PetroChina Company Limited Annual Report 2016

FY2016 Annual Report · PetroChina Company Limited

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P E T R O N E F T
R E S O U R C E S P L C

A N N U A L R E P O R T
Г О Д О В О Й О Т Ч Е Т

2016

FORWARD
LOOKING
STATEMENTS

This report contains forward-looking statements.
These statements relate to the Group’s future
prospects, developments and business strategies.
Forward-looking statements are identified by their
use of terms and phrases such as ‘believe’, ‘could’,
‘envisage’, ‘potential’, ‘estimate’, ‘expect’, ‘may’, ‘will’
or the negative of those, variations or comparable
expressions, including references to assumptions.

The forward-looking statements in this report are
based on current expectations and are subject to risks
and uncertainties that could cause actual results to
differ materially from those expressed or implied by
those statements. These forward-looking statements
speak only as at the date of these financial statements.

PetroNeft Resources plc is
an international oil and gas
exploration and production
company, focused on Russia.
The company’s shares are
listed on the London AIM
and Dublin ESM markets.

PETRONEFT RESOURCES PLC

HIGHLIGHTS

IN THIS YEAR’S REPORT:

OPERATIONAL HIGHLIGHTS

FINANCIAL HIGHLIGHTS

REVIEW OF THE YEAR

Producing Oil from a Solid Asset Base

Licence 61

Licence 67

Our Reserves

Chairman’s Statement

Chief Executive Officer’s Report

Financial Review

Health, Safety and
Environmental Report

GOVERNANCE

Board of Directors

Directors’ Report

FINANCIAL STATEMENTS

Independent Auditor’s Report

Consolidated Income Statement

Consolidated Statement
of Comprehensive Income

Consolidated Balance Sheet

Consolidated Statement
of Changes in Equity

Consolidated Cash Flow Statement

Company Balance Sheet

Company Statement of
Changes in Equity

Company Cash Flow Statement

Notes to the Financial Statements

Notice of Annual General Meeting

Glossary

Group Information

CHIEF EXECUTIVE OFFICER’S REPORT
PAGES 12 – 14

FINANCIAL REVIEW
PAGES 15 – 21

2,707 BOPD
2,707 bopd Average gross
production at Licence 61 in 2016.

US$2.3M
PetroNeft revenue
US$2.3 million.

5
5 New wells drilled, four
at Arbuzovskoye, one
at Sibkrayevskoye.

35% INCREASE
35% increase in production
at Licence 61 in 2016.

US$56M
US$56m Loans receivable
from joint ventures.

US$14M
Funding of US$14 million
provided by Oil India to
fund 2016 and 2017 work
programmes at Licence 61.

50%
50% interest in Licence
61 and Licence 67.

US$95M
Total investment by Oil India
in Licence 61 Farmout to end
2016 is US$95 million.

65 MMBBLS
65 mmbbls 2P reserves net to
PetroNeft at 31 December 2016.

ZERO DEBT
PetroNeft is debt free following
completion of Licence 61 Farmout.

ANNUAL REPORT 2016REVIEW OF THE YEAR02

PRODUCING
OIL FROM
A SOLID
ASSET BASE

OUR ASSETS
The main assets of the Company are a 50% operating
interest in a 4,991 km² oil and gas licence (Licence 61) in
the Tomsk Oblast in Russia and a 50% operating interest
in a 2,447 km² oil and gas licence (Licence 67) also
located in the Tomsk Oblast. Both licences are located
in the prolific Western Siberian Oil and Gas Basin.

HISTORY
AND BUSINESS
STRATEGY

The Group has its origins in
PetroNeft LLC, a Texas-based
company, which was established in
2003 as an oil and gas investment
and consultancy company focused
principally on the Russian market.

In May 2005, PetroNeft LLC acquired a
Russian company, Stimul-T, which had
acquired a 100% interest in Licence 61
following a competitive auction process in
the November 2004 Tomsk Licence Auction.
PetroNeft Resources plc was incorporated
on 15 September 2005 and was admitted to
the London AIM and Dublin ESM Markets in
September 2006.

The Group’s strategy is to develop an oil
exploration, development and production
business in Russia, using the combined
skills, experience and resources of the
Group’s Directors and employees.
In the short-term this is to be achieved
through a focus on growth of production
and cash flows at Licence 61 and a rigorous
appraisal and exploration programme on
Licences 61 and 67, by seeking to bring
the existing discoveries into production as
rapidly as possible and by exploiting the
additional opportunities already identified
and summarised in the Ryder Scott Report.

In addition to operations on Licences 61 and
67, the Company continues to evaluate new
projects for acquisition. In 2014 PetroNeft
signed a Farmout deal with Oil India Limited
to farmout a 50% non-operating interest in
Licence 61. PetroNeft remains the operator of
Licence 61.

RUSSIATOMSK OBLASTMOSCOW01,000 KMSCALETOMSKLICENCE 61LICENCE 67010 KMSCALE012 KMSCALEKEY:PETRONEFTROSNEFTGAZPROMGAZPROMNEFTONGC (IMPERIAL ENERGY)OTHEROIL PIPELINEGAS PIPELINEALL-WEATHER ROAD0100 KMSCALELICENCE 61

Licence 61 contains seven known oil
fields: Lineynoye, Arbuzovskoye,
Tungolskoye, Sibkrayevskoye, West
Lineynoye, Kondrashevskoye and
North Varyakhskoye and over 25
exploration prospects and leads.

MORE INFORMATION
PAGES 04 – 07

LICENCE 67

Licence 67 contains the
Cheremshanskoye and Ledovoye
oil fields and numerous
prospects and leads.

MORE INFORMATION
PAGE 08

LICENCE 61

AS WELL AS SEVEN
DISCOVERED OIL FIELDS IN
LICENCE 61 THERE ARE OVER
25 ADDITIONAL PROSPECTS
AND LEADS TO BE EXPLORED.

012 KMSCALE010310110612021314151621170407081909207 OIL FIELDS01 LINEYNOYE OIL FIELD02 TUNGOLSKOYE OIL FIELD03 WEST LINEYNOYE OIL FIELD05 KONDRASHEVSKOYE OIL FIELD07 ARBUZOVSKOYE OIL FIELD08 NORTH VARYAKHSKOYE19 SIBKRAYEVSKOYE23 PROSPECTS02 TUNGOLSKOYE WEST LOBE AND NORTH (2)04 LINEYNOYE LOWER06 WEST KORCHEGSKAYA (LOWER JURASSIC)08 UPPER VARYAKHSKAYA09 EMTORSKAYA 10 SIGAYEVSKAYA11 SIGAYEVSKAYA EAST12 KULIKOVSKAYA GROUP (2)13 KUSINSKIY GROUP (2)14 TUGANSKAYA GROUP (3)15 KIRILLOVSKAYA (4)16 NORTH BALKINSKAYA17 TRAVERSKAYA18 TUNGOLSKOYE EAST4 POTENTIAL PROSPECTS/LEADS20 SOBACHYA21 WEST BALKINSKAYA OIL FIELD PROSPECT READY FOR DRILLING PROSPECT IDENTIFIED POTENTIAL PROSPECTS PIPELINE051805

LICENCE 61
50% JOINT VENTURE WITH OIL
INDIA LIMITED.

In April 2014 PetroNeft signed a deal with
Oil India Limited (‘OIL’ or ‘Oil India’)
to farmout a 50% non-operating interest
in Licence 61. The basic terms of this
agreement were as follows:
• Total investment by OIL of up to US$85

million consisting of:
— US$35 million upfront cash payment;
— US$45 million of exploration and

development expenditure on Licence 61;

— US$5 million performance bonus,

contingent upon average production
from the Sibkrayevskoye Field reaching
7,500 bopd within the next five years.
• PetroNeft to remain operator of Licence
61, but OIL will have the right to second
certain technical experts into PetroNeft’s
Tomsk team.

Under the terms of the agreement, OIL
subscribed for shares in WorldAce, the
holding company for Stimul-T, the entity
which holds Licence 61 and all related assets
and liabilities; following which, PetroNeft
and Oil India Limited will both hold 50% of
the voting shares of WorldAce.

In addition, through the shareholders
agreement, both parties will have joint
control of WorldAce with PetroNeft
continuing as operator. OIL also has the
right to become the Operator of the Licence
should there be a substantial change in the
management team of PetroNeft within the
first three years.

Additional Financing from Oil India
In March 2016 PetroNeft reached agreement
with Oil India for a loan to the joint venture
company, WorldAce Investments Limited
for the 2016 work programme requirement
of US$10 million. The loan was conditional
on the current management team remaining
in place.

The 2016 work programme included the
development of the southern lobe of the
Arbuzovskoye oil field in 2016 along with the
S-374 appraisal well at the Sibkrayevskoye
oil field.

In 2017 Oil India agreed to provide a similar
shareholder loan to WorldAce in the amount
of US$4 million to fund the 2017 work

programme which primarily relates to the
drilling of the S-375 delineation well at the
Sibkrayevskoye oil field.

Oil India have indicated to the Company
their willingness to provide 100 per cent
funding for the Sibkrayevskoye development
by way of a similar shareholder loan to the
joint venture company.

About Oil India Limited
Oil India Limited (BSE: 533106, NSE: OIL)
is one of the largest national oil and gas
companies in India as measured by total
proved plus probable oil and natural gas
reserves and production. It is engaged in
the business of exploration for oil and gas,
production of crude oil, natural gas and LPG
and transportation of crude oil, natural gas
and petroleum products. OIL has over 50
E&P blocks in India and an International
presence spanning Bangladesh, Gabon,
Libya, Mozambique, Nigeria, USA, Venezuela
and Yemen. For further detail please refer to
www.oil-india.com

LICENCE 61 (CONTINUED)
SOUTH ARBUZOVSKOYE DEVELOPMENT

Southern Lobe Development 2016
• Location for Pad 2 development wells.
• Pipeline and power line connected back to

Pad 1 at Arbuzovskoye

• A-213 Vertical well – control well for

Drilled in May 2016.
— Oil encountered in J1-2 for the first time

at Arbuzovskoye

— combined production from the J1-1 and

J1-2 intervals > 350 bopd

• A-214 Horizontal well location – based

upon the results of A-213/A-103.
— 1,000 m horizontal segment,
— 853 m interpreted net pay
— Initial flow rate > 850 bopd

• A-215 Horizontal well – based upon the

results of A-213/A-214. 1,000 m horizontal
segment in J1-1.
— Initial flow rate of 650 bopd

• A-216 Deviated well – production well to

drain south end of structure.
— Initial flow rate of 175 bopd
— Water influx saw this rate drop quickly

A-216 Pad 2 Pad 1 A-213 A-215 A-103 A-214 L-9L-8E-300Proposed E-305L-7L-4L-38 +.,1$6,-&%$:$,*'!"#$%#&%$'L-10L-334Proposed E-304Proposed S-375SEPTEMBER 2015 –CONTOUR INTERVAL 10 MPipeline to Lineynoye CPF – 26 kmsLine 06.0560 kms to Kiev–Eganskoye10 km pipelineSIBKRAYEVSKOYEN. VARYAKHSKOYEARBUZOVSKOYEARBUZOVSKOYELINEYNOYEEMTORSKAYA HIGHS-371S-372S-373E-303L-5L-212NV-1L-1L-2A-1A-103L-6K-2K-1K-2sS-370S-374Proposed E-305 10 km pipeline 60 kms to Kiev - Eganskoye ProposedE-304 EMTORSKAYA HIGH• EXTENSION OF LINEYNOYE FIELD• HUGE UNBOOKED RESERVE POTENTIAL• NEEDS FURTHER DELINEATIONSIBKRAYEVSKOYE NEW OIL FIELD DISCOVERY• 1972 WELL SHOWED BY-PASSED PAY• NEW WELL EXCEEDED PRE-DRILL ESTIMATES• 2P RESERVES OF 53.0 MILLION BBLS• S-373 DRILLED IN 2015• TOTAL NET PAY 11.5 M. 9.2 M IN J1-2 SANDSTONE• S-375 WELL PLANNED FOR SUMMER 2017• PRODUCED IN WINTERS OF 2015/16 AND 2016/17 AT A 200 BOPD ARBUZOVSKOYE OIL FIELD • QUICK TIE-IN TO LINEYNOYE FACILITIES• 2P RESERVES 6.5 MILLION BBLS• UNDER DEVELOPMENT• A-103 CONFIRMS OIL IN SOUTHERN LOBEEMTORSKAYA HIGHSIBKRAYEVSKOYEARBUZOVSKOYEARBUZOVSKOYEKONDRASHEVSKOYELINEYNOYEN. VARYAKHSKOYEWEST LINEYNOYE L-9 LOBE• OBLIGATION WELL COMPLETED• IN LINE WITH EXPECTATIONS• NEEDS CASED HOLE TESTWEST LINEYNOYE L-8 LOBE• SEVERAL QUICK TIE-IN LOCATIONS• UPDIP FROM L-8 WELLA-103A-1L-2L-1L-212NV-1S-371S-372S-370S-374S-373E-303E-300L-6L-4L-334L-7L-10L-3L-8L-9L-5K-2K-1K-2sPipeline to Lineynoye CPF – 26 kmsProposed S-375010 KMSCALESTRUCTURE MAP ON BASE BAZHENOVHORIZON 2015 SEPTEMBER 2015 - CONTOURINTERVAL 10 M012 KMSCALESTRUCTURE MAP ON BASE BAZHENOV HORIZON 2015SEPTEMBER 2015 - CONTOUR INTERVAL 10M02.5 KMSCALETOP J1-1 RESERVOIR – JUNE 2016 SIBKRAYEVSKOYE OIL FIELD
MAJOR DISCOVERY – 50 MILLION BBLS PLUS – EXPECTED ON-STREAM 2018

Four Wells Drilled In Prior Years
• Wells S-370 & S-371 drilled in early 1970s
• PetroNeft drilled Well S-372 in 2011

parallel to S-370
— Net pay 12.3 m (confirmed 8.2 m of

‘missed pay’ in S-370)

— Open hole inflow test 170 bopd, 37⁰ API

• Well S-373 – completed May 2015

— Net pay 11.5 m
— Winter production ~200 bopd in 2015/16

and 2016/17

• Additional 2D Seismic acquisition in Q1

2015

2016 Activities
• Drill Well S-374 – 10 km step-out to south
— No commercial oil encountered, well

abandoned

2017 Planned Activities
• S-375 well near to previous northerly wells
• To be spudded in July 2017, result August

2017

• Engineering Studies for Development
• Development Decision

NORTHERN DEVELOPMENTS 2016

A-216 Pad 2 Pad 1 A-213 A-215 A-103 A-214 L-9L-8E-300Proposed E-305L-7L-4L-38 +.,1$6,-&%$:$,*'!"#$%#&%$'L-10L-334Proposed E-304Proposed S-375SEPTEMBER 2015 –CONTOUR INTERVAL 10 MPipeline to Lineynoye CPF – 26 kmsLine 06.0560 kms to Kiev–Eganskoye10 km pipelineSIBKRAYEVSKOYEN. VARYAKHSKOYEARBUZOVSKOYEARBUZOVSKOYELINEYNOYEEMTORSKAYA HIGHS-371S-372S-373E-303L-5L-212NV-1L-1L-2A-1A-103L-6K-2K-1K-2sS-370S-374Proposed E-305 10 km pipeline 60 kms to Kiev - Eganskoye ProposedE-304 EMTORSKAYA HIGH• EXTENSION OF LINEYNOYE FIELD• HUGE UNBOOKED RESERVE POTENTIAL• NEEDS FURTHER DELINEATIONSIBKRAYEVSKOYE NEW OIL FIELD DISCOVERY• 1972 WELL SHOWED BY-PASSED PAY• NEW WELL EXCEEDED PRE-DRILL ESTIMATES• 2P RESERVES OF 53.0 MILLION BBLS• S-373 DRILLED IN 2015• TOTAL NET PAY 11.5 M. 9.2 M IN J1-2 SANDSTONE• S-375 WELL PLANNED FOR SUMMER 2017• PRODUCED IN WINTERS OF 2015/16 AND 2016/17 AT A 200 BOPD ARBUZOVSKOYE OIL FIELD • QUICK TIE-IN TO LINEYNOYE FACILITIES• 2P RESERVES 6.5 MILLION BBLS• UNDER DEVELOPMENT• A-103 CONFIRMS OIL IN SOUTHERN LOBEEMTORSKAYA HIGHSIBKRAYEVSKOYEARBUZOVSKOYEARBUZOVSKOYEKONDRASHEVSKOYELINEYNOYEN. VARYAKHSKOYEWEST LINEYNOYE L-9 LOBE• OBLIGATION WELL COMPLETED• IN LINE WITH EXPECTATIONS• NEEDS CASED HOLE TESTWEST LINEYNOYE L-8 LOBE• SEVERAL QUICK TIE-IN LOCATIONS• UPDIP FROM L-8 WELLA-103A-1L-2L-1L-212NV-1S-371S-372S-370S-374S-373E-303E-300L-6L-4L-334L-7L-10L-3L-8L-9L-5K-2K-1K-2sPipeline to Lineynoye CPF – 26 kmsProposed S-375010 KMSCALESTRUCTURE MAP ON BASE BAZHENOVHORIZON 2015 SEPTEMBER 2015 - CONTOURINTERVAL 10 M012 KMSCALESTRUCTURE MAP ON BASE BAZHENOV HORIZON 2015SEPTEMBER 2015 - CONTOUR INTERVAL 10M02.5 KMSCALETOP J1-1 RESERVOIR – JUNE 2016 PETRONEFT RESOURCES PLCANNUAL REPORT 2016REVIEW OF THE YEAR08

LICENCE 67

In 2011/2012 two wells were drilled, one at
the Cheremshanskaya prospect and a second
at the Ledovoye oil field.

These wells resulted in the discovery of a
new oil field at Cheremshanskoye (December
2011) and the confirmation of the Upper
Jurassic J1-3 oil pool at Ledovoye field with a
potential new oil pool discovery in the lower
Cretaceous (February 2012).

Cheremshanskoye
The Cheremshanskaya No. 3 well discovered
three separate oil pools and established the
Cheremshanskoye oil field. These intervals
were the J14, the J1-3 and the J1-1 + Bazhenov
and there were successful flow tests from
each interval. The area of the field is very
large encompassing almost 40 km2 and
further delineation and pilot testing will be
required to assess the true size of the field
and ultimate development plan.

There are large producing fields nearby
with similar characteristics and the strong
indications are that Cheremshanskoye will
prove to be a substantial discovery upon
further delineation.

Ledovoye
The Ledovaya No. 2a well was spudded in
December 2011 in order to target oil in both
the Lower Cretaceous and Upper Jurassic
intervals with oil discovered in both zones.
The well achieved stabilised natural oil flow
of 52 bopd from the Upper Jurassic interval
and the core and log data also indicate that
the well has discovered a new oil pool in
the secondary objective Lower Cretaceous
interval containing 4.5 m of potential oil pay.
The Lower Cretaceous zone will eventually
need to be flow tested behind casing for
confirmation. We are pleased with the result
given that the same interval is productive at
the neighbouring Stolbovoye field which is
located 24 km to the south of Ledovoye.

2014 3D Seismic
In the first half of 2014 PITC Geophysical
Company acquired 156 km2 of 3D
seismic data across the Ledovoye and
Cheremshanskoye oil fields. This is high
quality data that has helped to better
define the structure and potential of the
two fields. In October 2014, we received the
next 5 year exploration extension for the
Licence. We have no significant exploration
commitments on the Licence in 2016 and
are currently reviewing the next steps in the
development of the Licence with our partner
Arawak in light of the current oil prices.

010 KMSCALELEDOVOYE OIL FIELD0215060709080510011303041214CHEREMSHANSKOYE OIL FIELDDRILLED STRUCTURES01 CHEREMSHANSKOYE OIL FIELD02 LEDOVOYE OIL FIELD03 SKLONOVAYA04 NORTH PIONERSKAYA05 BOLOTNINSKAYAIDENTIFIED PROSPECTS AND LEADS06 LEVO-ILYAKSKAYA07 SYGLYNIGAISKAYA08 GRUSHEVAYA09 GRUSHEVAYA STRATIGRAPHIC TRAP10 MALOSTOLBOVAYA11 NIZHENOLOMOVAYA TERRASA GP.12 BAIKALSKAYA13 MALOCHEREMSHANSKAYA14 EAST CHERMSHANSKAYA15 EAST LEDOVOYEDRILLED STRUCTURE WITHOIL SHOW OR TESTDRILLED STRUCTURE WITH NOOIL SHOWS REPORTEDUNDRILLED STRUCTURE ORSTRATIGRAPHIC TRAPEXCLUDED AREA WITH PRODUCINGOIL FIELDS09

OUR RESERVES

2P RESERVES

3P RESERVES AND
EXPLORATION RESOURCES (P4)

LICENCES 61 AND 67
• 2P reserves are as estimated by Ryder Scott, Petroleum

LICENCES 61 AND 67
• 3P reserves are as estimated by Ryder Scott, Petroleum

Consultants, each year and conform to the definitions approved by
the Society of Petroleum Engineers (‘SPE’) Petroleum Resources
Management System (‘PRMS’) rules.

Consultants, and conform to the definitions approved by the
Society of Petroleum Engineers (‘SPE’) Petroleum Resources
Management System (‘PRMS’) rules.

• Ryder Scott reserves for Licence 61 were updated as at 1 January 2016.
• Ryder Scott reserves for Licence 67 were updated as at 1 January 2011.

• All Exploration Resources (P4) are based on structures with
unequivocal four-way dip closure at the reservoir horizon as
identified by 2D seismic data.

LICENCE 61

29.4

Sibkrayevskoye

172.8

Upper Jurassic

12.8

Lineynoye

4.2

Arbuzovskoye

2.9

Tungolskoye

1.3

Kondrashevskoye

0.4

North Varyakhskoye

LICENCE 67

14.0

Ledovoye

78.1

Lower Cretaceous

31.5

Lower to Middle
Jurassic

72.6

Upper Jurassic

37.4

Lower to Middle
Jurassic

2P TOTAL
65.0 MMBBLS

3P/P4 TOTAL
392.4 MMBBLS

CHAIRMAN’S
STATEMENT

2016 was an active year for our Company particularly
at Licence 61 where, with our partner Oil India, we
drilled wells at Arbuzovskoye and Sibkrayevskoye.
The work programme saw a mix of results, as
described in the Chief Executive Officer’s Report
which follows. 2016 also saw continuing challenges
for the industry as a whole with further significant
weakness in the oil price internationally.

Operations
The existing production wells at Lineynoye
and Arbuzovskoye generally performed
reasonably well during 2016 but continued
their expected natural decline. The main
development programme in 2016 brought
the southern part of the Arbuzovskoye
oil field into production. Thanks to the
considerable experience gained in drilling
horizontal wells in 2015 we achieved
excellent results at South Arbuzovskoye
where the two horizontal and two vertical
wells all achieved initial production rate
greater than forecast.

2017 work programme
Following the S-374 result and in view of the
low oil prices expected in the near term, it
was decided to defer the first development
pad at the Sibkrayevskoye oil field until
we could drill a further appraisal well just
2 km from existing wells. We will drill this
delineation well (S-375) at Sibkrayevskoye
in 2017 with a view to commencing
development of Sibkrayevskoye in 2018. Oil
India have indicated their willingness to
provide the funding for these two projects by
way of a shareholder loan to the joint venture
company.

In August 2016 we announced the results
of a delineation well at Sibkrayevskoye.
The S-374 well was a long (10 km) step out
from previous wells to a different structural
high. Unfortunately it failed to encounter
commercial oil and the well was plugged and
abandoned.

THE PRINCIPAL
NEAR-TERM
OBJECTIVE OF
THE GROUP IS THE
DEVELOPMENT OF
THE NORTHERN OIL
FIELDS ON LICENCE
61, LEVERAGING THE
INFRASTRUCTURE
PUT IN PLACE IN
RECENT YEARS,
TOGETHER WITH
OUR PARTNER
OIL INDIA.

I would like to thank David Sanders, who
was a founder of the Company, and Gerry
Fagan for their many years of service to the
Company.

Summary
2016 was a mixed year for PetroNeft with
positives and negatives coming from a
busy work programme. The lessons learned
from the 2015 programme of horizontal
wells bore good results at Arbuzovskoye
leading to a 35% increase in production. The
result of the S-374 well at Sibkrayevskoye
has led us to delay the commencement of
the Sibkrayevskoye development pending
the result of the S-375 well. Our industry is
continuing to go through tough times at
present but we have future development
targets such as Sibkrayevskoye that will still
be profitable at current reduced oil prices.

Finally, I know that I speak for all the
Directors, management and staff of the
Group in giving sincere thanks to our
shareholders, both old and new, for your
continued support throughout the past year.

David Golder
Non-Executive Chairman

Reserves
The Chief Executive Officer’s Report
contains the details of the Ryder Scott report
as at 1 January 2016 as adjusted for 2016
production. The report demonstrates the
large potential of the Sibkrayevskoye oil field
which we expect to start developing in 2018.

Business Development
The principal near-term objective of the
Group is the development of the northern
oil fields on Licence 61, leveraging the
infrastructure put in place in recent years,
together with our partner Oil India. However,
we have not lost sight of our longer-term
objective of securing assets outside our
current licences to provide growth for the
future. In that regard, Pavel Tetyakov joined
the Company in 2016 and is responsible
for new business development in Russia.
We have been very active in pursuing
opportunities since then and hope to make
significant progress during 2017.

Engagement with Natlata
Following extensive engagement with our
largest shareholder, Natlata Partners Limited
(‘Natlata’), during 2015 and in connection
with their requisitioned EGM, in April
2016 we announced that we reached an
agreement on a new Board composition and
structure. This involved the appointment
Maxim Korobov as non-executive Director
and Anthony Sacca and David Sturt as
independent non-executive Directors. David
Sanders, Gerry Fagan and Paul Dowling
left the Board. Mr. Dowling remains CFO
of the Company. The agreement includes a
commitment from Natlata that it will support
the newly constituted Board for a period of
two years and I am pleased to report that the
new Board has worked well together in the
period since April 2016.

PETRONEFT RESOURCES PLCANNUAL REPORT 2016REVIEW OF THE YEAR
12

CHIEF
EXECUTIVE
OFFICER’S
REPORT

2016 was an active year at Licence 61 as we
leveraged the experience gained in 2015 drilling
horizontal wells at Tungolskoye to the drilling
of new horizontal wells at South Arbuzovskoye.
Gross production at Licence 61 rose 35% to 990,931
barrels of oil (2015: 737,655 barrels) in the year
or an average of 2,707 bopd (2015: 2,021 bopd).

Licence 61 – Arbuzovskoye
Arbuzovskoye was brought into year-
round production in 2012 following the
construction of a 10 km pipeline and utility
line from the Lineynoye central processing
facilities to Arbuzovskoye Pad 1 at the
northern end of the Arbuzovskoye oil field.
Further production drilling recommenced in
October 2014 and five additional wells were
drilled up to March 2015. All of the wells
came in close to prognosis and confirmed
the continuity of the reservoir interval and
the oil water contact at the spill point of
the structure. The A-103 well was the most
important of these wells as it was drilled as
the maximum reach step out to the south to
confirm the oil productivity of the southern
lobe of the field. The A-103 result combined
with new seismic data acquired in 2015 gave
us additional confidence in the southern
portion of the Arbuzovskoye oil field. This
led to the approval of its development with
our partner.

The initial development plan was for the
construction of Pad 2 along with the drilling
of one vertical and two horizontal wells.
In the end we drilled two vertical and two

horizontal wells. Our pre-drill estimates were
to achieve initial production of 125 bopd
from the vertical wells and 600 bopd from
the horizontal wells. The results far exceeded
these estimates with the vertical wells (A213
& A-216) coming in at over 350 bopd and
175 bopd respectively and the horizontal
wells (A-214 & A-215) coming in at over 800
bopd and 650 bopd respectively. With the
exception of the A-216 well, the new wells
at South Arbuzovskoye continue to perform
ahead of expectations. The water cut at A-216
has been higher than expected due to water
production from a lower sand and we are
looking at ways to isolate it.

Licence 61 – Lineynoye Development
The wells at Lineynoye have continued to
perform well during 2016, however the wells
are showing natural production decline.
Our team in Tomsk, including our in-house
workover crew, have worked effectively to
keep wells online and to intervene where
necessary to optimise well performance,
replace pumps and in some cases carry
out acid washes on both production and
injection wells to improve or maintain
production.

WE HAVE HAD GOOD
EXPLORATION
SUCCESS IN THE
PAST AND FEEL WE
CAN ADD RESERVES
WITH ADDITIONAL
APPRAISAL AT
EMTORSKAYA AND
TRAVERSKAYA IN
THE MEDIUM TERM,
AND GROW OUR
RESERVES FURTHER
WITH CONTINUED
EXPLORATION
ON OUR TWO
LICENCE AREAS.

The result, however, did lead us to defer
commencement of the development of the
Sibkrayevskoye oil field by one year in order
to drill one more appraisal well, S-375.

The S-375 well will be drilled on the northern
structural lobe of the field approximately
2 km south of existing wells that contained
approximately 10 m of net pay (e.g. S-372
and S-373). This well will be spudded in July
2017 and completed later in the summer.
If successful, it is expected to lead to the
development of the Sibkrayevskoye oil field
commencing in 2018. The drilling rig and
materials have been mobilized for the S-375
well and the erection of the rig is almost
complete.

Reserves
Independent reserve consultants Ryder
Scott completed an assessment of petroleum
reserves on Licence 61 as at 1 January 2016.
The total Proved and Probable (‘2P’) reserves
for the licence stood at 103 mmbbls. PetroNeft’s
net interest in these reserves is 50%.

As shown in the table below, PetroNeft’s share
of the combined Licence 61 and Licence 67
reserves is 65.0 mmbbls 2P and 17.2 mmbbls P1
as at the end of 2016 following adjustment of
the Ryder Scott numbers for 2016 production.
We have had good exploration success in
the past and feel we can add reserves with
additional appraisal at Emtorskaya and
Traverskaya in the medium term, and grow our
reserves further with continued exploration on
our two Licence areas. Numerous prospects
have been seismically defined but not yet
drilled, particularly in the southern half of
Licence 61.

Licence 61 – Sibkrayevskoye
In 2015 we drilled the S-373 delineation
well and carried out a major 2D seismic
programme across the northern portion
of Licence 61 including Sibkrayevskoye.
Between late January and April 2016 the
S-373 well was put on production and
averaged 200 bopd during the period. The
S-373 well was also put on production in the
winter of 2016-2017 and achieved a similar
daily rate. This well, along with the previous
wells, S-372 and S-370, forms the basis for the
initial development of Sibkrayevskoye at Pad
1 which was initially planned for 2017.

In 2016 we sought to ascertain the full
potential of Sibkrayevskoye through the
drilling of a 10 km step out well, S-374. The
well was drilled in July and August 2016.
The well was designed to evaluate the
southernmost lobe of the Sibkrayevskoye oil
field about 10 km from existing wells. The
well was drilled to a total depth of 2,640 m
MD. The log evaluation was as follows:
• The Base Bazhenov was intersected at

-2,340.8 m TVDSS (2,554 MD)

• Two tight sandstone reservoirs with total
net pay of 3.6 m were identified on the
logs:
— J1-2 (2,559.4 to 2,561.1 m MD) net pay

1.7 m

— J1-2 (2,564.6 to 2,566.5 m MD) net pay

1.9 m

A cased-hole DST was conducted over
the two intervals and the fluid inflow was
minimal with about 6.3 bbls per day of
mineralised water with no indications of
hydrocarbons.

This was a disappointing result as it removed
some of the upside from the Sibkrayevskoye
oil field, however it does not significantly
affect the current 2P reserves of 59 million
bbls defined by 4 wells in the northern part of
the field. This remains a very significant field
with robust economics at today’s oil prices.

PETRONEFT RESOURCES PLCANNUAL REPORT 2016REVIEW OF THE YEAR
14

CHIEF EXECUTIVE OFFICER’S REPORT
(CONTINUED)

Licence 67 (Ledovy Licence)
In the winter of 2013/2014, we acquired
156 km2 of 3D seismic data over the
Cheremshanskoye and Ledovoye oil fields.
This is high quality data that has helped to
better define the structure and potential of
the two fields. In October 2014, we received
the next 5 year exploration extension for the
Licence. We have no significant exploration
commitments on the Licence in 2017 and
are currently reviewing the next steps in the
development of the Licence with our partner
Arawak in light of the current oil prices
which may include the sale of the licence.

Conclusion
In 2016 we applied the experience gained
in horizontal drilling at Tungolskoye
in 2015 to the new horizontal wells at
South Arbuzovskoye and achieved very
good results. We have had a setback at
Sibkrayevskoye but I am confident that the
S-375 well to be drilled in 2017 will get us
back on track there in 2018. Even with the
negative results of well S-374, Sibkrayevskoye
is the largest field found in the Tomsk region
in recent years and represents a core asset in
the future of the company. With an excellent
partner in Oil India we are well placed to
exploit these opportunities despite the
challenging times for our industry.

Dennis Francis
Chief Executive Officer

Ryder Scott Estimated Reserves in Oil Fields (net to PetroNeft)

Oil Field Name

Licence 61
Lineynoye
Tungolskoye
Kondrashevskoye
Arbuzovskoye
Sibkrayevskoye
North Varyakhskoye

Licence 67
Ledovoye

Total net to PetroNeft

Proved

Proved &
Probable

Proved, Probable
& Possible

1P mmbo
7.0
0.3
0.7
1.7
5.8
0.2

15.7

1.5

17.2

2P mmbo
12.8
2.9
1.3
4.2
29.4
0.4

51.0

14.0

65.0

3P mmbo
15.9
3.6
1.6
5.4
52.8
0.5

79.8

17.4

97.2

• Licence 61 as at 31 December 2016 (Ryder Scott report as at 1 January 2016, adjusted for

2016 production).

• Reserves reflect just PetroNeft’s 50% share of reserves for each licence.
• All oil in discovered fields is in the Upper Jurassic section.
• Reserves were determined in accordance with the Society of Petroleum Engineers (‘SPE’)

Petroleum Resources Management System (‘PRMS’) rules.

IN 2016 WE APPLIED THE EXPERIENCE
GAINED IN HORIZONTAL DRILLING
AT TUNGOLSKOYE IN 2015 TO
THE NEW HORIZONTAL WELLS
AT SOUTH ARBUZOVSKOYE AND
ACHIEVED VERY GOOD RESULTS.

FINANCIAL
REVIEW

The year was a challenging one from a
finance point of view with the continued
volatility encountered in the commodity and
currency markets. Oil prices continued to be volatile
during the year as was the Russian Rouble. Lower oil
prices and some disappointing well results in 2015
meant that the funding provided by Oil India as part
of the Licence 61 farmout was utilised earlier than
expected. Therefore some additional finance was
required in order to fund the 2016 work programme.

Oil India agreed to provide funding for the
development of South Arbuzovskoye and
Sibkrayevskoye by way of an unsecured
shareholder loan to the WorldAce Group,
thereby removing the funding requirement
from PetroNeft for this work. The first
tranche of this funding was agreed by way
of an unsecured US$10 million shareholder
loan from Oil India to WorldAce in March
2016. Principal repayments on the loan will
not commence until October 2019. A further
US$4 million shareholder loan was agreed
between WorldAce and Oil India in March
2017 to fund the 2017 programme.

Accounting implications of
the Licence 61 farmout
As discussed in previous Annual Reports,
the effect of the Licence 61 Farmout was that
PetroNeft became a 50% owner of WorldAce
Investments Limited which is the 100%
owner of Stimul-T the Russian entity that
owns Licence 61 and all of the associated
infrastructure. Prior to the farmout the
WorldAce Group was consolidated 100% in
the financial statements of PetroNeft. Once
the farmout was completed the consolidation
method changed to the equity method which
means that just the 50% share of the profit or
loss of the WorldAce Group is included in
the Income Statement of PetroNeft and 50%
of the share of net assets of WorldAce Group
is included in the Balance Sheet of PetroNeft
rather than showing the proportional share
of revenue, expenditure and individual
classes of assets and liabilities.

PETRONEFT RESOURCES PLCANNUAL REPORT 2016REVIEW OF THE YEAR16

FINANCIAL REVIEW
(CONTINUED)

IN 2016 PETRONEFT
GROUP CHARGED
A TOTAL OF
US$1.46 MILLION
(2015: US$1.64
MILLION) TO THE
JOINT VENTURES
IN RESPECT OF
MANAGEMENT
SERVICES.

PetroNeft Key Financial Metrics

Continuing operations
Revenue
Cost of sales

Gross profit
Administrative expenses
Exchange profit/(loss) on intra-Group loans

Operating loss
Share of joint venture’s net loss – WorldAce
Investments Limited
Share of joint venture’s net loss – Russian BD
Holdings B.V.
Finance revenue

Loss for the year for continuing operations
before taxation
Income tax expense

Loss for the year

Review of PetroNeft loss for the year
The loss after taxation for the year was
US$5,427,660 (2015: US$8,474,383). The
loss included a foreign exchange gain on
intra-group loans of US$77,458 (2015: loss
of US$284,449), the share of joint venture’s
net loss in WorldAce Investments of
US$5,721,232 (2015: US$8,765,055).

Revenue
Revenue in 2016 and 2015 includes income as
operator of both licences and the revenue of
PetroNeft’s wholly owned subsidiary, Granite
Construction in respect of construction
services provided in relation to both joint
ventures.

Income of PetroNeft Group as
Operator of Licence 61 and Licence 67
In the joint venture agreements related to
both Licence 61 and Licence 67, PetroNeft is
designated as the operator of each Licence.
This means that PetroNeft employees and
management are responsible for the day
to day running of both Licences. Major
strategic and financial decisions relating to

2016
US$’000

2,280
(2,038)

242
(2,155)
77

(1,836)

2015
US$’000

2,398
(2,371)

27
(1,380)
(284)

(1,637)

(5,721)

(8,765)

(288)
3,248

(4,597)
(830)

(5,427)

(315)
3,042

(7,675)
(799)

(8,474)

the Licences require unanimous approval
by both shareholders in the respective joint
venture agreements.

As PetroNeft management and employees
are responsible for day to day matters in
both Licences, PetroNeft is entitled to
recover a portion of its expenses from the
joint ventures. The costs associated with this
revenue are included in cost of sales.

In 2016 PetroNeft Group charged a total of
US$1.46 million (2015: US$1.64 million) to
the joint ventures in respect of management
services. PetroNeft also owns a small
construction company, Granite Construction,
which carries out small ad hoc construction
projects such as well pads and on-site
accommodation on both Licences. In 2016
Granite Construction charged the WorldAce
Group US$0.81 million (2015: US$0.75
million) in respect of these services.

Finance Revenue
Most of the finance revenue relates to Interest receivable on loans to joint ventures. During 2016 PetroNeft had interest receivable of US$3,011,025
(2015: US$2,826,303) on its loans to WorldAce Group and US$234,402 (2015: US$205,189) on its loans to Russian BD Holdings B.V.

Key Financial Metrics – WorldAce Group
Because of the equity method of consolidation that applies to PetroNeft’s interest in WorldAce, it is difficult to extract meaningful metrics
from the PetroNeft consolidated income statement. Therefore, the metrics below are an extraction from the audited financial statements of
the WorldAce Group and give an indication as to the performance of Licence 61:

Continuing operations
Revenue
Cost of sales
Gross profit
Gross margin %
Administrative expenses
Impairment of oil and gas properties
Operating loss
Loss on disposal of oil and gas properties
Write-off of exploration and evaluation assets
Finance revenue
Finance costs
Loss for the year for continuing operations before taxation
Income tax
Loss for the year for continuing operations before taxation

PetroNeft’s
2016
US$’000

PetroNeft’s
2015
US$’000

11,604
(11,200)
404
3.5%
(1,614)
–
(1,210)
(438)
(710)
10
(3,373)
(5,721)
–

(5,721)

10,300
(10,436)
(136)
(1.3%)
(1,519)
(4,550)
(6,205)
–
–
12
(2,572)
(8,765)
–

(8,765)

PETRONEFT RESOURCES PLCANNUAL REPORT 2016REVIEW OF THE YEAR18

FINANCIAL REVIEW
(CONTINUED)

WE WOULD EXPECT
THE GROSS MARGIN
TO IMPROVE IN
FUTURE PERIODS
AS OUR FACILITIES
AND FIELD
OPERATIONS ARE
FULLY STAFFED
AND CAN HANDLE
ADDITIONAL
PRODUCTION
FROM THE
SIBKRAYEVSKOYE
OIL FIELD ONCE IT
COMES ONLINE.

Net Loss – WorldAce Group
The net loss of WorldAce Group for the
full year decreased to US$11,442,464 from
US$17,530,110 in 2015. The decrease in
the loss for the year before taxation can
be attributed to the fact that there was
no impairment necessary in the year. Of
the US$6.6 million in interest payable
by WorldAce, US$3.0 million is payable
to PetroNeft. Due to the lower oil price
environment and a reduction in reserves at
the Lineynoye oil field an impairment of oil
and gas properties in the amount of US$9.1
million was required in 2015.

Revenue, Cost of Sales and Gross
Margin – WorldAce Group
Revenue from oil sales was US$23,208,363 for
the year (2015: US$20,600,188). Cost of sales
includes depreciation of US$3,337,902 (2015:
US$2,856,469), which was higher mainly due
to increased production. The gross margin
improved during the year also due to higher
production. Operating costs per barrel (cost
of sales excluding depreciation and Mineral
Extraction Tax) were lower at US$8.04 (2015:
US$10.73 per barrel). We would expect the
gross margin to improve in future periods
as our facilities and field operations are fully
staffed and can handle additional production
from the Sibkrayevskoye oil field once it
comes online. We produced 990,931 barrels
of oil (2015: 737,655 barrels) in the year and
sold 985,824 barrels of oil (2015: 761,123
barrels) achieving an average oil price of
US$24 per barrel (2015: US$27 per barrel).
All oil was sold on the domestic market in
Russia.

Finance Costs – WorldAce Group
Finance costs of US$6,744,948 (2015:
US$5,144,634) mainly relates to interest on
loans from PetroNeft and Oil India.

Taxation – WorldAce Group
There is no tax payable in 2016 or 2015.

Current and Future Funding
of PetroNeft Group
In the 2015 Annual Report we outlined
that PetroNeft expected to start receiving
interest due on its shareholder loans to
WorldAce in the second half of 2017 once
the development of the Sibkrayeskoye oil
field in Licence 61 was up and running.
The S-374 appraisal well drilled in 2016
at the Sibkrayevskoye oil field, to assess
the true extent of the field 10 km to the
south of existing wells, did not encounter
commercial hydrocarbons. The result of
this well has led to the postponement of
the commencement of the development
of the Sibkrayevskoye oil field by one year
pending the result of a new appraisal well,
S-375, which will be drilled in the summer of
2017. As a consequence of this, the date by
which PetroNeft expects to start receiving
interest due on its shareholder loans to
WorldAce has been extended by a minimum
of 12 months from the previously guided
estimate of late 2017.

Success of the S-375 well would provide
assurance that there are at least two pads to
be developed at Sibkrayevskoye, in which
case it is expected that the development
of the Sibkrayevskoye oil field will
commence in 2018. The proposed first pad at
Sibkrayevskoye has already been delineated
by the S-370, S-372 and S-373 wells. The S-375
well is being drilled within the proposed pad
2 area which is about 2 km from the existing
wells that found oil and is within the same
structural closure. The S-374 well was more
than 10 km south in a different structural lobe.
The S-373 well at the proposed pad 1 area has
produced oil during the last two winters at
consistent rates giving further comfort to the
Company of the prospects of the area.

The Directors are satisfied that the options
being pursued are progressing well and are
confident the funding gap can be solved.

The successful development of S-375 and the
potential shortfall in funds represent material
uncertainties that may cast significant doubt
upon the Group’s and the Company’s ability
to continue as a going concern as described
in Note 2 to the Consolidated Financial
Statements.

Financial Risk Management
The Board sets the treasury policies and
objectives of the Group, which include
controls over the procedures used to manage
financial risk. The Group’s activities expose
the Group to a variety of financial risks
including foreign currency, commodity
price, credit, liquidity and interest rate
risks. These financial risks are managed by
the Group under policies approved by the
Board. Details of the Group’s financial risk
management policies are set out in detail in
Note 21 to the financial statements.

SUCCESS OF
THE S-375 WELL
WOULD PROVIDE
ASSURANCE THAT
THERE ARE AT LEAST
TWO PADS TO BE
DEVELOPED AT
SIBKRAYEVSKOYE,
IN WHICH CASE IT
IS EXPECTED THAT
THE DEVELOPMENT
OF THE
SIBKRAYEVSKOYE
OIL FIELD WILL
COMMENCE IN 2018.

In 2016 the Board of Oil India provided a
non-binding indication of their willingness
to provide a US$25 million shareholder
loan to WorldAce for the development of
Sibkrayevskoye. Should the S-375 well not be
successful the joint venture shareholders will
need to consider other options. This could
include the development of Sibkrayevskoye
as a one-pad development focussed only
on the area surrounding previous wells
such as S-373 or it could lead to some
further appraisal work. The joint venture
shareholders have provided non-binding
indications of their willingness to consider
providing continuing support in this
event, including not immediately seeking
repayments of principal or payment of
interest under shareholder loan agreements.

The effect of the delay in receiving interest
due is that PetroNeft will require additional
funding to cover its operating costs during
the next 12 months. Management have
prepared cash flow projections for the
period to 31 December 2018 which indicate
a shortfall of funds by the end of quarter
one 2018, and a cumulative shortfall of
approximately US$1 million by 31 December
2018, irrespective of the success of S-375.

The Company is currently in confidential
discussions pursuing several options in
order to meet this potential shortfall. These
include the potential sale or farmout of
Licence 67, short term debt financing from a
related corporate entity and the acquisition of
producing and non-producing assets in share
for share type transactions. The Board believe
that the first two options can be completed in a
short timeframe. In relation to the latter option,
the Company has signed non-disclosure
agreements and opened data rooms. As there
are delaying factors, including regulatory
requirements, around a share for share type
transaction, the timeframe to close such a
transaction could be several months following
binding agreement between the parties.

PETRONEFT RESOURCES PLCANNUAL REPORT 2016REVIEW OF THE YEAR20

FINANCIAL REVIEW
(CONTINUED)

Principal risks and uncertainties
The principal risks and uncertainties affecting the Group and the actions taken by the Group to mitigate these risks and uncertainties are:

Risk Category
Country Risks

Risk Issue
Geopolitical

Political – federal risks

Political – local risks

Ownership of assets

Changes in tax structure

Technical Risks

Exploration risk

Drilling risk

Production/Completion risk

Reserve risk

Financial Risks

Availability of finance

Oil price

Industry cost inflation

Uninsured events

Mitigation
Sanctions to date relating to the Ukraine situation are at a very high
level concentrating on Government officials and very high net worth
individuals. It is not currently expected that international sanctions
will affect Group operations.
Fields/acquisitions below 500 million boe are not considered
strategic to the Russian state.
State is encouraging small operators.
Tomsk Oblast administration is very supportive of development.
Local management are well respected in region.
Licences were acquired at government auctions. Work programme
for Licence 61 is complete. Work programme for Licence 67 is not
onerous.
25-year licence term can be automatically extended based on
approved production plan.
Fiscal system is stable – recent and proposed changes largely benefit
upstream oil and gas companies.
Proactive lobbying effort made in area of tax legislation.
Proven oil and gas basin with multiple plays.
Good quality 2D & 3D seismic.
Knowledgeable exploration team with proven track record in region.
Relatively shallow wells with proven technology.
Good rig availability.
Experienced operations team.
Can avoid drilling wells low on structure that risk poor results.
Routine completion practices including fracture stimulation.
Reserves high-graded; extensive reservoir simulation and reservoir
management will be undertaken.
Performance of similar fields in region.
SPE and Russian reserves updated and in substantive alignment.

Strong reserve base and key infrastructure already in place makes
attractive investment case.
Robust project sanction economics – conservative base case
assumptions. Russian tax system means economics are not
too sensitive to changes in oil price. Board will consider use of
appropriate hedging instruments.
Rigorous contracting procedures with competitive tendering. Also
the relationship of the US Dollar:Russian Rouble exchange rate to the
oil price provides a natural balance between costs and income.
Comprehensive insurance programme in place.

Risk Category
Other Risks

Risk Issue
HSE incidents
Export quota

Third party pipeline access

Transneft pipeline access

Mitigation
HSE standards set and monitored regularly across the Group.
Equal access to export quotas available for all oil producers using
Transneft.
Conservative assumption in economics – domestic net back price
now largely in alignment with export net back.
25-year transportation agreement in place for Licence 61, several
options available for ultimate development of Licence 67.
Available capacity and access confirmed.
East Siberia-Pacific Ocean (‘ESPO’) pipeline allows export of oil to
Pacific market.

Investor Relations
During 2016, the CEO and CFO held regular meetings with analysts and institutional investors. The target for 2017 is to continue our
programme of meetings and specifically to remind investors of the existing and potential future value of the asset portfolio.

Significant Shareholders
So far as the Directors are aware, the names of the persons other than the Directors who, directly or indirectly, are interested in 3% or more of
the Issued Share Capital at 21 June 2017 are as follows:

Name of shareholder
Natlata Partners Limited
General Invest Overseas S.A.
Mr. Duming Zhai
Ali Sobraliev
J&E Davy

Paul Dowling
Chief Financial Officer

Ordinary Shares
208,429,458
75,678,700
26,000,000
23,014,273
55,184,379

Percentage
29.47%
10.70%
3.68%
3.25%
7.80%

PETRONEFT RESOURCES PLCANNUAL REPORT 2016REVIEW OF THE YEAR
22

HEALTH,
SAFETY AND
ENVIRONMENTAL
REPORT

The Group is fully
committed to high
standards of Health,
Safety and Environmental
(‘HSE’) management and
being socially responsible
within the communities
where we work. There
are inherent risks in
the oil and gas industry
and these are managed
through policies and
practices, which stress the
need for individual and
collective responsibility
within our staff structure
and with contractors that
operate for the Group.

Alexey Balyasnikov, the General Director
of Stimul-T, has primary responsibility for
all aspects of HSE management. As well as
reporting directly to Group CEO, Dennis
Francis, he also attends all Board meetings to
report to the full Board on HSE issues. There
were no lost time incidents in 2016 or 2015.

Health and Safety Management
The Group has a dedicated Labour Safety
and Industrial Security Department in
Tomsk. The role of the department is
to minimise the risks to employees and
contractors from the day-to-day operation
of our business, to train all staff in safety
awareness and to prepare contingency
plans to minimise the potential impact of
any unplanned incidents or events. For that
purpose we:
• Control compliance of all employee

operations with labour safety requirements
and ensure that employees of the Group
and employees of contractors are
adequately trained in the use of relevant
equipment.

• Have a medical facility and appropriate

medical personnel at our central
Lineynoye base to deal with any issues
arising and provide necessary healthcare.

• Monitor all contracts the Group enters

into in order to ensure that contractors are
informed of the labour safety policies of
the Group.

• Carry out regular site inspections to

ensure full compliance.

• Develop and deliver labour safety and
industrial security training to Group
employees.

• Maintain an Emergency Response Plan for

the facilities of the Group.

• Develop and get approved by state

authorities:
— Regulation for control of industrial
safety compliance at hazardous
facilities.

— Regulation for accident investigation
at hazardous industrial facilities of the
Group.

• Maintain a prevention programme for tick-
borne encephalitis, a disease common in
the West Siberian environment.

Emergency Preparedness Training
In March 2017, we held a joint training
exercise with the Ministry of Emergency
Situations to test our oil spill contingency
plan. The scheduled training plan involved
the scenario where there was an oil spill at
Lineynoye Pad 1 facilities and tested the
responsiveness of the Group’s staff and
of local emergency services in containing
and eliminating the spill. The exercise was
successful and, while there were some minor
recommendations at the end of the exercise,
the local and federal authorities were
satisfied that the Group is well prepared for
such an emergency. A similar joint exercise
had been carried out in 2013 and 2015. As
well as these major exercises involving
external authorities there is an internal
programme of regular drills and exercises.

WE CONTINUE TO
WORK TOWARDS A
GOAL OF 95% GAS
UTILISATION AND
ARE CURRENTLY
STUDYING VARIOUS
OPTIONS INCLUDING
MIXING ASSOCIATED
GAS WITH WATER
FOR USE IN OUR
WATER FLOOD
OPERATIONS.

Gas Utilisation
The initial facilities design at Lineynoye
emphasised the installation of gas piston
power generators to utilise associated gas
from the oil production to generate electricity
for the camp, facilities and field needs, and
thereby minimise the flaring of associated
gas. This has been very successful and has
led to our operations being amongst the top
three in the region in terms of percentage of
gas utilisation. We continue to work towards
a goal of 95% gas utilisation and are currently
studying various options including mixing
associated gas with water for use in our
water flood operations thereby re-injecting
the gas back to the formation it came from
and installing a gas condensate recovery
unit. In addition, in 2015 we installed two gas
turbine generators that can utilise a higher
percentage of the low pressure gas that is
currently being flared.

Compliance and Inspections
The Group reports on its HSE activities to
various statutory authorities in Russia on a
quarterly and annual basis and is also subject
to regular inspections by various bodies. A
number of routine inspections relating to
compliance with the various health, safety
and environmental obligations took place in
2016 and 2015 and no significant issues arose
from these inspections.

Environmental Impact Management
The Board recognises that the Group’s
activities can have a significant impact
on the environment. As part of its
responsibilities under Russian law, an
environmental assessment of Licence 61
was carried out before any drilling work
commenced in 2007. This was to establish
the state of the environment within Licence
61 in advance of any major works. A similar
base-line assessment at Licence 67 was also
completed before drilling works commenced.

The Group has a dedicated full-time
Environmental Engineer on site in our
Tomsk office. Her responsibilities include:
• Monitoring of exploration and production

activities.

• Monitoring activities of sub-contractors.
• Maintaining compliance with various
environmental laws and regulations.

In 2016 the main activities from an
environmental perspective were:
• Environmental, air, water and subsoil

monitoring at Lineynoye, Arbuzovskoye
and Tungolskoye oil fields.

• Planning and approvals for 2016 and 2017

drilling programmes.

• Recultivation at Arbuzovskoye Oil field.
• Engineering and survey works, including

environmental relating to planned
facilities construction at Sibkrayevskoye
oil field.

This included the use of an independent
company to supervise the work of both our
own staff and the staff of contractors working
at our sites.

PETRONEFT RESOURCES PLCANNUAL REPORT 2016REVIEW OF THE YEAR24

BOARD OF DIRECTORS

David Golder
(Non-Executive Chairman) (Age 69)

Dennis Francis
(Chief Executive Officer and Executive
Director) (Age 68)

Thomas Hickey
(Non-Executive Director) (Age 48)

Mr. Golder has been Non-Executive
Chairman of the Company since 2005.
He is also Chairman of the Remuneration
Committee and a member of the Audit and
Nomination Committees. He has over 40
years experience in the petroleum industry
and was formerly Senior Vice President
of Marathon Oil Company (‘‘Marathon’’),
retiring in 2003. From June 1996 to 1999,
Mr. Golder was seconded from Marathon to
Sakhalin Energy Investment Company where
he was Executive Vice President – Upstream.
Located in Moscow, he managed all
upstream activities which focused on the oil
development and company infrastructure
aspects of the Sakhalin II Project onshore
and offshore Sakhalin Island. Mr. Golder
is a member of the Society of Petroleum
Engineers. He has a BSc degree in
Petroleum & Natural Gas Engineering from
Pennsylvania State University and has
completed the Program for Management
Development at Harvard University.

Mr. Francis has been Chief Executive Officer
and an Executive Director of the Company
since its formation in 2005. He has over 40
years experience in the petroleum industry
and was with Marathon for 30 years. From
1990, Mr. Francis was the USSR/FSU task
force manager, responsible for developing
new opportunities for Marathon in Russia.
Marathon and its partners ultimately won
the first Russian competitive tender, which
was to develop the Sakhalin II Project
offshore Sakhalin Island. Mr. Francis was
instrumental in the formation of Sakhalin
Energy Investment Company and was a
director in that company. He is a member
of the American Association of Petroleum
Geologists and Society of Exploration
Geophysicists. He has a BSc degree in
geophysical engineering and an MSc degree
in geology, both from the Colorado School of
Mines. He has also completed the Program
for Management Development at Harvard
University.

Mr. Hickey has been a Non-Executive
Director of the Company since 2005. He
is Chairman of the Audit and Nomination
Committees and a member of the
Remuneration Committee. He is Chief
Financial Officer of CarTrawler, a world
leading B2B travel technology platform.
Tom was previously Chief Financial Officer
at Petroceltic International Plc. Prior to that
he was an Executive Director and Chief
Financial Officer of Tullow Oil plc, from
2000 to 2008. During this time, Tullow grew
via a number of significant acquisitions
including the US$570 million acquisition
of Energy Africa in 2004 and the US$1.1
billion acquisition of Hardman Resources
in 2006. Prior to joining Tullow, Tom was an
Associate Director of ABN AMRO Corporate
Finance (Ireland) Limited. Tom is a Fellow
of the Institute of Chartered Accountants in
Ireland.

Maxim Korobov
(Non-Executive Director) (Age 59)

Anthony Sacca
(Non-Executive Director) (Age 45)

David Sturt
(Non-Executive Director) (Age 55)

Mr. Korobov was appointed a Non-Executive
Director of the Company on 24 April 2016.
He is a Russian businessman with over 20
years of experience in the oil & gas sector
and the ultimate beneficial owner of Natlata
Partners Limited, a significant shareholder of
PetroNeft.

Mr. Sacca was appointed a Non-Executive
Director of the Company on 24 April 2016.
He is a member of the Audit Committee. He
is principal of Karri Tree executive coaching.
Anthony was previously the Chief Financial
Officer of Rolf Group of Companies, one of
Russia’s largest independent automotive
distributor/retailers. Prior to that he was a
Partner with PwC in Moscow. In addition to
coaching, Anthony sits on the advisory board
of Emex Group. His role on these businesses
ranges from business decision making to
the implementation or improvement of
corporate governance practices. Anthony
is a Fellow of the Institute of Chartered
Accountants in Australia. He holds a
Bachelor of Business and Administration
(Distinction) from Curtin University of
Technology Perth, Australia. He is a member
of the Russian Independent Directors
Association and is a Fellow Chartered
Director with the Institute of Directors in the
United Kingdom. In addition to his business,
Anthony is a lecturer on business ethics, as
part of the Masters in Finance programme at
the New Economic School in Moscow.

Mr. Sturt was appointed a Non-Executive
Director of the Company on 24 April 2016.
He is a member of the Remuneration and
Nomination Committees. David has over
29 years of international experience in the
oil and gas industry gained working on
projects in Europe, CIS, Africa and SE Asia.
Since 2012 David has been a Senior Vice
President with Azimuth Limited, and is a
founding shareholder of VTX, which is an
oil and gas production company with assets
in Indiana and Illinois formed after the sale
of VistaTex. He is currently a Non-Executive
director of Petrosibir AB a Swedish company
with oil and gas interests in Russia. During
2011 – 2012, David served as a Deputy
Board Chairman and Head of Upstream for
Ukrnafta. David was one of the founding
shareholders of VistaTex, a gas producing
company with assets onshore US, recently
acquired by Dome Energy. David holds
a BSc honours degree in Earth Sciences
from Kingston Polytechnic University, an
MSc degree in Exploration and Geophysics
from Leeds University, and a postgraduate
diploma in business administration from
Herriott Watt University.

PETRONEFT RESOURCES PLCANNUAL REPORT 2016GOVERNANCE26

DIRECTORS’ REPORT
FOR THE YEAR ENDED 31 DECEMBER 2016

The Directors present herewith
their Annual Report and the audited
financial statements of PetroNeft
Resources plc (the ‘Company’)
and its subsidiaries (collectively,
the ‘Group’) for the year ended 31
December 2016.

Principal Activity
The principal activities of the Group are
that of oil and gas exploration, development
and production through its holdings in
two joint venture undertakings. The Group
was established to acquire and develop
oil and gas exploration, development and
production interests in Russia and other
countries of the former Soviet Union. A
detailed business review is included in the
Chairman’s Statement, Chief Executive
Officer’s Report and in the Financial Review.

Results and Dividends
The loss for the year before tax amounted to
US$4,597,419 (2015: US$7,674,917). After a tax
charge of US$830,241 (2015: US$799,466) the
loss for the year amounted to US$5,427,660
(2015: US$8,474,383). The Directors do not
recommend payment of a final dividend and
no interim dividend was paid.

Review of the Development and
Performance of the Business
In compliance with the requirements of
the Companies Act 2014, a fair review of
the performance and development of the
Group’s business during the year, its position
at the year-end and its future prospects is
contained in the Chairman’s Statement on
pages 10 to 11, the Chief Executive Officer’s
Report on pages 12 to 14 and the Financial
Review on pages 15 to 21. The key financial
metrics used by management are set out in
the Financial Review on page 16.

Corporate Governance
The Company is not subject to the UK
Corporate Governance Code applicable to
companies with full listings on the Dublin
and London Stock Exchanges. The Company
has adopted and intends, in so far as is
practicable and desirable, given the size and
nature of the business and the constitution
of the Board, to comply with the Corporate
Governance Code For Small And Mid-
Size Quoted Companies (the ‘QCA Code’)
as published by the Quoted Companies
Alliance (the ‘QCA’). PetroNeft is a member
of the Quoted Companies Alliance.

The QCA Code was devised, in consultation
with a number of significant institutional
small company investors, as an alternative
corporate governance code applicable to
Small And Mid-Size Quoted Companies.
An alternative code was proposed because
the QCA considered the UK Corporate
Governance Code to be inappropriate
to many Small And Mid-Size Quoted
Companies.

The QCA Code states that ‘Good corporate
governance inspires trust between a public
company and its shareholders; it creates
value by reducing the risks that a company
faces as it seeks to create growth in long
term shareholder value. Without trust, there
will be no appetite from shareholders to
invest further or remain shareholders. In
reducing the risks, so the cost of capital is
reduced.’ The guidelines set out a code of
best practice for Small And Mid-Size Quoted
Companies. Those guidelines require, among
other things, that:
a) certain matters be specifically reserved

for the Board’s decision;

b) the Board should be supplied in a timely

manner with information (including regular
management financial information) in a
form and of a quality appropriate to enable
it to discharge its duties;

c) the Board should, at least annually,

conduct a review of the effectiveness of
the Company’s system of internal controls
and should report to shareholders that
they have done so;

d) the roles of Chairman and Chief

Executive should not be exercised by
the same individual or there should be
a clear explanation of how other Board
procedures provide protection against the
risks of concentration of power within the
Company;

e) the Company should have at least two
independent Non-Executive Directors
on the Board and the Board should not
be dominated by one person or group of
people;

f) all Directors should be submitted for

re-election at regular intervals subject to
continued satisfactory performance;

g) the Board should establish audit,
remuneration and nomination
committees; and

h) there should be a dialogue with
shareholders based on a mutual
understanding of objectives.

PetroNeft satisfies all of these requirements.
Major corporate decisions of the Group
are subject to Board approval. The Board
is supplied in a timely manner with
information in a form and of a quality
appropriate to enable it to discharge its
duties. These matters include approval of
the Group’s general commercial strategy,
financial statements, Board membership,
significant acquisitions and disposals, major
capital expenditures, overall corporate
governance and risk management and
treasury policies. The Company holds
regular Board meetings throughout the year.

In accordance with the QCA Code, the Board
has established Audit, Remuneration and
Nomination Committees, as described below,
and utilises other committees as necessary in
order to ensure effective governance.

Audit Committee
The members of the Audit Committee are
Thomas Hickey (Chairman), David Golder
and Anthony Sacca. The Audit Committee’s
responsibilities include, among other things,
reviewing interim and year-end financial
statements and preliminary announcement,
accounting principles, policies and
practices, internal controls and overseeing
the relationship with the external auditor
including reviewing the results of their audit.

Remuneration Committee
The members of the Remuneration
Committee are David Golder (Chairman),
Thomas Hickey and David Sturt. The
Remuneration Committee’s responsibilities
include, among other things, determining
the policy and elements of remuneration for
Executive Directors, provided however, that
no Director shall be directly involved in any
decisions as to their own remuneration.

Nomination Committee
The members of the Nomination Committee
comprises Thomas Hickey (Chairman),
David Golder and David Sturt.
The percentage of Non-Executive Directors
on the Board is above the recommended
50%. The Group has adopted a model code
for Directors’ dealings that is appropriate
for an AIM company. The Group complies
with Rule 21 of the AIM Rules relating
to Directors’ dealings and will take all
reasonable steps to ensure compliance by
the Directors and the Group’s applicable
employees and their relative associates.

Governance of Jointly Controlled
Entities
Under the joint venture agreements in
respect of Licence 61 and Licence 67
both partners are entitled to appoint two
board representatives to the joint venture
companies, WorldAce Investments Limited
and Russian BD Holdings B.V. PetroNeft
has appointed Paul Dowling to the Board
of both companies, positions for which
he receives no additional remuneration,
along with local independent directors in
Cyprus and Netherlands respectively. These

companies are managed and controlled in
Cyprus and the Netherlands through regular
Board meetings. The independent local
directors appointed by PetroNeft are Mr.
Themis Themistocleous and Ms. Suzanne
Röell in respect of WorldAce and Russian BD
Holdings B.V. respectively.

implementation of this system to executive
management. This system is reviewed
annually and includes financial controls that
enable the Board to meet its responsibilities
for the integrity and accuracy of the Group’s
accounting records.

The Group’s system of internal financial
control provides reasonable, though
not absolute, assurance that assets are
safeguarded, transactions authorised and
recorded properly and that material errors
or irregularities are either prevented or
detected within a timely period.

Directors
The present Directors are listed on pages
24 to 25.

In accordance with Article 89 of the Articles
of Association, David Golder and Thomas
Hickey retire by rotation and, being eligible,
offer themselves for re-election.

Shareholder Communication
Shareholder communication is given high
priority by the Group and there are regular
meetings between senior executives,
institutional shareholders, analysts and
brokers. These meetings, which are governed
by procedures designed to ensure that price
sensitive information is not divulged, are
designed to facilitate a two-way dialogue
based upon the mutual understanding of
objectives. The Annual General Meeting
(‘AGM’) affords individual shareholders
the opportunity to question the Chairman
and the Board and their participation is
welcomed. Shareholders are also welcome to
telephone or email the Company at any time.

The Chairmen of the Audit Committee,
Remuneration Committee and Nomination
Committee are available at the AGM
to answer questions. In addition, major
shareholders can meet with the Chairman
of the Board or any Executive and Non-
Executive Directors on request.

The Board is kept appraised of the views
of shareholders, and the market in general,
through feedback from the meetings
programme. Analysts’ reports on the
Company are also circulated to the Board
on a regular basis. The Group’s website,
www.petroneft.com, is also a key
communication tool with all shareholders.
News releases are made available on the
website immediately after release to the
Stock Exchange. Investor presentations,
reserve reports and other materials are also
available on the website.

Internal Control
The Directors have overall responsibility
for the Group’s system of internal control
and have delegated responsibility for the

PETRONEFT RESOURCES PLCANNUAL REPORT 2016GOVERNANCE28

DIRECTORS’ REPORT
FOR THE YEAR ENDED 31 DECEMBER 2016
(CONTINUED)

Directors, Company Secretary and their Interests
The Directors and Company Secretary who held office at 31 December 2016 had no interest, other than those shown below, in the Ordinary
Shares of the Company. All interests shown below are beneficial interests.

Directors
David Golder
Dennis Francis
Maxim Korobov†
Thomas Hickey

Company Secretary
Paul Dowling

Ordinary Shares
As at
21 June 2017

Ordinary Shares
As at
31 December 2016

Ordinary Shares
As at
1 January 2016*

3,165,458
25,890,416
208,429,458
2,226,283

3,165,458
24,390,416
208,429,458
2,226,283

731,583

* Position is as at 1 January 2016 or date of appointment if later.
† Appointed on 24 April 2016, shares held via Natlata Partners Limited.

In addition to the above, the Directors who held office at 31 December 2016 held the following share options:

Director
David Golder
Dennis Francis
Thomas Hickey

Options held as at
1 January 2016
370,000
1,135,000
310,000

Granted
in year
-
-
-

Exercised
in year
-
-
-

Lapsed
in year
(120,000)
(330,000)
(100,000)

Options held as
at 31 December
2016
250,000
805,000
210,000

Exercise price
£0.065 – £0.66
£0.065 – £0.66
£0.065 – £0.66

Details of the terms and conditions of the option scheme are included in Note 25 of the financial statements.

Principal Risks and Uncertainties
The Group has a risk management structure
in place which is designed to identify,
manage and mitigate business risks. Risk
assessment and evaluation is an essential
part of the Group’s internal control system.

Details of the principal risks and uncertainties
affecting the Group, as required to be
disclosed in accordance with the Companies
Act 2014, are listed on pages 20 to 21.

Going Concern
The appropriateness of continuing to
prepare the financial statements on a going
concern basis is discussed in detail in the
Finance Review on pages 18 to 19 in the
paragraphs related to the ‘Current and future
funding of PetroNeft’ and in Note 2 to the
financial statements on page 39.

uncertainties that may cast significant doubt
upon the Group and the Company’s ability to
continue as a going concern. Nevertheless,
after making enquiries, and considering
the uncertainties described in the Finance
Review and Note 2, the Directors are
confident that the Group and the Company
will have adequate resources to continue
in operational existence for the foreseeable
future. For these reasons, they continue to
adopt the going concern basis in preparing
the annual report and accounts.

Accordingly, these financial statements do
not include any adjustments to the carrying
amount or classification of assets and
liabilities that would result if the Group or
Company was unable to continue as a going
concern.

The circumstances outlined in the Finance
Review and Note 2 represent material

Remuneration Committee Report
The Group’s policy on senior executive
remuneration is designed to attract and

retain people of the highest calibre who can
bring their experience and independent
views to the policy, strategic decisions and
governance of the Group.

In setting remuneration levels, the
Remuneration Committee takes into
consideration the remuneration practices of
other companies of similar size and scope. A
key philosophy is that staff must be properly
rewarded and motivated to perform in the
best interests of the shareholders. Bonuses for
Executive Directors are based on performance
targets which include elements relating to
shareholder return and individual performance.

The share option scheme is designed to
incentivise performance and loyalty of
Directors and key employees. Options
vest when certain operational and total
shareholder return targets are met. Share
option holdings of the Directors are
disclosed above.

Directors’ Remuneration

Director
Executive directors
Dennis Francis
Paul Dowling†
David Sanders†

Non-executive directors
David Golder
Thomas Hickey
Anthony Sacca
David Sturt
Maxim Korobov
Gerard Fagan†
Vakha Sobraliev*

2016

2015

Emoluments &
Compensation

Pension

Total

Emoluments &
Compensation

Pension

Total

399,505
463,539
351,359
1,214,403

71,280
44,164
30,031
30,031
30,031
22,811
-
228,348

29,963
8,466
1,399
39,828

429,468
472,005
352,758
1,254,231

396,334
328,848
296,178
1,021,360

28,140
21,100
19,330
68,570

424,474
349,948
315,508
1,089,930

-
-
-
-
-
-
-
-

71,280
44,164
30,031
30,031
30,031
22,811
-
228,348

71,204
44,101
-
-
-
44,101
24,895
184,301

-
-
-
-
-
-
-
-

71,204
44,101
-
-
-
44,101
24,895
184,301

Total Directors’ remuneration

1,442,751

39,828

1,482,579

1,205,661

68,570

1,274,231

Your attention is drawn to the details of the share options received by the Directors as set out in the Report of the Directors on page 28. In
accordance with IFRS 2, Share-based Payment, a further expense of US$Nil (2015: US$8,971) has been recognised in the Consolidated Income
Statement in respect of share options granted to Directors.

* Vakha Sobraliev resigned as director on 18 September 2015.
† Paul Dowling, David Sanders and Gerard Fagan left the Board of PetroNeft on 24 April 2016.

Political Donations
The Company did not make any political
donations during the year.

Important Events after the Balance
Sheet Date
In March 2017, Oil India agreed to provide
100% funding for the agreed Licence 61 work
programme in 2017. A loan of US$4 million
was agreed with the joint venture company,
WorldAce Investments Limited, to fund the
2017 programme. The loan is unsecured and
capital repayments commence in October
2019. Should there be a significant change in
the management of PetroNeft while the loan
is outstanding then Oil India may seek early
repayment in full. In such circumstances
PetroNeft would need to provide its 50%
share of the amount outstanding.

Accounting Records
The measures taken by the Directors to
ensure compliance with the requirements
of Sections 281 to 285, Companies Act
2014, regarding accounting records are
the implementation of necessary policies
and procedures for recording transactions,
the employment of competent accounting
personnel with appropriate expertise and
the provision of adequate resources to the
financial function. The accounting records
of the Company are maintained at 20 Holles
Street, Dublin 2, Ireland.

Directors’ Compliance Statement
It is the policy of the Company to comply
with its relevant obligations (as defined in
the Companies Act 2014). The Directors have
drawn up a compliance policy statement
(as defined in section 225(3)(a) of the
Companies Act 2014) and arrangements

and structures are in place that are, in the
Directors’ opinion, designed to secure
material compliance with the Company’s
relevant obligations. The Directors confirm
that these arrangements and structures
were reviewed during the financial year. As
required by Section 225(2) of the Companies
Act 2014, the Directors acknowledge that
they are responsible for the Company’s
compliance with the relevant obligations.
In discharging their responsibilities under
Section 225, the Directors relied on the
advice both of persons employed by the
Company and of persons retained by the
Company under contract, who they believe
have the requisite knowledge and experience
to advise the Company on compliance with
its relevant obligations.

PETRONEFT RESOURCES PLCANNUAL REPORT 2016GOVERNANCE
30

DIRECTORS’ REPORT
FOR THE YEAR ENDED 31 DECEMBER 2016
(CONTINUED)

Annual General Meeting
Your attention is drawn to the Notice of the
Annual General Meeting (‘AGM’) set out
on page 60. The AGM will be held on 15
September 2017 in the Herbert Park Hotel,
Ballsbridge, Dublin 4, Ireland.

Your Directors believe that the Resolutions
to be proposed at the AGM are in the
best interests of the Company and its
shareholders as a whole and, therefore,
recommend you to vote in favour of the
Resolutions. Your Directors intend to vote
in favour of the Resolutions in respect of
their own beneficial holdings of 31,282,157
Ordinary Shares.

Approved by the Board on 27 June 2017

David Golder
Director

Dennis Francis
Director

Directors’ Responsibilities Statement
in Respect of the Financial
Statements
The Directors are responsible for preparing
the Directors’ Report and the financial
statements in accordance with applicable law
and regulations.

Irish company law requires the Directors
to prepare financial statements for each
financial year. Under that law the Directors
have elected to prepare the financial
statements in accordance with IFRSs as
adopted by the European Union. Under
company law the Directors must not approve
financial statements unless they are satisfied
they give a true and fair view of the assets,
liabilities and financial position, of the Group
and Parent Company as at the end of the
financial year, and the profit or loss for the
Group for the financial year, and otherwise
comply with the Companies Act 2014.

In preparing these financial statements, the
Directors are required to:
• select suitable accounting policies and then

apply them consistently;

• make judgements and estimates that are

reasonable and prudent;

• state whether the financial statements
have been prepared in accordance with
applicable accounting standards, identify
those standards, and note the effect and
reasons for any material departure from
those standards; and

• prepare the financial statements on
the going concern basis unless it is
inappropriate to presume that the Group
and Company will continue in business.

The Directors are responsible for ensuring
that the Company keeps or causes to be kept
adequate accounting records which correctly
explain and record the transactions of the
Company, enable at any time the assets,
liabilities, financial position and profit or
loss of the Company to be determined with
reasonable accuracy, enable them to ensure
that the financial statements and Directors’
Report comply with the Companies Act
2014 and enable the financial statements
to be audited. They are also responsible for
safeguarding the assets of the Group and
hence for taking reasonable steps for the
prevention and detection of fraud and other
irregularities.

Disclosure of information to auditors
So far as each of the Directors in office at the
date of approval of the financial statements
is aware:
• There is no relevant audit information of

which the Company’s auditors are unaware;
and

• The Directors have taken all the steps that
they ought to have taken as directors in
order to make themselves aware of any
relevant audit information and to establish
that the Company’s auditors are aware of
that information.

This confirmation is given and should be
interpreted in accordance with the provisions
of Section 330 of the Companies Act 2014.

Auditors
Ernst & Young, Chartered Accountants, have
indicated their willingness to continue in
office in accordance with the provisions of
Section 383(2) of the Companies Act 2014.

INDEPENDENT AUDITOR’S REPORT
TO THE MEMBERS OF PETRONEFT RESOURCES PLC

We have audited the Group and Parent Company financial
statements (the ‘financial statements’) of PetroNeft Resources
plc for the year ended 31 December 2016 which comprise the
Consolidated Income Statement, the Consolidated Statement of
Comprehensive Income, the Consolidated and Parent Company
Balance Sheets, the Consolidated and Parent Company Cash Flow
Statements, the Consolidated and Parent Company Statements
of Changes in Equity, and the related Notes 1 to 27. The financial
reporting framework that has been applied in their preparation is
Irish 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 2014.

This report is made solely to the Company’s members, as a body,
in accordance with section 391 of the Companies Act 2014. Our
audit work has been undertaken so that we might state to the
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 Company’s members as a
body, for our audit work, for this report, or for the opinions we have
formed.

Respective Responsibilities of Directors and Auditors
As explained more fully in the Directors’ Responsibilities Statement
on page 30, the Directors are responsible for the preparation of the
financial statements and for being satisfied that they give a true and
fair view and otherwise comply with the Companies Act 2014. Our
responsibility is to audit and express an opinion on the financial
statements in accordance with Irish law and International Standards
on Auditing (UK and Ireland). Those standards require us to comply
with the Auditing Practices Board’s Ethical Standards for Auditors.

Scope of the Audit of the Financial Statements
An audit involves obtaining evidence about the amounts and
disclosures in the financial statements sufficient to give reasonable
assurance that the financial statements are free from material
misstatement, whether caused by fraud or error. This includes an
assessment of: whether the accounting policies are appropriate to
the Group and the Parent Company’s circumstances and have been
consistently applied and adequately disclosed; the reasonableness
of significant accounting estimates made by the Directors; and the
overall presentation of the financial statements. In addition, we
read all the financial and non-financial information in the Annual
Report to identify material inconsistencies with the audited financial
statements and to identify any information that is apparently
materially incorrect based on, or materially inconsistent with, the
knowledge acquired by us in the course of performing the audit.
If we become aware of any apparent material misstatements or
inconsistencies we consider the implications for our report.

Opinion on Financial Statements
In our opinion:
• the financial statements give a true and fair view of the assets,

liabilities and financial position of the Group and Parent Company
as at 31 December 2016 and of the loss of the Group 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 as applied in accordance with the provisions of the
Companies Act 2014; and

• the Group and Parent Company financial statements have been
properly prepared in accordance with the requirements of the
Companies Act 2014.

Emphasis of Matter – going concern
In forming our opinion on the financial statements, which is not
modified, we have considered the adequacy of the disclosures made
in Note 2 to the financial statements concerning the Group and the
Company’s ability to continue as a going concern. These conditions
indicate the existence of material uncertainties which may cast
significant doubt about the Group and the Company’s ability to
continue as a going concern.

The financial statements do not include any adjustments to the
carrying amount or classification of assets and liabilities that would
result if the Group or the Company was unable to continue as a
going concern.

Matters on Which We Are Required to Report by the
Companies Act 2014
• We have obtained all the information and explanations which we

consider necessary for the purposes of our audit.

• In our opinion the accounting records of the Parent Company were
sufficient to permit the Parent Company financial statements to be
readily and properly audited.

• The Parent Company balance sheet is in agreement with the

accounting records.

• In our opinion the information given in the Directors’ Report is

consistent with the financial statements.

Matters on Which We Are Required to Report by
Exception
We have nothing to report in respect of sections 305 to 312 of the
Companies Act 2014 which require us to report to you if, in our
opinion, the disclosures of Directors’ remuneration and transactions
specified by law are not made.

Dermot Quinn
For and on behalf of Ernst & Young
Dublin
27 June 2017

PETRONEFT RESOURCES PLCANNUAL REPORT 2016FINANCIAL STATEMENTS32

CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2016

Continuing operations

Revenue
Cost of sales

Gross profit

Administrative expenses
Exchange gain/(loss) on intra-Group loans

Operating loss

Share of joint venture’s net loss – WorldAce Investments Limited
Share of joint venture’s net loss – Russian BD Holdings B.V.
Finance revenue

Loss for the year for continuing operations before taxation

Income tax expense

Loss for the year attributable to equity holders of the Parent

Loss per share attributable to ordinary equity holders of the Parent
Basic and diluted – US dollar cent

Note

12
13
7

2016
US$

2015
US$

2,279,585
(2,038,209)

241,376

(2,154,699)
77,458

2,398,314
(2,370,949)

27,365

(1,379,506)
(284,449)

(1,835,865)

(1,636,590)

(5,721,232)
(288,198)
3,247,876

(8,765,055)
(314,859)
3,041,587

(4,597,419)

(7,674,917)

(830,241)

(799,466)

(5,427,660)

(8,474,383)

(0.77)

(1.20)

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2016

Loss for the year attributable to equity holders of the Parent
Other comprehensive income to be reclassified to profit or loss in subsequent years:
Currency translation adjustments – subsidiaries
Share of joint ventures’ other comprehensive income – foreign exchange translation differences

Total comprehensive profit/(loss) for the year attributable to equity holders of the Parent

2016
US$

2015
US$

(5,427,660)

(8,474,383)

25,298
7,741,440

2,339,078

265,640
(12,474,502)

(20,683,245)

Note

2016
US$

2015
US$

11
12
13
15

16
17
18

143,466
-
-
47,713,421

47,856,887

28,973
1,143,904
319,618

1,492,495
49,349,382

181,703
-
-
42,883,861

43,065,564

54,302
1,842,128
1,284,212

3,180,642
46,246,206

9,429,182
140,912,898
6,796,540
(80,202,450)
(31,118,410)
336,000

9,429,182
140,912,898
6,796,540
(74,774,790)
(38,885,148)
336,000

46,153,760

43,814,682

2,113,541

1,286,378

1,082,081

1,082,081
3,195,622
49,349,382

1,145,146

1,145,146
2,431,524
46,246,206

CONSOLIDATED BALANCE SHEET
AS AT 31 DECEMBER 2016

Assets
Non-current Assets
Property, plant and equipment
Equity-accounted investment in joint ventures – WorldAce Investments Limited
Equity-accounted investment in joint ventures – Russian BD Holdings B.V.
Financial assets – loans and receivables

Current Assets
Inventories
Trade and other receivables
Cash and cash equivalents

Total Assets

Equity and Liabilities
Capital and Reserves
Called up share capital
Share premium account
Share-based payments reserve
Retained loss
Currency translation reserve
Other reserves
Equity attributable to equity holders of the Parent

Non-current Liabilities
Deferred tax liability

Current Liabilities
Trade and other payables

Total Liabilities
Total Equity and Liabilities

Approved by the Board on 27 June 2017

David Golder
Director

Dennis Francis
Director

PETRONEFT RESOURCES PLCANNUAL REPORT 2016FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2016

At 1 January 2015
Loss for the year
Currency translation
adjustments – subsidiaries
Share of joint ventures’ other comprehensive
income – foreign exchange translation
differences
Total comprehensive loss for the year
Share-based payment expense

Called up share
capital
US$

Share premium
account
US$

Share-based
payment and
other reserves
US$

Currency
translation
reserve
US$

Retained loss
US$

Total
US$

9,429,182
-

140,912,898
-

7,099,745
-

(26,676,286)
-

(66,300,407)
(8,474,383)

64,465,132
(8,474,383)

-
-
-

265,640

-
-
32,795

(12,474,502)
(12,208,862)
-

-
(8,474,383)
-

(12,474,502)
(20,683,245)
32,795

At 31 December 2015

9,429,182

140,912,898

7,132,540

(38,885,148)

(74,774,790)

43,814,682

At 1 January 2016
Loss for the year
Currency translation
adjustments – subsidiaries
Share of joint ventures’ other comprehensive
income – foreign exchange translation
differences

9,429,182
-

140,912,898
-

7,132,540
-

(38,885,148)
-

(74,774,790)
(5,427,660)

43,814,682
(5,427,660)

25,298

7,741,440

Total comprehensive profit for the year
At 31 December 2016

-
9,429,182

-
140,912,898

-
7,132,540

7,766,738
(31,118,410)

(5,427,660)
(80,202,450)

2,339,078
46,153,760

CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2016

Operating activities
Loss before taxation

Adjustment to reconcile loss before tax to net cash flows
Non-cash

Depreciation
Share of loss in joint ventures
Share-based payment expense

Finance revenue

Working capital adjustments
Decrease/(increase) in trade and other receivables
Decrease/(increase) in inventories
(Decrease)/increase in trade and other payables
Income tax paid

Net cash flows used in operating activities
Investing activities
Purchase of property, plant and equipment
Loan facilities advanced to joint venture undertakings
Interest received

Net cash used in investing activities
Net decrease in cash and cash equivalents
Translation adjustment
Cash and cash equivalents at the beginning of the year

Cash and cash equivalents at the end of the year

Notes

2016
US$

2015
US$

(4,597,419)

(7,674,917)

68,568
6,009,430
-
(3,247,876)

860,444
25,330
(59,474)
(16,650)

97,673
9,079,914
32,795
(3,041,587)

(548,351)
(39,122)
31,428
(25,832)

(957,647)

(2,087,999)

-
(10,000)
2,449

(7,551)
(965,198)
604
1,284,212

319,618

(19,059)
-
10,095

(8,964)
(2,096,963)
(11,594)
3,392,769

1,284,212

25
7

PETRONEFT RESOURCES PLCANNUAL REPORT 2016FINANCIAL STATEMENTS

COMPANY BALANCE SHEET
AS AT 31 DECEMBER 2016

Non-current Assets
Property, plant and equipment
Financial assets – investments in joint ventures and subsidiaries
Financial assets – loans and receivables

Current Assets
Trade and other receivables
Cash and cash equivalents

Total Assets

Equity and Liabilities
Capital and Reserves
Called up share capital
Share premium account
Share-based payment reserve
Retained loss
Other reserves

Equity attributable to equity holders of the parent

Non-current Liabilities
Deferred tax liability

Current Liabilities
Trade and other payables

Total Liabilities
Total Equity and Liabilities

Approved by the Board on 27 June 2017

David Golder
Director

Dennis Francis
Director

Note

2016
US$

2015
US$

11
14
15

17
18

2,283
5,152,529
56,492,695

61,647,507

1,830,334
297,247

2,127,581
63,775,088

3,480
40,199,899
53,237,269

93,440,648

2,671,295
1,279,652

3,950,947
97,391,595

9,429,182
140,912,898
6,796,540
(96,676,960)
336,000

9,429,182
140,912,898
6,796,540
(62,137,203)
336,000

60,797,660

95,337,417

2,113,541

1,286,378

863,887

767,800

2,977,428
63,775,088

2,054,178
97,391,595

COMPANY STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2016

At 1 January 2015
Profit for the year
Total comprehensive profit for the year
Share-based payment expense

At 31 December 2015

At 1 January 2016
Loss for the year

Total comprehensive loss for the year
At 31 December 2016

Share capital
US$

Share premium
US$

Share-based
payment and
other reserves
US$

Retained loss
US$

Total
US$

9,429,182
-
-
-

140,912,898
-
-
-

7,099,745
-
-
32,795

(63,214,387)
1,077,184
1,077,184
-

94,227,438
1,077,184
1,077,184
32,795

9,429,182

140,912,898

7,132,540

(62,137,203)

95,337,417

9,429,182
-
-

140,912,898
-
-

7,132,540
-
-

(62,137,203)
(34,539,757)
(34,539,757)

95,337,417
(34,539,757)
(34,539,757)

9,429,182

140,912,898

7,132,540

(96,676,960)

60,797,660

PETRONEFT RESOURCES PLCANNUAL REPORT 2016FINANCIAL STATEMENTS

COMPANY CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2016

Operating Activities
(Loss)/profit before taxation

Adjustments to reconcile (loss)/profit before tax to net cash flows
Non-cash
Depreciation of property, plant and equipment
Share-based payment expense
Impairment of financial assets – investments in joint ventures and subsidiaries
Finance revenue

Working capital adjustments
Decrease/(increase) in trade and other receivables
Increase/(decrease) in trade and other payables
Income tax paid

Net cash flows used in operating activities
Investing activities
Loan facilities advances
Return of loan facilities
Interest received

Net cash received from investing activities
Net decrease in cash and cash equivalents
Translation adjustment
Cash and cash equivalents at the beginning of the year

Cash and cash equivalents at the end of the year

Note

2016
US$

2015
US$

(33,712,055)

1,854,270

1,197
-
35,047,370
(3,310,811)

679,181
101,933
(3,876)

2,032
11,288
-
(3,108,342)

(381,035)
(486,020)
(4,193)

(1,197,061)

(2,112,000)

(10,000)
225,000
2,159

217,159
(979,902)
(2,503)
1,279,652

297,247

-
-
9,933

9,933
(2,102,067)
(10,516)
3,392,235

1,279,652

NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2016

GENERAL INFORMATION ON THE COMPANY AND THE
GROUP

PetroNeft Resources plc (‘PetroNeft’, ‘the Company’, or together
with its subsidiaries and joint ventures, ‘the Group’) is a company
incorporated in Ireland. The Company is listed on the Alternative
Investments Market (‘AIM’) of the London Stock Exchange and the
Enterprise Securities Market (‘ESM’) of the Irish Stock Exchange.
The address of the registered office and the business address in
Ireland is 20 Holles Street, Dublin 2. The Company is domiciled in
the Republic of Ireland.

The principal activities of the Group are oil and gas exploration,
development and production.

GOING CONCERN

As described in the Financial Review on page 15 PetroNeft is
facing a potential funding shortfall in 2018 due to the delay in the
commencement of the Sibkrayevskoye oil field development. The
effect of this delay is to also delay the commencement of payments
to PetroNeft of interest due to it under shareholder loan agreements
with WorldAce. The effect of this is that PetroNeft will require
additional funding to meet its operating costs during the next 12
months.

The S-374 appraisal well drilled at Sibkrayevskoye oil field in Licence
61 in 2016 did not encounter commercial hydrocarbons. The result
of this well has led to the postponement of the commencement of
the development of the Sibkrayevskoye oil field by one year pending
the result of a new appraisal well, S-375, which will be drilled in
the Summer of 2017. As a consequence of this, the date by which
Petroneft expects to start receiving interest due on its shareholder
loans to WorldAce has been extended by a minimum of 12 months
from the previously guided estimate of late 2017.

Success of the S-375 well would provide assurance that there are
at least two pads to be developed at Sibkrayevskoye, in which case
it is expected that the development of the Sibkrayevskoye oil field
will commence in 2018. The proposed first pad at Sibkrayevskoye
has already been delineated by the S-370, S-372 and S-373 wells. The
S-375 well is being drilled within the proposed pad 2 area which is
about 2 km from the existing wells that found oil and is within the
same structural closure. The S-374 well was more than 10 km south
in a different structural lobe. The S-373 well at the proposed pad 1
area has produced oil during the last two winters at consistent rates
giving further comfort to the Company of the prospects of the area.

In 2016 the Board of Oil India provided a non-binding indication
of their willingness to provide a US$25 million shareholder loan
to WorldAce for the development of Sibkrayevskoye. Should the
S-375 well not be successful the joint venture shareholders will need
to consider other options. This could include the development of
Sibkrayevskoye as a one-pad development focussed only on the area
surrounding previous wells such as S-373 or it could lead to some
further appraisal work. The joint venture shareholders have provided
non-binding indications of their willingness to consider providing
continuing support in this event, including not immediately seeking
repayments of principal or payment of interest under shareholder
loan agreements.

The Group has analysed its cash flow requirements through to
31 December 2018 in detail. The cash flow includes estimates
for a number of key variables including timing of cash flows of
expenditure and management of working capital, and the Directors
believe that the Group’s cash flow forecasts represent the best
estimate of the actual cash flows over the forecast period at the
date of approval of the financial statements. The cash flow is stress
tested to assess the adverse effect arising from reasonable changes
in circumstance. The cash flow projections for the period to 31
December 2018 indicate a potential shortfall of funds by the end of
quarter one in 2018.

The Company is currently in confidential discussions pursuing
several options in order to meet this potential shortfall. These
include the potential sale or farmout of Licence 67, short term
debt financing from a related corporate entity and the acquisition
of producing and non-producing assets in share for share type
transactions. The Board believe that the first two options can be
completed in a short timeframe. In relation to the latter option,
the Company has signed non-disclosure agreements and opened
data rooms. As there are delaying factors, including regulatory
requirements, around transferring licences and in a share for share
type transaction, the timeframe to close such a successful transaction
could be at least six months following binding agreement between
the parties. The Board is confident that one of these options will
bring a solution.

The successful development of S-375 and the potential shortfall in
funds represent material uncertainties that may cast significant
doubt upon the Group and the Company’s ability to continue
as a going concern. Nevertheless, after making enquiries, and
considering the uncertainties described above, the Directors are
confident that the Group and the Company will have adequate
resources to continue in operational existence for the foreseeable
future. For these reasons, they continue to adopt the going concern
basis in preparing the annual report and accounts.

Accordingly, these financial statements do not include any
adjustments to the carrying amount or classification of assets and
liabilities that would result if the Group or Company was unable to
continue as a going concern.

PETRONEFT RESOURCES PLCANNUAL REPORT 2016FINANCIAL STATEMENTS
40

NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2016 (CONTINUED)

ACCOUNTING POLICIES

3.1 Basis of Preparation
The financial statements have been prepared on a historical cost
basis. The financial statements are presented in US Dollars (’US$’).

The accounting policies set out below have been applied consistently
by all the Group’s subsidiaries and joint ventures to all periods
presented in these consolidated financial statements.

Statement of Compliance
The consolidated and standalone financial statements of PetroNeft
Resources plc and its subsidiaries have been prepared in accordance
with International Financial Reporting Standards (’IFRS’) as adopted
by the European Union (‘EU’).

Under the equity method, the investment in the joint venture is
carried in the balance sheet at cost plus post acquisition changes in
the Group’s share of net assets of the joint venture. Where there has
been a change recognised directly in other comprehensive income
or equity of the joint venture, the Group recognises its share of any
changes and discloses this, when applicable, in the consolidated
statement of comprehensive income or the statement of changes in
equity, as appropriate. Unrealised gains and losses resulting from
transactions between the Group and the joint venture are eliminated
to the extent of the interest in the joint venture. The share of the joint
venture’s net profit/(loss) is shown on the face of the consolidated
income statement.

This is the profit/(loss) attributable to the Group’s interest in the
joint venture.

3.2 Basis of Consolidation
The consolidated financial statements comprise the financial
statements of PetroNeft Resources plc and its subsidiaries as at 31
December each year.

The financial statements of the JCE are prepared for the same
reporting period as the venturer. Where necessary, adjustments
are made to bring the accounting policies in line with those of the
Group.

Subsidiaries are fully consolidated from the date of acquisition,
being the date on which the Group obtains control, and continue to
be consolidated until the date that such control ceases. The financial
statements of the subsidiaries are prepared for the same reporting
period as the Parent Company. All intra-Group balances, income and
expenses and unrealised gains and losses resulting from intra-Group
transactions are eliminated in full.

The Group, acting as the operator of the JCEs, receives
reimbursement of direct costs recharged to its joint ventures, such
recharges represent reimbursements of costs that the operator
incurred as an agent for the joint ventures. When the Group charges
a management fee to cover other general costs incurred in carrying
out the activities on behalf of the joint venture, it is not acting as an
agent.

3.3

Significant Accounting Judgements, Estimates and
Assumptions

The preparation of the Group’s consolidated financial statements
in compliance with IFRS as adopted by the European Union
(‘EU’) requires management to make judgements, estimates and
assumptions that affect the reported amounts of assets, liabilities
and disclosed contingent liabilities at the end of the reporting year
and the amounts of revenues and expenses recognised during
the reporting period. Estimates and judgements are continuously
evaluated and are based on management’s experience and other
factors, including expectations of the future events that are believed
to be reasonable under the circumstances. However, uncertainty
about these assumptions and estimates could result in outcomes that
require an adjustment to the carrying amount of the asset or liability
affected in future periods.

A change in the ownership interest of a subsidiary, without a loss of
control, is accounted for as an equity transaction. If the Group loses
control over a subsidiary, it:
• Derecognises the assets (including goodwill) and liabilities of the

subsidiary.

• Derecognises the carrying amount of any non-controlling interest.
• Derecognises the cumulative translation differences recognised in

equity.

• Recognises the fair value of the consideration received.
• Recognises the fair value of any investment retained.
• Recognises any surplus or deficit in profit or loss.
• Reclassifies the parent’s share of components previously

recognised in other comprehensive income to profit or loss or
retained earnings, as appropriate.

The Group has an interest in two joint venture undertakings,
WorldAce Investments Limited and Russian BD Holdings B.V.
Both joint ventures qualify separately as a jointly controlled entity
(‘JCE’), whereby the venturers have a contractual arrangement that
establishes joint control over the economic activities of the entity.
The agreement requires unanimous agreement for financial and
major operating decisions among the venturers. The JCE controls
the assets of the joint venture, earns its own income and incurs its
own liabilities and expenses. Interests in the JCE are accounted for
using the equity method.

Judgements

(a)
In the process of applying the Group’s accounting policies,
management has made the following judgements, apart from those
involving estimations, which have a significant effect on amounts
recognised in the consolidated financial statements.

Loans and receivables from joint ventures – Notes 12 and 13
During the year share of losses and currency translation adjustments
in the joint ventures exceeded the carrying value of equity-accounted
investment in joint ventures. It was judged that the loans receivable
from the joint ventures were part of the overall investment in the
joint ventures, and therefore, under IAS 28, any excess loss should be
credited against the carrying value of the receivable from the joint
venture company in accordance with IAS 28.

Estimates and Assumptions

(b)
The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a
significant risk of causing a material adjustment to the carrying
amount of assets and liabilities within the next financial year are
discussed below:

Impairment of non-financial assets
The Group assesses whether there are any indicators of impairment
for all non-financial assets at each reporting date. When value-in-
use or fair-value-less-costs-of-disposal calculations are undertaken,
management must estimate the future expected cash flows from the
asset or cash-generating unit and determine a suitable discount rate
in order to calculate the present value of those cash flows.

It is reasonably possible that the oil price assumption may change,
which may then impact the estimated life of a field and may then
require a material adjustment to the carrying value of the assets. The
Group continuously monitors internal and external indicators of
possible/potential impairment relating to its tangible and intangible
assets.

Impairment of financial assets – Note 14
Investments in joint ventures and subsidiaries in the Parent
Company balance sheet are stated at cost and are reviewed for
impairment if there are indications that the carrying value may not
be recoverable in the parent company balance sheet.

Foreign currencies

3.4 Summary of Significant Accounting Policies
(a)
The consolidated financial statements are presented in US Dollars,
which is the Group’s presentational currency. The US Dollar is
also the Company’s functional currency. Each entity in the Group
determines its own functional currency and items included in
the financial statements of each entity are measured using that
functional currency. The Company’s Russian subsidiaries’ functional
currency is the Russian Rouble. Transactions in foreign currencies
are initially recorded at the rate ruling at the date of the transaction.
Monetary assets and liabilities denominated in foreign currencies
are retranslated at the rate of exchange ruling at the balance sheet
date. All differences are taken to the income statement with the

exception of all monetary items that provide an effective hedge for a
net investment in a foreign operation. These are recognised in other
comprehensive income until the disposal of the net investment.

Non-monetary items are translated using the exchange rates ruling
as at the date of the initial transaction.

The assets and liabilities of foreign operations are translated into US
Dollars at the rate of exchange ruling at the balance sheet date and
their Income Statements are translated at monthly average exchange
rates. The exchange differences arising on the translation are taken
directly to equity.

The relevant average and closing exchange rates for 2016 and 2015 were:

US$1 =
Russian Rouble
Euro
British Pound

2016

2015

Closing
61.000
0.9487
0.8122

Average
66.930
0.9034
0.7403

Closing
73.293
0.9168
0.6755

Average
61.128
0.9012
0.6542

(b) Property, plant and equipment
Property, plant and equipment are stated at cost, less accumulated
depreciation.

The initial cost of an asset comprises its purchase price or
construction cost, any costs directly attributable to bringing the
asset into operation, the initial estimate of the decommissioning
obligation, and for qualifying assets, relevant borrowing costs. The
purchase price or construction cost is the aggregate amount paid
and the fair value of any other consideration given to acquire the
asset.

Depreciation
Property, plant and equipment are generally depreciated on a
straight-line basis over their estimated useful lives at the following
annual rates:
• Buildings and leasehold improvements – 3% to 7% or remaining

term of the lease.

• Plant and machinery – 10% to 35%.
• Motor vehicles – 14% to 35%.

(c)
Impairment of property, plant and equipment
At each balance sheet date, the Group reviews the carrying amounts
of its property, plant and equipment to determine whether there is any
indication that those assets may be impaired. If such indication exists,
the recoverable amount of the asset is estimated in order to determine
the extent of any impairment loss.

The recoverable amount is determined as the higher of the fair-
value-less-costs-of-disposal for the asset and the asset’s value-in-use.
If the carrying amount of the asset exceeds its recoverable amount,
the asset is impaired and an impairment loss is charged to the
Consolidated Income Statement so as to reduce the carrying amount
in the Consolidated Balance Sheet to its recoverable amount.

PETRONEFT RESOURCES PLCANNUAL REPORT 2016FINANCIAL STATEMENTS42

NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2016 (CONTINUED)

3.
3.4

ACCOUNTING POLICIES (CONTINUED)
Summary of Significant Accounting Policies (continued)

Fair value is determined as the amount that would be obtained
from the sale of the asset in an orderly transaction between market
participants at the measurement date. Direct costs of selling the
asset are deducted. Fair value for oil and gas assets is generally
determined as the present value of the estimated future cash flows
expected to arise from the continued use of the asset, including any
expansion prospects, and its eventual disposal, using assumptions
that a market participant could take into account. These cash flows
are discounted by an appropriate discount rate to arrive at a net
present value (‘NPV’) of the asset.

The Group assesses at each year-end whether a financial asset or
group of financial assets is impaired. If there is objective evidence
that an impairment loss on assets carried at amortised cost has
been incurred, the amount of the loss is measured as the difference
between the asset’s carrying amount and the present value of
estimated future cash flows (excluding future expected credit
losses that have not been incurred) discounted at the financial
asset’s original effective interest rate (i.e. the effective interest
rate computed at initial recognition). The amount of the loss is
recognised in the Consolidated Income Statement. The same policy
applies in respect of the Company financial statements.

Value-in-use is determined as the present value of the estimated
future cash flows expected to arise from the continued use of the
asset in its present form and its eventual disposal. Value-in-use
is determined by applying assumptions specific to the Group’s
continued use and cannot take into account future development.
These assumptions are different to those used in calculating fair
value and consequently the value-in-use calculation is likely to give a
different result to a fair value calculation.

If, in a subsequent period, the amount of the impairment loss
decreases and the decrease can be related objectively to an event
occurring after the impairment was recognised, the previously
recognised impairment loss is reversed, to the extent that the
carrying value of the asset does not exceed its amortised cost at
the reversal date. Any subsequent reversal of an impairment loss is
recognised in the Consolidated Income Statement.

Where it is not possible to estimate the recoverable amount of an
individual asset, the Group estimates the recoverable amount of the
cash-generating unit to which the asset belongs.

(d) Cash and cash equivalents
Cash and cash equivalents on the balance sheet comprise cash at
bank and on hand and short-term deposits with an original maturity
of three months or less.

(e) Financial assets
Financial assets within the scope of IAS 39 Financial Instruments:
Recognition and Measurement (‘IAS 39’) are classified as loans and
receivables. When financial assets are recognised initially, they are
measured at fair value plus, in the case of investments not at fair
value through profit or loss, directly attributable transaction costs.
The Group determines the classification of its financial assets on
initial recognition and, where allowed and appropriate, re-evaluates
this designation at each financial year end.

The Group does not have held-to-maturity investments or available-
for-sale financial assets or financial assets at fair value through profit
or loss.

Loans and receivables are non-derivative financial assets with fixed
or determinable payments that are not quoted in an active market.
After initial measurements, loans and receivables are carried at
amortised cost using the effective interest rate method (‘EIR’) less
any allowance for impairment. Amortised cost is calculated by taking
into account any discount or premium on acquisition and fees or
costs that are an integral part of the EIR. The EIR amortisation is
included in finance revenue in the Consolidated Income Statement.
The losses arising from impairment are recognised in the
Consolidated Income Statement in finance costs.

In relation to trade receivables, a provision for impairment is
made when there is objective evidence (such as the probability of
insolvency or significant financial difficulties of the debtor) that the
Group will not be able to collect all of the amounts due under the
original terms of the invoice. The carrying amount of the receivable
is reduced through use of an allowance account. Impaired debts are
written-off when they are assessed as uncollectible.

(f) Financial liabilities
Financial liabilities within the scope of IAS 39 are classified as
loans and borrowings. The Group determines the classification of
its financial liabilities at initial recognition. All financial liabilities
are recognised initially at fair value and in the case of loans and
borrowings, net of directly attributable transaction costs.

Financial assets and financial liabilities are offset and the net amount
is reported in the consolidated balance sheet if there is a currently
enforceable legal right to offset the recognised amounts and there
is an intention to settle on a net basis, to realise the assets and settle
the liabilities simultaneously.

The Group’s financial liabilities include trade and other payables.

Derecognition
A financial liability is derecognised when the obligation under the
liability is discharged or cancelled or expires.

When an existing financial liability is replaced by another from
the same lender on substantially different terms, or the terms of an
existing liability are substantially modified, such an exchange or
modification is treated as a derecognition of the original liability and
the recognition of a new liability, and the difference in the respective
carrying amounts is recognised in the Consolidated Income
Statement.

Level 2: valuation techniques for which the lowest level of inputs
which have a significant effect on the recorded fair value are
observable, either directly or indirectly.

Level 3: valuation techniques for which the lowest level of inputs that
have a significant effect on the recorded fair value are not based on
observable market data.

Inventories

(h)
Inventories are stated at the lower of cost and net realisable value.
Cost of producing and processing crude oil is accounted on a
weighted average basis. This cost includes all costs incurred in the
normal course of business in bringing each product to its present
location and condition. The cost of crude oil includes an appropriate
proportion of depreciation and overheads based on normal capacity.
Net realisable value of crude oil is based on estimated selling price
in the ordinary course of business less any costs expected to be
incurred to completion and disposal.

(i) Provisions
General
Provisions are recognised when the Group has a present obligation
(legal or constructive) as a result of a past event and it is probable
that an outflow of resources embodying economic benefits will be
required to settle the obligation and a reliable estimate can be made
of the amount of the obligation. Where the Group expects some or
all of a provision to be reimbursed, for example, under an insurance
contract, the reimbursement is recognised as a separate asset but
only when the reimbursement is virtually certain. The expense
relating to any provision is presented in the Consolidated Income
Statement net of any reimbursement. If the effect of the time value of
money is material, provisions are discounted using a current pre-tax
rate that reflects, where appropriate, the risks specific to the liability.
Where discounting is used, the increase in the provision due to the
passage of time is recognised as a finance cost.

A contingent liability is disclosed where the existence of an
obligation will only be confirmed by future events or where the
amount of the obligation cannot be measured with reasonable
reliability. Contingent assets are not recognised, but are disclosed
where an inflow of economic benefits is probable.

Compound Instruments
IAS 32 Financial Instruments: Presentation requires the issuer of
a financial instrument to classify the instrument, or its component
parts, on initial recognition, as a financial liability, financial
asset or equity instrument in accordance with the substance of
the contractual arrangement. When the initial carrying value
of a financial instrument is allocated to its liability and equity
components, the equity component is assigned the residual amount
after deducting from the fair value of the instrument as a whole
the amount separately determined for the liability component.
The fair value of the liability component is the present value of the
contractually determined stream of future cash flows discounted
at the rate of interest applied by the market to instruments of
comparable credit status and providing substantially the same
cash flows on the same terms, but without the equity component.
Thereafter, it is measured at amortised cost until extinguished on
conversion or redemption. The remainder of the proceeds on issue
is allocated to the equity component and included in other reserves.
The carrying amount of the equity component is not remeasured in
subsequent years.

(g) Fair value measurement
Fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. The fair value measurement
is based on the presumption that the transaction to sell the asset or
transfer the liability takes place either:
• In the principal market for the asset or liability, or
• In the absence of a principal market, in the most advantageous

market for the asset or liability.

The principal or the most advantageous market must be accessible
by the Group.

The fair value of an asset or a liability is measured using the
assumptions that market participants would use when pricing the
asset or liability, assuming that market participants act in their
economic best interest.

A fair value measurement of a non-financial asset takes into account
a market participant’s ability to generate economic benefits by using
the asset in its highest and best use or by selling it to another market
participant that would use the asset in its highest and best use.

For financial reporting purposes, fair value measurements are
categorised into Level 1, 2 or 3 based on the degree to which inputs
to the fair value measurements are observable and the significance
of the inputs to the fair value measurement in its entirety, which are
described as follows:

Level 1: quoted prices (unadjusted) in active markets for identical
assets or liabilities.

PETRONEFT RESOURCES PLCANNUAL REPORT 2016FINANCIAL STATEMENTS44

NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2016 (CONTINUED)

3.
3.4

ACCOUNTING POLICIES (CONTINUED)
Summary of Significant Accounting Policies (continued)

( j) Taxes
Current income tax
Current income tax assets and liabilities for the current and prior
periods are measured at the amount expected to be recovered from
or paid to the taxation authorities. The tax rates and tax laws used
to compute the amount are those that are enacted or substantively
enacted, by the reporting date, in the countries where the Group
operates and generates taxable income.

Deferred income tax
Deferred income tax is provided using the liability method on
temporary differences at the balance sheet date between the tax
bases of assets and liabilities and their carrying amounts for financial
reporting purposes. Deferred income tax liabilities are recognised for
all taxable temporary differences, except:

• in respect of taxable temporary differences associated with
investments in subsidiaries, associates and interests in joint
ventures, where the timing of the reversal of the temporary
differences can be controlled and it is probable that the temporary
differences will not reverse in the foreseeable future.

Deferred income tax assets are recognised for all deductible
temporary differences, carry forward of unused tax credits and
unused tax losses, to the extent that it is probable that taxable profit
will be available against which the deductible temporary differences
and the carry forward of unused tax credits and unused tax losses
can be utilised except:

Deferred income tax relating to items recognised outside of profit
and loss is recognised outside profit and loss. Deferred tax items
are recognised in correlation to the underlying transaction either in
other comprehensive income or directly in equity.

Deferred income tax assets and deferred income tax liabilities are
offset if a legally enforceable right exists to set off current tax assets
against current income tax liabilities and the deferred income taxes
relate to the same taxable entity and the same taxation authority.

(k) Revenue recognition
Revenue from the sale of crude oil is recognised when the significant
risks and rewards of ownership have been transferred, which is when
title passes to the customer. This generally occurs when product
is physically transferred into a pipe or other delivery mechanism.
Revenue from management services provided to joint venture
undertakings is recognised in accordance with agreements with
our joint venture partners. Revenue from construction services is
recognised in accordance with agreed work completion schedules.

All revenue is stated after deducting sales taxes, excise duties and
similar levies.

(l) Share-based payment
Employees (including senior executives) and Directors of the
Group may receive fees and remuneration in the form of share-
based payment transactions, whereby employees render services as
consideration for equity instruments (‘equity-settled transactions’).

• in respect of deductible temporary differences associated with
investments in subsidiaries, associates and interests in joint
ventures, deferred income tax assets are recognised only to the
extent that it is probable that the temporary differences will
reverse in the foreseeable future and taxable profit will be available
against which the temporary differences can be utilised.

In situations where equity instruments are issued and some or all of
the goods or services received by the entity as consideration cannot
be specifically identified, the unidentified goods or services received
(or to be received) are measured as the difference between the fair
value of the share-based payment transaction and the fair value of
any identifiable goods or services received at the grant date. This is
then capitalised or expensed as appropriate.

The carrying amount of deferred income tax assets is reviewed at
each balance sheet 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 deferred income tax asset to be utilised. Unrecognised
deferred income tax assets are reassessed at each balance sheet date
and are recognised to the extent that it has become probable that
future taxable profit will allow the deferred tax asset to be recovered.

Deferred income tax assets and liabilities are measured at the tax
rates that are expected to apply to the year when the asset is realised
or the liability is settled, based on tax rates (and tax laws) that have
been enacted or substantively enacted at the balance sheet date.

Equity-settled transactions
The cost of equity-settled transactions is measured by reference to
the fair value at the date on which they are granted. The fair value
is determined by an external valuer using an appropriate pricing
model, further details of which are given in Note 25.

The cost of equity-settled transactions is recognised, together with
a corresponding increase in equity, over the period in which the
performance and/or service conditions are fulfilled. The cumulative
expense recognised for equity-settled transactions at each reporting
date until the vesting date reflects the extent to which the vesting
period has expired and the Group’s best estimate of the number of
equity instruments that will ultimately vest. The income statement
charge or credit for a period represents the movement in cumulative
expense recognised as at the beginning and end of that period and is
recognised in employee benefits expense.

No expense is recognised for awards that do not ultimately vest,
except for equity-settled transactions where vesting is conditional
upon a market or non-vesting condition, which are treated as vesting
irrespective of whether or not the market or non-vesting condition
is satisfied, provided that all other performance and/or service
conditions are satisfied.

(p) Pension costs
Pension benefits are funded over the employees’ period of service by
way of contributions to a defined contribution scheme. Contributions
are charged to the Consolidated Income Statement in the year to
which they relate.

3.5 Changes in Accounting Policy and Disclosures
Adoption of IFRS and International Financial Reporting
Interpretations Committee (IFRIC) interpretations
A number of amendments to existing IFRS (principally related to
clarifications and refinements of definitions) became effective for,
and have been applied in preparing, these Financial Statements. The
application of these amendments did not result in material changes
to the results or financial position of the Group or the Company.

IFRS and IFRIC interpretations being adopted in subsequent
years
IFRS 15 Revenue from Contracts with Customers will replace IAS 18
Revenue, IAS 11 Construction Contracts and related interpretations.
The new standard is applicable from 1 January 2018 and is subject
to EU endorsement. IFRS 15 provides a new five step model to
be applied to revenue arising from contracts with customers.
The principles in IFRS 15 provide a more structured approach to
measuring and recognising revenue and may impact the timing and
amount of revenue recognised from contracts with customers. The
Group is currently assessing the impact of IFRS 15 but currently does
not expect any significant impact.

IFRS 9 Financial Instruments reflects the final phase of the
IASB’s work on the replacement of IAS 39 Financial Instruments:
Recognition and Measurement and applies to the classification and
measurement of financial assets and liabilities as defined in IAS
39, impairment, and the application of hedge accounting. IFRS 9 is
effective from 1 January 2018. The Group is currently assessing the
impact of IFRS 9.

There are no other IFRS or IFRIC interpretations that are effective
subsequent to the 2016 financial year-end that would have a material
impact on the results or financial position of the Group or the
Company.

Where the terms of an equity-settled transaction are modified, the
minimum expense recognised is the expense as if the terms had
not been modified, if the original terms of the awards are met. An
additional expense is recognised for any modification that increases
the total fair value of the share-based payment transaction, or is
otherwise beneficial to the employee as measured at the date of
modification.

Where an equity-settled award is cancelled, it is treated as if it
had vested on the date of cancellation, and any expense not yet
recognised for the award is recognised immediately. This includes
any award where non-vesting conditions within the control of either
the entity or the employee are not met. However, if a new award is
substituted for the cancelled award, and designated as a replacement
award on the date that it is granted, the cancelled and new awards
are treated as if they were a modification of the original award, as
described in the previous paragraph.

Where appropriate, the dilutive effect of outstanding options is
reflected as additional share dilution in the computation of diluted
earnings per share.

(m) Share issue expenses
Costs of share issues are deducted from equity.

(n) Operating leases
The determination of whether an arrangement is, or contains, a lease
is based on the substance of the arrangement at inception date, or
whether the fulfilment of the arrangement is dependent on the use of
a specific asset or assets or the arrangement conveys a right to use
the asset.

Operating lease payments are recognised as an expense in the
Consolidated Income Statement on a straight-line basis over the
lease term.

(o) Finance revenue and finance cost
For all financial instruments measured at amortised cost, interest
income or expense is recorded using the effective interest rate, which
is the rate that exactly discounts the estimated future cash payments
or receipts through the expected life of the financial instrument or
a shorter period, where appropriate, to the net carrying amount of
the financial asset or liability. Interest income is included in finance
revenue in the income statement.

PETRONEFT RESOURCES PLCANNUAL REPORT 2016FINANCIAL STATEMENTS
46

NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2016 (CONTINUED)

SEGMENT INFORMATION

OPERATING LOSS

At present the Group has one reportable operating segment,
which is oil exploration and production through its joint venture
undertakings. As a result, there are no further disclosures required in
respect of the Group’s reporting segment.

The risk and returns of the Group’s operations are primarily
determined by the nature of the activities that the Group engages
in, rather than the geographical location of these operations. This
is reflected by the Group’s organisational structure and the Group’s
internal financial reporting systems.

Management monitors and evaluates the operating results for the
purpose of making decisions consistently with how it determines
operating profit or loss in the consolidated financial statements.

Operating loss is stated after
charging/(crediting):
Included in cost of sales
Operating lease
rentals – equipment

Foreign exchange loss on intra-
Group loans

Included in administrative
expenses
Other foreign exchange gains
Operating lease rentals – land
and buildings

Geographical segments
Although the joint venture undertakings WorldAce Investments
Limited and Russian BD Holdings B.V. are domiciled in Cyprus and
the Netherlands, the underlying businesses and assets are in Russia.
Substantially all of the Group’s sales and capital expenditures are in
Russia.

Depreciation of property, plant
and equipment
Included in cost of sales
Included in administrative
expenses

Assets are allocated based on where the assets are located:

Non-current assets
Russia
Ireland

REVENUE

Revenue
Management Services
Construction Services

2016
US$

2015
US$

Auditors’ remuneration – Group
– audit of group

47,854,604
2,283

43,062,084
3,480

47,856,887

43,065,564

2016
US$

2015
US$

financial statements

– other assurance services
– tax advisory services
– other non-audit services

Auditors’
remuneration – Company
– audit of group

financial statements

1,465,105
814,480

1,644,642
753,672

– other assurance services
– tax advisory services

2,279,585

2,398,314

Most of the revenue from management and construction services
relate to services provided to the joint venture undertakings which
PetroNeft Group have interests in.

Note

2016
US$

2015
US$

102,326

148,998

(77,458)

284,449

(5,946)

(36,576)

36,804

32,052

67,371

95,641

1,197
68,568

2,032
97,673

79,920
-
-
-
79,920

77,622
-
-
-
77,622

20,000
-
-
20,000

Company
Employment costs (including Directors)

FINANCE REVENUE

Bank interest receivable
Interest receivable on loans to Joint
Ventures

EMPLOYEES

2016
US$

2015
US$

2,449

10,095

3,245,427

3,031,492

3,247,876

3,041,587

Wages and salaries
Social insurance costs
Share-based payment expense
Contributions to defined
contribution pension plan

Group
Number of employees
The average number of employees (including Directors) during the
year was:

Group and company
Directors’ emoluments

Directors
Senior Management
Professional Staff
Construction crew employees

2016
Number

2015
Number

6
3
6
35

Remuneration and other
emoluments – Executive Directors
Remuneration and other
emoluments – non-Executive
Directors
Pension contributions

7
5
9
31

2016
US$

2015
US$

1,976,953
99,606
-

1,533,107
94,686
11,288

68,405

94,932

2,144,964

1,734,013

2016
US$

2015
US$

1,214,403

1,021,360

228,348
39,828

184,301
68,570

1,482,579

1,274,231

Company
Number of employees
The average number of employees (including Directors) during the
year was:

2016
Number

2015
Number

6
2
1

7
1
1

Directors
Senior Management
Professional Staff

Group
Employment costs (including Directors)

Your attention is drawn to the details of the share options received by
the Directors as set out in the Report of the Directors. In accordance
with IFRS 2, Share-based Payment, a further expense of US$Nil
(2015: US$8,971) has been recognised in the Consolidated Statement
of Comprehensive Income in respect of share options granted to
Directors. The aggregate amount of any compensation paid to
directors or former directors in respect of retirement, loss of office
or other termination payments in the financial year was US$661,633
(2015: US$Nil). An amount of US$426,803 (2015: US$510,681)
relating to Executive Directors’ salaries was re-charged to WorldAce
Investments Limited. An amount of US$59,926 (2015: US$59,450)
relating to Executive Directors’ salaries was re-charged to Russian
BD Holdings B.V.

Wages and salaries
Social insurance costs
Share-based payment expense
Contributions to defined
contribution pension plan

2016
US$

2015
US$

2,495,310
244,350
-

2,377,958
298,567
32,795

68,405

94,932

2,808,065

2,804,252

PETRONEFT RESOURCES PLCANNUAL REPORT 2016FINANCIAL STATEMENTS

NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2016 (CONTINUED)

Loss before income tax

(4,597,419)

(7,674,917)

INCOME TAX

Current income tax
Current income tax charge

Total current income tax

Deferred tax
Relating to origination and reversal
of temporary differences

Total deferred tax
Income tax expense reported in the
Consolidated Income Statement

Accounting loss multiplied by
Irish standard rate of tax of 12.5%

Share-based payment expense
Non-deductible expenses
Effect of higher tax rates on
investment income
Tax deductible timing differences
Share of joint ventures’ net loss
Other
Profits taxable at higher rates
Taxable losses not utilised
Utilisation of previously
unrecognised tax losses
Total tax expense reported in the
Consolidated Income Statement

Deferred tax
Group and Company

Deferred income tax liability
At 1 January
Expense for the year recognised
in the income statement

At 31 December

Group and Company
Deferred tax at 31 December relates to the following:

2016
US$

2015
US$

3,078

24,863

Deferred income tax liability
Accrued interest income on
intra-Group loans

2016
US$

2015
US$

2,113,541

1,286,378

2,113,541

1,286,378

827,163

774,603

830,241

799,466

Factors that may affect future tax charges
The tax charge in future years will be affected by changes to the rates
of Irish Corporation Tax. There is no current expectation that the tax
rate of 12.5% in Ireland will change in the foreseeable future.

2016
US$

2015
US$

10. LOSS PER ORDINARY SHARE

(574,677)

(959,365)

-
15,453

413,851
19,397
751,179
21,788
39,908
246,937

4,099
-

388,543
1,265
1,134,990
24,515
7,813
194,268

(103,595)

3,338

830,241

799,466

Basic loss per Ordinary Share amounts are calculated by dividing net
loss for the year attributable to ordinary equity holders of the Parent
by the weighted average number of Ordinary Shares outstanding
during the year. Basic and diluted earnings per Ordinary Share are
the same as the potential Ordinary Shares are anti-dilutive.

Numerator
Loss attributable to equity
shareholders of the Parent for basic
and diluted loss

Denominator
Weighted average number of
Ordinary Shares for basic and
diluted earnings per Ordinary Share

Diluted weighted average number
of shares

Loss per share:
Basic and diluted – US dollar cent

2016
US$

2015
US$

(5,427,660)

(8,474,383)

(5,427,660)

(8,474,383)

707,245,906

(0.77)

(1.20)

2016
US$

2015
US$

1,286,378

511,775

827,163

774,603

2,113,541

1,286,378

The Company has instruments in issue that could potentially dilute
basic earnings per Ordinary Share in the future, but are not included
in the calculation for the reasons outlined below:
• Employee Share Options – Refer to Note 25 for the total number

of shares related to the outstanding options that could potentially
dilute basic earnings per share in the future. These potential
Ordinary Shares are anti-dilutive for the years ended 31 December
2016 and 2015.

• Warrants – All remaining warrants expired during 2015.

11. PROPERTY, PLANT AND EQUIPMENT

12. EQUITY-ACCOUNTED INVESTMENT IN JOINT

VENTURE – WORLDACE INVESTMENTS LIMITED

Group

Cost
At 1 January 2015
Additions
Translation adjustment

At 1 January 2016
Translation adjustment
At 31 December 2016

Depreciation
At 1 January 2015
Charge for the year
Translation adjustment

At 1 January 2016
Charge for the year
Translation adjustment
At 31 December 2016

Net book values
At 31 December 2016
At 31 December 2015

Company

Cost
At 1 January 2015

At 1 January 2016
At 31 December 2016

Depreciation
At 1 January 2015
Charge for the year

At 1 January 2016
Charge for the year
At 31 December 2016

Net book values
At 31 December 2016
At 31 December 2015

PetroNeft Resources plc has a 50% interest in WorldAce Investments
Limited, a jointly controlled entity which holds 100% of LLC Stimul-T,
an entity involved in oil and gas exploration and the registered
holder of Licence 61. The interest in this joint venture is accounted
for using the equity accounting method. WorldAce Investments
Limited is incorporated in Cyprus and carries out its activities,
through LLC Stimul-T, in Russia.

At 1 January 2015
Elimination of unrealised profit on intra-Group
transactions
Retained loss
Translation adjustment
Credited against loans receivable from WorldAce
Investments Limited (Note 15)

At 1 January 2016
Elimination of unrealised profit on intra-Group
transactions
Retained loss
Translation adjustment
Debited to loans receivable from WorldAce
Investments Limited (Note 15)
At 31 December 2016

Share of net
assets
US$

10,865,156

(29,326)
(8,765,055)
(11,587,393)

9,516,618

(157,876)
(5,721,232)
7,149,140

(1,270,032)
-

The balance sheet position of WorldAce Investments Limited
shows net liabilities of US$25,915,002 following a loss in the year
of US$11,442,464 together with a positive currency translation
adjustment of US$14,298,281. PetroNeft’s 50% share is included above
and results in a negative carrying value of US$8,246,586. Therefore,
the share of net assets is reduced to Nil and, in accordance with IAS
28 Investments in Associates and Joint Ventures, the amount of
US$8,246,586 is deducted from other assets associated with the joint
venture on the Balance Sheet which are the loans receivable from
WorldAce Investments (see Note 15).

Plant and
machinery
US$

996,588
19,059
(215,247)

800,400
145,468

945,868

674,786
97,673
(153,762)

618,697
68,568
115,137

802,402

143,466
181,703

Plant and
machinery
US$

32,066

32,066
32,066

26,554
2,032

28,586
1,197

29,783

2,283
3,480

PETRONEFT RESOURCES PLCANNUAL REPORT 2016FINANCIAL STATEMENTS

NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2016 (CONTINUED)

12. EQUITY-ACCOUNTED INVESTMENT IN JOINT

VENTURE – WORLDACE INVESTMENTS LIMITED
(CONTINUED)

Additional financial information in respect of PetroNeft’s 50%
interest in the equity-accounted joint venture entity is disclosed
below:

Continuing operations

Revenue
Cost of sales

Gross profit/(loss)
Administrative expenses
Impairment of oil and gas properties

Operating loss
Loss on disposal of oil and gas
properties
Write-off of exploration and
evaluation assets
Finance revenue
Finance costs

Loss for the year for continuing
operations before taxation
Income tax expense

Loss for the year

Loss for the year
Other comprehensive income to
be reclassified to profit or loss in
subsequent years:
Currency translation adjustments

Total comprehensive profit/(loss)
for the year

2016
US$

2015
US$

11,604,182
(11,199,845)

10,300,094
(10,435,521)

404,337
(1,614,435)
-

(135,427)
(1,519,005)
(4,550,000)

(1,210,098)

(6,204,432)

(438,034)

(710,047)
9,421
(3,372,474)

-
11,694
(2,572,317)

(5,721,232)
-

(8,765,055)
-

(5,721,232)

(8,765,055)

(5,721,232)

(8,765,055)

7,149,140

(11,587,393)

1,427,908

(20,352,448)

The currency translation adjustment results from the movement
of the Russian Rouble during the year. All Russian Rouble
carrying values in Stimul-T, the 100% subsidiary of WorldAce are
converted to US Dollars at each period end. The resulting gain
or loss is recognised through other comprehensive income and
transferred to the currency translation reserve. The Russian Rouble
appreciated significantly against the US Dollar during the year from
RUB73.3:US$1 at 31 December 2015 to RUB60.9:US$1 at 31 December
2016.

Non-current Assets
Oil and gas properties
Property, plant and equipment
Exploration and evaluation assets
Assets under construction

Current Assets
Inventories
Trade and other receivables
Cash and cash equivalents

2016
US$

2015
US$

37,945,273
199,338
7,556,920
932,631

27,646,307
197,826
6,044,036
2,345,358

46,634,162

36,233,527

536,685
176,318
40,415

753,418

257,857
259,142
153,198

670,197

Total Assets

47,387,580

36,903,724

Non-current Liabilities
Provisions
Interest-bearing loans and
borrowings

Current Liabilities
Trade and other payables

Total Liabilities

Net Liabilities

(433,573)

(273,278)

(56,686,519)

(48,366,752)

(57,120,092)

(48,640,030)

(3,224,989)

(2,649,103)

(3,224,989)
(60,345,081)

(2,649,103)
(51,289,133)

(12,957,501)

(14,385,409)

Capital commitments
Details of capital commitments at the balance sheet date are as
follows:

2016
US$

2015
US$

Contracted for but not provided
in the financial statements

1,080,620

1,236,788

Future minimum rentals payable under non-cancellable operating
leases at the balance sheet date are as follows:

Within one year
After one year but not more than
five years
More than five years

2016
US$

2015
US$

57,039

39,459

219,319
414,738

691,096

150,274
326,079

515,812

The above capital commitments in the joint venture are incurred
jointly with Oil India International B.V. The Group has a 50% share of
these commitments.

13. EQUITY-ACCOUNTED INVESTMENT IN JOINT
VENTURE – RUSSIAN BD HOLDINGS B.V.

Additional financial information in respect of PetroNeft’s 50%
interest in the equity-accounted joint venture entity is disclosed
below:

PetroNeft Resources plc has a 50% interest in Russian BD Holdings
B.V., a jointly controlled entity which holds 100% of LLC Lineynoye,
an entity involved in oil and gas exploration and the registered
holder of Licence 67. The interest in this joint venture is accounted
for using the equity accounting method. Russian BD Holdings B.V.
is incorporated in the Netherlands and carries out its activities in
Russia.

Revenue
Cost of sales

Gross profit
Administrative expenses

Share of net
assets
US$

Operating loss
Finance revenue
Finance costs

At 1 January 2015
Retained loss
Translation adjustment
Credited against loans receivable from
Russian BD Holdings B.V. (Note 15)

At 1 January 2016
Retained loss
Translation adjustment
Debited to loans receivable from
Russian BD Holdings B.V. (Note 15)
At 31 December 2016

365,178
(314,859)
(887,109)

836,790

-
(288,198)
592,300

(304,102)
-

The balance sheet position of Russian BD Holdings B.V. shows net
liabilities of US$1,065,376 following a loss in the year of US$576,396
together with a positive currency translation of US$1,184,600.
PetroNeft’s 50% share is included above and results in a negative
carrying value of US$532,688. Therefore, the share of net assets
is reduced to Nil and, in accordance with IAS 28 Investments in
Associates and Joint Ventures, the amount of US$532,688 is deducted
from other assets associated with the joint venture on the Balance
Sheet which are the loans receivable from Russian BD Holdings B.V.
(Note 15).

2016
US$

-
-

-
(66,718)

(66,718)
294
(239,079)

2015
US$

-
-

-
(106,224)

(106,224)
434
(209,069)

(305,503)

(314,859)

17,305

Loss for the year for continuing
operations before taxation

Taxation

Loss for the year

(288,198)

(314,859)

Loss for the year
Other comprehensive income to
be reclassified to profit or loss in
subsequent years:
Currency translation adjustments

Total comprehensive profit/(loss)
for the year

Non-current assets
Current assets

Total assets

Non-current liabilities
Current liabilities

Total liabilities

(288,198)

(314,859)

592,300

(887,109)

304,102

(1,201,968)

2016
US$
4,069,104
198,788

2015
US$
3,327,327
71,104

4,267,892

3,398,431

(4,512,667)
(287,913)

(4,034,780)
(200,441)

(4,800,580)

(4,235,221)

Net Liabilities

(532,688)

(836,790)

Future minimum rentals payable under non-cancellable operating
leases at the balance sheet date are as follows:

Within one year
After one year but not more than
five years
More than five years

2016
US$

2,524

7,898
25,751

36,173

2015
US$

2,091

6,706
22,010

30,807

There were no capital commitments as at 31 December 2016 or 31
December 2015.

PETRONEFT RESOURCES PLCANNUAL REPORT 2016FINANCIAL STATEMENTS

NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2016 (CONTINUED)

14. FINANCIAL ASSETS – INVESTMENTS IN JOINT VENTURES AND SUBSIDIARIES

Company

Cost
At 1 January 2015
Capital contribution in respect of share-based payment expense

At 1 January 2016
Impairment

At 31 December 2016

Net book values
At 31 December 2016
At 31 December 2015

Investment in joint
ventures
US$

Investment in
Subsidiaries
US$

39,894,040
12,145

39,906,185
(35,047,370)

4,858,815

284,342
9,372

293,714
-

293,714

Total
US$

40,178,382
21,517

40,199,899
(35,047,370)

5,152,529

4,858,815
39,906,185

293,714
293,714

5,152,529
40,199,899

Due to the net liability position of WorldAce as discussed in Note 12 above and the deferral of the commencement of the Sibkrayevskoye
development the Board took the view that it was prudent to impair the carrying value of the investment in WorldAce Investments Limited to
Nil.

Details of the Company’s holding in direct and indirect subsidiaries at 31 December 2016 are as follows:

Name of subsidiary
LLC Granite Construction

LLC Dolomite

Registered office
147 Prospekt Lenina, Tomsk
634009, Russia
147 Prospekt Lenina, Tomsk
634009, Russia

Proportion of ownership
interest
100%

Proportion of voting
power held
100%

Principal activity
Construction

100%

Oil and gas
exploration

Details of the Group’s interest in joint ventures at 31 December 2016 are as follows:

Name of entity
WorldAce Investments Limited

LLC Stimul-T

Russian BD Holdings B.V.

LLC Lineynoye

Registered office
3 Themistocles Street, Nicosia,
Cyprus
147 Prospekt Lenina, Tomsk
634009, Russia
Prins Bernhardplein 200, 1097 JB,
Amsterdam, the Netherlands
147 Prospekt Lenina, Tomsk
634009, Russia

Proportion of ownership
interest
50%

Proportion of voting power
held
50%

Principal activity
Holding company

50%

Oil and gas
exploration
Holding company

Oil and gas
exploration

Oil India International B.V. owns the other 50% of WorldAce Investments Limited and Belgrave Naftogas B.V. (an Arawak Energy group
company) owns the other 50% of Russian BD Holdings B.V.

15. FINANCIAL ASSETS – LOANS AND RECEIVABLES

17.

TRADE AND OTHER RECEIVABLES

Group

Loans to WorldAce Investments
Limited (Note 24)
Less: share of WorldAce Investments
Limited loss (Note 12)

Loans to Russian BD Holdings B.V.
(Note 24)
Less: share of Russian BD Holdings
B.V. loss (Note 13)

Company

Loans to WorldAce Investments
Limited (Note 24)
Loans to Russian BD Holdings B.V.
(Note 24)

2016
US$

2015
US$

Group

52,235,829

49,224,805

(8,246,586)

(9,516,618)

43,989,243

39,708,187

Other receivables
Receivable from jointly controlled
entities (Note 24)
Advances to contractors
Prepayments

4,256,866

4,012,464

Company

Amounts owed by subsidiary
undertakings (Note 24)
Amounts owed by other related
companies (Note 24)
VAT Receivable
Prepayments

(532,688)

(836,790)

3,724,178
47,713,421

3,175,674
42,883,861

2016
US$

2015
US$

52,235,829

49,224,805

4,256,866

4,012,464

56,492,695

53,237,269

The Company has granted a loan facility to its joint venture
undertaking WorldAce Investments Limited of up to US$45 million.
This loan facility is US$ denominated and unsecured. Interest
currently accrues on the loan at USD LIBOR plus 6.0% but the
Company has agreed not to seek payment of interest until 2018 at
the earliest. The loan is set to mature on 31 December 2022. As at 31
December 2016 the loan was fully drawn down. The loan from the
Company to Russian BD Holdings is repayable on demand. Interest
currently accrues on the loan at USD LIBOR plus 5.0% per annum.

Group

Cash at bank and in hand

16.

INVENTORIES

Materials

2016
US$
28,973

28,973

2015
US$
54,302

54,302

Company

Cash at bank and in hand

2016
US$
155,651

920,390
8,047
59,816

2015
US$
147,641

1,628,667
3,708
62,112

1,143,904

1,842,128

2016
US$

2015
US$

1,008,598

1,170,375

622,883
139,037
59,816

1,292,252
146,556
62,112

1,830,334

2,671,295

2016
US$
319,618

319,618

2015
US$
1,284,212

1,284,212

2016
US$
297,247

297,247

2015
US$
1,279,652

1,279,652

Other receivables are non-interest-bearing and are normally settled
on 60-day terms.

Amounts owed by subsidiary undertakings are interest-bearing.
Interest is charged at 10%.

18. CASH AND CASH EQUIVALENTS

Bank deposits earn interest at floating rates based on daily
deposit rates. Short-term deposits are made for varying periods of
between one day and one month depending on the immediate cash
requirements of the Group, and earn interest at the respective short-
term deposit rates.

PETRONEFT RESOURCES PLCANNUAL REPORT 2016FINANCIAL STATEMENTS

NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2016 (CONTINUED)

19. TRADE AND OTHER PAYABLES

21. FINANCIAL RISK MANAGEMENT OBJECTIVES AND

POLICIES

Group

Trade payables
Trade payables to jointly controlled
entity (Note 24)
Corporation tax
Oil taxes, VAT and employee taxes
Other payables
Accruals

Company

Trade payables
Corporation tax
Other taxes and social welfare costs
Accruals

2016
US$
337,208

108,338
55,750
56,165
318,074
206,546

2015
US$
238,570

239,228
59,087
78,293
212,141
317,827

1,082,081

1,145,146

The Group and Company’s principal financial instruments comprise
cash and cash equivalents. The main purpose of these financial
instruments is to provide finance for the Group and Company’s
operations. The Group has various other financial assets and
liabilities such as receivables and trade payables, which arise directly
from its operations.

The Group also considers the use of derivative transactions,
primarily forward currency contracts. The purpose is to manage the
currency risks arising from the Group and Company’s operations and
its sources of finance. There are no contracts outstanding for Group
or Company as at 31 December 2016 and 2015.

2016
US$
330,540
55,750
300,442
177,155

863,887

2015
US$
230,563
59,087
187,734
290,416

767,800

It is the Group and Company’s policy that no trading in derivatives
be undertaken.

The main risks arising from the Group and Company’s financial
instruments are commodity price risk, foreign currency risk, credit
risk, liquidity risk, interest rate risk and capital risk. The Board
reviews and agrees policies for managing each of these risks which
are summarised below.

The Directors consider that the carrying amount of trade and other
payables approximates their fair value.

Trade and other payables are non-interest-bearing and are normally
settled on 60-day terms.

Trade payables and accruals principally comprise amounts
outstanding for trade purchases and ongoing costs.

20. SHARE CAPITAL – GROUP AND COMPANY

Authorised

Commodity price risk
The Group is exposed to the risk of fluctuations in prevailing market
commodity prices on the oil produced by its joint venture interests.
To date the Group and its joint ventures have sold all of their oil
on the domestic market in Russia. There are no banks providing
hedging or derivative type contracts for oil sold on the domestic
market so it is not possible to mitigate risks in this way. The high
taxes on oil produced in Russia are based on prevailing international
oil prices and therefore operate as a natural hedge to a fall in oil
prices. At 31 December 2016 and 2015, the Group and the Company
had no outstanding commodity contracts.

1,000,000,000 (2015: 1,000,000,000)
Ordinary Shares of €0.01 each

2016
€

2015
€

10,000,000
10,000,000

10,000,000

Foreign currency risk
The Group and the Company undertake certain transactions
denominated in foreign currencies. Hence, exposures to exchange
rate fluctuations arise. Exchange rate exposures are managed within
approved policy parameters utilising forward exchange contracts
where appropriate.

Allotted, called up and fully paid equity

At 1 January 2015

At 1 January 2016
At 31 December 2016

Number of
Ordinary Shares

Called up share
capital US$

707,245,906

9,429,182

707,245,906
707,245,906

9,429,182
9,429,182

At 31 December 2016 and 2015, the Group and the Company had no
outstanding forward exchange contracts.

Foreign currency sensitivity analysis
The Group’s and the Company’s principal currency exposures arise
in the currencies of Russian Rouble, Euro, UK Sterling and US Dollar.
The Group has an exposure to US Dollars because the functional
currency of its Russian subsidiaries is Russian Roubles. A change
in the US Dollar:Russian Rouble exchange rate will therefore result
in a foreign exchange gain or loss on the US Dollar denominated
balances in these subsidiaries.

The Company has an exposure to US Dollars because payments
to some suppliers are effected in Euro and in UK Sterling, and the
Company has bank accounts in Russian Rouble, Euro, UK Sterling
and US Dollar.

In accordance with IFRS 7, the impact of foreign currencies is
determined based on the balances of financial assets and liabilities at
31 December 2016. The sensitivity analysis includes only outstanding
foreign currency denominated monetary items and largely results
from payables and receivables, and adjusts their translation at
the year-end for a 5% change in foreign currency rates. A positive
number below indicates a reduction in loss and increase in other
equity where the US Dollar strengthens 5% against the relevant
currency. For a 5% weakening of the US Dollar against the relevant
currency, there would be an equal and opposite impact on the loss
and other equity, and the balances following would be negative.

If the US Dollar had gained/lost 5% against all currencies significant
to the Group and Company at 31 December, the impact on loss and
equity for the Group and the Company is shown below.

Liquidity risk management
Liquidity risk is the risk that the Group and the Company will not
have sufficient funds to meet liabilities. Ultimate responsibility for
liquidity risk management rests with the Board of Directors, who
manage liquidity risk and short, medium and long-term funding and
liquidity management requirements by continuously monitoring
forecast and actual cash flows and matching the maturity profiles
of financial assets and liabilities. Cash forecasts are regularly
produced to identify the liquidity requirements of the Group and
the Company. To date, the Group and the Company have relied on
shareholder funding, loan facilities and normal trade credit to finance
its operations. The Group and Company’s financial liabilities as at 31
December 2016 and 2015 are all payable on demand. The Group and
the Company expect to meet its other obligations from operating
cash flows.

The expected maturity of the Group and Company’s third party
financial assets (excluding prepayments) as at 31 December 2016 and
2015 was less than one month. The expected maturity of the Group
and Company’s related party financial assets as at 31 December 2016
and 2015 was more than one month.

Group

Impact on loss [lower/(higher)]
Impact on net equity [lower/
(higher)]

Company

Impact on loss and net equity
[lower/(higher)]

2016
US$

2015
US$

36,964

34,550

The Group and the Company further mitigate liquidity risk by
maintaining an insurance programme to minimise exposure to
insurable losses.

38,457

36,054

The Group and the Company had no derivative financial instruments
as at 31 December 2016 and 2015.

2016
US$

2015
US$

5,535

3,122

Credit risk
Credit risk refers to the risk that a counterparty will default on its
contractual obligations resulting in financial loss to the Group.

The Group and Company’s financial assets comprise receivables
and cash and cash equivalents. The credit risk on cash and cash
equivalents is limited because the counterparties are banks with
high credit ratings assigned by international credit-rating agencies.
The Group and Company’s exposure to credit risk arise from default
of its counterparty, with a maximum exposure equal to the carrying
amount of cash and cash equivalents in its consolidated balance
sheet. As the Group or the Company does not have any significant
receivables outstanding from third parties, this risk is limited.
Recoverability of amounts due from joint venture companies are
dependent on the success of the joint ventures.

The Group and the Company do not have any significant credit risk
exposure to any single counterparty or any group of counterparties
having similar characteristics. The Group and the Company define
counterparties as having similar characteristics if they are connected
entities.

PETRONEFT RESOURCES PLCANNUAL REPORT 2016FINANCIAL STATEMENTS

NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2016 (CONTINUED)

21. FINANCIAL RISK MANAGEMENT OBJECTIVES AND

POLICIES (CONTINUED)

The tables below show the projected contractual undiscounted total cash outflows (principal and interest) arising from the Group’s trade and other
payables and gross debt. These projections are based on the interest and foreign exchange rates applying at the end of the relevant years:

Group

Year ended 31 December 2016
Trade and other payables

Year ended 31 December 2015
Trade and other payables

Company

Year ended 31 December 2016
Trade and other payables

Year ended 31 December 2015
Trade and other payables

Within 1 year
US$

Between 1 and 2
years
US$

Between 2 to 5
years
US$

After 5 years
US$

1,082,081

1,145,146

Within 1 year
US$

Between 1 and 2
years
US$

Between 2 to 5
years
US$

After 5 years
US$

863,887

767,800

Total
US$

1,082,081

1,145,146

Total
US$

863,887

767,800

Interest rate risk
The Group and Company’s exposure to the risk of changes in market
interest rates relates primarily to the Group and Company’s loans
to joint ventures which are tied to the LIBOR interest rate and their
holdings of cash and short-term deposits which are on variable rates
ranging from 0.1% to 0.5%. The effect of a rise of 1% in the LIBOR
interest rate (e.g. from 0.3% to 1.3%) receivable on loans to joint
ventures would be to increase Group loss before tax by US$32,304
and increase Company profit before tax by US$490,806.

It is the Group and Company’s policy, as part of its disciplined
management of the budgetary process, to place surplus funds on
short-term deposit in order to maximise interest earned.

Capital risk management
The Group and the Company manage capital to ensure that entities
in the Group will be able to continue as a going concern while
maximising the return to stakeholders through the optimisation of
the debt and equity balance. The Group and the Company manage
their capital structure and make adjustments to it in light of changes
in economic conditions. To maintain or adjust its capital structure,
the Group and the Company may issue new shares or raise debt. No
changes were made in the objectives, policies or processes during
the years ended 31 December 2016 and 2015. The capital structure
of the Group and the Company consists of equity attributable to
equity holders of the Parent, comprising issued capital, reserves
and retained losses as disclosed in the Consolidated Statement of
Changes in Equity. There is no external debt.

Fair values
The carrying amount of the Group’s and Company’s financial assets
and the Group and Company’s financial liabilities is a reasonable
approximation of the fair value. The carrying amount of the Group’s
financial assets is lower than the estimated fair value because of the
adjustment required in accordance with IAS 28 arising primarily
from the currency translation adjustments in the joint venture
companies that exceeded the carrying value of the equity accounted
investment in joint venture. See notes 12 and 13. The carrying value
of the loans to WorldAce in the Group is US$44.0 million. The
carrying value of the loans in the Company is US$52.2 million, which
approximates the fair value. The fair value of the loans is evaluated
using a discounted cashflow model (using a Weighted Average Cost
of Capital of 17%), based upon level 3 inputs.

The fair value of the Group’s financial liabilities is included at the
amount at which the instrument could be exchanged in a current
transaction between willing parties other than in a forced or
liquidation sale.

Hedging
At the year ended 31 December 2016 and 2015, the Group had no
outstanding contracts designated as hedges.

Offsetting of financial assets and liabilities
No financial assets and liabilities were offset in the balance sheet as
at 31 December 2016 and 2015.

22.

(LOSS)/PROFIT OF PARENT UNDERTAKING

The Company is availing of the exemption set out in section 304
of the Companies Act 2014 from presenting its individual Income
Statement to the Annual General Meeting and from filing it with
the Registrar of Companies. The amount of the loss dealt with in
the Parent undertaking for the year was US$34,539,757 (2015: profit
of US$1,077,184), which included impairment of investments in joint
ventures of US$35,047,370 (Note 14).

23. FUTURE MINIMUM RENTALS PAYABLE UNDER NON-

CANCELLABLE OPERATING LEASES AT THE BALANCE
SHEET DATE ARE AS FOLLOWS:

Land and buildings
Within one year
After one year but not more than
five years
More than five years

2016
US$

2015
US$

5,983

5,968

-
-

–
–

5,983

5,968

There were no capital commitments as at 31 December 2015 or 31
December 2016.

24. RELATED PARTY DISCLOSURES

Transactions with subsidiaries
Transactions between the Group and its subsidiaries, Granite and
Dolomite have been eliminated on consolidation. The Company
had the following transactions with its subsidiaries during the years
ended 31 December 2016 and 2015:

Company

Loans
At 1 January 2015
Interest accrued in the year

At 1 January 2016
Interest accrued in the year
Loans repaid during the year
Balance 31 December 2016

Capital contributions
Share-based payment 2016
Share-based payment 2015

Granite
Construction
US$

1,103,458
66,917

1,170,375
63,224
(225,000)

1,008,599

-
2,978

Transactions with joint ventures
PetroNeft Resources plc had the following transactions with its joint
ventures during the years ended 31 December 2016 and 2015:

Group

Receivable by PetroNeft Group
at 1 January 2015
Transactions during the year
Interest accrued in the year
Payments for services made during
the year
Share of joint venture’s translation
adjustment
Translation adjustment

At 1 January 2016
Advanced during the year
Transactions during the year
Interest accrued in the year
Payment for services made
during the year
Share of joint venture’s
translation adjustment
Translation adjustment
At 31 December 2016

Balance at 31 December 2015
comprised of:
Loan facility advanced
Trade and other receivables
Trade Payables

Balance at 31 December 2016
comprised of:
Loans receivable
Trade and other receivables
Trade and other payables

Russian BD
Holdings B.V.
Group
US$

WorldAce
Investments
Limited Group
US$

3,882,578
183,333
205,189

47,341,766
2,670,250
2,826,303

(29,781)

(2,483,727)

(836,790)
(14,821)

3,389,708
10,000
159,260
234,402

(9,516,618)
45,618

40,883,592
-
2,622,188
3,011,025

(10,821)

(3,426,007)

304,102
(5,769)

1,270,032
83,761

4,080,882

44,444,591

3,175,674
214,034
-

39,708,187
1,414,633
(239,228)

3,389,708

40,883,592

3,724,178
356,704
-

43,989,243
563,686
(108,338)

4,080,882

44,444,591

PETRONEFT RESOURCES PLCANNUAL REPORT 2016FINANCIAL STATEMENTS

NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2016 (CONTINUED)

24. RELATED PARTY DISCLOSURES (CONTINUED)

Company

At 1 January 2015
Transactions during the year
Interest accrued in the year
Payments for services made during
the year
Translation adjustment

At 1 January 2016
Advanced during the year
Transactions during the year
Interest accrued in the year
Payments for services made
during the year
Translation adjustment
Balance 31 December 2016

Balance at 31 December 2015
comprised of:
Loan facility advanced
Trade and other receivables

Balance at 31 December 2016
comprised of:
Loan facility advanced
Trade and other receivables

Russian BD
Holdings B.V.
Group
US$

WorldAce
Investments
Limited Group
US$

3,877,645
128,153
205,189

47,271,144
1,065,444
2,826,303

-
(8,551)

4,202,436
10,000
140,409
234,402

(834,318)
(1,488)

50,327,085
-
1,243,187
3,011,025

-
(12,486)

(2,040,000)
(480)

4,574,761

52,540,817

4,012,464
189,972

49,224,805
1,102,280

4,202,436

50,327,085

4,256,866
317,895

52,235,829
304,988

4,574,761

52,540,817

Remuneration of key management
Key management comprise the Directors of the Company, the Vice
Presidents of Business Development and Operations, the General
Director and the Executive Director of the Russian subsidiary LLC
Dolomite, along with both the Chief Geologist and Chief Engineer of
LLC Dolomite. Their remuneration during the year was as follows:

Compensation of key management
Contributions to defined
contribution pension plan
Share-based payment expense

2016
US$

2015
US$

1,923,326

1,715,340

69,308
-

89,917
15,401

1,992,634

1,820,658

The total amount of unpaid fees and expenses due to Directors as at
31 December 2016 was US$54,021 (2015: US$143,536).

Details of transactions between the Group and other related parties
are disclosed below.

Transactions with HGR Consulting Limited
Paul Dowling, Secretary and Chief Financial Officer of PetroNeft,
provides his services through HGR Consulting Limited (‘HGR’)
from May 2016. Services provided by HGR during 2016 amounted
to US$199,035. An amount of US$116,031 was owed to HGR at 31
December 2016.

Transactions with TBNG Group
Vakha Sobraliev, Director of PetroNeft until his resignation on 18
September 2015, is the principal of LLC Tomskburneftegaz (‘TBNG’),
a company which has drilled production and exploration wells for the
Group. Various contracts for drilling have been awarded to TBNG in
recent years. All drilling contracts with TBNG are ‘turnkey’ contracts
whereby TBNG assumes substantially all liabilities in relation to
the health and safety, environmental and other risks associated
with drilling operation. As part of this arrangement WorldAce
Group companies also occasionally sell sundry goods and services
to TBNG. Other companies related to TBNG also provide some
services to the Group such as transportation, power management
and repairs. The following is a summary of the transactions:

Maximum value of new contracts awarded during
the period
Paid during the period for drilling and related
services
Paid during the period for other services
Amount due to TBNG and related companies at
period end
Received during the period for sundry goods and
services
Amount due from TBNG and related companies at
period end

TBNG Group
From 1 January
to 18 September
2015
US$

1,778,324

5,379,260
2,023

98,789

Other PetroNeft Group companies provided various services to
TBNG Group during the period from 1 January to 18 September 2015
amounting to US$536. An amount of US$Nil was outstanding from
TBNG Group at 18 September 2015.

Outstanding as
at 1 January
Granted during
the year
Forfeited during
the year
Expired during
the year
Outstanding
at 31 December
Exercisable
at 31 December

2016
Number

2016
WAEP

2015
Number

2015
WAEP

13,842,500

£0.28 16,070,500

£0.2913

(2,622,500)

£0.2869

(40,000)

£0.3625

(2,405,000)

£0.1925

(2,188,000)

£0.3615

8,815,000

£0.3012 13,842,500

£0.28

4,114

The range of exercise prices for options outstanding at the year-end
is £0.065 to £0.66 (2015: £0.065 to £0.66).

The weighted average remaining contractual life for the share
options outstanding as at 31 December 2016 was 2.13 years (2015:
2.65 years).

The Group has an indirect 50% interest in Lineynoye which in turn
is 100% owned by the jointly controlled entity Russian BD Holdings
B.V. Lineynoye also entered into some transactions with TBNG and
related companies as follows:

TBNG Group
From 1 January to 18
September 2015
US$

-
-

Maximum value of new contracts awarded
during the period
Paid during the period for drilling and related
services
Paid during the period for other services
Amount due to TBNG and related companies
at period end
Received during the period for sundry goods
and services
Amount due from TBNG and related
companies at period end

25. SHARE-BASED PAYMENT

Share options
The expense recognised for employee services during the year is
US$Nil (2015: US$32,795). The Group share-based payment plan is
described below. There was no cancellation or modification to the
plan during 2016 and 2015.

Under the Group share option plan, employees of the Group can
receive conditional awards of share options depending on their
performance, seniority and length of service. The options typically
vest in tranches and are subject to the achievement of vesting
conditions related to drilling, production and shareholder return.
The maximum term for options is seven years. There are no cash
settlement alternatives.

Movement in the year
The fair value of the options is estimated at the grant date using an
option pricing model considering the terms and conditions upon
which the instruments were granted. The following table illustrates
the number and weighted average exercise prices (‘WAEP’) of, and
movements in, share options during the year.

No options were granted in 2016 or 2015.

The weighted average share price of forfeited options in 2016 was
£0.2869 (2015: £0.3625).

The weighted average share price of expired options in 2016 was
£0.1925 (2015: £0.3615).

As no options were issued in 2016 or 2015, no valuation was carried
out in 2016 or 2015.

Warrants
There were no warrants issued in 2016.

26. IMPORTANT EVENTS AFTER THE BALANCE SHEET

DATE

In March 2017, Oil India agreed to provide 100% funding for the
agreed Licence 61 work programme in 2017. A loan of US$4 million
was agreed with the joint venture company, WorldAce Investments
Limited, to fund the 2017 programme. The loan is unsecured and
capital repayments commence in October 2019. Should there be a
significant change in the management of PetroNeft while the loan is
outstanding then Oil India may seek early repayment in full. In such
circumstances PetroNeft would need to provide its 50% share of the
amount outstanding.

27. APPROVAL OF FINANCIAL STATEMENTS

The financial statements were approved, and authorised for issue, by
the Board of Directors on 27 June 2017.

PETRONEFT RESOURCES PLCANNUAL REPORT 2016FINANCIAL STATEMENTS

NOTICE OF ANNUAL GENERAL MEETING

Notice is hereby given that the Annual General Meeting of PetroNeft Resources plc (the ‘Company’) will be held
at the Herbert Park Hotel, Ballsbridge, Dublin 4 at 11.00 am on Friday 15 September 2017, for the purposes of
considering and, if thought fit, passing, the following Resolutions, of which Resolutions numbered 1, 2, 3, 4 and 5
will be proposed as Ordinary Resolutions and Resolution number 6 will be proposed as a Special Resolution.

Ordinary Business
1. To receive, consider and adopt the accounts for the year ended 31 December 2016 together with the Directors’ and Auditors’ Reports

thereon.

2. To re-elect Mr. Golder as a Director, who retires by rotation in accordance with Article 89 of the Articles of Association of the Company.
3. To re-elect Mr. Hickey as a Director, who retires by rotation in accordance with Article 89 of the Articles of Association of the Company.
4. To re-appoint Ernst & Young, Chartered Accountants, as Auditors and to authorise the Directors to fix the remuneration of the Auditors.

Special Business
5. That, in substitution for all existing authorities of the Directors, pursuant to Section 1021 of the Companies Act, 2014 (the ‘2014 Act’), the

Directors be and are hereby generally and unconditionally authorised to exercise all the powers of the Company to allot relevant securities
(within the meaning of the said Section 1021 of the 2014 Act) up to an aggregate nominal amount of €1,463,770.47 during the period
commencing on the date of passing of this Resolution and expiring on the earlier of the date of the next Annual General Meeting of the
Company held after the date of passing of this Resolution, and the close of business on 15 December 2018, save that the Company may
before such expiry make an offer or agreement which would or might require relevant securities to be allotted after such expiry and the
Directors may allot relevant securities in pursuance of such offer or agreement notwithstanding that the authority hereby conferred has
expired.

6. That the Directors be and are hereby empowered pursuant to Sections 1022 and 1023(3) of the 2014 Act to allot equity securities (within
the meaning of the said Section 1022 of the 2014 Act) for cash pursuant to the authority conferred by Resolution numbered 5 above as if
the said Section 1022 of the 2014 Act does not apply to any such allotment provided that this power shall be limited to the allotment of
equity securities:
a)
b)

in connection with the exercise of any options or warrants to subscribe granted by the Company;
(including, without limitation, any shares purchased by the Company pursuant to the provisions of the Companies Act 1990 and
held as treasury shares), in connection with any offer of securities, open for a period fixed by the Directors, by way of rights, open
offer or otherwise in favour of shareholders holding Ordinary Shares in the capital of the Company and/or any persons having a
right to subscribe for, or convert securities into, Ordinary Shares in the capital of the Company (including, without limitation, any
person entitled to options under any of the Company’s share option schemes or any other person entitled to participate in any of the
Company’s profit sharing schemes for the time being) and subject to such exclusions or other arrangements as the Directors may
deem necessary or expedient in relation to legal or practical problems under the laws or the requirements of any recognised body or
stock exchange in any territory; and

c) up to an aggregate nominal value not greater than the nominal value of 5% of the issued share capital of the Company from time to

time;

d) each of (a), (b) and (c) above being separate powers, which powers shall expire on the earlier of the date of the next Annual General

Meeting of the Company held after the date of passing of this Resolution and the close of business on 15 December 2018, save that the
Company may before such expiry make an offer or agreement which would or might require equity securities to be allotted after such
expiry and the Directors may allot equity securities in pursuance of such offer or agreement as if the power conferred hereby had not
expired.

Dated this 27th day of June 2017
BY ORDER OF THE BOARD

Paul Dowling
Company Secretary

Registered Office:
20 Holles Street
Dublin 2

GLOSSARY

AGM

AIM

AMI

Arawak

bbl

Proved reserves according to SPE standards.

Proved and probable reserves according to SPE standards.

Proved, probable and possible reserves according to SPE standards.

Annual General Meeting.

Alternative Investment Market of the London Stock Exchange.

Area of Mutual Interest.

Arawak Energy Russia B.V.

Barrel.

Belgrave Naftogas

Belgrave Naftogas B.V., a member of the Arawak group of companies

bfpd

boe

bopd

Company

CPF

CSR

Barrels of fluid per day.

Barrel of oil equivalent.

Barrels of oil per day.

PetroNeft Resources plc.

Central Processing Facility.

Corporate and Social Responsibility.

Custody Transfer Point

Facility/location at which custody of oil transfers to another operator.

Dolomite

DST

ESM

ESP

LLC Dolomite, a 100% subsidiary of PetroNeft registered in the Russian Federation

Drill stem test.

Enterprise Securities Market of the Irish Stock Exchange.

Electric Submersible Pump

Exploration resources

An undrilled prospect in an area of known hydrocarbons with unequivocal four-way dip closure at the
reservoir horizon.

Granite Construction

LLC Granite Construction, a 100% subsidiary of PetroNeft registered in the Russian Federation

Group

HSE

IAS

IFRIC

IFRS

km2/ sq km

KPI

Licence 61

Licence 61 Farmout

Licence 67

Lineynoye

mmbbls

The Company and its joint ventures and subsidiary undertakings.

Health, Safety and Environment.

International Accounting Standard.

IFRS Interpretations Committee.

International Financial Reporting Standard.

Kilometres.

Square kilometres.

Key Performance Indicator.

The Exploration and Production Licence in the Tomsk Oblast, Russia owned by the joint venture
company WorldAce Investments Limited. It contains seven known oil fields, Lineynoye, Tungolskoye,
West Lineynoye, Arbuzovskoye, Kondrashevskoye, Sibkrayevskoye and North Varyakhskoye and 27
Prospects and Leads that are currently being explored.

An agreement whereby Oil India Limited subscribed for shares in WorldAce, the holding company for
Stimul-T, the entity which holds Licence 61 and all related assets and liabilities, and following, PetroNeft
and Oil India Limited both hold 50% of the voting shares, and through the shareholders agreement, both
parties have joint control of WorldAce with PetroNeft as operator

The Exploration and Production Licence in the Tomsk Oblast, Russia owned by the joint venture
company Russian BD Holdings B.V. It contains two oil fields, Ledovoye and Cheremshanskoye and
several potential prospects.

Limited Liability Company Lineynoye, a wholly owned subsidiary of Russian BD Holdings B.V.,
registered in the Russian Federation.

Metres.

Million barrels.

PETRONEFT RESOURCES PLCANNUAL REPORT 2016FINANCIAL STATEMENTS62

GLOSSARY (CONTINUED)

mmbo

Natlata

Oil pay

Million barrels of oil.

Natlata Partners Limited, a significant shareholder of PetroNeft.

A formation containing producible hydrocarbons.

Proved reserves according to SPE standards.

Probable reserves according to SPE standards.

Possible reserves according to SPE standards.

PetroNeft

PetroNeft Resources plc.

Russian BD Holdings B.V.

Russian BD Holdings B.V., a company owned 50% by PetroNeft and registered in the Netherlands.

SPE

Spud

Stimul-T

TSR

VAT

WAEP

WorldAce

Society of Petroleum Engineers.

To commence drilling a well.

Limited Liability Company Stimul-T, a wholly owned subsidiary of WorldAce, based in the Russian
Federation.

Total Shareholder Return.

Value Added Tax.

Weighted Average Exercise Price.

WorldAce Investments Limited, a company owned 50% by PetroNeft, registered in Cyprus.

WorldAce Group

WorldAce Investments Limited and its 100% subsidiary LLC Stimul-T

Nominated Adviser
and ESM Adviser

Joint Brokers

Davy
49 Dawson Street
Dublin 2
Ireland

Canaccord Genuity
88 Wood Street
London
EC2V 7QR
United Kingdom

Principal Bankers

KBC Bank Ireland
Sandwith Street
Dublin 2
Ireland

AIB Bank
1 Lower Baggot
Street
Dublin 2
Ireland

Solicitors

Eversheds
One Earlsfort Centre
Earlsfort Terrace
Dublin 2
Ireland

White & Case
5 Old Broad Street
London
EC2N 1DW
United Kingdom

4 Romanov Pereulok
125009
Moscow
Russia

Registered Number

408101

Registrar

Computershare
Heron House
Corrig Road
Sandyford Industrial
Estate
Dublin 18
Ireland

GROUP INFORMATION

Directors*

David Golder (U.S. citizen)
(Non-Executive Chairman)

Dennis Francis (U.S. citizen)
(Chief Executive Officer)

Thomas Hickey
(Non-Executive Director)

Maxim Korobov (Russian citizen)
Appointed 24 April 2016
(Non-Executive Director)

Anthony Sacca (Australian citizen)
Appointed 24 April 2016
(Non-Executive Director)

David Sturt (British citizen)
Appointed 24 April 2016
(Non-Executive Director)

Paul Dowling
Resigned 24 April 2016
(Chief Financial Officer)

David Sanders (U.S. citizen)
Resigned 24 April 2016
(General Legal Counsel)

Gerard Fagan
Resigned 24 April 2016
(Non-Executive Director)

Registered Office
and Business
Address

20 Holles Street
Dublin 2
Ireland

Secretary

Auditor

Paul Dowling
Appointed 24 April 2016

David Sanders
Resigned 24 April 2016

Ernst & Young
Chartered Accountants
Harcourt Centre
Harcourt Street
Dublin 2
Ireland

* Irish citizens unless otherwise stated

PETRONEFT RESOURCES PLCANNUAL REPORT 2016FINANCIAL STATEMENTS64

NOTES

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PetroNeft Resources plc

Dublin Office
20 Holles Street
Dublin 2
Ireland

Houston Office
Suite 518, 10333 Harwin Drive
Houston, TX 77036
USA