JKX Oil & Gas plc Annual Report 2015
A fresh perspective
JKX Oil & Gas plc Annual Report 2015
1
JKX Oil & Gas plc Annual Report 2015
Strategic report
2-67
Governance
68-103
Financial statements
104-169
“In the past month, the team and I have
visited all the main assets of the Group.
We have identified significant scope for
improvement in capital investments, and
we found areas to realise both cost savings
and production gains through the application
of best in class technology and more
hands-on execution throughout the portfolio.
As we execute on these opportunities,
we expect to deliver significant improvements
to the value of JKX.”
Tom Reed Chief Executive Officer
A fresh perspective
Inside:
Strategic report
Overview
At a glance
Strategy
4
Chief Executive’s statement
Chairman’s statement
Market overview
6
8
Our business model
Strategic priorities
Performance
Performance in 2015
Financial review
Operational review
12
14
16
Principal risks and how we
manage them
Corporate Social Responsibility
28
30
35
41
54
Governance
Financial statements
Board composition
Corporate governance
Audit Committee Report
Directors’ Remuneration
Report
Directors’ report –
other disclosures
70
72
79
84
100
Independent auditors’ report –
Group
Group financial statements
Independent auditors’ report –
Company
106
112
155
Company financial statements
157
2
2
JKX Oil & Gas plc Annual Report 2015
Strategic report
3
3
JKX Oil & Gas plc Annual Report 2015
Strategic report
2-67
Governance
68-103
Financial statements
104-169
Strategic report
Overview
At a glance
Strategy
4
Chief Executive’s statement
Chairman’s statement
Market overview
6
8
Our business model
Strategic priorities
Performance
Performance in 2015
Financial review
Operational review
12
14
16
Principal risks and how we
manage them
Corporate Social Responsibility
28
30
35
41
54
“A new Board of Directors of JKX was voted
in by the shareholders on 28 January 2016.
The new Board is reformulating JKX’s
strategy for 2016 to turn the Company
around and to restore shareholder
value. The Board believes that the region
continues to offer significant development
opportunities in the medium to long term.”
Tom Reed Chief Executive Officer
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67
4
JKX Oil & Gas plc Annual Report 2015
At a glance – our business
What we do
JKX is an upstream oil and gas exploration and production
company with significant oil and gas assets in Ukraine and
southern Russia.
Where we operate
The head office is in London, which employs 22 staff.
Our operational areas are shown below:
Ukraine
Staff
Fields
Wells
493
6
45
Russia
Staff
Fields
Wells
249
1
5
Moscow
Production
4,325 boepd
Production
4,671 boepd
2P Reserves
29.7 MMboe
2P Reserves
66.1 MMboe
Russia
Kiev
Ukraine
Elizavetovskoye
Poltava
Novo-Nikolaevskoye Complex
Koshekhablskoye
Maikop
Black Sea
C
a
s
p
i
a
n
S
e
a
Strategic priorities
Profitable
production
growth
1
Oil and gas
reserves
growth
2
Safe and
responsible
operations
3
5
At a glance – our performance
From the Chief Executive, Tom Reed:
“Since the appointment of the new Board on 28 January 2016,
we have visited all the main assets of the Group and identified
significant scope for operational improvements and cost
savings across JKX.
We are encouraged by the physical characteristics of our
reservoirs in Russia and Ukraine, the quality of the staff
across JKX, the opportunity for operational and capital
spending improvements, and remain committed to improving
value per share to all shareholders.
Areas of legacy risk exist primarily related to production
tax litigation in Ukraine which we are confident that we can
continue to manage.
During 2015 and in 2016, significant non-recurring
administrative costs have been, or will be paid, by the
Company as a result of past events and the Board is exploring
all options to mitigate these.
There are many challenges facing the Company, and the new
Board is committed to a new and transparent approach and to
actively engage all shareholders and other stakeholders of the
Company in order to turn it around.”
Key financials
Revenue
Loss from operations before exceptional charges
Exceptional charges
Loss for the year
Loss per share
Net cash generated from operating activities
Capital expenditure
Operating highlights
2015
2014
$88.5 m
$146.2m
$10.7m
$11.6m profit
$64.9m
$72.5m
$81.5m
$79.5m
47.32 cents
46.21 cents
$9.1m
$8.7m
$47.5m
$42.3m
Board of Directors replaced by shareholders at a General Meeting on 28 January 2016
Average production 8,996 boepd (2014: 9,919 boepd)
No development drilling in 2015 due to cash constraints
Well-27 restored at the Koshekhablskoye field in Russia
Six 35-year production licences awarded in Hungary (JKX 100%)
Outlook
New Board reviewing all development projects and enhancement opportunities as part of a wider review of future strategy
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015Strategic report 2-67
6
Chairman’s statement
Paul Ostling Chairman
7
of approximately $180 million in Rental Fees, plus damages
to the business. The arbitration hearing is expected to take
place in July 2016, which will include witness statements from
certain members of the old Board and will result in additional
legal costs for JKX.
In Ukraine, the Company’s subsidiary, Poltava Petroleum
Company (‘PPC’), continues to experience a combination of
aggressive production tax demands for periods up to the
end of 2015 and also challenges to its compliance with the
terms of its production licences (see Notes 2 and 27 to the
financial statements). We have met with representatives of the
Ukrainian Government in recent weeks to attempt to find
a solution to all our production tax and licencing issues
in-country and we are confident that an acceptable solution
can be found. I will update shareholders when we have clarity
on these issues.
Russia
The fall in international oil prices and continued sanctions are
having a negative impact on Russia’s domestic economy.
A combination of continuing low gas prices, which are set by
the Russian Government, and the devaluation of the Russian
Rouble in 2015 from RR56:$1 to RR72:$1 adversely affected
the Group’s profit and cash generated from its Russian project
in US Dollar terms.
The combination of the recent Russian Rouble devaluation and
only a minimal gas tariff increase in the near term has had
a negative effect on our plans to expand our current licence
portfolio there.
Hungary and Slovakia
Despite the recent fall in international oil prices, our
exploration and appraisal prospects in Hungary and Slovakia
remain attractive. Both economies are relatively stable and
the Board is currently reviewing the investment options for
these licences in 2016.
Cash
The Group’s cash balance at the year end of $25.9 million has
been significantly reduced in the first two months of 2016 by the
$12.3 million redemption payment due under the terms of the
convertible bond and the $2.2 million of severance costs and
additional remuneration which the previous board approved
and paid prior to the General Meeting on 28 January 2016.
Cash balances will be further reduced in the coming
months due to $3 million of legal costs incurred by Eclairs
and Glengary, following the finding against the Company by
the Supreme Court of the United Kingdom in respect of the
imposed shareholder restrictions. In addition, the Company
will also have to pay its own legal costs for the continuation of
any international arbitration proceedings (as already
noted above).
If all bondholders exercise their option to early redemption
in February 2017, as they are entitled to under the terms of the
bonds, the Company will owe bondholders a further
$30.1 million at that time.
Board
Following the replacement of the entire Board on 28 January
2016, the composition of the Board has not complied with the
UK Corporate Governance Code in respect of the number of
independent Non Executive Directors.
The Company has engaged an independent consultant to
conduct due diligence on a short-list of candidates and is now
in the final phase of appointing two new independent
Non Executive Directors. As soon as this has been completed
we will be re-establishing board committees to oversee audit,
remuneration and nominations, to ensure that JKX has the
first class corporate governance that it needs. As a temporary
measure, and to ensure appropriate review and process in the
release of this report, an Interim Audit Committee consisting
of myself and Russell Hoare, your new Chief Financial Officer,
was appointed.
Outlook
There remain risks noted above in respect of the $30.1 million
bond payment which may become due in February 2017, the
contingent liabilities in respect of Ukrainian production taxes,
the Ukrainian production licence compliance issues and the
continued low oil and gas prices, which, if realised, may impact
the going concern status of the Company. These risks are fully
addressed in Note 2 to the financial statements. However the
Directors believe that there is a reasonable basis to mitigate
the effects of such eventualities through negotiation with
the Ukrainian Government, further operational and cash
management measures and other restructuring or refinancing
options, which are currently being assessed.
During our short period in office we have conducted an initial
review of the Group’s assets, and the Board believes that JKX
assets and staff provide a good platform to consolidate and
improve on its existing oil and gas opportunities in central and
eastern Europe.
It is true that the Board inherited many difficult challenges,
but this is why we believed that change was so desperately
needed. We remain committed to a transparent approach that
actively engages all shareholders and other stakeholders of
the Company and you will have already seen the first of what
will be regular operational updates. We are confident that we
will be able to turn JKX around.
Finally, I wish to thank all our shareholders and staff for their
support of the Company and the new Board in this period of
change. I look forward to working with all stakeholders to
restore the value of the Company over the coming months.
Debt
In accordance with the terms of the Company’s $40 million
Convertible Bond, $7.2 million of bond payments were
made during 2015 and in February 2016 the Company made
scheduled early redemption repayments to bondholders of
$12.3 million.
Paul Ostling
Chairman
A fresh perspective
I am pleased to present this report on behalf of the new Board
of Directors that was appointed by shareholders on 28 January
2016, charged with bringing a new vision and approach to
restore shareholder value at JKX. This change in the Board
resulted from proposals made by one of the Company’s
largest shareholders, who saw that the Company needed a
new direction and requisitioned a General Meeting to allow
all shareholders to vote on this idea. It is a rare example of
genuinely successful shareholder activism in the long history
of the London Stock Exchange.
At the time of writing I am nearing completion of my second
month as Chairman of your Company and so this report details
activities that occurred before any of the new Board took
office. None of the Directors who were in office in 2015 are
now with JKX. When combined with the fact that 2015 was
a year of continuing low international oil and gas prices
combined with volatility and uncertainty in the regions in which
JKX operates, the factors behind your Company’s results
were beyond our control. However I can make two promises:
from this point forward your new Board will be completely
transparent in how we communicate to shareholders
regarding the challenges we face in such an environment and
the steps we are taking to restore the Company’s fortunes; and
we will be resolutely committed to increasing efficiency and
reducing needless costs.
Performance in 2015
The low oil and gas prices and the lack of capital investment
led to the Company’s production, profits and operating cash
flow falling significantly in 2015. Despite this, the Company has
remained cash generative from its operations.
The disappointing financial performance and decline in
production was exacerbated by the suspension of all but
essential capital investment across the Group, the delays in
bringing well-27 in Russia back on line, and the intense focus
of the Company on various legal proceedings.
Ukraine
In Ukraine, the introduction of the 55% rate of production
tax, foreign exchange controls and government-imposed
restrictions on the sale of gas during the three months to
28 February 2015 led to cash constraints and no capital
investment programme during 2015.
The investment climate has improved following the reduction
of gas production tax rates to 29% for 2016 and the lifting of
restrictions on the sale of gas in February 2015. However the
Ukrainian economy remains fragile and foreign exchange
controls remain in place, making the repatriation of cash
extremely difficult.
You will no doubt recall that in 2014, the Company commenced
arbitration proceedings against Ukraine on the basis of
overpayment of production taxes (‘Rental Fees’), as explained
more fully in Note 27 to the financial statements. During 2015
an international arbitration tribunal issued an Interim Award
requiring the Government of Ukraine to limit the collection
of Rental Fees on gas produced by PPC to a rate of 28%.
This Interim Award remains in effect until final judgement is
rendered on the main case, which relates to the overpayment
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67
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9
Market overview – Ukraine
Why are we here?
A huge demand for energy 1
There is a huge demand for energy in Ukraine and a lack of
local supply. Historically there has been a lack of investment
in the development of oil and gas reserves in Ukraine and as
a result there are good opportunities to develop additional
reserves in Ukraine by applying the latest exploration and
production technology.
Ukraine is the fourth largest consumer in Europe with annual
gas consumption of 42 Bcm/year. Domestic production is
steady at 20 Bcm/year. As such, a significant gas demand gap
will remain in Ukraine for the foreseeable future.
Gas pricing and realisations 2
Ukraine imports its gas from Russia and Europe. The pricing
of Russian gas has always been based on an oil-based
formula. The pricing of gas from Europe is based on gas-
to-gas price competition at European hubs. The dynamic of
these two pricing philosophies differ significantly and there
are times when the hub based prices are significantly cheaper
than the formulaic prices.
This is the arbitrage opportunity for Ukraine and 15 Bcm/year
of gas can be accessed this way if the commercial incentives
prevail.
The fundamental base gas price of the Ukraine market
however will always be at least the oil indexed price or the hub
price of Slovakia plus the additional cost of reverse flow. As a
local producer we should always be able to get better netback
prices than any supplier who has to cover all of these shipping
costs (circa $20/Mcm).
A default price of European Hub plus $20/Mcm is a good floor
price for JKX.
Netback analysis 3
On 2 August 2014, the Ukrainian government increased gas
production taxes to 55% (from 28%) and oil production taxes
to 45% (from 39%) initially for 3 months but subsequently
extended this through to 31 December 2015. From 1 January
2016 the gas production tax has reduced to 29%.
The netback on our gas sold in Ukraine in 2015 was
approximately $4.77/Mcf (based on a gas sales price of
1
Gas demand
2
Gas pricing and realisations
Annual oil production-consumption
gap in Ukraine (‘000bpd)
Annual gas production-
consumption gap in Ukraine (Bcf)
Gas realisations in Ukraine in 2015
194,000 bpd
Shortfall
800 Bcf
Shortfall
300
200
100
260
1,800
1,200
600
700
66
Oil production (’000 bpd)1
Gas production (Bcf)1
Oil consumption (’000 bpd)1
Gas consumption (Bcf)1
$7.65 per Mcf
1,500
Gas market changes in 2015
The balance of gas (20 Bcm/year) is imported and until 2015,
virtually all of these imports have either been from Russia or from
other ex-Soviet countries (particularly Turkmenistan) through
Europe.
In 2015, the market has changed significantly due to the initiation
of so called “reverse flow” capability from Europe. This entails
the movement of gas from west to east across the existing border
crossings between Ukraine and Hungary, Poland and most
importantly Slovakia.
1 Source: USA Energy Information
Administration
The last of these (Velke-Kapucharny) has been the major transit
point for westward-moving Russian gas to Europe for over 40 years.
$8/Mcf) or 59% stated as a gross margin. Our netback on oil in
2015 was $17.56/bbl (based on an oil sales price of $40/bbl),
a gross margin of 44%.
Our competitive advantage
First to move
JKX invested in Ukraine over 20 years ago to help meet the
demand gap and was rewarded with licences covering some
of the best oil and gas fields in Ukraine. JKX has significant
experience of doing business in this region.
Sustainable low cost production, cash generative operations
The Company commenced commercial production of oil and
gas in Ukraine in 1995. It has over 450 experienced local staff
working there and six producing oil and gas fields.
Our six producing fields and two Gas Processing Facilities
(‘GPFs’) are located in the Poltava region of Ukraine.
JKX’s business assets in Ukraine
Novo-Nikolaevskoye Complex 4
Our Novo-Nikolaevskoye Complex reserves comprise five
distinct fields producing in to one GPF. In addition we have a
Liquefied Petroleum Gas (‘LPG’) facility which converts some
of our gas into LPG for sale into the expanding Ukrainian
market.
Elizavetovskoye field 5
Our Elizavetovskoye field and GPF, which are 45km from our
Novo-Nikolaevskoye Complex, began commercial production
in 2014. The field currently produces from three wells.
Our investment
We have invested over $550m in Ukrainian oil and gas
development projects over the past 22 years. We have
produced and sold gas, oil and condensate locally for the past
21 years.
Ukrainian reserves 6
At the end of 2015, our 2P reserves in Ukraine comprised
158.4 Bcf of gas and 3.3 MMbbl of oil (total 29.7 MMboe).
3
Netback analysis
Netback analysis of gas sales
(at $8/Mcf)
$1.11 (14%)
$2.12 (27%)
$4.77 (59%)
2015
2014
Production costs
Production taxes
Net
Netback analysis of oil sales
(at $40/bbl)
4
Novo-Nikolaevskoye
Complex project life cycle
6
Ukrainian reserves
Total project lifecycle
Reserves split
$0.94 (12%)
$2.84 (35%)
$4.22 (53%)
21
Years of
commercial
production
to date
Molchanovskoye
Ignatovskoye
1994
2015
2032
Novo-Nikolaevskoye
Rudenkovskoye
Zaplavskoye
89%
Gas
2.8
Gas
Oil
Principal risks associated with our business
in Ukraine (detail on page 42)
Geopolitical – Ukraine
Geopolitical – Group
Tax legislation
Commodity prices
Foreign exchange exposure
Reservoir performance
Environmental, asset integrity
and safety incidents
Bribery and corruption
A
B
C
D
E
H
I
J
Redundant capacity in the complex of pipelines and compressors
at this transit hub have been refurbished and upgraded to allow
for the movement of gas in the opposite direction to the
predominant flow.
This new-found technical capacity allows Ukraine to purchase gas
from Europe and, rather than being completely dependent on
Russia for imports, Ukraine can now assess competing bids for
gas imports from Gazprom on the one side and European Energy
Utilities on the other.
The macro gas world of Ukraine has changed forever.
This change broadens the supply pool in terms of the number of
companies competing in the market which should in time result in
more competition.
$5.10 (13%)
$17.34 (43%)
$3.12 (8%)
$15.36 (38%)
5
Elizavetovskoye field
project life cycle
$17.56 (44%)
2015
2014
$21.52 (54%)
Total project lifecycle
Production costs
Production taxes
Net
2
Years of
commercial
production
to date
1995
2015
2023
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67
10
11
Market overview – southern Russia
Why are we here?
JKX’s business assets in southern Russia
A huge demand for gas 1
Forecast gas demand 2
Our investment 6
We have worked over five existing wells, installed a state-
of-the-art Gas Processing Facility and expanded processing
capacity to 60 MMcfd (approximately 10,000 boepd).
Russian reserves 7
At the end of 2015, the estimation of remaining 2P reserves
was 392.5 Bcf of gas and 0.65 MMbbl of oil (total 66.1 MMboe).
Industrial output in Russia declined through 2015 and there
has been a proportionate reduction in domestic gas demand.
However, the south of Russia is defying the general trend and
in the Krasnodar region, where our Koshekhablskoye gas field
is located, there has been a sustained increase in industrial
gas demand in recent years.
Annual industrial consumption of gas in the Krasnodar and
Adygea regions is more than four times gas production.
Part of the reason for this is the population growth (and
hence energy demands) of Sochi – initially as an Olympic
venue, but more latterly as an expanding city and a favoured
tourist destination. Gas is used locally in cement production,
steel construction, glass manufacturing, heating and air
conditioning – all of which is now abundant in Sochi.
Lack of local supply 1
In southern Russia, gas demands are partially met by
transporting gas long distances (at high cost) from production
centres in the north of Russia.
In Russia, historical Gazprom gas fields are now all in decline.
To replace lost production, most investment into gas fields
is in the development of the Yamal peninsula gas fields
which are more than 4,000km north of our gas reserves at
Koshekhablskoye, Adygea in southern Russia.
Due to a rapid industrialisation in southern Russia in the past
five years, by 2020 gas demands there are expected to double.
Our competitive advantage 3
First to move
In 2007, we purchased the licence to rehabilitate and develop
the Koshekhablskoye gas field in order to participate
in the rapidly growing independent gas market. The
Koshekhablskoye gas field is located in the Republic of
Adygea, southern Russia, where gas resource is scarce, and
there are high transportation costs from Russia’s main gas
production area in the far north, some 4,000km away.
Gas realisations 4
The average increase in Russian gas prices since 2007 has
been 18%. There was an official 7% increase in the regulated
maximum industrial gas price in 2015.
Netback analysis 5
The gas production tax rate in southern Russia is 9%, which
is approximately one third of the rate in Ukraine (29%). The
netback on our gas sold in Russia in 2015 was approximately
$0.70/Mcf (based on a gas sales price of $1.68/Mcf) – a gross
margin of 41%.
Principal risks associated with our business in
southern Russia (detail on page 42)
Geopolitical – Group
Commodity prices
Foreign exchange exposure
Reservoir performance
Environmental, asset integrity
and safety incidents
Bribery and corruption
B
D
E
H
I
J
1
Gas supply
and demand
2
Forecast gas demand
3
Koshekhablskoye project life cycle
5
Netback analysis
6
Our investment
7
Russian reserves
Krasnodar-Adygea region annual
production-consumption gap (Bcf)
Southern Russia regional gas
consumption forecast (Bcm)³
279 Bcf
Shortfall
400
200
385
106
Gas production (Bcf) 1
Gas consumption (Bcf)2
Sources for supply and demand figures:
1 Rosnedra
2 Central Dispatching Unit of the
Energy Sector (TsDU TEK)
Total project lifecycle
3.8
Years of
commercial
production
to date
2012
2015
+9.26
+5.09
20
15
10
5
+0.34
+1.66
By 2030
By 2020
By 2010
Rostov
Three
Republics
of Northern
Caucasus
3 Source: ERTA consult 2010
Stavropol
Krasnodar
& Adygea
4
Gas and pricing realisations
Gas realisations in southern Russia in 2015
$1.68 per Mcf
Southern Russia netback analysis gas (at $2/Mcf)
Investment and production in
southern Russia
2048
$1.00 (50%)
$0.18 (9%)
$0.88 (44%)
$0.24 (12%)
$0.82 (41%)
2015
2014
$0.88 (44%)
($m)
120
60
Reserves split
99%
Gas
(MMboe)
5,000
4,000
3,000
2,000
1,000
1,075 MMboe
Production costs
Production taxes
Net
$3m
2000
2007
2015
Investment ($m)
Production (MMboe)
Gas
Oil
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13
Chief Executive’s statement
Tom Reed Chief Executive Officer
A fresh perspective
Late in 2015, JKX became the target of shareholder activism
on the London Stock Exchange. We saw what appeared
to be a company stuck in a rut rather than having a clear
strategy to resolve the myriad external challenges it faced
in today’s political and market environment. The Board that
shareholders appointed on 28 January 2016 will actively
address these challenges and return your company’s focus to
oil and gas development.
The new Board and I plan to make JKX an example of
successful shareholder activism on the London Stock
Exchange. We are true believers in shareholder rights and
believe shareholder voices must be heard.
Over the last 10 years, your company has invested in excess of
$925 million in oil and gas field developments and generated
cumulative operating cash flows of approximately $1.1 billion,
with $12.8 million generated in 2015.
This has been achieved without drilling a new well in Russia
and without utilising latest generation drilling and completion
techniques at our Ukrainian fields. This implies exciting
geological potential for both. Hungary has also become more
strategic to the Group in 2015 with the addition of six new
production licenses.
Performance
We were not participants in the Company’s performance in
2015, but we are responsible for reporting the financial results
to you. As such, we will stick to some simple facts.
Average oil and gas production for the year decreased by
9% to 8,996 boepd (2014: 9,919 boepd), primarily due to the
suspension of all non-essential capital investment in Ukraine,
and no production from well-27 in Russia until December, due
to repairs.
Group revenue for the year was 39% lower at $88.5m
(2014: $146.2m) as a result of lower oil, gas and condensate
prices in Ukraine and Russia, which followed international
pricing trends, exacerbated by the decline in production.
Operating loss before exceptional charges was $10.7m
(2014: profit $11.6m) and loss for the year was $81.5m
(2014: $79.5m).
Ukraine
In Ukraine, we exited 2015 with production at 4,210 boepd
and averaged 4,325 boepd for the year, down 10% from 2014.
No wells were drilled as capital expenditure was suspended,
however the natural decline in production was slowed by
workover and well-intervention operations.
Russia
At our Koshekahblskoye field in southern Russia, we exited
2015 at 7,271 boepd, and averaged 4,671 boped for the year,
down 9% from 2014 due to well-27 not contributing for most of
the year.
The two-year project to restore production to well-27 was
completed in December 2015, improving the 2015 exit
production as a result. To date, insurance recoveries related to
these restoration costs have been approximately $6.1m.
Russian operations are today stable and we will assess the
economics of further development opportunities in Russia in
comparison to the rest of the company’s portfolio of capital
investment opportunities.
Rest of World
Hungary and Slovakia saw expansion of acreage under licence
in 2015. JKX now has a 100% interest in six production licences
in Hungary covering an area of 200 sq km, and a 25% interest
in four exploration licences in Slovakia covering 1,376 sq km.
We will assess the economics of further development
opportunities in Hungary and Slovakia in comparison to the rest
of the company’s portfolio of capital investment opportunities.
Reporting and exceptional charges
Within the rules of International Financial Reporting Standards
(‘IFRS’), we will try to give the most open explanation of risks
and potential liabilities as we can, and report performance,
failures and major risks as they arise. We will also tell you
what we can about our plans to overcome the Company’s many
challenges.
Through our regular frank and open communications we
hope to rebuild investor confidence and trust in JKX with both
current and future shareholders.
In 2015, we have recognised an impairment charge of $51.1m
on the carrying value of our oil and gas assets; $49.6m of
which relates to our Novo-Nikolaevskoye Complex of fields
in Ukraine. The charge arises mainly due to the impact of
lower international oil and gas prices on our asset valuations
and also due to the increase in the discount rate used for
our Ukrainian projects, reflecting heightened economic
uncertainty there.
We have identified several potential liabilities relating to
production taxes in Ukraine for certain periods since 2007,
which we believe could have been more clearly communicated
to shareholders. Including amounts arising in the second half
of 2015, these potential liabilities total $41m and are being
actively contested by the company, as described in more detail
in Note 27 to the financial statements.
Due to a recent judgement against our Ukrainian
subsidiary, Poltava Petroleum Company (‘PPC’), in the High
Administrative Court of Ukraine in respect of one of these
cases, a $10.9m provision has been recognised to reflect our
estimate of the potential liability. The Board believes that these
claims are without merit under Ukrainian law and we will
continue to contest them vigorously.
An exceptional charge of $3.0m has also been recognised
for the legal costs of our two major shareholders, Eclairs
and Glengary, which the Company will have to pay as a result
of the finding against the Company by the Supreme Court
of the United Kingdom that the restrictions placed on these
shareholders in 2013 were invalid.
Once we have identified what’s possible, we will work
quickly to find the combination of talent, technology, and
engineering that’s right for our fields. The team at PPC is
talented and motivated; the staff are fully committed to
establishing themselves as the clear technical, operational
and development leader in Ukraine.
Russia
In Russia, we will maximise the cash generation from the
asset, while reviewing strategic options, including additional
development and monetisation options. We are conducting
this exercise while challenging ourselves and the local service
industry to target international norms for deep, HTHP gas well
construction and completion in southern Russia. Our historic
well workover costs are many times higher than similar wells
in North America and we will understand why that is the
case and what we can do about it before spending significant
additional capital in the field.
Rest of World
In Hungary and Slovakia, we will rebuild the Field Development
Plan using best global practices and then adapt that goal
for local execution. Attracting world-class services and
reasonably priced capital requires scale, which is what we will
have in mind while reviewing strategic opportunities in eastern
Europe as well.
Finally, I wish to thank our staff for their dedication and
support of the new Board and I look forward to updating
all shareholders in more detail in the coming weeks on our
strategy to restore shareholder value at JKX.
Tom Reed
Chief Executive Officer
Outlook
As long as the current board and I are managing your
company, we will stick to a few basic management and
communication principles:
A. Transparent reporting of financial performance, as well as
challenges and major risks to our business. We will treat
the market as our partner, ‘Mr. Market’. We will tell our
partner what we are thinking as well as our IFRS reporting,
and let the share price take care of itself over time.
B. Rational capital allocation based on predicted economic
return. No investments which are dependent on multiple
expansion, market perception, or an unknown future buyer
for positive return.
C. We will manage our operations and field development
based on ‘what’s possible’ in the world of petroleum
engineering, physics, and execution. Not based on what
happened last year or what the drilling equipment that
we acquired years ago can do. By targeting maximum
engineering performance, and dealing with the local and
technical shortcomings as they arise, we create a world-
class performance organisation.
Ukraine
In Ukraine, our immediate focus is to re-evaluate the Field
Development Plan with global best practices in mind and
particularly those practices that have successfully driven the
unconventional oil and gas revolution in North America, where
production gains were made in geology more challenging than
our own.
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67
14
15
Strategic priorities in 2015
Our business model in 2015
Strategic objective
Our objective in 2015 was to enhance
shareholder value by increasing both our
oil and gas production and reserves
through safe and responsible operations.
Investment, sales and return cycle
We seek to achieve our strategic objective by focussing on our
three strategic priorities (see right) and:
• our ongoing drilling and workover programme in our
existing oil and gas fields to sustain and increase oil, gas
and condensate production;
• exploration and appraisal using seismic and other
techniques to enhance reserves and resources;
• ongoing development of our physical infrastructure to
increase capacity and minimise operational costs; and
• new investments and acquisitions.
We invest in exploration for, and the appraisal and development of oil and
gas fields (for more information on those assets see page 35). We generate
revenue from production and sales of oil, gas, condensate and LPG.
-$ INVESTMENT
-$ INVESTMENT
+$ SALES
+$ SALES
X P LO
R
E
A
T
I
O
N
I SAL
A
R
P
P
A
E VEL
O
D
P
M
E
N
T
CT I O N
U
D
O
R
P
R E H OLD
E
R
S
A
H
S
Key beneficiaries
Local community
$0.2 million plus employee
time donated to charitable
causes in Ukraine and
Russia.
L O C AL
C
O
M
M
U
N
ITIES
S U PPL
I
E
R
S
P L O YEE
S
M
E
+$ RETURN
E R N MEN
T
V
O
G
Cash flow generated from production and sales is reinvested to achieve our
three strategic priorities (see right), and to the beneficiaries (below).
Employees
$14.9 million paid in
wages and salaries. We
provide jobs in developed,
emerging and developing
economies, creating local
purchasing power and
improving standards of
living.
Suppliers
$38.9 million paid to
suppliers for equipment,
materials and services.
Where possible, we
purchase local goods
and services and develop
infrastructure that benefits
entire communities.
Government
$50.8 million paid to
national governments
and local authorities. This
includes production taxes,
payroll taxes, corporate
tax, net VAT, licences fees,
land and utility taxes.
Through payment of taxes
we support local and
national economies.
Shareholders
No dividends were paid
during 2015.
Strategic priorities in 2015
production
1Profitable
growth 2 Oil and gas
growth 3 Safe and
reserves
responsible
operations
Our strengths supporting that:
Visionary marketplace
analysis and
subsurface expertise
Significant regional
experience and local
expertise
Stakeholder
management
Our competitive advantages
• First to move
• Sustainable low cost production
• Cash generative operations
Strengths explained
Competitive advantages explained
Visionary marketplace analysis and subsurface expertise
Allows us to explore for new oil and gas reserves and develop
oil and gas production.
Our on the ground intelligence is supported by our subsurface
expertise in Ukraine, Russia and London applying the latest
western technologies in oil and gas exploration and appraisal.
Significant regional experience and local expertise
We have over 20 years experience of operating in the oil and
gas industry in central and eastern Europe. Our significant
local knowledge, presence and on the ground intelligence is
supported by our strong, established relationships in the oil
and gas industry.
Stakeholder management
We build long-term, trusting relationships with local staff,
authorities, customers and other stakeholders, which provide
our business with a stable platform in volatile emerging
markets.
First to move
Ukraine and southern Russia are significant net consumers
of oil and gas. A significant gas supply-demand gap will remain
for the foreseeable future.
Sustainable low cost production
Our Ukrainian and Russian companies are led by a native
General Director who is empowered to build a stable business
platform through investment in a locally employed workforce.
Strong western governance standards are applied to our local
operations through close working relationships between the
Board and our management teams in Ukraine and Russia.
Cash generative operations
We sell our gas under long-term contracts to reputable
customers improving the reliability of our revenue streams.
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67 16
17
Strategic priorities in 2015
Performance dashboard in 2015
Our performance dashboard for our three
strategic priorities provides a snapshot of
our progress in 2015, our focus through
2016 and the associated risks. On the
following pages (18 through 27) we provide
more detail on the dashboard information.
Strategic priority
production growth
1Profitable
Progress in 2015
Strategic priority
Strategic priority
Oil and
gas reserves
growth
2
Safe and
responsible
operations
3
On 28 January 2016 a new Board was
appointed at JKX. The new Board has
completed preliminary on-site reviews of
the operations and assets of JKX and is
reviewing its strategic priorities and
future strategy.
• Ukrainian production down 10% to 4,325 boepd
• Reserves replacement ratio of 42%
• An All Injury Frequency Rate of 0.15 per 200,000 hours
• Elizavetovskoye field development on-stream contributing
an additional 1,715 boepd
• Russian production down 9% at 4,671 boepd
• Gas realisations maintained at $4.20/Mcf ($7.65/Mcf in
Ukraine, $1.68/Mcf in Russia)
• Production costs reduced to $7.45/boe
After 2015 production:
• Russian reserves decreased by 1.0 MMboe to
66.1 MMboe
• Novo-Nikolaevskoye Complex reserves increased by
2.4 MMboe to 26.4 MMboe
• Elizavetovskoye reserves up to 3.2 MMboe
worked
• Zero Lost Time Injuries per 200,000 hours worked
• An Environmental Incident Frequency Rate of 0.30 per
200,000 hours worked
Performance measures
Performance measures
Performance measures
Production volumes
Gas realisations
Reserves
Reserves replacement ratio
All Injury Frequency Rate (‘AIFR’)
Lost Time Injuries (‘LTI’)
8,996 boepd
$4.20 per Mcf
95.7 MMboe
42%
0.15
Zero
9%
27%
Return on average capital
employed
Production costs
(35.8)%
$7.45 per boe
14%
per 200,000 hours worked
per 200,000 hours worked
Environmental Incident Frequency
Rate (‘EIFR’)
0.3
per 200,000 hours worked
Future focus
Future focus
Future focus
• Restarting the 2015 capital investment programme in
Ukraine
• Investment in Ukraine to expand reserves is currently
restrained pending more favourable oil and gas prices
• To exceed internal and industry targets for AIFR, LTI
and EIFR
• Strategic review of assets by new Board of JKX
• Reserves at our Elizavetovskoye field in Ukraine could be
• An AIFR of 0.35 or below
(see page 12)
expanded if drilling restarts
• Strategic review of assets by new Board of JKX
(see page 12)
• LTI of 0.35 or below
• EIFR of 0.60 or below
• Maintain OHSAS 18001, ISO 14001 and
ISO 9001 accreditations
Associated principal risks
Associated principal risks
Associated principal risks
• Further Ukrainian government-imposed decrees making
• The Ukrainian government control the economic
• Containment of frequently used hydrocarbons and other
future investment uneconomic
• Decline in oil and gas prices
• Gas prices in Russia are controlled by the government
• Russian gas field reservoirs are 5,000m deep with high
temperature, pressure and sulphur content
parameters for investment
hazardous materials
• If future oil and gas prices are predicted to remain low,
• Ensuring that all staff and contractors comply with
reserves could be reduced
approved rules, standards and regulations at all times
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67 18
18
JKX Oil & Gas plc Annual Report 2015
Strategic priorities in 2015
19
19
JKX Oil & Gas plc Annual Report 2015
Strategic report
2-67
production
growth
1Profitable
Supporting strengths:
Visionary marketplace analysis
and subsurface expertise
Significant regional experience
and local expertise
Stakeholder
management
Associated principal risks (detail on page 42)
Geopolitical – Ukraine
Geopolitical – Group
Tax legislation
Commodity prices
Foreign exchange exposure
Liquidity
Overexposure to a single market
Reservoir performance
Bribery and corruption
A
B
C
D
E
F
G
H
J
Why is profitable production growth important?
Profitable production growth from our fields will increase our
revenue, profits and shareholder value. Our future production
profile underpins the value of the Group.
In 2014 at the Elizavetovskoye field in Ukraine, we drilled
three new wells, doubled the gas processing capacity at the
new GPF and converted our exploration licence into a 20 year
production licence.
99% and 81% of our total production in Russia and Ukraine,
respectively, is gas.
Our oil and gas production is limited by the performance of our
oil and gas reservoirs. Our gas production is also limited by
the processing capacity of the three Gas Processing Facilities
(‘GPFs’) at our Koshekhablskoye field in Russia, and the Novo-
Nikolaevskoye Complex and Elizavetovskoye fields in Ukraine.
How we go about it
We produce our oil, gas and condensate from fields in
Ukraine and southern Russia, where demand for oil and gas
significantly exceeds the local supply.
We sell all the oil, gas, and condensate that we produce,
locally. In Ukraine, some of our gas and condensate production
is converted into LPG and sold into the expanding Ukrainian
LPG market. This increases overall revenues from the gas
produced.
First to move
JKX invested in the oil and gas industry in the region in
1994. We own and control 100% of all our producing fields,
therefore we have the flexibility to regularly reprioritise field
developments to grow Group production in the most
effective way.
Significant regional experience and subsurface expertise
Our highly skilled local Russian and Ukrainian technical
teams are experts in local laws and regulations, who ensure
that we can quickly obtain the permits required to continue
with planned field developments. Having this expertise in-
house ensures efficient day-to-day drilling, development and
construction operations at minimum cost.
Stakeholder management
The gas markets in which we can sell our gas in Ukraine
and Russia are broadly regulated by Government. The price
at which we can sell our gas in Russia is controlled by the
Government.
We attempt to maximise stability and predictability within
these markets by selling our gas under long term contracts
to reputable customers. For example, in Russia, all of our gas
production is sold to a local trading company through a gas
sales contract which remains in place. Due to the disruption
in the Ukrainian gas market in 2015 our long term gas sales
agreement with Shell was terminated however we continue to
look to secure stable long-term industrial customers for our
gas production there.
Sustainable low cost production
Our low cost operating model using local employment and
expertise has been learnt from 22 years of operating in
Ukraine. This experience and knowledge is transferable
across central and eastern Europe.
Progress in 2015
Group production decreased by 9% to 8,996 boepd (4,671 boepd
in Russia; 4,325 boepd in Ukraine).
Production costs reduced by 14% at $7.45/boe mainly as a
result of Hryvnia and Rouble devaluations; gas realisations
also reduced to $4.20/Mcf.
Revenues declined significantly primarily due to a sharp fall in
oil and gas realisations and lower production volumes.
Performance measures
Production volumes
Production costs
Return on capital employed
Gas realisations
8,996 boepd
$7.45 per boe
(35.8)%
$4.20 per Mcf
9,731
9,919
8,996
13.71
9%
8.70
7.45
14%
6.73
5.74
4.20
27%
2013
2014
2015
2013
2014
2015
1.3
2013
2014
2015
(23.0)
(35.8)
2013
2014
2015
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67
20
20
21
21
JKX Oil & Gas plc Annual Report 2015
Strategic report
2-67
Governance
68-103
Financial statements
104-169
Strategic priorities in 2015
Strategic priorities in 2015
Oil and gas
reserves
growth
2
Supporting strengths:
Visionary marketplace analysis
and subsurface expertise
Significant regional experience
and local expertise
Stakeholder
management
Associated principal risks (detail on page 42)
Geopolitical – Ukraine
Geopolitical – Group
Liquidity
Over exposure to a single market
Reservoir performance
A
B
F
G
H
The Board is reviewing all development projects and
enhancement opportunities.
Gas realisations are anticipated to remain at current levels
in Ukraine through 2016, with Rouble-denominated gas
realisations in Russia expected to remain flat and to decrease
in US$-terms, if the Rouble devalues.
Risks
Ukraine
Investment plans in Ukraine to increase production may be
impacted if there is any further government intervention in
the gas market or increases to gas production tax. Production
growth requires the economic parameters for investment in
Ukraine being maintained.
Russia
In Russia, tubing replacements at our wells are complex and
the chances of success are reduced due to the depth of the
wells and the high temperatures and high pressures at which
they operate.
Future development work may only be commercial with
higher local gas prices and a strengthening of the Rouble
against the US$.
The Russian gas prices are controlled by the government and
therefore may not increase in line with current expectations.
In addition, the Rouble could weaken against the US$ and both
of these factors could reduce the value of future projects in
Russia and their net returns.
Ukraine
Development drilling in Ukraine was suspended in 2015
because of the government’s intervention in the gas sales
market including the introduction of punitive rates of
production tax, foreign exchange controls and government-
imposed restrictions on the sale of gas. Consequently, further
development of the Elizavetovskoye field was on hold in 2015,
although workover operations have continued in our mature
Ukrainian fields.
In Ukraine, production decreased by 10% to 4,325 boepd, gas
realisations reduced to $7.65/Mcf, as did production costs at
$7.45/boepd.
The three wells at our Elizavetovskoye field, contributed
production of 1,715 boepd (10.1 MMcfd of gas and 29 bopd).
Production at our mature fields in the Novo-Nikolaevskoye
Complex reduced 20% to 2,611 boepd.
Russia
In Russia, tubing failures in two of the five production wells at
the Koshekhablskoye field continued to constrain production
in 2015 to approximately 30 MMcfd from the remaining three
wells (see page 37). One of these wells, well-27 was restored
to production in December 2015 following repairs and
recompletion.
Production in 2015 reduced 9% to 4,671 boepd and our local
gas price improved 7% on 1 July 2015.
The Russian authorities issued their approval of the upgrade
project for expansion of our Russian GPF capacity to 60 MMcfd
in 2015, which permitted the project to be completed. The
nominal processing capacity of the GPF is close to 60 MMcfd
(approximately 10,000 boepd).
Outlook for 2016 and beyond
Production in 2016 is expected to increase following the
restoration of well-27 in Russia, in December 2015, the cost of
which was mostly covered by insurance proceeds.
A new Board was appointed at JKX on 28 January 2016
(see page 6). After visting the Group’s main assets within
30 days of its appointment, the new Board is encouraged by
the physical characteristics of the reservoirs in both Russia
and Ukraine.
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67 22
23
Strategic priorities in 2015
Why is oil and gas reserves growth important?
Production from our oil and gas reserves in Ukraine and
southern Russia will continue to generate cash to fund future
development and exploration in the region.
Our UK-based technical team focus on refining the Group’s
short, medium and long term plans to maximise value from
existing reserves and to increase the reserves in our licence
areas.
The reserves replacement ratio measures the amount of new
oil and gas reserves that we have discovered during the year
compared with what we have produced from existing reserves.
Our ability to replenish and grow our reserves base is a good
indicator of the success of our exploration and appraisal
programme and ensures sustainable production.
How we go about it
To ensure we can continue to grow our oil and gas reserves we
maintain a balance of investment in:
• exploration
• appraisal and
• development projects.
Visionary marketplace analysis and subsurface expertise
Exploration includes acquiring new oil and gas exploration
and production licences when they arise in the region and
continuing with our exploration programme across our
existing portfolio of licences. We continue to screen a lot of
potential opportunities in central and eastern Europe that fit
with the Company’s strategy.
We continue to focus on geographies and geologies that we
understand in central and eastern Europe.
Significant regional experience and local expertise
Our three technical teams in London, Poltava (Ukraine) and
Maikop (southern Russia) all have important roles to achieve
the highest quality results from subsurface.
This requires applying the latest Western technologies to
interpret the subsurface data and production results. We
use this to regularly reschedule our drilling targets and field
development plans to maximise our cash flows and chances of
success.
In addition the UK team oversees the day-to-day technical
challenges that arise at our fields and support the Group’s
business development activities with technical due diligence
when new opportunities arise.
We regularly use independent engineering firms to estimate
our reserves and resources which provide a certain level of
assurance over our own assessments.
We share technical knowledge and resources between our
projects in Ukraine and Russia.
Progress in 2015
Our 2P reserves have been assessed at 95.7 MMboe (Russia
66.1 MMboe; Ukraine 29.7 MMboe). Our reserves replacement
ratio was 42%.
In Ukraine, our potential to increase reserves has been
extremely limited in 2015 due to the suspension of
development drilling at the beginning of the year as a result of
the government’s introduction of punitive rates of production
tax, foreign exchange controls and restrictions on the sale
of gas (see page 32). The rate of gas production tax has now
reduced to 29% from 1 January 2016, and there has been no
further direct government intervention in the gas sales market
since it expired in February 2015.
Outlook for 2016 and beyond
Future reserves replacement in Ukraine requires capital
investment and the Board that was appointed on 28 January
2016 is reviewing the investment programme in Ukraine and
Russia for 2016.
Risks
The calculations to measure oil and gas reserves require an
estimate of expected future oil and gas prices. If a prolonged
period of low oil and gas prices is forecast, the commercial
returns from development projects reduce, which in turn can
reduce the reserves assessments.
The oil price is mainly influenced by international markets.
In Russia the governments control the gas sales price and
in both Ukraine and Russia governments control other key
economic parameters for investment there. It is therefore
difficult to predict whether any of these parameters affect JKX
in the foreseeable future which may impact the commercial
rates of return for investments into oil and gas projects.
Russia
Wells at the Russian gas field are deep, complex and
expensive, and will require significant technical analysis in
advance to de-risk the project.
Performance indicators
Reserves reassessment
Reserves
Reserves replacement ratio
Reserves by region
Russian reserves reassessment
Ukrainian reserves reassessment
95.7 MMboe
42%
95.7 MMboe
66.1 MMboe
29.7 MMboe
94.2
97.7
95.7
196
112
42
2013
2014
2015
2013
2014
2015
Russia
Ukraine
69%
31%
Oil MMbbl
Gas Bcf
Oil + Gas MMboe
1 Jan
2015 Production
Revisions
0.7
408.8
68.8
(0.0)
(10.1)
(1.7)
0.0
(6.2)
(1.0)
31 Dec
2015
0.7
392.5
Oil MMbbl
Gas Bcf
66.1
Oil + Gas MMboe
1 Jan
2015 Production
Revisions
2.8
156.5
28.9
(0.3)
(7.7)
(1.6)
0.8
9.6
2.4
31 Dec
2015
3.3
158.4
29.7
During the year our estimation of remaining 2P reserves decreased
by 6.2 Bcf of gas (total 1.0 MMboe). Our reserves were independently
reviewed by DeGolyer & MacNaughton at 31 December 2014 and
updated internally to 31 December 2015.
During the year our estimation of remaining 2P reserves increased
by 9.6 Bcf of gas and 0.8 MMbbl of oil (total 2.4 MMboe). Our reserves
were independently reviewed by DeGolyer & MacNaughton at
31 December 2014 and updated internally to 31 December 2015.
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67 24
24
JKX Oil & Gas plc Annual Report 2015
Strategic priorities in 2015
responsible
operations
3Safe and
Supporting strengths:
Stakeholder
management
Associated principal risks (detail on page 42)
Environmental, asset integrity
and safety incidents
I
25
25
JKX Oil & Gas plc Annual Report 2015
Why is operating safely and responsibly important?
At the year end, our Russian and Ukrainian operations
employed 249 and 493 personnel, respectively. Our London
office has 22 staff. This puts people as a top priority for the
Board.
Stakeholder management – community
We aim to invest in, and improve, the communities in which we
operate. We do this by providing local taxes, local employment
and stability, which are highly valued by employees, local
communities and governments.
We work in environments that are challenging and hazardous
by nature. As well as operating efficiently, it is vital that we
also operate safely and responsibly. Our behaviour impacts
our employees, our shareholders, the wider community and
the environment.
Our performance in the society in which we operate, and the
environment, are a critical part of measuring our overall
performance.
How we go about it
Stakeholder management – staff
We aim to attract and retain the best people, supporting them
with appropriate HSECQ systems and supporting the local
communities in which we operate. We attract the best people
by offering attractive remuneration packages and working
environments, by providing daily challenges, and opportunities
for personal development.
We have over 700 staff in Ukraine and Russia of which more
than 98% are local people. This provides us with a deeper
understanding of local cultures which we respect and work
with to get the best from our staff.
Ensuring the welfare and human rights of our employees is
an important consideration in our day-to-day activity, both in
the UK and internationally. We use the United Nations rights
frameworks as guiding principles throughout our Code of
Conduct, our employment practices and our relationships with
suppliers, wherever we do business.
Stakeholder management – environment
We operate an Environmental Management System (‘EMS’)
accredited to ISO 14001 to reduce our impact on the
environment. Our EMS requires ongoing training to staff and
promoting a thorough understanding of our environmental
policy to our business partners and suppliers.
Progress in 2015
During 2015 our performance against our health and safety
targets resulted in:
• an All Injury Frequency Rate (‘AIFR’)1 of 0.15, the target set
was 0.40;
• Zero Lost Time Injuries (‘LTI’)2, the target set was 0.25.
We measure our environmental performance using
Environment Incident Frequency Rate (‘EIFR’)3.
In 2015 our EIFR was 0.3 which exceeded our target set of 0.7.
Outlook for 2016 and beyond
We expect to maintain our strong Health and Safety culture
throughout the Group and exceed our industry AIFR and LTI
performance targets. Our internal AIFR and LTI performance
targets for 2016 are both set at 0.35, well below the industry
benchmarks.
Our internal EIFR performance target has been set at 0.6
for 2016.
Environmental Incident
Frequency rate3 (‘EIFR’)
0.30
0.75
0.71
Performance indicators
All Injury Frequency Rate1 (‘AIFR’)
Lost Time Injuries2 (‘LTI’)
Zero
0.15
0.99
0.25
0.15
0.84
0.30
2013
2014
2015
2013
2014
2015
2013
2014
2015
Zero
Zero
1 The AIFR, representing the health and
safety incidents per 200,000 hours
worked, is a direct measure of safety
performance.
2 The LTI represents the number of lost
3 The EIFR is the number of
time or recordable incidents per
200,000 hours worked and is a direct
measure of safety performance.
environmental incidents per 200,000
hours worked.
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67 26
27
Strategic priorities in 2015
We will continue to invest in local training and skills
development and appropriate community development
projects and will maintain a regular dialogue with local
stakeholders and authorities regarding our future plans.
Continuous improvement of our procedures and our
identification and recording systems is needed to mitigate our
health, safety and environmental risks, and these need to be
subject to regular external audit.
We will maintain our OHSAS 18001 Health & Safety
accreditation, our ISO 14001 Environmental accreditation and
our ISO 9001 Quality Management accreditation.
Risks
Development and monetisation of our oil and gas reserves,
exposes us to a wide range of significant health, safety,
security and environmental risks.
On a daily basis, there is a risk of the loss of containment of
hydrocarbons and other hazardous material, as well as the
risk of fires, explosions or other incidents.
Russia
Our wells at the Koshekhablskoye field are deep, high
temperature and high pressure, so are inherently difficult and
require significant planning to de-risk the safety and success
of any project.
Greenhouse Gas emissions
Scope 1 – Direct emissions
Scope 2 – Indirect emissions
Intensity ratio
339,149 T CO2e
568 T CO2e
317,441
339,149
827
7%
568
31%
103 T CO2e/MMboe
of production
103
88
17%
2014
2015
2014
2015
2014
2015
People – data
Staff by region
Staff: Male /Female
Directors and Senior Managers
Directors and Senior Managers,
Male/Female
764
13
160
604
Russia
Ukraine
Rest of the world
249
493
22
Male
Female
79%
21%
Directors1 9
Senior managers2 4
Male
Female
12
1
1 Company Directors consist of the Company’s Board as detailed on pages 100 and 101.
2 Senior Managers are directors of subsidiary companies or who otherwise have
responsibility for planning, directing or controlling the activities of the company or a
strategically significant part of it.
Payments to Government 2015
JKX Oil & Gas plc presents below its consolidated report on
payments to governments for the year ended 31 December
2015, for activities related to exploration, development and
extraction of oil and gas resources.
We disclose below payments made to governments of the
Group’s subsidiaries involved in extractive activities. The term
‘government’ includes a department, agency or entity that is
controlled by the government authority.
Reporting currency
Where payments have been made in currencies other than
the reporting currency (US$), the exchange rate existing at the
time the payment is made has been used.
Payment types disclosed at project level
Payments are disclosed on the project basis where
practicable.
They are presented on a cash basis, net of any interest and
penalties on late tax payments or on underpaid tax.
There were no payments in kind made to a Government during
the year.
The following payment types are disclosed for legal entities
involved in extractive activities for the year ended 31 December
2015:
Corporate income taxes
Payments to governments based on taxable profits under
legislated income tax rules.
Production taxes
Payments to governments in relation to revenue or production
generated under licence agreements. In the Consolidated
Income Statement (page 112), production taxes are presented
as production based taxes, not income tax.
Fees
Payments to governments in the form of fees include: tax on
gas consumed for its own use, licence fees, area fees.
Excluded amounts
Taxes levied on consumtion such as value added taxes,
personal income taxes, sales taxes, property and
environmental taxes have not been included in this report.
Payments to Government 2015 (unaudited)
Production
taxes
$’000
Corporate
income
taxes
$’000
Fees
$’000
Total
$’000
Ukraine
Novo-Nikolaevskoye
Complex1
Elizavetovskoye field1
Corporate
20,117
114
9,932
–
–
–
–
–
696
20,231
9,932
696
Total
30,049
114
696
30,859
Russia
Koshekhablskoye field1
Total
Hungary
Total
Slovakia
Total
1,445
1,445
–
–
–
–
1,445
1,445
1
–
52
(82)
(29)
173
339
–
173
614
32,448
Group total
31,495
1 See pages 35 to 38 for an explanation of each project
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67 28
Performance in 2015
PRODUCTION SUMMARY
Production
Oil (Mbbl)
Gas (Bcf)
Oil equivalent (Mboe)
Daily production
Oil (bopd)
Gas (MMcfd)
Oil equivalent (boepd)
OPERATING RESULTS
Revenue
Oil
Gas
Liquefied petroleum gas
Other
Cost of sales
Exceptional item – production based taxes
Exceptional item – provision for impairment of oil and gas assets
Exceptional item – well control operations
Other production based taxes
Depreciation, depletion and amortisation – oil and gas assets
Other operating costs
Total cost of sales
Gross profit/(loss) before exceptional item
Gross loss after exceptional item
Operating expenses
Exceptional item – legal costs
Administrative expenses
(Loss)/gain on foreign exchange
Loss from operations before exceptional items
Loss from operations after exceptional items
Total
2015
Second half
2015
First half
2015
318
17.8
3,283
871
49
8,996
164
9.4
1,724
890
51
9,374
154
8.4
1,559
851
47
8,611
Total
2015
$m
Second half
2015
$m
First half
2015
$m
14.6
68.7
4.6
0.6
88.5
(10.9)
(51.1)
–
(26.2)
(26.1)
(24.4)
(138.7)
(138.7)
7.3
34.5
2.4
–
44.2
(10.9)
(51.1)
–
(5.4)
(13.5)
(12.3)
(93.2)
(93.2)
11.8
13.0
(50.1)
(49.0)
(3.0)
(17.5)
(4.9)
(10.7)
(75.6)
(3.0)
(10.9)
(5.4)
(3.4)
(68.3)
7.3
34.2
2.2
0.6
44.4
–
–
–
(20.8)
(12.6)
(12.1)
(45.5)
(45.5)
(1.1)
(1.1)
–
(6.6)
0.5
(7.3)
(7.3)
Total
2014
368
19.5
3,620
1,008
54
9,919
Total
2014
$m
34.0
102.3
9.5
0.4
146.2
–
(69.1)
(3.5)
(45.5)
(32.4)
(31.5)
(182.0)
(182.0)
36.8
(35.7)
–
(19.5)
(5.7)
11.6
(60.9)
29
EARNINGS
Net loss ($m)
Net loss before exceptional item ($m)
Basic weighted average number of shares in issue (m)
Loss per share before exceptional item (basic, cents)
Loss per share after exceptional item (basic, cents)
Pre-exceptional earnings before interest, tax, depreciation and
amortisation ($m)1
REALISATIONS
Oil (per bbl)
Gas (per Mcf)
LPG (per tonne)
COST OF PRODUCTION ($/boe)
Production costs (excluding exceptional item)
Depreciation, depletion and amortisation
Production based taxes
CASH FLOW
Cash generated from operations ($m)
Operating cash flow per share (cents)
STATEMENT OF FINANCIAL POSITION
Total cash2 ($m)
Borrowings (excluding derivatives) ($m)
Net debt3 ($m)
Net (debt)/cash to equity (%)
Return on average capital employed4 (%)
Increase in property, plant and equipment/intangible assets ($m)
Ukraine
Russia
Other
Total
Total
2015
Second half
2015
$49.75
$4.20
$442.59
$47.49
$3.97
$437.32
Total
2015
Second half
2015
Total
2015
(81.5)
(25.8)
172
(14.97)
(47.32)
16.9
$7.45
$7.94
$8.00
Total
2015
12.8
7.4
Total
2015
26.3
34.4
(8.1)
(4.6)
(35.8)
2.8
5.2
0.7
8.7
Second half
2015
First half
2015
(67.7)
(12.0)
172
(6.96)
(39.31)
10.8
$7.17
$7.78
$3.15
(13.8)
(13.8)
172
(8.01)
(8.01)
6.1
First half
2015
$49.87
$4.46
$448
First half
2015
$7.75
$8.11
$13.36
Second half
2015
First half
2015
9.3
5.4
3.5
2.0
Second half
2015
First half
2015
26.3
34.4
(8.1)
(4.6)
(25.8)
1.1
2.9
0.5
4.5
22.4
32.8
(10.4)
(3.8)
(10.0)
1.7
2.3
0.2
4.2
Total
2014
(79.5)
(22.0)
172
(12.76)
(46.21)
46.0
Total
2014
$90.79
$5.74
$807
Total
2014
$8.70
$8.93
$12.57
Total
2014
58.4
33.9
Total
2014
25.9
36.4
(10.5)
(3.8)
(23.0)
35.4
5.3
1.6
42.3
1 Earnings before interest, tax, depreciation and amortisation (‘EBITDA’) is a non-IFRS measure and calculated using Loss from operations of $75.6m (2014: $60.9m) and
adding back depletion, depreciation, amortisation and exceptional items of $92.5m (2014: $106.9m). EBITDA is an indicator of the Group’s ability to generate operating cash
flow that can fund its working capital needs, service debt obligations and fund capital expenditures.
2 Total cash is Cash and cash equivalents plus Restricted cash.
3 Net debt is Total cash less Borrowings (excluding derivatives).
4 Return on average capital employed is the annualised profit/(loss) for the period divided by average capital employed.
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67
30
Financial review
31
• a provision for legal costs of $3.0m (including interest)
(2014: nil) to be reimbursed as a result of the judgement
of the Supreme Court which allowed an appeal by Eclairs
Group Limited (‘Eclairs’) and Glengary Overseas Limited
(‘Glengary’) and their nominees against the Court of
Appeal’s judgment that the voting restrictions placed on
them on 31 May 2013 by the Company were valid.
In 2014, an exceptional charge of $3.5m as a result of one-
off costs incurred in Russia to kill well-27 was recognised in
addition to non-cash impairment of $69.1m.
Loss for the year before exceptional charges was $25.8m
(2014: loss $22.0m).
Revenue 1
Group revenues in 2015 from Ukraine and Russia were down
39% and 41% respectively (see table) versus the previous year,
a fall of $57.7m in total.
Gas sales
Gas sales volumes in Ukraine were 8.9% lower at 3,171 boepd
(2014: 3,481 boepd) as a result of reduced gas production to
3,503 boepd (2014: 3,854 boepd), an inability to sell normal
levels of gas in January and February 2015 (due to restrictions
imposed by the Ukrainian Government), and the suspension
of all drilling activity in Ukraine until the investment climate
improves (a company policy which is currently under review).
Whilst the gas price increased by 62% from an average of
4,271 UAH per Mcm in 2014 to 6,924 UAH per Mcm in 2015,
US Dollar gas realisations in Ukraine declined 23.0% from
$9.93/Mcf to $7.65/Mcf due the devaluation of the Hryvnia
from an average of UAH12.0/$ during 2014 to an average of
UAH22.3/$ during 2015. Before introduction of a new law
on the Ukrainian gas market on 1 October 2015, the state
regulator made periodic adjustments for Hryvnia/$ exchange
rate fluctuations which impacted gas realisations. From
1 October 2015, these periodic adjustments ceased and gas
prices have followed market trends.
Russell Hoare Chief Financial Officer
Echoing the sentiments of your new Chairman and Chief
Executive Officer, I would like to add that it is an honour to have
been appointed by shareholders at the General Meeting on
28 January 2016 and I look forward to working with the new
Board and the rest of the Company’s employees to enhance
performance and restore value to JKX.
Results for the year
The Company’s financial performance for 2015 has been
severely impacted by the deteriorating economic conditions
and geopolitical situation in Ukraine compounded by the
decline in oil and gas prices and the deterioration of local
currencies where the Group operates.
The Group recorded a loss for the year of $81.5m (2014: loss
$79.5m) after exceptional charges of $64.9m which comprised:
• a non-cash impairment charge of $51.1m (2014: $69.1m) for
the Group’s oil and gas assets;
• a provision of $10.9m recognised as a result of a recent
judgement against our Ukrainian subsidiary in respect of
one of the rental fees cases (see Note 27 to the consolidated
financial statements) and
Gas sales volumes in Russia were 8.6% lower at 4,301 boepd
(2014: 4,706 boepd). Average gas realisations dropped by 35.4%
from $2.60/Mcf to $1.68/Mcf mainly due to the devaluation of
the Russian Rouble from an average of RR38.6/$ in 2014 to an
average of RR62.0/$ in 2015. The effects of the Rouble
devaluation partially offset the 7.5% increase in Rouble-
denominated gas realisations in Russia from 1 July 2015.
The combination of lower realisations in Russia and Ukraine
resulted in an overall average reduction in gas realisations of
26.8% to $4.20/Mcf (2014: $5.74/Mcf).
Oil sales
Oil sales volumes were 22.3% lower at 777 boepd (2014:
1,000 boepd) as a result of the lack of capital investment in
2015 and the expected decline in production volumes from the
mature Novo-Nikolaevskoye group of fields in Ukraine. More
recently commenced production from the Elizavetovskoye field
development in Ukraine is predominantly gas.
Average Group oil realisations were 45.2% lower at
$49.75/bbl (2014: $90.79/bbl), in line with the significant drop in
international oil prices.
Liquefied Petroleum Gas (‘LPG’) sales
The $4.9m decline in LPG revenues was due to lower
production volumes combined with a reduction in the domestic
market price of 45.1% to $442.6/tonne (2014: $807/tonne),
resulting from increased competition through both imports
and other domestically produced supplies.
Loss from operations
The loss from operations was $75.6m which included
exceptional charges of $64.9m.
Loss from operations before these exceptional charges
was $10.7m (2014: profit $11.6m) which was the result of
the $57.7m decrease in revenues being only partially offset
by a decrease in cost of sales of $32.6m, a decrease in
administrative expenses of $2.0m and a decrease in loss on
foreign exchange of $0.8m.
The $32.6m decrease in cost of sales (before exceptional
charges), to $76.8m (2014: $109.4m), is mainly due to
decreases in:
• Russian operating costs of $3.4m (a decrease of 22.4%
from 2014)
• Ukrainian operating costs of $2.3m (a decrease of 18.7%
from 2014)
• Ukrainian oil and gas inventory movements and product
purchases of $1.5m
• a reduction in the depreciation, depletion and amortisation
(‘DD&A’) charge of$6.3m
• production based taxes of $19.3m, predominantly related to
Ukraine
• offset by an increase in Rest of World costs of $0.2m.
The decrease in Russian operating costs of $3.4m is largely
due to lower field support activities and related costs, and
lower property tax payments due to the reduced value of the
Russian assets used for property tax purposes. Additionally,
the Rouble devaluation from an average of RR38.6/$ to an
average of RR62.0/$ reduced the US Dollar reported cost base
for Russia throughout the year.
Ukrainian operating costs decreased by $2.3m, mainly due to
suspended drilling activity, reduction in staff and the effects
of Hryvnia devaluation from an average of UAH12.0/$ to an
average of UAH22.3/$.
Ukrainian sales from inventory and product purchases
decreased by $1.5m to a gain of $0.4m (2013: charge $1.1m),
as a result of production meeting sales demand throughout
the year, thus reducing the need to purchase additional gas to
meet sales commitments.
The DD&A charge reduced by $6.3m, largely as a result of
lower production. The Group’s depletion rate reduced to
$7.94/boe (2014: $8.93/boe) following lower asset carrying
values resulting from impairments recognised in Ukraine and
Russia in 2014.
1
Group revenues
(39.5%)
Ukraine
Russia
Total
2015
($m)
72.2
16.3
88.5
Realisations
Change
Ukraine
Gas ($/Mcf)
($m) % Change
Oil ($/bbl)
(46.6)
(11.1)
(39.2)
LPG ($/tonne)
(40.5)
Russia
2014
($m)
118.8
27.4
146.2
(57.7)
(39.5)
Gas ($/Mcf)
Group
Gas ($/Mcf)
Oil ($/bbl)
LPG ($/tonne)
2015
2014
7.65
49.75
442.6
9.93
90.79
807
1.68
2.60
4.20
49.75
442.6
5.74
90.79
807
Ukrainian revenues
(39.2%)
Gas
Oil
Liquified Petroleum Gas
(‘LPG’)
Other
2015
($m)
53.1
14.1
4.6
0.4
2014
($m)
75.7
33.2
9.5
0.4
Change
($m) % Change
(22.6)
(19.1)
(29.9)
(57.5)
(4.9)
(51.6)
–
–
Total
72.2
118.8
(46.6)
(39.2)
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67 32
Financial review
33
Production taxes
Excluding the $10.9m exceptional charge for Ukrainian
production based taxes from 2010 (see below), other
production based taxes for the Group decreased by $19.3m
(or 42.4%) to $26.2m (2014: $45.5m), mainly as a result of
lower gas production tax rates applied due to the Interim
Award of the Arbitration Case (see ‘Other Taxation – Ukraine’),
lower production in Ukraine and the devaluation of the Hryvnia
(see “Other Taxation – Ukraine” section for details).
Average gas production tax in Ukraine decreased from
$124.4/Mcm to $83.4/Mcm and average oil production tax
decreased from $34.9/bbl to $21.6/bbl.
In Russia, average gas production tax decreased from
$11.4/Mcm to $5.3/Mcm in 2015 due to implementation of a
new Mineral Extraction Tax regime from 1 July 2014
(see ‘Other Taxation – Russia’).
The various factors listed above contributed to the Group’s
effective gas production tax decrease from $12.57/boe to
$8.00/boe.
Other taxation – Ukraine
On 1 April 2014, the Ukrainian government increased
production tax rates for gas from 25% to 28%. This rate was
then applied to the actual average import price for gas as
communicated by the Ministry of Economic Development
and Trade of Ukraine. The oil tax rate at this time remained
constant at 39%.
On 1 August 2014, the Ukrainian government passed
emergency budget legislation to increase the gas production
tax rate from 28% to 55% of the maximum gas price published
monthly by the Ministry of Economy. Oil tax rates also
increased from 39% to 45% from 1 August 2014.
In December 2015 the Ukrainian Government passed
legislation to reduce the gas production tax in Ukraine from
55% to 29% with effect from 1 January 2016.
As part of the JKX’s international arbitration against Ukraine
in respect of overpaid production taxes (see Note 27 to the
consolidated financial statements), the Group applied for
interim measures under the bilateral investment treaties
that exist between Ukraine and the United Kingdom and the
Netherlands, respectively, to reduce the rate of production
tax applicable to our Ukrainian subsidiary, Poltava Petroleum
Company (‘PPC’). On 23 July 2015, an international arbitration
tribunal issued an Interim Award requiring the Government of
Ukraine to limit the collection of rental fees on gas produced
by PPC, to a rate of 28%. The Interim Award, which is binding
on Ukraine as a matter of international law, will remain in
effect until the final ruling which will be issued following the
arbitration hearing which is expected to take place in July 2016.
Other taxation – Russia
A new mineral extraction tax (‘MET’) formula was
implemented from 1 July 2014. The gas and condensate
MET rate applicable in 2015 was 305 Roubles/Mcm (2014:
409 Roubles/Mcm). The formula is based on gas prices,
gas production as a share of total hydrocarbon output and
complexity of gas reservoirs (depletion rates, depth of the
producing horizons and geographical location of producing
fields). Our Russian subsidiary, Yuzhgazenergie LLC (‘YGE’),
is entitled to a 50% discount based on the depth of gas
reservoirs.
In addition to production taxes, YGE is subject to a 2.2%
property tax which is based on the net book value of its
Russian assets as calculated for property tax purposes.
This amounted to $1.5m in 2015 (2014: $2.5m). This amount
is included in other cost of sales in the consolidated income
statement.
Administrative expenses and foreign exchange
The Group’s administrative costs decreased by $2.0m to
$17.5m (2014: $19.5m) during the year largely due to:
• a decrease in group staff costs of $2.2m and other costs of
$2.1m mainly as a result of significant devaluation of local
currencies (Hryvnia and Rouble) against the US Dollar;
• offset by a $2.3m increase in legal and professional fees
incurred as a result of the international arbitration (see
Note 27 to the consolidated financial statements).
Foreign exchange losses were recognised at $4.9m
(2014: $5.7m loss) due to the Rouble and Hryvnia devaluations
previously noted. Included in foreign exchange loss is the
cost of $1.5m associated with the conversion and repatriation
of dividends of $10.0m from Ukraine to the UK. During 2014
the National Bank of Ukraine (‘NBU’) issued a decree which
imposed currency convertibility and repatriation restrictions,
initially until 1 December 2014, later extended to 2 March 2015,
3 June 2015, 3 September 2015, 4 March 2016 and subsequently
to 8 June 2016. The currency controls severely restrict the
group’s ability to make cash transfers out of Ukraine. JKX
received an award from the Tribunal ordering Ukraine to
convert and repatriate dividends to the UK however the NBU
declined to process the application.
Net finance charges
Finance costs have increased by $3.3m to $6.5m (2014:$3.2m)
comprising convertible bond interest of $6.5m. In 2014 interest
of $3.0m was capitalised in respect of borrowings used to
construct property, plant and equipment which was completed
in 2014.
The $1.9m charge (2014: $9.1m credit) for the fair value
movement on the derivative liability represents the change in fair
value of the conversion option associated with the convertible
bond. The bonds have a conversion option which becomes more
valuable to the bond holder as the Company’s share price nears
or exceeds the fixed conversion strike price (76.29 pence). As
the Company’s share price has increased from 12.00 pence at
31 December 2014 to 27.25 pence at 31 December 2015 and the
probability of the conversion option has increased, a charge has
been recognised that represents the increase in fair value of the
potential liability of the Company to settle any conversion options
that may be exercised in future periods.
Finance income comprising income from bank deposits
increased by $0.2m to $1.3m (2014: $1.1m).
Earnings per share
Basic loss per share before exceptional items were 14.97 cents
(2014: loss 12.76 cents) in line with the pre-exceptional loss.
Basic loss per share after exceptional items was 47.32 cents
(2014: loss 46.21 cents) reflecting the Group loss after
exceptional items net of their related tax effects of $55.7m
(2014: $57.6m).
Taxation
The total tax credit for the year was $1.2m (2014: $25.8m
charge) comprising a current tax charge of $4.8m (2014:
$9.5m) in respect of Ukraine, a deferred tax charge before
exceptional items of $3.1m (2014: $31.2m) and a deferred tax
credit of $9.2m in respect of exceptional items (2014: $15.0m).
The fall in current tax charge to $4.8m reflects lower
profitability in Ukraine. In Ukraine, the corporate tax rate for
2015 was 18% and remains at this level for 2016.
The total deferred tax credit of $6.1m (2014: $16.3m charge)
comprises:
• a $2.1m credit reflecting the recognition of deferred tax
assets in respect of Russian tax losses carried forward to
future periods; and
• a net $4.0m credit (2014: $15.0m) relating to an impairment
and the provision for historic production based taxes in
Ukraine and other tax timing differences on our oil and gas
assets in Russia and Ukraine.
Loss for the year after tax
The result for the year, after exceptional charges of $55.7m
(net of deferred tax effects), was a loss of $81.5m (2014: loss
of $79.5m). On a pre-exceptional basis, loss for the year was
$25.8m (2014: $22.0m).
On a pre-exceptional basis, the $3.8m change is the combined
result of:
• a $57.7m decrease in revenues (as noted above);
• a decrease in pre-exceptional cost of sales of $32.6m to
$76.8m (2014: $109.4m) as a result of reduced operating
costs, production taxes and a decrease in DD&A charges;
• a decrease in administrative expenses by $2.0m;
• a decrease in foreign exchange losses of $0.8m;
• an increase in net finance charges of $3.1m;
• a decrease in the result from business combinations of
$0.2m to nil (2014: $0.2m);
• a $11.0m decrease in the fair value of the derivative
attached to the convertible bond; and
• a $32.8m decrease in the taxation charge (before
exceptional items).
Exceptional charges
Exceptional charges of $64.9m in the year consist of:
• a $51.1m impairment charge against our oil and gas assets;
• a provision of $10.9m to cover potential liabilities of
production based taxes following the recent court hearing
in Ukraine, and
• $3.0m charge relating to reimbursement of legal costs
to Eclairs and Glengary as a result of the Supreme Court
decision.
The impairment charge for the year of $51.1m comprises:
• $49.6m in respect of Novo-Nikolaevskoye Complex in
Ukraine (see Note 5 (d) to the consolidated financial
statements) mainly as a result of the sharp decline in
international oil and gas prices and an increase in the
discount rate applicable to JKX’s Ukrainian projects;
• $1.5m in respect of our Hungarian oil and gas assets due to
the sharp decline in international oil and gas prices and the
reduction in assessed contingent resources (see Note 5 (f)
to the consolidated financial statements).
Performance measures
Gas realisations
Production costs
Return on capital employed
$4.20 per Mcf
$7.45 per boe
(35.8)%
6.73
5.74
13.71
4.20
27%
8.70
7.45
14%
2013
2014
2015
2013
2014
2015
1.3
2013
2014
2015
(23.0)
(35.8)
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67
34
Financial review
35
Operational review
Cash flows
Cash generated from operations was lower at $12.8m (2014:
$58.4m). This is a result of a $14.7m increase in the loss from
operations, despite decreases of $6.8m and $18.0m in non-
cash DD&A and impairment charges, respectively, an increase
in other non-cash charges of $0.5m combined with $6.6m
increase in cash outflow from changes in working capital
(although this is largely a timing difference and compares with
a working capital inflow of $15.6m in 2014).
Interest paid during the year comprised $3.0m (2013: $3.3m),
mainly relating to financing charges on the convertible bond.
Income tax paid in the year decreased to $0.7m (2014: $7.6m),
due to lower profits earned by the Ukrainian subsidiary and the
utilisation of prepaid tax in Ukraine at the end of last year.
Net cash generated from operating activities was lower at
$9.1m (2014: $47.5m) as a result of the $45.6m reduction
in cash from operations offset by a reduction of $6.9m in
Ukrainian corporation tax payments and a $0.3m decrease in
interest payments.
Net cash used in investing activities has significantly
decreased to $1.9m (2014: $41.9m) mainly due to the reduced
capital investment programme in both Russia and Ukraine.
Investment in property plant and equipment, the largest
component in investing activity cash flow, was $34.4m lower
than the prior year at $5.6m (2014: $40.0m).
Cash inflow from held-to-maturity investments of $2.7m
(2014: outflow $2.7m) comprises proceeds from Ukrainian
government US$ treasury bills which matured in January and
February 2015.
Net cash outflow from financing activities in the year mainly
relates to redemption of bonds with a principal amount of
$4.0m in addition to an early redemption premium of $0.2m on
19 February 2015 and a $1.5m repayment of the Credit Agricole
working capital facility at PPC, which expired during the year.
No dividends were paid to shareholders in the year (2014: nil).
Cash
Cash at the end of the year (excluding restricted cash) was
$25.9m (2014: $25.4m). The increase is as a result of an overall
increase in cash and cash equivalents generated in the year
of $1.6m (2014: $7.0m increase) driven by the reduced capital
expenditure program, offset by the negative effects of foreign
exchange on cash balances of $1.1m (2014: decrease $7.3m).
Liquidity
The Group employs a number of financial instruments to
manage the liquidity associated with the Group’s operations.
These include cash and cash equivalents, together with
receivables and payables that arise directly from our
operations.
Separate from these, the main financial instrument of
the Group is the $40 million guaranteed unsubordinated
convertible bond which was placed in Q1 2013 with institutional
investors which matures in 2018. The bonds have an annual
coupon of 8 per cent per annum payable semi-annually in
arrears. The bonds terms and conditions contain an annual
put option each February until maturity. Bonds with a
principal amount of $10m were redeemed on 19 February
2016 in addition to an early redemption premium of $0.9m, in
accordance with the terms and conditions of the bond. This
followed redemption of $4m in February 2015, together with an
early redemption premium of $0.2 million. Further information
on the terms and conditions of the bonds is included in Notes
13 and 14 to the consolidated financial statements.
Dividends
No dividends have been paid or proposed during the year, and
the Board will not be recommending the payment of a dividend
at the forthcoming AGM.
Outlook
As detailed in Note 2 to the financial statements, there remains
a number of material uncertainties that may cast significant
doubt about the Group’s and Company’s ability to continue as a
going concern.
The financial position of the Company continues to suffer from
the adverse economic conditions in Russia and Ukraine and the
generally low oil and gas prices affecting similar companies
around the world. The 2015 results have also been adversely
affected by weakening local currencies.
The new Board, which was appointed on 28 January 2016 is
assessing all possible avenues to optimise operations and
financial returns and reduce costs wherever this can be done
without risking the long-term viability of our assets or our health
and safety obligations. We will identify non-core costs that can
be reduced, operating efficiencies that can be implemented and
focus our capital on revenue-generating assets.
In Ukraine, the restrictions on exchanging and repatriating
dividends, the difficulties in attracting foreign investment and
credit, the threats to a stable and transparent gas market and
specific pressures on independent oil and gas producers will
all continue to make decisions for investment difficult for JKX
and other companies in the sector. However, the Company is
firmly committed to Ukraine having been present there for
more than 20 years with a highly experienced and committed
workforce and we will endeavour to increase the cash
generation capabilities of our resources in the country.
The returns on our Russian assets have been severely reduced
due to the adverse economic conditions and the low gas tariffs.
During 2015 the investment plans for Russia were halted and
the new Board is considering whether to continue with this
strategy. The operations, however, will be cash-flow positive
in 2016 and we will utilise these cash resources for allocation
throughout the Group.
This focus on reducing costs and implementing a robust
capital allocation policy will ensure maximised cash flows
from our assets and improvements to the Company’s
profitability and liquidity. I look forward to working with all the
Group’s employees to deliver on these promises.
Russell Hoare
Chief Financial Officer
Group production
In 2015, group production was adversely affected by Ukrainian
government imposed restrictions on gas sales to industrial
customers through to 28 February, which also disrupted the
Ukrainian gas sales market in the months thereafter, and
production constrained in the Koshekhablskoye field in Russia
with wells 27 and 5 off-line for tubing replacement. Production
increased from Q3 through to Q4 with sales restrictions lifted
in Ukraine, a successful rigless intervention campaign and
well-27 commencing production, as planned, late in 2015.
Group average production for 2015 was 8,996 boepd,
comprising 48.7 MMcfd of gas and 872 bpd of oil and
condensate, a 9% decrease on the average from 2014. Oil and
gas production from our facility in Hungary remains suspended
whilst development plans are reviewed and a farm-in partner
is sought to participate in the further development of the
Hajdunanas field.
2P reserves
MMboe
29.7
MMboe
66.1
MMboe
Asset lifecycle
Country
Stage and licence area
Exploration
Appraisal
Development
Production
Ukraine
Russia
Hungar y
Slovakia
JKX has 100% interest in its licences except for the following:
* JKX has a 50% interest in this licence area ** JKX has a 25% interest in this licence area
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67IgnatovskoyeMolchanovskoye NorthMolchanovskoye MainNovo-NikolaevskoyeRudenkovskoyeMolchanovskoye Wedge ZoneElizavetovskoyeZaplavskoyeKoshekhablskoye OxfordianKoshekhablskoye CallovianHajdunanasTurkeve*Svidnik**Tiszavasvari-IVMedzilaborce**Emod VSnina**Pely IJaszkiser II
36
Operational review
Ukraine
Novo-Nikolaevskoye licences
Production
Average production from the Novo-Nikolaevskoye group of
fields for 2015 was 2,611 boepd comprising 10.9 MMcfd of gas
and 794 bpd of oil and condensate, a 20% decrease on the
average for 2014.
Development drilling and other well activity
2015 saw no improvement in the investment climate in Ukraine
and a decision was taken to cease all capital investment in the
country, other than production optimization operations.
The Skytop N-75 rig is stacked in Ukraine on the
Elizavetovskoye field pending new work. The TW-100
workover rig continued operations through 2015 with four
abandonments and three workovers.
• Well recompletions in the period comprised re-running
the completion in well IG-140 to facilitate entry of coil
tubing to the horizontal section; resetting the completion
in well IG-106 to permit additional perforations to be made;
abandoning the horizontal section of M-169 and adding
perforations at the top of the Devonian.
• Z-04 in the Zaplavskoye license, IG-79 and IG-140 in the
Ignatovskoye license and M-31 in the Molchanvoskoye
license were plugged and abandoned. Plans were in place
to abandon R-12Z in the Rudenkovskoye field, however,
the well was put on test prior to abandonment and had
significant production. Consequently, the well has not been
abandoned and will become a batch producer.
• Wireline operations have focussed on the clearance of
wax and salt build up in the production tubing of a number
of wells. A sustained programme in the period, particularly
during the winter months, has ensured that oil production
in particular has exceeded expectations. Additional
wireline intervention included perforations in M-153 in
Molchanovskoye and IG-138, IG-106, IG-137bis, IG-105 and
IG-123 in Ignatovskoye.
• IG-140, IG-138 and IG-124Z on the Ignatovskoye field were
acidized to increase production.
• A seismic rock physics, inversion and reservoir
characterization study has started on the Novo Nikolavskoye
group fields. The work is aiming to characterize the fluid
types within the sands identified on seismic. The results aim
to de-risk additional drilling locations.
Production facilities
Operations at the main production facility and the LPG plant
continued smoothly throughout the year with routine work
continuing on plant optimisation, re-routing flowlines to
reduce back pressure, and wax clearance of flowlines to
enhance production from the available well stock. The annual
plant shut down was completed during May 2015.
Elizavetovskoye Production Licence
Production Licence extension
A westward licence extension to the Elizavetovskoye production
licence to include the West Mashivske prospect was awarded in
the second quarter of 2015. The licence is valid until 2034 and
the additional area of 33.9 square kilometres brings the total
area of the licence up to 104.7 square kilometres.
Production
Average production from the Elizavetovskoye field in 2015
was 1,715 boepd comprising 10.1 MMcfd of gas and 29 bpd
of condensate, a 13.5% increase on the average in 2014. The
relatively dry Elizavetovskoye wells E-301 and E-302 were
used as swing producers throughout Q1 2015 to adjust gas
export volumes to the market demand.
37
Drilling and development activity
There was no drilling activity on the Elizavetovskoye field
during the year. However there are plans in place for additional
development drilling on both the Elizavetovskoye and West
Mashivske fields should the investment climate improve. The
Skytop rig is stacked at the proposed E-305 drilling location.
Production facilities
The Elizavetovskoye production facility was upgraded at the
end of 2014 to expand capacity and meet the recently revised
hydrocarbon dew point specifications in the export pipeline.
The K-3000 compressor was commissioned in early 2015 and
is being used to ensure maximum possible input to the export
line.
Zaplavskoye exploration licence activity
Work is continuing on the evaluation of the Visean V25/26
sandstone traps and the Devonian sandstone and Visean
carbonate structural closures with the aim of working these
up for future drilling should the economic climate change.
Russia and the rest of world
Koshekhablskoye licence
Production
Average production from the Koshekhablskoye field in 2015
was 4,670 boepd comprising 27.7 MMcfd of gas and 48 bpd
of condensate, a 8.6% decrease on the average for 2014. The
production figures remain lower than plant capacity due to the
suspension of production from well-27 and well-05. Well-27
came back on line in December 2015.
Workover and well stimulation activity
Production from crestal well-20 in the period ranges from
14-18 MMcfd subject to three routine acid treatments using
coiled tubing during the year. The north flank well-25 has been
producing 8-12 MMcfd, with two routine acid treatments.
The deep east-flank well-15 cycles between 0.9 MMcfd and
1.5 MMcfd, with fluid build-up being cleared periodically.
The well-27 tubing replacement was completed, as planned,
in Q4 2015. Production has been restored and acid treatments
are planned for 2016.
Production facilities
Average production over the period of 27.7 MMcfd allowed the
Gas Processing Facility (‘GPF’) to operate comfortably within
its current design capacity of 40 MMcfd.
The plant was shut down for ten days in September 2015 to
complete the modifications required to increase the plant
capacity to 60 MMcfd. This involved changes to a number of
the vessels, replacement of some valves and pipework and
improvements to the operating procedures.
Licence obligations
The obligation to re-enter and sidetrack well-09 to re-drill the
full Callovian reservoir sequence and, if successful, test the
Callovian V unit, has been deferred until 2019.
Ukraine licence areas and major pipelines
Koshekhablskoye licence area and major pipeline
Dnieper-Donets
Basin
POLTAVA
Kiev
Ukraine
Russia
Black Sea
Elizavetovskoye field
Ukraine
Russia
Rostov-on-Don
Krasnodar
REPUBLIC
OF ADYGEA
Maikop
Koshekhablskoye field
Dnieper-Donets
Basin border
Soyuz pipeline
Black Sea
Gas pipeline
Gas/oil field
Licence area
Roads
Novo-Nikolaevskoye Complex
0
20 km
Gas pipeline
Gas/oil field
Licence area
Roads
KURGANINSK
0
10 km
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67
38
Operational review
39
JKX reserves and resources
Hungary
Slovakia
Total remaining reserves at 31 December 2015
Licences
JKX now operates six production licences (Mining Plots)
covering a total of 200 sq km in North Eastern Hungary.
This follows the exploration licence exchange which HHE
completed in 2014. JKX operates these areas with 100% equity.
Hajdunanas field
Production from the Hajdunanas and Gorbehaza fields was
suspended in 2013 by the operator at that time. JKX has since
taken 100% interest in the fields and is currently reviewing
plans to sidetrack the watered out Hn-2 well and continues
to seek a farm-in partner to participate in the further
development of the field.
Exploration and appraisal – Hernad licences
The Hernad I & II Exploration Licences expired in April 2015
and JKX (100%) submitted six mining plot applications to
cover known hydrocarbon accumulations in the licences.
By year end JKX had received approval for five of the Mining
Plots; Tiszavasvari IV, Hajdunanas IV (extension), Hajdunanas
V, Emod V and Jaszkiser II. The sixth Mining plot, Pely I was
approved on 4 January 2016.
These mining plots will enable JKX to carry out appraisal and
development activity over a 35 year period.
JKX is currently seeking a farm-in partner, or partners, to
participate in this activity.
Turkeve IV Mining Plot
JKX holds a 50% beneficial interest in part of the Turkeve IV
Mining Plot that includes the productive area around the
Ny-7 well. However, the high CO2 content has prevented direct
access to the pipeline network and the operator is developing
a mechanism to lower the CO2 content to an acceptable level.
Exploration
JKX holds a 25% equity interest in the Svidnik, Medzilaborce,
Snina and Pakostov exploration licences in the Carpathian fold
belt in north east Slovakia. The Pakostov Licence was acquired
in 2016, as protection acreage following encouraging prospect
mapping, and covers 128 sq km. The total area of the four
licences is 1,376 sq km.
Several prospects were matured by the Operator,
DiscoveryGeo, and the Joint Venture approved a three well
exploration programme in November. Location construction
work started in December at all three wellsites (Smilno,
Poruba and Kriva Ol’ka). The first well, Smilno-1, is expected
to spud in the first quarter of 2016 and the other two wells will
be drilled as part of the same drilling programme.
Total
Oil MMbbl
Gas Bcf
Oil + Gas MMboe
Ukraine
Oil MMbbl
Gas Bcf
Oil + Gas MMboe
Russia
Oil MMbbl
Gas Bcf
Oil + Gas MMboe
31 Dec
2014
3.4
565.3
97.7
2.8
156.5
28.9
0.7
408.8
68.8
Production
Revisions
(0.3)
(17.8)
(3.3)
(0.3)
(7.7)
(1.6)
(0.0)
(10.1)
(1.7)
0.8
3.5
1.4
0.8
9.6
2.4
0.0
(6.2)
(1.0)
31 Dec
2015
3.9
551.0
95.7
3.3
158.4
29.7
0.7
392.5
66.1
At 31 December 2014 the estimation of the Group’s proved and probable reserves was reviewed by an independent engineer, DeGolyer & MacNaughton.
An updated estimation of reserves as at 31 December 2015 was completed internally.
Consultants DeGolyer & MacNaughton (‘D&M’) completed
their evaluation of the 2014 JKX reserves and resources
position. This was used as the basis of the 2015 reserves
evaluation carried out by JKX. The reserves and resources
disclosed below in respect of 31 December 2015 have not been
independently audited.
P+P (2P) reserves
Proved and Probable (2P) group reserves reduced from 97.7
MMboe at year-end 2014 to 95.7 MMboe at year-end 2015. The
changes are shown on a field by field basis in the table below:
JKX P+P+P (3P) reserves
D&M also carried out a full assessment of the upside potential
in each field, the “Possible” reserves. The possible reserves
have been updated by subtracting production from last year’s
3P number and re-calculating the Possible reserves. The one
exception is Novo-Nikolaevskoye field where the 2P reserves
this year now exceed the 3P reserves evaluated by D&M.
These possible reserves are shown below together with the
total 2P reserves for each field:
MMboe
P+P
Possible
P+P+P
MMboe
Ignatovskoye
Molchanovskoye
Novo-Nikolaevskoye
Rudenkovskoye
Zaplavskoye
Sub-total Novo-Nik
production licences
Elizavetovskoye
Total Ukraine
Koshekhablskoye
Hernad
Turkeve
Total
31 Dec
2014 Production
Revisions
31 Dec
2015
Ignatovskoye
Molchanovskoye
4.5
0.6
0.5
20.5
0.5
26.5
2.4
28.9
68.8
–
–
(0.6)
(0.1)
(0.2)
(0.1)
–
(1.0)
(0.6)
(1.6)
(1.7)
–
–
(0.8)
1.1
0.4
0.2
–
0.9
1.5
2.4
(1.0)
–
–
Novo-Nikolaevskoye
Rudenkovskoye
Zaplavskoye
sub-total Novo-Nik
production licences
Elizavetovskoye
Total Ukraine
Koshekhablskoye
Hernad
Turkeve
Total
3.0
1.6
0.8
20.6
0.5
26.4
3.2
29.7
66.1
–
–
97.7
(3.3)
1.4
95.7
3.0
1.6
0.8
20.6
0.4
2.7
0.3
–
12.9
0.04
5.7
1.9
0.8
33.5
0.5
26.4
16.0
42.4
3.2
29.7
66.1
–
–
13.9
29.9
16.0
–
–
17.1
59.5
82.1
–
–
95.7
45.9
141.6
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67
40
41
JKX contingent resources
JKX prospective resources
Except for minor revisions to Hernad, changes have been
made to the contingent resources since 2014 year end. These
contingent resources are those volumes of hydrocarbons
which are potentially recoverable from known accumulations
but which are not currently considered to be commercially
recoverable. The categories of 1C, 2C or 3C are used to reflect
the range of uncertainty. These contingent resources are
tabulated below.
MMboe
1C (low)
2C (best)
3C (High)
Ignatovskoye
Molchanovskoye
Novo-Nikolaevskoye
Rudenkovskoye
Zaplavskoye
Sub-total Novo-Nik
production licences
Elizavetovskoye
Total Ukraine
Koshekhablskoye
Hernad
Turkeve
Total
11.78
17.28
49.54
0.03
0.00
17.99
0.00
1.19
0.09
1.60
0.14
110.09
382.66
0.00
0.99
29.81
128.65
434.9
0.00
29.8
25.1
0.3
0.2
0.00
128.7
78.6
0.3
0.2
0.00
434.9
111.4
0.7
0.3
55.4
207.9
548.9
D&M evaluated JKX’s exploration potential at the end of 2014
and categorised the potential resources of the undrilled
prospects in the Company’s portfolio. There are no changes
to the D&M work in Ukraine, however, an additional prospect,
SW V25 Amplitude, can be added as D&M’s work was
completed prior to the Zaplavskoye license extension thus
excluding this prospect. JKX has also identified a further
opportunity to the north east of the Molchanovskoye license,
NE Mol V25 Stratigraphic Sand. The three wells planned in
Slovakia are also now included in the Prospective Resources
category. Undrilled prospects inevitably carry an element
of technical risk and it is usual to summarise them under
unrisked potential and risked potential resources. It should
be noted that less well defined leads and prospects with little
expectation of being drilled are excluded from such a list.
Prospect A
V25 Sands pinchout
Prospect D
Prospect E North
Prospect E South
SW V25 Amplitude
NE Mol V25
Stratigraphic Sand
Mean
BCF
Mean
MMboe
4.35
3.86
30.04
62.69
78.61
95.23
16.46
0.73
0.64
5.00
10.45
13.10
15.87
2.74
sub-total Ukraine
291.25
48.54
Tisza-6b
Tisza-15 (Chevelle)
sub-total Hungary
Cierne-1 (Slovakia)
Kriva Ol’ka -1
Poruba -1
32.70
6.64
39.34
25.98
sub-total Slovakia
25.98
5.45
1.11
6.56
4.33
0.50
0.45
5.28
Ps1
0.25
0.23
0.29
0.29
0.32
0.13
0.14
0.31
0.36
0.15
0.39
0.36
Risked
Mean
MMboe
0.18
0.15
1.48
3.10
4.17
2.06
0.38
11.52
1.67
0.40
2.08
0.66
0.2
0.2
1.06
Total
356.57
60.38
14.66
1 Probability of economic success
Principal risks and how we manage them
Our framework of internal controls is supported by a culture
that promotes good risk management processes led by the
Board.
Risk assessment
The Board monitors the risk profile of the Group using four
risk categories:
Responsibilities
The Board is responsible for the Group’s system of internal
control and risk management systems and for reviewing their
effectiveness.
Risk management process
A risk management process, which involves the Risk
Committee, has been in place throughout 2015 and up to the
date of approval of this Annual Report.
The process is designed to manage rather than eliminate the
risk of failure to achieve business objectives, and can only
provide reasonable, not absolute, assurance against material
misstatement or loss.
Risk Committee 1
The Risk Committee assists the Executive Directors in the
operation and implementation of the risk management
process, and provides a source of assurance to the Audit
Committee that the process is operating effectively. This
approach aims to actively manage risk in a transparent and
accountable way.
The Risk Committee meets at least three times a year and
reports into each Audit Committee meeting.
1. External
2. Financial
3. Strategic
4. Operational
The Board acknowledges that it will be subject to residual
risk in pursuit of achieving its strategic priorities even after
mitigating actions.
Risk management framework
The key elements of the risk management process are as
follows:
Risk identification – risks faced by the Group are identified by
senior management and risk owners, who periodically review
the risks to ensure that the risk management processes and
controls in their area are appropriate and effective, and that
new risks are identified.
Risk assessment – the consequence and likelihood of each
risk materialising is assessed. Risk registers are used
to document the risks identified, the level of severity of
its impact, and probability of occurrence, ownership and
mitigation measures for each risk.
1
Risk Committee
Risk Committee work in 2015
Risk Committee work in 2016
At the Group level, work continued with the Audit Committee to review
the overall process of business risk management and to validate the
risk register, with particular focus on improving reporting and
involvement in the Group’s from Risk Committees at both our
operating subsidiaries in Ukraine and Russia.
At our operations in Russia and Ukraine:
• local training was provided to the Risk Committees to develop the
upward communication of specific risks and mitigation plans, and
the visibility between the risks associated with delivering the
Board’s strategic priorities and our activities on the ground;
• Risk Velocity was introduced to the Risk Committees as a factor in
grading the identified risks; and
• representatives from our Ukrainian and Russian Risk Committees
attended each of the Group Risk Committee meetings to expand on
the risks identified locally and their related mitigation plans.
The group level risks assessment process continued throughout the
first quarter of 2016 but with the appointment of new executive
directors on January 28th, 2016, the process of assessing such risks
involved a far deeper analysis than normal due to the need for the new
executive directors to fully understand the risk profile of the
business. This report on the Principal risks facing the business has
been drafted following input from this most recent assessment
process.
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67
42
43
Principal risks and how we manage them
Risk profiles of our principal risks
The graph represents our
current assessment of the
potential impact and probability of
occurrence of each of the
principal risks noted below.
HIGH
t
c
a
p
m
i
l
a
i
t
n
e
t
o
P
2014
2015
I
J
G
A,B
D
C
F
H
D
C
E
LOW
HIGH
Probability of occurrence and risk velocity
What is the risk
External risks
Geopolitical – Ukraine
Geopolitical – Group
Tax legislation
Commodity prices
Foreign exchange exposure
Financial risks
Liquidity
Strategic risks
Risk
profile
KPIs
affected
Change
from 2014
Strategic
objective
impacted
Responsibility
Page
A
B
C
D
E
Return on average capital employed
Return on average capital employed
Production costs
Return on average capital employed
Gas realisations
Return on average capital employed
I
<
<
<
I
1,2
1,2
1
1
1
The Board
The Board
Chief Executive Officer
Chief Financial Officer
Chief Financial Officer
44
44
46
46
48
F
Return on average capital employed
I
1,2
Chief Financial Officer
48
Over exposure to a single market
G
Return on average capital employed
<
1,2
Chief Executive Officer
50
Operational risks
Reservoir performance
Environmental, asset integrity
and safety incidents
H
I
Production volumes
Reserves
All Injury Frequency Rate
Lost Time Injuries
Environmental Incident Frequency Rate
I
I
1,2
Chief Executive Officer
50
3
Chief Executive Officer
50
Bribery and corruption
J
Return on average capital employed
I
1
The Board
52
A Risk Velocity measure is built in to the assessment of the
impact of each risk. Risk Velocity is the time to impact and is
an estimate of the time frame within which a risk may occur.
Risks are then logged with reference to consequence rating,
multiplied by the likelihood plus velocity rating, as shown in
the diagram below.
The Board has completed a robust assessment of the most
significant risks and uncertainties, which could impact the
business model, long-term performance, solvency or liquidity,
and the results are summarised below. Also presented is
an assessment of the probability of each risk occurring,
its potential impact should it occur, the Key Performance
Indicators (‘KPIs’) and strategic priorities most affected
as each risk increases, how each risk is being managed or
mitigated and whether the overall business risk has increased
or decreased since the last annual report.
The principal risks set out on pages 44 to 52 are not set out
in any order of priority, they are likely to change and do not
comprise all the risks and uncertainties that the Group faces.
Risk assessment table
Highly
likely
Likely
Very
high
High
Probability
+ velocity
Very
high
High
Possible
Medium
Medium
y
t
i
l
i
b
a
b
o
r
P
Unlikely
Low
Rare
y
t
i
c
o
l
e
V
Very
low
Low
Very
low
Impact
Insignificant
Minor
Moderate
Major
Catastrophic
LOW
LOW
LOW
LOW
LOW
MED
MED
MED
LOW
LOW
HIGH
MED
MED
MED
LOW
HIGH
HIGH
MED
MED
LOW
HIGH
HIGH
HIGH
MED
LOW
Low risk
Medium risk
High risk
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67
44
Principal risks and how we manage them
What is the risk?
External risks
Geopolitical – Ukraine
Probability
+ Velocity
Impact
Change
from 2014
KPIs
affected
Description: 81% of the Group’s revenues and most of its profits and cash flow from
operations are derived from its activities in Ukraine.
HIGH
HIGH
—
Return on
average
capital
employed
Recent civil conflict, political instability and ongoing military action in parts of Ukraine
have negatively impacted the economy and relations with the Russian Federation resulting
in Ukraine’s sovereign risk rating downgrade by all credit agencies in 2015.
Escalating geopolitical tensions have had an adverse effect on the Ukrainian financial
market. The ability of companies and financial institutions with assets in Ukraine to obtain
funding from the international capital markets has been hampered as a result of
decreased appetite for Ukrainian credit exposure. Any continuing or escalating military
action in eastern Ukraine could have a further adverse effect on the economy. In addition,
Ukraine will probably need additional external financial support through 2016 (see also
Liquidity Risk page 48).
Impact: If the country does not peacefully resolve the current conflict as well as secure
additional financing, there is a risk it may default on its obligations and/or introduce new
decrees to increase government funds from independent companies in Ukraine. Changes
in law or the regulatory environment and the possibility of immediate implementation
could have a sudden material adverse effect on the Group’s operations and financial
position, which would reduce the Group’s profits and cash flows.
Geopolitical – Group
Description: Most of the Group’s operations and more than 97% of our oil and gas assets
are located in Ukraine and Russia and the oil, gas and condensate that we produce is sold
into their domestic markets.
Both countries display emerging market characteristics where the right to production can
be challenged by State and non-State parties. The business environment is such that a
challenge may arise at any time in relation to the Group’s operations, licence history,
compliance with licence commitments and/or local regulations. The Group endeavours to
comply with all regulations via Group procedures and controls or, where this is not
immediately feasible for practical or logistical considerations, seeks to enter into dialogue
with the relevant Government bodies with a view to agreeing a reasonable time frame for
achieving compliance or an alternative, mutually agreeable course of action (see Note 2 to
the financial statements).
In addition, local legislation constantly evolves as the governments attempt to manage the
economies and business practices regarding taxation, banking operations and foreign
currency transactions.
Impact: The Group’s operations and financial position may be adversely affected by
interruption, inspections and challenges from local authorities, which could lead to
remediation work, time-consuming negotiations and suspension of production licences.
The constantly evolving legislation can create uncertainty for local operations if guidance
or interpretation is not clear.
HIGH
HIGH
<
Return on
average
capital
employed
45
Strategic
priority
impacted
1
Profitable
production
growth
2
Oil and gas
reserves
growth
1
Profitable
production
growth
2
Oil and gas
reserves
growth
Responsibility
How do we manage it?
The Board
To date, our operations have not been directly impacted by the unrest in Ukraine or the
military conflict in the east.
Ukrainian Government-imposed restrictions on selling its gas to industrial clients, the
doubling of gas production tax and the foreign exchange controls led the Board to suspend
the 2015 capital investment programme in Ukraine. The gas sales restrictions and punitive
tax rates have now been removed.
The Board frequently reviews announcements by national and local governments in
Ukraine and Russia regarding their future plans to influence economic factors, in
particular those plans that impact future oil and gas prices and related costs and taxes.
The Company also takes all reasonable measures to reduce and limit our commercial
exposure in Russia and Ukraine through the use of careful selection of contracting parties,
advanced payments and careful cash management.
The Board is currently assessing the investment program in Ukraine whilst bearing these
geopolitical risks in mind.
Further
information
Chairman’s
statement
P6
The Board
The Board and Management recognise the constant need for expert advice to ensure full
compliance with local and international regulations and laws.
Our strategy is to employ skilled local staff working in the countries of operation and
provide them with on-going training.
In addition, the Group engages established legal, tax and accounting advisers to assist in
compliance with statutory, employment and environmental regulation and laws, and to
ensure its tax and duty obligations are properly assessed and paid when due.
A key priority for the Group is to maintain transparent working relationships with all key
stakeholders in our significant assets in Ukraine and Russia and to improve the methods
of regular dialogue and on-going communications locally.
Chairman’s
statement
P6
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67 Probability
+ Velocity
Impact
Change
from 2014
KPIs
affected
MED
MED
<
Production
costs
Return on
average
capital
employed
MED
MED
<
Gas
realisations
46
Principal risks and how we manage them
What is the risk?
External risks continued
Tax legislation
Description: The Group is exposed to changes in local tax laws, particularly in Ukraine.
In Ukraine, PPC has at times sought clarification of their status regarding a number of
production related taxes. PPC continues to defend itself in court against action initiated by
the tax authorities regarding production related taxes for certain periods through to
31 December 2010 (see Note 27 to the financial statements).
At the end of July 2014, the Ukrainian Government approved emergency fiscal measures
which almost doubled subsoil taxes on the Company’s gas production through 2015.
The Ukrainian Government has now enacted legislation, effective from 1 January 2016,
to reduce the subsoil taxes on gas production to substantially the same levels that were in
effect prior to the temporary increase.
Governments in emerging markets sometimes bring in new tax laws which are effective
immediately but are subject to varying interpretations and changes, which may be applied
retrospectively.
Other risks include a weak judicial system that is susceptible to outside influence.
Impact: If Management’s interpretation of tax legislation does not coincide with that of the
tax authorities, the tax authorities in the countries of operation may challenge
transactions which could result in additional taxes, penalties and fines which could have a
material adverse effect on the Group’s financial position and results of operations.
Commodity prices
Description: JKX’s policy is not to hedge commodity price exposure on oil, gas, LPG or
condensate and therefore is exposed to international oil and gas price movements and
political developments in Russia and Ukraine. Change in prices will have a direct effect on
the Group’s trading results.
Oil prices declined significantly in 2015 and are predicted to remain lower for longer by
many market commentators. The Company sells the oil it produces at prices determined
by the global oil market.
During 2015 Ukraine acquired the ability to purchase gas from Europe which has more
closely aligned Ukrainian gas prices with those across Europe, which have almost halved
since the beginning of 2015. In addition, Ukrainian Government has enacted legislation
designed to deregulate the gas market in Ukraine, but the timeframe and guidance for the
implementation of such legislation and its impact on the Group is unclear. Over time, these
reforms are likely to have an effect on the internal gas market in Ukraine.
In Russia all our gas is sold in local industrial markets and the government control the gas
prices at which we can sell our gas. In 2014 there was no official increase in the regulated
maximum industrial price and on 1 July 2015 the regulated maximum industrial price was
increased by 7.5%.
Impact: A period of low oil and/or gas prices has led to impairment of the Group’s oil and
gas assets (see Note 5 to the financial statements) and may impact the Group’s ability to
support its long-term capital investment programme (see Liquidity Risk below) and
reduce shareholder returns including dividends and share price.
Previous oil and gas price increases have resulted in increased local taxes, cost inflation
and more onerous terms for access and to produce resources. As a result, increased oil
and gas prices may not improve the Group results.
47
Strategic
priority
impacted
1
Profitable
production
growth
3
Safe and
responsible
operations
1
Profitable
production
growth
Responsibility
How do we manage it?
Chief
Executive
Officer
The Board continues to receive legal advice that the case against PPC regarding
calculation and payment of various production related taxes to 31 December 2010 has little
legal merit under Ukrainian law for legal and technical reasons and the three year statute
of limitation. The Company continues to pursue international arbitration proceedings
against Ukraine under the Energy Charter Treaty to recover $180m in Rental Fees that
PPC has paid on production of oil and gas in Ukraine since 2011, in addition to damages to
the business (see Note 27 to the financial statements).
The Group takes regular advice on tax matters from Ukraine tax experts to comply with all
known requirements and to actively defend its legal position.
The Group maintains a transparent and open relationship with local, regional and national
tax authorities in Ukraine and Russia.
The Group’s financial information does not include any adjustments to reflect the possible
future effects on the recoverability, and classification of assets or the amounts or
classifications of liabilities that may result from these tax uncertainties.
Further
information
Financial
review
P30
Chief
Financial
Officer
JKX attempts to maximise stability and predictability of prices under long term contracts
with reputable customers. This minimises exposure to abrupt price movements, ensuring
sales are as closely matched as possible, in terms of timing and volume, to production.
Strategic
Report
P8-11
In Russia, all gas produced is sold to a local gas trading company through a gas sales
contract which remains in place through 2016. The sales price was negotiated using
current and expected future oil and gas prices and production volumes.
In 2015, most of the oil and gas production in Ukraine is sold by way of auctions, conducted
with a frequency aimed to achieve as close as practicable the aforementioned matching
principle.
The Group does not usually enter into hedge agreements unless required for borrowing
purposes as may occur from time to time.
The Board continues to monitor announcements by governments in Ukraine and Russia
regarding the gas price charged by Gazprom (Russia) to Ukraine and forecast European
hub prices to assess the potential impact on the Ukrainian industrial gas price and its
sustainability.
In Russia from 1 July 2015 the regulated maximum industrial price was increased by 7.5%
as was the price at which we sell gas to our buyer.
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67 49
Strategic
priority
impacted
1
Profitable
production
growth
Probability
+ Velocity
Impact
Change
from 2014
KPIs
affected
HIGH
LOW
—
Return on
average
capital
employed
48
Principal risks and how we manage them
What is the risk?
External risks continued
Foreign exchange exposure
Description: The Group operates internationally and is exposed to foreign exchange risk
arising from various currency exposures, primarily with respect to Ukrainian Hryvnia and
the Russian Rouble.
The US Dollar is the currency which influences the majority of the Group’s revenues and
capital costs.
Although a proportion of costs are incurred in US Dollars, most operating costs are
influenced by the local currencies of the countries where the Group operates, principally
Ukrainian Hryvnia and Russian Rouble.
During 2015, the Hryvnia and Rouble devalued by 34% and 23% respectively, against the
US Dollar.
As a result, the Group’s operating costs in US$ terms including the cost of production,
operating and general admin costs decreased however the Group reported a foreign
exchange loss of $4.9m in the income statement as a result of the devaluation of the
Rouble and Hryvnia.
The devaluation in the Rouble reduced the carrying value of the assets held in Russia
resulting in the Group’s net assets decreasing by $26.3m.
Impact: Appreciation of the Ukrainian Hryvnia or depreciation of the Russian Rouble
against the US Dollar or prolonged periods of exchange rate volatility may adversely affect
the Group’s business results.
Financial risks
Liquidity
Responsibility
How do we manage it?
Further
information
Chief
Financial
Officer
Foreign exchange risk arises in the Group from commercial transactions, financing
arrangements and assets and liabilities denominated in foreign currencies and net
investments in foreign operations.
Financial
review
P30
We attempt to match, as far as practicable, receipts and payments in the same currency
and also follow a range of commercial policies to minimise exposures to foreign exchange
gains and losses. These include minimising exposure to the Hryvnia denominated sales,
which continue to account for more than 80% of Group revenues, and the Rouble-based
operating and capital costs.
All our gas sales and most of our costs in Russia are denominated in Roubles which
mitigates the Group’s exposure to any Rouble/US Dollar fluctuations, however the recent
devaluation of the Rouble has reduced the value of Group revenues and costs which are
reported in US$.
The Group’s normal policy is not to hedge foreign exchange risk but to continually monitor
internal and external guidance on expected future currency exchange movements and
manage the currency of the Group’s major cash flows and holdings to minimise our
potential exposure.
Description: 81% of the Group’s revenues and most of its profits and cash flow from
operations are derived from its activities in Ukraine.
HIGH
HIGH
—
Changes in commodity prices have a direct effect on the Group’s liquidity position
(see Commodity Risk above).
If the Bondholders exercise their put option in February 2017 pursuant to the $40 million
Convertible Bonds (see Notes 13 and 14 to the consolidated financial statements), the
Company will have an obligation of $30.1 million which becomes payable at that time, or,
if the Bond expires at its full term, an obligation of $31.1 million in February 2018.
During 2015 the Ukrainian Government:
• implemented gas sales restrictions for the three month period to 28 February 2015
resulting in the Group’s Ukrainian gas sales reducing to approximately 50% of
production capacity
• increased Ukrainian gas production tax from 28% to 55%.
• implemented currency control restrictions such that dividends could not be repatriated
from our Ukrainian subsidiary (see Note 37 to the Group financial statements).
As a result the Board suspended all capital investment in Ukraine during 2015.
Suspending investment in appraisal and development activities in Ukraine and shutting-in
gas production in 2015 has had a significant adverse impact on the Group’s current and
future oil and gas production, sales, profits, cash flow, liquidity and working capital
balances, and has resulted in the delay and cancellation of capital projects.
Future capital investments in exploration, appraisal and development activities then
become more difficult to plan and finance as they are driven by the results of the Group’s
current capital projects.
Impact: The risks relating to currency restrictions imposed by the Ukrainian Government
are material uncertainties that may cast significant doubt on the Group’s ability to meet its
financial obligations as they fall due and continue as a going concern (see Note 2 to the
financial statements).
In addition, deviations in the timing and quantum of exploration and development
expenditures can expose the Group to funding challenges.
Return on
average
capital
employed
Chief
Financial
Officer
1
Profitable
production
growth
2
Oil and gas
reserves
growth
Financial
review
P30
The Board manages liquidity risk by attempting to maintain an adequate level of liquidity in
the form of readily available cash or committed credit facilities at all times.
Management monitors rolling forecasts of the Group’s liquidity on the basis of expected
cash flow to ensure that any remedial action can be taken with as much lead time as
possible.
In 2015 the Board made immediate strategic changes to streamline the organisation. Staff
and cost reductions were made in all key operational and administrative areas. Through
these reductions, the Group maintains a competitive cost base which enables it to continue
in operation whilst generating operating cash flow during periods of low commodity prices.
In 2016, the Directors have continued to implement further operational and cash
management measures across the Group to improve future cash flows and are assessing
other restructuring and/or refinancing options in order to meet future Bond payments.
Liquidity risk has reduced in 2016 following a reduction of gas production tax rates from
55% to 29% from 1 January 2016 however the currency controls remain in place.
In 2015 JKX applied for and received an award from the Permanent Court of Arbitraion
Tribunal ordering Ukraine to convert and repatriate PPC dividends to JKX which the NBU
declined. The Group therefore purchased Hryvnia-based corporate bonds and immediately
sold them to an international counterparty for US Dollars which increased the Group’s US
Dollar balances in order to make payments due under the Convertible Bonds and other
corporate overheads.
The Group finances current exploration and development activities with existing cash
balances and operating cash flow generated from the production and sale of gas, oil,
condensate and LPG. The Company’s options for additional debt financing are limited by
our Ukrainian focus and our current shareholder base.
The timing and nature of almost all of the Group’s exploration and development activities
are discretionary and therefore the Group prioritises these activities according to the
available finance.
The Board is currently evaluating all the potential development projects in Ukraine and
making decisions with full knowledge of the liquidity risks facing the Company.
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67 50
Principal risks and how we manage them
What is the risk?
Strategic risks
Over exposure to a single market
Probability
+ Velocity
Impact
Change
from 2014
KPIs
affected
Description: Our portfolio extends to 17 licences or licence interests in four different
countries and the Group’s focus continues to be our projects in Russia and Ukraine.
MED
MED
—
We own 100% of all our oil and gas assets in Ukraine and Russia.
Our strategy is focused on the development of these two wholly-owned production bases
and exploration portfolios.
The Group’s success in monetising its Ukrainian and Russian assets underpins the Group’s
long term value.
Impact: All of the risks and rewards associated with the commercialisation of our
Ukrainian and Russian licences are attributable to the Group alone and therefore the
Group is vulnerable to the impact of any changes in the Russian and Ukrainian operating
and economic environments.
Return on
average
capital
employed
Operational risks
Reservoir performance
Description: The hydrocarbon reservoirs that we operate in Ukraine and Russia generate
the cash flow that underpins the Group’s growth. These reservoirs may not perform as
expected, exposing the Group to lower profits and less cash to fund planned development.
Production from our mature fields at the Novo-Nikolaevskoye Complex in Ukraine require
a high level of maintenance and intervention to maintain production at recent levels.
In Russia, acidization of wells and other well maintenance procedures to increase
stabilised production continued through the year however well integrity issues arose
requiring two out of the five producing wells to be shut-in. One of the wells, well-05,
remains shut-in.
Impact: Accurate reservoir performance forecasts from fields in Ukraine and Russia is
critical in achieving the desired economic returns. These performance forecasts are also
used to determine the availability and allocation of funds for investment into the
exploration for, or development of, other oil and gas reserves and resources.
Environmental, asset integrity or safety incidents
Description: We are exposed to a wide range of significant health, safety, security and
environmental risks influenced by the geographic range, operational diversity and
technical complexity of our oil and gas exploration and production activities.
Impact: Technical failure, non-compliance with existing standards and procedures,
accidents, natural disasters and other adverse conditions where we operate, which could
lead to injury, loss of life, damage to the environment, loss of containment of hydrocarbons
and other hazardous material, as well as the risk of fires and explosions. Failure to
manage these risks effectively could result in loss of certain facilities, with the associated
loss of production, or costs associated with mitigation, recovery, compensation and fines.
Poor performance in mitigating these risks could also result in damaging publicity for the
Group.
MED
MED
—
Production
volumes
MED
HIGH
—
All Injury
Frequency
Rate
Lost Time
Injuries
Environmental
Incident
Frequency
Rate
51
Strategic
priority
impacted
1
Profitable
production
growth
1
Profitable
production
growth
2
Oil and gas
reserves
growth
Responsibility
How do we manage it?
The Board
The Board produces an annual business plan supported by a rigorous budgeting
procedure which is reviewed monthly against current information.
Periodically the Board updates the Group’s 3-Year Plan to ensure that the plan remains
relevant and material risks, including asset concentration, and sensitivities have been
considered.
Commercial production from our Russian gas plant has diversified our producing assets
which spread the geographical risk away from the previously very high concentration
which was solely in Ukraine.
The Board continues to proactively seek and investigate value-enhancing production and
exploration acquisitions and farm-outs/ins through our business development managers
across central and eastern Europe.
A key priority of the Board is to implement regular, open and transparent communications
with all stakeholders to ensure there is a clear understanding of the Group strategy, its
risks and the potential rewards.
Further
information
Chief
Executive’s
statement
P12
Chief
Executive
Officer
There is daily monitoring and reporting of the well performance at all our fields in Ukraine
and Russia. Production data is analysed by our in-house technical expertise. This supports
the well intervention planning and further field development.
Operational
review
P35
Using specialist engineers, the tubing replacement at well-27 in Russia to resolve well
integrity problems was completed in Q4 2015 to restore plateau production to levels
previously achieved.
Our subsurface specialists and industry-recognised personnel are part of the daily
monitoring and reservoir management process of our fields in Ukraine and Russia. Our
London-based in-house team of drilling, engineering and subsurface experts continue to
be closely involved in the remediation work in Russia, well prioritisation on mature fields
in Ukraine and our other field development plans. Our team is supported by skilled and
experienced local technical teams, in addition to external consultants, when necessary;
this interaction is key to mitigating our reservoir performance risk.
3
Safe and
responsible
operations
Chief
Executive
Officer
We treat health, safety and the environment as a priority of the Board and have a London-
based HSECQ manager who reports directly to the Chief Executive Officer.
Supported by the Board, the Group HSECQ manager is responsible for maintaining a
strong culture of health, safety and environmental awareness in all our operational and
business activities.
Corporate
social
responsibility
P54
The HSECQ Manager reports to the Board on a monthly basis with details of our
performance.
Our locations in Ukraine, Russia and Hungary all have a dedicated HSECQ Team of local
employees led by an HSECQ Manager who reports to the HSECQ Director for that
particular region. All locations have HSE Management Systems modelled on the ISO 9000
series, OHSAS 18001 and ISO 14001. These locations are regularly visited and reviewed by
the Group HSECQ manager. The Board participate in an annual review of the Group’s
HSECQ performance and the planning of continuous improvement initiatives and
objectives for the coming year.
The HSE Plan for 2016 has placed direct responsibility on line supervision to ensure that
standards and procedures are adequate and being enforced.
Appropriate insurances are maintained to manage the Group’s financial exposure to any
unexpected adverse events arising out of the normal operations.
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67 52
JKX Oil & Gas plc Annual Report 2015
Principal risks and how we manage them
What is the risk?
Operational risks continued
Bribery and corruption
Probability
+ Velocity
Impact
Change
from 2014
KPIs
affected
Description: The UK Bribery Act places onerous requirements on UK companies to
demonstrate the effectiveness of their anti-bribery measures.
MED
HIGH
—
Impact: Failing to implement adequate systems to prevent bribery and corruption could
result in prosecution of the Company and its officers.
Return on
average
capital
employed
Long term viability statement
Assessment of viability
At the date of this report, a number of material uncertainties
have been identied that may cast significant doubt about the
Group’s and Company’s ability to continue as a going concern.
The combination of circumstances giving rise to these
material uncertainties is discussed in Note 2 to the financial
statements.
Notwithstanding these material uncertainties, the Directors
have assessed the viability of the Group over a three-year
period to 31 December 2018, taking account of the Group’s
current position and the potential impact of the principal risks
documented above.
A three-year period was selected as it is the period used for
the Group’s strategic review.
Assessment of the Group’s prospects
A new Board was appointed on 28 January 2016 and has
completed an initial review of the Group’s assets. The new
Board believes that the Group’s assets and staff provide a
good platform to consolidate and improve on its existing oil
and gas opportunities in central and eastern Europe and will
continue to focus in this region, in particular in Ukraine (see
pages 12 and 13).
The Group has been operating in Ukraine for over 20 years
and most of the Group’s profits and cash flows continue to
be generated from its assets there. However there remain
significant risks associated with operating in Ukraine and the
near term economic outlook for the country remains uncertain
(see “Geopolitical risk – Ukraine” above), which could
adversely impact cash flows, profits and liquidity of the Group.
The new Board, who were appointed 7 weeks ago, continue to
review its future strategy in light of their ongoing review of the
Group’s operations.
The Board closely monitors and manages its liquidity risk using
cash flow forecasts which are regularly produced and applies
sensitivities for different scenarios including, but not limited
to, changes in oil and gas prices, changes to production and
other tax rates in relation to the Group’s producing assets,
increased operating and capital expenditure, changes in
Rouble and Hryvnia exchange rates, and delays to additional
future revenue. These sensitivities are applied both individually
and in unison.
Downside sensitivities were modelled to test the impact of using
a range of external forward oil and gas price curves including a
period of low oil and gas prices through to the end of 2016. The
testing incorporated the use of mitigating actions available to the
business such as a reduction in capital expenditure and further
reducing operating costs safely and responsibly.
Capital and operating costs were based on approved budgets
and latest forecasts in the case of 2016 and current development
plans in the case of 2017 through to December 2018. In addition,
the Directors made enquiries into and considered the Ukrainian
and Russian business environments and future expectations
regarding country and currency risks that the Group may
encounter, as disclosed in the risks above.
Principal risks facing the Group
For the purposes of assessing the Group’s viability, the
Directors focused on the following principal risks which are
critical to the Group’s success:
53
JKX Oil & Gas plc Annual Report 2015
Strategic report
2-67
Governance
68-103
Financial statements
104-169
Strategic
priority
impacted
1
Profitable
production
growth
Further
information
Corporate
social
responsibility
P54
Responsibility
How do we manage it?
The Board
We prohibit bribery and corruption in any form by all employees and by those working for
and/or connected with the business.
Our Group Compliance Manager is responsible for anti-bribery and corruption matters
and, with the support of the Board, implements an Annual Compliance Plan.
The compliance programme includes components which recognise the requirements of
the UK Bribery Act 2010 and which focus on training, monitoring, risk management and
due diligence.
We annually refresh our Global Code of Conduct and Statement of Ethics which is compliant
with the UK Bribery Act and its guidance and communicate this throughout the Group.
Employees are expected to report actual, attempted or suspected bribery to their line
managers or through our independently managed confidential reporting process, which is
available to all employees as well as third parties.
We will continue to regularly review the operation and impact of the Group’s policies and
procedures to ensure a consistent application of the Global Code of Conduct in all business
activities and throughout the supply chain processes.
Inadequate liquidity levels
The Company has an obligation of $30.1 million (consisting
of $26 million principal, $1 million interest and a redemption
premium of $3.1 million) which may become payable pursuant
to its $40 million Convertible Bond in February 2017, if
Bondholders exercise their put option at that time, or
$31.1 million in February 2018 if the Bond expires at its
full term (see Notes 13 and 14 to the consolidated financial
statements).
The Company’s Ukrainian subsidiary, Poltava Petroleum
Company (‘PPC’) has three contingent liabilities arising from
separate court proceedings over the amount of production taxes
(‘Rental Fees’) paid in Ukraine for certain periods since 2007,
which in total amount to approximately $41 million (including
interest and penalties, see Note 27 to the consolidated financial
statements). The Board believes that these claims are without
merit under Ukrainian law and will continue to contest them
vigorously.
In addition, the Company continues to pursue a final award
under its arbitration claim against Ukraine, which is to be
heard in July 2016, for the overpayment of US$180 million of
Rental Fees plus damages to the business (see Note 27 to the
consolidated financial statements).
Factors exist which are outside the control of management
which can have a significant impact on the business:
Oil and gas prices
The international oil and gas prices declined significantly
through 2015 and remain low.
Ukrainian subsoil permits
Following action initiated in late 2015, in January 2016, the
State Geology and Mineral Resources Survey of Ukraine
suspended four subsoil use permits owned by PPC, initially
with effect from 1 February 2016, but then with an extension
period until 1 March 2016. The authority gave a list of actions
that were required in order to avoid suspension (including
a change to the minimum production requirements under
the licences) and would normally have given the operator
sufficient time to remedy the failings. Instead PPC were given
only one month to do so. Through further discussion with the
relevant authority, PPC has been given more time to comply
and hearings regarding the status of the licenses are planned
for March 2016, at which the Board and PPC is confident of a
positive outcome.
Confirmation of longer-term viability
The Board has considered these risks and the other principal
risks faced by the business detailed on pages 44 to 53 of
the Annual Report. The Directors are implementing further
operational and cash management measures, and may be
required to implement other restructuring and/or refinancing
options, to settle amounts that may become payable in
February 2017 or will become payable in February 2018
pursuant to the $40m Convertible Bond. Assuming that
these payments can be made, based on the Group’s cash
flow forecasts, the Directors believe that the combination of
its current cash balances, expected future production and
resulting net cash flows from operations provide a reasonable
expectation that the Company will continue to be viable and
meet its liabilities over the assessment period.
54
55
Corporate and social responsibility (‘CSR’) review
Our understanding
Our impact
Local responsibility
CSR policies, procedures and standards
JKX is committed to understanding, monitoring and managing
our social, environmental and economic impact to enable us to
contribute to society. JKX’s safety culture is led from the top;
it is embraced and practised by the Chief Executive Officer and
throughout the organisation.
The increasing concern of environmental and social impacts
means that to achieve long term success, JKX measures its
‘triple bottom line’ – profit, people and planet. CSR positively
impacts these three elements and is therefore embedded
within JKX’s business strategy.
Our vision
Our CSR process is board led
CSR is led by Tom Reed, the Chief Executive Officer. JKX’s
Health, Safety, Environment, Community and Quality (‘HSECQ’)
manager reports directly to the CEO and has responsibility
for creating a framework and maintaining the HSECQ
Management System for the management of the Group’s non-
financial impacts.
The Board is provided with quarterly updates relating to the
major CSR issues.
A management review of all HSECQ systems is carried
out every year. A full Board level review of progress was
completed in December 2015 and plans for 2016 were agreed.
The new Board of Directors will ensure these plans are
carried out.
JKX is committed to achieve zero harm to employees,
environment, contractors, communities and property.
The Company has implemented the requirements of ISO 26000
and have joined the Global Reporting Initiative on Sustainability
Reporting, the international guidance on social responsibility.
Our approach
JKX’s approach is to act responsibly and with integrity,
conducting its global business as a responsible employer,
corporate citizen and neighbour. JKX is committed to building
a responsible, sustainable business by:
• Reducing the impact of unemployment
• Addressing the skills shortage necessary for local business
to compete in the future
• Engaging in Continuous Professional Development
• Addressing inequality in recruitment, pay and promotion
• Creating healthier, happier and more productive employees
• Supporting charities and communities
• Helping local people into work
• Improving the Company’s impact on the environment
• Acknowledging the International Labour Organisation
Health & Safety principles
• Working better with local suppliers and other stakeholders
• Developing a globally responsible mind-set throughout the
Group
Each of JKX’s operating companies has a nominated individual
with executive responsibility for implementing HSECQ
management systems. During 2015, local staff received
training in risk assessment, and due to enhanced skills being
required at operations, HSECQ management staff have been
replaced. HSECQ Managers are experienced, fully trained
and familiar with the local culture, regulations and working
practices.
In Ukraine, Russia, Slovakia and Hungary JKX has fully
trained HSECQ teams which deliver a high standard of HSECQ
management and reporting. Our teams report to the General
Director of the local operating company and the Group HSECQ
manager.
Our CSR objectives
• Strategy: Integrating long-term economic, environmental
and social aspects into JKX business strategies while
maintaining technical excellence.
• Financial: Meeting shareholders’ demands for sound
financial returns, long-term economic growth, open
communication, and transparent financial accounting.
• Customer and product: Fostering loyalty by investing in
customer relationship management, and product and
service innovation that focuses on using technologies and
systems in an economic manner over the long term.
• Governance and Stakeholder: Setting the highest
standards of corporate governance and stakeholder
engagement, including corporate codes of conduct and
public reporting. The new Board intends to improve such
reporting and governance during 2016 and onwards.
• Human: Managing human resources to maintain workforce
capabilities and employee satisfaction through best-in-
class organisational learning, knowledge management
practices and remuneration and benefit programs.
JKX aims to comply with all local laws and regulations and
to exceed them where possible - and expects all its partners
to reach the same standards. Environment, Social and
Governance and other risks facing the Company are included
in the JKX Risk Register and appropriate KPI’s are agreed
each year.
JKX’s policies and standards cover:
• Safety reporting and incident management
• Exposure hours
• Occupational health provision and record keeping
• Environmental reporting and incident management
including climate change
• Behavioural based safety programmes
• Continuing Professional Development and implementation
• Human resources practices, covering areas such as equal
opportunities
• Handling of charitable requests
• Local community relations
• Reference to the International Labour Organisation
• Reporting to local Russian, Ukrainian, Hungarian,
Slovakian and UK authorities
• Risk management programmes
• Business sustainability
• Anti-bribery and corruption
• Business ethics
• Equality and Diversity
• Human Rights / Modern Slavery Act
• Employee surveys
• Fair Employment Practices
• Setting annual targets and objectives
CSR achievements in 2015
All Injury Frequency Rate1 (‘AIFR’)
Environmental Incident
Frequency rate2 (‘EIFR’)
0.15
0.99
0.25
0.15
0.30
0.75
0.71
0.3
2013
2014
2015
2013
2014
2015
1 The AIFR, representing the health and
safety incidents per 200,000 hours
worked, is a direct measure of safety
performance.
2 The EIFR is the number of
environmental incidents per 200,000
hours worked.
Maintained our
ISO 9001 Quality
Management
accreditation
Maintained our
ISO 14001
Environmental
accreditation
Maintained our
OHSAS 18001
Health and Safety
accreditation
Recruited a highly
qualified HSECQ
manager for PPC
Commenced
ISO 9001
accreditation
process for YGE
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57
Targets 2015
Achievements 2015
Targets 2016
Further improve Emergency
Response (‘ER’) arrangements
and plans with simulated
exercises, drills and training in
each of our operational areas
Achieved
During 2015 JKX improved ER in Ukraine and Russia and continued
with regular ER drills and observations of the process. Plans have
been established which include rescue of personnel and actions to
minimise damage and business disruption.
Further improve ER
arrangements and plans with
simulated exercises, drills and
training in each of our
operational areas during 2016
Update the Carbon Management
Plan and reports
Ensure the next assessment of our Carbon Management
Submission by the Carbon Disclosure Project is submitted in Q3
2016.
Comply with the Greenhouse
Gas (‘GHG’) Emissions (Directors’
Reports) Regulations 2015
Achieved
An independent company, Tru-Cost, was engaged to analyse and
report our GHG’s.
Carry out a Management
Training Needs Analysis
All emissions sources owned, operated or controlled by the Group
are included in our report.
Identify current competencies within the JKX Senior
Management Team including Directors and propose a program of
Continuing Professional Development including Corporate
Governance and Environmental matters. With the change in the
JKX Board on 28 January 2016, the management training plan is
being revised for 2016.
The performance report is
included in this Annual Report
with improvements planned
for 2016
The baseline measurement is
included in this Annual Report
with improvements planned
for 2016
Revise current arrangements
with improvements planned
for 2016
Corporate and social responsibility (‘CSR’) review
CSR targets and achievements
JKX’s strategy for 2015 has been to continue to improve its
existing systems for managing its HSECQ aims and objectives.
Targets 2015
Achievements 2015
Targets 2016
Keep our AIFR to 0.40 or below
Continue to beat the
performance benchmark set by
the International Association of
Oil and Gas Producers (‘IOGP’)
JKX achieved an AIFR of 0.15 (2014: 0.99) per 200,000 hours
worked.
JKX achieved 0.75 injuries per million hours worked in 2015
(2014: 4.95), the 2015 IOGP performance benchmark was 1.6 per
million hours for 2015.
Keep our AIFR to 0.35 or below
and exceed the IOGP
performance benchmark
LTI of 0.25 or lower per 200,000
hours worked
EIFR of 0.70 per 200,000 hours
worked
Achieved Zero LTI per 200,000 hours worked
LTI of 0.35 or below
Exceeded target EIFR of 0.30 achieved
EIFR at 0.60 or below
Maintain ISO 9001 accreditation
Achieved
Maintain ISO 14001 accreditation
for JKX Oil & Gas plc
Achieved
Maintain OHSAS 18001
accreditation for JKX Oil &
Gas plc
Achieved
Complete OHSAS 18001
accreditation for PPC
Achieved
ISO 9001 accreditation for PPC
Achieved
Continue to improve our
Stakeholder engagement and
Community Liaison Plan
Progress made, improving levels of communication with local
stakeholders, their interests forming part of the decision-making
process for all our significant operations.
Maintain ISO 9001 accreditation
Maintain ISO 14001 accreditation
Maintain OHSAS 18001
accreditation
Maintain OHSAS 18001
accreditation for PPC
Evaluate assessors
recommendations and apply to
the PPC Management System
Continue to update and improve
our Stakeholder engagement and
Community Liaison Plan in all
locations
Continue to improve local
engagement in our Group Risk
Management Systems and
reporting into our Group Risk
Register
Continue to improve incident
reporting, using safety moments,
workshops, site campaigns,
training sessions, toolbox talks
and briefings
Achieved
Risk management strategy was updated and local Risk
Committees continued to operate in Ukraine and Russia supported
by staff training in risk identification and mitigation.
Improve our Risk Management
and Assessment activities
across the Group
Achieved
56 incidents were reported in 2015 (2014: 47) which included
near-miss reports, unsafe acts and hazards.
Continue to improve incident
reporting, using safety moments,
workshops, site campaigns,
training sessions, tool-box talks
and briefings
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59
Corporate and social responsibility (‘CSR’) review
Health and safety
Our approach
JKX’s Health, Safety, Environment, Community and Quality
(‘HSECQ’) philosophies are embodied in its Policy Statements,
which are endorsed by the Board and made known to all
employees and business partners. The statements represent
the Company’s commitment to a safe and healthy, incident
free, working environment and its responsibility to prevent
damage to the environment, our employees and neighbours.
JKX will never knowingly compromise its health, safety,
environmental or quality standards to meet operational
objectives.
Health and safety statistics
In 2015, JKX implemented and communicated its improved
HSECQ policy at all operations worldwide.
This policy represents a clear statement of core principles and
the approach to health and safety management at all Group
companies.
The priority is to ensure that all staff and contractors work
in a safe environment, where effective systems of work are
maintained and appropriate procedures and processes are
followed.
Continuous improvement in health and safety 1
Annual HSECQ targets are set for all levels within the
organisation. During 2015 JKX achieved an AIFR of 0.15 per
200,000 hours worked with 165days away from work recorded.
This equates to an AIFR of 0.75 per million hours worked.
With more than 750 personnel during 2015 JKX reported
56 incidents.
Our safety statistics for 2015 2
Measurement and analysis of JKX’s safety statistics is carried
out on a monthly basis with the results communicated to
senior management of all group companies and the Board.
There were no recorded lost time injuries (2014: 6). This year
JKX sadly suffered a fatality during mud mixing operations.
A Root Cause Analysis was carried out for this incident with
the lessons learned distributed across the Group to ensure no
such incident occurs again.
Employees are included in structured training and behavioural
programs which promote open discussion and employee
surveys are conducted annually. JKX has a clear Safety
Management System, which provides a comprehensive and
systematic vision of its objectives.
Each site has its own HSECQ Management System identifying
all major hazards and risks to personnel specific to the unique
nature of the country of operation.
In occupational health, the drug and alcohol policy continues
to be successful throughout the Group with no instances
of breaches noted. The policy applies to all JKX staff and
contractors and forbids the possession and/or use of defined
prohibited substances which includes drugs and alcohol.
The policy also clarifies testing and inspection procedures.
Drilling risks
The industry benchmark set by the IOGP was an AIFR of
1.6 per million hours worked. The reporting of incidents during
2015 continued, demonstrating that all statistics are reported
whether good or bad.
JKX recognises that the safety and efficiency of drilling and
workover operations depends primarily on the performance
of its employees and contractors. Local staff with decades
of local experience are used on our drilling rigs who are
1
Continuous improvement in health and safety
All Injury Frequency Rate (‘AIFR’) 2015
5.00
4.00
3.00
2.00
1.00
supported by expatriate supervisors to provide additional
expertise and oversight. This enables us to define and
manage risk more clearly using Western methodologies.
JKX drilling and workover employees and contractors have
the necessary training and certification in well safety and well
control, and all personnel have the authority to stop any job
that they deem unsafe.
Supervisors are selected for their expertise as well as for
their familiarity with the regions where JKX operates. They
understand and are sensitive to local working practices and
culture, and work to enhance the education and training of
local staff and contractors alike.
JKX makes the best use of its resources by sharing expertise
between operating companies using a strong collaborative
environment where everybody contributes to analyse the risks
and develop mitigating strategies in order to minimise it.
A Lead Drilling and Workover Engineer is based at the London
office who reports directly to the Board and is responsible
for the planning, reviewing and authorising of Group drilling
and workover operations; this significantly strengthens the
capability to identify and manage drilling risk. A daily drilling
update is provided to the Board for all JKX operations which
describes drilling progress, issues and expectations for the
following 24 hours.
Health and safety risk management
JKX is proud to have maintained accreditations for
compliance with:
• OHSAS 18001 Health & Safety
• ISO 14001 Environmental and
• ISO 9001 Quality Management.
These are internationally-recognised specifications for
occupational health and safety environmental and quality
management systems monitored by experienced auditors
bi-annually to ensure compliance to the standards The list
below is a sample of 3rd party inspection activities in 2015.
A full report of all inspections is available on request.
3rd Party Inspections during 2015
PPC, Ukraine
• Main Board of the State Emergency Situation Service of
Ukraine in Poltava region
• Expert organization NVF Promservisdiagnostika
• Expert organization PP Energomash
• State Labour Board, Poltava region
• Office of the Federal Service for Ecological, Technological
and Atomic Supervision (Rostekhnadzor)
• Association of independent experts of Ukraine Ukrexpert
• Federal Service for the Supervision of Natural Resources
YGE, Russia
• North Caucasus Office of the Federal Service for
Ecological, Technological and Atomic Supervision
(Rostekhnadzor)
• State Labour Inspectorate in Adygea Republic
• Federal Service for the Supervision of Natural Resources in
Krasnodar Region
• Federal Agency on Technical Regulating and Metrology,
Southern Interregional Territorial Office
• Head Office of the Ministry of the Russian Federation
for Civil Defence, Emergency Situation and Mitigation of
Natural Disaster Consequences in Adygea Republic
2
Our safety statistics for 2015
HSECQ statistical analysis for 2015
Fatal accident case
Lost time injuries
1
0
0
56
2001
2003
2005
2007
2009
2011
2013
2015
Near miss / Loss hazards / Property
damage / Unsafe act or conditions
0.15
Medical treatment / Restricted work cases
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61
Corporate and social responsibility (‘CSR’) review
Health and safety
• Ministry of Internal Affairs in the Republic of Adygea
• Federal Agency for Transport Supervision, State Road
Supervision Interregional Directorate in Krasnodar Region
and Adygea Republic.
Consistent Hazard Assessment Processes
In both Russia and Ukraine, JKX continued to carry out risk
management studies using its proven Hazard and Operability
(‘HAZOP’), Hazard Identification (‘HAZID’) and As Low as
Reasonably Practical (‘ALARP’) methodologies.
JKX has developed an integrated assessment process for
the safety assurance of development proposals which are
potentially hazardous. These assessments combined with the
essential features of the JKX safety management programme
complete the safety circle.
Health and safety training
Each location has a health and safety training budget which
is established after the Training Needs Analysis has been
completed, which includes training that is required under local
law. Additional training is provided according to operational
requirements.
Investment in the community
In 2015, the Group continued its support
for local communities. Community support
donations in Ukraine and Russia totalled
$240,242 in 2015.
Environmental management system
The JKX Environmental Management System is a
comprehensive, systematic, planned and documented
management process. It includes the organisational structure,
planning and resources for developing, implementing and
maintaining policy for environmental protection. JKX strives to
reduce impact on the environment, conserve energy, recycle
resources and eliminate environmental pollution, while
placing a high priority on preserving the environment.
Our approach
JKX is proud to have maintained ISO 14001 Environmental
Management accreditation in 2015. ISO 14001 is the
principal management system standard which specifies the
requirements for the formulation and maintenance of an
Environmental Management System.
Our impact
JKX complies with all relevant environmental requirements,
including environmental laws and regulations and industry
guidelines.
JKX enhances environmental awareness among employees
by providing environmental training and promoting a thorough
understanding of its environmental policy.
In 2015, JKX continued to make good progress and are pleased
to continue the ongoing work with The Carbon Disclosure
Project. JKX’s Environmental Report for 2015, prepared in
conjunction with TruCost, has identified emission reduction
measures for the 2016 campaign.
Environmental objectives
Achievements
Targets 2016
Reducing emissions.
In managing emissions
throughout the exploration, and
production process, JKX plan to
improve monitoring and reduce
emissions. In particular,
“reduced emissions
completions” (‘REC’) or “green
completions” will be assessed at
all stages
Continuously monitored:
• on-site fuel consumption measured more
efficiently
• Green House Gas (‘GHG’) emission levels
recorded and analysed through latest
software and reporting.
• purchased electricity records improved
• purchased heating/cooling records improved
• release/leakage of other chemicals causing
greenhouse gas emissions recorded,
reported and analysed
• fugitive emissions assessed and recorded
• fuel used for vehicles reduction by journey
management
• official travel of staff reduced
Continuous monitoring
Improved monitoring will be carried out before,
during and after operations to detect contaminants
in groundwater and potential leakages of into the
atmosphere. Revised and updated emission
reduction strategies for 2016 are likely to include:
• current carbon footprint reduction methods
identify opportunities for a reduction in CO2
emissions
• identification of technical requirements for more
efficient monitoring and recording
• identification of administrative requirements
• estimated emission reduction through any
proposed interventions
• estimated cost for the interventions
• estimated savings from the intervention
(e.g. through reduced energy use, reduced travel
costs, and reduced offset costs)
• responsibility for implementation
• implementation schedule.
• quantitative objectives and targets
The Greenhouse Gas Emissions
Regulations 2015
JKX has complied with its obligations to record
and report its annual greenhouse gas (‘GHG’)
emissions in this Annual Report
Continue to comply and improve GHG recording
and reporting
Zero discharge of chemicals to
land or surface waters
Achieved in 2015
Continuously monitored
Achieved in 2015
Continuously monitored
Restored habitat and
hydrological regime to pre-
construction state as soon as
reasonably practical
Establish group-wide and
site-level Biodiversity Action
Plan (‘BAP’)
Continuous monitoring
Continuous monitoring
Completed in 2015
Monitor progress throughout 2016
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63
Corporate and social responsibility (‘CSR’) review
Environmental management system
Environmental objectives
Achievements
Targets 2016
No loss of containment of
product
Achieved in 2015
Continuously monitored
Continuous monitoring
Reduction in water use
Recycling water from drilling operations has
helped us to reduce the use of this valuable
resource in 2015
Continue to improve the measurement of water use
and its recycling from our drilling operations and
aim to reduce water usage by 5% annually
Consulting with Stakeholders
(local communities, workforce,
NGOs and government agencies)
to implement and monitor supply
chain initiatives for emissions
reduction
Achieved in 2015
• Established Stakeholder Management Plans
JKX’s approach in 2016 will:
• measure return on community investment to
• Risk assessed the Stakeholder Priority levels
both the company and the community
• Openly communicated with stakeholders
• use outcome and impact indicators to measure
about their respective concerns
the quantity and quality of change
• Adopted processes and modes of behaviour
• track changes in community perceptions to gain
that are sensitive to the concerns and
capabilities of each stakeholder
real-time feedback on performance
• use participatory methods of monitoring and
evaluation to build trust and local ownership of
outcomes
• proactively communicate the value generated by
the Group to internal and external audiences
Reduce waste to landfill
JKX has continued to improve the recording
and measurement of the waste sent to landfill
during 2015
Improvement opportunities being considered for
2016 include:
• improving waste segregation efforts
• further engagement with the local communities
on recycling initiatives where economic and
practical
• update of our purchasing policy to encourage use
of regular supplies which are recyclable
• improve monitoring of waste and recycling and
reduce waste to landfill by 5% annually
JKX used the Greenhouse Gas Protocol methodology for
compiling its GHG data, and includes the following material
GHGs: CO2, N2O and CH4.
Our other environmental initiatives
Global Reporting Initiative (‘GRI’)
The GRI Reporting Framework is intended to provide
a generally accepted framework for reporting on an
organisation’s economic, environmental, and social
performance. The Framework consists of the Sustainability
Reporting Guidelines, the Indicator Protocols, Technical
Protocols, and the Sector Supplements.
During the year JKX reported according to the GRI’s
Sustainability Reporting Guidelines and will continue to report
in 2016.
Supply chain management
At the heart of JKX’s sustainable supply chain is a policy of
localising supply by fabricating, manufacturing and sourcing
as much as possible as close to the point of use by using
indigenous companies.
Our achievements
During 2015 some advances were made in JKX’s Supply Chain
Initiative, which will continue in 2016 with a more focused
approach to procurement and supply.
As required for JKX’s ISO 9001 certification, operating
procedures, prequalification processes and Stakeholder
Management Plans ensure that major suppliers, products and
services are evaluated for their environmental compliance and
commitment.
Outlook
Plans to improve these procedures during 2016 include
enhancing the JKX Code of Conduct to include more specific
policies, procedures and guidelines for purchasing and
contracting activities undertaken by Group companies.
The results of the employee survey show that there are
possible improvements and these will be the focus in 2016.
Environmental performance in 2015
In 2015, JKX was pleased to continue the ongoing work with
The Carbon Disclosure Project and improved its reporting
under the project with a score of 83% (2014: 71%).
Environmental Incident Frequency Rate (‘EIFR’) 1
The EIFR Target for 2015 was not to exceed 0.70 Environmental
incidents per 200,000 hours worked; 0.30 was achieved.
Greenhouse Gas (‘GHG’) emissions reporting
All emissions sources owned, operated or controlled by the
Group are included in our reporting.
Our approach
JKX’s terminals at operational sites in Ukraine, Hungary and
Russia are self-sufficient and can maintain operations without
the need for grid electricity therefore improving the security of
supply.
The Greenhouse Gas Protocol methodology was used for
compiling the GHG data.
GHG emissions by scope
The GHG Protocol categorises direct and indirect GHG
emissions as follows:
• Scope 1: all direct GHG emissions.
• Scope 2: indirect GHG emissions from consumption of
purchased electricity, heat or steam.
Mandatory GHG reporting 2
In accordance with GHG Protocol Scope 2 Guidance that was
released in January 2015, disclosures below now state two
Scope 2 emission totals – location-based and market-based.
Market-based emission factors are not available for either of
JKX’s Russia and Ukraine locations, only residual emission
factors are used for offices in U.K., and location-based
emission factors are used for locations in Russia and Ukraine.
Calculations will be updated when residual factors at all JKX
locations are available for public use.
The table opposite discloses JKX’s Scope 1 and 2 GHG
emissions and an emissions intensity ratio of tonnes CO2 per
million barrels of oil equivalent that JKX produced in 2015.
1
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
Environmental Incident Frequency Rate 2015 (‘EIFR’)
2
Mandatory GHG reporting
Data point
Scope 1
Scope 2
(Location based )
Scope 2
(Market based )
Scope 1 & 2
Intensity
0.30
Units
Quantity
2014
Quantity
2015
tonnes CO2e
317,441
339,149
tonnes CO2e
tonnes CO2e
tonnes CO2e
/Mboe of
production
827
N/A
88
568
566
103
2007
2008
2009
2010
2011
2012
2013
2014
2015
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Corporate and social responsibility (‘CSR’) review
Employment
Our approach
Employee engagement
JKX Health and Safety culture survey 2015
)
%
(
s
e
r
o
c
s
e
v
i
t
a
l
u
m
u
C
100
93
94
88
85
88
88
87
86
93
94
89
90
80
60
40
20
Good
80-100%
Acceptable
50-80%
Not
acceptable
0-50%
2014
2015
2014
2015
2014
2015
2014
2015
2014
2015
2014
2015
Training &
supervision
Safe work procedures
Consultation
Reporting safety
Management
commitment
Injury management &
return to work
By creating employment JKX makes a contribution to
reducing poverty and promoting economic and social
development. The Group provides career development,
international opportunities, a non-discriminatory workplace
and competitive remuneration within a decentralised
culture. The decentralised model is underpinned by a robust
governance framework and empowers local management to
make key business decisions locally.
Staff training and skills development is an essential
component of our employment proposition and assists people
to secure decent and productive jobs.
Our achievements
JKX employs more than 750 staff in five different countries
which puts people as a top priority.
At year-end, Yuzhgazenergie LLC, the Russian subsidiary,
employed 249 staff (2014: 257) at our Koshekhablskoye
production facilities and the Maikop administrative office. The
Ukrainian subsidiary, Poltava Petroleum Company, employed
493 personnel (2014: 622) at the production site and at the
Poltava office.
The London office has 22 employees (2014: 25).
Employment policies
The Company’s employment policies aim to attract the best
people in the belief that a diverse and inclusive culture is a
key factor in being a successful business. The Group remains
committed to equality of opportunity in all of its employment
practices. It selects employees for appointment, career
development and promotion based solely on the skills and
attributes which are relevant to the job and which are in
accordance with the laws of the country concerned.
Diversity and equality
Access to work opportunities is based on merit, equality,
fairness and need, and no one is treated less favourably on
the basis of their sex, racial or ethnic origin, colour, religion,
disability, marital status, sexuality or age.
This approach ensures that diversity and equality is reflected
in all JKX’s policies, practices and procedures, where
practicable.
JKX will not tolerate any form of discrimination – either direct
or indirect. Acts of discrimination, prejudice, harassment and
victimisation which occur within the workplace or within local
communities is not tolerated.
JKX aims to communicate openly with all its employees.
Operating across a number of different countries, cultures
and environments, JKX operates a decentralised management
structure, led by native General Directors and senior
management, with employment policies designed for the
needs of individual locations.
Each Group company complies with certain key principles,
including:
• providing safe and healthy working conditions for all
employees
• creating an open, challenging, rewarding and participative
environment which, through development and training,
aims to maximise the talent, skills and abilities of all
employees
• communicating to provide the fullest possible
understanding of our goals, directions and performance of
the business
• providing compensation and benefits which reflect good
current local practices and which reward collective and
individual abilities and personal performance
• providing a working environment, development
opportunities and incentives to promote team effort and
commitment to the performance of the Group
• referencing the International Labour Organisation to verify
standards and best practice.
Employee feedback
A health and safety employee satisfaction survey was carried
out again in 2015 to obtain feedback from staff on JKX’s health
and safety culture and success in applying group health and
safety policy. The survey was in the form of a questionnaire
which was translated and completed on an anonymous basis
by a range of employees from different locations across the
Group.
The results of the employee survey show that there are
perceived improvements in management commitment and
consultation, compared with 2014. These areas will continue to
be the focus in 2016.
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66
67
Corporate and social responsibility (‘CSR’) review
Community
Quality
Our approach
Charitable donations and volunteering
Our performance
ISO 9001 accreditation
In 2015 JKX continued to make progress by reviewing the
approach to stakeholder communications in Ukraine, Hungary,
Slovakia and Russia.
A mapping of stakeholders was carried out in 2015 using an
Influence-Interest-Matrix to identify JKX’s key stakeholders.
This is an area of key importance to JKX and plans are in
place to further develop the skills of staff and employees to
continually improve the stakeholder management capabilities.
Outlook
Internal and external stakeholder surveys were conducted
in 2015 to understand if JKX is meeting stakeholder and
customer expectations. The results of the surveys were
discussed with senior management and reviewed as part of
the JKX Annual Management Review.
JKX have the full Integrated Management System comprising
ISO 14001, OHSAS 18001 and ISO 9001. PPC Construction and
Engineering achieved accreditation to ISO 9001 on 27 January
2015 after meeting the requirements of the standard as
assessed by Bureau Veritas. YGE commenced their ISO 9001
accreditation process in 2015.
Achieving ISO 9001 accreditation ensures that the quality
management systems that JKX has adopted work to improve
the efficiency of business and are not just a set of procedures.
JKX use an external assessor and an internal resource to
carry out regular audits of the management system. The
support of the Board and senior management has been the
driver of this management system, so that all areas of the
organisation are aware of the importance and benefits of the
ISO accreditation process.
Outlook
A new version of ISO 9001 is due in 2016, which will be a
complete revision of the standard. JKX is planning to hold
practical workshops to support the organisation to get
acquainted with and implement the new standard.
Investor engagement
JKX seeks to enhance shareholder value through responsible
and effective communication with shareholders.
The Chief Executive Officer is responsible for maintaining
ongoing relations with the investor and shareholder
community, acting as the primary point of contact for
members of this community.
In 2015 the Board carried out various meetings with potential
and existing investors and with the wider investment
community through analyst presentations and other events.
JKX communicates the latest relevant company information and
future investor events through its website at www.jkx.co.uk.
JKX is committed to engaging with the community to share the
benefits of its success at its operating plants.
Each operation has a limited budget for good causes and
charitable donations locally.
Our community engagement
Locally, donations from the Group during 2015 amounted to:
The Company conducts various activities to forge good
relations with local communities through participation in
forums established by local authorities and residents’
associations, and by creating such forums.
Cleaning up areas around plants and neighbouring areas
is an activity that group companies are taking part in. The
number of employees who participate in clean-up activities is
increasing year by year.
• Ukraine UAH2,757,119 ($122,351) (2014: UAH4,376,868
($245,457))
• Russia RR7,590,519 ($117,891) (2014: RR4,379,785
($105,809))
Subject to management approval, staff may be given additional
time off in order to join in certain charity-related activities.
Local charitable projects
JKX contributes to improving local education by conducting
plant tours, providing employment and work experience, and
raises environmental awareness by actively participating in
environmental events in regions where it operates.
The financial aid is allocated to qualifying organisations using
a formal applications process. Applications for funding are
made to our local companies specifying how funds will be
used. A full list of charitable donations is available.
Assistance in our local communities
In practical terms, JKX’s community support frequently
involves using the Company’s plant and machinery – as well as
manpower – to provide much-needed assistance.
Working with the local authorities, JKX deployed available
vehicles including fire engines, cranes, trucks, excavators,
road clearing equipment, personnel and safety equipment to
assist local communities in a number of small isolated tasks
which benefit the local community.
For example, in Sokolova Balka village, a village local to JKX’s
operations in Poltava, Ukraine, PPC provided:
A sample of charity and community projects that are local to
JKX operations and that JKX has supported during the year
were:
Ukraine
• Purchase of coal-fired boilers and maintenance of the
boiler houses for educational facilities in Novi Sanzhary
village
• Reconstruction of museum premises and a school stadium
in Novi Sanzhary village
• Construction materials and services for the reconstruction
of a medical treatment room at the Poltava military hospital
• Purchase of windows for a kindergarten and school
• equipment to level an area for installation of fencing and the
renovation works in Lelyukhivka village
sand and crushed rock needed for the installation
• roader services for village tasks
• equipment to pump out sewage in a family house of 16.
In Novi Sanzhary, another local village, PPC provided a crane
for assistance with local operations.
Diversity and equality
Access to work opportunities is based on merit, equality,
fairness and need, and no one is treated less favourably on
the basis of their sex, racial or ethnic origin, colour, religion,
disability, marital status, sexuality or age.
JKX’s approach is to ensure that diversity and equality is
reflected in all its policies, practices and procedures, where
practicable.
JKX does not tolerate any form of discrimination – either direct
or indirect.
Russia
• Construction of a football field in Druzhba
• Roof repair works at a nursery school in Druzhba
• Repair works at a secondary school in Druzhba
• Repair works at a secondary school in Egerukhay village
• Svyato-Ilyinskiy Church Reconstruction in Dondukovskaya
Our stakeholder engagement
JKX works closely with outside interest groups and maintains
an open-door policy to better understand local issues so that
problems are avoided.
Business proposals are consulted on before making final
decisions. These consultations with stakeholders feed into the
business planning process to ensure that stakeholders’ needs
are prioritised in JKX’s business plan.
A key priority for the new Board appointed on 28 January
2016 is to maintain transparent working relationships with all
key stakeholders in our assets in Ukraine and Russia, and to
improve the method of regular local dialogue and on-going
communications.
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JKX Oil & Gas plc Annual Report 2015
Governance
69
JKX Oil & Gas plc Annual Report 2015
Strategic report
2-67
Governance
68-103
Financial statements
104-169
“One of the key priorities of the new Board
is to improve the standards of corporate
governance, transparency and stakeholder
engagement across the JKX Group.”
Paul Ostling Chairman
Governance
Board composition
Corporate governance
Audit Committee Report
Directors’ Remuneration
Report
Directors’ report –
other disclosures
70
72
79
84
100
70
Board composition
71
Paul Ostling (67)
Non Executive Chairman
Appointed–28 January 2016
Paul worked at Ernst & Young for 30 years working with
major entities listed on the New York and London Stock
Exchanges and holding senior management positions
including Global Executive partner from 1995 to 2003 and
Global Chief Operating Officer from 2003 to 2007. In
addition, for 15 years, he was one of several partners
leading the development and coordination of the firm’s
operations throughout Russia, Ukraine, the CIS and Eastern
Europe. From 2007 to 2012, Paul served as chairman of the
audit committee of Mobile TeleSystems OJSC (NYSE). Other
board and leadership roles include: Brunswick Rail (2012
to present), Uralkali (2011 to present), PromSvyazBank
(2008 to 2010), UralChem (2008 to 2011) and DME Ltd
(Domodedovo) (2011 to 2012), Kungur Oilfield Equipment &
Services (2007 to 2012, Chief Executive 2007-2009). In 2011,
Paul was named ‘Independent Director of the Year’ by the
Association of Independent Directors in Russia. Paul is a
proficient Russian speaker.
Dear shareholder
As I stated in my Chairman’s statement on page 6, on 28 January
2016, four Board members resigned and at a General Meeting of
the Company on the same day, shareholders voted to remove the
remaining five Board members.
At the same meeting, shareholders approved the appointment of five
new Directors of JKX, whose biographies are provided here.
Due to the highly unusual circumstances of the entire Board being
replaced on the same day, which included all the independent
Non Executive Directors, since 28 January 2016 the composition of
the Board has not complied with UK Corporate Governance Code
(‘the Code’) in respect of the number of independent Non Executive
Directors. Without independent Non Executive Directors, the
Company has not been able to form the various committees (Audit,
Remuneration and Nomination), which are compliant with the Code.
We are currently in the final phase of appointing two new independent
Non Executive Directors of JKX and, in the interim period, the Board
has put some measures in place for the Board committees and its
remuneration until the two new independent Board members are
appointed. These measures are described further on pages 79 and 84.
For the purposes of approving the Annual Report for 2015, an interim
Audit Committee consisting of myself, as Chairman, and Russell
Hoare, as Chief Financial Officer, was formed, but will be replaced with
an independent committee, in compliance with the Code, as soon as the
new independent Board members are appointed.
One of the new Board’s key priorities is to improve the standards of
corporate governance, transparency and stakeholder engagement
across the Group, in the best interests of all shareholders and
stakeholders.
Since the 28 January, the Group has been led by an experienced
Board of directors consisting of a Non Executive Chairman, the Chief
Executive Officer, the Chief Financial Officer and two Non Executive
Directors representing the interests of Proxima, JKX’s second largest
shareholder with a holding of almost 20%.
I look forward to updating you shortly on the new Board appointments,
compliance with the Code and the Board’s improvements to
governance and related matters.
Paul Ostling
Non Executive Chairman
Tom Reed (45)
Chief Executive Officer
Appointed–28 January 2016
Russell Hoare (44)
Chief Financial Officer
Appointed–28 January 2016
Tom was a founder and Chief Financial Officer of FTSE-
listed Ruspetro plc from December 2011 to February 2015,
which included a period as acting Chief Executive from July
to December 2013. For a number of years Tom worked as a
private equity investor and M&A advisor in Moscow and in
Russia, Ukraine and other CIS countries on the origination,
trading and structuring of equity, derivatives and distressed
debt. In addition he served as an advisor to VR Capital from
2001 to 2007 and to Raven Russia from 2005 to 2007. Tom is
a member of the Society of Petroleum Engineers and
speaks fluent Russian.
Russell has more than 15 years experience working in
Russia, Ukraine and Eastern Europe holding a variety of CFO
roles. This includes acting as Chief Financial Officer from
2011 to 2016 at Russ Outdoor, the leading out-of-home
advertising company in Russia, with assets across Russia
and, until recently, Ukraine. In addition, he spent 10 years in
News Corporation, based between London and Moscow, with
responsibility for many of the company’s media assets in
Russia and Eastern Europe. Russell has 10 years experience
of managing the financial operations of Ukrainian
businesses and working with local government and
authorities in addition to a number of years as an internal
auditor to LASMO plc, an oil and gas exploration and
development company based in London. Russell qualified as
a UK Chartered Accountant with Arthur Andersen in 1996.
Vladimir Tatarchuk (40)
Non Executive Director
Appointed–28 January 2016
Vladimir Rusinov (49)
Non Executive Director
Appointed–28 January 2016
Mr Tatarchuk has been the Chairman and Chief Executive
Officer at Proxima Capital Group since 2013. From 2011 to
2013 Mr Tatarchuk served as First Deputy Chairman of the
Executive Board and Head of Corporate-Investment
Banking at Alfa Bank. From 1998 to 2011 he held many
posts at Alfa Bank including Head of Corporate Banking,
Co-Head of Corporate-Investment Banking, Deputy
Chairman of the Executive Board, Deputy Head of Corporate
Finance and Vice President, and also served on the Board of
Directors of Alfa Bank in Ukraine. Mr Tatarchuk holds a
degree in law from the Lomonosov Moscow State University
and a diploma in executive management from the leading
international business school INSEAD.
Mr Rusinov joined Proxima Capital Group in 2015 as
Managing Director. Prior to that Mr Rusinov worked at
leading Russian and international investment banks for
20 years with a particular focus on oil and gas in Russia and
the CIS, including Managing Partner at VNR Capital, an
investment banking advisory firm, Managing Director and
Head of Oil and Gas at Renaissance Capital, Director at ABN
AMRO Oil and Gas Group, Vice President in the European
Energy & Power Group at Merrill Lynch and associate in
M&A, Corporate Finance and European Energy & Power
Departments at Goldman Sachs International. Mr Rusinov
holds a MA (Hons) Degree in International Economics from
Kiev State University and MBA Degree from Nijenrode
Business University, the Netherlands School of Business.
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72
Corporate governance
73
Governance framework and principles 1
The Company has a premium listing on the London Stock
Exchange and is subject to the Listing Rules of the UK Listing
Authority. The Board is committed to applying the principles of
the UK Corporate Governance Code (‘the Code’) and relevant
institutional shareholder guidelines. This section explains in
more detail how we have applied these provisions.
JKX’s Group-wide policies and procedures provide a framework
for governance and are underpinned by the Group’s Code of
Conduct. Good governance is taken seriously throughout the
JKX Group and the Board set the tone and take the lead to
ensure that good practice flows throughout the Group.
JKX Board replaced on 28 January 2016
The entire Board of JKX was replaced on 28 January 2016
following a General Meeting of the Company. The resignation
of all independent Non Executive Directors meant that, since
that date, the composition of the Board has not complied with
UK Corporate Governance Code (‘the Code’) in respect of the
number of independent Non Executive Directors. Without
independent Non Executive Directors, the Company has not
been able to form the various committees (Audit, Remuneration
and Nomination) which are compliant with the Code.
The Company is in the final phase of appointing two new
independent Non Executive Directors, using an independent
search firm, who will form the new Audit, Remuneration and
Nomination Committees, in accordance with the requirements
of the UK Corporate Governance Code.
Board effectiveness
Role of the Board 2
The principal matters reserved for the Board are set out on
page 73. Day-to-day operational decisions are managed by the
Executive Directors.
How the Board functions
The Board has historically held six scheduled meetings each
year, and arranges additional meetings if the need arises.
During 2015, there was one unscheduled Board meeting
(2014: two) and the Non Executive Directors met twice in
private session, with an open agenda to discuss the current
issues affecting the Group. The Board anticipates an increase
in the number of scheduled meetings in 2016 as the newly
appointed Board members build a new strategic direction for
the Company.
In addition, the Board considers strategy in depth as well as
reviewing the strategic objectives of the Company at each of its
Board meetings.
The Chairman, in consultation with the Executive Directors,
sets the agenda for Board meetings. All Directors receive
comprehensive documentation prior to each meeting on the
matters to be discussed.
Monthly Board reporting
The Group provides the Board with consolidated monthly
management reports 10 working days after the month end,
except for the financial year-end when the reporting is delayed
to accommodate the annual audit process. The reports outline
all material operational, financial, commercial and strategic
developments.
advice at the Company’s expense. During 2015, no Director
sought independent legal advice pursuant to the policy.
Prior to the General Meeting on 28 January 2016 at which
a new Board was appointed, the Board in place at that time
incurred legal fees of $66,530 in respect of issues related to
their severance payments and settlement agreements.
The monthly financial reports consolidate all financial
information from all parts of the Group and include actual
performance against budget and forecast for oil and gas
production, sales and costs.
These reports provide the Board with the latest information on
receivables, cash, cash flow forecast and the implications of
key sensitivities including changes in production, commodity
prices, production taxes and exchange rates. These monthly
reports ensure that members remain properly briefed on the
performance and financial position of the Group.
Board meeting documents
Prior to each set of meetings the Executive Directors ensure
that all the relevant papers and other information is delivered
at least five days in advance of the meeting date so that all
Directors have the necessary time to review in detail the latest
information.
Support for Directors
The Board has adopted a policy whereby Directors may, in the
furtherance of their duties, seek independent professional
Each Director has the benefit of a deed of indemnity from the
Company and its subsidiaries in respect of claims made and
liabilities incurred, in either case arising out of the bona fide
discharge by the director of his or her duties. The Company
has also arranged appropriate insurance cover in respect
of legal action against Directors of the Company and its
subsidiaries.
Committees of the Board in 2015
During 2015 and up until the General Meeting on 28 January
2016, the Board had three committees to assist the Board
by focusing on specialist areas, which were ultimately
accountable to it. These comprised:
• the Audit Committee;
• the Nominations Committee; and
• the Remuneration Committee.
The Board committees met independently and provided
feedback to the main Board through their chairmen.
1
Governance framework
2
Role of the Board
CHAIRMAN
BOARD – 2015
2015: Non Executive Chairman, four Executive Directors
and four Non Executive Directors
BOARD – 28 January 2016
From 28 January 2016: Non Executive Chairman, two Executive Directors
and four Non Executive Directors (two to be appointed)
Nominations
Committee*
Group Risk
Committee
Audit
Committee*
Chief
Executive
Officer
Remuneration
Committee*
PPC Risk
Committee
YGE Risk
Committee
PRINCIPAL SUBSIDIARY BOARDS
PPC General Director,
YGE General Director
* From 28 January 2016: to be appointed
The Board provides leadership to the Group. Key matters reserved
for the consideration and the approval of the Board are:
• setting and monitoring Group strategy;
• review of Group business plans, trading performance and costs;
• review and approval of the annual operating and capital
expenditure budgets;
• approval of capital investment projects across the Group;
• examination of acquisition opportunities, divestment
possibilities and significant financial and operational issues;
• remuneration policy (through the Remuneration Committee);
• appointments to the Board (through the Nominations
Committee) and senior management, Committee membership
and remuneration for Directors and senior management;
• review and approval of the Company’s financial statements
(through the Audit Committee);
• setting any interim dividend and recommendation of the final
dividend; and
• ensuring that the significant business risks are actively
monitored and managed using robust control and risk
management systems.
All other authorities are delegated by the Board, supported by
appropriate controls, to the Chief Executive Officer on behalf of
senior management.
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Corporate governance
75
Committee memberships in 2015 3
The roles and activities of each of these committees during
2015 are noted on pages 76, 79 and 90.
Since the General Meeting on 28 January 2016, the Company
established an interim Audit Committee comprising
Paul Ostling and Russell Hoare which will carry out the
requirements under the Disclosure and Transparency Rules
7.1.3R, pending the establishment of a permanent Audit
Committee.
Board composition, independence and commitment
Throughout 2015 and up until the General Meeting on
28 January 2016, the Board of nine members comprised:
• a Non Executive Chairman,
• four Executive Directors and
• four Non Executive Directors.
There were no changes to the Board during 2015.
Since the removal/resignation of all of the Board on
28 January 2016 (see above), the Board has comprised:
• a Non Executive Chairman,
• two Executive Directors and
• two Non Executive Directors representing the interests of
Proxima, JKX’s second largest shareholder with a holding
of almost 20%.
The Company is in the final phase of appointing two new
independent Non Executive Directors.
It is the Board’s view that the current Non Executive Directors
have sufficient time to fulfil their commitments to the
Company and no Executive Director holds a Non Executive
Directorship, or Chairmanship, in a FTSE 100 company.
Board skills, experience and responsibilities
The Directors have knowledge and experience of the oil and
gas industry, including expertise in geology, engineering and
financial matters, significant experience of working in central
and eastern Europe, particularly Ukraine and Russia, and
expertise in turn-around and restructuring situations within
the region. The key biographical details, relevant experience
and responsibilities of each Director are provided on pages 70
and 71.
The Non Executive Directors that the Board is looking to
appoint will bring the skills and expertise necessary to
challenge effectively, independently and constructively the
performance of the Executive Board and their strategy.
Board diversity
During 2015, the Board comprised eight men (89%) and one
woman (11%). The Board currently comprises 5 men.
Gender is only one aspect of diversity, and there are many
other attributes and experiences that can improve the Board’s
ability to act effectively. Our policy is to search for the highest
quality people with the most appropriate experience for the
requirements of the business, be they men or women.
The Board supports the longer term aspirations of Lord
Davies’ report regarding gender diversity on appointment of
directors to Boards and will maintain its practice of embracing
diversity in all its forms, but has chosen not to set any
measurable objectives. Details of our current gender diversity
statistics are set out on page 26.
Senior Independent Director
During 2015, Dipesh Shah was the Senior Independent
Director (‘SID’).
Following the replacement of the entire Board on 28 January
2016, which included the SID, the Board has been without a
SID since then. A SID will be selected from one of the two new
independent Non Executive Directors, when appointed.
The SID will be available for discussions with other Non
Executive Directors who may have concerns which they believe
have not been properly considered by the Board as a whole.
If required, they will also act as an alternative point of contact
for the Executive Directors in addition to the normal channels
of the Chairman and Chief Executive Officer.
A key responsibility of the SID is to ensure he is available
to shareholders if they have concerns that have not been
resolved by contact through the normal channels of Chairman,
Chief Executive Officer or other Executive Directors, or where
such contact is inappropriate.
2015 Board evaluation process
A process of evaluating the performance of the Directors,
the Board and its committees through one to one interviews
conducted by the Chairman with all other Board members was
planned for December 2015 but was cancelled following the
requisition of the meeting to remove most of the JKX Board.
A similar process will be implemented in December 2016.
External evaluation
As the Company is outside of the FTSE 350 there is no
requirement for an externally-facilitated evaluation of the
Board at least every three years.
Following a change of the full Board on 28 January 2016 and
the imminent appointment of two new independent
Non Executive Directors, the Board will consider the relevance
of an externally facilitated evaluation during 2017.
Development of the Board
All Directors are provided opportunities for further
development and training updates. In addition to the regular
updates on governance, legal and regulatory matters, the
Board also receives detailed briefings from advisers and at
their seminars on a variety of topics that are relevant to the
Group and its strategy. The annual Board evaluation includes a
review of governance where the Directors have an opportunity
to assess their effectiveness and that of the Board as a whole.
Board activities
Attendance at meetings in 2015 4
In addition to six scheduled Board meetings, there was one
unscheduled meeting convened at short notice (2014: two).
When a Director is unable to participate in a meeting either
in person or remotely because of another engagement, they
are provided with the briefing materials and the Chairman
will solicit their views on key items of business ahead of time,
in order for the views to be presented at the meeting and
influence the debate.
The number of meetings of the Board and its committees
during 2015 and individual attendance by Director is shown
below.
Senior management from across the Group, and advisers,
attend some of the meetings for the discussion of specific
items in greater depth. This is important to the Board as it
further enhances the Board’s understanding of operations and
the implementation of strategy.
Board’s work during 2015
The Board used a rolling agenda of strategy, finance,
operations, commercial matters, corporate governance and
compliance. All Directors have the authority to add any item to
the Board agenda.
3
Committee memberships in 2015
4
Attendence at meetings in 2015
Audit
Committee
Remuneration
Committee
Nomination
Committee
Nigel Moore
Dipesh Shah OBE
Lord Oxford
Alastair Ferguson
Richard Murray
Chairman
Member
Number of meetings
Nigel Moore
Dr Paul Davies
Cynthia Dubin
Martin Miller
Peter Dixon
Dipesh Shah OBE
Lord Oxford
Alastair Ferguson
Richard Murray
Board
Audit
Committee
Remuneration
7
7/7
7/7
7/7
7/7
7/7
7/7
6/7
7/7
7/7
5
–
–
–
–
–
5/5
–
4/5
5/5
4
4/4
–
–
–
–
4/4
–
–
4/4
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Corporate governance
77
At each of the six scheduled Board meetings during the year
matters considered include:
• the Chief Executive’s report on strategic, HSECQ and
performance matters;
• the Finance Director’s report which includes the latest
available management accounts;
• the Technical Director’s operations and exploration update;
• the Commercial Director’s report on oil, gas and
condensate prices, macroeconomic issues and business
development activity; and
• where applicable, reports from the Nominations
Committee, Audit Committee and Remuneration
Committee.
In addition to the standing agenda items and annual Board
responsibilities in respect of the Group’s reporting, other
topics covered by the Board during the year included:
• the political and economic developments in Ukraine
and Russia and managing the associated risks to our
operations;
• responding to the three Ukrainian government decrees on
doubling of gas production taxes, currency controls and gas
sales restrictions, and managing the impact on the Group;
• managing the Group’s liquidity following the Ukrainian
government decrees and significant disruption to the gas
sales market in Ukraine; and
• the international arbitration proceedings against Ukraine
under the Energy Charter Treaty and other relevant
investment treaties seeking compensation for losses
suffered due to Ukraine’s treaty violations.
Re-electing your Board
The Board contains a broad range of experience and skills
from a variety of industries and advisory roles, which fully
complement each other.
All of the current Board appointments were approved by
shareholders at the General Meeting on 28 January 2016.
As the Company is outside of the FTSE 350 there is no
requirement for all Board members to be subject to annual
re-election by shareholders. Directors will stand for
re-election at the 2016 Annual General Meeting, in accordance
with the Articles of Association.
Full biographies of all the Directors can be found on pages 70
and 71 and in the Notice of AGM.
Nomination Committee
The role of the Nomination Committee is to review the
structure, size, skills and composition of the Company Board
and the Boards of companies owned by JKX Oil & Gas plc. The
Committee also considers succession planning and suitable
nominations for appointments to the Boards, and makes
appropriate recommendations based on qualifications and
experience.
The Committee meets as often as it determines is appropriate
and generally meets at least once a year and more frequently
if required. The Committee did not meet during 2015 and no
appointments were made to the Board (2014: none).
Membership and process
The Nomination Committee comprised two Non Executive
Directors. During 2015 the Committee comprised Lord Oxford
and Nigel Moore (Chairman) who were removed from the
Board on 28 January 2016. As noted above, when the two
new independent Non Executive Directors are appointed a
Nominations Committee can be constituted in accordance with
the requirements of the Code.
The Chairman ensures that any new Directors are provided
with a full induction on joining the Board. The letters of
appointment of each Non Executive Director are available for
inspection at the registered office of the Company.
Succession planning
The Board is responsible for succession planning for
directorships and key management roles. This requires
performance and talent assessment, to ensure that able
successors for key roles are identified and then provided
with suitable opportunities through career and personal
development plans. It is crucial that we remunerate our most
talented people fairly and properly, such that they are more
likely to stay in our employment.
The new Nomination Committee, when appointed, will
consider succession planning.
Remuneration Committee
Details of the work of the Remuneration Committee is given in
the Remuneration report on pages 84 to 99.
Compliance
Compliance with the UK Corporate Governance Code
The Board believes that during 2015 the Company was fully
compliant with the provisions set out in the UK Corporate
Governance Code, with the following minor exceptions:
B.2.3. The terms of appointment of the Non Executive
Directors were set out in their service contracts, which for
Nigel Moore was dated 13 July 2012, for Lord Oxford was dated
1 January 2002, for Dipesh Shah was dated 1 June 2008, for
Alastair Ferguson was dated 1 November 2011 and for Richard
Murray was dated 1 January 2013 and included a termination
notice of three months by either party. However, the service
contracts were for an indefinite term, not a finite term, subject
to re-election on an as required basis. These contracts were
terminated on 28 January 2016.
B.7.1. Non Executive Directors who have served longer than
nine years should be subject to annual re-election. Lord
Oxford had served on the Board for more than nine years and
was re-elected a Director at the last AGM on 4 June 2014.
In considering that the Company was in 2015, other than
as noted above, in full compliance, the Board notes that
excluding the Chairman, independent Non Executive Directors
comprised 50% of the Board as the Board considered that the
four other Non Executive Directors in place during 2015 were
wholly independent.
The Executive Directors in office during 2015 undertook a
review of the independence of each of the Non Executive
Directors and Chairman. The review addressed the matters
highlighted at Section B.1.1 of the Code, which could appear to
affect a Director’s judgment. In undertaking the review, one
specific matter addressed was that Lord Oxford has served
on the Board for more than nine years. Following the review,
the Executive Directors at that time did not consider that this
matter in any way influenced the independent judgment of
Lord Oxford. Accordingly, the Executive Directors in office
during 2015 believed that each of the Non Executive Directors
and Chairman to be independent in accordance with Section B
1.1 of the Code both during the year under review.
The budgetary process for 2016 has been deferred in order
that the new Board is able to fully understand and contribute
to the process rather than continuing with a budget that was
approved by the previous Board.
Investment appraisal
For each capital intensive project there is a rigorous project
analysis and risk and return appraisal completed using
technical, financial, commercial, and operational specialists
across the Group. The new Board is reviewing the approach
to ensure the most effective allocation of capital across the
group as part of a wider consideration of the Company’s
strategy.
The contracts of all Directors who served in office during 2015
were terminated on 28 January 2016.
The five new Board members have entered into interim
arrangements which will be replaced by longer term
arrangements once an independent Remuneration Committee
has been nominated and can review and approve such
arrangements.
Internal control and risk management
The Board has overall responsibility for the Group’s system
of internal control and for reviewing its effectiveness. The
internal control systems are designed to meet the particular
needs of the Group and to manage rather than eliminate the
risk of failure to achieve business objectives. Such systems
can only provide reasonable and not absolute assurance
against material misstatement or loss.
For the year under review and up to the date of approval
of the 2015 Annual Report, the Board has reviewed the
effectiveness of the Company’s systems of internal control
and risk management and has concluded that the Company’s
procedures, policies and systems are appropriate and suitable
to enable the Board to safeguard shareholders’ investment and
the Company’s assets, and comply with Turnbull Guidance.
In addition, the Board has carried out a robust assessment
of the principal risks facing the Company, including those
that would threaten its business model, future performance,
solvency or liquidity. Details of the principal risks and how they
are managed or mitigated is included on pages 42 to 53.
Further information on internal control and risk management
is set out in the Audit Committee Report on page 79.
Budgetary process
Each year the Board reviews and approves the Group’s annual
budget with key risk areas identified. The preparation of the
annual Group budget is a multi-stage comprehensive process
led by the Chief Financial Officer who works closely with
local finance directors for operating subsidiaries in Russia
and Ukraine and other senior management with specific
responsibilities for our Hungarian, Slovakian and other
operations.
Performance is monitored through the monthly reporting
to the Board of variances from the budget. Relevant action
is taken by the Board throughout the year based on updated
forecasts which are prepared using current information on the
key risk areas and sensitivities.
Capital investment is regulated by the budgetary process, our
automated authorisation for expenditure (‘AFE’) system and
pre-defined authorisation levels.
For expenditure beyond specified levels, detailed written
proposals are submitted to the Board.
Using our AFE system Group capital expenditures are
reviewed monthly on a project-by-project basis by the Chief
Financial Officer and overruns, actual or foreseen, are
investigated, and approved by the Board where appropriate.
Whistleblowing
The Board reviews the arrangements by which employees
can raise any concerns they may have about workplace fraud
or mismanagement with local management on a confidential
basis. Whistleblowing incidents are taken very seriously by the
Board.
As part of the Board’s commitment to support our employees
in the work place, we have a confidential process for reporting
“Concerns at Work”. This is a confidential service for reporting
delicate matters that sometimes arise in the work place.
In addition, this service forms part of the Company’s
commitment to comply with best practice under the UK
Bribery Act. As disclosed in our Anti-Bribery and Corruption
policy, all individuals who work on behalf of the Group have
a responsibility to help detect, prevent and report instances
not only of bribery but also of any other suspicious activity or
wrongdoing.
Employees are expected to make complaints to their
line managers or, if this is not appropriate, through our
independently managed confidential reporting process, which
is available to all employees as well as third parties.
Complaints made under the confidential reporting service are
sent to the Finance Director and are investigated in the first
instance prior to a decision being taken about further steps.
Feedback is provided to the person making the complaint, if
necessary.
The Board is absolutely committed to ensuring that all
employees have a safe, reliable, and confidential way of
reporting any suspicious activity.
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Corporate governance
Audit Committee Report
Communication with shareholders
A key priority of the new Board that was appointed on
28 January 2016 is significant and rapid improvements to the
frequency and levels of communication with all shareholders.
The new Board has made contact with the Group’s major
shareholders since its appointment and is committed to a
more open relationship involving regular communications
in order that shareholders views on the Group can be
understood.
The authorisation of a conflict matter, and the terms of
authorisation, may be reviewed at any time by the Board. The
Nomination Committee supports the Board in this process,
both by reviewing requests from Directors for authorisations
of situations of actual or potential conflict and making
recommendations to the Board and by reviewing any situations
of actual or potential conflict that have been previously
authorised by the Board, and making recommendations
regarding whether the authorisation remains appropriate.
A number of formal communication channels are used to
account to shareholders for the performance of the Group,
which include the Annual Report, AGMs and periodic reports
to the London Stock Exchange.
Presentations given at appropriate intervals to representatives
of the investor community are available to all shareholders
to download from the Group’s website (www.jkx.co.uk).
Less formal processes include contacts with institutional
shareholders for which the Board as a whole takes
responsibility.
Extensive information about the Group’s activities is provided
in the Annual Report and the Half-yearly Report which are
provided to shareholders.
During 2015, the Chief Executive and Finance Director had a
number of meetings with institutional and other shareholders,
as did the Chairman. In addition, in April 2015 the Chairman
wrote to shareholders to update them on the Group’s progress
and other important matters affecting them and the Group.
Enquiries from individuals on matters relating to their
shareholding and the business of the Group are welcomed
and are dealt with in an informative and timely manner.
Shareholders are encouraged to attend the Annual General
Meeting to discuss the progress of the Group.
Conflicts of interest
The Company complies with the provisions on conflicts of
interest in the Companies Act 2006.
The Company has procedures in place for the disclosure
and review of any conflicts, or potential conflicts, of interest
which the Directors may have and for the authorisation of
such conflicting matters by the Board. In deciding whether to
authorise a conflict or potential conflict the Directors must
have regard to their general duties under the Companies
Act 2006. The procedure operates to ensure the disclosure
of conflicts, and for the consideration and if appropriate, the
authorisation of them by non-conflicted Directors.
Going concern
The Board closely monitors and manages its liquidity risk
using cash flow forecasts which are regularly produced and
applies sensitivities for different scenarios including, but not
limited to, changes in oil and gas prices, changes to production
and other tax rates in relation to the Group’s producing assets,
changes in Rouble and Hryvnia exchange rates, increased
operating and capital expenditure and delays to additional
future revenue, while also considering the current and future
country and currency risks that the business is exposed to.
At the date of this report, there is a combination of
circumstances which results in the existence of a material
uncertainty that may cast significant doubt about the Group’s
and Company’s ability to continue as a going concern. The
combination of circumstances giving rise to the material
uncertainty is discussed in Note 2 to the financial statements.
After making enquiries and considering the circumstances
discussed in Note 2 to the financial statements, the Directors
have, at the time of approving the financial statements, a
reasonable expectation that the Company and Group will
have adequate resources to continue in operational existence
for the foreseeable future. Thus they continue to adopt the
going concern basis of accounting in preparing the financial
statements.
On behalf of the Board
Paul Ostling Chairman
18 March 2016
During 2015, the Committee comprised three independent
Non Executive Directors who resigned on 28 January 2016.
JKX Board replaced on 28 January 2016
The entire Board of JKX was replaced on 28 January 2016
following a General Meeting of the Company. The resignation
of all independent Non Executive Directors meant that, since
that date, the composition of the Board has not complied with
the UK Corporate Governance Code (‘the Code’) in respect of
the number of independent Non Executive Directors. Without
independent Non Executive Directors, the Company has not
been able to form an Audit Committee which is compliant with
the Code.
The Company is in the process of conducting background
checks and appointing two new independent Non Executive
Directors which will enable a new Audit Committee to be
formed.
For the purposes of approving the Annual Report for 2015,
an interim Audit Committee consisting of Paul Ostling, as
Chairman, and Russell Hoare, as Chief Financial Officer, was
formed, but will be replaced with an independent committee,
in compliance with the Code, as soon as the new independent
Board members are appointed. Both Paul Ostling and Russell
Hoare have relevant financial experience, as defined by the
Code, and so were deemed most suited to form the Committee
as an interim measure.
Composition of the Audit Committee
During 2015, the Audit Committee was chaired by Richard
Murray, a Chartered Accountant and a former audit partner
with Ernst & Young LLP. The Board in 2015 determined that
Richard Murray has considerable recent and relevant financial
experience through his previous and current roles. In addition,
Richard maintained a regular pattern of attendance at relevant
seminars and courses.
The Committee also included two other Independent
Non Executive Directors, Dipesh Shah and Alastair Ferguson,
providing it with an appropriate balance between those
individuals with a financial or accounting background and
those with wider experience of the oil and gas sector in which
we operate. In practice, the Committee achieves its objectives
by a process of regular interaction with management and the
external auditors, as well as by reviewing the work of Internal
Audit and the Risk Committee, and other advisory firms.
Together with the collective financial and commercial
skills and experience of the other Committee members,
the Committee had the appropriate experience to fulfil its
responsibilities and oversee the activities of the Company’s
auditors.
Attendance at meetings in 2015
Role of the Audit Committee
Members to
28 January 2016
Committee
member since
Number
of meetings
in 2015
Resigned
Richard Murray
(as Chairman)
January 2013
Dipesh Shah
June 2008
Alastair Ferguson
November 2011
5/5
5/5
4/5
January 2016
January 2016
January 2016
The Audit Committee has delegated authority from the Board set
out in its written terms of reference, available on the Company’s
website, which were last reviewed by the Board in July 2015. The
principal objectives of the Audit Committee are:
• to monitor the integrity of the financial statements of the Group
and regulatory announcements, and to review any significant
financial reporting judgements;
• to monitor the adequacy and effectiveness of the Group’s
internal control, risk management and financial reporting
processes;
• to provide the Board with an independent assessment of the
Group’s accounting affairs and financial position;
• to provide the Board with assurance that the Annual Report and
Accounts are presented in a manner that is fair, balanced and
understandable, so as to enable shareholders to assess the
Group’s performance, business model and strategy;
• to recommend the (re-)appointment of the external auditors to
the Board and annually assess their independence, objectivity,
effectiveness, quality, remuneration and terms of engagement,
as well as ensuring that the policy with regard to their
appointment for non-audit services is appropriately applied.
Thereafter, the Committee provides a recommendation to the
Board regarding the auditors appointment to be put to the
shareholders in the forthcoming annual general meeting; and
• to monitor the adequacy and effectiveness of the internal audit
function and the Risk Committee and to review any significant
matters arising.
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Audit Committee Report
Attendance at meetings
Significant issues considered by the Audit Committee
Matters considered
Response and conclusion
After discussion with management and the external auditors,
the Committee determined that the key risk of misstatement in
relation to the Group’s 2015 financial statements related to:
• The going concern basis of accounting;
• The carrying value of the Group’s Oil and Gas assets; and
• The Group’s exposure to production-related taxes in
Ukraine.
These issues were discussed with management and the
external auditors at the time the Committee reviewed and
agreed the auditors’ Group Audit Plan, during the review of the
half year interim financial statements in July 2014 and at the
conclusion of the audit of these financial statements.
The Audit Committee met five times during 2015 (2014: three).
The Committee’s meetings were always attended by the
Chief Executive, the Finance Director, the lead partner of our
external auditors, and by certain senior managers who are
responsible for specific topics, such as risk management,
financial control, and internal compliance procedures. Other
Directors are invited to attend the meetings from time to time
when appropriate.
The Committee Chairman maintains contact with those other
attendees throughout the year. Twice during 2015 (2014: twice),
the Committee met with the external auditors to discuss
matters which the auditors and Audit Committee may wish to
raise without Executive Directors being present.
The Committee’s activities during 2015
The Committee had an annual work plan, developed from its
terms of reference, with standing items that the Committee
considers at each meeting in addition to any specific matters
arising and topical items on which the Committee has chosen
to focus.
The work of the Audit Committee during the year principally
fell under three main areas and is summarised below.
Internal controls and risk
External auditors
Accounting, tax and financial reporting
• Considered reports from KPMG in
relation to their audits and assessment of
the control environment in Russia and
Ukraine
• Considered and approved the audit approach
and scope of the audit work to be undertaken
by the external auditors and the fees for the
same
• Reviewed the half year and annual
financial statements and the significant
financial reporting judgements made
therein
• Considered reports from the external
auditors on their assessment of the
control environment
• Reviewed auditor’s reports on their audit
findings at the half year review and at the
year end
• Considered feedback from both the
• Reviewed and updated the policy governing
internal and external auditor reports as
submitted by local and Group
management
• Reviewed Risk Committee reports, which
required management to identify risks
and evaluate them, and ensured
appropriate mitigating controls were
agreed and implemented
• Approved the scope of the internal audit
programme for the year
• Considered the effectiveness of the
internal audit function
• Assessed the effectiveness of the Group’s
internal control environment
• Assessed the effectiveness of the Group’s
Anti-Bribery and Corruption Annual Plan
non-audit services
• Considered the independence of the auditors
and their effectiveness, taking into account:
(a) non-audit work undertaken by the
external auditors and compliance with the
policy;
(b) FRC guidance;
(c) feedback from a survey targeted at
various stakeholders; and
(d) the Committee’s own Assessment
• Considered the recommendations in the UK
Corporate Governance Code regarding the
tender of the external audit contract
• Considered and approved letters of
representation issued to the external
auditors
• Considered the liquidity risk and the basis
for preparing the Group half yearly and
full year financial statements on a going
concern basis and reviewed the related
disclosures in the Annual Report
• Reviewed the external auditors’ report on
audit and accounting judgements,
including consideration of relevant
accounting standards and underlying
assumptions
• Reviewed disclosures in the Annual
Report in relation to internal controls,
risk management, principal risks and
uncertainties and the work of the
Committee
• Received a corporate governance update
relating to changes to the UK Corporate
Governance Code
The impact on the going concern of the Company of:
• the sudden fall in worldwide oil and gas prices; and
• the ability to settle the potential $30.1 million which
may become payable in February 2017
The Group has a significant obligation of $30.1 million which may
become payable pursuant to its $40 million Convertible Bond in
February 2017 (see Notes 13 and 14 to the consolidated financial
statements) if all of the Bondholders exercise their put option at that
time, or in February 2018 if the Bond expires at its full term.
The majority of the Group’s revenues, profits and cash flow from
operations are currently derived from its oil and gas production in
Ukraine.
Accordingly, the Group’s going concern assessment is sensitive to
the realisations that are achieved from oil and gas sales in Ukraine
and the Company’s ability to repatriate cash to the UK to meet its
obligations to creditors and bondholders.
JKX’s oil and gas markets were severely affected through 2015 by the
sustained low international oil prices which have adversely affected
its financial results.
Under guidelines set out by the UK Financial Reporting Council the
Board is required to consider whether the going concern basis is the
appropriate basis of preparation for the Financial Statements, and
furthermore, is required to include appropriate disclosure of any
significant considerations or uncertainties relevant to the going
concern assumption.
The Committee has been in discussion throughout the year with
management and the external auditors (PwC) in order to assess the
impact of foreign exchange controls in Ukraine and the continued low
international oil and gas prices.
The Committee received reports prepared by management outlining
their assessment of the ability of the Group to continue as a going
concern, subject to the reprioritisation of capital expenditure, tighter
cost control and successfully repatriating cash to the UK through
other legitimate means.
The Committee challenged the appropriateness of the key
assumptions used and was fully briefed on discussions between the
Board, local management and advisors regarding the potential for
further unforeseen decrees in Ukraine affecting the Group.
In addition, PwC provided a detailed report on this issue to the
Committee. The audit opinion, provided by them, includes an
‘emphasis of matter’ paragraph referencing specific risks relating to
further legislation from the Ukrainian government affecting the
energy industry and material deterioration of our oil and gas
realisations, which represent material uncertainties. Whilst it is
unclear whether either or both of these risks will be realised, if
realised, they may cast significant doubt about the Group’s ability to
meet its obligations as they fall due and continue as a going concern.
The Committee has advised the Board that, on the basis of
management’s reasonable expectations as to the likely outcome and
impact of these risks, including consideration of mitigating measures,
the Group has adequate resources to continue in operational
existence for the foreseeable future and therefore the going concern
basis is the appropriate basis of preparation for the 2015 financial
statements. However, this notwithstanding, the Committee has
advised the Board that the current political and economic
uncertainties that exist, particularly those relating to oil and gas
realisations, together represent a material uncertainty, which should
be, and is, appropriately disclosed in the financial statements (see
Note 2 to the Group financial statements).
The carrying value of the Group’s oil and gas assets
As more fully explained in Note 5 to the financial statements, JKX’s
oil and gas assets are grouped into cash generating units (‘CGUs’) for
the purpose of assessing the recoverable amount. Each period these
assets are reviewed for indications of impairment. If any assets are
considered to have been impaired, the carrying value is adjusted
downwards by an appropriate amount, with a corresponding charge
made to the Income Statement.
An impairment review necessarily involves the use of assumptions
such as long-term production forecasts, gas prices, production-
related taxes, capital expenditure, discount rates, and other
macroeconomic assumptions underlying the valuation process. This
is particularly challenging in relation to the Group’s interests in
Ukraine and southern Russia due to the lower medium term visibility
of gas prices which are set by the respective governments and are
vulnerable to unexpected short term political manoeuvring.
The Committee received reports from management outlining the
basis for each of the key assumptions used, and these assumptions
were reviewed and challenged by the Committee to ensure
reasonableness and consistency e.g. with the Group’s 2016 Budget
which is approved by the Board. In addition, this area is a prime
source of audit focus and accordingly our auditors provide detailed
reporting to the Committee. Management also brought to the
attention of the Committee the sensitivity analysis disclosed in Note 5
to the financial statements.
The Committee agreed that, on the basis of the evidence available,
after the provision for impairments of $49.6m and $1.5m in respect of
our oil and gas assets in Ukraine and Hungary, the projected future
cash flows from the Group’s CGUs adequately supported the carrying
value of the associated oil and gas assets, and noted that full
disclosure of the key assumptions (including a sensitivity analysis in
Note 5) had been appropriately disclosed in the financial statements.
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Audit Committee Report
Matters considered
Response and conclusion
The Group’s exposure to production-related taxes
in Ukraine
As detailed in Note 27 to the financial statements, the Company is
engaged in a claim against Ukraine under international arbitration
proceedings for the recovery of overpayment of production taxes of
more than US$180m, in addition to damages to the business. The
claim is being heard in July 2016 and therefore the outcome is
unknown.
In addition, in recent years, the Group has been in receipt of a
number of unexpected claims for additional taxes, mainly
retrospective in nature, all of which have been successfully managed
and resisted by management to date and which have been/are being
contested in the Law Courts of Ukraine.
The outcome of legal challenges concerning additional production
tax liabilities in Ukraine for the period to 31 December 2010 is
underpinned by a range of judgements (see Note 27).
The Committee addressed this issue, as in previous periods, by
reviewing reports from senior management and examining the
degree to which these are supported by professional advice from
external legal and other advisory firms. This is also an area of
elevated audit risk and accordingly the Committee received detailed
verbal and written reporting from PwC on these matters.
Having reviewed these reports and submissions, the Committee was
satisfied that a provision of $10.9m was required in respect of
production taxes being claimed for 2010, and the other two claims
were disclosable as contingent liabilities.
Furthermore the Committee noted that the disclosures made in
Note 27 to the financial statements appropriately reflected the
uncertainties that necessarily persist.
Misstatements
Management reported to the Committee that they were not
aware of any material or immaterial misstatements made
intentionally to achieve a particular presentation. The auditors
reported the misstatements that they had found in the course
of their work to the Committee and confirmed that no material
amount remained unadjusted.
Internal control
The Audit Committee monitors the integrity of the financial
statements and related announcements, reviews the
Company’s internal control processes and risk management
systems, and reports its conclusions to the Board. The
Committee regularly reviews the effectiveness of the
Company’s systems of internal control and risk management.
Risk management
The Risk Committee, which comprises the Chief Financial
Officer and senior management, assists the Board in
discharging their responsibility to review on an ongoing basis
the risks potentially facing the Group, their potential impact,
the strategies available to mitigate those risks and the costs of
such mitigation.
The Risk Committee met three times in 2015.
The Chairman of the Risk Committee reports to the Audit
Committee and the Board at relevant meetings on matters
it has reviewed and material changes to the Group’s risk
environment, in addition to making recommendations when
appropriate.
Following each Risk Committee meeting, the Committee
reviews the minutes, the latest Risk Register and related
output, and challenges the Group’s high-rated risks and the
mitigating actions identified by each risk owner. An updated
list of principal risks is included within the Strategic Report on
pages 44 to 53.
For each high-rated risk the Committee reviews the Group’s
current level of exposure and considers the appropriateness of
the mitigating actions being taken by management.
The Committee was comfortable with the processes in place
for risk management.
Additional information on risk management is included in the
Principal risks and how we manage them section on page 41.
Internal audit
During the year, KPMG were retained to build on their prior
year’s assessment on the adequacy of the Group’s procedures
and controls in Russia and Ukraine, as well as complete full
internal audit procedures on the procure-to-pay process at
our significant operations in Ukraine.
The scope of the procure-to-pay internal audit included testing
of design and operating effectiveness of controls across the
full process.
KPMG’s independent assessment of our processes and
controls allowed management to prioritise their work so as to
address their recommendations and continue to strengthen
the financial and operating controls in these two operating
subsidiaries.
The Audit Committee is fully supportive of the development of
the internal audit programme which is intended to ensure that
the necessary processes and controls are firmly embedded
within our organisation making the control environment
stronger and more efficient.
In addition to the statutory audit fee, PwC and member firms
charged the Group $110,000 for audit-related assurance
services in 2015 in connection with the 2015 half year review
process and $2,000 for the use of their online technical
information database.
Further details of the fees paid, for both audit and non-audit
services, can be found in Note 23 to the consolidated financial
statements.
The Committee is satisfied that the quantum of the non-
audit services provided by PwC is such that the objectivity
and independence of the external auditor has not been
compromised.
Reappointment of Independent Auditors
During the year the performance of the auditor was formally
assessed by the Committee in conjunction with the senior
management team. In making this assessment the Committee
focused on the robustness of the audit, the quality of delivery
of audit services and the quality of the auditors’ staff.
Having reviewed the capability and effectiveness of PwC’s
performance during the year, and having satisfied itself
as to their continuing independence and objectivity within
the context of applicable regulatory requirements and
professional standards, the Committee has invited the Board
to recommend the reappointment of PwC as auditor at the
forthcoming AGM and a resolution to that effect will appear in
the notice of the AGM.
External audit
The Audit Committee maintains an objective and
professional relationship with the Company’s auditors,
PricewaterhouseCoopers LLP (‘PwC’), who have been auditors
to the Group since 2006, and meets in private session with
them on a periodic basis.
PwC were reappointed as the Company’s auditors in 2011
following a competitive tender process. The audit partner
rotated in 2013. PwC are required to rotate the audit partner
responsible for the Group audit every five years.
The Audit Committee are fully supportive of the Code’s
requirement that the audit should be put out to tender at least
once in every ten years. Any decision to open the external audit
to tender within ten years is taken on the recommendation
of the Audit Committee based on the results of the annual
performance review.
Non-audit services
During the year the Committee reviewed their policy governing
the engagement of the external auditor to provide non-audit
services. The policy precludes PwC from providing certain
services such as valuation work or the provision of accounting
services and also sets a presumption that the external auditor
should only be engaged for non-audit services where there is
no legal or practical alternative supplier.
In such instances, the continued objectivity and independence
of the auditors in their capacity of auditor is an objective of the
Group.
Under the policy, the Committee has delegated authority to
the Finance Director for the approval of non-audit services
from PwC of up to $20,000 per project and an aggregate
amount of not more than $50,000 in any year. Decisions above
these thresholds must be referred to the Audit Committee for
pre-approval of the services and be supported by appropriate
documentation detailing management’s reasons for
selecting PwC.
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Directors’ Remuneration Report
Independence
During 2015, the Committee comprised three independent
Non Executive Directors.
JKX Board replaced on 28 January 2016
The entire Board of JKX was replaced on 28 January 2016
following a General Meeting of the Company. The resignation
of all independent Non Executive Directors meant that, since
that date, the composition of the Board has not complied with
UK Corporate Governance Code (‘the Code’) in respect of the
number of independent Non Executive Directors. Without
independent Non Executive Directors, the Company has
not been able to form a Remuneration Committee which is
compliant with the Code.
The Company has engaged an independent consultant to
conduct due diligence on a short-list of candidates and is in
the final phase of appointing two new independent
Non Executive Directors who will form the new Remuneration
Committee, in accordance with the requirements of the UK
Corporate Governance Code.
No salary increases were awarded for 2015 across the
organisation. Annual bonuses in 2015 were based on a similar
performance framework as in 2014 using a range of strategic,
financial and health and safety targets.
Under the Performance Share Plan approved at the 2014 AGM,
awards would normally be granted of nil cost options which
equate to 150% of the base salary for each of the Executive
Directors. For 2015, the Committee restricted the grant to
100% of base pay with performance conditions that reflect the
approved Remuneration Policy.
Remuneration disclosure
As with last year, this Report is split into two parts: the Policy
Report and the Directors’ annual remuneration report:
• The Directors’ Remuneration Policy applicable during
2015 (pages 85 to 88) was unchanged from that approved by
shareholders at the June 2014 AGM, and we have therefore
provided a summary in order to provide context. The full
Policy Report, as approved by shareholders, can be found in
our 2013 Annual Report available on our website.
Remuneration of the Board appointed on 28 January 2016
• The Directors’ annual remuneration report (pages 89
Temporary remuneration levels have been put in place for the
Board members appointed on 28 January 2016 pending the
establishment of an independent Remuneration Committee
which will set remuneration levels that will apply from
28 January 2016. Any difference between the final
remuneration levels approved by the new Remuneration
Committee and the temporary levels currently in place will be
adjusted back to 28 January 2016. For further information on
this see pages 94 and 96.
to 99) sets out details of how our remuneration policy has
been applied for the year ended 31 December 2015. This
section is subject to an advisory shareholder vote.
These sections work together to give you full and transparent
disclosure of the Company’s approach to Directors’
remuneration during 2015.
At the 2016 AGM, the Directors’ annual remuneration report
will be put to an advisory shareholder vote.
Remuneration in 2015
Details of the remuneration decisions for the reporting year
are covered in the Annual Report on Remuneration. The
Committee annually examines the evolution of remuneration
practices and policy. Changes proposed by The Committee at
the AGM in June 2014 were approved and were to remain in
place for three years from 1 January 2015 to
31 December 2017.
Directors’ Remuneration Policy
Summary of Directors’ Remuneration Policy
Reward principles
The Remuneration Policy for Executive Directors and Non
Executive Directors was approved by shareholders at the June
2014 AGM and took effect from 1 January 2015. Below we
provide a summary including the Remuneration policy table,
and terms and conditions for members of the Board. The full
policy report, as approved by shareholders, can be found on
pages 125-133 of the 2013 Annual Report, a copy of which
can be found on the Company’s website at www.jkx.co.uk/
investor-centre/investor-download-centre.aspx
Reward policies
The Company aimed to ensure that total remuneration was
set at an appropriate level relative to peer group comparator
companies, those being UK-based oil and gas companies
which are primarily quoted on the London Stock Exchange
or AIM. The main components of remuneration for Executive
Directors and senior management are basic annual salary;
pension and benefits (including non-contributory health
insurance, life assurance and income protection); an annual
bonus scheme linked to short-term financial and strategic
objectives; and long-term incentives linked to the delivery of
long-term shareholder value.
The main objectives of JKX’s remuneration policy are to:
• enable the Company to recruit, retain and motivate
individuals with the skills, capabilities and experience to
achieve its stated objectives;
• strengthen teamwork by enabling all employees to share in
the success of the business; and
• ensure alignment of Executive, senior management and
shareholder interests.
The principles of JKX’s remuneration policy are to:
• pay an appropriate level of total remuneration in relation to
company and individual performance and with reference to
peer group companies;
• ensure that there is an appropriate link between
performance and reward;
• award annual bonuses which reflect the achievement of
short term financial and strategic objectives as well as
personal performance; and
• ensure that long-term incentives are linked to Total
Shareholder Return (‘TSR’) and to the delivery of Strategic
Plan targets including the achievement of strategic
objectives.
Each element of remuneration has a specific role in achieving
the objectives of the remuneration policy and aligning
the interests of Executive Directors with the interests of
shareholders. The combined potential remuneration from
the annual bonus and long-term incentives ensures that the
balance of the Executive remuneration package is weighted
towards at risk performance pay with a higher weighting on
long-term remuneration.
More than 97% of JKX staff are based outside of the UK,
primarily in the Ukraine and Russia. The Committee takes into
account remuneration conditions elsewhere in the Company,
and particularly for those employees based in the UK, in
formulating the Executive Director remuneration policy.
A summary of the Directors’ remuneration policy applicable
during 2015 is provided in the table overleaf. The policy will be
reconsidered by the new Remuneration Committee once it is
established.
Executive Director Remuneration Policy Table
Base salary
Purpose and link to strategy
To attract and retain talent by ensuring base salaries reflect individual performance and market factors.
Operation
Base salaries are reviewed annually on 1 January, with reference to the individual’s role, experience and
performance; salary levels at relevant UK sector comparators1; and the range of salary increases applying
across the Group.
Opportunity
Any base salary increases are applied in line with the outcome of the annual review.
It is not anticipated that salary increases for Executive Directors will exceed those of the UK-based
workforce over the period over which this policy will apply. Where increases are awarded in excess of the UK
employee population, the Committee will provide clear rationale in the relevant year’s Annual Report on
Remuneration.
Performance metrics
Business and individual performance are considerations in setting base salary.
1 Comparator companies used to assess market pay competitiveness have historically included UK-based oil and gas companies listed on the London Stock Exchange or AIM.
The Committee reviews comparator companies periodically to ensure they remain appropriate and retains the discretion to adjust the reference group or companies as
appropriate.
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Directors’ Remuneration Report
Directors’ Remuneration Policy
Executive Director Remuneration Policy Table
Executive Director Remuneration Policy Table
Pension
Performance Share Plan (‘PSP’)
Purpose and link to strategy
To provide competitive retirement benefits.
Operation
The Company makes a contribution to the pension scheme of the individual’s choice.
Purpose and link to strategy
To incentivise strong long-term financial performance and superior longer term returns to shareholders
relative to peers.
At their option, Executive Directors may either have equivalent contributions made to their personal pension
schemes or cash in lieu of pension or a combination of both.
Operation
Opportunity
Executive Directors are eligible to receive an annual contribution equivalent to 15% of base salary.
Opportunity
The PSP provides for an award up to a normal aggregate limit of 150% of salary for Executive Directors, with
an overall limit of 200% of salary in exceptional circumstances.
The Remuneration Committee has the ability to grant awards of nil-cost options annually to Executive
Directors, conditional on Group performance over a period of at least three years. The sale of vested PSP
awards is subject to meeting shareholding requirements (see page 98).
Award levels and performance conditions will be reviewed from time to time to ensure they remain
appropriate and no less stretching than the first cycle.
Clawback applies on unvested PSP shares in the event of gross misconduct, material misstatement, or in
any other circumstance that the Committee considers appropriate.
The Committee has the discretion to authorise a payment, in cash or shares, equal to the value of dividends
which would have accrued on vested shares during the vesting period.
Vesting of PSP awards is subject to continued employment and the Company’s performance over a 3-year
performance period. If no entitlement has been earned at the end of the relevant performance period,
awards will lapse.
From 2015, PSP awards are based on a number of financial and strategic measures, which may include, but
not be limited to:
• TSR
• Earnings per Share (‘EPS’)
• Other financial measures (e.g. ROCE, Profit before tax, cash resources)
• Strategic and operational measures (e.g. production, reserves)
In addition, awards are subject to an underpin such that for any awards to vest, the Remuneration Committee
must satisfy themselves that health and safety performance has been satisfactory over the performance
period. Each measure can be applied a weighting of between 0% and 50%. The Committee has the discretion
to adjust the performance measures and weightings in advance of making an award to ensure that they
continue to be linked to the delivery of Company strategy.
Under each measure, threshold performance will result in up to 25% of maximum vesting for that element.
The vesting level will increase on a sliding scale to 100% vesting for stretch levels of performance.
Vesting of PSP awards will be deferred in whole or in part for a period of up to two years following the end of
a three year vesting period. The Company’s policy from 2015 will be for awards to vest 50% after 3 years with
25% required to be held until the end of 4 years, and 25% until the end of 5 years.
As under the annual bonus, the Committee has discretion to adjust the formulaic PSP outcomes within the
plan limits to ensure alignment of pay with performance, i.e. to ensure the outcome is a true reflection of the
performance of the company.
Performance metrics
Not performance related.
Benefits
Purpose and link to strategy
To provide competitive benefits.
Operation
Executive Directors receive benefits which consist primarily of life assurance, income protection and private
medical cover, although can include any such benefits that the Committee deems appropriate.
Performance metrics
Opportunity
Benefits values vary by role and are reviewed periodically relative to market circumstances.
The cost of the benefits provided changes in accordance with market conditions and will, therefore,
determine the maximum amount that would be paid in the form of benefits during the Policy Period. The
Committee retains the discretion to approve a higher cost in exceptional circumstances (e.g. relocation) or in
circumstances where factors outside the company’s control have changed materially (e.g. increases in
insurance premiums).
Performance metrics
Not performance related.
Annual bonus
Purpose and link to strategy
To incentivise the achievement of short-term financial and strategic objectives.
Operation
Performance measures, targets and weightings are set at the start of the year according to strategic
priorities.
Opportunity
Performance metrics
At the end of the year, the Remuneration Committee determines the extent to which the targets have been
achieved, with any bonus payments delivered in cash.
For Executive Directors, the Committee has the discretion to mandate the deferral of a proportion (up to
100%) of the annual bonus in JKX shares, to be held for a minimum of 1 year. Deferred shares will be subject
to clawback provisions in the event of gross misconduct, material misstatement, or in any other
circumstance that the Committee considers appropriate.
For Executive Directors, the maximum annual bonus opportunity is 100% of base salary, with target
bonus set at 40% of maximum. For threshold level performance, the annual bonus will be between 0% to
20% of base salary.
Performance is assessed annually based on challenging budget and stretch targets for financial and
business performance. The measures selected may vary each year depending on business context and
strategy, and measures will be weighted appropriately according to business priorities. Under normal
circumstances, financial measures will make up at least half of the total bonus opportunity.
The Committee has discretion to adjust the formulaic bonus outcomes both upwards and downwards within
the plan limits (including down to zero) to ensure alignment of pay with the underlying performance of the
business, e.g., in the event of a target being significantly missed or unforeseen circumstances outside of
management control.
Further details of the measures, weightings and targets applicable are provided on page 92.
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Directors’ Remuneration Report
Directors’ Remuneration Policy
Executive Director Remuneration Policy Table
Discretionary Share Option Scheme (‘DSOS’)
The future policy proposed from 2015 does not envisage the grant of any DSOS awards.
Purpose and link to strategy
To incentivise superior long-term financial and share price performance.
Operation
The Remuneration Committee has the ability to grant awards of market-value options annually to Executive
Directors and senior managers, conditional on Group performance over a period of at least three years.
Following the approval of the new PSP at the 2014 AGM, the Committee will not grant awards under the
DSOS beyond 2014. Details of outstanding DSOS awards, and awards for 2014, are included in the Annual
Report on Remuneration on page 99.
Opportunity
The DSOS allows for awards up to an aggregate limit of 200% of salary in exceptional circumstances.
Performance metrics
Where granted, DSOS awards will be subject to performance conditions.
Details of the targets applying to DSOS awards will be included in the Annual Report on Remuneration,
where applicable.
Non Executive Director fees
Function
Operation
To attract and retain Non Executive Directors of the highest calibre with broad commercial and other
experience relevant to the Company.
Fee levels are reviewed annually, with any adjustments effective 1 January in the year following review.
The fees paid to the Chairman and Non Executive Directors are determined by the Board.
Additional fees are payable for acting as Senior Independent Director and as Chairman of the Audit and
Remuneration Committees, and for individual memberships of such Committees.
Fee levels are benchmarked against comparable companies in the sector as well as FTSE-listed companies
of similar size and complexity. Time commitment and responsibility are taken into account when reviewing
fee levels.
Opportunity
Non Executive Director fee increases are applied in line with the outcome of the annual fee review. Fees for
the year commencing 1 January 2015 are set out in the Annual Report on Remuneration.
Fee levels will be next reviewed during 2016, with any increase effective 1 January 2017. It is expected that
increases to Non Executive Director fee levels will be in line with salaried UK-based employees over the life
of the policy. In the event that there is a material misalignment with the market or a change in the complexity,
responsibility or time commitment required to fulfil a non-executive role, the Board has discretion to make
an appropriate adjustment to the fee level.
Performance metrics
None
Executive Director service contracts 1
Payments from existing awards
Executive Directors were eligible to receive payment from
any award made prior to the approval and implementation of
the remuneration policy detailed in last year’s Remuneration
Report, i.e. before 1 January 2015. Details of these awards
were disclosed on pages 105 to 114 of the 2014 Annual Report,
and included existing awards made under the DSOS.
Clawback
For the avoidance of doubt, the Committee has discretion
to operate clawback as a mechanism to reduce unvested or
deferred incentives in the event of a material misstatement
in the annual financial statements, gross misconduct, or any
other circumstances that the Committee deems appropriate.
Executive Director service contracts, including arrangements
for early termination, are carefully considered by the
Committee. The Committee considered appointments of
indefinite term and with a notice period of one year to be
appropriate. All service contracts and letters of appointment
are available for viewing at the Company’s registered office
and at the AGM.
Executive Director Service Contract severance payments
On 28 January 2016, the Executive Director Service contracts
(see below) were terminated with immediate effect. The Board
in place at that time approved:
• payments in lieu of notice totalling £1,007,500, equivalent
to 12 months’ salary for Paul Davies, Cynthia Dubin, Peter
Dixon and 6 months’ salary for Martin Miller;
• payments of £460,800 related to forfeiture of all unexpired
share options and shares deferred under the 2014 bonus
arrangements for Executive Directors (see page 91).
On 27 January 2016 the above amounts were approved and
paid, prior to the General Meeting on 28 January 2016.
These amounts will be included in the Directors remuneration
for 2016.
1
Executive Director service contracts during 2015
Dr Paul Davies
Cynthia Dubin
Peter Dixon
Martin Miller
Date of contract
Notice period1
Date of termination2
1 January 2007
12 months
28 January 2016
14 November 2011
12 months
28 January 2016
1 July 2007
1 July 2007
12 months
28 January 2016
12 months
28 January 2016
1 The notice period is 12 months by the Company or the individual
2 On 28 January 2016, Cynthia Dubin resigned and Paul Davies, Peter Dixon and Martin Miller were removed
from the Board at a General Meeting of the Company
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Directors’ Remuneration Report
Annual report
The following section provides details of how JKX’s
remuneration policy was implemented during the financial
year ending 31 December 2015. In accordance with the
Committee’s terms of reference and the Group’s remuneration
policy, the Committee determines Executive Directors’ actual
remuneration for the year.
Membership and process
During 2015, the Remuneration Committee comprised three
independent Non Executive Directors and was chaired by
Dipesh Shah.
Following the replacement of the entire JKX Board on
28 January 2016 (see page 101), the Company is in the final
phase of appointing two new independent Non Executive
Directors who will form the new Remuneration Committee,
in accordance with the requirements of the UK Corporate
Governance Code.
The Committee meets at least twice a year, to assist the Board
in determining the remuneration arrangements and contracts
of the Directors and senior employees. The Committee met
four times during 2015 (2014: three).
The Remuneration Committee had reviewed the Code,
specifically Section D that addresses the level, make up and
procedural aspects of remuneration. The Remuneration
Committee considered that it complied with all the provisions
and practices identified.
Attendance at meetings in 2015
When required, the Chief Executive attends Committee
meetings; however no Director plays a part in any discussion
regarding his own remuneration.
None of the Committee during 2015 had any personal
financial interest except as a shareholder (as detailed on page
101), which, given the level of holdings, the Board accepts
does not impair independence, and no conflicts of interests
arise from cross-directorships or day-to-day involvement in
running the Group.
Members
From
To
Number
of meetings
in 2015
Dipesh Shah obe
(Chairman)
1 Jun 2008
28 Jan 2016
Nigel Moore
26 Jun 2007
28 Jan 2016
Richard Murray
17 Jan 2013
28 Jan 2016
4/4
4/4
4/4
Advisers
The Committee retains Kepler Associates (‘Kepler’) as
its independent executive remuneration advisers. The
Committee undertakes due diligence periodically to ensure
that Kepler remains independent and that the advice provided
is impartial and objective. Their total fees for the provision of
remuneration services in 2015 were £15,371 on the basis of
time and materials. Kepler provides no other services to the
Group. Kepler is a signatory to the Remuneration Consultants
Group Code of Conduct, details of which can be found at www.
remunerationconsultantsgroup.com.
Members until
28 January 2016
Role of the Committee
Activities during 2015
Dipesh Shah (as Chairman)
Nigel Moore
Richard Murray
Establishes the overall
principles of remuneration for
Directors of all Group
companies
Determines the remuneration
of Executive Directors and
Senior Management,
communicates this to the
stakeholders in the annual
report
Recommends the participation
in, and operation of, the
Company’s long-term incentive
plans. The full terms of
reference are available from
the Company Secretary
In addition to regular topics, the Committee engaged in specific
matters including:
• Review and approval of payments to be made under the 2014
Annual Bonus Scheme
• Approval of executive salary levels for 2015
• Confirmation of lapse of share option awards made in 2012 due to
failure to achieve vesting criteria in 2015
• Review and approval of performance targets for the 2015 Annual
Bonus Scheme
• Review and approval of the allocation of, and performance
conditions applicable to, performance shares and share option
awards made in 2015; and
• Review the application and appropriateness of current
remuneration policies.
Single figure of total remuneration
for Executive Directors (audited)
The table below sets out a single figure for the total
remuneration received by each Director for the year ended
31 December 2015 and the prior year.
Dr Paul Davies
Cynthia Dubin
Martin Miller
Peter Dixon
Notes
1 Salary
2 Benefits
3 Annual bonus*
4 DSOS
5 PSP
6 Pension contribution
2015
£’000
423
9
372
–
–
61
2014
£’000
423
9
140*
–
–
61
Total remuneration
865
633
2015
£’000
2014
£’000
2015
£’000
2014
£’000
2015
£’000
2014
£’000
298
4
262
–
–
45
609
298
5
99*
–
–
45
447
159
4
120
–
–
19
302
226
4
75*
–
–
29
334
226
5
199
–
–
34
464
226
6
75*
–
–
34
341
*
In respect of the 2014 bonus, the Committee determined that the Executive Directors shall have no entitlement to receive a cash bonus in respect of the 2014 financial year
and that the bonus shall be deferred into JKX shares. The Committee agreed with each Executive Director that the Company will award the applicable number of deferred
shares later in 2015. No deferred shares were issued. The Executive Directors contracts were terminated on 28 January 2016 and the Board in place at that time agreed the
settlement amounts noted above be paid to each of the directors on 28 January 2016 to replace the right to these deferred shares. The amounts above have been restated
from last year’s report to equate to the amount paid in cash being the number of shares deferred multiplied by the share price on 27 January 2016.
1) Salary: amount earned for the year.
2) Benefits: the taxable value of benefits received in the year, including life assurance, income protection and private medical cover.
3) Annual Bonus 2014: this is the total bonus based on performance during the year which for 2014 was to be deferred into shares which were to be subject to clawback
(see * above). Annual Bonus 2015: this is the total cash bonus earned based on performance during the 2015.
4) DSOS: no awards vested on performance to 31 December 2015 (2014: none) as the performance conditions were not met.
5) PSP: no awards vested on performance to 31 December 2015 (2014: none) as the performance conditions were not met.
6) Pension: annual contribution by the Group to directors’ pension plans or cash in lieu.
Single total figure of remuneration
for Non Executive Directors (audited)
The table below sets out a single figure for the total
remuneration received by each Director for the year ended
31 December 2015 and the prior year.
Nigel Moore
Dipesh Shah
Lord Oxford
Alastair Ferguson
Richard Murray
2015
£’000
158
158
2014
£’000
158
158
2015
£’000
2014
£’000
2015
£’000
2014
£’000
2015
£’000
2014
£’000
2015
£’000
2014
£’000
74
74
74
74
47
47
47
47
53
53
53
53
63
63
63
63
Fees
Total remuneration
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Directors’ Remuneration Report
Annual report
Incentive outcomes for the year ended 31 December 2015
(audited)
Annual Bonus Scheme
The Annual Bonus Scheme for 2015 applied to Executive
Directors and certain senior management including
senior staff in Poltava Petroleum Company (‘PPC’) and
Yuzhgazenergie (‘YGE’). Bonuses are based on both Group and
individual performances against objectives determined by the
Committee at the beginning of the year and are designed to
reward short-term performance. The scheme is discretionary
and annual awards are not pensionable.
The performance conditions for each financial year are derived
from the Company’s Annual Budget and Strategic Plan and
have been approved by the Board. In order to encourage
teamwork across the Group the weighting applied to each
performance condition was identical for each Executive
Director and for senior management.
In 2015, the Maximum bonus opportunity for Executive
Directors was 100% of base salary and target bonus was 40%
of base salary. For senior managers target bonuses ranged
between 12% and 20%, and maximum bonus opportunity
ranged between 30% and 60%.
The Annual Bonus Scheme performance conditions and
Achievements for 2015 were as shown below.
To earn the maximum level of bonus requires the maximum to
be met or exceeded for each performance measure and all of
the strategic objectives to be met.
The Remuneration Committee considered that these
performance measures as the key drivers and indicators of
both short and long-term performance and value creation.
Given the close link between these targets and JKX’s previous
longer-term strategy, the Directors deemed that the targets
are commercially sensitive and will not be published at this
time. The Committee will disclose these bonus targets when
they cease to be commercially sensitive which is expected to
be in the 2018 Annual Report.
On the basis of the 2015 results above, bonuses achieved were
86% of basic salary for Executive Directors, and of between
26% and 52% of basic salary for senior management. Annual
bonuses were paid in January 2016.
Scheme interests awarded in 2014 (audited)
The Company only operated one long-term incentive plan
during 2015 that being the 2010 Performance Share Plan
(‘PSP’) which was approved by shareholders at the 2010 and
2014 Annual General Meetings.
There were no grants of awards under the approved
Discretionary Share Option Scheme (‘DSOS’) during 2015.
The approved policy does not envisage the grant of any DSOS
awards in future.
The PSP provides nil-cost options for Executive Directors
and senior management. In the aggregate, the market value
of shares that may be granted in any financial year under the
DSOS and the PSP together cannot exceed 300% of basic
salary for any Executive.
Element
Strategic
Plan targets
Financial
targets
Health
and safety
targets
Weighting
to overall
bonus
2015
Performance measures
2015
Performance targets
2015
Achievement
% of
bonus
achieved
40%
Increases in production
New reserves and resources
from existing and new licences
50%
Adjusted Pre-Tax Profit
Minimum rolling cash resources
Based on quantifiable
figures to limit
subjectivity as far as
possible
Targets established
against each measure
with a sliding scale
between threshold and
maximum
Exceeded target but
below stretch target
26%
Exceeded stretch
target
Exceeded stretch
target
Exceeded stretch
target
50%
10%
Lost Time Injury Frequency Rate
(‘LTIF’)
LTIF=0.25
Exceeded target
10%
All Injury Frequency Rate (‘AIFR’)
AIFR=0.40
Exceeded target
Environmental Incident
Frequency Rate (‘EIFR’)
EIFR=0.70
Exceeded target
Total
100%
86%
Vesting schedule for the DSOS
Vesting schedule for the PSP
g
n
i
t
s
e
v
s
n
o
i
t
p
o
f
o
%
100%
25%
0%
g
n
i
t
s
e
v
s
e
r
a
h
s
f
o
%
100%
25%
0%
Threshold
Maximum
Index
Index + 10% p.a.
3 year EPS growth p.a.
JKX’s 3 year TSR vs. Index
50% based on relevant FTSE market capitalisation Index and
50% based on FTSE All-Share Oil & Gas Producers Index
In any ten year period, the number of Shares which may be
placed under Option, or issued:
• may not exceed five per cent of the Company’s ordinary
share capital if issued under the discretionary employees’
share scheme; and
• may not exceed ten per cent of the Company’s ordinary
share capital if issued under the other employees’ share
schemes.
As at 31 December 2015, the maximum available shares
under the Company’s 5% and 10% limits was 0.7 million
(2014: 1.0 million) and 9.3 million (2014: 9.6 million) shares
respectively, out of an issued share capital of 172.1 million
shares.
2010 Performance Share Plan (‘PSP’)
From 2015 onwards, grants under the DSOS ceased, in
accordance with our policy, and a normal limit of 150% of
salary applied under the PSP. In exceptional circumstances
the Committee has the discretion to make awards of up to
200% of a participant’s basic salary.
To date, awards have never exceeded100% of salary. Maximum
award opportunities in 2015 were 100% of salary for Paul
Davies and Cynthia Dubin, and 80% of salary for Peter Dixon.
No grants were made to Martin Miller in 2015.
PSP awards vest based on 3-year TSR performance relative
to a relevant FTSE market capitalisation index (the FTSE
SmallCap for 2014 awards, the FTSE Fledgling for 2015 awards)
and FTSE All-Share Oil & Gas Producers index with half of the
award being assessed against each index. Each part of the
award will be based on performance relative to the relevant
index, with 25% vesting for performance in line with the index.
Vesting would increase on a straight-line basis between
25% and 100% for index out-performance of up to 10% p.a.
Historically, this has been broadly equivalent to upper quartile
performance. In addition, the Committee must be satisfied
that the recorded TSR is a genuine reflection of the underlying
performance of the Company over the performance period.
There is no retesting of performance targets.
TSR performance is measured using percentage out-
performance rather than a ranking approach since it is
less sensitive to the TSR of individual comparators, and
uses a 12-month averaging period due to the volatility of
the Company’s share price and the long-term nature of the
Company’s investments. Whilst noting market practice is
typically to use a shorter averaging period, the Committee feel
that 12-month averaging would give a fairer result for both
management and shareholders.
Change of control
In the event of a change of control, any outstanding PSP or
DSOS awards will be pro-rated for time and performance.
The Committee may in its absolute discretion waive time
pro-rating of the award and retains discretion to determine
the treatment of unvested awards. In the event of a change of
control, JKX awards may alternatively be exchanged for new
equivalent awards in the acquirer, where appropriate.
2015 awards under the PSP
Executive Director
Dr Paul Davies
Cynthia Dubin
Peter Dixon
1 Closing market price on the date of the award
Date of grant
23 Mar 2015
23 Mar 2015
23 Mar 2015
Shares over which
awards granted
Market price at
date of award1
1,281,800
903,000
684,800
£0.335
£0.335
£0.335
Face value
£429,403
£302,505
£229,408
End of
performance period
31 Dec 2017
31 Dec 2017
31 Dec 2017
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Directors’ Remuneration Report
Annual report
2013 PSP and DSOS vesting
Options granted in 2013 under the DSOS, in accordance with
the terms noted above, are subject to a 3-year performance
target of EPS growth of 10% p.a. for maximum vesting with
threshold vesting at 5% (on a straight-line basis between
these points). 3-year EPS growth to 31 December 2015 did not
reach the threshold vesting target therefore all DSOS awards
granted in 2013 will lapse in 2016.
PSP awards granted in 2013 vest based on a 3-year TSR
performance as described above, with TSR assessed relative
to the FTSE250 index and FTSE All-Share Oil & Gas Producers
index. The TSR for the 3-year period to 31 December 2015 was
below the performance of both indexes and therefore all PSP
awards granted in 2013 will lapse in 2016.
Executive Director remuneration for 2016
Base salary
An Executive Director’s basic salary and the other fixed
elements of pay are determined by the Committee at the
beginning of the year. The individual salaries and benefits
of Executive Directors were reviewed taking into account
individual performance and market factors, with reference to
independent and objective research that provides up-to-date
information on a comparator group of UK companies operating
in the independent oil and gas sector.
In recognition of the financial circumstances facing the
Company, the Committee did not increase basic salaries with
effect from 1 January 2016 (shown below).
Similarly, no salary increase was awarded to the UK
employees (2014: nil).
Executive Directors temporary base salary from
28 January 2016
On 28 January 2016, following a General Meeting of the
Company, all of the above Executive Directors were replaced.
Tom Reed and Russell Hoare were appointed as Executive
Directors and their base salaries have been set temporarily at
the following amounts shown in the table below.
These temporary salaries will be replaced once an
independent Remuneration Committee has been nominated
and can review and approve all of the Board’s incentive
arrangements. Any difference between the final salary levels
approved by the new Remuneration Committee and the
temporary levels noted below will be adjusted back to
28 January 2016.
Pension and benefits
The Company will make a contribution equivalent to 15% of
basic salary to the pension scheme of the individual’s choice.
At their option, Executive Directors may either have
contributions of the same amounts made to their personal
pension schemes or cash in lieu of pension at the stated rate,
or a combination of pension contributions and cash in lieu at
the stated rate, subject to normal statutory deductions.
Benefits provided to Executive Directors includes life
assurance, which is also provided for senior managers, for a
sum assured of four times base salary; income protection
(¾ base salary deferred for 13 weeks); and private medical
cover (AXA PPP) is offered to all Company employees and
provides medical cover for them and their dependents, on a
non-contributory basis.
Annual Bonus Scheme
Subject to the approval of the newly appointed Remuneration
Committee, the performance related annual bonus for
the 2016 financial year will operate on a similar basis as in
2015, and in line with the stated future remuneration policy.
Bonuses will continue to be based on Strategic Plan targets
which are in line with the strategy of the new Board which was
appointed on 28 January 2016. Details of the Annual Bonus
Scheme will be defined in accordance with the approved
policy once an independent Remuneration Committee has
been nominated and can review and approve all of the Board’s
incentive arrangements.
The performance targets previously set by the previous were
linked with JKX’s longer-term strategy, therefore targets
remain commercially sensitive and will not be published until
such time that the Committee is confident there will be no
adverse impact on the Company of such disclosure. At this
time the Committee believes that disclosure of the targets in
three years’ time is appropriate.
Long-Term Incentive Plans
In 2015 the Committee granted PSP awards to Executive
Directors in line with the framework stated in the policy noted
on page 87. Under the Performance Share Plan approved at
the 2014 AGM, awards would normally be granted of nil cost
options which equate to 150% of the base salary for each of
the Executive Directors. For 2015, the Committee has decided
to restrict the grant to 100% of base pay with performance
conditions that reflect the approved Remuneration Policy.
Details of the 2016 Long-Term Incentive Plans will be defined
in accordance with the approved policy once an independent
Remuneration Committee has been nominated and can review
and approve all of the Board’s incentive arrangements.
Non Executive Director remuneration
Non Executive Directors Service Contracts during 2015
The Non Executive Service Contracts shown below were in
place throughout 2015 and up until 28 January 2016.
In 2015, all Non Executive Directors had specific terms of
engagement and their remuneration was determined by the
Board within the limits set by the Articles of Association. The
Non Executive Directors service contracts noted above were for
an indefinite term, not a finite term as recommended by Section
B.2.3 of the Code, subject to re-election on an as required
basis. The Board believed that these terms were appropriate
given the Company size, the Non Executive skill set, including
experience of natural resources and the geographical regions
in which the Company operates, and the continuing evaluation
of performance and independence. In the event of early
termination, the Non Executive Directors’ contracts provided
for compensation of three months base fee.
The Non Executive Directors were paid a base fee for
carrying out their duties and responsibilities as Directors, and
fees for membership and, where applicable, chairmanship of
each of the remuneration, nomination and audit committees.
The fees were last increased by 5% at the end of 2013 and
based on a per annum rate (in Sterling) which was compared
to published material concerning Non Executive Director fees
in similar size companies and comparable companies in the
sector.
These fees were reviewed at the 2015 year end and no increase
has been awarded from their 2014 level. Non Executive
Directors’ fees for 2015 and 2016 were as shown below.
Non Executive Directors cannot participate in any of the
Company’s share schemes nor are they eligible to join the
Company’s pension benefit arrangements.
Non Executive Director Service Contract severance
payments
On 28 January 2016, following a General Meeting of the
Company, the Non Executive Director Service contracts noted
below were terminated with immediate effect. The Board in
place at that time approved payments in lieu of notice totalling
£99,750, equivalent to 3 months’ salary for each of the five
Non Executive Directors, with these amounts being approved
and paid before the General Meeting on 28 January 2016.
Non Executive Director service contracts during 2015
Non Executive Director fees during 2015
Date of
contract
Notice
period
Date of
termination1
2015
2016
%
increase
Nigel Moore
Lord Oxford
Dipesh Shah
13 Jul 2012
3 months 28 Jan 2016
Chairman of the Company
£157,5001
£157,5001
1 Jan 2002
3 months 28 Jan 2016
Board membership fee
£47,250
£47,250
1 Jun 2008
3 months 28 Jan 2016
Senior Independent Director
£10,500
£10,500
nil
nil
nil
nil
nil
nil
nil
Executive Director base salary
Executive Directors temporary base salary from
28 January 2016
1 On 28 January 2016, Richard Murray, Alastair Ferguson and Dipesh Shah resigned
and Nigel Moore and Lord Oxford were removed from the Board at a General
Meeting of the Company.
– Remuneration
Committee membership
– Audit
– Remuneration
Alastair Ferguson
1 Nov 2011
3 months 28 Jan 2016
Committee chairman
Richard Murray
1 Jan 2013
3 months 28 Jan 2016
– Audit
£10,500
£10,500
£10,500
£10,500
£5,250
£5,250
£5,250
£5,250
2015 salary
2016 salary % increase
2016 temporary salary
Dr Paul Davies
Cynthia Dubin
Martin Miller
Peter Dixon
£423,000
£423,000
£298,000
£298,000
£226,000
£136,0001
£226,000
£226,000
nil
nil
nil1
nil
Tom Reed
Russell Hoare
1 Martin Miller’s salary was reduced on a pro-rata basis to reflect a reduction in
contractual working days from 5 days to 3 days per week from July 2015.
£423,000
£298,000
1 The Chairman’s fee includes amounts for Chairman of the Nomination Committee
and membership of the Remuneration Committee
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67 96
97
Directors’ Remuneration Report
Annual report
Non Executive Directors Service Contracts from
28 January 2016
The Non Executive Directors and their base fees have been set
temporarily at the following amounts shown in the table below.
These temporary fees will be replaced once an independent
Remuneration Committee has been nominated and can review
and approve all of the Board’s incentive arrangements. Any
difference between the final fee levels approved by the new
Remuneration Committee and the temporary levels noted
above will be adjusted back to 28 January 2016.
Exit payments made in the year (audited)
No exit payments were made during the year.
Payments to past directors (audited)
No payments were made to past directors in the year.
Percentage change in CEO remuneration
The table below shows the percentage change in CEO
remuneration from the prior year compared to the average
percentage change in remuneration for UK employees.
The CEO’s remuneration includes base salary, taxable benefit
and annual bonus. The analysis excludes part-time employees
and is based on a consistent set of all UK employees, i.e. the
same individuals appear in the 2014 and 2015 populations.
A comparison with UK employees is used as most of the
Group’s senior management are based in the UK; all other
Group staff are employed in Ukraine and Russia which have
different economies from the UK driving their remuneration
levels and practices.
Relative importance of spend on pay
The table below show shareholder distributions (i.e. dividends
and share buybacks) and total employee pay expenditure for
the financial years ended 31 December 2014 and 31 December
2015, along with the percentage change in both.
Review of past performance
The graphs opposite show the Company’s TSR performance
compared to the performance of the FTSE All-Share and
FTSE All-Share Oil & Gas Producers Index indices over a
7-year and 10-year period. These indices have been chosen
as suitable broad comparators against which the Company’s
shareholders may judge their relative returns given that the
Company is a member of the FTSE All-Share and continue to
be part of the FTSE All-Share Oil & Gas Producers Index.
The table opposite details the Chief Executive’s ‘single figure’
remuneration over a 7-year period. An investment of £100
in the Company on 31 December 2008 was worth £15.42 at
31 December 2015 (same investment on 31 December 2008
was worth £6.79 at 31 December 2014). The calculation of
the return assumes dividends are reinvested to purchase
additional equity.
Non Executive Director fees
from 28 January 2016
Total employee pay expenditure
and shareholder distributions for 2015
Paul Ostling
Vladimir Tatarchuk
Vladimir Rusinov
2016 temporary
annualised fee
2015
£’000
2014
£’000
Year-on-year
change
£157,500
All-employee remuneration
15,361
19,193
(20.0 %)
Distributions to shareholders
–
–
–
Nil
Nil
Percentage change in CEO remuneration
CEO
All UK
employees
2015
£’000
2014
£’000
% change
2014-15
% change
2014-15
423
9
3722
8042
423
9
1402
5722
0%
0%
166%2
41%2
0%
5%1
97%2
36%
Base salary
Taxable benefits
Annual bonus
Total
1 Reflects increase in premiums. No additional benefits were provided.
2 The calculations are based on the cash amount of the 2014 and 2015 bonuses paid
during January 2016 in respect of each year.
JKX vs FTSE All-Share Index and
FTSE All-Share Oil & Gas Producers Index
JKX vs FTSE All-Share Index and
FTSE All-Share Oil & Gas Producers Index
200
175
150
125
100
75
50
25
200
175
150
125
100
75
50
25
31 Dec
2008
31 Dec
2009
31 Dec
2010
31 Dec
2011
31 Dec
2012
31 Dec
2013
31 Dec
2014
31 Dec
2015
31 Dec
2005
31 Dec
2007
31 Dec
2009
31 Dec
2011
31 Dec
2013
31 Dec
2015
JKX
FTSE All-Share Index
FTSE All-Share Oil and Gas Producers Index
JKX
FTSE All-Share Index
FTSE All-Share Oil and Gas Producers Index
Chief Executive ‘single figure’ remuneration over a 7-year period
CEO single figure of remuneration (£’000)
2009
596
2010
529
2011
519
2012
620
2013
729
2014
6332
STI award rates against maximum opportunity
64.2%
40.0%
43.3%1
33.4%
61.5%
33.1%2
LTI award rates against maximum opportunity
0%
0%
0%
0%
0%
0%
2015
865
86%
0%
1 At the request of the Remuneration Committee, half of the 2011 Annual Bonus earned was deferred into Performance Share Options at nil-cost and were subject to claw back
and performance conditions being met. One third of the deferred options granted became exercisable on 31 March 2012 and the balance of the options lapsed.
2 The amounts are restated from last year’s report to equate to the cash value of the 2014 bonus paid in January 2016 (see page 91).
Shareholder voting at the Annual General Meeting
At the Annual General Meeting held on 4 June 2014, the votes
on the Directors’ Remuneration Policy, which came into
effect on 1 January 2015, received the following votes from
shareholders:
At last year’s Annual General Meeting held on 5 June 2015, the
Directors’ Remuneration Report received the following votes
from shareholders:
Shareholder voting on the Directors’ Remuneration Policy
at the Annual General Meeting 2014
Shareholder voting on the Directors’ Remuneration Report
at the Annual General Meeting 2015
For
Against
Total number
of votes
% of
votes cast
84,771,713
80.88%
For
20,033,549
19.12%
Against
Total votes cast (for and against,
excluding withheld votes)
104,805,262
100 %
Total votes cast (for and against,
excluding withheld votes)
Total number
of votes
% of
votes cast
46,223,003
67,021,640
40.8%
59.2%
113,244,643
100 %
Votes witheld1
Total votes
(for, against and withheld)
85,133
0.08%
Votes witheld1
34,307,264
30.3%
104,890,395
Total votes
(for, against and withheld)
147,551,907
1 A withheld vote is not a vote in law and is not counted in the calculation of votes cast
1 A withheld vote is not a vote in law and is not counted in the calculation of votes cast
‘for’ and ‘against’ a resolution.
‘for’ and ‘against’ a resolution.
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67 98
99
Directors’ Remuneration Report
Annual report
Where shareholders voted against the Annual Report on
Remuneration, this was in part due to what the shareholders
considered to be excessive reward for Executive Directors
for unsatisfactory operational, financial and strategic
management. In addition shareholders considered that the
board was too large for the current circumstances of the
Company and therefore total board remuneration was too high.
The entire Board was removed/resigned on 28 January 2016
and a new Remuneration Committee is in the process of being
appointed in order to review the arrangements in place.
The Board values, and encourages, direct feedback from
shareholders.
Executive Directors’ shareholding requirements (audited)
In 2010, the Committee introduced executive share ownership
guidelines of 100% of basic salary for Executive Directors
which can be built up over a reasonable period of time from
appointment. No specific value per share was designated for
the calculation.
Unvested share awards, including shares held in connection
with compulsory bonus deferrals, are not taken into account in
applying this test. The table below shows the position at
31 December 2015, based on that day’s closing middle market
price of an ordinary share of the Company of 27.25 pence.
Since 31 December 2015, there have been no changes in the
Directors’ interests in shares owned outright.
On 28 January 2016, following a General Meeting of the
Company, the service contracts of above Executive Directors
were terminated with immediate effect. Prior to the General
Meeting, the Board in place at that time approved and made
payments of £460,800 to forfeit of all unexpired share options
(noted below and opposite) and shares deferred under the 2014
bonus arrangements for Executive Directors (see page 91).
These amounts will be included in the Directors remuneration
for 2016.
Executive Directors’ shareholding requirements (audited)
Shares
Options
Vested but
subject to
holding period/
deferral
Unvested and
subject to
performance
conditions
Owned outright
Vested but
not exercised
Shareholding
requirement
% salary/fee
Shareholding at
31 Dec 2015
% salary/fee
Requirement
met?
–
–
–
–
3,857,800
2,717,400
1,100,000
1,784,800
–
–
–
–
100%
100%
100%
100%
235%
4%
24%
21%
Yes
No
No
No
Executive Directors
Dr Paul Davies
Cynthia Dubin
Martin Miller
Peter Dixon
Non Executive Directors
Nigel Moore
Dipesh Shah
Lord Oxford
Alastair Ferguson
Richard Murray
3,663,105
40,000
202,303
175,482
29,000
10,490
94,000
–
–
Since 31 December 2015, there have been no changes in the Directors’ interests in shares owned outright.
Directors’ Share Options
No of
options at
1 Jan
2015
Options
granted
during
year
Options
exercised
during
year
Options
lapsed
during
year
No of
options
at 31 Dec
2015
Exercise
price
Market
price
Date
from which
exercisable
Expiry
date
Dr Paul Davies
(a) 17 Mar 2005
(b) 28 Mar 2012
(b) 6 Jun 2012
(c)
(c)
9 Apr 2013
9 Apr 2013
(d) 28 Mar 2014
(d) 28 Mar 2014
(e) 20 Mar 2015
Peter Dixon
(a)
(b)
(b)
(c)
(c)
(d)
(d)
(e)
17 Mar 2005
28 Mar 2012
6 Jun 2012
9 Apr 2013
9 Apr 2013
28 Mar 2014
28 Mar 2014
20 Mar 2015
Martin Miller
(a)
(b)
(b)
(c)
(c)
(d)
(d)
17 Mar 2005
28 Mar 2012
6 Jun 2012
9 Apr 2013
9 Apr 2013
28 Mar 2014
28 Mar 2014
Cynthia Dubin
(b)
(b)
(c)
(c)
(d)
(d)
(e)
28 Mar 2012
6 Jun 2012
9 Apr 2013
9 Apr 2013
28 Mar 2014
28 Mar 2014
20 Mar 2015
90,000
252,200
252,200
580,100
580,100
707,900
707,900
–
–
–
–
–
–
–
–
1,281,800
3,170,400
1,281,800
16,750
107,500
107,500
247,400
247,400
302,600
302,600
–
–
–
–
–
–
–
–
684,800
1,331,750
684,800
33,500
107,500
107,500
247,400
247,400
302,600
302,600
1,348,500
177,400
177,400
408,500
408,500
498,700
498,700
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
903,000
2,169,200
903,000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
90,000
252,200
252,200
–
–
–
–
–
–
–
–
580,100
580,100
707,900
707,900
1,281,800
594,400
3,857,800
16,750
107,500
107,500
–
–
–
–
–
–
–
–
247,400
247,400
302,600
302,600
684,800
231,750
1,784,800
33,500
107,500
107,500
–
–
–
–
–
–
–
247,400
247,400
302,600
302,600
248,500
1,100,000
177,400
177,400
–
–
–
–
–
–
–
408,500
408,500
498,700
498,700
903,000
354,800
2,717,400
£1.515
£0.000
£0.975
£0.000
£0.705
£0.000
£0.598
£0.000
£1.515
£0.000
£0.975
£0.000
£0.705
£0.000
£0.598
£0.000
£1.515
£0.000
£0.975
£0.000
£0.705
£0.000
£0.598
£0.000
£0.975
£0.000
£0.705
£0.000
£0.598
£0.000
£1.515
17 Mar 2008
17 Mar 2015
£1.578
28 Mar 2015
28 Mar 2022
£0.975
£0.705
£0.705
6 Jun 2015
6 Jun 2022
9 Apr 2016
9 Apr 2023
6 Jun 2016
6 Jun 2023
£0.598
28 Mar 2017
28 Mar 2024
£0.598
28 Mar 2017
28 Mar 2024
£0.330
20 Mar 2022
20 Mar 2025
£1.515
17 Mar 2008
17 Mar 2015
£1.578
28 Mar 2015
28 Mar 2022
£0.975
£0.705
£0.705
6 Jun 2015
6 Jun 2022
9 Apr 2016
9 Apr 2023
6 Jun 2016
6 Jun 2023
£0.598
28 Mar 2017
28 Mar 2024
£0.598
28 Mar 2017
28 Mar 2024
£0.330
20 Mar 2022
20 Mar 2025
£1.515
17 Mar 2008
17 Mar 2015
£1.578
28 Mar 2015
28 Mar 2022
£0.975
£0.705
£0.705
6 Jun 2015
6 Jun 2022
9 Apr 2016
9 Apr 2023
6 Jun 2016
6 Jun 2023
£0.598
28 Mar 2017
28 Mar 2024
£0.598
28 Mar 2017
28 Mar 2024
£1.578
28 Mar 2015
28 Mar 2022
£0.975
£0.705
£0.705
6 Jun 2015
6 Jun 2022
9 Apr 2016
9 Apr 2023
6 Jun 2016
6 Jun 2023
£0.598
28 Mar 2017
28 Mar 2024
£0.598
28 Mar 2017
28 Mar 2024
£0.330
20 Mar 2022
20 Mar 2025
(a) 2001 Share Options Scheme in respect of 2005
(b) 2010 DSOS/PSP in respect of 2012
(c) 2010 DSOS/PSP in respect of 2013
(d) 2010 DSOS/PSP in respect of 2014
(e) 2010 DSOS/PSP in respect of 2015
On 28 January 2016, all unexpired share options (noted above) were forfeited. See page 98.
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67 100
101
Directors’ report – other disclosures
This information is required to be presented by law. The
UKLA’s Disclosure & Transparency Rules (‘DTRs’) and Listing
Rules (‘LRs’) also require the Company to make certain
disclosures.
The Corporate Governance Report, the Audit Committee
Report and the Strategic report form part of this information.
Disclosures elsewhere in the Annual Report and Accounts are
cross-referenced where appropriate. Taken together, they fulfil
the combined requirements of company law, the DTRs and LRs.
Legal form
JKX Oil & Gas plc is a company incorporated in England
& Wales, with company number 3050645. The principal
activities of the Group are oil and gas exploration, appraisal,
development and production. It conducts very limited business
activities on its own account, and trades principally through its
subsidiary undertakings in various jurisdictions.
Annual General Meeting
Notice of the 2016 AGM and matters of Ordinary Business and
those proposed as Special Business, together with explanatory
notes, will be sent to shareholders at least 20 working days
before the meeting.
At the AGM, individual shareholders are given the opportunity
to put questions to the Chairman and to other members of
the Board. The voting results are announced via the London
Stock Exchange as soon as practicable after the meeting.
The announcement is also made on the Company’s corporate
website.
Political and charitable contributions
In line with Group policy, the Group did not make any political
contributions during the year (2014: nil). The Group made
charitable contributions of $240,242 (2014: $353,426) for local
educational, health and village infrastructure initiatives in
Ukraine and Russia, details of which can be found on page 66.
Disabled employees
The Group gives full consideration to applications for
employment from disabled persons where the requirements
of the job can be adequately fulfilled by such persons.
Should an existing employee become disabled, it is in the
Group’s policy wherever practicable to provide continuing
employment under normal terms and conditions and to
provide training and career development and promotion.
Greenhouse gas emissions
The disclosures concerning greenhouse gas emissions
required by law are included in the Corporate Social
Responsibility review on pages 62 to 63.
Policy on derivatives and financial instruments
The Group’s objectives and policies on financial risk
management, and information on the Group’s exposures to
foreign exchange, commodity price and liquidity risks can
be found on pages 46 to 49 and in Note 15 to the financial
statements.
Shares in JKX Oil & Gas plc
Appointment and replacement of Directors
Directors and their interests 1
Details of movements in share capital during the year are set
out in Note 17 to the financial statements. The Company has
one class of Ordinary Share which carries no right to fixed
income. Each share carries the right to one vote at General
Meetings of the Company. There are no significant restrictions
on the transfer of securities.
Treasury shares
In 2015, the Company did not purchase in the market any of its
own ordinary 10p shares, to be held as treasury shares. At
31 December 2015, 402,771 (2014: 402,771) shares continued to
be held as treasury shares representing 0.23% (2014: 0.23%)
of the shares then in issue.
Restrictions on voting
No member shall, unless the Directors otherwise determine,
be entitled in respect of any share held by him/her to vote
either personally or by proxy at a shareholders’ meeting or to
exercise any other right conferred by membership in relation
to shareholders’ meetings if any call or other sum presently
payable by him/her to the Company in respect of that share
remains unpaid. In addition, no member shall be entitled to vote
if he/she has been served with a notice after failing to provide
the Company with information concerning interests in those
shares required to be provided under the Companies Act.
Amendment of Articles of Association
Any amendments to the Articles may be made in accordance
with the provisions of the Companies Act by way of special
resolution.
Authority to allot shares
At the AGM on 3 June 2015, authority was given to the
Directors to allot new ordinary shares up to a nominal value of:
(a) £5,724,104, representing approximately one third (33.33%)
of the Company’s existing issued share capital (excluding
shares held in treasury); and
(b) £11,448,209, representing approximately two thirds
(66.67%) of the Company’s existing issued share capital,
less the nominal amount of any shares issued under part
(a), in connection with a pre-emptive offer by way of a rights
issue to shareholders.
This authority expires at the conclusion of the 2016 AGM.
Directors
The names and biographies of the Directors who held office
as at the date of this Annual Report are set out on pages 70
and 71.
Directors who held office throughout 2015 and to 28 January
2016, and the changes made to the Board at that date are set
out on the opposite page.
The number of Directors shall not be less than two nor more
than ten.
Directors may be appointed to the Board by shareholders by
ordinary resolution or by the Board. A Director appointed by
the Board holds office only until the next following AGM and
is then eligible for election by shareholders but is not taken
into account in determining the Directors or the number of
Directors, who are to retire by rotation at that meeting.
The Directors in office at the year end and their interests at the
beginning and end of the year in the shares of the Company, all
beneficially held, were as shown below.
Paul Ostling, Tom Reed and Russell Hoare were appointed
to the Board on 28 January 2016 and have no interest in the
shares of the Company.
Name
Appointed
Position
Paul Ostling
Tom Reed
Russell Hoare
Vladimir Tatarchuk
Vladimir Rusinov
Nigel Moore
Dr Paul Davies
Cynthia Dubin
Peter Dixon
Martin Miller
Lord Oxford
Alastair Ferguson
Richard Murray
Dipesh Shah
Appointed 28 January 2016
Appointed 28 January 2016
Appointed 28 January 2016
Appointed 28 January 2016
Appointed 28 January 2016
Removed/Resigned
Removed 28 January 2016
Removed 28 January 2016
Resigned 28 January 2016
Removed 28 January 2016
Removed 28 January 2016
Removed 28 January 2016
Resigned 28 January 2016
Resigned 28 January 2016
Resigned 28 January 2016
Non Executive Chairman
Chief Executive Officer
Chief Financial Officer
Non Executive Director
Non Executive Director
Non Executive Chairman
Chief Executive Officer
Finance Director
Commercial Director
Technical Director
Non Executive Director
Non Executive Director
Non Executive Director
Non Executive Director
1
Directors and their interests
Director sharholdings
Nigel Moore
Dr Paul Davies1
Cynthia Dubin
Peter Dixon
Martin Miller
Dipesh Shah2
Lord Oxford
Alastair Ferguson
Richard Murray
1 January 2015
Ordinary Share
Number
31 December 2015
Ordinary Share
Number
29,000
3,663,105
40,000
175,482
202,303
10,490
94,000
–
–
29,000
3,663,105
40,000
175,482
202,303
10,490
94,000
–
–
1 Dr Paul Davies’ interest is partly indirect with 1,975,000 ordinary shares held in trust, the beneficiary of
which is the family of Dr Paul Davies. Of the remaining ordinary shares 1,000 are held by Mr D Davies, the
son of Dr Paul Davies with the balance held directly by Dr Paul Davies.
2 Dipesh Shah’s interest is held by members of his immediate family.
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Directors’ report – other disclosures
Vladimir Tatarchuk and Vladimir Rusinov were appointed to the
Board on 28 January 2016 and are deemed to have a beneficial
interest in 34,288,253 ordinary shares and Convertible Bonds
with principal amount of $3.4m, which are held by Proxima
Capital Group. If fully converted, the convertible bonds held by
Proxima would result in the issue of a maximum of 2,819,077,
representing 1.64% of the issued share capital, based on
the conversion price of 76.29 pence per ordinary share and a
US$/GBP exchange rate of 1.5809. Further information on the
terms and conditions of the Convertible Bonds is disclosed in
Notes13 and 14 to the consolidated financial statements.
There were no changes to the shareholders of the continuing
Directors between the end of the financial year and the date of
this Annual Report.
Details of Directors’ remuneration and share options are
shown in the Remuneration Report on pages 84 to 99. No
Director had a material interest in any significant contract,
other than a service contract or contract for services, with the
Company or any of its subsidiary companies at any time during
the year.
The share capital structure is listed in Note 17 to the financial
statements and the significant holdings are listed below.
Directors’ indemnities
As permitted by the Articles of Association, the Directors
have the benefit of an indemnity which is a qualifying third
party indemnity provision as defined by Section 234 of the
Companies Act 2006. The indemnity was in force throughout
the last financial year and is currently in force. The Company
also purchased and maintained throughout the financial year
Directors’ and Officers’ liability insurance in respect of itself
and its Directors.
Change of control (significant contracts)
The Company is not party to any significant agreements
that take effect, alter or terminate upon a change of control
following a takeover except for the $40m convertible bond dated
19 February 2013, which could become repayable following a
relevant change of control. There are no agreements between
the Company and any Director or its employees that would
provide compensation for loss of office or employment resulting
from a change of control following a takeover bid, except that
provisions of the Company’s share schemes may cause options
and awards granted under such schemes to vest in those
circumstances. All of the Company’s share schemes contain
provisions relating to a change of control. Outstanding options
and awards would normally vest and become exercisable for
a limited period of time upon a change of control following a
takeover, reconstruction or winding up of the Company (not
being an internal reorganisation), subject at that time to rules
concerning the satisfaction of any performance conditions.
There are a number of other agreements that take effect, alter
or terminate upon a change of control of the Company such as
commercial contracts, finance agreements and property lease
arrangements. None of these is considered to be significant in
terms of their likely impact on the business of the Group as a
whole.
Events after the reporting date
Events after the reporting date are discussed in Note 37 to the
financial statements.
Substantial shareholders 2
At 31 December 2015 and at 4 March 2016, the Company had
received notification from the following institutions of interests
in excess of 3% of the total number of voting rights of the
Company as shown in the table below.
Other disclosures
Certain information that is required to be included in the
Directors’ Report can be found elsewhere in this document
as referred to below, each of which is, to the extent not in this
report, incorporated by reference.
Dividends
No dividends has been paid or proposed for the year ended
31 December 2015 and the Board will not be recommending
the payment of a dividend at the forthcoming AGM.
Going concern
The going concern statement can be found on page 78.
Future developments within the Group
The Strategic report starting on page 2 contains details of
likely future developments within the Group.
2
Substantial shareholders
Eclairs Group Limited
Proxima Capital Group
Neptune Invest & Finance Corp
Glengary Overseas Ltd
Interneft Ltd
31 December 2015
Number of shares
31 December 2015
% of total voting rights
4 March 2016
Number of shares
4 March 2016
% of total voting rights
47,287,027
34,288,253
21,534,387
19,656,344
11,368,460
27.47%
19.92%
12.51%
11.42%
6.60%
47,287,027
34,288,253
22,881,056
19,656,344
11,368,460
27.47%
19.92%
12.71%
11.42%
6.60%
103
Loss
Details of the Company’s loss for the year ended
31 December 2015 can be found on page 112.
Capitalised interest
See Group financial statements Note 22.
Long term incentive schemes
See pages 84 to 99 of the Directors’ Remuneration Report.
Directors’ responsibilities
Each of the Directors, whose names and functions are
listed on pages 70 and 71, confirm that, to the best of their
knowledge:
• the Group financial statements, which have been prepared
in accordance with IFRSs as adopted by the EU, give a true
and fair view of the assets, liabilities, financial position and
profit of the Group;
• the Directors’ report contained in the Annual Report
includes a fair review of the development and performance
of the business and the position of the Group, together with
a description of the principal risks and uncertainties that
it faces;
Directors’ responsibilities statement
The Directors are responsible for preparing the Annual Report,
the Directors’ Remuneration Report and the financial statements
in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law the Directors
have prepared the Group financial statements in accordance with
International Financial Reporting Standards (IFRSs) as adopted by
the European Union, and the parent company financial statements
in accordance with United Kingdom Generally Accepted
Accounting Practice (United Kingdom Accounting Standards and
applicable law). Under company law the Directors must not
approve the financial statements unless they are satisfied that
they give a true and fair view of the state of affairs of the Group and
the Company and of the profit or loss of the Group for that period.
In preparing these financial statements, the Directors are
required to:
• select suitable accounting policies and then apply them
consistently;
• make judgements and accounting estimates that are reasonable
and prudent;
• state whether IFRSs as adopted by the European Union and
applicable UK Accounting Standards have been followed,
subject to any material departures disclosed and explained in
the Group and parent company financial statements
respectively; and
• prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business.
• the annual report and financial statements, taken as a
whole is fair, balanced and understandable and provides
the information necessary for shareholders to assess the
company’s performance, business model and strategy;
• so far as the Director is aware, there is no relevant audit
information of which the Company’s auditors are unaware;
and
• he or she has taken all the steps that he or she ought to
have taken as a Director in order to make himself or herself
aware of any relevant audit information and to establish
that the Company’s auditors are aware of that information.
By order of the Board
Capita Company Secretarial Services Limited
Company Secretary
18 March 2016
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company’s
transactions and disclose with reasonable accuracy at any time
the financial position of the Company and the Group and enable
them to ensure that the financial statements and the
Remuneration Report comply with the Companies Act 2006 and, as
regards the Group financial statements, Article 4 of the IAS
Regulation. They are also responsible for safeguarding the assets
of the Company and the Group and hence for taking reasonable
steps for the prevention and detection of fraud and other
irregularities.
The Directors are responsible for the maintenance and integrity of
the Company’s website. Legislation in the United Kingdom
governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
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JKX Oil & Gas plc Annual Report 2015
Financial statements
105
JKX Oil & Gas plc Annual Report 2015
Strategic report
2-67
Governance
68-103
Financial statements
104-169
“It was an honour to have been appointed
by shareholders on 28 January 2016. I look
forward to working with the new Board
and JKX staff to enhance performance and
restore value to the Company.”
Russell Hoare Chief Financial Officer
Financial statements
Independent auditors’ report –
Group
Group financial statements
Independent auditors’ report –
Company
106
112
155
Company financial statements
157
106
107
Independent Auditors’ Report to the members of JKX Oil & Gas plc
Report on the Group financial
statements
Our opinion
In our opinion, JKX Oil & Gas plc’s group financial statements
(the “financial statements”):
• give a true and fair view of the state of the group’s affairs as
at 31 December 2015 and of its loss and cash flows for the
year then ended;
• have been properly prepared in accordance with
International Financial Reporting Standards (“IFRSs”) as
adopted by the European Union; and
• have been prepared in accordance with the requirements of
the Companies Act 2006 and Article 4 of the IAS Regulation.
Emphasis of matter – Going concern
In forming our opinion on the financial statements, which is not
modified, we have considered the adequacy of the disclosure
made in note 2 to the financial statements concerning the
Group’s ability to continue as a going concern. A number of
potential conditions exist that may impact this assumption:
(i) gas and/or oil net realisations remain at current levels
for the foreseeable future or deteriorate materially, (ii) the
full $30.1 million obligation pursuant to the $40 million
Convertible Bond becomes payable in February 2017, (iii) the
Group becomes liable for additional Rental Fees in Ukraine
as a result of unfavourable outcomes in one or more of the
ongoing court proceedings, and (iv) the Group’s Ukrainian
subsoil permits are suspended by the State Geology and
Mineral Resources Survey of Ukraine. These conditions, along
with the other matters explained in note 2 to the financial
statements, indicate the existence of material uncertainties
which may cast significant doubt about the group’s ability to
continue as a going concern. The financial statements do not
include the adjustments that would result if the group was
unable to continue as a going concern.
What we have audited
The financial statements, included within the Annual Report,
comprise:
• the Consolidated income statement and Consolidated
statement of comprehensive income for the year ended
31 December 2015;
• the Consolidated statement of financial position as at
31 December 2015;
• the Consolidated statement of changes in equity for the year
then ended;
• the Consolidated statement of cash flows for the year then
ended; and
• the notes to the financial statements, which include a
summary of significant accounting policies and other
explanatory information.
Certain required disclosures have been presented elsewhere
in the Annual Report, rather than in the notes to the financial
statements. These are cross-referenced from the financial
statements and are identified as audited.
The financial reporting framework that has been applied in the
preparation of the financial statements is IFRSs as adopted by
the European Union, and applicable law.
Our audit approach
Overview
• Overall group materiality: $1.7m which represents 5% of
five year average profit before tax adjusted for exceptional
items, as defined in the accounting policies in Note 3.
• The group comprises 38 separate reporting units
• We identified three significant components, which were
selected due to their size and risk characteristics.
This enabled us to obtain coverage over 99% of Group
consolidated revenue. We visited the components in Russia
and Ukraine as part of our audit.
• Specific audit procedures were performed on certain
balances and transactions at a further two reporting units.
• Russia, Ukraine and Hungary – carrying value of oil and gas
assets.
• Going concern.
• Taxation in Ukraine - production taxes.
The scope of our audit and our areas of focus
We conducted our audit in accordance with International
Standards on Auditing (UK and Ireland) (‘ISAs (UK & Ireland)’).
We designed our audit by determining materiality and
assessing the risks of material misstatement in the financial
statements. In particular, we looked at where the directors
made subjective judgements, for example in respect of
significant accounting estimates that involved making
assumptions and considering future events that are inherently
uncertain. As in all of our audits we also addressed the
risk of management override of internal controls, including
evaluating whether there was evidence of bias by the directors
that represented a risk of material misstatement due to fraud.
The risks of material misstatement that had the greatest
effect on our audit, including the allocation of our resources
and effort, are identified as ‘areas of focus’ in the table below.
We have also set out how we tailored our audit to address
these specific areas in order to provide an opinion on the
financial statements as a whole, and any comments we make
on the results of our procedures should be read in this context.
This is not a complete list of all risks identified by our audit.
Area of focus
How our audit addressed the area of focus
Russia, Ukraine and Hungary – carrying value
of oil and gas asset
Refer to page 81 (Audit Committee Report), page 123
(critical accounting estimates and assumptions) and
page 127 (Property, plant and equipment).
Oil and gas assets in Russia, Ukraine and Hungary total
$192.4m after the recognition of a $51.1m impairment
charge. These represent 98.9% of the Group’s total
Property, plant and equipment. As well as the material
nature of the balance, we focused on this area due to the
further decline in oil and gas prices in 2015. In addition in
Ukraine, the continuing poor political and economic
situation has increased the yield on sovereign bonds,
which is a proxy for risk free rate.
These difficulties resulted in an impairment loss of
$49.5m being booked by management on its Novo-
Nikolaevskoye Cash Generating Unit (“CGU”) and a
further $1.5m loss on its Turkeve CGU in Hungary. In
arriving at these impairment losses, and supporting the
carrying value of other oil and gas assets, there are a
number of complex and subjective judgements made by
management including estimates of future commodity
prices, production levels
and capex requirements.
We evaluated the directors’ discounted cash flow forecasts which support the
carrying value of the Russia, Ukraine and Hungary oil and gas assets.
After considering internal and external factors, as well as preparing a ceiling
test model, management concluded there were no impairment triggers in
respect of the Russian CGU.
We reviewed the factors in IAS 36 and reviewed the ceiling test model. One key
assumption in the Russian cash flow forecast is the predicted change in the
regulated gas price, which is set by the Russian Government. We reviewed the
Ministry of Economics guidance, and considered wider macro-economic
factors in Russia in determining that management’s gas pricing assumptions
are within an expected range, and in the short term do not differ substantially
from forecast inflation rates in Russia.
Management’s production forecasts, another key assumption, were
reconciled to the 31 December 2014 independent reserves report prepared by
DeGolyer and MacNaughton (‘D&M’) adjusted for 2015 production and changes
to internal modelling. Forecast production remains broadly in line with the
D&M model.
We challenged management on the technical feasibility of planned workovers
which are predicted to increase production from 2016, and we consider these
assumptions to be reasonable. Other capital expenditure assumptions were
assessed and found to be in accordance with our expectations. We also
considered any potential impact from the current sanctions regime in place.
The current regime does not impact the Group’s Russian operations. We were
therefore able to conclude no impairment triggers exist in respect of the
Russian CGU.
In Ukraine, the key assumptions in management’s cash flow forecast relate to
future sales prices and production. Management’s forecast oil and gas prices
were benchmarked against a consensus forecast from leading analysts, and
we also considered actual realised prices in 2015 when compared with the
Brent price and European gas prices in determining management’s
assumptions are within an expected range.
Consistent with our approach to Russian assets, we reconciled forecast
production to the D&M report, considering changes arising from 2015
production and internal modelling. The forecast was deemed reasonable.
We discussed with management the recent suspension of the Group’s subsoil
use permits, along with other independent producers in Ukraine. Management
are still in the process of addressing concerns raised by the State Geology
Service. The assumption that the permits will be retained is key to the
impairment assessment, and management have acknowledged there remains
some uncertainty regarding this in their Going Concern disclosure in Note 2.
In Hungary, the key assumptions in the cash flow forecast relate to future
sales prices and production forecasts. As with Ukraine, we benchmarked
management’s forecast oil and gas prices against a consensus forecast from
leading analysts. We found management’s forecasts to be within a reasonable
range. Production forecasts were based on management’s internal modelling,
so we considered consistency of these estimates with prior years.
As no reserves are recognised in respect of Hungarian oil and gas assets,
management have applied a risk weighting to the discounted cash flow model.
This weighting is judgmental, however we note based on materiality a change in
the risk weighting does not materially impact the analysis.
For Russia, Ukraine and Hungary we assessed management’s discount rates,
based on each CGU’s weighted average cost of capital, and found these to be
within an acceptable range.
We also considered the adequacy of management’s disclosure of key
judgements and sensitivities in relation to their impairment assessment in
Note 5. These were deemed to be in line with the requirements of IFRSs.
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Area of focus
How our audit addressed the area of focus
Going concern
Refer to page 81 (Audit Committee Report) and page 116
(Basis of Preparation).
The Group has a potential obligation of $30.1m which
may become payable in February 2017 when convertible
bondholders have the option to put the remaining bonds
outstanding. During 2015, the political and economic
situation in Ukraine continued to deteriorate, which
impacted the Group’s profitability. This included the
introduction of an emergency tax on gas production and
a continuation of currency restrictions. While there have
been some recent positive developments, including a
reduction in the production tax rate on gas from 55% to
29% from 1 January 2016, currency restrictions remain
in place and the political and economic situation remains
unpredictable.
As discussed in the Area of Focus below, the Group is
also subject to a number of challenges regarding
production taxes (‘rental fees’) which could become
payable in the foreseeable future if the Group is
unsuccessful in the ongoing legal proceedings.
The Group is also contending with a deterioration in
international oil and gas markets which has impacted oil
and gas realisations in 2015, as well as a recent
suspension of its subsoil use permits in Ukraine pending
rectification of several technical breaches of licence
conditions. In arriving at their conclusion that the Group
can continue as a going concern, the directors have
made a number of judgmental assumptions about future
cash flows.
Taxation in Ukraine – production taxes
Refer to page 82 (Audit Committee Report) and page 147
(Taxation).
The Group is subject to a number of challenges by the tax
authorities in Ukraine concerning rental fees for periods
from January to March 2007, April to December 2010 and
January to December 2015. The total assessments as
well as potential interest and penalties for these periods
are disclosed in Note 27 and total $41m. The Group has
recognised a $10.9m provision in the Annual Report in
respect of the 2010 dispute. No provision has been
recorded in respect of the 2007 and 2015 disputes on the
basis management believe the risk of a cash outflow is
not probable. However, the risk has been assessed as
possible and thus a contingent liability has been
disclosed. We have focused on this area due to the
potential material impact on the financial statements and
because the decision on whether to recognise a provision
in the financial statements is judgmental.
We obtained management’s cash flow forecast which supports their use of the
going concern basis of accounting. We tested the integrity of this model,
including mathematical accuracy, and reviewed key assumptions such as
forecast sales revenue and operating costs for consistency with impairment
models (discussed above). Any differences were investigated.
The key uncertainty in management’s going concern assessment concerns the
ability of the Group to meet its expected $30.1m obligation in February 2017 in
respect of outstanding convertible bonds which can be put on this date.
Management are considering a range of options to mitigate this risk.
Another key assumption is in relation to the ongoing disputes with the Ukraine
tax authorities regarding non-payment of oil and gas rental fees (discussed
below). Management have assumed no cash outflow in respect of these
disputes and conversely no cash inflow is assumed from management’s claim
against the Ukraine Government under the Energy Charter Treaty and bilateral
investment treaties. This is a key judgment, and we sensitised the cash flow
forecast to determine the impact if one or more of the disputed amounts
became payable.
We have challenged management on the likelihood of certain other downside
sensitivities. These include continuing low oil and gas realisations, further
deterioration in oil and gas realisations and reductions in forecast production
due to well integrity issues.
From our work performed, it is clear there are material uncertainties, which
if realised, may affect the Group’s ability to continue as a going concern, with
the outcome over the next 18 months dependent on a number of external
factors outside the Group’s control. We have therefore considered the
adequacy of management’s disclosure of material uncertainties, included in
Note 2. We concluded these are sufficient to inform the users of the financial
statements about the risks facing the Group.
An Emphasis of Matter paragraph is included in our opinion to highlight these
uncertainties. Our conclusion on going concern is below.
We updated our understanding of events that have occurred during 2015 in
relation to the ongoing disputes with the Ukraine tax authorities, as well as the
international arbitration. This included discussions with the Group’s solicitors
and legal experts in Ukraine.
The Group received an Interim Award from the International Arbitration
Tribunal in July 2015 directing Ukraine not to collect rental fees above the level
of 28%, to remain in effect until the main hearing in July 2016. From our
discussions with the Group’s solicitors and review of the key documents in the
arbitration case, we consider the Group has a reasonable chance of success in
the main arbitration hearing in July 2016. If the tribunal rules in favour of the
Group, this will require enforcement in the Ukrainian courts, however we
understand there is recourse under international law should Ukraine not
accept the decisions of the tribunal.
We therefore assessed the likelihood of cash outflows in relation to the 2007,
2010 and 2015 disputes both on their own legal merits and also in the context of
the international arbitration.
We concur with management that the likelihood of a cash outflow in relation to
the 2007 and 2015 disputes is possible, but not probable, and therefore
disclosure of the contingent liabilities is sufficient. In relation to the 2010
dispute, having lost the most recent case in the High Administrative Court in
Ukraine, we consider the recognition of a provision to be appropriate.
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed
enough work to be able to give an opinion on the financial
statements as a whole, taking into account the geographic
structure of the group, the accounting processes and controls,
and the industry in which the group operates.
The Group is structured along four operating segments being
the Ukraine, Russia, Rest of World and the UK as set out in
Note 4. The Group financial statements are a consolidation
of 38 reporting units, comprising the Group’s operating
businesses and centralised functions within these segments.
In establishing the overall approach to the Group audit, we
determined the type of work that needed to be performed at
the reporting units by us, as the Group engagement team, or
component auditors from other PwC network firms operating
under our instruction. Where the work was performed by
component auditors, we determined the level of involvement
we needed to have in the audit work at those reporting
units to be able to conclude whether sufficient appropriate
audit evidence had been obtained as a basis for our opinion on
the Group financial statements as a whole.
Accordingly, of the Group’s 38 reporting units, we identified
three which, in our view, required an audit of their complete
financial information, either due to their size or their risk
characteristics. Specific audit procedures on certain balances
and transactions were performed at a further two reporting
units. Because the Group includes a number of relatively small
reporting units, this gave us coverage of 99% of consolidated
revenue. This, together with additional procedures performed
at the Group level, gave us the evidence we needed for our
opinion on the Group financial statements as a whole.
Due to the analysis being prepared by management at Group
level, the Group audit team performed the required audit
procedures over impairment of oil and gas assets and going
concern.
We visited both of JKX Oil & Gas plc’s main operating locations
in 2015, being Ukraine and Russia. This included meeting with
local management and component auditors, as well as visiting
JKX’s operations. This assisted with addressing significant
audit risks including impairment of oil and gas assets and
also enabled us to exercise oversight over the component
auditors. In addition we attended the closing meetings, via
teleconference, for both the Ukraine and Russian operations.
Materiality
The scope of our audit was influenced by our application
of materiality. We set certain quantitative thresholds for
materiality. These, together with qualitative considerations,
helped us to determine the scope of our audit and the nature,
timing and extent of our audit procedures on the individual
financial statement line items and disclosures and in
evaluating the effect of misstatements, both individually and
on the financial statements as a whole.
Based on our professional judgement, we determined
materiality for the financial statements as a whole as shown in
the table below.
We agreed with the Audit Committee that we would report to
them misstatements identified during our audit above $85,000
(2014: $111,000) as well as misstatements below that amount
that, in our view, warranted reporting for qualitative reasons.
Going concern
Under the Listing Rules we are required to review the
directors’ statement, set out on page 78, in relation to going
concern. We have nothing to report having performed our
review.
Under ISAs (UK & Ireland) we are required to report to you
if we have anything material to add or to draw attention to
in relation to the directors’ statement about whether they
considered it appropriate to adopt the going concern basis in
preparing the financial statements and their identification of
any material uncertainties. We have nothing material to add
or to draw attention to other than the material uncertainty we
have described in the emphasis of matter paragraph above.
As noted in the directors’ statement, the directors have
concluded that it is appropriate to adopt the going concern
basis in preparing the financial statements. The going concern
basis presumes that the group has adequate resources to
remain in operation, and that the directors intend it to do so,
for at least one year from the date the financial statements
were signed. As part of our audit we have concluded that
the directors’ use of the going concern basis is appropriate,
although because of the factors outlined in the Emphasis
of matter - Going concern above, a number of material
uncertainties exist which may cast significant doubt about
the use of the going concern assumption. However, because
not all future events or conditions can be predicted, these
statements are not a guarantee as to the group’s ability to
continue as a going concern.
Materiality
Overall group materiality
How we determined it
Rationale for benchmark applied
$1.7m (2014: $2.2m).
5% of five year average profit before tax adjusted for exceptional items as defined in the
accounting policies in Note 3.
We did this to take account of the volatility that has impacted JKX Oil & Gas plc’s results
and the nature of the exceptional items.
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Other required reporting
Consistency of other information
Companies Act 2006 opinion
In our opinion, the information given in the Strategic Report
and the Directors’ Report for the financial year for which
the financial statements are prepared is consistent with the
financial statements.
ISAs (UK & Ireland) reporting
Under ISAs (UK & Ireland) we are required to report to you if,
in our opinion:
• information in the Annual Report is:
We have no exceptions to report.
– materially inconsistent with the information in the audited financial statements; or
– apparently materially incorrect based on, or materially inconsistent with, our knowledge of the
group acquired in the course of performing our audit; or
– otherwise misleading.
• the statement given by the directors on page 103, in accordance with provision C.1.1 of the
We have no exceptions to report.
UK Corporate Governance Code (the ‘Code’), that they consider the Annual Report taken as a whole to
be fair, balanced and understandable and provides the information necessary for members to assess
the group’s position and performance, business model and strategy is materially inconsistent with our
knowledge of the group acquired in the course of performing our audit.
• the section of the Annual Report on page 79 to 83, as required by provision C.3.8 of the Code, describing
the work of the Audit Committee does not appropriately address matters communicated by us to the
Audit Committee.
We have no exceptions to report.
The directors’ assessment of the prospects of the group
and of the principal risks that would threaten the solvency
or liquidity of the group
Under ISAs (UK & Ireland) we are required to report to you
if we have anything material to add or to draw attention to in
relation to:
• the directors’ confirmation on page 43 of the Annual Report, in accordance with provision C.2.1 of the
Code, that they have carried out a robust assessment of the principal risks facing the group, including
those that would threaten its business model, future performance, solvency or liquidity.
We have nothing material to add
or to draw attention to.
• the disclosures in the Annual Report that describe those risks and explain how they are being managed
or mitigated.
• the directors’ explanation on page 52 and 53 of the Annual Report, in accordance with provision C.2.2
of the Code, as to how they have assessed the prospects of the group, over what period they have done
so and why they consider that period to be appropriate, and their statement as to whether they have a
reasonable expectation that the group will be able to continue in operation and meet its liabilities as
they fall due over the period of their assessment, including any related disclosures drawing attention to
any necessary qualifications or assumptions.
We have nothing material to add
or to draw attention to.
Refer to our Emphasis of Matter -
Going Concern above. We have
nothing else material to add or to
draw attention to.
Under the Listing Rules we are required to review the directors’ statement that they have carried out a robust assessment of the principal risks
facing the group and the directors’ statement in relation to the longer-term viability of the group. Our review was substantially less in scope
than an audit and only consisted of making inquiries and considering the directors’ process supporting their statements; checking that the
statements are in alignment with the relevant provisions of the Code; and considering whether the statements are consistent with the
knowledge acquired by us in the course of performing our audit. We have nothing to report having performed our review.
Adequacy of information and explanations received
Under the Companies Act 2006 we are required to report to
you if, in our opinion, we have not received all the information
and explanations we require for our audit. We have no
exceptions to report arising from this responsibility.
We test and examine information, using sampling and other
auditing techniques, to the extent we consider necessary to
provide a reasonable basis for us to draw conclusions. We
obtain audit evidence through testing the effectiveness of
controls, substantive procedures or a combination of both.
Directors’ remuneration
Under the Companies Act 2006 we are required to report
to you if, in our opinion, certain disclosures of directors’
remuneration specified by law are not made. We have no
exceptions to report arising from this responsibility.
Corporate governance statement
Under the Listing Rules we are required to review the part of
the Corporate Governance Statement relating to ten further
provisions of the Code. We have nothing to report having
performed our review.
Responsibilities for the financial
statements and the audit
In addition, we read all the financial and non-financial
information in the Annual Report to identify material
inconsistencies with the audited financial statements and to
identify any information that is apparently materially incorrect
based on, or materially inconsistent with, the knowledge
acquired by us in the course of performing the audit. If we
become aware of any apparent material misstatements or
inconsistencies we consider the implications for our report.
Other matter
We have reported separately on the company financial
statements of JKX Oil & Gas plc for the year ended
31 December 2015. That report includes an emphasis of
matter.
Our responsibilities and those of the directors
As explained more fully in the Directors’ Responsibilities
Statement set out on page 103, the directors are responsible
for the preparation of the financial statements and for being
satisfied that they give a true and fair view.
Alison Baker (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
18 March 2016
Our responsibility is to audit and express an opinion on the
financial statements in accordance with applicable law and
ISAs (UK & Ireland). Those standards require us to comply
with the Auditing Practices Board’s Ethical Standards for
Auditors.
This report, including the opinions, has been prepared for
and only for the company’s members as a body in accordance
with Chapter 3 of Part 16 of the Companies Act 2006 and for
no other purpose. We do not, in giving these opinions, accept
or assume responsibility for any other purpose or to any other
person to whom this report is shown or into whose hands it
may come save where expressly agreed by our prior consent
in writing.
What an audit of financial statements involves
An audit involves obtaining evidence about the amounts and
disclosures in the financial statements sufficient to give
reasonable assurance that the financial statements are free
from material misstatement, whether caused by fraud or
error. This includes an assessment of:
• whether the accounting policies are appropriate to the
group’s circumstances and have been consistently applied
and adequately disclosed;
• the reasonableness of significant accounting estimates
made by the directors; and
• the overall presentation of the financial statements.
We primarily focus our work in these areas by assessing the
directors’ judgements against available evidence, forming
our own judgements, and evaluating the disclosures in the
financial statements.
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67 112
113
Group financial statements
Consolidated income statement
for the year ended 31 December 2015
Revenue
Cost of sales
Exceptional item – production based taxes
Exceptional item – provision for impairment of oil and gas assets
Exceptional item – well control operations
Other production based taxes
Other cost of sales
Total cost of sales
Gross loss
Exceptional item – legal costs
Administrative expenses
Loss on foreign exchange
(Loss)/profit from operations before exceptional items
Loss from operations after exceptional items
Finance income
Finance costs
Fair value movement on derivative liability
Net result arising from business combinations
Loss before tax
Taxation – current
Taxation – deferred
– before the exceptional items
– on the exceptional items
Total taxation
Loss for the year attributable to equity shareholders of the parent company
Basic loss per 10p ordinary share (in cents)
– before exceptional items
– after exceptional items
Diluted loss per 10p ordinary share (in cents)
– before exceptional items
– after exceptional items
Consolidated statement of comprehensive income
for the year ended 31 December 2015
Loss for the year
Comprehensive income to be reclassified to profit or loss in subsequent periods when specific
conditions are met
Currency translation differences
Other comprehensive loss for the year, net of tax
Total comprehensive loss attributable to:
Equity shareholders of the parent
Consolidated statement of financial position
as at 31 December 2015
ASSETS
Non-current assets
Property, plant and equipment
Intangible assets
Other receivable
Deferred tax assets
Current assets
Inventories
Trade and other receivables
Restricted cash
Cash and cash equivalents
Held-to-maturity financial investments
Total assets
LIABILITIES
Current liabilities
Trade and other payables
Borrowings
Provisions
Non-current liabilities
Provisions
Other payables
Borrowings
Derivatives
Deferred tax liabilities
Total liabilities
Net assets
EQUITY
Share capital
Share premium
Other reserves
Retained earnings
Total equity
Note
5(a)
5(b)
6
28
8
9
10
10
11
12
13
19
19
13
14
28
2015
$000
2014
$000
194,649
292,474
7,812
3,534
15,603
7,932
3,966
21,048
221,598
325,420
3,689
11,695
312
25,943
–
41,639
263,237
(18,977)
(10,856)
(10,854)
(40,687)
(4,135)
(3,534)
(23,494)
(2,171)
(14,950)
(48,284)
(88,971)
4,124
10,018
559
25,384
2,700
42,785
368,205
(16,225)
(5,590)
–
(21,815)
(3,988)
(3,966)
(30,837)
(1,037)
(25,214)
(65,042)
(86,857)
174,266
281,348
17
26,666
97,476
26,666
97,476
18
(179,545)
(153,268)
229,669
174,266
310,474
281,348
These financial statements on pages 112 to 154 were approved by the Board of Directors on 18 March 2016 and signed on its behalf by:
Note
4
19
5
5(a)
20
20
23
21
22
14
35
27
27
27
27
27
29
29
29
29
2015
$000
2014
$000
88,535
146,206
(10,854)
(51,055)
–
(26,255)
(50,517)
–
(69,062)
(3,471)
(45,519)
(63,847)
(138,681)
(181,899)
(50,146)
(2,988)
(17,525)
(4,919)
(10,681)
(75,578)
1,289
(6,500)
(1,921)
–
(82,710)
(4,827)
(3,132)
9,206
1,247
(81,463)
(14.97)
(47.32)
(14.97)
(47.32)
(35,693)
–
(19,536)
(5,673)
11,631
(60,902)
1,094
(3,197)
9,072
222
(53,711)
(9,511)
(31,270)
14,961
(25,820)
(79,531)
(12.76)
(46.21)
(12.76)
(46.21)
2015
$000
2014
$000
(81,463)
(79,531)
(26,277)
(26,277)
(130,327)
(130,327)
(107,740)
(209,858)
Tom Reed Director
Russell Hoare Director
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67
114
115
Group financial statements
Consolidated statement of changes in equity
as at 31 December 2015
Attributable to equity shareholders of the parent
Consolidated statement of cash flows
for the year ended 31 December 2015
Retained
earnings
$000
Other reserves
(Note 18)
$000
389,720
(79,531)
(22,941)
–
Total
equity
$000
490,921
(79,531)
Cash flows from operating activities
Cash generated from operations
Interest paid
Income tax paid
–
(130,327)
(130,327)
Net cash generated from operating activities
At 1 January 2014
Loss for the year
Exchange differences arising on translation of overseas
operations
Total comprehensive loss attributable to equity
shareholders of the parent
Transactions with equity shareholders of the parent
Share-based payment charge
Total transactions with equity shareholders of the parent
Share
capital
$000
26,666
Share
premium
$000
97,476
–
–
–
–
–
–
–
–
–
–
At 1 January 2015
Loss for the year
Exchange differences arising on translation of overseas
operations
Total comprehensive loss attributable to equity
shareholders of the parent
Transactions with equity shareholders of the parent
Share-based payment charge
Total transactions with equity shareholders of the parent
26,666
97,476
–
–
–
–
–
–
–
–
–
–
(79,531)
(130,327)
(209,858)
285
285
–
–
285
285
310,474
(81,463)
(153,268)
–
281,348
(81,463)
–
(26,277)
(26,277)
658
658
–
–
658
658
At 31 December 2014
26,666
97,476
310,474
(153,268)
281,348
At 31 December 2015
26,666
97,476
229,669
(179,545)
174,266
Share premium represents the amounts received by the Company on the issue of its shares which were in excess of the nominal value of
the shares.
Retained earnings represent the cumulative net gains and losses recognised in the statement of comprehensive income less any
amounts reflected directly in other reserves.
Cash flows from investing activities
Decrease/(increase) in held-to-maturity investments
Interest received
Purchase of intangible assets
Purchase of property, plant and equipment
Cash acquired from business combination
Net cash used in investing activities
Cash flows from financing activities
Restricted cash
Repayment of borrowings
Funds received from borrowings (net of costs)
Increase in cash and cash equivalents in the year
Cash and cash equivalents at 1 January
Effect of exchange rates on cash and cash equivalents
Cash and cash equivalents at 31 December
(81,463)
(26,277)
(107,740)
Net cash (used)/generated from financing activities
Note
31
35
10
2015
$000
2014
$000
12,797
(3,040)
(696)
9,061
2,700
1,612
(612)
(5,630)
–
58,411
(3,345)
(7,579)
47,487
(2,700)
771
(338)
(39,986)
362
(1,930)
(41,891)
247
(5,738)
–
(5,491)
1,640
25,384
(1,081)
25,943
(93)
–
1,522
1,429
7,025
25,682
(7,323)
25,384
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67
116
117
Notes to the consolidated financial statements
1. GENERAL INFORMATION
JKX Oil & Gas plc (the ultimate parent of the Group hereafter, ‘the Company’) is a public limited company listed on the London
Stock Exchange which is domiciled and incorporated in England and Wales under the UK Companies Act. The registered number
of the Company is 3050645. The registered office is 6 Cavendish Square, London, W1G 0PD and the principal place of business is
disclosed in the introduction to the Annual Report.
The principal activities of the Company and its subsidiaries, (the ‘Group’), are the exploration for, appraisal and development of
oil and gas reserves.
2. BASIS OF PREPARATION
The Group’s financial statements have been prepared in accordance with International Financial Reporting Standards (‘IFRSs’)
as adopted by the European Union, IFRS Interpretations Committee (‘IFRS IC’) interpretations and the Companies Act 2006
applicable for Companies reporting under IFRS and therefore the consolidated financial statements comply with Article 4 of the
EU IAS Regulations. The Group’s financial statements have been prepared under the historical cost convention, as modified for
derivative instruments held at fair value through profit or loss. The principal accounting policies adopted by the Group are set
out below.
Going concern
The majority of the Group’s revenues, profits and cash flow from operations are currently derived from its oil and gas production
in Ukraine, rather than Russia.
Throughout 2015 the decline in international oil and gas prices has significantly lowered oil and gas net realisations from JKX’s
Ukrainian operations. The prolonged period of low international oil and gas prices has continued in 2016, further adversely
affecting the financial results of the Group, and will continue to do so if prices do not recover.
If all of the Bondholders exercise their put option in February 2017, the Company will have an obligation of $30.1 million
(consisting of $26 million principal, $1 million interest and a redemption premium of $3.1 million), which will become payable at
that time. If some or all of the Bondholders do not exercise this option and the Bonds expire at their full term in February 2018,
an obligation of up to $31.1 million will become payable, the amount being dependent on the number of remaining Bonds that
were not put in February 2017 (see Notes 13 and 14 to the consolidated financial statements).
The Company’s Ukrainian subsidiary, Poltava Petroleum Company (‘PPC’) has three contingent liabilities arising from separate
court proceedings over the amount of production taxes (‘Rental Fees’) paid in Ukraine for certain periods since 2007, which in total
amount to approximately $41 million (including interest and penalties, see Note 27 to the consolidated financial statements).
The Board believes that these claims are without merit under Ukrainian law and will continue to contest them vigorously.
Also in relation to Rental Fees, the Company continues to pursue a final award under its arbitration claim against Ukraine for the
overpayment of more than $180 million of Rental Fees, in addition to damages to the business (see Note 27 to the consolidated
financial statements). This international arbitration is expected to be heard in July 2016.
Following action initiated in late 2015, in January 2016, the State Geology and Mineral Resources Survey of Ukraine suspended
four subsoil use permits owned by PPC, initially with effect from 1 February 2016, but then with an extension period until
1 March 2016. The authority gave a list of actions that were required in order to avoid suspension (including a change to the
minimum production requirements under the licences) and would normally have given the operator sufficient time to remedy the
failings. Instead PPC were given only one month to do so. Through further discussion with the relevant authority, PPC has been
given more time to comply and hearings regarding the status of the licenses are planned for March 2016, at which the Board and
PPC is confident of a positive outcome.
The Directors have concluded that it is necessary to draw attention to the potential impact of (i) gas and/or oil net realisations
remaining at current levels for the foreseeable future or deteriorating materially (ii) the full $30.1 million obligation pursuant to
the $40 million Convertible Bond becoming payable in full in February 2017 (iii) the Group becoming liable for additional Rental
Fees in Ukraine as a result of unfavourable outcomes in one or more of the ongoing court proceedings and (iv) the Group’s
Ukrainian subsoil permits being suspended by the State Geology and Mineral Resources Survey of Ukraine. It is unclear whether
any or all of these risks will be realised but they are material uncertainties which may cast significant doubt about the Group’s
ability to continue as a going concern.
However, based on the Group’s cash flow forecasts, the Directors believe that the combination of its current cash balances,
expected future production and resulting net cash flows from operations, the implemented cost reductions as well as the
availability of additional courses of action with respect to financing, mean that it is appropriate to continue to adopt the going
concern basis of accounting in preparing these financial statements. These financial statements do not include the adjustments
that would result if the Group was unable to continue as a going concern.
Adoption of new and revised standards
The disclosed policies have been applied consistently by the Group for both the current and previous financial year with the
exception of the new standards adopted.
The EU IFRS financial information has been drawn up on the basis of accounting policies consistent with those applied in the
financial statements for the year to 31 December 2014, except for the following:
• Annual Improvements to IFRSs 2011-2013 Cycle
The application of the amendments has had no impact on the disclosures of the amounts recognized in the Group’s consolidated
financial statements.
Below is a list of new and revised IFRSs that are not yet mandatorily effective (but allow early application) for the year ending
31 December 2015:
• IAS 19 ‘Employee Benefits’ (Amendments)
• Annual Improvements to IFRSs 2010 – 2012 Cycle
• Annual Improvements to IFRSs 2012 – 2014 Cycle
• IFRS 14 ‘Regulatory Deferral Accounts’
• IAS 16 ‘Property, Plant and Equipment’ (Amendments)
• IAS 38 ‘Intangible Assets’ (Amendments)
• IFRS 11 ‘Joint arrangements’ (Amendments)
• IAS 27 ‘Separate financial statements’ (Amendments)
• IFRS 10 ‘Consolidated financial statements’ (Amendments) (subject to EU endorsement)
Effective for annual periods
beginning on or after
01-Jan-16
01-Jan-16
01-Jan-16
01-Jan-16
01-Jan-16
01-Jan-16
01-Jan-16
01-Jan-16
01-Jan-16
• IAS 28 ‘Investments in associates and joint ventures’ (Amendments) (subject to EU endorsement)
01-Jan-16
• IAS 1 ‘Presentation of financial statements’ (Amendments) (subject to EU endorsement)
• IAS 7 ‘Statement of cash flows’ (Amendments) (subject to EU endorsement)
• IAS 12 ‘Income taxes’ (Amendments) (subject to EU endorsement)
• IFRS15 ‘Revenue from contracts with customers’
• IFRS 9 ‘Financial instruments’ (subject to EU endorsement)
• IFRS 16 ‘Leases’ (subject to EU endorsement)
01-Jan-16
01-Jan-17
01-Jan-17
01-Jan-18
01-Jan-18
01-Jan-19
3. SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the
Company (its subsidiaries) made up to 31 December each year. All intragroup balances, transactions, income and expenses and
profits or losses, including unrealised profits arising from intragroup transactions, have been eliminated on consolidation.
Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when
the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those
returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the
Group. They are deconsolidated from the date that control ceases. The consolidated financial statements include all the assets,
liabilities, revenues, expenses and cash flows of the Companies and their subsidiaries after eliminating intragroup transactions
as noted above. Uniform accounting policies are applied across the Group.
Interests in joint venture agreements
A joint arrangement is one in which two or more parties have joint control. Joint control is the contractually agreed sharing of
control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of
the parties sharing control. Where the Group’s activities are conducted through joint operations, whereby the parties that have
joint control of the arrangement have the rights to the assets, and obligations for the liabilities, relating to the arrangement, the
Group reports its interests in joint operations using proportionate consolidation – the Group’s share of the assets, liabilities,
income and expenses of the joint operation are combined with the equivalent items in the consolidated financial statements on a
line-by-line basis.
A joint venture, which normally involves the establishment of a separate legal entity, is a contractual arrangement whereby
the parties that have joint control of the arrangement have the rights to the arrangement’s net assets. The results, assets and
liabilities of a joint venture are incorporated in the consolidated financial statements using the equity method of accounting.
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67
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119
Notes to the consolidated financial statements
Where the Group transacts with its joint operations, unrealised profits and losses are eliminated to the extent of the Group’s
interest in the joint operation.
Foreign currencies
All amounts in these financial statements are presented in thousands of US dollars, unless otherwise stated. The presentation
currency of the Group is the US Dollar based on the fact that the Group’s primary transactions originate in, or are dictated by, the
US Dollar, these being, amongst others, oil sales and procurement of rigs and drilling services.
Each entity in the Group is measured using the currency of the primary economic environment in which the entity operates
(‘the functional currency’). Foreign currency transactions are translated into functional currency using the exchange rates
prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses
resulting from the settlement of such transactions and from translation at year-end exchange rates of monetary assets and
liabilities denominated in foreign currencies are recognised in the income statement.
On consolidation of subsidiaries and joint operations with a non US Dollar presentation currency, their statements of financial
position are translated into US Dollar at the closing rate and income and expenses at the average monthly rate. All resulting
exchange differences arising in the period are recognised in other comprehensive income, and cumulatively in the Group’s
translation reserve. Such translation differences are reclassified to profit or loss in the period in which any such foreign
operation is disposed of.
Subsidiaries within the Group hold monetary intercompany balances for which settlement is neither planned nor likely to
occur in the foreseeable future and thus this is considered to be part of the Group’s net investment in the relevant subsidiary.
An exchange difference arises on translation in the company income statement which on consolidation is recognised in equity,
only being recognised in the income statement on the disposal of the net investment.
The major exchange rates used for the revaluation of the closing statement of financial position at 31 December 2015 were
$1:£0.67 (2014: $1:£0.6), $1:24 Hryvnia (2014: $1:15.77 Hryvnia), $1:72.88 Roubles (2014: $1:56.26 Roubles), $1:289.43 Hungarian
Forint (2014: $1: 259.29 Hungarian Forint).
Goodwill and fair value adjustments arising on acquisition are treated as assets/liabilities of the foreign entity and translated at
the closing rate.
Property, plant and equipment and other intangible assets
Property plant and equipment comprises the Group’s tangible oil and gas assets together with computer equipment, motor
vehicles and other equipment and are carried at cost, less any accumulated depreciation and accumulated impairment losses.
Cost includes purchase price and construction costs for qualifying assets, together with borrowing costs where applicable, in
accordance with the Group’s accounting policy. Depreciation of these assets commences when the assets are ready for their
intended use.
Oil and gas assets
Exploration, evaluation and development expenditure is accounted for under the ‘successful efforts’ method. The successful
efforts method means that only costs which relate directly to the discovery and development of specific oil and gas reserves are
capitalised.
Exploration and evaluation costs are valued at costs less accumulated impairment losses and capitalised within intangible
assets. Development expenditure on producing assets is accounted for in accordance with IAS 16, ‘Property, plant and
equipment’. Costs incurred prior to obtaining legal rights to explore are expensed immediately to the income statement.
All lease and licence acquisition costs, geological and geophysical costs and other direct costs of exploration, evaluation and
development are capitalised as intangible assets or property plant and equipment according to their nature. Intangible assets
are not amortised and comprise costs relating to the exploration and evaluation of properties which the Directors consider to
be unevaluated until reserves are appraised as commercial, at which time they are transferred to property plant and equipment
following an impairment review and are depreciated accordingly. Where properties are appraised to have no commercial value,
the associated costs are treated as an impairment loss in the period in which the determination is made.
Costs related to hydrocarbon production activities are depreciated on a field by field unit of production method based on
commercial proved plus probable reserves of the production licence, except in the case of assets whose useful life differs from
the lifetime of the field, which are depreciated on a straight-line basis over their anticipated useful life of up to 10 years.
The calculation of the ‘unit of production’ depreciation takes account of estimated future development costs and is based on
current period end unescalated price levels. The ‘unit of production’ rate is set at the beginning of each accounting period.
Changes in reserves and cost estimates are recognised prospectively.
Other assets
Depreciation is charged so as to write off the cost, less estimated residual value, over their estimated useful lives, using the
straight-line method, for the following classes of assets:
Motor vehicles
Computer equipment
– 4 years
– 3 years
Other equipment
– 5 to 10 years
The estimated useful lives of property plant and equipment and their residual values are reviewed on an annual basis and,
if necessary, changes in useful lives are accounted for prospectively. Assets under construction are not subject to depreciation
until the date on which the Group makes them available for use.
The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds
and the carrying amount of the asset and is recognised in the income statement for the relevant period.
Business combinations
The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the
aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed and equity instruments
issued by the Group in exchange for control of the acquiree. The acquiree’s identifiable assets, liabilities and contingent liabilities
that meet the criteria for recognition under IFRS 3 (revised) are recognised at their fair value at the acquisition date. In a
business combination achieved in stages, the previously held equity interest in the acquiree is re-measured at its acquisition
date fair value and the resulting gain or loss, if any, is recognised in the income statement. Acquisition costs are expensed.
Goodwill is recognised as an asset and is initially measured at cost being the excess of the cost of the business combination
over the Group’s share in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities. After
initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill impairment reviews are
undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. Impairment
losses on goodwill are not reversed.
On disposal of a subsidiary or jointly arrangement, the attributable amount of unamortised goodwill, which has not been subject
to impairment, is included in the determination of the profit or loss on disposal.
Impairment of property, plant and equipment and intangible assets
Whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, the Group reviews the
carrying amounts of its property, plant and equipment and intangible assets to determine whether there is any indication that
those assets have suffered an impairment loss. Individual assets are grouped together as a cash-generating unit for impairment
assessment purposes at the lowest level at which their identifiable cash flows, that are largely independent of the cash flows of
the other Groups assets, can be determined.
If any such indication of impairment exists the Group makes an estimate of its recoverable amount.
The recoverable amount is the higher of fair value less costs of disposal and value in use. Where the carrying amount of an
individual asset or a cash-generating unit exceeds its recoverable amount, the asset/cash-generating unit is considered
impaired and is written down to its recoverable amount. Fair value less costs of disposal is determined by discounting the post-
tax cash flows expected to be generated by the cash-generating unit, net of associated selling costs, and takes into account
assumptions, market participants would use in estimating fair value. In assessing the value in use, the estimated future cash
flows are adjusted for the risks specific to the asset/cash-generating unit and are discounted to their present value that reflects
the current market indicators.
Where an impairment loss subsequently reverses, the carrying amount of the asset/cash-generating unit is increased to the
revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that
would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years.
A reversal of an impairment loss is recognised as income immediately.
JKX Employee Benefit Trust
The JKX Employee Benefit Trust was established in 2014 to hold ordinary shares purchased to satisfy various new share scheme
awards made to the employees of the Company which will be transferred to the members of the scheme on their respective
vesting dates subject to satisfying the performance conditions of each scheme.
The trust has been consolidated in the Group financial statements in accordance with IFRS 10. The cost of shares temporarily
held by the trusts are reflected as treasury shares and deducted from equity.
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121
Notes to the consolidated financial statements
Financial instruments
Financial assets and financial liabilities are recognised in the consolidated statement of financial position when the Group
becomes party to the contractual provisions of the instrument.
Restricted cash
Restricted cash is disclosed separately on the face of the statement of financial position and denoted as restricted when it is not
under the exclusive control of the Group.
Derivative financial instruments
The Group may use derivative financial instruments (derivatives) primarily to hedge its risks associated with oil price fluctuations
relating to certain firm commitments and forecasted transactions. Any such derivatives are initially recorded at fair value on the
date at which the contract is entered into and subsequently re-measured at fair value on subsequent reporting dates.
A financial asset or liability is derecognised when the obligation under the asset or liability is discharged, cancelled or expires.
The purpose for which a derivative is used is established at inception. To qualify for hedge accounting, the derivative must be
’highly effective’ in achieving its objective and this effectiveness must be documented at inception and throughout the period
of the hedge relationship. The hedge must be assessed on an ongoing basis and determined to have been ’highly effective’
throughout the financial reporting periods for which the hedge was designated.
For the cash flow hedge, the portion of the gains and losses on the hedging instrument that is determined to be an effective
hedge is taken to equity and the ineffective portion, as well as any change in time value, is recognised in the consolidated income
statement. The gains and losses taken to equity are subsequently transferred to the consolidated income statement during the
period in which the hedged transaction affects the consolidated income statement or if the hedge is subsequently deemed to
be ineffective.
Gains or losses on derivatives that do not qualify for hedge accounting treatment (either from inception or during the life of the
instrument) are taken directly to the consolidated income statement in the period.
Convertible bonds due 2018
The net proceeds received from the issue of convertible bonds at the date of issue have been split between two elements: the
host debt instrument classified as a financial liability in Borrowings, and the embedded derivative.
The fair value of the embedded derivative has been calculated first and the residual value is assigned to the host debt liability.
The difference between the proceeds of issue of the convertible bonds and the fair value assigned to the embedded derivative,
representing the value of the host debt instrument, is included as Borrowings and is not remeasured. The host debt component
is then carried at amortised cost and the fair value of the embedded derivative is determined at inception and at each reporting
date with the fair value changes being recognised in profit or loss.
Issue costs are apportioned between the host debt element (included in Borrowings) and the derivative component of the
convertible bond based on their relative carrying amounts at the date of issue.
The interest expense on the component included in Borrowings is calculated by applying the effective interest method, with
interest recognised on an effective yield basis.
Borrowings
Borrowings are initially measured at fair value, net of transaction costs and are subsequently measured at amortised cost using
the effective interest method, with interest expense recognised on an effective yield basis. The effective interest method is a
method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period.
The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the
financial liability, or, where appropriate, a shorter period.
Trade and other receivables
Trade and other receivables are recognised initially at fair value and are subsequently measured at amortised cost, reduced by
any provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence
that the Group will not be able to collect all amounts due. Indicators of impairment would include financial difficulties of
the debtor, likelihood of the debtor’s insolvency, default in payment or a significant deterioration in credit worthiness. Any
impairment is recognised in the income statement within ‘Administrative expenses’.
Loans and receivables
Loans and receivables, comprising trade and other receivables, and cash and cash equivalents, are non-derivative financial
instruments which have a fixed or easily determinable value. They are recognised at cost, less any provisions for impairment in
their value.
Cash and cash equivalents
Cash and cash equivalents comprise cash in hand and current balances with banks and similar institutions, which are readily
convertible to known amounts of cash. Cash equivalents are short-term with an original maturity of less than 3 months.
Government treasury bills
Government treasury bills are securities with maturity of up to 4 months issued by the National Bank of Ukraine with a fixed
coupon rate. Treasury bills are recognised as “Held-to-maturity financial investments”.
Held-to-maturity financial investments
The government US$ treasury bills issued by the National Bank of Ukraine are non-derivative financial assets with fixed
payments and fixed maturity that are intended to be held to maturity.
Held-to-maturity financial investments are measured at amortised cost using the effective interest rate method less
impairment. Interest income and discounts and premiums on held-to-maturity securities are recognised as “Interest and
similar income” in the consolidated income statement.
Trade and other payables
Trade and other payables are initially measured at fair value, and are subsequently measured at amortised cost, using the
effective interest rate method if the time value of money is significant.
Financial liabilities and equity
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered
into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its
liabilities. Equity instruments issued by the Company are recorded at the proceeds received net of direct issue costs.
Inventories
Inventory is comprised of produced oil and gas or certain materials and equipment that are acquired for future use. The oil and
gas is valued at the lower of average production cost and net realisable value; the materials and equipment inventory is valued
at purchase cost. Cost comprises direct materials and, where applicable, direct labour costs plus attributable overheads based
on a normal level of activity and other costs associated in bringing the inventories to their present location and condition. Cost
is calculated using the weighted average method. Net realisable value represents the estimated selling price less all estimated
costs of completion and costs to be incurred in marketing, selling and distribution and any provisions for obsolescence.
Taxation
Income tax expense represents the sum of the current tax payable and deferred tax.
The current tax payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income
statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes
items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been
enacted or substantively enacted by the reporting date.
Tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity or in
other comprehensive income, in which case the tax is also dealt with in equity or other comprehensive income respectively.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and
liabilities in the financial statements and the corresponding tax base used in the computation of taxable profit. Deferred
tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the
extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised.
Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition
(other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the
accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, and interests
in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the
temporary difference will not reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer
probable that sufficient taxable profit will be available to allow all or part of the asset to be recovered. Any such reduction shall
be reversed to the extent that it becomes probable that sufficient taxable profit will be available.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset
realised based on tax rates and laws substantively enacted by the reporting date. Deferred tax assets and liabilities are offset
when there exists a legal and enforceable right to offset and they relate to income taxes levied by the same taxation authority
and the Group intends to settle its current tax assets and liabilities on a net basis.
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67 122
123
Notes to the consolidated financial statements
Segmental reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the Chief Operating Decision
Maker. The Chief Operating Decision Maker, who is responsible for allocating resources and assessing performance of the
operating segments, has been identified as the Executive and Non Executive Directors of the Group that make the strategic
decisions.
Share options
The group operates a number of equity-settled, share-based compensation plans, under which the Company receives services
from Executive Directors and Senior Management as consideration for equity instruments (options) of the group. The fair value
of the services received from Executive Directors and Senior Management in exchange for the grant of the options is recognised
as an expense. The total amount to be expensed is determined by reference to the fair value of the options granted:
• including any market performance conditions; (for example, the Company’s share price);
• excluding the impact of any service and non-market performance vesting conditions (for example, profitability, sales growth
targets and remaining an employee of the entity over a specified time period); and
• including the impact of any non-vesting conditions (for example, the requirement for employees to save).
Non-market performance and service conditions are included in assumptions about the number of options that are expected
to vest. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting
conditions are to be satisfied.
In addition, in some circumstances employees may provide services in advance of the grant date and therefore the grant date
fair value is estimated for the purposes of recognising the expense during the period between service commencement period
and grant date.
At the end of each reporting period, the group revises its estimates of the number of options that are expected to vest based on
the non-market vesting conditions. It recognises the impact of the revision to original estimates, if any, in the income statement,
with a corresponding adjustment to equity.
When the options are exercised, the company issues new shares or shares held by the JKX Employee Benefit Trust. The proceeds
received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium.
The grant by the Company of options over its equity instruments to the employees of subsidiary undertakings in the group is
treated as a capital contribution. The fair value of employee services received, measured by reference to the grant date fair
value, is recognised over the vesting period as an increase to investment in subsidiary undertakings, with a corresponding credit
to equity in the parent entity financial statements.
The social security contributions payable in connection with the grant of the share options is considered an integral part of the
grant itself, and the change will be treated as a cash-settled transaction.
The rules regarding the scheme are described in the Remuneration Report on pages 84 to 99 and in Note 26 on share based
payments.
Bonus scheme
The Group operates a bonus scheme for its Directors and employees. The scheme has three performance conditions: 1. financial
objectives; 2. key strategic objectives and 3. safety performance conditions. The bonus payments are made annually, normally in
January of each year and the costs are accrued in the period to which they relate.
Pension costs
The Group contributes to the individual pension scheme of the qualifying employees’ choice. Contributions are charged to the
income statement as they become payable. The Group has no further payment obligations once the contributions have been paid.
Decommissioning
Provision is made for the cost of decommissioning assets at the time when the obligation to decommission arises. Such
provision represents the estimated discounted liability for costs which are expected to be incurred in removing production
facilities and site restoration at the end of the producing life of each field. A corresponding item of property plant and equipment
is also created at an amount equal to the provision. This is subsequently depreciated as part of the capital costs of the
production facilities. Any change in the present value of the estimated expenditure attributable to changes in the estimates of the
cash flow or the current estimate of the discount rate used are reflected as an adjustment to the provision and the property plant
and equipment. The unwinding of the discount is recognised as a finance cost.
Revenue recognition
Sales of oil and gas products are recognised when the significant risks and rewards of ownership have passed to the buyer and
it can be reliably measured. This generally occurs when the product is physically transferred into a vessel, pipe or other delivery
mechanism. Revenue from other services are recognised when the services have been performed. Revenue is measured at the
fair value of the consideration received, excluding discounts, rebates, value added tax (“VAT”) and other sales taxes or duty.
Revenue resulting from the production of oil and natural gas from properties in which the Group has an interest with other
producers is recognised on the basis of the Group’s working interest (entitlement method). Gains and losses on derivative
contracts are reported on a net basis in the consolidated income statement.
Interest income is recognised as the interest accrues, by reference to the net carrying amount at the effective interest rate
applicable.
Share capital and treasury shares
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognised
as a deduction from share premium, net of any tax effects. When share capital recognised as equity is repurchased, the amount
of the consideration paid, which includes directly attributable costs, net of any tax effects, is recognised as a deduction from
share premium.
Repurchased JKX Oil & Gas plc shares are classified as treasury shares in shareholders’ equity and are presented in the
reserve for own shares. The consideration paid, including any directly attributable incremental costs is deducted from equity
attributable to the Company’s equity holders until the shares are cancelled or reissued.
When treasury shares are sold or reissued subsequently, the amount received is recognised as an increase in equity, and the
resulting surplus or deficit on the transaction is presented in share premium. No gain or loss is recognised in the financial
statements on the purchase, sale, issue or cancellation of treasury shares.
Leasing
Rentals payable under operating leases are charged to the income statement on a straight-line basis over the term of the relevant
lease. Under operating leases, the risks and rewards of ownership are retained by the lessor. The Group has no finance leases.
Dividends
Interim dividends are recognised when they are paid to the Company’s shareholders. Final dividends are recognised when they
are approved by shareholders.
Exceptional items
Exceptional items comprise items of income and expense, including tax items, that are material in amount and unlikely to recur
and which merit separate disclosure in order to provide an understanding of the Group’s underlying financial performance.
Examples of events giving rise to the disclosure of material items of income and expense as exceptional items include, but are
not limited to, impairment events, disposals of operations or individual assets, litigation claims by or against the Group and the
restructuring of components of the Group’s operations. See Note 5 for further details.
Critical accounting estimates and assumptions
The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition,
seldom equal the related actual results. The estimates and assumptions that have a risk of causing material adjustment to the
carrying amounts of assets and liabilities within the next financial year are discussed below.
a) Recoverability of oil and gas assets and intangible oil and gas costs (Note 5)
Costs capitalised as oil and gas assets in property, plant and equipment, and intangible assets are assessed for impairment
when circumstances suggest that the carrying value may exceed its recoverable value. As part of this assessment, management
has carried out an impairment test (ceiling test) on the oil and gas assets classified as property, plant and equipment. This test
compares the carrying value of the assets at the reporting date with the expected discounted cash flows from each project. For
the discounted cash flows to be calculated, management has used a production profile based on its best estimate of proven
and probable reserves of the assets and a range of assumptions, including an internal oil and gas price profile benchmarked
to mean analysts’ consensus and a discount rate which, taking into account other assumptions used in the calculation,
management considers to be reflective of the risks. This assessment involves judgement as to (i) the likely commerciality of the
asset, (ii) proven, probable and possible (‘3P’) reserves which are estimated using standard recognised evaluation techniques
(iii) future revenues and estimated development costs pertaining to the asset, (iv) the discount rate to be applied for the purposes
of deriving a recoverable value and (v) the value ascribed to contingent resources associated with the asset.
b) Carrying value of intangible exploration and evaluation expenditure (Note 5 (b))
The amounts for intangible exploration and evaluation assets represent the costs of active exploration projects the
commerciality of which is unevaluated until reserves can be appraised. Where a project is sufficiently advanced the
recoverability of intangible exploration assets is assessed by comparing the carrying value to estimates of the present value
of projects. The present values of intangible exploration assets are inherently judgemental. Exploration and evaluation costs
will be written off to the income statement unless commercial reserves are established or the determination process is not
completed and there are no indications of impairment. The outcome of ongoing exploration, and therefore whether the carrying
value of exploration and evaluation assets will ultimately be recovered, is inherently uncertain.
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67 124
125
Notes to the consolidated financial statements
c) Depreciation of oil and gas assets (Note 5)
Oil and gas assets held in property, plant and equipment are mainly depreciated on a unit of production basis at a rate
calculated by reference to proved plus probable reserves and incorporating the estimated future cost of developing and
extracting those reserves. Future development costs are estimated using assumptions as to the numbers of wells required to
produce those reserves, the cost of the wells, future production facilities and operating costs; together with assumptions on oil
and gas realisations.
d) Taxation (Notes 27 and 28)
Tax provisions are recognised when it is considered probable that there will be a future outflow of funds to the tax authorities.
In this case, provision is made for the amount that is expected to be settled. The provision is updated at each reporting date
by management by interpretation and application of known local tax laws with the assistance of established legal, tax and
accounting advisors. These interpretations can change over time depending on precedent set and circumstances in addition new
laws can come into effect which can conflict with others and, therefore, are subject to varying interpretations and changes which
may be applied retrospectively. A change in estimate of the likelihood of a future outflow or in the expected amount to be settled
would result in a charge or credit to income in the period in which the change occurs.
Deferred tax assets are recognised only to the extent it is considered probable that those assets will be recoverable. This
involves an assessment of when those deferred tax assets are likely to reverse, and a judgement as to whether or not there will
be sufficient taxable profits available to offset the tax assets when they do reverse. This requires assumptions regarding future
profitability and is therefore inherently uncertain. To the extent assumptions regarding future profitability change, there can be
an increase or decrease in the level of deferred tax assets recognised that can result in a charge or credit in the period in which
the change occurs.
Tax provisions are based on enacted or substantively enacted laws. To the extent that these change there would be a charge or
credit to income both in the period of charge, which would include any impact on cumulative provisions, and in future periods.
e) Derivatives (Note 14)
Under the terms of the placing of the $40m of guaranteed unsubordinated convertible bonds (see Note 13), at the option of the
Company, any conversion notice can be settled in cash rather than shares. The Cash Alternative Amount is based on the Volume
Weighted Average Price of the Company’s shares prior to the conversion notice. In addition there are other terms and conditions
attached to the bond which, together with the Cash Alternative Amount, are classified as a derivative financial instrument (see
Note 14). This derivative financial instrument was measured at inception at its fair value and changes in its fair value through
to the reporting date are recorded each period in the Consolidated income statement. The fair value is computed based on
the conversion price of each bond as well as directly observable market information, including the Company’s share price and
historic volatility. The assumptions used are only an estimate of how the Company’s future share price may change and the
appropriate discount rate and are, therefore, subjective. Changes in these assumptions could materially impact the internally
computed fair value of the derivative resulting in corresponding impact on income or loss in the Consolidated income statement.
4. SEGMENTAL ANALYSIS
The Group has one single class of business, being the exploration for, evaluation, development and production of oil and gas
reserves. Accordingly the reportable operating segments are determined by the geographical location of the assets.
There are four (2014: four) reportable operating segments which are based on the internal reports provided to the Chief
Operating Decision Maker (‘CODM’). Ukraine and Russia segments are involved with production and exploration; the ‘Rest
of World’ are involved in exploration, development and production and the UK is the home of the head office and purchases
material, capital assets and services on behalf of other segments. The ‘Rest of World’ segment comprises operations in
Hungary and Slovakia.
Transfer prices between segments are set on an arm’s length basis in a manner similar to transactions with third parties.
Segment revenue, segment expense and segment results include transfers between segments. Those transfers are eliminated
on consolidation.
Segment results and assets include items directly attributable to the segment. Segment assets consist primarily of property,
plant and equipment, inventories and receivables. Capital expenditures comprise additions to property, plant and equipment and
intangible assets.
4. SEGMENTAL ANALYSIS
2015
External revenue
Revenue by location of asset:
– Oil
– Gas
– Liquefied petroleum gas
– Management services/other
Inter segment revenue:
– Management services/other
Total revenue
Loss before tax
Loss from operations
Finance income
Finance cost
Fair value movement on derivative liability
UK
$000
Ukraine
$000
Russia
$000
Rest of world
$000
Sub total
$000
Eliminations
$000
Total
$000
–
–
–
–
–
14,106
53,112
4,585
411
526
15,625
–
170
72,214
16,321
11,459
11,459
–
–
–
–
11,459
72,214
16,321
–
–
–
–
–
–
–
–
14,632
68,737
4,585
581
88,535
–
–
–
–
–
14,632
68,737
4,585
581
88,535
11,459
11,459
(11,459)
(11,459)
–
–
99,994
(11,459)
88,535
(8,704)
(53,796)
(9,292)
(3,705)
(75,497)
(81)
(75,578)
1,289
(6,500)
(1,921)
–
–
–
1,289
(6,500)
(1,921)
(82,629)
(81)
(82,710)
Assets
Property, plant and equipment
828
100,634
88,178
Intangible assets
Other receivable
Deferred tax
Inventories
Trade and other receivables
Restricted cash
–
–
–
–
904
6
–
–
4,713
2,022
2,733
–
Cash and cash equivalents
19,298
6,054
–
3,534
10,890
1,667
7,352
–
187
5,009
7,812
–
–
–
706
306
404
194,649
7,812
3,534
15,603
3,689
11,695
312
25,943
Total assets
Total liabilities
21,036
116,156
111,808
14,237
263,237
(45,322)
(31,138)
(10,220)
(2,291)
(88,971)
Non cash expense (other than depreciation
and impairment)
Exceptional item – provision for impairment of
oil and gas assets
Exceptional item – production based taxes
Exceptional item – legal costs
Increase in property, plant and equipment and
intangible assets
Depreciation, depletion and amortisation
300
173
4,821
283
5,577
–
–
2,988
41
537
49,549
10,854
–
2,830
21,603
–
–
–
5,150
5,451
1,506
51,055
–
–
10,854
2,988
687
8,708
–
27,591
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
194,649
7,812
3,534
15,603
3,689
11,695
312
25,943
263,237
(88,971)
5,577
51,055
10,854
2,988
8,708
27,591
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67
126
127
Notes to the consolidated financial statements
4. SEGMENTAL ANALYSIS (continued)
5. (A) PROPERTY, PLANT AND EQUIPMENT
2014
External revenue
Revenue by location of asset:
– Oil
– Gas
– Liquefied petroleum gas
– Management services/other
Inter segment revenue:
– Management services/other
Total revenue
Loss before tax:
UK
$000
Ukraine
$000
Russia
$000
Rest of world
$000
Sub total
$000
Eliminations
$000
Total
$000
–
–
–
–
–
33,150
75,741
9,542
360
873
26,526
–
–
14
–
–
–
34,037
102,267
9,542
360
118,793
27,399
14
146,206
–
–
–
–
–
34,037
102,267
9,542
360
146,206
2015
GROUP
Cost
Oil and gas assets
Oil & gas fields
Ukraine
$000
Gas field
Russia
$000
Oil & gas fields
Hungary
$000
Other
assets
$000
Total
$000
At 1 January
Additions during the year*
Foreign exchange equity adjustment
Disposal of property, plant and equipment
557,509
2,677
–
–
223,518
5,094
(50,984)
(159)
36,214
20,567
75
–
–
249
(331)
(170)
837,808
8,095
(51,315)
(329)
At 31 December
560,186
177,469
36,289
20,315
794,259
15,687
15,687
–
–
–
–
–
–
15,687
(15,687)
15,687
(15,687)
–
–
Accumulated depreciation, depletion and amortisation
and provision for impairment
15,687
118,793
27,399
14
161,893
(15,687)
146,206
At 1 January
388,996
108,143
31,181
17,014
545,334
Depreciation on disposals of property, plant and
equipment
Exceptional item – provision for impairment of oil and
gas assets
Foreign exchange equity adjustment
Depreciation charge for the year
At 31 December
Carrying amount
At 1 January
At 31 December
–
49,549
–
21,006
459,551
(83)
–
(23,914)
5,145
89,291
–
(124)
(207)
1,506
–
51,055
–
–
(249)
1,440
(24,163)
27,591
32,687
18,081
599,610
168,513
115,375
100,635
88,178
5,033
3,602
3,553
2,234
292,474
194,649
* No finance costs have been capitalised within oil and gas properties during the year (2014: $3.0m), weighted average interest rate for 2014 was 18.0 per cent.
Oil and gas fields in Russia include $3.7m relating to items under construction (2014: nil).
(Loss)/profit from operations
(6,631)
17,392
(58,026)
(13,503)
(60,768)
(134)
(60,902)
Finance income
Finance cost
Fair value adjustment on acquisition
Fair value movement on derivative liability
Assets
Property, plant and equipment
1,452
168,513
115,375
1,094
(3,197)
222
9,072
–
–
–
–
1,094
(3,197)
222
9,072
(53,577)
(134)
(53,711)
Intangible assets
Other receivable
Deferred tax
Inventories
Trade and other receivables
Restricted cash
Cash and cash equivalents
Held to maturity financial investments
Total assets
Total liabilities
Non cash expense (other than depreciation
and impairment)
Exceptional item – well control operations
Exceptional item – provision for impairment of
oil and gas assets
Increase in property, plant and equipment and
intangible assets
Depreciation, depletion and amortisation
Major customers
1 Ukraine
2 Russia
–
–
–
–
631
6
12,105
–
–
–
7,520
2,108
6,480
–
526
–
–
3,966
13,527
2,016
1,254
–
5,891
–
7,134
7,932
–
1
–
1,653
553
6,862
2,700
292,474
7,932
3,966
21,048
4,124
10,018
559
25,384
2,700
14,194
185,147
142,029
26,835
368,205
(38,164)
(35,428)
(10,232)
(3,033)
(86,857)
340
1,143
3,288
1,186
–
3,471
–
5,957
3,471
12,800
46,262
10,000
69,062
35,382
23,179
5,263
9,227
1,311
42,277
1,181
34,390
–
–
321
803
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
292,474
7,932
3,966
21,048
4,124
10,018
559
25,384
2,700
368,205
(86,857)
5,957
3,471
69,062
42,277
34,390
2014
$000
46,461
–
2015
$000
20,168
16,151
There are 2 (2014: 1) customers that exceed 10% of the Group’s total revenues, one in Ukraine and one in Russia.
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67
128
129
Notes to the consolidated financial statements
5. (A) PROPERTY, PLANT AND EQUIPMENT (continued)
5. (B) INTANGIBLE ASSETS: EXPLORATION AND EVALUATION EXPENDITURE
Oil and gas assets
Oil & gas fields
Ukraine
$000
Gas field
Russia
$000
Oil & gas fields
Hungary
$000
Other
assets
$000
Total
$000
2015
GROUP
Cost
2014
GROUP
Cost
At 1 January
Additions during the year*
Additions relating to stepped acquisition (see Note 35)
Foreign exchange equity adjustment
Disposal of property, plant and equipment
522,127
35,382
–
–
–
375,529
5,263
–
(157,088)
(186)
32,788
244
3,182
–
–
21,711
1,051
–
(919)
(1,276)
952,155
41,940
3,182
(158,007)
(1,462)
At 31 December
557,509
223,518
36,214
20,567
837,808
Accumulated depreciation, depletion and amortisation
and provision for impairment
At 1 January
353,017
89,224
27,448
16,850
486,539
Depreciation on disposals of property, plant and
equipment
Exceptional item – provision for impairment of oil and
gas assets
Foreign exchange equity adjustment
Depreciation charge for the year
At 31 December
Carrying amount
At 1 January
At 31 December
–
(25)
–
(1,368)
(1,393)
12,800
46,262
3,733
–
62,795
–
23,179
388,996
(36,545)
9,227
–
–
(452)
1,984
(36,997)
34,390
108,143
31,181
17,014
545,334
169,110
286,305
168,513
115,375
5,340
5,033
4,861
3,553
465,616
292,474
Exceptional item – well control operations
During 2014, due to unexpected pressure building in the annulus of well-27 at our Koshekhablskoye field in Russia, the well was
diverted to the flare pit and a coiled tubing unit was mobilised to kill the well. This operation was completed successfully. The
cost of these well control operations was $3.5m which has been charged to the income statement in 2014.
Exceptional item – provision for impairment of oil and gas assets
During both 2014 and 2015 impairment triggers were noted in respect of our oil and gas assets in Ukraine, Russia and Hungary.
Impairment tests were completed resulting in impairments of $51.1m (2014: $69.1m) comprised of $49.6m (2014: $12.8m) in respect
of our Ukrainian oil and gas fields, nil (2014: $46.3m) in respect of our Russian gas field, $1.5m (2014: $3.7m) in respect of our
Hungarian oil and gas fields and nil (2014: $6.3m) in respect of our Hungarian exploration and evaluation costs (see Note 5 (b)).
Full impairment disclosures for each of the impairment tests are made in Notes 5 (c), (d), (e) and (f).
At 1 January
Additions during the year
Effect of exchange rates on intangible assets
At 31 December
Provision against oil and gas assets
At 1 January and 31 December
Carrying amount
At 1 January
At 31 December
2014
GROUP
Cost
At 1 January
Additions during the year
Write off of unsuccessful exploration and evaluation costs
Additions relating to stepped acquisition (see Note 35)
Exceptional item – provision for impairment of Hungarian assets (Note 5(f))
Disposal relating to stepped acquisition (see Note 35)
Effect of exchange rates on intangible assets
At 31 December
Provision against oil and gas assets
At 1 January and 31 December
Carrying amount
At 1 January
At 31 December
Ukraine
$000
Hungary
$000
Rest
of World
$000
Total
$000
1,308
–
–
1,308
768
46
–
814
13,519
15,595
566
(732)
612
(732)
13,353
15,475
1,308
–
6,355
7,663
–
–
768
814
Ukraine
$000
Hungary
$000
1,308
11,144
–
–
–
–
–
–
1,308
102
(15)
1,316
(6,267)
(5,512)
–
768
7,164
6,998
Rest
of World
$000
14,138
237
–
–
–
–
(856)
13,519
7,932
7,812
Total
$000
26,590
339
(15)
1,316
(6,267)
(5,512)
(856)
15,595
1,308
–
6,355
7,663
–
–
11,144
768
7,783
7,164
18,927
7,932
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67 130
131
Notes to the consolidated financial statements
5. (C) IMPAIRMENT TEST FOR PROPERTY, PLANT AND EQUIPMENT
A review was undertaken at the reporting date of the carrying amounts of property, plant and equipment to determine whether
there was any indication of a trigger that may have led to these assets suffering an impairment loss. Following this review
impairment triggers were noted in relation to the Ukrainian assets (see Note 5 (d)) and the Hungarian assets (see Note 5 (f)).
In respect of Yuzhgazenergie LLC (‘YGE’) in Russia, impairment triggers were noted in 2014 and a full impairment review was
completed, however no impairment triggers were noted in 2015 (see Note 5 (e)).
As there is no readily available market for the Group’s oil and gas properties, fair value is derived as the net present value of
the estimated future cash flows arising from the continued use of the assets, incorporating assumptions that a typical market
participant would take into account.
The value in use of an oil and gas property is generally lower than its Fair Value Less Costs of Disposal (‘FVLCD’) as value in
use reflects only those cash flows expected to be derived from the asset in its current condition. FVLCD includes appraisal and
development expenditure that a market participant would consider likely to enhance the productive capacity of an asset and
optimise future cash flows. Consequently, the Group determines recoverable amount based on FVLCD using a Discounted Cash
Flow (‘DCF’) methodology.
The DCF was derived by estimating discounted after tax cash flows for each CGU based on estimates that a typical market
participant would use in valuing such assets.
The impairment tests compared the recoverable amount of the respective CGUs noted below to the respective carrying values
of their associated assets. The estimates of FVLCD meet the definition of level three fair value measurements as they are
determined from unobservable inputs.
5. (D) IMPAIRMENT TEST FOR THE UKRAINIAN OIL AND GAS ASSETS
2014
The Ukrainian government issued decrees in the second half of 2014 which directed major industrial gas buyers to acquire
their gas solely from the Ukraine state-owned gas company from 1 December 2014 through to 28 February 2015 and increased
the rate of gas production tax to 55% (from 28%), initially for 3 months but extended through to 31 December 2015. These
factors, combined with the sharp decline in international oil prices and a 71% reduction in the assessed 3P reserves for the
Elizavetovskoye field constituted an impairment trigger at 31 December 2014 and accordingly an impairment test was undertaken.
2015
During 2015, the geopolitical situation in Ukraine, the economic impact of the devaluation of the Ukrainian Hryvnia and the
uncertainty about the political, fiscal and economic outlook increased the Company’s post tax discount rate used in its DCF
calculations for impairment testing on the Ukrainian assets. The post tax discount rate increased from 17.2% to 20.0%.
Together with the continued decline in international oil and gas prices during 2015, these constituted an impairment trigger and
accordingly an impairment test was undertaken.
Poltava Petroleum Company (‘PPC’), a wholly owned subsidiary of JKX, holds 100% interest in five production licences
(Ignatovskoye, Molchanovskoye, Rudenkovskoye, Novo-Nikolaevskoye, Elizavetovskoye) and one exploration licence
(Zaplavskoye) in the Poltava region of Ukraine.
Key assumptions – NNC and Elizavetovskoye
The key assumptions used in the impairment testing were:
• Production profiles: these were based on the latest available information provided by independent reserve engineers,
DeGolyer & MacNaughton, as at 31 December 2014 adjusted for 2015 production volumes and data and reassessed internally.
Such information included 3P reserves for NNC and Elizavetovskoye (including the West Mashivske extension) of 28.4 MMboe
and 5.0 MMboe, respectively.
• Economic life of field: it was assumed that the title to the licences is retained and that the NNC licence term will be
successfully extended beyond its current 2024 expiration date through to the economic life of the field (expected to be around
2032). The economic life of the Elizavetovskoye field is currently expected to be around 2023.
• Gas prices: during 2015 Ukraine acquired the ability to purchase gas from Europe rather than being completely dependent
on Russia for imports. As such, Ukrainian gas prices are expected to be more aligned with European gas prices in future
but also influenced by Russian-Ukrainian border price and international oil prices. The gas price used for 2016 is based on
current and forecast gas prices realised by PPC. For the following six years a forward gas price curve was used with gas
prices increasing at 2.8% thereafter.
• Oil prices: the Company used a forward price curve for the next six years and an increase of 2.8% per annum thereafter.
• Production taxes: the Company has assumed production tax rates of 29% for gas and 45% for oil which were introduced by
the government on 1 January 2016.
• Capital and operating costs: these were based on current operating and capital costs in Ukraine for both projects. Estimates
were provided by third parties and supported by estimates from our own specialists, where necessary.
• Post tax nominal discount rate of 20%. This was based on a Capital Asset Pricing Model analysis consistent with that used in
previous impairment reviews
Based on the key assumptions set out above:
• the NNC’s oil and gas assets were impaired by $49.6m after significant erosion of the headroom from the prior year due to the
increase in discount rate applied, the international oil and gas price decline and the new expectation that prices will remain
lower for longer.
• Elizavetovskoye’s recoverable amount (including the West Mashivske extension) exceeds its carrying value by $34.9m and
therefore Elizavetovskoye’s oil and gas assets were not impaired.
Any impairment is dependent on judgement used in determining the most appropriate basis for the assumptions and estimates
made by management, particularly in relation to the key assumptions described above. Sensitivity analysis to likely and potential
changes in key assumptions has therefore been provided below.
The impact on the impairment calculation of applying different assumptions to gas prices, production volumes, production tax
rates, future capital expenditure and post-tax discount rates, all other inputs remaining equal, would be as follows:
The Ignatovskoye, Molchanovskoye, Rudenkovskoye, Novo-Nikolaevskoye production licences contain one or more distinct fields
which, together with the Zaplavskoye exploration licence, form the Novo-Nikolaevskoye Complex (‘NNC’).
Sensitivity analysis 2015 for the NNC and the Elizavetovskoye
The Elizavetovskoye production licence is located 45km from the Novo-Nikolaevskoye Complex and has its own gas production
facilities.
Ukrainian Cash Generating Units (‘CGUs’)
In respect of the Group’s Ukraine assets the NNC forms a single CGU as these contain oil and gas fields which are serviced by
a single processing facility and do not have separately identifiable cash inflows. In addition they have commonality of facilities,
personnel and services.
The Elizavetovskoye licence also has its own separate processing facilities and separately identifiable cash flows and therefore
is a distinct CGU for the purpose of the impairment test. During 2015 an extension to the Elizavetovskoye production licence was
awarded to PPC which included the West Mashivske field. Due to the proximity of the West Mashivske field to the Elizavetovskoye
plant, production will be tied back to the Elizavetovskoye processing facilities and therefore forms part of this CGU.
In accordance with IAS 36, the impairment review was undertaken in US$ being the currency in which future cash flows from
NNC and Elizavetovskoye will be generated.
Impact if gas price:
Impact if gas production volumes:
Impact if future capital expenditure:
increased by 20%
reduced by 20%
increased by 10%
decreased by 10%
increased by 20%
decreased by 20%
Impact if post-tax discount rate:
increased by 2 percentage points to 22.0%
decreased by 2 percentage points to 18.0%
NNC
Increase/(decrease) in
impairment of $49.6m
for NNC
CGU
$m
Elizavetovskoye
Increase/(decrease)
in impairment
headroom of $34.9m
for Elizavetovskoye
CGU
$m
(37.6)
37.6
(24.0)
24.0
27.5
(27.5)
9.5
(11.0)
13.1
(13.1)
6.7
(6.7)
(3.9)
3.9
(1.8)
2.0
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67 132
133
Notes to the consolidated financial statements
5. (E) IMPAIRMENT TEST FOR YUZHGAZENERGIE LLC (‘YGE’), RUSSIA – 2014 DISCLOSURES
Following the 2007 acquisition of YGE in Russia, a technical and environmental re-evaluation of YGE’s Koshekhablskoye gas field
redevelopment was undertaken by the Group. The re-evaluation resulted in a revised development plan and production profile.
The development plan and production profile have continued to be refined since that time.
For purposes of testing for impairment triggers of YGE’s non-current assets, the Company took account of developments since
the last test for impairment in 2013, based on the assessment of FVLCD.
In previous estimates, the Company assumed net-back convergence with European gas prices occurring in 2023, which was in
line with the Russian government’s stated intention, after applying to increase gas sector tariffs annually by 10% to achieve this.
The domestic gas market in Russia deteriorated significantly during 2014 and the prospects for a significant improvement in the
domestic gas market in the near term have receded rapidly.
The economic recession in Russia, the devaluation of the Rouble, the sharp decline in international oil prices and the declining
gas demand in Europe and Russia have conspired to create a short term gas oversupply within Russia and a cessation of any
political appetite for achieving net-back parity with European gas prices.
This revision to our estimate of the future increases in Russian gas prices constituted an impairment trigger. Accordingly an
impairment test was undertaken.
In accordance with IAS 36, the impairment review was undertaken in Russian Roubles.
Key Assumptions – YGE – 2014 disclosures
The key assumptions used in the impairment testing were:
• Production profiles: these were based on the latest available information provided by independent reserve engineers,
DeGolyer & MacNaughton, at 31 December 2014. Such information included 3P reserves for YGE of 68.3 MMboe.
• Economic life of field: it was assumed that YGE will be successful in extending the licence term beyond its current 2026
expiration to the economic life of the field (expected to be around 2047). The discounted cash flow methodology used has
not taken account of any opportunities that may exist to extract reserves in a shorter timeframe by investing to increase the
current plant capacity.
• Gas prices: for 2015 these were based on the gas sales agreement that the Company had negotiated with Kubangazifikatziya
for the forecast gas production in 2015. The gas price is expected to remain at the same level through to 1 July 2016.
• Gas prices: from 1 July 2016 and annually thereafter, the gas prices have been increased by Rouble inflation of between 4.3%
and 8.0% through to 2021, and 5.1% thereafter.
• Gas prices: historically, gas prices in the Adygea Region are higher than the average gas price across all regions in Russia as
a result of the vast transportation distances from Russia’s main producing regions. The Company has assumed that Adygean
gas prices will remain higher than the average price across Russia.
• Capital and operating costs: these were based on current operating and capital costs in Russia, project estimates provided by
third parties and supported by estimates from our own specialists, where necessary.
• Post tax nominal Rouble discount rate of 15.2%. This was based on a Capital Asset Pricing Model analysis consistent with that
used in previous impairment reviews.
Based on the key assumptions set out above YGE was impaired by $46.3m. The main driver of the impairment has been the
revision to the expected increase in Adygean gas prices.
Any impairment is dependent on judgement used in determining the most appropriate basis for the assumptions and estimates
made by management, particularly in relation to the key assumptions described above. Sensitivity analysis to likely and potential
changes in key assumptions has therefore been provided below.
The impact on the impairment calculation of applying different assumptions to gas prices, production, future capital expenditure
and post-tax discount rates, all other inputs remaining equal, would be as follows:
Sensitivity Analysis for YGE – 2014 disclosures
Impact if Adygean gas price:
Impact if gas production volumes:
Impact if future capital expenditure:
increased by 10%
reduced by 10%
increased by 10%
decreased by 10%
increased by 20%
decreased by 20%
Impact if post-tax discount rate:
increased by 1 percentage point to 16.2%
decreased by 1 percentage point to 14.2%
Increase/(decrease) in impairment of
$46.3m for Yuzhgazenergie LLC CGU
$m
(28.8)
27.8
(27.8)
26.8
15.7
(15.7)
9.6
(10.8)
2015 update
For purposes of testing for impairment of YGE’s non-current assets in 2015, the Company adopted a similar process to that
used in previous periods. Having taken account of developments since the last test for impairment, based on the assessment of
fair value less costs to sell, the recoverable amount exceeds the carrying value by approximately US$4.3m (4.9 per cent)
(2014: nil) and no impairment trigger has been noted. However it should be noted that the FVLCD estimate of the recoverable
amount uses a DCF methodology which is highly sensitive to changes in the key assumptions of future Russian gas prices and
related production taxes, both of which are under the direct control of the Russian government. Therefore Russian gas prices
may not align with international gas prices.
As in previous estimates, from 1 July 2016 and annually thereafter, the Company has assumed gas prices increase by Rouble
inflation of between 4.3% and 8.0% through to 2021, which reflect the Russian government’s current stated intentions for gas
prices, and a 5.1% thereafter.
5. (F) IMPAIRMENT TEST FOR HUNGARIAN OIL AND GAS ASSETS
Hungarian property plant and equipment – Folyópart Energia Kft (‘FEN’) (previously HHE North Kft (‘HHN’))
The Company now holds a 100% interest in six development licences (Mining Plots) through its wholly owned Hungarian
subsidiary, Folyópart Energia Kft. The Hajdunanas IV Mining Plot (‘HMP’) (previously Hernad I licence) contains two suspended
wells which experienced an unexpected decline in production rates in 2013.
Hungarian property, plant and equipment – Turkeve
Through its wholly owned Dutch subsidiary, JKX Hungary BV, the Company holds a 50% beneficial interest in part of the Turkeve
IV Mining Plot of 10 sq. km (‘Turkeve’) surrounding the Ny-7 well which encountered gas.
Hungarian intangible assets: exploration and evaluation expenditure - Tiszavasvári-IV Mining Plot (previously
Tiszavasvári-6)
The Tiszavasvári-IV Mining Plot contains the Tiszavasvári-6 discovery well (‘TZ-6’), which, due to the early stage of appraisal, is
classified as an exploration and appraisal asset and recognised within intangible assets.
During 2014 and 2015, there was a sharp decline in international oil and gas prices. In 2015 this constituted an impairment
trigger and accordingly an impairment test was undertaken. In 2014, the absence of a firm work programme at year end to
develop the Hungarian reserves, and the reclassification of the estimated reserves at the Group’s Hungarian oil and gas fields to
contingent resources also constituted an impairment trigger.
Hungarian Cash Generating Units (‘CGUs’)
HMP forms a single CGU as it holds the two suspended oil and gas wells which are serviced by a single processing facility and
which do not have separately identifiable cash inflows. In addition they have commonality of facilities, personnel and services.
The development of the Turkeve Ny-7 field and the TZ-6 discovery require their own distinct processing facilities. Once these
discoveries are developed, they will have separately identifiable cash flows and therefore are two separate CGUs for the
impairment test of the Hungarian oil and gas assets.
In accordance with IAS 36, the impairment reviews for the Hungarian assets have been undertaken in US$ being the currency in
which future cash flows from HMP, Turkeve and TZ-6 will be generated.
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67
134
135
Notes to the consolidated financial statements
Key Assumptions 2015 – HMP, Turkeve and TZ-6
The key assumptions used in the impairment testing in 2015 were:
7. INVESTMENTS
The net book value of unlisted investments comprises:
• Production profiles: these were based on the latest available information provided by our reserve engineers which included
contingent resources of 0.6 MMboe for HMP, 0.1 MMboe (net to JKX) for Turkeve and 3.7 MMboe for TZ-6.
• Oil and gas prices: these were based on current prices being realised and short term price curves derived from expectations
in the Hungarian oil and gas market.
• Capital and operating costs: these were based on project estimates provided by third parties and the partner and operator of
our Hungarian assets.
The post tax discount rate of 10% was applied. This was based on a Capital Asset Pricing Model analysis for our Hungarian
assets.
Accordingly the impairment review is dependent on judgement used in determining the most appropriate basis for the
assumptions and estimates made by management, particularly in relation to the key assumptions described above. Sensitivity
analysis to likely and potential changes in key assumptions has therefore been provided below.
Based on the key assumptions set out above:
• HMP recoverable amount exceeds its carrying value by $1.3m and therefore the oil and gas assets related to HMP were not
impaired;
• Turkeve was impaired by $1.5m after significant erosion of the headroom from the prior year due to international oil and gas
price decline, the new expectation that prices are to remain lower for longer and the reduction in contingent resources from
0.3 MMboe to 0.1 MMboe due to a reassessment of field development options; and
• TZ-6 recoverable amount exceeds its carrying value by $1.0m and therefore oil and gas assets relating to TZ-6 were not
impaired.
In respect of the 2015 impairment review, the impact on the impairment calculation of applying different assumptions to
production, oil and gas prices and future capital and operating costs, all other inputs remaining equal, would be as follows:
Impact if oil and gas prices:
increased by 20%
decreased by 20%
Impact if oil and gas production volumes:
increased by 10%
decreased by 10%
Impact if future capital and operating costs:
increased by 20%
decreased by 20%
HMP
Increase/(decrease) in
impairment headroom
of $1.3m for HMP
CGU
$m
Turkeve
Increase/(decrease) in
impairment of
$1.5m for Turkeve
CGU
$m
TZ-6
Increase/(decrease) in
impairment headroom
of $1.0m for TZ-6
CGU
$m
2.2
(2.2)
1.2
(1.1)
(1.9)
1.9
(0.5)
0.3
(0.2)
0.2
0.2
(0.2)
1.0
(0.8)
0.5
(0.5)
(0.9)
0.9
6. OTHER RECEIVABLE
Other receivables consist of VAT recoverable as a result of expenditures incurred in Russia. The receivable is expected to be
recovered between two and five years (2014: two and five years).
Cost
At 1 January and 31 December
Accumulated impairment
At 1 January and 31 December
Carrying amount
At 31 December
2015
$000
2014
$000
5,617
5,617
5,617
5,617
–
–
Full provision was made against investments in 2007 which comprise an investment in a Ukrainian oil and gas company.
At the end of 2007 there were no clear development plans relating to the investment and this continues to be the position at
31 December 2015. The investment reflects a 10% holding of the Company’s ordinary share capital.
8. INVENTORIES
Warehouse inventory and materials
Oil and gas inventory
9. TRADE AND OTHER RECEIVABLES
Trade receivables
Other receivables
VAT receivable
Prepayments
2015
$000
2,182
1,507
3,689
2015
$000
3,168
5,143
717
2,667
2014
$000
2,994
1,130
4,124
2014
$000
3,116
1,043
274
5,585
11,695
10,018
As of 31 December 2015, there were no trade receivables which were impaired (2014: nil). At this date there were no trade
receivables past due (2014: nil).
There is no difference between the carrying value of trade and other receivables and their fair value.
The carrying amounts of the Group’s trade and other receivables are denominated in the following currencies:
US Dollar
Sterling
Euros
Hungarian Forints
Ukrainian Hryvna
Russian Roubles
2015
$000
27
–
44
423
563
7,254
8,311
2014
$000
415
20
763
446
1,266
1,247
4,157
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67
136
137
Notes to the consolidated financial statements
10. CASH AND CASH EQUIVALENTS
Cash
Short term deposits
Government treasury bills
Cash and cash equivalents
Restricted cash
Total
2015
$000
20,244
5,699
–
25,943
312
26,255
2014
$000
19,186
198
6,000
25,384
559
25,943
Short term deposits comprise amounts which are held on deposit, but are readily convertible to cash. Ukrainian government
US$ treasury bills of $6.0m matured on 7 January 2015.
Restricted cash
Included in Restricted cash is $0.3m (2014: $0.6m) held in Hungary at K & H Bank Zrt, which is deposited in accordance
with the Hungarian Mining Act to cover potential compensation for any land damage and the costs of recultivation, including
environmental damage of the waste management facilities.
The Bonds have an annual coupon of 8 per cent per annum payable semi-annually in arrears. The Bonds are convertible into
ordinary shares of the Company at any time from 1 April 2013 up until seven days prior to their maturity on 19 February 2018 at a
conversion price of 76.29 pence per Ordinary Share, unless the Company settles the conversion notice by paying the Bondholder
the Cash Alternative Amount (see below).
Interest, after the deduction of issue costs and the inclusion of the redemption premium, will be charged to the income
statement using an effective rate of 18.0%.
Cash Alternative Amount
At the option of the Company, the conversion notice in respect of the Bonds can be settled in cash rather than shares, the Cash
Alternative Amount payable is based on the Volume Weighted Average Price of the Company’s shares prior to the conversion
notice.
Credit facility
On 31 March 2011, Poltava Petroleum Company (‘PPC’), our subsidiary in Ukraine, entered into a reducing credit facility
agreement with Crédit Agricole CIB (France) secured by indemnity provided by the parent company, JKX Oil & Gas plc. The
credit facility was for a maximum of Ukrainian Hryvnia equivalent of $15.0m. The facility was renewed on 27 June 2014 and
was available until 30 June 2015 with the maximum facility reducing to $10.0m and $5.0m on 30 April 2015 and 30 May 2015
respectively. All provisions contained in the credit facility documentation were negotiated on normal commercial and customary
terms for such finance arrangements. The interest was calculated at prevailing Crédit Agricole CIB (France) bank rate plus a
margin.
11. HELD-TO-MATURITY FINANCIAL INVESTMENTS
The credit facility with Crédit Agricole CIB (France) lapsed on 30 June 2015.
Government treasury bills
2015
$000
–
2014
$000
2,700
In October 2014, the Company purchased selected Ukrainian government US$ treasury bills with a fixed coupon which matured
on 11 February 2015 and which were classified as held-to-maturity financial investments. The fair value of the held-to-maturity
securities at 31 December 2014 was US$3.3m.
12. TRADE AND OTHER PAYABLES
Trade payables
Other payables
Other taxes and social security costs
VAT payable
Accruals
13. BORROWINGS
Current
Convertible bonds due 2018
Credit facility
Term-loans repayable within one year
Non-current
Convertible bonds due 2018
2015
$000
2,701
2,692
1,051
1,177
11,356
18,977
2015
$000
10,856
–
10,856
2014
$000
1,694
1,416
4,780
1,797
6,538
16,225
2014
$000
4,068
1,522
5,590
23,494
30,837
14. DERIVATIVES
Non-current derivative financial instruments
At the beginning of the year
Partial settlement of derivative liability
Fair value movement during the year – Net loss/(gain)
At the end of the year
2015
$000
1,037
(787)
1,921
2,171
2014
$000
10,109
–
(9,072)
1,037
Convertible bonds due 2018 – embedded derivatives
Coupon Makewhole
Upon conversion of a Bond prior to the 19 February 2015 the Company was required to pay an amount of interest equal to the
aggregate interest which would have been payable on the principal amount of the Bond if such Bond had been outstanding until
19 February 2015.
Bondholder Put Option
Bondholders have the right to require the Company to redeem the following number of Bonds on the following dates together
with accrued and unpaid interest to (but excluding) such dates:
Redemption Date
19 February 2016
19 February 2017
Maximum number of Bonds to be redeemed
25% of the Bonds, having an aggregate principal amount of $10,000,000
all outstanding Bonds
Current liabilities include $10.9m (2014: $4.1m) in respect of the put option available to bondholders on 19 February 2016
(2014: 19 February 2015). Bonds with a principal amount of $10m were redeemed on 19 February 2016 (19 February 2015: $4m) in
addition to an early redemption premium of $0.9m (19 February 2015: $0.2m) in accordance with the terms and conditions of the
bond. None of the bondholders exercised their option to put 10% of the outstanding principal of the bonds on 19 February 2014.
Company Call Option
The Company can redeem the Bonds early in full but not in part at their principal amount together with accrued interest at any
time on or after 19 February 2017 if the Volume Weighted Average Price of the Company’s shares over a specified period equal or
exceed 130 per cent of the principal amount of the Bonds; or if the aggregate principal amount of the bonds outstanding is less
than 15% of the aggregate principal amount originally issued.
Convertible bonds due 2018
On 19 February 2013 the Company successfully completed the placing of $40m of guaranteed unsubordinated convertible bonds
with institutional investors which are due 2018 raising cash of $37.2m net of issue costs.
Fixed exchange rate
The Sterling-US Dollar exchange rate is fixed at £1/$1.5809 for the conversion and other features.
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Notes to the consolidated financial statements
15. FINANCIAL INSTRUMENTS
Fair values of financial assets and financial liabilities – Group
Set out below is a comparison by category of carrying amounts and fair values of the Group’s financial instruments. Fair value is
the amount at which a financial instrument could be exchanged in an arm’s length transaction. Where available, market values
have been used (this excludes short term assets and liabilities).
Book and fair value
Book value
Fair value
2015
$000
2014
$000
2014
$000
Financial assets
Cash and cash equivalents and restricted cash (Note 10) – classified as loans
and receivables
26,255
25,943
25,943
Trade receivables (Note 9) – classified as loans and receivables
Other receivables (Note 9) – classified as loans and receivables
Held-to-maturity financial investments (Note 11) – classified as loans
and receivables
Financial liabilities
Trade payables (Note 12) – carried at amortised cost
Other payables (Note 12) – carried at amortised cost
Borrowings – credit facility (Note 13)
Borrowings – convertible bonds due 2018 (Note 13) – carried at amortised cost
Borrowings – convertible bonds due 2018 (Note 13) – carried at amortised cost
3,168
5,143
–
2,701
2,692
–
10,856
23,494
Derivatives – fair value through profit or loss (Note 14)
2,171
3,116
1,043
2,700
1,694
1,416
1,522
4,068
30,837
1,037
3,116
1,043
3,262
1,694
1,416
1,522
4,068
30,837
1,037
Financial liabilities measured at amortised cost are carried at $39.7m (2014: $40.6m). The Group’s borrowings at 31 December
2015 relate entirely to the convertible bonds due 2018.
Fair value hierarchy
Derivatives
At the year end the Group’s derivative financial instrument related to various embedded derivatives within the convertible bonds
due 2018 (Note 14). The value of the derivative was calculated at inception, using the Monte Carlo simulation methodology, and at
the reporting date using the Black-Scholes formula, discounted cash flow methodology, the Company’s historic share price and
volatility, treasury rates and other estimations. As it was derived from inputs that are not from observable market data it was
been grouped into Level 3 within the fair value measurement hierarchy.
The main assumptions used in valuation of the derivative conversion option as at 31 December 2015 were:
• underlying share price of: £0.2725 (31 December 2014: £0.120);
• £/US$ spot rate of 1.4736 (31 December 2014: £1/$1.5577);
• historic volatility of 45.0% (31 December 2014: 70.7%);
• discount rate of 8.2% (31 December 2014: 8.2%)
• risk free rate based on 2.14 years (31 December 2014: 3.14 years) US Treasury rate of 0.932% (31 December 2014: 0.897%).
A 10% increase/decrease in Company’s historic share price volatility would have resulted in an increase in the fair value loss for
the year of $0.3m (31 December 2014: reduction in the fair value gain of $0.3m) and a decrease in the fair value loss of $0.1m
(31 December 2014: increase in the fair value gain of $0.2m) respectively, assuming that all other variables remain constant.
A 3% increase/decrease in the discount rate would have resulted in an increase in the fair value loss for the year of $0.6m and a
decrease in the fair value loss of $0.7m respectively, assuming that all other variables remain constant.
Held-to-maturity financial investments
Held-to-maturity securities were grouped into Level 1 as market prices were available at the reporting date for the treasury bills
from the National Bank of Ukraine benchmark.
Credit risk – Group
The Group has policies in place to ensure that sales of products are made to customers with appropriate credit worthiness.
The Group limits credit risk by assessing creditworthiness of potential counterparties before entering into transactions with
them and continuing to evaluate their creditworthiness after transactions have been initiated. Where appropriate, the use of
prepayment for product sales limits the exposure to credit risk. There is no difference between the carrying amount of trade and
other receivables and the maximum credit risk exposure.
The maximum financial exposure due to credit risk on the Group’s financial assets, representing the sum of cash and cash
equivalents, trade receivables, held to maturity financial investments and other current assets, as at 31 December 2015 was
$34.6m (2014: $32.8m).
Capital management – Group
The Directors determine the appropriate capital structure of the Group specifically, how much is raised from shareholders
(equity) and how much is borrowed from financial institutions (debt) in order to finance the Group’s business strategy.
The Group’s policy as to the level of equity capital and reserves is to ensure that it maintains a strong financial position and low
gearing ratio which provides financial flexibility to continue as a going concern and to maximise shareholder value. The capital
structure of the Group consists of shareholders’ equity together with net debt. The Group’s funding requirements are met
through a combination of debt, equity and operational cash flow.
Net debt
Net debt comprises: borrowings disclosed in Note 13 and total cash in Note 10 and excludes derivatives. Equity attributable to
the shareholders of the Company comprises issued capital, other reserves and retained earnings (see Consolidated statement
of changes in equity).
The capital structure of the Group is as follows:
Current liabilities (Note 13)
Convertible bonds due 2018 – Non-current liability (Note 13)
Total cash (Note 10)
Government treasury bills (Note 11)
Net debt
Total shareholders’ equity
2015
$000
(10,856)
(23,494)
26,255
–
(8,095)
2014
$000
(5,590)
(30,837)
25,943
2,700
(7,784)
174,266
281,348
Following the issue of $40m of convertible bonds in February 2013, the primary capital risk to the Group is the level of
indebtedness. The convertible bond includes a financial covenant which limits the Group’s indebtedness (excluding the bonds
themselves and the $15.0m Credit Agricole facility) in respect of any new borrowings (in addition to the bond amount) to three
times 12-month free cash flow based on the most recently published consolidated financial statements. During the year the
Group has complied with this financial covenant.
Liquidity risk – Group
The treasury function is responsible for liquidity, funding and settlement management under policies approved by the Board
of Directors. Liquidity needs are monitored using regular forecasting of operational cash flows and financing commitments.
The Group maintains a mixture of cash and cash equivalents and committed facilities in order to ensure sufficient funding for
business requirements.
Significant restrictions
Cash and short-term deposits held in Ukraine are subject to local exchange control regulations. These regulations provide for
restrictions on exporting capital from Ukraine (see Note 37).
Cash and short term deposits included within the consolidated financial statements to which these restrictions apply is $6.1m
(2014: $0.5m).
Temporary capital controls established by the National Bank of Ukraine (‘NBU’) on 1 December 2014 remain in place in an
attempt by the Ukrainian government to safeguard the economy and protect foreign exchange reserves in the short term.
On 4 March 2015 a number of new NBU Resolutions were implemented with immediate effect (NBU No. 160 dated 3 March 2015;
Resolution of the NBU No. 161 dated 3 March 2015; Resolution of the NBU No. 154 dated 2 March 2015).
The Resolutions extended the currency control restrictions implemented in Ukraine on 1 December 2014 and introduced
additional measures which have the impact of restricting the remittance of funds to foreign investors under certain conditions
and bans the transfer of Hryvnia to purchase Ukrainian Government bonds.
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Notes to the consolidated financial statements
15. FINANCIAL INSTRUMENTS (continued)
The restrictions were initially effective until 3 June 2015 but have subsequently been extended until 8 June 2016.
The following tables set out details of the expected contractual maturity of non-derivative financial liabilities. The tables
include both interest and principal cash flows on an undiscounted basis. To the extent that interest flows are floating rate, the
undiscounted amount is derived from interest rate curves at the reporting date.
The maturity analysis for Convertible bonds due 2018 is based on the earliest Put dates for the relevant portions of the Bonds
(see Note 13) of 19 February 2016 and 2017. None of the Bonds were put on 19 February 2015.
Group – 31 December 2015
Maturity of financial liabilities
Trade payables (Note 12)
Other payables (Note 12)
Borrowings – convertible bonds due 2018
Group – 31 December 2014
Maturity of financial liabilities
Trade payables (Note 12)
Other payables (Note 12)
Borrowings – credit facility (Note 12)
Borrowings – convertible bonds due 2018
1,040
30,171
Within 3
months
$000
3 months
-1year
$000
2,701
2,692
12,296
1,694
1,416
–
5,829
–
–
–
–
1,522
1,428
1-2
years
$000
–
–
–
–
–
2-3
years
$000
–
–
–
–
–
–
13,339
30,180
Interest rate risk profile of financial assets and liabilities – Group
At 31 December 2014, the Group was exposed to interest rate risk principally in relation to the balance outstanding on the credit
facility with Crédit Agricole CIB (France) where interest is calculated at prevailing Crédit Agricole CIB (France) bank rate plus a
margin, however there were no balances outstanding on this facility. The facility lapsed on 30 June 2015.
Fixed rate interest is charged on the Group’s convertible bond (see Note 13). The interest rate profile of the other financial assets
and liabilities of the Group as at 31 December is as follows (excluding short-term assets and liabilities, non-interest bearing):
Group – Year ended 31 December 2015
Floating rate
Short term deposits (Note 10)
Other receivables (Note 9)
Other payables (Note 12)
Group – Year ended 31 December 2014
Floating rate
Short term deposits (Note 10)
Other receivables (Note 9)
Other payables (Note 12)
Within 1 year
$000
5,699
5,143
2,692
198
1,043
(1,416)
Floating rate financial assets comprise cash deposits placed on money markets at call, seven day and monthly rates.
Fixed rate
Government treasury bills (Note 10)
Held-to-maturity financial investments (Note 11)
2015
Within 1 year
$000
2014
Within 1 year
$000
–
–
6,000
2,700
2014 fixed rate financial assets comprised Ukrainian government US$ treasury bills which matured on 7 January 2015 (Note 10)
and 11 February 2015 (Note 11).
Interest rate sensitivity – Group
The sensitivity analysis below has been determined based on the exposure to interest rates on our short term deposits at the
reporting date.
If interest rates had been 1 per cent higher/lower and all other variables were held constant, the Group’s loss after tax and net
assets for the year ended 31 December 2015 would increase/decrease by $52,000 (2014: $51,000). 1 per cent is the sensitivity
rate used as it best represents management’s assessment of the possible change in interest rates that could apply to the Group.
Foreign currency exposures – Group
The table below shows the extent to which the Group has monetary assets and liabilities in currencies other than the functional
currency of the operating company involved. These exposures give rise to the net currency gains and losses recognised in the
income statement.
As at 31 December the asset/(liability) foreign currency exposures were:
US Dollar
Sterling
Euros
Hungarian Forints
Ukrainian Hryvna
Bulgarian Leva
Russian Roubles
Canadian Dollar
Total net
2015
$000
487
(1,735)
307
904
3,320
90
5
1
2014
$000
–
333
590
1,091
(3,064)
11
33
29
3,379
(977)
Foreign currency sensitivity – Group
The Group is mainly exposed to the currency fluctuations of Ukraine (Hryvnia), Russia (Rouble) and UK (Sterling). The sensitivity
analysis principally arises on money market deposits and working capital items held at the reporting date.
The following table details the Group’s sensitivity to a 10 per cent increase and decrease in the US Dollar against Sterling and
30 per cent against Hryvnia and Rouble, all other variables were held constant. Due to the significant foreign currency fluctuation
in Ukraine and Russia 30 per cent has been used to calculate sensitivity for Hryvnia and Rouble. 30 per cent and 10 per cent
are the sensitivity rates that best represents management’s assessment of the possible change in the foreign exchange rates
affecting the Group. A positive number below indicates an increase in profit and equity when the US Dollar weakens against the
relevant currency. For a strengthening of the US Dollar against the relevant currency, there would be an equal and opposite
impact on the profit and other equity, and the balances below would be negative.
Profit/(loss) for the year and equity
30 per cent/10 per cent strengthening of the US Dollar
30 per cent/10 per cent weakening of the US Dollar
Hryvna
Rouble
Sterling
2015
$000
(766)
766
2014
$000
707
(707)
2015
$000
2014
$000
2015
$000
2014
$000
(1)
1
(8)
8
158
(158)
(30)
30
Commodity risk and sensitivity – Group
The Group’s earnings are exposed to the effect of fluctuations in oil, gas and condensate prices and the risks relating to
their fluctuation in are discussed on page 46, together with the discussion of financial risk factors. The Group’s oil, gas and
condensate is sold to local trading companies through market related contracts.
The Group is a price taker and does not enter into commodity hedge agreements unless required for borrowing purposes which
may occur from time to time. Therefore no sensitivity analysis has been prepared on the exposure to oil, gas or condensate
prices for outstanding monetary items at the 31 December 2015 as there is no impact on any outstanding amounts.
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Notes to the consolidated financial statements
16. JKX EMPLOYEE BENEFIT TRUST
In 2013, JKX Employee Benefit Trust was established and acquired 5,000,000 of shares in JKX Oil & Gas plc at a cost of $4.0m
for the purpose of making awards under the Group’s employee share schemes and these shares have been classified in the
statement of financial position as treasury shares within equity.
None of these shares were used in 2015 (2014: nil) to settle share options, therefore at the year end JKX Employee Benefit Trust
held 5,000,000 shares in JKX Oil & Gas plc (2014: 5,000,000).
17. SHARE CAPITAL
Equity share capital, denominated in Sterling, was as follows:
2015
Number
2015
£000
2015
$000
2014
Number
2014
£000
2014
$000
Authorised
Ordinary shares of 10p each
300,000,000
30,000
–
300,000,000
30,000
–
Allotted, called up and fully paid
Opening balance at 1 January
172,125,916
17,212
26,666
172,125,916
17,212
26,666
Exercise of share options
–
–
–
–
–
–
Closing balance at 31 December
172,125,916
17,212
26,666
172,125,916
17,212
26,666
Of which the following are shares held in treasury:
Treasury shares held at 1 January and
31 December
402,771
40
77
402,771
40
77
The Company did not purchase any treasury shares during 2015 (2014: none) and no treasury shares were used in 2015 (2014:
none) to settle share options. There are no shares reserved for issue under options or contracts. As at 31 December 2015 the
market value of the treasury shares held was $0.2m (2014: $0.1m).
18. OTHER RESERVES
At 1 January 2014
Exchange differences arising on translation of overseas operations
At 31 December 2014
At 1 January 2015
Exchange differences arising on translation of overseas operations
At 31 December 2015
Merger
reserve
$000
30,680
–
30,680
30,680
–
30,680
Capital
redemption
reserve
$000
587
–
587
587
–
587
Foreign
currency
translation
reserve
$000
(54,208)
(130,327)
Total
$000
(22,941)
(130,327)
(184,535)
(153,268)
(184,535)
(26,277)
(153,268)
(26,277)
(210,812)
(179,545)
Merger reserve was created on 30 May 1995 when JKX Oil & Gas plc acquired the issued share capital of JP Kenny Exploration &
Production Limited for the issue of ordinary shares and represents the difference between the fair value of consideration given
for the shares and the nominal value of those instruments.
Capital redemption reserve relates to the buy-back of shares in 2002, there have been no additional share buy-backs since this
time.
Foreign currency translation reserve includes movements that relate to the retranslation of the subsidiaries whose functional
currencies are not the US Dollar.
During 2015, the Russian Rouble (‘RR’) devalued by approximately 23% (2014: 72%) from RR56.26/$ to RR72.88/$ (2014: RR32.72/$
to RR56.26). A significant portion of the currency translation differences of US$26.3m (2014: US$130.2m) included in the
Consolidated statement of comprehensive income arose on the translation of property, plant and equipment denominated in RR
(see Note 5 (a)).
19. PROVISIONS
Current provisions
Ukrainian production based taxes (‘Rental Fees’)
2015
$000
10,854
2014
$000
–
Exceptional production based taxes
The provision, which has been recognised as a charge in the 2015 Consolidated income statement, is in respect of a claim
against PPC for additional Rental Fees for the period from August to December 2010. The claim is being contested in the
Ukrainian courts (see Note 27). The amount is denominated in Ukrainian Hryvnia (‘UAH’) and is stated above at its US$-
equivalent amount using the 2015 year end rate of UAH24.0/$. The provision is based on the total value of the claim plus interest
and penalties. The Board believes that the claim is without merit under Ukrainian law and the Company will continue to contest
it vigorously.
Contingent liabilities
Other contingent liabilities in respect of Ukrainian production taxes are explained in Note 27.
Non-current provisions
Provision for site restoration
At 1 January
Foreign exchange adjustment
Wells restored
Revision in estimates
Unwinding of discount (Note 22)
At 31 December
Ukraine
2015
$000
1,515
–
(182)
–
144
Russia
2015
$000
1,854
(417)
–
225
416
Hungary
2015
$000
619
(39)
–
–
–
Total
2015
$000
3,988
(456)
(182)
225
560
1,477
2,078
580
4,135
The provision in respect of Ukraine represents the present value of the well and site restoration costs that are expected to be
incurred up to 2034 (2014: 2034). The Russia provision results from the decommissioning of 12 wells (2014:12) and removal of
plant as required by the license obligation. Decommissioning is due to take place from 2016 to 2048 (2014: 2015 to 2048). The
provisions are made using the Group’s internal estimates that management believe form a reasonable basis for the expected
future costs of decommissioning.
20. COST OF SALES
Operating costs
Depreciation, depletion and amortisation
Other production based taxes
Exceptional item – production based taxes
Exceptional item - provision for impairment of oil and gas assets (Note 5)
Exceptional Item – well control operations (Note 5 (a))
2015
$000
24,449
26,068
26,255
76,772
10,854
51,055
–
2014
$000
31,466
32,381
45,519
109,366
–
69,062
3,471
138,681
181,899
The cost of inventories (calculated by reference to production costs) expensed in cost of sales in 2015 was $76.7m (2014: $109.3m).
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Notes to the consolidated financial statements
21. FINANCE INCOME
Interest income on deposits
Interest income from government treasury bills
Other
22. FINANCE COSTS
Bank interest payable
Borrowing costs
Unwinding of discount on site restoration (Note 19)
Less: finance costs capitalised at 18.0% (2014: 18.0%*)
* No interest has been capitalized in 2015. Tax relief on capitalised interest in 2014 is $0.7m.
23. LOSS FROM OPERATIONS – ANALYSIS OF COSTS BY NATURE
Loss from operations derives solely from continuing operations and is stated after charging the following:
Depreciation – other assets
Depreciation, depletion and amortisation – oil and gas assets
Staff costs (net of $0.2m (2013: $0.5m) capitalised, Note 25)
Foreign exchange loss
Operating lease payments:
– property lease rentals
– plant and equipment
2015
$000
1,248
41
–
2014
$000
634
323
137
1,289
1,094
2015
$000
25
5,915
560
6,500
–
6,500
2015
$000
1,440
26,151
18,537
4,919
877
1,402
2014
$000
145
5,938
139
6,222
(3,025)
3,197
2014
$000
1,984
32,406
21,995
5,673
1,101
1,560
During the year the Group (including its overseas subsidiaries) obtained the following services from the Company’s auditors as
detailed below:
Company auditors’ remuneration
Audit of the parent company and consolidated financial statements
Fees payable to company’s auditors for other services:
– Audit of the Company’s subsidiaries
– Audit related assurance services
– Other non-audit services
Exceptional item – legal costs
2015
$000
278
173
110
2
563
2014
$000
284
176
112
5
577
As disclosed on page 13 of the 2015 Annual Report, the Company has been involved in Court proceedings since July 2013 with
two shareholders.
The shareholders appealed to the Supreme Court contesting the Appeal Court ruling made in May 2014 in favour of the
Company. In December 2015 the Supreme Court overturned the Appeal Court ruling and therefore the Company is required
to settle the appropriate portion of the legal expenses incurred by the two shareholders during the process. The amount
recognised in the income statement and accruals is an estimate of their legal costs that the Company will be required to pay
when the legal process is complete.
24. OBLIGATIONS UNDER LEASES
At the reporting date, the Group’s aggregate future minimum commitments under non-cancellable operating leases are as follows:
Within one year
In the second to fifth years inclusive
After five years
2015
$000
607
2,038
425
3,070
2014
$000
811
2,116
970
3,897
Operating lease primarily relate to rentals payable by the Group for certain of its office premises and staff accommodation.
25. STAFF COSTS
Wages and salaries
UK social security costs
Other pension costs
Share based payments (equity-settled) (Note 26)
2015
$000
15,361
1,092
1,626
658
18,737
Staff costs are shown gross and $0.2m (2014: $0.5m) was capitalised, representing time spent on exploration and
development activities.
During the year, the average monthly number of employees was:
Management/operational
Administration support
2015
709
55
764
2014
$000
19,193
352
2,665
285
22,495
2014
847
60
907
Included within management/operational are 4 (2014: 4) Directors on service contracts. Further details of the Directors and
their remuneration are included on pages 84 to 99 which form part of these financial statements.
26. SHARE-BASED PAYMENTS
Share options
Share options are granted to Executive Directors and senior management based on performance criteria. The scheme rules are
described in the Directors’ Remuneration Report and repeated below. All share-based payments are equity settled.
At 31 December 2015, there were outstanding options under various employee share option schemes, exercisable during the
years 2016 to 2025 (2014: 2015 to 2024), to acquire 12,740,100 (2014: 10,854,700) shares of the Company at prices ranging from
£0.00 to £3.15 per share (2014: £0.00 to £3.15). The vesting period for 12,740,100 (2014: 10,854,700) of the share options is 3 years,
with an exercise period of 7 years making a 10 year maximum term.
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Notes to the consolidated financial statements
26. SHARE-BASED PAYMENTS (continued)
The following table illustrates the number and weighted average exercise prices (‘WAEP’) of, and movements in, share options
during the year.
Outstanding as at 1 January
Granted during the year
Lapsed during the year
Outstanding at 31 December
Exercisable at 31 December
2015
Number
10,854,700
3,845,900
(1,960,500)
2015
WAEP
45.75p
27.10p
68.85p
2014
Number
6,549,300
4,974,700
2014
WAEP
65.12p
37.99p
(669,300)
177.48p
12,740,100
28.39p
10,854,700
45.75p
–
–
158,000
151.50p
For the share options outstanding as at 31 December 2015, the weighted average remaining contractual life is 8.3 years
(2014: 8.5 years).
During the year share options were granted in accordance with the Performance Share Plan (‘PSP’), which was introduced in
2010. In addition, in 2014, share options were granted in accordance with the Discretionary Share Option Scheme (‘DSOS’). These
schemes reflect the best practice aspects recommended by the Association of British Insurers following the publication of their
guidelines in March 2001 (the ‘ABI Guidelines’).
Lapsing of Directors share options in 2016
On 28 January 2016, following a General Meeting of the Company, the service contracts of the four Executive Directors were
terminated with immediate effect. Prior to the General Meeting, the Board in place at that time approved and made payments of
£460,800 to forfeit 9,460,000 unexpired share options, which are included in the table above, and shares deferred under the 2014
bonus arrangements for Executive Directors (see page 98).
2014 Share Option Schemes
DSOS
The DSOS is made up of two parts. Options to acquire ordinary shares in the Company granted under Part A are ‘Approved
Options’ and options to acquire Shares granted under Part B of the DSOS are ‘Unapproved Options’. No consideration shall be
payable for the grant of an Option.
No options were granted under the DSOS in 2015 (2014: 3,162,900). The weighted average exercise price of options granted under
DSOS is nil (2014: 59.75p). For these options to vest there has to be an increase in the Group’s Earnings Per Share (‘EPS’) growth
over the performance period measured over the 3 consecutive calendar years commencing from the date the options were
granted. The weighted average fair value of options granted during the year under the DSOS was nil per option (2014: 24.01p).
PSP
PSP are granted to Executive Directors and senior management. Executive Directors and senior management receive awards
under the 2010 Performance Share Plan in the form of nil cost options. No consideration is required to be paid for the grant or
exercise of an Option.
3,845,900 (2014: 1,811,800) options were granted under PSP in 2015. The PSP options provide a conditional right to acquire
shares at nil cost subject to the satisfaction of the performance conditions and continued employment with the Group. For these
options to vest a comparison is performed between the Group’s TSR against the FTSE Fledgling index (half the options) (2014:
FTSE SmallCap index)and the All-Share Oil & Gas Producers index (other half of options). The weighted average fair value of
options granted during the year under the PSP was 10.35p per option (2014: 26.00p).
Fair value of share options granted
The fair value of options granted under the DSOS is estimated as at the date of grant using a variance of the Binomial model,
taking into account terms and conditions upon which the options are granted, which includes the performance condition related
to the Company’s earnings per share directly. No dividends are paid on shares under the scheme prior to exercise.
The fair value of options granted under the PSP is estimated as at the date of grant using a variant of the Monte Carlo model,
taking into account the terms and conditions upon which the options are granted, which includes the performance condition
related to the TSR directly. No dividends are paid on shares under the scheme prior to exercise.
The total share based payment charge for the year was $0.7m (2014: $0.3m).
The following table lists the inputs to the model used for the options granted in the years ended 31 December 2015 and
31 December 2014. The expected future volatility has been determined by reference to the historical volatility.
Dividend yield
Expected share price volatility
Risk free interest rate
Exercise price
Expected life of option (years)
Weighted average share price
2015
PSP
0.0%
82%
0.6%
0.0p
3.0
33.5p
2014
PSP
0.0%
44%
1.2%
0.0p
3.0
26.0p
2014
DSOS
0.0%
43%
1.5%
59.75p
3.9
24.1p
Bonus scheme
The full details of the bonus performance criteria for Directors and senior employees and the bonus earned is explained in the
Remuneration Report on pages 84 to 99.
27. TAXATION
Analysis of tax on loss
Current tax
UK – current tax
Overseas – current year
Current tax total
Deferred tax
Overseas – current year
Deferred tax total
Total taxation
2015
$000
2014
$000
–
4,827
4,827
(6,074)
(6,074)
(1,247)
(1,400)
10,911
9,511
16,309
16,309
25,820
Factors that affect the total tax charge
The total tax credit for the year of $1.2m (2014: $25.8m) is higher (2014: higher) than the average rate of UK corporation tax of
20.25% (2014: 21.50%). The differences are explained below:
Total tax reconciliation
Loss before tax
Tax calculated at 20.25% (2014: 21.50%)
Net change in unrecognised losses carried forward
Permanent foreign exchange differences
Effect of tax rates in foreign jurisdictions
Other non-deductible expenses
Recognition of previously unrecognised tax losses
Total excluding impact of change in tax rates, tax losses of prior year not previously recognised and
impairment and write down of fixed assets
Effect of changes in tax rates
Impairment of oil and gas assets/write off of exploration costs
Total tax charge
2015
$000
(82,710)
(16,749)
5,341
10,769
(256)
1,839
(2,191)
(1,247)
–
–
(1,247)
2014
$000
(53,711)
(11,548)
38,456
(4,629)
(811)
3,420
(949)
24,025
1,747
48
25,820
The current tax charged in the year of $4.8m relates to Ukrainian corporation tax and foreign exchange losses on local prepaid tax
which has arisen in the Group subsidiary, Poltava Petroleum Company. Taxes charged on production of hydrocarbons in Ukraine
and Hungary are included in cost of sales (Note 20). The standard rate of corporation tax in the UK changed from 21% to 20% with
effect from 1 April 2015. Accordingly, the Company’s profits for this accounting year are taxed at an effective rate of 20.25%.
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67
148
149
Notes to the consolidated financial statements
27. TAXATION (continued)
Factors that may affect future tax charges
A significant proportion of the Group’s income will be generated overseas. Profits made overseas will not be able to be offset by
costs elsewhere in the Group. This could lead to a higher than expected tax rate for the Group.
The UK corporation tax rate changes announced in the July 2015 Budget include reductions to the main rate of UK corporation
tax to 19% in 2017. The March 2016 Budget included a reduction in the main rate of UK corporation tax to 17% in 2020, which
has not been substantively enacted. The impact of the rate reduction is not expected to have a material impact on provided and
unprovided UK current or deferred taxation.
The corporation tax rate in Ukraine for 2015 was 18% (2014: 18%).
Taxation in Ukraine – production taxes
Since Poltava Petroleum Company’s (‘PPC’s’) inception in 1994 the Company has operated in a regime where conflicting laws
have existed, including in relation to effective taxes on oil and gas production.
In order to avoid any confusion over the level of taxes due, in 1994, PPC entered into a licence agreement with the Ukrainian State
Committee on Geology and the Utilisation of Mineral Resources (‘the Licence Agreement’) which set out expressly in the Licence
Agreement that PPC would pay royalties on production at a rate of only 5.5% even in the event that existing tax rates were
amended or new taxes introduced so as to adversely affect the economic benefit to be derived by PPC or the Company.
Pursuant to the Licence Agreement, PPC was granted an exploration licence and four 20-year production licences, each in
respect of a particular field. In 2004, PPC’s production licences were renewed and extended until 2024. New licence agreements
were also signed to reflect this change and PPC’s operations continued as before.
The Company and PPC have continued to invest in Ukraine on the basis that PPC would pay royalties on production at a rate of
only 5.5%.
In December 1994, a new fee on the production of gas (known as a ‘Rental Payment’ or ‘Rental Fee’) was introduced in Ukrainian
law. On 30 December 1995, PPC was issued a letter by the Ministry of Economy, the Ministry of Finance and the State Committee
for the Oil and Gas Industry (‘the Exemption Letter’), which established a zero rent payment rate for oil and natural gas produced
in Ukraine by PPC. Based on the Exemption Letter PPC did not expect to pay any Rental Fees.
Rental Fees paid since 2011
In 2011, new laws were enacted which established new mechanisms for the determination of the Rental Fee. Notwithstanding
the Exemption Letter, in January 2011 PPC began to pay the Rental Fee in order to avoid further issues with the Ukrainian
authorities but without prejudice to its right to challenge the validity of the demands.
Since 2011, the Rental Fees paid by PPC have amounted to more than $180m. These charges have been recorded in cost of sales
in each of the accounting periods to which they relate.
International arbitration proceedings
In 2015, the Company and its wholly-owned Ukrainian and Dutch subsidiaries commenced arbitration proceedings against
Ukraine under the Energy Charter Treaty, the bilateral investment treaties between Ukraine and the United Kingdom and the
Netherlands, respectively. In these proceedings, the Company is seeking a repayment of more than $180m in Rental Fees that
PPC has paid on production of oil and gas in Ukraine since 2011, in addition to damages to the business.
During 2015 Rental Fees in Ukraine were increased to 55% and capital control restrictions were introduced. On 14 January 2015,
an Emergency Arbitrator issued an award ordering Ukraine to cease imposing Rental Fees in excess of 28% on gas produced by
PPC, pending the outcome of the application to a full tribunal for the Interim Award. On 23 July 2015 an international arbitration
tribunal issued an Interim Award requiring the Government of Ukraine to limit the collection of Rental Fees on gas produced by
PPC to a rate of 28%.
The Interim Award was to remain in effect until final judgement is rendered on the main arbitration case, which is expected to be
heard in July 2016.
Rental Fee demands
The Group currently has three claims for additional Rental Fees being contested through the Ukrainian court process.
These arise from disputes over the amount of Rental Fees paid by PPC for certain periods since 2007, which in total amount
to approximately $41 million (including interest and penalties and translated at the 2015 year end rate of UAH24.0/$), as noted
below. All amounts are being claimed in Ukrainian Hryvnia (‘UAH’) and are stated below at their US$-equivalent amounts using
the 2015 year end rate of UAH24.0/$. The Board believes that these claims are without merit under Ukrainian law and the
Company will continue to contest them vigorously.
• January – March 2007: approximately $6 million (including $3 million of interest and penalties). The statutory term for the
tax authorities to claim payments in respect of the 2007 financial year has lapsed however in February 2013 PPC lost a legal
challenge to the legitimacy of these payments. In July 2013, PPC appealed the decision to the Kharkov Court of Appeal. PPC
won this case on the basis of a 1,095 day statute of limitation for collection having passed under Ukrainian legislation. The
Poltava tax office then filed an appeal in the High Administrative Court of Ukraine. At a hearing on 24 February 2016, the High
Administration Court of Ukraine ruled in favour of PPC although the tax authorities may choose to appeal to the Supreme
Court of Ukraine. No provision has been made in respect of this claim.
• August – December 2010: approximately $10.9 million (including $4 million of interest and penalties). On 11 March 2014 PPC
won the case in the Poltava Court. The tax office appealed and the Kharkov Court of Appeal reversed the earlier decision.
PPC then filed an appeal in the High Administrative Court of Ukraine. This hearing commenced on 3 February 2016 but was
deferred until 2 March 2016 when the court ruled against PPC. The Board intends to continue to pursue a successful decision
in this case.
• January – December 2015: approximately $24 million (including $9 million of interest and penalties). Following the
commencement of international arbitration proceedings at the beginning of 2015 (see above), from July 2015 PPC reverted to
paying a 28% Rental Fee for gas production (instead of the revised official rate of 55%) as a result of the awards granted under
the arbitration. PPC also declared part of its Rental Fee payments at 55% for the first 6 months of 2015 as overpayments
and consequently stopped paying the Rental Fee for gas in order to align the total payments made in 2015 with the 28%
rate awarded made under the arbitration proceedings. The Ukrainian tax authorities have issued PPC with claims for the
difference between 28% and 55% for the first, second and third quarters of 2015 and we anticipate receiving a claim for the
fourth quarter shortly.
As part of these proceedings, property, plant and equipment that cost UAH158m (approximately $6.6m at the period end rate of
UAH24.0/$1) was required to be pledged as security against the non-settlement of any claims that may arise in the event that the
Ukrainian authorities are successful. The net book value of the property, plant and equipment is $22.0m based on the historical
exchange rates at the dates of acquisition which were between UAH5/$1 and UAH8/$1.
A provision for $10.9m has been made in respect of the claim for the period from August-December 2010 (see Note 19).
No provision has been made for the possible future liabilities that may result from the tax uncertainties in respect of the claims
for periods from January-March 2007 and from January-December 2015.
No adjustment has been made to recognise any possible future benefit to the Company that may result from the international
arbitration proceedings.
28. DEFERRED TAX
Provided deferred taxation – net
Fixed asset differences
Other temporary differences
Tax losses
Assets
Liabilities
Net
2015
$000
8,250
5,162
2,191
2014
$000
13,090
7,958
–
2015
$000
2014
$000
2015
$000
2014
$000
(14,347)
(25,214)
(6,097)
(12,124)
(603)
–
–
–
4,559
2,191
653
7,958
–
(4,166)
Net deferred tax (liability)/asset recognised
15,603
21,048
(14,950)
(25,214)
A deferred tax liability of $14.3m (2014: $21.9m) arises in respect of PPC’s activities and $0.6m (2014: $3.3m) in respect of YGE’s
activities.
No deferred tax asset (2014: $nil) has been recognised in respect of brought forward UK losses. A deferred tax asset has of
$2.2m been recognised in respect of Yuzhgaznergie LLC (2014: nil) in respect of Russian tax losses as sufficient future taxable
profits are forecast against which these losses can be utilised before they expire. Deferred tax assets are recognised only to the
extent it is considered probable that those assets will be recoverable. This involves an assessment of when those deferred tax
assets are likely to reverse, and a judgement as to whether or not there will be sufficient taxable profits available to offset the
tax assets when they do reverse. This requires assumptions regarding future profitability and is therefore inherently uncertain.
To the extent assumptions regarding future profitability change, there can be an increase or decrease in the level of deferred tax
assets recognised which can result in a charge or credit in the year in which the change occurs.
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67 150
Notes to the consolidated financial statements
28. DEFERRED TAX (continued)
Movement on the deferred tax account in 2015
Deferred tax liabilities
Fixed assets differences
Deferred tax assets
Other temporary differences
Net change in recognised losses carried forward
Net deferred tax movement
Movement on the deferred tax account in 2014
Deferred tax liabilities
Fixed assets differences
Deferred tax assets
Other temporary differences
Net change in recognised losses carried forward
Net deferred tax movement
1 January
2015
$000
Exchange
differences
$000
(Charge)/credit
in the year
$000
31 December
2015
$000
(12,124)
1,672
4,355
(6,097)
7,958
–
7,958
(4,166)
(2,615)
(312)
(2,927)
(1,255)
(784)
2,503
1,719
6,074
4,559
2,191
6,750
653
1 January
2014
$000
Exchange
differences
$000
(Charge)/credit
in the year
$000
31 December
2014
$000
(17,380)
5,253
3
(12,124)
3,347
31,436
34,783
17,403
(1,012)
(9,501)
(10,513)
(5,260)
5,623
(21,935)
(16,312)
(16,309)
7,958
–
7,958
(4,166)
151
Loss
Loss for the purpose of basic and diluted earnings per share
(profit for the year attributable to the owners of the parent):
Before exceptional item
After exceptional item
Number of shares
Basic weighted average number of shares
Dilutive potential ordinary shares:
Share options
Weighted average number of shares for diluted earnings per share
2015
$000
2014
$000
(25,772)
(81,463)
(21,959)
(79,531)
2015
2014
172,125,916
172,125,916
–
–
172,125,916
172,125,916
In accordance with IAS 33 (Earnings per share) the effects of antidilutive potential have not been included when calculating
dilutive loss per share for the year end 31 December 2015 (2014: nil). 29,849,048 (2014: 33,165,609) potentially dilutive ordinary
shares associated with the convertible bonds (Note 13) have been excluded as they are antidilutive in 2015, however they could be
dilutive in future periods.
There were 12,740,100 (2014: 10,854,700) outstanding share options at 31 December 2015, of which 7,141,100 (2014: 3,637,200) had
a potentially dilutive effect. All of the Group’s equity derivatives were anti-dilutive for the year ended 31 December 2015.
30. DIVIDENDS
No interim dividend was paid for 2015 (2014: nil). In respect of the full year 2015, the directors do not propose a final dividend
(2014: no final dividend paid).
The deferred tax assets in respect of Russian and Ukrainian corporation tax have been recognised with due consideration of the
tax rate effective on the expected unwinding of those temporary differences.
31. RECONCILIATION OF PROFIT FROM OPERATIONS TO NET CASH INFLOW FROM OPERATIONS
Unprovided deferred taxation
Tax losses
Fixed asset differences
Other temporary differences
2015
$000
(42,235)
(5,225)
(155)
(47,615)
2014
$000
(43,209)
(3,012)
(100)
(46,321)
$122.1m (2014: $124.8m) of the tax losses will expire principally between 2017 and 2025 (2014: 2017 and 2024). The deductible
temporary differences do not expire under current tax legislation.
Deferred tax assets have not been recognised in respect of the unprovided deferred taxation items because it is not probable
that future taxable profit will be available to utilise these deductible temporary differences.
29. LOSS PER SHARE
The calculation of the basic and diluted loss per share attributable to the owners of the parent is based on the weighted average
number of shares in issue during the year of 172,125,916 (2014: 172,125,916) and the loss for the relevant year.
Loss before exceptional item in 2015 of $25,772,141 (2014 loss: $21,959,036) is calculated from the 2015 loss of $81,463,000
(2014: $79,531,000) and adding back exceptional items of $64,896,496 (2014: 72,532,964) less the related deferred tax on the
exceptional items of $9,205,637 (2014: $14,961,000).
The diluted earnings per share for the year is based on 172,125,916 (2014: 172,125,916) ordinary shares calculated as follows:
Loss from operations
Depreciation, depletion and amortisation
Loss on disposal of fixed assets
Impairment of property, plant and equipment/intangible assets
Share-based payment costs
Cash generated from operations before changes in working capital
(Increase)/decrease in operating trade and other receivables
Increase/(decrease) in operating trade and other payables
Exceptional item – increase in provision for production based taxes
Decrease in inventories
Cash generated from operations
2015
$000
(75,578)
27,591
122
51,055
658
3,848
(4,157)
1,977
10,854
275
12,797
2014
$000
(60,902)
34,390
–
69,062
285
42,835
20,836
(8,182)
–
2,922
58,411
32. CAPITAL COMMITMENTS
Under the work programmes for the Group’s exploration and development licenses the Group had committed $1.3m to future
capital expenditure on drilling rigs and facilities at 31 December 2015 (2014: $8.0m).
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67 152
153
Notes to the consolidated financial statements
33. RELATED PARTY TRANSACTIONS
The transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation.
Amounts owed by and to joint ventures are disclosed in Note 36.
Key management personnel are considered to comprise only the Directors. The remuneration of Directors during the year was
as follows:
Short-term employee benefits
Post-employment benefits
Share-based payments
2015
$000
3,671
231
508
4,410
2014
$000
3,1161
271
295
3,682
1 Restated from prior year to replace the value of the bonus in respect of 2014, which was paid in cash in January 2016 at $0.552m. In the prior year financial statements
$0.819m had been included in the above amount which reflected the value of the 2014 bonus at the time, which was expected to be deferred into shares.
Further information about the remuneration of individual Directors, together with the Directors’ interests in the share capital
of JKX Oil & Gas plc, is provided in the audited part of the Remuneration Report on pages 84 to 99 and in the Directors Report on
pages 101 and 102.
Share-based payments represents the expenses arising from share-based payments included in the income statement,
determined based on the fair value of the related awards at the date of grant (Note 26).
Subsidiary undertakings and joint operations
The Company’s principal subsidiary undertakings including the name, country of incorporation and proportion of ownership
interest for each are disclosed in Note B to the Company’s separate financial statements which follow these consolidated
financial statements. Transactions between subsidiaries and between the Company and its subsidiaries are eliminated on
consolidation. Folyópart Energia Kft (previously HHE North Kft), a Hungarian registered company, is the only entity where the
Group recognised its share of assets and liabilities up to the point of acquisition on 20 November 2014; refer to Note 36 for
further details.
34. AUDIT EXEMPTIONS FOR SUBSIDIARY COMPANIES
The Group has elected to take advantage of the full extent of the exemptions available under Section 479A of the Companies Act
2006. As a result, statutory financial statements will not be audited for the following UK entities: JKX Services Limited,
JKX Bulgaria Limited, JKX Georgia Ltd, JKX Turkey Ltd, JKX (Ukraine) Ltd, Baltic Energy Trading Ltd, EuroDril Limited, JP Kenny
Exploration & Production Limited, Page Gas Ltd, Trans-European Energy Services Limited, JKX Limited, JKX (Middle East)
Limited.
35. BUSINESS COMBINATIONS
On 20 November 2014, the Group acquired the remaining 50% of the share capital of HHE North Kft (‘HHN’), a Hungarian
registered company in exchange for 25% of share in Sarkad Licence. Following the acquisition the Hungarian company changed
its name to Folyópart Energia Kft (‘FEN’). The Group owns100% of the equity share capital of FEN.
The following table summarises the consideration paid for HHN, the fair value of assets acquired, liabilities assumed at the
acquisition date.
Purchase consideration at 20 November:
Fair value of 25% interest in the Sarkad licence
Purchase consideration to be settled in cash
Cash acquired
Fair value of existing interest at acquisition date
Total purchase consideration
Recognised amounts of identifiable assets acquired and liabilities assumed:
Property, plant and equipment
Restricted cash
Trade and other receivables
Trade and other payables
Long-term liabilities – decommissioning provision
Total identifiable net assets acquired
Gain on stepped acquisition:
Book value of existing 50% working interest
Fair value of existing 50% working interest1
Gain on stepped acquisition recognised
$000
4,626
272
(721)
4,178
8,355
8,999
556
448
(1,181)
(467)
8,355
3,956
4,178
222
1 The fair value of existing working interest is calculated based upon the consideration for the outstanding ordinary shares excluding amounts attributed to the acquisition of
non-controlling interests.
As a result of the acquisition, the 50% previously held equity interest in HHN was required to be re-measured at fair value as at
the acquisition date (IFRS 3), resulting in a gain of $0.2m. This gain has been included within the net gain arising from business
combinations line in the consolidated income statement for the year ended 31 December 2014.
Acquisition-related costs of $0.4m have been charged to administrative expenses in the consolidated income statement for the
year ended 31 December 2014.
No revenue contributed by HHN has been included in the consolidated income statement since 20 November 2014. HHN also
contributed a loss of $0.9m over the same period. Had HHN been consolidated from 1 January 2014, the consolidated statement
of comprehensive income would have included revenue of $0.01m and a loss of $1.9m.
36. JOINT ARRANGEMENTS
HHN was set up for the purpose of holding the Hernad I and Hernad II Licences. On 20 November 2014 the Company increased
its holding in HHN from 50% to 100% (see Note 35) taking full control and therefore HHN has been consolidated from that date.
The following amounts represent that share of the revenue and expenses of HHN to the period ending 20 November 2014:
Revenue
Expenses
Loss after tax
Period to
20 November 2014
$000
14
(863)
(849)
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67
154
155
Notes to the consolidated financial statements
Independent Auditors’ Report to the members of JKX Oil & Gas plc
37. EVENTS AFTER THE REPORTING DATE
JKX Board replaced
On 28 January 2016, Cynthia Dubin, Dipesh Shah, Richard Murray and Alastair Ferguson resigned as directors of the Company,
Nigel Moore, Paul Davies, Peter Dixon, Martin Miller and Lord Oxford were removed as directors at a General Meeting on the
same day. At the same meeting Paul Ostling, Tom Reed, Russell Hoare, Vladimir Rusinov and Vladimir Tatarchuk were appointed
as directors of the Company.
The resignation of all independent Non Executive Directors meant that, since that date, the composition of the Board has not
complied with UK Corporate Governance Code (‘the Code’) in respect of the number of independent Non Executive Directors. The
Company is in the final phase of appointing two new independent Non Executive Directors.
Board severance payments
Prior to the General Meeting on 28 January 2016, the previous board approved and paid themselves $2.2 million of severance
costs and additional remuneration. In addition the Company incurred $0.3 million of related social security costs.
National Bank of Ukraine (‘NBU’) strengthens its currency control restrictions
Temporary capital controls established by the NBU on 1 December 2014 remain in place in an attempt by the Ukrainian
government to safeguard the economy and protect foreign exchange reserves in the short term (see Note 15).
On 5 March 2016, these restrictions were extended until 8 June 2016.
Further award of production licences in Hungary
In January 2016, the Company’s wholly owned Hungarian subsidiary, Folyópart Energia Kft (previously HHE North Kft), was
granted a further three 35-year production licences (mining plots) covering an additional area of approximately 124 sq km within
its original Hernad I & II exploration licence areas.
Report on the company financial
statements
Other required reporting
Consistency of other information
Our opinion
In our opinion, JKX Oil & Gas plc’s company financial
statements (the ‘financial statements’):
• give a true and fair view of the state of the company’s affairs
as at 31 December 2015;
• have been properly prepared in accordance with United
Kingdom Generally Accepted Accounting Practice; and
• have been prepared in accordance with the requirements of
the Companies Act 2006.
Emphasis of matter – Going concern
In forming our opinion on the financial statements, which is
not modified, we have considered the adequacy of the
disclosure made in Note A to the financial statements
concerning the Group’s ability to continue as a going concern.
A number of potential conditions exist that may impact
this assumption: (i) gas and/or oil net realisations remain
at current levels for the foreseeable future or deteriorate
materially (ii) the full $30.1 million obligation pursuant to the
$40 million Convertible Bond becomes payable in February
2017 (iii) the Group becomes liable for additional Rental Fees
in Ukraine as a result of unfavourable outcomes in one or
more of the ongoing court proceedings and (iv) the Group’s
Ukrainian subsoil permits are suspended by the State Geology
and Mineral Resources Survey of Ukraine. These conditions,
along with the other matters explained in Note A to the
financial statements, indicate the existence of a material
uncertainty which may cast significant doubt about the
company’s ability to continue as a going concern. The financial
statements do not include the adjustments that would result if
the company was unable to continue as a going concern.
What we have audited
Companies Act 2006 opinion
In our opinion, the information given in the Strategic Report
and the Directors’ Report for the financial year for which
the financial statements are prepared is consistent with the
financial statements.
ISAs (UK & Ireland) reporting
Under International Standards on Auditing (UK and Ireland)
(‘ISAs (UK & Ireland)’) we are required to report to you if, in our
opinion, information in the Annual Report is:
• materially inconsistent with the information in the audited
financial statements; or
• apparently materially incorrect based on, or materially
inconsistent with, our knowledge of the company acquired
in the course of performing our audit; or
• otherwise misleading.
We have no exceptions to report arising from this
responsibility.
Adequacy of accounting records and information and
explanations received
Under the Companies Act 2006 we are required to report to
you if, in our opinion:
• we have not received all the information and explanations
we require for our audit; or
• adequate accounting records have not been kept by the
company, or returns adequate for our audit have not been
received from branches not visited by us; or
• the financial statements and the part of the Directors’
Remuneration Report to be audited are not in agreement
with the accounting records and returns.
The financial statements, included within the Annual Report,
comprise:
We have no exceptions to report arising from this
responsibility.
• the Company statement of financial position as at
Directors’ remuneration
31 December 2015;
• the Company statement of changes in equity for the year
then ended; and
• the notes to the financial statements, which include a
summary of significant accounting policies and other
explanatory information.
Certain required disclosures have been presented elsewhere
in the Annual Report, rather than in the notes to the financial
statements. These are cross-referenced from the financial
statements and are identified as audited.
The financial reporting framework that has been applied in
the preparation of the financial statements is United Kingdom
Accounting Standards, comprising FRS 101 “Reduced
Disclosure Framework”, and applicable law (United Kingdom
Generally Accepted Accounting Practice).
Directors’ remuneration report – Companies Act 2006
opinion
In our opinion, the part of the Directors’ Remuneration Report
to be audited has been properly prepared in accordance with
the Companies Act 2006.
Other Companies Act 2006 reporting
Under the Companies Act 2006 we are required to report
to you if, in our opinion, certain disclosures of directors’
remuneration specified by law are not made. We have no
exceptions to report arising from this responsibility.
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67 156
157
Independent Auditors’ Report to the members of JKX Oil & Gas plc
Company financial statements
Other matter
We have reported separately on the group financial statements
of JKX Oil & Gas plc for the year ended 31 December 2015. That
report includes an emphasis of matter.
Alison Baker (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
18 March 2016
Responsibilities for the financial
statements and the audit
Our responsibilities and those of the directors
As explained more fully in the Directors’ Responsibilities
Statement set out on page 103, the directors are responsible
for the preparation of the financial statements and for being
satisfied that they give a true and fair view.
Our responsibility is to audit and express an opinion on the
financial statements in accordance with applicable law and
ISAs (UK & Ireland). Those standards require us to comply
with the Auditing Practices Board’s Ethical Standards for
Auditors.
This report, including the opinions, has been prepared for
and only for the company’s members as a body in accordance
with Chapter 3 of Part 16 of the Companies Act 2006 and for
no other purpose. We do not, in giving these opinions, accept
or assume responsibility for any other purpose or to any other
person to whom this report is shown or into whose hands it
may come save where expressly agreed by our prior consent
in writing.
What an audit of financial statements involves
We conducted our audit in accordance with ISAs (UK &
Ireland). An audit involves obtaining evidence about the
amounts and disclosures in the financial statements sufficient
to give reasonable assurance that the financial statements are
free from material misstatement, whether caused by fraud or
error. This includes an assessment of:
• whether the accounting policies are appropriate to the
company’s circumstances and have been consistently
applied and adequately disclosed;
• the reasonableness of significant accounting estimates
made by the directors; and
• the overall presentation of the financial statements.
We primarily focus our work in these areas by assessing the
directors’ judgements against available evidence, forming
our own judgements, and evaluating the disclosures in the
financial statements.
We test and examine information, using sampling and other
auditing techniques, to the extent we consider necessary to
provide a reasonable basis for us to draw conclusions. We
obtain audit evidence through testing the effectiveness of
controls, substantive procedures or a combination of both.
In addition, we read all the financial and non-financial
information in the Annual Report to identify material
inconsistencies with the audited financial statements and to
identify any information that is apparently materially incorrect
based on, or materially inconsistent with, the knowledge
acquired by us in the course of performing the audit. If we
become aware of any apparent material misstatements or
inconsistencies we consider the implications for our report.
Company statement of financial position
as at 31 December
FIXED ASSETS
Property, plant and equipment
Investments
CURRENT ASSETS
Trade and other receivables – amounts falling due within one year
Trade and other receivables – amounts falling due after more than one year
Cash and cash equivalents
Creditors – amounts falling due within one year
Total assets less current liabilities
Amounts falling due after more than one year
Derivatives
Creditors – amounts falling due after more than one year
Net assets
CAPITAL AND RESERVES
Share capital
Share premium
Other reserves
Retained earnings
Total shareholders’ funds
Note
B
C
C
E
F
F
F
G
G
2015
$000
–
8,242
8,242
53,875
263,237
12,515
329,627
2014
$000
67
8,269
8,336
58,289
368,519
11,649
438,457
(129,638)
(115,881)
199,989
322,576
208,231
330,912
(2,171)
(31,794)
(1,037)
(39,140)
174,266
290,735
26,666
97,476
(503)
50,627
174,266
26,666
97,476
(503)
167,096
290,735
These financial statements on pages 157 to 169 were approved by the Board of Directors on 18 March 2016 and signed on its
behalf by:
Tom Reed Director
Russell Hoare Director
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67
158
159
Company financial statements
Company statement of changes in equity
Notes to the Company financial statements
At 1 January 2014
Loss for the year
Total comprehensive loss for the year
Share option charge
Total transactions with equity shareholders
Share
capital
$000
26,666
–
–
–
–
Share
premium
$000
97,476
–
–
–
–
Retained
earnings
$000
336,646
(169,835)
(169,835)
285
285
Other reserves
$000
(503)
–
–
–
–
Total
equity
$000
460,285
(169,835)
(169,835)
285
285
A. PRESENTATION OF THE FINANCIAL STATEMENTS
Basis of preparation
The financial statements have been prepared in accordance with Financial Reporting Standard 101, ‘Reduced Disclosure
Framework’ (FRS 101). The financial statements have been prepared under the historical cost convention, as modified for
financial assets and financial liabilities (including derivative instruments) at fair value through income statement, and in
accordance with the Companies Act 2006.
Please refer to Director’s report on page 100 for information on Company’s domicile, legal form, country of incorporation,
description of the nature of the entity’s operations and business activities.
At 31 December 2014
26,666
97,476
167,096
(503)
290,735
Going concern
At 1 January 2015
Loss for the financial year
Total comprehensive loss for the year
Share option charge
Total transactions with equity shareholders
26,666
97,476
–
–
–
–
–
–
–
–
167,096
(117,127)
(117,127)
658
658
(503)
–
–
–
–
290,735
(117,127)
(117,127)
658
658
At 31 December 2015
26,666
97,476
50,627
(503)
174,266
The majority of the Group’s revenues, profits and cash flow from operations are currently derived from its oil and gas production
in Ukraine, rather than Russia.
Throughout 2015 the decline in international oil and gas prices has significantly lowered oil and gas net realisations from JKX’s
Ukrainian operations. The prolonged period of low international oil and gas prices has continued in 2016, further adversely
affecting the financial results of the Group.
The Company may have an obligation of $30.1 million (consisting of $26 million principal, $1 million interest and a
redemption premium of $3.1 million) which may become payable pursuant to its $40 million Convertible Bond in February 2017,
if Bondholders exercise their put option at that time, or $31.1 million in February 2018 if the Bond expires at its full term
(see Notes 13 and 14 to the consolidated financial statements).
The Company’s Ukrainian subsidiary, Poltava Petroleum Company (‘PPC’) has three contingent liabilities arising from separate
court proceedings over the amount of production taxes (‘Rental Fees’) paid in Ukraine for certain periods since 2007, which in total
amount to approximately $41 million (including interest and penalties, see Note 27 to the consolidated financial statements).
The Board believes that these claims are without merit under Ukrainian law and will continue to contest them vigorously.
In addition, the Company continues to pursue a final award under its arbitration claim against Ukraine for the overpayment
of more than $180 million of Rental Fees, in addition to damages to the business (see Note 27 to the consolidated financial
statements). This international arbitration is expected to be heard in July 2016.
Following action initiated in late 2015, in January 2016, the State Geology and Mineral Resources Survey of Ukraine suspended
four subsoil use permits owned by PPC, initially with effect from 1 February 2016, but then with an extension period until
1 March 2016. The authority gave a list of actions that were required in order to avoid suspension (including a change to the
minimum production requirements under the licences) and would normally have given the operator sufficient time to remedy the
failings. Instead PPC were given only one month to do so. Through further discussion with the relevant authority, PPC has been
given more time to comply and hearings regarding the status of the licenses are planned for March 2016, at which the Board and
PPC is confident of a positive outcome.
The Directors have concluded that it is necessary to draw attention to the material uncertainties relating to the risks that (i) gas
and/or oil net realisations remain at current levels for the foreseeable future or deteriorate materially (ii) the full $30.1 million
obligation pursuant to the $40 million Convertible Bond becomes payable in February 2017 (iii) the Group becomes liable for
additional Rental Fees in Ukraine as a result of unfavourable outcomes in one or more of the ongoing court proceedings and
(iv) the Group’s Ukrainian subsoil permits are suspended by the State Geology and Mineral Resources Survey of Ukraine. It is
unclear whether any or all of these risks will be realised. These specific risks, which represent material uncertainties, may cast
significant doubt about the Group’s ability to meet its obligations as they fall due and continue as a going concern.
However the Directors believe that there is a reasonable basis to mitigate the effects of such eventualities through further
operational and cash management measures and other restructuring and/or refinancing options which are currently being
assessed.
Based on the Group’s cash flow forecasts, the Directors believe that the combination of its current cash balances, expected
future production and resulting net cash flows from operations, the implemented cost reductions as well as the availability of
additional courses of action should the need arise, mean that it is appropriate to continue to adopt the going concern basis of
accounting in preparing these financial statements. These financial statements do not include the adjustments that would result
if the Company was unable to continue as a going concern.
Transition to FRS 101
The Company is preparing its financial statements in accordance with FRS 101 for the first time and has consequently applied
the provisions of IFRS 1 – First time adoption of International Financial Reporting Standards, where applicable. There are no
differences to previously reported results arising from GAAP change.
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67 160
161
Notes to the Company financial statements
A. PRESENTATION OF THE FINANCIAL STATEMENTS (continued)
The Company has taken advantage of the following disclosure exemptions under FRS 101:
• Presentation of statement of cash flows;
• The requirements of IFRS 7 ‘Financial instruments’: Disclosure of quantitative and qualitative information regarding risks
arising from all financial instruments held by the Company. Equivalent disclosures are included in the Group’s consolidated
financial statements;
• The requirement of IFRS 13 ‘Fair Value Measurement’ to disclose the valuation techniques and inputs used to develop fair
value measurements for assets and liabilities held at fair value. Equivalent disclosures are included in the Group consolidated
financial statements;
• Disclosure of related party transactions entered into between two or more members of a group. Equivalent disclosures are
included in the Group consolidated financial statements;
• Disclosure of information relating to new standards not yet effective and not yet applied;
Property, plant and equipment
Property, plant and equipment are stated at historic purchase cost less accumulated depreciation. Cost includes the original
purchase price of the asset and the costs attributable to bringing the asset to its working condition for its intended use.
Depreciation is calculated to write off the cost of property, plant and equipment, less their residual values, over their expected
useful lives using the straight line basis as follows:
Fixtures and fittings
Computer equipment and software
– five to ten years
– three years
Investments in subsidiaries
Investments are initially measured at historic cost, including transaction costs, and stated at cost less accumulated impairment
losses. The Company assesses investments for impairment whenever events or changes in circumstances indicate that the
carrying value of an investment may not be recoverable. If any such indication of impairment exists, the Company makes
an estimate of its recoverable amount. Where the carrying amount of an investment exceeds its recoverable amount, the
investment is considered impaired and is written down to its recoverable amount.
Foreign currencies
Transactions in foreign currencies are initially recorded at the exchange rate ruling at the date of the transaction. Monetary
assets and liabilities denominated in foreign currencies are translated at the rates of exchange ruling at the statement of
financial position date, with a corresponding charge or credit to the income statement. Non-monetary items are measured in
terms of historical cost in foreign currency and are translated using the exchange rates of the original transaction.
The presentation and functional currency of the Company is the US Dollar. The US$/£ exchange rate used for the revaluation of
the closing statement of financial position at 31 December 2015 was $1/£0.67 (2014: $1/£0.6).
Share based payments
The Company operates a number of equity-settled, share-based compensation plans, under which the Company receives
services from Executive Directors and Senior Management as consideration for equity instruments (options) of the Company.
The fair value of the services received from Executive Directors and Senior Management in exchange for the grant of the options
is recognised as an expense. The total amount to be expensed is determined by reference to the fair value of the options granted:
• including any market performance conditions; (for example, the Company’s share price);
• excluding the impact of any service and non-market performance vesting conditions (for example, profitability, sales growth
targets and remaining an employee of the entity over a specified time period); and
• including the impact of any non-vesting conditions (for example, the requirement for employees to save).
Non-market performance and service conditions are included in assumptions about the number of options that are expected
to vest. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting
conditions are to be satisfied.
In addition, in some circumstances employees may provide services in advance of the grant date and therefore the grant date
fair value is estimated for the purposes of recognising the expense during the period between service commencement period
and grant date.
At the end of each reporting period, the Company revises its estimates of the number of options that are expected to vest
based on the non-market vesting conditions. It recognises the impact of the revision to original estimates, if any, in the income
statement, with a corresponding adjustment to equity.
When the options are exercised, the Company issues new shares or shares held by the JKX Employee Benefit Trust. The
proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share
premium.
The grant by the Company of options over its equity instruments to the employees of subsidiary undertakings in the group is
treated as a capital contribution. The fair value of employee services received, measured by reference to the grant date fair
value, is recognised over the vesting period as an increase to investment in subsidiary undertakings, with a corresponding credit
to equity in the parent entity financial statements.
The social security contributions payable in connection with the grant of the share options is considered an integral part of the
grant itself, and the change will be treated as a cash-settled transaction.
The rules regarding the scheme are described in the Remuneration Report on pages 84 to 99 and in Note I on share based
payments.
Share capital and treasury shares
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognised
as a deduction from share premium, net of any tax effects. When share capital recognised as equity is repurchased, the amount
of the consideration paid, which includes directly attributable costs, net of any tax effects, is recognised as a deduction from
share premium.
Repurchased JKX Oil & Gas plc shares are classified as treasury shares in shareholders’ equity and are presented in the
reserve for own shares. The consideration paid, including any directly attributable incremental costs is deducted from equity
attributable to the Company’s equity holders until the shares are cancelled or reissued.
When treasury shares are sold or reissued subsequently, the amount received is recognised as an increase in equity, and the
resulting surplus or deficit on the transaction is presented in share premium. No gain or loss is recognised in the financial
statements on the purchase, sale, issue or cancellation of treasury shares.
JKX Employee Benefit Trust
The JKX Employee Benefit Trust was established in 2014 to hold ordinary shares purchased to satisfy various new share scheme
awards made to the employees of the Company which will be transferred to the members of the scheme on their respective
vesting dates subject to satisfying the performance conditions of each scheme.
The trust has been consolidated in the Group financial statements in accordance with IFRS 10. The cost of shares temporarily
held by the trusts are reflected as treasury shares and deducted from equity.
Leasing
Rentals payable under operating leases are charged to the income statement on a straight-line basis over the term of the
relevant lease. Under operating leases, the risks and rewards of ownership are retained by the lessor. The Company has no
finance leases.
Financial instruments
Financial assets and financial liabilities are recognised on the Company’s balance sheet when the Company becomes party to
the contractual provisions of the instrument.
Derivative financial instruments
The Company accounts for derivative financial instruments in line with IFRS 7 – ‘Financial Instruments: Disclosures’ and IAS 39
– ‘Financial Instruments: Recognition and measurement’.
Any such derivative was initially recorded at fair value on the date at which the contract was entered into and subsequently re-
measured at fair value on subsequent reporting dates.
A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expires.
Fair value is the amount for which a financial asset, liability or instrument could be exchanged between knowledgeable and
willing parties in an arm’s length transaction. It is determined by reference to quoted market prices adjusted for estimated
transaction costs that would be incurred in an actual transaction, or by the use of established estimation techniques such as
option pricing models and estimated discounted values of cash flows.
Convertible bonds due 2018
The fair value of the embedded derivative associated with the convertible bond has been calculated at inception and changes in
the fair value at each reporting date are recognised in the income statement.
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67
162
163
Notes to the Company financial statements
A. PRESENTATION OF THE FINANCIAL STATEMENTS (continued)
Cash and cash equivalents
Cash and cash equivalents comprise cash in hand and current balances with banks and similar institutions, which are readily
convertible to known amounts of cash. Cash is short-term with an original maturity of less than 3 months, highly liquid investments
that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.
Restricted cash
Restricted cash is disclosed separately in the notes and denoted as restricted when it is not under the exclusive control of the
Company.
Financial liabilities and equity
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered
into. An equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its
liabilities. Equity instruments issued by the Company are recorded at the proceeds received net of direct issue costs.
Dividends
Interim dividends are recognised when they are paid to the Company’s shareholders. Final dividends are recognised when they
are approved by shareholders.
Taxation
Income tax expense represents the sum of the current tax payable and deferred tax.
The current tax payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income
statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes
items that are never taxable or deductible. Company’s liability for current tax is calculated using tax rates that have been
enacted or substantively enacted by the reporting date.
Tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity or in
other comprehensive income, in which case the tax is also dealt with in equity or other comprehensive income respectively.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and
liabilities in the financial statements and the corresponding tax base used in the computation of taxable profit. Deferred
tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the
extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised.
Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition
(other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the
accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, and interests in
joint ventures, except where the Company is able to control the reversal of the temporary difference and it is probable that the
temporary difference will not reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer
probable that sufficient taxable profit will be available to allow all or part of the asset to be recovered. Any such reduction shall
be reversed to the extent that it becomes probable that sufficient taxable profit will be available.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset
realised based on tax rates and laws substantively enacted by the reporting date. Deferred tax assets and liabilities are offset
when there exists a legal and enforceable right to offset and they relate to income taxes levied by the same taxation authority
and the Company intends to settle its current tax assets and liabilities on a net basis.
Critical accounting estimates and assumptions
The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition,
seldom equal the related actual results. The estimates and assumptions that have a risk of causing material adjustment to the
carrying amounts of assets
a) Derivatives (Note F)
Under the terms of the placing of the $40m of guaranteed unsubordinated convertible bonds (see Note F), at the option of the
Company, any conversion notice can be settled in cash rather than shares. The Cash Alternative Amount is based on the Volume
Weighted Average Price of the Company’s shares prior to the conversion notice. In addition there are other terms and conditions
attached to the bond which, together with the Cash Alternative Amount, are classified as a derivative financial instrument (see
Note F). This derivative financial instrument was measured at inception at its fair value and changes in its fair value through
to the reporting date are recorded each period in the Consolidated income statement. The fair value is computed based on
the conversion price of each bond as well as directly observable market information, including the Company’s share price and
historic volatility. The assumptions used are only an estimate of how the Company’s future share price may change and are,
therefore, subjective. Changes in these assumptions could materially impact the internally computed fair value of the derivative
resulting in corresponding impact on income or loss for the year.
B. INVESTMENTS
The net book value of unlisted fixed asset investments comprises:
Cost
At 1 January
Disposals
At 31 December
Equity investment in subsidiaries
At 31 December
2015
$000
8,269
(27)
8,242
2014
$000
8,269
–
8,269
8,242
8,269
During 2012, JKX Oil & Gas (Jersey) Limited was incorporated in Jersey as a wholly-owned subsidiary. Its sole activity is to hold
the bonds that completed in February 2014 and which provided finance for the JKX Group of companies (see Note 13 to the Group
Financial Statements).
At 31 December 2015, subsidiary undertakings of JKX Oil & Gas plc were:
Name
Adygea Gas B.V.
Baltic Catering Services
Baltic Energy Trading Ltd*
Catering-Yug LLC
Eastern Ukrainian Pipeline Ltd
EuroDril Limited
JKX Bulgaria Limited*
JKX Bulkan BG EAD
JKX Carpathian BV
JKX Georgia Ltd*
JKX Hungary BV
JKX Ltd*
Business
Holding
Oil & gas services
Oil & gas exploration and production
Oil & gas services
Oil & gas services
Oil & gas exploration, production and services
Oil & gas exploration and production
Oil & gas exploration and production
Oil & gas exploration and production
Oil & gas exploration, production and services
Oil & gas exploration and production
Dormant
JKX (Middle East) Limited*
Oil & gas exploration and production
JKX (Navtobi) Limited
JKX (Nederland) B.V.
Oil & gas exploration and production
Finance and Holding
JKX Oil & Gas (Jersey) Limited*
Finance
JKX Ondava BV
JKX Services Limited*
JKX Slovakia BV
JKX Turkey Ltd*
JKX Ukraine BV
JKX (Ukraine) Ltd*
Oil & gas exploration and production
Services
Oil & gas exploration and production
Oil & gas exploration, production and services
Finance and Holding
Oil & gas exploration, production and services
JP Kenny Exploration & Production Limited*
Finance and Holding
Kharkiv Investment Company
Holding
Page Gas Ltd*
Poltava Gas B.V.
Oil & gas exploration and production
Holding
% held
(ordinary shares)
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
Country of
incorporation
and area of
operation
Netherlands
Ukraine
UK
Russia
Ukraine
UK
UK
Bulgaria
Netherlands
UK
Netherlands
UK
UK
Cyprus
Netherlands
Jersey
Netherlands
UK
Netherlands
UK
Netherlands
UK
UK
Ukraine
UK
Netherlands
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67 164
165
Notes to the Company financial statements
B. INVESTMENTS (continued)
Subsidiary undertakings of JKX Oil & Gas plc continued:
Name
Business
Poltava Petroleum Company
Oil & gas exploration and production
Folyópart Energia Kft
Shevchenko Farm
Oil & gas exploration, production and services
Land lease
Trans-European Energy Services Limited*
Oil & gas exploration, production and services
Yuzhgazenergie LLC
Oil & gas exploration, production and services
* Held directly by JKX Oil & Gas plc. All other companies are held through subsidiary undertakings.
% held
(ordinary shares)
100.00
100.00
62.00
100.00
100.00
Country of
incorporation
and area of
operation
Ukraine
Hungary
Ukraine
UK
Russia
In the opinion of the Directors the carrying value of the investments is supported by their underlying net assets.
C. TRADE AND OTHER RECEIVABLES
Amounts falling due within one year
Amounts owed by group undertakings
Other receivables
Prepayments and accrued income
VAT receivable
2015
$000
2014
$000
53,387
58,209
–
70
418
8
72
–
53,875
58,289
45.6m (2014: $51.0m) owed by subsidiary undertakings are unsecured, bears interest based on LIBOR plus a mark-up and
repayable on demand.
Amounts falling due after more than one year
Amounts owed by group undertakings
2015
$000
2014
$000
263,237
368,519
$45.6m (2014: $46.5m) owed by subsidiary undertakings are unsecured, bears interest based on LIBOR plus a mark-up and
repayable on demand. Although amounts owed by group undertakings are due on demand, it is management’s intention that
the amounts will not be demanded in less than one year. $217.6m (2014: $322.0m) owed by subsidiary undertakings bears no
interest as these loans were classified as quasi-equity.
During the year the Company increased provision for impairment by $103.7m (recognised in 2014: $129.2m) related to
intercompany loan receivables from various subsidiaries, of which, nil (2014: $11.1m) and $103.7m (2014: $118.1m) relate to
amounts falling due within one year and after more than one year respectively. Following recent impairments to some of the
assets held by subsidiaries (see Note 5 to the consolidated financial statements), the Company expects that the carrying value
of the intercompany loan receivable may not be recoverable as these entities may not generate sufficient future profits from the
impaired assets to settle the amounts owing and accordingly, these amounts have been provided for.
D. TAXATION
Current tax charge for the year
Factors that affect the total tax charge
2015
$000
–
2014
$000
–
The total tax charge for the year of $nil (2014: nil) is higher (2014: higher) than the average rate of UK corporation tax of 20.25%
(2014: 21.5%). The differences are explained below:
Total tax reconciliation
Loss on ordinary activities before taxation
Tax calculated at 20.25% (2014: 21.50%)
Other fixed asset differences
Net change in unrecognised losses carried forward
Other differences
Non taxable income
Other non-deductible expenses
Total tax charge
Unprovided deferred tax
Tax losses
Property, plant and equipment differences
Other temporary differences
2015
$000
2014
$000
(117,127)
(169,835)
(23,718)
(36,514)
(2)
2,803
–
(2,646)
23,563
–
2015
$000
3,486
7
112
3,605
–
8,309
148
–
28,057
–
2014
$000
–
3
60
63
Neither the deductible temporary differences nor the tax losses expire under current tax legislation. Deferred tax assets have
not been recognised in respect of the unprovided deferred taxation items because it is not probable that future taxable profit will
be available to utilise these deductible temporary differences.
The UK corporation tax rate changes announced in the July 2015 Budget include reductions to the main rate of UK corporation
tax to 19% in 2017. The March 2016 Budget included a reduction in the main rate of UK corporation tax to 17% in 2020, which
has not been substantively enacted. The impact of the rate reduction is not expected to have a material impact on provided and
unprovided UK current or deferred taxation.
E. CASH AND CASH EQUIVALENTS
Cash and cash equivalents
Restricted cash
Total
2015
$000
12,509
6
12,515
2014
$000
11,643
6
11,649
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67
166
167
Notes to the Company financial statements
F. CREDITORS
Amounts falling due within one year
Amounts owed to group undertakings
Trade creditors
Other creditors
Accruals and deferred income
Amounts falling due after more than one year
Derivatives
Amounts owed to group undertakings
31 December 2015
Maturity of financial liabilities
Amounts owed to group undertakings
31 December 2014
Maturity of financial liabilities
Amounts owed to group undertakings
2015
$000
2014
$000
124,249
1,994
–
3,395
114,828
–
530
523
129,638
115,881
2,171
31,794
1,037
39,140
In 1 year or less,
or on demand
$000
2-5 years
$000
124,249
31,794
114,828
39,140
Non-current derivative financial instruments
Convertible bonds due 2018 – embedded derivatives
On 19 February 2013 the Company successfully completed the placing of $40m of guaranteed unsubordinated convertible
bonds with institutional investors which are due 2018 raising cash of $37.2m net of issue costs. The Company’s wholly-owned
direct subsidiary, JKX Oil & Gas (Jersey) Limited holds the bonds raised to finance the JKX Group. The Company unconditionally
guaranteed all the performance conditions including the conversion option.
The Bonds have an annual coupon of 8 per cent per annum payable semi-annually in arrears. The Bonds are convertible into
ordinary shares of the Company at any time from 1 April 2013 up until seven days prior to their maturity on 19 February 2018 at a
conversion price of 76.29 pence per Ordinary Share, unless the Company settles the conversion notice by paying the Bondholder
the Cash Alternative Amount (see below).
Interest, after the deduction of issue costs and the inclusion of the redemption premium, will be charged to the income
statement using an effective rate of 18.0%.
Cash Alternative Amount
At the option of the Company, the conversion notice in respect of the Bonds can be settled in cash rather than shares, the Cash
Alternative Amount payable is based on the Volume Weighted Average Price of the Company’s shares prior to the conversion
notice.
Coupon Makewhole
Upon conversion of a Bond prior to the 19 February 2015 the Company is required to pay an amount of interest equal to the
aggregate interest which would have been payable on the principal amount of the Bond if such Bond had been outstanding until
19 February 2015.
Bondholder Put Option
Bondholders have the right to require the Company to redeem the following number of Bonds on the following dates together
with accrued and unpaid interest to (but excluding) such dates:
Redemption date
19 February 2016
19 February 2017
Maximum number of Bonds to be redeemed
25% of the Bonds, having an aggregate principal amount of $10,000,000
All outstanding Bonds
Company Call Option
The Company can redeem the Bonds early in full but not in part at their principal amount together with accrued interest at any
time on or after 19 February 2017 if the Volume Weighted Average Price of the Company’s shares over a specified period equal or
exceed 130 per cent of the principal amount of the Bonds; or if the aggregate principal amount of the bonds outstanding is less
than 15% of the aggregate principal amount originally issued.
Fixed exchange rate
The Sterling-US Dollar exchange rate is fixed at £1/$1.5809 for the conversion and other features.
G. CALLED UP SHARE CAPITAL AND OTHER RESERVES
Share capital, denominated in Sterling, was as follows:
2015
Number
2015
£000
2015
$000
2014
Number
2014
£000
2014
$000
Authorised
Ordinary shares of 10p each
300,000,000
30,000
300,000,000
30,000
Allotted, called up and fully paid
Opening balance at 1 January
172,125,916
17,212
26,666
172,125,916
17,212
26,666
Exercise of share options
–
–
–
–
–
–
Closing balance at 31 December
172,125,916
17,212
26,666
172,125,916
17,212
26,666
Of which the following are shares held in treasury:
Treasury shares held at 1 January and
31 December
402,771
40
77
402,771
40
77
The Company purchased no treasury shares during 2015 (2014: none). There were no treasury shares used in 2015 (2014: none)
to settle share options. There are no shares reserved for issue under options or contracts. As at 31 December 2015 the market
value of the treasury shares held was $0.2m (2014: $0.1m).
Other reserves
At 1 January 2015 and 31 December 2015
Capital
Redemption
Reserve
$000
Foreign
Currency
Translation
reserve
$000
587
(1,090)
Total
$000
(503)
The foreign currency translation reserve comprises differences arising from the retranslation of the Company balance sheet
from £ Sterling into US Dollars in 2006.
H. INCOME STATEMENT
The Company has elected to take the exemption under section 408 of the Companies Act 2006, to not present the parent
company income statement. The net loss for the parent company was $117.1m (2014: $169.8m loss).
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67
For the share options outstanding as at 31 December 2015, the weighted average remaining contractual life is 8.3 years
(2014: 8.5 years).
J. AUDITORS’ REMUNERATION
12,740,100
28.39p
10,854,700
45.75p
Bonus scheme
–
–
158,000
151.50p
The full details of the bonus performance criteria for Directors and senior employees and the bonus earned is explained in the
Remuneration Report on pages 84 to 99.
168
169
Notes to the Company financial statements
I. SHARE-BASED PAYMENTS
Share options
Share options are granted to Executive Directors and senior management based on performance criteria. The scheme rules are
described in the Directors’ Remuneration Report and repeated below. All share-based payments are equity settled.
At 31 December 2015, there were outstanding options under various employee share option schemes, exercisable during the
years 2016 to 2025 (2014: 2015 to 2024), to acquire 12,740,100 (2014: 10,854,700) shares of the Company at prices ranging from
£0.00 to £3.15 per share (2014: £0.00 to £3.15). The vesting period for 12,740,100 (2014: 10,854,700) of the share options is 3 years,
with an exercise period of 7 years making a 10 year maximum term.
The following table illustrates the number and weighted average exercise prices (‘WAEP’) of, and movements in, share options
during the year.
2015
Number
10,854,700
3,845,900
(1,960,500)
2015
WAEP
45.75p
27.10p
68.85p
2014
Number
6,549,300
4,974,700
2014
WAEP
65.12p
37.99p
(669,300)
177.48p
Outstanding as at 1 January
Granted during the year
Lapsed during the year
Outstanding at 31 December
Exercisable at 31 December
During the year share options were granted in accordance with the Performance Share Plan (‘PSP’), which was introduced in
2010. In addition, in 2014, share option were granted in accordance with the Discretionary Share Option Scheme (‘DSOS’). These
schemes reflect the best practice aspects recommended by the Association of British Insurers following the publication of their
guidelines in March 2001 (the ‘ABI Guidelines’).
Lapsing of Directors share options in 2016
On 28 January 2016, following a General Meeting of the Company, the service contracts of the four Executive Directors were
terminated with immediate effect. Prior to the General Meeting, the Board in place at that time approved and made payments of
£460,800 to forfeit 9,460,000 unexpired share options, which are included in the table above, and shares deferred under the 2014
bonus arrangements for Executive Directors (see page 98).
Share Option Schemes
DSOS
The DSOS is made up of two parts. Options to acquire ordinary shares in the Company granted under Part A are ‘Approved
Options’ and options to acquire Shares granted under Part B of the DSOS are ‘Unapproved Options’. No consideration shall be
payable for the grant of an Option.
No options were granted under the DSOS in 2015 (2014: 3,162,900). The weighted average exercise price of options granted under
DSOS is nil (2014: 59.75p). For these options to vest there has to be an increase in the Group’s Earnings Per Share (‘EPS’) growth
over the performance period measured over the 3 consecutive calendar years commencing from the date the options were
granted. The weighted average fair value of options granted during the year under the DSOS was nil per option (2014: 24.01p).
PSP
PSP are granted to Executive Directors and senior management. Executive Directors and senior management receive awards
under the 2010 Performance Share Plan in the form of nil cost options. No consideration is required to be paid for the grant or
exercise of an Option.
3,845,900 (2014: 1,811,800) options were granted under PSP in 2015. The PSP options provide a conditional right to acquire
shares at nil cost subject to the satisfaction of the performance conditions and continued employment with the Group. For these
options to vest a comparison is performed between the Group’s TSR against the FTSE Fledgling index (half the options) (2014:
FTSE SmallCap index) and the All-Share Oil & Gas Producers index (other half of options). The weighted average fair value of
options granted during the year under the PSP was 10.35p per option (2014: 26.00p).
Fair value of share options granted
The fair value of options granted under the DSOS is estimated as at the date of grant using a variance of the Binomial model,
taking into account terms and conditions upon which the options are granted, which includes the performance condition related
to the Company’s earnings per share directly. No dividends are paid on shares under the scheme prior to exercise.
The fair value of options granted under the PSP is estimated as at the date of grant using a variant of the Monte Carlo model,
taking into account the terms and conditions upon which the options are granted, which includes the performance condition
related to the TSR directly. No dividends are paid on shares under the scheme prior to exercise.
The total share based payment charge for the year was $0.7m (2014: $0.3m).
The following table lists the inputs to the model used for the options granted in the years ended 31 December 2015 and
31 December 2014. The expected future volatility has been determined by reference to the historical volatility.
Dividend yield
Expected share price volatility
Risk free interest rate
Exercise price
Expected life of option (years)
Weighted average share price
2015
PSP
0.0%
82%
0.6%
0.0p
3.0
33.5p
2014
PSP
0.0%
44%
1.2%
0.0p
3.0
26.0p
2014
DSOS
0.0%
43%
1.5%
59.75p
3.9
24.1p
2015
$000
2014
$000
Audit services
Fees payable to the Company’s auditors for the audit of the parent company
40
40
K. DIRECTORS’ REMUNERATION
The remuneration of the Directors is disclosed in the audited section of the Remuneration Report on pages 84 to 99, which form
part of these financial statements.
L. DIVIDENDS
No interim dividend was paid for 2015 (2014: nil). In respect of the full year 2015, the directors do not propose a final dividend
(2014: no final dividend paid).
M. OPERATING LEASE COMMITMENTS
At the reporting date, the Company’s aggregate future minimum commitments under non-cancellable operating leases in
respect of properties as follows:
Within one year
In the second to fifth years inclusive
After five years
N. EVENTS AFTER THE REPORTING DATE
See Note 37 to the consolidated financial statements.
2015
$000
510
2,038
425
2,973
2014
$000
529
2,116
970
3,615
Financial statements 104-169Governance 68-103JKX Oil & Gas plc Annual Report 2015JKX Oil & Gas plc Annual Report 2015Strategic report 2-67 171
JKX Oil & Gas plc Annual Report 2015
Notes
Directors and advisers
Directors
Paul Ostling
Tom Reed
Russell Hoare
Vladimir Rusinov
Vladimir Tatarchuk
Company Secretary
Capita Company Secretarial Services Limited
Registered office
6 Cavendish Square, London W1G 0PD
Registered in England
Number: 3050645
Registrars
Equiniti
Aspect House, Spencer Road
Lancing, West Sussex BN99 6DA
Solicitors
Herbert Smith Freehills LLP
Exchange House, Primrose Street
London EC2A 2EG
Principal bankers
Bank of Scotland plc
The Mound, Edinburgh EH1 1YZ
Independent auditors
PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
1 Embankment Place, London WC2N 6RH
170
170
General information
Glossary
2P reserves
3P reserves
P50
AFE
AIFR
Bcf
Bcm
bcpd
boe
boepd
bopd
bpd
bwpd
cfpd
EPF
FEN
GPF
HHN
Hryvnia
HSECQ
HTHP
KPI
LIBOR
LPG
LTI
Mbbl
Mboe
Mcf
Mcm
MMcfd
MMbbl
MMboe
PPC
Roubles
RR
sq. km
TD
$
UAH
US
VAT
YGE
Proved plus probable
Proved, probable and possible
Reserves and/or resources estimates
that have a 50 per cent probability of
being met or exceeded
Authorisation For Expenditure
All Injury Frequency Rate
Billion cubic feet
Billion cubic metres
Barrel of condensate per day
Barrel of oil equivalent
Barrel of oil equivalent per day
Barrel of oil per day
Barrel per day
Barrels of water per day
Cubic feet per day
Early Production Facility
Folyópart Energia Kft
Gas Processing Facility
HHE North Kft
The lawful currency of Ukraine
Health, Safety, Environment,
Community and Quality
High Temperature High Pressure
Key Performance Indicator
London InterBank Offered Rate
Liquefied Petroleum Gas
Lost Time Injuries
Thousand barrels
Thousand barrels of oil equivalent
Thousand cubic feet
Thousand cubic metres
Million cubic feet per day
Million barrels
Million barrels of oil equivalent
Poltava Petroleum Company
The lawful currency of Russia
Russian Roubles
Square kilometre
Total depth
United States Dollars
Ukranian Hryvna
United States
Value Added Tax
Yuzhgazenergie LLC
Conversion factors 6,000 standard cubic feet
of gas = 1 boe
JKX Oil & Gas plc Annual Report 2015
172
JKX Oil & Gas plc Annual Report 2015
Notes
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JKX Oil & Gas plc, 6 Cavendish Square, London W1G 0PD
+44 (0)20 7323 4464