PetroNeft
Resources plc
Annual Report
Годовой Отчет
2017
In this year’s report:
Review of the Year
Producing Oil from a Solid Asset Base 02
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
Glossary
Group Information
04
08
10
12
14
18
22
24
26
31
36
36
37
38
39
40
41
42
43
74
76
Forward Looking Statements
This report contains forward-looking statements. These
statements relate to the Group’s future prospects, de-
velopments 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 as-
sumptions.
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
01
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.
Operational Highlights
Financial Highlights
2,237 BOPD
2,237 bopd average gross
production at Licence 61 in 2017.
US$1.7M
PetroNeft revenue
US$1.7 million.
S-375s
The S-375s well at Sibkrayevskoye
produced about 150 bopd on test
with an electric submersible pump.
35% Decrease
35% decrease in administrative
expenditure
50%
50% interest in Licence
61 and Licence 67.
US$49M
US$49m Loans receivable
from joint ventures.
64 MMBBLS
64 mmbbls 2P reserves net to
PetroNeft at 31 December 2017.
US$98M
Total investment by Oil India
in Licence 61 Farmout to end
2017 is US$98 million.
US$2m Debt
US$2 million debt facility agreed
with Petrogrand AB in January 2018.
Chief Executive Officer’s Report
pages 14 – 17
Financial Review
pages 18 – 21
Annual Report 2017Review of the Year 02
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.
RUSSIATomsk OblastMoscow01,000 KMOb RiverNizhnevartovskLineynoye CPFKiev Eganskoye –Imperial Pipeline Tie-inZavyalovo – Transneft Pipeline Tie-inStrezhevoyKargasokParabelKolpashevoChazhemtoTomsk0100 KMKEY:PetroNeftRosneftTomskneft / Rosneft-GazpromneftGazpromGazpromneftRussneftImperial (ONGC)OtherAuction SiteOil PipelineGas PipelineOil FieldOil and Gas FieldGas-condensate Field• Acquired State Auction 2004• 50% ownership / operator• 4,991 sq kmLicence 61• Acquired State Auction 2010• 50% ownership / operator• 2,447 sq km Licence 67 PetroNeft Resources plc
Annual Report 2017
03
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 ac-
quired a 100% interest in Licence 61 follow-
ing 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 Di-
rectors 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 rigor-
ous 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.
Licence 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
RUSSIATomsk OblastMoscow01,000 KMOb RiverNizhnevartovskLineynoye CPFKiev Eganskoye –Imperial Pipeline Tie-inZavyalovo – Transneft Pipeline Tie-inStrezhevoyKargasokParabelKolpashevoChazhemtoTomsk0100 KMKEY:PetroNeftRosneftTomskneft / Rosneft-GazpromneftGazpromGazpromneftRussneftImperial (ONGC)OtherAuction SiteOil PipelineGas PipelineOil FieldOil and Gas FieldGas-condensate Field• Acquired State Auction 2004• 50% ownership / operator• 4,991 sq kmLicence 61• Acquired State Auction 2010• 50% ownership / operator• 2,447 sq km Licence 67Review of the Year 04
Licence 61
As well as seven discovered oil fields in
Licence 61 there are over 24 additional
prospects and leads to be explored.
Exploration
Potential
Lineynoye Oil Field
Oil Fields
1
2 Tungolskoye Oil Field
3 West Lineynoye Oil Field
4 Kondrashevskoye Oil Field
5 Arbuzovskoye Oil Field
Sibkrayevskoye Oil Field
6
7 North Varyakhskoye Oil
Field
Prospects
8 Tungolskoye West Lobe
and North (2)
9
Lineynoye Lower
10 West Korchegskaya
11 Upper Varyakhskaya
12 Emtorskaya (East &
Crown)
13 Sigayevskaya
14 Sigayevskaya East
15 Kulikovskaya Group (2)
16 Kusinskiy Group (2)
17 Tuganskaya Group (3)
18 Kirillovskaya (4)
19 North Balkinskaya
20 Traverskaya
21 Tungolskoye East
Potential Prospects (Leads)
22 Emtorskaya North
23 Sobachya
24 West Balkinskaya
9Sibkrayevskoye New Oil Field Discovery• POD being updated18KirillovskayaGroup19NorthBalkinskayaWestBalkinskaya2420TraverskayaKiev-Eganskoye16Kusinskiy Group17TuganskayaWest Lineynoye523214Kondrashevskoye3131410Kulikovskaya Group15Tungolskoye82East TungolskoyeSobachya12Emtorskaya HighSibkrayevskoye226N. VaryakhskoyeArbuzovskoye111LineynoyeArbuzovskoye New Oil Field• 2P Reserves 8.0 million bblsdTungolskoyeOil Field• 2P Reserves 5.6 million bbls• T-5 Horizontal well7Initial Focus onNorthern AreaFollowed bySouthern AreaSouthern Prospects• Log Reinterpretation shows missed pay in multiple horizons – C, UJ, M/LJ• Cretaceous and Lower Jurassic pay confirmed by well tests in immediately adjacent blocks• Exploration delayed due to focus on cash flow from Northern DevelopmentsKEY:Oil fieldProspect ready for drillingProspect identifiedPipelinePetroNeftPipeline toKiev-Eganskoye60 kmImperialPipeline toZavyalovo152 km012 KMBase Bazhenov Horizon Structurecontour interval 10m
05
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.
Due to better than expected operating cashflows only US$3.2 million
needed to be drawn on this facility.
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
Development
Highlights
2010/11: Lineynoye
• Construction of 60 km oil pipeline to KE
• Processing/storage facilities completed
and expanded to ±14,800 bpd
• Drilled 9 oil wells Pad 1, 12 wells Pad 2
• Hydraulic fracked wells on both pads
• Commenced production in August, 2010
2012/13: Arbuzovskoye
and W Lineynoye
• Construction of 10 km pipeline completed
• New production wells at Pad 1 – 6 wells
drilled
• Drilled Lineynoye No. 9 obligation well
2014/15: Arbuzovskoye
and Tungolskoye
• Arbuzovskoye Pad 1 – 5 wells
• Tungolskoye (T-5) Delineation well
• Tungolskoye Pad 1 – 4 horiz and 4 vertical
wells
• Sibkrayevskoye (S-373) Delineation well
• Lineynoye No. 10 horiz well
• Additional seismic data at Sibkrayevskoye,
other
2016/17: South Arbuzovskoye
and Sibkrayevskoye
• Arbuzovskoye Pad 2 – 2 horiz and 2 ver-
tical wells
• Sibkrayevskoye (S-374) Delineation well
• S-375/S-375s Delineation well
9Sibkrayevskoye New Oil Field Discovery• POD being updated18KirillovskayaGroup19NorthBalkinskayaWestBalkinskaya2420TraverskayaKiev-Eganskoye16Kusinskiy Group17TuganskayaWest Lineynoye523214Kondrashevskoye3131410Kulikovskaya Group15Tungolskoye82East TungolskoyeSobachya12Emtorskaya HighSibkrayevskoye226N. VaryakhskoyeArbuzovskoye111LineynoyeArbuzovskoye New Oil Field• 2P Reserves 8.0 million bblsdTungolskoyeOil Field• 2P Reserves 5.6 million bbls• T-5 Horizontal well7Initial Focus onNorthern AreaFollowed bySouthern AreaSouthern Prospects• Log Reinterpretation shows missed pay in multiple horizons – C, UJ, M/LJ• Cretaceous and Lower Jurassic pay confirmed by well tests in immediately adjacent blocks• Exploration delayed due to focus on cash flow from Northern DevelopmentsKEY:Oil fieldProspect ready for drillingProspect identifiedPipelinePetroNeftPipeline toKiev-Eganskoye60 kmImperialPipeline toZavyalovo152 km012 KMBase Bazhenov Horizon Structurecontour interval 10mPetroNeft Resources plcAnnual Report 2017Review of the Year 06
Licence 61
Northern Developments 2017
Emtroskaya High
• Extension of Lineynoye Field
• Huge unbooked reserve
potential
• Better definition after 2015
seismic
Likely Field Extension
to the North
• Well 212 oil-down-to
-2,434 m J11
• Well 211 owc -2,436
m J12
West Lineynoye
• Utility and temporary
pipeline to Lineynoye
• Good production with
minimal decline since 2015
• Economics of developing L-8
Lobe with 4 Hz wells very
attractive
• Targets about 10 million bbls
Lineynoye Central Processing Facility
• Design Capacity – 14,800 bfpd
• Storage Capacity – 37,740 bbls
• Export Pipeline Capacity – 20,000 bopd
Arbuzovskoye
• Pad 2 (South) development
• 2 Hz and 2 Vertical wells – very efficient
development
• 2 Hz wells had over 800 and 650 bopd
initial production
• Same initial production from Pad 2 as
Pad 1 (North) at half the cost
05 KMBase Bazhenov Horizon 2015 September 2015 – contour interval 10 mWest LineynoyeL-9 LobeL-8 LobeL-7 LobeL-9L-7L-4K-2K-1K-2sL-2L-1L-5L-212NV-1NV-2A-1S-374S-375 Location2km drilling radiusJ11 oil down to-2,383 m tvdssin E-300 and E-303Area = 75.8 km2J11 Spill Point-2,430 m tvdssSibneftegeofizikaprovisional oil watercontact at -2,363 mtvdssS-370S-373S-371A-103A-213L-211E-303E-300Proposed E-305L-6L-334L-10L-3KondrashevskoyeSobachyaEmtorskaya HighSibkrayevskoyeN. VaryakhskoyeArbuzovskoyeLineynoyeL-860 kms pipeline toKiev-Eganskoye 10 km pipeline 10 km utility linePipeline to LineynoyeCPF – 26 kmsLine 021519S-372S-375 Sidetrack 07
Sibkrayevskoye Development
Major discovery
Three 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.
Confirmed 12.3 m missed pay, 170 bopd open hole
test, 37⁰ API
• RS 2P reserves 53 million bbls (2013)
2015 Work Activities
• Well S-373 – Net pay 11.5 m - 97 bopd natural flow,
equates to over 200 bopd with ESP
• Additional 2D Seismic acquisition in Q1 2015
• Significant increase in size of structure and C3 re-
sources (> 100 million bbls potential)
2016 Work Activities
• Well S-373 – long term production test Q1 – stable
flow at 200 bopd on ESP
• Drilled unsuccessful well S-374 – 10 km step-out to
determine full potential of field – poor reservoir de-
velopment
• Engineering Studies for Development
• Development Decision deferred to drill S-375
2017 Work Activities
• Well S-373 – long term production test Q1 – stable
flow at 200 bopd on ESP
• Drilled wells S-375 and S-375s – mixed results
• Further testing in winter 2017/18
S-375/S-375s Well Results
• 4.8 m of net pay in thin sandstones
• Defined oil-down-to at -2,357 m tvdss
• Sidetrack from surface casing
• 14.8 m of net pay – thickest to date
• Peak rate 210 bopd on ESP on 8 mm choke
• Sustained rate of 150 bopd on a 4 mm choke
Sibkrayevskoye Development Concept
• Initial 2 pads highlighted in red/blue
• Reserves at pads 1 & 2 ~ originally estimated at about
20 million bbls each
• Pad 2 currently being updated
• View to optimize
05 KMBase Bazhenov Horizon 2015 September 2015 – contour interval 10 mWest LineynoyeL-9 LobeL-8 LobeL-7 LobeL-9L-7L-4K-2K-1K-2sL-2L-1L-5L-212NV-1NV-2A-1S-374S-375 Location2km drilling radiusJ11 oil down to-2,383 m tvdssin E-300 and E-303Area = 75.8 km2J11 Spill Point-2,430 m tvdssSibneftegeofizikaprovisional oil watercontact at -2,363 mtvdssS-370S-373S-371A-103A-213L-211E-303E-300Proposed E-305L-6L-334L-10L-3KondrashevskoyeSobachyaEmtorskaya HighSibkrayevskoyeN. VaryakhskoyeArbuzovskoyeLineynoyeL-860 kms pipeline toKiev-Eganskoye 10 km pipeline 10 km utility linePipeline to LineynoyeCPF – 26 kmsLine 021519S-372S-375 SidetrackPetroNeft Resources plcAnnual Report 2017Review of the Year 08
Licence 67
In 2011/2012 two wells were drilled, one at the
Cheremshanskaya prospect and a second at the
Ledovoye oil field. 3D Seismic was acquired in 2014.
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. In 2018 we plan to drill the C-4 well on
the Cheremshanskoye oil field targeting about
75 million bbls gross Russian C3 reserves.
These wells resulted in the discovery of a
new oil field at Cheremshanskoye (Decem-
ber 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 + Bazhe-
nov 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 indica-
tions 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 in-
tervals 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 be-
hind 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.
Major Activities
2010 – Acquired block in State Auction
• Reprocessed and reinterpreted 2,447 km2 of vintage seismic data and
21 wells located in and adjacent to the Licence area
• Identified potential oil fields at Ledovoye and Cheremshanskoye that
were not properly tested
2011 – Drilled confirmatory discovery wells
• Ledovoye No. 2a
• Cheremshanskoye No.3
2014 – Acquired 3D Seismic data
• Ledovoye - 61.68 sq km
• Cheremshanskoye - 95.16 sq km
• Acquisition – PITC Geofizika
• Processing and Interpretation – Tomsk Geophysical Company (TGK)
• Final Report – December 2014
2015 – 5 year Exploration Licence Extension
2018 – C-4 Delineation Well
Drilled Structures
1 Cheremshanskoye Oil
Field
Ledovoye Oil Field
Sklonovaya
2
3
4 North Pionerskaya
5 Bolotninskaya
Identified Prospects
and Leads
6
7
8 Grushevaya
9 Grushevaya Stratigraphic
Levo-Ilyakskaya
Syglynigaiskaya
Trap
10 Malostolbovaya
11 Nizhenolomovaya Terrasa
Gp.
12 Baikalskaya
13 Malocheremshanskaya
14 East Chermshanskaya
15 East Ledovoye
111133412141098576152CheremshanskoyeLedovoyeGrushevoye(Russneft)Lomovoye(Tomskneft)3D Seismic61.68 sq km3D Seismic95.16 sq km010 KMOil Fields and Oil TestsProspectsDrilled Structures – Dry and under reviewExcluded areas 09
Ledovoye Oil Field
Log re-evaluation confirms oil in L-2 and L-5 wells:
• LC = 4.5 – 10.9 metres
• UJ J1 = 4.9 – 11.8 metres
• Just UJ 2P Reserves booked at net 14 million bbls
2011/2012 well L-2a drilled parallel to L-2
• LC = 4.5 + metres
• UJ J1 = 4.4 metres
• More work required
MOL Group Licence 55
• Recent discovery on Verkhne-
• Laryegan structure located just east
of North Ledovoye field – extends into
Licence 67
Cheremshanskoye
Oil Field
1962 well C-1
• showed potential by-passed
pay in 3 intervals; UJ, MJ
and LJ
2011 well C-3 drilled
parallel to C-1
• UJ J1 = 8.3 metres net oil
• LJ J14 = 6.5 metres
• Delineation required
2018 proposed C-4 well
• updip from C-3 well
• targeting gross 75 million
bbls
111133412141098576152CheremshanskoyeLedovoyeGrushevoye(Russneft)Lomovoye(Tomskneft)3D Seismic61.68 sq km3D Seismic95.16 sq km010 KMOil Fields and Oil TestsProspectsDrilled Structures – Dry and under reviewExcluded areasPetroNeft Resources plcAnnual Report 2017Review of the Year 10
Our Reserves
2P Reserves
3P Reserves and Exploration
Resources (P4)
Licences 61 and 67
Licences 61 and 67
• 2P reserves are as estimated by Ryder Scott, Petroleum
Consultants, and conform to the definitions approved by
the Society of Petroleum Engineers (‘SPE’) Petroleum Re-
sources Management System (‘PRMS’) rules.
• Ryder Scott reserves for Licence 61 were updated as at 1 Jan-
uary 2016.
• Ryder Scott reserves for Licence 67 were updated as at 1 Jan-
• 3P reserves are as estimated by Ryder Scott, Petroleum
Consultants, and conform to the definitions approved by
the Society of Petroleum Engineers (‘SPE’) Petroleum Re-
sources Management System (‘PRMS’) rules.
• All Exploration Resources (P4) are based on structures with
unequivocal four-way dip closure at the reservoir horizon
as identified by 2D seismic data.
uary 2011.
Licence 61
Licence 61
29.4
Sibkrayevskoye
12.7
Lineynoye
Arbuzovskoye
Tungolskoye
Kondrashevskoye
North
Varyakhskoye
4.0
2.8
1.3
0.4
50.6
Licence 67
Licence 67
14.0 Ledovoye
2P Total
64.6 MMBBLS
3P/P4 Total
392.4 MMBBLS
172.8
Upper Jurassic
Lower
Cretaceous
Lower to Middle
Jurassic
78.1
31.5
282.4
72.6
Upper Jurassic
37.4
Lower to Middle
Jurassic
110.4
11
PetroNeft Resources plcAnnual Report 2017Review of the Year 12
Chairman’s Statement
2017 was an important year for our
Company particularly at Licence 61
where, with our partner Oil India, we
drilled an additional delineation well at
Sibkrayevskoye. The work programme saw
a mix of results, as described in detail in
the Chief Executive Officer’s Report which
follows. In 2017 we also saw continuing
challenges for the industry in what remains
an uncertain environment, with further
volatility geopolitically and in the oil price
internationally. Our production for the
year was ahead of expectations and we
have implemented a range of cost cutting
measures including salary deferrals and
reductions by the Board and
senior management.
Operations
The existing production wells at Lineynoye
and Arbuzovskoye generally performed well
during 2017 but continued their expected
natural decline. No new development wells
were drilled in 2017, however the two hori-
zontal wells drilled at South Arbuzovskoye
in 2016 continued to perform above expec-
tations. Thanks to the experience from these
wells and long term stable production from
West Lineynoye, we re-evaluated the West
Lineynoye L-8 Lobe development and have
designed a low risk development option uti-
lising horizontal development wells and with
very good economics. This development
targets about 10 million barrels of oil and
utilises existing infrastructure.
In October 2017 we announced the results
of the additional delineation well at Sib-
krayevskoye. The S-375 well was a 2 km step
out from previous wells. The initial borehole
encountered a thin pay interval so the well
was side-tracked to the north where it en-
countered 14.8 m of net oil pay, the thickest
found in the field to date. The development
plan for the field is currently being updat-
ed and revised, however we are potentially
looking at a phase one development option
with two initial development pads targeting
about 40 million barrels of oil.
2018 work programme
Following the mixed results of the S-375 well
in 2017 and in view of unstable oil prices in
the near term, it was decided to defer the first
development pad at the Sibkrayevskoye oil
field in order to further evaluate the S-375
well results and optimal development op-
tions. This review is underway and our next
development decision will reflect learnings
from previous drilling when assessing the
merits of both the Sibkrayevskoye and West
Lineynoye L-8 Lobe developments.
In Licence 67 we plan to drill the Cherem-
shanskoye No. 4 well in 2018. We feel the
well has great potential as it will test mul-
tiple targets up-dip from prior wells on the
structure that have already tested oil in the
same intervals. This is also the first well
to be drilled by the Company based on the
modern 3D seismic data acquired in 2014.
We are targeting about 75 million barrels
of Russian gross C3 reserves.
13
Reserves
The Chief Executive Officer’s Report con-
tains the details of the Ryder Scott report as
at 1 January 2016 as adjusted for 2016 and
2017 production. The report demonstrates
the large potential of the Sibkrayevskoye oil
field and the potential upside that could be
achieved from prospects such as Emtorskaya,
which lies north of Lineynoye.
Business Development
The principal near-term objective of the
Group is the development of the northern oil
fields on Licence 61 together with our partner
Oil India, and leveraging the infrastructure
already in place. 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 pur-
suing opportunities since then and are very
far advanced on one particular transaction
with due diligence and legal agreements well
advanced. We expect to be in a position to
announce a firm deal in Q3-2018.
Engagement with Natlata
Following the agreement entered into with
our largest shareholder, Natlata Partners Lim-
ited (“Natlata”) in April 2016, I am pleased to
report that the new Board has continued to
work well together in 2017/18 and our rela-
tionship with Natlata will continue to benefit
the Company in future.
Senior Management
In January 2018 Alexey Balyasnikov, the
General Director of all our Russian entities
retired from the Group, having been with us
since 2005. I would like to place on record
my deep appreciation and that of the Board
for Alexey’s service and counsel over the
years and I wish him well in his retirement.
Summary
2017 was a mixed year for PetroNeft with pos-
itives and negatives coming from the work
programme. The lessons learned from the
horizontal wells drilled in 2015 and 2016 have
been used to re-evaluate the development of
the West Lineynoye L-8 Lobe leading to a
low risk, low cost development option with
very good economics. The mixed results
of the S-375 well at Sibkrayevskoye has led
to another delay in commencement of pro-
duction there pending further review of the
well results and development options which
is underway.
Cash-flow from operations at Licence 61
has been higher than forecast so far in 2018
due to the continued strong performance of
the horizontal wells at South Arbuzovskoye,
the recent very positive improvement in oil
prices and significant reduction we have
achieved in operating expenses and overhead
costs. We will do everything possible to con-
tinue this positive trend as we go forward.
We look forward to drilling the high potential
Cheremshanskoye No. 4 well in Licence 67
in 2018; this well could significantly influ-
ence the future of the Company. The drilling
rig and necessary materials to drill the well
have already been mobilized to location on
winter roads and we plan to drill the well
this summer.
Our industry is continuing to experience un-
stable times but we have future development
targets such as the West Lineynoye L-8 Lobe
and Sibkrayevskoye that will be profitable
even at reduced oil prices.
Finally, I know that I speak for all the Direc-
tors, 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
In Licence 67 we plan to
drill the Cheremshanskoye
No. 4 well in 2018. We feel
the well has great potential
as it will test multiple
targets up-dip from prior
wells on the structure that
have already tested oil
in the same intervals.
PetroNeft Resources plcAnnual Report 2017Review of the Year 14
Chief Executive Officer’s Report
Gross production at Licence 61 in 2017
was 816,476 barrels of oil or an average of
2,237 bopd. No new production wells were
drilled during the year and this represents
a decline of 17% from 2016 production
of 990,931 barrels (2,707 bopd average).
The two horizontal wells drilled at South
Arbuzovskoye in 2016 are experiencing
natural decline but continue to perform
above expectations. The Sibkrayevskoye
development remains under evaluation
because of mixed results of the S-375
delineation well drilled in 2017.
The development of the L-8 Lobe at West
Lineynoye is under detailed consideration
based on steady production from existing
wells and the performance of the South Ar-
buzovskoye horizontal wells.
Licence 61 – Arbuzovskoye
The southern part of the Arbuzovskoye field
(Pad 2) was brought into production in 2016.
The development consisted of two horizontal
wells with about 1,000 m horizontal sections
and two vertical wells. The design was based
on our experience with the horizontal wells
drilled at Tungolskoye. The initial flow rates
on the two horizontal wells were over 800
bopd and 650 bopd and today they are mak-
ing around 500 bopd and 250 bopd which is
better than forecast. It is important to note
that the initial flow rates and declines for the
Pad 2 wells are better than that for the north-
ern part of the field (Pad 1) which comprised
11 vertical wells and cost about twice as much
to develop. The use of a mix of vertical and
strategically placed horizontal wells is now
a proven as a more efficient way to develop
similar fields in the future.
Licence 61 – Lineynoye and West
Lineynoye Development
The wells at Lineynoye have continued to
perform well during 2017, although they are
showing natural production decline. Our
team in Tomsk, including our in-house work-
over crew, have worked effectively to keep
wells online and to intervene where necessary
to optimise well performance.
At West Lineynoye we have been producing
from two vertical wells and one horizontal
well since 2015 with minimal decline in
production and no water cut. Based on the
experience gained at Tungolskoye and at
Arbuzovskoye Pad 2 where we have sim-
ilar pays in the J1-1 reservoir interval we
feel we can get much better wells at West
Lineynoye. We are currently re-evaluating
the development of the L-8 Lobe of the field
utilising four horizontal wells with up to 1,000
m horizontal sections. As we have existing
infrastructure which ties the L-8 Lobe to the
Central Processing Unit, the economics of
the development look very good. This de-
velopment would target about 10 million
barrels of 2P reserves.
15
coming months. This data will help to shape
our future plans for Sibkrayevskoye.
Licence 61 – Emtorskaya
Emtorskaya is a very large prospect interpret-
ed to be the northern extension of the Liney-
noye oil field. Two wells (E-300 and E-303)
drilled on the structure in Soviet times have
been reinterpreted and confirm oil in the J1-1
interval and potential oil in the J1-2 interval.
The structural crest of Emtorskaya is about
60 m high to the Lineynoye crest. The re-
serves associated with this prospect could
be very large. Ryder Scott estimates the P3
reserves just up dip from the existing wells
at 64 million barrels and Sibneftegeofizika
estimates the Russian C3 reserves for the
same area at over 100 million barrels. The
recent work done at West Lineynoye L-8 Lobe
shows that Emtorskaya can be very economic
with minimal net pay projections and further
de-risks this important prospect.
Today based on the
experience gained at
Tungolskoye and at
Arbuzovskoye Pad 2
where we have similar
pays in the J1-1 reservoir
interval we feel we can
get much better wells
at West Lineynoye.
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. In Q1
2016, Q1 2017 and Q1 2018 the S-373 well was
put on winter test production and averaged
about 200 bopd during the periods. This
well, along with the previous wells, S-372
and S-370, formed the basis for the initial
development of Sibkrayevskoye (Pad 1) which
was initially planned for 2017 but has now
been deferred pending further review of the
S-374 and S-375 well results drilled in 2016
and 2017 respectively.
In 2017, we took a conservative approach and
drilled the S-375 well about 2 km south of the
initial core wells. The objective of the well
was to determine the sand distribution and
confirm the oil water contact at the southern
edge of the northern lobe of the field. The
well was drilled as a deviated well from the
Pad 2 surface position to a targeted loca-
tion 1.5 km to the south. The wireline logs
indicated there is about 4.8 m of oil pay in
the well with the top of the Jurassic J1 in-
terval located at -2,346 m tvdss, which was
on prognosis, and the oil-down-to confirmed
at -2,357 m tvdss.
The well was then sidetracked (S-375s) from
the surface casing to a location about 400 m
north of the Pad 2 surface position. The log
and core evaluation of the primary Jurassic
J1 reservoir indicated about 14.8 m of net oil
pay. This pay is thicker than encountered
in other wells drilled at the northern part of
Sibkrayevskoye, which typically had about
10 m of net oil pay.
The cased-hole step testing of the S-375s
well was completed in October 2017. Dur-
ing the final five days of ESP production the
well produced about 150 bopd. The well
was then suspended due to lack of storage
capacity at site. The S-375s and S-373 wells
are being produced on long term test during
the winter season of 2017/2018 with the oil
being trucked about 26 kms to the Lineynoye
central processing facility by winter road.
The reserve estimate and Development Plan
for the field will be updated with the S-374
and S-375s drilling and testing results in the
PetroNeft Resources plcAnnual Report 2017Review of the Year
16
Chief Executive Officer’s Report
(continued)
Licence 67 – Cheremshanskoye
In the winter of 2013/2014, we acquired 156
km2 of 3D seismic data over the Cheremshan-
skoye and Ledovoye oil fields. This is high
quality data that has helped to better define
the structure and potential of the two fields.
In 2018 we plan to drill the Cheremshanskoye
No. 4 (C-4) delineation well. The C-4 well is
designed to further delineate and de-risk the
Cheremshanskoye field in advance of field
development. Three prior wells have been
drilled on the field, most recently in 2011 by
PetroNeft, and oil has been identified and
tested in 4 different intervals in the field: the
Lower Jurassic J-14 and J-13 intervals and
the Upper Jurassic J1-1 and J1-3 intervals.
These initial wells were drilled without the
benefit of modern 3D seismic data which was
acquired in 2014. The C-4 well is designed to
test a large portion of the field which is struc-
turally higher than the previous wells based
on this recently acquired 3D seismic data.
The primary reservoir target is the J1-3 inter-
val which is approximately 10 m in thickness
throughout the region and is the primary
reservoir at the adjacent producing Lomo-
voye field operated by TomskNeft. The J1-3
interval tested 240 bopd of light oil (40°API)
on natural flow in the adjacent Lomovoye
No. 208 well.
The secondary reservoir target is the J14
interval which had a natural flow of 33 bopd
of light oil (49°API) from 6.5 m of net pay in
the 2011 Cheremshanskoye No. 3 well. The
current Russian State (GKZ) registered re-
serves for this interval are about 16 million
bbls gross recoverable C1+C2 reserves.
Tomsk Geophysical Company estimates the
Russian C3 gross reserves for all 4 intervals at
about 75 million bbls recoverable for the field,
based on the 3D seismic and log evaluation
of the existing wells.
Based on the results of a competitive tender
the drilling contract was awarded to SSK
Drilling, a large drilling contractor with op-
erations throughout Russia. The drilling
rig and necessary supplies have been mobi-
lised to the site this winter while winter roads
were in place and the well will be drilled this
summer. The well is being drilled under the
joint venture agreement with our partner for
Licence 67, Arawak Energy, on a 50:50 basis.
PetroNeft’s proportion of the well costs will
be funded from existing resources.
Reserves
Independent reserve consultants Ryder
Scott completed an assessment of petrole-
um 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 on page 17,
PetroNeft’s share of the combined Licence
61 and Licence 67 reserves is 64.6 mmbbls
2P and 16.5 mmbbls P1 as at 1 January 2018
following adjustment of the Ryder Scott num-
bers for production.
We have had good exploration success in
the past and feel we can add reserves with
additional appraisal at Cheremshanskoye,
Emtorskaya and Traverskaya in the medium
term. In the longer term we expect to grow
our reserves further with continued explo-
ration on our two Licence areas. Numerous
prospects have been seismically defined but
not yet drilled, particularly in the southern
half of Licence 61.
Conclusion
In 2016 we applied the experience gained in
horizontal drilling at Tungolskoye in 2015
to the new horizontal wells at South Arbu-
zovskoye and achieved very good initial re-
sults. These two horizontal wells continue
to perform better than initial expectations
throughout 2017 and to date in 2018.
Based on the steady production data from 3
wells at West Lineynoye and the experience
gained from the horizontal wells results at
South Arbuzovskoye, we are re-evaluating the
West Lineynoye L-8 Lobe development and
are confident that the field can be developed
in a low risk, very economical way utilising
horizontal wells and the existing infrastruc-
ture. This development would target about
10 million barrels of gross 2P reserves.
In 2017 we had another setback at Sib-
krayevskoye with the mixed results of the
S-375 well. Even with this mixed result, Sib-
krayevskoye is the largest field found in the
Tomsk region in recent years and represents
We have had good
exploration success in
the past and feel we
can add reserves with
additional appraisal
at Cheremshanskoye,
Emtorskaya and
Traverskaya in the
medium term.
17
Ryder Scott Estimated Reserves in Oil Fields (net to PetroNeft)
Oil Field Name
Proved
Proved &
Probable
Proved,
Probable &
Possible
1P mmbo
2P mmbo
3P mmbo
6.8
0.3
0.7
1.4
5.9
0.2
15.3
1.5
16.8
12.7
2.8
1.3
4.0
29.4
0.4
50.6
14.0
64.6
15.7
3.6
1.6
5.2
29.4
0.5
56.0
17.4
73.4
• Licence 61 as at 31 December 2017 (Ryder Scott report as at 1 January 2016, adjusted
for 2016 and 2017 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.
Dennis Francis
Chief Executive Officer
a core asset in the future of the company.
We are currently evaluating a phase one de-
velopment for the field that would include
two initial development pads. This initial
phase would target about 40 million barrels
of gross 2P reserves and requires investment
in infrastructure to develop the field and
transport the oil to Lineynoye.
Licence 61
Lineynoye
Tungolskoye
In addition to Sibkrayevskoye and the West
Lineynoye L-8 Project which are under study
and consideration, we view the Emtorskaya
Prospect as a very low risk appraisal oppor-
tunity in Licence 61.
Kondrashevskoye
Arbuzovskoye
Sibkrayevskoye
North Varyakhskoye
Licence 67
Ledovoye
Total net to PetroNeft
In Licence 67 we look forward to drilling
the Cheremshanskoye No. 4 well targeting
about 75 million barrels of Russian gross C3
reserves. The well has great potential as it
will test multiple targets up-dip from nearby
wells on the structure that have already tested
oil in the same intervals and utilising the
modern 3D seismic data acquired in 2014.
In Licence 61 we have an excellent partner
in Oil India and who are assisting in these
challenging times for our industry. We also
have an excellent partner in Licence 67 in
Arawak Energy who appreciate the technical
potential of the Licence.
PetroNeft Resources plcAnnual Report 2017Review of the Year 18
Financial Review
2017 was a challenging one from a
finance point of view with the continued
volatility encountered in the commodity
and currency markets. Oil India agreed
to provide funding for the drilling of a
well at Sibkrayevskoye by way of an
unsecured US$4 million shareholder loan
to the WorldAce Group, however only
US$3.2 million needed to be drawn as the
remainder was funded from operating
cashflows within the WorldAce Group.
Review of PetroNeft loss for the year
The loss after taxation for the year was US$3,239,041 (2016: US$5,427,660). The
loss included a foreign exchange gain on intra-group loans of US$52,093 (2016:
US$77,458), the share of joint venture’s net loss in WorldAce Investments of
US$4,285,833 (2016: US$5,721,232) and the share of joint venture’s net loss in
Russian BD Holdings B.V. of US$381,654 (2016: US$288,198).
PetroNeft Key Financial Metrics
Continuing operations
Revenue
Cost of sales
Gross profit
Administrative expenses
Exchange gain on intra-Group loans
Operating loss
Share of joint venture’s net loss – WorldAce
Investments Limited
Share of joint venture’s net loss – Russian BD
Holdings B.V.
Finance revenue
Loss for the year for continuing operations
before taxation
Income tax expense
Loss for the year
2017
US$’000
2016
US$’000
1,713
(1,550)
163
(1,403)
52
2,280
(2,038)
242
(2,155)
77
(1,188)
(1,836)
(4,286)
(5,721)
(382)
3,511
(2,345)
(894)
(3,239)
(288)
3,248
(4,597)
(830)
(5,427)
Revenue
Revenue in 2017 and 2016 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.
Administrative
expenditure was
reduced by 35%
in the year.
19
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 strate-
gic and financial decisions relating to 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 ven-
tures. The costs associated with this revenue
are included in cost of sales.
In 2017 PetroNeft Group charged a total of
US$0.85 million (2016: US$1.46 million) to
the joint ventures in respect of management
services. PetroNeft also owns a small con-
struction company, Granite Construction,
which carries out small ad hoc construction
projects such as well pads and on-site ac-
commodation on both Licences as well as
maintaining the winter road network each
year. In 2017 Granite Construction charged
the WorldAce Group US$0.86 million (2016:
US$0.81 million) in respect of these services.
Administrative expenditure was reduced
by 35% in the year . The Company imple-
mented a cost cutting program across the
Group and the Directors and management
have agreed to reduce and defer significant
portions of their remuneration in order to
assist the Company. A total of US$824,080
has been deferred by the Directors and senior
management in order to assist the Company
- see Note 24 for details.
Finance Revenue
Most of the finance revenue relates to in-
terest receivable on loans to joint ventures.
During 2017 PetroNeft had interest receiva-
ble of US$3,238,839 (2016: US$3,011,025) on
its loans to WorldAce Group and US$270,773
(2016: US$234,402) on its loans to Russian BD
Holdings B.V.
Key Financial Metrics – WorldAce Group
Because of the equity method of consolidation that applies to PetroNeft’s interest in WorldAce,
it is difficult to extract meaningful metrics from the PetroNeft consolidated income statement.
Therefore, the metrics below are an extraction from the audited financial statements of the
WorldAce Group and give an indication as to the performance of Licence 61:
Continuing operations
Revenue
Cost of sales
Gross profit
Administrative expenses
Operating loss
Loss on disposal of oil and gas properties
Write-off of exploration and evaluation assets
Finance revenue
Finance costs
Loss for the year for continuing operations
before taxation
Income tax
Loss for the year
WorldAce Group WorldAce Group
2016
US$’000
2017
US$’000
27,637
(25,273)
2,364
(3,093)
(729)
-
(26)
66
(7,883)
(8,572)
-
(8,572)
23,208
(22,399)
809
(3,229)
(2,420)
(876)
(1,420)
19
(6,745)
(11,442)
-
(11,442)
PetroNeft’s 50% share
(4,286)
(5,721)
Net Loss – WorldAce Group
PetroNeft’s share of the net loss of WorldAce
Group for the full year decreased to US$4.3
million from US$5.7 million in 2016. The de-
crease in the loss for the year before taxation
can be attributed to an improved oil price
and lower costs. Of the US$7.7 million in
interest payable by WorldAce, US$3.2 million
is payable to PetroNeft.
822,388 barrels of oil (2016: 985,824 barrels)
achieving an average oil price of US$35 per
barrel (2016: US$24 per barrel). All oil was
sold on the domestic market in Russia.
Finance Costs – WorldAce Group
Gross Finance costs of US$7.9 million (2016:
US$6.7 million) mainly relates to interest on
loans from PetroNeft and Oil India.
Revenue, Cost of Sales and Gross
Margin – WorldAce Group
Gross Revenue from oil sales was US$27.6
million for the year (2016: US$23.2 million).
Cost of sales includes depreciation of US$2.6
million (2016: US$3.3 million), which was
lower mainly due to lower production. The
gross margin improved during the year due
to improved oil prices. Operating costs per
barrel (cost of sales excluding depreciation
and Mineral Extraction Tax) were higher at
US$10.36 (2016: US$8.82 per barrel) due to
lower production. 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 816,476 barrels of oil
(2016: 990,931 barrels) in the year and sold
Taxation – WorldAce Group
There is no tax payable in 2017 or 2016.
Current and Future Funding
of PetroNeft Group
In previous Annual Reports 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 10km to
the south of existing wells, did not encoun-
ter commercial hydrocarbons. The result of
this well has led to the postponement of the
commencement of the development of the
Sibkrayevskoye oil field. As a consequence
of this, the date by which PetroNeft expects
PetroNeft Resources plcAnnual Report 2017Review of the Year 20
Financial Review
(continued)
to start receiving interest due on its share-
holder loans to WorldAce has been delayed
until 2019 at the earliest from the previously
guided estimate of late 2017.
The success of the S-375 well in 2017 has
led to a period of extended testing at Sib-
krayevskoye and in 2018 we will refine and
re-evaluate the development program.
While there were consolidated net current
liabilities at the year-end of US$1.1m (2016:
net current assets of US$410k), the Company
has implemented a cost cutting program
across the Group and the Directors and man-
agement have agreed to reduce and defer
significant portions of their remuneration
in order to assist the Company. Note 24 out-
lines the amounts owed to the Board and
management in this regard. Cashflow from
operations within the WorldAce Group in
2018 to date is significantly ahead of forecast
due to higher than expected production,
much improved oil prices and the benefit
of the cost cutting programme.
In January 2018 we agreed a secured loan
facility for up to US$2 million with Swedish
company Petrogrand AB (“Petrogrand”). The
loan matures on 31 December 2018. The loan
facility will be used for general corporate pur-
poses and to finance the drilling programme
in 2018. This loan facility will provide time
and space for a more long-term financing
solution to be put in place. This loan facility
is secured and Petrogrand AB have a floating
charge over the assets of the Group.
The Company is in advanced discussions on
a transaction that would refinance the US$2
million loan and provide additional financing
with basic terms agreed and due diligence
and legal documentation well advanced. We
expect to conclude this transaction in Q3
2018. The Company is also pursuing other
options such as the sale or farmout of Li-
cence 67.
The Directors are satisfied that the options
being pursued are progressing well and are
highly confident the funding gap can be solved.
Production/
Completion risk
The ability to re-finance the Petrogrand loan
represents a material uncertainty 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 Con-
solidated 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.
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 /
Risk Issue
Country Risks
Geopolitical
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.
Political – federal
risks
Fields/acquisitions below 500 million boe are not considered
strategic to the Russian state.
State is encouraging small operators.
Political – local risks
Tomsk Oblast administration is very supportive of development.
Ownership of assets
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.
Changes in tax
structure
Fiscal system is stable – recent and proposed changes largely
benefit upstream oil and gas companies.
Proactive lobbying effort made in area of tax legislation.
Technical Risks
Exploration risk
Proven oil and gas basin with multiple plays.
Good quality 2D & 3D seismic.
Knowledgeable exploration team with proven track record in
region.
Drilling risk
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.
Reserve risk
SPE and Russian reserves updated and in substantive alignment.
21
Risk Category /
Risk Issue
Financial Risks
Availability of
finance
Oil price
Mitigation
Strong reserve base and key infrastructure already in place
makes good investment case.
Robust project sanction economics – conservative base case
assumptions. Russian tax system means economics are less
sensitive to changes in oil price.
Industry cost
inflation
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.
Uninsured events
Comprehensive insurance programme in place.
Other Risks
HSE incidents
HSE standards set and monitored regularly across the Group.
Export quota
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.
Third party pipeline
access
25-year transportation agreement in place for Licence 61, several
options available for ultimate development of Licence 67.
Transneft pipeline
access
Available capacity and access confirmed.
East Siberia-Pacific Ocean (“ESPO”) pipeline allows export of oil
to Pacific market.
Investor Relations
During 2017, the CEO and CFO held regular meetings with analysts and institutional
investors. The target for 2018 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 20 June
2018 are as follows:
Ordinary Shares
Percentage
208,429,458
78,079,986
37,000,000
23,014,273
53,203,708
29.47%
11.04%
5.23%
3.25%
7.52%
Name of shareholder
Natlata Partners Limited
Daria Shaftelskaya
Mr. Duming Zhai
Ali Sobraliev
J&E Davy
Paul Dowling
Chief Financial Officer
The success of the S-375
well in 2017 has led to
a period of extended
testing at Sibkrayevskoye
and in 2018 we will
refine an re-evaluate the
development program.
PetroNeft Resources plcAnnual Report 2017Review 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.
23
Alexander Frenovsky, 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 important Board
meetings to report to the full Board on HSE
issues. There were no lost time incidents in
2017 or 2016.
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 opera-
tions 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 em-
ployees.
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
a 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 suc-
cessful and, while there were some minor
recommendations at the end of the exercise,
the local and federal authorities were satis-
fied that the Group is well prepared for such
an emergency. Similar joint exercises 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.
Environmental Impact Management
The Board recognises that the Group’s ac-
tivities can have a significant impact on the
environment. As part of its responsibilities
under Russian law, an environmental assess-
ment 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 Envi-
ronmental Engineer on site in our Tomsk
office. Her responsibilities include:
• Monitoring of exploration and production
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.
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 percent-
age 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 joint inspections relating
to compliance with the various health, safety
and environmental obligations took place
in 2017 and 2016 and no significant issues
arose from these inspections.
• Maintain an Emergency Response Plan
activities.
for the facilities of the Group.
• Develop and get approved by state au-
thorities:
– Regulation for control of industrial safe-
ty 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.
• Monitoring activities of sub-contractors.
• Maintaining compliance with various en-
vironmental laws and regulations.
In 2017 the main activities from an environ-
mental perspective were:
• Environmental, air, water and subsoil mon-
itoring at Lineynoye, Arbuzovskoye and
Tungolskoye oil fields.
• Planning and approvals for 2017 and 2018
drilling programmes.
• Recultivation at Arbuzovskoye Oil field.
• Engineering and survey works, including
environmental relating to planned facili-
ties construction at Sibkrayevskoye and
West Lineynoye oil fields.
PetroNeft Resources plcAnnual Report 2017Review of the Year
24
Board of Directors
David Golder
(Non-Executive Chairman)(Age 70)
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.
Dennis Francis
(Chief Executive Officer and Executive
Director) (Age 69)
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.
Thomas Hickey
(Non-Executive Director) (Age 49)
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. 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.
25
Maxim Korobov
(Non-Executive Director) (Age 60)
Anthony Sacca
(Non-Executive Director) (Age 46)
David Sturt
(Non-Executive Director) (Age 56)
Mr. Korobov was appointed a
Non-Executive Director of the
Company in 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
in 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
in 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 Herriot Watt
University.
PetroNeft Resources plcAnnual Report 2017Governance 26
Directors’ Report
for the year ended 31 December 2017
The Directors present herewith their Annual Report and the audited
financial statements of PetroNeft Resources plc (“PetroNeft”, “the
Company”, or together with its subsidiaries and joint ventures,
“the Group”) for the year ended 31 December 2017.
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 estab-
lished to acquire and develop oil and gas
exploration, development and production
interests in Russia and other countries of
the former Soviet Union. A detailed busi-
ness 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$2,345,371 (2016: US$4,597,419). After a tax
charge of US$893,670 (2016: US$830,241) the
loss for the year amounted to US$3,239,041
(2016: US$5,427,660). 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 12 to
13, the Chief Executive Officer’s Report on
pages 14 to 17 and the Financial Review on
pages 18 to 21. The key financial metrics used
by management are set out in the Financial
Review on page 18.
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 prac-
ticable and desirable, given the size and na-
ture of the business and the constitution
of the Board, to comply with the new 2018
QCA Corporate Governance Code (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 consul-
tation with a number of significant insti-
tutional small company investors, as an
alternative corporate governance code
applicable to Small and Mid-Size Quoted
Companies. An alternative code was pro-
posed because the QCA considered the UK
Corporate Governance Code to be inappro-
priate to many Small and Mid-Size Quoted
Companies.
The QCA Code states that “Good corpo-
rate 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 reg-
ular 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, con-
duct 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 in-
dividual or there should be a clear expla-
nation 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, remu-
neration and nomination committees; and
h) there should be a dialogue with sharehold-
ers 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 sup-
plied in a timely manner with information in
a form and of a quality appropriate to enable
it to discharge its duties. These matters in-
clude approval of the Group’s general com-
mercial 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.
27
and have delegated responsibility for the
implementation of this system to executive
management. This system is reviewed an-
nually 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 con-
trol provides reasonable, though not absolute,
assurance that assets are safeguarded, trans-
actions 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 page 76.
There have been no changes to the composi-
tion of the Board to date since 1 January 2017.
In accordance with Article 89 of the Articles
of Association, Dennis Francis and Anthony
Sacca retire by rotation and, being eligible,
offer themselves for re-election.
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 rela-
tionship with the external auditor including
reviewing the results of their audit. During
the year the Committee took the decision to
put the Group audit out to tender as Ernst &
Young had been the auditors for ten years
and while there is no obligation to change
auditors it is good practice to go out to tender
every ten years. Following the tender process
Deloitte were appointed as Group auditors.
The Board would like to thank Ernst & Young
for their advice and assistance during their
tenure as auditors.
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
comprise 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 Joint Ventures
Under the joint venture agreements in re-
spect of Licence 61 and Licence 67 both
partners are entitled to appoint two board
representatives to the joint venture com-
panies, 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 regu-
lar 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.
Shareholder Communication
Shareholder communication is given high
priority by the Group and there are regular
meetings between senior executives, insti-
tutional shareholders, analysts and brokers.
These meetings, which are governed by pro-
cedures designed to ensure that price sensi-
tive 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 an-
swer questions. In addition, major share-
holders 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 pro-
gramme. 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 pres-
entations, 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
PetroNeft Resources plcAnnual Report 2017Governance
28
Directors’ Report
for the year ended 31 December 2017
(continued)
Directors, Company Secretary and their Interests
The Directors and Company Secretary who held office at 31 December 2017 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
* Shares held via Natlata Partners Limited.
Ordinary Shares
As at
Ordinary Shares
As at
20 June 2018 31 December 2017
Ordinary Shares
As at
1 January 2017
3,165,458
3,165,458
3,165,458
25,890,416
25,890,416
25,890,416
208,429,458
208,429,458
208,429,458
2,226,283
2,226,283
2,226,283
731,583
731,583
731,583
In addition to the above, the Directors who held office at 31 December 2017 held the following share options:
Director
David Golder
Dennis Francis
Thomas Hickey
Options held
as at
1 January 2017
Granted
in year
Exercised
in year
250,000
805,000
210,000
-
-
-
-
-
-
Lapsed
in year
(120,000)
(330,000)
(100,000)
Options
held as at 31
December
2017
130,000
475,000
110,000
Exercise price
£0.065
£0.065
£0.065
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 struc-
ture 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 uncertain-
ties 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 19 and 20 in the paragraphs
related to the “Current and future funding
of PetroNeft” and in Note 2 to the financial
statements on page 43.
tainties that may cast significant doubt upon
the Group and the Company’s ability to con-
tinue as a going concern. Nevertheless, after
making enquiries, and considering the un-
certainties described in the Finance Review
and Note 2, the Directors are confident that
the Group and the Company will have ade-
quate 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, the financial statements do
not include any adjustments to the carry-
ing amount or classification of assets and
liabilities that would result if the Group or
Company were unable to continue as a going
concern.
The circumstances outlined in the Finance
Review and Note 2 represent material uncer-
Remuneration Committee Report
The Group’s policy on senior executive re-
muneration 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 govern-
ance of the Group.
In setting remuneration levels, the Remune-
ration Committee takes into consideration
the remuneration practices of other compa-
nies of similar size and scope. A key philos-
ophy 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 share-
holder 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 share-
holder return targets are met. Share option
holdings of the Directors are disclosed above.
29
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*
2017
2016
Fees,
Emoluments &
Compensation
Pension
Total
Fees,
Emoluments &
Compensation
Pension
Total
399,505
29,963
429,468
-
-
-
-
-
-
399,505
463,539
351,359
29,963
8,466
1,399
429,468
472,005
352,758
399,505
29,963
429,468
1,214,403
39,828
1,254,231
57,903
36,907
36,907
36,907
36,907
-
205,531
-
-
-
-
-
-
-
57,903
36,907
36,907
36,907
36,907
-
71,280
44,164
30,031
30,031
30,031
22,811
205,531
228,348
-
-
-
-
-
-
-
71,280
44,164
30,031
30,031
30,031
22,811
228,348
Total Directors’ remuneration
605,036
29,963
634,999
1,442,751
39,828
1,482,579
* Paul Dowling, David Sanders and Gerard Fagan left the Board of PetroNeft on 24 April 2016.
As detailed in Note 24 included in the above are unpaid fees and remuneration due to Directors as at 31 December 2017 of US$424,564
(2016: US$54,021).
Your attention is drawn to the details of the share options held by the Directors as set out in the Report of the Directors on page 28.
Political Donations
The Company did not make any political
donations during the year.
Important Events after the Balance
Sheet Date
In January 2018 we agreed a secured loan
facility for up to US$2 million with Swedish
company Petrogrand AB (“Petrogrand”). The
loan matures on 31 December 2018. The loan
facility will be used for general corporate pur-
poses and to finance the drilling programme
in 2018. This loan facility will provide time
and space for a more long-term financing
solution to be put in place. Petrogrand is a
related party by virtue of Maxim Korobov,
a director of PetroNeft, being a significant
shareholder of Petrogrand.
Accounting Records
The measures taken by the Directors to en-
sure compliance with the requirements of
Sections 281 to 285, Companies Act 2014,
regarding accounting records are the im-
plementation of necessary policies and
procedures for recording transactions, the
employment of competent accounting per-
sonnel with appropriate expertise and the
provision of adequate resources to the finan-
cial 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 responsibil-
ities 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.
Directors’ Responsibilities Statement
in Respect of the Financial
Statements
The Directors are responsible for prepar-
ing 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 finan-
cial year. Under that law the Directors have
PetroNeft Resources plcAnnual Report 2017Governance
30
Directors’ Report
for the year ended 31 December 2017
(continued)
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 state-
ments 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;
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 una-
ware; 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.
• 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 go-
ing concern basis unless it is inappropriate
to presume that the Group and Company
will continue in business.
Auditors
In 2017 PetroNeft held a competitive tender
process for the appointment of auditors for
the 2017 financial period onwards. Following
that process, Ernst & Young Chartered
Accountants resigned as auditors and the
Board appointed Deloitte as new auditors to
PetroNeft Group. Deloitte Ireland LLP contin-
ue in office in accordance with the provisions
of Section 383 (2) of the Companies Act 2014.
Approved by the Board on 25 June 2018
David Golder
Dennis Francis
Director
Director
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 safe-
guarding the assets of the Group and hence
for taking reasonable steps for the prevention
and detection of fraud and other irregular-
ities. Legislation in Ireland governing the
preparation and dissemination of financial
statements may differ from legislation in
other jurisdictions. The directors are respon-
sible for the maintenance and integrity of the
corporate and financial information included
on the company’s website.
Independent Auditor’s Report
to the Members of PetroNeft Resources plc
31
Opinion on the financial statements of PetroNeft Resources plc
In our opinion the Group and Parent Company’s 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 2017 and of the loss of the Group and Parent Company for the financial year then
ended; and
• have been properly prepared in accordance with the relevant financial reporting framework and, in
particular, with the requirements of the Companies Act 2014.
The financial statements we have audited comprise:
The Group financial statements:
• The consolidated income statement;
• The consolidated statement of comprehensive income;
• The consolidated balance sheet;
• The consolidated statement of changes in equity;
• The consolidated cash flow statement; and
• The related notes 1 to 27, including a summary of significant accounting policies as set out in note 3.
The Parent Company financial statements:
• The parent company balance sheet;
• The parent company statement of changes in equity;
• The parent company cash flow statement; and
• The related notes 1 to 27, including a summary of significant accounting policies as set out in note 3.
The financial reporting framework that has been applied in the preparation of the group financial statements is the Companies Act 2014
and International Financial Reporting Standards (IFRS) as adopted by the European Union (IFRSs as adopted by the EU) (“relevant
financial reporting framework”).
The financial reporting framework that has been applied in the preparation of the parent company financial statements is the Companies
Act 2014 and IFRSs as adopted by the EU as applied in accordance with the provisions of the Companies Act 2014 (“relevant financial
reporting framework”).
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (Ireland) (ISAs (Ireland)) and applicable law. Our
responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the financial statements
section of our report.
We are independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit of
the financial statements in Ireland, including the Ethical Standard issued by the Irish Auditing and Accounting Supervisory Authority,
as applied to public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Material uncertainty relating to going concern
We draw attention to Note 2 in the financial statements concerning the Group and Parent Company’s ability to continue as a going concern.
The Group incurred a loss of US$3.2 million for the financial year ended 31 December 2017, had total assets of US$50.2 million and net cur-
rent liabilities of US$1.1 million. The Group’s total assets of US$50.2 million includes US$49.4 million in respect of financial assets – loans
and receivables due from joint ventures. The Group is dependent on the performance of its subsidiaries and joint ventures. The Group and
Parent Company have two joint ventures that are loss making.
PetroNeft Resources plcAnnual Report 2017Financial Statements 32
Independent Auditor’s Report
to the Members of PetroNeft Resources plc
(continued)
The Parent Company incurred a loss of US$14.3 million for the financial year ended 31 December 2017, had total assets of US$50.9 million
and net current liabilities of US$0.25 million. The Parent Company’s total assets of US$50.9 million includes US$49.4 million in respect
of financial assets – loans and receivables due from joint ventures and US$0.3 million in respect of financial assets – investments in joint
ventures and subsidiaries.
In response to this, we:
• obtained an understanding of the Group’s and Parent Company’s controls over the development and approval of the projections and assump-
tions used in the cash flow forecasts to support the going concern assumption and assessed the design and implementation of these controls;
• tested the key assumptions used in the cash flow forecasts by agreement to historical run rates, expenditure commitments and other sup-
porting documentation;
• performed sensitivity analysis on the cash flow forecasts to assess the amount of headroom;
• reviewed the terms of loan facility received subsequent to the financial year-end;
• tested the clerical accuracy of the cash flow forecast model; and
• assessed the adequacy of the disclosures in the financial statements.
As stated in Note 2, these events and conditions, along with other matters as set forth in Note 2, indicate that a material uncertainty exists
that may cast significant doubt on the Group’s and Parent Company’s ability to continue as a going concern. Our opinion is not modified
in respect of this matter.
Summary of our audit approach
Key audit matters
The key audit matters that we identified in the current year were:
• Recoverability of financial assets and loans advanced to joint venture undertakings; and
• Going concern (see material uncertainty relating to going concern section)
Materiality
The materiality that we used for the Group financial statements was US$595,000, which was determined
based on approximately 1.3% of shareholders’ equity.
Scoping
The materiality that we used for the Parent Company financial statements was US$476,000, which
was determined based on approximately 1.3% of shareholders’ equity.
Our Group audit was scoped by obtaining an understanding of the Group and its environment and
assessing the risks of material misstatement at the Group level. We also considered the quantum of
financial statement balances and individual financial transactions of a significant nature.
We assessed the Group to consist of three significant components being PetroNeft Resources PLC
(Parent Company), LLC Granite Construction (subsidiary) and WorldAce Investments Limited (joint
venture). We performed a full scope audit on these components.
Significant changes in our
approach
No significant changes in our approach.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial state-
ments of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that
we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in
the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial
statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
In addition to the matter described in the Material Uncertainty relating to Going Concern section, we have determined the matter
described below to be the key audit matter to be communicated in our report.
33
Key audit matter title: Recoverability of financial assets and loans advanced to joint venture undertakings
Key audit matter
description
As described in the significant accounting policies 3.5, the Parent Company held investments in joint ventures
and subsidiaries of US$NIL (2016: US$4.9 million) and US$0.3 million (2016: US$0.3 million) respectively. The
Group and Parent Company held loans receivable from joint ventures of US$49.4 million (2016: Group: US$47.7
million, Parent Company: US$56.5million) at the balance sheet date.
The realisation of investments in joint ventures and subsidiaries and amounts due from joint ventures is de-
pendent on the successful development of economic reserves and revenue growth from the Licences 61 and
67, held by joint ventures.
Licence 61, held by WorldAce Investments Limited, is dependent on the future exploration and development of
the licence, including the reserves at the Sibkrayevskoye field. Licence 67, held by Russian BD Holdings B.V. is
dependent on the successful drilling of a new well in 2018, and subsequent development or sale of the Licence.
There is a risk that the recoverability of financial assets and loans advanced to joint venture undertakings is
not realisable and a provision should be recorded in the financial statements.
As such, we have identified this as a key audit matter.
We carried out the following procedures:
• We evaluated the design and implementation of key controls identified in the impairment process;
• We reviewed the carrying value of the investments for impairment indicators;
• Where there were indications of impairment, we reviewed and challenged management’s impairment models
of the joint ventures including the key assumptions (oil reserves, discount rate, oil production rates, oil price
and foreign exchange rates etc.) underpinning the models.
• We assessed the adequacy of the disclosures in the financial statements.
As noted above the realisation of investments and the recoverability of amounts due from joint ventures is
dependent on the Group and Parent Company continuing as a going concern and the continued successful
development of economic reserves on the Licence 61 and on the successful drilling in Licence 67 and subse-
quent sale, which are subject to a number of uncertainties, including the raising of additional finance, which
is subject to a number of uncertainties. The financial statements do not include any adjustments relating to
this uncertainty and the ultimate outcome cannot, at present, be determined.
Our opinion is not modified in respect of this matter and we are satisfied that the disclosures are reasonable
and proportionate to this uncertainty.
How the scope
of our audit
responded to the
key audit matter
Key observations
Our application of materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions
of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work
and in evaluating the results of our work.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Group financial statements
Parent company financial statements
Materiality
$595,000
$476,000
Basis for determining
materiality
Rationale for the
benchmark applied
Materiality was determined based on approximately
1.3% of shareholders equity.
Materiality was determined based on ap-
proximately 1.3% of shareholders equity.
We have used one benchmark to determine our materiality, which we believe cover key metrics of
the Group, which are used by stakeholders.
Given that the Group’s main activity is the holding of investments in joint ventures that are current-
ly engaged in both production and exploration activities and are loss making we have calculated
materiality based on shareholders’ funds (1.3%).
We believe that using a materiality based on this benchmark reflects critical underlying measures
of the Group given these are the critical elements of the business.
PetroNeft Resources plcAnnual Report 2017Financial Statements 34
Independent Auditor’s Report
to the Members of PetroNeft Resources plc
(continued)
We agreed with the Audit Committee
that we would report to the
Committee all audit differences in
excess of $30,000 for the group and
$23,800 for the Parent Company, as
well as differences below that thresh-
old that, in our view, warranted re-
porting on qualitative grounds. We
also report to the Audit Committee
on disclosure matters that we identi-
fied when assessing the overall pres-
entation of the financial statements.
An overview of the scope of our audit
Shareholders
Funds
$45.429m
Shareholders Funds
Group materiality
Group materiality
$0.595m
Component
materiality range
$0.238m to $0.476m
Audit Committee
reporting threshold
$0.03m
Our Group audit was scoped by obtaining an understanding of the Group and its environment and assessing the risks of material misstatement
at the Group level. We also considered the quantum of financial statement balances and individual financial transactions of a significant nature.
Based on this assessment, we assessed the Group to consist of three significant components being PetroNeft Resources plc (Parent Company),
LLC Granite Construction (subsidiary) and WorldAce Investments Limited (joint venture). We performed a full scope audit on these com-
ponents covering 100% of revenue, 100% of profit before tax and 99% of net assets. In addition, we have performed analytical procedures on
all non-significant components. The work performed by component audit teams was directed by the Group audit team and performed to
component materiality levels applicable to each component which were lower than Group materiality.
At the Parent Company level we also tested the consolidation process to confirm our conclusion that there were no significant risks of material
misstatement of the aggregated financial information of the remaining components not subject to audit or audit of specified account balances.
Other information
The directors are responsible for the other information. The other information comprises the information
included in the Annual Report and Financial Statements for the year ended 31 December 2017, other than
the financial statements and our auditor’s report thereon.
We have nothing to
report in respect of
these matters.
Our opinion on the financial statements does not cover the other information and, except to the extent oth-
erwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and,
in doing so, consider whether the other information is materially inconsistent with the financial statements
or our knowledge obtained in the audit or otherwise appears to be materially misstated.
If we identify such material inconsistencies or apparent material misstatements, we are required to determine
whether there is a material misstatement in the financial statements or a material misstatement of the other
information. If, based on the work we have performed, we conclude that there is a material misstatement of
this other information, we are required to report that fact.
Responsibilities of directors
As explained more fully in the directors’ responsibilities statement, the directors are responsible for the preparation of the financial statements
and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the
preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the group’s and the parent company’s ability to continue as a
going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors
either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance,
but is not a guarantee that an audit conducted in accordance with ISAs (Ireland) will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected
to influence the economic decisions of users taken on the basis of these financial statements.
35
As part of an audit in accordance with ISAs (Ireland), the auditor exercises professional judgment and maintains professional scepticism
throughout the audit. We also:
• Identify and assess the risks of material misstatement of the entity’s (or where relevant, the consolidated) financial statements, whether due
to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate
to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting
from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circum-
stances, but not for the purpose of expressing an opinion on the effectiveness of the Group and Company’s internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made
by the directors.
• Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained,
whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group and Company’s ability to
continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the
related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on
the audit evidence obtained up to the date of the auditor’s report. However, future events or conditions may cause the Group or Company
to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial
statements represent the underlying transactions and events in a manner that achieves fair presentation.
• Obtain sufficient appropriate audit evidence regarding the financial information of the business activities within the Group to express an
opinion on the Group financial statements. The Group auditor is responsible for the direction, supervision and performance of the Group
audit. The Group auditor remains solely responsible for the audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and signif-
icant audit findings, including any significant deficiencies in internal control that the auditor identifies during the audit.
Use of our report
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.
Report on other legal and regulatory requirements
Opinions on other matters prescribed by the Companies Act 2014
Based on the work undertaken in the course of the audit, we report that:
• 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 financial statements to be readily and properly
audited;
• The Parent Company balance sheet is in agreement with the accounting records; and
• In our opinion the information given in the Directors’ Report is consistent with the financial statements and the Directors’ Report has been
prepared in accordance with the Companies Act 2014.
Matters on which we are required to report by exception
Based on the knowledge and understanding of the Group and Company and its environment obtained in the course of the audit, we have not
identified material misstatements in the Directors’ Report.
We have nothing to report in respect of the provisions in 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.
Ciarán O’Brien
For and on behalf of Deloitte Ireland LLP
Chartered Accountants and Statutory Audit Firm
Deloitte & Touche House, Earlsfort Terrace, Dublin 2
Ireland
Date: 25 June 2018
PetroNeft Resources plcAnnual Report 2017Financial Statements 36
Consolidated Income Statement
For the year ended 31 December 2017
Continuing operations
Revenue
Cost of sales
Gross profit
Administrative expenses
Exchange gain 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
Note
2017
US$
2016
US$
5
1,712,574
2,279,585
(1,550,119)
(2,038,209)
162,455
241,376
(1,402,867)
(2,154,699)
52,093
77,458
(1,188,319)
(1,835,865)
(4,285,833)
(5,721,232)
(381,654)
(288,198)
3,510,435
3,247,876
(2,345,371)
(4,597,419)
7
12
13
8
9
(893,670)
(830,241)
Loss for the year attributable to equity holders of the Parent
(3,239,041)
(5,427,660)
Loss per share attributable to ordinary equity holders of the Parent
Basic and diluted – US dollar cent
10
(0.46)
(0.77)
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2017
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
2017
US$
2016
US$
(3,239,041)
(5,427,660)
(37,190)
25,298
Share of joint ventures’ other comprehensive income – foreign exchange translation differences
2,551,042
7,741,440
Total comprehensive (loss)/profit for the year attributable to equity holders of the Parent
(725,189)
2,339,078
37
Note
2017
US$
2016
US$
11
12
13
15
16
17
18
88,202
143,466
-
-
-
-
49,439,502
47,713,421
49,527,704
47,856,887
21,908
28,973
587,601
1,143,904
9,389
319,618
618,898
1,492,495
50,146,602
49,349,382
19
9,429,182
9,429,182
140,912,898 140,912,898
6,796,540
6,796,540
(83,441,491)
(80,202,450)
(28,604,558)
(31,118,410)
336,000
336,000
45,428,571
46,153,760
9
3,001,617
2,113,541
3,001,617
2,113,541
20
1,716,414
1,082,081
1,716,414
1,082,081
4,718,031
3,195,622
50,146,602
49,349,382
Consolidated Balance Sheet
As at 31 December 2017
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 25 June 2018.
David Golder
Director
Dennis Francis
Director
PetroNeft Resources plcAnnual Report 2017Financial Statements
38
Consolidated Statement of Changes in Equity
For the year ended 31 December 2017
At 1 January 2016
Loss for the year
Currency translation adjustments –
subsidiaries
Share of joint ventures’ other
comprehensive income – foreign
exchange translation differences
Total comprehensive profit for the year
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
7,132,540 (38,885,148) (74,774,790)
43,814,682
-
-
-
-
-
-
-
-
-
-
-
-
-
(5,427,660)
(5,427,660)
25,298
-
25,298
7,741,440
-
7,741,440
7,766,738
(5,427,660)
2,339,078
At 31 December 2016
9,429,182 140,912,898
7,132,540 (31,118,410) (80,202,450)
46,153,760
At 1 January 2017
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
9,429,182 140,912,898
7,132,540 (31,118,410) (80,202,450)
46,153,760
-
-
-
-
-
-
-
-
-
-
-
-
-
(3,239,041)
(3,239,041)
(37,190)
-
(37,190)
2,551,042
-
2,551,042
2,513,852
(3,239,041)
(725,189)
At 31 December 2017
9,429,182 140,912,898
7,132,540 (28,604,558) (83,441,491)
45,428,571
Consolidated Cash Flow Statement
For the year ended 31 December 2017
Operating activities
Loss before taxation
Adjustment to reconcile loss before tax to net cash flows
Non-cash
Depreciation
Share of loss in joint ventures
Finance revenue
Working capital adjustments
Decrease in trade and other receivables
Decrease in inventories
Increase/(decrease) in trade and other payables
Income tax paid
Net cash flows used in operating activities
Investing activities
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
39
Note
2017
US$
2016
US$
(2,345,371)
(4,597,419)
62,748
68,568
4,667,487
6,009,430
8
(3,510,435)
(3,247,876)
294,434
860,444
7,066
555,937
(9,783)
25,330
(59,474)
(16,650)
(277,917)
(957,647)
(40,000)
(10,000)
823
(39,177)
2,449
(7,551)
(317,094)
(965,198)
6,865
604
319,618
1,284,212
18
9,389
319,618
PetroNeft Resources plcAnnual Report 2017Financial Statements
40
Company Balance Sheet
As at 31 December 2017
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
Note
2017
US$
2016
US$
11
14
15
17
18
1,386
2,283
293,714
5,152,529
49,439,502
56,492,695
49,734,602
61,647,507
1,110,630
1,830,334
9,306
297,247
1,119,936
2,127,581
50,854,538
63,775,088
19
9,429,182
9,429,182
140,912,898 140,912,898
6,796,540
6,796,540
(110,995,698)
(96,676,960)
336,000
336,000
46,478,922
60,797,660
9
3,001,617
2,113,541
3,001,617
2,113,541
20
1,373,999
1,373,999
863,887
863,887
4,375,616
2,977,428
50,854,538
63,775,088
The Company reported a loss for the financial year ended 31 December 2017 of US$14.3 million (2016: US$34.5 million).
Approved by the Board on 25 June 2018
David Golder
Director
Dennis Francis
Director
Company Statement of Changes in Equity
For the year ended 31 December 2017
41
At 1 January 2016
Loss for the year
Total comprehensive loss for the year
At 31 December 2016
At 1 January 2017
Loss for the year
Total comprehensive loss for the year
Share capital Share premium
US$
US$
Share-based
payment and
other reserves
US$
Retained loss
US$
Total
US$
9,429,182 140,912,898
7,132,540 (62,137,203)
95,337,417
-
-
-
-
-
-
(34,539,757)
(34,539,757)
(34,539,757)
(34,539,757)
9,429,182 140,912,898
7,132,540 (96,676,960)
60,797,660
9,429,182 140,912,898
7,132,540 (96,676,960)
60,797,660
-
-
-
-
- (14,318,738) (14,318,738)
- (14,318,738)
(14,318,738)
At 31 December 2017
9,429,182 140,912,898
7,132,540 (110,995,698)
46,478,922
PetroNeft Resources plcAnnual Report 2017Financial Statements
42
Company Cash Flow Statement
For the year ended 31 December 2017
Operating Activities
Loss before taxation
Adjustments to reconcile profit/(loss) before tax to net cash flows
Non-cash
Depreciation of property, plant and equipment
Impairment of financial assets – investments in joint ventures and subsidiaries
Allowance for doubtful debts on financial assets – loans and receivables
Finance revenue
Working capital adjustments
Decrease in trade and other receivables
Increase 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
2017
US$
2016
US$
(13,434,172) (33,712,055)
897
1,197
4,858,815 35,047,370
10,923,056
-
(3,540,251)
(3,310,811)
304,326
424,160
(930)
679,181
101,933
(3,876)
(464,099)
(1,197,061)
(40,000)
210,000
315
(10,000)
225,000
2,159
170,315
217,159
(293,784)
(979,902)
5,843
(2,503)
297,247
1,279,652
18
9,306
297,247
Notes to the Financial Statements
For the year ended 31 December 2017
43
1. General information on the Company
and the Group
six months following binding agreement between the parties. The
Board is confident that one of these options will bring a solution.
PetroNeft Resources plc (“PetroNeft”, “the Company”, or together
with its subsidiaries and joint ventures, “the Group”) is a public
limited company incorporated in the Republic of Ireland with a
company registration number 408101. 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, which are unchanged from
last year, are oil and gas exploration, development and production.
The above circumstances 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 ad-
justments 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.
2. Going Concern
As described in the Financial Review on page 18 PetroNeft agreed a
loan facility for up to US$2 million with Swedish company Petrogrand
AB (“Petrogrand”). The loan matures on 31 December 2018 and
is secured by way of a floating charge on the assets of PetroNeft.
The loan facility will be used for general corporate purposes and
to finance the drilling programme in 2018. This loan facility will
provide time and space for a more long-term financing solution
to be put in place.
The Group has analysed its cash flow requirements through to
30 June 2019 in detail. The cash flows are highly dependent on
the successful re-financing of the Petrogrand loan and on future
production rates and oil prices achieved in its joint-venture un-
dertaking, WorldAce Investments Limited. Should the loan not be
re-financed or should production or oil price be lower than expected
the Group may need additional funding in order to continue as a
going concern. The Group has put in place cost saving measures
and the Board and management have agreed to reduce and defer
significant portions of their remuneration in order to assist the
Company. Note 24 outlines the amounts owed to the Board and
management in this regard.
The Company is currently in confidential advanced and detailed
discussions in order to provide a longer-term financing solution
that will allow for the repayment of the loan from Petrogrand in
advance of the maturity date. Heads of terms have been agreed
and due diligence and legal documentation is well advanced. The
Company expects to make a firm announcement in Q3 2018. The
Company is also considering the potential sale or farmout of Licence
67 and the drilling of the C-4 well is a key part of this process. The
Company has signed non-disclosure agreements and opened data
rooms in relation to the potential sale or farmout of Licence 67. 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
3. 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 consist-
ently 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 accord-
ance with International Financial Reporting Standards (”IFRS”) as
adopted by the European Union (“EU”).
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.
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. Control
is achieved when the Company has power over the investee, is ex-
posed or has rights to variable returns from its involvement with the
investee and has the ability to use its power to affect its returns. 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.
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:
PetroNeft Resources plcAnnual Report 2017Financial Statements
44
Notes to the Financial Statements
For the year ended 31 December 2017
(continued)
3. Accounting policies (continued)
• Derecognises the assets (including goodwill) and liabilities of
3.3 Business Combination
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 recog-
nised 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. A
joint venture (‘JV’) is a type of joint arrangement whereby the parties
that have joint control of the arrangement have rights to the net
assets of the joint venture. Joint control is the contractually agreed
sharing of control of an arrangement, which exists only when the
decisions about the relevant activities require unanimous consent
of the parties sharing control.
The Group’s investments in its joint ventures are accounted for
using the equity method. Under the equity method, an investment
in the joint venture is initially recognised at cost. The carrying
amount of the investment is adjusted to recognise changes in the
Group’s share of net assets of the joint venture since the acquisition
date. Consolidated income statement reflects Group’s share of the
results of operations of joint venture. Any change in other compre-
hensive income of the investee is presented as part of the Group’s
other comprehensive income. In addition, when there has been a
change recognised directly in the equity of the joint venture, the
Group recognises its share of any changes, when applicable, in the
statement of changes in equity. Unrealised gains and losses result-
ing from transactions between the Group and the joint venture are
eliminated to the extent of the interest in the joint venture. When
the Group’s share of losses of a joint venture exceeds the Group’s
interest in that joint venture (which includes any long-term interest
that, in substance, form part of the Group’s net investment in joint
venture), the Group discontinues recognising its share of further
losses. The financial statements of the joint ventures are prepared
for the same reporting period as the Group. Where necessary, ad-
justments are made to bring the accounting policies in line with
those of the Group.
Acquisitions of businesses are accounted for using the acquisition
method. The consideration transferred in a business combination
is measured at fair value, which is calculated as the sum of the
acquisition-date fair values of the assets transferred by the Group,
liabilities incurred by the Group to the former owners of the acquiree
and the equity interests issued by the Group in exchange for control
of the acquiree. Acquisition-related costs are recognised in profit
or loss as incurred.
At the acquisition date, the identifiable assets acquired and the
liabilities assumed are recognised at their fair value at the acqui-
sition date, except that:
• deferred tax assets or liabilities and liabilities or assets related
to employee benefit arrangements are recognised and measured
in accordance with IAS 12 Income Taxes and IAS 19 Employee
Benefits respectively;
• liabilities or equity instruments related to share-based payment
arrangements of the acquiree or share-based payment arrange-
ments of the Group entered into to replace share-based payment
arrangements of the acquiree are measured in accordance with
IFRS 2 Share-based Payment at the acquisition date; and
• assets (or disposal groups) that are classified as held for sale in
accordance with IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations are measured in accordance with that
Standard.
3.4 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 assump-
tions that affect the reported amounts of assets and 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 experi-
ence 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.
The Group, acting as the operator of the JVs, receives reimburse-
ment 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 manage-
ment 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.
Judgements
(a)
In the process of applying the Group’s accounting policies, man-
agement has made the following judgements, apart from those
involving estimations, which have a significant effect on amounts
recognised in the consolidated financial statements.
Going concern – Note 2
The directors have, at the time of approving the financial statements,
a reasonable expectation that the Company and the Group have
45
3. Accounting policies (continued)
adequate resources to continue in operational existence for the
foreseeable future. Thus, they continue to adopt the going concern
basis of accounting in preparing the financial statements. Further
detail is contained in Note 2 on page 43.
Loans and receivables from joint ventures – Notes 12, 13 and 15
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.
(b) Estimates and Assumptions
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:
Income tax
Significant judgment is required in determining the provision for
income taxes. There are transactions and calculations for which the
ultimate tax determination is uncertain during the ordinary course
of business. The Group recognises liabilities for anticipated tax audit
issues based on estimates of whether additional taxes will be due.
Where the final tax outcome of these matters is different from the
amounts that were initially recorded, such differences will impact
the income tax and deferred tax provisions in the period in which
such determination is made.
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 indica-
tors of possible/potential impairment relating to its tangible and
intangible assets.
3.5 Summary of Significant Accounting Policies
Foreign currencies
(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 func-
tional 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 2017 and
2016 were:
2017
2016
US$1 =
Closing
Average
Closing
Average
Russian Rouble
Euro
British Pound
57.860
0.8338
0.7398
58.335
0.8789
0.7728
61.000
0.9487
0.8122
66.930
0.9034
0.7403
(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 construc-
tion 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.
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.
Depreciation
Property, plant and equipment are generally depreciated on a
straight-line basis over their estimated useful lives at the follow-
ing annual rates:
PetroNeft Resources plcAnnual Report 2017Financial Statements 46
Notes to the Financial Statements
For the year ended 31 December 2017
(continued)
3. Accounting policies (continued)
• Buildings and leasehold improvements – 3% to 7% or remaining
term of the lease.
• Plant and machinery – 10% to 35%.
• Motor vehicles – 14% to 35%.
Impairment of property, plant and equipment
(c)
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.
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.
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.
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 short-term deposits with an original maturity of three
months or less.
Financial assets
(e)
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 availa-
ble-for-sale financial assets or financial assets at fair value through
profit or loss.
In the Company’s financial statements investments in joint ventures
and subsidiaries are accounted for at cost. Investments carried at cost
are measured at the lower of their carrying amount and fair value
less costs of disposal. Investments are reviewed for impairment if
there are indications that the carrying value may not be recoverable
in the parent company balance sheet
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 amorti-
sation 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.
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 es-
timated 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 com-
puted 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.
If, in a subsequent period, the amount of the impairment loss de-
creases, and the decrease can be related objectively to an event
occurring after the impairment was recognised, the previously rec-
ognised 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.
In relation to trade receivables, an allowance 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.
47
3. Accounting policies (continued)
Financial liabilities
(f)
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.
(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 Group’s financial liabilities include trade and other payables.
Trade Payables
Trade payables are initially measured at fair value and are subsequently
measured at amortised cost, using the effective interest rate method.
The fair value of an asset or a liability is measured using the as-
sumptions that market participants would use when pricing the
asset or liability, assuming that market participants act in their
economic best interest.
Non-current liabilities
Non-current liabilities represent amounts that are due more than
twelve months from the reporting date.
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.
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.
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 con-
tractual 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 deduct-
ing 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.
For financial reporting purposes, fair value measurements are cat-
egorised 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.
Level 2: valuation techniques for which the lowest level of inputs
which have a significant effect on the recorded fair value are ob-
servable, 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 includes all costs incurred in bringing each product to its
present location and condition. Net realisable value represents
the estimated selling price in the normal course of business less
estimated costs of completion and estimated costs necessary to
make the sale.
Loans and receivables
(i)
Trade receivables, loans, and other receivables that have fixed or
determinable payments that are not quoted in an active market
are classified as ‘loans and receivables’. Loans and receivables are
measured at amortised cost using the effective interest method,
less any impairment. Interest income is recognised by applying
the effective interest rate, except for short-term receivables when
PetroNeft Resources plcAnnual Report 2017Financial Statements 48
Notes to the Financial Statements
For the year ended 31 December 2017
(continued)
3. Accounting policies (continued)
the recognition of interest would be immaterial. Loans to and re-
ceivables from joint ventures represent funding by the company
for which repayment is neither planned nor likely to occur in the
foreseeable future. These are treated as part of the Company’s net
investment in the joint ventures.
Deferred income tax assets are recognised for all deductible tem-
porary 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:
Provisions
(j)
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 obliga-
tion 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.
(k) Share capital
Ordinary shares are classified as equity. Costs of share issues are
deducted from equity.
(l)
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 tem-
porary 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 invest-
ments 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.
• in respect of deductible temporary differences associated with
investments in subsidiaries, associates and interests in joint ven-
tures, 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.
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.
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.
(m) 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.
(n) 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 con-
sideration for equity instruments (“equity-settled transactions”).
49
3. Accounting policies (continued)
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.
(o) 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.
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.
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 recog-
nised 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.
Operating lease payments are recognised as an expense in the
Consolidated Income Statement on a straight-line basis over the
lease term.
(p) 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.
(q) 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.
3.6 Changes in Accounting Policy and Disclosures
Adoption of IFRS and International Financial Reporting
Inter pretations 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 Company is in the process of evaluating the effect that the
adoption of the new standards will have on the financial statements
of the Company, and it does not intend to early adopt any of them.
The Company expects that the most significant impact will result
from the below new standards that have been issued but are not
yet effective:
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 interpreta-
tions. The new standard is applicable from 1 January 2018. 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’s implementation of IFRS 15
from 1 January 2018 has no significant impact on the measurement
and recognition of Group’s revenue.
PetroNeft Resources plcAnnual Report 2017Financial Statements 50
Notes to the Financial Statements
For the year ended 31 December 2017
(continued)
3. Accounting policies (continued)
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. It is expected that the Group’s implementation of IFRS
9 from 1 January 2018 will have no significant impact on the measurement and recognition of Group’s financial assets and liabilities.
IFRS 16 “Leases” specifies how an IFRS reporter entity will recognise, measure, present and disclose leases. The standard provides a
single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months
or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to
lessor accounting substantially unchanged from its predecessor, IAS 17. IFRS 16 Leases will be effective for and will be adopted by the
Group for the 2019 financial year beginning 1 January 2019.
The Group expects to adopt the modified retrospective approach to transition permitted by the standard in which the cumulative effect
of initially applying the standard is recognised in opening retained earnings at the date of initial application.
The Group is currently assessing the impact of IFRS 16. Information on the Group’s leases currently classified as operating leases is
provided in note 23.
There are no other IFRS or IFRIC interpretations that are effective subsequent to the 2017 financial year-end that would have a material
impact on the results or financial position of the Group or the Company.
4. Segment information
At present the Group has one reportable operating segment, which is oil exploration and production through its joint venture under-
takings. 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.
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.
Assets are allocated based on where the assets are located:
Non-current assets
Russia
Ireland
2017
US$
2016
US$
49,526,318
47,854,604
1,386
2,283
49,527,704
47,856,887
5. Revenue
Revenue
Management Services
Construction Services
51
2017
US$
2016
US$
848,230
864,344
1,465,105
814,480
1,712,574
2,279,585
Most of the revenue from management and construction services relate to services provided to the joint venture undertakings which
PetroNeft Group have interests in.
6. Employees
Number of employees
Group
The average number of employees (including Directors) during the year was:
Directors
Senior Management
Professional Staff
Construction crew employees
Company
The average number of employees (including Directors) during the year was:
Directors
Senior Management
Professional Staff
Employment costs (including Directors)
Group
Wages and salaries
Social insurance costs
Contributions to defined contribution pension plan
No employment costs were capitalised during 2017 or 2016.
2017
Number
6
2
5
36
49
2016
Number
6
3
6
35
50
2017
Number
6
2016
Number
6
2
1
9
2
1
9
2017
US$
2016
US$
1,697,063
2,495,310
183,238
78,050
244,350
68,405
1,958,351
2,808,065
PetroNeft Resources plcAnnual Report 2017Financial Statements
52
Notes to the Financial Statements
For the year ended 31 December 2017
(continued)
6. Employees (continued)
Company
Wages and salaries
Social insurance costs
Contributions to defined contribution pension plan
No employment costs were capitalised during 2017 or 2016.
Directors’ emoluments
Group and company
Remuneration and other emoluments – Executive Directors
Remuneration and other emoluments – non-Executive Directors
Contributions to defined contribution pension plan
2017
US$
2016
US$
1,188,185
1,976,953
40,521
78,050
99,606
68,405
1,306,756
2,144,964
2017
US$
399,505
205,531
29,963
634,999
2016
US$
1,214,403
228,348
39,828
1,482,579
Pension contributions to directors during the year relate to 1 director (2016: 3 directors).
Your attention is drawn to the details of the share options received by the Directors as set out in the Report of Directors.
The aggregate amount of any compensation paid to directors or former directors in respect of retirement, loss of office or other termi-
nation payments in the financial year was US$Nil (2016: US$661,633). An amount of US$199,752 (2016: US$426,803) relating to Executive
Directors’ salaries was re-charged to WorldAce Investments Limited. An amount of US$59,926 (2016: US$59,926) relating to Executive
Directors’ salaries was re-charged to Russian BD Holdings B.V.
53
Note
2017
US$
2016
US$
11
64,071
102,326
(52,093)
(77,458)
13,971
38,596
61,851
897
62,748
(5,946)
36,804
67,371
1,197
68,568
65,849
79,920
-
-
-
-
-
-
65,849
79,920
16,500
49,349
-
-
-
20,000
59,920
-
-
-
65,849
79,920
2017
US$
823
3,509,612
3,510,435
2016
US$
2,449
3,245,427
3,247,876
7. Operating loss
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
Depreciation of property, plant and equipment
Included in cost of sales
Included in administrative expenses
Auditors’ remuneration – Group
– audit of group financial statements
– other assurance services
– tax advisory services
– other non-audit services
Auditors’ remuneration – Company
-audit of entity financial statements
-audit of group financial statements
-other assurance services
-tax advisory services
-other non-audit services
8. Finance revenue
Bank interest receivable
Interest receivable on loans to Joint Ventures
PetroNeft Resources plcAnnual Report 2017Financial Statements
54
Notes to the Financial Statements
For the year ended 31 December 2017
(continued)
9.
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
2017
US$
9,182
9,182
2016
US$
3,078
3,078
884,488
884,488
827,163
827,163
Income tax expense reported in the Consolidated Income Statement
893,670
830,241
Loss before income tax
(2,345,371)
(4,597,419)
Accounting loss multiplied by Irish standard rate of tax of 12.5%
(293,171)
(574,677)
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
Translation adjustment
At 31 December
Deferred tax at 31 December relates to the following:
Deferred income tax liability
Accrued interest income on intra-Group loans
Factors that may affect future tax charges
9,977
442,531
1,087
583,436
2,942
6,939
149,182
(9,253)
893,670
15,453
413,851
19,397
751,179
21,788
39,908
246,937
(103,595)
830,241
2017
US$
2016
US$
2,113,541
884,488
3,588
1,286,378
827,163
-
3,001,617
2,113,541
2017
US$
2016
US$
3,001,617
3,001,617
2,113,541
2,113,541
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.
55
10. Loss per Ordinary Share
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
2017
US$
2016
US$
(3,239,041)
(5,427,660)
(3,239,041)
(5,427,660)
Weighted average number of Ordinary Shares for basic and diluted earnings per Ordinary Share
707,245,906
707,245,906
Diluted weighted average number of shares
707,245,906
707,245,906
Loss per share:
Basic and diluted - US dollar cent
(0.46)
(0.77)
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 2017 and 2016.
PetroNeft Resources plcAnnual Report 2017Financial Statements
56
Notes to the Financial Statements
For the year ended 31 December 2017
(continued)
11. Property, Plant and Equipment
Group
Cost
At 1 January 2016
Translation adjustment
At 1 January 2017
Translation adjustment
At 31 December 2017
Depreciation
At 1 January 2016
Charge for the year
Translation adjustment
At 1 January 2017
Charge for the year
Translation adjustment
At 31 December 2017
Carrying amount
At 31 December 2017
At 31 December 2016
Company
Cost
At 1 January 2016
At 1 January 2017
At 31 December 2017
Depreciation
At 1 January 2016
Charge for the year
At 1 January 2017
Charge for the year
At 31 December 2017
Carrying amount
At 31 December 2017
At 31 December 2016
Plant and
machinery
US$
800,400
145,468
945,868
47,060
992,928
618,697
68,568
115,137
802,402
62,748
39,576
904,726
88,202
143,466
Plant and
machinery
US$
32,066
32,066
32,066
28,586
1,197
29,783
897
30,680
1,386
2,283
57
12. Equity-accounted Investment in Joint Venture – WorldAce Investments Limited
PetroNeft Resources plc has a 50% interest in WorldAce Investments Limited, a joint venture 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.
Share of net assets
US$
At 1 January 2016
Elimination of unrealised profit on intra-Group transactions
Retained loss
Translation adjustment
Debited to loans receivable from WorldAce Investments Limited
At 1 January 2017
Elimination of unrealised loss on intra-Group transactions
Retained loss
Translation adjustment
Credited against loans receivable from WorldAce Investments Limited
At 31 December 2017
-
(157,876)
(5,721,232)
7,149,140
(1,270,032)
-
(27,336)
(4,285,833)
2,356,702
1,956,467
-
The balance sheet position of WorldAce Investments Limited shows net liabilities of US$29,773,264 (2016: US$25,915,002) following a
loss in the year of US$8,571,665 (2016: US$11,442,464) together with a positive currency translation adjustment of US$4,713,403 (2016:
US$14,298,281). PetroNeft’s 50% share is included above and results in a negative carrying value of US$10,203,053 (2016: 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$10,203,053 (2016: US$8,246,586) is deducted from other assets associated with the joint venture on the Balance Sheet
which are the loans receivable from WorldAce Investments (see Note 15).
Additional financial information in respect of PetroNeft’s 50% interest in the equity-accounted joint venture entity is disclosed below:
Continuing operations
Revenue
Cost of sales
Gross profit
Administrative expenses
Operating loss
Write-off of oil and gas properties
Write-off of exploration and evaluation assets
Finance revenue
Finance costs
Loss for the year for continuing operations before taxation
Income tax expense
50% Share of WorldAce Group
2017
US$
2016
US$
13,818,415
(12,636,469)
1,181,946
(1,546,643)
(364,697)
-
(13,051)
33,176
(3,941,261)
(4,285,833)
-
11,604,182
(11,199,845)
404,337
(1,614,435)
(1,210,098)
(438,034)
(710,047)
9,421
(3,372,474)
(5,721,232)
-
Loss for the year
Other comprehensive income to be reclassified to profit or loss in subsequent years:
Currency translation adjustments
Total comprehensive (loss)/profit for the year
(4,285,833)
(5,721,232)
2,356,702
(1,929,131)
7,149,140
1,427,908
PetroNeft Resources plcAnnual Report 2017Financial Statements
58
Notes to the Financial Statements
For the year ended 31 December 2017
(continued)
12. Equity-accounted Investment in Joint Venture – WorldAce Investments Limited (cont.)
Finance costs mainly relate to interest on shareholder loans from Oil India International B.V. and PetroNeft. The details of gross interest
accrued on loans to PetroNeft are disclosed in Note 24 Related party disclosures.
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 against the
US Dollar during the year from RUB60.9:US$1 at 31 December 2016 to RUB57.7:US$1 at 31 December 2017.
Non-current Assets
Oil and gas properties
Property, plant and equipment
Exploration and evaluation assets
Assets under construction
Current Assets
Inventories
Trade and other receivables
Cash and cash equivalents
Total Assets
Non-current Liabilities
Provisions
Interest-bearing loans and borrowings
Current Liabilities
Interest-bearing loans and borrowings
Trade and other payables
Total Liabilities
Net Liabilities
50% Share of WorldAce Group
2017
US$
2016
US$
39,312,150
37,945,273
184,027
199,338
9,321,748
7,556,920
824,992
932,631
49,642,917
46,634,162
605,240
282,925
68,613
956,778
536,685
176,318
40,415
753,418
50,599,695
47,387,580
(658,513)
(433,573)
(61,435,277)
(56,686,519)
(62,093,790)
(57,120,092)
(715,405)
-
(2,677,132)
(3,224,989)
(3,392,537)
(3,224,989)
(65,486,327)
(60,345,081)
(14,886,632)
(12,957,501)
Interest-bearing loans and borrowings are shareholder loans from Oil India International B.V. and PetroNeft. The details of loans due
to PetroNeft are disclosed in Note 24 Related party disclosures.
Capital commitments
Details of capital commitments at the balance sheet date are as follows:
Contracted for but not provided in the financial statements
2017
US$
2016
US$
466,114
1,080,620
59
12. Equity-accounted Investment in Joint Venture – WorldAce Investments Limited (cont.)
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
2017
US$
65,570
244,391
421,508
731,469
2016
US$
57,039
219,319
414,738
691,096
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.
PetroNeft Resources plc has a 50% interest in Russian BD Holdings B.V., a joint venture 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.
At 1 January 2016
Retained loss
Translation adjustment
Debited against loans receivable from Russian BD Holdings BV (Note 15)
At 1 January 2017
Retained loss
Translation adjustment
Credited against loans receivable from Russian BD Holdings BV (Note 15)
At 31 December 2017
Share of net assets
US$
-
(288,198)
592,300
(304,102)
-
(381,654)
194,339
187,315
-
The balance sheet position of Russian BD Holdings B.V. shows net liabilities of US$1,440,006 (2016: US$1,065,376) following a loss in
the year of US$763,308 (2016: US$576,396) together with a positive currency translation of US$388,678 (2016: US$1,184,600). PetroNeft’s
50% share is included above and results in a negative carrying value of US$720,003 (2016: US$532,688). Therefore, the share of net as-
sets is reduced to Nil and, in accordance with IAS 28 Investments in Associates and Joint Ventures, the amount of US$720,003 (2016:
US$532,688) is deducted from other assets associated with the joint venture on the Balance Sheet which are the loans receivable from
Russian BD Holdings B.V. (Note 15).
PetroNeft Resources plcAnnual Report 2017Financial Statements
60
Notes to the Financial Statements
For the year ended 31 December 2017
(continued)
13. Equity-accounted Investment in Joint Venture - Russian BD Holdings B.V. (cont.)
Additional financial information in respect of PetroNeft’s 50% interest in the equity-accounted joint venture entity is disclosed below:
Revenue
Cost of sales
Gross profit
Administrative expenses
Operating loss
Finance revenue
Finance costs
Loss for the year for continuing operations before taxation
Taxation
Loss for the year
Other comprehensive income to be reclassified to profit or loss in subsequent years:
Currency translation adjustments
Total comprehensive (loss)/ profit for the year
50% Share of Russian
BD Holdings B.V. Group
2017
US$
-
-
-
(94,626)
(94,626)
259
(287,287)
(381,654)
2016
US$
-
-
-
(66,718)
(66,718)
294
(239,079)
(305,503)
-
17,305
(381,654)
(288,198)
194,339
(187,315)
592,300
304,102
Finance costs comprise of interest on shareholder loans from Belgrave Naftogas B.V. and PetroNeft. The details of gross interest accrued
on loans to PetroNeft are disclosed in Note 24 Related party disclosures.
50% Share of Russian
BD Holdings B.V. Group
Non-current assets
Current assets
Total assets
Non-current liabilities
Current liabilities
Total liabilities
Net Liabilities
2017
US$
2016
US$
4,370,482
4,069,104
12,048
198,788
4,382,530
4,267,892
(4,981,608)
(4,512,667)
(120,925)
(287,913)
(5,102,533)
(4,800,580)
(720,003)
(532,688)
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
There were no capital commitments as at 31 December 2017 or 31 December 2016.
2017
US$
2,194
8,775
26,416
2016
US$
2,524
7,898
25,751
37,385
36,173
61
14. Financial assets – investments in joint ventures and subsidiaries
Company
Cost
At 1 January 2016
Impairment (WorldAce)
At 1 January 2017
Impairment (Russian BD Holdings)
At 31 December 2017
Carrying amount
At 31 December 2017
At 31 December 2016
Investment in joint
ventures
US$
Investment in
Subsidiaries
US$
Total
US$
39,906,185
(35,047,370)
4,858,815
(4,858,815)
-
-
4,858,815
293,714
40,199,899
-
(35,047,370)
293,714
-
5,152,529
(4,858,815)
293,714
293,714
293,714
293,714
293,714
5,152,529
Due to the net liability position of Russian BD Holdings as discussed in Note 12 above the Board has taken the view that it was prudent
to impair the carrying value of the investment in Russian BD Holdings to Nil.
During 2016 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 2017 are as follows:
Name of subsidiary
Registered office
Proportion of
ownership interest
Proportion of voting
power held
LLC Granite Construction
LLC Dolomite
147 Prospekt Lenina, Tomsk
634009, Russia
147 Prospekt Lenina, Tomsk
634009, Russia
100%
100%
100%
100%
Principal activity
Construction
Oil and gas
exploration
Details of the Group’s interest in joint ventures at 31 December 2017 are as follows:
Name of entity
Registered office
Proportion of
ownership interest
Proportion of voting
power held
Principal activity
WorldAce Investments Limited
LLC Stimul-T
Russian BD Holdings B.V.
3 Themistocles Street, Nicosia,
Cypru
147 Prospekt Lenina, Tomsk
634009, Russia
Prins Bernhardplein 200,
1097 JB, Amsterdam, the
Netherlands
50%
50%
50%
50%
50%
50%
Holding company
Oil and gas
exploration
Holding company
LLC Lineynoye
147 Prospekt Lenina, Tomsk
634009, Russia
50%
50%
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.
PetroNeft Resources plcAnnual Report 2017Financial Statements
62
Notes to the Financial Statements
For the year ended 31 December 2017
(continued)
15. Financial assets – loans and 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)
Allowance for doubtful debts
2017
US$
2016
US$
55,474,668
52,235,829
(10,203,053)
(8,246,586)
45,271,615
43,989,243
4,887,890
(720,003)
4,167,887
4,256,866
(532,688)
3,724,178
49,439,502
47,713,421
2017
US$
2016
US$
55,474,668
52,235,829
4,887,890
4,256,866
(10,923,056)
-
49,439,502
56,492,695
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 2019 at the earliest. The loan is set to mature on 31 December 2025. As at 31 December 2017
the loan was fully drawn down. The realisation of financial assets of US$45.2m in respect of WorldAce is dependent on the continued
successful development of economic reserves which is subject to a number of uncertainties including future rates of oil production and
the ability to raise finance to continue to successfully generate revenue from the assets.
The loan from the Company to Russian BD Holdings B.V. is repayable on demand. Interest currently accrues on the loan at USD LIBOR
plus 5.0% per annum. The group plan to drill the Cheremshanskoye No. 4 well in 2018. The board believe the well has great potential
as it will test multiple targets up-dip from prior wells on the structure that have already tested oil in the same intervals.
The realisation of financial assets of US$4.2m in respect of Russian BD Holdings B.V. is ultimately dependent on the successful de-
velopment of reserves as outlined above in relation to Cheremshanskoye, which is subject to a number of uncertainties including the
ability to finance the well development and bringing the assets to economic maturity and profitability or the monetisation of the asset
through a sale or farmout.
Due to the difference in carrying value caused by the application of the equity method of accounting to the Group financial statements
the Company thought it prudent to provide for an allowance for doubtful debts against the carrying value of these loans on the Company
Balance Sheet in order to align the balances on the Group and Company balance sheets.
16. Inventories
Materials
2017
US$
21,908
21,908
2016
US$
28,973
28,973
17. Trade and other receivables
Group
Other receivables
Receivable from joint ventures (Note 24)
Advances to contractors
Prepayments
Company
Amounts owed by subsidiary undertakings (Note 24)
Amounts owed by other related companies (Note 24)
VAT Receivable
Prepayments
63
2017
US$
21,039
503,527
1,676
61,359
2016
US$
155,651
920,390
8,047
59,816
587,601
1,143,904
2017
US$
870,373
164,810
14,088
61,359
2016
US$
1,008,598
622,883
139,037
59,816
1,110,630
1,830,334
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
Group
Cash at bank
Company
Cash at bank
2017
US$
9,389
9,389
2017
US$
9,306
9,306
2016
US$
319,618
319,618
2016
US$
297,247
297,247
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 2017Financial Statements
64
Notes to the Financial Statements
For the year ended 31 December 2017
(continued)
19. Share capital – Group and Company
Authorised
1,000,000,000 (2016: 1,000,000,000) Ordinary Shares of €0.01 each
Allotted, called up and fully paid equity
At 1 January 2016
At 1 January 2017
At 31 December 2017
20. Trade and other payables
Group
Trade payables
Trade payables to joint ventures (Note 24)
Corporation tax
Other taxes and social insurance costs
Accruals and other payables
Company
Trade payables
Corporation tax
Other taxes and social insurance costs
Accruals and other payables
2017
€
2016
€
10,000,000
10,000,000
10,000,000
10,000,000
Number of
Ordinary Shares
Called up share
capital US$
707,245,906
707,245,906
707,245,906
9,429,182
9,429,182
9,429,182
2017
US$
570,476
212,442
54,898
83,305
795,293
2016
US$
337,208
108,338
55,750
278,983
301,802
1,716,414
1,082,081
2017
US$
570,326
54,898
16,675
732,100
1,373,999
2016
US$
330,540
55,750
222,818
254,779
863,887
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.
65
21. Financial risk management objectives and policies
The Group and Company’s principal financial instruments comprise cash and cash equivalents and loans to joint venture undertakings.
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 cur-
rency 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 2017 and 2016.
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.
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 inter-
ests. 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 2017 and 2016, the Group and the Company had no outstanding commodity contracts.
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.
At 31 December 2017 and 2016, the Group and the Company had no outstanding forward exchange contracts.
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 Group and the Company have an exposure to Russian Rouble, Euro and UK Sterling because the
Company has trade and other receivables and payables denominated in these currencies. In addition, the Group has an exposure to
Russian Rouble as currency translation of the foreign subsidiaries and joint ventures affects the Group’s net equity.
Foreign currency sensitivity analysis
In accordance with IFRS 7, the impact of foreign currencies is determined based on the balances of financial assets and liabilities at 31
December 2017. 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.
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.
PetroNeft Resources plcAnnual Report 2017Financial Statements 66
Notes to the Financial Statements
For the year ended 31 December 2017
(continued)
21. Financial risk management objectives and policies (continued)
Group
2017
2017
2016
2016
Company
2017
2017
2016
2016
Credit risk
Change in
USD/RUB
Effect on loss
before tax
US$
Effect on
pre-tax
equity
US$
Change in
USD/EUR
Effect on loss
before tax
US$
Effect on
pre-tax
equity
US$
Change in
USD/GBP
Effect on loss
before tax
US$
5%
-5%
5%
-5%
33,921
-33,921
-37,491
37,491
50,430
-50,430
-50,430
50,430
5%
-5%
5%
-5%
-34,240
34,240
59,290
-59,290
-458
506
458
-506
5%
-5%
5%
-5%
-4,614
5,100
-5,077
5,611
Effect on
pre-tax
equity
US$
4,614
-5,100
5,077
-5,611
Change in
USD/RUB
5%
-5%
5%
-5%
Effect on
profit before
tax
US$
Effect on
pre-tax
equity
US$
-33,921
-33,921
37,491
37,491
-
-
-
-
Change in
USD/EUR
5%
-5%
5%
-5%
Effect on
profit before
tax
US$
Effect on
pre-tax
equity
US$
34,240
34,240
-59,290
-59,290
458
-506
458
-506
Change in
USD/GBP
5%
-5%
5%
-5%
Effect on
profit before
tax
US$
4,614
-5,100
Effect on
pre-tax
equity
US$
4,614
-5,100
5,077
5,077
-5,611
-5,611
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 (Note 17) and cash and cash equivalents (Note 18). 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 with the exception of the loans receivable from its two joint ventures. The Group and the Company define
counterparties as having similar characteristics if they are connected entities.
Liquidity risk management
Liquidity risk is the risk that the Group and the Company will encounter difficulties in meeting obligations associated with their finan-
cial 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 2017 and 2016 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 2017 and
2016 was less than one month. The expected maturity of the Group and Company’s related party financial assets as at 31 December
2017 and 2016 is in excess of one year.
The Group and the Company further mitigate liquidity risk by maintaining an insurance programme to minimise exposure to insurable losses.
67
21. Financial risk management objectives and policies (continued)
The Group and the Company had no derivative financial instruments as at 31 December 2017 and 2016.
The tables below show the projected contractual undiscounted total cash outflows arising from the Group’s and Company’s trade and
other payables. These projections are based on the foreign exchange rates applying on 31 December 2017 (2016: 31 December 2016):
Group
Year ended 31 December 2017
Trade and other payables
Year ended 31 December 2016
Trade and other payables
Company
Year ended 31 December 2017
Trade and other payables
Year ended 31 December 2016
Trade and other payables
Interest rate risk
Within 1 year
US$
Between
1 and 2 years
US$
Between
2 to 5 years
US$
After 5 years
US$
1,578,211
1,578,211
747,348
747,348
-
-
-
-
-
-
-
-
-
-
-
-
Within 1 year
US$
Between
1 and 2 years
US$
Between
2 to 5 years
US$
After 5 years
US$
1,302,426
1,302,426
585,319
585,319
-
-
-
-
-
-
-
-
-
-
-
-
Total
US$
1,578,211
1,578,211
747,348
747,348
Total
US$
1,302,426
1,302,426
585,319
585,319
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%.
Financial instrument
Interest-bearing loans to joint ventures
Fixed %
Variable %
5.0% to 6.0%
US$ LIBOR
The effect of a rise of 1% in the LIBOR interest rate (e.g. from 1.3% to 2.3%) receivable on loans to joint ventures would be to increase
Group loss before tax by US$68,348 and Company profit before tax by US$493,565.
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.
PetroNeft Resources plcAnnual Report 2017Financial Statements 68
Notes to the Financial Statements
For the year ended 31 December 2017
(continued)
21. Financial risk management objectives and policies (continued)
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 adjust 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 2017 and 2016. 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 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 and Company is US$45.3 million, which approximates the fair value. The fair value of the loans is evaluated
using a discounted cashflow model (using a pre-tax Weighted Average Cost of Capital of 15.8%), 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 2017 and 2016, 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 2017 and 2016.
22. Loss 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$14,318,738 (2016: US$34,539,757), which included impairment of investments in joint ven-
tures of US$4,858,815 (2016: US$35,047,370) (Note 14) and allowance for doubtful debts on loans and receivables from joint ventures of
US$10,923,056 (2016: US$NIL) (Note 15).
69
2016
US$
5,983
-
-
5,983
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
There were no capital commitments as at 31 December 2017 or 31 December 2016.
24. Related party disclosures
Transactions with subsidiaries
2017
US$
28,509
6,369
-
34,878
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 2017 and 2016:
Company
Loans
At 1 January 2016
Interest accrued in the year
Loans repaid during the year
At 1 January 2017 (Note 17)
Interest accrued in the year
Loans repaid during the year
Translation adjustment
At 31 December 2017 (Note 17)
Granite
Construction
US$
1,170,375
63,224
(225,000)
1,008,599
30,325
(210,000)
41,449
870,373
PetroNeft Resources plcAnnual Report 2017Financial Statements
70
Notes to the Financial Statements
For the year ended 31 December 2017
(continued)
24. Related party disclosures (continued)
Transactions with joint ventures
PetroNeft Resources plc had the following transactions with its joint ventures during the years ended 31 December 2017 and 2016:
Group
Russian BD
Holdings BV Group
US$
WorldAce
Investments
Limited Group
US$
Receivable by PetroNeft Group at 1 January 2016
3,389,708
40,883,592
Advanced during the year
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 2017
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 2017
Balance at 31 December 2016 comprised of:
Loans receivable (Note 15)
Trade and other receivables
Trade Payables
Balance at 31 December 2017 comprised of:
Loans receivable (Note 15)
Trade and other receivables
Trade and other payables
10,000
159,260
234,402
(10,821)
304,102
(5,769)
-
2,622,188
3,011,025
(3,426,007)
1,270,032
83,761
4,080,882
44,444,591
360,251
142,086
270,773
(480,723)
(187,315)
32,962
-
1,798,417
3,238,839
(2,019,374)
(1,956,467)
5,665
4,218,916
45,511,671
3,724,178
43,989,243
356,704
-
563,686
(108,338)
4,080,882
44,444,591
4,167,887
45,271,615
51,029
-
452,498
(212,442)
4,218,916
45,511,671
71
Russian BD
Holdings BV Group
US$
WorldAce
Investments
Limited Group
US$
4,202,436
50,327,085
10,000
140,409
234,402
-
1,243,187
3,011,025
-
(2,040,000)
(12,486)
(480)
4,574,761
52,540,817
360,251
133,034
270,773
(480,251)
30,578
-
716,451
3,238,839
(859,713)
1,828
4,889,146
55,638,222
4,256,866
52,235,829
317,895
304,988
4,574,761
52,540,817
4,887,890
55,474,668
1,256
163,554
4,889,146
55,638,222
24. Related party disclosures (continued)
Company
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
At 1 January 2017
Advanced during the year
Transactions during the year
Interest accrued in the year
Payments for services made during the year
Translation adjustment
At 31 December 2017
Balance at 31 December 2016 comprised of:
Loans receivable (Note 15)
Trade and other receivables
Balance at 31 December 2017 comprised of:
Loans receivable (Note 15)
Trade and other receivables
PetroNeft Resources plcAnnual Report 2017Financial Statements
72
Notes to the Financial Statements
For the year ended 31 December 2017
(continued)
24. Related party disclosures (continued)
Remuneration of key management
Key management comprise the Directors, the Vice Presidents of Business Development and Operations of the Company and the con-
sulting fees paid to HGR Consulting Limited for the services of the CFO. Their remuneration and fees during the year were as follows:
Remuneration of key management
Compensation of key management
Contributions to defined contribution pension plan
Consulting fees (HGR Consulting – see below)
The following amounts, which are included in the above, were owed to key
management at 31 December 2017 and 2016
Remuneration, fees and expenses due to Directors
Remuneration due to other key management
Consulting fees (HGR Consulting – see below)
2017
US$
2016
US$
1,103,224
1,923,326
52,693
304,556
69,308
199,035
1,460,473
2,191,669
424,564
122,946
276,570
824,080
54,021
15,000
116,031
185,052
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 2017 amounted to US$304,556 (2016: US$199,035). An amount of US$276,570 was owed to
HGR at 31 December 2017 (2016: US$116,031).
25. Share-based payment
Share options
The expense recognised for employee services during the year is US$NIL (2016: US$NIL). The Group share-based payment plan is
described below. There was no cancellation or modification to the plan during 2017 and 2016.
Under the Group share option plan, employees of the Group can receive conditional awards of share options depending on their perfor-
mance, 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.
73
25. Share-based payment (continued)
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.
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
2017
Number
8,815,000
-
(80,000)
(3,475,000)
5,260,000
-
2017
WAEP
2016
Number
£0.3012
13,842,500
-
£0.2509
£0.66
£0.065
-
-
(2,622,500)
(2,405,000)
8,815,000
-
2016
WAEP
£0.28
-
£0.2869
£0.1925
£0.3012
-
The exercise price for options outstanding at the year-end is £0.065 (2016: £0.065 to £0.66).
The weighted average remaining contractual life for the share options outstanding as at 31 December 2017 was 1.91 years (2016: 2.13 years).
No options were granted in 2017 or 2016.
The weighted average share price of forfeited options in 2017 was £0.2509 (2016: £0.2869).
The weighted average share price of expired options in 2017 was £0.66 (2016: £0.1925).
As no options were issued in 2017 or 2016, no valuation was carried out in 2017 or 2016.
Warrants
There were no warrants issued in 2017 or 2016.
26. Important Events after the Balance Sheet Date
In January 2018 we agreed a secured loan facility for up to US$2 million with Swedish company Petrogrand AB (“Petrogrand”). The loan
matures on 31 December 2018. The loan facility will be used for general corporate purposes and to finance the drilling programme in
2018. This loan facility will provide time and space for a more long-term financing solution to be put in place.
27. Approval of financial statements
The financial statements were approved, and authorised for issue, by the Board of Directors on 25 June 2018.
PetroNeft Resources plcAnnual Report 2017Financial Statements 74
Glossary
1P
2P
3P
AGM
AIM
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.
Arawak Energy Russia B.V.
Barrel.
Belgrave Naftogas
Belgrave Naftogas B.V., a member of the Arawak group of companies
bfpd
boe
bopd
Barrels of fluid per day.
Barrel of oil equivalent.
Barrels of oil per day.
Company
PetroNeft Resources plc.
CPF
CSR
Central Processing Facility.
Corporate and Social Responsibility.
Custody Transfer Point
Facility/location at which custody of oil transfers to another operator.
Dolomite
LLC Dolomite, a 100% subsidiary of PetroNeft registered in the Russian Federation
DST
ESM
ESP
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
km
km2/ sq km
KPI
Licence 61
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.
75
GLOSSARY (continued)
Licence 61 Farmout
Licence 67
Lineynoye
m
mmbbls
mmbo
Natlata
Oil pay
P1
P2
P3
PetroNeft
POD
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., reg-
istered in the Russian Federation.
Metres.
Million barrels.
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 Resources plc.
Plan of Development.
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
PetroNeft Resources plcAnnual Report 2017Financial Statements 76
Group Information
Directors
David Golder (U.S. citizen)
(Non-Executive Chairman)
Dennis Francis (U.S. citizen)
(Chief Executive Officer)
Thomas Hickey (Irish citizen)
(Non-Executive Director)
Maxim Korobov (Russian citizen)
(Non-Executive Director)
Anthony Sacca (Australian citizen)
(Non-Executive Director)
David Sturt (British citizen)
(Non-Executive Director)
Registered
Office
and Business
Address
20 Holles Street
Dublin 2
Ireland
Secretary
Paul Dowling
Auditor
Deloitte Ireland LLP
Chartered Accountants
Earlsfort Terrace
Dublin 2
Ireland
Nominated
Adviser and
ESM Adviser
Davy
49 Dawson Street
Dublin 2
Ireland
Joint Brokers
Davy
49 Dawson Street
Dublin 2
Ireland
Canaccord Genuity
88 Wood Street
London
EC2V 7QR
United Kingdom
Principal
Bankers
Solicitors
KBC Bank Ireland
Sandwith Street
Dublin 2
Ireland
AIB Bank
1 Lower Baggot
Street
Dublin 2
Ireland
Byrne Wallace
88 Harcourt Street
Dublin 2
Ireland
Registered
Number
408101
Registrar
Computershare
Heron House
Corrig Road
Sandyford Industrial
Estate
Dublin 18
Ireland
e
i
.
n
g
i
s
e
d
e
c
r
u
o
s
w
w
w
.
PetroNeft Resources plc
Dublin Office
20 Holles Street
Dublin 2
Ireland
Houston Office
Suite 518, 10333 Harwin Drive
Houston, TX 77036
USA