ShaMaran Petroleum Corp
Annual Report
For the year ended December 31, 2011
SHAMARAN PETROLEUM CORP.
MANAGEMENT DISCUSSION AND ANALYSIS
For the year ended December 31, 2011
(Expressed in United States Dollars unless otherwise indicated)
_____________________________________________________________________________________
Management’s discussion and analysis (“MD&A”) of the financial and operating results of ShaMaran Petroleum
Corp. (“ShaMaran” together with its subsidiaries the “Company”) is prepared as of March 28, 2012. The MD&A
should be read in conjunction with the audited consolidated financial statements for the year ended December 31,
2011 together with the accompanying notes. Unless otherwise stated herein all monetary amounts are expressed
in US dollars (“USD”).
The financial statements of the Company have been prepared in accordance with International Financial Reporting
Standards (“IFRS”) as required for Canadian public listed entities with year ends beginning on or after January 1,
2011. In reporting periods prior to the year 2011 the Company’s financial statements were prepared under
Canadian generally accepted accounting principles.
Overview
ShaMaran is a Canadian‐based oil and gas company with interests in two petroleum properties located in Kurdistan
in Northern Iraq (“Kurdistan”). The Company is currently in the pre‐production stages of its exploration and
development program relating to the petroleum properties. ShaMaran trades on the TSX Venture Exchange and
the NASDAQ OMX First North Exchange (Stockholm) under the symbol “SNM”.
Highlights
A major oil discovery in the Atrush Block was announced by the Company on April 13, 2011. The Atrush 1 well
flowed at rates totalling over 6,393 bopd of 26.5 API oil from three tests in the Middle and Upper Jurassic
reservoirs and well analysis indicated that the intervals are capable of much higher rates when completed for
production. The well was drilled in budget and on time to a total depth of 3,400 meters.
The Appraisal Work Programme and Budget on the Atrush Block has been submitted to the KRG. The
Programme consists of 3D seismic and a number of appraisal wells and studies. 3D seismic acquisition is in
progress and the construction of the location for the Atrush‐2 appraisal well is underway with drilling
operations planned to commence in May 2012. Planning for an Early Production facility to conduct a long term
test in the field is also underway.
The Company’s 100% owned subsidiary ShaMaran Petroleum BV entered into a production sharing contract
(“PSC”) on July 27, 2011 in respect of the Taza Block (formerly Block K42) in the Kurdistan Region of Iraq.
ShaMaran holds a 20% working interest in the PSC, and Oil Search Iraq Limited (“OSIL”) is the operator with a
60% working interest in the PSC. The Kurdistan Regional Government of Iraq (“KRG”) holds a 20% working
interest in the PSC with costs carried by ShaMaran and OSIL. Planning is underway for an exploration well
with drilling operations expected to commence near the end of the second quarter of 2012.
Operations were discontinued in December 2011 in Pulkhana after disappointing testing results from the
Pulkhana 9 well. On January 17, 2012 the Company signed a final binding agreement with the KRG to
relinquish to the KRG the 60% working interests previously held in each of the Arbat and Pulkhana Production
Sharing Contracts.
1
In February 2012 the Company received a Detailed Property Report (“the Report”) from its third party
auditors, McDaniel & Associates Consultants Ltd. The Report includes 124,782 Mboe as best estimate of Gross
Estimated Contingent Resources and 87,910 Mboe as the unrisked best estimate of Gross Estimated
Prospective Resources net to ShaMaran for the Company's two assets. These estimates are exclusive of
amounts relating to the Pulkhana and Arbat Blocks which were relinquished in January 2012.
Cash proceeds of $CAD 51.0 million were raised by the Company ($CAD 49.7 million net of issuance costs)
through a private placement of 127.5 million common shares at $CAD 0.40 per share which was concluded on
November 15, 2011. In May 2011 the Company raised cash proceeds of $CAD 50.4 million ($CAD 49.5 million
net of issuance costs) through a private placement of 56 million common shares at $CAD 0.90 per share which
was concluded on May 5, 2011.
The cash balance of the Company was $49.1 million as at December 31, 2011.
Operations in Kurdistan
The Company had at December 31, 2011 direct working interests in each of the Pulkhana Block, the Arbat Block
and the Taza Block (formerly Block K42) and an indirect interest in the Atrush Block. All petroleum properties are
located in Kurdistan within the northern extension of the Zagros Folded Belt. The area is currently undergoing a
major exploration and development campaign by over 40 mid to large size international oil companies.
On January 17, 2012 ShaMaran signed a final binding agreement with the KRG to relinquish to the KRG the 60%
working interests which it then held in each of the Arbat and Pulkhana Production Sharing Contracts ("PSC").
Under the terms of the agreement the PSC for each of the Pulkhana and Arbat blocks was terminated whereby
ShaMaran's interests in both PSCs are relinquished. This asset realignment relieved the Company from the
remaining work program obligations of Pulkhana and Arbat blocks, and allows ShaMaran to focus its activities and
resources on the Atrush and Taza Blocks, which the Company considers to be their most prospective blocks.
Atrush Block
The Atrush Block is located approximately 85 km northwest of Erbil, the capital of the Kurdish administered part of
Iraq, and is 269 square kilometers in area. The topography is similar to the Shaikan Block to the south which had a
major discovery reported by Gulf Keystone Petroleum Ltd in January 2010. Immediately to the north of the Atrush
Block is the Sarsang block where Hillwood International Energy also made an oil discovery in the Swara Tika‐1 well.
The structures located on the Block contain multiple stacked oil reservoirs in the Cretaceous, Jurassic and Triassic
sections and due to a high‐degree of fracturing are capable of high production rates.
In August 2010 the Company acquired a 33.5% shareholding in General Exploration Partners Inc (“GEP”). GEP is the
operator of the Atrush Block PSC, holding an 80% working interest in the Block, with the remaining 20% third party
interest (“TPI”) being held by the KRG. In October 2010, Marathon Oil Corporation was assigned the 20% TPI.
Under the terms of PSC the KRG has the option of participating as a Contractor Entity with an undivided interest in
the petroleum operations and all the other rights, duties, obligations and liabilities of the Contractor in the PSC, of
up to 25% and not less than 5%. If this option is exercised, the government will become liable for their share of the
petroleum costs incurred on or after the first commercial declaration date. Fiscal terms under the PSC include a
10% royalty, a variable profit split, based on a percentage share to the KRG and a capacity building payment equal
to 30% of profit oil (produced oil, less royalty and cost oil) to be paid to the KRG. GEP has the right to recover costs
using up to 40% of the available oil (produced oil less royalty oil) and 55% of the produced gas.
2
GEP acquired 143 km of 2D seismic data (covering the Atrush Block) data in 2008. The first exploration well on the
Atrush Block was spudded on October 5, 2010 and a total depth of 3,400 meters was reached on January 21, 2011.
A comprehensive well testing program consisting of ten drill stem tests (DSTs) commenced on January 30, 2011
and was completed on the April 3, 2011. Following notification to the KRG of a major Jurassic oil discovery on the
April 4, 2011 the operator GEP submitted an Appraisal Work Program which consists of 3D seismic, appraisal wells
and studies leading to the possible installation of an Early Production facility in 2012 to conduct a long term test in
the field. 3D seismic acquisition operations commenced on the block in July 2011 and planning for the Atrush‐2
well is currently in progress, with the well location under construction.
Refer also to discussion under “Commitments” in this MD&A.
Taza Block (formerly Block K42)
Taza Block located is a 511 square kilometer exploration area located in the South of Kurdistan immediately
northeast of the Pulkhana Block and on trend with the giant producing Jambur field situated to the north west of
the Block. The producing Jambur field has estimated oil reserves in excess of one billion barrels and is connected to
export infrastructure.
The Company’s 100% owned subsidiary ShaMaran Petroleum BV entered into a production sharing contract
(“PSC”) on July 27, 2011 in respect of the Taza Block. ShaMaran holds a 20% working interest in the PSC, and Oil
Search Iraq Limited (“OSIL”) is the operator with a 60% working interest in the PSC. The Kurdistan Regional
Government of Iraq (“KRG”) holds a 20% working interest in the PSC with costs carried by ShaMaran and OSIL. The
Company had previously been a party to an option agreement in respect of the Taza Block with the KRG and OSIL.
ShaMaran and OSIL exercised their option to convert that agreement into the PSC.
The acquisition of 232 line‐kilometers of 2D seismic data was concluded in May 2010 and identified a significant 90
square kilometer four‐way dip closed structure, with structural relief of between 150 and 300m. This closure lies
on the structural trend between the Jambur field and the Western Zagros Sarqala oil discovery to the south (with
reported test rates of over 9,000 barrels of oil per day from the Jeribe formation). The Jeribe will be one of the
main targets for the upcoming exploration well on the identified prospect which is in the planning phase with
drilling operations expected to commence near the end of the second quarter of 2012.
Refer also to discussion under “Commitments” in this MD&A.
Pulkhana Block
Operations were discontinued in the Pulkhana block after disappointing test results from the Pulkhana 9 well. The
Pulkhana Block PSC was fully relinquished to the KRG with an effective date of January 17, 2012.
The Pulkhana Block is a 529 square kilometer appraisal/development area located in southern Kurdistan.
Prior to relinquishing this PSC the Company was the operator of the project with a 60% undivided interest in the
production sharing contract. Petoil Petroleum and Petroleum Products International Exploration and Production
Inc. retained a 20% interest in the PSC and the KRG holds the remaining 20%. The Company was required to pay
100% of the minimum financial commitment in respect of the first exploration phase, following which the
Company would pay 75% of the forward costs.
3
Pulkhana‐9 was spudded by the Company on April 3, 2011 and a total depth of 2,333 meters was reached on July
23, 2011. A comprehensive testing program of six well tests ("DST") recovered oil from four separate reservoir
intervals, including two new reservoirs that predrilling had not been recognized as having resource potential. Due
to the inability to obtain sustained flow rates the Company opted to sidetrack the well targeting the lower two
zones (Shiranish and Balambo formations) using open hole "barefoot" testing. The well was sidetracked
successfully, however the targeted formations flowed only limited quantities of oil to surface during open hole
testing.
Refer also to the discussion under “Commitments” in this MD&A.
Arbat Block
On January 17, 2012 the Company completed the relinquishment to the KRG of the Arbat Block PSC.
The Arbat Block (formerly Block G) is a 973 square kilometer exploration area located in eastern Kurdistan.
Prior to relinquishing this PSC the Company was the operator of the project and held a 60% undivided interest in
the PSC with the KRG holding a 20% interest and the remaining 20% a third party interest which the KRG has the
option to assign to a third party or parties. The Company was required to pay 100% of the minimum financial
commitment in respect of the first exploration sub period or until such time as the KRG’s reserved 20% interest has
been sold following which the Company would pay 75% of the forward costs and receive a reimbursement for 25%
of the costs incurred to that date.
Fiscal terms under the PSC include a 10% royalty, a variable profit split, based on a percentage share to the KRG
and a capacity building payment equal to 20% of the Company’s profit oil share (produced oil, less royalty and cost
oil) to be paid to the KRG. The Company has the right to recover costs using up to 45% of the available crude oil
(produced oil less royalty oil) and 53% of the produced gas.
During the year 2011 the Company had initiated planning for the first well and had initiated an infill 2D seismic
program in an attempt to establish a second drillable prospect. As a result of the decision to relinquish the PSC the
seismic program was terminated December 22, 2011.
Refer also to discussion under “Commitments” in this MD&A.
4
Selected Annual Information
The following is a summary of selected annual financial information for the Company:
($000s, except per share data)
Continuing operations
General and administrative expenses
Share‐based payments
Depreciation and amortisation expense
Share of loss of associate
Impairment losses
Finance cost
Finance income
Income tax
Net income / (loss) from continuing operations
Discontinued operations
Net revenues
Expenses
Interest income
Gain loss on sale of assets
Net income / (loss) from discontinued operations
Net income/(loss)
Basic income / (loss), $ per share:
Continuing operations
Discontinued operations
Diluted income / (loss), $ per share:
Continuing operations
Discontinued operations
Total assets
Working capital surplus
Shareholders’ equity
Common shares outstanding (x 1,000)
For the year ended December 31,
2011
2010
2009*
(1,082)
(264)
(221)
(271)
(207,504)
(1,777)
518
(137)
(210,738)
‐
(1,279)
‐
1,078
(201)
(210,939)
(0.31)
‐
(0.31)
(0.31)
‐
(0.31)
151,239
29,798
125,259
807,984
(594)
(570)
(139)
(27)
‐
(1,353)
2,631
(81)
(133)
‐
(1,037)
‐
77
(960)
(1,093)
‐
‐
‐
‐
‐
‐
(2,378)
(546)
(6)
‐
‐
(636)
5,253
(12)
1,675
1,658
(2,041)
24
1,600
1,241
2,916
0.005
0.005
0.01
0.005
0.005
0.01
256,489
44,009
235,518
623,182
249,999
59,903
244,563
499,546
*The amounts for 2009 are presented in accordance with Canadian GAAP and have not been restated to conform to IFRS.
5
Summary of principal changes in annual information
The Company spent $103 million on exploration and evaluation activities in 2011, its second full year of operations
in Kurdistan, consisting primarily of drilling, workover and testing costs incurred on the Pulkhana 8 and Pulkhana 9
wells and a capacity building payment issued to the KRG associated with the signing of the Taza Block PSC. The
Company recorded an expense in December 2011 of $207.5 million to provide for the impairment of exploration
and evaluation, inventory, and property plant and equipment assets relating to the Pulkhana and Arbat Blocks
which were ultimately relinquished to the KRG in January 2012. Also during the year 2012 the Company increased
by $7.5 million its investment in GEP, the company operating the Atrush Block, primarily through cash contributions
which were required to fund the work program and budget on the Atrush Block. To finance its 2011 operations the
Company raised funds in May and November 2011 through the issuance of a total of 183.5 million shares for gross
proceeds of $99.8 million ($98.7 million net of issuance costs). As a result of these developments the total assets
and shareholders’ equity reported at the end of the year 2011 have decreased relative to the amounts reported in
2010 while common shares outstanding have increased. The income and expenses of the Company are explained in
detail below.
Results of Continuing Operations
The continuing operations of the Company are currently in the exploration stages and generate no revenue. The
expenses and income items of continuing operations are explained in detail as follows:
General and Administrative Expenses
In $000
Salaries and benefits
Management and consulting fees
Sponsorship expense
General and other office expenses
Listing costs and investor relations
Travel expenses
Legal, accounting and audit fees
General and administrative expense incurred
Expenses and PSC overhead capitalized as E&E assets
Net general and administrative expenses
For the year ended December 31,
2010
2,526
1,053
485
416
414
327
196
5,417
(4,823)
594
2011
3,623
1,459
1,025
1,159
643
413
300
8,622
(7,540)
1,082
The Company capitalizes as E&E assets those general and exploration expenses incurred which relate to the
operational aspects of the Company’s E&E activities. In addition the PSCs governing the Company’s petroleum
properties in Kurdistan allow the operating company to include within petroleum costs an annual exploration
overhead charge calculated on a sliding scale percentage of annual exploration costs. The exploration overhead
charge qualifies as recoverable petroleum costs under the term of the PSCs and will be recovered from a portion of
available petroleum production (produced oil less royalty oil) in the future.
The increase over the prior year G&A expenses incurred is due to the relative increase in current year technical and
support required by the additional exploration operations on the Company’s petroleum properties.
6
Share‐Based Payments
In $000
Share‐based payments
For the year ended December 31,
2010
570
2011
264
The share‐based payments expense results from the vesting of stock options granted in the years from 2009 to
2011. A total of 25,000 stock options were granted during the year ended December 31, 2011 (2010: 1,390,000).
The Company uses the fair value method of accounting for stock options granted to directors, officers, employees
and consultants whereby the fair value of all stock options granted is recorded as a charge to operations. The fair
value of common share options granted is estimated on the date of grant using the Black‐Scholes option pricing
model.
Depreciation and Amortisation
In $000
Depreciation and amortisation
For the year ended December 31,
2010
139
2011
221
Depreciation and amortisation corresponds to cost of use of the furniture and IT equipment at the Company’s
technical and administrative offices located in Switzerland and Kurdistan.
Share of loss of associate
In $000
Loss from investment in GEP
For the year ended December 31,
2010
27
2011
271
The loss relates to the Company’s pro‐rata portion of the net loss incurred by GEP in conducting exploration
operations on the Atrush Block in Kurdistan. The Company acquired its 33.5% interest in GEP on August 27, 2010.
Impairment losses
In $000
Write down of inventory to net realizable value
Provision for impairment of exploration and evaluation assets
Write down of property plant and equipment to liquidation values
Total impairment losses
For the year ended December 31,
2010
‐
‐
‐
‐
2011
1,243
205,862
399
207,504
As a result of the suspension in December 2011 of all operations associated with the Pulkhana and Arbat Blocks, and
the relinquishment of these PSCs completed on January 17, 2012, the Company has determined that at December
31, 2011 there was impairment in the value of the exploration and evaluation assets incurred in respect of these
PSCs and of certain drilling inventory and property, plant and equipment items which would no longer be used in
drilling programs associated with the Pulkhana and Arbat Blocks due to their cancellation.
Finance cost
In $000
Guarantee fees
Foreign exchange loss
Total finance cost
For the year ended December 31,
2010
1,353
‐
1,353
2011
915
862
1,777
7
The Company has incurred fees in respect of a guarantee of the minimum financial obligations under the Pulkhana
and Arbat PSCs. The guarantee which was provided to the KRG by a related company on behalf of ShaMaran
became effective on August 29, 2009 and was charged at a rate of 3.0 % per annum up to June 30, 2010 and at 1.5%
thereafter. Refer also to the discussions under “Commitments” and “Related Party Transactions” in this MD&A.
The foreign exchange loss in 2011 results primarily from holding cash and cash equivalents denominated in
Canadian dollars while the Canadian dollar weakened during the year against the United States dollar which is the
reporting currency of the Company.
Finance income
In $000
Interest income
Foreign exchange gain
Total finance income
For the year ended December 31,
2010
416
2,215
2,631
2011
518
‐
518
The foreign exchange gain in 2010 results primarily from holding cash and cash equivalents denominated in
Canadian dollars while the Canadian dollar strengthened during the year against the United States dollar which is
the reporting currency of the Company.
Interest income represents bank interest earned on cash and investments in marketable securities. The increase in
the amounts reported in 2011 relative to the amount reported in the year 2010 is primarily due to higher interest
rates received on the cash balances as well as higher average cash balances held throughout the year.
Income tax expense
In $000
Income tax expense
For the year ended December 31,
2010
81
2011
137
Income tax expense relates to provisions for income tax on service income generated in Switzerland. The amount
reported in 2011 has increased relative to the amount reported in 2010 due to a higher tax base relating to the cost
of additional services incurred to support the higher levels of exploration activity in the year 2011.
8
Results of Discontinued Operations
The main components of discontinued operations are explained as follows:
Expenses
In $000
Legal, accounting and audit fees
Management and consulting fees
General and other office expenses
Revision to asset retirement obligation
Total expenses
For the year ended December 31,
2010
246
308
144
339
1,037
2011
137
3
61
1,078
1,279
The revision to asset retirement obligation in 2011 relates to the provision for site restoration costs relating to the
remaining interests the Company holds in petroleum properties located in the United States. The provision was
determined based on the Company’s remaining net ownership interest in the corresponding wells and facilities,
estimated costs to abandon and reclaim the wells and facilities and the estimated timing of the costs to be
incurred in future periods.
The decrease in fees and expenses in the year 2011 relative to the year 2010 is due to the reduction in activity
associated with the Company’s United States based operations following the sale in 2009 of substantially all of the
properties located there. The decrease in fees and expenses in the year 2011 relative to the year 2010 is due to the
reduction in activity associated with the Company’s United States based operations following the sale in 2009 of
substantially all of the properties located there. The legal, management and consulting fees which the Company
continues to incur are related to the decommissioning and windup of its remaining properties and legal entities in
the United States.
Gain on disposal of assets
In $000
Gain on asset disposal
For the year ended December 31,
2010
77
2011
1,078
The Company received in April 2011 a cash payment of $1,078 in respect of a 2009 agreement for the sale of
petroleum properties located in the United States which allowed for a deferred purchase payment on the basis of
proved reserves as defined at December 31, 2010. The gain of $77 reported in year 2010 relates to the disposal of
all remaining inventories located in the United States.
9
Selected Quarterly Information
The following is a summary of selected quarterly financial information for the Company:
(In $000s, except per share data)
For the quarter ended
Dec 31
Sep 30
Jun 30 Mar 31
Dec 31
Sep 30
Jun 30 Mar 31
2011
2011
2011
2010
2010
2010
2010
2010
Continuing operations
General and admin. (exp.) / recovery
Share‐based payments
Depreciation and amortisation
Share of recovery / (loss) of associate
Impairment losses
Finance cost
Finance income
Income tax expense
(283)
(21)
(55)
11
(207,504)
(251)
552
(31)
202
(70)
(58)
(173)
‐
(2,780)
147
(32)
Net inc. / (loss) from continuing ops.
(207,582)
(2,764)
(837)
(114)
(56)
(30)
‐
(229)
367
(33)
(932)
(164)
(59)
(52)
(79)
‐
(227)
1,162
(41)
540
628
(83)
(43)
46
‐
9
1,961
(38)
2,480
(643)
(73)
(41)
(73)
‐
(457)
600
(16)
(360)
(161)
(29)
‐
‐
(2,212)
74
(14)
(219)
(254)
(26)
‐
‐
(458)
1,760
(13)
(703)
(2,702)
790
Discontinued operations
Expenses
Gain on sale of assets
Net from discontinued ops.
Net income / (loss)
Basic loss, $ per share:
Continuing operations
Discontinued operations
Diluted loss, $ per share:
Continuing operations
Discontinued operations
(34)
‐
(34)
(46)
‐
(1,121)
1,078
(78)
‐
(73)
‐
(47)
‐
(728)
‐
(46)
(43)
(975)
(78)
462
(73)
(47)
(728)
2,407
(750)
(3,430)
(188)
77
(111)
679
(207,616)
(2,810)
(0.28)
‐
‐
‐
(0.28)
‐
(0.28)
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
Summary of principal changes in fourth quarter information
(0.28)
In the fourth quarter of 2011 the Company completed drilling and testing the Pulkhana 9 well and the workover and
testing of the Pulkhana 8 well and subsequently suspended all operations in respect the Pulkhana and Arbat Blocks.
The net loss in the fourth quarter was primarily driven by the impairment losses associated with the decision to
relinquish the Pulkhana and Arbat Blocks.
Off‐Balance Sheet Arrangements
The Company has no off‐balance sheet arrangements.
Outstanding Share Data
As of December 31, 2011 the Company had 807,983,860 shares outstanding and 3,233,334 stock options
outstanding under its employee incentive stock option plan. No warrants were outstanding.
10
The Company concluded a private placement on November 15, 2011 and issued 127.5 million common shares at
$CAD 0.40 per share for gross cash proceeds of $CAD 51.0 million ($CAD 49.7 million net of issuance costs).
On May 5, 2011 a private placement of an additional 56 million common shares at $CAD 0.90 per share resulted in
total cash proceeds of $CAD 50.4 million ($CAD 49.5 million net of issuance costs).
During the year 2011 a quantity of 25,000 (2010: 1,390,000) share options were granted while cancellations of
share options were 50,000 (2010: 915,000). A quantity of 1,301,666 (2010: 25,000) options were exercised during
the year 2011 resulting in cash proceeds of $CAD 636 (2010: $CAD 12,000).
Related Party Transactions
In $000
Namdo Management Services Ltd.
Mile High Holdings Ltd.
McCullough O’Connor Irwin LLP
Vostok Naphta Investment Ltd.
Lundin Petroleum AB
Total
Purchases of services
during the year
2010
2011
Amounts owing
as at December 31
2010
2011
361
103
56
24
2,176
2,720
185
152
41
‐
2,673
3,051
7
19
14
‐
78
118
‐
12
‐
‐
214
226
Namdo Management Services Ltd. is a private corporation owned by a shareholder of the Company which has
provided corporate administrative support and investor relation services to the Company.
Mile High Holdings Ltd. is a private corporation associated with a shareholder of the Company which has provided
transportation services to the Company in relation to its fundraising activities.
McCullough O’Connor Irwin LLP is a law firm in which an officer of the Company is a partner which has provided
legal services to the Company.
Vostok Naphta Investment Ltd. is a corporation traded on the NASDAQ OMX Nordic Exchange in Stockholm (trading
symbol VNIL SDB) associated with a shareholder of the Company and which has provided investor relations services
to the Company in relation to its fundraising activities in Sweden.
The Company receives services from various subsidiary companies of Lundin Petroleum AB (“Lundin”), a
shareholder of the Company. Lundin charges during the year ended December 31, 2011 of $2,176 (2010: $2,673)
were comprised of G&G and other technical service costs of $195 (2010: $382), reimbursement for Company travel
and related expenses of $611 (2010: $601), office rental, administrative and building services of $455 (2010: $328)
and $915 (2010: $1,362) relating to a guarantee provided to the KRG on behalf of the Company in respect of its
minimum financial commitments, payable semi‐annually and charged at a rate of 1.5 % per annum (3.0% prior to
July 1, 2010).
Included within general and administrative expenses are contributions totalling $1,025 made in the year 2011
(2010: $485) to a charitable foundation whose Chairman is a major shareholder of the Company. Funds from this
charity, in part, are used for community investment activity in Kurdistan.
All transactions with related parties are in the normal course of business and are made on the same terms and
conditions as with parties at arm’s length.
11
Liquidity and Capital Resources
Working capital at December 31, 2011 totaled $29.8 million compared to $44.0 million at December 31, 2010.
The overall cash position of the Company decreased by $9.6 million during the year 2011 compared to an increase
in cash of $4.9 million during the year 2010. The primary components of the movement in funds are discussed in
the following paragraphs.
The operating activities of the Company during the year 2011 resulted in an increase in the cash position by $10.5
million compared to a decrease by $2.3 million in the year 2010. Increased trade payable balances are the primary
reason for the increase in 2011 cash position due to operating activities.
Net cash used in investment activities during the year 2011 was $119.7 million compared to funds used in 2010 in
the amount of $52.7 million. The main components of cash used was $100.1 million spending on E&E costs related
to the Company’s petroleum properties in Kurdistan, which included a payment to the KRG of $20 million as a
capacity building bonus in respect of the Taza Block PSC, and $20.4 million in cash contributions to GEP to fund joint
operations on the Atrush Block and to pay down the deferred purchase consideration which was outstanding at the
end of the year 2010.
The Company received financing funds net of issuance costs amounting to $99.8 million during the year 2011 ($CAD
99.2 million) in respect of May and November private placements of a total of 183.5 million common shares of
ShaMaran and an additional $661 in cash was received from the exercise of share options in the year 2011. During
the year 2010 the Company received financing funds net of issuance costs of $47.8 million ($CAD 49.3 million)
relating to the private placement in September of 111.1 million common shares of the Company.
The Company does not currently generate cash flow from its oil exploration and development operations. The
Company has relied upon the issuance of common shares to finance its ongoing oil exploration, development and
acquisition activities. The Company believes that based on the forecasts and projections they have prepared and a
number of financing initiatives which are being pursued the Company and its subsidiaries will have resources
sufficient to satisfy contractual obligations and commitments under agreed work programs. Although the Company
is confident that it will be able to raise sufficient funds there is no assurance at the date these financial statements
were approved that these financing initiatives will be successful. Continuing operations are dependent on discovery
of economic oil and gas reserves and ultimately on the attainment of profitable operations.
The share based payments reserve decreased by $140 in the year 2011 because the value of stock options exercised
during the year exceeded the issuance of share‐based payments. In the year 2010 the share based payments
reserve increased by $563 relating to the issuance of share‐based payments. When options are granted the Black‐
Scholes option value method is used to calculate a value for the stock options. When the options are exercised the
applicable amounts of share based payments are transferred to share capital.
Commitments
Production Sharing Contracts
At December 31, 2011 the Company held direct and indirect interests in four production sharing contracts (“PSCs”)
which govern petroleum operations in the Atrush, Taza (formerly K42), Pulkhana and Arbat Block petroleum
exploration and development properties located in Kurdistan.
12
The PSCs contemplate minimum financial commitments during the first exploration sub‐period and also require the
Contractor to fund certain community development, personnel, training, environmental, and technological
assistance projects during the period over which the contracts are in effect. At any time during the exploration
period the Contractor has the right to terminate the PSCs by surrendering the entire contract area. All modifications
to the PSC’s are subject to the approval of the KRG.
As at December 31, 2011, the Company the outstanding commitments of the Company were as follows:
In $000
General Exploration Partners Inc
Taza Block PSC
Pulkhana Block PSC (*see Note below)
Arbat Block PSC (*see Note below)
Office and other
Total commitments
2012
27,002
4,417
30,000
20,000
125
81,544
2013
‐
1,667
‐
‐
‐
1,667
2014
‐
1,667
‐
‐
‐
1,667
Thereafter
‐
‐
‐
‐
‐
‐
Total
27,002
7,751
30,000
20,000
125
84,878
* Note: The Company took the decision in December 2011 to relinquish to the KRG the Pulkhana and Arbat Block
PSCs and immediately suspend all operations associated with those two PSCs. The relinquishment was
subsequently completed in January 17, 2012 whereby the Company was released from any further obligation
under these two PSCs in exchange for fees totaling $25 million which were paid to the KRG on January 25, 2012.
ShaMaran holds 33.5% of the issued shares of General Exploration Partners Inc (“GEP”) which holds an 80% working
interest in the Atrush Block PSC. Marathon Oil Corporation holds the remaining 20% interest with the KRG holding
an option to acquire up to a 25% interest in the PSC prior to 180 days after declaration of a commercial discovery.
GEP is responsible for 80% of the approved annual work program and budget within the appraisal period now in
progress.
The Company currently holds a 20% working interest in the Taza PSC, and Oil Search Iraq Limited (“OSIL”) is the
operator with a 60% working interest in the PSC. The KRG holds a 20% working interest in the PSC with costs
carried by ShaMaran and OSIL. The Company had previously been a party to an option agreement in respect of the
Taza Block with the KRG and OSIL. ShaMaran and OSIL exercised their option on July 27, 2011 to convert that
agreement into the PSC.
At December 31, 2011 the Company held at a 60% undivided interest in the Pulkhana Block PSC, Petoil Petroleum
and Petroleum Products International Exploration and Production Inc (“Petoil”) held a 20% interest and the
remaining 20% was held by the Kurdistan Regional Government (the “KRG”). The Company was required to pay
100% of the minimum financial commitment in respect of the first exploration sub‐period which is 36 months from
the commencement of the PSC with option to extend by one year.
The Company held at December 31, 2011 a 60% undivided interest in the Arbat PSC, the KRG held a 20% interest
and the remaining 20% was a third party interest which the KRG held the option to assign to a third party or parties.
The Company was required to pay 100% of the minimum financial commitment in respect of the first exploration
sub‐period or until such time as the KRG’s reserved 20% interest has been sold following which the Company would
have paid 75% of the forward costs and receive a reimbursement for 25% of the costs incurred to that date.
13
Financial Instruments
The Company’s financial instruments consist of cash, cash equivalents, short‐term investments, accounts receivable,
accounts payable, accrued expenses and net payable to joint venture partner.
Cash, cash equivalents and short‐term investments are designated as held for trading and are therefore carried at
fair value, with unrealized gains or losses recorded in interest income.
The fair values of cash, cash equivalents, accounts receivable, accounts payable, accrued expenses and net payable
to joint venture partner approximate carrying values because of the short‐term nature of these instruments. The
fair values of short‐term investments are determined directly by reference to quoted market prices.
The Company is exposed in varying degrees to a variety of financial instrument related risks.
Credit Risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to
meet its contractual obligations. The Company manages its credit risk through monitoring counterparty ratings and
credit limits. The Company is mainly exposed to credit risk on its cash and cash equivalents and accounts
receivable. To manage this risk the Company maintains its excess cash on account in instruments having a
minimum credit rating of R‐1 (mid) or better (as measured by Dominion Bond Rate Services) or the equivalent
thereof according to a recognized bond rating service.
Accounts receivable are primarily from joint venture partners in the oil and gas industry and are subject to normal
industry credit risks. Joint venture receivables are typically collected within one to two months of the joint venture
bill being issued to the partner. The Company mitigates risks arising from joint venture receivables by obtaining
partner approval of capital expenditures prior to starting a project.
Liquidity Risk
Liquidity risk is the risk that the Company will incur difficulties meeting its financial obligations as they become due.
The Company’s approach to managing liquidity is to ensure, as far as possible, that it will have sufficient liquidity to
meet its liabilities when due, without incurring unacceptable losses or risk harm to the Company’s reputation.
The Company prepares annual capital expenditure budgets, which are regularly monitored and updated as
considered necessary. The Company requires authorizations for expenditure on both operating and non‐operating
projects to further manage capital expenditures.
Market Risk
Market risk is the risk that changes in market prices, such as foreign exchange rates, commodity prices and interest
rates, will affect the Company’s net earnings or the value of financial instruments. The objective of market risk
management is to manage and control market risk exposures within acceptable limits, while maximizing returns.
The significant market risk exposures to which the Company is exposed are foreign currency, commodity price and
interest rate risks.
14
Foreign currency risk – The Company maintains a substantial portion of its cash in Canadian dollars; however, the
Company’s operations are conducted predominantly in United States dollars. The Company’s operating results and
cash flows are affected to varying degrees by the changes in the Canadian dollar relative to the United States dollar.
The Company has not entered into any agreements or purchased any instruments to hedge possible currency risks.
Commodity price risk – The prices that the Company may receive for its crude oil and natural gas production may
have a significant impact on its revenue and cash inflows from operating activities. Any significant price decline in
commodity prices would adversely affect the amount of funds available for capital reinvestment purposes. At this
time the Company does not use derivative financial instruments to manage its exposure to this risk.
Interest rate risk – The Company’s bank accounts earn interest income at variable rates. The Company’s future
interest income is exposed to changes in short‐term rates.
Uncertainty of title
Although the Company conducts title reviews prior to acquiring an interest in a property, such reviews do not
guarantee or certify that an unforeseen defect in the chain of title will not arise that may call into question the
Company’s interest in the production sharing contracts. Any uncertainty with respect to one or more of the
Company’s production sharing contracts could have a material adverse effect on the Company’s business,
prospects and results of operations.
Risks and Uncertainties
The majority of ShaMaran’s assets are located in Kurdistan. ShaMaran operates in areas which are under foreign
governmental sovereignty and is therefore subject to political, economic, and other uncertainties associated with
foreign operations, which include (but are not limited to) the exposure of the Company to changes in general
government policies and legislation, change in the energy policies or in their administration, changes in fiscal terms
of a production sharing contract with the government, inability to export the petroleum produced under contract,
adverse determinations or rulings by governmental authorities, nationalization, currency fluctuations and
devaluations, as well as risks of loss due to civil strife, acts of war, guerrilla activities and insurrections.
Political Issues
The political and security situation in Iraq is not settled and is volatile. There are outstanding political issues and
differences between the various political factions in Iraq. These differences could adversely impact ShaMaran’s
interests in Kurdistan. In addition, certain borders of Kurdistan remain the subject of final determination, the result
of which may have an adverse effect on ShaMaran’s assets.
Legislative Issues
All contracts in Kurdistan are issued under the Oil and Gas Law of The Kurdistan Region ‐ Iraq. No federal Iraqi
legislation has been enacted by the Iraq Council of Ministers (Cabinet) and Council of Representatives (Parliament).
The lack of legislation, or the enactment of federal legislation contradictory to Kurdistan Region legislation, could
have a material adverse impact on ShaMaran’s interests in the region.
15
Marketing, Markets and Transportation
The export of oil and gas from Kurdistan remains subject to uncertainties which could have an adverse impact on
ShaMaran’s ability to export and market such oil and gas. Further, ShaMaran’s ability to market its oil and gas may
also depend upon its ability to secure transportation and delivery, in view of related issues such as the proximity of
its potential production to pipelines and processing facilities. Potential government regulation relating to price,
quotas and other aspects of the oil and gas business could also have an adverse impact.
Exploration, Development and Production Risks
Oil and gas operations involve geological, technical and commercial risks. ShaMaran’s success will depend on its
ability to find, appraise, develop and commercially produce oil and gas resources and reserves. Future oil and gas
exploration may involve risks relating to dry holes, wells which do not produce sufficient petroleum to return a
profit after drilling, operating and other costs. In addition, operations can be effected by drilling hazards,
environmental damage, and other field operating conditions which could adversely affect production and increase
the cost of operations. Diligent operations can contribute to maximizing production rates over time but production
delays and declines from normal field operating conditions cannot be eliminated and can adversely affect revenue
and cash flow levels.
Project Risks
ShaMaran’s ability to execute projects and market oil and gas will depend upon numerous factors beyond
ShaMaran’s complete control. Factors such as obtaining approvals from relevant authorities, issues relating to
security in the area of operation, adverse legislation in Kurdistan and/or Iraq, the regulation of the oil and gas
industry by various levels of government and governmental agencies in Kurdistan and/or Iraq could adversely
impact the execution of ShaMaran’s projects.
Substantial Capital Requirements
ShaMaran anticipates making substantial capital expenditures in the future for the acquisition, exploration,
development and production of oil and gas reserves. ShaMaran’s results will impact its access to the capital
necessary to undertake or complete future drilling and development programs. ShaMaran’s ability to access the
equity or debt markets in the future may be affected by any prolonged market instability. There can be no
assurance that debt or equity financing, or future cash (if any) generated by operations, would be available or
sufficient to meet these requirements or for other corporate purposes or, if debt or equity financing is available,
that it will be on terms acceptable to ShaMaran. The inability of ShaMaran to access sufficient capital for its
operations could have a material adverse effect on ShaMaran’s financial condition, results of operations and
prospects.
Additional Funding Requirements
ShaMaran’s cash balances may not be sufficient to fund its ongoing activities at all times. From time to time,
ShaMaran may require additional financing in order to carry out its oil and gas acquisition, exploration and
development activities. Failure to obtain such financing on a timely basis could cause ShaMaran to forfeit its
interest in certain properties, miss certain acquisition opportunities and reduce or terminate its operations.
ShaMaran’s ability to access the equity or debt markets in the future may be affected by any prolonged market
instability.
16
Dilution
ShaMaran may make future acquisitions or enter into financings or other transactions involving the issuance of
securities of ShaMaran which may be dilutive to the existing shareholders.
Accounting Policies and Critical Accounting Estimates
Use of Estimates
The consolidated financial statements of the Company have been prepared by management using International
Financial Reporting Standards (“IFRS”). In preparing financial statements, management makes informed judgments
and estimates that affect the reported amounts of assets and liabilities as of the date of the financial statements
and affect the reported amounts of revenues and expenses during the period. Specifically, estimates were utilized
in calculating depletion, asset retirement obligations, share‐based payments, amortisation and impairment write‐
downs. Actual results could differ from these estimates and differences could be material.
Accounting for Oil and Gas Operations
The Company follows the successful efforts method of accounting for its oil and gas operations. Under this method
acquisition costs of oil and gas properties, costs to drill and equip exploratory wells that find proved reserves and
costs of drilling and equipping development wells are capitalized and subject to annual impairment testing.
Exploration well costs are initially capitalized and, if subsequently determined to have not found sufficient reserves
to justify commercial production, are charged to exploration expense. Exploration well costs that have found
sufficient reserves to justify commercial production, but whose reserves cannot be classified as proved, continue to
be capitalized as long as sufficient progress is being made to assess the reserves and economic viability of the well
and or related project.
Capitalized costs of proved oil and gas properties are depleted using the unit of production method based on
estimated gross proved reserves of petroleum and natural gas as determined by independent engineers. Successful
exploratory wells and development costs and acquired resource properties are depleted over proved developed
reserves. Acquisition costs of unproved reserves are not depleted or amortized while under active evaluation for
commercial reserves.
Costs associated with significant development projects are depleted once commercial production commences.
A revision to the estimate of proved reserves can have a significant impact on earnings as they are a key component
in the calculation of depreciation, depletion and accretion.
Producing properties and significant unproved properties are assessed annually, or more frequently as economic
events dictate, for potential impairment. The impairment test is initially based on undiscounted future cash flows
from proved and risk adjusted probable reserves. If an impairment is identified, fair value is calculated as the
present value of estimated expected discounted cash flows from proved and risk‐adjusted probable reserves. Any
impairment loss is the difference between the carrying value of the petroleum property and its fair value.
Therefore, if it is determined that the estimated fair value is less than the net carrying amount, a write‐down to the
oil and gas property’s fair value is recognized during the period, with a charge to earnings.
17
Estimates of future cash flows used in the evaluation of impairment of assets are performed based on risk
assessments on field and reservoir performance and include assumptions regarding commodity prices, discount
rates and future costs.
A substantial portion of the Company’s exploration and development activities are conducted jointly with others.
The Company engaged McDaniel & Associates Consultants Ltd (“McDaniel”), an independent geoscience
consultancy firm, to evaluate 100% of the Company’s reserves and resource data at December 31, 2011. The
conclusions of this evaluation have been presented in a Detailed Property Report, which has been prepared in
accordance with standards set out in the Canadian National Instrument NI 51‐101 and Canadian Oil and Gas
Evaluation Handbook (COGEH).
The Company’s crude oil and natural gas contingent resources for all four of the Company’s assets as of December
31, 2011 were estimated to be as follows:
COMPANY GROSS ESTIMATED CONTINGENT RESOURCES AS OF DECEMBER 31, 2011
MBBL, MMCF (1) (2) (3) (4)
Crude Oil (Mbbl)
Natural Gas (MMcf)
Total Company (Mboe)
Low Estimate (1C) Best Estimate (2C) High Estimate (3C)
82,276
16,462
85,020
143,618
28,279
148,331
257,315
50,956
265,807
Mean (3)
Estimate
159,388
31,651
164,663
There is no certainty that it will be commercially viable to produce any portion of the resources.
Company Gross resources are based on working interest share of the property gross resources.
The statistical mean is provided in addition to the standard 1C, 2C and 3C resource categories.
Based on arithmetic aggregation of the low (P90) and high (P10) estimates for the individual fields; statistically therefore the low (1C)
estimate presented above has a greater than 90 percent chance of being exceeded and the high (3C) estimate has a lower than 10 percent
chance of being exceeded.
The Company’s crude oil, condensate and natural gas prospective resources for all four of the Company’s assets as
of December 31, 2011 were estimated to be as follows:
COMPANY GROSS ESTIMATED PROSPECTIVE RESOURCES AS OF DECEMBER 31, 2011
MBBL, MMCF (1) (2) (3) (4)
Crude Oil (Mbbl)
Condensate (Mbbl)
Natural Gas (MMcf)
Total Company (Mboe)
Unrisked
Low
Estimate
58,351
2,801
224,156
98,512
Unrisked Best
Estimate
133,935
6,912
494,500
223,264
Unrisked
Mean
Estimate
165,327
8,868
592,963
273,022
Unrisked High
Estimate
310,185
17,108
1,077,592
506,892
Risked (2)
Mean
Estimate
70,401
4,840
196,031
107,912
There is no certainty that any portion of the resources will be discovered. If discovered, there is no certainty that it will be economically
viable or technically feasible to produce any portion of the resources.
These are partially risked prospective resources that have been risked for chance of discovery, but have not been risked for chance of
development.
18
Based on arithmetic aggregation of the low (P90) and high (P10) estimates for the individual prospects; statistically therefore the low
estimate presented above has a greater than 90 percent chance of being exceeded and the high estimate has a lower than 10 percent
chance of being exceeded.
Company Gross resources are based on working interest share of the property gross resources.
As the Pulkhana and Arbat Blocks were relinquished January 17, 2012 (after the effective date of McDaniel’s report)
the contingent and prospective resources excluding these blocks were summarized by McDaniels as follows:
COMPANY GROSS ESTIMATED CONTINGENT RESOURCES
EXCLUDING PULKHANA AND ARBAT BLOCKS
AS OF DECEMBER 31, 2011
MBBL, MMCF (1) (2) (3) (4) (5)
Crude Oil (Mbbl)
Natural Gas (MMcf)
Total Company (Mboe)
Low Estimate (1C) Best Estimate (2C) High Estimate (3C)
71,149
16,243
73,856
120,177
27,630
124,782
209,641
49,379
217,871
Mean (3)
Estimate
132,272
30,846
137,413
These estimates are provided for information purposes only as they exclude Pulkhana and Arbat Blocks.
There is no certainty that it will be commercially viable to produce any portion of the resources.
Company Gross resources are based on working interest share of the property gross resources.
The statistical mean is provided in addition to the standard 1C, 2C and 3C resource categories.
Based on arithmetic aggregation of the low (P90) and high (P10) estimates for the individual fields; statistically therefore the low (1C)
estimate presented above has a greater than 90 percent chance of being exceeded and the high (3C) estimate has a lower than 10 percent
chance of being exceeded.
The Company’s crude oil, condensate and natural gas prospective resources excluding the Pulkhana and Arbat
Blocks as of December 31, 2011 were estimated to be as follows:
COMPANY GROSS ESTIMATED PROSPECTIVE RESOURCES
EXCLUDING PULKHANA AND ARBAT BLOCKS
AS OF DECEMBER 31, 2011
MBBL, MMCF (1) (2) (3) (4) (5)
Crude Oil (Mbbl)
Condensate (Mbbl)
Natural Gas (MMcf)
Total Company (Mboe)
Unrisked
Low
Estimate
31,031
1,861
60,739
43,016
Unrisked Best
Estimate
61,302
4,402
133,235
87,910
Unrisked
Mean
Estimate
70,616
5,674
166,635
104,062
Unrisked High
Estimate
120,749
10,884
312,564
183,726
Risked (2)
Mean
Estimate
45,439
4,325
126,554
70,856
These estimates are provided for information purposes only as they exclude Pulkhana and Arbat Blocks.
There is no certainty that any portion of the resources will be discovered. If discovered, there is no certainty that it will be economically
viable or technically feasible to produce any portion of the resources.
These are partially risked prospective resources that have been risked for chance of discovery, but have not been risked for chance of
development.
Based on arithmetic aggregation of the low (P90) and high (P10) estimates for the individual prospects; statistically therefore the low
estimate presented above has a greater than 90 percent chance of being exceeded and the high estimate has a lower than 10 percent
chance of being exceeded.
Company Gross resources are based on working interest share of the property gross resources.
19
The estimation of reserves and resources is subjective. Forecasts are based on engineering data, future prices,
expected future rates of production and the timing of capital expenditures, all of which are subject to uncertainties
and interpretations. The Company had no reserves at December 31, 2011.
The estimation of reserves and resources is subjective. Forecasts are based on engineering data, future prices,
expected future rates of production and the timing of capital expenditures, all of which are subject to uncertainties
and interpretations.
International Financial Reporting Standards
International Financial Reporting Standards (“IFRS”) replaced Canadian GAAP for publicly accountable enterprises
for with fiscal years commencing January 1, 2011. The Company has adopted IFRS for the interim and annual
periods beginning on January 1, 2011 and has reported comparative information for the year 2010.
The overall impact of the adjustments to the balance sheet, statement of comprehensive income and statement of
cash flows conversion from Canadian GAAP to IFRS is considered to be insignificant.
The following notes explain the adjustments made in converting from Canadian GAAP to IFRS:
i.
ii.
In accordance with IFRS 6 Exploration for and evaluation of Mineral Resources the Company’s accounting
policy is to record as E&E assets those costs of exploring and evaluating oil and gas properties including
payments to acquire the legal right to explore, costs of technical services and studies, seismic acquisition and
exploratory drilling and testing. Under Canadian GAAP these costs were included within PP&E as petroleum
properties. Accordingly, the conversion from Canadian GAAP to IFRS has increased intangible assets and
reduced PP&E by $185.0 million at January 1, 2010 and $149.9 million at December 31, 2010.
IFRS 2 Share‐based payments requires that the cost of equity‐settled share‐based payments granted to
directors, employees and other third parties is expensed over the vesting period using the graded method of
amortisation rather than a straight‐line method which was the method used by the Company under Canadian
GAAP. As a result the conversion from Canadian GAAP to IFRS has increased the share based payments
reserve and reduced accumulated deficit at the date of transition by $45 and increased share based payment
expenses by $56 for the year ended December 31, 2010.
Information relating to the Company’s accounting policies and transition to IFRS is included in notes 2, 3 and 5 of
the Consolidated Financial Statements.
Outlook
The outlook for the year 2012 for the two blocks which the Company holds interests in Kurdistan is as follows:
Atrush Block
The operating company (GEP) had completed more than half of the planned 309 square kilometers for the 3D
seismic acquisition program by the end of December 2011 when operations were suspended because of the winter
weather. Operations to acquire the balance portion of the 3D Seismic will commence by the end of the first quarter
2012 and are likely to be completed by the end of second quarter 2012. The Atrush‐2 well location is under
construction and GEP is in the process of tendering for a rig for a planned commencement of drilling operations in
May 2012.
20
Taza Block (Formerly Block K42)
Preparations for drilling the first Taza exploration well will continue over the coming months. The surface location of
the well has been selected and civil engineering works for site access road and the site preparation are under way.
The planned commencement of drilling operations is for the end of the second quarter of 2012.
New Ventures
As part of its normal business the Company continues to evaluate new opportunities in the region.
Budget
The capital and operating budget approved by the Board of Directors for the year 2012 was for $80.6 million. The
budget contains amounts relating to the work programs of the two Kurdistan petroleum properties, net to the
Company, as follows: $29.3 million for the Atrush Block, $16.3 million for the Taza Block, combined relinquishment
fees for the Pulkhana and Arbat Blocks of $25.0 million, $3.8 million in final costs to windup operations in Pulkhana
and Arbat and $6.2 million in G&A support and corporate costs. The Company has a number of financing
possibilities which will be pursued as required and is confident that it will obtain the resources sufficient to satisfy
its contractual obligations and commitments under the agreed budgets.
General
The security situation in Kurdistan remains stable with no major reported incidents. The region is seeing a rapid
development in infrastructure and a significant increase in the availability of oil and gas services in the country.
Based on current reports oil exports from Kurdistan are now around 175,000 bopd. Several major international oil
companies, most recently Exxon Mobil, have acquired properties in Kurdistan over the last two years. In addition,
the KRG announced in May 2011 that KRG contractors would receive first payment for oil exports of around 50
percent (US$243 million) of net revenues derived from the export of over 5 million barrels of oil from the Kurdistan
Region between the start of February 2011 and March 27 and on June 6 and September 21 one of the KRG
contractors, DNO International ASA, confirmed that it had received payment for exports in the amounts of $103.7
million and 60.0 million, respectively. These are extremely positive developments for the region.
21
Forward‐Looking Statements
This report contains forward‐looking statements concerning anticipated developments on the Company’s
operations; the adequacy of the Company’s financial resources; financial projections, including, but not limited to,
estimates of capital and operating costs, production rates, commodity prices, exchange rates, net present values;
and other events and conditions that may occur in the future. Forward‐looking statements are frequently, but not
always, identified by the words such as “expects,” “anticipates,” “believes,” “intends,” “estimates,” “potential,”
“possible,” “budget” and similar expressions, or statements that events, conditions or results “will,” “may,” “could,”
or “should” occur or be achieved. Information concerning the interpretation of drill results and reserve estimates
also may be deemed to be forward‐looking statements, as such information constitutes a prediction of what might
be found to be present if and when a project is actually developed. Forward ‐looking statements are statements
about the future and are inherently uncertain, and actual achievements of the Company or other future events or
conditions may differ materially from those reflected in the forward‐looking statements due to a variety of risks,
uncertainties and other factors, including, without limitation, those described in this MD&A.
The Company’s forward‐looking statements are based on the beliefs, expectations and opinions of management
on the date the statements are made and the Company assumes no obligation to update such forward‐looking
statements in the future. For the reasons set forth above, investors should not place undue reliance on forward‐
looking statements.
Additional Information
Additional information related to the Company is available on SEDAR at www.sedar.com and on the Company’s
web‐site at www.shamaranpetroleum.com.
22
Auditor’s Report
19 April 2012
Independent Auditor’s Report
To the Shareholders of ShaMaran Petroleum Corp
To the Shareholders of ShaMaran Petroleum Corp
We have audited the accompanying consolidated financial statements of
We have audited the accompanying consolidated financial statements of ShaMaran Petroleum
comprise the consolidated balance sheet as at 31 December 2011, 31 December 2010 and 1 January 2010 and
comprise the consolidated balance sheet as at 31 December 2011, 31 December 2010 and 1 January 2010 and
comprise the consolidated balance sheet as at 31 December 2011, 31 December 2010 and 1 January 2010 and
the Consolidated Statement of Comprehensive Income, Consolidated Statement of Changes in Equity and
the Consolidated Statement of Comprehensive Income, Consolidated Statement of Changes in Equity and
the Consolidated Statement of Comprehensive Income, Consolidated Statement of Changes in Equity and
Flow for the years ended 31 December 2011 and 31 December 2010, and the
Consolidated Statement of Cash Flow for the years ended 31 December 2011 and 31 December 2010, and the
Flow for the years ended 31 December 2011 and 31 December 2010, and the
related notes including a summary of significant accounting policies.
related notes including a summary of significant accounting policies.
Petroleum Corp, which
Management’s responsibility for the consolidated financial statements
Management’s responsibility for the consolidated financial statements
on and fair presentation of these consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements
Management is responsible for the preparati
and for such internal control as management
in accordance with International Financial Reporting Standards, and for such internal control as management
in accordance with International Financial Reporting Standards
ements that are free from
determines is necessary to enable the preparation of consolidated financial statements that are free from
determines is necessary to enable the preparation of consolidated financial stat
material misstatement, whether due to fraud or error.
material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We
Canadian Generally Accepted Auditing Standards. Those standards
conducted our audits in accordance with Canadian Generally Accepted Auditing Standards. Those standards
conducted our audits in accordance with
require that we comply with ethical requirements and plan and perform the audits to obtain reasonable
require that we comply with ethical requirements and plan and perform the audits to obtain reasonable
require that we comply with ethical requirements and plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free from material misstatement.
assurance about whether the consolidated financial statements are free from material misst
assurance about whether the consolidated financial statements are free from material misst
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the
consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the
consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud
al misstatement of the consolidated financial statements, whether due to fraud
al misstatement of the consolidated financial statements, whether due to fraud
or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s
or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s
or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s
ments in order to design audit procedures
preparation and fair presentation of the consolidated financial statements in order to design audit procedures
preparation and fair presentation of the consolidated financial state
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting
An audit also includes evaluating the appropriateness of accounting policies used
An audit also includes evaluating the appropriateness of accounting
and the reasonableness of accounting estimates made by management, as well as evaluating the overall
and the reasonableness of accounting estimates made by management, as well as evaluating the overall
and the reasonableness of accounting estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements.
presentation of the consolidated financial statements.
ppropriate to provide a
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a
We believe that the audit evidence we have obtained in our audits is sufficient and a
basis for our audit opinion.
PricewaterhouseCoopers LLP, 1 Embankment Place, London WC2N 6RH
PricewaterhouseCoopers LLP, 1 Embankment Place, London WC2N 6RH
T: +44 (0) 20 7583 5000, F: +44 (0) 20 7822 4652, www.pwc.co.uk
T: +44 (0) 20 7583 5000, F: +44 (0) 20 7822 4652, www.pwc.co.uk
egistered in England with registered number OC303525. The registered office of
PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The registered office of
PricewaterhouseCoopers LLP is a limited liability partnership r
PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and regulated by the Financial Services
PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and regulated by
PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and regulated by
Authority for designated investment business.
23 Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated
balance sheet of ShaMaran Petroleum Corp as at 31 December 2011, 31 December 20
10 and 1 January 2010 and
balance sheet of ShaMaran Petroleum Corp as at 31 December 2011, 31 December 2010 and 1 January 2010 and
its financial performance and its cash flows for the years ended 31 December 2011 and 31 December 2010 in
its financial performance and its cash flows for the years ended 31 December 2011 and 31 December 2010 in
its financial performance and its cash flows for the years ended 31 December 2011 and 31 December 2010 in
accordance with International Financial Reporting Standards.
accordance with International Financial Reporting Standards.
going concern
Emphasis of matter – going concern
, which is not modified, we have considered the adequacy of
e financial statements, which is not modified, we have considered the adequacy of
able to raise sufficient funds, there is no
Although the Company is confident that it will be able to raise sufficient funds, there is no
In forming our opinion on the financial statements
the disclosures made in Note 2 to the financial statements concerning the Company’s ability to continue as a
the disclosures made in Note 2 to the financial statements concerning the Company’s ability to continue as a
the disclosures made in Note 2 to the financial statements concerning the Company’s ability to continue as a
going concern. Although the Company is confident that it will be
assurance that financing initiatives which the company will pursue will be successful. The lack of sufficient
assurance that financing initiatives which the company will pursue will be successful. The lack of sufficient
assurance that financing initiatives which the company will pursue will be successful. The lack of sufficient
committed funding for the next 12 months indicates the existence of a material uncertainty which may cast
committed funding for the next 12 months indicates the existence of a material uncertainty which may c
committed funding for the next 12 months indicates the existence of a material uncertainty which may c
significant doubt about the company’s ability to continue as a going concern. The financial statements do not
significant doubt about the company’s ability to continue as a going concern. The financial statements do not
significant doubt about the company’s ability to continue as a going concern. The financial statements do not
was unable to continue as a going concern.
include the adjustments that would result if the Company was unable to continue as a going concern.
include the adjustments that would result if the Company
(Signed) “PricewaterhouseCoopers LLP”
(Signed) “PricewaterhouseCoopers LLP”
Chartered Accountants, Licensed Public Accountants
Chartered Accountants, Licensed Public Accountants
London
PricewaterhouseCoopers LLP, 1 Embankment Place, London WC2N 6RH
PricewaterhouseCoopers LLP, 1 Embankment Place, London WC2N 6RH
T: +44 (0) 20 7583 5000, F: +44 (0) 20 7822 4652, www.pwc.co.uk
T: +44 (0) 20 7583 5000, F: +44 (0) 20 7822 4652, www.pwc.co.uk
egistered in England with registered number OC303525. The registered office of
PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The registered office of
PricewaterhouseCoopers LLP is a limited liability partnership r
PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and regulated by the Financial Services
PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and regulated by
PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and regulated by
Authority for designated investment business.
24 SHAMARAN PETROLEUM CORP.
Consolidated Statement of Comprehensive Income
(Expressed in thousands of United States Dollars, expect for per share data)
______________________________________________________________________________
Note
For the year ended December 31,
2010
2011
Expenses from continuing operations
General and administrative expenses
Share based payments
Depreciation and amortisation expense
Impairment losses
Share of loss of associate
Operating loss
Finance costs
Finance income
Net finance (costs) / income
Loss before income tax expense
Income tax expense
Net loss from continuing operations
Discontinued operations
Loss from discontinued operations
Net loss for the year
Other comprehensive income:
Currency translation differences
Total other comprehensive income / (loss)
Total comprehensive loss for the year
Earnings per share:
Continuing operations
Basic and diluted
Discontinued operations
Basic and diluted
Continuing and discontinued operations
Basic and diluted
7
19
8
15
9
10
11
12
18
18
18
(1,082)
(264)
(221)
(207,504)
(271)
(209,342)
(1,777)
518
(1,259)
(210,601)
(137)
(210,738)
(201)
(210,939)
(23)
(23)
(594)
(570)
(139)
‐
(27)
(1,330)
(1,353)
2,631
1,278
(52)
(81)
(133)
(960)
(1,093)
1
1
(210,962)
(1,092)
(0.31)
‐
(0.31)
‐
‐
‐
The accompanying notes are an integral part of these consolidated financial statements.
25
SHAMARAN PETROLEUM CORP.
Consolidated Balance Sheet
(Expressed in thousands of United States Dollars)
______________________________________________________________________________
Note
December 31,
2011
December 31,
2010
January 1,
2010
Assets
Non‐current assets
Intangible assets
Property, plant and equipment
Investment in associate
Current assets
Other current assets
Inventories
Other receivables
Cash and cash equivalents
13
14
15
16
Assets associated with discontinued operations
12
Total assets
Liabilities
Current liabilities
Accounts payable and accrued expenses
Current tax liabilities
Deferred consideration
17
15
Non‐current liabilities
Other long‐term liabilities
Liabilities associated with discontinued operations
12
Total liabilities
Equity
Share capital
Equity share rights
Share based payments reserve
Cumulative translation adjustment
Accumulated deficit
Total equity
Total liabilities and equity
18
13
45,836
382
51,835
98,053
647
3,328
105
49,085
53,165
21
149,892
330
44,282
194,504
447
2,656
124
58,684
61,911
74
185,035
145
‐
185,180
376
‐
31
63,565
63,972
847
151,239
256,489
249,999
23,245
122
‐
23,367
‐
‐
2,613
25,980
533,349
‐
3,828
(18)
(411,900)
125,259
151,239
5,156
103
12,643
17,902
‐
‐
3,069
20,971
432,506
‐
3,968
5
(200,961)
235,518
2,087
12
‐
2,099
170
170
3,167
5,436
379,673
61,349
3,405
4
(199,868)
244,563
256,489
249,999
The accompanying notes are an integral part of these consolidated financial statements.
The amended financial statements were approved by the Board of Directors and authorized for issue on April 19,
2012 and signed on its behalf:
/s/Cameron Bailey____________________
/s/Keith Hill____________________
J. Cameron Bailey, Director
Keith
C. Hill, Director
26
SHAMARAN PETROLEUM CORP.
Consolidated Statement of Changes in Equity
(Expressed in thousands of United States Dollars)
______________________________________________________________________________
Share
capital
Equity
share
rights
Share based
payments
reserve
Cumulative
translation
adjustment
Accumulated
deficit
Total
Balance at January 1, 2010
379,673
61,349
3,405
Total comprehensive loss for the year
‐
Transactions with owners in their capacity as
as owners:
Shares issued on acquisition
Private placement
Transaction costs
Share‐based payments
Share options exercised
5,000
48,492
(679)
‐
20
52,833
‐
‐
‐
‐
‐
‐
‐
Release of rights to equity shares
‐
(61,349)
‐
‐
‐
‐
570
(7)
563
‐
4
1
‐
‐
‐
‐
‐
‐
‐
(199,868)
244,563
(1,093)
(1,092)
‐
‐
‐
‐
‐
‐
‐
5,000
48,492
(679)
570
13
53,396
(61,349)
Balance at December 31, 2010
432,506
Total comprehensive loss for the year
‐
Transactions with owners in their capacity as
as owners:
Private placements
Transaction costs
Share‐based payments
Share options exercised
Balance at December 31, 2011
101,953
(2,175)
‐
1,065
100,843
533,349
‐
‐
‐
‐
‐
‐
‐
‐
3,968
5
(200,961)
235,518
‐
(23)
(210,939)
(210,962)
‐
‐
264
(404)
(140)
3,828
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
101,953
(2,175)
264
661
100,703
(18)
(411,900)
125,259
The accompanying notes are an integral part of these consolidated financial statements.
27
SHAMARAN PETROLEUM CORP.
Consolidated Statement of Cash Flows
(Expressed in thousands of United States Dollars)
______________________________________________________________________________
Note
9, 10
8
19
15
Operating activities
Net loss for the year from continuing operations
Adjustments for:
Interest income
Foreign exchange loss / (gain)
Depreciation and amortisation expense
Income tax
Impairment losses
Share‐based payment expense
Share of loss of associates
Capitalized expenses
Changes in trade and other receivables
Changes in other current assets
Changes in inventories
Changes in accounts payable and accrued expenses
Cash used in discontinued operations
Net cash inflows / (outflows) from operating activities
Investing activities
Exploration, evaluation and other intangible assets
Property, plant and equipment
Investment in associate
Interest received on cash deposits
Cash provided by discontinued operations
Net cash outflows to investing activities
Financing activities
Proceeds net of costs on issuance of shares
Net cash inflows from financing activities
Effect of exchange rate changes on cash and cash equivalents
Change in cash and cash equivalents
Cash and cash equivalents, beginning of the year
Cash and cash equivalents, end of the year
For the year ended December 31,
2010
2011
(210,738)
(518)
862
221
19
207,504
264
271
(1,656)
19
(200)
(1,915)
18,089
(1,682)
10,540
(100,087)
(735)
(20,467)
518
1,078
(119,693)
100,439
100,439
(885)
(9,599)
58,684
49,085
(133)
(416)
(2,215)
139
91
‐
570
27
‐
(93)
(71)
(2,656)
3,069
(562)
(2,250)
(26,376)
(324)
(26,666)
416
277
(52,673)
47,826
47,826
2,216
4,881
63,565
58,684
The accompanying notes are an integral part of these consolidated financial statements.
28
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2011 and 2010
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
1. General Information
ShaMaran Petroleum Corp. (“ShaMaran” and together with its subsidiaries the “Company”) is incorporated under
the Business Corporations Act, British Columbia, Canada. The address of the registered office is Suite 2601 Oceanic
Plaza, 1066 West Hastings Street, Vancouver, British Columbia V6C 3X1. The Company’s shares trade on the TSX
Venture Exchange and NASDAQ OMX First North Exchange (Stockholm) under the symbol “SNM”.
The Company is engaged in the business of oil and gas exploration and development, and is currently in the pre‐
production stages of an exploration and development campaign in respect of petroleum properties located in the
Kurdistan Region of Iraq (“Kurdistan”).
2. Basis of Preparation and adoption of IFRS
The Canadian Accounting Standards Board confirmed in February 2008 that International Financial Reporting
Standards (“IFRS”) will replace Canadian Generally Accepted Accounting Principles (“Canadian GAAP”) for publicly
accountable enterprises effective for financial periods commencing on or after January 1, 2011. In these financial
statements the term “Canadian GAAP” refers to Canadian GAAP before the adoption of IFRS.
Accordingly, these consolidated financial statements have been prepared in accordance with IFRS applicable to the
preparation of annual financial statements, including IFRS 1, First‐time Adoption of IFRS, as issued by the
International Accounting Standards Board (“IASB”) and the IFRS Interpretations Committee.
In accordance with regulatory request the Company has amended these consolidated financial statements to
present on the balance sheet the statement of financial position on the date of transition to IFRS, information
which was disclosed in note 5 in the financial statements approved on March 28, 2012.
The consolidated financial statements have been prepared under the historical cost convention except for certain
financial assets and financial liabilities that are recognized at fair value through profit or loss. The preparation of
financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also
requires management to exercise its judgment in the process of applying the Company’s accounting policies.
The accounting policies applied in these consolidated financial statements are based on IFRS issued and
outstanding at the date these financial statements were approved for issuance by the Board of Directors.
These consolidated financial statements should be read in conjunction with the Company’s annual financial
statements for the year ended December 31, 2010 prepared in accordance with Canadian GAAP. Disclosures of
IFRS information for the year ended December 31, 2010 are included in note 5.
These consolidated financial statements have been prepared on the going concern basis which assumes that the
Company will be able to realize into the foreseeable future its assets and liabilities in the normal course of business
as they come due. The ability of the Company to continue as a going concern and to successfully carry out its
business plan is primarily dependent upon the continued support of its shareholders, the discovery of
economically recoverable reserves, the resolution of remaining political disputes in Iraq and the ability of the
Company to obtain additional financing to develop reserves.
In the absence of current production revenues, the Company is currently dependent upon its existing financial
resources which include $49.1 million of cash and cash equivalents as at December 31, 2011 to satisfy its
obligations and finance its exploration and evaluation program in Kurdistan. Failure to meet these exploration and
evaluation commitments could put the related license interests at risk of forfeiture.
29
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2011 and 2010
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
The Company believes that based on the forecasts and projections they have prepared and a number of financing
initiatives which will be pursued as required the Company and its subsidiaries will have sufficient resources to
satisfy its contractual obligations and commitments under the agreed work program over the next 12 months.
Although the Company is confident that it will be able to raise sufficient funds there is no assurance at the date
these financial statements were approved that these financing initiatives will be successful. The lack of sufficient
committed funding for the next 12 months indicates a material uncertainty which may cast significant doubt over
the Company’s ability to continue as a going concern. These consolidated financial statements do not include the
adjustments that would result if the Company is unable to continue as a going concern. Refer also to note 23.
3.
Significant accounting policies
The preparation of these consolidated financial statements in accordance with IFRS resulted in changes to the
accounting policies as compared with the annual consolidated financial statements at December 31, 2010
prepared under Canadian GAAP. The accounting policies set out below have been applied consistently to all
periods presented in these consolidated financial statements and have been applied in preparing an opening IFRS
balance sheet at January 1, 2010 for the purposes of the transition to IFRS. The impact of the transition to IFRS on
the Company’s reported financial position, financial performance and cash flows including the nature of significant
changes in accounting policies from those used in the Company’s consolidated financial statements for the year
ended December 31, 2010 is included in note 5.
(a) Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries,
entities controlled by the Company. Control is achieved where the Company has the power to govern the financial
and operating policies of an investee entity so as to obtain benefits from its activities. Subsidiaries are fully
consolidated from the date on which control is obtained by the Company and are de‐consolidated from the date
that control ceases.
Intercompany balances and unrealized gains and losses on intercompany transactions are eliminated upon
consolidation.
(b)
Investments in associates
Associates are entities over which the Company is in a position to exert significant influence but not control or joint
control. Significant influence is the power to participate in the financial and operating policy decisions of the
investee but not control or jointly control those policies.
Investments in associates are accounted for using the equity method whereby investments are initially recognized
at cost and subsequently adjusted by the Company’s share of the associate’s post acquisition profits or losses and
movements in other comprehensive income. Losses of an associate in excess of the Company’s interest in that
associate are recognized only to the extent that the Company has incurred legal or constructive obligations to
make payments on behalf of the associate.
Any excess of the cost of the acquisition over the Company’s share of the fair value of the identifiable assets and
liabilities of the associate at the date of acquisition is recognized as goodwill. The goodwill is included within the
carrying amount of the investment and is assessed for impairment as part of that investment. If the carrying value
of the investment is greater than its recoverable amount the impairment loss is recognized directly in the
statement of comprehensive income.
30
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2011 and 2010
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
Where a group company transacts with an associate of the Company unrealized gains are eliminated to the extent
of the Company’s interest in the relevant associate. Unrealized losses are also eliminated unless the transaction
provides evidence of impairment of the asset transferred in which case appropriate provision for impairment is
made.
The Company assesses at each year‐end whether there is any objective evidence indicating that the carrying value
of its interests in associates may exceed its recoverable amount. If impaired the carrying value of the Company’s
investment in associates is written down to its estimated recoverable amount, the higher of the fair value less cost
to sell and value in use with a provision for impairment recorded in the statement of comprehensive income
during the period of impairment.
(c)
Interest in joint ventures
A joint venture is a contractual arrangement whereby the Company and other parties undertake an economic
activity that is subject to joint control.
Where the Company undertakes its activities under joint venture arrangements directly, the Company’s share of
jointly controlled assets and any liabilities incurred jointly with other joint ventures are recognized in the financial
statements of the relevant company and classified according to their nature.
Liabilities and expenses incurred directly in respect of interests in jointly controlled assets are accounted for on an
accrual basis. Income from the sale or use of the Company’s share of the output of jointly controlled assets and its
share of the joint venture expenses are recognized when it is probable that the economic benefit associated with
the transactions will flow to/from the Company and the amount can be reliably measured.
(d) Business combinations
The acquisition method of accounting is used to account for business combinations. The consideration transferred
is measured at the aggregate of the fair values at the date of acquisition of assets given, liabilities incurred or
assumed, and equity instruments issued by the Company in exchange for control of the acquiree. Acquisition
related costs are expensed as incurred. The identifiable assets, liabilities and contingent liabilities that meet the
conditions for recognition under IFRS 3 Business Combinations are recognized at their fair value at the acquisition
date.
(e) Non‐current assets held for sale and discontinued operations
Non‐current assets (or disposal groups) are classified as assets held for sale when their carrying amount is to be
recovered principally through a sale transaction and a sale is considered highly probable. They are measured at
the lower of carrying amount and fair value less costs to sell.
The results of a component of the Company that represent a major line of business or geographical area of
operations that has either been disposed of (by sale, abandonment or spin‐off) or is classified as held for sale is
reported as discontinued operations. The financial statements of the Company include amounts and disclosures
pertaining to discontinued operations in accordance with IFRS 5 Non‐current Assets Held for Sale and Discontinued
Operations.
(f) Foreign currency translation
Functional and presentation currency
Items included in the financial statements of each of the Company’s subsidiaries are measured using the currency
of the primary economic environment in which the subsidiary operates (the “functional currency”). The functional
and presentation currency of the Company is United States Dollars.
31
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2011 and 2010
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
The results and financial position of subsidiaries that have a functional currency different from the presentation
currency are translated into the presentation currency as follows:
Assets and liabilities are translated at the closing exchange rate at the date of that balance sheet;
Income and expenses are translated at the average exchange rate for the period in which they were incurred as
a reasonable approximation of the cumulative effect of rates prevailing on transaction dates; and
All resulting exchange differences are recognized in other comprehensive income as part of the cumulative
translation reserve.
Transactions and balances
Transactions in currencies other than the functional currency are recorded in the functional currency at the
exchange rates prevailing on the dates of the transactions or valuation where items are re‐measured. At each
balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are translated at the
rates prevailing at the balance sheet date. Exchange differences are recognized in the statement of comprehensive
income during the period in which they arise.
(g) Exploration and evaluation costs and other intangible assets
Exploration and evaluation assets
The Company applies the full cost method of accounting for exploration and evaluation (E&E) costs in accordance
with the requirements of IFRS 6 Exploration for and Evaluation of Mineral Resources. All costs of exploring and
evaluating oil and gas properties are accumulated and capitalized to the relevant property contract area and are
tested on a cost pool basis as described below.
Pre‐license costs:
Costs incurred prior to having obtained the legal rights to explore an area are expensed directly to the statement
of comprehensive income.
Exploration and evaluation costs:
All E&E costs are initially capitalized as E&E assets and include payments to acquire the legal right to explore, costs
of technical services and studies, seismic acquisition, exploratory drilling and testing.
Tangible assets used in E&E activities such as the Company’s vehicles, drilling rigs, seismic equipment and other
property, plant and equipment (“PP&E”) used by the Company’s exploration function are classified as PP&E. To
the extent that such tangible assets are consumed in exploring and evaluating a property the amount reflecting
that consumption is recorded as part of the cost of the intangible asset. Such intangible costs include directly
attributable overhead including the depreciation of PP&E utilized in E&E activities together with the cost of other
materials consumed during the E&E phases such as tubulars and wellheads.
E&E costs are not depreciated prior to the conclusion of appraisal activities.
Treatment of E&E assets at conclusion of appraisal activities:
E&E assets are carried forward until a contractual area is capable of commercial development and are then
assessed for impairment. The carrying value of the E&E assets after any impairment loss is then reclassified as oil
and gas assets within PP&E. E&E assets that are not capable of commercial development remain capitalized at
cost less accumulated amortisation and are subject to the impairment test set out below. Such E&E assets are
depreciated on a unit of production basis over the life of the commercial reserves attributed to the cost pool to
which they relate.
32
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2011 and 2010
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
Other intangible assets
Other intangible assets that have finite useful lives such as computer software licenses are measured at cost and
amortized over their expected useful economic lives as follows:
Computer software
3 years
(h) Property, plant and equipment (“PP&E”)
Oil and gas assets
Oil and gas assets comprise of development and production costs for areas where technical feasibility and
commercial viability have been established and include any E&E assets transferred after conclusion of appraisal
activities as well as costs of development drilling, completion, gathering and production infrastructure, directly
attributable overheads, borrowing costs capitalized, and the cost of recognizing provisions for future restoration
and decommissioning. Oil and gas costs are accumulated separately for each contract area.
Depreciation of oil and gas assets:
Oil and gas assets are depreciated using the unit of production method based on proved and probable reserves
using estimated future prices and costs and taking into account future development expenditures necessary to
bring those reserves into production.
Other property, plant and equipment
Property, plant and equipment assets excluding oil and gas assets described above are carried at cost less
accumulated depreciation and any recognized impairment loss. Cost includes expenditures that are directly
attributable to the acquisition of the asset. S ubsequent costs are included in the assets’ carrying value or
recognized as a separate asset as appropriate only when it is probable that future economic benefits associated
with the item will flow to the Company and the cost can be measured reliably.
Repairs and maintenance costs are charged to the statement of comprehensive income during the period in which
they are incurred.
The carrying amount of an item of PP&E is derecognized on disposal or when no future economic benefits are
expected from its use or disposal. The gain or loss arising on the disposal or retirement of an asset is determined
as the difference between the sales proceeds and the carrying amount of the asset and is recognized in the
statement of comprehensive income during the period.
Depreciation and amortisation is provided to expense the cost of the PP&E assets on a straight‐line basis over their
estimated useful lives on the followed bases:
Furniture, fixtures and office equipment over 5 years
Computer and information technology assets over 3 years
(i)
Impairment of non‐financial assets:
E&E assets and oil and gas assets are assessed for impairment when facts and circumstances suggest that the
carrying amount may exceed its recoverable amount. Such indicators include:
the period for which the Company has the right to explore in the specific area has expired during the period or
will expire in the near future, and is not expected to be renewed.
substantive expenditure on further exploration for and evaluation of mineral resources in the specific area is
neither budgeted nor planned.
exploration for and evaluation of resources in the specific area have not led to the discovery of commercially
viable quantities of mineral resources and the Company has decided to discontinue such activities in the
specific area.
33
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2011 and 2010
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
sufficient data exist to indicate that, although a development in the specific area is likely to proceed, the
carrying amount of the E&E asset is unlikely to be recovered in full from successful development or by sale.
extended decreases in prices or margins for oil and gas commodities or products
a significant downwards revision in estimated volumes or an upward revision in future development costs.
For the purpose of impairment testing the assets are aggregated into cash generating unit (“CGU”) cost pools
based on their ability to generate largely independent cash flows. The recoverable amount of a CGU is the greater
of its fair value less costs to sell and its value in use. Fair value is determined to be the amount for which the asset
could be sold in an arm’s length transaction.
Fair value less costs to sell may be determined using discounted future net cash flows of proved and probable
reserves using forecast prices and costs. Value in use is determined by estimating the present value of the future
net cash flows expected to be derived from the continued use of the asset or CGU.
Where conditions giving rise to the impairment subsequently reverse the effect of the impairment charge is also
reversed as a credit to the statement of comprehensive income net of any depreciation that would have been
charged since the impairment.
(j) Revenue recognition
Revenues from the sale of hydrocarbons are recognized when title passes to an external party and collection is
reasonably assured which is normally upon delivery of products and customer acceptance.
Interest income is accrued on a time proportion basis by reference to the principal outstanding and at the effective
interest rate applicable.
(k) Taxation
The income tax expense comprises current income tax and deferred income tax.
The current income tax is the expected tax payable on the taxable income for the period. It is calculated on the
basis of the tax laws enacted or substantively enacted at the balance sheet date and includes any adjustment to
tax payable in respect of previous years.
Deferred income tax is the tax recognized in respect of temporary differences between the carrying amounts of
assets and liabilities in the financial statements and the corresponding tax bases and is accounted for using the
balance sheet liability method. Deferred income tax liabilities are generally recognized for all taxable temporary
differences and deferred income tax assets are recognized to the extent that it is probable that taxable profits will
be available against which deductible temporary differences can be utilized. Deferred income tax is not recorded if
it arises from the initial recognition of an asset or liability in a transaction other than a business combination that,
at the time of the transaction, affects neither the accounting profit nor loss.
Deferred income tax liabilities are recognized for taxable temporary differences arising on investments in
subsidiaries and associates and interests in joint ventures except where the Company is able to control the reversal
of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable
future.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that
it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be
recovered.
34
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2011 and 2010
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
Deferred income tax is calculated at the tax rates that are expected to apply in the year when the deferred tax
liability is settled or the asset is realized. Deferred tax is charged or credited in the statement of comprehensive
income except when it relates to items charged or credited directly to equity in which case the deferred tax is also
recognized directly in equity. Deferred tax assets and liabilities are offset when there is a legally enforceable right
to offset current tax assets against current tax liabilities and when they relate to income taxes levied by the same
taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.
(l)
Inventories
Inventories of drilling equipment and consumable materials, which normally include casing, tubing, downhole tools
and wellhead equipment, are stated at the lower of cost or net realizable value and determined on a first‐in, first‐
out (“FIFO”) method. Net realizable value represents the estimated selling price less all estimated costs of
completion and costs to be incurred in marketing, selling and distribution.
(m) Financial instruments
Financial assets and liabilities are recognized in the Company’s balance sheet when the Company becomes a party
to the contractual provisions of the instrument. Financial assets are derecognized when the contractual rights to
cash flows from the assets expire or the Company transfers the financial asset and substantially all the risks and
rewards of ownership. The Company derecognizes financial liabilities when the Company’s obligations are
discharged, cancelled or expire.
Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally
enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the
asset and settle the liability simultaneously.
Classification and measurement
The Company classifies its financial assets and liabilities at initial recognition in the following categories:
Financial assets and liabilities at fair value through profit or loss are those assets and liabilities acquired
principally for the purpose of selling or repurchasing in the short‐term and are recognized at fair value.
Transaction costs are expensed in the statement of comprehensive income and gains or losses arising from
changes in fair value are also presented in the statement of comprehensive income within other gains and
losses in the period in which they arise. Financial assets and liabilities at fair value through profit or loss are
classified as current except for the portion expected to be realized or paid beyond twelve months of the
balance sheet date, which is classified as non‐current.
Available‐for‐sale investments are non‐derivative financial instruments that are designated in this category or
not classified in any other category. They usually comprise marketable securities and investments in debt and
equity securities. Available ‐for‐sale investments are initially recognized and subsequently measured at fair
value. Gains and losses arising from changes in the fair value are recognized in other comprehensive income.
Available‐for‐sale investments are classified as non‐current unless the investment matures within the next
twelve months or management expects to dispose of them within twelve months. Interest on available‐for‐sale
investments is calculated using the effective interest method and is recognized in the statement of
comprehensive income within interest income. Dividends on available‐for‐sale equity instruments are
recognized in the statement of comprehensive income as other gains and losses when the company’s right to
receive payment is established. When an available‐for‐sale investment is sold or impaired the accumulated
gains or losses are moved from accumulated other comprehensive income to the statement of comprehensive
income within other gains and losses.
35
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2011 and 2010
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
Loans and receivables comprise of trade receivables and cash and cash equivalents and are financial assets with
fixed or determinable payments that are not quoted on an active market and are generally included within
current assets due to their short‐term nature. Loans and receivables are initially recognized at fair value and
are subsequently measured at amortized cost using the effective interest method less any provision for
impairment.
Financial liabilities at amortized cost comprise of trade and other payables and are initially recognized at the
fair value of the amount expected to be paid and are subsequently measured at amortized cost using the
effective interest rate method. Financial liabilities are classified as current liabilities unless the Company has an
unconditional right to defer settlement for at least 12 months after the balance sheet date.
Impairment of financial assets
At each reporting date, the Company assesses whether there is objective evidence indicating that a financial asset
is impaired including:
Significant financial difficulty of the issuer.
A breach of contract such as delinquency in interest or principal payments.
Active market for that financial asset disappears because of financial difficulties
Observable data indicating that there is a measureable decrease in the estimated future cash flows from a
portfolio of financial assets since the initial recognition of those assets.
If evidence of impairment exists the Company recognizes an impairment loss in the statement of comprehensive
income as follows:
Financial assets carried at amortized cost ‐ the impairment loss is the difference between the amortized cost of
the loan or receivable and the present value of the estimated future cash flows discounted using the
instrument’s effective interest rate.
Available for sale financial assets – the impairment loss is the difference between the original cost of the asset
and its fair value at the measurement date less any impairment losses previously recognized in the statement
of comprehensive income.
Impairment losses on financial assets carried at amortized cost are reversed in subsequent periods if the amount
of the loss decreases and the decrease can be related objectively to an event occurring after the impairment was
recognized. Impairment losses on available‐for‐sale equity investments are not reversed.
(n) Cash and cash equivalents
Cash and cash equivalents are comprised of cash on hand and demand deposits and other short‐term liquid
investments that are readily convertible to a known amount of cash with three months or less maturity.
(o) Provisions
Provisions are recognized when the Company has a present obligation, legal or constructive, as a result of a past
event when it is probable that the Company will be required to settle the obligation and a reliable estimate can be
made of the obligation.
The amount recognized as a provision is the best estimate of the consideration required to settle the present
obligation at the balance sheet date, taking into account the risks and uncertainties surrounding the obligation.
When a provision is measured using the cash flows estimates to settle the present obligation its carrying amount is
the present value of those cash flows.
36
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2011 and 2010
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
Decommissioning and site restoration
Provisions for decommissioning and site restoration are recognized when the Company has a present legal or
constructive obligation to dismantle and remove production, storage and transportation facilities and to carry out
site restoration work. The provision is calculated as the net present value of the Company’s share of the
expenditure expected to be incurred at the end of the producing life of each field using a discount rate that reflects
the market assessment of the time value of money at that date. Unwinding of the discount on the provision is
charged to the statement of comprehensive income within finance costs during the period. The amount
recognized as the provision is included as part of the cost of the relevant asset and is charged to the statement of
comprehensive income in accordance with the Company’s policy for depreciation and amortisation.
Changes in the estimated timing of decommissioning and site restoration cost estimates are dealt with
prospectively by recording an adjustment to the provision and a corresponding adjustment to the relevant asset.
(p) Share‐based payments
The Company issues equity‐settled share‐based payments to certain directors, employees and third parties. The
fair value of the equity settled share‐based payments is measured at the date of grant and is expensed using the
graded method of amortisation over the period in which the recipients become fully entitled to the equity
instrument (the “vesting period”). The cumulative expense recognized for equity‐settled share‐based payments at
each balance sheet date, represents the Company’s best estimate of the number of equity instruments that will
ultimately vest. The charge or credit for the period and the corresponding adjustment to contributed surplus
during the period represents the movement in the cumulative expense recognized for all equity instruments
expected to vest. The fair value of equity‐settled share‐based payments is determined using the Black‐Scholes
option pricing model.
(q) Pension obligations
Pensions are the most common long‐term employee benefit. The pension schemes are funded through payments
to insurance companies. The Company’s pension obligations consist of defined contribution plans. A defined
contribution plan is a pension plan under which the Company pays fixed contributions. The Company has no
further payment obligations once the contributions have been paid. The contributions are recognized as an
expense when they are due.
(r) Share capital
Common shares are classified as equity. Incremental costs directly attributable to the issue of new shares or share
options are shown in equity as a deduction, net of tax, from the proceeds.
(s) Accounting standards issued but not yet applied
IFRS 7: Financial Instruments: Disclosures – In 2011, IASB issued amendments to IFRS 7 Financial Instruments:
Disclosures relating to disclosure requirements for the offsetting of financial assets and liabilities when offsetting is
permitted under IFRS. The disclosure amendments are required to be adopted retrospectively for periods
beginning January 1, 2013.
IFRS 10: Consolidated Financial Statements – In 2011, the IASB issued IFRS 10 which provides additional guidance
to determine whether an investee should be consolidated. The guidance applies to all investees, including special
purpose entities. The standard is required to be adopted for periods beginning January 1, 2013.
IFRS 11: Joint Arrangements – In 2011, the IASB issued IFRS 11 which presents a new model for determining
whether an entity should account for joint arrangements using proportionate consolidation or the equity method.
An entity will have to follow the substance rather than legal form of a joint arrangement and will no longer have a
choice of accounting method. The standard is required to be adopted for periods beginning January 1, 2013.
37
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2011 and 2010
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
IFRS 12: Disclosure of Interests in Other Entities – In 2011, the IASB issued IFRS 12 which aggregates and amends
disclosure requirements included within other standards. The standard requires a company to provide disclosures
about subsidiaries, joint arrangements, associates and unconsolidated structured entities. The standard is required
to be adopted for periods beginning January 1, 2013.
IFRS 13: Fair Value Measurement – In 2011, the IASB issued IFRS 13 to provide comprehensive guidance for
instances where IFRS requires fair value to be used. The standard provides guidance on determining fair value and
requires disclosures about those measurements. The standard is required to be adopted for periods beginning
January 1, 2013.
IAS 1: Presentation of Items of Other Comprehensive Income – In 2011, the IASB issued amendments to IAS 1
Presentation of Financial Statements to split items of other comprehensive income (OCI) between those that are
reclassified to income and those that are not. The standard is required to be adopted for periods beginning on or
after July 1, 2012.
IAS 27: Separate Financial Statements – The IASB issued amendments to IAS 27 Separate Financial Statements to
coincide with the changes made in IFRS 10, but retains the current guidance for separate financial statements.
IAS 28: Investments in Associates and Joint Ventures – The IASB issued amendments to IAS 28 Investments in
Associates and Joint Ventures to coincide with the changes made in IFRS 10 and IFRS 11.
The Company is currently assessing the impact, if any, that the adoption of these standards will have on its
financial statements.
4.
Critical accounting judgments and key sources of estimation uncertainty
In the application of the Company’s accounting policies, which are described in note 3, management has made
judgments, estimates and assumptions about the carrying amounts of the assets, liabilities, revenues, expenses
and related disclosures. These estimates and associated assumptions are based on historical experience, current
trends, and other factors that management believes to be relevant at the time these consolidated financial
statements were prepared. Actual results may differ as future events and their effects cannot be determined with
certainty and such differences could be material. Ma nagement reviews the accounting policies, underlying
assumptions, estimates and judgments on an on‐going basis to ensure that the financial statements are presented
fairly in accordance with IFRS.
The following are the critical judgments and estimates that management has made in the process of applying the
Company’s accounting policies in these consolidated financial statements:
(a) Oil and gas reserves
The business of the Company is the exploration and development of oil and gas reserves in Kurdistan. Estimates of
commercial oil and gas reserves are used in the calculations for impairment, depreciation and amortisation and
decommissioning provisions. Changes in estimates of oil and gas reserves resulting in different future production
profiles will affect the discounted cash flows used for impairment purposes, the anticipated date of site
decommissioning and restoration, and the depreciation charges based on the unit of production method.
In March 2011, the Company commissioned an independent reserves and resources report from McDaniel &
Associates to estimate the Company’s reserves and resources at December 31, 2010. The reserves and resources
estimates provided in the report were used in the calculations for impairment, depreciation and amortisation and
decommissioning provisions within these consolidated financial statements.
38
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2011 and 2010
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
(b)
Impairment of E&E and PP&E assets
IAS 36 Impairment of Assets and IFRS 6 Exploration of and Evaluation of Mineral Resources require that a review
for impairment be carried out if events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The recoverable amounts are determined with reference to value in use calculations.
The key assumptions for the value in use calculations are those regarding production flow rates, discount rates,
and fiscal terms under the Production Sharing Contracts governing the Company’s assets and expected changes to
selling prices and direct costs during the period. These assumptions reflect management’s best estimates based
on historical experiences, past practices and expectations of future changes in the oil and gas industry.
(c) Decommissioning and site restoration provisions
The Company recognizes a provision for decommissioning and site restoration costs expected to be incurred in
order to remove and dismantle production, storage and transportation facilities and to carry out site restoration
work. The provisions are estimated taking into consideration existing technology and current prices after adjusting
for expected inflation and discounted using rates reflecting current market assessments of the time value of
money and where appropriate, the risks specific to the liability. The Company makes an estimate based on its
experience and historical data. Refer also to note 12.
(d) Share‐based payments
The Company issues equity‐settled share‐based payments to certain directors, employees and third parties. In
accordance with IFRS 2 Share‐based payments, in determining the fair value of options granted, the Company has
applied the Black‐Scholes model and as a result makes assumptions for the expected volatility, expected life, risk‐
free rate, behavioral considerations and expected dividend yield. The fair value of options granted at December
31, 2011 is shown in note 19.
5.
Transition to IFRS
The accounting policies indicated in note 3 have been applied in preparing these consolidated financial statements
for the year ended December 31, 2011, the comparative information for year ended December 31, 2010 and the
opening IFRS consolidated balance sheet on the transition date, January 1, 2010.
In preparing the opening IFRS consolidated balance sheet within these consolidated financial statements the
Company has adjusted amounts previously reported in accordance with Canadian GAAP within the comparative
financial information for the year ended December 31, 2010.
IFRS 1 First‐time Adoption of International Financial Reporting Standards (“IFRS 1”), provides certain mandatory
exceptions and optional exemptions for first‐time adopters of IFRS. The Company has transitioned to IFRS in
accordance with IFRS 1 and has chosen to apply no optional exemptions.
39
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2011 and 2010
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
The following disclosures demonstrate and explain how the Company’s financial position, financial performance
and cash flows have been affected by the transition to IFRS from Canadian GAAP:
(b) Reconciliation of assets and liabilities previously reported under Canadian GAAP (“CGAAP”) to IFRS is as
Note 5 (c)
i.
i.
follows:
Assets
Non‐current assets
Intangible assets
Property, plant and
equipment
Investments in associate
Current assets
Other current assets
Inventories
Other receivables
Cash and cash equivalents
Assets associated with
discontinued operations
Total assets
Liabilities
Current liabilities
Accounts payable and
accrued expenses
Current tax liabilities
Deferred consideration
Non‐current liabilities
Other long‐term liabilities
Liabilities associated with
discontinued operations
Total liabilities
Equity
At December 31, 2010
Adj.
CGAAP
IFRS CGAAP
At January 1, 2010
Adj.
IFRS
‐ 149,892
149,892
‐ 185,035
185,035
150,222 (149,892)
‐
‐
44,282
194,504
330 185,180 (185,035)
‐
‐
‐
194,504 185,180
44,282
447
2,656
124
58,684
61,911
74
256,489
5,156
103
12,643
17,902
‐
‐
3,069
20,971
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
447
2,656
124
58,684
61,911
376
‐
31
63,565
64,972
74
847
256,489 249,999
5,156
103
12,643
17,902
2,087
12
‐
2,099
‐
‐
170
170
3,069
3,167
20,971
5,436
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
145
‐
185,180
376
‐
31
63,565
63,972
847
249,999
2,087
12
‐
2,099
170
170
3,167
5,436
Share capital
Equity share rights
Share based payments reserve
Cumulative translation adjustment
Accumulated deficit
Total equity
Total liabilities and equity
ii
ii
432,506
‐
3,867
5
(200,860)
235,518
256,489
‐
‐
101
‐
(101)
‐
432,506 379,673
61,349
‐
3,360
3,968
4
5
(200,961) (199,823)
235,518 244,563
‐
‐
45
‐
(45)
‐
379,673
61,349
3,405
4
(199,868)
244,563
‐
256,489 249,999
‐
249,999
40
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2011 and 2010
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
(c) Reconciliation of comprehensive income as previously reported under Canadian GAAP (“CGAAP”) to IFRS is as
follows:
Note 5(c)
CGAAP
Adj.
IFRS
Year ended
December 31, 2010
ii
Continuing operations
General and administrative expenses
Share based payments
Depreciation and amortisation expense
Share of loss of associate
Operating loss
Finance costs
Finance income
Net finance income
Income / (loss) before income tax expense
Income tax expense
Net loss from continuing operations
Discontinued operations
Loss from discontinued operations
Net loss for the year
Other comprehensive income:
Currency translation differences
Total other comprehensive income
(594)
(514)
(139)
(27)
(1,274)
(1,353)
2,631
1,278
4
(81)
(77)
‐
(56)
‐
‐
(56)
‐
‐
‐
(56)
‐
(56)
(594)
(570)
(139)
(27)
(1,330)
(1,353)
2,631
1,278
(52)
(81)
(133)
(960)
‐
(960)
(1,037)
(56)
(1,093)
1
1
‐
‐
1
1
Total comprehensive loss for the year
(1,036)
(56)
(1,092)
Earnings per share:
Continuing operations
Basic and diluted
Discontinued operations
Basic and diluted
Continuing and discontinued ops.
Basic and diluted
‐
‐
‐
‐
‐
‐
‐
‐
‐
(d) The following IFRS conversion adjustments have been adopted by the Company in order to present these
consolidated financial statements in accordance with IFRS.
i. In accordance with IFRS 6 Exploration for and evaluation of Mineral Resources the Company’s accounting
policy is to record as E&E assets those costs of exploring and evaluating oil and gas properties including
payments to acquire the legal right to explore, costs of technical services and studies, seismic acquisition
and exploratory drilling and testing. Under Canadian GAAP these costs were included within PP&E as
petroleum properties. Accordingly, the conversion from Canadian GAAP to IFRS has increased intangible
assets and reduced PP&E by $185.0 million at January 1, 2010 and $149.9 million at December 31, 2010.
41
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2011 and 2010
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
ii. IFRS 2 Share‐based payments requires that the cost of equity‐settled share‐based payments granted to
directors, employees and other third parties is expensed over the vesting period using the graded method
of amortisation rather than a straight‐line method which was the method used by the Company under
Canadian GAAP. As a result the conversion from Canadian GAAP to IFRS has increased the share based
payments reserve and reduced accumulated deficit at the date of transition by $45 and increased share
based payment expenses by $56 for the year ended December 31, 2010.
(e) The transition from Canadian GAAP to IFRS had no significant impact on cash flows generated by the
Company over the reporting periods ended January 1, 2010 and December 31, 2010.
6. Business and geographical segments
The Company operates in one business segment, the exploration and development of oil and gas assets, in one
geographical segment, the Kurdistan Region of Iraq. As a result, in accordance with IFRS 8 Operating Segments,
the Company has presented its financial information collectively for one operating segment. Refer to note 12 for
disclosure of the Company’s discontinued operations.
7. General and administrative expenses
General and administrative expenses incurred
General and administrative expenses capitalized as E&E assets
General and administrative expenses
For the year ended December 31,
2010
2011
8,622
(7,540)
1,082
5,417
(4,823)
594
The Company capitalizes as E&E assets those general and administrative expenses incurred which relate to the
operational aspects of the Company’s E&E activities.
Refer also to note 13.
8.
Impairment losses
For the year ended December 31,
2010
2011
Write down drilling inventory to net realizable value
Provision for impairment of exploration and evaluation assets
Write down of property, plant and equipment to liquidation values
Total impairment losses
1,243
205,862
399
207,504
‐
‐
‐
‐
The above indicated losses relate to the suspension in December 2011 of all operations in the Pulkhana and Arbat
Blocks and to the subsequent relinquishment of the Pulkhana and Arbat production sharing contracts completed
January 17, 2012. Refer also to notes 13, 14, 16, 20 and 23.
9.
Finance cost
Guarantee fees
Foreign exchange loss
For the year ended December 31,
2010
2011
915
862
1,777
1,353
‐
1,353
42
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2011 and 2010
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
Guarantee fees relate to a guarantee provided by Lundin Petroleum AB, a shareholder of the Company, to the KRG
on behalf of the Company in respect of its minimum financial commitments payable semi‐annually and charged at a
rate of 1.5% per annum. Prior to July 2010 the rate was 3% per annum. Refer also to note 22 for related party
disclosures.
For the year ended December 31, 2011 the foreign exchange loss of $862 resulted primarily from holding cash and
cash equivalents denominated in Canadian dollars while the Canadian dollar weakened during the reporting period
against the United States dollar which is the reporting currency of the Company.
10. Finance income
Interest income
Foreign exchange gain
For the year ended December 31,
2010
2011
518
‐
518
416
2,215
2,631
Interest income represents bank interest earned on cash and investments in marketable securities.
For the year ended December 31, 2010 the foreign exchange gain of $2.2 million resulted primarily from holding
cash and cash equivalents denominated in Canadian dollars while the Canadian dollar strengthened during the
reporting period against the United States dollar which is the reporting currency of the Company.
11. Taxation
(a)
Income tax expense
The provision for income taxes reflects an effective tax rate which differs from Federal and Provincial statutory tax
rates. The main differences are as follows:
For the year ended December 31,
2010
2011
Loss from continuing operations before income tax
Corporate income tax rate
Computed income tax recovery
Increase / (decrease) resulting from:
Non‐taxable foreign exchange gain
Share issuance costs charged to share capital
Non‐deductible compensation expense
Foreign tax rate differences
Effect of change in tax rates
Change in valuation allowance
Effect of changes in foreign exchange rates
Other
Income tax expense from continuing operations
(210,601)
26.5%
(55,809)
228
(583)
70
13,474
54
42,064
110
529
137
(52)
30.0%
(23)
(664)
(204)
154
182
233
586
(200)
17
81
The Company’s income tax expense relates to a provision for income tax on service income generated in
Switzerland. The income tax is calculated at the effective tax rate of 25% prevailing in this jurisdiction.
43
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2011 and 2010
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
The components of the future income tax assets are as follows:
Non‐capital losses
Share issue costs carried forward
Properties‐tax basis over carrying value
Exploration expenses
Future income tax assets before allowance
Valuation allowance
Future income tax assets
(b)
Tax losses carried forward
For the year ended December 31,
2010
2011
104,218
1,098
1,279
784
107,379
(107,379)
‐
61,715
1,447
1,279
803
65,244
(65,244)
‐
The Company has tax losses and costs which are available to apply to future taxable income as follows:
Canadian losses from operations
Canadian exploration expenses
Canadian unamortized share issue costs
Dutch losses from operations
U.S. Federal losses from operations
U.S. Federal – tax basis in excess of carrying values of properties
Total
For the year ended December 31,
2010
2011
15,948
3,134
4,199
207,138
168,008
3,654
402,081
10,774
3,210
5,606
1,446
167,807
3,654
192,497
The Canadian losses from operations may be used to offset future Canadian taxable income and will expire over
the period from 2016 to 2031. The Canadian exploration expenses may be carried forward indefinitely to offset
future taxable Canadian income. Canadian unamortized share issue costs may offset future taxable Canadian
income of years 2012 to 2015. The U.S. Federal losses are available to offset future taxable income in the United
States through 2031.
12. Discontinued operations
During May of 2009 the Company sold to a third party substantially all of its oil and gas properties located in the
United States in the Gulf of Mexico. The results of the discontinued operations included in the consolidated
statement of comprehensive income are as follows:
Expenses
General and administrative, other
Revision to asset retirement obligation
Operating loss
Gain on disposal of assets
Net loss attributable to discontinued operations
For the year ended December 31,
2010
2011
201
1,078
1,279
1,078
201
698
339
1,037
77
960
During the year ended December 31, 2010 the remaining inventories in the United States from discontinued
operations were sold for gross proceeds of $0.3 million resulting in a gain on asset disposals of $0.1 million.
44
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2011 and 2010
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
The major classes of assets and liabilities included in the consolidated balance sheet are as follows:
Assets
Trade and other receivables
Other assets
Liabilities
Trade payables and accrued expenses
Provision
Net liabilities
2011
‐
21
21
539
2,074
2,613
2,592
2010
59
15
74
1,378
1,691
3,069
2,995
The provision relates to site restoration costs pertaining to the remaining interests the Company holds in
petroleum properties located in the United States. The provision was determined based on the Company’s
remaining net ownership interest in the corresponding wells and facilities, estimated costs to abandon and reclaim
the wells and facilities and the estimated timing of the costs to be incurred in future periods.
13.
Intangible assets
At January 1, 2010
Cost
Accumulated amortisation
Net book value
For the year ended December 31, 2010
Opening net book value
Additions
Release of rights to equity shares
Amortisation expense
Exchange differences
Net book value
At December 31, 2010
Cost
Accumulated amortisation
Net book value
For the year ended December 31, 2011
Opening net book value
Additions
Amortisation expense
Impairment losses
Exchange differences
Net book value
At December 31, 2011
Cost
Accumulated amortisation
Provision for impairment
Net book value
Exploration and
evaluation assets
Other intangible
assets
184,953
‐
184,953
184,953
26,088
(61,349)
‐
‐
149,692
149,692
‐
149,692
149,692
101,894
‐
(205,861)
‐
45,725
251,586
‐
(205,861)
45,725
84
(2)
82
82
186
‐
(61)
(7)
200
270
(70)
200
200
1
(97)
‐
7
111
271
(160)
‐
111
Total
185,037
(2)
185,035
185,035
26,274
(61,349)
(61)
(7)
149,892
149,962
(70)
149,892
149,892
101,895
(97)
(205,861)
7
45,836
251,857
(160)
(205,861)
45,836
45
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2011 and 2010
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
The PSCs governing the Company’s petroleum properties in Kurdistan allow the Company to include within
petroleum costs an annual exploration overhead charge calculated on a sliding scale percentage of annual
exploration costs. The exploration overhead charge qualifies as recoverable petroleum costs under the term of the
PSCs and will be recovered from a portion of available petroleum production (produced oil less royalty oil) in the
future. Exploration overhead charges of $1.7 million were capitalized during year ended December 31, 2011 (2010:
$0.6 million). The cumulative total exploration overhead charge included in intangible E&E assets was $2.5 million
at December 31, 2011 (2010: $0.8 million). Refer also to note 7.
In August 2010 the Company executed agreements with the Kurdistan Regional Government (“KRG”) to amend the
Pulkhana Block 10 and the Arbat Block PSCs relieving the Company of its previous contractual requirement to issue
150 million common shares of the Company to the KRG. As a result during 2010 an adjustment was made to
reduce the carrying value of the Company’s exploration and evaluation assets by $61,349,000 representing the
amount previously capitalized in relation to this right to receive equity shares. Refer also to note 17.
On July 26, 2011 the Company entered into a PSC in respect of the Taza Block (formerly Block K42) in Kurdistan.
Pursuant to the terms of the PSC the Company paid a $20 million capacity building bonus in September 2011.
In December 2011 the Company took the decision to relinquish to the KRG the Pulkhana and Arbat Block PSCs and
immediately suspend all operations associated with those two production sharing contracts. The Company has
recorded a provision to expense all exploration and evaluation expenses, which includes acquisition costs, capacity
building payments to the KRG, costs of acquiring seismic data, and drilling and testing costs which have been
incurred by the Company on these two Blocks up to December 31, 2011. The relinquishment was completed on
January 17, 2012. Refer also to notes 8 and 23.
Other intangible assets comprise computer software licenses. The amortisation charge is presented as part of
general and administrative expenses within the Company’s consolidated statement of comprehensive income.
46
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2011 and 2010
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
14. Property, plant and equipment
At January 1, 2010
Cost
Accumulated depreciation
Net book value
For the year ended December 31, 2010
Opening net book value
Additions
Depreciation expense
Exchange differences
Net book value
At December 31, 2010
Cost
Accumulated depreciation
Net book value
For the year ended December 31, 2011
Opening net book value
Additions
Disposals
Depreciation expense
Impairment losses
Exchange differences
Net book value
At December 31, 2011
Cost
Accumulated depreciation
Provision for impairment
Net book value
Oil and Gas
equipment
Computer
equipment
Furniture
and office
equipment
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
678
(171)
(160)
(174)
‐
173
507
(160)
(174)
173
121
(4)
117
117
82
(55)
(7)
137
203
(66)
137
137
36
(7)
(78)
(17)
5
76
232
(139)
(17)
76
29
(1)
28
28
189
(23)
(1)
193
217
(24)
193
193
13
(19)
(46)
(10)
2
133
203
(60)
(10)
133
Total
150
(5)
145
145
271
(78)
(8)
330
420
(90)
330
330
727
(197)
(284)
(201)
7
382
942
(359)
(201)
382
As a result of the decision to relinquish the Pulkhana and Arbat PSCs the Company has determined that at
December 31, 2011 there is an impairment in value of certain property plant and equipment employed in the
exploration operations associated with these production sharing contracts and has recorded a provision for
impairment on these assets. Refer also to notes 8 and 23.
The impairment provision remaining at year end reflects the impairment losses incurred during the year less the
book value of those impaired assets disposed of during the year.
15.
Investment in associate
On August 27, 2010 ShaMaran Ventures BV, a wholly owned subsidiary of the Company entered into a Subscription
Agreement and a Shareholders’ Agreement with Aspect Energy International, LLC (“Aspect”) to acquire 33.5% of
the fully‐diluted share capital of General Exploration Partners Inc (“GEP”), a wholly owned subsidiary of Aspect.
GEP holds an 80% working interest in the Production Sharing Contract (“PSC”) in respect of the Atrush Block oil and
gas Exploration Area located in Kurdistan.
47
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2011 and 2010
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
The total consideration exchanged for the investment in GEP was $45.1 million comprised of cash payments
totaling $24.3 million, share consideration of $5.0 million representing 12.5 million shares of the Company and an
obligation to contribute the next $15.8 million in cash required to fund GEP’s oil exploration and development
operations which will be repaid on a first in first out basis from a portion of available petroleum production in the
future. During the year ended December 31, 2011 the Company completed payment of this obligation. The
investment has been accounted for using the equity method.
The Company’s investment in GEP included in the balance sheet is explained as follows:
Cumulative cash contributions
Common share contribution
Deferred consideration
Acquisition costs
Share of net losses since acquisition
Recovery of costs from partner
Total investment in associate
2011
47,827
5,000
‐
204
(298)
(898)
51,835
2010
27,360
5,000
12,643
204
(27)
(898)
44,282
The share of loss from associate included in the statement of comprehensive income is explained as follows:
Total loss of associate
Company’s 33.5% share of loss of associate
16.
Inventories
Drilling and downhole equipment
Provision for impairment
Total inventories
For the year ended December 31,
2010
2011
(809)
(271)
2011
4,570
(1,242)
3,328
(81)
(27)
2010
2,656
‐
2,656
The Company has determined that at December 31, 2011 there was impairment in the value of certain inventory
items which were to be used in the drilling programs in the Pulkhana and Arbat Blocks as a result of its decision in
December 2011 to suspend all operations associated with these drilling programs. Refer also to notes 8 and 23.
17. Accounts payable and accrued expenses
Trade accounts payable
Accrued expenses
Net payables to joint venture partners
Total accounts payable and accrued expenses
2011
17,409
4,379
1,457
23,245
2010
879
4,263
14
5,156
The accounts payable and accrued expense balance at December 31, 2011 includes charges and estimates directly
related to the exploration activities in the amounts of $15.6 million in the Pulkhana Block, $3.0 million in the Arbat
Block and $3.2 million in other charges related to other exploration and corporate activities.
48
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2011 and 2010
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
18. Share capital
The Company is authorized to issue an unlimited number of common shares with no par value. The Company’s
issued share capital is as follows:
Balance at January 1, 2010
Corporate acquisition
Private placement, net of issuance costs
Share options exercised
Balance at December 31, 2010
Private placement, net of issuance costs
Share options exercised
Balance at December 31, 2011
Refer also to note 23.
Equity share rights
Number of
shares
499,546,088
12,500,000
111,111,106
25,000
623,182,194
183,500,000
1,301,666
807,983,860
$000
379,673
5,000
47,813
20
432,506
99,778
1,065
533,349
In August 2010 the Company executed agreements with the Kurdistan Regional Government to amend the
Pulkhana Block 10 and the Arbat Block PSCs. The amendments relieve the Company of its previous contractual
requirement to issue 150 million common shares of the Company to the KRG which was comprised of 100 million
shares due on signature of the PSCs plus a further 50 million shares due 30 days prior to the expiry of the first
exploration sub‐period in the Pulkhana Block. In exchange the amendments require the Company to contribute
20% of its profit oil share (produced oil, less royalty and cost oil) from the Pulkhana Block 10 PSC and the Arbat
Block PSC as capacity building payments to the Government. Accordingly the amount previously recognized as
equity share rights of $61,349,000 was reversed with a corresponding decrease to the cost of the Company’s E&E
assets. Refer also to note 13.
Earnings per share
The earnings per share amounts were as follows:
Continuing operations:
Net loss from continuing operations, in dollars
Weighted average common shares outstanding during the year
Basic and diluted loss per share from continuing operations, in dollars
Discontinued operations:
Net loss from discontinued operations, in dollars
Weighted average common shares outstanding during the year
Basic and diluted loss per share from discontinued operations, in dollars
Continuing and discontinued operations:
Net loss from continuing and discontinued operations, in dollars
Weighted average common shares outstanding during the year
Basic and diluted loss per share from continuing and discontinued operations,
in dollars
2011
2010
210,738,707
677,001,536
0.31
201,189
677,001,536
‐
210,939,896
677,001,536
133,381
536,164,313
‐
958,823
536,164,313
‐
1,093,204
536,164,313
0.31
‐
49
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2011 and 2010
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
19. Share‐based payments
The Company has an established share purchase option plan whereby a committee of the Company’s board of
directors may, from time to time, grant up to a total of 10% of the issued share capital to directors, officers,
employees or consultants. The number of shares under option at any specific time to any one option holder shall
not exceed 5% of the issued and outstanding common shares of the Company. The term of any options granted
under the plan will be fixed by the Board of Directors and may not exceed five years from the date of grant. A four
month hold period may be imposed by the stock exchange from the date of grant. Vesting terms are at the
discretion of the Board of Directors. All issued share options have terms of three to five years and vest over
periods of up to three years. The exercise prices reflect trading values of the Company’s shares at grant date.
Movements in the Company’s share options outstanding are explained as follows:
Outstanding at January 1, 2010
Granted
Exercised
Cancelled/forfeited
Outstanding at December 31, 2010
Granted
Exercised
Cancelled/forfeited
Outstanding at December 31, 2011
Number of
Share
options
4,110,000
1,390,000
(25,000)
(915,000)
4,560,000
25,000
(1,301,666)
(50,000)
3,233,334
Weighted
average
exercise price
CAD
0.82
0.51
0.48
1.20
0.65
0.80
0.49
0.43
0.72
The cancelled/forfeited options during the year ended December 31, 2011 were held by an employee who
resigned from the Company.
Share options exercisable:
At January 1, 2010
At December 31, 2010
At December 31, 2011
2,245,000
3,155,000
2,803,335
0.82
0.69
0.75
The Company recognizes compensation expense on share options granted to both employees and non‐employees
using the fair value method at the date of grant, which the Company records as an expense. The share based
payment expense is calculated using the Black‐Scholes option pricing model.
The weighted average fair value of options granted and the assumptions used in their determination are as
follows:
Expected dividend yield
Risk‐free interest rate (weighted average)
Expected share price volatility (weighted average)
Expected option life in years (weighted average)
Grant date fair value (weighted average)
2011
2010
0%
3.20%
86.94%
4.12
CAD 0.36
0%
3.21%
86.95%
4.11
CAD 0.37
Share based payment expense for the year ended December 31, 2011 was $264 (2010: $570).
Option pricing models require the input of highly subjective assumptions including the expected price volatility.
Changes in the subjective input assumptions can materially affect the fair value estimate, and therefore the
existing models do not necessarily provide a reliable single measure of the fair value of the Company’s share
options.
50
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2011 and 2010
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
20. Commitments
Production Sharing Contracts (“PSC”)
The Company entered into two PSCs during the year 2009, which govern its petroleum operations in two separate
petroleum exploration and development properties, the Pulkhana Block 10 and the Arbat Block located in the
Kurdistan. In addition the Company entered into a third PSC in July 2011 in respect of the Taza Block (formerly
Block K42) petroleum exploration and development property also located in Kurdistan.
Under the terms of the Pulkhana PSC, the Company holds a 60% undivided interest in the petroleum operations,
Petoil Petroleum and Petroleum Products International Exploration and Production Inc (“Petoil”) holds a 20%
interest and the remaining 20% is held by the Kurdistan Regional Government (the “KRG”). The Company is required
to pay 100% of the minimum financial commitment in respect of the first exploration sub‐period which is 36 months
from the commencement of the PSC with option to extend by one year. Under the terms of the Pulkhana PSC the
Company is the operator and collectively with Petoil represent the “Contractor”.
The Company holds a 60% undivided interest in the petroleum operations under the terms of the Arbat PSC, while
the KRG holds a 20% interest and the remaining 20% is a third party interest which the KRG has the option to assign
to a third party or parties. The Company is required to pay 100% of the minimum financial commitment in respect
of the first exploration sub‐period or until such time as the KRG’s reserved 20% interest has been sold following
which the Company will pay 75% of the forward costs and receive a reimbursement for 25% of the costs incurred to
that date. Under the terms of the Arbat PSC the Company is the operator and represents the “Contractor”.
ShaMaran holds a 20% working interest in the Taza PSC, and Oil Search Iraq Limited (“OSIL”) is the operator with a
60% working interest in the PSC. The KRG holds a 20% working interest in the PSC with costs carried by ShaMaran
and OSIL. The Company had previously been a party to an option agreement in respect of the Taza Block with the
KRG and OSIL. ShaMaran and OSIL exercised their option on July 27, 2011 to convert that agreement into the PSC.
ShaMaran holds 33.5% of the issued shares of General Exploration Partners Inc (“GEP”) which holds an 80% working
interest in the Atrush Block PSC. Marathon Oil Corporation holds the remaining 20% interest with the KRG holding
an option to acquire up to a 25% interest in the PSC prior to 180 days after declaration of a commercial discovery.
GEP is responsible for 80% of the approved annual work program and budget within the appraisal period now in
progress.
All qualifying petroleum costs incurred by the Contractor shall be recovered from a portion of available petroleum
production, defined under the terms of the PSCs. At any time during the exploration period the Contractor has the
right to terminate the PSCs by surrendering the entire contract area. All modifications to the PSC’s are subject to
the approval of the KRG.
The PSCs contemplate minimum financial commitments during the first exploration sub‐period and also require the
Contractor to fund certain community development, personnel, training, environmental, and technological
assistance projects during the period over which the contracts are in effect.
As at December 31, 2011, the outstanding commitments of the Company were as follows:
Pulkhana Block PSC
Arbat Block PSC
General Exploration Partners Inc
Taza Block PSC
Office and other
Total commitments
2012
30,000
20,000
27,002
4,417
125
81,544
2013
‐
‐
‐
1,667
‐
1,667
2014
‐
‐
‐
1,667
‐
1,667
Thereafter
‐
‐
‐
‐
‐
‐
Total
30,000
20,000
27,002
7,751
125
84,878
51
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2011 and 2010
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
In December 2011 the Company took the decision to relinquish to the KRG the Pulkhana and Arbat Block PSCs and
immediately suspend all operations associated with those two production sharing contracts. The relinquishment
was subsequently completed in January 17, 2012 whereby the Company was released from further obligation under
these two PSCs in exchange for payments totaling $25 million. Refer also to notes 8 and 23.
21. Financial instruments
Financial assets
The financial assets of the Company on the balance sheet dates are explained as follows:
Note
Loans and receivables
2010
2011
Available‐for‐sale investments
2010
2011
Current assets
Other receivables
Other current assets, excluding prepaid expense
Cash and cash equivalents
Financial assets associated with discontinued
operations
Total financial assets
105
68
49,085
‐
49,258
124
91
58,684
59
58,958
12
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
Financial assets classified as loans and receivables are initially recognized at fair value and are subsequently
measured at amortized cost using the effective interest method less any provision for impairment.
Financial assets classified as available‐for sale are recognized at fair value with gains and losses arising from
changes in fair value recognized in other comprehensive income.
The carrying amount of the Company’s financial assets approximates their fair value and none of which are past
due.
Financial liabilities
The financial liabilities of the Company on the balance sheet dates are explained as follows:
Current financial liabilities
Accounts payable and accrued expenses
Current tax liabilities
Deferred consideration
Financial liabilities associated with discontinued operations
Total financial liabilities
Note
2011
2010
17
15
12
23,245
122
‐
2,613
25,980
5,156
103
12,643
3,069
20,971
Financial liabilities are initially recognized at the fair value of the amount expected to be paid and are subsequently
measured at amortized cost using the effective interest rate method. All financial liabilities have been classified as
current as payment is expected within the next twelve months.
Capital risk management
The Company manages its capital to ensure that entities within the Company will be able to continue as a going
concern, while maximizing return to shareholders. The Company is not exposed to externally imposed capital
requirements. The capital structure of the Company consists of cash and cash equivalents and equity, comprising
issued share capital, reserves and retained earnings as disclosed in the consolidated statement of changes in equity.
Given the current stage of development of the Company’s assets, it is the Company’s policy to finance operations
through the issuance of equity instruments. Accordingly the Company has no debt at December 31, 2011.
52
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2011 and 2010
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
Significant accounting policies
Details of the significant accounting policies and methods adopted, including the criteria for recognition, basis of
measurement and the basis on which income and expenses are recognized in respect of each class of financial
assets and liability are disclosed in note 3.
Financial risk management objectives
The Company’s management monitors and manages the Company’s exposure to financial risks facing the
operations. These financial risks include market risk (including commodity price, foreign currency and interest rate
risks), credit risk and liquidity risk.
The Company does not presently hedge against these risks as the benefits of entering into such agreements is not
considered to be significant enough as to outweigh the significant cost and administrative burden associated with
such hedging contracts.
Commodity price risk
The prices that the Company receives for its oil and gas production may have a significant impact on the
Company’s revenues and cash flows provided by operations. World prices for oil and gas are characterized by
significant fluctuations that are determined by the global balance of supply and demand and worldwide political
developments and in particular the price received for the Company’s oil and gas production in Kurdistan is
dependent upon the Kurdistan government and its ability to export production outside of Iraq. A significant
decline in the price at which the Company can sell future oil and gas production could adversely affect the amount
of funds available for capital reinvestment purposes as well as the Company’s value in use calculations for
impairment test purposes.
The Company does not hedge against commodity price risk, however given that the Company is in the exploration
and development stage, it is not exposed to significant commodity price risk.
Foreign currency risk management
The Company maintains a substantial portion of its cash and cash equivalents in Canadian dollars; however, the
Company’s operations are conducted predominantly in United States dollars. As a result, the Company is exposed
to foreign currency risk due to exchange rate fluctuations between the Canadian dollar (“CAD”) and the reporting
currency of the Company, the United States dollar (“USD”).
In addition, Company entities undertake certain transactions denominated in foreign currencies, being any
currency other than the functional currency of the Company entity.
The Company has elected not to hedge its exposure to the risk of changes in foreign currency exchange rates.
The carrying amounts of the Company’s principal monetary assets and liabilities denominated in foreign currency
at the reporting date are as follows:
Canadian dollars in thousands (“CAD 000”)
Swiss francs in thousands (“CHF 000”)
Assets
2011
2010
Liabilities
2011
2010
42,165
685
50,432
243
618
346
90
597
53
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2011 and 2010
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
Foreign currency sensitivity analysis:
The Company is exposed primarily to movements in CAD against the USD, the presentational currency of the
Company. Funds are raised through the issuance of equity instruments in CAD and are held in CAD until they are
required to fund operations at which time they are converted into USD. Sensitivity analyses have been performed
to indicate how the profit or loss would have been affected by changes in the exchange rates between the USD
and CAD. The analysis below is based on a strengthening of the USD by 1% against the USD in which the Company
has significant assets and liabilities at the end of respective period. A movement of 1% reflects a reasonably
possible sensitivity when compared to historical movements over a three to five year timeframe. The sensitivity
analysis includes only outstanding foreign currency denominated monetary items and adjust their translation at
the period end for a 1% change in foreign currency rates.
A positive number in the table below indicates an increase in profit where USD weakens 1% against the CAD on the
basis of the CAD assets and liabilities held by the Company at the balance sheet dates. For a 1% strengthening of
the USD against the CAD there would be an equal and opposite impact on the profit or loss.
Income statement
Interest rate risk management
Assets
2011
2010
Liabilities
2011
2010
408
488
(6)
(1)
The Company earns interest income at variable rates on its cash and cash equivalents and is therefore exposed to
interest rate risk due to a fluctuation in short‐term interest rates.
The Company’s policy on interest rate management is to maintain a certain amount of funds in the form of cash
and cash equivalents for short‐term liabilities and to have the remainder held on relatively short‐term deposits.
Interest rate sensitivity analysis:
Based on exposure to the interest rates for cash and cash equivalents at the balance sheet date a 0.5% increase or
decrease would not have a material impact on the Company’s profit or loss for the year. A rate of 0.5% is used as
it represents management’s assessment of the reasonably possible changes in interest rates.
Credit risk management
Credit risk is the risk that a counterparty will default on its contractual obligations resulting in financial loss to the
Company. The Company is primarily exposed to credit risk on its cash and cash equivalents and trade and other
receivables. Trade and other receivables are primarily with joint venture partners in the oil and gas industry and are
subject to normal industry credit risks. Joint venture receivables are typically collected within one to two months of
the joint venture bill being issued to the partner. The Company mitigates risks arising from joint venture receivables
by obtaining partner approval of capital expenditures prior to starting a project.
The Company manages credit risk by monitoring counterparty ratings and credit limits and by maintaining excess
cash and cash equivalents on account in instruments having a minimum credit rating of R‐1 (mid) or better (as
measured by Dominion Bond Rate Services) or the equivalent thereof according to a recognized bond rating service.
The carrying amount of the Company’s financial assets recorded in the consolidated financial statements represent
the Company’s maximum exposure to credit risk.
54
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2011 and 2010
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
Liquidity risk management
Liquidity risk is the risk that the Company will have difficulties meeting its financial obligations as they become due.
In common with many oil and gas exploration companies, the Company raises financing for its exploration and
appraisal activities in discrete tranches in order to finance its activities for limited periods. The Company seeks to
raise additional funding as and when required. The Company anticipates making substantial capital expenditures in
the future for the acquisition, exploration, development and production of oil and gas reserves and as the
Company’s projects move into the development stage, specific financing, including the possibility of debt, may be
required to enable future development to take place. The financial results of the Company will impact its access to
the capital markets necessary to undertake or complete future drilling and development programs. There can be no
assurance that debt or equity financing, or future cash generated by operations, would be available or sufficient to
meet these requirements or, if debt or equity financing is available, that it will be on terms acceptable to the
Company.
It is presently the Company’s policy to finance its business by means of internally generated funds and external
share capital. The Company manages liquidity risk by maintaining adequate cash reserves and by continuously
monitoring forecast and actual cash flows. Annual capital expenditure budgets are prepared, which are regularly
monitored and updated as considered necessary. In addition, the Company requires authorizations for expenditure
on both operating and non‐operating projects to further manage capital expenditures.
The maturity profile of the Company’s financial liabilities are indicated by their classification in the consolidated
balance sheet as “current” or “non‐current”, and further information relevant to the Company’s liquidity position is
disclosed in the Company’s going concern assessment in note 2.
22. Related party transactions
Namdo Management Services Ltd.
Mile High Holdings Ltd.
McCullough O’Connor Irwin LLP
Vostok Naphta Investment Ltd.
Lundin Petroleum AB
Total
Purchases of services
during the year
2010
2011
Amounts owing at
the reporting dates
2010
2011
361
103
56
24
2,176
2,720
185
152
41
‐
2,673
3,051
7
19
14
‐
78
118
‐
12
‐
‐
214
226
Namdo Management Services Ltd. is a private corporation owned by a shareholder of the Company which has
provided corporate administrative support and investor relation services to the Company.
Mile High Holdings Ltd. is a private corporation associated with a shareholder of the Company which has provided
transportation services to the Company in relation to its fundraising activities.
McCullough O’Connor Irwin LLP is a law firm in which an officer of the Company is a partner which has provided
legal services to the Company.
Vostok Naphta Investment Ltd. is a corporation traded on the NASDAQ OMX Nordic Exchange in Stockholm (trading
symbol VNIL SDB) associated with a shareholder of the Company and which has provided investor relations services
to the Company in relation to its fundraising activities in Sweden.
55
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2011 and 2010
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
The Company receives services from various subsidiary companies of Lundin Petroleum AB (“Lundin”), a
shareholder of the Company. Lundin charges during the year ended December 31, 2011 of $2,176 (2010: $2,673)
were comprised of G&G and other technical service costs of $195 (2010: $382), reimbursement for Company travel
and related expenses of $611 (2010: $601), office rental, administrative and building services of $455 (2010: $328)
and $915 (2010: $1,362) relating to a guarantee provided to the KRG on behalf of the Company in respect of its
minimum financial commitments, payable semi‐annually and charged at a rate of 1.5 % per annum (3.0% prior to
July 1, 2010).
Included within general and administrative expenses are contributions totalling $1,025 made in the year 2011
(2010: $485) to a charitable foundation whose Chairman is a major shareholder of the Company. Funds from this
charity, in part, are used for community investment activity in Kurdistan.
All transactions with related parties are in the normal course of business and are made on the same terms and
conditions as with parties at arm’s length.
Refer also to note 23.
23. Events after the balance sheet date
On January 17, 2012 the Company signed a final binding agreement with the KRG to relinquish to the KRG the 60%
working interests previously held in each of the Arbat and Pulkhana Production Sharing Contracts ("PSC"). Under
the terms of the agreement the PSC for each of the Pulkhana and Arbat blocks was terminated whereby ShaMaran's
interests in both PSCs were relinquished. On January 25, 2012 the Company paid a total of USD 25 million to the
KRG, which will be expensed in 2012, in accordance with the terms of the agreement and relieving the Company of
all further obligations under the PSCs.
On April 2, 2012 the Company entered into a debenture financing from two related parties (the "Lenders") in the
principal amount of US$10,000,000 (the "Loan") on the following terms and conditions. The Loan will mature and be
payable six months after closing of the Loan transaction (the "Maturity Date") and can be prepaid up to the
Maturity Date without interest or penalty. Subsequent to the Maturity date interest will accrue on any unpaid Loan
balance at 5% per annum commencing on the earlier of the Maturity Date or an event of default under the
Debenture, and will be payable semi‐annually thereafter. The Debenture is secured against the shares of the
Company's operating subsidiaries. In connection with the Loan the Company has issued to the Lenders an
aggregate of 3,000,000 common shares of the Company.
56
SHAMARAN PETROLEUM CORP.
DIRECTORS
CORPORATE INFORMATION
Keith C. Hill
Director, Chairman
Vancouver, British Columbia
Pradeep Kabra
Director, President & Chief Executive Officer
Geneva, Switzerland
Brian D. Edgar
Director
Vancouver, British Columbia
Gary S. Guidry
Director
Calgary, Alberta
Alexandre Schneiter
Director
Anieres, Switzerland
J. Cameron Bailey
Director
Calgary, Alberta
CORPORATE OFFICE
885 West Georgia Street
Suite 2000
Vancouver, British Columbia V6C 3E8
Telephone: +1‐604‐689‐7842
Facsimile: +1‐604‐689‐4250
Website: www.shamaranpetroleum.com
OPERATIONS OFFICE
5 Chemin de la Pallanterie
1222 Vésenaz
Switzerland
Telephone: +41‐22‐560‐8600
Facsimile: +41‐22‐560‐8601
BANKER
HSBC Bank Canada
Vancouver, British Columbia
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP
London, UK
TRANSFER AGENT
OFFICERS
Computershare Trust Company of Canada
Brenden Johnstone
Chief Financial Officer
Geneva, Switzerland
Kevin E. Hisko
Corporate Secretary
Vancouver, British Columbia
Vancouver, British Columbia
STOCK EXCHANGE LISTINGS
TSX Venture Exchange and
NASDAQ OMX First North Exchange
Trading Symbol: SNM
INVESTOR RELATIONS
Sophia Shane
Vancouver, British Columbia
57