,210,642 of the Company (each). Mr Oraziman also agreed to gift 18
million shares to an unrelated individual.
Taken together Mr Oraziman and his adult children hold 745,706,614 shares
** includes 1,135,000 shares held by his wife
Biographical details of the current Directors are set out on the Company's website www.caspiansunrise.com.
Details of the Directors' individual remuneration, service contracts and interests in share options are shown in the Remuneration
Committee Report.
15
Directors' report (continued)
Financial instruments
Details of the use of financial instruments by the Group and its subsidiary undertakings are contained in note 25 of the financial
statements.
Statement of disclosure of information to auditors
All of the current Directors have taken all the steps that they ought to have taken to make themselves aware of any information
needed by the Group's auditors for the purposes of their audit and to establish that the auditors are aware of that information. The
Directors are not aware of any relevant audit information of which the auditors are unaware.
Auditors
BDO LLP have indicated their willingness to continue in office and a resolution concerning their reappointment will be proposed at
the next Annual General Meeting.
Directors' responsibilities
The Directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and
regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have
elected to prepare the Group and Company financial statements in accordance with International Financial Reporting Standards
(IFRSs) as adopted by the European Union. Under Company law the Directors must not approve the financial statements unless
they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of the profit or loss of the
Group for that period. The Directors are also required to prepare financial statements in accordance with the rules of the London
Stock Exchange for companies trading securities on the London Stock Exchange AIM Market.
In preparing these financial statements, the Directors are required to:
select suitable accounting policies and then apply them consistently;
•
• make judgements and accounting estimates that are reasonable and prudent;
•
state whether they have been prepared in accordance with IFRSs as adopted by the European Union, subject to any
material departures disclosed and explained in the financial statements;
prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company and
the Group will continue in business.
•
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s and the
Company's transactions and disclose with reasonable accuracy at any time the financial position of the Group and the Company
and enable them to ensure that the financial statements comply with the requirements of the Companies Act 2006.
They are also responsible for safeguarding the assets of the Group and the Company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
Website publication
The Directors are responsible for ensuring the annual report and the financial statements are made available on a website. Financial
statements are published on the Company's website in accordance with legislation in the United Kingdom governing the preparation
and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of
the Company's website is the responsibility of the Directors. The Directors' responsibility also extends to the ongoing integrity of the
financial statements contained therein.
Clive Carver
Chairman
11 May 2018
16
Remuneration Committee Report
Remuneration Committee
The Remuneration Committee comprises Edmund Limerick, Kuat Oraziman and Clive Carver, and is chaired by Edmund Limerick.
Remuneration policy
The Group’s and the Company’s policy is to provide remuneration packages that will attract, retain and motivate its executive
Directors and senior management. This consists of a basic salary, ancillary benefits and other performance-related remuneration
appropriate to their individual responsibilities and having regard to the remuneration levels of comparable posts. The Remuneration
Committee determines the contract term, basic salary, and other remuneration for the members of the Board and the senior
management team.
Service contracts
Details of the current Directors’ service contracts are as follows:
Executive
Clive Carver
Kuat Oraziman
Kairat Satylganov
Non-Executive
Edmund Limerick
Basic salary and benefits
Date of service
agreement/
appointment letter
1 June 2012
1 April 2007
Date of last renewal
of appointment
1 March 2018
1 June 2012
11 February 2013
Resigned as the Board member on
February 28, 2018
1 February 2010
1 February 2010
The basic salaries of the Directors who served during the financial year are established by reference to their responsibilities and
individual performance. The amounts received by the Directors are set out below in US$.
Directors
Clive Carver
Executive Chairman
Kuat Oraziman
Kairat Satylganov
CEO
CFO
Edmund Limerick
Non-Executive
Total
2017
Salary/fees
US$
2017
Share options
US$
2017
Total
US$
2016
Total
US$
240,000
122,730
122,730
38,667
524,127
102,330
102,330
102,330
25,583
342,330
376,441
225,060
258,823
225,060
258,823
64,250
74,466
332,573
856,700
968,553
Share option amounts refer to the IFRS 2 accounting charge.
There were no company pension contributions in respect of any director
Bonus schemes
All Executive Directors are eligible for consideration of participation in the Company bonus scheme. However, as in previous years
no bonuses are payable in respect of the year ended 31 December 2017 (2016: nil).
17
Remuneration Committee Report (continued)
Share options
The current interests as at approval of accounts of the current Directors and as at 31 December 2017 in share options agreements
are as follows:
Directors
Clive Carver
Kuat Oraziman
Edmund Limerick
Directors
Clive Carver
Kuat Oraziman
Edmund Limerick
Directors
Clive Carver
Kuat Oraziman
Edmund Limerick
Directors
Clive Carver
Kuat Oraziman
Kairat Satylganov
Edmund Limerick
The following Directors options have been expired during 2017
Directors
Clive Carver
Kuat Oraziman
Granted
2,400,000
4,200,000
1,200,000
Exercise Price
4p
4p
4p
Expiry date
14 December 2021
14 December 2021
14 December 2021
Granted
538,264
269,132
200,000
Exercise Price
12p
12p
12p
Expiry date
14 August 2019
14 August 2019
15 February 2020
Granted
750,000
3,090,000
750,000
Exercise Price
13p
13p
13p
Expiry date
12 January 2021
12 January 2021
12 January 2021
Granted
3,000,000
3,000,000
3,000,000
750,000
Exercise Price
20p
20p
20p
20p
Expiry date
21 August 2024
21 August 2024
21 August 2024
21 August 2024
Granted
1,345,660
672,830
Exercise Price
38p
38p
Expiry date
22 May 2017
22 May 2017
The following Directors options have been expired during 2018 before the approval of accounts
Directors
Clive Carver
Clive Carver
Kuat Oraziman
Kuat Oraziman
Granted
1,215,385
387,692
607,692
193,846
Exercise Price
65p
65p
65p
65p
Expiry date
29 February 2018
22 April 2018
29 February 2018
22 April 2018
On behalf of the Directors of Caspian Sunrise plc
Edmund Limerick
Chairman of Remuneration Committee
11 May 2018
18
Report on Corporate Governance
The Directors consider it important that appropriately high standards of corporate governance are maintained. They have therefore
put in place governance structures and provide information, which would be expected for companies whose shares are trading on
the AIM Market of the London Stock Exchange and in light of the Group’s size, stage of development and resources. However, the
Company is not required to comply with the UK Corporate Governance Code (the “Code”), as published by the Financial Reporting
Council, so this report does not describe compliance with or departures from the Code.
During the period under review the Company had one Non-Executive Director and three Executive Directors as follows:
Clive Carver
Kuat Oraziman
Kairat Satylganov
Edmund Limerick
Executive Chairman
Chief Executive Officer
Chief Financial Officer
Non-Executive Director
Following the resignation of Kairat Satylganov on 28 February 2018, the Company currently has one Non-Executive Director and
two Executive Directors. The Company intends to appoint at least one new Non-Executive Director.
The Board retains full and effective control over the Company. The Company holds a Board meeting at least once per quarter, at
which operational, financial and other reports are considered and, where appropriate, voted on.
Apart from these formal board meetings, which have taken place in the year, additional meetings and calls are arranged when
necessary to review strategy, planning, operational, financial performance, risk and capital expenditure and human resource and
environmental management. Such additional informal discussions form an integral part of retaining full and effective control over the
Company and continued through the year.
The Board is also responsible for monitoring the activities of the Management.
From 28 September 2018, all AIM companies must adopt a recognised code of corporate governance and include it on their website
with details of how the Company complies with that code and, where it departs from it, an explanation for the reasons for doing so.
The Company intends to adopt the corporate governance code of the Quoted Companies Alliance (“QCA”) once revised and will on
or before 28 September 2018, post details of its compliance and non-compliance to its website.
Board meetings
The Board met 4 times and 7 times during 2017 and 2016 respectively, with the following attendance:
C Carver
E Limerick
K Oraziman
K Satylganov
The Board has established the following committees:
Audit & Risk Committee
2017
2016
4
4
4
3
7
7
5
4
The Audit & Risk Committee, which comprises Edmund Limerick and Clive Carver, with Edmund Limerick acting as Chairman,
determines and examines any matters relating to the financial affairs of the Group including the terms of engagement of the Group’s
auditors and, in consultation with the auditors, the scope of the audit.
The Audit & Risk Committee receives and reviews reports from the management and the external auditors of the Group relating to
the annual and interim amounts and the accounting and internal control systems of the Group. In addition it considers the financial
performance, position and prospects of the Group and the Company and ensures they are properly monitored and reported on.
Remuneration Committee
The Remuneration Committee, which comprises Edmund Limerick, Kuat Oraziman and Clive Carver, with Edmund Limerick acting
as Chairman, reviews the performance of the senior management, sets and reviews their remuneration and the terms of their
service contracts and considers the Group’s bonus and option schemes.
Rule 21
The Directors comply with Rule 21 of the AIM Rules relating to Directors’ dealing and take all reasonable steps to ensure
compliance by the Group’s applicable employees. The Company has adopted and operates a share dealing code for Directors and
employees in accordance with the AIM Rules.
19
Report on Corporate Governance (continued)
Internal controls
The Board acknowledges responsibility for maintaining appropriate internal control systems and procedures to safeguard the
shareholders’ investments and the assets, employees and the business of the Group.
The Board has established and operates a policy of continuous review and development of appropriate financial controls together
with operating procedures consistent with the accounting policies of the Group.
The Board does not consider it appropriate for the current size of the Group to establish an internal audit function.
Bribery and corruption
The Bribery Act 2010 came into force on 1 July 2011. The Company is committed to acting ethically, fairly and with integrity in all its
endeavours and compliance with legislation is monitored. The principal terms of the Bribery Act have been translated into Russian
and circulated to our Kazakh based staff. Consideration of the Bribery Act is a standing item at Company board meetings.
20
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF
CASPIAN SUNRISE PLC
Opinion
We have audited the financial statements of Caspian Sunrise Plc (the ‘parent company’) and its subsidiaries (the ‘group’) for the
year ended 31 December 2017 which comprise the consolidated statement of profit or loss, the consolidated statement of
comprehensive income, the consolidated statement of changes in equity, the parent company statement of changes in equity, the
consolidated statement of financial position, the parent company statement of financial position, the consolidated and parent
company statements of cash flows and notes to the financial statements, including a summary of significant accounting policies.
The financial reporting framework that has been applied in the preparation of the financial statements is applicable law and
International Financial Reporting Standards (IFRSs) as adopted by the European Union, and, as regards the parent company
financial statements, as applied in accordance with the provisions of the Companies Act 2006.
In our opinion:
•
•
•
•
the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31
December 2017 and of the group’s loss for the year then ended;
the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;
the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European
Union and as applied in accordance with the provisions of the Companies Act 2006; and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements
section of our report. We are independent of the parent company and the group in accordance with the ethical requirements that are
relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed entities and we
have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have
obtained is sufficient and appropriate to provide a basis for our opinion.
Use of our report
This report is made solely to the parent company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies
Act 2006. Our audit work has been undertaken so that we might state to the parent company’s members those matters we are
required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the parent company and the parent company’s members as a body, for our audit work,
for this report, or for the opinions we have formed.
Conclusions relating to going concern
We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where:
•
•
the directors’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate;
or
the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant
doubt about the group’s or the parent company’s ability to continue to adopt the going concern basis of accounting for a
period of at least twelve months from the date when the financial statements are authorised for issue.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial
statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to
fraud) we identified, including those which had the greatest effect on the overall audit strategy, the allocation of resources in the
audit and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial
statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
Key audit matter that a material uncertainty existed over going concern that required disclosure
The Board is required to make an assessment of the group’s and the parent company’s ability to continue as a going concern for
at least 12 months from the date the financial statements are approved. Where a material uncertainty exists in respect of the
going concern assessment, the Board is required to disclose those matters.
The Board have reviewed cash flow forecasts prepared by management for the period to June 2019 which indicated that the
group would have sufficient funding to meet its liabilities as they fell due as detailed in note 1.1.
This assessment included estimates and judgments regarding assumptions over future production, oil prices, costs, licence and
drilling expenditure.
The Board exercised judgment regarding the Group’s ability to obtain a full production licence during the period and commence
sales at world oil prices.
Further, the Board exercised judgment regarding the availability of funding from oil traders and the extent to which funding
requirements would be met by the group’s largest shareholder as required in the event of delays in obtaining or failure to obtain a
full production licence.
21
How the matter was addressed in our audit
• We obtained management’s cash flow forecasts and critically assessed the key inputs including oil prices, production levels,
operating costs and planned drilling, licence and exploration expenditure. We assessed the inputs against recent empirical
data, work programs, licence obligations and considered forecast oil market trends.
• We considered the appropriateness of the Board’s judgment regarding the availability of oil trader funding through the
forecast period. In doing so, we considered factors such as the production profile, oil price trends, the terms of the
arrangements and the history of transactions with the oil traders.
• We confirmed that the Group has the right to apply for a production licence and assessed its impact on production cash
flows.
• We assessed the level of funding required from the group’s largest shareholder under reasonable sensitivity scenarios,
including a delay to the planned full production licence.
• We obtained a written undertaking to provide financial support by the group’s largest shareholder. We considered the
appropriateness of the Board’s judgment that such financial support would be available as required based on factors such
as the past history of such financial support being provided by the shareholder and the potential sources of such funding
amongst other factors.
• We assessed the disclosures included in the financial statements at note 1.1.
Our observations
Refer to ‘Our conclusions relating to going concern’ above. We found the disclosures in note 1 to be appropriate.
Key audit matter that the carrying value of the unproven oil and gas assets require impairment
As at 31 December 2017, the group’s unproven oil and gas assets related to the BNG Contract area cost pool were carried at
US$69.7m as shown in note 11.
At each reporting period end, management are required to assess the unproven oil and gas assets for indicators of impairment
and, where such indicators exist, perform an impairment test. In performing the impairment indicator review, management are
required to make a number of estimates and judgements. In particular, the assessment involves consideration of the standing of
the exploration licence and remaining term, the future planned exploration activity and results of activity to date.
Following their assessment management concluded that no indicators of impairment existed in respect of the BNG cost pool. In
forming their conclusion, management particularly considered the potential impact of the outstanding obligations under the
licence detailed in note 20 and concluded that they had a reasonable expectation that the existing licence would be extended
effective July 2018 in line with the agreement reached with the Kazakh authorities in October 2017.
Given the judgment and estimation required by management in assessing potential impairment indicators, we considered this
area to be a key focus for our audit.
How the matter was addressed in our audit
• We reviewed the existing licence to confirm that the group holds a valid right to explore the BNG Contract area and
reviewed correspondence with the Ministry of Energy of Kazakhstan to confirm that the group had been granted an
extension to its exploration licence for a period of 6 years effective 1 July 2018.
• We reviewed Board minutes, made specific inquiries of management and reviewed budgets and work programs submitted
to the Kazakh authorities to confirm that further drilling and exploration is planned for the asset.
• We reviewed the conditions of the licence and obtained reports submitted to the Kazakh authorities in respect of exploration
expenditure to assess the compliance with the licence term. We specifically considered management’s judgment that the
unfulfilled licence conditions set out in note 20 would not reasonably be expected to result in a loss of the licence. In doing
so, we confirmed that necessary payments were included in the group’s cash flow forecasts and considered factors
including the history of expenditure and the recent extension to the licence.
• We reviewed the 2015 independent reserves statement prepared by Gaffney, Cline & Associates (“GCA”) for the shallow
reservoir structures and the current financial model used by the group in its impairment indicator review. We compared key
inputs to the financial model to recent oil prices realised by the group and the GCA report. We considered the additional
value associated with the deep reservoir structures and 3P reserves and prospective oil and gas resources not included in
financial model.
• We considered the implied valuation of the BNG Contract area based on the market value of the shares issued by the group
to acquire a further 40.59% interest in the asset and considered the group’s market capitalisation which demonstrates a
significant premium to its net asset value.
• We assessed the independence and competence of GCA as a management expert.
• We assessed the disclosures included in the financial statements at note 1.8.
Our observations
We found management’s conclusion that no impairment exists on the BNG unproven oil and gas asset to be appropriate. We
found the judgments made by management to be appropriately considered and the disclosures in the notes to be sufficient.
Our application of materiality
Group materiality as at 31 December 2017
US$1,230,000
Basis for materiality
1.5% of total assets
22
We apply the concept of materiality both in planning and performing our audit and in evaluating the effect of misstatements. We
consider materiality to be the magnitude by which misstatements, including omissions, could influence the economic decisions of
reasonable users that are taken on the basis of the financial statements.
Importantly, misstatements below these levels will not necessarily be evaluated as immaterial as we also take account of the nature
of identified misstatements, and the particular circumstances of their occurrence, when evaluating their effect on the financial
statements as a whole.
Materiality for the group financial statements as a whole was set at $1,230,000, being 1.5% of total assets (2016: $1,255,000). We
consider total assets to be the most relevant consideration of the group’s financial performance as the group continues to focus on
oil and gas exploration. Materiality for the parent company financial statements was set at $1,088,000, being 1.5% of total assets
(2016: $1,230,000).
In performing the audit we applied a lower level of performance materiality in order to reduce to an appropriately low level the
probability that the aggregate of uncorrected and undetected misstatements exceeds financial statement materiality. Each
significant component of the Group including the parent company was audited using a lower level of performance materiality ranging
from $820,000 to $1,032,000 (2016: $810,000 to $1,080,000).
We agreed with the Audit Committee that we would report to the committee all individual audit differences in excess of $65,000
(2016: $63,000). We also agreed to report differences below this threshold that, in our view, warranted reporting on qualitative
grounds.
An overview of the scope of our audit
Our group audit was scoped by obtaining an understanding of the group and its environment and assessing the risks of material
misstatement in the financial statements at the group level.
The Group’s operations principally comprise exploration & development of oil and gas assets located in Kazakhstan. We assessed
there to be 2 significant components comprising BNG and the parent company.
These locations, which were subject to full scope audit procedures represent the principal business units.
A non-BDO member firm performed a full scope audit of BNG in Kazakhstan, under our direction and supervision as group auditors
under ISA 600. The audit of the parent company and the group consolidation were performed in the United Kingdom by BDO LLP.
As part of our audit strategy, as group auditors:
•
Detailed group reporting instructions were sent to the component auditor, which included the significant areas to be
covered by the audit (including areas that were considered to be key audit matters as detailed above).
• We performed a review of the component audit files in Kazakhstan and held meetings with the component audit team
•
during the planning and completion phases of their audit.
The group audit team was actively involved in the direction of the audits performed by the component auditors, along with
the consideration of findings and determination of conclusions drawn. We performed our own additional procedures in
respect of the significant risk areas that represented Key Audit Matters in addition to the procedures performed by the
component auditor.
The remaining components of the group were considered non-significant and these components were principally subject to
analytical review procedures to confirm there are no significant risks of material misstatements within these components.
Other information
The directors are responsible for the other information. The other information comprises the information included in the annual
report, other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover
the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance
conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider
whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or
otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we
are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the
other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other
information, we are required to report that fact. We have nothing to report in this regard.
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of the audit:
•
•
the information given in the strategic report and the directors’ report for the financial year for which the financial
statements are prepared is consistent with the financial statements; and
the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements.
23
Matters on which we are required to report by exception
In the light of the knowledge and understanding of the group and the parent company and its environment obtained in the course of
the audit, we have not identified material misstatements in the strategic report or the directors’ report.
We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to
you if, in our opinion:
•
•
•
•
adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been
received from branches not visited by us; or
the parent company financial statements are not in agreement with the accounting records and returns; or
certain disclosures of directors’ remuneration specified by law are not made; or
we have not received all the information and explanations we require for our audit.
Responsibilities of directors
As explained more fully in the directors’ responsibilities statement, the directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is
necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the group’s and the parent company’s ability to
continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of
accounting unless the directors either intend to liquidate the group or the parent company or to cease operations, or have no
realistic alternative but to do so.
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a
high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s
website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
Ryan Ferguson (Senior Statutory Auditor)
For and on behalf of BDO LLP, Statutory Auditor
London,
United Kingdom
11 May 2018
BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).
24
Consolidated Statement of Profit or Loss
Revenue
Cost of sales
Gross (loss)/profit
Share-based payments
Other administrative costs
Total administrative expenses
Operating loss
Finance cost
Finance income
Loss before taxation
Tax charge
Loss after taxation
Loss attributable to owners of the parent
Loss attributable to non-controlling interest
Loss for the year
Basic loss per ordinary share (US cents)
Diluted loss per ordinary share (US cents)
Notes
4
7
8
9
10
10
Year to
31 December
2017
US$’000
7,575
(7,550)
25
(476)
(2,925)
(3,401)
(3,376)
(167)
194
(3,349)
(1,345)
(4,694)
(3,928)
(766)
(4,694)
(0.29)
(0.29)
Year to
31 December
2016
US$’000
1,571
(1,589)
(18)
(555)
(3,085)
(3,640)
(3,658)
(826)
235
(4,249)
(1,124)
(5,373)
(3,582)
(1,791)
(5,373)
(0.38)
(0.38)
The notes on pages 32 to 56 are essential part of these financial statements
25
Consolidated Statement of Comprehensive Income
Loss after taxation
Other comprehensive income:
Exchange differences on translating foreign operations
Total comprehensive loss for the year
Total comprehensive loss attributable to:
Owners of parent
Non-controlling interest
Year ended
31 December
2017
Year ended
31 December
2016
US$000
US$000
(4,694)
(5,373)
72
(4,622)
(3,922)
(700)
2,311
(3,062)
(2,055)
(1,007)
The notes on pages 32 to 56 are essential part of these financial statements
26
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28
Consolidated Statement of Financial Position
Company number 5966431
Notes
Group
2017
US$’000
Group
2016
US$’000
69,701
165
21
9,255
263
79,405
832
1,479
2,311
81,716
25,401
228,974
64,702
(2,362)
(210,877)
(55,000)
50,838
(4,654)
46,184
9,538
2,132
4,399
16,069
-
7,784
721
10,958
19,463
35,532
81,716
68,086
223
10
7,738
283
76,340
8,490
405
8,895
85,235
16,000
146,728
64,702
(583)
(127,343)
(55,006)
44,498
2,617
47,115
5,643
809
3,692
10,144
9,935
7,748
679
9,614
27,976
38,120
85,235
Assets
Non-current assets
Unproven oil and gas assets
Property, plant and equipment
Inventories
Other receivables
Restricted use cash
Total non-current assets
Current assets
Other receivables
Cash and cash equivalents
Total current assets
Total assets
Equity and liabilities
Capital and reserves attributable
to equity holders of the parent
Share capital
Share premium
Deferred shares
Other reserves
Retained deficit
Cumulative translation reserve
Equity attributable to the owners of the Parent
Non-controlling interests
Total equity
Current liabilities
Trade and other payables
Short - term borrowings
Current provisions
Total current liabilities
Non-current liabilities
Borrowings
Deferred tax liabilities
Non-current provisions
Other payables
Total non-current liabilities
Total liabilities
Total equity and liabilities
11
12
14
15
15
16
17
17
18
19
20
21
22
20
18
Approved by the Board and authorized for issue:
Clive Carver,
Chairman,
11 May 2018
Company number: 5966431
The notes on pages 32 to 56 are essential part of these financial statements
29
Parent Company Statement of Financial Position
Company number 5966431
Notes
Company
2017
US$’000
Company
2016
US$’000
Assets
Non-current assets
Investments in subsidiaries
Other receivables
Total non-current assets
Current assets
Other receivables
Cash and cash equivalents
Total current assets
Total assets
Equity and liabilities
Capital and reserves attributable
to equity holders of the parent
Share capital
Share premium
Deferred shares
Other reserves
Retained deficit
Equity attributable to the owners of the Parent
Total equity
Current liabilities
Trade and other payables*
Total current liabilities
Non-current liabilities
Borrowings
Other payables*
Total non-current liabilities
Total liabilities
Total equity and liabilities
13
15
15
16
17
17
18
21
18
211,658
2,944
214,602
5
17
22
214,624
25,401
228,974
64,702
14,936
(144,073)
189,940
189,940
8,626
8,626
-
16,058
16,058
24,684
214,624
126,342
2,728
129,070
3,204
10
3,214
132,284
16,000
146,728
64,702
16,715
(143,775)
100,370
100,370
7,076
7,076
9,935
14,903
24,838
31,914
132,284
The Company incurred a loss for the year ended 31 December 2017 in the amount of US$ 2,553,000 (2016: US$ 9,891,000).
* Refer to note 18 in respect of the reclassification.
Approved by the Board and authorized for issue:
Clive Carver,
Chairman,
11 May 2018
Company number: 5966431
The notes on pages 32 to 56 are essential part of these financial statements
30
Consolidated and Parent Company Statements of Cash Flows
Group
2017
US$’000
Group
2016
US$’000
Company
2017
US$’000
Company
2016
US$’000
Cash flows from operating activities
Cash received from customers
Payments made to suppliers for goods and services
Payments made to employees
Net cash flow from operating activities
Cash flows from investing activities
Purchase of property, plant and equipment
Additions to unproven oil and gas assets *
Transfers from/(to) restricted use cash
Notes
12
11
10,928
(1,319)
(1,548)
8,061
(5)
(9,973)
(20)
Proceeds from disposal of joint venture (net of cash
disposed and taxation) in prior periods
8, 15
1,696
Advances repaid by subsidiaries
Advances issued to subsidiaries
Net cash flow from investing activities
Cash flows from financing activities
Net proceeds from issue of ordinary share capital
Loans repaid
Loans received
Repayment of loans provided by subsidiaries
Net cash flow from financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
19
19
Cash and cash equivalents at the end of the year
16
3,823
(2,256)
(1,541)
-
(872)
(692)
-
(1,363)
(744)
26
(1,564)
(2,107)
(64)
(9,840)
(12)
-
-
-
-
-
(8,302)
(9,916)
-
(7,000)
8,315
-
1,315
1,074
405
1,479
85
(753)
501
-
(167)
(10,057)
10,462
405
-
-
-
1,696
410
(535)
1,571
-
-
-
-
-
7
10
17
-
-
-
-
8,302
-
8,302
85
(753)
-
(5,542)
(6,210)
(15)
25
10
Significant non-cash transactions include the following and details can be found in notes 6, 7, 8, 9,15,25, 27:
-
Share-based payments in the amount of US$ 476,000 (2016: US$ 555,000);
- Withholding tax in the amount of US$ 1,345,000 (2016: US$ 1,124,000);
-
-
-
-
-
-
-
-
Discounting of receivables in the amount of US$ 100,000 (2016: US$235,000);
Exchange differences on translating foreign operations of US$ 72,000 (2016: US$ 2,311,000);
Depreciation charge of US$ 43,000 (2016: US$ 42,000);
Conversion of debt to equity of US$ 10,100,000 (2016: US$ 0);
Interest expense of US$ 167,000 (2016: US$ 826,000);
Conversion of Loan provided to Baverstock to investments in Eragon in the amount of US$ 3,254,000 (2016: US$ 0);
Conversion of Receivable from Baverstock due to royalty to investments in Eragon in the amount of US$ 3,202,000 (2016:
US$ 0);
Non-cash effect from the acquisition of non-controlling interest in the amount of US$ 6,885,000 (2016: US$ 0)
* Additions to unproven oil and gas assets contain the amount of US$ 330,000 in relation to payroll expenses capitalized
(2016: US$: 211,000).
The notes on pages 32 to 56 form part of these financial statements
31
Notes to the Financial Statements
General information
Caspian Sunrise plc (“the Company”) is a public limited company incorporated and domiciled in England and Wales. The address of
its registered office is 5 New Street Square, London, EC4A 3TW. These consolidated financial statements were authorised for issue
by the Board of Directors on 11 May 2018.
The principal activities of the Group are exploration and production of crude oil.
1 Principal accounting policies
The principal accounting policies applied in the preparation of these consolidated financial statements are set out below.
1.1 Basis of preparation
The Group’s and Parent’s financial statements have been prepared in accordance with International Financial Reporting Standards
as adopted by the European Union (“IFRSs”), and with those parts of the Companies Act 2006 applicable to companies reporting
under IFRSs.
The Directors have prepared cash flow forecasts for the next 12 months which demonstrate that the Group will have sufficient funds
to meet its liabilities as they fall due and operate as a going concern, including completion of its planned drilling program. The
forecasts include growth in revenue including both the impact of anticipated well drilling and increased pricing associated with BNG
production sold at world prices following the planned conversion of existing wells into a production licence. The production cash
flows are forecast to be sufficient to meet the Group’s cash flow requirements.
In addition, the Group continues to forward sell its production and receive advances from oil traders as part of its operations. The
continued availability of such arrangements are important to working capital and, in the event the Group was unable to continue to
access these arrangements additional funding would be required. The Directors are confident that the oil trader funding will
continue, based on the production profile and relationships with the oil traders.
In the event that the award of a production licence is delayed, the Group’s total cash flow from production sold at domestic prices is
forecast to exceed the cash flows for operating expenditure and drilling over the period as a whole. However, the Group would
require additional working capital during the period to meet certain payments under its licences and drilling and well repair
expenditures owing to the timing of such payments. The forecasts in this scenario include an anticipated increase in oil trader
funding through advances for future production, together with funding from a significant shareholder to meet its working capital
requirements. The Group’s major shareholder has provided a written undertaking to provide financial support as is required which
the Board are satisfied will be available given the history of financial support and having considered the shareholder’s ability to
provide such funding.
Additional funding, if required, for new wells, infrastructure and assets to accelerate development over and above the level included
in the forecasts, is expected to be available from a number of sources, including debt funding for much of the infrastructure
spending, advances from local oil traders from the sale of oil yet to be produced, industry funding in the form of partnerships with
larger industry players, further support from existing shareholders and if appropriate, equity funding from financial institutions.
However, such accelerated development is at the Group’s discretion.
On this basis the Directors have therefore concluded that it is appropriate to prepare the financial statements on a going concern
basis.
The Company has taken advantage of section 408 of the Companies Act 2006 and has not included its own profit or loss in these
financial statements. The Group loss for the year included a loss on ordinary activities after tax of US$2,553,000 (2016: US$
9,891,000) in respect of the Company.
The preparation of financial statements in conformity with IFRSs requires the Management to make judgements, estimates and
assumptions that affect the application of policies and reported amounts in the financial statements.
The areas involving a higher degree of judgement or complexity, or areas where assumptions or estimates are significant to the
financial statements are disclosed in note 2.
1.2 New and revised standards and interpretations applied
The following new standards and amendments to standards are mandatory for the first time for the Group for financial year
beginning 1 January 2017. The implementation of these standards did not have a material effect on the Group.
32
Notes to the Financial Statements (continued)
1 Principal accounting policies (continued)
1.2
New and revised standards and interpretations applied (continued)
Standard
IAS 12
IAS 7
Standard
IFRS 12
Description
Amendment – Recognition of deferred tax assets for
unrealized losses
Amendment – Disclosure initiative
Description
Effective date
1 Jan 2017
1 Jan 2017
Effective date
Disclosure of interest in other entities
1 Jan 2017
Annual Improvements to IFRSs 2014–2016
Standards, amendments and interpretations, which are effective for reporting periods beginning after the date of this financial
information which have not been adopted early:
Standard
IFRS 9
IFRS 15
IFRS 16
IFRS 2
IFRIC 22
IAS 28*
IFRS 11*
Description
Financial Instruments
Revenue from Contracts with Customers
Leases
Amendment – Classification and measurement
of share based payment transactions
Foreign currency transactions and advance
considerations
Investments in Associates and Joint ventures
Joint operations
Effective date
1 Jan 2018
1 Jan 2018
1 Jan 2019
1 Jan 2018
1 Jan 2018
1 Jan 2019
1 Jan 2019
*Not yet been endorsed by the European Union at the date that this financial information was approved and authorised for issue by
the Board.
IFRS 15 is intended to introduce a single framework for revenue recognition and clarify principles of revenue recognition. This
standard modifies the determination of when to recognise revenue and how much revenue to recognize. The core principle is that
an entity recognises revenue to depict the transfer of promised goods and services to the customer of an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. The Group’s revenue recognition
policy is set out in note 1.19. The Group sells oil in advance to oil traders in Kazakhstan for delivery over a period of time, which
may give rise to a financing component on such transactions although it is noted that contracts are for less than 12 months. The
Group is currently undertaking an analysis of the effect of IFRS 15 on its revenue recognition which will be completed during H1
2018 but does not currently anticipate a material impact.
IFRS 16 introduces a single lease accounting model. This standard requires lessees to account for all leases under a single on-
balance sheet model. Under the new standard, a lessee is required to recognise all lease assets and liabilities on the balance
sheet; recognise amortization of leased assets and interest on lease liabilities over the lease term; and separately present the
principal amount of cash paid and interest in the cash flow statement. Management are currently assessing the impact of this
standard as whilst there are no material operating leases in the Group it may be relevant to future operations including service
agreements containing the use of assets.
IFRS 9 addresses the classification and measurement of financial assets and financial liabilities. It replaces the guidance in IAS 39
that relates to the classification and measurement of financial instruments. IFRS 9 retains but simplifies the mixed measurement
model and establishes three primary measurement categories for financial assets: amortised cost, fair value through other
comprehensive income (OCI) and fair value through profit or loss. The basis of classification depends on the entity’s business
model and the contractual cash flow characteristics of the financial asset. There is now a new expected credit loss model that
replaces the incurred loss impairment model used in IAS 39. For financial liabilities there were no changes to classification and
measurement except for the recognition of changes in credit risk in other comprehensive income, for liabilities designated at fair
value through profit or loss. Contemporaneous documentation is still required but is different to that currently prepared under IAS
39. The Group is currently undertaking an analysis of the effect of IFRS 9 which will be completed during H1 2018 but does not
currently anticipate a material impact.
The remaining items in the table are still being assessed by the Group.
33
Notes to the Financial Statements (continued)
1 Principal accounting policies (continued)
1.3 Basis of consolidation
Subsidiary undertakings are entities that are directly or indirectly controlled by the Group. Control is achieved when the Group is
exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through
its power over the investee. Generally, there is a presumption that a majority of voting rights result in control. To support this
presumption and when the Group has less than a majority of the voting or similar rights of an investee, the Group considers all
relevant facts and circumstances in assessing whether it has power over an investee. The consolidated financial statements present
the results of the Company and its subsidiaries (“the Group”) as if they formed a single entity. Intercompany transactions and
balances between group companies are therefore eliminated in full.
The purchase method of accounting is used to account for the acquisition of subsidiary undertakings by the Group. The cost of an
acquisition is measured at the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date
of exchange. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured
initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of
acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill.
1.4 Operating Loss
Operating loss is stated after crediting all operating income and charging all operating expenses, but before crediting or charging the
financial income or expenses.
1.5 Foreign currency translation
1.5.1 Functional and presentational currencies
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic
environment in which the entity operates (“the functional currency”). The consolidated financial statements are presented in US
Dollars (“US$”), which is the Group’s presentational currency. Beibars Munai LLP, Munaily Kazakhstan LLP, BNG Ltd LLP and Roxi
Petroleum Kazakhstan LLP, subsidiary undertakings of the Group, undertake their activities in Kazakhstan and the Kazakh Tenge is
the functional currency of these entities. The functional currency for the Company, Beibars BV, Ravninnoe BV, Galaz Energy BV,
BNG Energy BV and Eragon Petroleum FZE is USD as USD reflects the underlying transactions, conducts and events relevant to
these companies.
1.5.2 Transactions and balances in foreign currencies
In preparing the financial statements of the individual entities, transactions in currencies other than the entity’s functional currency
(“foreign currencies”) are recorded at the rates of exchange prevailing at the dates of the transactions. At each reporting date,
monetary items denominated in foreign currencies are retranslated at the rates prevailing at the reporting date. Non-monetary items
carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value
was determined. Non-monetary items, including the parent’s share capital, that are measured in terms of historical cost in a foreign
currency are not retranslated. Exchange differences are recognised in profit or loss in the period in which they arise.
1.5.3 Consolidation
For the purpose of consolidation all assets and liabilities of Group entities with a functional currency that is not US$ are translated at
the rate prevailing at the reporting date. The profit or loss is translated at the exchange rate approximating to those ruling when the
transaction took place. Exchange difference arising on retranslating the opening net assets from the opening rate and results of
operations from the average rate are recognised directly in other comprehensive income (the “cumulative translation reserve”). On
disposal of a foreign operator, related cumulative foreign exchange gains and losses are reclassified to profit and loss and are
recognized as part of the gain or loss on disposal.
1.6 Current tax
Current tax is based on taxable profit for the year. Taxable profit differs from profit as reported in the profit or loss because it
excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never
taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively
enacted by the reporting date.
34
Notes to the Financial Statements (continued)
1 Principal accounting policies (continued)
1.7 Deferred tax
Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: the initial
recognition of assets or liabilities that affect neither accounting nor taxable profit other than in a business combination, and
differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future.
The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets
and liabilities, using tax rates enacted or substantively enacted at the reporting date.
Deferred tax liabilities are generally recognised for all taxable temporary differences. A deferred tax asset is recorded only to the
extent that it is probable that taxable profit will be available, against which the deductible temporary differences can be utilised.
1.8 Unproven oil and gas assets
The Group applies the full cost method of accounting for exploration and unproven oil and gas asset costs, having regard to the
requirements of IFRS 6 ‘Exploration for and Evaluation of Mineral Resources’. Under the full cost method of accounting, costs of
exploring for and evaluating oil and gas properties are accumulated and capitalised by reference to appropriate cost pools. Such
cost pools are based on license areas. The Group currently has two cost pools.
Exploration and evaluation costs include costs of license acquisition, technical services and studies, seismic acquisition, exploration
drilling and testing, but do not include costs incurred prior to having obtained the legal rights to explore an area, which are expensed
directly to the profit or loss as they are incurred.
Plant and equipment assets acquired for use in exploration and evaluation activities are classified as property, plant and equipment.
However, to the extent that such asset is consumed in developing an unproven oil and gas asset, the amount reflecting that
consumption is recorded as part of the cost of the unproven oil and gas asset.
The amounts included within unproven oil and gas assets include the fair value that was paid for the acquisition of partnerships
holding subsoil use in Kazakhstan. These licenses have been capitalised to the Group’s full cost pool in respect of each license
area.
Exploration and unproven oil and gas assets related to each exploration license/prospect are not amortised but are carried forward
until the technical feasibility and commercial feasibility of extracting a mineral resource are demonstrated.
Commercial reserves are defined as proved oil and gas reserves.
Proven oil and gas properties
Once a project reaches the stage of commercial production and production permits are received, the carrying values of the relevant
exploration and evaluation asset are assessed for impairment and transferred to proven oil and gas properties and included within
property plant and equipment.
Proven oil and gas properties are accounted for in accordance with provisions of the cost model under IAS 16 “Property Plant and
Equipment” and are depleted on unit of production basis based on commercial reserves of the pool to which they relate.
Impairment
Exploration and unproven intangible assets are reviewed for impairments if events or changes in circumstances indicate that the
carrying amount may not be recoverable as at the reporting date. Intangible exploration and evaluation assets that relate to
exploration and evaluation activities that are not yet determined to have resulted in the discovery of the commercial reserve remain
capitalised as intangible exploration and evaluation assets subject to meeting a pool-wide impairment test as set out below.
In accordance with IFRS 6 the Group firstly considers the following facts and circumstances in their assessment of whether the
Group’s exploration and evaluation assets may be impaired, whether:
!
!
!
!
the period for which the Group has the right to explore in a specific area has expired during the period or will expire in the
near future, and is not expected to be renewed;
substantive expenditure on further exploration for and evaluation of mineral resources in a specific area is neither
budgeted nor planned;
exploration for and evaluation of hydrocarbons in a specific area have not led to the discovery of commercially viable
quantities of hydrocarbons and the Group has decided to discontinue such activities in the specific area; and
sufficient data exists to indicate that although a development in a specific area is likely to proceed, the carrying amount of
the exploration and evaluation assets is unlikely to be recovered in full from successful development or by sale.
If any such facts or circumstances are noted, the Group perform an impairment test in accordance with the provisions of IAS 36.
The aggregate carrying value is compared against the expected recoverable amount of the cash generating unit, being the relevant
cost pool. The recoverable amount is the higher of value in use and the fair value less costs to sell.
An impairment loss is reversed if the asset’s or cash-generating unit’s recoverable amount exceeds its carrying amount.
35
Notes to the Financial Statements (continued)
1 Principal accounting policies (continued)
Workovers/Overhauls and maintenance
From time to time a workover or overhaul or maintenance of existing proven oil and gas properties is required, which normally falls
into one of two distinct categories. The type of workover dictates the accounting policy and recognition of the related costs:
Capitalisable costs – cost will be capitalised where the performance of an asset is improved, where an asset being overhauled is
being changed from its initial use, the assets’ useful life is being extended, or the asset is being modified to assist the production of
new reserves.
Non-capitalisable costs – expense type workover costs are costs incurred as maintenance type expenditure, which would be
considered day-to-day servicing of the asset. These types of expenditures are recognised within cost of sales in the statement of
comprehensive income as incurred. Expense workovers generally include work that is maintenance in nature and generally will not
increase production capability through accessing new reserves, production from a new zone or significantly extend the life or
change the nature of the well from its original production profile.
1.9 Abandonment
Provision is made for the present value of the future cost of the decommissioning of oil wells and related facilities. This provision is
recognised when the asset is installed. The estimated costs, based on engineering cost levels prevailing at the reporting date, are
computed on the basis of the latest assumptions as to the scope and method of decommissioning. The corresponding amount is
capitalised as a part of the oil and gas asset and, when in production is amortised on a unit-of-production basis as part of the
depreciation, depletion and amortisation charge. Any adjustment arising from the reassessment of estimated cost of
decommissioning is capitalised, while the charge arising from the unwinding of the discount applied to the decommissioning
provision is treated as a component of the interest charge.
1.10 Restricted use cash
Restricted use cash is the amount set aside by the Group for the purpose of creating an abandonment fund to cover the future cost
of the decommissioning of oil and gas wells and related facilities and in accordance with local legal rulings.
Under the Subsoil Use Contracts the Group must place 1% of the value of exploration costs in an escrow deposit account, unless
agreed otherwise with the Ministry of Energy. At the end of the contract this cash will be used to return the field to the condition that
it was in before exploration started.
1.11 Property, plant and equipment
All property, plant and equipment assets are stated at cost or fair value on acquisition less accumulated depreciation. Depreciation
is provided on a straight-line basis, at rates calculated to write off the cost less the estimated residual value of each asset over its
expected useful economic life. The residual value is the estimated amount that would currently be obtained from disposal of the
asset if the asset were already of the age and in the condition expected at the end of its useful life. Expected useful economic life
and residual values are reviewed annually.
The annual rates of depreciation for class of property, plant and equipment are as follows:
- motor vehicles
- other
4-5 years
over 2-4 years
The Group assesses at each reporting date whether there is any indication that any of its property, plant and equipment has been
impaired. If such an indication exists, the asset’s recoverable amount is estimated and compared to its carrying value.
1.12 Investments (Company)
Investments in subsidiary undertakings are shown at cost less allowance for impairment. Long term advances to subsidiaries form
part of the net investment in the subsidiary and are recorded at cost as part of the investment.
1.13 Financial instruments
The Group classifies financial instruments, or their component parts on initial recognition, as a financial asset, a financial liability or
an equity instrument in accordance with the substance of the contractual agreement.
Financial assets and financial liabilities are recognised when the Group becomes a party to the contractual provisions of the
financial instrument and are measured initially at fair value adjusted for transaction costs, except for those carried at fair value
through profit or loss which are measured initially at fair value. Subsequent measurement of financial assets and financial liabilities
is described below.
Financial assets are derecognised when the contractual rights to the cash flows from the financial asset expire, or when the financial
asset and substantially all the risks and rewards are transferred. A financial liability is derecognised when it is extinguished,
discharged, cancelled or expires.
The Group’s financial assets consist of cash and other receivables. Cash and cash equivalents are defined as short term cash
deposits which comprise cash on deposit with an original maturity of less than 3 months. Other receivables are initially measured at
fair value and subsequently at amortised cost.
36
Notes to the Financial Statements (continued)
1 Principal accounting policies (continued)
The Group’s financial liabilities are non-interest bearing trade and other payables, other interest bearing borrowings. Non-interest
bearing trade and other payables and other interest bearing borrowings are stated initially at fair value and subsequently at
amortised cost.
Where a loan is renegotiated on substantially different terms, this is treated as an extinguishment of the original financial liability and
the recognition of a new financial liability. The terms are considered to be ‘substantially different’ if the discounted present value of
the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective
interest rate, is at least 10 per cent different from the discounted present value of the remaining cash flows of the original financial
liability. In addition to this quantitative test, a qualitative test is also applied.
Share capital issued to extinguish financial liabilities is fair valued with any difference to the carrying value of the financial liability
taken to the profit or loss.
1.14 Inventories
Inventories are initially recognised at cost, and subsequently at the lower of cost and net realisable value. Cost comprises all costs
of purchase and other costs incurred in bringing the inventories to their present location and condition.
1.15 Other provisions
A provision is recognised when the Group has a present legal or constructive obligation as a result of a past event, and it is
probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are
determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time
value of money and, where appropriate, the risks specific to the liability.
1.16 Share capital
Ordinary and deferred shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options
are shown in equity as a deduction from the proceeds.
1.17 Share-based payments
The Group has used shares and share options as consideration for services received from employees.
Equity-settled share-based payments to employees and others providing similar services are measured at fair value at the date of
grant. The fair value determined at the grant date of such an equity-settled share-based instrument is expensed on a straight-line
basis over the vesting period, based on the Group’s estimate of the shares that will eventually vest.
Equity-settled share-based payment transactions with other parties are measured at the fair value of the goods or services received,
except where the fair value cannot be estimated reliably, in which case they are measured at the fair value of the equity instruments
granted, measured at the date the entity obtains the goods or the counterparty renders the service. The fair value determined at the
grant date of such an equity-settled share-based instrument is expensed since the shares vest immediately. Where the services are
related to the issue of shares, the fair values of these services are offset against share premium where permitted.
Fair value is measured using the Black-Scholes model. The expected life used in the model has been adjusted based on the
Management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.
1.18 Warrants
Warrants are separated from the host contract as their risks and characteristics are not closely related to those of the host contracts.
Where the exercise price of the warrants is in a different currency to the functional currency of the Company, at each reporting date
the warrants are valued at fair value with changes in fair values recognised through profit or loss as they arise. The fair values of the
warrants are calculated using the Black-Scholes model. Where the warrant exercise price is in the same currency as the functional
currency of the issuer and involve the issuance of a fixed number of shares the warrants are recorded in equity.
1.19 Revenue
Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for oil and gas
products provided in the normal course of business, net of discounts, VAT and other sales related taxes to third party customers.
Revenues are recognised when the risks and rewards of ownership together with effective control are transferred to the customer,
which is considered to occur when title passes to the customer and the amount of the revenue and associated costs incurred in
respect of the relevant transaction can be reliably measured. Revenue is not recognised unless it is probable that the economic
benefits associated with the sales transaction will flow to the Group. Under the Group’s contractual agreements, risk and reward
passes upon transfer of oil to the customer at a designated oil terminal or upon collection from the field, depending on the relevant
contract.
Payments in advance by oil traders are recorded initially as deferred revenue, reflecting the nature of the transaction.
Subsequently, the deferred revenue is reduced and revenue is recorded, as sales are made under the Group’s revenue recognition
policy.
37
Notes to the Financial Statements (continued)
1 Principal accounting policies (continued)
1.20 Cost of sales
During test production cost of sales cannot be reliably estimated and therefore a cost of sales equal to revenue is recognised and
credited to the unproven oil and gas assets.
1.21 Segmental reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker.
The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating
segments and making strategic decisions, has been identified as the Board of Directors. The Group has one operating segment
being oil exploration and production in Kazakhstan and therefore one reporting segment. The Group has several cost pools divided
based on the different contractual territory of its assets. As the activity of all cost pools is the same (oil exploration and production)
and all of them operate geographically in Kazakhstan, the Group reports one segment in its financials.
1.22 Interest receivable and payable
Interest income and expense are reported on an accrual basis using the effective interest rate method.
1.23 Exchange rates
For reference the year end exchange rate from sterling to US$ was 1.35 and the average rate during the year was 1.3. The year-
end exchange rate from KZT to US$ was 332.33 and the average rate during the year was 326.
2 Critical accounting estimates and judgements
In the process of applying the Group’s accounting policies, which are described in note 1, the Management has made the following
judgements and key assumptions that have the most significant effect on the amounts recognised in the financial statements.
2.1 Recoverability of exploration and evaluation costs
Under the full cost method of accounting for exploration and evaluation costs, such costs are capitalised as intangible assets by
reference to appropriate cost pools, and are assessed for impairment on a concession basis based on the IFRS 6 impairment
indicators detailed in the accounting policy note 1.8. As at 31 December 2017, the Group assessed the exploration and evaluation
assets disclosed in note 11 and determined that no indicators of impairment existed at a cost pool level in respect of the BNG cost
pool. In forming this assessment, the Board considered the results of the Competent Person report, the economic models
associated with the shallow wells, the results of exploration activity to date, the status of licences and future plans for the licence
areas. In forming its assessment, the Board considered the Group’s commitments under the licence detailed in note 20. The Board
noted the early renewal of its BNG licence in 2017 for a further 6 years for which a work program is required to be agreed with the
relevant authorities and is expected to be agreed in due course.
The Beibars cost pool remains impaired based on the continuance of the force majeure. The Group has decided to formally
relinquish any interest in Beibars. Currently the Group is in the process of returning all available information and contract territory to
the Ministry of Energy.
2.2 Classification of BNG as an unproven oil and gas asset
The costs capitalised in respect of the BNG contract area are recorded within unproven oil and gas assets. Judgment has been
applied in assessing whether the asset meets the criteria for reclassification to proven oil and gas assets under the Group’s
accounting policy in note 1.8 given the increased production volumes and reserves. The Board considers the BNG contract area to
remain in an exploration phase given the level of wells and production relative to plans for the field, the exploration status of the
licence and the requirement to sell its oil in the domestic market which represents a substantial discount to the international market.
2.3 Recoverability of VAT
The Group holds VAT receivables of $3.5million (2016: $3.6million) as detailed in note 15 which are anticipated to be primarily
recovered through offset of future VAT payable in accordance with Kazakh legislation. Management have assessed the
recoverability of the asset based on forecast levels of VAT payables which demonstrate that the balance will be recovered within 3.5
years. This required estimates regarding future production, oil prices and expenditure.
2.4 Decommissioning
Provision has been made in the accounts for future decommissioning costs to plug and abandon wells in note 20. The costs of
provisions have been added to the value of the unproven oil and gas asset and will be depreciated on a unit of production basis.
The decommissioning liability is stated in the accounts at discounted present value and accreted up to the final expected liability by
way of an annual finance charge. The Group has potential decommissioning obligations in respect of its interests in Kazakhstan.
The extent to which a provision is required in respect of these potential obligations depends, inter alia, on the legal requirements at
the time of decommissioning, the cost and timing of any necessary decommissioning works, and the discount rate to be applied to
such costs. Actual costs incurred in future periods may substantially differ from the amounts of provisions. In addition, future
changes in environmental laws and regulations, estimates of deposit useful lives and discount rates may affect the carrying value of
this provision
38
Notes to the Financial Statements (continued)
2 Critical accounting estimates and judgements (continued)
2.5 Share-based compensation
In order to calculate the charge for share-based compensation as required by IFRS 2, the Group makes estimates principally
relating to the assumptions used in its option-pricing model.
3 Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker.
The chief operating decision maker, who is responsible for allocating resources and assessing the performance of the operating
segments and making strategic decisions, has been identified as the Board of Directors. The Group operates in one operating
segment (exploration for and production of oil in Kazakhstan). All revenues from test production are generated domestically in
Kazakhstan. 67% of the Group’s revenue was derived from one major customer.
4 Operating loss
Group operating loss for the year has been arrived after charging:
Depreciation of property, plant and equipment (note 12)
Auditors’ remuneration (note 5)
Staff costs (note 6)
Share based payment remuneration (note 6)
5 Group Auditor’s remuneration
Group
2017
US$’000
(43)
(292)
(1,403)
(476)
Group
2016
US$’000
(42)
(170)
(1,541)
(555)
Fees payable by the Group to the Company's auditor BDO and its member firms in respect of the year:
Fees for the audit of the annual financial statements
Audit related services
Other services – tax related
Fees payable by the Group to Grant Thornton and its associates in respect of the year:
Auditing of accounts of subsidiaries of the Company
6 Employees and Directors
Staff costs during the year
Wages and salaries
Social security costs
Pension costs
Share-based payments
Payroll expenses were capitalized in the amount of US$ 330,000 (2016: US$ 211,000).
Group
2017
US$’000
Group
2016
US$’000
72
11
180
263
77
13
59
149
Group
2017
US$’000
Group
2016
US$’000
29
29
21
21
Group
2017
US$’000
Company
2017
US$’000
Group
2016
US$’000
Company
2016
US$’000
1,403
135
90
476
2,104
794
32
-
476
1,302
1,541
128
83
555
2,307
744
32
-
555
1,331
39
Notes to the Financial Statements (continued)
6 Employees and Directors (continued)
Average monthly number of people employed
(including executive Directors)
Technical
Field operations
Finance
Administrative and support
Directors’ remuneration
Director’s emoluments
Share-based payments
Group
2017
Company
2017
US$’000
Group
2016
Company
2016
US$’000
13
53
10
19
95
2
-
2
2
6
13
46
9
22
90
1
-
2
2
5
Group
2017
US$’000
Group
2016
US$’000
524
333
857
525
444
969
The Directors are the key management personnel of the Company and the Group. Details of Directors' emoluments and interests in
shares are shown in the Remuneration Committee Report. The highest paid director had emoluments totalling US$240,000 (2016:
US$240,000).
7 Finance cost
Loan interest payable
Unwinding of discount on provisions (note 20)
8 Finance income
Unwinding of discount of loan receivable from Baverstock (note 15)
Finance income related to the late receipt of receivable under SPA (note 15)
9 Taxation
Analysis of charge for the year
Current tax charge
Deferred tax charge
Loss before tax
Tax on the above at the standard rate of corporate income tax in the UK 19.25% (2016:
20%)
Effects of:
Non-deductible expenses
Withholding tax on interest expense
Unrecognised tax losses carried forward
.
Group
2017
US$’000
165
2
167
Group
2017
US$’000
100
94
194
Group
2017
US$’000
1,345
-
1,345
Group
2017
US$’000
(3,349)
(645)
545
1,345
100
1,345
Group
2016
US$’000
765
61
826
Group
2016
US$’000
235
-
235
Group
2016
US$’000
1,124
-
1,124
Group
2016
US$’000
(4,249)
(850)
305
1,124
545
1,124
40
Notes to the Financial Statements (continued)
10 Earnings/(loss) per share
Basic earnings/(loss) per share is calculated by dividing the income/(loss) attributable to ordinary shareholders by the weighted
average number of ordinary shares outstanding during the year including shares to be issued.
There is no difference between the basic and diluted loss per share as the Group made a loss for the current and prior year. Dilutive
potential ordinary shares include share options granted to employees and directors where the exercise price (adjusted according to
IAS33) is less than the average market price of the Company’s ordinary shares during the period.
The calculation of earnings/(loss) per share is based on:
The basic weighted average number of ordinary shares in
issue during the year
The loss for the year attributable to owners of the parent (US$’000)
2017
2016
1,362,172,379
(3,928)
937,191,981
(3,582)
There were 8,400,000 potentially dilutive instruments in the year (2016: 8,400,000).
41
Notes to the Financial Statements (continued)
11 Unproven oil and gas assets
COST
Cost at 1 January 2016
Additions
Sales from test production
Foreign exchange difference
Cost at 31 December 2016
Additions
Sales from test production
Foreign exchange difference
Cost at 31 December 2017
ACCUMULATED IMPAIRMENT
Accumulated impairment at 1 January 2016
Foreign exchange difference
Accumulated impairment at 31 December 2016
Foreign exchange difference
Accumulated impairment at 31 December 2017
Net book value at 1 January 2016
Net book value at 31 December 2016
Net book value at 31 December 2017
Group
US$’000
72,128
10,470
(997)
1,622
83,223
9,158
(7,535)
(10)
84,836
Group
US$’000
14,805
332
15,137
(2)
15,135
57,323
68,086
69,701
Unproven oil and gas assets represent license acquisition costs and subsequent exploration expenditure in respect of two licenses
held by Kazakh group entities. The carrying values of those assets at 31 December 2017 were as follows: Beibars Munai LLP US$
nil (2016: US$ nil) and BNG Ltd LLP US$69,701,000 (2016: US$68,086,000).
The Directors have carried out an impairment review of these assets on a cost pool level as detailed in note 2.1. No impairment
indicators were identified for BNG Ltd LLP.
As a result of military training activities, the Group currently cannot access the Beibars license area which resulted in a force-
majeure situation and the Group is in the process of relinquishing its interest in the asset and handing it back to the Kazakh
authorities. Due to this ongoing position the carrying value remains fully impaired.
42
Notes to the Financial Statements (continued)
12
Property, plant and equipment
Following the commencement of commercial production in December 2012 the Group reclassified its Munaily assets from unproven
oil and gas assets to proven oil and gas assets. The assets were impaired in 2013 and remain fully impaired based on an
assessment of the recoverable amount of the assets.
Group
Cost at 1 January 2016
Additions
Foreign exchange difference
Cost at 31 December 2016
Additions
Disposals
Foreign exchange difference
Cost at 31 December 2017
Depreciation at 1 January 2016
Charge for the year
Foreign exchange difference
Depreciation at 31 December 2016
Charge for the year
Foreign exchange difference
Depreciation at 31 December 2017
Net book value at:
01 January 2016
31 December 2016
31 December 2017
Proven
oil and gas
assets
Motor
Vehicles
Other
Total
US$’000
US$’000
US$’000
US$’000
47
-
-
47
-
-
-
47
47
-
-
47
-
-
47
104
45
4
153
-
-
-
153
52
13
2
67
13
-
80
302
19
7
328
5
(21)
1
313
159
29
3
191
30
-
221
453
64
11
528
5
(21)
1
513
258
42
5
305
43
-
348
-
-
-
52
86
73
143
137
92
195
223
165
43
Notes to the Financial Statements (continued)
13 Investments (Company)
Investments (equity and long term advances)
Cost
At 1 January 2016
Reclassification from receivables
Receipt
At 31 December 2016
Acquisition of Eragon non-controlling interest (note 27)
Receipts
Payments
At 31 December 2017
Impairment
At 1 January 2016
Impairment
At 31 December 2016
Impairment
At 31 December 2017
Net book value at:
31 December 2016
31 December 2017
Company
US$’000
171,560
27,337
(8,302)
190,595
85,179
(398)
535
275,911
64,253
-
64,253
-
64,253
126,342
211,658
The carrying value of the investments has been assessed by the Directors including consideration of the underlying BNG contract
area progress and the implied values of BNG based on the Baverstock merger in the year. On 1 June 2017 Caspian Sunrise plc
acquired an additional 41% in its subsidiary Eragon Petroleum Ltd in exchange of issuance of 651,436,544 Company's shares (note
17) and forgiveness of the debt due from Baverstock (note 15). After that Company’s interest in Eragon increased from 59% to
100%.
Direct investments
Name of undertaking
Country of
incorporation
Effective
holding and
proportion
of voting
rights held
at 31 December
2017
Effective holding
and
proportion
of voting
rights held
at 31 December
2016
Eragon Petroleum Limited
United Kingdom
100%
59%
Eragon Petroleum FZE
Dubai
100%
100%
Beibars BV
Netherlands
100%
100%
Ravninnoe BV
Netherlands
100%
100%
Roxi Petroleum Kazakhstan LLP
Kazakhstan
100%
100%
Registered
address
Nature
of business
5 New Street
Square
London
EC4A 3TW
Holding
Company
CN-135789,
Jebel Ali, Dubai,
UAE
Management
Company
Utrechtseweg
79
1213 TM
Hilversum
The Netherlands
Utrechtseweg
79
1213 TM
Hilversum
The Netherlands
152/140
Karasay Batyr
Str., Almaty,
Kazakhstan
Holding
Company
Holding
Company
Management
Company
44
Notes to the Financial Statements (continued)
13 Investments (continued)
Indirect investments held by Eragon Petroleum Limited
Name of undertaking
Country of
incorporation
Effective
holding and
proportion
of voting
rights held
at 31 December
2017
Effective holding
and
proportion
of voting
rights held
at 31 December
2016
Registered
address
Nature
of business
Galaz Energy BV
Netherlands
100%
100%
BNG Energy BV
Netherlands
100%
100%
BNG Ltd LLP
Kazakhstan
99%
99%
Munaily Kazakhstan LLP
Kazakhstan
99%
99%
Utrechtseweg 79
1213 TM Hilversum
The Netherlands
Holding
Company
Utrechtseweg 79
1213 TM Hilversum
The Netherlands
Holding
Company
152/140 Karasay
Batyr Str., Almaty,
Kazakhstan
Exploration
Company
152/140 Karasay
Batyr Str., Almaty,
Kazakhstan
Oil Production
Company
Indirect investments held by Beibars BV
Name of undertaking
Country of
incorporation
Effective
holding and
proportion
of voting
rights held
at 31 December
2017
Effective holding
and
proportion
of voting
rights held
at 31 December
2016
Registered
address
Nature
of business
Beibars Munai LLP
Kazakhstan
50%
50%
152/140 Karasay
Batyr Str., Almaty,
Kazakhstan
Exploration
Company
Beibars Munai LLP is a subsidiary as the Group is considered to have control over the financial and operating policies of this entity.
Its results have been consolidated within the Group.
45
Notes to the Financial Statements (continued)
14 Inventories
Materials and supplies
15 Other receivables
Amounts falling due after one year:
Prepayments made
VAT receivable
Intercompany receivables
Amounts falling due within one year:
Loan provided to Baverstock
Receivable from Baverstock due to royalty
settlement
Prepayments made
Receivable under SPA
Other receivables
Group
2017
US$’000
21
21
Group
2017
Group
2016
Company
2017
US$ ‘000
US$ ‘000
US$ ‘000
5,799
3,456
-
9,255
-
-
227
-
605
832
4,187
3,551
-
7,738
3,154
3,202
116
1,602
416
8,490
98
-
2,846
2,944
-
-
5
-
-
5
Group
2016
US$’000
10
10
Company
2016
US$’000
32
-
2,696
2,728
-
3,202
2
-
-
3,204
The VAT receivables relate to purchases made by operating companies in Kazakhstan and will be recovered through VAT payable
resulting from sales to the local market and, after the commencement of oil production and its export from Kazakhstan, through cash
refunds in accordance with Kazakh tax legislation.
On 1 June 2017 Caspian Sunrise plc acquired an additional 41% in its subsidiary Eragon Petroleum Ltd in exchange of issuance of
651,436,544 Company's shares and forgiveness of the debt due from Baverstock fair valued at the level of US$ 6.5 million
(including interest accrued during 2017). As a result, Baverstock related receivables were converted to an investment in Eragon.
The current intercompany receivables bear interest rates between LIBOR + 2% and LIBOR + 7%.
Long-term advances to the subsidiaries in note 15 are shown net of provisions of US$34.2 million (2016: US$33.3 million). The
movement of the bad debt allowance related to the long-term advances was as follows:
Denomination
As at 1 January
Charge
As at 31 December
Group
2017
US$’000
-
-
-
Group
2016
US$’000
-
-
Company
2017
US$’000
33,310
922
Company
2016
US$’000
26,550
6,760
-
34,232
33,310
46
Notes to the Financial Statements (continued)
16 Cash and cash equivalents
Cash at bank and in hand
Group
2017
US$’000
1,479
Group
2016
US$’000
405
Company
2017
US$’000
17
Company
2016
US$’000
10
Funds are held in US Dollars, Sterling and Kazakh Tenge currency accounts to enable the Group to trade and settle its debts in the
currency in which they occur and in order to mitigate the Group's exposure to short-term foreign exchange fluctuations. All cash is
held in floating rate accounts.
Denomination
US Dollar
Sterling
Kazakh Tenge
17 Called up share capital
Group and Company
Group
2017
US$’000
1,221
6
252
1,479
Group
2016
US$’000
51
7
347
405
Company
2017
US$’000
11
6
-
17
Company
2016
US$’000
3
7
-
10
Balance at 1 January 2016
Share options exercised
Balance at 31 December 2016
Acquisition of Eragon non-controlling
(note 27)
Debts converted to equity (note 21)
Balance at 31 December 2017
interest
Number
of ordinary
shares
935,945,577
1,487,500
937,433,077
651,436,544
80,804,199
1,669,673,820
US$’000
15,979
21
16,000
8,364
1,037
25,401
Number
of deferred
shares
373,317,105
-
373,317,105
-
-
373,317,105
US$’000
64,702
-
64,702
-
-
64,702
Caspian Sunrise Plc has authorised share capital of £100,000,000 divided into 6,640,146,055 ordinary shares of 1p each and
373,317,105 deferred shares of 9p each.
18 Trade and other payables – current
Trade payables
Taxation and social security
Accruals
Other payables
Intercompany payables *
Advances received (deferred revenue)
CIT payable
Group
2017
US$’000
1,220
175
225
2,120
-
5,798
-
9,538
Group
2016
US$’000
674
101
225
2,020
-
2,421
202
5,643
Company
2017
US$’000
380
38
195
318
7,695
-
-
Company
2016
US$’000
183
26
195
-
6,470
-
202
8,626
7,076
As at 31 December 2017 and 31 December 2016, the Group has received a significant amount of prepayments from the oil traders
in relation to increasing production on the BNG oil field.
Other payables relate to the purchase of Munaily oil field.
47
Notes to the Financial Statements (continued)
18
Trade and other payables – non-current
Intercompany payables *
Taxation and social security
Group
2017
US$’000
-
10,958
10,958
Group
2016
US$’000
-
9,614
9,614
Company
2017
US$’000
16,058
-
16,058
Company
2016
US$’000
14,903
-
14,903
Taxation and social security payable relate to withholding tax accrued on the interest expense.
* Intercompany payables in 2017 included US$7.7m in respect of amount payable on demand. The amount was previously recorded
as a non-current payable in 2016. The comparative for 2016 has been reclassified to current to reflect the terms applicable in the
prior period.
19 Short-term borrowings
Prosperity (a)
Other borrowings (b)
Group
2017
US$’000
1,196
936
2,132
Group
2016
US$’000
-
809
809
Company
2017
US$’000
-
-
-
Company
2016
US$’000
-
-
-
a) During December 2017 Eragon Petroleum FZE (a subsidiary of the Company) received a US $1.2 million loan from KC Caspian
Explorer (KCCE), a 100% subsidiary of Prosperity Petroleum Ltd (“PPL”) under a loan provided by PPL. PPL is a company
controlled by Mr Kuat Oraziman and therefore a related party of the Group. The loan is interest free and matures in December 2018.
In October 2017, Eragon Petroleum FZE received US$7 million from KCCE and advanced such funds to Mr Kuat Oraziman on
behalf of PPL under the terms of a loan facility between PPL as lender and Mr Kuat Oraziman as borrower. The Group has no
obligation or liability to PPL or rights over the amounts transferred to Mr Kuat Oraziman as a result of the flow of funds.
b) The total amount borrowed by the Group at 31 December 2017 US$936,000 (2016: US$809,000) was payable to Kuat Oraziman
and legal entity controlled by Mr Oraziman (note 26.1 (c)). The loans are interest free and are repayable on demand.
48
Notes to the Financial Statements (continued)
20 Provisions
Group only
Balance at 1 January 2016
Increase/(decrease) in provision
Paid in the year
Unwinding of discount
Foreign exchange difference
Balance at 31 December 2016
Non-current provisions
Current provisions
Balance at 31 December 2016
Group only
Balance at 1 January 2017
Increase in provision
Paid in the year
Unwinding of discount
Foreign exchange difference
Balance at 31 December 2017
Non-current provisions
Current provisions
Balance at 31 December 2017
Employee
holiday
provision
US$’000
Liabilities
under Social
Development
Program and
historical cost
US$’000
Abandonment
fund
2016
Total
US$’000
US$’000
62
25
(21)
-
2
68
-
68
68
3,535
751
(232)
48
48
4,150
526
3,624
4,150
Employee
holiday
provision
US$’000
Liabilities
under Social
Development
Program and
historical cost
US$’000
68
25
-
-
-
93
-
93
93
4,150
700
(19)
-
2
4,833
527
4,306
4,833
140
(3)
-
13
3
153
153
-
153
Abandonment
fund
3,737
773
(253)
61
53
4,371
679
3,692
4,371
2017
Total
US$’000
US$’000
153
39
(6)
2
6
194
194
-
194
4,371
764
(25)
2
8
5,120
721
4,399
5,120
Liabilities and commitments in relation to Subsoil Use Contracts are disclosed below:
a) Beibars Munai LLP
During 2007 Beibars Munai LLP, a subsidiary undertaking, and the Ministry of Energy and Mineral Resources of the Republic of
Kazakhstan signed a Contract for oil exploration within the block XXXVII-10 in Mangistauskaya oblast (Contract #2287). The
contract term expired in January 2012 and the Group has applied to the Ministry of Oil and Gas for the extension of the Beibars
exploration license, given the force majeure situation. However the Group was unsuccessful.
In February 2017 the Group decided to formally relinquish any interest in Beibars. Currently the Group is in the process of returning
all available information and contract territory to the Ministry of Energy.
49
Notes to the Financial Statements (continued)
20 Provisions (continued)
b)
Munaily Kazakhstan LLP
Munaily Kazakhstan LLP, a subsidiary, signed a contract # 1646 dated 31 January 2005 with the Ministry of Energy and Mineral
Resources of RK (now the Ministry of Oil and Gas (MOG) for the exploration and extraction of hydrocarbons on Munaily deposit
located in the Atyrau region.
The contract is valid for 25 years. On 13 July 2011 Munaily Kazakhstan LLP and a competent authority signed Addendum No. 5 to
the Subsoil Use Contract (SSUC), which stipulates the oil production period to be 15 years to 2025 and approves the minimum work
program for the production period.
In accordance with the terms of the contract and addendums Munaily Kazakhstan LLP remains committed to the following:
• Social development of Atyrau region – US$600,000* over the period of the contract;
• To allocate US$400,000* to the Astana city development program;
• Professional education of engaged Kazakhstan personnel – not less than 1% of total investments;
• Transferring, on an annual basis, 1% of production expenditures to a liquidation fund through a special deposit account in a
bank located within the Republic of Kazakhstan; and
• To fund the minimum work program during the 15 year production period of US$29,271,756;
• Once the production stage begins, to pay the remaining part of historical costs of US$1,579,770 within 10 years in equal
quarterly instalments.
*Unpaid amounts in respect of the above social obligations are included within liabilities for social programs above.
c) BNG Ltd LLP
BNG Ltd LLP a subsidiary, signed a contract #2392 dated 7 June 2007 with the Ministry of Energy and Mineral Resources of RK
for exploration at Airshagyl deposit, located in Mangistau region. Under addendum No.1 dated 17 April 2008, the Contract Area was
increased. The contract was valid for 4 years and expired on 7 June 2011. Addendum No. 6 to the Subsoil Use Contract for
extension of exploration period up to June 2013 was obtained on 13 July 2011. On 16 July 2013 BNG Ltd LLP signed Addendum
No. 7 extending the exploration period for two consecutive years until June 2015. On 22 June 2015 BNG Ltd LLP signed Addendum
No. 9 extending the exploration period for three consecutive years until June 2018. On 24 December 2015 BNG Ltd LLP signed
Addendum No.10 according to which the geological territory was extended by 140.6 sq kilometres. On 23 September 2016
addendum No.11 was signed that has reduced the penalties for non-fulfilment of the contractual obligations from 30% to 1%. On 20
December 2017 BNG Ltd LLP signed addendum No.12 where amended its contractual obligations increasing the minimal work
program for 2016-2018 from US$16.5 million to US$27.5 million. All other obligations, including social obligations, remained the
same.
In accordance with the terms of the contract and addendums, BNG Ltd LLP remains committed to the following:
• For the three-year extension period up to 2018 US$700,000 per annum should be invested in the social development of the
region;
• To fund minimum work program during the extended exploration period of US$ 27,527,000
•
Investing not less than 1% of total investments in professional training of Kazakhstani personnel engaged in work under the
contract; and
• Transferring, on an annual basis, 1% of exploration expenditures to a liquidation fund through a special deposit account in a
bank located within the Republic of Kazakhstan.
In June 2018 BNG Ltd LLP is going to sign the Addendum No.13 with the Ministry of Energy for the 6 years appraisal period on the
BNG oilfield.
As at December 31, 2017 BNG Ltd LLP has not paid its social obligations for the years 2015-2017. US$ 2,100,000 will be paid
before the signing of Addendum No.13.
50
Notes to the Financial Statements (continued)
21 Borrowings
Loan from Vertom
Group
2017
US$’000
-
-
Group
2016
US$’000
9,935
9,935
Company
2017
US$’000
-
-
Company
2016
US$’000
9,935
9,935
On 29 September 2011 the Company entered into the loan facility with Vertom International NV (“Vertom”) whereby Vertom agreed
to lend up to US$5 million to the Company with an associated interest of 12% per annum. The Company offered Vertom security
over its investments in its operating assets in respect to this loan facility. On 30 April 2012 the Group extended the term of the loan
facility arrangement with Vertom for further two years to 30 April 2014 and at the same time increased the facility amount to US$7
million. On 28 June 2013 the term of the loan facility was extended until 30 April 2016. On 26 June 2015 the term of the loan facility
was extended until 30 April 2018. The loan was converted to the 80,804,199 Company's shares on June 1 2017 after the finalization
of the purchase of Baverstock's interest in the share capital of Eragon (note 17 and note 27).
22 Deferred tax
Deferred tax liabilities comprise:
Deferred tax on exploration and evaluation assets acquired
Group
2017
US$’000
7,784
7,784
Group
2016
US$’000
7,748
7,748
The Group recognises deferred taxation on fair value uplifts to its oil and gas projects arising on acquisition. These liabilities reverse
as the fair value uplifts are depleted or impaired.
The movement on deferred tax liabilities was as follows:
At beginning of the year
Foreign exchange
Group
2017
US$’000
7,748
36
7,784
Group
2016
US$’000
7,485
263
7,748
As at 31 December 2017 the Group has accumulated deductible tax expenditure related to BNG expenditure of approximately
US$104 million available to carry forward and offset against future profits. This represents an unrecognised deferred tax asset of
approximately US$20.8 million. As a result of these deductions the tax written down value of the exploration assets is zero, creating
an equal and opposite deferred tax liability which is offset by the deferred tax asset. Munaily and Beibars have tax losses carried
forward of US$7.8 million and US$6.0m. These assets are however fully impaired and there is insufficient certainty of future
profitability to utilise these deductions.
23 Share option scheme
During the year the Group and the Company had in issue equity-settled share-based instruments to its Directors and certain
employees. Equity-settled share-based instruments have been measured at fair value at the date of grant and are expensed on a
straight-line basis over the vesting period, based on an estimate of the shares that will eventually vest. Options generally vest in
three equal tranches over the three years following the grant.
The options were issued to Directors and employees as follows:
Number of
options granted
Number of options
expired
Options
exercised
Total options
outstanding
As at 31 December 2016
Directors
Employees and others
As at 31 December 2017
88,458,226 (33,107,634)
- (2,018,490)
- (10,440,091)
88,458,226 (45,566,215)
32,242,011 outstanding options as at 31 December 2017 are exercisable.
(9,900,000) 45,450,592
- (2,018,490)
- (10,440,091)
(9,900,000) 32,992,011
The range of exercise prices of share options outstanding at the year end is 4p – 65p (2016: 4p – 65p). The weighted average
remaining contractual life of share options outstanding at the end of the year is 4.4 years (2016: 4.9 years).
Weighted
average
exercise price
in pence (p)
per share
20
-
-
17
51
Notes to the Financial Statements (continued)
24 Warrants
Equity - warrants
The Company had 7.5 million warrants valid until 21 May 2017 that were recognised in equity (other reserves) in the amount of
US$1,779 thousand. During 2017 the warrants expired therefore the Company reclassified the amount to Retained deficit.
25 Financial instrument risk exposure and management
In common with all other businesses, the Group and Company are exposed to risks that arise from its use of financial instruments.
This note describes the Group and Company’s objectives, policies and processes for managing those risks and the methods used
to measure them. Further quantitative information in respect of these risks is presented throughout these financial statements.
The significant accounting policies regarding financial instruments are disclosed in note 1.
There have been no substantive changes in the Group or Company’s exposure to financial instrument risks, its objectives, policies
and processes for managing those risks or the methods used to measure them from previous years unless otherwise stated in this
note.
Principal financial instruments
The principle financial instruments used by the Group and Company, from which financial instrument risk arises, are as follows:
Financial assets
Intercompany receivables
Loan provided to Baverstock
Receivable from Baverstock due to royalty
settlement
Receivable under SPA
Other receivables
Restricted use cash
Cash and cash equivalents
Financial liabilities
Trade and other payables
Other payables - current
Other payables - non-current
Borrowings – current
Borrowings - non-current
Group
2017
US$’000
Group
2016
US$’000
Company
2017
US$’000
Company
2016
US$’000
-
-
-
-
605
263
1,479
2,347
-
3,154
3,202
1,602
416
283
405
9,062
2,846
-
-
-
-
-
17
2,696
-
3,202
-
-
-
10
2,863
5,908
Group
2017
US$’000
Group
2016
US$’000
Company
2017
US$’000
Company
2016
US$’000
3,565
-
2,132
-
5,697
2,919
-
809
9,935
13,663
893
7,695
16,058
-
-
24,646
378
6,470
14,903
-
9,935
31,686
The Baverstock receivable due to royalty settlement was initially measured at fair value based on the Baverstock share of the
royalty obligations settled through the issue of the Company’s shares in 2015. As at 31 December 2016 the fair value of the asset
has been measured with reference to the value attributed to the receivable as part of the Baverstock acquisition as detailed in note
27. During 2017 the loan has been converted to investments after Caspian Sunrise plc acquired an additional 41% in its subsidiary -
Eragon Petroleum Ltd (note 26).
52
Notes to the Financial Statements (continued)
25 Financial instrument risk exposure and management (continued)
Changes in liabilities arising from financial activities
Below is the movement of financial liabilities of the Group for the years ended 31 December 2017 and 2016:
1 January
2017
Loans
received
Interest
accrued
Conversion to
equity
Repayment
Foreig exchange
difference, net
31 December
2017
Financial
liabilities
Borrowings
10,744
8,315
165
(10,100)
(7,000)
8
2,132
1 January
2016
Loans
received
Interest
accrued
Conversion to
equity
Repayment
Foreig exchange
difference, net
31 December
2016
Financial
liabilities
Borrowings
10,211
501
765
-
(753)
20
10,744
Principal financial instruments
The principal financial instruments used by the Group and Company, from which financial instrument risk arises, are as follows:
•
•
•
•
other receivables
cash at bank
trade and other payables
borrowings
General objectives, policies and processes
The Board has overall responsibility for the determination of the Group and Company’s risk management objectives and policies
and, whilst retaining ultimate responsibility for them, it has delegated the authority for designing and operating processes that
ensure the effective implementation of the objectives and policies to the Group and Company’s finance function. The Board receives
regular reports from the finance function through which it reviews the effectiveness of the processes put in place and the
appropriateness of the objectives and policies it sets.
The overall objective of the Board is to set policies that seek to reduce risk as far as possible without unduly affecting the Group and
Company’s competitiveness and flexibility. Further details regarding these policies are set out below:
Credit risk
Credit risk arises principally from the Group’s other receivables. It is the risk that the counterparty fails to discharge its obligation in
respect of the instrument. The maximum exposure to credit risk equals the carrying value of these items in the financial statements.
When commercial exploitation commences sales will only be made to customers with appropriate credit rating. Sales during test
production are made on prepayment base thereby eliminating credit risk.
Credit risk with cash and cash equivalents is reduced by placing funds with banks with high credit ratings.
Credit risk with intercompany receivables is reduced by placing funds after detailed analysis of the spending and determination of
the high potential of future cash returns.
53
Notes to the Financial Statements (continued)
25 Financial instrument risk exposure and management (continued)
Capital
The Company and Group define capital as share capital, share premium, deferred shares, other reserves, retained deficit and
borrowings. In managing its capital, the Group’s primary objective is to provide a return for its equity shareholders through capital
growth. Going forward the Group will seek to maintain a gearing ratio that balances risks and returns at an acceptable level and also
to maintain a sufficient funding base to enable the Group to meet its working capital and strategic investment needs. In making
decisions to adjust its capital structure to achieve these aims, either through new share issues or the issue of debt, the Group
considers not only its short-term position but also its long-term operational and strategic objectives.
The Group’s gearing ratio as at 31 December 2017 was 5% (2016:22%).
There has been no other significant changes to the Group’s Management objectives, policies and processes in the year.
Liquidity risk
Liquidity risk arises from the Group and Company’s Management of working capital and the amount of funding committed to its
exploration programme. It is the risk that the Group or Company will encounter difficulty in meeting its financial obligations as they
fall due.
The Group and Company’s policy is to ensure that it will always have sufficient cash to allow it to meet its liabilities when they
become due. To achieve this aim, it seeks to raise funding through equity finance, debt finance and farm-outs sufficient to meet the
next phase of exploration and where relevant development expenditure.
The Board receives cash flow projections on a periodic basis as well as information regarding cash balances. The Board will not
commit to material expenditure in respect of its ongoing exploration programmes prior to being satisfied that sufficient funding is
available to the Group to finance the planned programmes.
For maturity dates of financial liabilities as at 31 December 2017 and 2016 see table below. The amounts are contractual payments
and may not tie to the carrying value:
Group 2017 US$’000
Group 2016 US$’000
Company 2017 US$’000
Company 2016 US$’000
Interest rate risk
On
Demand
Less than
3 months
936
809
7,695
6,470
911
2,919
359
378
3-12
months
3,850
-
534
-
1- 5 years
-
10,300
-
10,300
Over 5
years
-
-
23,617
23,530
Total
5,697
14,028
32,205
40,678
The majority of the Group’s borrowings are at fixed rate. As a result the Group is not exposed to the significant interest rate risk.
Currency risk
The Group and Company’s policy is, where possible, to allow group entities to settle liabilities denominated in their functional
currency (primarily US$ and Kazakh Tenge) in that currency. Where the Group or Company entities have liabilities denominated in a
currency other than their functional currency (and have insufficient reserves of that currency to settle them) cash already
denominated in that currency will, where possible, be transferred from elsewhere within the Group.
In order to monitor the continuing effectiveness of this policy, the Board receives a periodic forecast, analysed by the major
currencies held by the Group and Company.
The Group and Company are primarily exposed to currency risk on purchases made from suppliers in Kazakhstan, as it is not
possible for the Group or Company to transact in Kazakh Tenge outside of Kazakhstan. The finance team carefully monitors
movements in the US$/Kazakh Tenge rate and chooses the most beneficial times for transferring monies to its subsidiaries, whilst
ensuring that they have sufficient funds to continue its operations. The currency risk relating to Tenge is significant.
In the event that Kazakhstani Tenge devalues against the US$ by 30% the Group would incur foreign exchange losses in the
amount of US$51 million (2016: US$48 million) that would be reflected in other comprehensive income. The impact of such a
devaluation on the translation of monetary assets and liabilities (predominantly intercompany loans) held in Kazakhstan and
denominated in non-Tenge currencies would be exchange losses recorded in the statement of changes in equity of US$51 million
(2016: US$48 million).
54
Notes to the Financial Statements (continued)
26
Related party transactions
The Company has no ultimate controlling party.
26.1 Loan agreements
a) Loan to Baverstock
In August 2010 Galaz Energy BV (a subsidiary of the Company) provided Baverstock GmbH (holds 41% interest in Eragon) with a
loan facility of up to US$10,000,000, it was initially at LIBOR +7%, from 01 January 2012 the loan is interest free. The amounts
borrowed under this loan agreement were to be used exclusively for the repayment of Kuat Oraziman’s US$10,000,000 loan
received in July 2007. The facility was to be repaid through future dividends receivable by Baverstock from Eragon. In December
2010 the first tranche of US$5,000,000 under the facility agreement was transferred to Kuat Oraziman directly by Galaz Energy BV
to be repaid by Baverstock (Kuat Oraziman is the main shareholder in Baverstock). During 2017 the loan has been converted to
investments after Caspian Sunrise plc acquired an additional 41% in its subsidiary - Eragon Petroleum Ltd (note 27).
b) Receivable from Baverstock due to royalty
On 24 July 2015 the Company entered into an agreement with Canamens Limited and Sector Spesit IV to cancel future royalty
payments due to them from production from Company’s BNG asset in return for the issue of 46,661,654 fully paid Company’s
ordinary shares. That resulted in cancellation of the derivative financial liability in the amount of US$6.8 million and recognition of
the receivable from Baverstock in the amount of US$3.2 million related to the Baverstock portion of the Company's royalty obligation
(note 15). During 2017 the loan has been converted to investments after Caspian Sunrise plc acquired an additional 41% in its
subsidiary - Eragon Petroleum Ltd (note 27).
c) Other loans payable to Kuat Oraziman
The Company has loans outstanding as at 31 December, 2017 and 2016 with Kuat Oraziman and legal entities controlled by him,
details of which have been summarised in note 19. The loans provided are interest free.
d) Loan payable to Vertom
During the year ended 31 December 2011 the Company entered into two loan facilities with Vertom International NV, details of
which have been summarised in note 21. The loan payable at 31 December 2017 was nill (2016: US$9,935,000). A director of the
Company, Kuat Oraziman, is a director of and holds 100% of the issued share capital of both Vertom International N.V. (“Vertom”)
and Vertom International BV. Interest accrued for the year is US$ 165,000 (2016: US$ 765,000). During 2017 the loan has been
converted to the Company's share capital after Caspian Sunrise plc acquired an additional 41% in its subsidiary Eragon Petroleum
ltd (note 21).
e) Baverstock acquisition
On 1 June 2017 Caspian Sunrise plc acquired an additional 41% in its subsidiary Eragon Petroleum ltd. After that Company’s
interest in BNG and Munaily increased from 58.41% to 99% and interest in Eragon increased from 59% to 100% (note 27).
26.2
Key management remuneration
Key management comprises the Directors and details of their remuneration are set out in note 6.
26.3
Purchases
During 2017 the Group had not purchased drilling services from the related party STK Geo LLP, the company registered in
Kazakhstan, which is owned by a member of Kuat Oraziman’s family (2016: US$4.4 million). As at year end the Group has
prepayments made in the amount of US$2.6 million (2016: US$2.4 million) and trade receivables in the amount of US$92,200
(2016: US$69,300) in relation to STL Geo LLP.
During 2017 the Group had purchased drilling services from the related party KazSmartEnerKon LLP, a company registered in
Kazakhstan, which is owned by Kuat Oraziman, in the amount of US$ 4.6 million (2016: US$2 million). These expenses were
capitalized to unproven oil and gas assets. As at year end the Group has prepayments made in the amount of US$2.8 million (2016:
US$1.3 million) in relation to these drilling service.
55
Notes to the Financial Statements (continued)
27 Acquisition of non-controlling interest
On 1 June 2017 Caspian Sunrise plc acquired an additional 41% in its subsidiary Eragon Petroleum ltd in exchange of issuance of
651,436,544 Company's shares and forgiveness of the debt due from Baverstock fair valued at the level of US$6.5 million. Also the
Company incurred acquisition related costs in the amount of US$0.4 million. After that Company’s interest in BNG and Munaily
increased from 58.41% to 99% and interest in Eragon increased from 59% to 100%. Related NCI share in net assets of Eragon at
the date of acquisition was equal to US$6.6 million. The difference between the purchase consideration and net assets was charged
directly to the consolidated statement of changes in equity.
Carrying amount of NCI acquired
Consideration paid to NCI
A decrease in equity attributable to owners of the
Company
28 Events after the reporting period
3ABest Group
US$’000
6,571
88,432
(81,861)
In January 2018, the Company announced the intention to acquire 100% of the shares of 3ABest Group JSC, a company that owns
a 1,347 sq km Contract Area located close to the Caspian port city of Aktau in the Mangystau Province of Kazakhstan.
The indicated purchase price is $24 million would be satisfied by the issue of approximately 148 million new Companies shares at
the proposed price of 12p per share. Caspian Sunrise would, by completing the acquisition of 3ABest, become responsible for the
outstanding work programme commitment represented by the drilling of one well to a depth of 3,000 meters at an estimated cost of
up to $2 million. 3ABest is owned by members of the existing concert party, including the Company’s CEO Kuat Oraziman and the
former CFO Kairat Satylganov. The purchase of 3ABest is subject to further due diligence, the entering into of a definitive binding
agreement, compliance with the AIM Rules for related party transactions, the UK Takeover Code and the approval of the
Company’s Independent directors and shareholders.
56