JKX Oil & Gas plc
2018
Annual Report
JKX Oil & Gas plc Annual Report 2018
In this report
Strategic report
How we performed this year
Our business
Chairman’s statement
Market overview
General directors statements
Our business model
2019 Strategic objectives
Operations review
Reserves update
Performance in 2018
Financial review
Corporate social responsibility (CSR) review
Principal risks and how we manage them
Governance
Board composition
Corporate governance
Audit Committee Report
Directors’ Remuneration Report
Directors’ report – other disclosures
Financial statements
Group
Independent Auditors’ Report
Consolidated income statement
01
02
04
06
10
12
13
16
19
22
24
27
32
42
44
51
56
68
72
80
Consolidated statement of comprehensive income 82
Consolidated statement of financial position
Consolidated statement of changes in equity
Consolidated statement of cash flows
Notes to the consolidated financial statements
Company
Company statement of financial position
Company statement of changes in equity
Notes to the Company financial statements
83
84
85
86
126
127
128
1
JKX Oil & Gas plc Annual Report 2018
STRATEGIC REPORT
How we performed this year
Update:
2018 was a year of achievement for JKX. On the back of successful
operations we built up our liquidity reserves and reduced our
borrowings. Our cash now significantly exceeds our bond debt. We
resumed drilling in Ukraine and sourced a new rig in Russia. Both
countries exceeded 2017 production. We also benefitted from a strong
market in Ukraine.
Revenue
$92.9m
2017: $74.6m
Profit from operations
before exceptional charges
$20.7m
2017: $7.5m
Profit/(loss) for the year
$15.3m
2017: $(17.7)m
Cash generated from continuing
operations
Cash flow used in investing
activities
Total year-end cash
$37.3m
2017: $14.2m
$12.8m
2017: $16.0m
$19.2m
2017: $6.9m
Outlook:
• In Ukraine we are drilling side tracks and new wells as we continue
to execute our new five year development plan.
• In Russia we are undertaking a substantial three well workover
programme targeting a significant increase in production.
• We expect a final decision on one of the two outstanding tax claims
in 2019.
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JKX Oil & Gas plc Annual Report 2018
STRATEGIC REPORT
Our business
What we do
JKX is an oil and gas exploration and
production company focused on eastern
Europe.
Where we operate
MOSCOW
Russia
Ukraine
KIEV
POLTAVA
Elyzavetivske
Novomykolaivske Complex
Hajdunanas
Hungary
Koshekhablskoye
MAIKOP
Black Sea
C
a
s
p
i
a
n
S
e
a
3
JKX Oil & Gas plc Annual Report 2018
Group statistics
Licences
Ukraine
Russia
Hungary
Group
1. Ignativske
1. Koshekhablskoye
1. Emod V
13 licences
2. Elyzavetivske
3. Rudenkivske
4. Novomykolaivske
5. Movchanivske
6. Zaplavska
2. Tiszavasvari IV
3. Hajdunanas IV
4. Hajdunanas V
5. Pely I
6. Jaszkiser II
Total licence area, sq. km
405
33
200
638
Stage
Production
2018 gas production, MMcfd
[MMcm]
2018 oil production, bopd
2018 total production, boepd
Reserves
2P reserves, MMboe
3P reserves, MMboe
2C resources, MMboe
Staff
Exploration
Appraisal
Development
Production
Appraisal
Development
Production
Exploration
Appraisal
Production
Exploration
Appraisal
Development
Production
17.6
[497]
751
3,677
24.2
36.1
90.9
372
30.7
[868]
58
5,169
69.8
115.8
74.8
197
0.5
[14]
7
91
0.0
0.0
0.0
0
48.8
[1,379]
816
8,937
93.9
151.8
166.0
569
Note: there are minor differences in the tables above due to rounding effects.
4
JKX Oil & Gas plc Annual Report 2018
STRATEGIC REPORT
Chairman’s statement
constructive relationship with Cascade over the years to come,
whilst ensuring the continued independent nature of the Board.
During the year all the independent Directors (myself included)
stood down and offered ourselves up for re-election at an
EGM held on 22 March 2018 in order to ensure that we had the
confidence of all shareholders.
I am glad to be able to report that all the directors were
reappointed - as were Mr Bakunenko and Mr Rusinov who stood
down and offered themselves up for re-election at the AGM held
on 25 June 2018.
The Board seeks to foster an active and open communication
with all our shareholders. During the year I have met with a
range of shareholders to ensure that I can explain our strategy
and discuss their concerns in order to ensure that decisions are
taken in the best interests of the Company as a whole.
Operational and financial alignment between all companies
of the Group
The Board has undertaken a review of key processes and has
introduced a number of new policies and procedures in order
to ensure the robustness of the Group control framework and a
harmonised approach on a Group-wide basis. These processes will
enhance the Board and senior management’s ability to identify
and manage risk.
In 2018, the Group has also reviewed its existing contractor base.
This work has included comprehensive rig tender exercises in
both Ukraine and Russia, to find rigs of a suitable standard to
carry out the 2019 work plan. New drilling contractors have
been appointed and additional contracts will be concluded in
the near future. In addition a five year field development plan
has been approved for Ukraine as well as a three well work over
programme for Russia.
Focus on operational risk management developing existing
fields step by step with proven, low risk technology
In 2018 Poltava Petroleum Company (‘PPC’) undertook an active
work programme including working over leased and owned
wells, three successful side-tracks and a new well completed. As a
consequence annual production from Ukrainian assets increased
by 4.8% in 2018 compared to 2017 and we are now starting to see
the benefits of the work done in Q4 2018 and Q1 2019. The Group
production from the first 2 months of 2019 is 11% higher than for
the same period in 2018 and 9% higher than the average monthly
production during 2018.
During 2018 successful production from two leased wells in the
northern part of Rudenkivske further confirmed the presence
of commercial hydrocarbons and plans are in place to drill a
side-track in this field in 2019. Access to WM215, a leased well in
the West Mashivska licence, together with the implementation of
the necessary flowline connections led to first production from
this field in the second half of the year. After year end a new well
has been drilled in the new West Mashivska field (WM3) and 3D
seismic shooting completed. Preparations are underway for the
testing of WM3 and the seismic now being processed.
In Russia production increased by 3% in 2018 compared to 2017.
Despite a continuing decline in Well 20 through the year, Russian
production is up year-on-year, with the help of periodic acid jobs,
due to the continued stable performance of Well 25 and 27.
Ensure financial stability by building liquidity reserves,
reducing debt and keeping tight control over costs
As reported above, the Company has recorded its first full year
profit after tax since 2013 (2018: $15.3 m, 2017: Net loss $17.7
m) and has moved from being in a net debt position to a net cash
Dear shareholder, I am pleased to present the
results for the full 2018 year and to report
that 2018 has been a year of significant
and positive change for the Company, with
progress made in many key areas.
Previously the Board identified the following areas of
immediate focus for 2018:
• Restoring a constructive relationship with the
shareholders of the Company;
• Ensuring full operational and financial alignment
between all companies of the Group;
• Operational risk management developing existing fields
with proven, low risk technology;
• Ensuring financial stability by building liquidity
reserves, reducing debt and keeping tight control over
cost;
• Resolving outstanding tax issues.
It is particularly notable that I am able to report the first full year
profit for the year ended 31 December 2018 since 2013 and that in
2018 we have moved from having a net debt of $9.7m at the start
of the year to a closing net cash position of $8.2m.
This represents a significant improvement in the Company’s
financial position and a vindication of the hard work and
commitment from the Company’s officers and staff over the
year. The Company’s focus has been on cost and risk control,
building liquidity reserves, stabilising the operations, improving
the contractor base and achieving successful results from the
workover programme, as well as achieving stronger oil and gas
prices.
Along with improved financial results there has also been
positive progress in the other key focus areas I identified in the
2017 Annual Report:
Relationship with shareholders
For the first time in many years the Company’s Board and senior
leaders have remained stable since the last annual report, the
only changes in the Board arising from the sale of Proxima’s
19.97% shareholding to our new strategic investor, Cascade
Investment Fund. I would like to recognise Proxima’s support
of the Company and to welcome Cascade. I look forward to a
5
JKX Oil & Gas plc Annual Report 2018
position (2018 net cash: $8.2 m, 2017: net debt: $9.7m).
The Board and the senior executive team have successfully
used the Group’s positive operating cash flow to pay off debt
on schedule and to consolidate cash reserves by strengthening
cost controls and ensuring improved procurement and payment
procedures in order to reduce future spend.
All planned payments to bondholders were successfully made in
February 2018 and 2019, thus repaying on schedule one third of
the capital outstanding on the bonds in 2018 (capital repaid 2018:
$5.3 m) and one half of the remainder in 2019 (2019: $5.3 m). The
final capital repayment ($5.4 m) will be made in February 2020.
Resolving outstanding tax issues
The Company’s principal operating Company, PPC, has three
material unresolved tax issues relating to:
1.
2.
A claim for underpayment of rental fees for 2010. The claim,
including interest and penalties, amounts to approximately
$12.4m. A ruling from the Supreme Court of Ukraine is
expected in H1 2019.
Claims for underpayment of rental fees for 2015. The claims,
including interest and penalties, amount to approximately
$30.1m. The tax notification was subsequently cancelled. The
cases are still being contested
in court. We do not expect any final ruling in these cases
before 2020.
3. An award of approximately $12.1m made by the Hague
international tribunal in 2017. In February 2019 we filed
for recognition of this award in the Ukrainian courts, and
although material uncertainties remain over practical
enforcement, we expect the recovery in 2020 at the earliest.
As described above, the timing of the court processes dealing
with the royalty claims has become much clearer during 2018,
and a decision on the claim for underpayment of rental fees for
2015 is not expected before 2020. This provision for potential
liability of $30.1m has consequently been reclassified from short
term to long term liabilities. This reclassification, together with
the improved cash position, means that the company reasonably
expects to have sufficient liquidity to pay tax claims that may
arise if we do not successfully defend our position in Ukrainian
courts.
More effective governance
The Board is culturally diverse, widely experienced and consists
of individuals with knowledge and skills in each of the key
areas of risk for the Company and with significant experience of
operating in JKX’s key markets.
As described in last year's Annual Report and Accounts, an
external investigation was commissioned in Q1 2018 into the
procurement of legal services and subsequent payments made to
legal advisers in Ukraine in 2017. This investigation concluded
that there had been a breakdown in internal controls and a
number of measures have been introduced to strengthen the
Company's internal control systems.
The Board’s approach to the senior executive leadership remains
unchanged and fit for purpose. In practice this means that each
operating subsidiary has a General Director reporting directly
to the Chairman whilst a Group Chief Financial Officer provides
Group level overview and leadership. At the same time the highly
experienced Board continues to make its range of skills and
experience available to the Company.
would not otherwise be available to it, whilst reinforcing the
Directors’ strong commitment to Board independence. In addition
to the non-executive Chairman, the number of independent
directors has remained steady at three, while the number of non-
independent directors has been reduced from three to one.
Outlook
Ukraine and Russia will remain our main areas of operation and
the Board and management will continue to devote their full
attention to our assets in these countries.
In Ukraine, we are starting to see the benefits of the work done
and plan developed in 2018. Production figures in Q1 2019 have
risen to 5,009 boepd (2018 average annual production: 3,677
boepd). We will continue to prioritise low cost, low risk activities
in order to maximise the impact of our free cash using the newly
appointed drilling contractors and we will enhance our technical
capabilities to ensure on time and on budget delivery of work
packages.
In Russia a rig has arrived for the first well of the three well
workover programme planned for 2019 and we are exploring
alternative sales strategies in order to secure stable, long term
sales at increased prices.
We anticipate a gradually improved cash flow through 2019 as
the Group strategy and focus on operational excellence starts
to yield results. This includes an unrelenting focus on internal
control and cost optimisation.
In summary the key areas of focus for 2019 are:
•
•
•
•
successful implementation of the five year field development
programme;
continued focus on financial stability, risk management and
cost control;
resolving outstanding tax issues; and
an initial, strategic review of areas of new opportunity.
People
In 2018 the company suffered the tragic loss of an operator in
Ukraine. This sad loss has caused the company to review its HSE
provision across all its operations, in particular in high risk
activities.
2018 has been a period of organisational stability for JKX
following a period of significant Board and management change.
This stability has given us the chance to continue right-sizing the
organisation and to ensure that we have the correct resources in
the right places in order to implement our revised strategy.
I would like to thank JKX’s staff for ensuring continuity and
smooth operations and to both our staff and our shareholders for
their continued faith in the Company.
I remain optimistic about the Company, whilst being realistic
about the challenges that it continues to face.
On behalf of the Board
We believe that the current composition of the Board continues
to provide the Company with access to expertise and skills that
Hans Jochum Horn
Chairman
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JKX Oil & Gas plc Annual Report 2018
STRATEGIC REPORT
Market overview - Ukraine
Why are we here?
Ukraine is our most important market,
providing most of our cash flow.
Gas consumption still exceeds Ukrainian domestic production,
which leaves an incentive for us to increase our production
further. The gas market remains liberal and natural gas prices
were strong during 2018.
Reserves
Ukraine holds 1.1 trillion cubic metres (37.1 trillion cubic feet)
of proven gas reserves - the second largest proven reserves in
Europe.
Regulatory and investment climate
Ukraine continues to improve the investment climate in the
gas production sector. Notable developments in 2018 include a
new fiscal regime for wells in force from January 2018, which
reduced rental fee for new wells of less than 5,000 metres to
12%, and for deeper wells to 6%.
Opportunities
The Government and the State Geological Survey of Ukraine
announced electronic auctioning of oil and gas field licences,
which is a significant step towards a more transparent process.
In total, 30 oil and gas licences have been made available for
Ukraine's gas balance 1992-2018 (bcm)
auction and there is the opportunity for further investments
in Production Sharing Agreements.
JKX’s expertise in this market, gained through more than
25 years of successful business in Ukraine, leaves us well
placed to take advantage of these and other investment
opportunities as they emerge.
Total proven gas reserves in Europe
Trillion cubic metres (data as of end 2017)
1.7
2.0
1.5
1.0
0.5
0.0
1.1
0.7
0.2
0.1
0.1
Norway
Ukraine
Netherlands
United
Kingdom
Poland
Romania
Source: BP Statistical Review of World Energy 2018
150
120
90
60
30
0
-30
2
9
9
1
3
9
9
1
4
9
9
1
5
9
9
1
6
9
9
1
7
9
9
1
8
9
9
1
9
9
9
1
0
0
0
2
1
0
0
2
2
0
0
2
3
0
0
2
4
0
0
2
5
0
0
2
6
0
0
2
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
7
1
0
2
8
1
0
2
Source: Energobusiness; Company Research.
Ukraine's gas price premium ($/Mcm)
500
400
300
200
100
0
2010
2011
2012
2013
2014
2015
2016
2017
2018
Source: Company Research.
Imports from Russia
Imports from Central Asia
Domestic production
Imports from Europe
Exports
Ukraine
TTF
Henry Hub
7
JKX Oil & Gas plc Annual Report 2018
Netback
Netback analysis of gas sales (at $307.8/Mcm in 2018
and $237.4/Mcm in 2017)
JKX’s assets in Ukraine
$41.5 (18%)
$60.0 (25%)
$135.9 (57%)
2018
2017
$53.2 (18%)
$81.4 (26%)
$173.2 (56%)
Production costs
Production taxes
Net
Netback analysis of oil sales (at $74.0/bbl in 2018
and $64.3/bbl in 2017)
$9.1 (12%)
$19.2 (26%)
$7.1 (11%)
$17.2 (27%)
D N I E P E R - D O N E T S
B A S I N
Kiev
Ukraine
Elyzavetivske
Novomykolaivske
Complex
Russia
Black Sea
Novomykolaivske Complex
Our Novomykolaivske 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.
Elyzavetivske field
Our Elyzavetivske field and
GPF, which are 45km from our
Novomykolaivske Complex, began
commercial production in 2014.
The field currently produces from
eight wells.
Ukrainian reserves
At the end of 2018, our 2P reserves
in Ukraine comprised 129.8 Bcf of
gas and 2.5 MMbbl of oil (total 24.2
MMboe).
Project life cycle
Reserves
$45.7 (62%)
$40.0 (62%)
Novomykolaivske Complex
Reserves split
2018
2017
Production costs
Production taxes
Net
24 years
of commercial production to date
89.7% gas
10.3%
1994
2018
2035
89.7%
Gas
Oil
Movchanivske
Ignatativske
Novomykolaivske
Rudenkivske
Zaplavska
Elyzavetivske field
5 years
of commercial production to date
Principal risks associated with our business
in Ukraine (detail on page 32-40)
1995
2018
2029
Liquidity, funding, and portfolio management
Commodity prices and FX fluctuations
Reservoir and operational performance
A
H
C
8
STRATEGIC REPORT
Market overview - Russia
Why are we here?
We have access to high quality, long
life reserves in Russia together with an
established processing facility.
Whilst gas prices are regulated, they are stable and increase
year on year. Our focus is now to increase production volumes
closer to the plant capacity, in order to maximise return on the
capital expenditure invested.
Despite Russia’s overall gas surplus, Russia’s southern regions
are short of gas with consumption exceeding production by
more the three times. Whilst Russia’s average gas consumption
has stagnated in recent years, Russia’s southern regions such as
Krasnodar have continued to grow.
Our Koshekhablskoye field is located in the Autonomous
Republic of Adygea in southern Russia. This region enjoys
some of the country’s highest gas prices. This is because the
gas industry’s key reference price - the regulated price for
industrial consumers set for Gazprom - is set based on the
distance from Russia’s key producing region - Nadym Pur Taz
(NPT) in Russia’s far north. Adygea is located more than
4,000 km from NPT.
Adygean regional authorities are proactively working on
investment projects aimed at boosting industrial potential,
and as the major local energy supplier we look forward to their
development.
Due to the depth of the main production horizons in our
Koshekhablskoye field, we enjoy a significant production tax
break as compared to other non-Gazprom producers.
Notwithstanding our access to some of the highest regional gas
prices in Russia, we continue to seek opportunities to increase
gas sales margins, particularly by direct gas sales to end users.
In the longer term we remain extremely well placed for any
liberalisation of the gas market in Russia.
Regulated gas pricing by region (RUB/Mcm)
Region
YaNAO
KhMAO
Chelyabinsk
Samara
Moscow
Adygeya
Netback
Residential
price
Industrial
price
2,573
3,007
3,601
3,651
3,754
3,805
2,574
3,029
4,003
4,213
4,694
4,792
Netback analysis of gas sales (at $58.3/Mcm in 2018 and $59.7/Mcm in
2017 )
$27.0 (46%)
$5.7 (10%)
$25.6 (44%)
$32.1 (53%)
$5.8 (10%)
$21.8 (37%)
2018
2017
Production costs
Production taxes
Net
Southern Russia gas supply and demand (Bcm)
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
13.1
53.9
18.3
Supply
Demand
Gas production
Gas export
Gas consumption
Source: Company Research.
JKX Oil & Gas plc Annual Report 2018 9
JKX’s assets in Russia
Ukraine
Rostov-on-Don
Russia
Krasnodar
Koshekhablskoye
Maikop
R E P U B L I C
O F A DY G E A
Black Sea
Koshekhablskoye field
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 4,000 km away.
Russian reserves
At the end of 2018, our 2P reserves
in Russia comprised of 414.6 Bcf of
gas and 0.7 MMbbl of oil (total 69.8
MMboe).
Koshekhablskoye
project life cycle
Reserves
Total project life cycle
Reserves split
6 years
of commercial production to date
99% gas
1%
2012
2018
2049
99%
Gas
Oil
Principal risks associated with our business
in Russia (detail on pages 32-40)
Geopolitical and fiscal risks
Reservoir and operational performance
B
C
JKX Oil & Gas plc Annual Report 2018 10
STRATEGIC REPORT
General directors statements
Ukraine
Ukraine
Victor Gladun General Director
In 2018 in Ukraine we achieved our best
financial results since 2011 and a new well
was drilled for the first time in 5 years.
Profitability was increased by access to third
party wells operated under service or rental
agreements.
Our revenue was up by 32% (from $57.0m to $75.3m) due to
the increased price for oil and gas.
Gas production for the year was up by 5% from 16.7 MMcfd
(474 Mcmd) in 2017 to 17.6 MMcfd (497 Mcmd) in 2018, while
oil production was also up by 5% from 719 boepd in 2017 to 751
boepd in 2018.
Key elements of 2018 activity were getting access to third party
wells under service or rental agreements and entering the
West Mashivska field, one of our main undeveloped assets. To
enable production from this field, we installed 8 km of pipeline
and commenced a 113 km2 3D seismic acquisition programme,
completed in February 2019.
The five year development plan for all five Ukrainian
licences was approved by the Board in September 2018 and
implementation began in December, ending the year with
encouraging results from a side track on Ignativske. 2019 is
off to a good start with first quarter production more than 40%
higher than in 2018.
In 2019 we continue to focus on the quality of our in house
technical team, as well as our contractors and suppliers.
Highlights
• $10.9m invested in the fields
• First new well drilled after five year break
• 20 work overs
• Three sidetracks
• First production from the West Mashivska field
Warehouse in Novomykolaivske,Ukraine.
JKX Oil & Gas plc Annual Report 2018
11
Russia
Russia
Alexander Bogdanov General Director
In 2018 we achieved a 3% production increase
in spite of minimal capital expenditure.
We also developed a three well workover
programme and selected contractors and
equipment suppliers to implement it.
Our gas processing facility has considerable spare capacity and
does not require significant investment to handle increased
production volumes. Our medium term objective is to maximise
utilisation of this spare capacity.
We have now initiated a substantial three well workover
programme and a newly contracted rig was mobilised to the
field in late 2018 for the first workover on Well 5. We also took
delivery of 5,500m of corrosion resistant high specification
chrome tubing for use in Well 20. Successful completion of
the three well work over programme will give a significant
production increase in the medium term.
Importantly, in 2018 we obtained approval from the Ministry of
Natural Resources and Environment of the Russian Federation
to defer its Callovian obligations until 2025 relieving us of a
significant short term licence commitment.
Highlights
• Rig mobilised to Well 5 to commence workover
programme
• Deferral of Callovian obligation until 2025
JKX Oil & Gas plc Annual Report 2018 12
STRATEGIC REPORT
Our business model
We strive to create value to our stakeholders
by investing in exploration for, appraisal and
development of oil and gas assets in eastern
Europe.
We generate revenue from production and
sales of oil, gas, condensate and LPG. Cash
flow is distributed to our stakeholders and
reinvested in our business.
Cash is distributed among our stakeholders
Exploration
Appraisal
Government
Suppliers
Asset life
cycle
Stakeholders
Investors
Employees
Production
Development
Local community
Cash is invested in existing and new assets
We manage a portfolio of assets in Russia, Ukraine and Hungary.
We aim to evaluate where we can add the most value and manage our portfolio accordingly.
Exploration
We use highly experienced in-house and contracted technical staff
to help us identify exploration targets both within our portfolio and
elsewhere. However, exploration activity is currently not what we are
focused on.
Appraisal
A large number of legacy wells are located in and around the area of
the mature assets operated by JKX. Dedicated efforts to gain access
and evaluate valuable data from these wells allow JKX to greatly
reduce risks and costs of its appraisal activities and optimize further
development planning.
Development
We strive to manage our field development based on ‘what’s possible’
in petroleum engineering, physics and execution.
Production
JKX has engaged experts in the latest drilling, completion, and
engineering technology from countries we operate in and abroad.
Although production decline is a characteristic of oil & gas assets, we
strive to minimize decline within our mature fields by identifying and
executing production enhancement and workover opportunities.
Government.
Payments to government include production, payroll, corporate, VAT,
land, utility, licensing and other taxes and fees. Through payment of
taxes and fees we support local and national economies.
Suppliers
Payments to suppliers are made for equipment, materials and services.
Where possible, we purchase local goods and services and develop
infrastructure that benefits entire community. However, using new
technologies proven internationally is important for maximizing returns
from investing in and developing our assets.
Employees
We provide jobs in developed, emerging and developing economies,
creating local purchasing power and improving standards of living.
Local community
We support local communities through providing both funding and staff
time and commitment to charitable causes in Ukraine and Russia.
Investors
We deploy capital provided by our investors, including bondholders and
shareholders, and aim to realize attractive return on investments while
adhering to our all commitments.
JKX Oil & Gas plc Annual Report 2018 13
STRATEGIC REPORT
2019 Strategic objectives
Our objective is to be a leading independent
emerging market upstream company and
enhance shareholder value by increasing oil
and gas production and cash flow through
safe and responsible operations.
Our strategic priorities are:
1. Financial and operational stability
The technical challenges inherent in our business, commodity price
volatility and the need to be able to react to future risks and opportunities
mean that we have an emphasis on building a liquidity reserve,
maintaining strong governance and controls, and effectively managing
operational, technical, and subsurface risks.
2. Profitable production growth
Our future production profile underpins the value of the Group. We aim
to maximise production from our existing fields, and to grow our reserve
base and hence production through either successful exploration and
appraisal activities within our existing assets, or through acquisition of
new ones.
3. Operating safely and responsibly
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 on 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.
JKX Oil & Gas plc Annual Report 2018 14
STRATEGIC REPORT
2019 Strategic priorities
Strategic priority
Strategic priority
1
Financial and operational stability
2
Profitable production growth
Key targets 2019
Key targets 2019
• Growing our liquidity reserve through maximizing the cash
• Continue implementing five year development plan in Ukraine
flow and access to external funding
• Maintaining strong and stable governance
• Focus on low-risk investments and use of proven
technologies
• Resolution of at least one of the outstanding rental fee claim
cases
•
Implement three well workover programme in Russia
• Review other growth opportunities in our key markets
Performance to date
Operating cash flow from
continuing operations,
$million
Liquidity (cash and available
facilities), $million
Production volumes, boepd
EBITDA $per boe
Performance to date
40
30
20
10
0
17.0
14.2
37.3
40
30
20
10
0
11.9
19.2
14.3
5.3
6.9
12000
10000
8000
6000
4000
2000
0
10,083
8,657
8,937
10.9
8.0
12
10
8
6
4
2
0
4.3
2016
2017
2018
2016
2017
2018
2016
2017
2018
2016
2017
2018
Cash
Facilities
EBITDA is defined on page 23
Associated principal risks
Associated principal risks
(detail on pages 32 to 40)
Liquidity, funding, and portfolio management
Financial discipline and governance
A
D
(detail on page 32 to 40)
Geopolitical and fiscal risks
Reservoir and operational performance
Commodity prices and FX fluctuation
B
C
H
JKX Oil & Gas plc Annual Report 2018 15
Strategic priority
3
Operating safely and responsibly
Key targets 2019
• Zero fatalities
• To exceed internal and industry targets for AIFR, LTI, and EIFR
Performance to date
Fatalities
All Injury Frequency Rate
(‘AIFR’)
Lost Time Injury (‘LTI’) cases
Environmental Incident
Frequency Rate (‘EIFR’)
3
2
1
0
1
0
0
2
1
0
0
0
0.19
3
2
1
0
0.80
0.60
0.59
0.40
0.35
0.32
0
0
0
0.20
0.00
2016
2017
2018
2016
2017
2018
2016
2017
2018
2016
2017
2018
Associated principal risks
(detail on page 32 to 40)
Health, Safety, and Environment
Major breach of business, ethical, or compliance standards
E
G
JKX Oil & Gas plc Annual Report 2018 16
STRATEGIC REPORT
Operations review
Group production
In 2018 group average production was 8,937 boepd (2017: 8,657 boepd), an overall increase in
production of 3%. The increase in production year-on-year was a result of the ongoing drilling
and workover programme in Ukraine and higher uptime in Russia.
Group production
Cash generating unit
Novomykolaivske complex
Elyzavetivske licence
Total Ukraine
Russia
Hungary
Total Group
*Includes abandonments.
boepd
Workovers*
Sidetracks
New wells
2018
2,414
1,263
3,677
5,169
91
8,937
2017
2,335
1,172
3,507
5,019
131
8,657
2018
2017
2018
2017
2018
2017
18
2
20
0
0
20
15
0
15
2
1
18
2
0
2
0
0
2
1
0
1
0
0
1
0
1
1
0
0
1
0
0
0
0
0
0
Gas and oil production increased year-on-year in all cash generating units, except Hungary.
Gas, MMcfd
Gas, Mcmd
Oil, bopd
2018
10.1
7.5
17.6
30.7
0.5
48.8
2017
9.8
6.9
16.7
29.8
0.7
47.2
2018
2017
2018
2017
286
211
497
868
14
276
196
474
843
20
1,379
1,337
731
20
751
58
7
816
701
18
719
55
9
783
Cash generating unit
Novomykolaivske complex
Elyzavetivske licence
Total Ukraine
Russia
Hungary
Total Group
Ukraine
Novomykolaivske complex production and operations
boepd
Workovers
Sidetracks
Field name
Ignativske
Molchanivske
Novomykolaivske
Rudenkivske
2018
1,395
346
286
387
2017
1,349
260
383
343
Novomykolaivske complex
2,414
2,335
2018
2017
2018
2017
6
2
2
8
18
5
2
0
8
15
1
1
0
0
2
1
0
0
0
1
The increase in Novomykolaivske complex production year-on-year was mostly attributed to production from two sidetracks, and the
workover of a leased well in Rudenkivske.
Outlook
Following the creation of a five year field development plan and the recent success of IG103 sidetrack a follow-up well, IG142, is planned
in 2019 to target another structural high point in the potentially productive horizons in the area directly south of IG103 sidetrack.
JKX Oil & Gas plc Annual Report 2018 17
In Novomykolaivske one firm well, and one contingent well, are planned to be drilled to appraise the V16 to the south of the main field
in 2019. Success of these two wells would lead to further wells targeting the shallow Visean sands to the west of the Molchanviske
licence. These wells benefit from a relatively low capex cost due to the target depth being less than 2000m.
In Rudenkivske, following the success of the leased well workovers in 2018, a sidetrack is planned to further evaluate the Visean sands
in the north western part of the field in 2019. Commercial success of this sidetrack could lead to the drilling of at least 7 more wellbores
targeting the Visean sands in the North of Rudenkivkse.
Elyzavetivske licence production and operations
Field name
Elyzavetivske
West Mashivska
Elyzavetivske Licence
boepd
Workovers
New wells
2018
1,177
86
1,263
2017
1,172
0
1,172
2018
2017
2018
2017
1
1
2
0
0
0
1
0
1
0
0
0
The increase in production from the Elyzavetivske licence was mainly the result of the successful workover of two leased wells, one of
which was on the West Mashivska licence.
Outlook
Following the successful workover of a leased well in West Mashivska and the tie-in to the Elyzavetivske facilities a new well was
spudded in the West Mashivska field in December 2018.
After year end the shooting of a 3D seismic survey has been completed and is now being processed which along with the results from
the first new well will enable a field development plan to be created for this field, the only undeveloped field in our portfolio.
Russia
Koshekhablskoye licence production and operations
Field name
Well 20
Well 25
Well 27
Koshekhablskoye field*
boepd
Workovers
2018
1,733
1,693
1,665
5,169
2017
2,153
1,078
1,699
5,019
2018
2017
0
0
0
0
0
1
0
2
*Includes Well 15 production and Well 5 workover.
In 2018 there were no workovers while resources were focussed on finding a suitable rig to complete a 3 well workover programme
to start in 2019. This workover programme will include the work overs of Well 5 and Well 18 which upon completion are expected to
deliver a significant increase in production within two years.
The Callovian licence commitment has now been extended from 2019 to 2025.
JKX Oil & Gas plc Annual Report 2018
18
STRATEGIC REPORT
Operations review
Operations update for Q1 2019
Ukraine
Russia
Hungary
Total Group
Production, boepd
Q1 2019
5,009
4,873
25
9,907
2018
3,677
5,169
91
8,937
2017
3,507
5,019
131
8,657
Following the encouraging initial test rate in IG103 ST the well continues to produce at a gas rate of 8.3 MMcfd [234 Mcmd] and
148 bpd of condensate (1,531 boepd) at a WHP of 1,660 psig. To date (2 April 2019) this well has produced 0.8 Bcf [22 MMcm] of
gas. A recent reservoir pressure recorded indicates an in-place volume of 3 Bcf [85 MMcm] which doubles the expected recovery
previously quoted of 1 Bcf [28 MMcm].
WM215 has been successfully worked over and with the aid of continuous fresh water injection is now producing at a stable rate of
1.0 MMcfd [27 Mcmd].
The drilling of WM3 has now been completed with the well reaching a TD of 3,570m, with 11m of net pay thickness found in the A8.
Due to an over pressured gas zone immediately beneath the salt completing the 7” liner section took longer than anticipated. This
over pressured zone (A1) was found to have better reservoir properties and net pay thickness, 7m, than the secondary target, A2,
which has a net pay thickness of 3m. It is intended to perforate this interval in WM3, due to the encouraging log response, after the
A8 and A2 as it is less likely to be as extensive as the deeper reservoirs.
The 3D seismic survey has been completed over the West Mashivske field ahead of target time, despite some difficulties due to
unseasonal weather.
Upon completion of WM3, the SMS rig will move to drill the shallow well, NN81, the last well on its contract. Progress is being made
with the finalisation of the contract between PPC and a rig contractor for the main part of the 2019 drilling programme.
In Russia the workover of Well 5 was started on 11 January 2019. To date good progress has been made with the sidetrack completed
to a TD depth of 5,204m MD RT. Encouraging gas shows were encountered on prognosis from 5,135m to 5,173m MD RT and log
interpretation has indicated a net pay thickness of 21m in a gross interval of 42.3m, fully in line with expectations. The workover is
currently suspended due to problems with the drill pipe in use. Thorough mechanical, chemical and instrumental inspections have
successfully cleared 3,000m of the current 2 7/8" drill pipe for further use. The damaged sections of drill pipe will be repaired by a
certified specialist service company in Tolyatti, where work has started already.
Note about unit convention
This will be the last reported document which will contain gas production volumes in oilfield units (cf for gas). All future reports,
RNS’s and press releases will only publish produced gas volumes in m3. Oil will continue to be reported as bbls and boe will also
continue to be used.
JKX Oil & Gas plc Annual Report 2018 19
STRATEGIC REPORT
Reserves update
In Ukraine, production from 2018 has been more than offset by increases to reserves. The most
significant increase is the result of continuing production from the West Mashivska field in the
Elyzavetivske licence.
In Russia, there has been no change to the reserves this year other than depletion due to 2018 production. Currently more than 50%
of the Group reserves are accounted for by Russia and with a current commercial cut-off of 2049, relying on long term price and other
commercial assumptions, no change to reserves year-on-year is justified.
Total remaining 2P reserves at 31 December 2018
Total
Oil (MMbbl)
Gas (Bcf)
[MMcm]
Oil + Gas (MMboe)
Ukraine
Oil (MMbbl)
Gas (Bcf)
[MMcm]
Oil + Gas (MMboe)
Russia
Oil (MMbbl)
Gas (Bcf)
[MMcm]
Oil + Gas (MMboe)
* 0.18 Bcf [5.1 MMcm] produced in Hungary.
Field-by-Field 2P reserves at 31 December 2018
MMboe
Ukraine
Ignativske
Movchanivske
Novomykolaivske
Rudenkivske
Zaplavska
Sub-total Novomykolaivske complex licences
Elyzavetivske
Total Ukraine
Russia
Koshekhablskoye
Total
Note: there are minor differences in the tables above due to rounding effects.
31-Dec-17
Revisions
Production
31-Dec-18
3.9
546.7
[15,480.0]
95.0
3.2
120.6
[3,414.0]
23.3
0.7
425.9
[12,059.0]
71.7
(0.4)
15.5
[439.0]
2.2
(0.4)
15.6
[443.0]
2.2
0.0
(0.1)
[(2.2)]
0.0
(0.3)
(17.8)*
[(504.0)]
(3.3)
(0.3)
(6.4)
[(181.0)]
(1.3)
(0.0)
(11.2)
[(317.0)]
(1.9)
3.2
544.4
[15,415.0]
93.9
2.5
129.8
[3,676.0]
24.2
0.7
414.6
[11,740.0]
69.8
Dec-17
Revisions
Production
Dec-18
5.5
0.7
0.5
15.0
-
21.8
1.6
23.3
71.7
95.0
0.2
(0.1)
0.4
0.4
-
0.8
1.3
2.2
0.0
2.2
(0.5)
(0.1)
(0.1)
(0.1)
-
(0.9)
(0.5)
(1.3)
(1.9)
(3.2)
5.2
0.5
0.8
15.2
-
21.7
2.5
24.2
69.8
93.9
JKX Oil & Gas plc Annual Report 2018 20
STRATEGIC REPORT
Reserves update
JKX contingent resources
There is no change to the contingent resources in 2018.
MMboe
Ukraine
Ignativske
Movchanivske
Novomykolaivske
Rudenkivske
Zaplavska
Sub-total Novomykolaivske complex licences
Elyzavetivske
Total Ukraine
Russia
Koshekhablskoye
Hungary
Hajdunanas
Tiszavasvari 6
Total
1C (low)
2C (best)
3C (high)
11.98
0.00
0.00
9.16
0.03
21.17
0.00
21.17
24.12
0.00
0.20
45.49
17.53
1.25
0.00
65.52
0.38
84.68
6.20
90.88
74.77
0.00
0.30
165.95
50.10
2.76
0.15
197.89
1.41
252.31
20.83
273.14
107.53
0.00
0.70
381.37
JKX Oil & Gas plc Annual Report 2018 21
LPG plant at the
Sakalova Balka
production facility
in Ukraine.
JKX Oil & Gas plc Annual Report 2018
22
STRATEGIC REPORT
Performance in 2018
OPERATING RESULTS
Revenue
Oil
Gas
Liquefied petroleum gas
Other
Cost of sales
Exceptional item - provision for production based taxes
Exceptional item - reversal of provision for impairment of
Ukrainian oil and gas assets
Exceptional item - impairments and well write offs
Exceptional item - write off of appraisal expenditure in Ukraine
Other production based taxes
Depreciation, depletion and amortisation - oil and gas assets
Other operating costs
Total cost of sales
Gross profit
Administrative expenses
Exceptional items
Administrative expenses
(Loss)/gain on foreign exchange
Profit from operations before exceptional items
Profit/(loss) from operations after exceptional items
Total
2018
$m
Second half
2018
$m
First half
2018
$m
20.0
66.4
5.6
0.9
92.9
10.8
36.4
3.0
0.3
50.5
9.2
30.0
2.6
0.5
42.4
(5.1)
(2.2)
(2.9)
-
-
-
(21.9)
(14.8)
(20.7)
(62.5)
30.3
-
(13.9)
(0.7)
20.7
15.7
-
-
-
(12.0)
(8.0)
(10.6)
(32.8)
17.6
-
(7.8)
1.5
13.4
11.3
-
-
-
(9.9)
(6.9)
(10.1)
(29.7)
12.7
-
(6.1)
(2.2)
7.3
4.4
Total
2017
$m
17.1
52.8
4.6
0.1
74.6
(4.4)
5.6
(7.9)
(9.4)
(16.7)
(16.7)
(18.5)
(67.9)
6.7
(1.5)
(16.4)
1.2
7.5
(10.0)
JKX Oil & Gas plc Annual Report 2018
23
EARNINGS/(LOSS)
Net profit/(loss) ($m)
Net profit/(loss) before exceptional items ($m)
Basic weighted average number of shares in issue (m)
Profit/(loss) per share before exceptional item (basic, cents)
Profit/(loss) per share after exceptional item (basic, cents)
Pre-exceptional earnings before interest, tax, depreciation and
amortisation ($m)1
COSTS OF PRODUCTION ($/boe)
Operating costs (excluding exceptional item)
Depreciation, depletion and amortisation
Production based taxes
CASH FLOW
Cash generated from continuing operations ($m)
Operating cash flow per share (cents)
STATEMENT OF FINANCIAL POSITION
Total cash2 ($m)
Borrowings (excluding derivatives) ($m)
Net cash/(debt)3 ($m)
Net cash/(debt) to equity (%)
Return on average capital employed (%)4
Increase in property, plant and equipment/
intangible assets ($m)
Ukraine
Russia
Other
Total
Total
2018
15.3
18.6
166.7
11.13
9.15
35.8
Second half
2018
First half
2018
13.4
14.2
166.7
8.52
8.04
21.2
1.9
4.4
166.7
2.64
1.14
14.3
Total
2018
Second half
2018
First half
2018
6.4
4.6
6.8
Total
2018
37.3
22.4
6.4
4.8
7.2
6.5
4.4
6.3
Second half
2018
First half
2018
22.0
13.2
15.3
9.2
Total
2017
(17.7)
(0.7)
166.7
(0.42)
(10.59)
24.9
Total
2017
5.9
5.4
5.4
Total
2017
14.2
8.6
At 31 December
2018
At 30 June
2018
At 31 December
2017
19.2
(11.0)
8.2
5.8
8.2
11.1
0.7
-
11.8
7.5
(10.8)
(3.3)
(2.4)
2.7
4.1
0.5
-
4.6
6.9
(16.6)
(9.7)
(6.7)
(7.9)
12.7
5.8
0.8
19.3
7.0
0.2
-
7.2
1 Pre-exceptional earnings before interest, tax, depreciation and amortisation (‘EBITDA’) is a non-IFRS measure and calculated using profit/(loss) from operations and adding
back depletion, depreciation, amortisation and exceptional items. 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. EBITDA is one of the measures provided to the Board in the monthly reporting and used to
monitor Group and subsidiaries’ performance.
2 Total cash is Cash and cash equivalents less Restricted cash. 31 December 2018 total cash includes only balances relating to continuing operations.
3 Net cash/(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.
JKX Oil & Gas plc Annual Report 2018
24
STRATEGIC REPORT
Financial review
Ben Fraser
Chief Financial Officer
During the year the Group significantly
increased its available cash balances from
$6.9m to $19.2m while at the same time
decreasing its borrowings from $16.6m to
$11.0m, therefore moving from a net debt to
a net cash position.
Group revenues*
24.5%
Ukraine
Gas
Oil
Liquefied Petroleum
Gas (‘LPG’)
Other
Russia
Gas
Condensate
Other
Total
2018
($m)
2017
($m)
Change
($m)
%
Change
74.9
49.2
19.3
5.6
0.8
17.8
17.2
0.6
0.2
92.9
57.0
35.8
16.5
4.6
0.1
17.6
17.0
0.6
-
74.6
17.9
13.4
2.8
1.0
0.7
0.2
0.2
-
0.2
18.3
31.4
37.4
17
21.7
>100
1.1
1.2
-
N/A
24.5
*Note that Hungary as a segment is presented as assets held for sale.
Sales prices
Ukraine
Gas ($/Mcm)
Oil ($/bbl)
LPG ($/tonne)
Russia
Gas ($/Mcm)
2018
2017
Change
%
Change
307.8
74.0
544.0
237.5
64.3
467.0
70.3
9.7
77.0
29.6
15.1
16.5
58.3
59.7
(1.4)
(2.3)
Average exchange rates
Russia (RUB/$)
Ukraine (UAH/$)
2018
62.9
27.2
2017
Change
58.3
26.6
(4.6)
(0.6)
%
Change
(7.9)
(2.3)
Results for the year
The profit after tax for the year of $15.3m is the first reported
since 2013 and is a marked improvement upon the loss after
tax of $17.7m reported for 2017. Results for both years include
significant charges reflecting updated interest calculations
for the provisions for disputed rental fees for 2010 and 2015 in
Ukraine ($5.1m in 2018 and $4.4m in 2017). No other exceptional
charges have been reported for 2018, which compares favourably
with the significant charges for the unsuccessful Rudenkivske
fracturing programme, impairment charges and severance
payments reported for 2017.
Total revenue for 2018 is $92.9m, 24.5% higher than the $74.6m
reported in 2017. The increase is primarily due to the higher
commodity prices in Ukraine, as well as the 3.1% increase in total
JKX Oil & Gas plc Annual Report 2018 25
Group production from 8,657 boepd in 2017 to 8,937 boepd in
2018. Gas sales prices and netbacks are still significantly higher
in Ukraine than in Russia.
Analysis showing production costs, production taxes and
netbacks for both our Ukrainian and Russian operations is shown
on pages 7 and 8.
Ukraine revenues
The $17.9m increase in total revenues was due to both higher
sales prices, as shown in the table, and higher sales volumes.
The average gas sales price in dollar terms was 29.6% higher
in 2018 than in 2017. This is in line with international market
trends. Total gas sales volumes increased by 5.9% from 150,909
Mcm in 2017 to 159,887 Mcm in 2018, primarily due to the gas
production volume having increased 4.9% from 172,939 Mcm in
2017 to 181,482 Mcm in 2018. The increase in production was a
result of the ongoing drilling and workover activity in Ukraine.
For more detail please refer to the Operations review.
The average oil sales price increased from $64.3/bbl in 2017
to $74.0/bbl in 2018 and total oil sales volumes for the year
increased 2.1% from 256,076 barrels in 2017 to 261,420 barrels
in 2018. Oil production volume increased 4.5% from 262,334
barrels in 2017 to 274,087 barrels in 2018, with the surplus being
taken to inventory.
LPG sales volumes were 10,266 tonnes in 2018 compared to 9,855
tonnes in 2017, with sales prices being higher in 2018 ($544/tonne
in 2018 compared to $467/tonne).
A portion of production comes from wells owned by third parties,
operated under service agreements with UkrGasVidobuvannya
and under rental agreements with NAK Nadra Ukrayini and
Ukrnafta. This production is subject to sale in the normal way,
with payments being made to the well owners in accordance with
the service and rental agreements.
Russia revenues
Russian revenues benefitted from a 3.9% price increase in rouble
terms on 1 July 2018 and a year on year increase in production
volumes (2018:316,996 Mcm, 2017:307,841 Mcm) but were
negatively impacted by the weakening of the rouble as shown in
the table (left), leading to an increase of just 1.1% in dollar terms.
Cost of sales
The provision for disputed rental fees, in respect of claims for
additional rental fees for the years 2010 and 2015, was increased
by $5.1m, to reflect updated interest calculations, in 2018 as set
out in Note 18.
Cost of sales before exceptional items for 2018 totalled $57.4m
(2017:$51.9m). This includes:
• $21.9m of production taxes, which were $5.2m higher than in
2017 due to the higher production taxes incurred in Ukraine.
Production tax expense in Ukraine increased from $14.9m
in 2017 to $20.1m in 2018, mainly due to an increase in the
average border gas price which is the basis for calculating
gas production taxes (UAH8,194 per Mcm in 2018 compared
to UAH6,115 per Mcm in 2017). Only $1.8m of the total
production taxes relate to Russia (2017: $1.8m) where the
mineral extraction tax rate for wells deeper than 5,000m has
remained at 328 Roubles/Mcm;
• $20.7m of operating costs, of which $12.1m relates to Ukraine
(2017:$9.6m) and $8.6m relates to Russia (2017:$9.9m). The
increase in operating costs in Ukraine is mainly due to a
$2.0m increase in well service and rental costs (2018:$3.0m,
2017:$1.0m). The decrease in Russia is partly due to the rouble
exchange rate; and
• $14.8m of depreciation, depletion and amortisation charge
(2017:$15.7m).
Administrative expenses
Administrative expenses before exceptional items of $13.9m
in 2018 compare favourably to those of $16.4m in 2017. The
decrease is mainly due to staff cost reductions resulting from
a right sizing exercise carried out during 2018 to ensure that
resources are appropriate to the needs of the Group, and a
reduction in legal, lobbying and other professional fees incurred.
2018 administrative expenses include $0.5m of professional
fees in relation to the forensic investigation of payment of legal
expenses in Ukraine, as disclosed in our previous annual report,
which are considered non-recurring.
Finance income and costs
Finance costs decreased from $3.2m in 2017 to $2.5m in 2018.
This mainly consists of the convertible bond interest, which
reduced from $2.8m to $2.0m due to the repayment of principal
outstanding in February 2018. Finance costs also include
unwinding of discount of provisions for site restoration of $0.4m
(2017: $0.3m).
Finance income of $0.9m (2017: $0.3m) comprises income from
bank deposits, which has risen in accordance with the increase in
funds held.
Taxation
The total tax charge for 2018 is $2.2m (2017: $0.8m credit)
comprising a current tax charge of $5.5m (2017: $3.0m) which
relates to Ukraine and a deferred tax credit of $3.3m (2017:
credit $3.8m). The increase in current tax charge reflects a
higher profitability in Ukraine. The deferred tax credit relates
to movements in various deferred tax assets and liabilities in
Ukraine and Russia.
Discontinued operation
The Hungarian business is presented as a discontinued operation
to reflect our decision to dispose of it, as explained in our
previous annual report. It covered its costs in 2018, providing
a small operational profit. The total profit attributable to it, as
presented in the consolidated income statement, largely relates
to non-cash items as set out in Note 14. The remaining net assets
of $0.5m include deposits held to address future abandonment
costs.
During 2018 we withdrew from our non-core Slovakian interests.
Capital Expenditure
While we started the year with only $6.9m unrestricted cash and
building liquidity was a clear priority, we also recognise the need
to invest for the longer term.
Of the $11.8m capital expenditure incurred during the year
(2017:$19.3m), $11.1m relates to Ukraine where we drilled a new
well and two sidetracks. Only $0.7m relates to Russia, where
investment was minimal while we were securing a suitable rig
for the three well workover programme to be performed in 2019.
Cash flows
During the year the Group significantly increased its available
cash balances from $6.9m to $19.2m while at the same time
decreasing its borrowings from $16.6m to $11.0m, therefore
moving from a net debt to a net cash position. This was achieved
as a result of strong operating cash flow of $37.3m (2017:$14.2m)
from continuing operations, almost all of it generated in Ukraine.
Successful completion of the three well workover programme in
Russia, improving netbacks by increasing production volumes,
will improve its cash contribution to the Group beyond 2019.
JKX Oil & Gas plc Annual Report 2018 26
STRATEGIC REPORT
Financial review
Use of cash during the year is as shown in the cash bridge below.
Capital expenditure cash outflow of $3.5m relating to Russia
includes $2.8m to settle creditor balances from prior periods.
Net cash outflow from financing activities in the period mainly
relates to the $5.8m payment to the bondholders in February
2018. No dividends were paid to shareholders in the period
(2017: nil).
Liquidity outlook
We have considerably improved our liquidity over the last year
underpinned by greater operating cash flows.
After a further payment of $6.0m to bond holders in February
2019 the Group remains in a net cash position, with sufficient
funds to make the remaining bond payments ($0.4m in August
2019 and $5.8m in February 2020). In addition in December 2018
PPC, our subsidiary in Ukraine, has renewed and increased a 12
month UAH280m ($10.1m) revolving credit line and a UAH50m
($1.8m) overdraft facility with Tascombank, neither of which
are currently being used. We are confident that this facility
can be renewed again for 2020. As well as our continued focus
on cost control, other options available to us to improve our
liquidity include the execution of forward sales in Ukraine and
deferring capital expenditure if required. We are not burdened
by significant field development commitments in the short or
long terms.
Furthermore, we have improved our understanding of the 2010
and 2015 rental fee claims for which we continue to maintain
provisions (see Note 27 to the consolidated financial statements)
and are now satisfied that we have the resources to meet these
potential liabilities if necessary based on the expected timing
of potential payments. In particular, careful consideration
has been given to the earliest dates that courts may conclude
that PPC may be required to settle each of the various claims
in the event that court hearings proceed without undue delay,
including assessments with external legal counsel.
The Group’s expectation is that a final hearing with respect to
the 2010 rental fee claim will take place in 2019 and that final
hearings in respect of the 2015 rental fee claims will take place
in 2020 and 2021. The $12.4m provision for the 2010 rental fee
claim has therefore been reported under current liabilities and
the $30.1m provision for the 2015 rental fee claims has been
reported under non-current liabilities.
Both our Ukrainian and Russian operations remain cash flow
positive, generating sufficient cash to cover the Group’s costs and
their own investment programmes and the Group’s liquidity is
forecast to improve through 2019 and beyond. The consolidated
financial statements have been prepared on a going concern basis
(see Note 2 to the consolidated financial statements).
Ben Fraser
Chief Financial Officer
Cash flows ($m)
50.0
45.0
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
37.3
(1.9)
(3.9)
(10.2)
(3.5)
0.3
19.2
(5.8)
6.9
31
December
2017
Cash
generated
from
continuing
operations
Interest
paid
Income tax
paid
Capital
expenditure
(Ukraine)
Capital
expenditure
(Russia)
Bond
repayment
Interest
received and
other cash
movements
31
December
2018
JKX Oil & Gas plc Annual Report 2018 27
STRATEGIC REPORT
Corporate social responsibility (‘CSR’) review
Our vision
At JKX we are committed to target key health and safety issues
and to manage the core elements of health and safety and
ensuring we are doing what we need to do in delivering effective
arrangements and applying adequate resources and to work with
those bodies best placed to assist in injury/ill health reduction
with the aim of achieving zero harm to employees, environment,
contractors, communities & property.
Our approach
As part of managing the health and safety of our business, we
have taken control of the risks in the workplace. To do this we
have thought about what, in our business, might cause harm
to people and decide whether we are taking adequate steps
to prevent that harm. Our approach to governance, Health,
Safety, Environment and Quality (HSECQ), people, supply chain,
and Social commitment directly affect our ability to run our
business successfully.
Our impact
The increasing concern of environmental and social impacts
means that to achieve long term success, JKX must continue
looking towards, people, planet and profit.
Our CSR process is board led
Our Health, Safety, Environment, Community and Quality
(‘HSECQ’) manager reports directly to the JKX Chairman 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 monthly
updates relating to the major CSR issues. A management review
of all HSECQ systems is carried out every year.
Local responsibility
We have 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.
CSR policies, procedures and standards
We aim to comply with all local laws and regulations and to
exceed them where possible. We expect our partners to reach the
same standards.
Our understanding
The Plan, Do, Check, Act approach shows how
it has helped us achieve a balance between
the systems and behavioural aspects of HSE
management. It also treats health and safety
management as an integral part of good
management.
JKX Oil & Gas plc (JKX) are committed to
understanding, monitoring and managing
our social, environmental and economic
impact to enable us to contribute to society’s
wider goal of sustainable development.
Our CSR achievements in 2018
• All Injury Frequency Rate (AIFR) of 0.19
• Environmental Incident Frequency Rate (EIFR) of 0.59
•
ISO 9001 Quality Management standard maintained
• Maintained our ISO 14001 Environmental standard
• OHSAS 18001 Health and Safety accreditation standard
maintained (ISO 45001-The Standard Replacing OHSAS
18001)
• Established and maintained the recording and
monitoring process for our Greenhouse Gas reporting
requirements
• Prepared and submitted report to the Global Reporting
Initiative
• Prepared and submitted Global Reporting Initiative
Report on Sustainability.
• Completed enhanced Stakeholder Management
procedures
• Updated and reviewed HSECQ Management Systems
across the group
JKX Oil & Gas plc Annual Report 2018 28
STRATEGIC REPORT
Corporate social responsibility (‘CSR’) review
Health and safety performance
Before we even begin to drill or workover a well, we identify and
address the inherent risks in drilling and workover operations.
This industry best practice makes sure:
• health, safety and environment issues are clearly identified
and assessed;
•
•
•
•
•
regulatory and JKX requirements are met;
risks have been removed or mitigated according to a
structured, systematic process, with any remaining risks
demonstrated to be both tolerable and as low as reasonably
practicable;
critical safety items and procedures are identified to manage
remaining risks;
a comprehensive environmental management plan has been
developed;
social, health, and environmental benefits and opportunities
are identified; and
•
personnel roles and responsibilities are indicated.
We have a manager based in our London office that is responsible
for the planning, reviewing and authorising of Group drilling
and workover operations which significantly strengthens our
capability to identify and manage drilling risk.
Health and safety risk management
We apply ISO 45001 (The Standard Replacing OHSAS 18001)
ISO 14001 Environmental and ISO 9001 Quality Management
standards.
Consistent hazard assessment processes
In both Russia and Ukraine, we continued to carry out risk
management studies using our proven Hazard and Operability
(‘HAZOP’), Hazard Identification (‘HAZID’) and As Low as
Reasonably Practical (‘ALARP’) methodologies.
Health and safety training
Each location has an H&S training budget which includes legally
required training from the host country H&S regulations.
Additional training is provided according to operational
requirements.
Our approach
By integrating health, safety and
environmental considerations into all aspects
of our business, we protect our employees, our
communities and the environment.
We will never knowingly compromise our
health, safety, environmental or quality
standards to meet our operational objectives.
Our 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. We set annual HSECQ targets for all levels within the
organisation.
Our performance in 2018
We have a clear Safety Management System, which provides
a comprehensive and systematic vision of our objectives. 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 our staff and contractors
and forbids the possession and/or use of defined prohibited
substances which includes drugs and alcohol. Our policy also
clarifies our testing and inspection procedures.
A fatal accident took place in our Ukrainian operations in
February 2018 involving an operative falling from height. The
Chairman of the Special Investigation Commission engaged
technical experts to assist in the analysis of the incident and
a full report was provided to the JKX Board of Directors. The
recommendations included in this report, including those made
by the State Labour Service Commission, were accepted and
implemented in full.
During 2018 we achieved an AIFR of 0.19 per 200,000 hours
worked. In 2018 we reported 61 incidents, which demonstrates
further consolidation in our incident reporting procedures.
Drilling risks
We recognise that the safety and efficiency of our drilling and
workover operations depends primarily on the performance of
our employees and contractors. We utilise a mix of primarily
local staff with decades of local experience and expatriate
supervisors on our drilling rigs to provide additional expertise
and oversight.
Our drilling and workover employees and contractors have
the necessary training in well safety and well control, and all
personnel have the authority (and are expected) to stop any job
they deem unsafe.
We select supervisors for their expertise as well as for their
familiarity with the regions where we operate. 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.
We make the best use of our resources by sharing expertise
between our operating companies, and we have a strong
collaborative environment where everybody contributes to
analyse the risks and develop mitigating strategies in order to
minimise it.
JKX Oil & Gas plc Annual Report 2018 29
Health and safety statistics
All Injury Frequency Rate 2018 (‘AIFR’)
5
4
3
2
1
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
0.19
HSECQ Statistical Analysis for 2018
Fatal accident case
Lost time injuries
Medical treatment/restricted work cases
Near miss/loss/hazards/property damage/
unsafe act or conditions
2018 JKX and contractors
Days away from work
Fatal accident cases
Lost time injury cases
Medical treatment/restricted
work cases
Near miss/loss/hazards/property
damage/unsafe act or conditions
Man-hours since last lost
time injury
1
0
0
61
0
1
0
0
76
Safety exposure man-hours
1,008,904
Fatal accident case frequency rate
Lost time injuries frequency rate
Medical treatment/restricted work cases
frequency rate
Near miss/loss/hazards/property damage/
unsafe act or conditions frequency
0.19
0
0
15.06
5,775,423
Man-hours since last fatal accident case
974,287
JKX Oil & Gas plc Annual Report 2018 30
STRATEGIC REPORT
Corporate social responsibility (‘CSR’) review
Environmental management system
Environmental Incident Frequency Rate (‘EIFR’)
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.59
2008 2009
2010
2011
2012 2013 2014
2015 2016 2017 2018
Mandatory GHG reporting
Data point
Scope 1
Scope 2
(Location based )
Scope 2
(Market based )
Units
tonnes CO2e
tonnes CO2e
tonnes CO2e
Scope 1 & 2 Intensity
(Location based )
tonnes CO2e /Mboe
of production
Quantity
2018
234,658
800
812
103
The JKX Environmental Management System
is a comprehensive, systematic, planned and
documented management process.
Our impact
We comply with all relevant environmental requirements,
including environmental laws and regulations and industry
guidelines. The Environmental Report for 2018 on the annual
performance of JKX in conjunction with TruCost has identified
reduction measure targets for the 2019 campaign.
Environmental performance in 2018
In 2018, we again made good progress and we were pleased to
continue the ongoing work with TruCost. We are committed
to providing information to investors about its environmental
performance.
Environmental incident frequency rate (‘EIFR’)
Our EIFR Target for 2018 was not to exceed 0.6 Environmental
incidents per 200,000 hours worked; we achieved 0.59. There
were two minor incidents during the year, both of which were
appropriately addressed.
Greenhouse gas (‘GHG’) emissions reporting
All emissions sources owned, operated or controlled by the Group
are included in our reporting.
Our approach
Our terminals are self-sufficient and can maintain operations
without the need for grid electricity therefore improving
the security of supply. We used the Greenhouse Gas Protocol
methodology for compiling our GHG data.
Mandatory GHG reporting
JKX is required to comply with UK government legislation on
mandatory GHG reporting. The legislation requires all companies
as a minimum, to report Scope 1 and 2 GHG emissions and an
emission intensity ratio. According to the GHG Protocol Scope 2
Guidance released in January 2015, corporates now are to report
two scope 2 emission totals – location-based and market-based.
Since market-based emission factors are not available to any of
JKX’s Russia and Ukraine locations, residual emission factors are
only adopted for offices in U.K., and average grid emission factors
are adopted for locations in Russia and Ukraine. Calculations shall
be updated upon the Government release of residual factors for
public use. JKX’s disclosure is in accordance with this legislation
and the latest GHG protocol requirements.
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.
Supply chain management
At the heart of our 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 2018 some advances were made in our Supply Chain
Initiative, and this will continue in 2019 with a more focused
approach to procurement and supply.
Outlook
Plans to improve these procedures during 2019 include enhancing
our JKX Code of Conduct.
JKX Oil & Gas plc Annual Report 2018 31
STRATEGIC REPORT
Corporate social responsibility (‘CSR’) review
Community, stakeholder engagement , quality and
investor engagement
Community
Our approach
We are committed to engaging with the community to share the
benefits of our success at our operating plants.
Our community engagement
We conduct various activities to forge good relations with local
communities through participation in forums established by
local authorities and residents' associations.
Assistance in our local communities
In practical terms, our community support frequently involves
using the Company’s plant and machinery – as well as manpower
– to provide much-needed assistance.
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. We 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 the communities in which we work is not
tolerated.
Charitable donations and volunteering
Each operation has a limited budget for good causes and we
handle charitable donations at a local level. Locally, donations
from the Group during 2018 amounted to $0.2m across the group.
Subject to management approval, staff may be given additional
time off in order to join in certain charity-related activities. A
detailed list of donations is available on request.
Our stakeholder engagement
We work closely with outside interest groups and maintain an
open-door policy to better understand local issues and problems
are avoided.
Quality
Complying with ISO 9001 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. The new versions of
ISO 9001 as well as OHSAS 18001 & ISO 14001 have been applied.
Our investor engagement
We seek to enhance shareholder value through responsible and
effective communication with our shareholders.
JKX Oil & Gas plc Annual Report 2018 32
STRATEGIC REPORT
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.
Responsibilities
The Board is responsible for the Group’s continuous system of
internal control and risk management systems and for reviewing
their effectiveness.
Risk profile
The chart below represents our current assessment of the potential impact
and probability of occurrence of each of the principal risks noted below.
A
D
G
E
B
C
AA
D
G
F
H
H
Probability of occurrence
Higher
Risk management process
The risk management 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.
Higher
A risk management process involves the Group Risk Committee
and subsidiary Risk Committees in Ukraine and Russia. All the
Risk Committees were in place throughout 2018, with the last
Group Risk Committee being in December 2018.
Risk Committee
Purpose of the Group Risk Committee is to assist the Board in the
operation and implementation of the risk management process,
and to provide 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.
Risk Committee reports to the Audit Committee. Composition
of the Group Risk Committee includes representatives from our
Ukrainian and Russian Risk Committees to expand on the risks
identified locally and their related mitigation plans.
t
c
a
p
m
i
l
a
i
t
n
e
t
o
P
Risk management framework
The key elements of the risk management process are as follows:
Lower
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.
2019
2018
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.
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 (right)are not set out in any order of
priority, are likely to change and do not comprise all the risks and
uncertainties that the Group faces.
JKX Oil & Gas plc Annual Report 2018
33
Risk summary
Risk profile
What is the risk
KPIs affected
Change from 2018
A
A
B
B
C
C
D
D
E
E
F
F
G
G
H
H
Liquidity, funding,
and portfolio
management
Geopolitical and
fiscal
Reservoir and
operational
performance
- Operating cash flow
- Liquidity
- Operating cash flow
- Production
- Liquidity
- Production
I
- Cash from operations
I
- EBITDA per boe
Financial discipline
and governance
- Liquidity
- Cash from operations
Health, safety,
and environment
Asset integrity
- AIPR
- LTI
- EIFR
- Production
- Liquidity
I
I
Major breach of business,
ethical, or compliance
standards
- Cash from operations
- Liquidity
Commodity prices
and FX fluctuations
- Liquidity
- EBITDA per boe
Strategic objective
impacted
Responsibility
1, 2
CFO
Page
34
1, 2
1, 2
1
3
3
3
The Board
34
General Directors
36
CFO
The Board
36
36
General Directors
38
The Board
38
38
1, 2
CFO
JKX Oil & Gas plc Annual Report 2018 34
STRATEGIC REPORT
Principal risks and how we manage them
What is the risk
Liquidity, funding, and portfolio management
Description: As for any other exploration and production company, our fields are prone to natural
production decline. Our ability to ensure long-term sustainable production depends on having sufficient
funds to invest in our development and efficient allocation of capital on investment projects or
acquisitions.
It is important to maintain sufficient liquidity to allow for operational, technical, commercial, legal, and
other contingencies.
Having sufficient funds to invest in development projects or other growth opportunities is subject to not
only cash flow generated by existing operations, but also access to external capital (such as equity or debt
financing) or ability to carry out corporate transactions (such as mergers, acquisitions, or divestitures).
Impact: Inability to build or maintain sufficient liquidity may result in increased risk of having
insufficient funds on hand to address unanticipated cash outflows, need to suspend planned payments to
third parties, or other unplanned actions to urgently build sufficient liquidity.
Poor capital allocation decisions, inability to access external sources of capital or execute corporate
transactions may result in long-term decline in production and cash flow from existing operations and
further reduced ability to engage in new development projects.
Although unrestricted cash on hand at 31 December 2018 is $19.2m compared to $6.9m at 31 December
2017, this risk remains.
Geopolitical and fiscal
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.
There are geopolitical risks related to these countries and the relationship between them.
Some of such risks may be related to changes in taxes, capital controls, laws and regulations, political
situation, or investor sentiment.
Both countries have relatively weak judicial systems that are susceptible to outside influence, and it can
take an extended period for the courts to reach final judgment.
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.
Local legislation constantly evolves as the governments attempt to manage the economies and business
practices regarding taxation, banking operations and foreign currency transactions. The constantly
evolving legislation can create uncertainty for local operations if guidance or interpretation is not clear.
Geopolitical tensions between Ukraine and Russia, political instability and military action in parts
of Ukraine have negatively impacted its economy, financial markets and relations with the Russian
Federation. Any continuing or escalating military action in eastern Ukraine could have a further adverse
effect on the economy.
Impact: If Management’s interpretation of tax legislation does not align with that of the tax authorities,
the tax authorities 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.
PPC has at times sought clarification of their status regarding a number of rental fees. PPC continues
to defend itself in court against action initiated by the tax authorities regarding rental fees for August
to December 2010 and for January to December 2015. In addition, in February 2017, the Company
was awarded approximately $11.8m in damages plus interest and costs of $0.3m by an international
arbitration tribunal pursuant to a claim made against Ukraine under the Energy Charter Treaty. The
Group is currently arranging for this award to be recognized in Ukraine.
Probability
Impact
Change from
2018
Responsibility
How do we manage it?
Further information
MED
HIGH
CFO
Liquidity is accumulated by deferring high-risk investment projects and minimizing costs.
Chairman’s statement
Projects are analysed and ranked across the Group and capital is allocated accordingly. All significant
investment decisions are subject to Board approval and taken with due consideration to funding
availability. These decisions are taken within the context of the longer term field development plans.
page 4
Financial review
After a further payment of $6.0m to bond holders in February 2019 the Group remains in a net cash
page 24
HIGH
HIGH
I
challenges from local authorities, which could lead to remediation work, time-consuming negotiations
page 4
The Board
The Group’s operations and financial position may be adversely affected by interruption, inspections and
Chairman’s statement
position, with sufficient funds to make the remaining bond payments ending in February 2020. In
addition in December 2018 PPC, our subsidiary in Ukraine, has renewed and increased a 12 month
UAH280m ($10.1m) revolving credit line and a UAH50m ($1.8m) overdraft facility with Tascombank,
neither of which are currently being used. We are confident that this facility can be renewed again for
2020. YGE, our subsidiary in Russia, is considering options for a similar facility. Other liquidity tools
include the ability to make forward sales in Ukraine.
Furthermore we have improved our understanding of the 2010 and 2015 rental fee claims and ensured
that we have the resources to meet these potential liabilities if necessary. In particular, careful
consideration has been given to the earliest dates that courts may conclude that PPC may be required to
settle any or all of the various claims in the event that court hearings proceed without undue delay.
The Group's expectation is that a final hearing with respect to the 2010 rental fee claim will take place in
2019 and that final hearings in respect of the 2015 rental fee claims will take place in 2020 and 2021.
and suspension of production licences.
The Board continues to receive regular legal advice regarding the cases against PPC in respect of the
2010 claims and 2015 claims, and has invested considerable time in order to understand them fully.
Financial review
page 24
In respect of the 2010 rental fee claims and 2015 rental fee claims, provisions of $12.4m and $30.1m,
respectively, have been recognised in these financial statements to reflect the Company’s estimate of the
potential liability.
Except for this $42.5m provision, the Group’s financial statements do not include any other 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.
The Company has begun to recognise the international arbitration award in Ukraine and plans to engage
with the authorities to reach a mutually beneficial outcome taking in consideration mutual claims.
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 ongoing
communications locally.
Our strategy is to employ skilled local staff working in the countries of operation and to engage
established legal, tax and accounting advisers to assist in compliance, when necessary.
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.
JKX Oil & Gas plc Annual Report 2018 35
What is the risk
Probability
Impact
Change from
Responsibility
How do we manage it?
Further information
2018
Liquidity, funding, and portfolio management
Description: As for any other exploration and production company, our fields are prone to natural
production decline. Our ability to ensure long-term sustainable production depends on having sufficient
funds to invest in our development and efficient allocation of capital on investment projects or
It is important to maintain sufficient liquidity to allow for operational, technical, commercial, legal, and
acquisitions.
other contingencies.
Having sufficient funds to invest in development projects or other growth opportunities is subject to not
only cash flow generated by existing operations, but also access to external capital (such as equity or debt
financing) or ability to carry out corporate transactions (such as mergers, acquisitions, or divestitures).
Impact: Inability to build or maintain sufficient liquidity may result in increased risk of having
insufficient funds on hand to address unanticipated cash outflows, need to suspend planned payments to
third parties, or other unplanned actions to urgently build sufficient liquidity.
Poor capital allocation decisions, inability to access external sources of capital or execute corporate
transactions may result in long-term decline in production and cash flow from existing operations and
further reduced ability to engage in new development projects.
Although unrestricted cash on hand at 31 December 2018 is $19.2m compared to $6.9m at 31 December
2017, this risk remains.
Geopolitical and fiscal
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.
There are geopolitical risks related to these countries and the relationship between them.
Some of such risks may be related to changes in taxes, capital controls, laws and regulations, political
situation, or investor sentiment.
Both countries have relatively weak judicial systems that are susceptible to outside influence, and it can
take an extended period for the courts to reach final judgment.
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.
Local legislation constantly evolves as the governments attempt to manage the economies and business
practices regarding taxation, banking operations and foreign currency transactions. The constantly
evolving legislation can create uncertainty for local operations if guidance or interpretation is not clear.
Geopolitical tensions between Ukraine and Russia, political instability and military action in parts
of Ukraine have negatively impacted its economy, financial markets and relations with the Russian
Federation. Any continuing or escalating military action in eastern Ukraine could have a further adverse
effect on the economy.
Impact: If Management’s interpretation of tax legislation does not align with that of the tax authorities,
the tax authorities 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.
PPC has at times sought clarification of their status regarding a number of rental fees. PPC continues
to defend itself in court against action initiated by the tax authorities regarding rental fees for August
to December 2010 and for January to December 2015. In addition, in February 2017, the Company
was awarded approximately $11.8m in damages plus interest and costs of $0.3m by an international
arbitration tribunal pursuant to a claim made against Ukraine under the Energy Charter Treaty. The
Group is currently arranging for this award to be recognized in Ukraine.
CFO
Liquidity is accumulated by deferring high-risk investment projects and minimizing costs.
Projects are analysed and ranked across the Group and capital is allocated accordingly. All significant
investment decisions are subject to Board approval and taken with due consideration to funding
availability. These decisions are taken within the context of the longer term field development plans.
After a further payment of $6.0m to bond holders in February 2019 the Group remains in a net cash
position, with sufficient funds to make the remaining bond payments ending in February 2020. In
addition in December 2018 PPC, our subsidiary in Ukraine, has renewed and increased a 12 month
UAH280m ($10.1m) revolving credit line and a UAH50m ($1.8m) overdraft facility with Tascombank,
neither of which are currently being used. We are confident that this facility can be renewed again for
2020. YGE, our subsidiary in Russia, is considering options for a similar facility. Other liquidity tools
include the ability to make forward sales in Ukraine.
Furthermore we have improved our understanding of the 2010 and 2015 rental fee claims and ensured
that we have the resources to meet these potential liabilities if necessary. In particular, careful
consideration has been given to the earliest dates that courts may conclude that PPC may be required to
settle any or all of the various claims in the event that court hearings proceed without undue delay.
The Group's expectation is that a final hearing with respect to the 2010 rental fee claim will take place in
2019 and that final hearings in respect of the 2015 rental fee claims will take place in 2020 and 2021.
Chairman’s statement
page 4
Financial review
page 24
The Board
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.
Chairman’s statement
page 4
The Board continues to receive regular legal advice regarding the cases against PPC in respect of the
2010 claims and 2015 claims, and has invested considerable time in order to understand them fully.
Financial review
page 24
In respect of the 2010 rental fee claims and 2015 rental fee claims, provisions of $12.4m and $30.1m,
respectively, have been recognised in these financial statements to reflect the Company’s estimate of the
potential liability.
Except for this $42.5m provision, the Group’s financial statements do not include any other 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.
The Company has begun to recognise the international arbitration award in Ukraine and plans to engage
with the authorities to reach a mutually beneficial outcome taking in consideration mutual claims.
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 ongoing
communications locally.
Our strategy is to employ skilled local staff working in the countries of operation and to engage
established legal, tax and accounting advisers to assist in compliance, when necessary.
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.
JKX Oil & Gas plc Annual Report 2018 36
STRATEGIC REPORT
Principal risks and how we manage them
What is the risk
Reservoir and operational performance
Description: Subsurface and operational risks are inherent for our business. The reservoir performance
cannot be predicted with certainty, and operations required for hydrocarbon production are subject to
risks of interruption or failure.
Production from our mature fields at the Novomykolaivske Complex in Ukraine require a high level of
maintenance and intervention to minimize the production decline. In Russia, acidization of deep, high
pressure and high temperature wells and other well maintenance procedures to stabilise production are
required, increasing risk of failure.
Impact: Accurate reservoir performance forecasts from fields in Ukraine and Russia are critical in
achieving the desired economic returns and to determine the availability and allocation of funds for
future investment into the exploration for, or development of, other oil and gas reserves and resources.
If reservoir performance is lower than forecast, sufficient finance may not be available for planned
investment in other development projects which will result in lower production, profits and cash flows.
Inability to ensure continuous operation of wells, flowlines, production facilities and successful execution
of drilling, workover, repair, enhancement interventions may result in lower production, profits and cash
flows.
Financial discipline and governance
Description: The Group has presence in five countries with major operations in Russia, Ukraine, and the
United Kingdom. Such complex structure requires complex governance and control procedures to be in
place to ensure appropriate level of financial discipline and controls, as well as delegation of authority
along the corporate and management structure.
From 2015 to 2018 the Group underwent several major Board and management changes, changes of
advisors and contractors, as well as significant reduction of staff across its operations. These changes
require additional efforts to ensure proper implementation of governance, controls, and financial
discipline procedures.
Impact: Failure to maintain an appropriate level of financial discipline, governance and controls may
lead to unnecessary or inappropriate spending, lack of control over procurement, contracting, investing
decisions, and exposure to increased legal, regulatory, or financial risks.
Health, safety, and environmental risks
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.
The Group has not assessed Climate Change as being a significant risk to its business in the foreseeable
future. We monitor supply and demand forecasts for our products from a variety of sources and Climate
Change does not appear as a major cited factor. If political responses to Climate Change actually lead to
major reductions in coal – fired European electricity generation, the Group may benefit from substitution
by cleaner gas – fired plant.
Impact: Technical failure, non-compliance with existing standards and procedures, accidents, natural
disasters and other adverse conditions where we operate, 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.
Probability
Impact
Change from
2018
Responsibility
How do we manage it?
Further information
HIGH
HIGH
I
data is analysed by our in-house technical expertise. This supports well intervention planning and further
page 16
There is daily monitoring and reporting of the well and plant performance at all our fields. Production
Operations review
General
Directors
field development.
Our subsurface and operations specialists and industry-recognised personnel are part of the daily
monitoring and reservoir management process of our field and assets.
Production forecasts generated for future development opportunities are risked to take account of
geological uncertainty. Operational risks are taken account of by adding a percentage of contingency to
the duration and cost of the planned development action. The percentage of contingency added is based
on both historical experience and perceived difficulty of the development action.
MED
HIGH
CFO
Since 2017 the current Board has prioritised financial discipline and governance.
During 2018 new financial controls have been implemented and corporate governance has been
enhanced, including through more frequent and detailed management reporting to the Board of
Directors.
Chairman’s statement
page 4
Financial review
A Group Policy Manual has been implemented across the group. It is subject to annual review and revision
page 24
by the Board to ensure that governance and control procedures are sufficient to insure the appropriate
level of financial discipline and controls, as well as delegation of authority along the corporate and
management structure. All payments are subject to approval by the CFO.
HIGH
HIGH
I
General
Directors
Health, safety and the environment is a priority of the Board who are involved in the planning and
Corporate social
implementation of continuous improvement initiatives. A London-based HSECQ Manager reports directly
responsibility
to Board of Directors.
page 27
The Group HSECQ Manager is responsible for maintaining a strong culture of health, safety and
environmental awareness in all our operational and business activities. The HSECQ Manager reports to
the Board with details of Group performance.
Operations in Ukraine, Russia and Hungary all have a dedicated HSECQ Team of local personnel 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.
Appropriate insurance policies, provided by reputable insurers, are maintained at Group level to mitigate
the Group’s financial exposure to any unexpected adverse events arising out of the normal operations.
JKX Oil & Gas plc Annual Report 2018
37
What is the risk
Probability
Impact
Change from
Responsibility
How do we manage it?
Further information
2018
Reservoir and operational performance
Description: Subsurface and operational risks are inherent for our business. The reservoir performance
cannot be predicted with certainty, and operations required for hydrocarbon production are subject to
risks of interruption or failure.
Production from our mature fields at the Novomykolaivske Complex in Ukraine require a high level of
maintenance and intervention to minimize the production decline. In Russia, acidization of deep, high
pressure and high temperature wells and other well maintenance procedures to stabilise production are
required, increasing risk of failure.
Impact: Accurate reservoir performance forecasts from fields in Ukraine and Russia are critical in
achieving the desired economic returns and to determine the availability and allocation of funds for
future investment into the exploration for, or development of, other oil and gas reserves and resources.
If reservoir performance is lower than forecast, sufficient finance may not be available for planned
investment in other development projects which will result in lower production, profits and cash flows.
Inability to ensure continuous operation of wells, flowlines, production facilities and successful execution
of drilling, workover, repair, enhancement interventions may result in lower production, profits and cash
flows.
Financial discipline and governance
Description: The Group has presence in five countries with major operations in Russia, Ukraine, and the
United Kingdom. Such complex structure requires complex governance and control procedures to be in
place to ensure appropriate level of financial discipline and controls, as well as delegation of authority
along the corporate and management structure.
From 2015 to 2018 the Group underwent several major Board and management changes, changes of
advisors and contractors, as well as significant reduction of staff across its operations. These changes
require additional efforts to ensure proper implementation of governance, controls, and financial
discipline procedures.
Impact: Failure to maintain an appropriate level of financial discipline, governance and controls may
lead to unnecessary or inappropriate spending, lack of control over procurement, contracting, investing
decisions, and exposure to increased legal, regulatory, or financial risks.
Health, safety, and environmental risks
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.
The Group has not assessed Climate Change as being a significant risk to its business in the foreseeable
future. We monitor supply and demand forecasts for our products from a variety of sources and Climate
Change does not appear as a major cited factor. If political responses to Climate Change actually lead to
major reductions in coal – fired European electricity generation, the Group may benefit from substitution
by cleaner gas – fired plant.
Impact: Technical failure, non-compliance with existing standards and procedures, accidents, natural
disasters and other adverse conditions where we operate, 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.
General
Directors
There is daily monitoring and reporting of the well and plant performance at all our fields. Production
data is analysed by our in-house technical expertise. This supports well intervention planning and further
field development.
Operations review
page 16
Our subsurface and operations specialists and industry-recognised personnel are part of the daily
monitoring and reservoir management process of our field and assets.
Production forecasts generated for future development opportunities are risked to take account of
geological uncertainty. Operational risks are taken account of by adding a percentage of contingency to
the duration and cost of the planned development action. The percentage of contingency added is based
on both historical experience and perceived difficulty of the development action.
CFO
Since 2017 the current Board has prioritised financial discipline and governance.
During 2018 new financial controls have been implemented and corporate governance has been
enhanced, including through more frequent and detailed management reporting to the Board of
Directors.
A Group Policy Manual has been implemented across the group. It is subject to annual review and revision
by the Board to ensure that governance and control procedures are sufficient to insure the appropriate
level of financial discipline and controls, as well as delegation of authority along the corporate and
management structure. All payments are subject to approval by the CFO.
Chairman’s statement
page 4
Financial review
page 24
General
Directors
Health, safety and the environment is a priority of the Board who are involved in the planning and
implementation of continuous improvement initiatives. A London-based HSECQ Manager reports directly
to Board of Directors.
Corporate social
responsibility
page 27
The Group HSECQ Manager is responsible for maintaining a strong culture of health, safety and
environmental awareness in all our operational and business activities. The HSECQ Manager reports to
the Board with details of Group performance.
Operations in Ukraine, Russia and Hungary all have a dedicated HSECQ Team of local personnel 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.
Appropriate insurance policies, provided by reputable insurers, are maintained at Group level to mitigate
the Group’s financial exposure to any unexpected adverse events arising out of the normal operations.
JKX Oil & Gas plc Annual Report 2018
38
STRATEGIC REPORT
Principal risks and how we manage them
What is the risk
Asset integrity
Probability
Impact
Change from
2018
Responsibility
How do we manage it?
Further information
Description: Our operations depend on maintaining and adhering to licence requirements and related
regulations set by government authorities in countries we operate in.
Impact: Failure to comply with licence obligations and other regulations or requirements may result in
our licences being suspended or revoked which will require us to suspend production and operations.
MED
HIGH
I
General
Directors
Status of our licences and relevant licence obligations are monitored on a country level.
In 2018 the deadline for the Callovian well drilling commitment in Russia, which is the Group’s largest
single commitment, has been extended until 2025.
Major breach of business, ethical, or compliance standards
Description: The Company is subject to numerous requirements and standards including UK Bribery Act,
UK Listing Rules, UK Corporate Governance Code, UK Listing Rules, Disclosure and Transparency Rules,
among others. Additionally, some of our stakeholders, such as financial institutions, may require us to
comply with other requirements or ask us to provide information on our business, operations, employees
and shareholders as part of Know Your Client (“KYC”) procedures.
Impact: Failing to comply with onerous regulations and requirements, such as failure to implement
adequate systems to prevent bribery and corruption, could result in prosecution, fines or penalties
imposed on the Company or its officers, suspension of operations or listing.
Inability to clear KYC procedures to satisfaction of the third parties may result in refusal to engage in
business relationships with the Company.
MED
HIGH
Corporate social
responsibility
page 27
Corporate governance
page 44
responsibility
page 27
The Board
The CFO is responsible for compliance and, with the support of the Board, implements compliance-related
Corporate social
activities and procedures.
policies and procedures.
Such activities focus on training, monitoring, risk management, due diligence and regular review of
We prohibit bribery and corruption in any form by all employees and by those working for and/or
Corporate governance
connected with the business. Employees are expected to report actual, attempted or suspected bribery
page 44
or other issues related to compliance to their line managers or through our independently managed
confidential reporting process, which is available to all staff as well as third parties.
In 2017 we engaged an independent consultant to assess our anti-bribery and corruption (“ABC”) policies,
procedures, and practices and in 2018 we engaged KPMG to conduct a forensic review of procurement
of legal services and subsequent payments made to legal advisors in Ukraine in 2017. Recommendations
arising from both have been implemented to further strengthen our ABC framework. This included
completion of a full Bribery Risk Assessment.
In dealing with the third parties, our policy is to maximize transparency and provide all information
available to address KYC-related procedures and requests.
Commodity prices and FX fluctuations
Description: JKX is exposed to international oil and gas price movements, policy developments in Russia
which may affect the regulated gas price, and movements in exchange rates. Such changes in will have a
direct effect on the Group’s trading results.
Gas prices in Ukraine are closely aligned with gas prices in Europe. Since Ukraine stopped purchasing gas
from Russia directly, domestic gas prices have been at a premium to those in Europe. Change in gas import
flows may have impact on gas prices in Ukraine, and a prolonged period of low gas prices would impact the
Group’s liquidity.
In Russia, from 1 July 2018 the regulated price to which our sales contract is tied has increased by 3.9%
however, prevailing prices remain significantly lower than in Europe due to existing regulations.
In Ukraine PPC sells the oil it produces at prices determined by a combination of the global oil market and
local market factors.
During 2018, the Hryvnia exchange rate remained stable while the Rouble weakened by more than 20%.
Impact: A period of low oil and/or gas prices could lead to impairments of the Group’s oil and gas assets
and may impact the Group’s ability to support its field development plans and reduce shareholder returns.
MED
HIGH
foreign exchange risk.
CFO
JKX’s policy is not to hedge commodity price exposure on oil, gas, LPG or condensate and not to hedge
Financial review
JKX attempts to maximise its realisations versus relevant benchmarks while keeping credit risk to a
minimum by selling mostly on spot markets and on a prepayment basis.
As commodity prices in Ukraine closely follow international benchmarks, significant changes in the
Page 14
exchange rates are reflected in commodity prices providing a natural hedge.
In Russia, the vast majority of gas produced is sold to a single local gas trading company through a long
term gas sales contract with prices set in Roubles. Sales price for gas is fixed and is subject to increase
according to changes in a tariff set by relevant regulatory bodies. The Company continues to seek other
sales opportunities in Russia to improve realisations.
The Group attempts 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.
page 24
Strategic report
JKX Oil & Gas plc Annual Report 2018
39
Probability
Impact
Change from
Responsibility
How do we manage it?
Further information
2018
General
Directors
Status of our licences and relevant licence obligations are monitored on a country level.
In 2018 the deadline for the Callovian well drilling commitment in Russia, which is the Group’s largest
single commitment, has been extended until 2025.
The Board
The CFO is responsible for compliance and, with the support of the Board, implements compliance-related
activities and procedures.
Such activities focus on training, monitoring, risk management, due diligence and regular review of
policies and procedures.
We prohibit bribery and corruption in any form by all employees and by those working for and/or
connected with the business. Employees are expected to report actual, attempted or suspected bribery
or other issues related to compliance to their line managers or through our independently managed
confidential reporting process, which is available to all staff as well as third parties.
In 2017 we engaged an independent consultant to assess our anti-bribery and corruption (“ABC”) policies,
procedures, and practices and in 2018 we engaged KPMG to conduct a forensic review of procurement
of legal services and subsequent payments made to legal advisors in Ukraine in 2017. Recommendations
arising from both have been implemented to further strengthen our ABC framework. This included
completion of a full Bribery Risk Assessment.
In dealing with the third parties, our policy is to maximize transparency and provide all information
available to address KYC-related procedures and requests.
Corporate social
responsibility
page 27
Corporate governance
page 44
Corporate social
responsibility
page 27
Corporate governance
page 44
CFO
JKX’s policy is not to hedge commodity price exposure on oil, gas, LPG or condensate and not to hedge
foreign exchange risk.
Financial review
page 24
JKX attempts to maximise its realisations versus relevant benchmarks while keeping credit risk to a
minimum by selling mostly on spot markets and on a prepayment basis.
As commodity prices in Ukraine closely follow international benchmarks, significant changes in the
exchange rates are reflected in commodity prices providing a natural hedge.
Strategic report
Page 14
In Russia, the vast majority of gas produced is sold to a single local gas trading company through a long
term gas sales contract with prices set in Roubles. Sales price for gas is fixed and is subject to increase
according to changes in a tariff set by relevant regulatory bodies. The Company continues to seek other
sales opportunities in Russia to improve realisations.
The Group attempts 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.
What is the risk
Asset integrity
Description: Our operations depend on maintaining and adhering to licence requirements and related
regulations set by government authorities in countries we operate in.
Impact: Failure to comply with licence obligations and other regulations or requirements may result in
our licences being suspended or revoked which will require us to suspend production and operations.
Major breach of business, ethical, or compliance standards
Description: The Company is subject to numerous requirements and standards including UK Bribery Act,
UK Listing Rules, UK Corporate Governance Code, UK Listing Rules, Disclosure and Transparency Rules,
among others. Additionally, some of our stakeholders, such as financial institutions, may require us to
comply with other requirements or ask us to provide information on our business, operations, employees
and shareholders as part of Know Your Client (“KYC”) procedures.
Impact: Failing to comply with onerous regulations and requirements, such as failure to implement
adequate systems to prevent bribery and corruption, could result in prosecution, fines or penalties
imposed on the Company or its officers, suspension of operations or listing.
Inability to clear KYC procedures to satisfaction of the third parties may result in refusal to engage in
business relationships with the Company.
Commodity prices and FX fluctuations
Description: JKX is exposed to international oil and gas price movements, policy developments in Russia
which may affect the regulated gas price, and movements in exchange rates. Such changes in will have a
direct effect on the Group’s trading results.
Gas prices in Ukraine are closely aligned with gas prices in Europe. Since Ukraine stopped purchasing gas
from Russia directly, domestic gas prices have been at a premium to those in Europe. Change in gas import
flows may have impact on gas prices in Ukraine, and a prolonged period of low gas prices would impact the
Group’s liquidity.
local market factors.
In Russia, from 1 July 2018 the regulated price to which our sales contract is tied has increased by 3.9%
however, prevailing prices remain significantly lower than in Europe due to existing regulations.
In Ukraine PPC sells the oil it produces at prices determined by a combination of the global oil market and
During 2018, the Hryvnia exchange rate remained stable while the Rouble weakened by more than 20%.
Impact: A period of low oil and/or gas prices could lead to impairments of the Group’s oil and gas assets
and may impact the Group’s ability to support its field development plans and reduce shareholder returns.
JKX Oil & Gas plc Annual Report 2018
40
STRATEGIC REPORT
JKX Oil & Gas plc Annual Report 2018
Principal risks and how we manage them
Such changes will have a direct effect on the Group’s trading
results.
• Potential fee claims
The Company has persistently defended its position in the
Ukrainian courts regarding the rental fee claims for 2010
and 2015 totalling approximately $42.5 million (including
interest and penalties, see Note 27 to the consolidated
financial statements), the Company will continue to defend
its position in the Ukrainian courts in all outstanding cases,
the Directors have given careful consideration to the earliest
dates that courts may conclude that any or all of the claims
may be required to be settled and ensured that the resources
are available to meet these liabilities if necessary based on
the expected timing of potential payments (see Financial
review page 26).
Confirmation of longer-term viability
The Board has undertaken a robust assessment of these risks
and the other principal risks faced by the business detailed
on pages 32 to 40 of the Annual Report. The Directors have
implemented operational and cash management measures, to
settle amounts that may become payable in relation to the 2010
and 2015 rental fee claims, if and when they become payable.
The Directors believe that the combination of its current cash
balances, and continued availability of current facilities,
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.
Long term viability statement
The Directors have assessed the viability of the Group over
a three-year period to 31 December 2021, during which it is
expected that the final bond payment will be made and any
potential liabilities from 2010 and/or 2015 rental fee claims
may arise,taking account of the Group’s current position and the
potential impact of the principal risks documented above.
Summary of the strategic review by country
•
•
•
Ukraine In 2018 we have developed a five year field
development plan (medium term), that we are now
executing. In addition, we have started to systematically
review opportunities for acquisition and new licensing in
Ukraine.
Russia Operations, production and cash flow are stable in
Russia. Production can be increased in 2019 by a three well
workover programme.
Hungary We are in the process of disposing of our six
mining plots in Hungary.
More detail on these opportunities and the Company’s plans are
provided on pages 10 to 11.
The Board believes that the Group’s assets and staff provide a
good platform to consolidate and improve on its existing oil and
gas opportunities.
The Group has been operating in Ukraine for over 25 years and
in Russia for over 10 years. Most of the Group’s profits and cash
flows continue to be generated in Ukraine and, to a lesser extent,
in Russia. However there remain significant risks associated
with operating in the emerging markets in general, and
operating our assets specifically, which could adversely impact
cash flows, profits and liquidity of the Group.
Assessment of viability
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 in Rouble and Hryvnia
exchange rates, various scenarios for reservoir performance,
and delays to additional future revenue. These sensitivities are
considered both individually and in unison.
The assessment incorporated the use of mitigating actions
available to the business, such as a reduction in capital
expenditure and use of external facilities.
Capital and operating costs were based on approved budgets and
latest forecasts in the case of 2019 and current development
plans in the case of 2020 through to December 2021. 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 but which is outside the control of management
and could have a significant impact on the business:
• Commodity prices and FX fluctuations
The Group is exposed to international oil and gas price
movements, policy developments in Russia which may affect
the regulated gas price, and movements in exchange rates.
41
JKX Oil & Gas plc Annual Report 2018
Governance and Financial statements
Governance
Board composition
Corporate governance
Audit Committee Report
Directors’ Remuneration Report
Directors’ report - other disclosures
Financial statements
Group
Independent Auditors’ Report
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated statement of financial position
Consolidated statement of changes in equity
Consolidated statement of cash flows
Notes to the consolidated financial statements
Company
42
44
51
56
68
72
80
82
83
84
85
86
Company statement of financial position
Company statement of changes in equity
Notes to the Company financial statements
126
127
128
42
JKX Oil & Gas plc Annual Report 2018
GOVERNANCE
Board composition
Hans Jochum Horn Non Executive Chairman
Appointed – 24 October 2017
Experience – worked in emerging markets for more than 25 years, primarily in
Russia/CIS and Africa. Previous experience included roles as CEO and Chairman of the
Board of Rendeavour, Africa’s largest urban developer, CEO and Chairman of the Board
of Renaissance Group, and a director and head of the Audit Committee of Uralkali and
Eurochem.
Hans Jochum Horn was the Country Managing Partner for Russia / CIS from 1990 to 2005
at Arthur Andersen and subsequently Ernst & Young. He has been a frequent advisor to
governments and regional authorities in CIS and Africa.
Hans Jochum holds an MA in Accounting and Auditing from the Norwegian School of
Economics, as well as an MBA from the University of Mannheim, Germany. He has
served as Chairman of the Norwegian Association of MBA Graduates, was the founding
member of the German Chamber of Commerce in Russia, and former President of Junior
Achievement Russia.
Michael Bakunenko Non Executive Director
Appointed – 8 December 2017
Experience – an Executive Chairman of the Board at PJSC Ukrnaftoburinnya, the third
largest private oil and gas E&P Company in Ukraine since September 2015. From 2011
to 2015 Mr. Bakunenko was Deputy Board Chairman, Director of Corporate
Development and Strategy at PJSC Ukrnafta, the largest oil company in Ukraine. Prior
to this Mr. Bakunenko worked for 8 years in the investment banking industry, notably
at Goldman Sachs in New York and Renaissance Capital in Moscow and Kiev. Mr.
Bakunenko holds a Bachelor’s degree from Lehigh University and Master’s degree from
Columbia University.
Christian Bukovics Non Executive Director
Appointed – 9 February 2018
Experience – currently a director at AEEV Ltd, pursuing low-cost onshore oil
opportunities in the CIS. Until 2013, Christian worked for Shell for 33 years, based in
eight countries on four continents. From 2006 to 2013 he was Exploration VP for Russia
and the CIS region, a member of Shell’s global exploration leadership team and board
chairman of CMOC during part of that period. Earlier roles included VP Commercial for
Global Exploration, GM Shell Technical Services Iran and GM Shell Temir (Kazakhstan).
Mr. Bukovics holds a PhD in Physics from University of Vienna.
43
JKX Oil & Gas plc Annual Report 2018
Adrian Coates Non Executive Director, Senior Independent Director
Appointed – 8 December 2017
Experience – is the Chairman of Thor Explorations Limited, a TSX-V listed mining
exploration and development company with assets in West Africa. He was a Non
Executive Director of Petropavlovsk from February to June 2018, Regal Petroleum from
2008 to 2017 and of Polyus Gold from 2010 to 2015. Mr. Coates has many years’
experience in the investment banking industry, having held positions with HSBC, UBS
and Credit Suisse First Boston, with a specialisation in the natural resources sector.
Mr. Coates holds a Master’s degree in Economics from University of Cambridge and an
MBA from the London Business School.
Andrey Shtyrba Non Executive Director
Appointed – 24 October 2017
Experience – currently CEO of Stevedores Yamal LLC, a logistics company operating in
Russia. Previously Andrey was Managing Director of Sovfrakht Management Company
LLC (which provides logistics in Russia and Ukraine), a Managing Director of Alfa
Capital Partners, Director of Corporate Finance and Vice President of Alfa Bank as well
as holding positions with Credit Swiss First Boston and KPMG’s audit and tax practice.
Andrey holds a degree (with Honours) in Economics from the Finance Academy in
Moscow.
Vladimir Rusinov Non Executive Director
8 December 2017
16 August 2018
Vladimir Tatarchuk Non Executive Director
28 January 2016
16 August 2018
Appointed
Resigned
44
JKX Oil & Gas plc Annual Report 2018
GOVERNANCE
Corporate governance
Governance principles
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 2016 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 and the Board set the tone and take the lead to ensure that good practice flows throughout the
Group.
Governance framework
Chairman
BOARD
Non Executive Chairman,
four Non Executive Directors (including three independent
Non Executive Directors)
Nomination
Committee
Group Risk
Committee
Audit
Committee
Remuneration
Committee
PPC Risk Committee
YGE Risk Committee
JKX Board changes during 2018
On 9 February 2018, following a search by an independent executive search consultant, Christian Bukovics was appointed to the
Board as a Non Executive Director and a member of the Remuneration and Nomination Committees.
On 22 March 2018 an EGM was held at which the four independent Directors (including the Chairman, the Senior Independent
Director, Andrey Shtyrba and Christian Bukovics), all of whom had been appointed to the Board since the last Annual General
Meeting stood down and presented themselves for reappointment by the Shareholders. All were reappointed.
On 25 June 2018 Michael Bakunenko and Vladimir Rusinov (both of whom had been appointed to the Board since the last Annual
General Meeting) were reappointed by the Shareholders at the Annual General Meeting.
On 16 August 2018 Vladimir Rusinov and Vladimir Tatarchuk both resigned as Directors following the disposal of Proxima’s
entire interest in the company to Cascade.
The Group is led by an experienced Board of Directors consisting of a Non Executive Chairman, three independent Non Executive
Directors and one Non Executive Director, who represents the interests of Eclairs, JKX’s largest shareholder with a holding of
over 27%.
45
JKX Oil & Gas plc Annual Report 2018
Board effectiveness
Role of the Board
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 significant business risks are actively monitored and managed using robust control and risk management systems.
In addition, the Board considers strategy in depth as well as reviewing the strategic objectives of the Company at each of its Board
meetings.
All other authorities are delegated by the Board, supported by appropriate controls, to the Chief Financial Officer and General Directors
of PPC and YGE.
How the Board functions
The Board has historically held six scheduled meetings each year, and arranges additional meetings if the need arises. During 2018,
there were 6 unscheduled Board meetings (2017: nine), including one meeting at which the Non Executive Directors met in private
session, with an open agenda to discuss the current issues affecting the Group (2017: once). The number of unscheduled Board meetings
in 2018 was needed for the Board members to build a strategic direction for the Company and to address ongoing developments.
The Chairman, in consultation with the Directors and senior executives, 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 a monthly performance update each month after the month end. The monthly reports outline all
material operational, financial, commercial and strategic developments.
The monthly reports consolidate all financial and operational 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 cash, cash flow forecast, receivables and payables 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 Chairman ensures that all the relevant papers and other information is delivered, where possible, 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 advice at the
Company’s expense.
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.
46
JKX Oil & Gas plc Annual Report 2018
GOVERNANCE
Corporate governance
Committees of the Board in 2018
During 2018 the Board had three committees focusing on specialist areas, which were ultimately accountable to the Board. 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.
Committee memberships during 2018
Hans Jochum Horn
Michael Bakunenko
Christian Bukovics
Adrian Coates
Vladimir Rusinov
Andrey Shtyrba
Vladimir Tatarchuk
1 Resigned 16 August 2018.
2 Appointed on 8 October 2018.
3 Resigned 16 August 2018.
4 Appointed on 9 February 2018.
Audit Committee
Remuneration Committee
Nomination Committee
Member
Member
-
Chairman
Member1
Member
-
Member
Member2
Member4
-
-
Chairman
Member3
Chairman
-
Member
Member
-
Member
-
The roles and activities of each of these committees during 2018 are noted on pages 48, 51 and 61.
Board composition, independence and commitment
Up until the 15 August 2018 the Board comprised 7 individuals:
The Non Executive Chairman,
2 Non Executive Director representing the interests of Proxima, JKX’s second largest shareholder with a holding of almost 20%,
1 Non Executive Director representing the interests of Eclairs, JKX’s largest shareholder with a holding of over 27%, and
3 independent Non Executive Directors (Christian Bukovics, Adrian Coates, Andrey Shtyrba) who were assessed as independent on
the basis, inter alia, that the matters set out in Section B.1.1, of the Code did not apply to them.
Following the resignation of Vladimir Rusinov and Vladimir Tatarchuk on 16 August 2018 the Board comprised 5 individuals:
The Non Executive Chairman,
1 Non Executive Director representing the interests of Eclairs, JKX’s largest shareholder with a holding of over 27%, and
3 independent Non Executive Directors (Christian Bukovics, Adrian Coates, Andrey Shtyrba) who were assessed as independent on
the basis, inter alia, that the matters set out in Section B.1.1, of the Code did not apply to them.
It is the Board’s view that the current Non Executive Directors have sufficient time to fulfil their commitments to the Company. The
Board does however regularly consider the appropriateness of Board composition.
Board skills, experience and responsibilities
The Board has significant knowledge and experience of the oil and gas industry, engineering and financial matters, working in central
and eastern Europe, particularly Ukraine and Russia, and turn-around and restructuring situations within the region. The key
biographical details, relevant experience and responsibilities of each Director are provided on pages 42 and 43.
The Non Executive Directors bring the skills and expertise necessary to challenge effectively, independently and constructively, the
performance of the company and its strategy.
Board diversity
During the period covered by this report the Board consisted entirely of men with 5 different nationalities.
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.
47
JKX Oil & Gas plc Annual Report 2018
Senior Independent Director
Adrian Coates was appointed as Senior Independent Director (‘SID’) on 8 December 2017.
The SID is 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.
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 Financial Officer or where such contact is inappropriate.
2018 Board evaluation process
Following the Board changes in 2017 it was considered appropriate to defer the process of evaluating the performance of all the new
Directors and committees in 2018. The Chairman has however conducted one to one meetings with the Directors. During the first
quarter of 2019 the Senior Independent Director has reviewed the performance of the Chairman and an internal Board Evaluation has
been carried out.
External evaluation
As the Company was outside of the FTSE 350 during 2018 there was no requirement for an externally-facilitated evaluation of the
Board at least every three years. The Chairman will consider the relevance of an externally facilitated evaluation in due course.
Development of the Board
All Directors are provided with opportunities for further development and training updates. In addition to the 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.
Board activities
Attendance at meetings
In addition to six scheduled Board meetings, there were six unscheduled meetings convened at short notice (2017: nine).
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 2018 and individual attendance by Director is shown below:
Board and Committee meeting attendance in 2018
Number of meetings
Attendance/Eligibility:
Hans Jochum Horn
Michael Bakunenko3
Christian Bukovics1
Adrian Coates
Vladimir Rusinov2
Andrey Shtyrba
Board
12
Board
12/12
11/12
12/12
12/12
8/9
10/12
Vladimir Tatarchuk
3/9
Audit Committee
Remuneration Committee
Nomination Committee
6
5
5
Audit Committee
Remuneration Committee
Nomination Committee
6/6
6/6
-
6/6
4/4
5/6
-
5/5
1/1
5/5
-
-
5/5
0/3
5/5
-
5/5
5/5
-
4/5
-
1 Christian Bukowics was appointed as a Director on 9 February 2018.
2 Vladimir Rusinov and Vladimir Tatarchuk resigned as Directors on 16 August 2018.
3 Michael Bakunenko was appointed as a member of the Remuneration Committee on 8 October 2018.
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 2018
During the year the Board used a rolling agenda of strategy, finance, operations, commercial matters, corporate governance and
compliance including the matters set out below. All Directors have the authority to add any item to the Board agenda.
Reports from the General Directors of each of the two major operating units on strategic, and operational matters including political
and economic developments,
48
JKX Oil & Gas plc Annual Report 2018
GOVERNANCE
Corporate governance
The Chief Financial Officer’s report which includes a report of actual performance against budget, reforecasting, updates on oil, gas
and condensate prices,
HSECQ matters,
Additional funding opportunities,
Compliance (including Anti Bribery and Corruption) issues,
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 implementation of the Board’s updated strategy for the Company reflecting matters such as the deployment of an improved
contractor base, a focus on cost control and the execution of low risk, high margin operations;
managing the Group’s liquidity including the payment of principal and interest on the existing Convertible Bond;
reduction in overhead costs and improved efficiency through the implementation of staff cuts in London, Ukraine and Russia and
resolution of historic cost issues those arising from the storage of specialist drilling tubing;
increased transparency and engagement with shareholders regarding production and operations with a regular reporting schedule.
Identifying and addressing critical gaps in the Board and senior management team;
introducing enhanced management information updates focussing on key parameters including production, liquidity and future
cashflow;
introducing enhanced monitoring and control processes centralised to the Board appropriate to the Company’s financial position -
focussing in particular on procurement, cost and payment;
disposal of non-core Slovakian assets;
appointment of new statutory auditors;
overhaul of the capex approval process by ensuring that appropriate screening criteria such as risk, payback period, cash flow impact
and return on investment are considered;
development and implementation of a future strategy, including the five year development plan in Ukraine and the three well work
over programme reflecting the Company’s position and its opportunities and challenges;
review and management of ongoing tax and other litigation;
identifying sources of third party financing and arranging for a standby facility; and
prioritisation of the 2019 group budgeting process.
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 the independent Non Executive Directors (including the Chairman) stood down and were reappointed at the EGM held on 22 March
2018. Of the remaining Directors Vladimir Tatarchuk was reappointed at the 2016 Annual General Meeting and Michael Bakunenko
and Vladimir Rusinov were appointed to the Board on 8 December 2017. Michael Bakunenko and Vladimir Rusinov stood for re-
election at the 2018 Annual General Meeting as they had been appointed to the Board since the last AGM and both were reappointed.
Vladimir Rusinov and Vladimir Tatarchuk resigned as Directors on 16 August 2018.
Although none of the Directors have been appointed since the last AGM and no director has been in place for more than one annual
general meeting the Directors have all agreed to stand down and submit themselves to the shareholders for reappointment, in line with
the new recommendations of the 2018 UK Corporate Governance Code.
Full biographies of all the Directors can be found on pages 42 and 43.
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 Nomination Committee regularly
reviews the management structure of the Company, including the absence of a CEO, and seeks ways to minimise any negative impact.
The Committee meets as often as it determines is appropriate. Generally it meets at least once a year and more frequently if required.
Committee member since
To
Hans Jochum Horn (Chairman) November 2017
Christian Bukovics
February 2018
Adrian Coates
Andrey Shtyrba
December 2017
November 2017
present
present
present
present
The Committee met 5 times during 2018 (2017: 3).
Number of meetings in 2018
Attendance/Eligibility
5/5
5/5
5/5
4/5
49
JKX Oil & Gas plc Annual Report 2018
A new independent Non Executive Director (Christian Bukovics) was appointed in 2018 following a search by an independent search
consultant (Drax) that has no other connection with the Group.
Membership and process
Until 8 February 2018 the Nomination Committee comprised Hans Jochum Horn (as Chairman), Adrian Coates and Andrey Shtyrba. On
9 February 2018, Christian Bukovics joined the other independent Non Executive Directors as a member of the Nomination Committee.
Throughout 2018 Hans Jochum Horn acted as Chairman of the Committee and the Committee was compliant with 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 in order 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.
Remuneration Committee
Details of the work of the Remuneration Committee is given in the Remuneration report on pages 56 to 67.
Compliance
Compliance with the UK Corporate Governance Code
The Board believes that, except in relation to the composition of certain Board Committees prior to the appointment of Christian
Bukovics as an independent Non Executive Director on February 9th 2018 the Company was fully compliant during 2018 with the
provisions set out in the UK Corporate Governance Code.
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.
The Board is responsible for identifying and evaluating the major business risks faced by the Company and for determining and
monitoring the appropriate course of action to manage these risks. The Audit Committee reviews the Company’s internal control
processes and risk management systems and reports its conclusions to the Board.
During the year the Board has strengthened a number of key internal control processes including those relating to approval of
expenditure, procurement, anti-bribery and corruption, sponsorship and donations.
The Board has concluded that for the period up until the date of the Annual Report the Company’s current procedures, policies and
systems are appropriate and suitable to enable the Board to safeguard shareholders’ investment and the Company’s assets, and comply
with FRC ‘Risk Management, Internal Control and Related Financial Business Reporting Guidance’.
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 32 to 40. Further information on internal control and risk management is set out in the Audit Committee Report on
page 52.
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 managers of
operating subsidiaries in Russia and Ukraine.
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.
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 Board has reviewed the approach to ensure the most effective allocation
of capital across the group as part of a wider consideration of the Company’s strategy in accordance with the five year development
plan in Ukraine and the three well work over programme in Russia.
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 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.
50
JKX Oil & Gas plc Annual Report 2018
GOVERNANCE
Corporate governance
Whistleblowing
The Board reviews the arrangements by which employees and others 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 which is available on the Company’s website, 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
potential 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 Internal Audit Manager 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.
Communication with shareholders
The Board is committed to frequent and comprehensive communication with all shareholders. The Board is committed to an open
relationship involving regular communications in order that shareholders views on the Group can be better understood and addressed
as 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.
Formal presentations, when made, are available to all shareholders to download from the Group’s website (www.jkx.co.uk). Less formal
processes include contacts with other 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. 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.
The authorisation of a conflict matter, and the terms of authorisation, may be reviewed at any time by the Board. The Nomination
Committee is mandated to support the Board in this process, being tasked to review requests from Directors for authorisations of
situations of actual or potential conflict and making recommendations to the Board and to review any situations of actual or potential
conflict that have been previously authorised by the Board. The Committee may also make recommendations regarding
appropriateness of the authorisation.
Going concern
The Board closely monitors and manages the Group’s liquidity risk using cash flow forecasts which are regularly produced and applies
sensitivities for different scenarios that reflect future expectations including but not limited to those regarding country, commodity
price and currency risks that the Group may encounter.
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
Hans Jochum Horn
Chairman
5 April 2019
51
GOVERNANCE
Audit committee report
JKX Oil & Gas plc Annual Report 2018
Attendance and eligibility
Member
Committee member since
To
Number of meetings in 2018
Attendance/Eligibility
Adrian Coates (as Chairman)
December 2017
December 2017
October 2017
present
present
present
Michael Bakunenko
Hans Jochum Horn
Vladimir Rusinov
Andrey Shtyrba
December 2017
Resigned 16 August 2018
October 2017
present
6/6
6/6
6/6
4/4
5/6
The Audit Committee currently comprises 3 Non Executive Directors, two of whom are independent, and the Non Executive Chairman.
Audit Committee during 2018
Adrian Coates (Chairman), Michael Bakunenko, Hans Jochum Horn and Andrey Shtyrba were the members of the Audit Committee,
throughout the year. Vladimir Rusinov was also a member of the Committee until 16 August 2018 on which date he resigned.
The Audit Committee has carried out the requirements under the Disclosure and Transparency Rules 7.1.3R throughout the period that
this report covers. Adrian Coates, Andrey Shtyrba and Hans Jochum Horn have relevant financial experience as defined by the Code.
Role of the Audit Committee
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 2016. 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 or following an appropriate competitive tender recommend the
appointment of a new external auditor and to 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 manage the adequacy and effectiveness of the Internal Audit function and the Risk Committee and to review any significant
matters arising.
Composition of the Audit Committee
The Board has determined that Andrey Shtyrba, Hans Jochum Horn and Adrian Coates had recent and relevant financial experience
gained through their previous and current roles and that for the purposes of the Disclosure and Transparency Rules Hans Jochum Horn
is independent applying the guidance set out in B.1.1 of the Code.
The composition of the Audit Committee over the relevant period provided the Committee with an appropriate balance between those
individuals with a financial or accounting background and those with wider experience of the oil and gas sector and doing business in
regions in which JKX operates. 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 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
The Audit Committee met six times during 2018 (2017: five).
The Committee’s meetings were attended when considered appropriate by the Chairman of the Committee, by the Chief Financial
Officer, the lead partner of our external auditors, and by certain senior managers who are responsible for specific topics, such as risk
management, internal audit, 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 2018 (2017: twice) the
Committee Chairman met with the external auditors to discuss matters which the auditors and Audit Committee may wish to raise.
52
GOVERNANCE
Audit committee report
JKX Oil & Gas plc Annual Report 2018
As there are were no Executive Directors in office during 2018 there was no need to hold any meeting with the auditors at which
Executive Directors were not present.
The Committee’s activities during 2018
During the period covered by this report, the Committee had an annual work plan, developed from its terms of reference, with standing
items that the Committee considered 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
Considered reports from the external
auditors on their assessment of the
control environment;
Retendered for external auditors and
appointed BDO LLP to act as external
auditors;
Considered feedback from both the
Considered and approved the audit
internal and external auditor reports
as submitted by local and Group
management;
approach and scope of the audit work
to be undertaken by the external
auditors and the fees for the same;
Reviewed auditors’ reports on their
audit findings at the half year review
and at the year end;
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) the Committee’s own Assessment;
Considered and approved letters of
representation issued to the external
auditors; and
Agreement of the external auditors’
remuneration for the 2018 statutory
accounts.
Reviewed risk 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;
Reviewed the status of
implementation of the
recommendations arising from an
independent expert’s review of the
effectiveness of the Group’s Anti-
Bribery and Corruption policies and
systems received in 2017;
Commissioned and received KPMG’s
review of certain payments made to
legal advisers in 2016 and 2017;
Review of finance, legal, internal audit
and compliance staffing; and
Implementation of enhanced interim
controls relating to cost, procurement
and payment and ongoing monitoring
of their effectiveness.
Accounting, tax and
financial reporting
Reviewed the half year and annual
financial statements and the
significant financial reporting
judgements made therein;
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;
Ongoing analysis of future cash flow
and liquidity and implementation of
monthly financial update reports;
Review of Transfer Pricing issues; and
Review of ongoing tax and other
litigation.
Significant issues considered by the Audit Committee
After discussion with management and the external auditors, the Committee determined that the key risks of misstatement in relation
to the Group’s 2018 financial statements related to:
the carrying value of oil and gas assets;
rental fee claims in Ukraine;
international arbitration award; and
going concern.
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 2018 and at the conclusion of the audit of
these financial statements.
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JKX Oil & Gas plc Annual Report 2018
Matters considered
Response and conclusion
The carrying value of oil and gas assets
As 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. In 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.
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
2019 Budget which is approved by the Board. In addition, this
area is a prime source of audit focus and accordingly our auditors
provided detailed reporting to the Committee. Management also
brought to the attention of the Committee the sensitivity
analyses disclosed in Note 5 to the financial statements.
The Committee agreed that, on the basis of the evidence
available, the projected future cash flows from the Group’s CGUs
adequately supported the carrying value of oil and gas assets in
Ukraine and Russia, and noted that full disclosure of the key
assumptions in respect of the CGUs (including sensitivity
analyses in Note 5) had been appropriately disclosed in the
financial statements.
Rental fee claims in Ukraine
As detailed in Note 27 to the financial statements, PPC continues
to defend itself in the local courts against claims initiated by the
tax authorities regarding rental fees for August to December
2010 and for January to December 2015. Management has
recorded total provisions for the rental fee claims of $42.5m
(2017:$37.1m), with the increase in the amount provided of
$5.1m reflecting additional potential interest accrued (see Note
18 to the financial statements). In prior years all rental fee claim
provisions were classified as current. In 2018 Management has
made a more detailed investigation into the mostly likely timing
of any potential payments in respect of these rental fee claims
and accordingly reclassified the 2015 rental fee claims as non-
current.
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
significant audit risk and accordingly the Committee received
detailed verbal and written reporting from BDO LLP (“BDO”) on
this matter.
Having reviewed these reports and submissions, the Committee
was satisfied that total provisions of $42.5m (2017:$37.1m)
(including interest and penalties) were required in respect of the
rental fee claims and that both the classification of the $12.4m
provision for the 2010 rental fee claim as current, and the
classification of the $30.1m provision for the 2015 rental fee
claims as non-current were appropriate.
International arbitration award
Also as detailed in Note 27 to the financial statements, in
February 2017 an international arbitration tribunal awarded the
Company damages of $11.8m plus interest, and costs of $0.3m,
pursuant to a claim made against the Government of Ukraine.
While binding under international law, the tribunal ruling still
requires recognition and enforcement in the Ukrainian courts.
Although this process was commenced in February 2019,
management has judged that it is not appropriate to recognise
any potential inflow of economic benefits from the arbitration
award in the Consolidated statement of financial position until
there is further clarity on the process for, and likely success of,
enforcing collection.
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
significant audit risk and accordingly the Committee received
detailed verbal and written reporting from BDO on this matter.
Having reviewed these reports and submissions, the Committee
has concurred with management’s judgment and is satisfied that
the disclosures made in Note 27 to the financial statements in
respect of the international arbitration award are appropriate.
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Matters considered
Going concern
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 material uncertainties relevant to the going
concern assumption.
Response and conclusion
The Committee addressed this issue by reviewing cash flow
forecasts, together with associated sensitivity analysis, provided
by senior management and in particular by examining and
challenging the appropriateness of the assumptions used to
prepare them. This is also an area of significant audit risk and
accordingly the Committee received detailed verbal and written
reporting from BDO on this matter.
Having reviewed these reports and submissions, the Committee
has advised the Board that the Group has adequate resources to
continue in operational existence for the foreseeable future, that
the going concern basis is the appropriate basis of preparation
for the 2018 financial statements (See Note 2 to the financial
statements) and that no material uncertainties exist that require
disclosure.
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 senior management and functional experts, 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 once in 2018 (2017: once).
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 34 to 39.
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 pages 32 to 33.
Internal Audit
The Internal Audit Manager has direct access to the Chairman of the Audit Committee and undertook a number of significant pieces of
work including:
Assessment of the effectiveness of key aspects of the sales process implemented in PPC, the Ukrainian subsidiary of JKX, including a
full scope review of procedures and controls surrounding hydrocarbon sales that included testing of design and operating
effectiveness of controls across the entire process.
A high-level review of procurement processes at YGE.
Continuous monitoring of the software development process at PPC during implementation of a new ERP system.
A Bribery Risk Assessment at both PPC and YGE and developed a GAP closure plan to ensure that the bribery risk is properly
controlled.
Preparation of a 3-year Internal Audit plan that was subsequently approved by the Audit Committee.
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JKX Oil & Gas plc Annual Report 2018
The Audit Committee remains 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.
External Audit
The Audit Committee maintains an objective and professional relationship with the Company’s auditors. During the year
PricewaterhouseCoopers LLP (‘PwC’) were replaced as the company’s auditors by BDO LLP with effect from 18 October 2018 following a
competitive tender process, BDO and PWC completed the customary and regulatory handover of the role prior to the Group’s year end.
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 precluded the auditor 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.
The Committee approves all non-audit services procured from the auditors. In addition to the statutory audit fee:
i)
ii)
PwC and member firms charged the Group US$105,000 for audit-related assurance services in 2018 up to the date of
their resignation in connection with the 2018 half year review; and
BDO and member firms made no charge to the Group for audit-related assurance services in 2018
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 had not been compromised during their tenure.
Adrian Coates
Chairman of the Audit Committee
5 April 2019
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JKX Oil & Gas plc Annual Report 2018
Introduction
During 2018 the Company has reviewed remuneration across the Group, adopting a fit-for-purpose approach that ensures that the
necessary talent and skills are available at all levels of the company in each of the geographies in which it operates.
More specifically the Remuneration Committee has undertaken a number of significant activities, including the standardisation of
senior executive terms, reviewing and updating of KPI’s and reward structures for key staff and implementing additional
remuneration for technical staff who have skills that are particularly in demand, as further described below.
The Remuneration Committee has a full agenda ensuring that the Director’s Remuneration Policy and remuneration structures for
senior executives remain in line with market trends and governance development.
Independence
From 1 January 2018 until 9 February 2018 the Remuneration Committee comprised Andrey Shtyrba (as Chairman), Hans Jochum
Horn and Vladimir Tatarchuk. On 9 February 2018 Christian Bukovics joined the Company as an independent Non Executive Director
and was also appointed to the Committee. On 16 August 2018 Vladimir Tatarchuk resigned as a member of the Committee and on
8 October 2018 Michael Bakunenko was also appointed to the Committee.
Remuneration in 2018
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.
Non Executive Directors’ board contractual fees for 2018 remained on the same level as in 2017. The Non Executive directors who were
not independent had previously waived their board fees and additionally waived their fees as members of committees with effect from
22 March 2018.
Under the Performance Share Plan (‘PSP’) 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. The Company did not have Executive Directors in 2018 and
accordingly no such awards were granted.
Remuneration for 2019
The revised Director’s Remuneration Policy proposed at the 2017 Annual General Meeting was not approved by shareholders and
therefore the Directors Remuneration Policy approved at the Annual General Meeting in June 2014 remains in place.
Remuneration disclosure
This Report is split into two parts: the Directors’ Remuneration Policy and the Directors’ annual remuneration report:
The Directors’ Remuneration Policy applicable during 2018 (pages 56 to 60) was unchanged from that approved by shareholders at
the June 2014 AGM, and a summary is therefore provided in order to provide context.
The Annual Report on Directors’ Remuneration (pages 61 to 67) sets out details of how our remuneration policy has been applied
for the year ended 31 December 2018. 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
2018.
Summary of Directors’ Remuneration Policy
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. Although there were no Executive Director’s in office during 2018 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
http://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.
At present there are no executive directors appointed to the Board as Directors and no executive director remuneration is included in
this report.
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JKX Oil & Gas plc Annual Report 2018
Reward principles
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 in order to attract, retain and motivate individuals with the appropriate skills and capabilities;
ensure that there is an appropriate link between performance and reward; and
award annual bonuses which reflect the achievement of short term financial and strategic objectives as well as personal
performance.
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 99% 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 2018 is provided in the table below.
Executive Director Remuneration Policy Table1
Base salary
Purpose and link to strategy
Operation
To attract and retain talent by ensuring base salaries reflect individual performance and
market factors.
Base salaries were reviewed annually, with reference to the individual’s role, experience and
performance; salary levels at relevant UK sector comparators1, and the range of salary
increases applied across the Group.
Opportunity
Any base salary increases were applied in line with the outcome of the annual review.
Performance metrics
Business and individual performance were 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 reviewed comparator companies periodically to ensure they remain appropriate and retains the discretion to adjust the reference group or companies as
appropriate.
Pension
Purpose and link to strategy
To provide competitive retirement benefits.
Operation
The Company made a contribution to the pension scheme of the individual’s choice.
Opportunity
At their option, UK-based Executive Directors could have either had equivalent contributions
made to their personal pension schemes or cash in lieu of pension or a combination of both.
UK-based Executive Directors were eligible to receive an annual contribution equivalent to
15% of base salary.
Performance metrics
Not performance related.
Benefits
Purpose and link to strategy
To provide competitive benefits.
Operation
Opportunity
Executive Directors received benefits which consisted primarily of life assurance, income
protection and private medical cover, although could have included any such benefits that the
Committee deemed appropriate.
Benefits values varied by role and were reviewed periodically relative to market
circumstances.
The cost of the benefits provided changed in accordance with market conditions and would,
therefore, determined the maximum amount that would have been paid in the form of
benefits during the Policy Period. The Committee retained the discretion to approve a higher
cost in exceptional circumstances (e.g. relocation) or in circumstances where factors outside
the company’s control had changed materially (e.g. increases in insurance premiums).
1 These policy details are provided although there were no Executive Director’s in office during 2018
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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 were set at the start of the year according to
strategic priorities.
Opportunity
Performance metrics
At the end of the year, the Remuneration Committee determined the extent to which the
targets had been achieved, with any bonus payments delivered in cash.
For Executive Directors, the Committee had 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 were subject to clawback provisions in the event of gross misconduct,
material misstatement, or in any other circumstance that the Committee considered
appropriate.
For Executive Directors, the maximum annual bonus opportunity was 100% of base salary,
with target bonus set at 40% of maximum. For threshold level performance, the annual bonus
would be between 0% to 20% of base salary.
Performance is assessed annually based on challenging and stretch targets for operational,
organisational, financial and health and safety performance. The measures selected could
vary each year depending on business context and strategy, and measures would be weighted
appropriately according to business priorities. Under normal circumstances, financial
measures would make up at least half of the total bonus opportunity.
The Committee had 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.
Purpose and link to strategy
To incentivise strong long-term financial performance and superior longer term returns to
shareholders relative to peers.
Operation
Opportunity
The Remuneration Committee had 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 was subject to meeting shareholding requirements.
The PSP provided 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.
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JKX Oil & Gas plc Annual Report 2018
Performance metrics
Vesting of PSP awards is subject to continued employment and the Company’s performance
over a 3-year performance period. If no entitlement had been earned at the end of the
relevant performance period, awards would lapse.
From 2015, PSP awards were based on a number of financial and strategic measures, which
could include, but were not be limited to:
TSR;
Earnings per share (‘EPS’);
Other financial measures (e.g. ROCE, Profit before tax, cash resources); and
Strategic and operational measures (e.g. production, reserves).
In addition, awards were subject to an underpin such that for any awards to vest, the
Remuneration Committee must have satisfied themselves that health and safety
performance was satisfactory over the performance period. Each measure could have been
applied a weighting of between 0% and 50%. The Committee had the discretion to adjust the
performance measures and weightings in advance of making an award to ensure that they
continued to be linked to the delivery of Company strategy.
Under each measure, threshold performance would result in up to 25% of maximum vesting
for that element. The vesting level would increase on a sliding scale to 100% vesting for
stretch levels of performance.
Vesting of PSP awards would 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 was 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 had discretion to adjust the formulaic PSP
outcomes within the plan limits to ensure alignment of pay with performance, i.e. to ensure
the outcome was a true reflection of the performance of the company.
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Directors’ remuneration report
JKX Oil & Gas plc Annual Report 2018
Non Executive Director fees
Function
Operation
Opportunity
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, Nomination and Remuneration Committees, and for individual membership 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.
Non Executive Directors fee increases are applied in line with the outcome of the annual fee
review. Fees for the year commencing 1 January 2018 are set out in the Annual Report on
Remuneration.
Fee levels will be next reviewed during 2019, with any increase effective 1 January 2020. 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
Executive Director Service Contracts, including arrangements for early termination, are considered by the Committee. There were no
Executive Directors appointed as Directors in 2018.
Executive Director Service Contract severance payments
There were no Executive Director Service Contract severance payments in 2018.
Payments from existing awards
There were no Executive Directors appointed as Directors in 2018.
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JKX Oil & Gas plc Annual Report 2018
The following section provides details of how JKX’s remuneration policy was implemented during the financial year ended 31
December 2018. 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
Members
From
To
Andrey Shtyrba (Chairman) 11 December 2017
present
Christian Bukovics
9 February 2018
present
Michael Bakunenko
8 October 2018
present
Hans Jochum Horn
11 December 2017
present
Vladimir Tatarchuk
1 April 2016
16 August 2018
Number of meetings
in 2018 -
Attendance/Eligibility
5/5
5/5
1/1
5/5
0/3
Christian Bukovics joined the Board as an independent Non Executive Director on the 8 February 2018 and was appointed to the
Remuneration Committee on the same date at which point the membership of Committee complied with the 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 five times during 2018 (2017: three times).
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, except in
relation to its membership prior to 8 February 2018.
Attendance at meetings
No Director plays a part in any discussion regarding his own remuneration.
During 2018, none of the Committee members had any personal financial interest and no conflicts of interests arise from cross-
directorships or day-to-day involvement in running the Group.
Members from 1 Jan 2018
Role of the Committee
Activities during 2018
Andrey Shtyrba (as Chairman) - appointed
11 December 2017
Michael Bakunenko – appointed
8 October 2018
Christian Bukovics – appointed
9 February 2018
Hans Jochum Horn - appointed
11 December 2017
Vladimir Tatarchuk - appointed 1 April
2016, resigned 16 August 2018
Establishes the overall principles of
remuneration for Directors of all Group
companies
In addition to regular topics, the
Committee engaged in specific matters
including:
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’s website
Review and approval of performance
targets for the 2018/19 Annual Bonus
Scheme, and
Review the application and
appropriateness of current
remuneration policies.
Given the greater focus that shareholders now apply to the remuneration policies of pubic company boards, the Company believes it
appropriate to include one of the non executive shareholder representative directors on the Remuneration Committee, while also
recognising the need for the remainder of the Committee to be independent directors in order to maintain corporate governance
standards.
Single figure of total remuneration for Executive Directors (audited)
There were no Executive Directors appointed as Directors in 2018.
The table below sets out a single figure for the total remuneration received by each Director for the year ended 31 December 2017.
Through 2017, the contract for Tom Reed was stated and settled in US Dollars and the contract for Russell Hoare was stated in US
Dollars and settled in its Sterling equivalent. Figures in this report are disclosed in US Dollars (the Group’s reporting currency).
Following results of the AGM on 30 June 2017, two Executive Directors, Tom Reed and Russell Hoare were removed from the Board of
Directors. Figures exclude bonus and benefit differential agreed and paid as part of severance package to two Executive Directors
removed 30 June 2017. Please refer to ‘Payments for loss of office’ section on page 68 of 2017 Annual report.
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Directors’ remuneration report
JKX Oil & Gas plc Annual Report 2018
$’000
Executive Directors - removed 30 June 2017
Tom Reed1
Russell Hoare1
Salary1
Benefits2
Pension3
2017
2017
2017
325
225
550
-
4
4
-
34
34
Total
2017
325
263
588
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. 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 2018 and
the prior year.
All Directors' remuneration was rebased to US Dollars from 28 January 2016 (the Group’s reporting currency). Through 2018 contracts
for Adrian Coates and Christian Bukovics were settled in its Sterling equivalent (2017: contracts for Paul Ostling and Adrian Coates).
$’000
2018
2017
2018
2017
Fees
Total remuneration
Non Executive Directors
Hans Jochum Horn1
Andrey Shtyrba1
Adrian Coates2
Michael Bakunenko3
Christian Bukovics4
Former Non Executive Directors
Vladimir Tatarchuk7
Vladimir Rusinov8
Paul Ostling5
Alan Bigman6
Bernie Sucher6
260
142
149
2
113
2
2
-
-
-
670
50
25
10
1
-
8
4
216
116
116
546
260
142
149
2
113
2
2
-
-
-
670
50
25
10
1
-
8
4
216
116
116
546
1 Appointed 24 October 2017, appointed to Board Committees 11 December 2017.
2 Appointed 8 December 2017, appointed to Board Committees 11 December 2017.
3 Appointed a member of Remuneration committee on 8 October 2018.
4 Appointed 9 February 2018.
5 Appointed 28 January 2016, resigned 24 October 2017.
6 Appointed 1 April 2016; resigned and reappointed 28 June 2016. Resigned 24 October 2017.
7 Appointed 28 January 2016; appointed to Board Committees 1 April 2016. Resigned 16 August 2018.
8 Appointed 28 January 2016; appointed to Board Committees 1 April 2016. Removed from the Board of Directors 30 June 2017 and reappointed 8 December 2017. Resigned 16
August 2018.
The Non Executive Directors’ fees are subject to an overall cap under the Company’s Articles of Association. In order to ensure
compliance with this cap the Non Executive Directors’ waived certain of their fees in December 2018.
Incentive outcomes for the year ended 31 December 2018 (audited)
Annual Bonus Scheme
The Annual Bonus Scheme for 2018 applied to certain senior management including senior staff in Poltava Petroleum Company (‘PPC’).
The scheme is discretionary and annual awards are not pensionable.
Scheme interests awarded in 2018 (audited)
The Company only operated one long-term incentive plan during 2018 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 to Directors or otherwise under the
PSP during 2018.
The PSP may continue to be used to award options to other executives within the business as the board sees appropriate.
The PSP provides nil-cost options for Executive Directors and senior management.
63
JKX Oil & Gas plc Annual Report 2018
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 2018, the maximum available shares under the Company’s 5% and 10% limits was 8.3 million (2017: 7.5 million) and
16.9 million (2017: 16.1 million) shares respectively, out of an issued share capital of 172.1 million shares.
Payments for loss of office (audited)
Executive Director Service Contract severance payments
There were no Executive Directors who left the business during the year.
Non Executive Director – Exit payments
On 16 August 2018 Vladimir Tatarchuk and Vladimir Rusinov tendered their resignations with immediate effect, and such resignations
were accepted by the board. No additional payments were made to them.
Executive Director remuneration for 2018
Base salary
There were no Executive Directors appointed as Directors in 2018.
Pension and benefits
There were no Executive Directors appointed as Directors in 2018.
Non Executive Director remuneration
The following Non Executive Service Contracts were in place during the year:
Non Executive
Date of contract
Term of contract
Notice period
Date of termination
Hans Jochum Horn
24 October 2017
Michael Bakunenko
8 December 2017
Christian Bukovics
9 February 2018
Andrey Shtyrba
24 October 2017
Adrian Coates
8 December 2017
Vladimir Tatarchuk
Vladimir Rusinov
28 January 2016,
resigned 16 August 2018
28 January 2016
removed 30 June 2017,
reappointed
December 2017
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 months
3 months
3 months
3 months
3 months
3 months
3 months
N/A
N/A
N/A
N/A
N/A
Resigned 16 August 2018
30 June 2017, reappointed
8 December 2017,
resigned 16 August 2018
All Non Executive Directors’ service contracts were put in place for an initial term of three years, a finite term, as recommended by
Section B.2.3 of the Code. In the event of early termination, the Non Executive Directors’ contracts provided for compensation of three
months base fee.
The Non Executive Directors are 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.
All Non Executive Directors’ remuneration was stated and paid in Sterling until 27 January 2016. From 28 January 2016, all Directors'
remuneration was rebased to US Dollars (the Group’s reporting currency).
64
GOVERNANCE
Directors’ remuneration report
JKX Oil & Gas plc Annual Report 2018
These fees were reviewed at the 2018 year end and no increase has been awarded from their 2018 level. Non Executive Directors’ fees
for 2018 and 2019 are as follows:
Chairman of the Company
Board membership fee
Senior Independent Director
Committee chairman - Audit
Committee chairman - Remuneration
Committee chairman - Nomination
Committee membership – Audit
Committee membership – Remuneration
Committee membership – Nomination
2018
2019
$250,000
$250,000
$120,000
$120,000
$15,000
$15,000
$15,000
$15,000
$7,500
$7,500
$7,500
$15,000
$15,000
$15,000
$15,000
$7,500
$7,500
$7,500
% increase from
2018 to 2019
nil
nil
nil
nil
nil
nil
nil
nil
nil
Non Executive Directors’ fees are however subject to an overall cap under the Company’s Articles of Association. In order to ensure
compliance with this cap the Non Executive Directors waived certain of their fees in December 2018.
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 directors who were not independent waived their fees for committee membership with effect
from 23 March 2018, having previously agreed to waive their board membership fees.
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 benefits 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 2017 and 2018 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.
Base salary
Taxable benefits
Annual bonus
Total
2018
$’000
-
-
-
-
CEO
2017
$’000
325
-
-
325
% change
2017 - 2018
(100)%
(100)%
(100)%1
(100)%
All UK employees
% change
2017 - 2018
0%
0%
>100%1
>100%
1 The calculations are based on the cash amount of the 2017 and 2018 bonuses paid during April 2018 and January 2019.
There were no Executive Directors appointed as Directors in 2018. The difference shown above is a result of the removal of Tom Reed
as Executive Director from the Board of the Company following results of the AGM on 30 June 2017.
Relative importance of spend on pay
The table below shows shareholder distributions (i.e. dividends and share buybacks) and total employee pay expenditure for the
financial years ended 31 December 2017 and 31 December 2018, along with the percentage change in both.
All-employee remuneration
12,502
14,104
Distributions to shareholders
–
–
2018
$’000
2017
$’000
Year-on-year
change
(11)%
–
65
JKX Oil & Gas plc Annual Report 2018
Review of past performance
The following graph shows the Company’s TSR performance compared to the performance of the FTSE All-Share and FTSE All-Share Oil
& Gas Producers indices over a 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.
JKX vs FTSE All-Share Index and FTSE All-Share Oil & Gas Producers Index
225.00
200.00
175.00
150.00
125.00
100.00
75.00
50.00
25.00
-
JKX
FTSE All-Share Index
FTSE All-Share Oil & Gas Producers Index
The table below details the Chief Executive’s “single figure” remuneration over a 10-year period. An investment of £100 in the Company
on 31 December 2008 was worth £16.4 at 31 December 2018 (same investment on 31 December 2008 was worth £4.0 at 31 December
2017).
From 28 January 2016, the CEO’s remuneration was rebased to its equivalent US Dollar amount at that time. For years 2009 to 2015, the
CEO’s single figure remuneration amounts, which in previous Remuneration Reports were quoted in Sterling, have been converted into
their US Dollar equivalent in each year using the following average Sterling: US Dollar exchange rates as follows: 2009: £1:1.565;
$2010: £1:$1.546; 2011: £1:$1.604; 2012: £1:$1.585; 2013: £1:$1.565; 2014: £1:$1.648; 2015:£1: $1.529.
CEO single figure of remuneration -
Paul Davies ($’000)
CEO single figure of remuneration –
Tom Reed ($’000)
Total CEO single figure of
remuneration ($’000)
STI award rates against maximum
opportunity
LTI award rates against maximum
opportunity
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
933
818
832
983
1,141
1,043
1,322
62
-
N/A
N/A
N/A
N/A
N/A
N/A
N/A
1,261
325
933
818
832
983
1,141
1,043
1,322
1,323
325
-
-
-
64%
40%
43%
33%
62%
33 %
86%
70%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
In addition certain severance payments were made to executive directors over the period 2009 - 2017 and disclosed in the relevant
Annual Report and Accounts. The most recent of these were payments were to Tom Reed and Russell Hoare and totalled $1,364,000 and
were itemised on page 68 of the 2017 Annual Report.
Shareholder voting at the Annual General Meeting
At the Annual General Meeting (‘AGM’) held on 25 June 2014, the votes on the Directors’ Remuneration Policy, which came into effect
on 1 January 2015, received the following votes from shareholders:
For
Against
84,771,713
20,033,549
Total votes cast (for and against, excluding withheld votes)
104,805,262
80.88%
19.12%
100 %
Total number of votes
% of votes cast
66
GOVERNANCE
Directors’ remuneration report
JKX Oil & Gas plc Annual Report 2018
Votes witheld1
85,133
0.08%
Total votes (for, against and withheld)
104,890,395
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.
At the AGM held on 30 June 2017, the votes on the revised Directors’ Remuneration Policy, which has not been approved, received the
following votes from shareholders:
Total number of votes
% of votes cast
For
Against
20,865,585
84,759,100
Total votes cast (for and against, excluding withheld votes)
105,624,685
Votes witheld1
Total votes (for, against and withheld)
18,582
105,643,267
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.
19.75%
80.25%
100%
0.02%
At the AGM held on 30 June 2017, the Directors’ Remuneration Report received the following votes from shareholders:
Total number of votes
% of votes cast
For
Against
55,154,208
50,470,947
Total votes cast (for and against, excluding withheld votes)
105,625,155
Votes witheld1
Total votes (for, against and withheld)
18,112
105,643,267
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.
52.22%
47.78%
100%
0.02%
At the AGM held on 25 June 2018, the Directors’ Remuneration Report received the following votes from shareholders:
For
Against
Total votes cast (for and against, excluding withheld votes)
Votes witheld1
Total votes (for, against and withheld)
Total number of votes
% of votes cast
45,702,709
206,233
45,908,942
47,297,856
93,206,798
99.55%
0.45%
100 %
103%
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.
67
JKX Oil & Gas plc Annual Report 2018
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 the date of appointment. No specific value per share was designated for the calculation.
There were no Executive Directors appointed as Directors in 2018.
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 2018, based on that day’s closing middle market price of an ordinary share
of the Company of 39.50 pence:
Shares
Options
Vested but
Unvested* and
subject to
subject to
Shareholding
Shareholding
Owned
holding period/
performance
Vested but not
requirement
at 31 Dec 2018
Requirement
outright
deferral
conditions
exercised
% salary/fee
% salary/fee
met?
Non Executive Directors
Hans Jochum Horn
Andrey Shtyrba
Christian Bukovics
Adrian Coates
Michael Bakunenko
Non Executive Directors –
resigned 16 August 2018
Vladimir Tatarchuk
Vladimir Rusinov
200,0001
-
30,000
50,000
-
-
-
1
Shares held by Hans Jochum Horn (100,000) and a person closely associated with him (100,000).
Since 31 December 2018, there have been no changes in the Directors’ interests in shares of the Company.
The report was approved by the Board of Directors and signed on its behalf by
Andrey Shtyrba
Chairman of the Remuneration Committee
5 April 2019
68
JKX Oil & Gas plc Annual Report 2018
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 limited by shares and 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 2019 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 (2017: nil). The Group made charitable
contributions of $0.2m (2017: $0.9m) for local educational, health, sport and village infrastructure initiatives in Ukraine and Russia.
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 27 to 31.
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 34 to 39 and in Note 13 to the financial statements.
Shares in JKX Oil & Gas plc
Details of movements in share capital during the year are set out in Note 16 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 2018, the Company did not purchase in the market any of its own ordinary 10p shares, to be held as treasury shares. At 31 December
2018, 402,771 (2017: 402,771) shares continued to be held as treasury shares representing 0.23% (2017: 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.
69
JKX Oil & Gas plc Annual Report 2018
Directors
The names and biographies of the Directors who held office as at the date of this Annual Report are set out on pages 42 and 43.
Directors who held office throughout 2018 and the changes made to the Board at that date are set out below:
Name
Hans Jochum Horn
Michael Bakunenko
Christian Bukovics
Adrian Coates
Vladimir Rusinov
Andrey Shtyrba
Vladimir Tatarchuk
Appointed
24 October 2017
8 December 2017
9 February 2018
8 December 2017
8 December 2017
24 October 2017
28 January 2016
Removed/Resigned
Position
Non Executive Chairman
Non Executive Director
Non Executive Director
Senior Independent Director
Non Executive Director
Non Executive Director
Non Executive Director
Vladimir Tatarchuk
Vladimir Rusinov
Resigned 16 August 2018
Non Executive Director
Resigned 16 August 2018
Non Executive Director
Appointment and replacement of Directors
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.
Directors and their interests
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 follows:
1 January 2018
Ordinary Share
Number
31 December 2018
Ordinary Share
Number
Hans Jochum Horn1
Not Applicable
200,000
Michael Bakunenko2 Not Applicable
See Note 2
Christian Bukovics
Not Applicable
Adrian Coates
Not Applicable
30,000
50,000
Andrey Shtyrba
Not Applicable
Not Applicable
Shares held by Hans Jochum Horn (100,000) and a person closely associated with him (100,000).
1
2 Michael Bakunenko, a nominee for Eclairs Group Limited, is deemed to have a beneficial interest in 47,287,027 ordinary shares.
There were no changes to the shareholdings 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 61 to 67. 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 16 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.
70
JKX Oil & Gas plc Annual Report 2018
Directors’ report – other disclosures
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, following repurchases and cancellation of bonds during
2016, was reduced to a nominal value of $16m of which $10.7m remained outstanding at 31 December 2018, see Note 11 to the
consolidated financial statements) 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 35 to the financial statements.
Substantial shareholders
At 31 December 2018 and at 29 March 2019, 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:
Substantial shareholders
Eclairs Group Limited
Cascade Investment Fund
Neptune Invest & Finance Corp
Keyhall Holding Limited
Interneft Ltd
31 December 2018
Number of shares
31 December 2018
% of total voting rights
29 March 2019
Number of shares
29 March 2019
% of total voting rights
47,287,027
34,288,253
22,295,598
19,656,344
10,599,447
27.54%
19.97%
12.98%
11.45%
6.16%
47,287,027
34,288,253
22,295,598
19,656,344
10,601,447
27.54%
19.97%
12.98%
11.45%
6.16%
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 regulation.
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, comprising FRS 101 “Reduced Disclosure Framework”, 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 parent company and of the profit or loss of the Group and
parent company 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 they have been prepared in accordance with IFRSs as adopted by the European Union for the group financial
statements and United Kingdom Accounting Standards, comprising FRS 101, have been followed for the parent company
financial statements, subject to any material departures disclosed and explained in the financial statements; prepare the
financial statements on the going concern basis unless it is inappropriate to presume that the Group and parent company will
continue in business: and
prepare a director’s report, a strategic report and director’s remuneration report which comply with the requirements of the
Companies Act 2006.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group and
parent company’s transactions and disclose with reasonable accuracy at any time the financial position of the parent 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.
The Directors are also responsible for safeguarding the assets of the parent 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 parent company’s website. Legislation in the United
Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
71
JKX Oil & Gas plc Annual Report 2018
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 have been paid or proposed for the year ended 31 December 2018. 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 86.
Future developments within the Group
The Strategic report starting on page 1 contains details of likely future developments within the Group.
Profit
Details of the Company’s profit for the year ended 31 December 2018 can be found on page 80.
Capitalised interest
No interest was capitalised in 2018 (2017: nil).
Long term incentive schemes
See pages 59 to 65 of the Directors’ Remuneration Report.
Directors’ responsibilities
Directors’ responsibilities pursuant to DTR4
The directors confirm to the best of their knowledge:
The Group financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as
adopted by the European Union and Article 4 of the IAS Regulation and give a true and fair view of the assets, liabilities, financial
position and profit and loss of the Group.
The parent company financial statements, which have been prepared in accordance with United Kingdom Generally Accepted
Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 “Reduced Disclosure Framework”, and applicable
law), give a true and fair view of the assets, liabilities, financial position and loss of the company;
The annual report includes a fair review of the development and performance of the business and the financial position of the Group
and the parent company, together with a description of the principal risks and uncertainties that they face.
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 Group and parent company's performance, business model and strategy;
In the case of each Director in office at the date the Directors’ Report is approved:
so far as the Director is aware, there is no relevant audit information of which the Group and parent 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 Group and parent company’s auditors are aware of that information.
By order of the Board
Julian Hicks
Company Secretary
5 April 2019
72
JKX Oil & Gas plc Annual Report 2018
Independent auditors’ report
to the members of JKX Oil & Gas plc
Report on the audit of the group financial statements
Qualified opinion
We have audited the financial statements of JKX Oil & Gas Plc (the ‘Parent Company’) and its subsidiaries (the ‘Group’) for the year
ended 31 December 2018 which comprise the consolidated income statement, the consolidated statement of comprehensive income,
the consolidated and company statement of financial position, the consolidated and company statement of cash flows, the consolidated
and company statement of changes in equity and notes to the financial statements, including a summary of significant accounting
policies. The financial reporting framework that has been applied in their preparation is applicable law and International Financial
Reporting Standards (IFRSs) as adopted by the European Union and, as regards the Parent Company financial statements, as applied in
accordance with the provisions of the Companies Act 2006.
In our opinion, except for the effects of the matter described in the basis for qualified opinion paragraph, the financial statements:
give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 December 2018 and of the Group’s
profit for the year then ended;
the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;
the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union
and as applied in accordance with the provisions of the Companies Act 2006; and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006; and, as regards the
Group financial statements, Article 4 of the IAS Regulation.
Basis for qualified opinion in respect of the Group financial statements
– comparative amounts for the year ended 31 December 2017
As discussed in Note 2 to the Group financial statements, there were a number of payments made to legal advisers in Ukraine during
the year ended 31 December 2017, which in total amounted to approximately $1m. The predecessor auditor was not able to obtain
sufficient, appropriate audit evidence to conclude on whether the payments made to the advisers were for a proper purpose and were
appropriately classified in the consolidated income statement for the year ended 31 December 2017.
The auditor’s opinion on the financial statements for that year was qualified in this respect. We also have been unable to obtain
sufficient appropriate evidence in respect of this prior year matter and, as a result, our audit opinion is qualified in respect of this
limitation on the scope of the audit in respect of the comparative amounts - shown in the consolidated income statement.
We have performed specific procedures in respect of payments to legal advisers to obtain sufficient appropriate audit evidence in
respect of amounts recorded in the year ended 31 December 2018, in the context of our opinion on the financial statements as a whole.
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs(UK)) and applicable law. Our responsibilities
under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our
report. We are independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our
audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we
have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have
obtained is sufficient and appropriate to provide a basis for our opinion.
Conclusions relating to principal risks, going concern and viability statement
We have nothing to report in respect of the following information in the annual report, in relation to which the ISAs (UK) require us to
report to you whether we have anything material to add or draw attention to:
the disclosures in the annual report set out on pages 32 to 40 that describe the principal risks and explain how they are being
managed or mitigated;
the directors’ confirmation set out on page 40 in the annual report 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;
the directors’ statement set out on page 50 in the financial statements about whether the directors considered it appropriate to
adopt the going concern basis of accounting in preparing the financial statements and the directors’ identification of any material
uncertainties to the Group’s ability to continue to do so over a period of at least twelve months from the date of approval of the
financial statements;
whether the directors’ statement relating to going concern required under the Listing Rules in accordance with Listing Rule 9.8.6R(3)
is materially inconsistent with our knowledge obtained in the audit; or
the directors’ explanation set out on page 40 in the annual report 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.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial
statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to
fraud) that we identified, including those which had the greatest effect on the overall audit strategy, the allocation of resources in the
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JKX Oil & Gas plc Annual Report 2018
audit and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial
statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
Key Audit Matter
How the matter was addressed in our audit
Carrying value of oil and gas assets
(see Note 5)
Management and the Directors are required to assess
whether there are potential indicators of impairment of the
Group’s oil and gas assets at each reporting date and, if
potential indicators of impairment are identified,
management are required to perform a full assessment of
the recoverable value of the oil and gas assets in accordance
with the requirements of the relevant accounting standard.
Management identified an impairment indicator in respect
of each of the three cash generating units in the Ukraine and
Russia as the Company’s market capitalisation exceeds its
net assets and performed an impairment test. Based on that
impairment test management concluded that no impairment
was required.
The assessment of the recoverable value of the oil and gas
assets required judgments and estimates by management
and the Board regarding the inputs applied in the models
including future oil and gas prices, production and reserves,
operating and development costs and discount rates.
The carrying value of the Group’s oil and gas assets were
therefore considered to be a key audit matter.
We obtained and examined management’s impairment
indicator paper and agreed with their conclusion that a
potential indicator of impairment was present, as detailed in
note 5. Accordingly, we obtained management’s impairment
test assessments.
We assessed the appropriateness of Management’s
determination of each cash generating unit (CGU) in order to
determine if the conclusions were in line with the relevant
accounting standard.
We obtained management’s discounted cash flow models and
performed data integrity and mechanical checks on the
models using our proprietary tool.
We determined whether the basis of preparation of the
models were in line with the applicable accounting standard,
our expectations and valuation methodology.
We compared the actual performance of the CGUs during
2018 to budgets for the period in order to assess the quality
of management’s forecasting.
We critically challenged the NPV model, focussing on the
appropriateness of estimates with reference to empirical
data and external evidence with specific emphasis on the
following assumptions: oil and gas prices, foreign exchange
rates, production levels, operating and development costs
and discount rates.
We compared forecast oil and gas prices in Ukraine to
current pricing, empirical data and market forecasts. In
Russia, where prices are regulated, we compared forecasts to
current contracted prices and market inflation data.
We assessed the consistency of production profiles and
capital expenditure forecasts against the Group’s Field
Development Plans and approved budgets and met with
operational Management to inform our assessment and
understanding of these plans and budgets.
We compared the 2P reserves included in the models to
Reserve Statements prepared by the Group’s internal
reserve engineer and performed procedures to assess both
their independence and competence. We met with the
internal reserve engineers and challenged key assumptions,
risk factors and the basis of changes to 2P reserves.
We reviewed Management’s sensitivity analysis and
performed our own sensitivity analysis on key inputs to
assess the impact of reasonably foreseeable changes in
assumptions.
We involved our valuations specialists to review the
valuation methodology and support our assessment of the
discount rates applied.
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JKX Oil & Gas plc Annual Report 2018
Independent auditors’ report
to the members of JKX Oil & Gas plc
Key Audit Matter
How the matter was addressed in our audit
We read the key licence agreements and confirmed that the
Group holds valid licences and in order to gain an
understanding of the key licence conditions. We considered
management’s judgment that licences would be capable of
being extended beyond 2024 and 2026 including assessment
of the legislative process, the forecast economic value of the
assets beyond the expiry date and risks and uncertainties
within the operating environments.
We reviewed the disclosures in the financial statements
regarding key assumptions and sensitivity of the carrying
value to reasonable changes in such assumptions to ensure
they were in accordance with the requirements of the
relevant accounting standard.
Our findings
We found management’s conclusion that no impairment charge was required in respect of the CGU’s in 2018 to be supported by the
underlying models. We found the judgments and estimates applied by management in preparing the forecasts to be supportable,
although the recoverable value remains sensitive to changes in key inputs including oil and gas prices, foreign exchange rates and
discount rates.
We found the disclosures in note 5 to be appropriate.
Key Audit Matter
How the matter was addressed in our audit
Rental fee claims in the Ukraine
(Notes 18 and 27)
The assessment of the provisioning for the 2010 and 2015
Rental fee claims requires significant judgement and
estimation by management including both the value of the
provision and its presentation within the financial
statements.
Management have recorded a provision of $42.5m with the
movement in the year primarily reflecting additional
potential interest accrued of $5.1m.
Separately, the Group was awarded $11.8m plus interest and
costs at international arbitration in relation to claims
brought by the Group against the Ukraine. The Group
recently commenced the process to have the award
registered in the Ukraine and ultimate enforcement of the
award. The assessment of whether the award meets asset
recognition criteria at year end under relevant accounting
standards requires judgment given the operating
environment.
The legislation behind the Rental fee claims is complex in
nature and the claims have been, and continue to be, subject
to court proceedings which are at various stages of
progression. When taken together with the developing
nature of the Ukrainian tax system and the challenging legal
and political regime, to which the Group are subject, this area
is considered to be a key audit matter.
We held focused meetings with management, internal and
external legal counsel in order to obtain an understanding of
the background to each of the Rental claims, the significant
developments in the year and the impact of the wider
legislative environment in the Ukraine on the overall
assessment of the claims.
We read key correspondence in the year between the Group,
its external legal advisers and the tax and legal authorities
for indications of additional claims or factors which may
indicate management’s conclusions are inappropriate.
We inspected a number of critical documents such as the
High Court arbitration rulings and most recent court rulings
in the Ukraine.
We performed a recalculation of the movement in the Rental
claim provision.
We compared the base claim amounts to the original claim
documents and assessed the compliance of the fines and
penalties with local legislation. We specifically considered
and challenged any change to the basis of the calculations
from prior year and assessed the calculations for consistency
with relevant Ukrainian legislation in conjunction with our
own legal and tax specialists.
We obtained legal letters from the Group’s external legal
advisor in order to obtain confirmation of whether as
Management’s expert they were aware of any additional
areas of contention the tax authorities may raise.
We critically challenged management’s overall assessment
of each element of the claims, considering other information
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JKX Oil & Gas plc Annual Report 2018
Key Audit Matter
How the matter was addressed in our audit
obtained during the course of the audit, the claim history and
developments over recent periods and assessed whether
judgments and estimates associated with the claims were
supportable and appropriate.
We obtained management’s analysis of the estimated timing
of any payments, discussed further under ‘Going Concern’
and agreed the presentational split between current and
non-current provision was consistent with this analysis.
In respect of the arbitration award, we reviewed documents
associated with the High Court arbitration award and
confirmed the existence and quantum of the award.
We made inquiries of Management, internal and external
legal counsel regarding the legal process required for
registration of the claim in Ukraine.
We critically assessed Management’s judgments regarding
the probability of ultimate recovery and associated financial
reporting treatment. We specifically considered factors such
as the local legislative environment, history of awards being
successfully enforced and other relevant facts and
circumstances. We discussed the process with legal counsel
and the Board.
We reviewed the disclosures in the financial statements. In
particular, we focused on ensuring that the disclosures are
clear, transparent and understandable notwithstanding the
complex nature of the matters.
Our findings
We found management’s conclusion that it remains appropriate to record a provision in respect of the 2010 Rental fee claim to be
appropriate given the uncertainties associated with the remaining court process. We found management’s judgment that a provision
remained appropriate in respect of the 2015 Rental fee claims to be appropriate recognising the uncertainty associated with the court
process. We found the value of the provision to be appropriate and that the underlying judgments in determining the quantum to be
acceptable.
We found the presentation of the provisions between current and non-current classifications in the statement of financial position to
be appropriate and consistent with the Board’s assessment of the most likely timing of any required payments.
We found the disclosures in note 18 and 27 to be appropriate.
Key Audit Matter
Going Concern (Note 2)
How the matter was addressed in our audit
The Board are required to make an assessment of the Group’s
ability to continue as a going concern for a period of at least
twelve months from the date of signing of the financial
statements and, where the Group is considered to be a going
concern, disclose any material uncertainties that exist in
reaching that conclusion.
As set out in note 2 the Board concluded that the going
concern assumption is appropriate and that no material
uncertainties exist which require disclosure.
Given the estimates and judgments required by management
and the Board in preparing forecast cash flows, including
factors such as oil and gas prices, production, the timing and
quantum of potential 2010 and 2015 Rental fee payments in
the period to June 2020 and the availability of sufficient and
We obtained management’s going concern assessment paper
and supporting cash flows and performed a detailed review
of the cash flow forecast, challenging the key operating
assumptions based on 2018 and 2019 actual results and
external data, where possible.
We confirmed the integrity of the forecast models and
assessed their consistency with approved budgets and Field
Development Plans, as applicable.
We confirmed that the forecasts did not include any receipts
associated with the arbitration award detailed in ‘Rental fee
claims in Ukraine’ above.
We critically assessed management’s judgments regarding
the quantum and timing of rental fee payments. In doing so,
we made inquiries of internal and external legal counsel and
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JKX Oil & Gas plc Annual Report 2018
Independent auditors’ report
to the members of JKX Oil & Gas plc
Key Audit Matter
How the matter was addressed in our audit
appropriate lending facilities, this area represented a key
audit matter.
involved our own Ukrainian legal specialists to assess the
status of the claims, scenarios for the remaining legal
process and risks of acceleration in the timing of potential
payments, as well as considering the impact of the wider
Ukrainian political and legislative environment on the
Group’s operations.
We reviewed Management’s sensitivity analysis and
performed our own sensitivities on pricing, foreign exchange
rates, specific production delays and possible acceleration of
certain Rental fee payments to consider available headroom
under reasonably possible scenarios. We assessed the
validity of any mitigating factors identified by Management.
We documented the terms of all facilities in place and
confirmed the consistency of the forecasts with the
facilities. We assessed the risk of any potential withdrawal
of facilities or default events. In particular, we considered
management’s judgment that the undrawn Tascom facilities
(note 2) would reasonably be expected to remain available
beyond their current maturity in December 2019. In doing so,
we discussed this assumption with the Audit Committee,
reviewed the most recent renewal and increase to the
facility, security package and considered the forecast cash
flows and concluded that this judgment was reasonable.
We reviewed the adequacy and completeness of disclosures
in the financial statements in respect of going concern.
Our findings
Please refer to the ‘Conclusions relating to principal risks, going concern and viability statement’ section.
Our application of materiality
We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. We
consider materiality to be the magnitude by which misstatements, including omissions, could influence the economic decisions of
reasonable users that are taken on the basis of the financial statements. Importantly, misstatements below these levels will not
necessarily be evaluated as immaterial as we also take account of the nature of identified misstatements, and the particular
circumstances of their occurrence, when evaluating their effect on the financial statements as a whole.
Materiality
Group
$1,000,000
Basis for determining materiality
c0.5% of total assets
Performance materiality
Group
$750,000
Basis for performance materiality
75% of Group materiality
Materiality
Company
$777,000
Basis for determining materiality
c0.5% of total assets
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JKX Oil & Gas plc Annual Report 2018
Performance materiality
Basis for performance materiality
Company
$500,000
65% of Company
materiality
We considered the activities of the Group and previous period benchmarks. Due to the lack of consistent profitability and given a
significant portion of the Group’s value is attributed to the oil and gas assets, we believe an asset based materiality is the most
appropriate.
Whilst materiality for the financial statements as a whole was $1,000,000, each significant component of the Group was audited to a
lower performance materiality ranging from $500,000 to $550,000.
Performance materiality has been set at 75% of materiality, which is used to determine the financial statement areas that are included
within the scope of our audit and the extent of sample sizes during the audit. Performance materiality is applied at the individual
account or balance level set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and
undetected misstatements exceeds materiality for the financial statements as a whole.
We agreed with the Audit Committee that we would report to them all individual audit differences identified during the course of our
audit in excess of $20,000. We also agreed to report differences below that threshold that, in our view, warranted reporting on
qualitative grounds.
An overview of the scope of our audit
In setting our Group audit strategy we obtain an understanding of the Group, its environment and assessed the risks of material
misstatement in the financial statements at the Group as a whole.
In setting the audit strategy we considered our approach in respect of the ability of the audit to detect irregularities, including fraud.
We designed audit procedures to respond to the risk, recognising that the risk of not detecting a material misstatement due to fraud is
higher than the risk of not detecting one resulting from error, as a fraud may involve deliberate concealment by, for example, forgery
or intentional misrepresentations or through collusion.
We considered the laws and regulations of the Ukraine, Russia and the UK to be of significance in the context of the Group audit. As
part of our Group audit strategy direction was provided to the auditors of the significant components to ensure an assessment was
performed on the extent of the components compliance with the relevant local and regulatory framework. As part of our Group audit
work we reviewed this work and held meetings with relevant internal Management and external third parties to form our own opinion
on the extent of Group wide compliance. In addition our tests included, but were not limited to agreement of the Financial Statement
disclosures to underlying supporting documentation, performing substantive testing on accounts balances which were considered to be
at a greater risk of susceptibility to fraud and reviewed correspondence with regulators in so far as the correspondence related to the
Financial Statements. There are inherent limitations in the audit procedures described above and the further removed non-compliance
with laws and regulations is from the events and transactions reflected in the Financial Statements, the less likely we would become
aware of it.
The Group’s operations principally comprise exploration, development and production assets split across two primary geographical
locations being Ukraine and Russia. We assessed there to be two significant components (Ukraine and Russia) which were both subject
to a full scope audit. Together with the parent company (also considered a significant component) and its group consolidation, which
was also subject to a full scope audit, these represent the significant components of the Group.
The three significant components subject to full scope audit procedures represent the principal business units and account for 98% of
the Group’s revenue and 98% of the Group’s total assets.
The audits of the Ukrainian and Russian components were performed in the Ukraine and Russia, respectively. The audits of the parent
company and the Group consolidation were performed in the United Kingdom. All of the audits were conducted by BDO LLP and BDO
network member firms.
All BDO member firms performed the full scope audit of the significant components in the Ukraine and Russia, under the direction and
supervision of BDO LLP as Group auditor.
As part of our audit strategy, the Group Audit Partner or a Key Audit Partner and senior members of the Group audit team visited both
of the Group’s key oil and gas operations during the year and met with management and the component auditors in the Ukraine and
Russia during the planning and execution phases of the audit. These teams from BDO UK performed a review of the component audit
files in the Ukraine and Russia and held meetings with the component audit teams during the planning and completion phases of their
audits.
The Group audit team was actively involved in the direction of the audits performed by the component auditors along with the
consideration of findings and determination of conclusions drawn. We performed additional procedures in respect of certain of the
significant risk areas that represented Key Audit Matters in addition to the procedures performed by the component auditor.
The remaining components of the group were considered non-significant and these components were principally subject to analytical
review procedures.
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JKX Oil & Gas plc Annual Report 2018
Independent auditors’ report
to the members of JKX Oil & Gas plc
Other information
The directors are responsible for the other information. The other information comprises the information included in the annual
report, other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the
other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance
conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider
whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or
otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are
required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other
information. If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we
are required to report that fact.
We have nothing to report in this regard.
In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in the other
information and to report as uncorrected material misstatements of the other information where we conclude that those items meet
the following conditions:
Fair, balanced and understandable set out on page 71 the statement given by the directors that they consider 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 Group’s performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit;
or
Audit committee reporting set out on page 52 describing the work of the audit committee does not appropriately address matters
communicated by us to the audit committee; or
Directors’ statement of compliance with the UK Corporate Governance Code set out on page 49 the parts of the directors’ statement
required under the Listing Rules relating to the Company’s compliance with the UK Corporate Governance Code containing
provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a
relevant provision of the UK Corporate Governance Code.
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the
Companies Act 2006.
In our opinion, based on the work undertaken in the course of the audit:
the information given in the strategic report and the directors’ report for the financial year for which the financial statements are
prepared is consistent with the financial statements; and
the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements.
Matters on which we are required to report by exception
In the light of the knowledge and understanding of the Group and its environment obtained in the course of the audit, we have not
identified material misstatements in the strategic report or the directors’ report.
In respect solely of the limitation of scope in respect of the comparative information relating to payments to legal advisers in Ukraine
in 2017, described in the Basis for Qualified Opinion paragraph above, we have not obtained all the information and explanations that
we considered necessary for the purpose of our audit.
We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you
if, in our opinion:
adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received
from branches not visited by us; or
the Parent Company financial statements and the part of the directors’ remuneration report to be audited are not in agreement with
the accounting records and returns; or
certain disclosures of directors’ remuneration specified by law are not made.
Responsibilities of directors
As explained more fully in the directors’ responsibilities statement set out on page 70, the directors are responsible for the preparation
of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors
determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to
fraud or error.
In preparing the financial statements, the directors are responsible for assessing the Group’s and the Parent Company’s ability to
continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting
unless the directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative
but to do so.
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JKX Oil & Gas plc Annual Report 2018
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high
level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial
statements.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s
website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
Other matters which we are required to address
Following the recommendation of the audit committee, we were appointed by the Board of directors on 13 October 2018 to audit the
financial statements for the year ending 31 December 2018 and subsequent financial periods. This is the first year of our engagement
as auditor.
The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the Parent Company and we remain
independent of the Group and the Parent Company in conducting our audit.
Our audit opinion is consistent with the additional report to the audit committee.
Use of our report
This report is made solely to the Parent Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act
2006. Our audit work has been undertaken so that we might state to the Parent Company’s members those matters we are required to
state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company and the Parent Company’s members as a body, for our audit work, for this report, or
for the opinions we have formed.
Ryan Ferguson (Senior Statutory Auditor)
For and on behalf of BDO LLP, Statutory Auditor
London
5 April 2019
BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).
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JKX Oil & Gas plc Annual Report 2018
GROUP FINANCIAL STATEMENTS
Consolidated income statement
For the year ended 31 December 2018
Revenue
Cost of sales
Exceptional item – provision for production based taxes
Exceptional item – reversal of provision for impairment of Ukrainian oil and gas assets
Exceptional item – provision for impairment of Slovakia
Exceptional item – write off of appraisal expenditure in Ukraine
Other production based taxes
Other cost of sales
Total cost of sales
Gross profit
Exceptional items
Other administrative expenses
Total administrative expenses
(Loss)/gain on foreign exchange
Profit from operations before exceptional items
Profit/(loss) from operations after exceptional items
Finance income
Finance costs
Fair value movement on derivative liability
Profit/(loss) before tax
Taxation – current
Taxation – deferred
- before the exceptional items
- on the exceptional items
Total taxation
Note
2018
$000
20171
$000
4
18
5
5
5
20
20
20
19
21
22
12
27
27
27
27
92,873
74,631
(5,055)
-
-
-
(21,857)
(35,629)
(62,541)
30,332
-
(13,945)
(13,945)
(711)
20,731
15,676
908
(4,357)
5,636
(7,881)
(9,391)
(16,715)
(35,219)
(67,927)
6,704
(1,513)
(16,410)
(17,923)
1,179
7,466
(10,040)
348
(2,510)
(3,164)
(59)
14,015
(5,478)
1,472
1,761
(2,245)
(3)
(12,859)
(2,964)
(356)
4,113
793
Profit/(loss) from continuing operations (attributable to equity holders of the parent
company)
Profit/(loss) from discontinued operation (attributable to equity holders of the parent
company), net of tax
11,770
(12,066)
14
3,487
(5,597)
Profit/(loss) for the year attributable to equity shareholders of the parent company
15,257
(17,663)
1 Prior year numbers were restated as a result of application of IFRS 5 “Non-current Assets Held for Sale and Discontinued Operations” to the Group’s operations in Hungary.
Please refer to Note 14 for details.
The above consolidated income statement should be read in conjunction with the accompanying notes on pages 86 to 125
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JKX Oil & Gas plc Annual Report 2018
Earnings per share for profit/(loss) from continuing operations
attributable to the ordinary equity holders of the parent company:
Basic profit/(loss) per 10p ordinary share (in cents)
-after exceptional items
-before exceptional items
Diluted profit/(loss) per 10p ordinary share (in cents)
-after exceptional items
-before exceptional items
Earnings per share for profit/(loss) from discontinued operations
attributable to the ordinary equity holders of the parent company:
Basic profit/(loss) per 10p ordinary share (in cents)
-after exceptional items
-before exceptional items
Diluted profit/(loss) per 10p ordinary share (in cents)
-after exceptional items
-before exceptional items
Earnings per share for profit/(loss) attributable to the ordinary equity
holders of the parent company:
Basic profit/(loss) per 10p ordinary share (in cents)
-after exceptional items
-before exceptional items
Diluted profit/(loss) per 10p ordinary share (in cents)
-after exceptional items
-before exceptional items
Note
2018
$000
2017*
$000
29
29
29
29
29
29
29
29
29
29
29
29
7.06
9.04
6.67
8.54
2.09
2.09
1.98
1.98
9.15
11.13
8.65
10.51
(7.24)
0.79
(7.24)
0.73
(3.36)
(1.22)
(3.36)
(1.22)
(10.59)
(0.42)
(10.59)
(0.42)
*
Comparative earnings per share have been amended to provide a consistent basis of measurement with 2018. Refer to Note 29 for details.
The above consolidated income statement should be read in conjunction with the accompanying notes on pages 86 to 125
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JKX Oil & Gas plc Annual Report 2018
GROUP FINANCIAL STATEMENTS
Consolidated statement of comprehensive income
For the year ended 31 December 2018
Profit/(loss) for the year
Other comprehensive income to be reclassified to profit or loss in subsequent periods when specific
conditions are met
Currency translation differences
Other comprehensive income that will not be reclassified to profit or loss in subsequent periods
Remeasurements of post-employment benefit obligations
Other comprehensive income for the year, net of tax
2018
$000
20171
$000
15,257
(17,663)
(19,475)
7,118
(22)
(19,497)
(333)
6,785
Total comprehensive income for the year attributable to equity shareholders of the parent company
(4,240)
(10,878)
Continuing operations
(7,587)
(5,281)
Discontinued operations
(5,597)
1 Prior year numbers were restated as a result of application of IFRS 5 “Non-current Assets Held for Sale and Discontinued Operations” to Group’s operations in Hungary. Please
3,347
refer to Note 14 for details.
The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes on pages 86 to 125
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JKX Oil & Gas plc Annual Report 2018
GROUP FINANCIAL STATEMENTS
Consolidated statement of financial position
As at 31 December 2018
ASSETS
Non-current assets
Property, plant and equipment
Deferred tax assets
Current assets
Inventories
Trade and other receivables
Restricted cash
Cash and cash equivalents
Assets classified as held for sale
Total current assets
Total assets
LIABILITIES
Current liabilities
Current tax liabilities
Trade and other payables
Borrowings
Provisions
Liabilities of disposal group classified as held for sale
Total current liabilities
Non-current liabilities
Provisions
Borrowings
Derivatives
Defined pension benefit plan
Deferred tax liabilities
Total liabilities
Net assets
EQUITY
Share capital
Share premium
Other reserves
Retained earnings
Total equity
Note
5(a)
28
7
8
9
9
14
10
11
18
14
18
11
12
28
16
17
2018
$000
2017*
$000
173,474
10,419
183,893
5,990
5,111
-
19,182
30,283
1,237
31,520
215,413
(2,214)
(10,782)
(5,962)
(12,645)
(31,603)
(775)
194,031
11,293
205,324
5,824
4,969
497
6,929
18,219
-
18,219
223,543
(645)
(11,878)
(7,630)
(37,269)
(57,422)
-
(32,378)
(57,422)
(35,673)
(5,041)
(62)
(577)
-
(41,353)
(73,731)
141,682
(5,341)
(9,003)
(3)
(490)
(5,375)
(20,212)
(77,634)
145,909
26,666
97,476
26,666
97,476
(172,623)
(153,126)
190,163
141,682
174,893
145,909
*
Comparative amounts in respect of deferred tax assets, liabilities, non current other receivables and other payables have been reclassified for comparability with 2018. Please
refer to Note 2.
These financial statements on pages 80 to 125 were approved by the Board of Directors on 5 April 2019 and signed on its behalf by:
Hans Jochum Horn Chairman
Ben Fraser Chief Financial Officer
The above consolidated statement of financial position should be read in conjunction with the accompanying notes on pages 86 to 125
84
JKX Oil & Gas plc Annual Report 2018
GROUP FINANCIAL STATEMENTS
Consolidated statement of changes in equity
For the year ended 31 December 2018
At 1 January 2017
Loss for the year
Exchange differences arising on translation of overseas
operations
Remeasurement of post-employment benefit obligations
Total comprehensive loss attributable to equity
shareholders of the parent
Transactions with equity shareholders of the parent
Share-based payment credit
Total transactions with equity shareholders of the parent
Attributable to equity shareholders of the parent
Share
capital
$000
Share
premium
$000
Retained
Earnings
$000
Other reserves
(Note 17)
$000
Total
equity
$000
26,666
97,476
192,602
(159,911)
156,833
-
-
-
-
-
-
-
-
-
-
-
-
(17,663)
-
(17,663)
-
-
7,118
7,118
(333)
(333)
(17,663)
6,785
(10,878)
(46)
(46)
-
-
(46)
(46)
At 31 December 2017
26,666
97,476
174,893
(153,126)
145,909
At 1 January 2018
Profit for the year
Exchange differences arising on translation of overseas
operations
Remeasurement of post-employment benefit obligations
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
174,893
(153,126)
145,909
-
-
-
-
-
-
-
-
-
-
-
-
15,257
-
15,257
-
-
(19,475)
(19,475)
(22)
(22)
15,257
(19,497)
(4,240)
13
13
-
-
13
13
At 31 December 2018
26,666
97,476
190,163
(172,623)
141,682
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.
Other reserves – please refer to the Note 17 for the details.
85
JKX Oil & Gas plc Annual Report 2018
GROUP FINANCIAL STATEMENTS
Consolidated statement of cash flows
For the year ended 31 December 2018
Cash flows from operating activities
Cash generated from continuing operations
Cash (used)/generated from discontinued operations
Bank fees paid
Interest paid
Income tax paid
Net cash generated from operating activities
Cash flows from investing activities
Interest received
Dividend received
Proceeds from sale of property, plant and equipment
Purchase of intangible assets
Purchase of property, plant and equipment
Net cash used in investing activities
Cash flows from financing activities
Restricted cash
Repayment of borrowings
Net cash used in financing activities
Increase/(decrease) 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
Cash and cash equivalents in continuing operations at the end of the year
Cash and cash equivalents in discontinued operations at the end of the year
9
14
Note
31
14
2018
$000
2017
$000
37,281
14,182
(158)
(69)
(1,870)
(3,896)
1,541
-
(1,760)
(2,933)
31,288
11,030
908
-
3
-
(13,688)
(12,777)
286
(5,760)
(5,474)
13,037
6,929
(511)
19,455
19,182
273
348
114
291
(9,581)
(7,131)
(15,959)
(296)
(1,920)
(2,216)
(7,145)
14,067
7
6,929
6,516
413
86
JKX Oil & Gas plc Annual Report 2018
GROUP FINANCIAL STATEMENTS
Notes to 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.
As described in the Chairman’s statement on pages 4 to 5, an investigation into the procurement of legal services in Ukraine, and
subsequent payments made to legal advisers, was commissioned by the Audit Committee in Q1 2018 and is now complete. While this
investigation concluded there was a breakdown in the group’s internal control in relation to the engagement and contracting with
these legal advisers, the Committee has not been able to conclude on the nature of the payments made in 2017, and the extent to which
these were valid payments for legal services provided. The current Board has introduced a number of measures to strengthen the
Company’s internal control systems and has reviewed legal costs incurred in 2018 and is satisfied as to the nature of such costs.
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.
Comparative amounts in respect of deferred tax assets, liabilities, non-current other receivables and other payables have been
reclassfied for comparability with 2018 in accordance with IFRS. The reclassifications had no impact on net assets or the loss for the
period.
Comparatives
In the 2017 Annual report deferred tax assets of $20.8m and liabilities of $14.9m were presented gross, whereas in the 2018 Annual
report the 2017 deferred tax assets of $11.3m and liabilities of $5.4m are presented net (please refer to Note 28 for details). Deferred
tax assets and liabilities are offset where 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.
In the 2017 Annual report defined pension benefit plan liabilities of $0.5m were included in current trade and other payables,
whereas in the 2018 Annual report they are presented separately under non-current liabilities.
Non-current other receivables of $3.1m and payables of $3.1m consisting of VAT were presented gross in the 2017 Annual report,
whereas in the 2018 Annual report they are presented net reflecting that the amounts arise in the same taxable entity and are
settled on a net basis.
Going concern
Background to the Group’s performance and funding, including significant developments over the past year, is provided in the
Financial Review. The Directors have reviewed the Group’s forecast cash flows for the period to June 2020. Capital and operating costs
are based on approved budgets and latest forecasts in the case of 2019 and current development plans in the case of 2020. The forecast
cash flows reviewed include scenarios where potential liabilities arise in relation to the rental fee claims in Ukraine (see Note 27 to the
consolidated financial statements) including assessments of the timing of such potential payments undertaken following detailed
analysis of Ukrainian legislation and the status of each claim with internal and external legal and tax experts. In addition the Directors
have considered further scenarios that reflect future expectations regarding country, commodity price and currency risks that the
Group may encounter. None of the scenarios have recognised any possible future benefit that may result from the arbitration award
(see Note 27 to the consolidated financial statements). 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, as well as the
availability of additional courses of action with respect to financing the settlement of any successful rental fee claims arising in the
forecast period, mean that the Group currently has adequate cash and other available resources to meet its liabilities and commitments
as they fall due across the forecast period. One key means of such financing is the Tascombank loan of UAH280m ($10.1m) and
overdraft facility of UAH50m ($1.8m) that was renewed and increased in December 2018 and that the Directors are confident will
continue to be available throughout the forecast period beyond its current maturity date of December 2019 given operating cash flows,
the recent renewal and increase and the security package available. Having considered the forecasts and reasonable sensitivity
scenarios the Board considers it is appropriate to adopt the going concern basis of accounting in preparing these financial statements.
Adoption of new and revised standards
New standards, interpretations and amendments effective from 1 January 2018
The disclosed policies have been applied consistently by the Group for both the current and previous financial year with the exception
of the new standards adopted.
The European Union (“EU”) IFRS financial information has been drawn up on the basis of accounting policies consistent with those
applied in the financial statements for the year to 31 December 2017, except for the following:
(a)
IFRS 2 Share Based Payments (Amendment – Classification and Measurement of Share-Based Payment Transactions)
87
JKX Oil & Gas plc Annual Report 2018
(b) Annual Improvements to IFRSs 2014 – 2016 Cycle (IFRS 1 First-time Adoption of IFRS, IFRS 12 Disclosures of interest in Other
Entities and IAS 28 Investments in Associates and Joint Ventures)
IFRIC Interpretation 22 ‘Foreign Currency Transactions and Advance Consideration’
IFRS 9 ‘Financial instruments’
IFRS 15 ‘Revenue from contracts with customers’
(c)
(d)
(e)
The application of (a) to (c) has had no impact on the disclosures or the amounts recognized in the Group’s consolidated financial
statements.
There were no retrospective adjustments as a result of adopting the new standards (d) and (e) listed below. The Group amended
accounting policies applied from 1 January 2018 are disclosed in Note 3 under ‘Significant accounting policies’.
IFRS 15 ‘Revenue from contracts with customers’
The IASB has issued a new standard for the recognition of revenue. This replaced IAS 18 which covers contracts for goods and services
and IAS 11 which covers construction contracts. The new standard is based on the principle that revenue is recognised when control of
a good or service transfers to a customer.
To assess the impact of IFRS 15 on the Group’s revenue recognition, a 5-step model had been applied to analyse sales contracts in
Ukraine, Russia and Hungary. According to the analysis carried out by the Group, the current practice of revenue recognition complies
with the new IFRS 15 revenue recognition standard and there was no impact from the adoption of the new standard on 1 January 2018.
IFRS 9 ‘Financial instruments’
IFRS 9 replaces the provisions of IAS 39 that relate to the recognition, classification and measurement of financial assets and financial
liabilities, derecognition of financial instruments, impairment of financial assets and hedge accounting. The classification depends on
the entity’s business model for managing the financial assets and the contractual terms of the cash flows. Financial assets are
derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the group has
transferred substantially all the risks and rewards of ownership.
From 1 January 2018, the Group classifies its financial assets in the following measurement categories:
Those to be measured at amortised cost
Trade and intergroup receivables are held to collect contractual cash flows and are expected to give rise to cash flows representing
solely payments of principal and interest. The Company analysed the contractual cash flow characteristics of those instruments and
concluded that they meet the criteria for amortized cost measurement under IFRS 9. Therefore, reclassification for these
instruments is not required.
IFRS 9 sets out a new forward looking ‘expected loss’ impairment model which replaces the incurred loss model in IAS 39 and applies
to financial assets classified at amortised cost, debt instruments measured at FVOCI, contract assets under IFRS 15 Revenue from
Contracts with Customers, intergroup receivables, lease receivables, loan commitments and certain financial guarantee contracts.
Under the IFRS 9 ‘expected credit loss’ model, a credit event (or impairment ‘trigger’) no longer has to occur before credit losses are
recognised. It is therefore appropriate that the Group’s policy for recognition of trade and other receivables is amended.
Based on the review of the historic occurrence of credit losses, consideration of prospective factors and given the short-term nature
of trade and other receivables and the Group’s active management of credit risk, the Group did not identify any credit losses requiring
provision except for specific items in Note 8. The outlook for the oil and gas industry is not expected to result in a significant change
in the Group’s exposure to credit losses.
Those to be measured subsequently at fair value (either through OCI, or through profit or loss)
Investments in unquoted equity instruments were previously measured at cost less impairment as allowed by IAS 39. As of 1 January
2018 investments in equity instruments were reclassified to financial assets at fair value through other comprehensive income. The
Group has made an irrevocable election at the time of initial recognition to account for the equity investment at fair value through
other comprehensive income (FVOCI). Movements in the carrying amount are taken through OCI, except for the recognition of
impairment gains or losses, interest income and foreign exchange gains and losses which are recognised in profit or loss. There was no
impact of reclassification on the carrying value of its unlisted investment. Please refer to Note 6 for details.
Financial liabilities
Financial liabilities held by the Group comprise trade and other payables and Convertible Bonds due 19 February 2020. Convertible
Bonds were restructured on 3 January 2017. The Group has reviewed its financial liabilities and there was no impact from the adoption
of the new standard on 1 January 2018.
Under IAS 39 the revised terms and conditions of the Bond were considered to be a modification and therefore the difference in the
amortised cost carrying amount at the modification date was recognised through a change in the effective interest rate at the
modification date through to the end of the revised estimated term of the Bond. In accordance with IFRS 9, following a modification or
renegotiation of a financial asset or financial liability that does not result in de-recognition, an entity is required to recognise any
modification gain or loss immediately in profit or loss. Any gain or loss is determined by recalculating the gross carrying amount of the
financial liability by discounting the new contractual cash flows using the original effective interest rate. The difference between the
original contractual cash flows of the Bond and the modified cash flows discounted at the original effective interest rate is immaterial
and hence there is no impact on adoption of IFRS 9 on 1 January 2018.
88
JKX Oil & Gas plc Annual Report 2018
GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
New standards, interpretations and amendments not yet effective
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 2018 and have not been early adopted by the Group. The Group’s assessment of the impact of these new standards and
interpretations is set out below:
IFRIC 23 ‘Uncertainty over Income Tax Positions’
IFRS 16 ‘Leases’
Effective for annual periods
beginning on or after
01-Jan-19
01-Jan-19
Effective as of 1 January 2019, IFRIC 23 explains how to recognise and measure deferred and current income tax assets and liabilities
where there is uncertainty over a tax treatment. An uncertain tax treatment is any tax treatment applied by an entity where there is
uncertainty over whether that treatment will be accepted by the tax authority. IFRIC 23 applies to all aspects of income tax accounting
where there is an uncertainty regarding the treatment of an item, including taxable profit or loss, the tax bases of assets and liabilities,
tax losses and credits and tax rates. There will be no impact on adoption of IFRIC 23 on 1 January 2019, as detailed disclosures on
judgements and estimates used in calculation of taxation as well as rental fees and deferred tax assets are included in accounting
policies under ‘critical accounting estimates, assumptions and judgements’ and Notes 27 and 28.
IFRS 16 specifies how to recognize, measure, present and disclose leases. The standard provides a single lessee accounting model,
requiring lessees to recognize right-of-use assets and lease liabilities for all material leases. It will result in almost all leases being
recognised on the balance sheet by lessees, as the distinction between operating and finance leases is removed. Under the new
standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognised. The only exceptions are short-
term and low-value leases. The Group’s well service and rental arrangements in Ukraine for oil and gas extraction activities are outside
of the scope of IFRS 16.
The Group’s accounting policy under IFRS 16 will be as follows: at inception of a contract, the Group will assess whether a contract is, or
contains, a lease based on whether the contract conveys the right to control the use of an identified asset for a period of time in
exchange for consideration.
The Group will recognize a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset will be
initially measured based on the initial amount of the lease liability adjusted for any lease payments made at or before the
commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to
restore the underlying asset or the site on which it is located, less any lease incentives received.
The assets will be depreciated to the earlier of the end of the useful life of the right-of-use asset or the lease term using the straight-
line method as this most closely reflects the expected pattern of consumption of the future economic benefits. The lease term will
include periods covered by an option to extend if the Group is reasonably certain to exercise that option. Lease terms range from two to
three years for offices. Service agreements for equipment on the working sites are not considered leases. In addition, the right-of-use
asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.
The lease liability will be initially measured at the present value of the lease payments that are not paid at the commencement date,
discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group’s incremental borrowing
rate. Generally, the Group will use its incremental borrowing rate as the discount rate. The lease liability will be measured at amortized
cost using the effective interest method. It will be remeasured when there will be a change in future lease payments arising from a
change in an index or rate, if there is a change in the Group’s estimate of the amount expected to be payable under a residual value
guarantee, or if the Group changes its assessment of whether it will exercise a purchase, extension or termination option. When the
lease liability is remeasured in this way, a corresponding adjustment will be made to the carrying amount of the right-of-use asset, or is
recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero.
The Group will elect to apply the practical expedient not to recognize right-of-use assets and lease liabilities for short-term leases that
have a lease term of 12 months or less and leases of low-value assets.
The lease payments associated with these leases will be recognized as an expense on a straight-line basis over the lease term.
The Group is planning to adopt IFRS 16 from 1 January 2019 using the modified retrospective approach and accordingly the
information presented for 2018 is not going to be restated. It would remain as previously reported under IAS 17 and related
interpretations. On initial application, the Group will elect to record right-of-use assets based on the corresponding lease liability. A
right-of-use assets and lease obligations of $0.8m will be recorded as of 1 January 2019, with no net impact on retained earnings. When
measuring lease liabilities, the Group will discount lease payments using its incremental borrowing rate at 1 January 2019. The
weighted-average rate applied is 17%.
The Group has not elected to apply the practical expedient to grandfather the assessment of which transactions are leases on the date
of initial application, as previously assessed under IAS 17 and IFRIC 4. The Group will apply the definition of a lease under IFRS 16 to all
existing contracts.
The following table reconciles the Group’s operating lease obligations at 31 December 2018, as disclosed in the Group’s consolidated
financial statements, to the lease obligations recognized on initial application of IFRS 16 at 1 January 2019.
89
JKX Oil & Gas plc Annual Report 2018
Operating lease commitments at 31 December 2018
Discounted using the incremental borrowing rate at 1 January 2018
Affect of discounting
Recognition exemption for short-term leases
Assets that do not meet definition of a lease
Impairment provision to be recognised on one of the properties
3. Significant accounting policies
$
1.8
0.8
0.2
0.2
0.1
0.4
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.
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 2018 were $1:£0.78
(2017: $1:£0.74), $1: 27.69 Hryvnia (2017: $1: 28.07 Hryvnia), $1: 69.47 Roubles (2017: $1: 57.60 Roubles), $1: 280.31 Hungarian Forint
(2017: $1: 258.63 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
90
JKX Oil & Gas plc Annual Report 2018
GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
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 including production plants and capital spares 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.
For assets under construction depreciation begins when the assets are available for use and continues until the assets are derecognised,
even if it is idle.
The calculation of the ‘unit of production’ depreciation takes account of estimated future development costs. The ‘unit of production’
rate is set at the beginning of each accounting period. Changes in reserves and cost estimates are recognised prospectively applied from
the date of the Board approval of revised field development plans.
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
Other equipment
- 4 years
- 3 years
- 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 joint 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.
Non-current assets held for sale and discontinued operations
A discontinued operation is a component of the entity that has been disposed of or is classified as held for sale and that represents a
separate major line of business or geographical area of operations, is part of a single co-ordinated plan to dispose of such a line of
business or area of operations, or is a subsidiary acquired exclusively with a view to resale.
Assets that are classified as held for sale are carried at the lower of carrying amount and fair value less costs to sell. An asset
classified as held for sale is not depreciated.
Non-current assets (or disposal groups) are classified as held for sale if their carrying amount will be recovered principally through a
sale transaction rather than through continuing use and a sale is considered highly probable. They are measured at the lower of their
carrying amount and fair value less costs to sell, except for assets such as deferred tax assets, and financial assets within the scope of
IFRS 9, which are specifically exempt from this requirement.
Non-current assets classified as held for sale and the assets of a disposal group classified as held for sale are presented separately from
the other assets in the statement of financial position. The liabilities of a disposal group classified as held for sale are presented
separately from other liabilities in the statement of financial position.
Any gain or loss from disposal, together with the results of these operations until the date of disposal, is reported separately as
discontinued operations. The financial information of discontinued operations is excluded from the respective captions in the
Consolidated financial statements and related notes for all periods presented. Comparatives in the statement of financial position are
not represented when a non-current asset or disposal group is classified as held for sale. Comparatives are represented for
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JKX Oil & Gas plc Annual Report 2018
presentation of discontinued operations in the Statement of cash flow and Statement of comprehensive income. Further information
on discontinued operations and non-current assets held for sale can be found in note 14 “Discontinued operations and assets classified
as held for sale”.
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. A cash-generating unit is the smallest group of assets that independently generates cash flow and whose
cash flow is largely independent of the cash flows generated by other assets.
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.
Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that
necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such
time as the assets are substantially ready for their intended use or sale. To the extent that variable rate borrowings are used to finance
a qualifying asset and are hedged in an effective cash flow hedge of interest rate risk, the effective portion of the derivative is
recognised in other comprehensive income and reclassified to profit or loss when the qualifying asset impacts profit or loss. To the
extent that fixed rate borrowings are used to finance a qualifying asset and are hedged in an effective fair value hedge of interest rate
risk, the capitalised borrowing costs reflect the hedged interest rate. Investment income earned on the temporary investment of
specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation.
All other borrowing costs are recognised in profit or loss in the period in which they are incurred.
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.
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.
Convertible bonds due 2020 – embedded derivative
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.
Upon redemption of convertible bonds by the Company in the market, the difference between the repurchase cost and the total of the
carrying amount of the liability plus the repurchased embedded option to convert is recorded in the income statement.
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.
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GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
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 their transaction price in accordance with IFRS 9 and are subsequently
measured at amortised cost. The Group applies the simplified approach to providing for expected credit losses (ECL) prescribed by IFRS
9, which permits the use of the lifetime expected loss provision for all trade receivables. Expected credit losses are assessed on a
forward looking basis. The loss allowance is measured at initial recognition and throughout its life at an amount equal to lifetime ECL.
Any impairment is recognised in the income statement within ‘Administrative expenses’.
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.
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. Please refer to Note 9 ‘Cash and cash equivalents’ for further details.
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 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.
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 Directors of the Group that make the strategic decisions.
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JKX Oil & Gas plc Annual Report 2018
Pension obligations
The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit
obligation at the end of the reporting period. The defined benefit obligation is calculated annually by an independent actuary using the
projected unit credit method.
The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest
rates of government bonds that are denominated in the currency in which the benefits will be paid (hryvnia), and that have terms
approximating to the terms of the related obligation. Currently, there is no sufficiently developed market of bonds denominated in
hryvnia with a sufficiently long period of repayment which would be consistent with an estimated period of payment of all benefits. In
such cases the Standard allows using current market rates to discount respective short-term payments and calculating the discount
rate for long-term liabilities by extending the current market rates along the yield curve.
The current service cost of the defined benefit plan, recognised in the Income Statement, except where included in the cost of an asset,
reflects the increase in the defined benefit obligation resulting from employee service in the current year, benefit changes
curtailments and settlements. Past-service costs are recognised immediately in the Income Statement.
The net interest cost is calculated by applying the discount rate to the net balance of the defined benefit obligation. This cost is
included in employee benefit expense in the statement of profit or loss.
Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to equity
in other comprehensive income in the period in which they arise.
Share options
The group operates an equity-settled, share-based compensation plan, under which the Company receives services from Senior
Management as consideration for equity instruments (options) of the group. The fair value of the services received from 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 56 and 67 and in Note 26 on share based payments.
Bonus scheme
The Group operates a bonus scheme for its employees. 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
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JKX Oil & Gas plc Annual Report 2018
GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
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. Discount rates are based on
governmental bonds which will be redeemed around the end of field life. The unwinding of the discount is recognised as a finance cost.
Provisions
Provisions are created where the Group has a present obligation as a result of a past event, where it is probable that it will result in an
outflow of economic benefits to settle the obligation, and where it can be reliably measured. Provision for onerous lease is recognised
when the net cash outflows exceed the expected benefits to be received under the lease.
Provisions are measured at the best estimate of the expenditure required to settle the obligation at the balance sheet date, and are
discounted to present value where the effect is material. Where amounts provided for attract interest reflecting the appropriate time
value of money no discounting is applicable. The amounts provided are based on the Group’s best estimate of the likely committed
outflow.
Revenue recognition
Revenue from contracts with customers is recognized when or as the Group satisfies a performance obligation by transferring a
promised good or service to a customer. A good or service is transferred when the customer obtains control of that good or service. The
transfer of control of oil, natural gas, LPG, condensate, and other items sold by the Group usually coincides with title passing to the
customer and the customer taking physical possession. The Group principally satisfies its performance obligations at a point in time
and the amounts of revenue recognized relating to performance obligations satisfied over time are not material.
Revenue is measured at the fair value of the consideration received, excluding discounts, rebates, value added tax (“VAT”) and other
sales taxes or duty. Production based taxes are not included in revenue, they are paid on production and recorded within cost of sales.
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 in retained earnings.
Repurchased JKX Oil & Gas plc shares are classified as treasury shares in shareholders’ equity and are presented in the retained
earnings. 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 either because of their size or their
nature 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 which may give 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. Exceptional items are disclosed separately on the
face of the income statement.
Critical accounting estimates, assumptions and judgements
The Group makes estimates, assumptions and judgements concerning the future. The resulting accounting estimates will, by definition,
seldom equal the related actual results. The estimates, assumptions and judgements 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 (a))
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, where indicators of
impairment have been identified on a CGU. This test compares the carrying value of the assets at the reporting date with the expected
discounted cash flows from each project prepared under the fair value less cost of disposal approach. 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
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JKX Oil & Gas plc Annual Report 2018
assessment involves judgement as to (i) the likely commerciality of the asset, (ii) proven, probable (‘2P’) 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, (v). In cases where impairment tests demonstrate
headroom, reversals of impairment charges are not recognised in the Group income statement if the existence of the headroom is
sensitive to pricing, production or discount rates.
b) Carrying value of intangible exploration and evaluation expenditure (Note 5 (b))
The carrying value 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 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. The recoverability of
intangible exploration assets is assessed by comparing the carrying value to estimates of the present value of projects where indicators
of impairment have been identified on an asset. 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.
c) Depreciation of oil and gas assets (Note 5 ((a))
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 based on the approved
field development plans.
d) Taxation including rental fees and deferred tax assets (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.
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.
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.
e) Provisions for decommissioning costs (Note 18)
Estimates of the cost of future decommissioning and restoration of production facilities are based on current legal and constructive
requirements, technology and price levels, while estimates of when decommissioning will occur depend on assumptions made
regarding the economic life of fields which in turn depend on such factors as oil and gas prices, decommissioning costs, discount rates
and inflation rates. The management reviewed the estimation process and the basis for the principal assumptions underlying the cost
estimates, noting in particular the reasons for any major changes in estimates as compared with the previous year. The Group was
satisfied that the approach applied was fair and reasonable. The Group was also satisfied that the discount and inflation rates used to
calculate the provision were appropriate. The discount rates were based on government bonds issued in the respective countries.
f) Judgement used in the fair value of unlisted investments (Note 6)
The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The
objective of a fair value measurement is to estimate the price at which an orderly transaction would take place between market
participants under the market conditions that exist at the measurement date. IFRS 13 requires that valuation techniques maximise the
use of observable inputs and minimise the use of unobservable inputs. The Group has used a market approach to estimate fair value of
the unlisted investments. The Group used its judgements to (i) select a valuation method, (ii) make assumptions that are based on
market conditions existing at the end of the reporting period, (iii) determine the point in a range of values that is ‘most representative
of a fair value’, (iv) determine discounts applied to the fair value.
g) Enforcement of arbitration award (Note 27)
No asset has been recognised in respect of the arbitration award due to the uncertainty inherent in the process for, and likely success
of, enforcing collection.
h) Exceptional items (Notes 5, 18 and 27)
Judgment is required when determining whether items meet the definition of ‘exceptional’ under the Group’s accounting policy.
Impairments and reversals of impairments reflecting specific circumstances including strategic re-focusing of the business, changes
arising due to unusual market conditions or geopolitical factors are considered to qualify as exceptional items.
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JKX Oil & Gas plc Annual Report 2018
GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
Provisions for August to December 2010 and January to December 2015 rental fee claims have been included in ‘exceptional items’ due
to their material, specific and unusual nature and the Board considered that it was appropriate to highlight these items to users of the
financial statements. In particular, the issues are considered to represent isolated historical disputes that will not recur having related
to specific circumstances and discrete periods of time with production based taxes currently paid at standard Ukrainian government
rates. Whilst the Board is cognisant that items should not be disclosed as exceptional when they recur, in this instance the Board
considered items to be exceptional, because the two underlying claims are not anticipated to recur and the additional charges refer to
accrual of interest and penalties of the original claims.
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 (2017: 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 Group derives revenue from the transfer of goods at a point in time. The Group is only engaged in one business of upstream oil and
gas exploration and production, therefore all information is being presented for geographical segments. This is consistent with the
revenue information that is disclosed for each reportable segment under IFRS 8 Operating Segments.
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.
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JKX Oil & Gas plc Annual Report 2018
2018
External revenue
Revenue by location of asset:
– Oil
– Gas
– Liquefied petroleum gas
– Other
Inter segment revenue:
– Management services/other
Total revenue
Profit/(loss) before tax:
UK
$000
Ukraine
$000
Russia
$000
Rest of
World1
$000
Sub Total
$000
Eliminations
$000
Total
$000
-
-
-
112
112
3,523
3,523
3,635
19,341
679
49,221
17,155
5,579
781
-
5
74,922
17,839
-
-
-
-
74,922
17,839
-
-
-
-
-
-
-
-
20,020
66,376
5,579
898
92,873
-
-
-
-
-
20,020
66,376
5,579
898
92,873
3,523
3,523
(3,523)
(3,523)
-
-
96,396
(3,523)
92,873
Profit/(loss) from operations
(6,106)
20,979
(104)
(817)
13,952
1,724
15,676
Finance income
Finance cost
Fair value movement on derivative
liability
Assets
908
(2,510)
(59)
-
-
-
908
(2,510)
(59)
12,291
1,724
14,015
Property, plant and equipment
211
91,836
80,693
734
173,474
Deferred tax
Inventories
Trade and other receivables
-
-
736
Cash and cash equivalents
13,344
3,493
966
9,453
2,851
2,502
3,139
1,864
2,265
-
-
9
10,419
5,990
5,111
80
19,182
Total assets1
Total liabilities1
14,291
101,648
97,414
823
214,176
(12,580)
(56,857)
(3,481)
(38)
(72,956)
Non cash expense (other than depreciation
and impairment)
Exceptional item – production based taxes
Increase in property, plant and equipment
and intangible assets
-
-
-
673
5,055
11,011
80
-
742
Depreciation, depletion and amortisation
58
9,210
5,887
6
-
-
-
759
5,055
11,753
15,155
1 Total assets and liabilities exclude assets and liabilities of the Hungarian disposal group classified as held for sale. Please refer to Note 14 for details.
-
-
-
-
-
-
-
-
-
-
-
173,474
10,419
5,990
5,111
19,182
214,176
(72,956)
759
5,055
11,753
15,155
Major customers
Ukraine
Russia
2018
$000
18,131
2017
$000
-
16,911
16,964
There are two customers, one in Ukraine and one in Russia, that exceed 10% of the Group’s total revenues (2017: one in Russia).
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JKX Oil & Gas plc Annual Report 2018
GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
2017
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
World1
$000
Sub Total
$000
Eliminations
$000
Total
$000
-
-
-
33
33
16,458
636
35,835
16,998
4,607
50
-
14
56,950
17,648
11,020
11,020
-
-
-
-
11,053
56,950
17,648
-
-
-
-
-
-
-
-
17,094
52,833
4,607
97
74,631
-
-
-
-
-
17,094
52,833
4,607
97
74,631
11,020
(11,020)
11,020
(11,020)
-
-
85,651
(11,020)
74,631
(Loss)/profit from operations
(1,911)
3,733
(2,692)
(9,067)
(9,937)
(103)
(10,040)
Finance income
Finance cost
Fair value movement on derivative liability
Assets
348
(3,164)
(3)
-
-
-
348
(3,164)
(3)
(12,756)
(103)
(12,859)
Property, plant and equipment
268
90,024
102,961
778
194,031
Intangible assets
Deferred tax
Inventories
Trade and other receivables
Restricted cash
-
-
-
572
269
-
-
2,497
1,528
-
Cash and cash equivalents
2,762
3,141
-
11,293
3,327
2,004
-
558
-
-
-
865
228
468
-
11,293
5,824
4,969
497
6,929
Total assets
Total liabilities
3,871
97,190
120,143
2,339
223,543
(18,227)
(49,196)
(6,177)
(4,034)
(77,634)
-
-
-
-
-
-
-
-
-
194,031
-
11,293
5,824
4,969
497
6,929
223,543
(77,634)
80
-
36
116
-
116
Non cash expense (other than depreciation
and impairment)
Exceptional item - reversal of provision for
impairment of Ukrainian oil and gas assets
Exceptional Item – provision for
impairment in Slovakia
Exceptional item – write off of appraisal
expenditure in Ukraine
Exceptional item – production based taxes
-
-
-
-
5,636
-
9,391
4,357
-
-
-
-
-
-
-
-
5,636
7,881
7,881
-
-
-
9,391
4,357
1,513
Exceptional items - other
Increase in property, plant and equipment
and intangible assets
Depreciation, depletion and amortisation
1,513
203
116
12,688
5,771
660
19,322
12,139
5,173
-
17,428
-
-
-
-
-
-
-
5,636
7,881
9,391
4,357
1,513
19,322
17,428
1 Assets and liabilities include Hungary at 31 December 2017 within ‘Rest of the World’. The loss before tax excludes the loss of the Hungarian disposal group classified as held
for sale in 2018 with the comparative results of the disposal group reclassified to discontinued operations. Please refer to Note 14 for details.
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JKX Oil & Gas plc Annual Report 2018
5. Property, plant and equipment and Intangible assets
5.(a) Property, plant and equipment
2018
Group
Cost
Oil and gas assets
Oil and gas
fields
Ukraine
$000
Gas field
Russia
$000
Oil and gas
fields
Hungary
$000
Other assets
$000
Total
$000
At 1 January
Additions during the year
Foreign exchange
Disposal of property, plant and equipment
Reclassified to assets held for sale
567,195
230,149
37,442
18,257
853,043
10,899
-
-
-
602
(39,325)
(112)
-
-
-
252
(292)
(462)
11,753
(39,617)
(574)
-
(37,442)
-
(37,442)
At 31 December
578,094
191,314
-
17,755
787,163
Accumulated depreciation, depletion and
amortisation and provision for impairment
At 1 January
477,171
127,188
37,442
17,211
659,012
Depreciation on disposals of property, plant and
equipment
Foreign exchange
Depreciation charge for the year
Reclassified to assets held for sale
At 31 December
Carrying amount
At 1 January
At 31 December
-
-
9,087
-
(112)
(22,212)
5,757
-
-
-
(459)
(253)
311
(571)
(22,465)
15,155
-
(37,442)
-
(37,442)
486,258
110,621
90,024
91,836
102,961
80,693
-
-
-
16,810
613,689
1,046
945
194,031
173,474
Oil and gas fields in Ukraine and Russia include $1.0m and nil respectively relating to items under construction (2017: $2.6m and
$4.8m).
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JKX Oil & Gas plc Annual Report 2018
GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
2017
Group
Cost
Oil and gas assets
Oil and gas
fields
Ukraine
$000
Gas field
Russia
$000
Oil and gas
fields
Hungary
$000
Other assets
$000
Total
$000
At 1 January
Additions during the year
Foreign exchange
Disposal of property, plant and equipment
564,023
213,181
36,971
18,296
832,471
3,172
-
-
5,756
12,088
(876)
471
-
-
344
117
(500)
9,743
12,205
(1,376)
At 31 December
567,195
230,149
37,442
18,257
853,043
Accumulated depreciation, depletion and
amortisation and provision for impairment
At 1 January
471,013
115,293
34,687
16,968
637,961
Depreciation on disposals of property, plant and
equipment
Exceptional item - reversal of provision for
impairment of Ukrainian oil and gas assets
Exceptional item – provision for impairment of oil
and gas assets in Hungary
Foreign exchange
Depreciation charge for the year
At 31 December
Carrying amount
At 1 January
At 31 December
-
(24)
(5,636)
-
-
11,794
-
-
6,957
4,962
-
-
2,755
-
-
(487)
(511)
-
-
58
672
(5,636)
2,755
7,015
17,428
477,171
127,188
37,442
17,211
659,012
93,010
90,024
97,888
102,961
2,284
-
1,328
1,046
194,510
194,031
Exceptional item – provision for impairment of oil and gas assets
During 2017 and 2018 impairment test triggers were identified in respect of our oil and gas assets with impairments and reversals of
impairments recorded in 2017. Full impairment disclosures for each of the impairment tests are made in the Note 5 (c).
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JKX Oil & Gas plc Annual Report 2018
5.(b) Intangible assets: exploration and evaluation expenditure
2018
Group
Cost:
At 1 January
Reclassified to assets held for sale
Disposal of assets written off
At 31 December
Provision against oil and gas assets
At 1 January
Reclassified to assets held for sale
Disposal of assets written off
At 31 December
Carrying amount
At 1 January
At 31 December
2017
Group
Cost:
At 1 January
Additions during the year
Exceptional item – write off of appraisal expenditure in Ukraine
Foreign exchange
At 31 December
Provision against oil and gas assets
At 1 January
Exceptional item - Impairment of Hungarian and Slovakian assets
At 31 December
Carrying amount
At 1 January
At 31 December
Ukraine
$000
Hungary
Rest of World
$000
$000
Total
$000
1,308
-
(1,308)
-
1,308
-
(1,308)
-
-
-
814
(814)
-
-
814
(814)
-
-
-
-
14,236
16,358
-
(814)
(14,236)
(15,544)
-
-
14,236
16,358
-
(814)
(14,236)
(15,544)
-
-
-
-
-
-
Ukraine
$000
Hungary
$000
Rest of World
$000
Total
$000
1,308
9,391
(9,391)
-
1,308
1,308
-
1,308
-
-
15,369
9,581
(9,391)
799
16,358
7,663
8,695
814
13,247
-
-
-
190
-
799
814
14,236
-
814
814
814
-
6,355
7,881
14,236
16,358
6,892
-
7,706
-
Exceptional item – write off of appraisal expenditure in Ukraine and provision for impairment of intangible assets
Full details are provided in the Note 5 (d).
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 and Russian assets due to the carrying amount of the Group net assets exceeding the
Company’s market capitalisation.
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
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JKX Oil & Gas plc Annual Report 2018
GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
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.
Impairment test for the Ukrainian oil and gas assets
Poltava Petroleum Company (‘PPC’), a wholly owned subsidiary of JKX, holds 100% interest in five production licences (Ignativske,
Movchanivske, Rudenkivske, Novomykolaivske, Elyzavetivske) and one exploration licence (Zaplavska) in the Poltava region of
Ukraine.
The Ignativske, Movchanivske, Rudenkivske, Novomykolaivske production licences contain one or more distinct fields which, together
with the Zaplavska exploration licence, form the Novomykolaivske Complex (‘NNC’).
The Elyzavetivske production licence is located 45km from the Novomykolaivske 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 Elyzavetivske 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 Elyzavetivske production licence was awarded to
PPC which included the West Mashivska field. Due to the proximity of the West Mashivska field to the Elyzavetivske plant, production
will be tied back to the Elyzavetivske 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
Elyzavetivske will be generated.
Key Assumptions – NNC and Elyzavetivske
The key assumptions used in the impairment testing were:
Production profiles: these were based on the latest available information assessed internally. Such information included 2P reserves
for NNC and Elyzavetivske of 21.7 MMboe and 2.5 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 2035). The
economic life of the Elyzavetivske field is currently expected to be around 2029 as per management’s current expectation.
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 2019 is based on current and forecast gas prices
realised by our Ukrainian subsidiary. For the following ten years a forward gas price curve was used with gas prices remaining
constant thereafter.
Oil prices: the Company used a forward price curve for the next ten years and remaining constant thereafter.
Production taxes: the Company has assumed production tax rates of 29% for gas and oil. A gas tax rate of 12% is applied to new wells.
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 19.1%. 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 recoverable amount of NNC’s oil and gas assets ($105.5m) exceeds its carrying amount ($83.0m) by $22.5m and therefore NNC’s
oil and gas assets were not impaired.
Elyzavetivske’s recoverable amount (including the West Mashivska extension) ($14.6m) exceeds its carrying amount ($8.0m) by
$6.6m, and therefore the CGU’s oil and gas assets were not impaired.
Elyzavetivske impairment reversal in 2017
During 2014 the Elyzavetivske field was impaired by $12.8m after significant erosion of the headroom from 2013. The main driver of
the impairment was the reduction in reserves. Had this impairment not been made, then the carrying value of Elyzavetivske would
have been $6.1m as at 31 December 2017. Therefore, a reversal of $5.6m was recognised in 2017.
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JKX Oil & Gas plc Annual Report 2018
Sensitivity analysis for the NNC and Elyzavetivske
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, future capital
expenditure and post-tax discount rates, all other inputs remaining equal, would be as follows:
NNC
Increase/(decrease) in
headroom of $22.5m for
NNC CGU
$m
Elyzavetivske
Increase/(decrease) in
headroom of $6.6m for
Elyzavetivske CGU $m
Impact if gas and oil prices:
increased by 20%
Impact if gas and oil production
volumes:
reduced by 20%
increased by 10%
decreased by 10%
Impact if future capital expenditure:
increased by 20%
decreased by 20%
Impact if post-tax discount rate:
increased by 2 percentage points to 21.1%
decreased by 2 percentage points to 17.1%
44.5
(44.5)
27.4
(27.4)
(18.7)
18.7
(10.7)
12.4
6.8
(6.9)
3.7
(3.6)
(1.2)
1.2
(0.6)
0.7
Impairment test for Yuzhgazenergie LLC (‘YGE’), Russia
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.
In accordance with IAS 36, the impairment review has been undertaken in Russian Roubles, which is the functional currency of YGE.
Key Assumptions – YGE
The key assumptions used in the impairment testing were:
Production profiles: these were based on the latest available information assessed internally. Such information included 2P reserves
for YGE of 69.8 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 2049). 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: from 1 July 2019 and annually thereafter, the gas prices have been increased by 4.0% through to 2026 based on historical
experience.
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 13.6%. 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’s recoverable amount ($104.7m) exceeds it carrying amount ($80.6m) by $24.1m and
therefore YGE’s Koshekhablskoye gas field was 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 reviewed below.
104
JKX Oil & Gas plc Annual Report 2018
GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
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
Increase/(decrease) in headroom of $24.1m for
Yuzhgazenergie CGU
$m
Impact of Adygean gas price:
growth rates increased by 10% annually
growth rates reduced by 10% annually
Impact of production volumes:
Increased by 10%
Decreased by 10%
Impact of future capital expenditure:
Increased by 20%
Decreased by 20%
Impact of post-tax discount rate:
Increased by 1 percentage point to 14.6%
Decreased by 1 percentage point to 12.6%
7.5
(7.4)
22.7
(22.7)
(8.8)
8.8
(8.0)
9.0
Impairment test for Hungarian oil and gas assets in 2017
As a result of impairment testing of Hungarian oil and gas assets, the carrying amount exceeded the CGU’s recoverable amount of nil by
$2.8m and therefore the assets were impaired to nil due to the reduction in the estimated recoverable oil and gas volumes from this
field.
5.(d) Appraisal expenditure written off and impairment test for intangible assets
Exceptional item in 2017 – appraisal expenditure written off
After the well stimulation programme to target contingent resources in the Northern part of Rudenkivske two of the wells were
abandoned due to lack of gas production. Other wells are only expected to produce insignificant quantities of gas. The total amount of
written off expenditure was $9.4m.
Impairment of Hungarian exploration and evaluation expenditure in 2017
The Tiszavasvári-IV Mining Plot contains the Tiszavasvári-6 discovery well (‘TZ-6’), which, due to the early stage of appraisal, was
classified as an exploration and appraisal asset and recognised within intangible assets.
In 2017, the absence of a firm work programme at year end to develop the Hungarian reserves constituted an impairment trigger and
accordingly an impairment test was undertaken. At year end there were no further exploration or evaluation planned or budgeted.
There was no clear indication that FVLCD was greater than zero and the assets were impaired in full by $0.8m.
Impairment of Slovakian exploration and evaluation expenditure in 2017
During 2017 there was no progress with the exploration licences in Slovakia and at year end there was no further exploration or
evaluation planned or budgeted. There was no clear indication that FVLCD was greater than zero and the assets were impaired in full by
$7.9m.
6. Investments
Group unquoted equity investments comprise a 10% holding of the ordinary share capital of PJSC of “Mining Company
Ukrnaftoburinnya” (“UNB”), a Ukrainian oil and gas company, and a 1.43% holding of the ordinary share capital of Linx
Telecommunications Holding B.V. (“Linx”), a Netherlands telecommunications company. These investments were previously measured
at cost as allowed by IAS 39 (paragraph 46 (c)) and were fully impaired at 31 December 2017 and had been for several years.
As of 1 January 2018 Group’s investments in equity instruments were reclassified to financial assets at fair value through other
comprehensive income in accordance with the provisions of IFRS 9. The Group has made an irrevocable election at the time of initial
recognition to account for the equity investment at fair value through other comprehensive income (FVOCI).
At 31 December 2018 the carrying value of UNB remained fully impaired following assessment by the Board considering relevant
available information and valuation techniques, reflecting:
the lack of liquidity in the shares of UNB and considerations regarding the nature of markets for such an investment;
the absence of any history of dividends or other returns on the investment since acquisition in 2006 and the significant uncertainty
regarding future returns;
the absence of regular formal communication with UNB or potential buyers; and
the level of uncertainty regarding any market valuation method based on quoted Ukrainian oil and gas companies given key
differences in the respective businesses and corporate structures;
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JKX Oil & Gas plc Annual Report 2018
the limited number of quoted Ukrainian oil and gas companies that can be used for the market valuation approach, defined
in IFRS 13.
At 31 December 2018 the carrying value of Linx remained fully impaired following assessment by the Board considering relevant
available information and valuation techniques, reflecting:
the lack of liquidity in the shares of Linx and considerations regarding the nature of markets for such an investment;
the absence of dividends or other returns on its investment since the investment acquisition in 2002 (apart from a one-off dividend
received during 2017 of $0.1m due to reorganisation of Linx).
the absence of formal communication with any potential buyers; and
the level of uncertainty regarding any market valuation method based on the limited number of quoted Netherlands
telecommunication companies and key differences in the respective businesses.
7. Inventories
Warehouse inventory and materials
Oil and gas inventory
2018
$000
3,911
2,079
5,990
2017
$000
4,441
1,383
5,824
During the year there were no obsolete inventories written off to profit and loss (2017: $0.6m were written off to profit and loss under
‘cost of sales’ at Poltava Petroleum Company (‘PPC’), our wholly owned subsidiary in Ukraine).
8. Trade and other receivables
Trade receivables
Less: ECLs
Trade receivables – net
Other receivables
VAT receivable
Prepayments
2018
$000
2,085
(559)
1,526
279
384
2,922
5,111
2017
$000
3,348
(505)
2,843
508
469
1,149
4,969
As of 31 December 2018, trade and other receivables of $0.6m (2017: $0.5m) were past due and full expected credit loss (“ECL”)
provision was recognized with the asset considered credit impaired. The amount of the provision was $0.6m (2017: $0.5m). This
receivable relates to a single gas customer, which is more than two years past due. Legal proceedings were initiated in Q4 of 2016 and
finished in Q3 of 2018 in favour of the Company. The Company is seeking collection of the amount outstanding, but significant
uncertainty remains over the collection.
As of 31 December 2018, trade and other receivables of $1.8m (2017: $3.4m) were current and not impaired. 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 Hryvnia
Russian Roubles
2018
$000
42
-
1
-
15
1,747
1,805
2017
$000
137
17
487
44
776
1,890
3,351
106
JKX Oil & Gas plc Annual Report 2018
GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
9. Cash and cash equivalents
Cash
Short term deposits
Cash and cash equivalents
Restricted cash
Total
2018
$000
16,939
2,243
19,182
-
19,182
2017
$000
4,958
1,971
6,929
497
7,426
Short term deposits held comprised amounts held on deposit, but were readily convertible to cash.
Restricted cash
At 31 December 2018 restricted cash does not include restricted cash held in Hungary, it is included under “assets held for sale” in the
Statement of financial position. Included in Restricted cash in 2017 is $0.2m 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 other $0.3m related to funds received by the Trustees of the
JKX Death in Services scheme, it was paid out to the beneficiaries in December 2018.
10. Trade and other payables
Trade payables
Other payables
Contract liabilities
Other taxes and social security costs
VAT payable
Accruals
11. Borrowings
Current
Convertible bonds due 2020
Term-loans repayable within one year
Non-Current
Convertible bonds due 2020
Term-loans repayable after more than one year
2018
$000
873
3
3,273
2,196
1,327
3,110
10,782
2018
$000
5,962
5,962
5,041
5,041
2017
$000
2,828
278
1,931
2,166
1,121
3,554
11,878
2017
$000
7,630
7,630
9,003
9,003
Convertible bonds due 2020
On 19 February 2013 the Company successfully completed the placing of $40m of guaranteed unsubordinated convertible bonds with
institutional investors which were due 2018 (prior to restructuring) raising cash of $37.2m net of issue costs.
Prior to restructuring the Bonds had 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 2020 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).
Convertible bonds restructured on 3 January 2017
On 3 January 2017 a special resolution was approved by Bondholders to change the terms and conditions of the Bonds. The main
amendments to the terms and conditions of the Bonds were as follows:
the Bondholder's option to require redemption of all of the outstanding Bonds on 19 February 2017 was deleted;
107
JKX Oil & Gas plc Annual Report 2018
the final maturity date of the Bonds was extended to 19 February 2020, with the outstanding principal amount of the Bonds being
repaid in three instalments; 33% on 19 February 2018; 33 % on 19 February 2019; and 34% on the 19 February 2020;
the coupon rate of the Bonds was increased from 8% to 14%;
the covenant which limited new borrowings by the Company was removed; and
the Company were to make two payments to Bondholders in respect of prior accretion amounts, on 19 February 2017 and on 19
February 2018 of 12.0% and 3.0%, respectively, of the principal amount of the Bonds.
19 February 2017 the Company made the first payment to Bondholders in respect of prior accretion amounts of $1.9m (12.0% of the
principal amount of the Bonds) and interest payment of $1.8m. 19 February 2018 the Company made a payment of the first instalment
to Bondholders of $5.3m (33% of the principal amount of the Bonds), together with the final accretion payment of $0.5m (3.0% of the
principal amount of the Bonds) and interest of $1.1m. On 19 February 2019 the Company made a payment of the second instalment to
Bondholders of $5.3m (33% of the principal amount of the Bonds), together with $0.7m interest payment in accordance with the terms
and conditions of the Bond.
The revised terms and conditions of the Bond were considered to be a modification and therefore the difference in the amortised cost
carrying amount at the modification date was recognised through a change in the effective interest rate at the modification date
through to the end of the revised estimated term of the Bond. Interest, after the deduction of issue costs is charged to the income
statement using an effective rate of 17.3% (18.0% prior to restructuring).
There was therefore no impact of the restructuring of the Bond on the Consolidated Income Statement in 2017.
The impact of the amendments to the Bond on the Consolidated Statement of Financial Position was to decrease the carrying amount of
the total Bond liability of $18.1m (at 31 December 2016, includes the associated derivative) by $0.7m, which is amortised over the
estimated remaining life of the modified Bond.
In accordance with IFRS 9, following a modification or renegotiation of a financial liability that does not result in de-recognition, the
Group is required to recognise any modification gain or loss immediately in profit or loss. Any gain or loss is determined by
recalculating the gross carrying amount of the financial liability by discounting the new contractual cash flows using the original
effective interest rate. The difference between the original contractual cash flows of the Bond and the modified cash flows discounted
at the original effective interest rate is immaterial and hence there was no impact on adoption of IFRS 9 on 1 January 2018.
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 11 December 2018, PPC, our subsidiary in Ukraine, renewed a 12 month revolving credit line from Tascombank for UAH280m
(originally secured 15 December 2017 for UAH150 m). At 31 December 2018 the total short-term line of credit amounted to $10.1m at an
exchange rate of $1: 27.69 (2017: $5.3m at an exchange rate of $1: 28.07 Hryvnia). The amount outstanding at 31 December 2018 was
nil (2017: nil), so the undrawn portion totaled $10.1m (2017: $5.3m). The facility will be available through 14 December 2019 (2017: 14
December 2018) subject to planned renewal if required. In addition PPC holds a UAH50m ($1.8m) overdraft facility which remains
undrawn and is due for renewal in December 2019.
The main terms and conditions of the revolving credit line are as follows:
drawdowns can be made either in USD or UAH;
interest rate cost for USD drawn down is 10%;
interest rate cost for UAH drawn down: 17.5% to 30 days, 18.0% 31 to 90 days, 20.75% 91 to 180 days, 22.5% 181 to 365 days;
borrowing above UAH90m, equivalent to $3.3m at 31 December 2018 (2017: $3.2m) will require a corporate guarantee from JKX Oil &
Gas Plc. The corporate guarantee provided by the JKX Oil & Gas plc in respect of the credit facility with Tascombank is considered to
be an insurance contract under the provisions of IFRS 4;
assets with a market value of UAH460m, equivalent to $16.6m at 31 December 2018 (2017: UAH355m, equivalent to $12.6m at 31
December 2017) have been identified for use as a collateral, collateral is to be provided only on a drawdown;
amount borrowed will be repaid during the last 4 months, by equal-sized monthly payments, to be effected on the last day of the
month/the last day of the credit limit period. Last date of repayment for the last part of amount borrowed is 14.12.2019.
The credit facility of $10.1m (2017: $5.3m) includes two financial covenants. If the covenants are not met an additional interest of 2%
applies to the facility but failure to meet covenants does not represent an event of default:
to keep gross margin at no less than 50% during the period of the credit facility agreement, based on PPC’s financial reporting
results.
starting from the first quarter of 2019 and during the period of the credit facility agreement, PPC is to maintain the ratio between
financial (interest) debt and EBITDA (adjusted to the annual value) at no more than 3.0.
108
JKX Oil & Gas plc Annual Report 2018
GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
12. Derivatives
Current derivative financial instruments
At the beginning of the year
Reclassification to/from non-current derivative financial instruments
At the end of the year
Non-current derivative financial instruments
At the beginning of the year
Reclassification from/to current derivative financial instruments
Full/partial settlement of derivative liability
Fair value loss movement during the year
At the end of the year
2018
$000
-
-
-
3
-
-
59
62
2017
$000
1,341
(1,341)
-
-
1,341
(1,341)
3
3
Convertible bonds due 2020 – embedded derivatives
Bondholder Put Option– cancelled 3 January 2017
Bondholders had the right to require the Company to redeem the following number of Bonds on the following future dates together
with accrued and unpaid interest to (but excluding) such dates:
Redemption Date
Maximum number of Bonds to be
redeemed
19 February 2017
all outstanding Bonds
On 3 January 2017, this put option was cancelled as part of the Bond restructuring as detailed in Note 11.
Company Call Option
The Company can redeem the Bonds at any time in full but not in part at their principal amount plus one semi-annual coupon plus any
accrued interest. If the Bonds are called prior to 19 February 2020, the redemption price will also include an additional U.S. $6,000 per
Bond.
The Company can redeem the Bonds any time in full but not in part at their principal amount plus any accrued interest 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.
13. 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).
Financial assets
Cash and cash equivalents and restricted cash (Note 9) – classified at
amortised cost
Trade receivables (Note 8) – classified at amortised cost
Other receivables (Note 8) – classified at amortised cost
Financial liabilities
Trade payables (Note 10) - carried at amortised cost
Other payables (Note 10) - carried at amortised cost
Accruals (Note 10) - carried at amortised cost
Book Value
2018
$000
Fair Value
2018
$000
Book Value
2017
$000
Fair Value
2017
$000
19,182
19,182
7,426
1,526
1,526
279
279
873
3
873
3
2,468
2,468
2,843
508
2,828
278
2,262
7,426
2,843
508
2,828
278
2,262
109
JKX Oil & Gas plc Annual Report 2018
Borrowings – convertible bonds due 2020
(Note 11) - carried at amortised cost (current)
Borrowings – convertible bonds due 2020
(Note 11) - carried at amortised cost (non-current)
5,962
5,962
7,630
6,486
5,041
5,041
9,003
7,653
Derivatives – fair value through profit or loss (Note 12)
62
62
3
3
Financial liabilities measured at amortised cost are carried at $14.3m (2017: $22.0m). The Group’s borrowings at 31 December 2018
relate entirely to the convertible bonds due 2020.
Fair value hierarchy
Derivatives
At the year end the Group’s derivative financial instrument related to embedded derivative within the convertible bonds due 2020
(Note 12). The value of the derivative was calculated at inception using the Monte Carlo simulation methodology and subsequently
using the Black-Scholes formula, and the Company’s historic share price and volatility, treasury rates and other estimations. As it was
derived from inputs that are not from observable market data it was grouped into level 3 within the fair value measurement hierarchy.
The main assumptions used in valuation of the derivative conversion option as at 31 December 2018 were:
underlying share price of: £0.395 (2017: £0.11);
£/US$ spot rate of 1.2754 (2017: £1/$1.3513 );
historic volatility of 54.03% (2017: 56.29%);
risk free rate based on the maturity which is 1.14 year US Treasury rate of 2.578% and 0.14 year US Treasury rate of 2.444%
(continuously compounded). At 31 December 2017 risk free rate based on the maturity which is 2.14 year US Treasury rate of
1.874%, 1.14 year US Treasury rate of 1.831% and 0.14 year US Treasury rate of 1.302% (continuously compounded).
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 $0.1m and decrease in the fair value loss of $0.02m, respectively (2017: increase in the fair value loss for the year of $0.01m and
a decrease in the fair value loss that would bring derivative’s fair value to nil), assuming that all other variables remain constant.
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 and other current assets, as at 31 December 2018 was $21.0m (2017: $10.8m).
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 cash
Net cash/(debt) comprises: borrowings disclosed in Note 11 and total cash in Note 9 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:
Convertible bonds due 2020 (current and non-current, Note 11)
Total cash (Note 9)
Net cash/(debt)
Total shareholders’ equity
2018
$000
2017
$000
(11,003)
(16,633)
19,182
6,929
8,179
(9,704)
141,682
145,909
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 included a financial covenant which limited the Group’s indebtedness (excluding the bonds themselves) in respect
110
JKX Oil & Gas plc Annual Report 2018
GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
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. On 3 January 2017 this indebtedness covenant was cancelled as part of the Bond restructuring as
detailed in Note 11.
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
Temporary capital controls were established by the National Bank of Ukraine (‘NBU’) on 1 December 2014 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.
The restrictions were effective until 8 June 2016 but have subsequently been eased by the NBU resolution No. 342 on 9 June 2016. The
resolution enabled the repatriation of dividends from JKX’s Ukrainian subsidiary for the years 2014 and 2015. NBU issued the
Resolution No.33 on 13 April 2017 which enabled the repatriation of dividends for 2016.
Prior to the easing of restrictions, Cash and short-term deposits held in Ukraine were subject to local exchange control regulations
which restricted exporting capital from Ukraine. Following the easing of these restrictions, no cash or short term deposits included
within these consolidated financial statements is restricted.
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 financial liabilities was as follows:
Group - 31 December 2018
Maturity of financial liabilities
Trade payables (Note 10)
Other payables (Note 10)
Accruals (Note 10)
Borrowings – Convertible bonds due 2020
Group - 31 December 2017
Maturity of financial liabilities
Trade payables (Note 10)
Other payables (Note 10)
Accruals (Note 10)
Borrowings – Convertible bonds due 2020
Within 3
months
$000
3 months
- 1year
$000
1-2 years
$000
873
3
2,468
6,030
-
-
-
-
-
-
381
5,821
Within 3
months
$000
3 months
- 1year
$000
1-2 years
$000
2-3 years
$000
2,828
278
2,262
6,880
-
-
-
-
-
-
-
-
-
750
6,411
5,821
111
JKX Oil & Gas plc Annual Report 2018
Interest rate risk profile of financial assets and liabilities - Group
Fixed rate interest is charged on the Group’s convertible bond (see Note 11). 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 – 31 December
Floating rate
Short term deposits (Note 9)
Other receivables (Note 8)
Other payables (Note 10)
2018
2017
Within 1 Year
$000
Within 1 Year
$000
2,243
279
3
1,971
508
278
Floating rate financial assets comprise cash deposits placed on money markets at call, seven day and monthly rates.
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 profit (2017: loss) after tax
and net assets for the year ended 31 December 2018 would increase/decrease by $16,000 (2017: $28,150). 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 Forints1
Ukrainian Hryvnia
Bulgarian Leva
Russian Roubles
Canadian Dollar
Total net
2018
$000
-
(1,223)
371
-
4,583
33
3,732
6
7,502
2017
$000
1
(451)
464
130
1,263
50
6
1
1,464
1
Foreign currency exposures do not include Hungarian Forints, as Hungary is included under “assets held for sale” in the Statement of financial position.
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 (2017: 5 per cent) increase and decrease in the US Dollar against
Sterling and against Hryvnia and Rouble, all other variables were held constant. Due to the historically significant foreign currency
fluctuation in the UK, Ukraine and Russia 10 per cent has been used to calculate sensitivity for Sterling, Hryvnia and Rouble. 10 per
cent (2017: 5 per cent) is the sensitivity rate 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
10 per cent strengthening of the US Dollar/ (2017: 5 per cent)
10 per cent weakening of the US Dollar/(2017: 5 per cent)
458
(458)
(60)
60
373
(373)
-
-
(122)
122
21
(21)
Hryvnia
2018
$000
Hryvnia
2017
$000
Rouble
2018
$000
Rouble
2017
$000
Sterling
2018
$000
Sterling
2017
$000
112
JKX Oil & Gas plc Annual Report 2018
GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
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 38, 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 2018 as there is no impact on any outstanding amounts.
14. Discontinued operations and assets classified as held for sale
In early February 2018 the Group announced its intention to exit its oil and gas operations in Hungary and initiated an active
programme to locate a buyer for its subsidiary JKX Hungary BV which 100% owns Riverside Energy Kft, based in Hungary. Preparation
of marketing materials and a target investor list were complete in Q1 2018, and the marketing process was commenced in Q2 2018. It is
anticipated that binding bids are received in the first half of 2019 and sale is highly probable within the next 12 months.
The associated assets and liabilities are consequently presented as held for sale in the financial statements at 31 December 2018. Prior
to the reclassification assets were measured at the lower of carrying amount and fair value less costs to sell.
The financial performance and cash flow information presented are for periods ended 31 December 2018 and 31 December 2017.
Revenue
Cost of sales
Exceptional item – provision for impairment of Hungary
Royalties
Other cost of sales
Total cost of sales
Administrative expenses
(Loss)/gain on foreign exchange
Profit/(loss) from operations and before tax
Taxation – current
Taxation – deferred
Total taxation
Profit/(loss) for the year
Net cash (outflow)/inflow from operating activities
Net cash used in financing activities
Net cash outflow from investing activities
Effect of exchange rates on cash and cash equivalents
Net cash used by the subsidiary
31 December
2018
$000
31 December
2017
$000
1,645
1,804
-
(75)
(356)
(431)
20
(304)
930
(7)
2,564
2,557
3,487
(158)
-
-
17
(141)
(3,569)
(241)
(1,428)
(5,238)
2
244
(3,188)
-
(2,409)
(2,409)
(5,597)
1,541
(27)
(1,572)
25
(33)
The following assets and liabilities were reclassified as held for sale in relation to the discontinued operation as at 31 December 2018.
Assets and liabilities of disposal group classified as held for sale
Assets classified as held for sale
Trade and other receivables
Cash
Restricted cash
Total assets of disposal group held for sale
31 December
2018
$000
753
273
211
1,237
113
JKX Oil & Gas plc Annual Report 2018
Liabilities of the disposal group classified as held for sale
Deferred tax liability
Trade and other payables
Abandonment provision
Total liabilities of disposal group held for sale
Net assets
15. JKX Employee Benefit Trust
-
(322)
(453)
(775)
462
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 retained earnings.
None of these shares were used in 2018 (2017: nil) to settle share options, therefore at the year end JKX Employee Benefit Trust
held 5,000,000 shares in JKX Oil & Gas plc (2017: 5,000,000).
16. Share capital
Equity share capital, denominated in Sterling, was as follows:
2018
Number
2018
£000
2018
$000
2017
Number
2017
£000
2017
$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 2018 (2017: none) and no treasury shares were used in 2018 (2017: none) to
settle share options. There are no shares reserved for issue under options or contracts. As at 31 December 2018 the market value of the
treasury shares held was $0.2m (2017: $0.1m).
114
JKX Oil & Gas plc Annual Report 2018
GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
17. Other reserves
At 1 January 2017
Exchange differences arising on translation of overseas
operations
Remeasurement of post-employment benefit obligations
Merger
reserve
$000
30,680
Capital
redemption
reserve
$000
Foreign currency
translation
reserve
$000
587
(191,178)
-
-
-
-
7,118
Post-
employment
benefit
obligation
reserve
$000
Total
$000
(159,911)
7,118
-
-
-
(333)
(333)
At 31 December 2017
30,680
587
(184,060)
(333)
(153,126)
At 1 January 2018
30,680
587
(184,060)
(333)
(153,126)
Exchange differences arising on translation of overseas
operations
Remeasurement of post-employment benefit obligations
-
-
-
-
(19,475)
-
(19,475)
-
(22)
(22)
At 31 December 2018
30,680
587
(203,535)
(355)
(172,623)
Merger reserve was created on 30 May 1995 when JKX Oil & Gas plc acquired the issued share capital of JP Kenny Exploration &
Production Limited for the issue of ordinary shares and represents the difference between the fair value of consideration given for the
shares and the nominal value of those instruments.
Capital redemption reserve relates to the buyback of shares in 2002, there have been no additional share buy-backs since this time.
Foreign currency translation reserve includes movements that relate to the retranslation of the subsidiaries whose functional
currencies are not the US Dollar.
During 2018, the Russian Rouble (‘RR’) weakened by approximately 21% (2017: strengthened by 5%) from RR57.60/$ to RR69.47/$
(2017: strengthened from RR60.66/$ to RR57.60/$). A significant portion of the currency translation differences of US$19.4m (2017:
US$7.1m) included in the Consolidated statement of comprehensive income arose on the translation of property, plant and equipment
denominated in RR (see Note 5 (a)).
Post-employment benefit obligation reserve relates to a remeasurement of liability for defined benefit pension plan in PPC, our
subsidiary in Ukraine. Under the Ukrainian legislation, employees who work in hazardous conditions have the right for an early
retirement. PPC has jobs with hazardous working conditions (hereinafter referred to as the “list II”) and participates in the government
defined benefit plan. Upon early retirement the pensioners are entitled to a pension which is financed by their employers until they
enrol into a regular pension scheme financed by a Pension Fund of Ukraine. The early pension benefit (in the form of a monthly
annuity) is payable by employers only until the employee has reached the statutory retirement age (60 – for males and females). The
right to pension emerges once a number of conditions pertaining to pension insurance service record and service record in hazardous
jobs have been met and a certain age has been reached. Once employees from the list II have reached 55 years of age, PPC would
compensate to Pension Fund of Ukraine pension obligation for the next 5 years on a monthly basis. The employer is responsible for
100% for “list II” categories of early pensioners. Pensions are calculated using a formula based on the employee’s salary, pension
insurance service record, and total length of past service at specific types of workplaces (“list II” category) and, thus, the pension plan is
a defined benefit plan by its nature.
18. Provisions
Current provisions
At 1 January 2018
Foreign currency translation
Amount utilised in the year
Amount provided in the year
Reclassification to non-current provisions
At 31 December 2018
Onerous lease
provision2
$000
Production based
taxes1
$000
204
4
(274)
280
-
214
37,065
385
-
5,055
(30,074)
12,431
Total
$000
37,269
389
(274)
5,335
(30,074)
12,645
115
JKX Oil & Gas plc Annual Report 2018
Non-current provisions
At 1 January 2018
Reclassification from current provisions
At 31 December 2018
Production
based taxes1
$000
-
30,074
30,074
Total
$000
-
30,074
30,074
1 The provision for production based taxes, is in respect of a claim against PPC for additional rental fee for the period August to December 2010 and January to December 2015.
$5.1m (2017: $4.4m) was recognised as a charge in the 2018 Consolidated income statement and relates to interest accrued during 2018, of which $1.0m (2017: $1.1m) relates
to August to December 2010 liability and $4.1m (2017: $3.3m) to January to December 2015. Both claims are being contested in the Ukrainian courts (see Note 27). The amount
is denominated in Ukrainian Hryvnia (‘UAH’) and is stated above at its US$-equivalent amount using the 2018 year end rate of UAH27.69/$ (2017: UAH 28.07/$). The provision
for rental fee claims at 31 December 2018 includes estimated interest and penalties. Judgement is applied regarding application of relevant legislation to determine estimates
of the interest and penalties, together with aspects of the underlying claims which are considered overstated based on the legislation on which the claims are based, should this
legislation be applied, notwithstanding that the Group disputes the claims in their entirety. The Board believes that the claims are without merit under Ukrainian law and the
Company will continue to contest them vigorously. Whilst provisions are held by the Group, additional contingent liabilities exist in respect of the rental fee claims given the
judgments required in forming the provisions and alternative potential outcomes.
2
2018 onerous lease provision concerns the Group’s liability for onerous lease contracts relating to its London office. Following a reduction in London office staff in 2016, three
out of the four floors of the occupied building became surplus to requirements. Subsequently, two out of three floors have been assigned to new tenants. The provision has been
determined as the present value of the unavoidable costs relating to rents and rates to the end of the lease terms, net of the expected sub-lease income, discounted at 6.5%
(2017: 6.5%). The remaining life of the leases at 31 December 2018 was 3 years (2017: 4 years).
Provisions relating to the 2015 rental fee claims of $30.1m were reclassified from current provisions to non-current provisions in 2018.
Management, together with its legal advisors, has done a thorough review of the expected hearings and possible appeals of the 2015
rental fee claim cases. It is the opinion of management that even if the Company is not able to defend its position successfully in court,
no payments related to these cases will fall due before 2020 at the earliest.
Non-current provisions
Provision on decommissioning
Provision for site restoration
At 1 January 2018
Foreign exchange adjustment
Revision in estimates
Unwinding of discount (Note 22)
Transfer of assets held for sale
At 31 December 2018
Ukraine
$000
Russia
$000
Hungary
$000
2,574
-
831
176
-
2,142
(390)
-
266
-
3,581
2,018
625
-
-
-
(625)
-
Total
$000
5,341
(390)
831
442
(625)
5,599
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 2035 (2017: 2034). The Russia provision results from the decommissioning of 15 wells (2017:12) and removal of plant as required
by the licence obligation and is due to start from 2050 (2017: 2049). The provisions are made using the Group’s internal estimates that
management believe form a reasonable basis for the expected future costs of decommissioning.
19. Exceptional items
During the year, the exceptional items as detailed below have been included in administrative expenses in the income statement:
Exceptional item – onerous lease provision (1)
Exceptional item – remuneration and severance costs (2)
Exceptional item – legal costs (3)
2018
$000
-
-
-
-
2017
$000
(55)
(1,364)
(94)
(1,513)
1
2
3
See Note 18 for details. During 2018 the onerous lease provision was not included under exceptional items, as it was considered to be recurring and immaterial.
$1.4 million of severance costs paid to two Executive Directors removed from the Board of Directors at the AGM on 30 June 2017.
$0.1 million of professional advisory fees incurred in relation to the removal of two Executive Directors from the Board of Directors in 2017.
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JKX Oil & Gas plc Annual Report 2018
GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
20. Cost of sales
Operating costs
Depreciation, depletion and amortisation
Other production based taxes
Exceptional item – production based taxes (Note 18)
Exceptional item - reversal of provision for impairment of Ukrainian oil and gas assets (Note 5)
Exceptional item – provision for impairment of Slovakia (Note 5)
Exceptional item – write off of appraisal expenditure in Ukraine (Note 5)
2018
$000
20,897
14,732
21,857
57,486
5,055
-
-
-
2017
$000
18,463
16,756
16,715
51,934
4,357
(5,636)
7,881
9,391
62,541
67,927
The cost of inventories (calculated by reference to production costs) expensed in cost of sales in 2018 was $0.9m (2017: $2.0m).
21. Finance income
Interest income on deposits
22. Finance costs
Borrowing costs
Unwinding of discount on site restoration (Note 18)
2018
$000
908
908
2018
$000
2,068
442
2,510
23. Profit/(loss) from operations – analysis of costs by nature
Profit/(loss) from operations derives solely from continuing operations and is stated after charging/(crediting) the following:
Depreciation – other assets (Note 5. (a))
Depreciation, depletion and amortisation – oil and gas assets (Note 5. (a))
Staff costs (net of $0.5m (2017: $0.2m) capitalised, Note 25)
Foreign exchange (loss)/gain
Operating lease payments
- property lease rentals
- plant and equipment
2018
$000
311
14,732
12,452
(711)
719
9
2017
$000
348
348
2017
$000
2,838
326
3,164
2017
$000
672
16,756
14,368
1,179
817
13
117
JKX Oil & Gas plc Annual Report 2018
During the year the Group (including its overseas subsidiaries) obtained the following services from the Company’s auditors:
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
2018
$000
2018
$000
2017
$000
BDO fees
PWC fees
PWC fees
205
167
-
2
374
-
-
105
2
107
288
198
101
41
628
Non-audit services in 2018 include $2 thousand of tax advisory services provided by BDO Unicon Moscow. The tax advisory services fee
relates to reporting periods prior to BDO LLP’s appointment as the Group auditor and was discontinued upon their appointment.
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
2018
$000
420
586
2017
$000
428
932
1,006
1,360
Operating leases 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)
2018
$000
2017
$000
12,502
14,145
257
205
13
300
210
(46)
12,977
14,609
Staff costs are shown gross and $0.5m (2017: $0.2m) was capitalised, representing time spent on exploration and development
activities.
During the year, the average monthly number of employees was:
Management/operational
Administration support
2018
Number
2017
Number
487
88
575
448
79
527
There are no Directors on service contracts included within management/operational (2017: nil). Further details of the Directors and
their remuneration are included on pages 56 to 67 which form part of these financial statements.
26. Share-based payments
According to the 2010 Performance Share Plan (PSP) that is currently in place, the Remuneration Committee has the ability to grant
awards of nil-cost options annually to senior management of the Group, conditional on the Group’s performance over a period of at least
three years. No consideration is required to be paid for the grant or exercise of an Option. Vesting of the options is dependent upon
certain criteria, including comparison of the Group’s TSR against the FTSE Fledgling index and the All-Share Oil & Gas Producers index.
118
JKX Oil & Gas plc Annual Report 2018
GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
Options lapse when certain criteria are not met and may be forfeited when employees cease to be employed by the Group. The plan rules
are described in the Directors’ Remuneration Report. All share-based payments are equity settled.
At 31 December 2018, there were outstanding options under the PSP, exercisable during the years 2019 to 2026 (2017: 2018 to 2026),
to acquire 256,150 (2017: 1,059,650) shares of the Company at nil cost per share (2017: nil cost per share). The vesting period for
256,150(2017: 1,059,650) 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.
Outstanding as at 1 January
Lapsed/forfeited during the year
Outstanding at 31 December
Exercisable at 31 December
2018
Number
1,059,650
2018
WAEP
0.00p
2017
Number
2,168,450
(803,500)
0.00p
(1,108,800)
151,250
104,900
0.00p
1,059,650
0.00p
-
2017
WAEP
22.78p
44.55p
0.00p
-
For the share options outstanding as at 31 December 2018, the weighted average remaining contractual life is 7.0 years (2017: 8.0
years). Weighted average exercise prices (‘WAEP’) of options outstanding at 31 December 2018 is nil (2017: nil).
During the year no share options were granted in accordance with the PSP (2017: nil).
27. Taxation
Analysis of tax on loss
Current tax
UK - current tax
Overseas - current year
Current tax expense
Deferred tax
Overseas – prior year
Overseas - current year
Deferred tax benefit
Income tax expense/ (benefit)
2018
$000
-
5,478
5,478
-
(3,233)
(3,233)
2,245
2017
$000
-
2,964
2,964
-
(3,757)
(3,757)
(793)
Factors that affect the total tax charge
The total tax charge for the year of $2.2m (2017: $0.8m credit) is lower (2017: higher) than the average rate of UK corporation tax of
19.00% (2017: 19.25%). The differences are explained below:
Total tax reconciliation
Profit / (Loss) before tax
Tax calculated at 19.00% (2017: 19.25%)
Recognition of previously unrecognised tax losses
Permanent foreign exchange differences
Effect of tax rates in foreign jurisdictions
Rental fee provision
Other non-deductible expenses
Other
Total tax charge/(credit)
2018
$000
2017
$000
14,015
(12,859)
2,663
(1,332)
-
205
(724)
1,149
284
(2,475)
2,709
913
354
(3,280)
2,642
(70)
2,245
(793)
The total tax charge for the year was $2.2m (2017: $0.8m credit) comprising a current tax charge of $5.5m (2017: $3.0m) in respect of
Ukraine, a deferred tax charge before exceptional items of $1.5m (2017: credit of $0.4m) and a deferred tax credit of $1.8m in respect
119
JKX Oil & Gas plc Annual Report 2018
of exceptional items (2017: credit of $4.1m). The increase in current tax charge reflects a higher profitability in Ukraine. In Ukraine,
the corporate tax rate for 2017 was 18% and remains at this level in 2018.
The standard rate of corporation tax in the UK changed from 20% to 19% with effect from 1 April 2017. The Company’s profits for this
accounting year are taxed at an effective rate of 19.00%.
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.
Changes to the UK corporation tax rates were substantively enacted as part of Finance Bill 2015 and Finance Bill 2016. These include
reductions to the main rate to reduce the rate to 19% from 1 April 2017 and to 17% from 1 April 2020. The impact of the rate reduction
is not expected to have a material impact on UK current taxation.
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 Rental Fees on production at a rate of only 5.5% of sales value for the duration of the Licence
Agreement.
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, Subsoil Use Agreements were signed and
attached to the licences and operations continued as before.
In December 1994, a new fee on the production of oil and gas (known as a ‘Rental Payment’ or ‘Rental Fee’) was introduced through
Ukrainian regulations. On 30 December 1995, JKX, together with its Ukrainian subsidiaries (including PPC), was issued with a Joint
Decision of the Ministry of Economy, the Ministry of Finance and the State Committee for the Oil and Gas (‘the Exemption Letter’),
which established a zero rent payment rate for oil and natural gas produced in Ukraine by PPC for the duration of the Licence
Agreement for Exploration and Exploitation of the Fields. Based on the Exemption Letter PPC did not expect to pay any Rental Fees
until the new law on Rental Fees was enacted in 2011.
Rental Fees paid since 2011
In 2011 a new law was 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 $180 million. 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 sought repayment of more than $180 million in Rental Fees that PPC 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 not to collect Rental Fees from PPC 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 was heard in early July
2016. A decision from the tribunal was awarded on 6 February 2017.
The tribunal did not find in favour of the Company in respect of the Rental Fees but awarded the Company damages of $11.8 million
plus interest, and costs of $0.3 million in relation to subsidiary claims.
In March 2017, Ukraine's Ministry of Justice filed a claim with the High Court of the United Kingdom naming JKX as a defendant in an
application seeking to set aside the arbitration award for damages against Ukraine and in favour of JKX.
In October 2017 the High Court of the United Kingdom, ordered that the application brought by Ukraine seeking to set aside the recent
Uncitral arbitration award against Ukraine and in favour of JKX be dismissed. The Government of Ukraine is therefore still liable to pay
to JKX the sum of USD11.8 million plus interest, and costs of USD0.3 million in relation to subsidiary claims, as previously ordered. The
Judge also ordered that Ukraine should pay JKX's costs of $83,638.
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JKX Oil & Gas plc Annual Report 2018
GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
On 21 February 2019 application was filed for the recognition and enforcement of the arbitration award. No recognition will be made in
the financial statements of any possible future benefit that may result from this award until there is further clarity on the process for,
and likely success of, enforcing collection.
Rental Fee demands
The Group currently has two claims (2017: two) 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 2010 (2017: 2010), which in total amount to
approximately $42.5 million (2017: $37.1 million) (including interest and penalties), as detailed below. All amounts are being claimed in
Ukrainian Hryvnia (‘UAH’) and are stated below at their US$-equivalent amounts using the year end rate of $1:UAH27.69 (2017: $1:
UAH 28.07).
August – December 2010: approximately $12.4 million (2017: $11.3 million) (including $8.0 million (2017: $7.0 million) of interest
and penalties). On 11 March 2014 PPC won the case in the Poltava Court. The tax office appealed and the Kharkiv Appellate
Administrative Court reversed the earlier decision. PPC then lost an appeal in the High Administrative Court of Ukraine and the
Supreme Court rejected PPC’s application for the appeal. PPC has discovered that there were in fact certain procedures that were not
followed regarding the tax notifications that formed the basis of the original claims against PPC. Certain documentation was found
to be missing from the files of the tax authorities. In April 2017 the Poltava Circuit Administrative Court found in favour of PPC and
cancelled the tax notification decisions on the grounds that due process had not been followed. On 1 June 2017 the Kharkiv Appellate
Administrative Court upheld the judgment of the Poltava Circuit Administrative Court. In July 2017 the Poltava Joint State Tax
Inspectorate ("PJSTI") filed a cassation complaint against the previous court judgements of lower courts in PPC's favour. This
cassation hearing at the Supreme Court of Ukraine is expected in mid-2019. Whilst PPC has been successful in the April, June and
July 2017 court hearings, the Board considers it appropriate to maintain a provision notwithstanding that PPC disputes the claim
basis, given assessment of all relevant facts and circumstances.
January – December 2015: approximately $30.1 million (2017: $25.8 million) (including $17.9 million (2017: $13.7 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 the series of claims
for the difference between 28% and 55%. The 2015 Rental Fee claims are being contested in eight separate cases. The first of these
was subject to ruling by the Poltava Circuit Administrative Court (PCAC) in December 2018. While the PCAC ruled that the disputed
tax notification decisions in this case were illegal and cancelled them, meaning that PPC won the case on merits, it should be noted
that the PJSTI has appealed the judgment. Three other cases are now being considered by the PCAC, and four others are still
suspended in connection with the finalisation of the international arbitration. It is expected that hearings in respect of the majority
of these claims will be held in the remainder of 2019 and 2020.
Following the tribunal’s dismissal of the Company’s claim for overpayment of Rental Fees, an exceptional charge of $5.1 million has
been charged to the Consolidated income statement in the year (2017: $4.4 million) relating to interest accrued on the August –
December 2010 and January – December 2015 claims (see Note 18).
28. Deferred tax
Continuing operations
Ukraine
Russia
Discontinued operations
Hungary
(Note 14 Discontinued operations and
assets classified as held for sale)
Deferred tax asset
Deferred tax liability
Assets
Liability
Net
2018
$000
2017
$000
2018
$000
2017
$000
9,193
11,130
7,248
11,293
(8,227)
(1,677)
(10,059)
-
2018
$000
966
9,453
2017
$000
(2,811)
11,293
-
343
-
(2,907)
-
(2,564)
10,419
-
11,293
(5,375)
Refer to Note 2 for details of reclassifications between deferred tax assets and liabilities affecting the comparative information. At 31
December 2017 a deferred tax liability was held in Hungary related to intercompany funding structures. Following restructuring in
2018 ahead of the proposed sale of the business the deferred tax liability no longer applies.
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JKX Oil & Gas plc Annual Report 2018
The balance comprises temporary differences attributable to:
Assets
Liability
Net
Property, plant and equipment
Inventory
Provision for disputed rental fees
Provision for site restoration
Tax losses
Other
Deferred tax asset
/(liability)recognised
Deferred tax liabilities
Property, plant and equipment
Other
Deferred tax assets
Inventory
Provision for disputed rental fees
Provision for site restoration
Tax losses
Other
Net deferred tax
Deferred tax liabilities
Property, plant and equipment
Other
Deferred tax assets
Inventory
Provision for disputed rental fees
Provision for site restoration
Tax losses
Other
Net deferred tax
2018
$000
-
1,206
7,038
1,058
2017
$000
-
1,215
5,277
925
10,721
10,858
2018
$000
2017
$000
2018
$000
2017
$000
(9,635)
(9,941)
(9,635)
(9,941)
-
-
-
-
-
-
-
-
1,206
7,038
1,058
10,721
31
1,215
5,277
925
10,858
(2,416)
300
584
(269)
(3,000)
20,323
18,859
(9,904)
(12,941)
10,419
5,918
(Charged)/credited
1 January
2018
$000
exchange
differences
$000
to profit or loss
$000
(9,941)
(3,000)
1,215
5,277
925
-
-
-
-
(75)
10,858
(1,221)
584
5,918
-
(1,296)
306
167
(9)
1,761
208
1,084
(284)
3,233
(Charged)/credited
classified as
discontinued
operation
and credited
to income
statement
$000
31 December
2018
$000
-
(9,635)
2,564
(269)
-
-
-
-
-
1,206
7,038
1,058
10,721
300
2,564
10,419
1 January
exchange
2017
$000
differences
to profit or loss *
$000
$000
31 December
2017
$000
(8,281)
(3,411)
1,013
1,170
895
10,743
2,058
4,187
146
-
-
-
-
121
116
383
(1,806)
411
202
4,107
30
(6)
(1,590)
1,348
(9,941)
(3,000)
1,215
5,277
925
10,858
584
5,918
*Out of charge of $1.3m, $2.4m (charge) relates to discontinued operation (refer to Note 14) and $3.8m (credit) – to continuing operation
122
JKX Oil & Gas plc Annual Report 2018
GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
The deferred tax assets include an amount of $10.7m (2017: $10.9m) which relates to carried forward tax losses of our Russian
subsidiary. The Group concluded that the deferred tax assets will be recoverable using the estimated future income based on the
approved business plans and budgets for the subsidiary notwithstanding historic losses. The subsidiary is expected to generate
taxable income from 2019 onwards.
Unprovided deferred taxation
Tax losses
Property, plant and equipment
Other temporary differences
2018
$000
2017
$000
(35,439)
(51,939)
-
-
(3,641)
(27)
(35,439)
(55,607)
There is no expiry date on the remaining losses as 31 December 2018. The UK corporation tax main rate will be at 19% for the next year
and starting from 1 April 2020 will be reduced to 17%. The impact of the rate reduction is not expected to have a material impact.
29. Earnings per share
The calculation of the basic and diluted earnings per share attributable to the owners of the parent is based on the weighted average
number of shares in issue during the year of 166,723,145(2017: 166,723,145), including shares held to satisfy the Group’s employee
share schemes and shares purchased by the Company and held as treasury shares of 5,402,771 (2017: 5,402,771), and the profit for the
relevant year. The loss and diluted loss per share as previously presented in the 2017 Annual report was calculated based on a weighted
average number of shares of 172,125,916. The comparatives have been revised to reflect the weighted average number of shares shown
below to include the treasury shares and treasury shares held in the EBT.
Profit before exceptional items in 2018 of $18,550,956 (2017 loss: $701,204) is calculated from the 2018 profit of $15,257,404 (2017:
$17,662,920 loss) and adding back exceptional items of $3,293,552 (2017: $21,074,348) less the related deferred tax on the exceptional
items of $1,761,000 (2017: $4,112,632).
The diluted earnings per share for the year is based on 176,455,391 (2017: 166,723,145) ordinary shares calculated as follows:
Profit/(loss)
Profit/(loss) for the purpose of basic and diluted earnings per share (profit/(loss) for the year
attributable to the owners of the parent):
After exceptional item
Before exceptional item
Number of shares
Basic weighted average number of shares
Treasury shares
Treasury shares held in Employee Benefit Trust
Weighted average number of shares
Dilutive potential ordinary shares:
Share options
Convertible bonds 2020
2018
$000
2017
$000
15,257
18,551
(17,663)
(701)
2018
2017
172,125,916
172,125,916
(402,771)
(402,771)
(5,000,000)
(5,000,000)
166,723,145
166,723,145
256,150
9,476,096
-
-
Weighted average number of shares for diluted earnings per share
176,455,391
166,723,145
The effects of dilutive potential have been included when calculating dilutive earnings per share for the year ended 31 December 2018
(31 December 2017 loss per share, hence antidilutive). 9,476,096 (31 December 2017: 13,266,244) potentially dilutive ordinary shares
associated with the convertible bonds have been included as they are dilutive at 31 December 2018 (31 December 2017: antidilutive,
hence excluded).
There were 256,150(2017: 1,059,650) outstanding share options at 31 December 2018, of which 256,150 (2017: nil) had a potentially
dilutive effect. All of the Group’s equity derivatives were dilutive for the year ended 31 December 2018 (31 December 2017:
antidilutive, hence excluded).
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JKX Oil & Gas plc Annual Report 2018
30. Dividends
No interim dividend was paid for 2018 (2017: nil). In respect of the full year 2018, the directors do not propose a final dividend (2017: no
final dividend paid).
31. Reconciliation of loss from operations to net cash inflow from operations
Profit/(loss) from operations (continuing operations)
Profit/(loss) from operations (discontinued operations)
Depreciation, depletion and amortisation
Loss on disposal of fixed assets
Exceptional item - reversal of provision for impairment of Ukrainian oil and gas assets
Exceptional item - provision for impairment of Hungary (Note 14) and Slovakia
Exceptional item – write off of appraisal expenditure in Ukraine
Exceptional item – increase in provision for production based taxes, including forex
Increase in provisions – onerous lease provision, including forex
Abandonment provision write-off
Share-based payment charge/(credit)
Cash generated from operations before changes in working capital
Increase in operating trade and other receivables
Increase/(decrease) in operating trade and other payables
Increase in inventories
Net cash generated from continuing operations
Net cash (used)/generated in discontinued operations (Note 14)
Changes in liabilities from financing activities
2018
$000
15,676
930
2017
$000
(10,040)
(3,188)
15,155
17,428
-
-
-
-
5,441
284
(172)
13
37,327
(1,288)
1,250
(166)
37,281
(158)
557
(5,636)
11,450
9,391
3,144
83
-
(46)
23,143
(1,179)
(4,897)
(1,344)
14,182
1,541
The table below details changes in the Group’s liabilities arising from financing activities, including both cash and non-cash changes.
Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the Group’s
consolidated cash flow statement as cash flows from financing activities.
At 1 January 2018
Cash flows
- Payment of principal
- Payment of interest
- Accretion payment
Non-cash flows
- Interest accruing in the period
At 31 December 2018
Borrowings
$000
16,633
(5,280)
(1,870)
(480)
2,000
11,003
124
JKX Oil & Gas plc Annual Report 2018
GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
At 1 January 2017
Cash flows
- Payment of interest
- Accretion payment
- Net impact of Bond restructuring costs
Non-cash flows
- Interest accruing in the period
At 31 December 2017
32. Capital commitments
Borrowings
$000
16,795
(1,760)
(1,920)
680
2,838
16,633
Under the work programs for the Group’s exploration and development licences the Group had committed $4.4m to future capital
expenditure on drilling rigs and facilities at 31 December 2018 (2017: nil).
33. Related party transactions
Key management compensation
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 charge/(credit)
2018
$000
670
-
13
683
2017
$000
2,579
43
(46)
2,576
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 56 to 67 and in the Directors Report on pages 68 to
71.
There were five Non Executive Directors at 31 December 2018 following resignations of Vladimir Tatarchuk and Vladimir Rusinov on
16 August 2018. There were no Executive Directors appointed as Directors in 2018. No bonus was awarded to the Board for 2018
(2017: nil).
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).
Transactions with related parties
The transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation.
PJSC “Mining Company Ukrnaftoburinnya” (“UNB”), a Ukrainian oil and gas company in which Group holds a 10% of the ordinary share
capital was considered a related party at 31 December 2018. One of the Group’s Non Executive Directors, Michael Bakunenko, a
member of Audit and Remuneration Committees, is also a Chairman of the Board of UNB.
125
JKX Oil & Gas plc Annual Report 2018
The following transactions were carried out with UNB:
Gas sales
Oil purchase
2018
$000
662
2018
$000
240
2017
$000
1,054
2017
$000
32
Gas and oil are sold and purchased on normal commercial terms and conditions.
Vladimir Tatarchuk and Vladimir Rusinov were appointed to the Board on 28 January 2016 and had a beneficial interest in Convertible
Bonds with principal amount of $3.4m (interest and accretion amount of $0.8m) at 31 December 2017, which are held by Proxima (see
Notes 11 and 12).
In February 2018, the following redemptions were made in relation to Proxima’s bond holding and in accordance with the terms and
conditions of the restructured Bonds (see Note 11):
$1.1m in respect of first instalment of the principal;
$0.1m in respect of prior accretion amounts (2017: $0.4m);
$0.2m Bond interest payment (2017: $0.4m).
Since the Annual General Meeting on 30 June 2017 Vladimir Rusinov was removed from the Board of Directors. On 8 December 2017 he
was reappointed to the Board. On 16 August 2018 Vladimir Tatarchuk and Vladimir Rusinov tendered their resignations with
immediate effect, and such resignations were accepted by the board. They ceased to be related parties as of this date.
Subsidiary undertakings and joint operations
The Company’s principal subsidiary undertakings including the name, country of incorporation, registered address 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.
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.
Exemption from mandatory audit in section 479A of the act is available for qualifying subsidiaries that fulfil a set of conditions. 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 (Ukraine) Ltd, Baltic Energy Trading Ltd, EuroDril Limited, JP Kenny Exploration & Production Limited, Page Gas Ltd,
Trans-European Energy Services Limited, JKX Limited.
35. Events after the reporting date
On 19 February 2019 the Company made a payment of the second instalment to Bondholders of $5.3m (33% of the principal amount of
the Bonds), together with $0.7m interest payment in accordance with the terms and conditions of the Bond.
On 21 February 2019 application was filed for the recognition and enforcement of the arbitration award. No recognition will be made in
the financial statements of any possible future benefit that may result from this award until there is further clarity on the process for,
and likely success of, enforcing collection.
126
JKX Oil & Gas plc Annual Report 2018
COMPANY FINANCIAL STATEMENTS
Company statement of financial position
As at 31 December 2018
Assets
Non-current assets
Investments
Other receivables
Current assets
Trade and other receivables
Cash and cash equivalents
Total assets
Liabilities
Current liabilities
Trade and other payables
Non-current liabilities
Derivatives
Total liabilities
Net Assets
Equity
Called up share capital
Share premium account
Other reserves
Retained earnings
Total equity
Note
2018
$000
2017
$000
B
C
C
E
F
F
G
G
21,424
21,424
104,700
152,133
126,124
173,557
631
13,272
13,903
351
1,320
1,671
140,027
175,228
(81,301)
(104,508)
(81,301)
(104,508)
(62)
(3)
(81,363)
(104,511)
58,664
70,717
26,666
97,476
(503)
26,666
97,476
(503)
(64,975)
(52,922)
58,664
70,717
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 $12.1m (2017: $86.0m).
These financial statements on pages 126 to 135 were approved by the Board of Directors on 5 April 2019 and signed on its behalf by:
Hans Jochum Horn Chairman
Ben Fraser Chief Financial Officer
127
JKX Oil & Gas plc Annual Report 2018
COMPANY FINANCIAL STATEMENTS
Company statement of changes in equity
For the year ended 31 December 2018
At 1 January 2017
Loss for the financial year
Total comprehensive loss for the year
Share option credit
Total transactions with equity shareholders
Share
capital
$000
Share
premium
$000
Accumulated
deficit
$000
Other
reserves
$000
Total
equity
$000
26,666
97,476
-
-
-
-
-
-
-
-
33,152
(86,028)
(86,028)
(46)
(46)
(503)
156,791
-
-
-
-
(86,028)
(86,028)
(46)
(46)
At 31 December 2017
26,666
97,476
(52,922)
(503)
70,717
At 1 January 2018
Loss for the financial year
Total comprehensive loss for the year
Share option charge
Total transactions with equity shareholders
Share
capital
$000
Share
premium
$000
Accumulated
deficit
$000
Other
reserves
$000
Total
equity
$000
26,666
97,476
-
-
-
-
-
-
-
-
(52,922)
(12,066)
(12,066)
13
13
(503)
70,717
-
-
-
-
(12,066)
(12,066)
13
13
At 31 December 2018
26,666
97,476
(64,975)
(503)
58,664
128
JKX Oil & Gas plc Annual Report 2018
COMPANY FINANCIAL STATEMENTS
Notes to the Company financial statements
Presentation of the financial statements
Basis of preparation
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
as applicable to companies using Financial Reporting Standard 101, ‘Reduced Disclosure Framework’ (FRS 101).
Please refer to Directors’ report on page 68 for information on Company’s domicile, legal form, country of incorporation, description of
the nature of the entity’s operations and business activities.
Going concern
Background to the Group’s performance and funding, including significant developments over the past year, is provided in the
Financial Review. The Directors have reviewed the Group’s forecast cash flows for the period to June 2020. Capital and operating costs
are based on approved budgets and latest forecasts in the case of 2019 and current development plans in the case of 2020. The forecast
cash flows reviewed include scenarios where potential liabilities arise in relation to the rental fee claims in Ukraine (see Note 27 to the
consolidated financial statements) including assessments of the timing of such potential payments undertaken following detailed
analysis of Ukrainian legislation and the status of each claim with internal and external legal and tax experts. In addition the Directors
have considered further scenarios that reflect future expectations regarding country, commodity price and currency risks that the
Group may encounter. None of the scenarios have recognised any possible future benefit that may result from the arbitration award
(see Note 27 to the consolidated financial statements). 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, as well as the
availability of additional courses of action with respect to financing the settlement of any successful rental fee claims arising in the
forecast period, mean that the Group currently has adequate cash and other available resources to meet its liabilities and commitments
as they fall due across the forecast period. One key means of such financing is the Tascombank loan of UAH280m ($10.1m) and
overdraft facility of UAH50m ($1.8m) that was renewed and increased in December 2018 and that the Directors are confident will
continue to be available throughout the forecast period beyond its current maturity date of December 2019 given operating cash flows,
the recent renewal and increase and the security package available. Having considered the forecasts and reasonable sensitivity
scenarios the Board considers it is appropriate to adopt the going concern basis of accounting in preparing these financial statements.
Adoption of new and revised standards
IFRS 9 is effective for the year ended 31 December 2018. Please refer to Group’s accounting policies note for the full disclosure.
Disclosure exemptions
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,
129
JKX Oil & Gas plc Annual Report 2018
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 2018 was $1/£0.78 (2017: $1/£0.74).
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 129ealized129d 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 59 to 65 and in Note H 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 in retained earnings.
Repurchased JKX Oil & Gas plc shares are classified as treasury shares in shareholders’ equity and are presented in the retained
earnings. 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 2013 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.
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 9 – ‘Financial Instruments’.
130
JKX Oil & Gas plc Annual Report 2018
COMPANY FINANCIAL STATEMENTS
Notes to the Company financial statements
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.
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. The value of the derivative is calculated at inception using the Monte Carlo simulation
methodology and subsequently using the Black-Scholes formula, and the Company’s historic share price and volatility, treasury rates
and other estimations. As it is derived from inputs that are not from observable market data it is grouped into level 3 within the fair
value measurement hierarchy.
Other receivables
Other receivables include intercompany receivables which are initially recorded at their transaction price in accordance with IFRS 9
and are subsequently measured at amortised cost, reduced by any provision for impairment. IFRS 9 sets out a new forward looking
‘expected loss’ impairment model which replaces the incurred loss model in IAS 39. Under the IFRS 9 ‘expected loss’ model, a credit
event (or impairment ‘trigger’) no longer has to occur before credit losses are recognised. Expected credit losses are assessed on a
forward looking basis. The loss allowance is measured at initial recognition and throughout its life at an amount equal to lifetime ECL.
Any impairment is recognised in the income statement within ‘Administrative expenses’.
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.
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 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 130when 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 recognised. 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.
131
JKX Oil & Gas plc Annual Report 2018
B. Investments
The net book value of unlisted fixed asset investments comprises:
Cost
At 1 January
Additions
At 31 December
Equity investment in subsidiaries
At 31 December
2018
$000
2017
$000
21,424
21,424
-
-
21,424
21,424
21,424
21,424
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 were issued in February 2013 and which provided finance for the JKX Group of companies (see Note 11 to the consolidated
financial statements).
During 2016, Company further invested in its subsidiary, JP Kenny Exploration & Production Limited.
132
JKX Oil & Gas plc Annual Report 2018
COMPANY FINANCIAL STATEMENTS
Notes to the Company financial statements
At 31 December 2018, subsidiary undertakings of JKX Oil & Gas plc were:
Name
Adygea Gas B.V. 1
Baltic Catering Services 7
Baltic Energy Trading Ltd* 4
Catering-Yug LLC3
Eastern Ukrainian Pipeline Ltd 7
EuroDril Limited4
JKX Bulgaria Limited* 4
JKX Bulkan BG EAD 9
JKX Carpathian BV 1
JKX Georgia Ltd*4
JKX Hungary BV 1
JKX Ltd*5
JKX (Navtobi) Limited 8
JKX (Nederland) B.V. 1
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
Oil & gas exploration and production
Finance and Holding
JKX Oil & Gas (Jersey) Limited* 5
Finance
JKX Ondava BV 1
JKX Services Limited*4
JKX Slovakia BV 1
JKX Ukraine BV 1
JKX (Ukraine) Ltd* 4
Oil & gas exploration and production
Services
Oil & gas exploration and production
Finance and Holding
Oil & gas exploration, production and services
JP Kenny Exploration & Production
Limited* 4
Kharkiv Investment Company 7
Finance and Holding
Holding
Page Gas Ltd* 4
Poltava Gas B.V. 1
Oil & gas exploration and production
Holding
Poltava Petroleum Company 2
Oil & gas exploration and production
Folyópart Energia Kft 10
Oil & gas exploration, production and services
Trans-European Energy Services Limited* 4 Oil & gas exploration, production and services
Yuzhgazenergie LLC 6
Oil & gas exploration, production and services
* Held directly by JKX Oil & Gas plc. All other companies are held through subsidiary undertakings.
Company registered addresses:
Schiphol Boulevard 283, Tower F, 7th floor, 1118 BH Schiphol, Netherlands.
124 Yevropeiska street, office 77, Poltava, Ukraine, 36002.
177-a Pervomaiskaya Str., Maikop, Adygea Republic, 385000, Russia.
6 Cavendish Square, London, W1G 0PD, England.
47 Esplanade, St Helier, JE1 0BD, Jersey.
400m from Shovgenovsk-Koshekhabl motor road, a. Koshekhabl, Koshekhablsky District, Republic of Adygea, 385400, Russia.
1
2
3
4
5
6
7 Production site of JV PPC, Sokolova Balka, Novosanjary district, Poltava region, 39352, Ukraine.
8
1st Floor, 22 Stasicratous Olga Court, Nicosia, Cyprus.
9
45/A Bulgaria Boulevard, Sofia, 1404, Bulgaria.
10 VI. Floor, Vaci ut 33, Budapest, 1134, Hungary.
% 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
100.00
100.00
Country of incorporation
and area of operation
Netherlands
Ukraine
UK
Russia
Ukraine
UK
UK
Bulgaria
Netherlands
UK
Netherlands
UK
Cyprus
Netherlands
Jersey
Netherlands
UK
Netherlands
Netherlands
UK
UK
Ukraine
UK
Netherlands
Ukraine
Hungary
UK
Russia
a
The Group also holds a 62% investment in Schevchenko farm in Ukraine. The investment was not included in the “subsidiary undertakings” list above and does not need to be
consolidated as the Group does not have any control over the entity. The Group is not exposed to any rights to variable returns from its involvement with the farm and does not
have any ability to affect the farm’s returns through its holding in the Farm’s Charter Capital. The interest was purchased to protect access required for oil and gas activities,
originally recorded at immaterial cost and subsequently impaired as part of the NNC cash generating unit in prior years.
In the opinion of the Directors the carrying value of the investments is supported by their underlying net assets of the Group’s CGU’s.
133
JKX Oil & Gas plc Annual Report 2018
C. Other receivables
Current
Prepayments
VAT receivable
Non-current
Amounts owed by group undertakings
2018
$000
285
346
631
2018
$000
2017
$000
182
169
351
2017
$000
104,700
152,133
$104.7m (2017: $152.1m) owed by subsidiary undertakings bears no interest and is due on demand. They were classified as non-current
to reflect estimated timing of recovery.
In accordance with IFRS 9 5.5 ‘Recognition of expected credit losses’, the Company recorded an expected credit loss in relation to the
intercompany loans of $35.7m (recognised in 2017: $84.7m IAS 39 provision) as at 31 December 2018. Movement, mainly comprising
cash receipts, amounted to $11.7m.
The Company expects that the carrying value of the intercompany loan receivable may not be fully recoverable as the subsidiaries may
not generate sufficient future profits to settle the amounts owing and accordingly, these amounts have been impaired. Amongst other
things, the Company’s expected credit loss model used information generated by the expected credit losses model of its subsidiary
undertakings to give an indication of the expected trading cash flows to be generated during the loan recovery period. That model
includes relevant and reliable internal and external forward-looking information, incorporating economic forecasts about gas and oil
prices and inflation. Discounting over the recovery period had no effect as an effective interest rate is 0% given the loans are on demand.
D. Taxation
Unprovided deferred tax
Tax losses
Property, plant and equipment differences
Other temporary differences
2018
$000
5,820
-
-
2017
$000
5,838
5
(8)
5,820
5,835
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.
Changes to the UK corporation tax rates were substantively enacted as part of Finance Bill 2015 and Finance Bill 2016. These include
reductions to the main rate to reduce the rate to 19% from 1 April 2017 and to 17% from 1 April 2020. The impact of the rate reduction
is not expected to have a material impact on UK current or provided deferred taxation but is expected to reduce unprovided UK
deferred tax balances in future periods.
E. Cash and cash equivalents
Cash and cash equivalents
Total
2018
$000
13,272
13,272
2017
$000
1,320
1,320
134
JKX Oil & Gas plc Annual Report 2018
COMPANY FINANCIAL STATEMENTS
Notes to the Company financial statements
F. Trade and other payables
Current
Amounts owed to group undertakings
Trade payables
Accruals and deferred income
Non-current
Derivatives
Maturity of financial liabilities
31 December 2018
Maturity of financial liabilities
Amounts owed to group undertakings
Trade payables
Accruals
Derivatives
31 December 2017
Maturity of financial liabilities
Amounts owed to group undertakings
Trade payables
Accruals
Derivatives
2018
$000
2017
$000
80,598
103,767
527
176
584
157
81,301
104,508
62
3
In 1 year or
less, or on
demand
$000
80,598
527
176
-
2-5 years
$000
-
-
-
62
In 1 year or less,
or on demand
$000
2-5 years
$000
103,767
584
157
-
-
-
-
3
Non-current derivative financial instruments
Please refer to Group Consolidated financial statements for the full disclosure on Non-current financial instruments in Note 11 and 12.
G. Called up share capital and other reserves
Share capital, denominated in Sterling, was as follows:
2018
Number
2018
£000
2018
$000
2017
Number
2017
£000
2017
$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
135
JKX Oil & Gas plc Annual Report 2018
The Company purchased no treasury shares during 2018 (2017: none). There were no treasury shares used in 2018 (2017: none) to settle
share options. There are no shares reserved for issue under options or contracts. As at 31 December 2018 the market value of the
treasury shares held was $0.2m (2017: $0.1m).
Other reserves
Capital Redemption
Reserve
$000
Foreign Currency
Translation reserve
$000
Total
$000
At 1 January 2018 and 31 December 2018
587
(1,090)
(503)
Capital redemption reserve relates to the buyback of shares in 2002, there have been no additional share buy-backs since this time.
The foreign currency translation reserve comprises differences arising from the retranslation of the Company balance sheet from
£ Sterling into US Dollars in 2006.
H. Share-based payments
Please refer to Group Consolidated financial statements for the full disclosure on share-based payments in Note 26.
Bonus scheme
The full details of the bonus performance criteria for senior employees and the bonus earned is explained in the Remuneration Report
on pages 56 to 67.
I. Auditors’ remuneration
Audit services
2018
$000
2017
$000
Fees payable to the Company’s auditors for the audit of the parent company
30
42
J. Directors’ remuneration
The remuneration of the Directors is disclosed in the audited section of the Remuneration Report on pages 56 to 67, which form part of
these financial statements.
K. Dividends
No interim dividend was paid for 2018 (2017: nil). In respect of the full year 2018, the directors do not propose a final dividend (2017: no
final dividend paid).
L. 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
M. Employees
2018
$000
313
575
888
2017
$000
332
932
1,264
There were no employees of the Company during the year (2017: none). Staff costs are met by group company JKX Services Ltd.
N. Events after the reporting date
See Note 35 to the consolidated financial statements.
136
JKX Oil & Gas plc Annual Report 2018
General information
Glossary
2P reserves
Proved plus probable
3P reserves
Proved, probable and possible
P50
AFE
AIFR
Bcf
Bcm
boe
boepd
bopd
GPF
HHN
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 oil equivalent
Barrel of oil equivalent per day
Barrel of oil per day
Gas Processing Facility
HHE North Kft
Hryvnia
The lawful currency of Ukraine
HSECQ
KPI
LIBOR
LPG
LTI
Mbbl
Mboe
Mcf
Mcm
MMcfd
MMbbl
MMboe
MMcm
PPC
Health, Safety, Environment, Community and
Quality
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
Million cubic metres
Poltava Petroleum Company
Roubles
The lawful currency of Russia
RR
sq. km
TD
$
UAH
US
VAT
YGE
Russian Roubles
Square kilometre
Total depth
United States Dollars
Ukrainian Hryvnia
United States
Value Added Tax
Yuzhgazenergie LLC
Conversion factors 6,000 standard cubic feet
of gas = 1 boe
Directors and advisers
Directors
Hans Jochum Horn
Adrian Coates
Michael Bakunenko
Christian Bukovics
Andrey Shtyrba
Company Secretary
Julian Hicks
6 Cavendish Square
London
W1G 0PD
Registered office
6 Cavendish Square, London W1G 0PD
Registered in England
Number: 3050645
Registrars
Equiniti
Aspect House, Spencer Road
Lancing, West Sussex BN99 6DA
Independent auditors
BDO LLP
55 Baker Street
Chartered Accountants and Statutory Auditors
London, W1U 7EU
Financial advisors
SPARK Advisory Partners Limited
5 St. John’s Lane
London, EC1M 4BH
Public relations
EM Communications
25 Southampton Buildings
London, WC2A 1AL
JKX Oil & Gas plc Annual Report 2018
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JKX Oil & Gas plc
JKX Oil & Gas plc
6 Cavendish Square
London W1G 0PD
+44 (0)20 7323 4464