Company number: 5966431
Caspian Sunrise plc
Annual report and financial statements
for the year ended
31 December 2019
Contents
Chairman’s Statement
Qualified Person & Glossary
Kazakhstan
Strategic Report
Directors’ report
Principal and other risks and uncertainties facing the business
Corporate Governance Report
Remuneration Committee Report
Audit Committee Report
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
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Directors
Mr C Carver (Executive Chairman)
Mr K Oraziman (Chief Executive Officer)
Lord Limerick (Non-Executive Director)
Mr T Field (Non-Executive Director)
Company Secretary
Mr C Carver FCA, FCT
Registered Office and Business address
5 New Street Square, London EC4A 3TW
Company Number 5966431
Nominated Adviser and Broker
WH Ireland Limited,
24 Martin Lane,
London, EC4R 0DR
Solicitors
Fladgate LLP
16 Great Queen Street,
London, WC2B 5DG
Auditors
BDO LLP,
55 Baker Street,
London, W1U 7EU
Share Register
Link Asset Services,
6th Floor, 65 Gresham Street,
London, EC2V 7NQ
Principal Banker
Barclays Bank
1 Churchill Place,
London, E14 5HP
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CHAIRMAN’S STATEMENT
Introduction
In the past twelve months we have taken several large steps forward towards our goal of becoming a leading, profitable
oil and gas exploration and production group focused on Kazakhstan. Operationally we are now significantly better
placed in our quest to deliver real value to our shareholders over the medium / longer term. However, in the short term
we are focused on surviving the impact of the Covid-19 virus.
Our principal weapon in this fight will be the revenues from be our MJF production. Since the year end Wells 150 &
153 have entered production increasing the production capacity from the BNG Contract Area to approximately 2,000
bopd, the majority of which may be sold by reference to international rather than domestic prices.
Our focus until the full impact of Covid-19 virus becomes clearer will be to continue to conserve cash to better preserve
the medium / longer term value for shareholders. Further details on the Group’s funding position is set out later in this
statement.
The contents of the remainder of the statement are presented as follows:
(cid:31) Significant events in the period under review and subsequently
(cid:31) Our assets
(cid:31) Finance & administration
(cid:31) The investment case
(cid:31) Outlook
There are separate sections on Kazakhstan and Risk Factors elsewhere in this Annual Report.
Significant events in the period under review
3A Best
In January 2019, we announced the completion of the acquisition of 100% of the 3A Best Group JSC, a Kazakh
corporation owning an existing Contract Area of some 1,347 sq. km located near the Caspian port city of Aktau, for a
consideration of $24 million payable by the issue of 149,253,732 Caspian Sunrise shares issued at a price of 12p per
share.
The Contract Area, which has been designated by the Kazakh authorities as a strategic national asset, surrounds and
goes below the established shallow field at Dunga, currently owned by Total, which we believe to be producing at the
rate of approximately 15,000 bopd.
In February 2020, we announced amendments to the work programme inherited with the acquisition, whereby we are
obliged to drill only one well to a depth of 2,500 meters at an expected cost of $2 million. Our approach with 3A Best
is to develop the field but also to recognise its potential M&A value given its proximity to the successful Dunga field.
Further details of the 3A Best Contract Area are set out later in this report.
Non-executive director
Also in January 2019, we announced the appointment of Tim Field as an independent non-executive director.
Tim is a highly experienced international corporate lawyer specialising in securities law and corporate governance
and is the principal of the specialist corporate and securities law firm "Field". He is also the equity capital markets
consultant to the law firm Mishcon de Reya, where until recently he led its public company practice. He has a long
and significant track record of advising AIM companies and Nominated Advisers. His input into the oversight of the
Company and its future direction is much valued.
Further details are set out in the Corporate Governance Report.
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Chairman’s Statement continued
MJF licence upgrade
In July 2019, we announced the long awaited upgrade to the MJF licence.
Under Kazakh regulations oil produced during the appraisal phase of a licence may be sold but only at domestic prices.
An upgrade to a full production licence is required to be able to sell the majority of the oil produced by reference to
international prices.
Separate changes to the oil laws in Kazakhstan resulted in much longer delays than expected when we submitted our
licence upgrade application to split the licence and move the MJF structure to a 25 year full production licence with
the remainder of the BNG Contract Area remaining under the appraisal rules.
The principal benefit from the licence upgrade is that the net price at which production from the MJF structure may
be sold, was broadly double the domestic price previously received.
Following receipt of the licence upgrade we embarked on an up to 18 well infill drilling programme, which after the
first two New Wells 150 and 153, and the spudding of New Well 151, was temporarily suspended until the impact of
the Covid-19 virus became clearer. Drilling at New Well 151 has now resumed.
Further details of our all our assets and licences are set out later in this report.
Purchase of equipment
In September 2019, we announced the purchase of drilling equipment for a consideration of $7 million, payable by
the issue of 58,333,333 shares at an issue price of 10p per share.
With the contraction of medium and smaller scale drilling activities in Kazakhstan and the consequential retreat of the
larger equipment and services providers, our operations have on many occasions suffered delays waiting for the
required equipment to be delivered to site. The lack of activity also reduced the equipment’s effective resale value,
thereby reducing its acquisition cost to a point where we concluded it was better to own and control certain key
operational equipment rather than to continue to rent. We therefore decided to acquire a portfolio of assets comprising,
four drilling rigs, two cranes, pumps, generators, a blow-out preventor and 12 vehicles, including trucks, crew buses
and pickup trucks.
The largest of the rigs acquired is a 350 tonne G50 rig, with the capacity to drill to a depth of up to 5,000, meters. Two
further drilling rigs are 225 tonne G40 rigs, each being able to drill to depths of up to 4,000 meters. The fourth is a
workover rig of 80 tonnes, with a capacity to drill up to 1,500 meters and perform general workover tasks to a depth
of 2,500 meters. The cranes are used in the assembly and dis-assembly of the rigs with one able to lift up to 50 tonnes
and the other up to 25 tonnes.
The effect of the acquisition has been to provide greater certainty in the timing of our drilling operations, particularly
with the MJF infill programme, together with a reduction in our development costs.
Deep Well break through
In early January 2020, we announced that Deep Well A5 had flowed without interruption or artificial stimulation for
four days. Our priority at that time was to maintain the flow rather than to maximise production volumes. Accordingly,
we quickly switched to smaller choke sizes than the 12 mm used when the well started to flow, or the 19 mm we used
when the well flowed at the rate of 3,800 bopd in 2017.
This allowed the well to continue to flow without interruption for 40 days in total, albeit at rates much lower than
expected from a deep high pressure well. In February 2020, the well was closed to clear excess drilling fluid, which
was restricting production levels and limiting reserves estimates.
Our G50 rig is now in position to replace a broken link in the tubing before we attempt to re-commence production at
rates more expected of a deep well.
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Chairman’s Statement continued
Further details of the performance of each of the deep wells drilled at our BNG Contract Area are set out later in this
report.
Caspian Explorer
Also in January 2020, we announced the proposed acquisition of the Caspian Explorer for a consideration of $25
million to be satisfied by the issue of 160,256,410 shares at an issue price of 12p per share. On 13 February 2020, we
announced the acquisition had been approved by shareholders at a General Meeting. Completion of the acquisition
remains subject to a number of regulatory consents and filings in Kazakhstan and the UAE.
In parts of the northern Caspian Sea, where the Group’s management believe there are attractive oil producing
prospects, the water levels are extremely shallow and prospects cannot be explored with traditional deep water rigs.
The principal ways of exploring these properties are either from a land base or by the use of a specialist shallow
drilling vessel. Land based options typically involve either the creation of man-made islands from which to drill as if
onshore or less commonly drilling out from an onshore location. Both are expensive compared to the use of a specialist
drilling platform.
The acquisition of the Caspian Explorer will mark the Group’s first step into off-shore exploration, which is typically
more expensive and complicated than on-shore exploration.
Further details of our plans for the Caspian Explorer are set out later in this report.
Response to the Covid-19 virus
In March 2020, we announced that in response to the impact of the Covid-19 virus, and in particular the sharp fall in
world oil prices, we would suspend all new drilling activities following the completion of planned work at New Wells
150 & 153 and Deep Wells A6, 801 & A8.
The BNG oilfields are typically staffed with two sets of workers or “crews” each working on a two 12 hours shift
basis two weeks on and two weeks off. In recognition of the risks of contamination at the time of a crew changeover
the decision was taken that there would be no crew changeover and that the crew then operating would stay in place
for a longer period. To maximise the benefit of their limited time in the field we decided to focus on projects capable
of quick success being principally the planned acid treatments at Deep Wells A6, 801 & A8, which do not require rig
movements.
However, border and road closures delayed the specialist acid reaching BNG. We therefore mobilised one of the G40
rigs acquired in 2019 to spud New Well 151, the third of infill wells on the MJF structure and mobilised our G50 rig,
previously in use at New Well 153, to continue the work at Deep Well A5.
In a series of announcements from March 2020, we updated the market with news of action taken to conserve cash,
including reducing staff numbers in the field and in our administrative offices in Almaty together with deferrals of
salary for all but field workers. In early May 2020, we announced that following further deferrals the aggregate cash
costs of the board had fallen to 25% of the aggregate entitlement and that we had secured additional financial support
from local oil traders.
New Wells 150 & 153 and 151
At the end of March 2020, we announced the success of New Well 150, the first of the planned infill on the MJF
structure. Towards the end of April we announced the success of New Well 153, the second planned infill well on the
MJF structure.
In early May 2020, we announced that New Well 151 had been spudded and drilled to a depth of 12 meters but that
further drilling would be dictated by the overall funding position. Since that announcement additional local funding
has been sourced to continue frilling New Well 151 and following that New Well 152.
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Chairman’s Statement continued
Our Assets
BNG Contract Area
The Group’s principal asset is its 99% interest in the BNG Contract Area.
We first took a stake in the BNG Contract Area in 2008, as part of the acquisition of 58.41% of portfolio of assets
owned by Eragon Petroleum Limited. In 2017, we increased our stake to 99% upon the completion of the merger with
Baverstock GmbH.
Since 2008, approximately $100 million has been spent at BNG.
The Contract Area is located in the west of Kazakhstan 40 kilometers southeast of Tengiz on the edge of the Mangistau
Oblast, covering an area of 1,561 square kilometers of which 1,376 square kilometers has 3D seismic coverage
acquired in 2009 and 2010. We became operators at BNG in 2011, since when we have identified and developed both
shallow and deep structures.
Shallow structures
There are two confirmed and producing shallow structures at BNG with the possibility of a third.
MJF structure
In 2013, we announced the discovery of the MJF structure and have subsequently drilled 8 wells of which 7 are
currently producing with an aggregate capacity of approximately 1,700 bopd.
The productive Jurassic aged reservoir consists of stacked pay intervals with most ranging in thickness from two
meters to 17 meters. The current mapped lateral extent of the MJF field is now approximately 13km2. The producing
wells range in depth from 2,192 meters to 2,450 meters.
In December 2018, we formally applied to move the MJF structure, which was part of the overall BNG licence, from
an appraisal licence to a full production licence, under which the majority of the oil produced from the MJF wells may
be sold by reference to world rather than domestic Kazakh prices.
A condition of the licence upgrade is that an amount assessed by the regulatory authorities on award of the production
licence becomes liable to be repaid quarterly over a 10 year period. We are challenging the amount assessed on the
basis that first it has been incorrectly calculated and second that despite the MJF structure accounting for
approximately only 1% of the BNG Contract Area it has been assessed to repay an amount equivalent to 100% what
would be due for the BNG Contract Area as a whole if under a production licence. On the basis of advice received we
believe the basis of the payments due will be reassessed in accordance with our own calculations.
The MJF structure licence was upgraded in July 2019, and the first oil sold by reference to international rather than
domestic prices in August 2019. Following the licence upgrade we have embarked on an infill drilling programme
with the intention of extending the number of wells to up to 24 wells.
A third infill well, New Well 151, has been spudded and is to be drilled to a planned Total Depth of 2,500 meters.
Assuming no unforeseen issues we expect this well to start to produce in Q3 2020. Funding has also been sourced to
drill a fourth infill well, New Well 152 following the completion of New Well 151. Drilling at New Well 151 has now
resumed.
As noted elsewhere in these financial statements the pace at which we undertake this infill drilling programme is
dependent on funding and the international oil price.
We are started to workover existing wells at the MJF structure, with a view to improving production.
South Yelemes
This structure is the subject of an ongoing licence upgrade application for a separate 25 year production licence. Until
the application is approved we are unable produce from the four existing wells on the structure.
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Chairman’s Statement continued
The first wells were drilled on the South Yelemes structure during the Soviet era.
Well 54 was intermittently active between periods of being shut in to allow pressure to be restored. There are three
other wells at South Yelemes (805, 806 & 807). The production from South Yelemes was in aggregate approximately
300 bopd. These older wells are the only wells on the BNG Contract Area which use artificial lift to assist the oil to
flow to the surface.
We believe the structure may have untapped quantities of oil at higher levels than previously explored making it
potentially suitable for a horizontal drilling campaign. At an appropriate time we intend to test this theory.
As with the MJF structure, once the South Yelemes structure is moved onto a full production licence we will be able
to sell the majority of oil produced by reference to world rather than domestic prices.
Potential New Structure
In April 2017, we drilled Well 808 to a depth of 3,070 meters to assess whether a new structure similar to the MJF
structure existed. The results of limited testing were inconclusive indicating oil bearing intervals with high water
saturation. Re-evaluation of the wireline and mudlog data suggests additional untested potential within two intervals
shallower in the well.
While not a prime focus we did test further in the period under review without yet finding a commercial interval.
Deep structures
We have identified two deep structures at the BNG Contract Area. The first is the Airshagyl structure and the second
is the Yelemes Deep structure.
Deep wells of the type drilled to date at BNG are typically drilled by much larger companies and at much greater cost.
A common feature of the two discovered deep structures at BNG are the extremely high temperature and pressure that
exist below the salt layer. At the Airshagyl structure the salt layer is typically found at depths between 3,700 -4,000
meters where at the Yelemes Deep structure the salt layer is typically found at depths between 3,000 - 3,500 meters.
The extreme pressure below the salt layer requires the use of high density drilling fluid to maintain control of the well
during drilling. The high density drilling fluid’s principal role is to help prevent dangerous blow-outs.
The attributes of the high density drilling fluid, which allow the wells to be controlled during the drilling phase, act
against us when we attempt to clear the well for production. To the extent that drilling fluids, which include solid
particles added to increase density, are not fully recovered they can form a barrier in the well or in the reservoir
preventing or restricting the oil flow.
Other problem areas encountered in bringing these deep wells into production have related to drilling through the salt
layer, often in excess of 100 meters thick; cementing the casing below the salt layer; and with the perforation the wells,
where the presence of extreme pressure requires a much greater explosive force.
Competent third party experience has been difficult to find, as the exceptional temperature and pressure are unusual
for many international consultancies more used to conventional shallower exploration. We have however, developed
our drilling techniques and now use drilling fluids with lower density, which we have found easier to remove once
drilling has been completed. Deep Wells A6 & A8, the third and fourth deep wells drilled, encountered fewer problems
during the drilling phase than the earlier wells.
Our focus remains bringing into production all the deep wells drilled to date.
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Chairman’s Statement continued
Airshagyl
We believe the Airshagyl structure extends to 58 km2.
Deep Well A5
Deep Well A5 was spudded in July 2013, and drilled to a total depth of 4,442 meters with casing set to a depth of
4,077 meters to allow open-hole testing. Core sampling revealed the existence of a gross oil-bearing interval of at least
105 meters from 4,332 meters to at least 4,437 meters.
As noted above the well was difficult to drill with a salt layer of approximately 130 meters with high temperature and
high pressure encountered at the lower depths. The extremely high-pressure in the well required the use of drilling
fluids with a high density (2.16 g/cm3). Removing this high density drilling fluid to allow testing was problematic but
was eventually completed sufficiently to allow an extended flow test.
In December 2017, using a choke setting of 19 mm, the well tested for 15 days at an average rate of 3,800 bopd before
the flow reduced by debris in the well fell to 1,000 bopd leading to the well test being suspended.
Following two ultimately unsuccessful side-tracks a third side-track from a depth of 3,976 meters was completed in
November 2019. On 31 December 2019, the well started to flow initially at a rate of 1,500 bopd using a 12 mm choke,
Given our experiences in 2017, our priority was to keep the well flowing by maintaining a good level of pressure. This
required the choke setting to be reduced to just a few mm, which in turn quickly reduced the flow of oil. The
unrecovered drilling fluid used in the original well and each of the three side-tracks further restricted the flow of oil
from the well.
Accordingly, in February 2019, after 40 days of unassisted oil flows, the well was closed to allow work to remove
excess drilling fluid which was restricting the flow rates and therefore any calculation of reserves. To date some 30
tonnes of excess drilling fluid has been removed using coil tubing equipment.
Our G50 rig is now on site to replace a cracked link in the tubing, following which we will once again attempt to get
the well to flow at rates expected of a deep, high pressure well.
Deep Well A6
The second well drilled on the Airshagyl structure was Deep Well A6, which was spudded in 2015 and drilled to a
depth of 4,528 meters.
Repeated problems in perforating the well prevented it being put on test. Additionally, work at Deep Wells A5 and
801 took precedence while we were operating with only two rigs and crews.
Plans to undertake an acid treatment at Deep Well A6 have been delayed waiting for the required acid to be delivered
to the BNG Contract Area.
Deep Well A8
In November 2018, Deep Well A8 was spudded with a planned Total Depth of 5,300 meters, initially targeting the
same pre-salt carbonates that were successfully identified in the Deep Well A5 at depths of 4,342 meters but with a
prime target being the deeper carbonate of the Devonian to Mississippian ages towards the planned Total Depth of
5,300 meters.
We identified intervals of interest at depths of 4,342 meters. We then had to decide whether to seek to produce from
the intervals identified or whether to continue to the original Total Depth of 5,300 meters. The arguments in favour of
seeking to produce from the higher interval were short term commercial considerations of expected significant
immediate income. The arguments for continuing to the original Total Depth were based on the far greater potential
from intervals in the Devonian.
While we favour pressing on to the original Total Depth of 5,300 meters a final decision is yet to be taken. As with
Deep Well A6 above the planned acid treatment at Deep Well A8 has been delayed.
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Chairman’s Statement continued
Deep Well A9
The next deep well on the Airshagyl structure will be Deep Well A9, which, if successful, would extend the perimeter
of the Airshagyl structure. The well has a planned Total Depth of 5,300 meters and will target the same Jurassic
prospects as A5 & A6.
Our intention was to spud Deep Well A9 in the first half of 2020. However, we have delayed drilling the well pending
greater certainty on the lasting impact of the Covid-19 virus.
Summary
Based on results to date we continue to believe the Airshagyl structure will provide the greatest quantities of oil at the
BNG Contract Area.
Each of the three Deep Wells drilled on the structure has the potential to flow commercially
Should two or more of the deep wells flow consistently we expect that the Airshagyl structure will be the first deep
structure for which we apply to move to a full production licence.
Yelemes Deep
We believe the Yelemes Deep structure extends over an area of 36 km2.
Deep Well 801
To date Deep Well 801 is the only deep well drilled at the Yelemes structure. The well was spudded in December
2014, and was drilled to a Total Depth of 4,950 meters. The well is located approximately 8 kilometers from Deep
Well A5 and was planned to target prospects in the Middle and Lower Carboniferous
As with the deep wells drilled on the Airshagyl structure the blockages in the well preventing an extended flow test
are the result of high temperatures/ pressures and excess drilling fluids. We have used a variety of techniques including
the use of chemicals and the drilling of a side-track, to establish good reservoir connectivity.
As at Deep Wells A6 & A8 on the Airshagyl structure our plans to use an acid treatment on Deep Well 801 have been
delayed.
BNG Infrastructure requirements
We have limited treatment facilities on site and storage of approximately only 7,000 bbls, which represents less than
one weeks production. Our production is transported using a fleet of heated tankers, however as production levels
from the MJF structure increase and when production commences from the deep wells already drilled it will not be
practical to rely on these present arrangements.
At this point a pipeline either to an adjoining Contract Area or to a treatment facility with access to the main pipeline
network would be required. In addition, we would look to conduct additional water separation and other treatment
activities before selling the oil produced, increasing the price at which our production could be sold.
The timing of a decision on how to proceed with a build-out of the infrastructure for the BNG Contract Area is
inevitably linked to actual production levels. In the event we decide to construct significant additional storage,
treatment and distribution facilities at the BNG Contract Area we believe the majority of the costs involved would be
capable of being debt funded.
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Chairman’s Statement continued
3A Best
In January 2019, the Group acquired 100 per cent of the shares of 3A Best 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
site is located adjacent to and runs under the commercially successful Dunga field, which was discovered in 1966 and
developed by Maersk Oil. The 3A Best Contract Area has been designated a national strategic asset by the Kazakh
regulatory authorities.
Whilst the Group has acquired the equity of 3ABest Group JSC, the acquisition has been recorded as an asset purchase
as the company’s sole asset is the exploration stage Contract Area.
The 149,253,732 consideration shares were calculated by reference to an agreed issue price of 12p per share, which
resulted in a total purchase consideration of $23 million. Before the acquisition was finalised we agreed with the
vendors to reduce the notional issue price of the shares to 7.0p per share, being the market price at 21 January 2019,
but keeping the number of shares at 149,253,732 thereby reducing the headline price to $11.8 million.
Based on an assessment of the geology we believe some of the characteristics of the Dunga Contract Area are also
present at 3A Best. Additionally, we believe the area 2,500 meters and below the Dunga Contract area, which forms
part of the 3A Best Contract Area, also indicates the likely presence of oil.
490 sq. km of 3D seismic has been shot. 1,327 linear km of 2D has been digitised and reprocessed. Two wells have
been drilled on the Contract Area in recent years, both encountering water and signs of oil and gas. Neither was
commercially successful.
The current 3A Best licence runs until June 2020. We are in the final stages of discussions with the Kazakh authorities
regarding an extension of the 3A Best licence, which we expect will entail a new set of work programme obligations.
Caspian Explorer
Introduction
To date we have focused on exclusively on onshore exploration and production. To continue with this approach would
exclude us from the very significant potential we see in the Northern Caspian Sea.
We decided to acquire the Caspian Explorer for two reasons. The first as a means to become involved in offshore
development, which for a Group of our size would otherwise be difficult. The second as a conventional source of
income when rented to other explorers.
Offshore exploration is traditionally much more expensive than on shore exploration. Projects therefore tend to go to
the larger operators or more commonly to specially formed consortia of such companies.
We believe the Caspian Explorer is the only drilling vessel of its type capable of drilling exploration wells to depths
of 6,000 meters in water as shallow as 2.5 meters currently ready to operate in the Caspian Sea. Further, given the
lead times and construction costs, we do not expect a new competing drilling vessel to enter the market in the next
few years.
Once acquired we will seek to rent out the Caspian Explorer for both an immediate economic return, in the form of
rental payments, but also where appropriate seek a position in the development consortia.
Completion of the acquisition of the Caspian Explorer remains subject to regulatory approvals in Kazakhstan and the
UAE.
Background
The Caspian Explorer was conceived of by a consortium of leading Korean companies including KNOC, Samsung
and Daewoo Shipbuilding. The vessel was assembled in the Ersay shipyard in Kazakhstan between 2010 and 2011
for a construction cost believed to be approximately $170 million. The total costs after fit-out are believed to have
been approximately $200 million.
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Chairman’s Statement continued
The Caspian Explorer became operational in 2012 at a time of relatively low oil prices and reduced exploration activity
in the Northern Caspian Sea. In 2017, the Korean consortium decided to sell the Caspian Explorer by way of a
competitive tender with the buyer being KC Caspian Explorer LLP.
The Caspian Explorer typically operates between May and November as the Northern Caspian Sea is subject to ice in
the winter months, with a crew of 20 and room to accommodate up to 100.
Commercial potential
We believe there to be two principal drivers for the further exploration of the Northern Caspian Sea. The first is
continued development of existing projects and the second is following any awards of new blocks.
Although a big ticket item by our standards spending $25 - $30 million a year hiring a drilling platform such as the
Caspian Explorer is a modest sum for companies often measuring their annual investment in $ billions.
By way of example, in 2017, the Caspian Explorer was hired out to a KazMunaiGas / Indian state oil company joint
venture for $28 million after costs and drilled one exploration well to a depth of 3.5 km and in 2018, the Caspian
Explorer was hired out KazMunaiGas for up to $24 million drilling one exploration well to a depth of 1.8 km.
The impact on the Group of a contract at these levels even once every three years would be dramatic. In any year when
the Caspian Explorer is contracted it could fund the majority of the rest of the Group’s annual drilling programme.
The Caspian Explorer did not operate in 2019 and has no contracts in place for 2020. Following completion our
financial exposure in the event of no external contracts are costs of approximately $100,000 per month while the
Caspian Explorer is in port.
Licences & Work Programmes
BNG
BNG LLP Ltd holds two contracts for a subsoil use. The first is the exploration contract, covering the full extent of
the BNG Contract Area (except the MJF structure), originally issued in 2007 and successively extended until 2024.
The second is the export contract covering just the MJF structure which runs to 2043 and under which the majority of
oil produced may be sold by reference to international rather than domestic prices.
Our 2020 MJF work programme obligation to drill seven obligations has been reduced to two wells, which are already
completed and producing.
We have also submitted an application to move the South Yelemes shallow structure to an export licence and look
forward to receiving the regulators consent in the due course.
There are no 2020 work programme obligations at the Airshagyl structure.
At the Yelemes Deep structure the existing work programme commitments require us to drill a further deep well,
Deep Well 802, by the end of 2020 and to test it in 2021. In light of the impact of the Covid-19 virus we have applied
to the Kazakh regulatory authorities to defer that commitment and await their response.
3A Best
The licence is due for renewal in June 2020 and an application has been made for the licence’s renewal and an early
response is expected. Under our current 2020 work programme commitments we are obliged to drill only one well to
a depth of 2,500 meters at an expected cost of $2 million. However, given the Covid-19 virus and the measures taken
by the Kazakh authorities to mitigates its impact, we do not expect to be held to this obligation.
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Chairman’s Statement continued
Reserves
BNG
In 2011 Gaffney Cline & Associates (“GCA”) undertook a technical audit of the BNG license area and subsequently
Petroleum Geology Services (“PGS”) to undertake depth migration work, based on the 3D seismic work carried out
in 2009 and 2010.
The work of GCA resulted in confirming total unrisked 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.
In September 2016 GCA assessed the reserves attributable to the BNG shallow structures.
Between then and the end of 2019, approximately 2 mmbls of oil were produced, which under financial reporting rules
are deducted from the assessment of reserves as at 31 December 2019.
BNG
Shallow P1
Shallow P2
Deep P1
Deep P2
As at 31 December 2019
As at 31 December 2018
mmbls
mmbls
16.1
27.8
Nil
Nil
17.8
28.8
Nil
Nil
The above is based on 100% of each Contract Area.
3A Best
There has been no assessment of the reserve base at the 3A Best Contract Area.
Financial review
Review of the results to 31 December 2019
Revenue
Revenue in 2019 increased by 13 per cent compared to 2018, despite production volumes declining by 9 per cent.
We benefited for the final four months of the year by selling the majority of the oil produced by reference to
international rather than domestic prices.
Production volumes in 2019, were 506,620 barrels compared to 589,750 barrels in 2018. This was the result of
choosing to run the first five producing wells at the MJF structure at or near maximum capacity to generate income to
fund the business without the customary shut-in’s for routine maintenance. Accordingly, we experienced a higher
level of depletion during the period under review than would have been the case with periodic workovers.
Gross profit
For the first time we report a gross profit of $5.1 million (2018: nil) This follows different accounting rules for oil
sold under production licences rather than under appraisal licences.
13
Chairman’s Statement continued
The method of accounting for production sold under an exploration phase of an appraisal licence differs from the sale
of oil under a full production licence in which commercial production is considered to have been reached.
Under an appraisal licence revenues are treated as a contribution to the costs associated with the main objective, which
is to ascertain the productive capabilities of the producing wells concerned. Therefore, whilst revenue is recorded as
an amount equivalent to the margin amounts derived from the sale of oil are charged to cost of sale and recorded as a
reduction in the appraisal assets resulting in a zero gross profit.
Under a production licence only the actual costs of production are recorded as costs of sales so that any excess of
receipts over direct costs is shown as gross profit.
Selling expenses of $2.2 million (2018: nil) relate to export and customs duties.
A reversal of impairment of $2.4 million (2018: nil) has been recorded, representing the portion of the historic
impairment provision of c$12 million that relates to the MJF structure that has now commenced commercial
production which enables it to realise significant economic value.
Other administrative expenses
Other administrative costs at $3.9 million (2018: $2.6 million) were $1.3 million greater reflecting the increased
operational and corporate activity. We believe we remain a low cost operator, in comparison to other listed companies
and companies operating in Kazakhstan.
Tax charge
The tax charge for 2019 at approximately $2.3 million (2018: $0.6 million) includes a provision of $1.9 million for
withholding tax on inter group interest.
Oil and gas assets
The carrying value of unproven oil and gas assets in these consolidated group accounts increased from $55.7 million
to $60.0 million. The increase represented the combination of the acquisition of the 3A Best exploration assets for
$12.6 million and drilling and other capitalised costs of $8.9 million; before deductions in respect of sales from test
production $5.5 million and transfers of the MJF assets to proven oil and gas assets within property, plant and
equipment of $12.0 million.
Plant, property and equipment increased during the period under review from $0.1 million to $51.3 million, comprising
principally the transfer in respect of the MJF structure ($12 million) following the export licence contract being
secured and associated commercial phase production commencing; an amount of derived from the current value of
the licence payments assessed by the Kazakh regulatory authorities against the BNG Contract Area ($28.3 million);
and the purchase of drilling and other equipment ($8.0 million).
Cash position
Unusually, at the year-end we had cash balances of approximately $4.1 million (2018: $0.6 million). This resulted
principally from the timings of the cash advances from local oil traders and are broadly offset by the amounts due to
the oil traders recorded in liabilities.
Liabilities
The move of the MJF structure to an export licence resulted in a one-off working capital squeeze, which lies behind
much of the higher than usual liabilities at the year end.
For domestic sales we generally receive payment from local oil traders one month in advance of production. However,
for international sales we typically receive payments two months often after production once the oil has been delivered
to a distant port. This in effect resulted, for that part of our production sold on the international markets, in a three
month period in Q4 2019, with much reduced receipts from production.
Rather than raise additional long term equity capital thereby diluting shareholders we have sought to manage our way
through by conserving cash and managing payments to suppliers. The issue is working its way through the business
and we expect to have returned to normal trading terms with our suppliers by the end of Q3 2020.
14
Chairman’s Statement continued
Trade and other payables increased from $6.3 million at 31 December 2018 to $14.8 million at 31 December 2019.
This comprises principally advances from local oil traders ($7.0 million); other payables ($4.3 million); and tax and
social security ($1.8 million).
Additionally, a consequence of the working capital squeeze has been an increase at 31 December 2019, in the loans
provided by the Oraziman family under the existing framework agreement to $4 million.
As at 31 December 2019, the provision for payments to be made over the next 10 years as part of the award of the
production licence, termed BNG Licence Payments, has been estimated at $27.4 million. Other current provisions
increased primarily due to amount payable in respect of the 3A Best licence which are matched by a corresponding
receivable as they are indemnified by the vendors.
Funding
Policy
Our approach to funding the business has not changed in the period under review or subsequently, despite the recent
Covid-19 created fall in world oil prices. It remains to seek to minimise the issuance of equity and therefore to use
other forms of funding to develop our assets. In this way we seek to preserve the upside for existing shareholders,
even if this is at the expense of higher costs in the short term.
From time to time we are prepared to issue equity, in particular in situations where we expect the return to be a multiple
of the price paid, for example with both 3A Best and the Caspian Explorer, or to fund the purchase of equipment that
puts us in control of the pace at which we develop our shallow structures.
Where we have issued shares we have done so at prices which we believe more reflects the underlying value in the
business rather than at the conventional 10 per cent discount to the prevailing share price. The premia achieved for
share issues in the period under review and subsequently have ranged from 3.2 to 27.7 percent.
Going concern
The Board have assessed cash flow forecasts prepared for a period of at least 12 months from the of approval of the
financial statements and assessed the risks and uncertainties associated with the operations and funding position,
including the potential further effects of the COVID-19 pandemic.
The pandemic has had a significant impact on the business and its cash generation through the collapse of international
and domestic oil prices and operational issues at local refineries and loading stations, whilst operations have also been
disrupted through restrictions which continue to affect the ability of workers, contractors, supplies and equipment to
reach the site.
This was exacerbated in May 2020 when, as a one-off event, with uncertainty in international demand and prices we
had to decide where to sell our oil. 100% of oil produced was allocated to the domestic market which coincided with
a fall in domestic prices below $10/bbl due to operational issues at the local refinery. As a result the income for
production delivered in May 2020, was greatly reduced. However, from June 2020 onwards, we have reverted to our
practice of seeking to sell approximately 60% of production on the export markets with headline Brent prices currently
approximately $40 per barrel. Additionally, domestic prices are expected to return to previous levels.
Under the base case forecasts, production is estimated at 1,700bopd with approximately 60% of oil production sold
on the export market at an anticipated $40/bbl and 40% sold on the domestic market at an anticipated $15/bbl. The
forecasts indicate that the Group will be able to meet its operating expenditures, taxes, social payment obligations
under the licences and certain licence obligations whilst enabling the Group to gradually pay down accumulated
creditor balances.
15
Chairman’s Statement continued
However, the Group’s liquidity is dependent on a number of key factors:
(cid:31) The Group continues to forward sell its domestic production and receive advances from oil traders with $4.5m
currently advanced and the continued availability of such arrangements is important to working capital. Whilst
the Board anticipate such facilities remaining available given its trader relationships and recent increases, should
they be withdrawn or reduced more quickly than forecast cash flows allow then additional funding would be
required.
(cid:31) The forecasts assume that certain material licence commitments and obligations respect of 3A Best and BNG will
be deferred by the authorities based on applications submitted in May 2020. Additionally, the forecasts assume
that quarterly BNG Licence Payments (refer to note19) will be revised to levels below the current assessments
received from the authorities, based on legal proceedings initiated. In the event that the authorities refuse one or
more of such applications or the BNG licence payment is not reduced additional funding will be required.
(cid:31) The Group has approximately $0.5m of aged creditors which are being settled over the coming months from
operating cash flows. Whilst relations are positive with the suppliers, if their support is withdrawn additional
funding may be required.
(cid:31) The Group has $4m of loans due on demand or within the forecast period to its largest shareholder and his
connected companies. Whilst the Board has received assurances that the facilities will not be called for payment
unless sufficient liquidity exists, there are no binding agreements currently in place to this effect and if repayment
was required additional funding would be needed.
(cid:31) The forecasts remain sensitive to oil prices, which have shown significant volatility. Independent of the factors
above, if international oil prices fell below c$30/bbl additional actions would be required including further cost
reductions, additional payment deferrals and raising funds.
The Directors remain confident that additional funding, if required, could be obtained through a number of sources
including: further 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, there can be no guarantee that such funding would be available and the
terms of any new funding, if required, may be onerous.
These circumstances indicate the existence of a material uncertainty which may cast significant doubt about the
Group's ability to continue as a going concern and therefore it may be unable to realise its assets and discharge its
liabilities in the normal course of business. The financial statements do not include the adjustments that would result
if the Group was unable to continue as a going concern.
Notwithstanding the material uncertainty described above, after making enquiries and assessing the progress against
the forecast, projections and the status of the mitigating actions referred to above, the Directors have a reasonable
expectation that the Group will continue in operation and meet its commitments as they fall due over the going concern
period. Accordingly, the Directors continue to adopt the going concern basis in preparing the financial statements.
Low cost operator
We continue to pride ourselves on being a low-cost operator, both as operators in the field and in controlling our
General & Administrative (“G&A”) costs.
We believe our drilling costs, which following the acquisition of our own rigs are now broadly $1.2 million for shallow
wells and $10 - $12 million (including completion and testing) for deep wells are among the lowest in the industry.
The presence of high pressure at BNG reduces our lifting, treatment, storage and transport costs for domestic sales are
estimated at approximately $3 per barrel. For export sales our lifting, treatment storage and transport costs are
estimated to be $7 per barrel.
Employees
Following the suspension of operational drilling the Group now has 71 employees, including Directors, of whom 68
are based in Kazakhstan and split principally between the corporate offices in Almaty and in the field. As ever the
board is grateful for their continued contributions.
For those working in the field oil exploration is potentially very dangerous with the risk of serious injury ever present.
The work continues on a 24 hour basis with 12 hour shifts and fortnightly rotations. The work is undertaken often in
16
Chairman’s Statement continued
terrible weather with temperatures peaking at more than 40 degrees in the summer and falling to as low as minus 35
degrees in the winter. In addition the geography the Steppe region results in very strong and dangerous winds for
those working often many meters above the ground.
During the period under review I had the opportunity for an extended stay in the field at both assets we own and those
we may have an interest in owning in the future and witnessed first-hand the difficulties faced by those working at
each well location. The success of the Group is built on the efforts of these key workers.
Move to the UAE
During the period under review and subsequently we moved the location of the Group’s intermediate holding
companies to the UAE. The UAE is closer to our oilfields and to the corporate offices in Almaty. The move has
allowed the Group to significantly reduce general & administrative expenditure in the UK and the Netherlands.
Over time we intend to make the UAE the centre of Group treasury operations.
Market reporting
Earlier this year we ended the monthly disclosure of prices achieved in the domestic and export markets for fear of
impacting our commercial position in subsequent months.
However, announcing solely production volumes on a monthly basis is out of line with market practice and also seems
to provoke suspicion in some of what is not included in such announcements. Accordingly, we will seek to provide
much fuller operational updates on a quarterly basis but cease the practice of announcing monthly production numbers.
Significant events, operational or otherwise, will continue to be announced at the appropriate time as required under
the AIM Rules.
The investment case
Even before the recent international oil price fall the statistics for the smaller AIM Exploration and Production
companies made for depressing reading. The sector was out of favour with few companies providing positive returns
for their investors.
Early stage exploration has always been difficult to fund through the public markets. With exploration cycles of 7-10
years and the interest span of investors typically measured in months, even before the dramatic price decline, the days
when interesting early stage exploration can be funded entirely via the public markets may be long gone.
The current position
Our immediate objective is to come through the present situation in good shape to benefit from the medium and longer
term opportunities we believe still exist. In this we have the following advantages:
We have production.
The base production capacity from our existing shallow wells is already some 2,000 bopd. To that we hope to be
able to add production from New Wells 151 and 152 and more impactfully from our already drilled deep wells.
We are a low cost operator
(cid:31) we have low lifting costs and transportation costs
(cid:31)
(cid:31) we now own four rigs thereby reducing the cash costs of future exploration
a large proportion of our costs re in Kazakh Tenge, which has devalued significantly in recent years
We do not have any long term debt
Other than the Oraziman family loan and short term finance provided by local oil traders, we have no external debt.
17
Chairman’s Statement continued
Medium / longer term
We continue to be believe that for much of the last decade there has been a very significant lack of exploration activities
leading to the discovery of meaningful new reserves. Every year a significant portion of the world’s proven reserves
are consumed by production. As demand for oil recovers and with the lack of recent exploration activity those with
proven assets should expect to attract interest over the medium and longer terms.
The current Covid-19 related problems in the market may well create new acquisition opportunities for those with
access to funding.
Operating with a low oil price
Operating with a low oil price is nothing new as until August 2019, all our oil sales were at domestic prices, which
continue to be much lower than international prices.
We have reliable production, which we expect will continue to increase at relatively low risk. In particular, the MJF
structure infill programme already underway should be a succession of easy wins.
(cid:31) The wells are typically only 2,500 meters deep and do not need to penetrate the salt layer, thereby avoiding any
high temperature / high pressure issues
(cid:31) The infill wells are located inside the perimeter of a structure we already know to contain oil.
(cid:31) The oil flows naturally to the surface removing the need for expensive artificial stimulation
(cid:31) With our own rigs we can drill when it suits us and at relatively low cost.
The bulk of the drilling costs of our four existing deep wells have already been incurred and already paid. In the event
these wells come into meaningful production it will dramatically improve our cashflows
Once acquired the Caspian Explorer is capable earning up to $25 million per annum in the event it is commissioned
for northern Caspian Sea exploration work.
Outlook
We have confidence in our assets and their value over the medium / longer term. To realise this value however, we
first need to deal with the current situation.
Despite market conditions we have sourced additional funding to continue to develop both our shallow and deep
prospects. We further believe the Group’s advantages noted above and the steps already taken provide the basis to
overcome the short term issues and then when the time is right move forward when we expect there to be plenty of
new opportunities.
While the present situation is undoubtedly difficult, we believe we are well placed to come through and subsequently
prosper.
Clive Carver
Executive Chairman
24 June 2020
18
Qualified Person & Glossary
Qualified Person
Mr. Assylbek Umbetov, who works in the Group’s geological department, 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
Proven 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.
19
Kazakhstan
Since our IPO in 2007 we have focused exclusively on Kazakhstan and in recent years entirely on the pre-Caspian
basin located on the north eastern shore of the Caspian Sea.
Introduction
The Republic of Kazakhstan is the world's largest landlocked country and the ninth largest in the world, with an area
of 2,724,900 square kilometres. Most of the country is in Asia with only the most western parts being in Europe.
Kazakhstan is the dominant nation of Central Asia economically, generating approximately 60% of the region's GDP,
primarily through its oil and gas industry. It also has vast mineral resources.
Oil and gas in Kazakhstan
Super giants
Three of the world’s largest oil and gas projects are located in Kazakhstan, Tengiz, Kashagan and Karachaganak, with
Tengiz and Kashagan being close to BNG.
Tengiz,
Tengiz, which is located just onshore along the northeast edge of the Caspian Sea is only 40 km from our flagship
BNG asset in the Pre-Caspian basin. Oil in place for the field is estimated to be 25 billion barrels, of which 7 billion
barrels are likely to be recoverable. The Tengiz field currently produces approximately 540,000 bopd. Chevron, the
lead operator, is spending a reported $37 billion to increase production by 260,000 bopd by 2022.
Our technical team believe BNG may share a number of important geological features with Tengiz.
Kashagan
The Kashagan oilfield is located 80km south-east of Atyrau in the North Caspian Sea, Kazakhstan, and is the largest
offshore field outside the Middle East. The field contains more than 35 billion barrels of oil in total and an estimated
recoverable oil reserve of nine billion barrels. It was discovered in 2000 and commercial development was announced
in 2002.
The field is being developed in phases by the North Caspian Sea Production Sharing Agreement (NCSPSA)
consortium comprised of KMG (KazMunayGas), Eni, ExxonMobil, Shell, Total, China National Petroleum
Corporation and INPEX.
The total cost of the project is estimated to be more than $100bn. Initial oil production from Kashagan started in 2013
but had to be stopped due to faults in onshore section of pipeline. Production resumed in 2016 with commercial
production announced in October following the first export delivery of 26,500 metric tons. By mid-2017 production
being delivered was over 200,000 barrels a day. By year end 2017 production capacity was 270,000 barrels of oil per
day with the goal of increasing production capacity to 370,000. Also, at the end of 2017 the Kazakh government
approved early engineering and design work for a further expansion project which could raise Phase 1 production
capacity to 450,000 bopd.
Karachaganak
The Karachaganak oilfield is located onshore, several hundred kilometres away from BNG, on the northern edge of
the ancient PreCaspian basin. Production is from the same Permian and Carboniferous aged reservoirs that are
productive at Tengiz and Kashagan.
Discovered in 1979, production from Karachaganak began in 1984. One of the world’s largest gas condensate fields,
original hydrocarbons in place are estimated at 9 billion barrels of condensate and 48 trillion cubic feet of gas;
approximately 18 billion barrels of oil equivalent in total. Estimated recoverable reserves are 2.4 billion barrels of
condensate and 16 tcf of gas.
20
Kazakhstan continued
The field is currently producing about 200,000 barrels of condensate and 18 million cubic feet of gas per day. Since
becoming operator of the field in 1997, the Karachaganak Petroleum Operating (KPO); Royal Dutch Shell, Eni,
Chevron, Lukoil, KazMunayGas, has invested over $22 billion dollars in the development.
The rest
Most of the other fields active in Kazakhstan are operated either by local privately-owned enterprises or by the
subsidiaries of larger, often state-owned enterprises. Few are self-standing public companies such as Caspian Sunrise.
The gap between the super-giant part of the Kazakh oil scene and the rest provides us with opportunities for the
acquisition of fields too small for the multinational operators but still potentially very valuable.
The economy
The steady fall in the value of the Kazakh Tenge against the US dollar over recent years, and the impact of Kazakhstan
being in a customs union with sanctions hit Russia, have resulted in Tenge denominated operating costs falling for
companies operating predominantly in US dollars. The impact of Covid-19 has resulted in a further depreciation
against the US$.
National infrastructure
As a result of the super-giant projects the oil and gas infrastructure in Kazakhstan is strong with a network of pipelines
connecting the oil producing regions with the west, Russia and China.
There is a deep pool of experienced workers and an array of international support services.
Licences
As with all oil and gas territories the permission of the state is required to operate. The first international developments
in Kazakhstan were operated under profit sharing agreements but more recently licences have been awarded to
operators based on an agreed work programme, with the risk that failure to complete the work programme could lead
to the loss of the licence without compensation.
Exploration licences
The initial licence to develop a field is typically an exploration licence where the focus is on completing agreed work
programme.
The work programmes under an exploration licence are typically two years in duration and it is usual for there to be
several consecutive two-year work programmes agreed during the exploration phase.
Appraisal licences
In the event the project appears commercial, the exploration licence is usually upgraded to an appraisal licence. Under
an appraisal licence, oil produced incidentally while exploring and assessing may be sold but only at domestic prices.
Taxation under an appraisal licence is limited with only modest deductions.
Changes to the legislation in the last few years has reduced the length of appraisal generally licences from six to five
years, with a concession of reduced social obligation payments.
Full production licences
To sell oil by reference to world prices requires either the field as a whole or a particular structure to be upgraded to
a full production licence.
Under a full production licence there is only limited scope to develop areas not already drilled. Additionally, a
minority portion of production typically remains at domestic prices although the majority is sold by reference to world
prices.
21
Kazakhstan continued
Under a full production licence the Group is subject to the full array of taxes and levies as set out in more detail below.
Operational
Lifting costs, which at BNG are estimated to be less than $2 per barrel.
The combined costs of lifting, treatment, storage and transportation, which for domestic sales from the BNG Contract
Area are estimated to be approximately $3 per barrel and for export sales are estimated to be approximately $7 per
barrel.
Taxes
There are five different taxes that apply to Kazakh oil & gas producers. Each has its own basis of calculation with
some being related to profits, others by reference to world oil prices and yet others by refence to the volume of oil
sold.
The overall impact is that as world prices increase so does the percentage taken by the Kazakh state. Similarly, as
world prices fall the percentage taken by the Kazakh state also falls. Such an arrangement helps cushion the impact
the recent world price falls.
22
Strategic Report
The Directors present their strategic report on the Group for the year ended 31 December 2019.
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 immediately after the
Directors’ report.
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
initially 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.
The Group’s principal asset is its 99 per cent interest in BNG. Additionally, the Group owns a 100 per cent interest in
the 3A Best Contract Area and it has agreed, subject to regulatory consent, to acquire a 100% interest in the Caspian
Explorer, a shallow water drilling vessel designed for the Northern parts of the Caspian Sea.
Business model
The business model is straightforward. To take assets at any stage of the development cycle and to improve them to
the point they contribute to the Group’s profitability or that they may be sold on at a profit to provide funding for
additional development.
Our main asset BNG has been developed over the past 12 years with approximately $100 million spent to the point it
now contributes to Group revenues and is set to be a very substantial asset for many years to come.
While we seek to grow our asset portfolio with appropriately timed acquisitions we are also prepared and able to sell
assets when their value to others exceeds the value we can see. This was the case in 2015, when, in poor market
conditions, we sold our then second asset Galaz for a headline price of $100 million, which represented a profit of
$15 million on our interest in the asset, and which provided $33 million to re-invest into BNG.
Further growth by acquisition
When appropriate the Group will consider acquiring additional assets or related businesses where the board believes
they would increase shareholder value, including by providing funding or infrastructure to develop the Group’s other
assets. In Kazakhstan the Directors believe the Group is exceptionally well placed through its local presence to identify
and buy undervalued oil and gas assets on an opportunistic basis.
23
Strategic Report continued
Key performance indicators
The Non-Financial Key Performance Indicators are:
• Operational (wells drilled at end of year) 2019: 17 (2018: 17)
• Aggregate production for 2019 was 506,620 barrels (2018: 589,750) a decline of 14.1 per cent.
• Reserves at 31 December 2019 P1 17.8 mmbls & P2 28.8 mmbls (2018: P1 17.8mmbls & P2 28.8) mmbls
The Financial Key Performance Indicators are:
• Revenue: $12.1 million (2018: $10.7 million)
• Loss for the year $1.4 million (2018: $8.5 million)
• Cash at bank: $4.1 million (2018: $0.6 million)
• Total assets: $127.5 million (2018: $65.5 million)
• CAPEX expenditures:
o Exploration assets $61.8 million (2018: $55.7 million)
o Plant, property & equipment $48.9 million (2018: $ nil)
As at 31 May 2020 production was at the rate of 1,700 bopd, with a production capacity of 2,000 bopd.
Reserves
Details of the Group's assets and reserves are set out in the Chairman's statement.
Financial
With world prices at or above $35 per barrel cash flow from oil sales from our shallow wells, cover the Group’s
General & Administrative costs and day to day operational costs, while also making a contribution to the costs new
drilling and of working over our existing deep wells.
A condition of moving the MJF structure to a production licence is the requirement, over a ten year period, to pay an
amount assessed by the Kazakh regulatory authorities as part of the award of the production licence. We are
challenging the amount initially assessed on two grounds. First it was incorrectly calculated and second that it has
been allocated solely against the MJF structure rather than as we are advised should be the case over the whole BNG
Contract Area.
Production from the shallow wells is expected to rise over time with new wells coming into production. In the event
any of our four deep wells already drilled start to produce oil, the associated revenues should transform the Group’s
cash flows. The same would be the case in the event, once acquired, the Caspian Explorer is chartered at market rates.
Now we own our own rigs each shallow well typically would cost approximately $1.2. million to drill and test. Each
deep well typically costs approximately $10 - $12 million to drill, complete and test. These estimates do not include
the costs of additional or remedial work, such as at the four existing deep wells A5, A6, 801 & A8.
Drilling wells at a rate faster than could be funded from oil sales, would require additional funding, as would any
acquisitions to be funded by cash. Potential sources of such funding would include: further advances from local oil
traders for 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 equity funding from financial institutions. Additionally, funding may
be available from selected asset sales.
Dividends
It is the policy of the Board to work towards a position where meaningful dividends can be paid. This requires not
only consistently profitable trading but also in all likelihood a corporate reorganisation to create distributable reserves.
New corporate subsidiaries have been incorporated in the UAE, with a view improving and simplifying the Group
structure and easing the future payment of dividends.
Any dividend declared will be set at an affordable level that does not conflict with the need to fund value enhancing
growth, whether by further investments in our existing fields or by acquisition.
24
Strategic Report continued
S 172 Statement
The Board is mindful of the duties of directors under S.172 of the Companies Act 2006.
Directors act in a way they consider, in good faith, to be most likely to promote the success of the Company for the
benefit of its members. In doing so, they each have regard to a range of matters when making decisions for the long-
term success of the Company.
Our culture is that of treating everyone fairly and with respect and this extends to all our principal stakeholders
Through engaging formally and informally with our key stakeholders, we have been able to develop an understanding
of their needs, assess their perspectives and monitor their impact on our strategic ambition.
As part of the Board’s decision-making process, the Board and its Committees consider the potential impact of
decisions on relevant stakeholders whilst also having regard to a number of broader factors, including the impact of
the Company’s operations on the community and environment, responsible business practices and the likely
consequences of decisions on the long term.
Our objective is to act in way that meets the long term needs of all our main stakeholder groups. However, in so doing
we pay particular regard to the longer term needs of shareholders. We engage with investors on our financial
performance, strategy and business model and our Annual General Meeting provides an opportunity for investors to
meet and engage with members of the Board.
In particular during the period under review and subsequently Board concluded that the dual approach of seeking to
develop both the shallow and deep structures at the BNG Contract Area met stakeholders expectations. Additionally
the Board decision to acquire the 3A Best Contract Area diversified the Group’s exploration activities in accordance
with stakeholder wishes as did the Board’s decision to seek to acquire the Caspian Explorer.
Earlier this year we stopped disclosing the prices achieved in the domestic and export markets to avoid being at a
commercial disadvantage when negotiating in subsequent months. Announcing stand-alone monthly volume numbers
is out of line with market practice and seems on occasion to provoke suspicion regarding information not contained
in these basic reports. We will therefore provide fuller operational updates on a quarterly basis but end the practice
of reporting monthly production. Significant events, operational or otherwise, will continue to be announced at the
appropriate time as required under the AIM Rules.
We are a small team and until recently one with relatively low staff turnover. We seek to attract and retain staff by
acting as a responsible employer. Health and safety of our employees is important to the Company and an area we
have to regularly report on the Kazakh regulatory authorities.
We continue to provide support to communities and governments through the provision of employment, the payment
of taxes and supporting social and economic development in the surrounding areas, both through social investment
and local procurement. We have contributed to a range of social programmes for well over a decade.
We have established long-term partnerships that complement our in-house expertise, and have built a network of
specialised partners within the industry and beyond.
Clive Carver
Executive Chairman
24 June 2020
25
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 2019. The Strategic report forms part of the business
review for this year.
Principal activity
The principal activity of the Group is oil and gas exploration and production.
Results and dividends
The consolidated statement of profit or loss is set out on page 46 and shows US$1.4 million loss for the year
(2018: US$8.5 million). The Directors do not recommend the payment of a dividend for the year ended 31
December 2019 (2018: US$ nil). The position and performance of the Group is discussed below and further details
are given in the business review.
Review of the year
The review of the year and the Directors’ strategy are set out in the Chairman’s Statement and the Strategic Report.
Events after the reporting period
Other than:
(cid:31) The proposed acquisition of the Caspian Explorer
(cid:31) The actions taken in response of the Covid-19 virus
(cid:31) Operational and financial developments
all as disclosed in this annual report, including notes to the financial statements, there have been no material events
between 31 December 2019, and the date of this report, which are required to be brought to the attention of
shareholders. Please refer to note 27 of these financial statements for further details.
Board changes
In January 2019, Tim Field joined the Board as a non-executive director. Tim is a highly experienced international
corporate lawyer working in London. His input into the oversight of the Company and its future direction is much
valued.
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 and staff are kept informed of major developments through email updates. They also have access to the
Group’s website.
The Group has taken out full indemnity insurance on behalf of the Directors and officers.
26
Directors’ Report continued
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 held office during the period under review and up to the date
of the Annual Report are as follows:
Clive Carver
Kuat Oraziman
Edmund Limerick
Timothy Field (appointed 25 January 2019)
Directors’ interests
Director
Clive Carver
Kuat Oraziman*
Edmund Limerick**
Timothy Field
Number of shares
Number of shares
As at 31 December 2019
As at December 2018
nil
41,485,330
6,430,000
nil
nil
37,285,330
6,430,00
nil
* Taken together Mr Oraziman and his adult children held 807,275,739 shares on 31 December 2019
** 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.
Financial instruments
Details of the use of financial instruments by the Group and its subsidiary undertakings are contained in note 24
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
27
Directors’ Report continued
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 Group’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 Group’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
Executive Chairman
24 June 2020
28
The principal and other risks and uncertainties facing the business
Introduction
Risk assessment and evaluation is an essential part of the Group’s planning and an important aspect of the Group’s
internal control system. Oil & gas exploration and production is a dangerous activity and as such is necessarily
subject to an extremely rigourous health and safety regime.
The Board aims to identify and evaluate the risks the Group faces or is likely to face in future both from its
immediate activities and from the wider environment. This helps to inform and shape the Group’s strategy and to
quantify its tolerance to risk.
Operational success generally helps to mitigate financial risks. Typically with increases in production as new
wells come on stream the ability to generate cash improves the Group’s financial position which can then lead to
further operational success.
As the Group develops, its approach to risk management and mitigation will be refined. We plan to include a
formal risk register including all the principal operational and non-operational risks to the business. Such a risk
register would be reviewed and assessed at least once a year by our new Corporate Governance Committee.
The Group is 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 Group's business
activities and are listed in the Board assessment in the order of greatest potential impact.
Covid-19 risk
A significant and current risk to the business is the prolonged worldwide impact of the COVID-19 pandemic.
As set out more fully in the Chairman’s Statement and the Strategic Report the impact to date has been extensive
both financially in the sharp decline in revenues and operationally as getting crews, equipment and consumables
to site has proved difficult under extensive lockdown restrictions.
We have sought to mitigate the impact of Covid-19 by cost cutting and reducing the pace of new drilling
operations. At this stage however, it is not possible to know how long the impact of Covid-19 will last and its
long term impact on the Group.
Pricing risk
The Group’s financial performance will be adversely affected by a prolonged fall in the price of oil.
Brent oil prices below $35 per barrel for a prolonged period would result in a reduction in the Group’s planned
new drilling activities.
Brent oil prices below $30 per barrel for a prolonged period would also require further cost cutting and may
require raising addition equity funding on onerous terms.
Financing risks
Despite owing our own rigs exploring for oil is still an expensive business.
However, the relatively low value of the Kazakh Tenge compared to the US$ reduces the costs of exploration and
production as most staff costs and some equipment costs are denominated in Kazakh Tenge.
For domestic sales the Group typically enters into contracts with oil traders to forward sell its production and
receives advances as part of its operating activities. With respect to export sales again we typically use different
local oil traders but usually have to wait two months for payment.
29
The principal and other risks and uncertainties facing the business continued
The continued availability of such arrangements is 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 expected growth in production revenues and is mitigated by maintaining strong relationships
with the oil traders.
Under world prices, which apply to the majority of oil sold from the MJF structure the Group forecasts indicate
sufficient working capital is available to meet all shallow structure cost and the Group’s G&A expenditure.
Pending any meaningful contribution from oil sales from our deep wells new drilling will require additional
funding. Potential sources of funding include further advances from local traders; industry funding in the form of
partnerships with larger industry player; if appropriate equity funding from financial institutions; further support
from existing shareholders; and selected asset sales.
We have sought to mitigate the financial risks associated with the Covid-19 virus while international prices low
by a significant reduction in headcount, a deferral of pay and by reducing the pace at which we plan to further
develop our assets.
Refer to note 1.1 for further details on funding and going concern.
Exploration risk
Despite the success of 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 Group also seeks to engage suitably skilled personnel either as employees or contractors to undertake detailed
assessments of the areas under exploration.
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.
Permitting risks
We operate in a highly regulated industry. As such we are only able to fulfil our work programme obligations
once agreed with the Kazakh regulatory authorities after we receive all the required permits, licences and other
permissions. Delays in receiving these regulatory clearances usually results in additional costs.
When the MJF structure was granted its own export licence we became liable to repay assessed relevant historical
costs termed BNG Licence Payments. The payments are to be made on a quarterly basis spread over a ten year
period from the licence upgrade. We have appealed against the level of the assessment on two principal grounds.
The first is that the factual calculation of the amount due is incorrect and the second is the amount assessed has
30
The principal and other risks and uncertainties facing the business continued
been allocated solely against production from the MJF structure rather than as we have been advised should be
the case across the wider BNG Contract area.
We have been advised that based on the facts the amount assessed against the MJF structure should be materially
reduced. However, in the event this is not the case we would need to fund repayments in aggregate of $32.5
million over the next 10 years. In such case there should be no significant historic cost liabilities for other BNG
structures.
Regulatory delays are inevitable and common place and likely to increase as a result of the impact of the Covid-
19 virus.
Our experienced Kazakh workforce has both a thorough knowledge of the complex rules and a detailed practical
understanding of the workings of each of the regulatory bodies with whom we need to deal. Accordingly, we
believe we are well placed to minimise the financial impact of regulatory delays.
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 impact of the Covid-19 virus is likely to add to the times required to obtain the required regulatory approvals.
Political risk
To date 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 reinterpretation 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.
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 Tenge broadly maintained its value against the US$.
In the event however, that the Kazakh Tenge is devalued further against the US$, the Group benefits as income is
unaffected. With approximately 50% of the Group’s costs incurred in Tenge the depreciation of the Tenge against
the US$ materially benefits the Group commercially.
Given the relative strengths of the US$ and the Kazakh Tenge, the Group has decided not to seek to hedge this
foreign currency exposure.
31
Corporate Governance Report
Introduction
In September 2018, new regulations took force under which all companies with shares trading on AIM were
required to comply with a recognised corporate governance code and to disclose how the implementation of the
governance code has been applied or to explain any areas of departure from its requirements.
Caspian Sunrise, in line with the majority of AIM companies, elected to apply the rules of the Quoted Companies
Alliance (QCA) Corporate Governance Code (“QCA Code”), which is based around 10 broad principles. The
QCA Code requires significant additional disclosures which have been made to our corporate website
www.caspiansunrise.com. It also requires explanations of departures from the guidelines of the QCA code.
Under the QCA regulations we have the option to cross refer to disclosures made on the website rather than repeat
them all in this annual report. The principal disclosures such as the Remuneration Committee and Directors’
report will continued to be included in this annual report. However, for a full assessment of the Company you are
encouraged to review the website for both the regulatory disclosures, and as we progress, more information on
the activities of the Company.
Board composition, skills and capabilities
Between 1 January 2019 and 25 January 2019, the Group had two executive directors and one non-executive
director. Following the appointment of Tim Field on 25 January 2019, the Group currently has two executive
directors and two independent non-executive directors as follows:
Clive Carver, Executive Chairman
Clive Carver takes the lead on all non-operational matters, financial matters and all aspects related to the listing
of the Company’s shares on AIM, Corporate Governance compliance and Investor Relations.
Clive is a fellow of the Institute of Chartered Accountants in England and Wales (FCA) and a fellow of the
Association of Corporate Treasurers (FCT). While working in the UK broking industry Clive gained more than
15 years’ experience as a Qualified Executive under the AIM Rules having run the Corporate Finance departments
of several of the larger and more active Nominated Adviser firms.
He is also an experienced non-executive director having been chairman of a number of AIM companies in recent
years.
Kuat Oraziman, Chief Executive Officer
Kuat Oraziman runs the Company’s operations in Kazakhstan. Kuat Oraziman is a trained geologist and member
of the Academy of Sciences. He has more than 25 years oil and gas experience in Kazakhstan.
The Oraziman family hold in aggregate approximately 43% of the Company’s shares and Mr Oraziman has in
recent years provided $4.0 million by way of cash advances against a master loan agreement.
Edmund Limerick, Senior Non-Executive Director
Edmund is a Russian speaking former lawyer and investment banker who ran an institutional investment fund
focused on Central Asia.
Edmund was called to the Bar in 1987, and served as an officer in the Foreign & Commonwealth Office until
1992 with postings in Paris, Dakar and Amman. He was an international corporate lawyer at Clifford Chance,
Freshfields and Milbank Tweed (where he headed the Moscow Office) before joining Deutsche Bank as a director
in Moscow, London and Dubai. In 2006, he joined Altima Partners where he managed the Altima Central Asia
Fund, focusing on Kazakhstan. Edmund has served as a director of Caspian Sunrise plc since 2010, and chairs
the Audit and Remuneration Committees.
32
Corporate Governance Report continued
Timothy Field, Non-Executive Director (appointed 25 January 2019)
Tim joined the Board in January 2019, and is an independent non-executive director. He is a highly experienced
international corporate lawyer specialising in securities law and corporate governance and is the principal of the
specialist corporate and securities law firm "Field". He is also the equity capital markets consultant to the law firm
Mishcon de Reya where until recently he led its public company practice. He has a long and significant track
record of advising AIM companies and Nominated Advisers. His input into the oversight of the Company and its
future direction will be much valued.
Tim is a member of the Remuneration and Audit committees and chairs the new Governance committee.
The Board believes it possesses the skills required to build a successful and durable oil and gas business focused
on Kazakhstan.
Operational skills are maintained through an active day to day interaction with leading international consultancies
and contractors engaged to assist in the development of the Group’s assets.
Non-operational skills are maintained principally via the Group’s interaction with its professional advisers plus
the experience gained from sitting on the boards of other commercial enterprises.
As the Group develops and in particular moves from predominantly an oil exploration company to a balanced
production and exploration company, the Board will periodically re-assess the adequacy of the skills on both the
Board. Where gaps are identified as the Group evolves, new appointments will be made.
The Board retains full and effective control over the Group. The Group holds at least four Board meetings each
year, at which operational, financial and other reports are considered and, where appropriate, voted on. The Board
also has a list of standing items, including compliance with the UK Bribery Act, litigation and existence of open
and closed periods for director dealings, which are considered at each meeting.
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 Group and continued through the year.
The Board is also responsible for monitoring the activities of the Management.
Board performance
The Group currently does not evaluate board performance on a formal basis. However, it intends in the near term
to formalise the assessment of both executive and non-executive board members.
The Group is aware of its need to facilitate succession planning and in the period under review conducted a
detailed assessment of the risks relating to succession.
Following the expansion of the board such that the board audit and remuneration board committees now contain
only non-executive directors.
33
Corporate Governance Report continued
Board and committee meetings
Attendances of Directors at Board and committee meetings convened in the year, and which they were eligible to
attend in person or by phone, are set out below:
Director
Number of meetings in year
Clive Carver
Kuat Oraziman
Edmund Limerick
Tim Field*
Board
Meetings
attended
Remuneration
Committee attended
Audit
Committee
Attended
4
4
4
4
4
2
N/A
N/A
2
2
2
N/A
N/A
2
2
* Tim Field joined the Board on 25 January 2019.
Committees of the Board
From 1 January 2019 to 25 January 2019, the Board operated with only three directors, which inevitably meant
that the Board committees comprised both executive and non-executive directors. In its QCA Corporate
Governance statement published in September 2018, the Company acknowledged that this departure from the
recommendations of the QCA was not a long-term solution and was actively seeking to appoint an additional non-
executive director.
The appointment of Tim Field in January 2019, to the Board and to the Committees of the Board has enabled the
Company to have an appropriate balance of executive and non-executive directors. The Audit and Remuneration
committees of the Board are now comprised of only independent non-executive directors.
The Board has established the following committees:
Audit Committee
The Audit Committee which comprises Edmund Limerick and Tim Field, 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 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 and Tim Field, 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. The Report of the
Remuneration Committee for 2019 is set out immediately after this Corporate Governance Report.
Corporate Governance Committee
Upon the appointment of Tim Field as a Non-Executive director, the Company decided to form a new Corporate
Governance Committee.
34
Corporate Governance Report continued
Committee membership
The Committee has been formed and comprises Tim Field, Edmund Limerick and Clive Carver, with Tim Field
acting as chairman.
Remit of the Committee
Overall compliance with the Group’s compliance, corporate governance, risk management, market disclosure and
related obligations rests with the Board.
Nonetheless, the Board recognises that the Group is required to assess such matters on an ongoing basis and make
timely and accurate disclosure of certain information by virtue of its obligations set out in the EU Market Abuse
Regulation No.596/2014 (MAR) and associated technical standards and delegated regulations, as well as the AIM
Rules for Companies.
The Group is also required to maintain systems and procedures to comply with these obligations. There are
efficiencies that can result from the Committee having responsibility to undertake certain matters toward the
overall obligations of the Group and having due regard to the above objectives and requirements the Committee
shall:
(a)
(b)
(c)
oversee the Group’s systems and procedures as regards the discovery, assessment and disclosure of Inside
Information;
determine the disclosure treatment of material and potential Inside Information and, save in respect of
routine public announcements, ensure its timely and accurate communication so as to avoid the creation
or the continuation of a false market in the securities of the Group;
determine whether the disclosure of Inside Information can be delayed and, to the extent that it is delayed,
ensure that the Group discharges its associated record-keeping requirements. To that end, the Group has
decided to create and maintain a register which contains the records required by MAR in relation to each
item of inside information the disclosure of which is to be delayed;
(d)
review the effectiveness of the Group’s internal controls and risk management systems;
(e)
(f)
(g)
(h)
(i)
(j)
ensure that risk management is properly considered in Board decisions and review the methodology for
reporting risk to the Board;
review the adequacy and security of the Group’s arrangements for its employees and contractors to raise
concerns, in confidence, about possible wrongdoing in financial reporting or other matters;
review the Group’s systems and controls for ethical behaviour and the prevention of bribery and as
appropriate modern slavery;
oversee and ensure that the Company discharges its regulatory disclosure obligations generally (including
a review of the Company's web-site at least as frequently as required in accordance with the AIM Rules
for Companies, and in particular Rule 26 thereof);
assist in the production, implementation and periodic evaluation of the adequacy and effectiveness of the
Company's disclosure and controls procedures;
ensure that the Company's systems and procedures as regards the creation and maintenance of the
Company's insider list(s) are compliant and effective and periodically assess whether the Company has
correctly identified those considered to be permanent insiders; and
(h)
consider other duties determined by the Board from time to time.
The Board plans to include a formal risk register including all the principal operational and non-operational risks
to the business to be considered by the Governance & Risk Committee. This will be in addition to the procedures
already in place as set out elsewhere in this document.
35
Corporate Governance Report continued
Meetings of the Committee
The committee held its first meeting during the period under review and intends to meet at least twice a year.
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 Group has adopted and operates a share dealing
code for Directors and employees in accordance with the AIM Rules.
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 intends to establish and operate a policy of continuous review and development of appropriate financial
controls together with operating procedures consistent with the accounting policies of the Group.
Internal audit
The Board does not consider it appropriate for the current size of the Group to establish an internal audit function.
However, this will be kept under review.
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 board meetings.
The Company’s culture
Our culture might best be described as one where we strive for commercial success while treating others fairly
and with respect. The board firmly believes that sustained success will best be achieved by following this simple
philosophy.
Accordingly, in dealing with each of the Groups principal stakeholders, we encourage our staff to operate in an
honest and respectful manner. Given the simplicity of the culture we do not believe lengthy illustrations of our
culture in action add much.
We also believe in getting proper value for money spent. Given the high percentage of the Groups shares
represented by senior management figures we seek to spend the Groups money very carefully. We believe this
goes hand in hand with being a low-cost operator.
Kazakhstan plays an important part in the Group’s culture. It is where we operate; where almost all staff are
based; it is the nationality of most staff and of the majority of shareholders.
The Group is committed to promoting a culture based on ethical values and behaviours across the business.
Policies are in place covering key matters such as equality, protection of sensitive information, conflicts of
interest, whistleblowing and health and safety as well as environmental concerns.
Tim Field
Chairman, Corporate Governance Committee
24 June 2020
36
Remuneration Committee Report
Remuneration Committee
The Remuneration Committee comprises Edmund Limerick and Tim Field 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
Non-Executive
Edmund Limerick
Date of service
agreement /
appointment letter
Date of last
renewal of
appointment
20 March 2019
21 June 2019
6 December 2019
19 June 2018
Timothy Field
25 January 2019
21 June 2019
25 January 2019
13 June 2017
Basic salary and benefits
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
2019
Salary/fees
US$
2019
Share options
US$
2019
Total
US$
2018
Total
US$
Clive Carver
Executive Chairman
425,289
Kuat Oraziman
CEO
170,620
-
-
425,289
336,140
170,620
122,330
Edmund Limerick Non-Executive
69,136
12,645
81,781
60,672
Tim Field
Non-Executive
64,351
12,645
76,996
Nil
Kairat Satylganov CFO
-
-
-
20,388
Total
729,396
25,290
754,684
539,530
Share option amounts refer to the IFRS 2 accounting charge. There were no company pension contributions in
respect of any director
37
Remuneration Committee Report continued
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 2019 (2018: nil).
Long term incentives
In May 2019, we announced the introduction of cash based long term incentive arrangements for the senior
management team since 2012.
Under these arrangements, provided the share price growth exceeds pre-set targets starting at 17.23p, then for
every $500 million increase in the Group’s market capitalisation above $300 million, as adjusted to take account
of dividends paid, both Kuat Oraziman CEO and Clive Carver, Executive Chairman would receive payments of
$3 million each.
The principal hurdles under these arrangements are set out in the table below.
Market cap threshold
$ billion
Share price target
Pence per share
Pay-out rate (each)
%
Pay-out amount (each)
$' million
0.8
1.3
1.8
2.3
2.8
17.23
20.67
24.81
29.77
35.72
0.6
0.6
0.6
0.6
0.6
3.0
3.0
3.0
3.0
3.0
The scheme continues beyond the numbers in the table such that with the threshold for market capitalisation
increasing at the rate of $0.5 billion and the corresponding share price threshold increasing from the earlier
threshold by a constant factor of 1.2.
Each threshold must be sustained for at least 30 consecutive days for the awards to be triggered.
There may be only one pay-out for each market capitalisation threshold crossed no matter how many times it is
crossed.
Whilst the Executive Director Incentive Scheme is in place neither of the current executive directors will be
granted any further options.
The Executive Director Incentive Scheme is a related party transaction under the AIM Rules for Companies.
Accordingly, the directors other than Kuat Oraziman and Clive Carver, considered, having consulted with its
nominated adviser, WH Ireland, that the terms of the transaction were fair and reasonable in so far as shareholders
were concerned.
38
Remuneration Committee Report continued
Share options
The current interests as at approval of accounts of the current Directors in share options agreements are as follows:
Directors
Clive Carver
Directors
Clive Carver
Kuat Oraziman
Edmund Limerick
Directors
Clive Carver
Kuat Oraziman
Edmund Limerick
Edmund Limerick
Tim Field
Granted
2,400,000
Exercise Price Expiry date
4p
14 December 2021
Granted
750,000
3,090,000
750,000
Exercise Price Expiry date
13p
13p
13p
12 January 2021
12 January 2021
12 January 2021
Granted
3,000,000
3,000,000
750,000
1,000,000*
1,000,000*
Exercise Price Expiry date
20p
20p
20p
20p
20p
21 August 2024
21 August 2024
21 August 2024
5 June 2029
5 June 2029
* granted during 2019
The following options were exercised during 2019
Directors
Kuat Oraziman
Exercised Exercise Price Exercise date
4,200,000
4p
22 January 2019
The following options expired during 2019
Directors
Clive Carver
Kuat Oraziman
Expired
538,264
269,132
Exercise Price Expiry date
12p
12p
14 August 2019
14 August 2019
On behalf of the Directors of Caspian Sunrise plc
Edmund Limerick
Chairman of Remuneration Committee
24 June 2020
39
Audit Committee Report
Composition
The Audit Committee, which comprises Edmund Limerick and Tim Field, 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.
Role and responsibilities
The Audit Committee is responsible for monitoring the integrity of the Company’s financial statements, reviewing
significant financial reporting issues, reviewing the effectiveness of the Group’s internal control and risk
management systems. 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. It oversees the relationship with the
Auditor (including advising on their appointment, agreeing the scope of the audit and reviewing the audit
findings).
The Board and the Audit Committee do not consider it appropriate for the current size of the Group to establish
an internal audit function. However, this will be kept under review.
Attendance at Audit Committee meetings
Please see the table in the preceding Corporate Governance Report for attendance by the members of the Audit
Committee.
Edmund Limerick
Chairman of Audit Committee
24 June 2020
40
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 2019 which comprise the consolidated statement of profit or loss, the consolidated statement of
other 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 Group 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 2019 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 Group and the Parent Company 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.
Material uncertainty in relation to going concern
We draw attention to note 1.1 in the financial statements concerning the Group and the Parent Company’s ability to continue as
a going concern. Note 1.1 highlights that Group and Parent Company’s ability to meet its liabilities and commitments as they fall
due without additional funding is sensitive to the oil prices realised across the forecast period and, separately, it is dependent
upon the deferral of financial obligations and drilling commitments associated with its licences, continued availability of oil trader
advances and the continued support of certain creditors together with other matters set out therein. These factors are outside the
control of the Group and the Parent Company and there is no certainty that any funding that may therefore be required can be
secured within the necessary timescales. These events or conditions indicate that a material uncertainty exists that may cast
significant doubt on the Group and the Parent Company’s ability to continue as a going concern. Our opinion is not modified in
respect of this matter.
We consider going concern to be a Key Audit Matter based on our assessment of the risk and the effect on our audit. Our
response to this key audit matter is shown below:
• We discussed the potential impact of Covid-19 with management and the Audit Committee including their assessment of
risks and uncertainties associated with areas such as production disruption, commodity price volatility and the impact on the
availability of funding. We formed our own assessment of risks and uncertainties based on our understanding of the business
and oil sector.
• We obtained management’s cash flow forecasts and critically assessed the key inputs. In doing so we compared oil prices
to market data, production levels to recent performance trends and operating costs to historical data.
• We evaluated the completeness of forecast license related expenditure against the license work programs and payments
due under the 3A Best license. We inspected submissions made to the relevant authorities for deferral of work program
commitments and payments due and held discussions with management and the Audit Committee regarding the status of
such applications.
• We compared the forecast cash payments in respect of the BNG production license award against the $32m assessment
received from the Government payable in instalments over 10 years. We discussed the status of the court process with
management and the Audit Committee which seeks to reduce the payments to the level included in the forecast and
considered the impact of the court process being unsuccessful.
• We considered the appropriateness of the Board’s judgment regarding the availability of sufficient 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 assessed the terms of the loans provided from the Group’s largest shareholder and his connected companies, the
dependence on continued support and the Board’s conclusion that the loans will not be called for payment for at least the
next 12 months unless the Group has sufficient liquidity. We obtained written representation from the Board regarding this
assessment.
• We evaluated management’s sensitivity analysis and performed our own sensitivity analysis in respect of the key assumptions
underpinning the forecasts, including specific scenarios such as reduced revenue cash flows or the impact of one or more
adverse events such as withdrawal of facilities, withdrawal of creditor support or license payments or commitments being
enforced. We assessed the validity of any mitigating actions identified by Management.
41
INDEPENDENT AUDITOR’S REPORT (continued)
• We reviewed the adequacy and completeness of the disclosure included within the financial statements in respect of going
concern.
Key audit matters
In addition to the matter described in the material uncertainty related to going concern section, 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: The risk that the carrying value of the oil and gas assets require impairment or that previously
recorded impairments should be reversed
As at 31 December 2019, the Group’s oil and gas assets related to BNG and 3A Best were carried at US$103.2m as shown in
notes 10 and 11. At each reporting period end, management are required to assess the oil and gas assets for indicators of
impairment and, where such indicators exist, perform an impairment test. Additionally, management are required to assess whether
circumstances that gave rise to historical impairment provisions not longer apply and the impairments should be reversed.
In performing the impairment indicator review for the unproven oil and gas assets in the exploration phase, management are
required to make a number of judgements as detailed in notes 1.8 and 2.1. In respect of the 3A Best oil and gas assets, as detailed
in note 2.5 management applied significant judgment in concluding that its application for deferral of the payments due in July
2020 under the licence will be successful following application to the Government and that the license will be extended. As a result,
no impairment was considered to be appropriate by management.
In respect of the MJF production license, as detailed in note 2.3 management recorded a reversal of $2.4m of historical impairment
provision based on the net present value forecasts for the field, which required estimation and judgment regarding the inputs to
the forecasts and assessing whether the factors that gave rise to the original impairment no longer applied.
Given the judgment and estimation required by management, we considered this area to be a key focus for our audit.
How the matter was addressed in our audit
(cid:31)
(cid:31) We considered whether indicators of impairment existed in respect of the BNG and 3A Best unproven oil and gas assets. In
doing so, we inspected the licenses to confirm valid title and assessed the compliance with the license conditions through
review of correspondence with the authorities and inquiries of management. We inspected budgets and work programs
submitted to the Kazakh authorities to confirm that further drilling and exploration is planned for the assets. We considered
the results of exploration activity in the period for indications that the licenses would be abandoned or that the recoverable
value would be below cost.
In respect of the 3A Best license, we reviewed correspondence from the Government which included payment obligations
which, if unfulfilled, would entitle the Government to withdraw the license. We discussed management’s judgment that the
obligations would be ultimately be deferred and the license be extended with the Audit Committee. In assessing the judgment,
we inspected applications submitted to the Government, the history of investment in Kazakh oil fields by the Group and the
previous extensions and revisions to work program commitments and obligations.
In respect of the MJF producing assets we inspected the production license awarded in the period and obtained
management’s net present value forecasts and critically assessed the inputs. In doing so, we compared the oil price forecasts
as at 31 December 2019 to market consensus forecasts and compared operational production and cost assumptions to the
2015 Competent Person’s Report, historical data and other third party sources.
(cid:31)
(cid:31) We evaluated the independence and competence of the Competent Person as a management expert.
(cid:31) We considered management’s judgment that it was appropriate to record a reversal of previous impairment associated with
the MJF producing assets. In doing so, we considered the impact of the production license award on the field economics and
the recoverable value calculated by management. We evaluated the basis on which management determined the share of
the historic impairment that related to the MJF structure for consistency with the ratio of the cost pool transferred into
production upon the commencement of commercial production.
(cid:31) We assessed the disclosures included in the financial statements at notes 2.1, 2.3, 2.5, 10 and 11.
Our observations
We found management’s conclusion that no impairment exists on the BNG oil and gas assets and 3A Best oil and gas assets to
be appropriate. We found the judgments made by management to be appropriately considered and the disclosures in the notes to
be sufficient.
42
INDEPENDENT AUDITOR’S REPORT (continued)
Key audit matter: Accounting for licence payment obligations triggered by the award of the BNG production contract
Under the terms of the BNG license, on award of the production contract the Group incurred an obligation for payments under the
licence as detailed in note 2.6, 11 and 19. Whilst the quantum to be paid has been assessed by the Government authorities it
remains subject to dispute with a legal process ongoing. Management recorded a provision and increase in the proven oil and gas
asset cost of $28.3m on initial recognition. The determination of the appropriate accounting treatment and the estimate of the
provision required management to exercise judgment.
Given the judgment required and the material impact of the transaction, this was considered to be a focus for our audit and a key
audit matter.
How the matter was addressed in our audit
(cid:31) We reviewed the terms of the license to confirm that a payment obligation was triggered upon award of the contract.
(cid:31) We reviewed correspondence with the relevant authorities regarding the assessment of the quantum of the payment due and
the terms of payment which formed the basis for the amounts recorded as a provision. We inspected court applications which
were consistent with management’s assertions that they were challenging the quantum of the assessment and discussed the
basis for the legal proceedings with management and the Audit Committee.
(cid:31) We recalculated the provision and compared the discount rate to market bond yield data for similar termed instruments.
(cid:31) We evaluated that accounting policy established by management against relevant IFRS literature and the nature of the
transaction. In particular, this involved assessing the extent to which capitalization of the cost was appropriate in conjunction
with our technical specialists.
(cid:31) We assessed the disclosures included in the financial statements at notes 2.6, 11 and 19.
Our observations
We found the accounting treatment of the transaction to be appropriate.
Key audit matter: Appropriateness of revenue recognition policies and the appropriateness of cut off for oil revenue
The Group generated revenues of $12.1m which arises both from the test production and, for the first time in 2019, export sales at
BNG as shown in note 3. We considered there to be a risk that the accounting policy for export revenues did not meet the
requirements of IFRS 15. In addition, we considered there to be a risk of revenue being recorded in the incorrect period for
transactions around year end. Given these conditions we considered revenue recognition to be a focus for our audit and a key
audit matter.
How the matter was addressed in our audit
(cid:31) We evaluated the group’s revenue recognition policies for each revenue stream (export and domestic) and assessed their
compliance with IFRS 15 and its 5-step revenue recognition model based around control and consistency with the contractual
arrangements with its customers.
(cid:31) We examined the terms of all significant sales agreements and assessed the impact of such terms of revenue recognition.
(cid:31) We performed cut off procedures on revenue around the year end for each revenue stream, to determined whether revenue
had been recognised in the correct period. In doing so, we confirmed the appropriateness of the revenue recognition point
against the terms of contract and delivery documents for items pre and post year end.
(cid:31) We verified a sample of oil production revenues to supporting evidence.
Our observations
We found the revenue recognition policies to be compliant with accounting standards and found that revenue is recorded in the
appropriate period.
43
INDEPENDENT AUDITOR’S REPORT (continued)
Our application of materiality
Group materiality as at 31 December 2019
US$1,900,000
Basis for materiality
1.5% of total assets
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 $1,900,000, being 1.5% of total assets (2018: $1,000,000).
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 $1,710,000, being 90% of
Group materiality (2018: $800,000 capped at 80% of Group materiality).
In performing the audit we applied a lower level of performance materiality of $1,425,000, being 75% of Group materiality (2018:
$750,000), 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 $300,000 to $900,000 (2018: $600,000 to $675,000).
We agreed with the Audit Committee that we would report to the committee all individual audit differences in excess of $70,000
(2018: $50,000). 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 oil and gas exploration and production in Kazakhstan. We assessed there to be 3
significant components comprising BNG, 3A Best and the parent company.
These locations, which were subject to full scope audit procedures represent the principal business units.
Non-BDO member firms performed a full scope audit of BNG and 3A Best in Kazakhstan, under our direction and supervision as
Group auditors. 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 auditors, which included the significant areas to be
covered by the audit.
As a result of travel restrictions resulting from the COVID-19 pandemic, senior members of the group audit team were
unable to visit Kazakhstan to meet with component management and the component auditors during the audit
completion phase as we have done historically. Accordingly, we performed a remote review of the component audit
files in Kazakhstan using online software platforms and held regular calls with the component audit teams during the
planning and completion phases of their audit.
• We reviewed Group reporting submissions received and held calls and meetings with the component audit team during
the completion phases of their audit to discuss significant findings from their audit.
• We held calls and meetings with members of Group and component management to discuss accounting and audit
•
matters arising.
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.
Other information
The Directors are responsible for the other information. The other information comprises the information included in the Annual
Report and Financial Statements, 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.
44
INDEPENDENT AUDITOR’S REPORT (continued)
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.
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 set out on page 28, 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.
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.
Ryan Ferguson (Senior Statutory Auditor)
For and on behalf of BDO LLP, Statutory Auditor
London,
United Kingdom
24 June 2020
BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).
45
Consolidated Statement of Profit or Loss
Revenue
Cost of sales
Gross profit
Selling expense
Impairment reversal of unproven and proved oil and gas assets
Share-based payments
Other administrative costs
Total administrative expenses
Operating income / (loss)
Finance cost
Finance income
Profit/(Loss) before taxation
Tax charge
Loss after taxation from continuing operations
Loss for the year from discontinued operations
Loss for the year
Loss attributable to owners of the parent
Loss attributable to non-controlling interest
Loss for the year
Basic loss per ordinary share (US cents)
From continuing operations
From discontinued operations
Total loss per share
Diluted loss per ordinary share (US cents)
From continuing operations
From discontinued operations
Total loss per share
Notes
3
11
4
7
8
20
9
9
Year to
31 December
2019
US$’000
12,108
(6,971)
5,137
(2,220)
2,414
(31)
(3,907)
(3,938)
1,393
(452)
-
941
(2,343)
(1,402)
-
(1,402)
(1,278)
(124)
(1,402)
(0.07)
-
(0.07)
(0.07)
-
(0.07)
Year to
31 December
2018
US$’000
10,747
(10,747)
-
-
-
(13)
(2,611)
(2,624)
(2,624)
(348)
-
(2,972)
(414)
(3,386)
(5,147)
(8,533)
(8,366)
(167)
(8,533)
(0.19)
(0.31)
(0.5)
(0.19)
(0.31)
(0.5)
The notes on pages 53 to 81 are an essential part of these financial statements
46
Consolidated Statement of Comprehensive Income
Loss after taxation
Other comprehensive income:
Exchange differences on translating foreign operations
Recycling of exchange difference on disposal of subsidiary
Total comprehensive loss for the year
Total comprehensive loss attributable to:
Owners of parent
Non-controlling interest
Year ended
31 December
2019
Year ended
31 December
2018
US$000
US$000
(1,402)
(8,533)
268
-
(1,134)
(1,010)
(124)
(10,136)
8,305
(10,364)
(9,277)
(1,087)
The notes on pages 53 to 81 are an essential part of these financial statements
47
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E
Consolidated Statement of Financial Position
Company number 5966431
Notes
Group
2019
US$’000
Group
2018
US$’000
10
11
13
14
14
15
16
16
26
17
18
19
19
22
19
19
17
60,040
51,326
384
5,745
241
117,736
5,663
4,060
9,723
127,459
28,120
246,299
64,702
(2,362)
(220,477)
(55,643)
60,639
(5,729)
54,910
14,836
4,050
3,178
6,304
28,368
7,244
24,216
428
12,293
44,181
72,549
127,459
55,685
88
132
8,445
249
64,599
364
557
921
65,520
25,416
229,020
64,702
(2,362)
(219,230)
(55,911)
41,635
(5,605)
36,030
6,259
2,572
-
3,515
12,346
6,733
-
125
10,286
17,144
29,490
65,520
Assets
Non-current assets
Unproven oil and gas assets
Property, plant and equipment
Inventories
Other receivables
Restricted use cash
Total non-current assets
Current assets
Other receivables
Cash and cash equivalents
Total current assets
Total assets
Equity and liabilities
Capital and reserves attributable
to equity holders of the parent
Share capital
Share premium
Deferred shares
Other reserves
Retained deficit
Cumulative translation reserve
Equity attributable to the owners of the Parent
Non-controlling interests
Total equity
Current liabilities
Trade and other payables
Short - term borrowings
Provision for BNG licence payment
Other current provisions
Total current liabilities
Non-current liabilities
Deferred tax liabilities
Provision for BNG licence payment
Other non-current provisions
Other payables
Total non-current liabilities
Total liabilities
Total equity and liabilities
Approved by the Board and authorized for issue:
Clive Carver,
Chairman,
24 June 2020
Company number: 5966431
The notes on pages 53 to 81 are an essential part of these financial statements
50
Parent Company Statement of Financial Position
Company number 5966431
Notes
Company
2019
US$’000
Company
2018
US$’000
Assets
Non-current assets
Investments in subsidiaries
Other receivables
Total non-current assets
Current assets
Other receivables
Cash and cash equivalents
Total current assets
Total assets
Equity and liabilities
Capital and reserves attributable
to equity holders of the parent
Share capital
Share premium
Deferred shares
Other reserves
Retained deficit
Equity attributable to the owners of the Parent
Total equity
Current liabilities
Short - term borrowings
Trade and other payables
Total current liabilities
Non-current liabilities
Other payables
Total non-current liabilities
Total liabilities
Total equity and liabilities
12
14
14
15
16
16
18
17
17
223,781
10,704
234,485
7
87
94
234,579
28,120
246,299
64,702
-
(138,167)
200,954
200,954
1,814
31,811
33,625
-
-
33,625
234,579
211,986
3,066
215,052
6
292
298
215,350
25,416
229,020
64,702
14,936
(144,911)
189,163
189,163
400
9,052
9,452
16,735
16,735
26,187
215,350
The Company incurred a loss for the year ended 31 December 2019 in the amount of US$ 8,223,000 (2018: US$ 851,000).
Approved by the Board and authorized for issue:
Clive Carver,
Chairman,
24 June 2020
Company number: 5966431
The notes on pages 53 to 81 are an essential part of these financial statements
51
Consolidated and Parent Company Statements of Cash Flows
Cash flows from operating activities
Cash received from customers
Return of taxes previously paid
Payments made to suppliers for goods and services
Notes
8
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
Proceeds from disposal of subsidiaries
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 provided by subsidiaries
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
20
24
24
Cash and cash equivalents at the end of the year
15
Group
2019
US$’000
Group
2018
US$’000
Company
2019
US$’000
Company
2018
US$’000
16,465
-
(6,767)
(1,226)
8,472
(669)
(5,830)
8
-
-
-
9,025
1,013
(2,747)
(1,185)
6,106
(3)
(7,733)
-
134
-
-
(6,491)
(7,602)
220
(28)
-
1,330
-
1,522
3,503
557
4,060
61
(534)
-
1,047
-
574
(922)
1,479
557
-
-
-
1,013
(1,128)
(1,175)
(597)
(1,725)
(614)
(776)
-
-
-
-
108
(100)
8
220
-
-
1,330
(38)
1,512
(205)
292
87
-
-
-
-
180
(100)
80
61
-
600
400
(90)
971
275
17
292
Significant non-cash transactions include the following and details can be found in notes 6, 7, 8, 10, 11, 16:
-
-
-
Acquisition of 100% interest at 3A Best in exchange of issue of 149,253,732 new Caspian Sunrise shares with the
consideration value of US$ 11,795,000 on the date (2018: US$ 0);
Acquisition of PP&E in exchange of issue of 58,333,333 new Caspian Sunrise shares with the value of US$ 7,996,000
(2018: US$ 0);
Share-based payments in the amount of US$ 31,000 (2018: US$ 13,000);
- Withholding tax in the amount of US$ 1,860,000 (2017: US$ 1,375,000);
-
-
-
-
-
Exchange differences on translating foreign operations of US$ 49,000 (2018: US$ 3,154,000);
Depreciation charge of US$ 148,000 (2018: US$ 31,000);
Interest expense of US$ 452,000 (2018: US$ 348,000);
Reversal of impairment on the BNG assets of US$2,414,000 (2018: US$Nil);
Additions to the BNG proven oil and gas assets of US$28,335,000 (2018: US$Nil) associated with the provision for licence
payments
* Additions to unproven oil and gas assets contain the amount of US$ 185,500 in relation to payroll expenses capitalized (2018: US$:
332,000).
The notes on pages 53 to 81 are an essential part of these financial statements
52
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 24 June 2020.
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 Board have assessed cash flow forecasts prepared for a period of at least 12 months from the of approval of the financial
statements and assessed the risks and uncertainties associated with the operations and funding position, including the potential
further effects of the COVID-19 pandemic.
However, the Group’s liquidity is dependent on a number of key factors:
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
The Group continues to forward sell its domestic production and receive advances from oil traders with $4.5m currently advanced
and the continued availability of such arrangements is important to working capital. Whilst the Board anticipate such facilities
remaining available given its trader relationships and recent increases, should they be withdrawn or reduced more quickly than
forecast cash flows allow then additional funding would be required.
The forecasts assume that certain material licence commitments and obligations respect of 3A Best and BNG will be deferred
by the authorities based on applications submitted in May 2020. Additionally, the forecasts assume that quarterly payments in
respect of the BNG production licence will be revised to levels below the current assessments received from the authorities,
based on legal proceedings initiated. In the event that the authorities refuse one or more of such applications or the BNG licence
payment is not reduced additional funding will be required.
The Group has approximately $0.5m of aged creditors which are being settled over the coming months from operating cash
flows. Whilst relations are positive with the suppliers, if their support is withdrawn additional funding may be required.
The Group has $4m of loans due on demand or within the forecast period to its largest shareholder and his connected companies.
Whilst the Board has received assurances that the facilities will not be called for payment unless sufficient liquidity exists, there
are no binding agreements currently in place to this effect and if repayment was required additional funding would be needed.
The forecasts remain sensitive to oil prices, which have shown significant volatility. Independent of the factors above, if
international oil prices fell below c$30/bbl additional actions would be required including further cost reductions, additional
payment deferrals and raising funds.
The Directors remain confident that additional funding, if required, could be obtained through a number of sources including: further
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, there can
be no guarantee that such funding would be available and the terms of any new funding, if required, may be onerous.
These circumstances indicate the existence of a material uncertainty which may cast significant doubt about the Group's ability to
continue as a going concern and therefore it may be unable to realise its assets and discharge its liabilities in the normal course of
business. The financial statements do not include the adjustments that would result if the Group was unable to continue as a going
concern.
Notwithstanding the material uncertainty described above, after making enquiries and assessing the progress against the forecast,
projections and the status of the mitigating actions referred to above, the Directors have a reasonable expectation that the Group will
continue in operation and meet its commitments as they fall due over the going concern period. Accordingly, the Directors continue
to adopt the going concern basis in preparing the financial statements.
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$8,223,000 (2018: US$ 851,000)
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.
The notes on pages 53 to 81 are an essential part of these financial statements
53
Notes to the Financial Statements (continued)
1 Principal accounting policies (continued)
1.2 New and revised standards and interpretations applied
The disclosed policies have been applied consistently by the Group for both the current and previous financial year with the
exception of the new standards adopted.
The European Union (“EU”) IFRS financial information has been drawn up on the basis of accounting policies consistent with those
applied in the financial statements for the year to 31 December 2018, except for the following:
(a)
IFRS 16 ‘Leases’
(b)
IFRIC 23 ‘Uncertainty over Income Tax Positions’
(c) Prepayment Features with Negative Compensation – Amendments to IFRS 9
(d) Long-term Interests in Associates and Joint Ventures – Amendments to IAS 28
(e) Annual Improvements to IFRS Standards 2015 – 2017 Cycle
(f) Plan Amendment, Curtailment or Settlement – Amendments to IAS 19
In respect of IFRS 16 the Group amended accounting policies applied from 1 January 2019 are disclosed in Note 3 under ‘Significant
accounting policies’.
IFRS 16 specifies how to recognise, measure, present and disclose leases. The standard provides a single lessee accounting model,
requiring lessees to recognise right-of-use assets and lease liabilities for all material leases. It results in almost all leases being
recognised on the balance sheet by lessees, as the distinction between operating and finance leases was removed. Under the new
standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognised. The only exceptions are
short-term and low-value leases. The Group adopted IFRS 16 from 1 January 2019 using the modified retrospective approach and
accordingly the information presented for 2018 is not restated. It remains as previously reported under IAS 17 and related
interpretations. The Group undertook an assessment of contracts to identify potential lease arrangements and following such analysis
determined that the impact was immaterial.
Effective as of 1 January 2019, IFRIC 23 explains how to recognise and measure deferred and current income tax assets and liabilities
where there is uncertainty over a tax treatment. An uncertain tax treatment is any tax treatment applied by the Group where there is
uncertainty over whether that treatment will be accepted by the tax authority. IFRIC 23 applies to all aspects of income tax accounting
where there is an uncertainty regarding the treatment of an item, including taxable profit or loss, the tax bases of assets and liabilities,
tax losses and credits and tax rates. refer to note 19 for details of uncertain tax positions.
Standards, amendments and interpretations, which are effective for reporting periods beginning after the date of this financial
information which have not been adopted early:
Amendments to IFRS 3, ‘Business combinations’
Amendments to IAS 1 and IAS 8: Definition of Material
Amendments to References to the Conceptual Framework in IFRS Standards
IFRS 17, ‘Insurance contracts’
Effective for annual
periods beginning on or
after
01-Jan-20
01-Jan-20
01-Jan-20
01-Jan-21
Management are currently assessing the impact of the amendments to IFRS 3 vis a vis the proposed acquisition of Caspian Explorer
as detailed in the subsequent events note.
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.
The notes on pages 53 to 81 are an essential part of these financial statements
54
Notes to the Financial Statements (continued)
1 Principal accounting policies (continued)
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$”), which is the Group’s presentational currency. Beibars Munai LLP, Munaily Kazakhstan LLP, BNG Ltd LLP and Roxi Petroleum
Kazakhstan LLP, 3A_Best Group JSC, and Caspian Technical Services LLP subsidiary undertakings of the Group during the period,
undertake their activities in Kazakhstan and the Kazakh Tenge is the functional currency of these entities. The functional currency for
the Company, Beibars BV, Ravninnoe BV, Galaz Energy BV, BNG Energy BV and Eragon Petroleum FZE is USD as USD reflects
the underlying transactions, conducts and events relevant to these companies.
1.5.2 Transactions and balances in foreign currencies
In preparing the financial statements of the individual entities, transactions in currencies other than the entity’s functional currency
(“foreign currencies”) are recorded at the rates of exchange prevailing at the dates of the transactions. At each reporting date,
monetary items denominated in foreign currencies are retranslated at the rates prevailing at the reporting date. Non-monetary items
carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value
was determined. Non-monetary items, including the parent’s share capital, that are measured in terms of historical cost in a foreign
currency are not retranslated. Exchange differences are recognised in profit or loss in the period in which they arise.
1.5.3 Consolidation
For the purpose of consolidation all assets and liabilities of Group entities with a functional currency that is not US$ 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
recognised 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.
In case of the uncertainty of the tax treatment, the Group assess, whether it is probable or not, that the tax treatment will be accepted,
and to determine the value, the Group use the most likely amount or the expected value in determining taxable profit (tax loss), tax
bases, unused tax losses, unused tax credits and tax rates.
Withholding tax payable at Kazakhstan
According to requirements of the Tax Code of Kazakhstan, withholding taxes payable for non-residents should be withheld from the
total amount of interest income of non-residents and paid to the government when interest is paid (in cash) to non-residents. The
companies should pay taxes from non-residents’ interest income derived from sources in the Republic of Kazakhstan on behalf of
these non-residents.
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.
The notes on pages 53 to 81 are an essential part of these financial statements
55
Notes to the Financial Statements (continued)
1 Principal accounting policies (continued)
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. The costs transferred comprise direct costs associated with the relevant wells and infrastructure,
together with an allocation of the wider unallocated exploration costs in the cost pool such as original acquisition costs for the field.
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.
As part of the Kazakh licencing regime, upon award of a production contract in respect of the BNG licence area, an obligation to make
a payment to the licencing authority is triggered, settled over a 10 year period in equal quarterly instalments. Such payments are
considered to form a cost of the licence and are capitalised to proven oil and gas assets and subsequently depreciated on a units of
production basis in accordance with the Group’s depreciation policy. In circumstances where the amount assessed by the authorities
is contested, the Group records a provision discounted using a Kazakh government bond yield with a term approximating the payment
profile and the discount is unwound over the payment term and charged to finance costs. Payments made are charged against the
provision.
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.
Impairment of development and production assets and other property, plant and equipment
At each balance sheet date, the Group reviews the carrying amounts of its PP&E to determine whether there is any indication that
those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order
to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other
assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. The recoverable amount
is the higher of fair value less costs to sell and value in use. Fair value less costs to sell is determined by discounting the post-tax
cash flows expected to be generated by the cash-generating unit, net of associated selling costs, and takes into account assumptions
market participants would use in estimating fair value including future capital expenditure and development cost for extraction of the
field reserves. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount
rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of
future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount
of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately.
The notes on pages 53 to 81 are an essential part of these financial statements
56
Notes to the Financial Statements (continued)
1 Principal accounting policies (continued)
Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised
estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have
been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an
impairment loss is recognised as income immediately.
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 are
discounted at estimated market rate of interest. Difference between a fair value and a face value of the advance is recorded within
investments. The loan at amortised cost is assessed for expected credit loss under IFSR 9.
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.
The notes on pages 53 to 81 are an essential part of these financial statements
57
Notes to the Financial Statements (continued)
1 Principal accounting policies (continued)
Financial assets
Financial assets are classified as either financial assets at amortised cost, at fair value through other comprehensive income
(“FVTOCI”) or at fair value through profit or loss (“FVPL”) depending upon the business model for managing the financial assets and
the nature of the contractual cash flow characteristics of the financial asset.
A loss allowance for expected credit losses is determined for all financial assets, other than those at FVPL, at the end of each reporting
period. The Group applies a simplified approach to measure the credit loss allowance for any trade receivables using the lifetime
expected credit loss provision. The lifetime expected credit loss is evaluated for each trade receivable taking into account payment
history, payments made subsequent to year end and prior to reporting, past default experience and the impact of any other relevant
and current observable data. The Group applies a general approach on all other receivables classified as financial assets. The general
approach recognises lifetime expected credit losses when there has been a significant increase in credit risk since initial recognition.
The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or when it transfers
the financial asset and substantially all the risks and rewards of ownership of the asset to another party. The Group derecognises
financial liabilities when the Group’s obligations are discharged, cancelled or have expired.
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.
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 with a gain or loss recorded in the income statement. In accordance with IFRS 9, following
a modification or renegotiation of a financial asset or financial liability that does not result in de-recognition, an entity is required to
recognise any modification gain or loss immediately in profit or loss. Any gain or loss is determined by recalculating the gross carrying
amount of the financial liability by discounting the new contractual cash flows using the original effective interest rate. The difference
between the original contractual cash flows of the liability and the modified cash flows discounted at the original effective interest rate
is recorded in the income statement.
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.
The notes on pages 53 to 81 are an essential part of these financial statements
58
Notes to the Financial Statements (continued)
1 Principal accounting policies (continued)
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 from contracts with customers is recognised when or as the Group satisfies a performance obligation by transferring a
promised good or service to a customer. A good or service is transferred when the customer obtains control of that good or service.
The transfer of control of oil sold by the Group usually coincides with title passing to the customer. The Group satisfies its performance
obligations at a point in time.
Under the terms of domestic oil sales arrangements, the performance obligation is satisfied when the local refinery provides the seller
and the customer with the act of acceptance of crude oil of quantity and quality according to the agreement between the parties.
Under the terms of export sales arrangements, the performance obligation is satisfied when the Ocean Bill of Lading is issued by the
transport company that reflects the fact of boarding the crude oil of specified quantity and quality on the tanker.
Revenue is measured at the fair value of the consideration received, excluding value added tax (“VAT”) and other sales taxes or duty.
Royalties are not included in revenue, they are paid on production and recorded within cost of sales.
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 with the
performance obligation satisfied.
1.20 Cost of sales
The Group started to calculate the cost of sales on crude oil sold during 2019 because its asset BNG has received the production
license on part of its contract territory in July 2019. On the rest of its territory (%) BNG continues to work under Exploration license.
During test production on Exploration 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 1.32 and the average rate during the year was 1.28. The year-
end exchange rate from KZT to US$ was 382.6 and the average rate during the year was 382.8.
The notes on pages 53 to 81 are an essential part of these financial statements
59
Notes to the Financial Statements (continued)
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 Carrying value of exploration and evaluation costs (note 10)
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 2019, the Group assessed the exploration and evaluation
assets disclosed in note 10 and determined that no indicators of impairment existed at a cost pool level in respect of the BNG cost
pool. The Group also considered whether the factors that gave rise to the original impairment loss no longer existed and reversal of
the impairment is appropriate. In forming this assessment, the Board considered the oil reserves and resources associated with the
licence area, 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 19 and the impact of outstanding
obligations. Having undertaken this assessment the Group concluded that no indicators of impairment existed and that no reversal
of previous impairment provisions attributable to the unproven oil and gas assets of US$9,654,000 was yet appropriate given the
absence of a significant breakthrough on the deep structures at 31 December 2019.
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 Transfer of costs to proven oil and gas assets (note 10 & 11)
Judgment has been applied in assessing that the MJF area assets meets the criteria for reclassification to proven oil and gas assets
under the Group’s accounting policy in note 1.8. In concluding that it was appropriate to transfer the asset to proven oil and gas
assets management took account of the award of a production licence enabling exports and sales at international prices together with
the production volumes. In August 2019 BNG has received the required production license for its MJF structure and got the export
permission starting September 2019. According to the approach above BNG moved the related O&G assets to the production stage
in August 2019 and accordingly started charging DD&A expense. The Board considers the remaining 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 test oil in the domestic market which represents a substantial discount to the international market such that
production is primarily a by-product of continued exploration and appraisal.
2.3 Recoverability of proven oil and gas assets (note 11)
The proven oil and gas assets, representing the MJF structure, have been assessed for indicators of impairment at 31 December
2019 including assessment of the discounted cash flows indicated by the Group’s field plan. The Group also considered whether the
factors that gave rise to the previously recorded impairment loss attributable to the MJF structure no longer existed and reversal of
the impairment is appropriate and concluded that the factors no longer applied, noting the successful exploration activity and the
transition to commercial production. Accordingly, the recoverable value of the MJF structure was assessed using the discounted cash
flow analysis. This analysis required judgment and estimate in determining forecast prices as at 31 December 2019 based on
conditions existing at that time, future production and reserves, operating costs and development costs for the field and the discount
rate. The forecasts demonstrated significant headroom with prices based on forward prices of $60 adjusted for net back adjustments,
reserves calculated using the most recent Competent Person’s report and discount rates run at 10% and 15%. Having undertaken
this assessment the Group concluded that the previous impairment attributable to the MJF structure of US$2,414,000 should be
released. The allocation of the historic impairment provision between proven and unproven oil and gas assets required judgment and
was based on relative costs incurred between the proven and unproven asset categories as the original impairment arose when the
proven oil and gas assets formed part of the single BNG unproven oil and gas cost pool.
2.3 Recoverability of VAT (note 14)
The Group holds VAT receivables of $3.3 million (2018: $3million) as detailed in note 14 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 (2018: 3.5
years). This required estimates regarding future production, oil prices and expenditure.
2.4 Decommissioning (note 19)
Provision has been made in the accounts for future decommissioning costs to plug and abandon wells in note 19. 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
The notes on pages 53 to 81 are an essential part of these financial statements
60
Notes to the Financial Statements (continued)
2 Critical accounting estimates and judgements (continued)
2.5 Acquisition of 3A Best and carrying value (note 21)
Judgment was required in assessing the accounting treatment for the purchase of 3A Best as an asset purchase rather than a business
combination. In forming this assessment, management note that whilst the Group acquired legal entities to obtain control the legal
entities held an exploration phase asset and associated obligations such that the criteria for a business combination were not met.
As such, the fair value of the purchase consideration was allocated to the assets and liabilities acquired, costs associated with the
transaction capitalised and no deferred tax arose on the transaction.
Judgment has been applied in assessing whether impairment of the asset is required at 31 December 2019 noting that the authorities
have the right to withdraw the licence if payments due by July 2020 are not made in respect of obligations arising prior to the
acquisition. The Board considers the risk of the licence being withdrawn to be remote given the history of investment by the Group in
Kazakhstan, the impact of COVID-19 in 2020 on the Group’s cash generation and ability to undertake work program commitments
and past experience. An application to extend the licence has been submitted together with an application to defer the obligations
and commitments. However, if the Group is unsuccessful the asset would be impaired.
2.6 Provision for BNG licence payments (note 11, 19)
As part of the Kazakh licencing regime, upon award of a production contract in respect of the BNG licence area, an obligation to make
a payment to the licencing authority was triggered, settled over a 10 year period in equal quarterly instalments. Judgment was required
in assessing the appropriate accounting policy for the transaction including assessment of the terms of the arrangement. Such
payments are considered to form a cost of the licence and are capitalised to proven oil and gas assets. As at 31 December 2019, the
Group is contesting the amount levied by the authorities with a legal process ongoing. As such, a provision for the amounts due has
been made based on the most recent amount formally assessed although the final outcome may differ to the amount recorded and
the Board is seeking a significant reduction to the amount. Estimation was also required in selecting an appropriate discount rate for
the provision and a rate of 2.7% has been applied, based on US dollar Eurobonds yields in Kazakhstan with a comparable term.
2.7 Uncertain tax positions (note 19)
As detailed in note 19, judgment has been applied in assessing the extent to which tax treatments adopted by the Group historically
will be accepted or rejected by the relevant tax authority and the resulting measurement of uncertain tax positions in circumstances
were it is probable that the treatment will be challenged.
2.8 Indemnity receivables in relation to 3A Best acquisition (note 21)
Under the terms of the SPA for 3A Best, the vendors provided indemnities that obligations related to the period prior to acquisition
would be reimbursed. Judgment has been applied in assessing the recoverability of the indemnity receivables detailed in note 21,
which included assessment of the terms of the SPA, and assessments of the vendors’ ability to meet such payments.
3 Segment reporting & revenue
Operating segments
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 phase and commercial phase production are generated
domestically in Kazakhstan. 100% of the Group’s revenue was derived from two major customers (local market operator – 56% and
the export trader – 44%). The revenue split in 2019 between the domestic trader (ANK-Energo LLP) and the export trader (Euro-Asian
Oil SA) was US $6,818,000 and $ US $5,290,000 respectively.
Revenue
The Group's revenues are derived from the sale of oil in Kazakhstan. After moving part of O&G assets into Production phase The
Group started to receive export revenues in September 2019. During the first quarter of sales the Group could receive cash one month
after the delivery of oil. Later, in December 2019 The Group agreed to get a big advance from the export trader ($3.9m). Later, during
2020 The Group managed to repay this advance in full, mainly by way of delivering the crude oil to the export trader.
Under the terms of sales on the local market, the performance obligation is the supply of oil and the performance obligation is satisfied
at a point in time, being the delivery of oil to the refinery. Control passes to the customer at this point with title and risk transferred.
Under the terms of export sales control over the oil delivered is with the Group until the customer confirms it has been shipped on the
board of the tanker.
When advances are received from oil traders for delivery of future production at specified prices, deferred revenue is recorded and
the liability reduced as oil is delivered.
Where advances are made for future production and the financing component of such transactions is material, a finance charge is
recorded based on the market rate of interest.
No trade receivables or accrued income was applicable at year end (2018: $Nil).
The notes on pages 53 to 81 are an essential part of these financial statements
61
Notes to the Financial Statements (continued)
4 Operating income/(loss)
Group operating income/(loss) for the year has been arrived after charging:
Staff costs (note 6)
Depreciation of property, plant and equipment (note 11)
Auditors’ remuneration (note 5)
Share based payment remuneration (note 6)
Reversal of impairment (note 11)
5 Group Auditor’s remuneration
Group
2019
US$’000
(1,420)
(148)
(137)
(31)
2,414
Group
2018
US$’000
(1,319)
(31)
(220)
(13)
-
Fees payable by the Group to the Company's auditor BDO and its member firms in respect of the year:
Fees for the audit of the annual financial statements
Audit related services
Other services – tax related
Fees payable by the Group to Grant Thornton and its associates in respect of the year:
Group
2019
US$’000
Group
2018
US$’000
94
9
8
111
Group
2019
US$’000
26
26
95
11
88
194
Group
2018
US$’000
26
26
1,319
108
73
13
1,513
Group
2018
10
47
9
14
80
782
32
-
13
827
Company
2018
US$’000
1
-
2
2
5
Group
2018
US$’000
540
-
540
Group
2019
US$’000
729
25
754
Auditing of accounts of subsidiaries of the Company
6 Employees and Directors
Staff costs during the year
Group
2019
US$’000
Company
2019
US$’000
Group
2018
US$’000
Company
2018
US$’000
Wages and salaries
Social security costs
Pension costs
Share-based payments
1,420
76
90
31
1,617
590
12
-
31
633
Payroll expenses were capitalized in the amount of US$185,500 (2018: US$332,000).
Average monthly number of people employed
(including executive Directors)
Technical
Field operations
Finance
Administrative and support
Directors’ remuneration
Director’s emoluments
Share-based payments
Group
2019
11
47
9
16
83
Company
2019
US$’000
1
-
2
2
5
The notes on pages 53 to 81 are an essential part of these financial statements
62
Notes to the Financial Statements (continued)
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$425,289 (2018:
US$336,140).
7 Finance cost
Loan interest payable
Unwinding of discount on BNG licence payment provision (note 19)
Unwinding of discount on other provisions (note 19)
8 Taxation
Analysis of charge for the year
Current tax charge
Deferred tax charge (note 22)
Profit/(Loss) before tax
Tax on the above at the standard rate of corporate income tax in the UK 19% (2018: 19%)
Effects of:
Non-deductible expenses
Return of prior year CIT payment*
Withholding tax on interest expense
Utilisation of tax losses not previously recognized
Unrecognised tax losses carried forward
Group
2019
US$’000
82
368
2
452
Group
2019
US$’000
1,860
483
2,343
Group
2019
US$’000
941
Group
2018
US$’000
337
-
11
348
Group
2018
US$’000
414
-
414
Group
2018
US$’000
(2,972)
179
(565)
1,183
-
1,860
(1,888)
1,009
2,343
23
(1,013)
1,375
(2,882)
3,476
414
* During the years ended 31 December 2014 and 2015 the Company incurred taxation in respect of interest accrued on non-current
advances provided to a subsidiary. Following subsequent analysis of the agreements it was identified that interest had been
incorrectly accrued under the terms of the agreements. Accordingly, during 2016 the Parent company results were restated. As a
result the Company resubmitted its CIT returns to HMRC. During H1 2018 the amended CIT returns were proved by HMRC and
related tax payment from HMRC has been received by the Company during August 2018.
9 Earnings/(loss) per share
Basic earnings/(loss) per share is calculated by dividing the income/(loss) attributable to ordinary shareholders by the weighted
average number of ordinary shares outstanding during the year including shares to be issued.
There is no difference between the basic and diluted loss per share as the Group made a loss for the current and prior year. Dilutive
potential ordinary shares include share options granted to employees and directors where the exercise price (adjusted according to
IAS33) is less than the average market price of the Company’s ordinary shares during the period.
The calculation of earnings/(loss) per share is based on:
The basic weighted average number of ordinary shares in
issue during the year
The earnings / (loss) for the year attributable to owners of the parent from continuing
operations (US$’000)
The loss for the year attributable to owners of the parent from discontinued operations
(US$’000)
2019
2018
1,824,955,952
1,669,706,698
(1,278)
-
(3,219)
(5,147)
There were 3,000,000 potentially dilutive instruments in the year (2018: 7,200,000).
The notes on pages 53 to 81 are an essential part of these financial statements
63
Notes to the Financial Statements (continued)
10 Unproven oil and gas assets
COST
Cost at 1 January 2018
Additions
Sales from test production
Foreign exchange difference
Cost at 31 December 2018
Additions
Sales from test production
Acquisitions (note 21)
Reclassification to PP&E
Foreign exchange difference
Cost at 31 December 2019
ACCUMULATED IMPAIRMENT
Accumulated impairment at 1 January 2018
Foreign exchange difference
Accumulated impairment at 31 December 2018
Reclassification to PP&E
Foreign exchange difference
Accumulated impairment at 31 December 2019
Net book value at 1 January 2017
Net book value at 31 December 2018
Net book value at 31 December 2019
Group
US$’000
84,838
7,479
(10,747)
(13,082)
68,488
8,886
(5,466)
11,293
(12,000)
(1,507)
69,694
Group
US$’000
15,135
(2,334)
12,801
(2,414)
(733)
9,654
69,701
55,685
60,040
Unproven oil and gas assets represent license acquisition costs and subsequent exploration expenditure in respect of three
licenses held by Kazakh group entities. The carrying values of those assets at 31 December 2019 were as follows: Beibars Munai
LLP US$ nil (2018: US$ nil), 3A Best-Group JSC US$12,666,000 (2018: US$ nil) and BNG Ltd LLP US$47,374,000 (2018:
US$55,685,000).
The Directors have carried out an impairment review of these assets on a cost pool level as detailed in note 2.1. No impairment
indicators were identified for the unproven oil and gas assets held by BNG Ltd LLP or 3A Best-Group JSC.
The notes on pages 53 to 81 are an essential part of these financial statements
64
Notes to the Financial Statements (continued)
11 Property, plant and equipment
Following the commencement of commercial production in July 2019 the Group reclassified part of BNG assets from unproven
oil and gas assets to proven oil and gas assets. During 2018 the Group disposed it Munaily assets.
Group
Cost at 1 January 2018
Additions
Disposals
Foreign exchange difference
Cost at 31 December 2018
Additions
Transferred from unproved oil and gas assets
Additions to Proved O&G assets related to BNG
licence payment provision
Reversal of impairment (note 10)
Disposals
Foreign exchange difference
Cost at 31 December 2019
Depreciation at 1 January 2018
Charge for the year
Disposals
Foreign exchange difference
Depreciation at 31 December 2018
Charge for the year
Disposals
Foreign exchange difference
Depreciation at 31 December 2019
Net book value at:
01 January 2018
31 December 2018
31 December 2019
Proved
oil and gas
assets
Motor
Vehicles
Other
Total
US$’000
US$’000
US$’000
US$’000
47
-
(47)
-
-
564
12,000**
28,335***
2,414
-
5
43,318
47
-
(47)
-
-
153
-
(85)
(12)
56
-
-
-
-
-
-
56
80
9
(51)
(7)
31
313
3
(8)
(42)
266
8,071*
-
-
-
(3)
-
8,334
221
22
(8)
(32)
203
513
3
(140)
(54)
322
8,635
12,000
28,335
2,414
(3)
5
51,708
348
31
(106)
(39)
234
130
-
-
130
8
-
-
39
10
(3)
3
213
148
(3)
3
382
-
-
43,189
73
24
16
92
64
8,122
165
88
51,326
*$7,966,000 of $8,071,000 relate to the acquisition during 2019 of drilling rigs and other fixed assets. The Group acquired the
drilling rigs in September 2019 with 58,333,333 shares issued as consideration with the assets recorded based on the market
price of the shares issued.
**$12,000,000 – the amount of O&G assets transferred from Unproven O&G to Proved O&G assets at BNG asset for the MJF
structure. Refer to note 2.
*** Refer to notes 19 and 2.
A previous impairment provision amount of US$2,414,000 (US$ 1,931,000 net of deferred tax) was reversed in the period (see
note 2)
The notes on pages 53 to 81 are an essential part of these financial statements
65
Notes to the Financial Statements (continued)
12 Investments (Company)
Investments
Cost
At 31 December 2018
Receipts
Payments
At 31 December 2018
Increase in investments
At 31 December 2019
Impairment
At 1 January 2018
Impairment
At 31 December 2018
Impairment
At 31 December 2019
Net book value at:
31 December 2018
31 December 2019
Company
US$’000
275,911
534
(206)
276,239
11,795
288,034
64,253
-
64,253
-
64,253
211,986
223,781
During 2019 the Company acquired 100% interest at 3A-Best group JSC for US$11,975,000 by means of issuing the Company’s
shares. The carrying value of the investments has been assessed by the Directors including consideration of the discounted cash
flows associated with the proven oil and gas assets, underlying BNG and 3A-Best contract area progress and the continued
exploration value of the assets.
Direct investments
Name of undertaking
Country of
incorporation
Effective
holding and
proportion
of voting
rights held
at 31 December
2019
Effective holding
and
proportion
of voting
rights held
at 31 December
2018
Eragon Petroleum Limited
United Kingdom
100%
100%
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
The notes on pages 53 to 81 are an essential part of these financial statements
66
Notes to the Financial Statements (continued)
12 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
2019
Effective holding
and
proportion
of voting
rights held
at 31 December
2018
Registered
address
Nature
of business
Galaz Energy BV
Netherlands
100%
100%
BNG Energy BV
Netherlands
100%
100%
BNG Ltd LLP
Kazakhstan
99%
99%
3A-Best Group JSC
Kazakhstan
100%
100%
CTS LLP
Kazakhstan
100%
100%
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
Oil Production
Company
152/140 Karasay
Batyr Str., Almaty,
Kazakhstan
Exploration
Company
152/140 Karasay
Batyr Str., Almaty,
Kazakhstan
Drilling &
Service
Company
During 2019 Eragon Petroleum FZE has established the subsidiary with100% interest: Caspian Technical Services LLP (CTS
LLP). The main activity of the new subsidiary is drilling services for the companies of the group. In December 2019 CTS LLP
spuded the well #150 at BNG field and successfully completed it in March-April 2020. The company is using the rigs and other
equipment acquired by the Group during 2019.
Indirect investments held by Beibars BV
Name of undertaking
Country of
incorporation
Effective
holding and
proportion
of voting
rights held
at 31 December
2018
Effective holding
and
proportion
of voting
rights held
at 31 December
2017
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.
The notes on pages 53 to 81 are an essential part of these financial statements
67
Notes to the Financial Statements (continued)
13 Inventories
Materials and supplies
14 Other receivables
Amounts falling due after one year:
Prepayments made
VAT receivable
Intercompany receivables
Amounts falling due within one year:
Prepayments made
Other receivables*
Group
2019
US$’000
384
384
Group
2019
Group
2018
Company
2019
US$ ‘000
US$ ‘000
US$ ‘000
2,459
3,286
-
5,745
1,159
4,504
5,663
5,516
2,929
-
8,445
119
245
364
-
69
10,635
10,704
7
-
7
Group
2018
US$’000
132
132
Company
2018
US$’000
54
-
3,012
3,066
6
-
6
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.
*US$ 3,826,000 out of US$ $ 4,504,000 other receivables at the Group represent the amounts reimbursable by the vendors of
3A Best under the indemnities provided on acquisition of the exploration asset (note 21).
The current intercompany receivables bear interest rates between LIBOR + 2% and LIBOR + 7%.
Inter-company receivables has been assessed for expected credit losses considering factors such as the status of underlying
licenses, reserves, financial models and future risks and uncertainties. The provision substantially refers to balances considered
credit impaired. Inter-company receivables from the subsidiaries in the table above are shown net of provisions of US$12.9 million
(2018: US$12.2 million). The movement in the expected credit loss provision related to the inter-company receivables was as
follows:
Denomination
As at 1 January
Charge
Write-off*
As at 31 December
Group
2019
US$’000
-
-
-
-
Group
2018
US$’000
-
-
-
Company
2019
US$’000
12,212
701
-
Company
2018
US$’000
34,232
286
(22,306)
-
12,913
12,212
*During 2018 the Company wrote off its fully impaired Munaily receivables following the sale of Munaily and wrote off of its fully
impaired Roxi Petroleum Kazakhstan receivables.
The Company recognised US$ 701 thousand of expected credit loss provisions in relation to it receivables from subsidiaries in
2019 (2018: US$ 286 thousand).
The notes on pages 53 to 81 are an essential part of these financial statements
68
Notes to the Financial Statements (continued)
15 Cash and cash equivalents
Cash at bank and in hand
Group
2019
US$’000
4,060
Group
2018
US$’000
557
Company
2019
US$’000
87
Company
2018
US$’000
292
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.
Group
2019
US$’000
3,842
-
218
4,060
Group
2018
US$’000
448
60
49
557
Company
2019
US$’000
87
-
-
87
Company
2018
US$’000
232
60
-
292
Denomination
US Dollar
Sterling
Kazakh Tenge
16 Called up share capital
Group and Company
Balance at 1 January 2018
Share options exercised
Balance at 31 December 2018
Share options exercised
Acquisition of 100% interest at 3A Best-Group JSC
(note 21)
Equipment bought during 2019 (note 11)
Balance at 31 December 2019
Number
of ordinary
shares
1,669,673,820
1,200,000
1,670,873,820
4,200,000
149,253,732
58,333,333
1,882,660,885
US$’000
25,401
15
25,416
56
Number
of deferred
shares
373,317,105
-
373,317,105
-
US$’000
64,702
-
64,702
-
1,919
729
28,120
-
-
373,317,105
-
-
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.
17 Trade and other payables – current
Trade payables
Taxation and social security
Accruals
Other payables
Intercompany payables
Advances received (deferred revenue)
Group
2019
US$’000
1,384
1,813
282
4,368
-
6,989
14,836
Group
2018
US$’000
861
180
197
2,235
-
2,786
6,259
Company
2019
US$’000
575
22
172
364
30,678
-
31,811
Company
2018
US$’000
221
21
165
413
8,232
-
9,052
As at 31 December 2019 and 31 December 2018, the Group has received a significant amount of prepayments from the oil
traders in relation to increasing production on the BNG oil field. Amounts included in advances received that was recognised as
revenue during the period: $6.6m (2018: $10.7m). Excess of revenue recognised over cash being recognised during the period
is US$ 7m (2018: excess of cash recognised over the revenue is US$ 3m).
The notes on pages 53 to 81 are an essential part of these financial statements
69
Notes to the Financial Statements (continued)
During 2019 the Company has started restructuring of the intercompany loans. The result of the transactions should be a
simplified structure of mutual receivable/payable amounts within the group. As a result of the restructuring and associated loan
assignments, the Company has a payable to Eragon Petroleum Limited, its 100% subsidiary, of US $30.7 million and other
entities reduced their mutual indebtedness to a minimum. As part of the restructuring, previous interest free intercompany
payables were extinguished. On initial recognition the liability was discounted using a market interest rate and US$14,936,000
recorded in other reserves, On extinguishment of the liability the reserves has been transferred to retained losses. The
restructuring has not resulted in any cash outflows.
17 Trade and other payables – non-current
Intercompany payables
Taxation
Group
2019
US$’000
-
12,293
12,293
Group
2018
US$’000
-
10,286
10,286
Company
2019
US$’000
-
-
-
Company
2018
US$’000
16,735
-
16,735
Taxation payable relate to withholding tax accrued on the interest expense at the BNG subsidiary level.
18 Short-term borrowings
Mr. Oraziman (a)
Fosco BV (b)
Other borrowings (c)
Group
2019
US$’000
2,288
661
1,101
4,050
Group
2018
US$’000
913
650
1,009
2,572
Company
2019
US$’000
727
-
1,087
1,814
Company
2018
US$’000
-
-
400
400
a) At the start of the period under review Eragon Petroleum FZE, a wholly owned subsidiary, had an outstanding loan of US$
913,000 from Kuat Oraziman. Caspian Sunrise had an outstanding loan of US$ 400,000 from Kuat Oraziman. During 2019 Mr.
Oraziman provided an additional US$300,000 to Caspian Sunrise. The total balance of these loans as at 31 December 2019,
including the accrued interest, was US$ 1,704,000. Additionally, during 2019 a loan due from Roxi Kazahstan LLP to KC Caspian
Explorer, an entity controlled by Aibek Oraziman, was assigned to Kuat Oraziman. The balance of the loan at 31 December 2019
was US$ 584,000.
b) During July 2016 Fosco BV, a company controlled by Mr Oraziman, therefore a related party of the Group, provided an on
demand loan to BNG LLP in the amount of US$ 0.63 million. The loan is interest bearing with the rate of Libor+ 1%.
c) The total amount borrowed by the Group at 31 December 2019 US$1,101,000 (2018: US$1,009,000) was payable to Kuat
Oraziman and a legal entities controlled by Mr Oraziman. The loans are interest bearing with the rate of 7% and repayable during
2020 with the possibility of further extension.
The notes on pages 53 to 81 are an essential part of these financial statements
70
Notes to the Financial Statements (continued)
19 Provisions and contingencies
Group only
Balance at 1 January 2018
Increase in provision
Sale of Munaily (note 20
Paid in the year
Unwinding of discount
Foreign exchange difference
Balance at 31 December 2018
Non-current provisions
Current provisions
Balance at 31 December 2018
Group only
Balance at 1 January 2019
Increase in provision
Paid in the year
Unwinding of discount
Foreign exchange difference
Balance at 31 December 2019
Non-current provisions
Current provisions
Balance at 31 December 2019
Employee
holiday
provision
US$’000
Liabilities
under Social
Development
Program and
historical cost
US$’000
Abandonment
fund
2018
Total
US$’000
US$’000
93
2
(8)
-
-
(12)
75
-
75
75
4,833
-
(795)
(318)
-
(280)
3,440
-
3,440
3,440
BNG
licence
payments*
Employee
holiday
provision
US$’000
US$’000
Liabilities
under Social
Development
Program and
historical cost
US$’000
-
28,652
(1,626)
368
-
27,394
24,216
3,178
27,394
75
-
(75)
-
-
-
-
-
-
3,440
3,048
(339)
-
5
6,154
-
6,154
6,154
194
9
(49)
(18)
11
(22)
125
125
-
125
Abandonmen
t fund
5,120
11
(852)
(336)
11
(314)
3,640
125
3,515
3,640
2019
Total
US$’000
US$’000
125
450
-
2
1
578
428
150
578
3,640
32,150
(2.040)
370
6
34,126
24,644
9,482
34,126
*The subsoil use contract held by BNG Ltd for the Yelemes field stipulates that it must make payments to the Kazakhstan
Government upon award of a production contract after commercial feasibility. The Kazakhstan Government has assessed the
amount payable as a total of US$32.5m. The sum is paid on a quarterly basis from 1 July 2019 in equal instalments and the final
payment is due to be paid on 1 April 2029. The payments have been discounted to their net present value. This discounted value
has been capitalised as Property, plant and equipment (note 11) and will be amortised over the productive period. Any changes
in estimated payments and discount rate are dealt with prospectively and result in a corresponding adjustment to property plant
and equipment. The Group is currently contesting the value of the amount assessed.
Amounts in relation to Subsoil Use Contracts are included in the table above and relate to the licence areas 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. The Group has fully impaired its Beibars assets.
The notes on pages 53 to 81 are an essential part of these financial statements
71
Notes to the Financial Statements (continued)
19 Provisions and contingencies (continued)
b) 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 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 June 2018 BNG Ltd LLP signed the Addendum No.13 with the Ministry of Energy for the 6
years appraisal period on the BNG oilfield until June 2024.
In accordance with the terms of the addendum #13, BNG Ltd LLP remains committed to the following:
(cid:31) For the six-year appraisal period US$261,000 per annum should be invested in the social development of the region starting
from January 2019;
(cid:31) To fund minimum cumulative work program during the appraisal period of US$ 28,103,000
(cid:31)
Investing not less than 1% of total investments in professional training of Kazakhstani personnel engaged in work under the
contract; and
(cid:31) 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.
The license commitments are established for the license term as a whole, with annual schedules contained therein under the
license. Should the company have unfulfilled commitments or outstanding payments under social programs, a 1% penalty is
applied until the commitments are fulfilled. Refer to table above.
On 11 July 2019, BNG Ltd LLP has signed the Production contract with the Ministry of Energy of Republic of Kazakhstan on the
part of the territory. The Contract is valid during 25 years till 2043. To reach the expected production levels the Group will over
the 25 year period need to drill approximately 15 wells.
c) 3A-Best Group JSC
As at 31.12.2019 3A-Best had the following debts related to its SSU contract: US$2,500,000 of social development payment and
about $US 1,000,000 of the debts related to previous years’ work program obligations. According to the Addendum #8 to the
Contract signed by the company on January 20 2020 3A-Best has agreed the following schedule of payments related to the
social development and the work program related to previous SSUC extension(s):
(cid:31) To make payment of US$580,000 quarterly during 6 quarters till June 2021;
(cid:31) To drill 2 shallow wells with the total depth of 5,750 meters during the period January-June 2020;
(cid:31) To make investments of approximately US$2,350,000 during the period January-June 2020.
According to the SPA related to the acquisition of 3A-Best the Company has been indemnified by the previous owners from any
previous debts (quarterly payments of US$580,000 to discharge the historic obligations) and they guaranteed to make
repayments on a timely basis. The Group is responsible for the work program obligations agreed with the Ministry of Energy of
Kazakhstan for the period January-June 2020 (US$2,350,000). The Group has applied for a deferral of the amounts due and
work program commitments. Management believes that the declaration by the Government of Kazakhstan of an emergency
situation during March-April and partly in May 2020 as a result of COVID-19 are such that the Kazakhstan authorities will agree
postpone the requirement for works until 2021 without negative consequences.
Contingent liabilities
A subsidiary of the Group is subject to an open tax assessment in respect of the 2012 tax year. The Group has taken professional
advice and continues to dispute the assessment. If the Group is unsuccessful in defending its position, the amount payable
based on the assessment would be US$2 million plus potential fines and penalties. The assessment involves interpretation of
contractual arrangements between companies in the Group. The matter is considered to represent an uncertain tax position
under IFRS and management have determined that the most likely outcome method of measurement is most appropriate. Based
on professional advice, the development of the matter over several years and all relevant facts and circumstances no provision
is considered to be applicable.
The notes on pages 53 to 81 are an essential part of these financial statements
72
Notes to the Financial Statements (continued)
20 Munaily disposal
During 2018 the Group entered into a sale and purchase agreement (“SPA”) with WIX Energy LLP to dispose of 99% of its interest
in Munaily Kazakhstan LLP. Under the terms of the agreement, WIX Energy LLP agreed to purchase 99% of the equity for a total
consideration of US$134 thousand from the Group.
This transaction completed on 20 December 2018.
The loss on disposal of Munaily Kazakhstan LLP was determined as follows:
Total consideration
Non-current assets
Trade and other receivables
Trade and other payables
Non-current liabilities
Net liabilities at date of disposal
Less: minority share
Gain on disposal before the effect of cumulative
translation reserve
Less: Release of cumulative translation reserve
Loss on disposal
The net cash inflow on disposal comprises:
Cash received
Cash disposed of
Net cash inflow
Munaily Kazakhstan LLP had the following results during 2018 and 2017:
Revenue
Expenses
Loss before taxation
Cash movements related to Munaily were negligible.
At date of disposal
$’000
134
(58)
(14)
350
2,882
3,160
136
3,158
8,305
(5,147)
134
-
134
2018
US$’000
-
(334)
(334)
2017
US$’000
16
(614)
(598)
The notes on pages 53 to 81 are an essential part of these financial statements
73
21 Purchase of 3A-Best Group JSC
On 21 January 2019, the Company acquired 100% of the shares of 3A-Best Group JSC, a company that owns a 1,347 sq
km Contract Area located close to the Caspian port city of Aktau in the Mangystau Province of Kazakhstan.
The purchase price is satisfied by the issue of 149,253,732 new Companies shares at the price of 6.15 p per share, that
represents closing price of Company's shares at the date the SPA was signed and the substantive conditions had been met
such that control passed to the Company, notwithstanding delays in the shares of 3A-Best being legally transferred to the
Company and associated issuance of the Company's shares in consideration owing to procedural delays. Management
have analysed the structure of the transaction and the underlying activities and concluded that the transaction represents
an asset purchase.
The fair value of the identifiable assets and liabilities of 3ABest as at the date of acquisition were:
Exploration assets
Receivable from sellers recognized in other non-current
receivables*
Other non-current receivables
Total assets
Current contractual provisions
Other payables related to contractual obligations
Total liabilities
Total identifiable net assets at fair value
Total value of shares issued as consideration
Additional fair value recorded to unproven oil and gas assets
US$'000
6,404
3,826
502
10,732
2,906
920
3,826
6,906
11,795
4,889
* Based on the terms of SPA previous owners of 3A-Best must compensate the Group for all contractual obligations of 3ABest
incurred in the period up to SPA sign off date under an indemnification in the SPA. Therefore, the Group has recognized the
receivable equal to the contractual provisions and other payables related to the contractual obligations in the completion date
balance sheet. The Group have assessed the receivable for expected credit losses, considering scenarios around the probability
of default by one or more of the vendors and concluded no expected credit loss is applicable.
22 Deferred tax
Deferred tax liabilities comprise:
Deferred tax on exploration and evaluation assets acquired
Group
2019
US$’000
7,244
7,244
Group
2018
US$’000
6,733
6,733
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
Deferred tax related to impairment reversal (note 8)
Foreign exchange
Group
2019
US$’000
6,733
483
28
7,244
Group
2018
US$’000
7,784
-
(1,051)
6,733
As at 31 December 2019 the Group has accumulated deductible tax expenditure related to BNG expenditure of approximately
US$89 million (31 December 2018 US$97 million) available to carry forward and offset against future profits. This represents an
unrecognised deferred tax asset of approximately US$17.8 million (31 December 2018: US$19.4 million). Given the uncertainties
regarding such deductions and the developing nature of the relevant tax system no deferred tax asset is recorded. Beibars have
tax losses carried forward of US$5.1 million (31 December 2018: US$5.1 million). This asset is fully impaired and there is
insufficient certainty of future profitability to utilise these deductions.
The notes on pages 53 to 81 are an essential part of these financial statements
74
Notes to the Financial Statements (continued)
23 Share option scheme and LTIP scheme
During the year the Group and the Company had in issue equity-settled share-based instruments to its Directors and certain
employees. Equity-settled share-based instruments have been measured at fair value at the date of grant and are expensed on
a straight-line basis over the vesting period, based on an estimate of the shares that will eventually vest. Options generally vest
in three equal tranches over the three years following the grant.
The options were issued to Directors and employees as follows:
Number of
options granted
Number of options
expired
Options
exercised
Total options
outstanding
As at 31 December 2018
Directors
Employees and others
As at 31 December 2019
88,458,226
2,000,000
1,000,000
91,458,226
(54,810,830)
(807,396)
(200,000)
(55,818,226)
(11,100,000)
(4,200,000)
-
(15,300,000)
22,547,396
(3,007,396)
800,000
20,340,000
20,340,000 outstanding options as at 31 December 2019 are exercisable.
Weighted
average
exercise price
in pence (p)
per share
13
-
-
15
The range of exercise prices of share options outstanding at the yearend is 4p – 20p (2018: 4p – 20p). The weighted average
remaining contractual life of share options outstanding at the end of the year is 4.3 years (2018: 3.8 years).
The options granted in the year are exercisable at 20p with a life of 10 years with employment based vesting conditions. The fair
value of the options was determined to be US$ 130,061 using a Black-Scholes valuation model. The key inputs were: Stock
price – 0.12 GBP, Expected life in years – 3, Annualized Volatility – 80%, Discount Rate, Bond Equivalent Yield – 1.81%.
Long Term Incentive Plan (LTIP) scheme:
On 5 June 2019 the Company made awards under a long term incentive plan. Clive Carver, Executive Chairman, and Kuat
Oraziman, Chief Executive Officer, are entitled to receive cash payments to be triggered by the Company's attainment of both
pre-set market capitalisation and share price targets as follows:
Market cap threshold
$ billion
Share price target
Pence per share
Pay-out rate (each)
%
Pay-out amount (each)
$' million
0.8
1.3
1.8
2.3
2.8
17.23
20.67
24.81
29.77
35.72
0.6
0.6
0.6
0.6
0.6
3.0
3.0
3.0
3.0
3.0
The scheme continues beyond the numbers in the table such that with the threshold for market capitalisation increasing at the
rate of $0.5 billion and the corresponding share price threshold increasing from the earlier threshold by a constant factor of 1.2.
Each threshold must be sustained for at least 30 consecutive days for the awards to be triggered. Payments shall be made only
when the Company has free cash either in the form of distributable reserves or as a result of a non interest bearing subordinated
shareholder loan or an equity placing at a price not below the relevant share price threshold.
There may be only one pay-out for each market capitalisation threshold crossed no matter how many times it is crossed.
The Group has determined that at inception and 31 December 2019, the fair value of the cash settled share based payment
award is immaterial based on analysis of the thresholds, historical volatility rates and the applicable share price and market
capitalisation in the period.
The notes on pages 53 to 81 are an essential part of these financial statements
75
Notes to the Financial Statements (continued)
24 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
Other receivables
Restricted use cash
Cash and cash equivalents
Financial liabilities
Trade and other payables
Other payables - current
Other payables - non-current
Borrowings – current
Group
2019
US$’000
Group
2018
US$’000
Company
2019
US$’000
Company
2018
US$’000
-
4,504
241
4,060
8,805
-
245
250
557
10,635
-
-
87
1,052
10,722
3,012
-
-
292
3,304
Group
2019
US$’000
Group
2018
US$’000
Company
2019
US$’000
Company
2018
US$’000
6,606
-
-
4,050
10,656
3,293
-
-
2,572
5,865
1,111
30,678
-
1,814
33,603
799
8,232
16,735
400
26,166
The notes on pages 53 to 81 are an essential part of these financial statements
76
Notes to the Financial Statements (continued)
24 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 2019 and 2018:
1 January
2019
Loans
received
Interest
accrued
Disposal of
loans
Repayment
Foreign
exchange
difference, net
31 December
2019
Financial
liabilities
Borrowings
2,572
1,330
160
-
(28)
3
4,050
1 January
2018
Loans
received
Interest
accrued
Disposal of
loans
Repayment
Foreign
exchange
difference, net
31 December
2018
Financial
liabilities
Borrowings
2,132
1,047
337
(326)
(534)
(84)
2,572
Below is the movement of financial liabilities of the Company for the years ended 31 December 2019 and 2018:
1 January
2019
Loans
received
Interest
accrued
Disposal of
loans
Repayment
Foreign
exchange
difference, net
31 December
2019
Financial
liabilities
Borrowings
400
1,330
84
-
-
-
1,814
1 January
2018
Loans
received
Interest
accrued
Conversion to
equity
Repayment
Foreign exchange
difference, net
31 December
2018
Financial
liabilities
Borrowings
-
400
-
-
-
-
400
The notes on pages 53 to 81 are an essential part of these financial statements
77
Notes to the Financial Statements (continued)
24 Financial instrument risk exposure and management (continued)
Principal financial instruments
The principal financial instruments used by the Group and Company, from which financial instrument risk arises, are as follows:
(cid:31)
(cid:31)
(cid:31)
(cid:31)
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
The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the balance sheet which
at the yearend amounted to US$ 8.8 million (2018: US$ 1 million).
Credit risk with respect to Group receivables and advances is mitigated by active and continuous monitoring the credit quality of
its counterparties through internal reviews and assessment. Refer to note 21 for details of the 3A Best credit risk assessment.
The Company is exposed to credit risk on its receivables from its subsidiaries. The subsidiaries are exploration and development
companies with no current commercial exploitation sales and therefore, whilst the receivables are due on demand, they are not
expected to be paid until there is a successful outcome on a development project resulting in commercial exploitation sales being
generated by a subsidiary. In application of IFRS 9 the Company has calculated the expected credit loss from these receivables
(Note 15).
The carrying amount of financial assets recorded in the Group and Company financial statements, which is net of any impairment
losses, represents the Group’s and Company’s maximum exposure to credit risk.
Credit risk with cash and cash equivalents is reduced by placing funds with banks with high credit ratings.
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 2019 was 9% (2018:6%).
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.
The notes on pages 53 to 81 are an essential part of these financial statements
78
Notes to the Financial Statements (continued)
24 Financial instrument risk exposure and management (continued)
For maturity dates of financial liabilities as at 31 December 2019 and 2018 see table below. The amounts are contractual
payments and may not tie to the carrying value:
Group 2019 US$’000
Group 2018 US$’000
Company 2019 US$’000
Company 2018 US$’000
Interest rate risk
On
Demand
Less than
3 months
3-12
months
1- 5 years
Over 5
years
4,050
2,572
1,814
8,632
1,384
710
575
210
5,222
2,583
536
589
-
-
-
-
-
-
30,678
23,617
Total
10,656
5,865
33,603
33,048
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$49 million (2018: US$46 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$49 million
(2018: US$46 million).
25 Related party transactions (please see also note 26)
The Company has no ultimate controlling party.
25.1 Loan agreements
The Company has loans outstanding as at 31 December, 2018 and 2018 with Kuat Oraziman and legal entities controlled by
him, details of which have been summarised in note 18.
25.2 3A-Best acquisition
On 1 July 2019 Caspian Sunrise plc acquired 100% interest at 3A-Best Group JSC by the way of exchange of the shares (note
21). 33.33% of the interest at 3A-Best was owned by Mr. Rafik Oraziman, the member of Oraziman family. As a result of the deal
the interest of Oraziman family at Caspian Sunrise plc at 31.12.2019 increased to 44%.
25.3
Key management remuneration
Key management comprises the Directors and details of their remuneration are set out in note 6.
25.4
Purchases
As at year end the Group has no prepayments made (2018: US$2.3 million) and no trade receivables (2018: US$80,000) in
relation to STK Geo LLP, the company registered in Kazakhstan, which is owned by a member of Kuat Oraziman’s family. Major
part of the prepayments to STK Geo LLP has been settled through delivery of works. The remaining part of the receivable from
the company of US $ 261,000 has been impaired during 2019.
During 2018-2019 the Group had purchased drilling and workover services from the related party KazSmartEnerKon LLP, a
company registered in Kazakhstan, which is owned by Kuat Oraziman, amounted US$ 3 million (2018: US$4.2 million). These
expenses were capitalized to unproven oil and gas assets. As at year end the Group has prepayments made in the amount of
US$ 0.5 million (2018: US$2.9 million) in relation to these drilling services.
The notes on pages 53 to 81 are an essential part of these financial statements
79
Notes to the Financial Statements (continued)
25.5
Caspian Explorer
In February 2020, shareholders approved the acquisition of Prosperity Petroleum FZE, the UAE registered entity that is the
ultimate holding company for the Caspian Explorer, a shallow water drilling vessel operating in the norther Caspian Sea. The
acquisition remains subject to regulatory approvals in the UAE. (see note 27)
26 Non-controlling interest
Balance at the beginning of the year
Share of loss for the year
Exchange differences on translating foreign operations and recycling
on disposal
Disposal of Munaily
Group
2019
US$’000
(5,605)
(124)
-
-
(5,729)
Group
2018
US$’000
(4,654)
(167)
(920)
136
(5,605)
As at 31 December 2019 non-controlling interest represents minority share in BNG Ltd LLP and Beibars Munail LLP (as at 31
December 2018: BNG Ltd LLP, Beibars Munai LLP and Munaily Kazakhstan LLP).
27 Events after the reporting period
Acquisition of the Caspian Explorer
In February 2020, the Shareholders approved the proposed acquisition of 100% of the shares of Prosperity Petroleum FZE, the
UAE registered holding company of the Caspian Explorer, a drilling vessel capable drilling exploration wells in the shallow waters
of the northern Caspian Sea. A majority of the shares of Prosperity Petroleum are owned by members of the Oraziman family
and therefore a related party transaction on completion.
The estimated consideration of $25 million to be satisfied by the issue of 160,256,410 new Ordinary shares at a price of 12p per
share, a premium of 27.7 per cent to the closing mid-market price on 20 January 2020. Currently the Company is in a process of
acquiring the related consent from the officials of Kazakhstan, the Company expects to get all the related permissions during the
second part of 2020.
At the date of approval of these consolidated financial statements, Covid-19 continues to spread internationally, contributing to a
sharp decline in global financial markets and a significant decrease in global economic activity. On 11 March 2020, the Covid-19
outbreak was declared a global pandemic by the World Health Organization and has since then resulted in numerous
governments and companies, including Caspian Sunrise, introducing a variety of measures to contain the spread of the virus.
The outbreak has also created significant volatility in financial markets and is considered to have negatively impacted commodity
prices, including oil prices, which is relevant to financial performance since year end and may impact future asset values including
the carrying value of proven and unproven oil and gas assets should they remain depressed for a prolonged period.
The notes on pages 53 to 81 are an essential part of these financial statements
80