Empire Energy Group Limited
Annual Report 2022

Plain-text annual report

2 0 2 2 A N N U A L R E P O R T E M P I R E E N E R G Y G R O U P L I M I T E D A N D I T S C O N T R O L L E D E N T I T I E S A B N 2 9 0 0 2 1 4 8 3 6 1 F E A T U R E D O N T H E F R O N T C O V E R I S C A R P E N T A R I A - 3 H D R I L L I N G R I G W W W . E M P I R E E N E R G Y G R O U P . N E T Empire Energy Group Limited Contents 31 December 2022 Corporate directory Chairman and Managing Director letters to shareholders Operations review Directors' report Directors' report - remuneration report Auditor's independence declaration Consolidated statement of profit or loss and other comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements Directors' declaration Independent auditor's report to the members of Empire Energy Group Limited Shareholder information 2 4 7 18 29 49 50 51 52 53 54 100 101 105 1 Empire Energy Group Limited Corporate directory 31 December 2022 Directors Paul Espie AO (Chairman) Alexander Underwood (Managing Director) Peter Cleary Paul Fudge Jacqui Clarke (Alternate Director to Paul Fudge) Louis Rozman Prof John Warburton Company Secretary Ben Johnston Notice of Annual General Meeting The details of the annual general meeting of Empire Energy Group Limited are: 30 May 2023 at 9am Level 2, 259 George Street, Sydney NSW 2000 Registered Office Share Registry Australian Auditor US Auditor Australian Solicitors US Solicitors Level 5 6-10 O'Connell Street Sydney NSW 2000 Computershare Investors Services Pty Limited Level 3 60 Carrington Street Sydney NSW 2000 Nexia Sydney Audit Pty Ltd Level 16 1 Market Street Sydney NSW 2000 Schneider Downs & Co. Inc One PPG Place Suite 1700 Pittsburgh PA 15222 Baker McKenzie Level 46, Tower One International Towers Sydney 100 Barangaroo Avenue Barangaroo NSW 2000 Depew Rathbun & Gillen McInteer, LLC 8301 East 21st Street North Suite 450, Wichita KS 67206-2936 2 Empire Energy Group Limited Corporate directory 31 December 2022 Bankers Macquarie Bank Limited 50 Martin Place Sydney NSW 2000 Australia & New Zealand Banking Group Limited 1 Chifley Plaza Sydney NSW 200 PNC Bank 249 Fifth Avenue One PNC Plaza Pittsburgh PA 15222 Stock Exchange Listing Empire Energy Group Limited shares are listed on: Australian Securities Exchange (ASX code: EEG) New York OTC Market (Code: EEGNY) OTC#: 452869103 Sponsor: Bank of New York 1 ADR for 20 Ordinary Shares Website www.empireenergygroup.net 3 Empire Energy Group Limited Chairman and Managing Director letters to shareholders 31 December 2022 CHAIRMAN’S LETTER TO SHAREHOLDERS Dear Shareholders, We are pleased to present to you Empire’s 2022 Annual Report. Domestic and international gas markets experienced significant dislocation in 2022. The Russian invasion of Ukraine caused unprecedented volatility and price spikes as global gas flows shifted to ensure adequate supply of gas to Europe. However, prices for Liquid Natural Gas (‘LNG’) had already risen considerably prior to the war, reflecting an increasing imbalance between growing demand for seaborne gas and limited new sources of supply. This poses an opportunity for Empire Energy to supply LNG into Asian markets in years ahead from existing LNG export infrastructure in Darwin and Gladstone. According to Wood Mackenzie, over US$100 billion of US LNG export projects are planned between now and 2030, underscoring the enduring demand for gas in the decades ahead. Australia was not immune from global factors affecting gas markets, with domestic prices rising by multiples over the course of the year, leading to unprecedented intervention by the Federal Government in the gas market. In recent weeks, the Australian Energy Market Operator has called for increased gas supply to prevent forecast shortages predicted as soon as this winter and in the years ahead. Empire’s Beetaloo commercialisation strategy is aimed at contributing additional supply into Australia’s domestic and Asian markets. The addition to Empire’s resources as a result of the acquisition of the Western Beetaloo properties from Pangaea Resources has complemented Empire’s Beetaloo focused strategy, and field work is expected to recommence later this year. All these factors unfolding in the international and domestic marketplaces present attractive opportunities for Empire Energy as it develops its resources. Yours Sincerely Paul Espie AO Chairman Empire Energy Group Limited 28 March 2023 4 Empire Energy Group Limited Chairman and Managing Director letters to shareholders 31 December 2022 MANAGING DIRECTOR’S LETTER TO SHAREHOLDERS Dear Shareholders, 2022 was a breakout year for Empire Energy as the Company executed the most active work program in the history of the Beetaloo Sub-basin. The team executed its planned work programs on time and under budget with strong environmental and safety performance across the asset portfolio. This progress is rapidly accelerating the Company’s technical knowledge base as it moves towards pilot production. Empire has entered 2023 with a higher cash balance than previously anticipated due to strong cost control and high gas prices that drove strong cash generation in our US business. This positions the Company well as we plan for Beetaloo pilot production commencing in 2024 / 2025 and larger scale production supplying Australia’s East Coast and Asian LNG markets in later years. Empire fracture stimulated Carpentaria-2H, the largest ever in the basin, successfully stimulating 21 stages across its horizontal section. Multiple stimulation methodologies were tested. Despite the highly experimental completion design, flow rates recently announced are highly encouraging, indicating that a commercially viable development may be achievable in EP187, especially as we optimise drilling and stimulation design in future wells. Empire drilled Carpentaria-3H to a total depth of 4,460 metres in 34.16 days, the fastest well drilled to a target depth of more than 3,500 metres within the Beetaloo Basin, with a 2,632 metre horizontal section, by far the longest horizontal section drilled to date. This milestone demonstrates that the Company can drill long laterals utilising the services of Australia’s existing onshore drilling rig fleet. The US shale experience has shown that drilling long laterals can have a material positive impact on development economics. Empire fracture stimulated Carpentaria-3H with a total of 40 stages, nearly doubling the record the Company set at Carpentaria-2H. Empire has now successfully placed a total of 65 fracture stimulation stages out of 65 attempted, while rapidly learning which designs are most productive. Empire successful drilled Carpentaria-4V in the Carpentaria East area which demonstrated the Velkerri shales are consistent across the block and deeper and thicker in the Carpentaria East location. Earlier in the year, Netherland, Sewell and Associates increased the independently assessed 2C contingent resources in EP187 to 396 Billion Cubic Feet (‘BFC’). Empire anticipates another material increase in EP187 resources in coming weeks following the success of the 2022 work program. Over the course of the year, Empire’s balance sheet was strengthened by a $30.5 million capital raise, execution of a $15 million credit facility with Macquarie Bank Limited that is available but undrawn, and the execution of replacement grant agreements with the Australian Government under the Beetaloo Cooperative Drilling Program which provided for up to $21 million to offset the cost of 25% of agreed Beetaloo work programs. Empire successfully executed those work programs on time and under budget, and the Company ended the year with $21.9 million cash at bank. We expect to receive the final grant payment of ~$7.6 million in the coming weeks. This year Empire’s focus will be on progressing EP187 towards a final investment decision to commence pilot production in EP187, and to recommence field activities in the Western Beetaloo properties. This is likely to involve substantially lower capital intensity while driving material shareholder value in the success case. Empire’s near-term goal is to be the first Beetaloo operator to enter commercial production as we commence pilot production (subject to Front End Engineering and Design (‘FEED’), regulatory approvals, financing and Board approval). This will involve substantial consultation with traditional owners, pastoralists, communities, Northern Territory (‘NT’) based businesses and Government. 5 Empire Energy Group Limited Chairman and Managing Director letters to shareholders 31 December 2022 Empire will seek to develop its Beetaloo properties in a capital efficient manner while building modern surface facilities designed to minimise emissions. Successful execution would provide maiden Beetaloo revenues for Empire’s shareholders while enhancing energy security across Northern Australia and putting downward pressure on prices. Thereafter, focus will turn to a material expansion of supply from Empire’s properties to supply both Australia’s East Coast and Asian LNG markets. Empire is focused on delivering these strategies in a manner that minimises equity dilution to its shareholders. The successful execution of this strategy is likely to create substantial value for our shareholders. I thank Empire’s management, technical and operations teams for your hard work over the course of 2022 and our shareholders and stakeholders across all of our operating areas for your support. Yours Sincerely Alex Underwood Managing Director Empire Energy Group Limited 28 March 2023 Managing Director Alexander Underwood, Chairman Paul Espie and NT Resources Minister Hon Nicole Manison MLA on site during Carpentaria-2 Fracture Stimulation Operations 6 Empire Energy Group Limited Operations review 31 December 2022 A. 2022 OVERVIEW & HIGHLIGHTS Empire Group’s functional currency is Australian Dollars. All references to dollars are Australian Dollars unless otherwise stated. GROUP FINANCIAL HIGHLIGHTS • Group Revenue $13.7 million (2021: $8.5 million) • Net production 4,581Mcfe per day (2021: 4,633 Mcfe per day) • Outstanding debt US$5.30 million (2021: US$5.85 million) • Cash at bank $21.9 million (2021: $25.6 million) AUSTRALIA – NORTHERN TERRITORY • • • • • • • • Empire holds a 100% working interest and operatorship in approximately 28.9 million acres of petroleum exploration tenements across the McArthur Basin and its Beetaloo Sub-basin in onshore Northern Territory, Australia In February 2022, Empire announced maiden 1C Contingent Resources of 81BCF, 2C Contingent Resources of 396BCF and 3C Contingent Resources of 1,292BCF for EP187 following completion of an updated independent resource report as assessed by Netherland, Sewell & Associates Inc (‘NSAI’). Also in February 2022, Empire’s wholly owned subsidiary, Imperial Oil & Gas Pty Limited executed replacement grant agreements with the Australian Government totalling up to $19.4 million which will offset 25% of the cost of seismic acquisition and the drilling, fracture stimulation and flow testing of three horizontal appraisal wells in its 100% owned EP187 tenement, located in the Beetaloo Sub-basin, Northern Territory. In May 2022, Empire announced that civil works for hydraulic stimulation of Carepentaria-2H (‘C-2H’) had been completed and mobilisation of equipment was underway. Baseline water sampling of the shallow aquifers as required by NT environmental approvals was undertaken. In June 2022, Empire announced it had successfully raised $27.5 million (gross) via a single-tranche placement to existing and new institutional and sophisticated investors at $0.22 per share. Strategic investor Bryan Sheffield provided cornerstone support with a $7 million investment (Mr Sheffield was previously Chairman, CEO & Founder of Parsley Energy Inc, a major independent shale player in the Permian Basin, Texas which was later acquired by Pioneer Natural Resources Inc.). Empire Directors committed an additional $520,000. Empire also launched a Share Purchase plan (‘SPP’) during June 2022 to raise $2.5 million. The SPP was fully underwritten by Blue Ocean Equities Pty Limited. In July 2022, Empire announced that Mr Robin Polson had joined Empire as Chief Financial Officer. His prior roles included 15 years as a financial advisory partner at Deloitte focusing on the Australian east coast gas sector, 3 years as Chief Commercial Officer of Central Petroleum Limited (which has production, appraisal and exploration interests in the Northern Territory and on the east coast) and most recently as Associate Partner of Enable Advisory Pty Ltd advising Empire and other gas sector clients over the last year. In August 2022, Empire announced it had completed the hydraulic stimulation of C-2H. 21 stages were stimulated, which was the greatest number of stimulation stages in a single well in the Beetaloo Sub-basin to date. A total of 6.3 million pounds of proppant was successfully placed. In September 2022, Empire reported the C-2H average production rate over the first 30 days of testing (‘IP30’) of 2.4 mmscf per day, equating to 2.6 mmscf per day per 1,000 metres of horizontal section. Gas composition data confirmed significant methane and ethane contribution with very low CO2 (0.88%). The average production rate over the first 51 days of testing was 2.2 mmscf per day (normalised to 2.4 mmscf 7 Empire Energy Group Limited Operations review 31 December 2022 per day per 1,000 metres of horizontal section). Separately, Empire commenced drilling Carpentaria-3H (‘C-3H’). • In November 2022, Empire announced that C-3H had been drilled to total depth of 4,460 metres on time and under budget. The total horizontal section length of 2,632 metres drilled, of which 2,374 metres was successfully placed within the target Velkerri-B shale formation, represents by far the longest horizontal section drilled in the Beetaloo to date. Empire also established a new $15 million credit facility with Macquarie to support its Northern Territory operations and provide additional liquidity. The facility is available and undrawn at the date of this report. • Over December 2022 and January 2023, Empire completed the fracture stimulation of C-3H which comprised 40 stages across 1,989 metres of wellbore. Of these 40 stages, 35 were executed in the Velkerri-B Shale target window along an effective 1,655 metre section. An additional 5 stages were executed in other intervals of lower mud gas over the remaining 334 metres to assess those intervals’ deliverability. C-3H represented the largest stimulation in the Beetaloo Sub-basin and in Australian history. In addition, Empire successfully drilled C-4V to a depth of 2,000 metres. C-4V encountered the thick, gas charged Velkerri shales according to pre-drill prognosis. The shales at C-4V are ~150 metres deeper than at the C-3H location, providing additional pressure support to drive enhanced gas flow rates in future development scenarios. Carpentaria-2H Extended Production Test Flare 8 Carpentaria-2H Fracture Stimulation Operations Empire Energy Group Limited Operations review 31 December 2022 USA – APPALACHIA • • Empire’s Appalachia operations had strong operational performance throughout the financial year with minimal production decline and minimal capital investment. Empire’s Appalachia operations have benefited from strong Henry Hub gas prices during the financial year. The Henry Hub gas index moderated in the latter part of 2022 and into 2023 due to the outage of the Freeport LNG export facility in Texas (~2BCF per day of gas demand when operational) and a milder winter leading to growing gas in storage. • Net gas production of 1,654,481 Mcf (2021: 1,689,464 Mcf) reflects some natural field decline. • Net oil production of 2,919 Bbls (2021: 2,472 Bbls) reflects timing of oil sales. B. RESERVES AND RESOURCES US RESERVES UPDATE The Company’s USA reserves are reviewed annually by certified independent third-party reservoir engineers. The scope of the reviews is to prepare an estimate of the proved, probable and possible reserves attributable to Empire’s ownership position in the subject properties. Reserves at 30 November 2022 – USA (NYMEX Strip 30 November 2022 excluding hedges) Reserves - As of 30 Nov 2022 Reserves (Reserves) Proved Developed Producing Proved Developed Non-producing Proved Behind Pipe Shut-in Proved Undeveloped Total 1P Probable Total 2P Possible Total 3P Oil (Mbbls) Gas (MMcf) MMcfe Capex US$M PV0 US$M PV10 US$M 53 - - - - 53 - 53 158 211 33,871 149 - - - 34,020 - 34,020 14,100 48,120 34,189 149 - - - 34,338 - 34,338 15,048 49,386 - (49) - - - (49) - (49) (12,910) (12,959) 61,326 24 - - - 61,350 - 61,350 53,675 115,025 28,066 14 - - - 28,080 - 28,080 13,027 41,107 USA Reserves by: Graves & Co Consulting Notes to Reserves • The quantities presented are estimated reserves and resources of oil and natural gas that geologic and engineering data demonstrate are “In-Place” and can be recovered from known reservoirs. • Oil prices are based on NYMEX West Texas Intermediate (‘WTI’). • Gas prices are based on NYMEX Henry Hub (‘HH’). • Prices were adjusted for any pricing differential from field prices due to adjustments for location, quality, and gravity, against the NYMEX price. This pricing differential was held constant to the economic limit of the properties. All costs are held constant throughout the lives of the properties. The deterministic method was used to calculate 1P, 2P and 3P reserves. The reference point used for measuring and assessing the estimated petroleum reserves is the wellhead. “PV0” Net revenue is calculated net of royalties, production taxes, lease operating expenses and capital expenditures but before Federal Income Taxes. “PV10” is defined as the discounted Net Revenues of the Company’s reserves using a 10% discount factor. • • • • • 9 Empire Energy Group Limited Operations review 31 December 2022 • • • • • “1P Reserves” or “Proved Reserves” are defined as Reserves which have a 90% probability that the actual quantities recovered will equal or exceed the estimate. “Probable Reserves” are defined as Reserves that should have at least a 50% probability that the actual quantities recovered will equal or exceed the estimate. “Possible Reserves” are defined as Reserves that should have at least a 10% probability that the actual quantities recovered will equal or exceed the estimate. “Bbl” is defined as a barrel of oil. “Boe” is defined as a barrel of oil equivalent, using the ratio of 6 Mcf of Natural Gas to 1 Bbl of Crude Oil. This is based on energy conversion and does not reflect the current economic difference between the value of 1 Mcf of Natural Gas and 1 Bbl of Crude Oil. “M” is defined as a thousand. “MMBoe” is defined as a million barrels of oil equivalent. “Mcf” is defined as a thousand cubic feet of gas. “MMcfe” is defined as a million of cubic feet of gas equivalent. All volumes presented are net volumes and have had subtracted associated royalty burdens. • • • • • • Reserve estimates have been prepared by the following independent reserve engineers: o New York & Pennsylvania (Appalachia) – Graves & Co Consulting. • The following NYMEX prices, at November 30, 2022, were used to calculate reserves and cash flow: Year 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 US$/Bbl 79.81 75.28 71.38 68.33 65.85 63.70 61.74 59.88 58.48 57.42 56.45 56.45 US$/Mcf 5.709 4.781 4.579 4.499 4.471 4.522 4.683 4.949 5.155 5.332 5.494 5.494 NT RESERVES UPDATE Unrisked Net Contingent Resources Liquids (MMBBL) Unrisked Net Contingent Resources Sales Gas (BCF) Unrisked Net Prospective Resources Liquids (MMBBL) Estimate Best (2U) Low (1U) High (3U) Unrisked Net Prospective Resources Gas (BCF) Low (1U) Estimate Best (2U) High (3U) 4,891 Estimate Best (2C) Low (1C) High (3C) 27.7 Estimate Low (1C) 0.8 0.1 - Best (2C) 3.0 0.5 - High (3C) 11.1 3.0 - 0.8 138 - 88 82 - 4.5 378 1,571 184 857 549 1,680 - - 419 2,062 10,744 31,018 89,217 - - 1,633 11,053 45,380 Zone Kyalla* Mid Velkerri* Barney Creek* Total* 3,633 *Empire derived arithmetic summation of previous and current NSAI probabilistic resources estimations 553.5 1,707.7 138.8 14.1 170 797 3.5 0.9 12,561 42,928 139,488 For further disclosure refer to Empire Energy’s ASX release of 16 February 2022. 10 Empire Energy Group Limited Operations review 31 December 2022 Empire Energy’s Northern Territory Acreage 11 Empire Energy Group Limited Operations review 31 December 2022 C. CREDIT FACILITIES The outstanding balance of the USA Macquarie Bank Limited Credit Facility as at 31 December 2022 was US$5.30 million. Total repayments of US$550,000 were made during the financial year. The Company’s Credit Facility with Macquarie Bank Limited has the following key terms: Principal amount US$7.5 million (availability and outstanding loan balance US$5.3 million) Term 5 years Interest rate LIBOR + 650 bps Repayment terms 100% of Appalachia Net Operating Cashflow subject to minimum amortisation of US$550,000 per annum Hedging Key covenants Empire shall maintain a rolling hedging program whereby 55% of forecast Proved Developed Producing Reserves shall be hedged for 3 years Proved Developed Producing Reserves PV10 / Net Debt > 1.3x Current Ratio > 1.0x Working capital > 0 The Company established an additional credit facility with Macquarie Bank Limited during the year. The outstanding balance as at 31 December 2022 was $nil. Key terms of this credit facility are set out below: Principal amount $15 million comprising: • • Facility A (Revolving Credit Facility, $10 million) Facility B (Performance Bond Facility, $5 million) Borrowers Imperial Oil & Gas Pty Limited Imperial Oil & Gas A Pty Limited Guarantor Empire Energy Group Limited and Borrowers Security Fees First ranking security over all present and after-acquired property of each Borrower First ranking security Utilisation Fee: 1.5% of utilisation Commitment Fee: 40% of margin Margin: Facility A (5.5% p.a.), Facility B (10% p.a.) Interest rate Margin plus BBSW Financial covenants Ratio of current assets to current liabilities of at least 1.00 to 1.00 Minimum cash balance in the Borrowers and Guarantor of at least $5 million (or its equivalent in any other currency or currencies) Repayment date 31 December 2025 Repayment arrangements Facility A: on receipt of relevant R&D Tax Incentive payment Facility B: on release of environmental bonds after rehabilitation 12 Empire Energy Group Limited Operations review 31 December 2022 D. HEDGING Due to the risk model implemented by Empire, a comprehensive hedging strategy has been adopted to mitigate commodity price risk associated with its producing assets. E. BUSINESS RISK Exploration risk – Empire and its subsidiaries have interests in assets at various stages of exploration, appraisal and development. Many leases have had very low levels of exploration undertaken to date and may not yield commercial quantities of hydrocarbons. Oil and gas exploration is inherently subject to numerous risks, including the risk that drilling will not result in commercially viable oil and gas production. Application risk – Several of Empire’s Northern Territory assets are in application stage requiring native title and / or regulatory approvals to be granted as leases capable of being explored on. Such approvals may or may not be granted which could adversely impact the value of the Company. Regulatory risk – Empire has operations spanning two states in the USA and the Northern Territory, Australia. Regulatory approvals are required to explore, appraise, develop and produce from the assets. Where such regulatory approvals are already in place, there is a risk that they could be revoked. Where such regulatory approvals are not in place, there is a risk that they may not be granted. Debt facility risk – Empire, through its subsidiaries, has debt facilities in place with Macquarie Bank Limited. Whilst Empire has financial flexibility and expects to generate sufficient cash flow to repay the debts in full, there is a risk in the future that financial and other covenants under the debt facilities could be breached, which could result in Macquarie exercising its security rights under the facilities. The facilities mature in September 2024 and December 2025 and will need to be repaid or refinanced prior to maturity. Commodity price risk – Empire, through its US subsidiaries, sells oil and gas at market prices to customers who price the products off US benchmark oil and gas markets. Empire is exposed to the risk of material declines in the prices of those commodities. Empire, through its Australian subsidiary, explores for oil and gas in Australia and maybe subject to domestic Australian gas price risk, LNG price risk and oil price risk. Reliance on key personnel – Empire’s success depends in large measure on certain key personnel. The loss of the services of such key personnel may have a material adverse effect on the business, financial condition, operational results and prospects. Economic risk – General economic conditions, movements in interest rates, inflation rates and foreign exchange rates, investor sentiment, demand for, and supply of capital and other general economic conditions may have a negative impact on Empire and its subsidiaries ability to carry out its exploration, appraisal, development and production plans. Environmental risk – The upstream oil and gas industry is exposed to environmental risks, including the risk of oil and chemical spills, the risk of uncontrolled gas venting, and other material environmental risks. If an environmental incident was to occur, it may result in Empire’s subsidiaries’ licenses being revoked, its rights to carry on its activities suspended or cancelled, or rectification costs, and significant legal consequences. Title risk – Interests in onshore tenements in Australia are governed by the respective state legislation and are evidenced by the granting of licences or leases. Each licence or lease is for a specific term and carries with it annual expenditure and reporting commitments, as well as other conditions requiring compliance. Consequently, the Company could lose title to or its interest in the Tenements if licence conditions are not met or if insufficient funds are available to meet expenditure commitments. The Northern Territory Government has declared proposed Reserved Blocks over parts of Empire’s tenements which are likely to impact the Company’s ability to carry out petroleum exploration and development activities on those areas. Native title and Aboriginal land - The Tenements extend over areas in which legitimate common law native title rights of indigenous Australians exist. The ability of the Company to gain access to its Tenements and to conduct exploration, development and production operations remains subject to native title rights and aboriginal land rights and the terms of registration of such title agreements. 13 Empire Energy Group Limited Operations review 31 December 2022 Reserves risk – Reserves assessment is a subjective process that provides an estimate of the volume of recoverable hydrocarbons. Oil and gas estimates are not precise and are based on knowledge, experience, interpretation and industry practices. There is a risk that the Company’s reserves do not generate the actual revenues and cashflows that are currently being budgeted which could adversely impact the Company. Services risk – Empire engages the services of third party service providers to carry out exploration, appraisal, development and operating activities. The cost of such services is subject to very high price volatility, particularly in remote areas. There is a risk that such services may not be able to be provided at a reasonable price, thereby preventing exploration, appraisal, development and operations activities from occurring. Production risk – Empire has producing oil and gas assets in the USA. If these assets do not produce the level of production currently budgeted by Empire, then the cashflow they deliver will not materialise. The carrying values of these assets could also be adversely impacted. Production risk has the potential to adversely impact the Company. Insurance risk – The Company intends to insure its operations in accordance with industry practice. However, in certain circumstances, the Company’s insurance may not be of a nature or level to provide adequate insurance cover. The occurrence of an event that is not covered or fully covered by insurance could have a material adverse effect on the business, financial condition and results of the Company. Insurance against all risks associated with exploration and production is not always available and where available the costs can be prohibitive. Acquisitions – The Company may decide to pursue potential acquisitions in the future. This may give rise to various operational and financial risks, including, but not limited to, poor integration resulting in higher than expected integration costs, and financial underperformance of the acquired assets. Funding risk – The Company may need capital in the future to progress the development of its acreage. There can be no guarantee that future capital, debt or equity, will be available or available on suitable terms. It could adversely impact the value of the Company. Climate change risk – Empire recognises the science supporting climate change and that the world is transitioning to a lower carbon economy in which gas has a crucial role to play. Climate change and management of future carbon emissions may lead to increasing regulation, activism, and costs. Climate change may also have a direct physical impact on our operations e.g. through changing climate patterns such as wet seasons and increased frequency of large storms. Carpentaria-4V Drilling Operations 14 Empire Energy Group Limited Operations review 31 December 2022 F. COMPETENT PERSONS STATEMENT The information in this report which relates to the Company’s reserves is based on, and fairly represents, information and supporting documentation prepared by or under the supervision of the following qualified petroleum reserves and resources evaluators, all of whom are licensed professional petroleum engineers, geologists, or other geoscientists with over five years’ experience and are qualified in accordance with the requirements of Listing Rule 5.42: Name Organisation Qualifications Mr William Vail Jr Mr John G. Hattner Graves & Co. Consulting LLC Netherland Sewell & Associates Inc Mr Joseph M. Wolfe Netherland Sewell & Associates Inc BSc in Petroleum Engineering, MBA MBA, Master of Science in Geological Oceanography, BSc Master of Petroleum Engineering, BSc Mathematics Professional Organisation Society of Petroleum Engineers Licenced Professional Geophysicist in the State of Texas, USA Licenced Professional Engineer in the State of Texas, USA None of the above evaluators or their employers have any interest in Empire Energy E&P, LLC or the properties reported herein. The evaluators mentioned above consent to the inclusion in the report of the matters based on their information in the form and context in which it appears. Note Regarding Forward-Looking Statements Certain statements made and information contained in this report are forward-looking statements and forward- looking information (collectively referred to as “forward-looking statements” within the meaning of Australian securities laws. All statements other than statements of historical fact are forward-looking statements. 15 Empire Energy Group Limited Operations review 31 December 2022 Carpentaria–3H Drilling Operations Carpentaria-2H Drilling Operations 16 Empire Energy Group Limited Operations review 31 December 2022 Carpentaria-3H Drilling Operations Carpentaria-2H Extended Production Test Flare 17 Empire Energy Group Limited Directors' report 31 December 2022 The Directors present their report, together with the financial statements, on the consolidated entity (referred to hereafter as the 'Group' or 'Empire Group') consisting of Empire Energy Group Limited (referred to hereafter as the 'Company' or 'Parent entity' or 'Empire') and the entities it controlled at the end of, or during, the year ended 31 December 2022. Directors The following persons were Directors of Company during the whole of the financial year and up to the date of this report, unless otherwise stated: Paul Espie AO Alexander Underwood Peter Cleary Paul Fudge Jacqui Clarke Louis Rozman Prof John Warburton Non-Executive Director and Chairman Managing Director Non-Executive Director Non-Executive Director Non-Executive Director – Alternate Director to Paul Fudge Non-Executive Director Non-Executive Director Principal activities During the financial year the principal continuing activities of the Group consisted of: ● The progression of exploration and appraisal work programs in Empire’s wholly owned and operated exploration tenements and applications located in the highly petroleum prospective Northern Territory McArthur Basin (including the Beetaloo Sub-Basin). Key activities completed during the year include the hydraulic stimulation of Carpentaria-2H, and the hydraulic stimulation of Carpentaria-3H horizontal well and drilling of Carpentaria-4V vertical well in EP187. The production and sale of oil and natural gas in the United States of America. The Empire Group sells its oil and gas products primarily to owners of domestic pipelines, utilities and refiners located in Pennsylvania and New York. ● Dividends There were no dividends paid, recommended or declared during the current or previous financial year. Business risks For information on the Group's business risks refer to the Operations review prior to the Directors' report. Review of operations The loss for the Group after providing for income tax amounted to $6,003,206 (31 December 2021: $11,047,609). For information on a review of the Empire Group’s operations refer to the Operations review prior to the Directors' report. 18 Empire Energy Group Limited Directors' report 31 December 2022 Significant changes in the state of affairs (1) On 16 February 2022, Empire announced that the successful 2021 Beetaloo work program had resulted in a substantial increase in Contingent and Prospective resources independently assessed by Netherland, Sewell & Associates Inc for EP187. (2) On 18 February 2022, Empire issued 993,774 Performance Rights and 568,778 Restricted Rights to its employees for the 2021 financial year. (3) On 23 February 2022, Empire provided an update regarding grants awarded under the Australian Government’s Beetaloo Cooperative Drilling Program. Empire’s wholly owned subsidiary, Imperial Oil & Gas Pty Limited, had executed replacement grant agreements with the Australian Government totalling up to $19.4 million which would offset 25% of the cost of seismic acquisition and the drilling, fracture stimulation and flow testing of three horizontal appraisal wells in its 100% owned EP187 tenement, located in the Beetaloo Sub-basin, Northern Territory. (4) On 18 February 2022, Empire issued 1,200,000 ordinary shares following the exercise of 1,200,000 unlisted options at $0.30 per share. The proceeds of the conversion of the options to shares were $360,000. (5) During the year Empire executed three fixed price swaps with EnergyMark LLC, its largest gas customer in the USA. The terms of the swaps are: 1 April 2022 to 30 September 2022 (50,000 mmbtu per month at US$4.21), 1 October 2022 to 31 March 2023 (50,000 mmbtu per month at US$5.35) and 1 June 2022 to 28 February 2023 (25,000 mmbtu per month at US$7.50) referenced against NYMEX Henry Hub. (6) On 14 June 2022, Empire issued 125,000,000 ordinary shares at $0.22 per share under existing placement capacity. (7) On 17 June 2022, Empire issued 275,360 Restricted Rights to Paul Espie AO and Peter Cleary for Directors fees in lieu of cash for Q3 and Q4 2021 and 509,198 to Alex Underwood for his 2021 short- term incentive bonus. (8) On 17 June 2022, Empire issued 20,105,132 ordinary shares to Paul Fudge as part consideration for acquisition of Beetaloo assets. (9) On 17 June 2022, Empire issued 1,451,409 Performance Rights to Alex Underwood as approved by shareholders at the AGM held 30 May 2022. (10) On 19 July 2022, Empire issued 11,363,702 ordinary shares at $0.22 per share following completion of Share Purchase Plan to raise $2,500,000 (gross) in cash. (11) On 9 September 2022, Empire issued 69,227,558 unlisted options for every two shares subscribed for by participants under the Placement ('Attaching Options'). The Attaching Options will be exercisable at $0.35 and expire two years from the date of allotment of Shares under the Placement. (12) Empire also issued 2,363,638 ordinary shares to Director’s to raise $520,000 at $0.22 per share on the same terms as the Placement. (13) On 9 September 2022, Empire issued 131,493 Restricted Rights to Paul Espie AO and Peter Cleary for Directors fees in lieu of cash for Q2 2022. (14) On 12 September 2022, Empire announced C-2H average production rate over the first 30 days of testing was 2.4 mmscf per day (a normalised rate of 2.6 mmscf per day / 1,000m horizontal section). The well was producing at a rate of 2.1 mmscf per day on day 30, with the rate of production decline reducing with the early type curve flattening, at a lower rate of decline than other wells currently flow testing in the Beetaloo. (15) In September 2022, Empire reported the C-2H average production rate over the first 30 days of testing ('IP30') of 2.4 mmscf per day, equating to 2.6 mmscf per day per 1,000 metres of horizontal section. Gas composition data confirmed significant methane and ethane contribution with very low CO2 (0.88%). The average production rate over the first 51 days of testing was 2.2 mmscf per day (normalised to 2.4 mmscf per day per 1,000 metres of horizontal section). Separately, Empire 19 Empire Energy Group Limited Directors' report 31 December 2022 commenced drilling Carpentaria-3H ('C-3H'). (16) In November 2022, Empire announced that C-3H had been drilled to total depth of 4,460 metres on time and under budget. The total horizontal section length of 2,632 metres drilled, of which 2,374 metres was successfully placed within the target Velkerri-B shale formation, represents by far the longest horizontal section drilled in the Beetaloo to date. Empire also established a new $15 million credit facility with Macquarie to support its Northern Territory operations and provide additional liquidity. (17) Over December 2022 and January 2023, Empire completed the fracture stimulation of C-3H which comprised 40 stages across 1,989 metres of wellbore. Of these 40 stages, 35 were executed in the Velkerri-B Shale target window along an effective 1,655 metre section. An additional 5 stages were executed in other intervals of lower mud gas over the remaining 334 metres to assess those intervals’ deliverability. C-3H represented the largest stimulation in the Beetaloo Sub-basin and in Australian history. In addition, Empire successfully drilled C-4V to a depth of 2,000 metres. C-4V encountered the thick, gas charged Velkerri shales according to pre-drill prognosis. The shales at C-4V are ~150 metres deeper than at the C-3H location, providing additional pressure support to drive enhanced gas flow rates in future development scenarios. There were no other significant changes in the state of affairs of the Group during the financial year. Matters subsequent to the end of the financial year (1) On 3 February 2023 Empire issued 613,830 Restricted Rights to its employees under the Company’s Rights Plan. (2) On 3 February 2023 Empire issued 548,234 Performance Rights to its employees as part of their 2020 Long-Term Incentive compensation which have vested. (3) On 3 February 2023 Empire issued 1,297,209 Performance Rights to its employees for the 2022 financial year. (4) On 3 March 2023 Empire lodged a work program update that detailed initial flow rates at Carpentaria-3H of up to 5.7 mmscf per day with an average of 2.6 mmscf per day over 27 days, an increase in Carpentaria-2H flow rates following an extended shut-in with an average of 3.24 mmscf per day over 8 days and petrophysical analysis of Carpentaria-4V results that demonstrated the Middle Velkerri shale is 20% thicker and 150 metres deeper than at the Carpentaria-2H location. (5) On 27 March 2023, the House of Representatives passed the Safeguard Mechanism (Crediting) Amendment Bill 2023(1). Empire understands that the bill will be considered by the Senate shortly. The Safeguard Mechanism applies to facilities with scope 1 covered emissions of more than 100,000 tonnes of carbon dioxide equivalent (CO2-e) per year(2). Empire‘s present expectation is that its pilot project is not likely to reach the Safeguard Mechanism threshold. It has been reported in the media that new gas entrants in the basin will be required to have net zero scope 1 emissions from entry. This is consistent with the prior Commonwealth Government’s April 2022 commitments. Whilst no current impact on the company’s operations, Empire’s management continue to monitor these developments closely. 1. https://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r6957 2. https://www.cleanenergyregulator.gov.au/NGER/The-safeguard-mechanism No other matter or circumstance has arisen since 31 December 2022 that has significantly affected, or may significantly affect the Group's operations, the results of those operations, or the Group's state of affairs in future financial years. 20 Empire Energy Group Limited Directors' report 31 December 2022 Likely developments and expected results of operations Except for information disclosed on certain developments and the expected results of those developments included in this report under review of operations, further information on likely developments in the operations of the Group and the expected results of operations have not been included in this report because the Directors believe it would be likely to result in unreasonable prejudice to the Group. Environmental regulation There are environmental regulations surrounding oil and gas activities which have been conducted by the Empire Group. There has been no material breach of these regulations during the financial period or since the end of the financial period and up to the date of this report. Information on Directors Name: Title: Age: Qualifications: Experience and expertise: Other current directorships: Former directorships (last 3 years): Special responsibilities: Interests in shares: Interests in options: Interests in rights: Name: Title: Age: Qualifications: Experience and expertise: Other current directorships: Former directorships (last 3 years): Special responsibilities: Interests in shares: Interests in options: Interests in rights: Paul Espie AO Non-Executive Director and Chairman 78 BSc, MBA Mr Paul Espie AO was the founding principal of Pacific Road Capital, a private equity fund investing in the resources sector internationally, in 2006. He was Chairman of Oxiana Limited during the development of the Sepon copper/gold project in Laos (2000 to 2003) and prior to that Chairman of Cobar Mines Pty Ltd after a management buy-out in 1993. Mr Espie was previously responsible for Bank of America’s operations in Australia, New Zealand and Papua New Guinea and Chairman of the Australian Infrastructure Fund. He is a Fellow of the Australian Institute of Company Directors, Trustee of the Australian Institute of Mining & Metallurgy, Educational Endowment Fund. He is also Chairman of the Menzies Research Centre. None Aurelia Metals Limited Chairman of Empire Energy Group Limited 10,135,363 ordinary shares 704,546 unlisted options expiring on 14 June 2024 @ $0.35 per share 733,169 restricted rights Alexander Underwood Managing Director 40 LLB, BCom (Hons) Mr Underwood has nearly 20 years of specialist upstream oil and gas investing, financing and management experience. Previously he spent two years with the Commonwealth Bank of Australia, Singapore as Director of Natural Resources and nine years with Macquarie Bank in Sydney and Singapore as Associated Director of Energy Markets Division. He commenced his career at BHP Billiton Petroleum. None None Chief Executive Officer of Imperial Oil & Gas Pty Limited Executive Director of Imperial Oil & Gas Pty Limited Executive Director of Imperial Oil & Gas A Pty Limited President and Managing Member of the Company’s 100% wholly owned US subsidiaries 2,550,000 ordinary shares None 3,894,123 unvested performance rights 1,300,500 vested performance rights 1,000,000 service rights 1,586,579 restricted rights 21 Empire Energy Group Limited Directors' report 31 December 2022 Name: Title: Age: Qualifications: Experience and expertise: Other current directorships: Former directorships (last 3 years): Special responsibilities: Interests in shares: Interests in options: Interests in rights: Name: Title: Age: Experience and expertise: Other current directorships: Former directorships (last 3 years): Special responsibilities: Interests in shares: Interests in options: Interests in rights: Peter Cleary Non-Executive Director 65 BCom, LLB Mr Cleary is a leader in the oil and gas sector. He holds relationships with commercial and government entities gained over a distinguished 29-year career representing Santos, the North West Shelf Venturers and BP in Asia. His executive career was in LNG, pipeline gas and chemicals operations. Mr Cleary is currently a member of the Executive Committee of the Australia Japan Business Co-operation Committee and the Australia Korea Business Council. He is Fellow of the Australian Institute of Energy – SA Branch. He previously held positions as a Board member of the Australian Petroleum Production & Exploration Association (APPEA), the Australia China Council and the Australia Japan Foundation. He is a Graduate of the Australian Institute of Company Directors. None None Chairman of Remuneration Committee Member of the Audit and Risk Committee 1,044,546 ordinary shares 227,273 unlisted options expiring on 14 June 2024 @ $0.35 per share 328,943 restricted rights Paul Fudge Non-Executive Director 74 Mr Fudge was appointed to the board of Empire in August 2021. Mr Fudge brings significant business and investment experience to Empire, having acquired vast investment experience in onshore Australian oil and gas, including being an early mover in the Queensland Coal Seam Gas industry and in the Beetaloo Sub-Basin. He is the controlling shareholder of Pangaea (NT) Pty Limited, Empire’s largest shareholder. None None None 140,000,000 ordinary shares 8,000,000 unlisted options expiring on 31 August 2024 at $0.70 per share None 22 Empire Energy Group Limited Directors' report 31 December 2022 Name: Title: Age: Qualifications: Experience and expertise: Jacqui Clarke Non-Executive Director (Alternate) 51 CA, FCA, CTA & GAICD Ms Clarke was appointed to the board of Empire in August 2021. With over 30 years in professional practice with the Big 4, including more than 16 years as a Partner of Deloitte, Ms Clarke is an experienced professional with extensive executive for building a performance culture, driving profitable growth, developing and executing on strategy and delivering results. Ms Clarke advises a broad range of groups, including private family groups, entrepreneurial growth companies and not- for-profit organisations. track record Presently, Ms Clarke is the Chair and Non-Executive Director ('NED') of SMEG Australia, a NED on ASX Listed BKI Investment Company Ltd, sits on the Fudge Group Advisory Board, is a Founder of Maxima Private and an author. Ms Clarke is a Chartered Accountant and Fellow of Chartered Accountants Australia and New Zealand, Graduate of AICD (Australian Institute of Company Directors), Chartered Tax Advisor and Justice of the Peace. BKI Investments Limited None Member of the Audit and Risk Committee None None None Louis Rozman Non-Executive Director 65 BEng, MGeoSc Mr Rozman is a mining engineer and executive with 40 years’ experience in operating and constructing projects internationally. He has held numerous senior executive positions in the mining and energy industries and has been a non-executive director of several ASX and TSX listed companies. Mr. Rozman’s experience as Chief Executive Officer of CH4 Gas Limited ('CH4') a successful and pioneering Queensland coal seam gas developer and producer, is of direct relevance to Empire’s growth plans. CH4 was one of the first companies to commercialise a Queensland coal seam methane project. CH4 merged with Arrow Energy in 2006, and the enlarged business was later acquired by Royal Dutch Shell and PetroChina for >A$3 billion. Mr Rozman is a Fellow of the Australian Institute of Company Directors, the Australasian Institute of Mining and Metallurgy ('AusIMM') and a Chartered Professional (Management). He has a Bachelor of Engineering (Mining) degree from the University of Sydney and a Masters in Geoscience (Mineral Economics) from Macquarie University. None None Member of the Remuneration Committee Member of the Technical Committee 621,546 ordinary shares 227,273 unlisted options expiring on 14 June 2024 @ $0.35 per share None 23 Other current directorships: Former directorships (last 3 years): Special responsibilities: Interests in shares: Interests in options: Interests in rights: Name: Title: Age: Qualifications: Experience and expertise: Other current directorships: Former directorships (last 3 years): Special responsibilities: Interests in shares: Interests in options: Interests in rights: Empire Energy Group Limited Directors' report 31 December 2022 Name: Title: Age: Qualifications: Experience and expertise: Other current directorships: Former directorships (last 3 years): Special responsibilities: Interests in shares: Interests in options: Interests in rights: Prof John Warburton Non-Executive Director 65 PhD, FGS, FPESA, MAICD John Warburton has 39 years of professional oil and gas experience in operated and non-operated conventional and unconventional petroleum discovery, development and in new business delivery. John has worked in Western Europe, West Africa, Central Asia, Middle East, Pakistan, Papua New Guinea and throughout the Asia Pacific Region including Australia and New Zealand. He has resided as an expatriate in a number of these regions and has a keen focus on people, safety, cultural heritage and environment. Prof Warburton’s career includes 14 years of senior technical and leadership roles at BP. He was Executive General Manager for Exploration & New Business at Eni in Pakistan, and until March 2018 John was Chief of Geoscience & Exploration Excellence at Oil Search Ltd. Prof Warburton has been a Director of Empire’s wholly owned Northern Territory subsidiary, Imperial Oil & Gas Pty Limited ('Imperial'), since 2011 and was its Chief Executive Officer from 2011 to 2014. He continues to serve as a Non-Executive Director of Imperial. In addition, John is Visiting Professor in the School of Earth & Environment at Leeds University UK where he has served twelve years on the External Advisory Board of Geosolutions, Leeds (formerly Petroleum Leeds) which is the focus for integrated Petroleum Engineering, Geoscience and Climate Research. TMK Energy Limited Senex Energy Limited Non-Executive Director of Imperial Oil & Gas Pty Limited Chairman of the Audit and Risk Committee Member of the Technical Committee 772,815 ordinary shares 159,091 unlisted options expiring on 14 June 2024 @ $0.35 per share 1,200,000 service rights 'Other current directorships' quoted above are current directorships for listed entities only and excludes directorships of all other types of entities, unless otherwise stated. 'Former directorships (last 3 years)' quoted above are directorships held in the last 3 years for listed entities only and excludes directorships of all other types of entities, unless otherwise stated. Company secretary Ben Johnston Mr Johnston joined Empire as Vice President Business Development in November 2019. Ben is an energy sector specialist having worked across M&A, ECM and debt / project finance transactions while at leading banks including RBC Capital Markets and Commonwealth Bank. Ben is a chartered accountant having trained with KPMG and holds an MBA from the Australian Graduate School of Management. Andrew Philips (November 2020 to 30 May 2022) Mr Phillips has over 25 years’ experience working in senior financial and commercial management positions with public and multinational companies based in Australia and New Zealand and has served as Company Secretary for a number of ASX listed companies. He is currently Executive Director, CFO and Company Secretary of Lithium Power International Limited and holds independent directorships for ASX listed companies, Southern Cross Exploration NL and Donaco International Limited. 24 Empire Energy Group Limited Directors' report 31 December 2022 Meetings of Directors The number of meetings of the Company's Board of Directors ('the Board') and of each Board committee held during the year ended 31 December 2022, and the number of meetings attended by each Director were: Full Board Remuneration Committee Audit and Risk Committee Attended Held Attended Held Attended Held 9 9 9 8 9 9 9 9 9 9 9 9 9 9 - 2 2 - - 2 - - 2 2 - - 2 - - 3 3 - 3 - 3 Technical Committee Attended Held - 4 1 - - 4 4 - 3 3 - 3 - 3 - 4 4 - - 4 4 Paul Espie AO Alexander Underwood* Peter Cleary Paul Fudge Jacqui Clarke Louis Rozman Prof John Warburton Paul Espie AO Alexander Underwood Peter Cleary Paul Fudge Jacqui Clarke Louis Rozman Prof John Warburton Held: represents the number of meetings held during the time the Director held office or was a member of the relevant committee. * Mr Underwood excused himself from Remuneration Committee Meetings when matters relating to his remuneration were discussed. Shares under option Unissued ordinary shares of Empire Energy Group Limited under option at the date of this report are as follows: Grant date Expiry date 13 August 2021 13 August 2021 9 September 2022 31 August 2024 31 August 2024 9 September 2024 Exercise price Number under option 8,000,000 $0.700 1,696,970 $0.700 $0.350 69,227,558 78,924,528 No person entitled to exercise the options had or has any right by virtue of the option to participate in any share issue of the Company or of any other body corporate. Shares issued on the exercise of options There were no ordinary shares of Empire Energy Group Limited issued on the exercise of options during the year ended 31 December 2022 and up to the date of this report. 25 Empire Energy Group Limited Directors' report 31 December 2022 Shares under Performance Rights Unissued ordinary shares of Empire Energy Group Limited under Performance Rights at the date of this report are as follows: Grant date Unvested 13 September 2013 7 August 2020 6 August 2021 21 December 2021* 17 June 2022 Vested 3 August 2021 30 March 2022 Expiry date N/A 31 December 2035 31 December 2036 31 December 2036 31 December 2037 30 June 2034 30 December 2034 Number under rights 250,000 3,913,960 1,015,625 993,774 1,451,409 1,300,500 840,134 9,765,402 * Performance Rights granted on 21 December 2021 were issued on 18 February 2022. No person entitled to exercise the Performance Rights had or has any right by virtue of the performance right to participate in any share issue of the Company or of any other body corporate. Shares issued on the exercise of Performance Rights There were no ordinary shares of Empire Energy Group Limited issued on the exercise of Performance Rights during the year ended 31 December 2022 and up to the date of this report. Shares under Restricted Rights Unissued ordinary shares of Empire Energy Group Limited under Restricted Rights at the date of this report are as follows: Grant date Expiry date 7 August 2020 1 June 2021 23 December 2020 2 July 2021 21 December 2021* 17 June 2022 17 June 2022 9 September 2022 31 December 2035 1 June 2036 23 December 2035 2 July 2036 21 December 2036 17 June 2037 17 June 2037 9 September 2037 Exercise price Number under rights $0.000 $0.000 $0.000 $0.000 $0.000 $0.000 $0.000 $0.000 1,019,753 617,979 485,485 94,908 568,778 509,198 275,360 131,493 3,702,954 * Restricted Rights granted on 21 December 2021 were issued on 18 February 2022. No person entitled to exercise the Restricted Rights had or has any right by virtue of the restricted right to participate in any share issue of the Company or of any other body corporate. Shares issued on the exercise of Restricted Rights There were no ordinary shares of Empire Energy Group Limited issued on the exercise of Restricted Rights during the year ended 31 December 2022 and up to the date of this report. Shares under Service Rights Unissued ordinary shares of Empire Energy Group Limited under Service Rights at the date of this report are as follows: 26 Empire Energy Group Limited Directors' report 31 December 2022 Grant date 14 June 2019 4 August 2020 1 June 2021 Expiry date 30 June 2034 31 December 2035 31 December 2036 Exercise price Number under rights $0.00 $0.00 $0.00 1,000,000 838,558 600,000 2,438,558 No person entitled to exercise the Service Rights had or has any right by virtue of the service right to participate in any share issue of the Company or of any other body corporate. Shares issued on the exercise of Service Rights There were no ordinary shares of Empire Energy Group Limited issued on the exercise of Service Rights during the year ended 31 December 2022 and up to the date of this report. Indemnity and insurance of officers The Company has indemnified the Directors and executives of the Company for costs incurred, in their capacity as a Director or executive, for which they may be held personally liable, except where there is a lack of good faith. During the financial year, the Company paid a premium in respect of a contract to insure the Directors and executives of the Company against a liability to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. Indemnity and insurance of auditor The Company has not, during or since the end of the financial year, indemnified or agreed to indemnify the auditor of the Company or any related entity against a liability incurred by the auditor. During the financial year, the Company has not paid a premium in respect of a contract to insure the auditor of the Company or any related entity. Proceedings on behalf of the Company No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Company, or to intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or part of those proceedings. Non-audit services Details of the amounts paid or payable to the auditor for non-audit services provided during the financial year by the auditor are outlined in note 28 to the financial statements. The Directors are satisfied that the provision of non-audit services during the financial year, by the auditor (or by another person or firm on the auditor's behalf), is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The Directors are of the opinion that the services as disclosed in note 28 to the financial statements do not compromise the external auditor's independence requirements of the Corporations Act 2001 for the following reasons: ● all non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants (including Independence Standards) issued by the Accounting Professional and Ethical Standards Board, including reviewing or auditing the auditor's own work, acting in a management or decision-making capacity for the Company, acting as advocate for the Company or jointly sharing economic risks and rewards. ● Officers of the Company who are former partners of Nexia Sydney Audit Pty Ltd There are no officers of the Company who are former partners of Nexia Sydney Audit Pty Ltd. 27 Empire Energy Group Limited Directors' report 31 December 2022 Auditor's independence declaration A copy of the auditor's independence declaration as required under section 307C of the Corporations Act 2001 is set out immediately after this Directors' report. This report is made in accordance with a resolution of Directors, pursuant to section 298(2)(a) of the Corporations Act 2001. On behalf of the Directors ___________________________ Alexander Underwood Managing Director 28 March 2023 28 Empire Energy Group Limited Directors’ report – Remuneration report 31 December 2022 Remuneration Report – Audited The Remuneration Report for the year ended 31 December 2022 (‘2022 Financial Year’ or ‘FY22’) forms part of the Directors’ Report. It has been prepared in accordance with the Corporations Act 2001 (‘the Act’), Corporations Regulation 2M.3.03, in compliance with AASB124 Related Party Disclosures, and audited as required by section 208(3C) of the Act. It also includes additional information and disclosures that are intended to support a deeper understanding of remuneration governance and practices, for shareholders, where statutory requirements are not sufficient. Letter from the Chair of the Remuneration Committee Dear Shareholders, As the Chair of the Remuneration Committee and on behalf of the Board, I am pleased to present Empire Energy’s (‘EEG’) Remuneration Report for the year ended 31 December 2022. FY22 has seen significant progress in the Beetaloo Sub-basin and USA operations with: 1. all activities carried out without any significant safety or environmental incidents; 2. the drilling of the Carpentaria 3H well that included the longest horizontal completed and cased well section in Beetaloo Sub-basin of 2,632 metres; the successful fracture stimulation of Carpentaria 2H and Carpentaria 3H as well as the commencement of production testing; the drilling of Carpentaria 4 vertical; and 4. 5. ongoing positive engagement through on-country meetings with Traditional Owners and pastoral 3. stakeholders. Items 2-4 were completed on time and within budget, demonstrating EEG’s cost and operational efficiencies within the basin. The Board is confident that we will continue to observe further progress and cost reductions during FY23 and beyond. As indicated in the Remuneration Report for FY21, the Board undertook a review of the Managing Director’s total remuneration and rebalanced it so it better benchmarks with the market. The Managing Director’s FY22 Total Remuneration Package at Target was: Fixed Pay: Short-term Variable Remuneration: Long-term Variable Remuneration: $430,000 (FY21 $390,000) 25% of Fixed Pay (FY21 40%) 40% of Fixed Pay (FY21 40%) The Remuneration Committee assessed the Managing Director’s performance against the Key Performance Indicators (set out in Section 2.2) at 120% of Target, primarily due to the successfully drilling operations carried out in FY22. This translated into a Short-Term Incentive award of $129,600 which the Board approved. The Board also gave the Managing Director the option of receiving his award in cash or Restricted Rights. The Remuneration Committee continually reviews the Managing Director’s and other senior executives’ total remuneration package and is of the view that it is fairly benchmarked but also reflects the strong performance and growing capability of the Managing Director. Peter Cleary Chair, Remuneration Committee 28 March 2023 29 Empire Energy Group Limited Directors’ report – Remuneration report 31 December 2022 1. People covered by this report This report covers Key Management Personnel (‘KMP’) which are defined as those who have the authority and responsibility for planning, directing and controlling the activities of Empire Energy. Table 1 Name Role Appointed Audit & Risk Remuneration Technical Committee Membership Non-Executive KMP Mr Paul Espie AO Non-Executive Chairman Non-Executive Director Prof John Warburton Non-Executive Director Non-Executive Director Mr Peter Cleary Non-Executive Director Mr Louis Rozman Non-Executive Director Mr Paul Fudge Alternate Director Ms Jacqui Clarke Executive KMP Mr Alex Underwood Managing Director Mr Robin Polson (‘MD’) Chief Financial Officer (‘CFO’) 5/02/2019 8/11/2018 6/02/2019 25/5/2020 11/03/2021 17/08/2021 17/08/2021 23/07/2018 18/07/2022 ✓ = Member, C = Chair C ✓ ✓ ✓ C ✓ ✓ There were no changes to the composition of the Board or its Committees during FY22. 2. Remuneration Overview 2.1 Remuneration Policy EEG’s Remuneration Policy (the ‘Policy’) was last updated in March 2021 under the Remuneration Committee Charter. The Remuneration Committee retains overall responsibility for the review and recommendations in relation to the remuneration of Executive Directors (including the Managing Director) and executives reporting to the Managing Director as well as Non-executive Director Board Fees. In discharging these responsibilities, the Committee adheres to the following: • to ensure the Company’s remuneration structures are equitable and aligned with the long-term interests of the Company and its shareholders; having regard to relevant Company policies without rewarding conduct that is contrary to the Company’s values or risk appetite; to attract and retain skilled executives; to structure short- and long-term incentives that are challenging and linked to the creation of sustainable shareholder returns; and to ensure any termination benefits are justified and appropriate. • • • The primary objective of the Policy is to ensure that the quantum and elements of remuneration attract and retain key talent and are aligned with the Company’s current strategy and business objectives. Executive KMP remuneration is currently made up of Fixed Pay and Variable Remuneration (split into short- and long-term components). Fixed Pay is made up of base salary and any other fixed elements such as superannuation, and other benefits where applicable. Fixed Pay is intended to be positioned against the median of market benchmarks from a group of comparable resources and energy companies of similar size to ensure remuneration is competitive and fair, subject to a ±20% pay range to account for individual factors such as experience, qualifications, and performance. 30 Empire Energy Group Limited Directors’ report – Remuneration report 31 December 2022 Total Remuneration Package (‘TRP’) is intended to be composed of an appropriate mix of remuneration elements including Fixed Pay, short-term variable remuneration (‘STVR’) and long-term variable remuneration (‘LTVR’). The Target TRP (TRP for expected performance) is generally intended to fall between the median and upper quartile of market benchmarks. This is because market data often shows nil or negative variable remuneration values, despite an incumbent having a real variable remuneration opportunity when benchmarks are based on statutory disclosure by other companies. As a result, total package market data median benchmark values are lower than actual median opportunities offered to incumbents in the market. This has been established by research conducted by the Board’s appointed independent External Remuneration Consultant. The Board has selected a competitive TRP market position between median and upper quartile benchmarks to adjust for the impact of nil and negative reported variable remuneration. Variable Remuneration fills the gap between Fixed Pay and Total Remuneration Package and is intended to be a mix of “at-risk” and “incentive” remuneration. The “at-risk” component of variable remuneration that is below “Target policy” is designed to be what an executive would stand to lose for not meeting expectations. The “incentive” component is the upside for performing above expectations and represent the true “bonus”. Metrics selected are intended to be linked to the primary drivers of value creation for stakeholders, and successful implementation of the long-term strategy over both the short- and long-term. The Committee also regularly engages with External Remuneration Consultants (‘ERCs’) to ensure the current policy and frameworks are aligned with current market practices and remain competitive and fair (refer to section 5.5.1 for ERCs engaged during FY22). 31 Empire Energy Group Limited Directors’ report – Remuneration report 31 December 2022 2.2 Executive Remuneration – Executive Framework Overview The following table outlines the Company’s approach to executive remuneration: Fixed Pay Fixed Pay (‘FP’) is set with reference to the median of benchmarks and aimed at paying fairly for meeting the requirements of a role. Base Salary, superannuation and other benefits. Short-Term Variable Remuneration for FY22 To link achievement of EEG’s short-term performance objectives with the remuneration received by the executive. Long-Term Variable Remuneration To link achievement of EEG’s shareholder wealth creation with the remuneration received by the executive. The Board has discretion to settle STVR awards in the form of cash or Restricted Rights. Performance Rights to receive EEG shares, subject to LTVR performance over a 3-year Measurement Period. Purpose Delivery Fixed Pay is set with reference to the median of tailored benchmarks designed around companies of comparator market capitalisation and market sector. FY22 Approach Opportunity as percentage of FP: Intended opportunity as percentage of FP: MD Target Stretch 37.5% 25% MD Target Stretch 40% 80% LTVR Performance Measures: - 75% Absolute Total Shareholder Return (‘TSR’) 25% Milestones - A 'Gate' of no major health, safety or environmental incidents occurring during the measurement period applies. STVR Key Performance Indicators (‘KPIs’): - NT Work Program – 50% - Cost management and funding coverage for activities – 30% - Management of US - Assets – 10% Individual Effectiveness – 10% A 'Gate' of no major health, safety or environmental incidents occurring during the measurement period applies. 32 Empire Energy Group Limited Directors’ report – Remuneration report 31 December 2022 The following diagram outlines the executive KMP remuneration structure and timing under the remuneration framework as applicable to FY22 where STVR is Short-Term Variable Remuneration, and LTVR is Long-Term Variable Remuneration. Chart A FY22 Fixed Pay STVR Performance Period* FY23 FY24 FY25 Audit & STVR Assessment Award Paid** LTVR Performance Period (75%) - Performance Rights with an Absolute TSR Vesting Condition LTVR Performance Period (25%) - Performance Rights with a Milestone Vesting Condition Vesting Assessments and Vesting * STVR awards are generally awarded soon after the release of the audited Annual Report ** STVR awards can be paid in either cash or equity (Restricted Rights) 2.3 FY22 Company Performance At-A-Glance The following outlines the Company’s performance in FY22, which is intended to assist in demonstrating the link between performance, value creation for shareholders, and executive reward: Table 1 – Statutory Performance Disclosure FY End Date Share Price (beginning of period) Share Price (end of period) Change in Share Price $ Dividends (paid during period) Change in Shareholder Wealth (Share Price Change + Dividends) Total Value % NT P(50) Prospective Resource (TCFe*) NT 2C Contingent Resource (BCFe**) Total Company 2P Reserves (MBOE***) 31/12/2022 $0.34 $0.20 $(0.14) $0.00 $(0.14) (41)% 47.7 575 5,723 31/12/2021 $0.36 $0.34 $(0.02) $0.00 $(0.02) (6)% 46.9 31/12/2020 $0.45 $0.36 $(0.09) $0.00 $(0.09) (20)% 14.7 31/12/2019 $0.14 $0.45 $0.31 $0.00 $0.31 221% 12.4 31/12/2018 $0.12 $0.14 $0.02 $0.00 $0.02 17% 12.4 221 41 - - 6,440 6,000 6,075 11,634 * TCFe: Trillion Cubic Feet ** BCFe: Billion Cubic Feet equivalent *** MBOE: Thousand barrels of oil equivalent 33 Empire Energy Group Limited Directors’ report – Remuneration report 31 December 2022 2.4 FY22 Executive Remuneration Opportunities and Outcomes At-A-Glance The following charts outline the remuneration opportunities under executive remuneration structures, with the outcomes dependent on performance over FY22 for STVR and LTVR, and the “Realised” remuneration payable in respect of the completed FY22 year and performance delivered: Chart B. Note: - - “Realised” refers to Fixed Pay received during FY22 and Cash STVR awarded in respect of FY22 performance and LTVR that vested during FY22. The Realised STVR outcome was above Target but below Stretch in absolute terms, however a proportion of TRP appears above Stretch due to Realised LTVR being significantly below Target. 2.5 Key KMP Remuneration Governance Considerations and Changes The following summarises the key remuneration governance matters that were the focus of considerations in FY22, and those that are expected to be addressed in FY23, including planned changes: • benchmarking Managing Director’s remuneration against ASX listed market data to inform quantum and mix decisions intended to meet strategy and market positioning requirements (Completed 2022); benchmarking and review of non-Executive remuneration (Completed: 2022); and assessment of vesting conditions for LTVR (Completed 2022). • • 34 Empire Energy Group Limited Directors’ report – Remuneration report 31 December 2022 3. The Empire Energy Strategy, Policy and Framework 3.1 FY22 Short-Term Variable Remuneration (‘STVR’) Plan A description of the STVR plan is set out below: Purpose Measurement Period Opportunity Outcome Metrics and Weightings To provide at-risk remuneration and incentives that rewards executives for performance against annual safety, operational and financial performance objectives set by the Board at the beginning of the financial year. The objectives selected are linked to the Company’s long-term strategy which is designed to provide sustainable value creation for shareholders. The Financial Year of the Company (1 January – 31 December). Opportunity as % of Fixed Pay MD Target 25% Stretch 37.5% For FY22, the following metrics and weightings – at Target - applied: • NT Work Program – 50% • Cost management and funding coverage for activities – 30% • Management of US Assets – 10% Individual Effectiveness – 10% • These metrics were selected because they were viewed by the Board as being the key drivers of value creation for FY22. Gate A 'Gate' of no major health, safety or environmental incidents occurring during the measurement period applies. Award and Settlement Awards will be calculated following the auditing of accounts. STVR awards may be paid as cash or equity. The Board offered the Managing Director the opportunity to receive his STVR in cash which he accepted. The overarching policy is to pay STVR awards in the form of Restricted Rights to preserve cash reserves, however the decision to offer cash was based on the Board’s view that this was more appropriate in the current market. There is currently no STVR deferral mechanism. Restricted Rights are granted for nil consideration under the Empire Energy Group Limited Rights Plan (‘EEGLRP’), and vest immediately upon grant. Restricted Rights are subject to a 90-day exercise restriction and can exercised anytime following vesting and before the end of the Term (15 years). Shares acquired on exercise of vested Restricted Rights (‘Restricted Shares’) will be subject to disposal restrictions until all of the following cease to restrict disposals: • • • the Company’s share trading policy; the Corporations Act insider trading provisions; and temporary Specified Disposal Restriction of one (1) year from their date of issue. The Board has discretion to vary awards upwards or downwards, including to nil, in the circumstance that the award would otherwise be likely to be viewed as inappropriate given the circumstances that prevailed over the Measurement Period (such as in the case of harm to the Company’s stakeholders for which participants are accountable). Disposal Restrictions Board Discretion 35 Empire Energy Group Limited Directors’ report – Remuneration report 31 December 2022 3.2 FY23 Short-Term Variable Remuneration (‘STVR’) Plan EEG intends to apply the following KPIs and weightings - at Target -in relation to FY23 to provide a sharper focus on operational expectations: • NT Work Program – 50% • Cost management and funding coverage for activities – 35% • Management of US Assets – 5% Individual Effectiveness – 10% • 3.3 FY22 Long-Term Variable Remuneration (‘LTVR’) Plan A description of the LTVR plan, which is operated under the EEGLRP, is set out below: Purpose The purpose of LTVR is to create a strong link between performance and reward for senior executives over the long-term and to align the interests of Participants with those of stakeholders through share ownership and performance testing. Measurement Period 1 January 2022 to 31 December 2024 (3 years). Grant Calculation The number of Rights in a Tranche of LTVR to be granted are calculated via the application of the following formula: Target LTVR $ x Tranche Weight at Target ÷ Right Value ÷ % Vesting at Target where Right Value is the 2021 Volume-weighted average price (‘VWAP’) of $0.336 Opportunity and Grant Value MD Opportunity as % of Fixed Pay Target 40% Stretch 80% Based on the Right Value of $0.336, the maximum/stretch level of grants made to KMP disclosed in this report in respect of FY22 LTVR for the Managing Director, Alex Underwood was 1,451,409 Performance Rights. Instrument The LTVR is in the form of Performance Rights with a nil Exercise Price, which are subject to performance and service vesting conditions. Performance Metrics and Weightings The Board has discretion to set Vesting Conditions for each tranche of each Invitation. For FY22 LTVR grants, the following Vesting Conditions were altered to reflect market practice and recognition of the significant value to shareholders if the Stretch target is achieved: Tranche 1 (75% weight at Target) is to be subject to an Absolute Total Shareholder Return (‘ATSR’) vesting condition. The vesting of such Performance Rights will be determined by comparing the Company’s TSR over FY22 to FY24 according to the following vesting scale: Table 2 Performance Level Stretch Between Target and Stretch Target Between Threshold and Target Threshold Below Threshold Empire Energy's Absolute TSR (per annum) ≥ 30% > 15% & < 40% = 25% > 10% & < 15% = 10% < 10% % of Tranche Vesting 100% Pro-rata 50% Pro-rata 25% 0% 36 Empire Energy Group Limited Directors’ report – Remuneration report 31 December 2022 SR is the sum of Share Price appreciation and dividends (assumed to be reinvested in Shares) during the Measurement Period. It is annualised for the purpose of the above vesting scale. The TSR of the Company over the Measurement Period will be calculated and converted to a compound annual growth rate (‘CAGR’) value for the purpose of assessment against this scale. During periods of nil dividends being declared, TSR is equal to the change in Share Price. The Board is aware that some investors prefer relative TSR over absolute TSR due to the potential of impact of broad market windfall gains and losses. The Board has set the TSR objectives sufficiently high such that vesting would not be expected to occur in relation to broad market movements alone. This metric was selected in this year and past years because the Board views that this is the best measure of long-term value creation for shareholders at this stage of Empire’s strategy. Tranche 2 (25% weight at Target) is to be subject to the Board’s determination of whether material value has been added to the Company’s assets through delivering on the Company’s strategy, including but not limited to exploration results, increasing reserves, operating cash flow and production rates. This metric was selected in this and past years because the Board views that this is the best measure of long-term value creation for shareholders at this stage of EEG’s strategy particularly when the Company held significant producing assets in the USA as well as exploration opportunities in Australia. The Board reviews these metrics annually. Gates A 'Gate' of no major health, safety or environmental incidents occurring during the measurement period applies. A Gate is a performance hurdle which must be satisfied before any Performance Rights can vest. Settlement The Rights are “Indeterminate Rights” which may be settled in the form of a Company Share, or cash equivalent, upon valid exercise. Term and Lapse The Term of the Performance Rights are 15 years from the Grant Date. If not exercised within the term, the Performance Rights will lapse. Service Condition and Cessation of Employment Under the Rules, in addition to the performance conditions, continued service during the Measurement Period is a requirement for all Rights to become eligible to vest. On termination, a portion of Performance Rights granted in the financial year in which the termination occurs will be forfeited. The proportion that will be forfeited will be equal to the remainder of the financial year following the termination as a proportion of the full financial year. This provision recognises that grants of Performance Rights are part of the remuneration for the year of grant and that if part of the year is not served then some of the Performance Rights will not have been earned. Measurement Period Modifier The EEGLRP Rules allow for the Measurement Period to be extended by 12 months, if an executive is still employed, and nil vesting occurred at the first test. The start of the Measurement Period would not be affected by this, and modification of the Measurement Period can only apply to vesting scales that are expressed on an annualised basis, which ensures the adjustment does not make vesting easier (i.e. will not apply to milestone conditions, only TSR). The Measurement Period would be extended from three years to four years. The purpose of this feature is to address short-term anomalies that arise at the relevant calculation points, and to motivate management to strive for improvement if the long-term incentive (‘LTI’) fails to vest at the end of the Measurement Period. 37 Empire Energy Group Limited Directors’ report – Remuneration report 31 December 2022 Cessation of Employment Unvested Performance Rights held at the date of termination and granted in the financial year of the termination will be forfeited in the proportion that the remainder of the financial year following the termination bears to the full financial year, unless otherwise determined by the Board. Corporation Actions All other unvested Performance Rights will be retained for possible vesting based on performance during the Measurement Period, to be assessed following the completion of the Measurement Period. If at the time of vesting subsequent to termination of employment the share price is lower than at the date of cessation of employment the value of the Rights will be paid in cash only, not Shares, unless otherwise determined by the Board. Change of Control In the event of a Change of Control: • Unvested Performance Rights granted in the financial year of the Change of Control will lapse in proportion that the remainder of the financial year bears to the full financial year, For all remaining unvested Performance Rights, the number of Performance Rights to vest will be determined by the number of unvested Performance Rights multiplied by the change in share price at the commencement of the Measurement Period and the share price at Change of Control. • Major Return of Capital to Shareholders In the event of a major return of capital to shareholders, the Board has discretion to determine how unvested Performance Rights will be dealt with. Board Discretion The Board retains discretion to increase or decrease, including to nil, the vesting percentage in relation to each Tranche of Performance Rights if it forms the view that it is appropriate to do so given the circumstances that prevailed during the Measurement Period. 3.4 FY22 Non-Executive Director (‘NED’) Remuneration 3.4.1 Fee Policy The following outlines the principles that EEG applies to governing NED remuneration: Fee Policy Remuneration of Non-executive Directors the Board based on recommendations from the Remuneration Committee and the maximum amount approved by shareholders from time to time. Non-executive Directors can participate in the Share Rights Plan. is determined by The Board undertakes an annual review of its performance and the performance of the Board Committees against performance goals set. Details of the nature and amount of each element of the remuneration of each Director and key management personnel are set out in the following tables: The following table outlines the current Fee Policy: Role/Function Main Board All Committees Chair Member $90,000 $60,000 $10,000 $5,000 Fees are exclusive of superannuation. Note: Non-executive Directors are also reimbursed for reasonable out-of-pocket expenses that are directly related to EEG’s business. Equity grants, if any, are deducted from the foregoing fees. 38 Empire Energy Group Limited Directors’ report – Remuneration report 31 December 2022 Aggregate Board Fees The total amount of fees paid to Non-executive Directors in FY22 is within the aggregate fee limit of $400,000 which was last approved by shareholders on 30 May 2019. Grants of equity approved by shareholders are excluded from counting towards the aggregate Board Fees, in accordance with the ASX Listing Rules. 3.4.2 FY22 NED Equity Grants A description of the terms of the NED equity grants for FY22 is described below: Purpose The purpose of NED equity grants in FY22 is to allow Non-executive Directors to exchange cash Board Fees for grants of equity in respect of FY22 remuneration. Opportunity NEDs may elect to receive up to 100% of their Board Fees excluding superannuation in lieu of cash payment. Instrument The FY22 NED Equity Plan grant is to be in the form of Restricted Rights. Price and Exercise Price The Price is nil, because it forms part of the remuneration of the Participant, however grants are generally based on an agreement to forego cash Board Fees. The Exercise Price is nil. Allocation method The Rights are valued using the following method: Right Value = Share Price – (Dividends expected to be lost before first exercise date) The Number of Rights to be granted = Sacrificed $ ÷ Right Value Vesting Conditions, Exercise Restrictions Disposal Restriction Share Price = 3-month Volume Weighted Average Price during each quarter In order to ensure NED independence is not compromised, and to recognise that the instruments are an alternative to cash remuneration, the Rights are not subject to any vesting conditions. Rights may not be exercised within 90 days of the Grant Date. The Director Fee Restricted Rights may not be disposed of at any time, but can be exercised following vesting, up to the end of their Term. Shares acquired on exercise of vested Director Fee Restricted Rights (‘Restricted Shares’) will be subject to disposal restrictions until all of the following cease to restrict disposals: the Company’s share trading policy; a) b) the Corporations Act insider trading provisions; and c) Specified Disposal Restriction of one (1) year from their date of issue. Term and Lapse Director Fee Restricted Rights will have a term of 15 years and if not exercised within the term the Rights will lapse. On exercise, each Director Fee Restricted Right will convert into one ordinary share. Fraud, Gross Misconduct etc. In the event that the Board forms the opinion that a Director has committed an act of fraud, defalcation or gross misconduct in relation to the Company, the Director will forfeit all unvested Director Fee Restricted Rights. 39 Empire Energy Group Limited Directors’ report – Remuneration report 31 December 2022 4 The Link Between Performance and Reward in FY22 4.1 FY22 STVR Outcomes The STVR plan is designed to reward executives for the achievement against annual performance objectives set by the Board at the beginning of the performance period. The payment of an STVR is dependent on the delivery of performance against a range of outcome metrics. The performance metrics and outcomes of assessment against those metrics are summarised below: Table 3 FY22 Business/Group Performance Scorecard Outcomes Metric/Measure Target Weighting Outcome (% of Target) Weighted Outcome (% of Target) NT Work Program Stretch targets exceeded including drilling and fracture stimulating the longest horizontal section in the history of the Beetaloo with C-3H, the fracture stimulation of C-2H and the drilling of C-4V on time and under budget. Flow testing also commenced. Cost management and Funding coverage All field activities completed on time and under budget. Corporate overheads within budget and cash balance kept above required level US Assets US assets operated at budget with improving HSE trend. Individual Performance Several growth options delivered. Relationships with Traditional owners, pastoralists and government officials maintained at high level. 50% 150% 75% 30% 100% 30% 10% 50% 5% 10% 100% 10% Total 100% 120% Overall STVR outcomes for FY22 are determined through the Board’s assessment of the Business and Individual Outcomes, as outlined below: Table 4 Executive KMP Alex Underwood Opportunity as % of Fixed Pay Maximum STVR Target STVR STVR Outcome as % of Target Total STVR Awarded ($) Cash ($) Restricted Rights ($) % Maximum STVR Awarded % Forfeited % 37.5% 25% 120% $129,600 $129,600 N/A N/A N/A 40 Empire Energy Group Limited Directors’ report – Remuneration report 31 December 2022 4.2 Recent LTVR Outcomes The LTVR that vested to executives in respect of the completed FY22 reporting period was granted in FY20, and may be summarised as follows (noting that the FY20 LTVR grant was issued under the same terms and conditions as the FY22 LTVR plan outlined in section 3.3): Instrument Performance Rights under the EEGLRP. Measurement Period Managing Director: 1 January 2020 – 31 December 2022 (3-year Measurement Period) Chief Operating Officer: 1 January 2020 – 31 December 2022 (3-year Measurement Period) Performance Metrics and Weightings Tranche 1 (75% weight at Target) is to be subject to an Absolute Total Shareholder Return (‘ATSR’) vesting condition. The vesting of such Performance Rights will be determined by comparing the Company’s TSR over the Measurement Period according to the following vesting scale: Performance Level Stretch Between Target and Stretch Target Between Threshold and Target Threshold Below Threshold Empire Energy's Absolute TSR (per annum) ≥ 40% > 25% & < 40% = 25% > 10% & < 25% = 10% < 10% % of Tranche Vesting 100% Pro-rata 50% Pro-rata 25% 0% TSR is the sum of Share Price appreciation and dividends (assumed to be reinvested in Shares) during the Measurement Period. It is annualised for the purpose of the above vesting scale. The TSR of the Company over the Measurement Period will be calculated and converted to a compound annual growth rate (‘CAGR’) value for the purpose of assessment against this scale. During periods of nil dividends being declared, TSR is equal to the change in Share Price. Tranche 2 (25% weight at Target) is to be subject to the Board’s determination of whether material value has been added to the Company’s assets through delivering on the Company’s strategy, including exploration results, increasing reserves, operating cash flow and production rates. Gate A 'Gate' of no major health, safety or environmental incidents occurring during the measurement period applies. A Gate is a performance hurdle that must be satisfied before any Performance Rights can vest. Performance Outcome and Vesting Determination The Board has assessed that the performance vesting conditions and exercised its discretion to extend the Tranche 1 vesting period for the Tranche 1 Performance Rights by a further 12 months to 31 December. These Tranche 1 Performance Rights remain unvested at 31 December 2022. The Board has also assessed that the vesting conditions for Tranche 2 were met and as a result, 100% vesting applies in respect of the Tranche 2 Performance Rights issued. Board Discretions Applied The Board exercised its discretion under the Empire Energy Group Limited Rights Plan to extend the measure period for Tranche 1 performance rights issued in 2020 by a further 12 months to 31 December 2023. Settlement Rights are not exercised automatically upon vesting. The Rights are “Indeterminate Rights” which may be settled in the form of a share, or cash equivalent, upon valid exercise. 41 Empire Energy Group Limited Directors’ report – Remuneration report 31 December 2022 Table 5 Role Tranche g n i t h g i e W No. Eligible To Vest In Reporting Period for FY22 perform- ance Target Perform- ance Actual Outcome % of Tranche Vested Number Vested Grant Date Valua tion $ Value of LTVR that Vested (as per Grant Date Valuat- ion) Realisable Value (Number x Vesting Date SP net of Exercise Price) Absolute TSR The Board used its discretion to extend the vesting measurement period to 31 December 2023 MD CFO Milestones 25% 203,847 Board Discretion Board Discretion 25% 203,847 7/8/20 $15,116 $40,769 For FY22, the Chief Financial Officer was not issued any Performance Rights 4.3 Achieved Total Remuneration Package for FY22 The following outlines “Achieved” (what became payable, awarded or vested in respect of FY22 performance completed) total remuneration, including the portions of maximum variable remuneration that were awarded or vested, and portions that were forfeited or lapsed as the result of performance assessments that were completed as at the completion of 31 December 2022. Table 6 Name Role(s) Year Fixed Package (incl Super) Total STVR Awarded Following Completion of the Financial Year (cash)* Total STVR Awarded Following Completion of the Financial Year (equity- settled) Value of LTVR that Vested Following Completion of the Measurement Period** Total Remuneration Package (TRP) Gains/Losses on Vested LTVR from Change in Value During Vesting Period*** Alex Underwood Robin Polson (commenced 18/07/2022) MD MD CFO CFO 2022 $430,000 $129,600 $0 $18,346 $577,946 $22,423 2021 $390,000 2022 $325,292 2021 N/A $0 N/A N/A $171,600 $31,509 $593,109 $332,631 $41,250 N/A N/A N/A $190,342 N/A N/A N/A * This is the value of the total STVR/bonus award calculated following the end of the Financial Year. The STVR will be paid in the form of Restricted Rights, subject to Shareholder Approval. ** This is the grant value of the LTVR/Equity that vested in respect of the FY22 performance i.e. the number that vested multiplied by the Black-Scholes value at grant. *** This is the difference between the Black-Scholes value at grant, and the realisable value based on the market value of a share at the time of vesting, for the LTVR that vested immediately following the end of the reporting period. Use of Board Discretion 4.4 During the financial year and to the date of this report, the Board did not exercise its discretions available to it to modify STVR outcomes, vesting or awards. The Board did use its discretion available to it to extend the measurement period for Tranche 1 of the 2020 Performance Rights from 31 December 2022 to 31 December 2023. No other outcomes were modified. 42 Empire Energy Group Limited Directors’ report – Remuneration report 31 December 2022 5 Statutory Tables and Supporting Disclosures 5.1 Executive KMP Statutory Remuneration for FY22 The following table outlines the statutory remuneration of executive KMP: Table 7 Fixed Pay Variable Remuneration Name Roles Year Salary Super Other Benefits *** Total Fixed Pay Cash STVR* Equity- Settled STVR* LTVR** Current Executive KMP Alex Underwood MD MD 2022 $406,432 $24,430 $6,043 $436,905 $129,600 $0 $147,342 2021 $369,469 $23,684 $24,577 $417,730 $110,000 $112,946 $49,766 Mr Robin Polson CFO 2022 $137,500 $11,592 $0 $149,092 $0 $41,250 $0 CFO 2021 N/A N/A N/A N/A N/A N/A N/A Name Roles Year Current Executive KMP Total Remuneration Package (TRP) Variable Remuneration as % TRP Termination Benefits Change in Accrued Leave Alex Underwood MD MD 2022 $713,847 2021 $690,442 Robin Polson CFO 2022 $190,342 CFO 2021 N/A 35% 39% 22% N/A $0 $0 $0 $0 $(8,159) $26,947 $13,330 N/A * Note that the STVR/bonus value reported in this table is the bonus that was paid during the reporting period, being the award earned during the previous period. Variable remuneration outcomes for the reporting period are outlined elsewhere in this report. ** Note that the LTVR/Equity value reported in this table is the amortised accounting charge of all grants that have not lapsed or vested as at the start of the reporting period. Where a market based measure of performance is used such as TSR or share price, no adjustments can be made to reflect actual LTVR vesting. *** Other benefits for Alex Underwood include items such as Fringe Benefit Tax and depreciation associated with motor vehicle running costs. $1,500 per month is deducted from Alex Underwood’s remuneration pre- tax to cover motor vehicle running costs including car parking, fuel, interest etc. 43 Empire Energy Group Limited Directors’ report – Remuneration report 31 December 2022 5.2 Non-executive Director (‘NED’) KMP Statutory Remuneration for FY22 The following table outlines the statutory and audited remuneration of NEDs ($, except where otherwise indicated): Table 8 Name Role(s) Paul Espie AO (a) Prof John Warburton (b) Peter Cleary (c) Louis Rozman Paul Fudge Jacqui Clarke John Gerahty (d) Non-Executive Chairman Non-Executive Chairman Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Alternate Director Alternate Director Non-Executive Director Non-Executive Director Year 2022 2021 - - 2022 $62,500 2021 $50,000 2022 2021 - - 2022 $60,000 2021 $40,205 2022 $55,000 2021 $19,178 2022 2021 2022 $60,913 $19,178 - 2021 $9,589 Board Fees Committ ee Fees Superan nuation Other Benefits Equity Grant * Total - - - - - - - - - - - - - - - - $6,500 $4,875 - - $6,238 $4,084 $5,713 $1,912 $2,563 $1,912 - $911 - - - - - - - - - - - - - - $54,382 $54,382 $74,236 $74,236 - $69,000 $207,000 $261,875 $36,255 $36,255 $56,391 $56,391 - - - - - - - - $66,238 $44,289 $60,713 $21,090 $63,476 $21,090 - $10,500 There were no termination payments made to NEDs. * Share based payments reflect a proportion of the independently valued cost of options granted under the Employee Share Option Plan (‘ESOP’). The cost shown is a non-cash cost and includes, on a pro-rata basis, the independently valued cost of options issued using the Black Scholes methodology. (a) Paul Espie AO has elected to take his Director Fees in Restricted Rights in lieu of a cash payment. The $54,382 was approved at the 2022 Annual General Meeting (‘AGM’) and relates to director fees from July 2021 to June 2022. The $74,236 was approved at the 2021 AGM and relates to director fees from July 2020 to June 2021. (b) Prof Warburton was granted Service Rights during the period and were in connection with a Contract Services Agreement between Prof Warburton and the Company which were approved at the 2020 and 2021 AGMs. This Contract Services Agreement concluded on 31 December 2021. (c) Peter Cleary has elected to take his Director Fees in Restricted Rights in lieu of a cash payment. The $36,255 and $24,540 were approved at the 2022 and 2021 AGMs, respectively and relate to director fees from June 2020 to June 2022. John Gerahty retired as Non-Executive Director on 11 March 2021. (d) 44 Empire Energy Group Limited Directors’ report – Remuneration report 31 December 2022 5.3 KMP Equity Interests and Changes During FY22 Movements in equity interests held by executive KMP during the reporting period, including their related parties, are set out below: Table 9 Name Instru- ment Number Held at Open FY22 Granted FY22 For- feited during FY22 Vested during FY22 FY22 Exercised (or Shares received from Exercising) FY22 Purchase d/ Other FY22 Sold Number Held at Close 2022 Number Number Number Number Number Number Number Number 2,400,000 Date Granted - - 3,377,881 17/06/22 509,198 2,442,714 17/06/22 1,451,409 - - - - - - - - - - - - Alex Under- wood Robin Polson Shares Vested Rights Unvested Rights Options Shares Vested Rights Unvested Rights TOTALS 8,220,595 N/A 1,960,607 - - - - - - - - - - - - - - - - - 150,000 600,000 - - - - - - - - - 2,550,000 3,887,079 3,894,123 (600,000) - - - - - - - 600,000 150,000 (600,000) 10,331,202 Movements in equity interests held by non-executive KMP during the reporting period, including their related parties, are set out below: Table 10 Name Instru- ment Paul Espie AO Prof John Warburton Peter Cleary Louis Rozman Shares Vested Rights Unvested Rights Options Shares Vested Rights Unvested Rights Options Shares Vested Rights Unvested Rights Options Shares Vested Rights Unvested Rights Options Shares Number Held at Open FY22 Number 8,726,271 Granted FY22 Forfeited, vested or exercised during FY22 FY22 Purchased /Other FY22 Sold Number Held at Close 2022 Number Number Number Number Number Date Granted - - 489,057 17/06/2022 165,216 - - - 454,633 1,200,000 - - 590,000 166,202 - - 167,000 - - - 9/09/2022 78,896 - - 9/09/2022 704,546 - - - - - - 9/09/2022 159,091 - 17/06/2022 110,144 9/09/2022 52,597 - - 9/09/2022 227,273 - - - - - - 9/09/2022 227,273 119,894,868 - - 45 - - - - - - - - - - - - - - - - - - 1,409,092 - - - - 318,182 - - - 454,546 - - - 454,546 - - - 20,105,132 - - - - - - - - - - - - - - - - - - 10,135,363 733,169 - 704,546 772,815 1,200,000 - 159,091 1,044,546 328,943 - 227,273 621,546 - - 227,273 140,000,000 Empire Energy Group Limited Directors’ report – Remuneration report 31 December 2022 Name Instru- ment Paul Fudge Jacqui Clarke Unissued Shares Vested Rights Unvested Rights Options Shares Vested Rights Unvested Rights Number Held at Open FY22 Number 20,105,132 - - 8,000,000 - - - TOTALS 159,793,163 Granted FY22 Forfeited, vested or exercised during FY22 FY22 Purchased /Other FY22 Sold Number Held at Close 2022 Date Granted - - - - - - - - Number Number Number Number Number - - - - - - - 1,725,006 - - - - - - - - - - - - - - - (20,105,132) (20,105,132) - - - - - - - - 8,000,000 - - - 22,741,498 (20,105,132) 164,154,565 The following outlines the accounting values and potential future costs of equity remuneration granted during FY22 for executive KMP: Table 11 2022 Equity Grants Name Alex Underwood Tranche Grant Type Vesting Conditions Grant Date Total Value at Grant Value Expensed in FY 22 FY21 STVR Restricted Rights FY22 LTVR Performance Rights FY22 LTVR Performance Rights STVR LTVR LTVR n/a* 17/06/2022 $104,385 $104,385 Absolute TSR Milestones 17/06/2022 $22,642 $11,473 $11,168 17/06/2022 $21,253 $10,770 $10,483 Max Value to be Expensed in Future Years - Note: the minimum value to be expensed in future years for each of the above grants made in FY21 is nil. A reversal of previous expense resulting in a negative expense in the future may occur in the event of an executive KMP departure or failure to meet non market-based conditions including failure for Gate to open. * Pursuant to Section 300A (1)(d) of the Corporations Act, The FY20 STVR Restricted Rights are not subject to the satisfaction of a performance condition as the Restricted Rights have been used to settle short-term awards already subject to performance conditions. 46 Empire Energy Group Limited Directors’ report – Remuneration report 31 December 2022 The following outlines the accounting values and potential future costs of equity remuneration granted during FY22 for Non-executive KMP: Table 12 2022 Equity Grants Name Paul Espie AO Peter Cleary Tranche Grant Type Vesting Conditions Grant Date Total Value at Grant Value Expensed in FY 22 Restricted Rights Restricted Rights Restricted Rights Restricted Rights Fee Sacrifice Fee Sacrifice Fee Sacrifice Fee Sacrifice n/a* n/a* n/a* n/a* 17/06/2022 $33,869 $33,869 9/09/2022 $20,513 $20,513 17/06/2022 $22,579 $22,579 9/09/2022 $13,675 $13,675 Max Value to be Expensed in Future Years - - - - Note: the minimum value to be expensed in future years for each of the above grants made in FY22 is nil. A reversal of previous expense resulting in a negative expense in the future may occur in the event of a NED departure or failure to meet non market-based conditions. * Pursuant to Section 300A (1)(d) of the Corporations Act, The Restricted Rights to Paul Espie and Peter Cleary are not subject to the satisfaction of a performance condition as the Restricted Rights have been granted in lieu of cash payments for the fulfilment of their roles as Non-Executive Directors. 5.4 KMP Service Agreements 5.4.1 Executive KMP Service Agreements The following outlines current executive KMP service agreements: Table 13 Name Position Held at Close of FY22 Employing Company Duration of Contract Period of Notice From Company From KMP Alex Underwood Managing Director Empire Energy Group Limited Robin Polson Chief Financial Officer Empire Energy Group Limited Permanent Permanent 12 months 12 months 3 months 3 months Termination Payments* 12 months of salary in lieu of notice 3 months of salary in lieu of notice * Note: Under the Corporations Act the Termination Benefit Limit is 12 months average Salary (over prior three years) unless shareholder approval is obtained. 5.4.2 Non-Executive Directors (‘NEDs’) Service Agreements The appointment of NEDs is subject to a letter of engagement. Under this approach NEDs are not eligible for any termination benefits following termination of their office, nor any payments other than those required under law such as in respect of superannuation. There are no notice periods applicable to either party under this approach. 47 Empire Energy Group Limited Directors’ report – Remuneration report 31 December 2022 5.5 Other Statutory Disclosures 5.5.1 External Remuneration Consultants The Remuneration Committee may engage the assistance and advice of External Remuneration Consultants to provide information on remuneration related matters. During FY22 the Board retained Godfrey Remuneration Group Pty Ltd (‘GRG’) as an External Remuneration Consultant to provide assistance on any remuneration related matters as they arise. During FY22, GRG provided the following services: • Analysis and recommendations regarding executive remuneration in relation to the Managing Director and Direct Reports - $25,000 + GST An agreed set of protocols has been put in place in prior years to ensure that the remuneration recommendations are free from undue influence from KMP. These protocols include requiring that the consultant not communicate with affected KMP without a member of the Remuneration Committee being present or without the authorisation of the Chairman of the Remuneration Committee, and that the consultant not provide any information relating to the outcome of the engagement with the affected KMP. The Board is also required to make inquiries of the consultants’ processes at the conclusion of the engagement to ensure that they are satisfied that any recommendations made have been free from undue influence. The Board is satisfied that these protocols were followed and that there was no undue influence. 5.5.2 Loans to KMP and their related parties During the financial year and to the date of this report, the Company made no loans to directors and other KMP and none were outstanding as at 31 December 2022 (2021: Nil). 5.5.3 Other transactions with KMP Certain directors and KMP, or their personally related entities (‘Related Parties’), hold positions in other entities that result in them having control or significant influence over the financial or operating policies of those entities. A number of these entities transacted with the Company in the FY22 reporting periods. The terms and conditions of the transactions were no more favourable than those available, or which might reasonably be expected to be available, on similar transactions with unrelated entities on an arms-length basis. The following transactions occurred with entities controlled by Related Parties: Related Party Paul Espie AO Related Entity Non-Executive Director Transactions Payment for marketing services to Menzies Research Centre Limited (director-related entity of Chairman Paul Espie AO) End of Audited Remuneration Report 48 To the Board of Directors of Empire Energy Group Limited Level 5, 6-10 O’Connell Street SYDNEY NSW 2000 Auditor’s Independence Declaration under section 307C of the Corporations Act 2001 As lead audit director for the audit of the financial statements of Empire Energy Group Limited for the financial year ended 31 December 2022, I declare that to the best of my knowledge and belief, there have been no contraventions of: (a) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (b) any applicable code of professional conduct in relation to the audit. Yours sincerely Nexia Sydney Audit Pty Ltd Joseph Santangelo Director Date: 28 March 2023 49 Empire Energy Group Limited Consolidated statement of profit or loss and other comprehensive income For the year ended 31 December 2022 Revenue Cost of sales Gross profit Other income Interest revenue calculated using the effective interest method Expenses Exploration expenses General and administration expenses Asset acquisition completion costs Other expenses Finance costs Loss before income tax expense Income tax expense Loss after income tax expense for the year attributable to the owners of Empire Energy Group Limited Other comprehensive income/(loss) Items that may be reclassified subsequently to profit or loss Foreign currency translation Other comprehensive income/(loss) for the year, net of tax Total comprehensive loss for the year attributable to the owners of Empire Energy Group Limited Basic earnings per share Diluted earnings per share Consolidated Note 2022 $ 2021 $ 5 6 7 7 8 9 9 13,722,333 (5,960,674) 7,761,659 8,502,389 (5,005,174) 3,497,215 258,613 21,360 1,592,345 13,322 (2,175,882) (7,990,121) - (1,359,783) (2,280,524) (1,770,790) (7,673,097) (2,146,971) (2,353,926) (1,992,968) (5,764,678) (10,834,870) (238,528) (212,739) (6,003,206) (11,047,609) (121,182) 124,582 (121,182) 124,582 (6,124,388) (10,923,027) Cents Cents (0.86) (0.86) (2.41) (2.41) The above consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes 50 Empire Energy Group Limited Consolidated statement of financial position As at 31 December 2022 Assets Current assets Cash and cash equivalents Trade and other receivables Prepayments Inventories Derivative financial instruments Total current assets Non-current assets Derivative financial instruments Oil and gas properties Property, plant and equipment Exploration and evaluation assets Right-of-use assets Intangibles Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Borrowings Lease liabilities Provisions Total current liabilities Non-current liabilities Lease liabilities Provisions Total non-current liabilities Total liabilities Net assets Equity Contributed equity Contributed equity - unissued Reserves Accumulated losses Total equity Consolidated Note 2022 $ 2021 $ 10 11 12 12 13 14 15 16 17 18 19 20 21 20 21 21,880,311 9,683,019 564,022 66,361 96,410 32,290,123 25,649,699 5,359,851 267,624 44,604 244,171 31,565,949 - 36,611,612 608,774 127,039,687 999,606 100,689 106,360 34,899,982 553,413 90,849,806 752,993 94,015 165,360,368 127,256,569 197,650,491 158,822,518 18,469,820 7,822,908 399,195 252,424 26,944,347 11,568,698 8,027,261 439,926 213,482 20,249,367 608,977 36,489,377 37,098,354 389,341 28,863,656 29,252,997 64,042,701 49,502,364 133,607,790 109,320,154 22 22 23 255,945,973 220,905,029 5,629,437 9,520,152 (132,737,670) (126,734,464) - 10,399,487 133,607,790 109,320,154 The above consolidated statement of financial position should be read in conjunction with the accompanying notes 51 Empire Energy Group Limited Consolidated statement of changes in equity For the year ended 31 December 2022 Consolidated Issued Capital $ Unissued Shares $ Reserves $ Accumulated losses $ Total equity $ Balance at 1 January 2021 139,060,493 - - - - 6,862,086 (115,686,855) 30,235,724 - (11,047,609) (11,047,609) 124,582 - 124,582 124,582 (11,047,609) (10,923,027) - - - 83,702,870 5,629,437 (1,858,334) - - - - - 2,533,484 - - - 89,332,307 (1,858,334) 2,533,484 Balance at 31 December 2021 220,905,029 5,629,437 9,520,152 (126,734,464) 109,320,154 Consolidated Issued Capital $ Unissued Shares $ Reserves $ Accumulated losses $ Total equity $ Balance at 1 January 2022 220,905,029 5,629,437 9,520,152 (126,734,464) 109,320,154 Loss after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income/(loss) for the year Transactions with owners in their capacity as owners: Issue of ordinary shares Less: share issue transaction costs Share-based payments (note 35) Loss after income tax expense for the year Other comprehensive loss for the year, net of tax Total comprehensive loss for the year Transactions with owners in their capacity as owners: Contributions of equity, net of transaction costs (note 22) Share-based payments (note 35) - - - - - - - (6,003,206) (6,003,206) (121,182) - (121,182) (121,182) (6,003,206) (6,124,388) Balance at 31 December 2022 255,945,973 10,399,487 (132,737,670) 133,607,790 35,040,944 (5,629,437) - - 1,000,517 - - 29,411,507 1,000,517 - - The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes 52 Empire Energy Group Limited Consolidated statement of cash flows For the year ended 31 December 2022 Cash flows from operating activities Receipts from customers (inclusive of GST) Payments to suppliers and employees (inclusive of GST) Government grants Interest received Interest and other finance costs paid Income taxes paid Consolidated Note 2022 $ 2021 $ 10,693,582 (19,998,504) 15,323,024 21,360 (700,644) (238,528) 8,140,099 (15,183,614) 5,363,923 13,322 (580,885) (212,739) Net cash from/(used in) operating activities 36 5,100,290 (2,459,894) Cash flows from investing activities Payments for property, plant and equipment Payments for exploration and evaluation assets Payments for oil and gas properties Payments for acquisition of assets completion costs Net cash used in investing activities Cash flows from financing activities Net proceeds from issue of shares Rrepayments of interest-bearing liabilities Repayment of lease liabilities Net cash from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Effects of exchange rate changes on cash and cash equivalents 14 15 22 (229,274) (37,356,304) - - (249,779) (9,680,824) (12,965,477) (1,546,991) (37,585,578) (24,443,071) 29,411,507 (811,808) (223,159) 39,358,821 (456,750) (360,566) 28,376,540 38,541,505 (4,108,748) 25,649,699 339,360 11,638,540 14,145,866 (134,707) Cash and cash equivalents at the end of the financial year 21,880,311 25,649,699 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes 53 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 1. General information The financial statements cover Empire Energy Group Limited as a Group consisting of Empire Energy Group Limited and the entities it controlled at the end of, or during, the year. The financial statements are presented in Australian dollars, which is Empire Energy Group Limited's functional and presentation currency. Empire Energy Group Limited is a listed public company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is: Level 5 6 - 10 O’Connell Street Sydney NSW 2000 A description of the nature of the Group's operations and its principal activities are included in the Directors' report, which is not part of the financial statements. The financial statements were authorised for issue, in accordance with a resolution of Directors, on 28 March 2023. The Directors have the power to amend and reissue the financial statements. Note 2. Significant accounting policies The principal accounting policies adopted in the preparation of the financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. New or amended Accounting Standards and Interpretations adopted The Group has adopted all of the new or amended Accounting Standards and Interpretations issued by the Australian Accounting Standards Board ('AASB') that are mandatory for the current reporting period. Any new or amended Accounting Standards or Interpretations that are not yet mandatory have not been early adopted. Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board ('AASB') and the Corporations Act 2001, as appropriate for for-profit oriented entities. These financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board ('IASB'). Historical cost convention The financial statements have been prepared under the historical cost convention, except for, where applicable, the revaluation of financial assets and liabilities at fair value through profit or loss, financial assets at fair value through other comprehensive income, investment properties, certain classes of property, plant and equipment and derivative financial instruments. Critical accounting estimates The preparation of the financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 3. Parent entity information In accordance with the Corporations Act 2001, these financial statements present the results of the Group. Supplementary information about the parent entity is disclosed in note 33. Principles of consolidation The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Empire Energy Group Limited ('Company' or 'parent entity') as at 31 December 2022 and the results of all subsidiaries for the year then ended. Empire Energy Group Limited and its subsidiaries together are referred to in these financial statements as the 'Group'. 54 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 2. Significant accounting policies (continued) Subsidiaries are all those entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains on transactions between entities in the Group are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. The acquisition of subsidiaries is accounted for using the acquisition method of accounting. A change in ownership interest, without the loss of control, is accounted for as an equity transaction, where the difference between the consideration transferred and the book value of the share of the non-controlling interest acquired is recognised directly in equity attributable to the parent. Where the Group loses control over a subsidiary, it derecognises the assets including goodwill, liabilities and non-controlling interest in the subsidiary together with any cumulative translation differences recognised in equity. The Group recognises the fair value of the consideration received and the fair value of any investment retained together with any gain or loss in profit or loss. Operating segments Operating segments are presented using the 'management approach', where the information presented is on the same basis as the internal reports provided to the Chief Operating Decision Makers ('CODM'). The CODM is responsible for the allocation of resources to operating segments and assessing their performance. Foreign currency translation Foreign currency transactions Foreign currency transactions are translated into the Company's functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at financial year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss. Foreign operations The assets and liabilities of foreign operations are translated into the Company's functional currency using the exchange rates at the reporting date. The revenues and expenses of foreign operations are translated into the Company's functional currency using the average exchange rates, which approximate the rates at the dates of the transactions, for the period. All resulting foreign exchange differences are recognised in other comprehensive income through the foreign currency reserve in equity. The foreign currency reserve is recognised in profit or loss when the foreign operation or net investment is disposed of. Revenue recognition The Group recognises revenue as follows: Revenue from contracts with customers Revenue is recognised at an amount that reflects the consideration to which the Group is expected to be entitled in exchange for transferring goods or services to a customer. For each contract with a customer, the Group: identifies the contract with a customer; identifies the performance obligations in the contract; determines the transaction price which takes into account estimates of variable consideration and the time value of money; allocates the transaction price to the separate performance obligations on the basis of the relative stand-alone selling price of each distinct good or service to be delivered; and recognises revenue when or as each performance obligation is satisfied in a manner that depicts the transfer to the customer of the goods or services promised. 55 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 2. Significant accounting policies (continued) Variable consideration within the transaction price, if any, reflects concessions provided to the customer such as discounts, rebates and refunds, any potential bonuses receivable from the customer and any other contingent events. Such estimates are determined using either the 'expected value' or 'most likely amount' method. The measurement of variable consideration is subject to a constraining principle whereby revenue will only be recognised to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur. The measurement constraint continues until the uncertainty associated with the variable consideration is subsequently resolved. Amounts received that are subject to the constraining principle are recognised as a refund liability. Natural gas revenue Revenue from the sale of natural gas is recognised when natural gas has been delivered to a custody transfer point, contracts exist with customers, control of the assets passes to the purchaser upon delivery, collection of revenue from the sale is reasonably assured, and the sales price is fixed or determinable. Natural gas is sold by the Empire Group under contracts with terms ranging from one month up to the life of the well. Virtually all of the Empire Group contracts' pricing provisions are tied to a market index with certain adjustments based on, among other factors, whether a well delivers to a gathering or transmission line, quality of natural gas and prevailing supply and demand conditions, so that the price of the natural gas fluctuates to remain competitive with other available natural gas suppliers. The timing differences between the delivery of natural gas and the Empire Group's receipt of a delivery statement results in unbilled revenues. These revenues are accrued based upon volumetric data from the Empire Group's records and the Empire Group's estimates of the related transportation and compression fees, which are, in turn, based upon applicable product prices. Oil revenue Revenue from the sale of oil is recognised when control of the asset has been transferred to the buyer and can be measured reliably, which is usually at the time of lifting, transferred into a vessel, pipe or other delivery mechanism. There are no elements of variable consideration in oil contracts with customers and prices are determined based on prevailing market sales price data. Well operations Well operations and pipeline income are recognised when persuasive evidence of an arrangement exists, services have been rendered, collection of revenues is reasonably assured and the sales price is fixed or determinable. The Empire Group is paid a monthly operating fee for each well it operates for outside owners. The fee covers monthly operating and accounting costs, insurance and other recurring costs. The Empire Group might also receive additional compensation for special non-recurring activities, such as reworks and recompletions. Finance income Finance income comprises interest income on funds invested as well as fair value gains on oil and gas derivatives the Group is party to. Interest income is recognised as it accrues, using the effective interest method. Other revenue Other revenue is recognised when it is received or when the right to receive payment is established. Government grants Government grants relating to costs are deferred and recognised in profit or loss over the period necessary to match them with the costs that they are intended to compensate. Government grants related to assets, including non-monetary grants at fair value, are presented in the statement of financial position by deducting the grant in arriving at the carrying amount of the asset. 56 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 2. Significant accounting policies (continued) Income tax The income tax expense or benefit for the period is the tax payable on that period's taxable income based on the applicable income tax rate for each jurisdiction, adjusted by the changes in deferred tax assets and liabilities attributable to temporary differences, unused tax losses and the adjustment recognised for prior periods, where applicable. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to be applied when the assets are recovered or liabilities are settled, based on those tax rates that are enacted or substantively enacted, except for: ● when the deferred income tax asset or liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting nor taxable profits; or ● when the taxable temporary difference is associated with interests in subsidiaries, associates or joint ventures, and the timing of the reversal can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. The carrying amount of recognised and unrecognised deferred tax assets are reviewed at each reporting date. Deferred tax assets recognised are reduced to the extent that it is no longer probable that future taxable profits will be available for the carrying amount to be recovered. Previously unrecognised deferred tax assets are recognised to the extent that it is probable that there are future taxable profits available to recover the asset. Deferred tax assets and liabilities are offset only where there is a legally enforceable right to offset current tax assets against current tax liabilities and deferred tax assets against deferred tax liabilities; and they relate to the same taxable authority on either the same taxable entity or different taxable entities which intend to settle simultaneously. Tax consolidation Empire Energy Group and its wholly-owned Australian resident entities form a tax-consolidated Empire Group. As a consequence, all members of the tax-consolidated Empire Group have been taxed as a single entity since 1 July 2003. The head entity within the tax-consolidated Empire Group is Empire Energy Group Limited. Current tax expense/income, deferred tax liabilities and deferred tax assets arising from temporary differences of the members of the tax-consolidated Empire Group are recognised in the separate financial statements of the members of the tax-consolidated Empire Group using the ‘separate taxpayer within Empire Group’ approach by reference to the carrying amounts of assets and liabilities in the separate financial statements of each entity and the tax values applying under tax consolidation. Any current tax liabilities (or assets) and deferred tax assets arising from unused tax losses of the subsidiaries are assumed by the head entity in the tax-consolidated Empire Group and are recognised by the Empire Group as amounts payable/(receivable) to/from other entities in the tax-consolidated Empire Group in conjunction with any tax funding arrangement amounts (refer below). Any difference between these amounts is recognised by the Empire Group as an equity contribution or distribution. The Empire Group recognises deferred tax assets arising from unused tax losses of the tax consolidated Empire Group to the extent that it is probable that future taxable profits of the tax consolidated Empire Group will be available against which the asset can be utilised. Any subsequent period adjustments to deferred tax assets arising from unused tax losses as a result of revised assessments of the probability of recoverability is recognised by the head entity only. 57 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 2. Significant accounting policies (continued) Nature of tax funding arrangements and tax sharing arrangements The head entity, in conjunction with other members of the tax-consolidated Empire Group, has entered into a tax funding arrangement which sets out the funding obligations of members of the tax-consolidated Empire Group in respect of tax amounts. The tax funding arrangements require payments to/from the head entity equal to the current tax liability/(asset) assumed by the head entity and any tax-loss deferred tax asset assumed by the head entity, resulting in the head entity recognising an inter-entity receivable/(payable) equal in amount to the tax liability/(asset) assumed. The inter-entity receivables/(payables) are at call. Contributions to fund the current tax liabilities are payable as per the tax funding arrangement and reflect the timing of the head entity’s obligation to make payments for tax liabilities to the relevant tax authorities. The head entity in conjunction with other members of the tax-consolidated Empire Group, has also entered into a tax sharing agreement. The tax sharing agreement provides for the determination of the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. No amounts have been recognised in the financial statements in respect of this agreement as payment of any amounts under the tax sharing agreement is considered remote. Current and non-current classification Assets and liabilities are presented in the statement of financial position based on current and non-current classification. An asset is classified as current when: it is either expected to be realised or intended to be sold or consumed in the Group's normal operating cycle; it is held primarily for the purpose of trading; it is expected to be realised within 12 months after the reporting period; or the asset is cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period. All other assets are classified as non-current. A liability is classified as current when: it is either expected to be settled in the Group's normal operating cycle; it is held primarily for the purpose of trading; it is due to be settled within 12 months after the reporting period; or there is no unconditional right to defer the settlement of the liability for at least 12 months after the reporting period. All other liabilities are classified as non-current. Deferred tax assets and liabilities are always classified as non-current. Cash and cash equivalents Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short- term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Trade and other receivables Trade receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less any allowance for expected credit losses. Trade receivables are generally due for settlement within 30 to 90 days. An estimate of expected credit is loss is made based on historic data on collectability and consideration of the credit worthiness of customers. Bad debts are written-off when identified. The Group has applied the simplified approach to measuring expected credit losses, which uses a lifetime expected loss allowance. To measure the expected credit losses, trade receivables have been grouped based on days overdue. Inventories Inventories consists of crude oil, stated at the lower of cost to produce or market and other production supplies intended to be used in natural gas and crude oil operations. 58 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 2. Significant accounting policies (continued) Derivative financial instruments Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at each reporting date. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. Derivatives are classified as current or non-current depending on the expected period of realisation. Cash flow hedges Cash flow hedges are used to cover the Group's exposure to variability in cash flows that is attributable to particular risks associated with a recognised asset or liability or a firm commitment which could affect profit or loss. The effective portion of changes in the fair value of derivatives and other qualifying hedging instruments that are designated and qualify as cash flow hedges is recognised in other comprehensive income and accumulated under the heading of cash flow hedging reserve, limited to the cumulative change in fair value of the hedged item from inception of the hedge. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss, and is included in the ‘other gains and losses’ line item. Amounts previously recognised in other comprehensive income and accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss, in the same line as the recognised hedged item. However, when the hedged forecast transaction results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously recognised in other comprehensive income and accumulated in equity are removed from equity and included in the initial measurement of the cost of the non-financial asset or non-financial liability. This transfer does not affect other comprehensive income. Furthermore, if the Group expects that some or all of the loss accumulated in the cash flow hedging reserve will not be recovered in the future, that amount is immediately reclassified to profit or loss. The Group discontinues hedge accounting only when the hedging relationship (or a part thereof) ceases to meet the qualifying criteria (after rebalancing, if applicable). This includes instances when the hedging instrument expires or is sold, terminated or exercised. The discontinuation is accounted for prospectively. Any gain or loss recognised in other comprehensive income and accumulated in cash flow hedge reserve at that time remains in equity and is reclassified to profit or loss when the forecast transaction occurs. When a forecast transaction is no longer expected to occur, the gain or loss accumulated in the cash flow hedge reserve is reclassified immediately to profit or loss. Property, plant and equipment Property, plant and equipment is stated at historical cost less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is calculated on a straight-line basis to write off the net cost of each item of property, plant and equipment (excluding land) over their expected useful lives as follows: Plant and building Equipment Motor vehicles 40 years 5 years 5 year The residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each reporting date. Leasehold improvements are depreciated over the unexpired period of the lease or the estimated useful life of the assets, whichever is shorter. An item of property, plant and equipment is derecognised upon disposal or when there is no future economic benefit to the Group. Gains and losses between the carrying amount and the disposal proceeds are taken to profit or loss. 59 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 2. Significant accounting policies (continued) Oil and gas properties Oil and gas properties are stated at cost, less accumulated depreciation and accumulated impairment losses. Oil and natural gas exploration and development expenditure is accounted for using the successful efforts method of accounting for gas producing activities. Costs to acquire mineral interests in gas properties, drill and equip exploratory wells that find proved reserves, and drill and equip development wells and related asset retirement costs are capitalised. Depletion is based on cost less estimated salvage value using the unit- of-production method. The process of estimating and evaluating gas reserves is complex, requiring significant decisions in the evaluation of geological, geophysical, engineering and economic data. Costs to drill exploratory wells that do not find proved reserves, geological and geophysical costs, and costs of carrying and retaining unproved properties are expensed. Major maintenance and repairs Expenditure on major maintenance refits or repairs comprises the cost of replacement assets or parts of assets, inspection costs and overhaul costs. Where an asset or part of an asset that was separately depreciated and is now written off is replaced and it is probable that future economic benefits associated with the item will flow to the Empire Group, the expenditure is capitalised. Where part of the asset was not separately considered as a component, the replacement value is used to estimate the carrying amount of the replaced assets which is immediately written off. Exploration assets Mineral exploration and evaluation expenditure is written off as incurred or accumulated in respect of each identifiable area of interest and capitalised. These costs are carried forward only if they relate to an area of interest for which rights of tenure are current and in respect of which: ● ● such costs are expected to be recouped through the successful development and exploitation of the area of interest, or alternatively by its sale; or exploration and/or evaluation activities in the area have not reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves and active or significant operations in, or in relation to, the area of interest are continuing. In the event that an area of interest is abandoned or if the Directors consider the expenditure to be of reduced value, accumulated costs carried forward are written off during the period in which that assessment is made. A regular review is undertaken of each area of interest to determine the appropriateness of continuing to carry forward costs in relation to that area of interest. Immediate restoration, rehabilitation and environmental costs necessitated by exploration and evaluation activities are expensed as incurred and treated as exploration and evaluation expenditure. Exploration activities resulting in future obligations in respect of restoration costs result in a provision to be made by capitalising the estimated costs, on a discounted cash basis, of restoration and depreciating over the useful life of the asset. Right-of-use assets A right-of-use asset is recognised at the commencement date of a lease. The right-of-use asset is measured at cost, which comprises the initial amount of the lease liability, adjusted for, as applicable, any lease payments made at or before the commencement date net of any lease incentives received, any initial direct costs incurred, and, except where included in the cost of inventories, an estimate of costs expected to be incurred for dismantling and removing the underlying asset, and restoring the site or asset. Right-of-use assets are depreciated on a straight-line basis over the unexpired period of the lease or the estimated useful life of the asset, whichever is the shorter. Where the Group expects to obtain ownership of the leased asset at the end of the lease term, the depreciation is over its estimated useful life. Right-of use assets are subject to impairment or adjusted for any remeasurement of lease liabilities. The Group has elected not to recognise a right-of-use asset and corresponding lease liability for short-term leases with terms of 12 months or less and leases of low-value assets. Lease payments on these assets are expensed to profit or loss as incurred. 60 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 2. Significant accounting policies (continued) Intangible assets Goodwill Goodwill arises on the acquisition of a business. Goodwill is not amortised. Instead, goodwill is tested annually for impairment, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Impairment losses on goodwill are taken to profit or loss and are not subsequently reversed. Impairment of non-financial assets Goodwill and other intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other non-financial assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset's fair value less costs of disposal and value-in-use. The value- in-use is the present value of the estimated future cash flows relating to the asset using a pre-tax discount rate specific to the asset or cash-generating unit to which the asset belongs. Assets that do not have independent cash flows are grouped together to form a cash-generating unit. Trade and other payables Trade and other payables represent liabilities for goods and services provided to the Group prior to the end of the financial year and which are unpaid. Due to their short-term nature they are measured at amortised cost and are not discounted. The amounts are unsecured and are usually paid within 30 days of recognition. Borrowings Loans and borrowings are initially recognised at the fair value of the consideration received, net of transaction costs. They are subsequently measured at amortised cost using the effective interest method. Lease liabilities A lease liability is recognised at the commencement date of a lease. The lease liability is initially recognised at the present value of the lease payments to be made over the term of the lease, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group's incremental borrowing rate. Lease payments comprise of fixed payments less any lease incentives receivable, variable lease payments that depend on an index or a rate, amounts expected to be paid under residual value guarantees, exercise price of a purchase option when the exercise of the option is reasonably certain to occur, and any anticipated termination penalties. The variable lease payments that do not depend on an index or a rate are expensed in the period in which they are incurred. Lease liabilities are measured at amortised cost using the effective interest method. The carrying amounts are remeasured if there is a change in the following: future lease payments arising from a change in an index or a rate used; residual guarantee; lease term; certainty of a purchase option and termination penalties. When a lease liability is remeasured, an adjustment is made to the corresponding right-of use asset, or to profit or loss if the carrying amount of the right-of-use asset is fully written down. Finance costs Finance costs attributable to qualifying assets are capitalised as part of the asset. All other finance costs are expensed in the period in which they are incurred. Provisions Provisions are recognised when the Group has a present (legal or constructive) obligation as a result of a past event, it is probable the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the reporting date, taking into account the risks and uncertainties surrounding the obligation. If the time value of money is material, provisions are discounted using a current pre-tax rate specific to the liability. The increase in the provision resulting from the passage of time is recognised as a finance cost. 61 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 2. Significant accounting policies (continued) Employee benefits Short-term employee benefits Liabilities for wages and salaries, including non-monetary benefits, annual leave and long service leave expected to be settled wholly within 12 months of the reporting date are measured at the amounts expected to be paid when the liabilities are settled. Other long-term employee benefits The liability for annual leave and long service leave not expected to be settled within 12 months of the reporting date are measured at the present value of expected future payments to be made in respect of services provided by employees up to the reporting date. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on high quality corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Share-based payments Equity-settled and cash-settled share-based compensation benefits are provided to employees. Equity-settled transactions are awards of shares, or options over shares, that are provided to employees in exchange for the rendering of services. Cash-settled transactions are awards of cash for the exchange of services, where the amount of cash is determined by reference to the share price. The cost of equity-settled transactions are measured at fair value on grant date. Fair value is independently determined using either the Black-Scholes option pricing model that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the option, together with non-vesting conditions that do not determine whether the Group receives the services that entitle the employees to receive payment. No account is taken of any other vesting conditions. The cost of equity-settled transactions are recognised as an expense with a corresponding increase in equity over the vesting period. The cumulative charge to profit or loss is calculated based on the grant date fair value of the award, the best estimate of the number of awards that are likely to vest and the expired portion of the vesting period. The amount recognised in profit or loss for the period is the cumulative amount calculated at each reporting date less amounts already recognised in previous periods. The cost of cash-settled transactions is initially, and at each reporting date until vested, determined by applying either the Black-Scholes option pricing model, taking into consideration the terms and conditions on which the award was granted. The cumulative charge to profit or loss until settlement of the liability is calculated as follows: ● during the vesting period, the liability at each reporting date is the fair value of the award at that date multiplied by the expired portion of the vesting period. from the end of the vesting period until settlement of the award, the liability is the full fair value of the liability at the reporting date. ● All changes in the liability are recognised in profit or loss. The ultimate cost of cash-settled transactions is the cash paid to settle the liability. Market conditions are taken into consideration in determining fair value. Therefore any awards subject to market conditions are considered to vest irrespective of whether or not that market condition has been met, provided all other conditions are satisfied. If equity-settled awards are modified, as a minimum an expense is recognised as if the modification has not been made. An additional expense is recognised, over the remaining vesting period, for any modification that increases the total fair value of the share-based compensation benefit as at the date of modification. 62 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 2. Significant accounting policies (continued) If the non-vesting condition is within the control of the Group or employee, the failure to satisfy the condition is treated as a cancellation. If the condition is not within the control of the Group or employee and is not satisfied during the vesting period, any remaining expense for the award is recognised over the remaining vesting period, unless the award is forfeited. If equity-settled awards are cancelled, it is treated as if it has vested on the date of cancellation, and any remaining expense is recognised immediately. If a new replacement award is substituted for the cancelled award, the cancelled and new award is treated as if they were a modification. Fair value measurement When an asset or liability, financial or non-financial, is measured at fair value for recognition or disclosure purposes, the fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; and assumes that the transaction will take place either: in the principal market; or in the absence of a principal market, in the most advantageous market. Fair value is measured using the assumptions that market participants would use when pricing the asset or liability, assuming they act in their economic best interests. For non-financial assets, the fair value measurement is based on its highest and best use. Valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, are used, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. Assets and liabilities measured at fair value are classified into three levels, using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. Classifications are reviewed at each reporting date and transfers between levels are determined based on a reassessment of the lowest level of input that is significant to the fair value measurement. For recurring and non-recurring fair value measurements, external valuers may be used when internal expertise is either not available or when the valuation is deemed to be significant. External valuers are selected based on market knowledge and reputation. Where there is a significant change in fair value of an asset or liability from one period to another, an analysis is undertaken, which includes a verification of the major inputs applied in the latest valuation and a comparison, where applicable, with external sources of data. Issued capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Earnings per share Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to the owners of Empire Energy Group Limited, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the financial year. Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of additional ordinary shares that would have been outstanding assuming conversion of all dilutive potential ordinary shares. Goods and Services Tax ('GST') and other similar taxes Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the tax authority. In this case it is recognised as part of the cost of the acquisition of the asset or as part of the expense. 63 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 2. Significant accounting policies (continued) Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the tax authority is included in other receivables or other payables in the statement of financial position. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the tax authority, are presented as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the tax authority. New Accounting Standards and Interpretations not yet mandatory or early adopted Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet mandatory, have not been early adopted by the Group for the annual reporting period ended 31 December 2022. The Group has not yet assessed the impact of these new or amended Accounting Standards and Interpretations. Note 3. Critical accounting judgements, estimates and assumptions The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other various factors, including expectations of future events, management believes to be reasonable under the circumstances. The resulting accounting judgements and estimates will seldom equal the related actual results. The judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities (refer to the respective notes) within the next financial year are discussed below. Estimation of useful lives of assets The Group determines the estimated useful lives and related depreciation and amortisation charges for its property, plant and equipment and finite life intangible assets. The useful lives could change significantly as a result of technical innovations or some other event. The depreciation and amortisation charge will increase where the useful lives are less than previously estimated lives, or technically obsolete or non-strategic assets that have been abandoned or sold will be written off or written down. Impairment of non-financial assets other than goodwill and other indefinite life intangible assets The Group assesses impairment of non-financial assets other than goodwill and other indefinite life intangible assets at each reporting date by evaluating conditions specific to the Group and to the particular asset that may lead to impairment. If an impairment trigger exists, the recoverable amount of the asset is determined. This involves fair value less costs of disposal or value-in-use calculations, which incorporate a number of key estimates and assumptions. Income tax The Group is subject to income taxes in the jurisdictions in which it operates. Significant judgement is required in determining the provision for income tax. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. The Group recognises liabilities for anticipated tax audit issues based on the Group's current understanding of the tax law. Where the final tax outcome of these matters is different from the carrying amounts, such differences will impact the current and deferred tax provisions in the period in which such determination is made. Recovery of deferred tax assets Deferred tax assets are recognised for deductible temporary differences only if the Group considers it is probable that future taxable amounts will be available to utilise those temporary differences and losses. 64 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 3. Critical accounting judgements, estimates and assumptions (continued) Employee benefits provision As discussed in note 2, the liability for employee benefits expected to be settled more than 12 months from the reporting date are recognised and measured at the present value of the estimated future cash flows to be made in respect of all employees at the reporting date. In determining the present value of the liability, estimates of attrition rates and pay increases through promotion and inflation have been taken into account. Reserves base Estimates of recoverable quantities of proven, probable and possible reserves reported include judgmental assumptions regarding commodity prices, exchange rates, discount rates and production and transportation costs for future cash flows. It also requires interpretation of complex and difficult geological and geophysical models in order to make assessment of the size, shape, depth and quality of reservoirs, and their anticipated recoveries. The economic, geological and technical factors used to estimate may change from period to period. Changes in reported reserves can impact asset carrying values and the recognition of deferred tax assets due to changes in expected future cash flows. Reserves are integral to the amount of amortisation charged to the income statement. Future development costs are estimated using assumptions as to the number of wells required to produce the commercial reserves, the cost of such wells and associated production and other capital costs. The current gas price curves are used for price assumptions. The Empire Group uses suitably qualified persons to prepare annual evaluation of proven hydrocarbon reserves, compliant with US professional standards for petroleum engineers. Carrying value of oil and gas assets Oil and gas properties are depreciated using the units-of-production (UOP') method over proved developed and undeveloped reserves. The calculation of the UOP rate of depreciation, depletion and amortisation could be impacted to the extent that actual production in the future is different from current forecast production based on proved reserves. This would generally result from significant changes in any of the factors or assumptions used in estimating reserves. Estimates of gas reserve quantities provide the basis for calculation of depletion, depreciation and amortisation and impairment, each of which represents a significant component of the consolidated financial statements. These factors could include changes in proved reserves, the effect on proved reserves of differences between actual commodity prices and commodity price assumptions, and unforeseen operational issues. Impairment indicators The fair value of oil and gas properties is determined with reference to estimates of recoverable quantities of reserves (as outlined above) to determine the estimated future cash flows. An impairment loss is recognised for the amount by which the asset or Empire Group of assets carrying value exceeds the present value of its future cash flows. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash generating units). Recoverable amount The recoverable amount of an asset is the greater of its fair value less costs of disposal and its value-in-use, using an asset’s estimated future cash flows (as described below) discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and risks specific to the asset. Impairment of oil and gas assets For oil and gas assets, the expected future cash flow estimation is based on a number of factors, variables and assumptions, the most important of which are estimates of reserves, future production profiles, commodity prices, costs and foreign exchange rates. In most cases, the present value of future cash flows is most sensitive to estimates of future oil price and discount rates. 65 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 3. Critical accounting judgements, estimates and assumptions (continued) The estimated future cash flows for the value-in-use calculation are based on estimates, the most significant of which are hydrocarbon reserves, future production profiles, commodity prices, operating costs and any future development costs necessary to produce the reserves. Estimates of future commodity prices are based on the Group’s best estimate of future market prices with reference to external market analysts’ forecasts, current spot prices and forward curves. Future commodity prices are reviewed at least annually. The discount rates applied to the future forecast cash flows are based on the Group’s weighted average cost of capital, adjusted for risks where appropriate, including functional currency of the asset, and risk profile of the country in which the asset operates. In the event that future circumstances vary from these assumptions, the recoverable amount of the Group’s oil and gas assets could change materially and result in impairment losses or the reversal of previous impairment losses. Due to the interrelated nature of the assumptions, movements in any one variable can have an indirect impact on others and individual variables rarely change in isolation. Additionally, management can be expected to respond to some movements, to mitigate downsides and take advantage of upsides, as circumstances allow. Consequently, it is impracticable to estimate the indirect impact that a change in one assumption has on other variables and hence, on the likelihood, or extent, of impairments or reversals of impairments under the different sets of assumptions in subsequent reporting periods. Asset retirement obligations Asset retirement costs will be incurred by the Empire Group at the end of the operating life of some of Empire Group’s facilities and properties. The ultimate asset retirement costs are uncertain and cost estimates can vary in response to many factors including changes to relevant legal requirements, the emergence of new restoration techniques or experience at other production sites. The expected timing and amount of expenditure can also change, for example, in response to changes in reserves or changes in laws and regulations or their interpretation. As a result, there could be significant adjustments to the provisions established which would affect future financial results. Share-based payment transactions The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined by using either the Binomial or Black-Scholes model taking into account the terms and conditions upon which the instruments were granted. The accounting estimates and assumptions relating to equity-settled share-based payments would have no impact on the carrying amounts of assets and liabilities within the next annual reporting period but may impact profit or loss and equity. Note 4. Operating segments Identification of reportable operating segments The Group is organised into three operating segments: (1) US Operations - includes all oil and gas operations located in the USA. Revenue is derived from the sale of oil and gas and operation of wells; (2) Northern Territory - includes all exploration and drilling activity of the Group in the Northern Territory, conducted through Imperial Oil & Gas Pty Limited and Imperial Oil & Gas A Pty Limited; and (3) Corporate - includes all centralised administration costs, minor other income and investments/loans in Empire Group USA, Imperial Oil & Gas Pty Limited and Imperial Oil & Gas A Pty Limited (eliminated on consolidation). These operating segments are based on the internal reports that are reviewed and used by the Board of Directors (who are identified as the Chief Operating Decision Makers ('CODM')) in assessing performance and in determining the allocation of resources. There is no aggregation of operating segments. 66 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 4. Operating segments (continued) The revenue reported below represents revenue generated from external customers. Intersegment revenue relates to Corporate overhead charges only. Included in Other income above are gains disclosed separately of the face of the Statement of Profit and Loss and Other Comprehensive Income. Information reported to the CODM allows resources to be allocated and subsequent performance to be analysed. This is reviewed on a monthly basis. Segment profit/(loss) represents the profit/(loss) earned by each segment without allocation of central administration costs and share-based payments, finance income and finance expense, gains or losses on disposal of associates and discontinued operations. This is the measure reported to the CODM for the purposes of resource allocation and assessment of segment performance. Major customers During the year ended 31 December 2022 approximately $11,115,090 (2021: $7,397,078) of the Group's external revenue was derived from sales to two (2021: two) major customers. Operating segment information Consolidated - 2022 Revenue Sales to external customers Intersegment sales Total sales revenue Other income Interest income (external) Intersegment interest income Total revenue Segment profit/(loss) Depreciation and amortisation Unrealised loss on forward commodity contracts Finance costs (net) Finance costs - non-cash Intersegment interest expense Profit/(loss) before income tax expense Income tax expense Loss after income tax expense Assets Segment assets Total assets Liabilities Segment liabilities Total liabilities US Operations $ Northern Territory $ Corporate $ Eliminations $ Total $ 13,722,333 - 13,722,333 258,613 21,360 - 14,002,306 - - - - - - - - 4,262,350 4,262,350 - - 7,175,887 11,438,237 - (4,262,350) (4,262,350) - - (7,175,887) (11,438,237) 13,722,333 - 13,722,333 258,613 21,360 - 14,002,306 6,249,828 (809,128) (11,132,729) (105,113) 5,783,206 (173,442) (3,024,677) - (2,124,372) (1,087,683) (272,099) (669,842) (1,601,240) (2,381,970) - - - (4,790,771) - (9,442) - (3,146) - - - 7,175,887 515,549 (16,028,613) 5,597,176 4,151,210 (272,099) (679,284) (1,601,240) - (5,764,678) (238,528) (6,003,206) 47,261,555 134,551,461 245,562,697 (229,725,222) 197,650,491 197,650,491 (74,133,741) (174,686,256) (1,794,148) 186,571,444 (64,042,701) (64,042,701) 67 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 4. Operating segments (continued) Consolidated - 2021 Revenue Sales to external customers Intersegment sales Total sales revenue Other income Interest income (external) Intersegment interest income Total revenue Segment profit/(loss) Depreciation and amortisation Unrealised loss on forward commodity contracts Interest expense (external) Intersegment interest expense Finance costs - non-cash Profit/(loss) before income tax expense Income tax expense Loss after income tax expense Assets Segment assets Total assets Liabilities Segment liabilities Total liabilities Geographical information Us Operations $ Northern Territory $ Corporate $ Eliminations $ Total $ 8,502,389 - 8,502,389 1,592,345 13,250 - 10,107,984 - - - - - - - - 5,391,040 5,391,040 - 72 4,966,517 10,357,629 - (5,391,040) (5,391,040) - - (4,966,517) (10,357,557) 8,502,389 - 8,502,389 1,592,345 13,322 - 10,108,056 995,808 (1,286,527) (10,621,774) (131,625) 8,104,507 (273,992) (4,966,517) - (6,487,976) (1,692,144) (661,782) (557,152) - (1,425,405) - - - - - (10,411) (4,966,517) - - - 4,966,517 - (661,782) (567,563) - (1,425,405) (2,935,058) (10,753,399) 2,853,587 - (10,834,870) (212,739) (11,047,609) 40,731,366 93,999,011 206,535,235 (182,443,094) 158,822,518 158,822,518 67,782,221 122,367,210 1,577,620 (142,224,687) 49,502,364 49,502,364 All revenue generated from the sale of oil and gas to external customers is derived from operations in the USA. All of the Group’s producing oil and gas assets are located in the USA. The Group has exploration oil and gas tenements in the Northern Territory, Australia. Note 5. Revenue Revenue from oil sales Revenue from gas sales Revenue from well operations Oil and gas price risk management income Consolidated 2022 $ 2021 $ 365,325 12,806,031 550,977 - 221,734 7,667,418 495,099 118,138 13,722,333 8,502,389 The Group's total revenue are all generated in the USA and recognised at a point in time. 68 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 6. Other income US Government stimulus packages Other income Other income Note 7. Expenses Loss before income tax includes the following specific expenses: Depreciation Depletion - oil and gas properties (note 13) Depreciation - property, plant and equipment (note 14) Depreciation - right-of-use assets (note 16) Total depreciation General and administration expenses Salaries and wages - Australia Legal and advisory fees - litigation costs Other advisory fees Other overhead Insurance Share-based payments expense Finance costs Interest paid/payable on financial liabilities Unwinding of the discount* Accretion of asset retirement obligation (note 21) Finance costs expensed Employee costs** Defined contribution superannuation expense Salaries and wages Total employee costs Consolidated 2022 $ 2021 $ 258,613 - 1,551,081 41,264 258,613 1,592,345 Consolidated 2022 $ 2021 $ 645,696 242,597 199,390 1,109,217 280,881 302,046 1,087,683 1,692,144 2,282,504 - 592,928 3,808,632 305,540 1,000,517 2,080,682 222,105 370,846 3,333,296 562,701 1,103,467 7,990,121 7,673,097 679,284 36,604 1,564,636 567,563 660,405 765,000 2,280,524 1,992,968 158,886 5,592,909 140,720 4,645,291 5,751,795 4,786,011 * ** Due to debt restructuring in October 2018, the Group accumulated deferred financing costs of approximately US$521,000. Amortisation expense of the deferred financing costs is included with interest expense. 32 employees are based in the US and 8 employees are based in Australia. Employee costs for the US based employees are recognised in cost of sales and employee costs for Australia based employees are recognised in general and administration expense. 69 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 8. Income tax Income tax expense Current tax Deferred tax - origination and reversal of temporary differences Aggregate income tax expense Consolidated 2022 $ 2021 $ - 238,528 - 212,739 238,528 212,739 Numerical reconciliation of income tax expense and tax at the statutory rate Loss before income tax expense (5,764,678) (10,834,870) Tax at the statutory tax rate of 25% (2021: 26%) (1,441,170) (2,817,066) Difference in overseas tax rates Changes in Australian tax rate Withholding tax paid Deferred tax asset in relation to tax losses and temporary differences not recognised Income tax expense Deferred tax assets not recognised Deferred tax assets not recognised comprises temporary differences attributable to: Tax losses Capital losses Other Total deferred tax assets not recognised 100,210 96,941 238,528 145,549 - 212,739 1,244,019 2,671,517 238,528 212,739 Consolidated 2022 $ 2021 $ 18,689,936 201,841 7,739,633 13,940,952 201,841 4,966,105 26,631,410 19,108,898 The above potential tax benefit, which excludes tax losses, for deductible temporary differences has not been recognised in the statement of financial position as the recovery of this benefit is uncertain. The potential benefit of the deferred tax asset attributable to tax losses will only be obtained if: (i) the Group derives future assessable income of a nature and of an amount sufficient to enable the benefit from the deduction for the loss to be realised; or the Group continues to comply with the conditions for deductibility imposed by the law; and (ii) (iii) no changes in tax legislation adversely affect the Group in realising the asset. 70 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 8. Income tax (continued) Deferred tax asset Deferred tax asset comprises temporary differences attributable to: Amounts recognised in profit or loss: Accrued asset retirement obligation Oil and gas properties and property, plant & equipment Other Set-off of deferred tax assets pursuant to set-off provisions Deferred tax asset Deferred tax liability Deferred tax liability comprises temporary differences attributable to: Amounts recognised in profit or loss: Forward commodity contracts Oil and gas properties and property, plant & equipment Other Set-off of deferred tax liabilities pursuant to set-off provisions Deferred tax liability Note 9. Earnings per share Loss after income tax attributable to the owners of Empire Energy Group Limited Consolidated 2022 $ 2021 $ 2,944,649 4,130,777 664,207 (7,739,633) 2,140,298 2,180,824 644,983 (4,966,105) - - Consolidated 2022 $ 2021 $ 23,616 4,132,842 118,081 (4,274,539) 88,204 3,729,327 108,875 (3,926,406) - - Consolidated 2022 $ 2021 $ (6,003,206) (11,047,609) Number Number Weighted average number of ordinary shares used in calculating basic earnings per share 700,901,005 459,010,151 Weighted average number of ordinary shares used in calculating diluted earnings per share 700,901,005 459,010,151 Basic earnings per share Diluted earnings per share Cents Cents (0.86) (0.86) (2.41) (2.41) 78,924,528 options (2021: 14,196,970), 9,765,402 Performance Rights (2021: 7,442,896), 2,438,558 Service Rights (2021: 2,438,558) and 3,702,954 Restricted Rights (2021: 3,232,460) have been excluded from the above calculation as their inclusion would be anti-dilutive. 71 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 10. Trade and other receivables Current assets Trade receivables Other receivables* GST receivable Consolidated 2022 $ 2021 $ 2,970,945 4,287,035 2,425,039 3,077,852 871,404 1,410,595 9,683,019 5,359,851 *includes $3,627,587 of Northern Territory Environment bond held with the Northern Territory Government. Allowance for expected credit losses The Group has recognised a loss of $69,095 (USD$48,000) (2021: $7,629 (USD$5,300)) in profit or loss in respect of the expected credit losses for the year ended 31 December 2022. The ageing of the receivables and allowance for expected credit losses provided for above are as follows: Expected credit loss rate 2022 % Expected credit loss rate 2021 % Carrying amount 2022 $ Carrying amount 2021 $ Allowance for expected credit losses 2022 $ Allowance for expected credit losses 2021 $ - - - 10.40% - - - 8.60% 2,286,963 - 1,234 682,748 2,827,432 15,296 5,831 229,293 - - - 69,095 2,970,945 3,077,852 69,095 - - - 7,629 7,629 Consolidated 2022 $ 2021 $ 22,499 43,862 21,008 23,596 66,361 44,604 Consolidated Current 31 to 60 days overdue 61 to 90 days overdue Over 90 days overdue Note 11. Inventories Current assets Parts and supplies Oil 72 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 12. Derivative financial instruments Current assets Oil and gas price forward contracts Non-current assets Oil and gas price forward contracts Consolidated 2022 $ 2021 $ 96,410 244,171 - 106,360 96,410 350,531 Refer to note 26 for further information on fair value measurement. Empire's gas hedging book as set out in the table below is weighted towards put options to provide for upside gas price exposure while ensuring downside price protection and a level of cash flow stability: Period January 23 to February 2023 January 23 to March 2023 January 23 to December 2023 January 23 to December 2023 Note 13. Oil and gas properties Non-current assets Oil and gas - Producing Less: Accumulated depreciation Oil and gas - Non Producing Volume mmbtu/month Hedge Type Strike Price Premium US$/mmbtu US$/mmbtu 25,000 Swap 50,000 Swap 25,000 Put Options 25,000 Put Options 125,000 $7.50 N/A $5.35 N/A $2.50 $0.27 $2.50 $0.41 Consolidated 2022 $ 2021 $ 93,510,669 (60,112,537) 33,398,132 85,003,445 (53,103,922) 31,899,523 3,213,480 3,000,459 36,611,612 34,899,982 73 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 13. Oil and gas properties (continued) Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Consolidated Balance at 1 January 2021 Change in estimate at balance date Plugged sale of wells Exchange differences Depletion Balance at 31 December 2021 Additions Exchange differences Depletion Oil and gas - Producing $ Oil and gas - Non Producing $ 26,319,487 5,412,007 4,687 1,272,559 (1,109,217) 31,899,523 19,199 2,125,106 (645,696) 2,946,805 - - 53,654 - 3,000,459 - 213,021 - Total $ 29,266,292 5,412,007 4,687 1,326,213 (1,109,217) 34,899,982 19,199 2,338,127 (645,696) Balance at 31 December 2022 33,398,132 3,213,480 36,611,612 At 31 December 2022, the Group assessed the carrying amounts of its non-current assets for indicators of impairment in accordance with the Group’s accounting policy. Estimates of recoverable amounts for producing assets are based on an asset’s value in use or fair value less costs to sell, using a discounted cash flow method, and are most sensitive to the key assumptions described in note 3. The pre-tax discount rate that has been applied in assessing oil and gas assets is 12% (2021: 12%). Note 14. Property, plant and equipment Consolidated 2022 $ 2021 $ 7,380 6,891 333,039 (121,373) 211,666 310,963 (103,200) 207,763 2,297,091 (2,065,512) 231,579 2,180,340 (1,951,063) 229,277 918,695 (760,546) 158,149 780,907 (671,425) 109,482 608,774 553,413 Non-current assets Land - at cost Buildings - at cost Less: Accumulated depreciation Equipment - at cost Less: Accumulated depreciation Motor vehicles - at cost Less: Accumulated depreciation 74 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 14. Property, plant and equipment (continued) Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Consolidated Balance at 1 January 2021 Additions Exchange differences Depreciation expense Balance at 31 December 2021 Additions Depreciation expense Exchange differences Land $ Buildings $ Equipment $ 6,492 - 399 - 6,891 - - 489 195,791 10,715 11,657 (10,400) 207,763 - (10,578) 14,481 229,601 226,279 3,099 (229,702) 229,277 136,955 (185,550) 50,897 Motor vehicles $ 134,913 12,785 2,563 (40,779) 109,482 92,319 (46,469) 2,817 Total $ 566,797 249,779 17,718 (280,881) 553,413 229,274 (242,597) 68,684 Balance at 31 December 2022 7,380 211,666 231,579 158,149 608,774 Note 15. Exploration and evaluation assets Non-current assets Capitalised exploration and evaluation assets Consolidated 2022 $ 2021 $ 127,039,687 90,849,806 Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Capitalised exploration and evaluation assets $ 17,175,321 20,640,009 58,398,399 (5,363,923) 90,849,806 51,512,905 (15,323,024) 127,039,687 Consolidated Balance at 1 January 2021 Additions Pangaea acquisition Government grants Balance at 31 December 2021 Additions Government grants Balance at 31 December 2022 75 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 16. Right-of-use assets Non-current assets Plant and equipment - right-of-use Less: Accumulated depreciation Motor vehicles - right-of-use Less: Accumulated depreciation Consolidated 2022 $ 2021 $ 948,345 (48,538) 899,807 1,003,350 (425,799) 577,551 748,117 (648,318) 99,799 618,583 (443,141) 175,442 999,606 752,993 Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Consolidated Balance at 1 January 2021 Exchange difference Depreciation expense Balance at 31 December 2021 Additions Disposals Depreciation expense Balance at 31 December 2022 Right-of-use assets $ 1,149,087 (93,687) (302,407) 752,993 1,015,903 (569,900) (199,390) 999,606 The Company currently leases its Australian corporate headquarters in Sydney under a 4-year operating lease recognised as a right-of-use asset and lease liability, with monthly payments approximately $18,575. The rental agreement has a 3.75% fixed rent review on the anniversary of the commencement date of the lease being 3 November 2022. The Company previously leased its Australian corporate headquarters in Sydney under a 4-year operating sublease with monthly payments approximately $20,124. The rental agreement date of the sublease commenced on 29th January 2020 and was terminated on 15 July 2022. The landlord terminated the lease and as sub-tenants the Company had to relocate. The Group leased its former US corporate headquarters in Pittsburgh under a non-cancellable lease, with monthly payments ranging from US$3,665 to US$3,966 through November 2021. The US corporate headquarters moved in 2019 to Mayville, New York State, into a building owned by the Group. The Group was still obligated to make payments on the office for months throughout 2021, before the lease was terminated early in November 2021. Net rental expense approximated US$48,000 and US$83,000, for the years ended 31 December 2022 and 2021, respectively. The Group leases trucks under an operating agreement recognised as a right-of-use asset and lease liability. The term of the agreement begins upon delivery of each truck and lasts for a period of up to 48 months. The Empire Group has the option to acquire the leased assets at the agreed value on the expiry of the leases. The Group leases a photocopier under a 4-year operating agreement which commenced in November 2021. Monthly lease payments are $399. 76 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 16. Right-of-use assets (continued) For AASB 16 Lease disclosures refer to: ● ● ● note 7 for depreciation on right-of-use assets; note 20 for lease liabilities; and consolidated statement of cash flows for repayment of lease liabilities. Note 17. Intangibles Non-current assets Goodwill - at cost Movements in goodwill relate to foreign currency fluctuations. Note 18. Trade and other payables Current liabilities Trade payables* Accruals Other payables Consolidated 2022 $ 2021 $ 100,689 94,015 Consolidated 2022 $ 2021 $ 15,019,070 1,801,855 1,648,895 8,374,461 1,806,704 1,387,533 18,469,820 11,568,698 Refer to note 25 for further information on financial instruments. * Trade payables increased as at 31 December 2022 compared to the previous balance date as a result of budgeted costs incurred for the significant activities carried out in the Northern Territory in late 2022. At date of signing the annual report, ~30% remains as trade payables. Note 19. Borrowings Current liabilities Bank loan - secured Classification of borrowings Consolidated 2022 $ 2021 $ 7,822,908 8,027,261 These financial statements are presented on the basis that all borrowings have been classified as current liabilities. This treatment is as a result of a strict application of the relevant provisions of AASB 101 'Presentation of Financial Statements'. This accounting standard requires the Group to classify liabilities as current if the Group does not have an unconditional right to defer payment for at least 12 months after the reporting date. However, the expected repayment of the borrowings is not for complete repayment within the 12 month period. The Group maintains a facility consisting of the following, as restated in October 2018 and amended in September 2019, which matures in September 2024 with a bank that is a minority owner in the Group. Interest accrued on the outstanding borrowings at the 30-Day London Inter-Bank Offered Rate ('LIBOR') (4.33% at 31 December 2022) plus 6.5%. At 31 December 2022, the Group's rate option was the 30-day LIBOR. 77 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 19. Borrowings (continued) Outstanding borrowings under the agreement are secured by the assets of the group Under the terms of the facilities, the Group is required to maintain financial ratios customary for the oil and gas industry. The Group is required to repay the facilities monthly to the extent certain benchmarks of an applicable percentage of net operating cash flow and capital transactions are met and occur. Principal payments made during the financial year ended 31 December 2022 and 31 December 2021 were approximately US$550,000 and US$687,500, respectively. The Group was compliant with all financial covenants as of 31 December 2022. Credit facility summary Empire Energy USA, LLC maintains a long-term credit facility with Macquarie Bank Limited ('Macquarie'), which matures in September 2024. The credit facility balance on 31 December 2022 was US$5,300,000 (A$7,822,908) (31 December 2021: US$5,850,010 (A$8,027,261)). US Operations The loan has been classified as a current liability as there is no unconditional right to defer the settlement of the liability for at least 12 months after the reporting period. The directors do not expect the loan to be repaid in full in the year. The Group has a credit facility with Macquarie Bank Limited. The facility has the following key terms: Principal amount US$7.5 million (availability and outstanding loan balance US$5.30 million) Term 5 years Interest rate LIBOR + 650 bps Repayment terms 100% of Appalachia net operating cashflow subject to minimum amortisation of US$550,000 per annum Hedging Key covenants Empire shall maintain a rolling hedging program whereby 55% of forecast Proved Developed Producing Reserves production shall be hedged for 3 years Proved Developed Producing Reserves PV10 / Net Debt > 1.3x Current Ratio > 1.0x Working capital > 0 78 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 19. Borrowings (continued) Debt summary Facility Less deferred financing costs, net Total debt in USD Total debt in AUD Australian Operations 2022 $ 2021 $ 5,300,020 5,850,010 - (25,429) 5,300,020 5,824,581 7,822,908 8,027,261 The Group established an additional credit facility with Macquarie Bank Limited during the year. The outstanding balance as at 31 December 2022 was $nil. Key terms of this credit facility are set out below: Principal amount Borrowers Guarantor Security Fees $15 million comprising: - Facility A (Revolving Credit Facility, $10 million) - Facility B (Performance Bond Facility, $5 million) Imperial Oil & Gas Pty Limited Imperial Oil & Gas A Pty Limited Empire Energy Group Limited and Borrowers First ranking security over all present and after-acquired property of each Borrower First ranking security Utilisation Fee: 1.5% of utilisation Commitment Fee: 40% of margin Margin: Facility A (5.5% p.a.), Facility B (10% p.a.) Interest rate Margin plus BBSW Financial covenants Ratio of current assets to current liabilities of at least 1.00 to 1.00 Minimum cash balance in the Borrowers and Guarantor of at least $5 million (or its equivalent in any other currency or currencies) Repayment date 31 December 2025 Repayment arrangements Facility A: on receipt of relevant R&D Tax Incentive payment Facility B: on release of environmental bonds after rehabilitation 79 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 20. Lease liabilities Current liabilities Lease liability Non-current liabilities Lease liability Refer to note 25 for further information on financial instruments. Note 21. Provisions Current liabilities Employee benefits Non-current liabilities Lease make good Provision for rehabilitation (Northern Territory) Asset retirement obligations (USA) Consolidated 2022 $ 2021 $ 399,195 439,926 608,977 389,341 1,008,172 829,267 Consolidated 2022 $ 2021 $ 252,424 213,482 43,940 4,397,865 32,047,572 - 701,875 28,161,781 36,489,377 28,863,656 36,741,801 29,077,138 Movements in provisions Movements in provision for rehabilitation and asset retirement obligations during the current financial year, are set out below: Consolidated Provision for rehabilitation/ Asset retirement obligations $ Lease make good $ Total $ Carrying amount at the start of the year Additional provisions recognised Accretion expense for the period, included in finance costs Provision for rehabilitation Foreign currency translation movements - 43,940 - - - 28,863,656 - 1,564,636 3,695,990 2,321,155 28,863,656 43,940 1,564,636 3,695,990 2,321,155 Carrying amount at the end of the year 43,940 36,445,437 36,489,377 Asset retirement obligation The Empire Group makes full provision for the future costs of decommissioning oil and gas production facilities and pipelines on a discounted basis on the installation or acquisition of those facilities. 80 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 21. Provisions (continued) The provision represents the present value of decommissioning costs which are expected to be incurred up to 2048. The estimated liability is based on historical experience in plugging and abandoning wells, estimated remaining lives of those based on reserve estimates, external estimates as to the cost to plug and abandon the wells in the future, and regulatory requirements. Assumptions, based on the current economic environment, have been made which management believe are a reasonable basis upon which to estimate the future liability. These estimates are reviewed regularly to take into account any material changes to the assumptions. However, actual decommissioning costs will ultimately depend upon future market prices for the necessary decommissioning works. Furthermore, the timing of decommissioning is likely to depend on when the assets cease to produce at economically viable rates. This in turn will depend upon the future oil and gas prices, which are inherently uncertain. Note 22. Contributed equity Consolidated 2022 Shares 2021 Shares 2022 $ 2021 $ Ordinary shares - fully paid 773,121,148 612,074,341 255,945,973 220,905,029 Unissued ordinary shares - 20,105,132 - 5,629,437 2022 Shares 2021 Shares 2022 $ 2021 $ 81 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 22. Contributed equity (continued) Movements in ordinary share capital Details Date Shares Issue price $ 18 May 2021 16 April 2021 1 January 2021 Balance Issue of shares as a private placement to raise funds Issue of shares as a private placement to raise funds Issue of shares as a private placement to raise funds Issue of shares as a private placement to raise funds Issue of shares as a private placement to raise funds Issue of shares in lieu of cash payment for fees and services rendered Issue of shares for asset acquisition Issue of shares on the exercise of options 8 November 2021 Issue of shares on the exercise of options* 23 December 2021 Issue of shares on the exercise of options 30 December 2021 Share issue transaction costs, net of tax 16 August 2021 16 August 2021 18 May 2021 1 June 2021 1 June 2021 323,941,984 139,060,492 39,318,829 $0.300 11,795,649 10,000,000 $0.300 3,000,000 10,000,186 $0.300 3,000,056 60,681,171 $0.300 18,204,351 3,940,333 $0.300 1,182,100 2,000,000 149,591,838 600,000 - 12,000,000 - $0.300 $0.280 $0.300 $0.300 $0.320 600,000 41,885,715 180,000 15,000 3,840,000 (1,858,334) Balance Issue of shares on exercise of options Issue of shares on conversion of restricted rights Issue of shares on raising capital Issue of unissued shares as script for asset acquisition Issue of shares Issue of shares Issue of shares on conversion of restricted rights Share issue transaction costs, net of tax 31 December 2021 18 February 2022 612,074,341 1,200,000 $0.300 220,905,029 360,000 12 April 2022 10 June 2022 679,345 125,000,000 $0.000 $0.220 - 27,500,000 10 June 2022 19 July 2022 9 September 2022 20,105,132 11,363,702 2,363,638 $0.280 $0.220 $0.220 5,629,437 2,500,000 520,000 28 September 2022 334,990 - $0.000 $0.000 - (1,468,493) Balance 31 December 2022 773,121,148 255,945,973 * Funds received in December 2021, issued in January 2022. Movements in unissued ordinary share capital Details Date Shares Issue price $ Balance Unissued shares for asset acquisition 1 January 2021 10 June 2021 - 20,105,132 $0.280 Balance Issue of unissued shares as scrip for asset acquisition 31 December 2021 20,105,132 10 June 2022 (20,105,132) $0.000 (5,629,437) Balance 31 December 2022 - - 82 - 5,629,437 5,629,437 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 22. Contributed equity (continued) Ordinary shares Ordinary shares entitle the holder to participate in any dividends declared and any proceeds attributable to shareholders should the Company be wound up, in proportions that consider both the number of shares held and the extent to which those shares are paid up. The fully paid ordinary shares have no par value and the Company does not have a limited amount of authorised capital. On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. Share buy-back There is no current on-market share buy-back. Capital risk management The Group's objectives when managing capital is to safeguard its ability to continue as a going concern, so that it can provide returns for shareholders and benefits for other stakeholders and to maintain an optimum capital structure to reduce the cost of capital. Capital is regarded as total equity, as recognised in the statement of financial position, plus net debt. Net debt is calculated as total borrowings less cash and cash equivalents. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The Group would look to raise capital when an opportunity to invest in a business or company was seen as value adding relative to the current Company's share price at the time of the investment. The Group is not actively pursuing additional investments in the short term as it continues to integrate and grow its existing businesses in order to maximise synergies. The Group is subject to certain financing arrangements covenants and meeting these is given priority in all capital risk management decisions. There have been no events of default on the financing arrangements during the financial year. The capital risk management policy remains unchanged from the 2021 Annual Report. The Company considers its capital to comprise its ordinary share capital and reserves. In managing its capital, the Company’s primary objective is to maintain a sufficient funding base to enable the Company to meet its working capital and strategic operation needs. In making decisions to adjust its capital structure to achieve these aims, either through altering its dividend policy, new share issues, or consideration of debt the Company considers not only its short-term position but also its long-term operational and strategic objectives. Note 23. Reserves Foreign currency translation reserve Options reserve Fair value reserve Consolidated 2022 $ 2021 $ (635,277) 10,854,265 180,499 (514,095) 9,853,748 180,499 10,399,487 9,520,152 83 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 23. Reserves (continued) Foreign currency translation reserve The reserve is used to recognise exchange differences arising from the translation of the financial statements of foreign operations to Australian dollars. It is also used to recognise gains and losses on hedges of the net investments in foreign operations. Options reserve The reserve is used to recognise the value of equity benefits provided to employees and Directors as part of their remuneration, and other parties as part of their compensation for services. Fair value reserve The fair value reserve comprises the cumulative net change in the fair value of equity investments until the investment is derecognised. Movements in reserves Movements in each class of reserve during the current and previous financial year are set out below: Consolidated Balance at 1 January 2021 Foreign currency translation Share-based payments Balance at 31 December 2021 Foreign currency translation Share-based payments Foreign currency translation $ Options $ Fair value $ Total $ (638,677) 124,582 - (514,095) (121,182) - 7,320,264 - 2,533,484 9,853,748 - 1,000,517 180,499 - - 180,499 - - 6,862,086 124,582 2,533,484 9,520,152 (121,182) 1,000,517 Balance at 31 December 2022 (635,277) 10,854,265 180,499 10,399,487 Note 24. Dividends There were no dividends paid, recommended or declared during the current or previous financial year. Franking credits There are no franking account credits available as at 31 December 2022 and 31 December 2021. Note 25. Financial instruments Financial risk management objectives The Empire Group’s principal financial instruments, other than derivatives comprise bank loans, financial assets, and cash and cash equivalents. The main purpose of these financial instruments is to raise finance for the Empire Group’s operations. The Empire Group has various other financial assets and liabilities such as trade receivables and payables, which arise from its operations. The Empire Group also enters derivative transactions, principally commodity hedges. The Board has overall responsibility for the determination of the Empire Group’s risk management objectives and policies and has the responsibility for designing and operating processes that ensure the effective implementation of the objectives and policies to the Empire Group’s finance function. The Board receives monthly reports through which it reviews the effectiveness of the processes put in place and 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 Empire Group’s competitiveness and flexibility. 84 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 25. Financial instruments (continued) The Empire Group is exposed to risks that arise from its use of financial instruments. The main risks arising from the Empire Group’s financial instruments are interest rate risk, commodity price risk, liquidity risk, equity risk and credit risk. This note describes the Empire Group’s objectives, policies and processes for managing those risks and methods used to measure them. Further quantitative information in respect of these risks is presented throughout these financial statements. There have been no substantive changes in the Empire Group’s exposure to financial instrument risks, its objectives, policies and processes for managing those risks or the methods used to measure them from previous periods unless otherwise stated in this note. Further details regarding these policies are set out below: Market risk Foreign currency risk The Group undertakes certain transactions denominated in foreign currency and is exposed to foreign currency risk through foreign exchange rate fluctuations. The Empire Group’s core operations are located in Australia where the main expenditures are recorded. The Statement of Financial Position can be affected by movement in the A$/US$ exchange rates upon translation of the US operations into the A$ presentation currency. Foreign exchange risk arises from commercial transactions and recognised assets and liabilities denominated in a currency that is not the entity’s functional currency. The Empire Group seeks to mitigate the effect of its foreign currency exposure by borrowing in US$ for US operations and maintaining a minimum cash balance in Australia. Excluding presentation translation adjustments, the Empire Group’s exposure to foreign exchange risk at the reporting date is limited to loans and investments between the Parent entity and the US subsidiaries. Equity price risk The Empire Group relies on equity markets to raise capital for its exploration and development activities and is thus exposed to equity market volatility. Equity price risk arises from investments in equity securities and Empire Group Limited’s issued capital. The Group’s equity risk is considered minimal and as such no sensitivity analysis has been completed. Commodity price risk The Empire Group’s revenues and cash flows are exposed to commodity price fluctuations, in particular oil and gas prices. The Empire Group enters into option and forward commodity hedges to manage its exposure to falling spot oil and gas prices. To mitigate a portion of the exposure to adverse market changes, the Empire Group’s commodity hedging programs utilise financial instruments based on regional benchmarks including NYMEX Henry Hub Natural Gas. The Empire Group enters into derivative instruments for the Empire Group’s production to protect against price declines in future periods while retaining some of the benefits of price increases. While these derivatives are structured to reduce exposure to changes in price associated with the derivative commodity, they also limit benefits the Empire Group might otherwise have received from price changes in the physical market. The Empire Group believes the derivative instruments in place continue to be effective in achieving the risk management objectives for which they were intended. Interest rate risk The Group's main interest rate risk arises from long-term borrowings. 85 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 25. Financial instruments (continued) The Empire Group is constantly monitoring its exposure to trends and fluctuations in interest rates in order to manage interest rate risk. The Empire Group’s exposure to interest rate risk at 31 December 2022 is set out in 'liquidity and interest rate risk management' below. The Empire Group’s exposure to the risk of changes in market interest rates relates primarily to the Empire Group’s long-term debt obligations with a floating interest rate in the US. The Empire Group’s policy is to continually review the portion of its borrowings that are either at floating or fixed rates of interest. To manage this mix in a cost-efficient manner, the Empire Group previously entered into interest rate swaps, in which Empire agrees to exchange, at specified intervals, the difference between fixed and variable interest rate amounts calculated by reference to an agreed upon notional principal amount. These swaps were designated to hedge underlying debt obligations. There are no interest rate swaps at 31 December 2022. The Empire Group monitors forecasts and actual cash flows and the maturity profiles of financial assets and liabilities to manage its liquidity risk. Credit risk Credit risk is the risk that the other party to the financial instrument will fail to discharge their financial obligation in respect of that instrument resulting in the Empire Group incurring a financial loss. The Empire Group’s exposure to credit risk arises from potential default of the counter party with the maximum exposure equal to the carrying amount of these instruments. There are no significant concentrations of credit risk within the Empire Group. The Empire Group trades only with recognised, credit worthy third parties. In the US, trade receivables, (balances with oil and gas purchases) have not exposed the Empire Group to any bad debt to date. All derivatives are with the same counterparty. In the US, all of the purchasers that the Empire Group’s operators choose to deal with are oil or gas companies and local utilities. Trade and other receivable balances are monitored on an ongoing basis with the Empire Group’s exposure to bad debts minimal. Generally, trade receivables are written off when there is no reasonable expectation of recovery. Indicators of this include the failure of a debtor to engage in a repayment plan, no active enforcement activity and a failure to make contractual payments for a period greater than 1 year. The maximum exposure to credit risk at balance date is as follows: Trade and other receivables and derivative financial instruments 9,779,429 5,710,382 The maximum exposure to credit risk at balance by country is as follows: Consolidated 2022 $ 2021 $ Australia United States of America 86 Consolidated 2022 $ 2021 $ 6,114,110 3,665,319 1,483,512 4,226,870 9,779,429 5,710,382 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 25. Financial instruments (continued) Liquidity risk Liquidity risk is the inability to access funds, both anticipated and unforeseen, which may lead to the Empire Group being unable to meet its obligations in an orderly manner as they arise. Empire seeks to maintain sufficient available liquidity (cash and available debt facilitates) at all times. The Empire Group’s liquidity position is managed to ensure sufficient funds are available to meet financial commitments in a timely and cost-effective manner. The Empire Group is primarily funded through on-going cash flow, debt funding and equity capital raisings, as and when required. Funding is in place with reputable financial institutions in the US and Australia. Bank compliance reporting is undertaken quarterly and adherence to covenants checked regularly. Management also regularly monitors actual and forecast cash flows to manage liquidity risk. Remaining contractual maturities The following tables detail the Group's remaining contractual maturity for its financial instrument liabilities. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the financial liabilities are required to be paid. The tables include both interest and principal cash flows disclosed as remaining contractual maturities and therefore these totals may differ from their carrying amount in the statement of financial position. Consolidated - 2022 Non-derivatives Non-interest bearing Trade and other payables Interest-bearing - variable Bank loan Interest-bearing - fixed rate Lease liability Total non-derivatives Derivatives Oil and gas price forward contracts Total derivatives Weighted average interest rate % 1 year or less $ Between 1 and 2 years $ Between 2 and 5 years $ Over 5 years $ Remaining contractual maturities $ - 18,469,820 8.37% 7,822,908 - - - - - 18,469,820 - 7,822,908 3.87% 276,177 26,568,905 - 11,830,554 - 11,830,554 3,258 12,109,989 3,258 38,402,717 - (96,410) (96,410) - - - - - - (96,410) (96,410) 87 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 25. Financial instruments (continued) Consolidated - 2021 Non-derivatives Non-interest bearing Trade and other payables Interest-bearing - variable Bank loan Lease liability Total non-derivatives Derivatives Oil and gas price forward contracts Total derivatives Weighted average interest rate % 1 year or less $ Between 1 and 2 years $ Between 2 and 5 years $ Over 5 years $ - 11,568,698 6.59% - 8,027,261 - 19,595,959 - - - - - (244,171) (244,171) (106,360) (106,360) - - - - - - Remaining contractual maturities $ - 11,568,698 8,027,261 - - - - 19,595,959 - - (350,531) (350,531) The cash flows in the maturity analysis above are not expected to occur significantly earlier than contractually disclosed above. Fair value of financial instruments Unless otherwise stated, the carrying amounts of financial instruments reflect their fair value. Note 26. Fair value measurement Fair value hierarchy The following tables detail the Group's assets and liabilities, measured or disclosed at fair value, using a three level hierarchy, based on the lowest level of input that is significant to the entire fair value measurement, being: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly Level 3: Unobservable inputs for the asset or liability Consolidated - 2022 Assets Derivative financial instruments Total assets Consolidated - 2021 Assets Derivative financial instruments Total assets Level 1 $ Level 2 $ Level 3 $ Total $ Level 1 $ - - - - 96,410 96,410 Level 2 $ Level 3 $ 350,531 350,531 - - - - 96,410 96,410 Total $ 350,531 350,531 There were no transfers between levels during the financial year. The carrying amounts of trade and other receivables and trade and other payables are assumed to approximate their fair values due to their short-term nature. The fair value of financial liabilities is estimated by discounting the remaining contractual maturities at the current market interest rate that is available for similar financial liabilities. 88 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 26. Fair value measurement (continued) Valuation techniques for fair value measurements categorised within level 2 and level 3 Derivative financial instruments have been valued using quoted market rates. This valuation technique maximises the use of observable market data where it is available and relies as little as possible on entity specific estimates. Note 27. Key management personnel disclosures Directors The following persons were Directors of the Company at any time during the financial year were: Paul Espie AO Alexander Underwood Peter Cleary Paul Fudge Jacqui Clarke Louis Rozman Prof John Warburton The following persons were Key Management Personnel of the Company at any time during the financial year were: Robin Polson Compensation The aggregate compensation made to Directors and other members of key management personnel of the Group is set out below: Short-term employee benefits Post-employment benefits Long-term benefits Share-based payments Other transactions with key management personnel and their related parties Payment for marketing services from Menzies Research Centre Limited (director-related entity of Chairman, Paul Espie) Prof Warburton received Service Rights in connection with the consultancy contract between Prof Warburton and the Company* Consolidated 2022 $ 2021 $ 959,234 57,035 - 237,984 734,196 44,955 104,386 500,339 1,254,253 1,383,876 Consolidated 2022 $ 2021 $ 15,000 5,000 - 207,000 15,000 212,000 * Prof Warburton provided technical advisory services to the Company with payment in Service Rights in lieu of cash under the terms of the Company’s Rights Plan approved at the Shareholders Meeting on 27 May 2021. 89 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 28. Remuneration of auditors During the financial year the following fees were paid or payable for services provided by Nexia Sydney Audit Pty Ltd, the auditor of the Company, its network firms and unrelated firms: Audit services - Nexia Sydney Audit Pty Ltd Audit and review of the financial statements Other services - Nexia Sydney Audit Pty Ltd Taxation and other advisory services Audit services - other auditors (US operations) Audit or review of the financial statements Other services - other auditors Taxation services Other services - Deloitte Pty Ltd Advisory services Note 29. Contingent assets Consolidated 2022 $ 2021 $ 150,724 128,225 54,750 28,980 205,474 157,205 138,891 65,423 37,652 22,623 176,543 88,046 211,308 - There are no contingent assets as at the date of this annual report (31 December 2021: nil). Note 30. Contingent liabilities Empire Group Limited has executed a Deed of Guarantee and indemnity in favour of Macquarie Bank Limited guaranteeing the obligations of each of Empire Energy USA LLC and its subsidiary Empire Energy E&P LLC pursuant to the Macquarie Bank Limited credit facility. The Empire Group is subject to various federal, state and local laws and regulations relating to the protection of the environment. The Empire Group has established procedures for the ongoing evaluation of its operations, to identify potential environmental exposures and to comply with regulatory policies and procedures. Environmental expenditures that relate to current operations are expensed or capitalised as appropriate. Expenditures that relate to an existing condition caused by past operations, and do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessment and or clean-up is probable, and the costs can be reasonably estimated. The Empire Group maintains insurance that may cover in whole or in part certain environmental expenditures. At 31 December 2022, the Empire Group had $4,397,865 (31 December 2021: $701,875) environmental contingencies requiring specific disclosure. There have been no other changes in contingent liabilities since the last annual reporting date. 90 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 31. Commitments Exploration and petroleum tenement leases In order to maintain current rights of tenure to exploration and mining tenements, the Company and the companies in the Group are required to outlay lease rentals and to meet the minimum expenditure requirements of the various Government Authorities. These obligations are subject to re-negotiation upon expiry of the relevant leases or when application for a mining licence is made. No expenditure commitment exists at 31 December 2022 (31 December 2021:nil). Note 32. Related party transactions Empire Energy Group Limited is the parent entity. Subsidiaries Interests in subsidiaries are set out in note 34. Key management personnel Disclosures relating to key management personnel are set out in note 27 and the remuneration report included in the Directors' report. Transactions with related parties There were no transactions with related parties during the current and previous financial year, other than those identified with key management personnel in note 27. Receivable from and payable to related parties There were no trade receivables from or trade payables to related parties at the current and previous reporting date. Loans to/from related parties During the year the Company advanced and received loans and provided accounting and administrative services to other companies in the Empire Group. These balances, along with associated charges, are eliminated on consolidation. Terms and conditions All transactions were made on normal commercial terms and conditions and at market rates. Note 33. Parent entity information Set out below is the supplementary information about the parent entity. Statement of profit or loss and other comprehensive income Profit/(loss) after income tax Total comprehensive income/(loss) Parent 2022 $ 2021 $ 5,358,979 (2,640,849) 5,358,979 (2,640,849) 91 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 33. Parent entity information (continued) Statement of financial position Total current assets Total assets Total current liabilities Total liabilities Equity Contributed equity Contributed equity - unissued Foreign currency translation reserve Options reserve Other reserves Fair value reserve Accumulated losses Total equity Parent 2022 $ 2021 $ 14,892,734 23,975,135 245,562,697 206,535,235 1,094,092 1,208,362 1,794,148 1,577,620 255,945,973 220,905,029 5,629,437 2,617,052 6,849,169 337,482 607,280 (31,987,834) - 5,656,982 7,849,686 337,482 607,280 (26,628,854) 243,768,549 204,957,615 Guarantees entered into by the parent entity in relation to the debts of its subsidiaries The parent entity had no guarantees in relation to the debts of its subsidiaries as at 31 December 2022 and 31 December 2021. Contingent liabilities The parent entity had no contingent liabilities as at 31 December 2022 and 31 December 2021. Capital commitments - Property, plant and equipment The parent entity had no capital commitments for property, plant and equipment as at 31 December 2022 and 31 December 2021. Significant accounting policies The accounting policies of the parent entity are consistent with those of the Group, as disclosed in note 2, except for the following: ● ● ● Dividends received from subsidiaries are recognised as other income by the parent entity and its receipt Investments in subsidiaries are accounted for at cost, less any impairment, in the parent entity. Investments in associates are accounted for at cost, less any impairment, in the parent entity. may be an indicator of an impairment of the investment. 92 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 34. Interests in subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in note 2: Name Imperial Oil & Gas Pty Limited Imperial Oil & Gas A Pty Limited Empire Energy Holdings, LLC Empire Energy USA, LLC Empire Energy (MidCon), LLC Empire Energy E&P, LLC Note 35. Share-based payments Principal place of business / Country of incorporation Ownership interest 2021 2022 % % Australia Australia USA USA USA USA 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Share-based payments are issued to: ● enable the Company to provide variable remuneration including both an at-risk component and an incentive component, that is performance focussed and linked to long-term value creation for shareholders, enable the Company to compete effectively for the calibre of talent required for it to be successful, ensure that Participants have commonly shared goals, and assist Participants to become Shareholders. ● ● ● Options Set out below are summaries of options granted under the plan: 2022 Grant date Expiry date 18/06/2018 30/12/2022 30/12/2019 30/12/2022 13/08/2021 31/08/2024 13/08/2021 31/08/2024 09/09/2022 09/09/2024 Exercise price Balance at the start of the year Granted Exercised $0.300 $0.600 $0.700 $0.700 $0.350 1,700,000 2,800,000 8,000,000 1,696,970 - - - - - 69,227,558 14,196,970 69,227,558 Expired/ forfeited/ other Balance at the end of the year - - - - - - (1,700,000) - (2,800,000) - - 8,000,000 1,696,970 - - 69,227,558 (4,500,000) 78,924,528 Weighted average exercise price $0.630 $0.350 $0.000 $0.000 $0.390 2021 Grant date Expiry date 10/07/2017 31/12/2021 18/06/2018 30/12/2022 26/10/2018 30/12/2021 26/10/2018 31/12/2021 30/12/2019 30/12/2022 13/08/2021 31/08/2024 13/08/2021 31/08/2024 Exercise price Balance at the start of the year Granted Exercised Expired/ forfeited/ other Balance at the end of the year $0.300 1,300,000 $0.300 1,700,000 600,000 $0.300 $0.320 12,000,000 2,800,000 $0.600 - $0.700 - $0.700 18,400,000 (1,200,000) - - - (600,000) - (12,000,000) - - - - 8,000,000 - 1,696,970 9,696,970 (13,800,000) (100,000) - - - - - - - 1,700,000 - - 2,800,000 8,000,000 1,696,970 (100,000) 14,196,970 Weighted average exercise price $0.360 $0.700 $0.320 $0.300 $0.630 93 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 35. Share-based payments (continued) All Options are exercisable at the end of the financial year noting trading terms for options held by Company employees and directors are subject to the Company’s Share Trading Policy. The weighted average remaining contractual life of options granted during the financial year and outstanding at the end of the financial year was 1.8 years (2021: 2.7 years). The weighted average share price during the financial year was $0.263 (2021: $0.337). Performance Rights During the 2013 financial year the Company issued 2,500,000 Performance Rights (pre-consolidation) over fully paid ordinary shares in the Company as part consideration for the buyback of the minority interest equity holder in Empire Energy USA LLC. The minority interest holder also received 400,000 (on a post- consolidation bias) fully paid ordinary shares in the issued capital of Empire Energy Group Limited. The Performance Rights are exercisable at no cost under the following events: ● ● ● ● Lifting of the current moratorium on oil and/or natural gas fracking in New York State; If the Company sells, transfers or assigns all or substantially all of its property interests in Chautauqua and Cattaraugus Counties in the State of New York to an unaffiliated third party then the Performance Rights will vest in accordance with the following schedule: Fair market value of consideration received by the Company Performance Rights exercisable Less than $25.0 million 0.0% At least $25.0 million but less than $45.0 million Percentage calculated by dividing fair market value of consideration received by the Company by $45.0 million $45.0 million or more 100.0% If the holder of the Performance Rights in any way disposes of more than 75% of the 4 million ordinary shares assigned as part of the minority interest buy back transaction prior to either the moratorium being terminated or a third party sale being consummated then the Performance Rights will be cancelled. The holder of the Performance Rights is an associated entity of a former senior executive of the Company’s US subsidiaries, Mr Allen Boyer. ● At the Company’s Annual General Meeting conducted on 30 May 2019, Shareholders approved the consolidation of the Company’s equity on a 1 for 10 basis. The effect of the Share Consolidation during the period reduced the 2,500,000 Performance Rights to 250,000 Performance Rights. 2020 issue During the 2020 financial year, the Company issued 3,913,960 Performance Rights to the Managing Director and senior executives under the terms of the Company’s Rights Plan and was approved by Shareholders on 14 July 2020. 2021 issue During the 2021 financial year, the Company issued 1,015,625 Performance Rights to the Managing Director and senior executives under the terms of the Company’s Rights Plan and was approved by Shareholders on 3 August 2021. 2022 issue During the 2022 financial year, the Company issued 2,445,183 Performance Rights to the Managing Director and employees under the terms of the Company's Rights Plan and was approved by Shareholders on 30 May 2022. 94 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 35. Share-based payments (continued) During the 2022 financial year, 962,811 Performance Rights issued to senior executives in 2019 passed their three year measurement period for vesting calculation. 840,134 of these 2019 Performance Rights vested, while the remaining 122,677 Performance Rights were cancelled.. Set out below are summaries of Performance Rights (unvested) granted under the plan: 2022 Grant date Expiry date 09/09/2013 30/12/2019 07/08/2020 03/08/2021 21/12/2021 17/06/2022 01/01/2015 31/12/2034 31/12/2035 31/12/2036 31/12/2036 31/12/2037 Exercise price Balance at the start of the year Granted Exercised Expired/ forfeited/ other Balance at the end of the year $0.000 $0.000 $0.000 $0.000 $0.000 $0.000 250,000 962,811 3,913,960 1,015,625 - - 6,142,396 - - - - 993,774 1,451,409 2,445,183 - - - - - - - - (962,811) - - - - 250,000 - 3,913,960 1,015,625 993,774 1,451,409 (962,811) 7,624,768 Weighted average exercise price $0.000 $0.000 $0.000 $0.000 $0.000 Performance Rights granted on 21 December 2021 was issued on 18 February 2022. 2021 Grant date Expiry date 09/09/2013 14/06/2019 30/12/2019 07/08/2020 03/08/2021 01/01/2015 30/06/2024 30/12/2034 31/12/2035 31/12/2036 Exercise price Balance at the start of the year Granted Exercised Expired/ forfeited/ other Balance at the end of the year $0.000 $0.000 $0.000 $0.000 $0.000 250,000 3,150,000 962,811 3,913,960 - 8,276,771 - - - - 1,015,625 1,015,625 - - - - - - - (3,150,000) - - - 250,000 - 962,811 3,913,960 1,015,625 (3,150,000) 6,142,396 Weighted average exercise price $0.000 $0.000 $0.000 $0.000 $0.000 There are no unvested Performance Rights exercisable at the end of the financial year as they are subject to a 3-year term and vesting hurdles. The weighted average remaining time to Vesting Date of Performance Rights (unless extended in accordance with the rights Plan Rules) granted during the financial year and outstanding at the end of the financial year was 2 years (2021: 2). For the Performance Rights granted during the current financial year, the valuation model inputs used to determine the fair value at the grant date, are as follows: Grant date Expiry date Share price at grant date Exercise price Expected volatility  Dividend  yield Risk-free interest rate Fair value at grant date 21/12/2021 17/06/2022 31/12/2036 31/12/2037 $0.350 $0.205 $0.000 $0.000 97.97% 96.74% - - 1.60% 4.13% $0.052 $0.175 95 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 35. Share-based payments (continued) Set out below are summaries of Performance Rights (vested) granted under the plan: Grant date Expiry date Exercise price Balance at the start of the year Granted Exercised Expired/ forfeited/ other Balance at the end of the year 03/08/2021 30/03/2022 30/06/2034 30/12/2034 $0.00 $0.00 1,300,500 - - 840,134 - - - - 1,300,500 840,134 Weighted average exercise price $0.00 $0.00 $0.00 $0.00 $0.00 2021 Grant date Expiry date Exercise price Balance at the start of the year Granted Exercised Expired/ forfeited/ other Balance at the end of the year 30/08/2021 30/06/2034 $0.00 - 1,300,500 - - 1,300,500 Weighted average exercise price $0.00 $0.00 $0.00 $0.00 $0.00 There are no unvested Performance Rights exercisable at the end of the financial year as they are subject to a 3-year term and vesting hurdles. The weighted average remaining time to Vesting Date of Performance Rights (unless extended in accordance with the rights Plan Rules) granted during the financial year and outstanding at the end of the financial year was 2 years (2021: 2). For the Performance Rights granted during the current financial year, the valuation model inputs used to determine the fair value at the grant date, are as follows: Grant date Expiry date Share price at grant date Exercise price Expected volatility Dividend yield Risk-free Fair value at interest rate grant date 30/03/2022 30/12/2023 $0.335 $0.00 97.03% - 2.84% $0.33 Restricted Rights Set out below are summaries of Restricted Rights granted under the plan: 2022 Grant date Expiry date 07/08/2020 01/06/2021 23/12/2020 02/07/2021 21/12/2021 17/06/2022 17/06/2022 09/09/2022 31/12/2035 01/06/2036 23/12/2035 02/07/2036 21/12/2036 17/06/2037 17/06/2037 09/09/2037 Exercise price Balance at the start of the year Granted Exercised Expired/ forfeited/ other Balance at the end of the year $0.000 $0.000 $0.000 $0.000 $0.000 $0.000 $0.000 $0.000 1,019,753 617,979 1,499,820 94,908 - - - - 3,232,460 - - - - 568,778 509,198 275,360 131,493 - - (1,014,335) - - - - - 1,484,829 (1,014,335) - - - - - - - - - 1,019,753 617,979 485,485 94,908 568,778 509,198 275,360 131,493 3,702,954 Weighted average exercise price $0.000 $0.000 $0.000 $0.000 $0.000 Restricted Rights granted on 21 December 2021 was issued on 18 February 2022. 96 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 35. Share-based payments (continued) 2021 Grant date Expiry date 07/08/2020 01/06/2021 23/12/2020 02/07/2021 31/12/2035 10/06/2036 23/12/2035 02/07/2036 Exercise price Balance at the start of the year Granted Exercised Expired/ forfeited/ other Balance at the end of the year $0.000 $0.000 $0.000 $0.000 1,019,753 - - - 1,019,753 - 617,979 1,499,820 94,908 2,212,707 - - - - - - - - - - 1,019,753 617,979 1,499,820 94,908 3,232,460 Weighted average exercise price $0.000 $0.000 $0.000 $0.000 $0.000 Restricted Rights are all exercisable at the end of the financial year noting trading terms for Rights held by Company employees and directors are subject to the Company’s Share Trading Policy. The weighted average remaining time to Vesting Date of Restricted Rights (unless extended in accordance with the rights Plan Rules) granted during the financial year and outstanding at the end of the financial year was 0.2 years (2021: 0.3 years). For the Restricted Rights granted during the current financial year, the valuation model inputs used to determine the fair value at the grant date, are as follows: Grant date Expiry date Share price at grant date Exercise price Expected volatility  Dividend yield Risk-free interest rate Fair value at grant date 21/12/2021 17/06/2022 09/09/2022 21/12/2036 17/06/2037 09/09/2037 $0.350 $0.205 $0.260 $0.000 $0.000 $0.000 97.79% 96.74% 96.28% - - - 1.60% 4.13% 3.56% $0.350 $0.210 $0.260 Service Rights Set out below are summaries of Service Rights granted under the plan: 2022 Grant date Expiry date Exercise price Balance at the start of the year Granted Exercised Expired/ forfeited/ other Balance at the end of the year 14/06/2019 04/08/2020 01/06/2021 30/06/2034 31/12/2035 31/12/2036 $0.00 $0.00 $0.00 1,000,000 838,558 600,000 - - - - - - - - - - - - 1,000,000 838,558 600,000 2,438,558 Granted Exercised Exercised Balance at the end of forfeited/ the year other 2,438,558 Balance at the start of the year Exercise price 2021 Grant date Expiry date 14/06/2019 04/08/2020 01/06/2021 30/06/2034 31/12/2035 31/12/2036 - - - - 1,000,000 838,558 - - - 600,000 1,838,558 600,000 - - - - - - - - 1,000,000 838,558 600,000 2,438,558 97 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 35. Share-based payments (continued) Set out below are the Service Rights exercisable at the end of the financial year: Grant date Expiry date 14/06/2019 04/08/2020 01/06/2021 30/06/2034 31/12/2035 31/12/2036 2022 Number 2021 Number 1,000,000 838,558 600,000 1,000,000 838,558 600,000 2,438,558 2,438,558 The weighted average remaining time to Vesting Date of Service Rights (unless extended in accordance with the rights Plan Rules) granted during the financial year and outstanding at the end of the financial year was 0 year (2021: 0.5 year). Note 36. Cash flow information Reconciliation of loss after income tax to net cash from/(used in) operating activities Loss after income tax expense for the year (6,003,206) (11,047,609) Consolidated 2022 $ 2021 $ Adjustments for: Depreciation and amortisation Share-based payments Government grant offset against oil and gas properties Asset acquisition costs in income statement disclosed as investing activities Unwinding of the discount Accretion of asset retirement obligation Unrealised loss on forward commodity contracts Other non-cash expenses Change in operating assets and liabilities: Increase in trade and other receivables Increase in inventories Decrease/(increase) in prepayments Decrease in trade and other payables Increase in employee benefits Net cash from/(used in) operating activities Non-cash investing and financing activities 1,087,683 1,000,517 15,323,024 - 36,604 1,564,636 272,099 - 1,692,144 1,103,467 5,363,923 1,546,991 660,405 765,000 661,782 600,000 (4,323,168) (21,757) (296,398) (3,578,686) 38,942 (2,823,792) (4,887) 351,845 (1,392,037) 62,874 5,100,290 (2,459,894) Consolidated 2022 $ 2021 $ Additions to the right-of-use assets 920,297 - 98 Empire Energy Group Limited Notes to the consolidated financial statements 31 December 2022 Note 36. Cash flow information (continued) Changes in liabilities arising from financing activities Consolidated Balance at 1 January 2021 Net cash used in financing activities Amortisation of deferred finance costs Exchange differences Balance at 31 December 2021 Net cash used in financing activities Amortisation of deferred finance costs Acquisition of leases Exchange differences Bank loan $ Lease liabilities $ 7,823,606 (1,425,405) 660,405 968,655 1,283,520 (456,750) - 2,497 8,027,261 (811,808) 36,604 - 570,851 829,267 (223,159) - 920,297 (518,233) Total $ 9,107,126 (1,882,155) 660,405 971,152 8,856,528 (1,034,967) 36,604 920,297 52,618 Balance at 31 December 2022 7,822,908 1,008,172 8,831,080 Note 37. Events after the reporting period (1) On 3 February 2023 Empire issued 613,830 Restricted Rights to its employees under the Company’s Rights Plan. (2) On 3 February 2023 Empire issued 548,234 Performance Rights to its employees as part of their 2020 Long-Term Incentive compensation which have vested. (3) On 3 February 2023 Empire issued 1,297,209 Performance Rights to its employees for the 2022 financial year. (4) On 3 March 2023 Empire lodged a work program update that detailed initial flow rates at Carpentaria-3H of up to 5.7 mmscf per day with an average of 2.6 mmscf per day over 27 days, an increase in Carpentaria-2H flow rates following an extended shut-in with an average of 3.24 mmscf per day over 8 days and petrophysical analysis of Carpentaria-4V results that demonstrated the Middle Velkerri shale is 20% thicker and 150 metres deeper than at the Carpentaria-2H location. (5) On 27 March 2023, the House of Representatives passed the Safeguard Mechanism (Crediting) Amendment Bill 2023(1). Empire understands that the bill will be considered by the Senate shortly. The Safeguard Mechanism applies to facilities with scope 1 covered emissions of more than 100,000 tonnes of carbon dioxide equivalent (CO2-e) per year(2). Empire‘s present expectation is that its pilot project is not likely to reach the Safeguard Mechanism threshold. It has been reported in the media that new gas entrants in the basin will be required to have net zero scope 1 emissions from entry. This is consistent with the prior Commonwealth Government’s April 2022 commitments. Whilst no current impact on the company’s operations, Empire’s management continue to monitor these developments closely. 1. https://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r6957 2. https://www.cleanenergyregulator.gov.au/NGER/The-safeguard-mechanism No other matter or circumstance has arisen since 31 December 2022 that has significantly affected, or may significantly affect the Group's operations, the results of those operations, or the Group's state of affairs in future financial years. 99 Empire Energy Group Limited Directors' declaration 31 December 2022 In the Directors' opinion: ● ● ● ● the attached financial statements and notes comply with the Corporations Act 2001, the Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; the attached financial statements and notes comply with International Financial Reporting Standards as issued by the International Accounting Standards Board as described in note 2 to the financial statements; the attached financial statements and notes give a true and fair view of the Group's financial position as at 31 December 2022 and of its performance for the financial year ended on that date; and there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. The Directors have been given the declarations required by section 295A of the Corporations Act 2001. Signed in accordance with a resolution of Directors made pursuant to section 295(5)(a) of the Corporations Act 2001. On behalf of the Directors ___________________________ Alexander Underwood Managing Director 28 March 2023 100 Independent Auditor’s Report to the Members of Empire Energy Group Limited Report on the Audit of the Financial Report Opinion We have audited the financial report of Empire Energy Group Limited (the Company and its subsidiaries (the Group)), which comprises the consolidated statement of financial position as at 31 December 2022, the consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies, and the directors’ declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: i) giving a true and fair view of the Group’s financial position as at 31 December 2022 and of its financial performance for the year then ended; and ii) complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the ‘auditor’s responsibilities for the audit of the financial report’ section of our report. We are independent of the Group in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional & Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of the Company, would be in the same terms if given to the directors as at the time of this auditor’s report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. 101 Key audit matter How our audit addressed the key audit matter Carrying value of oil and gas assets Refer to note 13 (Oil and Gas properties). At 31 December 2022, the Group has capitalised Oil and Gas Assets - Producing of $33.4m. AASB 136 – ‘Impairment of Assets’ requires that the recoverable amount of an asset, or cash generating unit to which it belongs, be determined whenever an indicator of impairment exists. The management assessment based on the external expert valuation concluded that there is no impairment of the carrying value at reporting date. The Group’s assessment of the recoverable amount of its oil and gas producing properties was a key audit matter because the carrying value of the assets are material to the financial statements and management’s assessment of recoverable amounts incorporate significant internal and external judgements and assumptions including commodity prices, available reserves, residual values and discount rates. Exploration and evaluation expenditure - oil and gas assets Refer to note 15 (Exploration and evaluation assets). At 31 December 2022, the Group has capitalised exploration and evaluation expenditure of $127m. These costs predominately relate to the Northern Territory area of interest and were the result of exploration campaigns and the purchase of new exploration tenements referred to as the Pangaea acquisition. The Group’s accounting policy in respect of exploration and evaluation assets is outlined in note 2. This is a key audit matter because the carrying value of the assets are material to the financial statements, and significant judgements have been applied in determining whether an indicator of impairment exists in relation to capitalised expenditure assets in accordance with Australian Accounting Standard AASB 6 – Our procedures included, amongst others: ▪ assessing whether the external expert engaged by management to provide independent valuations was appropriately experienced and qualified; ▪ evaluating management’s key assumptions and estimates used to determine the recoverable amount of its assets, including those related to forecast commodity prices and revenue, costs, discount rates and estimated residual values; ▪ assessing the accuracy of management’s forecasting by evaluating the reliability of historical forecasts and reviewing whether current market conditions would impact those forecasts; and ▪ assessing whether appropriate disclosure regarding significant areas of uncertainty has been made in the financial report. Our procedures included, amongst others: ▪ agreeing the ownership and tenure of the ▪ ▪ exploration permits in the Northern Territory area of interest to the Spatial Territory Resource Information Kit for Exploration (“STRIKE”) online registry; testing a sample of additions of capitalised exploration expenditure to supporting documentation; in assessing whether an indicator of impairment exists in relation to the Group’s exploration assets in accordance with AASB 6 – ‘Exploration for and Evaluation of Mineral Resources’, including: - reviewing the minutes of the Group’s board meetings, market announcements and management assessment; 102 Key audit matter How our audit addressed the key audit matter ‘Exploration for and Evaluation of Mineral Resources’. - discussing with management the Group’s ability and intention to undertake further exploration and evaluation activities. Asset retirement obligations Refer to note 21 (Provisions) Our procedures included, amongst others: At 31 December 2022, the Group has a carrying value of Asset Retirement Obligations (USA) of $32m. ▪ evaluating management’s process of estimating and measuring the provision for asset retirement obligations; The measurement of the provision for Asset Retirement Obligations incorporates significant judgement and uncertainty, with restoration cost estimates varying in response to many factors including changes in technology, legal requirements, discount rates, past experience at other production sites, and estimates of future restoration well plugging costs. The expected timing and amount of expenditure can also change, for example, in response to changes in laws and regulations or their interpretation. This was a key area of audit focus due to the size and nature of these estimates and their consequential effects on assessing the recoverable amount of producing assets. ▪ evaluating whether the discount rate applied by management to the forecast cash outflows is appropriate and consistent with the requirements of AASB 137 – ‘Provisions, Contingent Liabilities and Contingent Assets’; ▪ considering the Group’s estimates of plugging costs per well, including assessment of whether there have been changes in technology or costs that would materially impact those estimates; ▪ considering whether the key assumptions and judgements used in management’s estimates were consistently applied in measuring the asset retirement obligations and in assessing the recoverable amount of the related assets; and ▪ benchmarking on management’s estimates used in calculating the obligations. Other information The directors are responsible for the other information. The other information comprises the information in Empire Energy Group Limited’s annual report for the year ended 31 December 2022, but does not include the financial report and the auditor’s report thereon. Our opinion on the financial report does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of the other information we are required to report that fact. We have nothing to report in this regard. Directors’ responsibility for the financial report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. 103 In preparing the financial report, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibility for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is 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 the Australian Auditing Standards 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 this financial report. A further description of our responsibilities for the audit of the financial report is located at The Australian Auditing and Assurance Standards Board website at: www.auasb.gov.au/admin/file/content102/c3/ar1_2020.pdf. This description forms part of our auditor’s report. Report on the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 29 to 48 of the directors’ Report for the year ended 31 December 2022. In our opinion, the Remuneration Report of Empire Energy Group Limited for the year ended 31 December 2022, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Nexia Sydney Audit Pty Ltd Joseph Santangelo Director 28 March 2023 Sydney 104 Empire Energy Group Limited Shareholder information 31 December 2022 The shareholder information set out below was applicable as at 16 March 2023 (grouped). Distribution of equitable securities Analysis of number of equitable security holders by size of holding: 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over Holding less than a marketable parcel Equity security holders Ordinary shares Number of holders % of total shares issued 193 642 379 1,077 579 2,870 491 0.01 0.25 0.39 5.57 93.78 100.00 - Twenty largest quoted equity security holders The names of the twenty largest security holders of quoted equity securities are listed below: Ordinary shares Number held % of total shares issued 140,000,000 63,000,000 32,294,969 31,818,182 29,752,405 26,515,152 26,451,367 17,807,500 17,000,000 16,129,964 12,620,621 9,245,000 8,624,069 8,214,714 7,548,706 7,190,030 6,089,504 5,500,000 5,445,817 5,200,000 476,448,000 18.11 8.15 4.18 4.12 3.85 3.43 3.42 2.30 2.20 2.09 1.63 1.20 1.12 1.06 0.98 0.93 0.79 0.71 0.70 0.67 61.64 Pangaea (Nt) Pty Ltd Elphinstone Holdings Pty Ltd Global Energy and Resources Development Limited Sheffield Holdings LP Citicorp Nominees Pty Limited EMG Northern Territory Holding Pty Ltd Macquarie Bank Limited (Metals Mining and AG A/C) Liangrove Media Pty Limited All-States Finance Pty Limited Grosvenor Equities Pty Ltd (No 2 A/C) HSBC Custody Nominees (Australia) Limited Cha Qian Robmar Investments Pty Limited National Nominees Limited HSBC Custody Nominees (Australia) Limited Invia Custodian Pty Limited (Kuarka A/C) USB Nominees Pty Ltd Mr Andrew Forster Netwealth Investments Limited Wrap Services A/C Ms Swati Shukla 105 Empire Energy Group Limited Shareholder information 31 December 2022 Unquoted equity securities as at 16 March 2023 Class of unquoted securities Number on issue Number of holders Unlisted options exercisable at A$0.35 per share expiring 14 June 2024 Unlisted options exercisable at A$0.70 expiring 31 August 2024 Unlisted Performance Rights Unlisted Performance Rights (Vested) Unlisted Service Rights Unlisted Restricted Rights 69,227,558 9,696,970 8,199,939 2,688,868 2,438,558 4,287,119 362 2 10 54 3 9 Substantial holders Substantial holders in the Company are set out below: Pangaea (NT) Pty Limited Elphinstone Group Voting rights The voting rights attached to ordinary shares are set out below: Ordinary shares Number held % of total shares issued 140,000,000 64,333,969 18.11 8.32 Ordinary shares On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. There are no other classes of equity securities. 106 

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