ShaMaran Petroleum Corp
(cid:4)(cid:374)(cid:374)(cid:437)(cid:258)(cid:367)(cid:3)(cid:90)(cid:286)(cid:393)(cid:381)(cid:396)(cid:410)
For the year ended December 31, 2012
SHAMARAN PETROLEUM CORP.
MANAGEMENT DISCUSSION AND ANALYSIS
For the year ended December 31, 2012
________________________________________________________________________________________
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 15, 2013. The MD&A should be read
in conjunction with the audited consolidated financial statements for the year ended December 31, 2012 together with
the accompanying notes.
The financial statements of the Company have been prepared in accordance with International Financial Reporting
Standards (“IFRS”) as issued by the International Accounting Standards Board. Unless otherwise stated herein all
currency amounts indicated as “$” in this MD&A are expressed in thousands of United States Dollars.
Overview
ShaMaran is a Canadian‐based oil and gas company with a 20.1% direct interest in the Atrush petroleum property
located in Kurdistan in Northern Iraq (“Kurdistan”). The Company is currently in the pre‐production stages of its
appraisal and development program relating to the Atrush oil discovery on this petroleum property. ShaMaran trades
on the TSX Venture Exchange and the NASDAQ OMX First North Exchange (Stockholm) under the symbol “SNM”.
Highlights
The Company announced on February 4, 2013 an increase of 35% in Best Estimate 2C Contingent Resources (gross)
for the Atrush Block, from 465.6 MMBOE at December 31, 2011 to 627.3 MMBOE at the end of 2012. The
estimates were provided by an independent qualified resources evaluator, McDaniel & Associates Consultants Ltd.,
in a Detailed Property Report prepared as at December 31, 2012.
On November 7, 2012 General Exploration Partners Inc (“GEP”), then operator of the Atrush Block and acting on
behalf of the Contractor Group under the Atrush Block Production Sharing Contract, submitted to the Atrush Block
Management Committee a Declaration of Commercial Discovery with effect from November 7, 2012.
The Atrush‐2 appraisal well was spudded on May 23, 2012 and a total depth of 1,750 meters was reached ahead of
schedule on July 10, 2012. Following the conclusion of the comprehensive well testing program the Company
announced on September 13, 2012 that the main reservoir in Atrush‐2 produced a combined flow rate from three
separate cased hole tests of more than 42,200 barrels of oil per day ("bopd") and that additional oil resources
were confirmed in two additional formations.
The Company announced on August 20, 2012 that it sold its entire 20% direct interest in the Taza production
sharing contract (“PSC”) to a subsidiary of Total S.A. for a $48 million purchase price plus a reimbursement of costs
incurred on joint operations from April 1, 2012 until the closing date.
The Company signed final binding agreements with the Kurdistan Regional Government (“KRG”) in January 2012 to
relinquish the 60% working interests previously held in each of the Arbat and Pulkhana PSCs. An amount of $25
million was paid in January 2012 to the KRG as relinquishment fees to fulfill all outstanding financial commitments
on these two blocks. The agreements relieve the Company of any further obligations under these PSCs.
Disappointing testing results from the Pulkhana 9 well led the Company to this decision.
In August 2012 the Company repaid in full the short term loan of $10 million which had been obtained in April
2012 from two related parties.
At December 31, 2012 the Company had a cash balance of $41.2 million and working capital of $29.6 million.
On March 12, 2013 the Contractor entities to the Atrush Block PSC were notified by the KRG that it had exercised
its option to acquire a 25% Government Interest in accordance with the provisions of the Atrush Block PSC.
1
Operations in Kurdistan
The Company holds a 20.1% direct interest in the Atrush Block petroleum property which is located in Kurdistan in the
northern extension of the Zagros Folded Belt adjacent to several major oil discoveries. The area is currently undergoing
a major exploration and development campaign by internationally recognised mid to large sized oil companies.
In the twelve months ended December 31, 2012 the Company completed a strategic realignment of its asset portfolio
and acquired control of GEP which holds the Company’s interest in the Atrush Block. In addition, significant progress
was made on the appraisal and development program in the Atrush Block with a Declaration of Commercial Discovery
submitted to the Atrush Block Management Committee on November 7, 2012.
In January 2012 ShaMaran signed a final binding agreement to relinquish to the KRG the 60% working interests which it
then held in each of the Arbat and Pulkhana PSCs. 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 and the Company has
been relieved of any further obligations under these PSCs.
The Company announced on August 20, 2012 that it had sold its entire 20% direct interest in the Taza Block to a
subsidiary of Total S.A. At this time the Taza‐1 exploration well had been drilled to a depth of approximately 1,650m,
which was above the target reservoirs. This asset realignment has relieved the Company from the remaining work
program obligations of the Pulkhana, Arbat and Taza Blocks, provided ShaMaran with a solid financial position and cash
resources, and enables the Company to focus its activities and resources on the appraisal and development program
now in progress on the Atrush Block.
The Atrush‐2 appraisal well was drilled to total depth from May 2012 to July 2012 followed by a comprehensive well
testing program. On September 13, 2012 the Company announced the results of the testing program indicating that the
main reservoir produced a total flow rate of more than 42,200 bopd and that additional oil resources were confirmed in
two additional formations. After the conclusion of operations on Atrush‐2 the drilling rig was moved to the Atrush‐1
discovery well to do a workover which was completed in November 2012. The drilling rig will now be moved to the
Atrush‐3 appraisal well which is expected to be spudded in March 2013.
GEP completed two principal transactions in December 2012 (the “Transactions”) resulting in the December 31, 2012
sale of a 53.2% direct interest in the Atrush Block to TAQA Atrush B.V. (“TAQA”), a subsidiary of Abu Dhabi National
Energy Company PJSC, and the December 31, 2012 repurchase from Aspect of the entire 66.5% shareholding interest
which Aspect held in GEP. As a result of the Transactions ShaMaran Ventures B.V., a 100% owned subsidiary of the
Company, became the sole remaining shareholder of GEP and the Company has therefore acquired control of GEP
which then held a 26.8% direct interest in the Atrush Block. Following the March 12, 2013 exercise by the KRG of its
option to acquire a 25% PSC interest the Company’s interest in this PSC is 20.1%.
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. To the east is the
Kalegran‐operated Akri‐Bijeel block which also has discoveries. 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 have
demonstrated very high production rates. In addition to the proven Atrush Jurassic oil discovery the Atrush Block has
additional exploration upside in the shallower Cretaceous reservoirs, a northern extension of the Atrush oil
accumulation at the Jurassic level into the Swara Tika structure, and the deeper Triassic Kurra Chine “C” (“KCC”).
In August 2010 the Company acquired a 33.5% shareholding in GEP which then held an 80% working interest in the
Atrush Block PSC, with the remaining 20% third party interest (“TPI”) being held by the KRG. In October 2010 Marathon
Oil Corporation (“Marathon”) was assigned the 20% TPI in the PSC. On December 31, 2012 GEP sold a 53.2% direct
interest in the Atrush Block to TAQA who also assumed from GEP the operatorship of the Block, and repurchased the
entire 66.5% shareholding which Aspect held in GEP, leaving the Company with a 100% shareholding interest in GEP
which then held a 26.8% direct interest in the PSC. The Company’s direct interest in the PSC was 20.1% after the KRG
exercised its option to participate, explained in the following paragraph.
2
On March 12, 2013 the Contractor entities to the Atrush Block PSC were notified by the KRG that it had exercised its
option to acquire a 25% Government Interest in accordance with the provisions of the Atrush Block PSC. The KRG now
participates as a Contractor Entity with a 25% undivided interest in the petroleum operations and all the other rights,
duties, obligations and liabilities of the Contractor in the PSC and becomes liable for its 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.
GEP acquired 143 km of 2D seismic data over the Atrush Block in 2008. The first exploration well 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 April 3,
2011. Following notification to the KRG of a major Jurassic oil discovery on April 4, 2011 GEP submitted an Appraisal
Work Program consisting of 3D seismic, appraisal wells and studies and a possible installation of an extended test
facility to conduct production testing in the field.
3D seismic acquisition operations commenced on the block in July 2011 and were completed on August 11, 2012 with
3D seismic data now covering the entire Atrush block. Final processing of the complete 3D seismic survey is expected in
the first quarter of 2013.
The Atrush‐2 appraisal well was spudded on May 23, 2012 and drilled to a planned total depth of 1,750m in the Butmah
formation ahead of schedule on July 10, 2012. The Company announced on September 13, 2012 the results of the
comprehensive Atrush‐2 well testing program which confirmed through three separate DSTs the Atrush‐1 Jurassic oil
discovery in the Barsarin‐Sareglu‐Alan‐Mus (“BSAM”) reservoir. The combined test rate for the three BSAM DSTs,
constrained by surface testing equipment, was over 42,200 bopd (approximately 27 degree API) and confirms the
significant potential for production from the highly fractured BSAM reservoir. An additional two DSTs conducted on the
Jurassic Adaiyah (cased hole) and Butmah (open hole) formations confirmed them to be oil bearing. GEP submitted in
October 2012 to the Ministry of Natural Resources of Kurdistan an Atrush‐2 Discovery Report giving notice of the
additional Discovery.
In September 2012 the drilling rig was moved from the Atrush‐2 well to the Atrush‐1 discovery well drilled in 2011.
A workover on this well was completed in November 2012.
On November 7, 2012 GEP and Marathon, collectively being the Contractor under the Atrush Block PSC, submitted to
the Atrush Block Management Committee a Declaration of Commercial Discovery (“DCD”) with effect from November 7,
2012 under Clause 12.6 (a) of the PSC. The DCD was submitted together with an Appraisal Report covering the Atrush
field. The Operator (TAQA) is currently in the process of preparing a Field Development Plan which will be submitted to
the Atrush Block Management Committee within 180 days following the DCD.
On February 4, 2013 the Company announced an increase of 35% in Best Estimate 2C Contingent Resources for the
Atrush Block, from 465.6 MMBOE at December 31, 2011 to 627.3 MMBOE at the end of 2012. The estimates were
provided by an independent qualified resources evaluator, McDaniel & Associates Consultants Ltd. (“McDaniel”), in a
Detailed Property Report prepared as at December 31, 2012 in accordance with standards set out in the Canadian
National Instrument NI 51‐101 and Canadian Oil and Gas Evaluation Handbook (“COGEH”). McDaniel estimates take into
account the results of the Atrush‐2 well (including the additional discovery in the Butmah formation) and remapping
based on the recently acquired 3D seismic. In addition the Triassic Kurra Chine C is a new Prospective Resource for 2012
based on 3D seismic and reported results from nearby wells.
Preparation work is continuing to enable the drilling rig to move from the Atrush‐1 location to the Atrush‐3 appraisal
well location. Construction work is almost complete to provide road access to the Atrush‐3 location which is
approximately 9km east of Atrush‐1. Atrush‐3 is expected to spud in March 2013. The Atrush‐3 well is an important
stepout from the previous two Atrush wells with the overall objective to establish contingent resources in the eastern
part of the Atrush structure.
Refer also to discussion under “Commitments” in this MD&A.
3
Taza Block
On August 20, 2012 the Company announced that it had sold to a subsidiary of Total S.A. its 20% interest in the Taza
Block PSC.
The Taza Block is a 511 square kilometer exploration area located in the south of Kurdistan immediately northeast of
the Pulkhana Block.
Prior to the sale of its interest in Taza the Company held a 20% direct interest in the production sharing contract. Oil
Search Iraq Limited (“OSIL”), the operator, held a 60% working interest in the PSC and the KRG held 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 Taza‐1 exploration well was spudded on July 3, 2012 and by August 20, 2012, the date the Company announced the
sale of its interest in Taza, the well was drilled to a depth of depth of approximately 1,650m which was above the
reservoir targets.
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% direct 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 held the remaining 20%.
Arbat Block
On January 17, 2012 the Company completed the relinquishment to the KRG of the Arbat Block PSC.
The Arbat Block 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% direct 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.
4
Selected annual information
The following is a summary of selected annual financial information for the Company:
For the year ended December 31,
2012
2011
2010
(In $000s, except per share data)
Continuing operations
General and administrative expense
Share based payments expense
Depreciation and amortisation expense
Share of income / (loss) of associate
Relinquishment costs
Impairment recovery / (loss)
Gain on sale of asset
Gain on fair valuation of net assets of subsidiary
Finance cost
Finance income
Income tax expense
Net income / (loss) from continuing operations
Discontinued operations
Expenses
Gain on sale of asset
Net loss from discontinued operations
Net income / (loss)
Basic income / (loss) in $ per share:
Continuing operations
Discontinued operations
Diluted income / (loss) in $ per share:
Continuing operations
Discontinued operations
Total assets
Working capital surplus
Shareholders’ equity
Common shares outstanding (x 1,000)
(594)
(570)
(139)
(27)
‐
‐
‐
‐
(1,353)
2,631
(81)
(133)
(1,037)
77
(960)
(1,093)
‐
‐
‐
‐
‐
‐
(2,852)
(8)
(183)
129,000
(25,732)
1,814
1,100
102,735
(719)
359
(89)
205,425
(61)
‐
(61)
(1,082)
(264)
(221)
(271)
‐
(207,504)
‐
‐
(1,777)
518
(137)
(210,738)
(1,279)
1,078
(201)
205,364
(210,939)
(0.31)
‐
(0.31)
(0.31)
‐
(0.31)
0.25
‐
0.25
0.25
‐
0.25
2012
345,554
29,628
331,376
810,984
As at December 31,
2011
151,239
29,798
125,259
807,894
2010
256,489
44,009
235,518
623,182
5
Summary of principal changes in annual information
The Company has reported net income in 2012 of $205 million which was primarily comprised of income from associate
of $129 million related to the sale by GEP on December 31, 2012 of a 53.2% interest in the Atrush Block and by the gain
of $103 million relating to the fair valuation as required by IFRS of GEP’s net assets and liabilities acquired (together, the
“Fair Value Increase”) offset by $25.7 million of relinquishment fees and other costs relating to the termination of the
Pulkhana and Arbat Block PSCs in January 2012. Also during the year the Company sold the 20% direct interest which it
held in the Taza Block PSC for net proceeds of $53.3 million resulting in a net gain of $1.1 million. The total assets
reported at the end of the year 2012 have increased by $194 million which was mainly due to recording the Fair Value
Increase of $232 million relating to the Atrush Block oil and gas assets and net cash out on other operating and investing
activities of $38 million.
Results of continuing operations
The Company’s continuing operations are compromised of an exploration and development program on a petroleum
property located in the Kurdistan Region of Iraq which is currently in the pre‐production stages and generates 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,
2011
2012
2,710
885
‐
637
271
406
415
5,324
(2,472)
2,852
3,623
1,459
1,025
1,159
643
413
300
8,622
(7,540)
1,082
The Company capitalizes as exploration and evaluation (“E&E”) assets those general and administrative expenses
incurred supporting E&E activities which relate to direct interests held in production sharing contracts as well as
exploration overhead charges in accordance with PSC terms on properties operated by the Company. The PSCs which
govern petroleum properties in Kurdistan allow for 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 under the terms of the PSCs as recoverable petroleum costs to be recovered from a portion
of available petroleum production. The Company has capitalized no general and administrative expenses subsequent to
the sale of its interest in the Taza Block PSC in August 2012 as it held no direct interests in production sharing contracts
for the remainder of the year.
The decrease in general and administrative expenses incurred and capitalized in the year ended December 31, 2012
relative to the amounts incurred and capitalized over the comparable periods of the prior year is primarily due to the
relinquishment in January 2012 of its two operated blocks, Arbat and Pulkhana as well as the sale of Taza Block in
August 2012, which resulted in a decrease overall in the Company’s technical and support activities during the reporting
periods.
6
Share based payments expense
In $000
Share based payments expense
For the year ended December 31,
2011
2012
8
264
The share based payments expense results from the vesting of stock options granted in the years 2010 and 2011. No
stock options have been granted during the year ended December 2012 (year 2011: 25,000 and year 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 amortization
In $000
Depreciation and amortisation
For the year ended December 31,
2011
2012
183
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 income / (loss) of associate
In $000
Income / (loss) from investment in associate
For the year ended December 31,
2011
2012
129,000
(271)
The income from investment in associate relates to the Company’s pro‐rata portion of the net income of GEP in
conducting petroleum operations on the Atrush Block in Kurdistan. The income of associate in the current year
substantially all has resulted from a gain on the sale to TAQA on December 31, 2012 of a 53.2% interest in the Atrush
Block PSC.
Relinquishment costs
In $000
Relinquishment fees
Costs to wind up Pulkhana and Arbat operations
Total relinquishment costs
For the year ended December 31,
2011
2012
25,000
732
25,732
‐
‐
‐
Under the terms of the January 17, 2012 agreements to relinquish the Pulkhana and Arbat Block PSCs the Company paid
to the KRG on January 25, 2012 a total of $25 million in fees which relieves the Company of all further obligations under
the PSCs, including its remaining minimum financial commitments under the first exploration sub periods which were
$50 million in total prior to relinquishing the PSCs. These fees are non‐recoverable and have therefore been expensed
together with all costs associated with winding up operations on these blocks.
7
Impairment losses / (recovery)
In $000
Write down of inventory to net realizable value
Impairment loss / (recovery) on E&E assets
Impairment loss / (recovery) on PP&E
Impairment loss / (recovery)
For the year ended December 31,
2011
2012
578
(2,347)
(45)
(1,814)
1,243
205,862
399
207,504
The write down of inventory is primarily due to the liquidation and restocking of certain drilling inventories which will
no longer be used in the Pulkhana and Arbat Block drilling programs due to their cancellation. The Company has
released excess accrued costs which were capitalized as exploration and evaluation (“E&E”) assets resulting in a
recovery in the current reporting periods of impairment losses previously recognized. The impairment loss / (recovery)
on property plant and equipment (“PP&E”) items during the reporting periods were due to changes in previous
estimates of net realizable value which have occurred in the course of liquidating assets relating to the relinquished
blocks.
Gain on sale of assets
In $000
Net proceeds on sale of asset
Costs of intangible assets and PP&E sold
Gain on sale of assets
For the year ended December 31,
2011
2012
53,266
(52,166)
1,100
‐
‐
‐
In August 2012 the Company sold the 20% direct interest which it held in the Taza Block PSC. The net proceeds on sale
of asset was comprised of $48 million purchase price proceeds plus a reimbursement of $5.8 million in costs incurred on
the Taza block work program since April 1, 2012 less transaction related costs of $0.5 million.
Gain on fair valuation of nets assets of subsidiary
In $000
Fair valuation of net assets of subsidiary
For the year ended December 31,
2011
2012
102,735
‐
GEP completed two principal transactions in December 2012 (the “Transactions”) resulting in the December 31, 2012
sale of a 53.2% direct interest in the Atrush Block to TAQA and the December 31, 2012 repurchase from Aspect of the
entire 66.5% shareholding interest which Aspect held in GEP. As a result of the Transactions ShaMaran Ventures B.V
became the sole remaining shareholder of GEP and the Company has therefore acquired control of GEP.
The acquisition has been accounted for using the acquisition method in accordance with IFRS 3 which requires that the
Company records the fair value on the date of acquisition of the net identifiable assets and liabilities of GEP and
consolidates these amounts with the other assets and liabilities of the Company. As the acquisition date coincides with
the balance sheet date there has been no incremental income or expense associated with the acquisition in the current
year.
The Company has recorded a gain on the fair valuation of net assets of subsidiary in the amount of $102.7 million which
is the difference between the $299.7 million fair value of net identifiable assets acquired and liabilities assumed and the
$197.0 million book value of investment in associate at acquisition of control.
8
The fair values of assets acquired and liabilities assumed in the acquisition of GEP are as follows:
In $000
Fair value of previously held equity interest in GEP
Cash
Other current assets
Property, plant and equipment
Intangible assets ‐ exploration and evaluation
Accounts payable and accrued expenses
Provisions
Deferred liability
Fair value of net identifiable assets acquired and liabilities assumed
Finance cost
In $000
Interest expense on equity based finance fee
Foreign exchange loss
Guarantee fees
Total finance cost
299,680
10,137
117
163
300,523
(6,140)
(120)
(5,000)
299,680
For the year ended December 31,
2011
2012
719
‐
‐
719
‐
862
915
1,777
The interest expense on equity based finance fee relates to a loan entered into with two investment companies who
jointly are principal shareholders of the Company. Under the terms of the loan the investment companies received an
aggregate of 3,000,000 common shares of the Company issued on April 2, 2012 at $0.24 per share as an equity based
finance fee.
The foreign exchange losses reported in the year 2011 resulted primarily from holding cash and cash equivalents
denominated in Canadian dollars while the Canadian dollar weakened during the reporting periods against the United
States dollar which is the reporting currency of the Company.
The Company incurred fees in the year 2011 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. As a result of having relinquished the Pulkhana and Arbat Blocks the guarantee is
no longer required by the Company resulting in no expense in the year 2012.
Finance income
In $000
Interest income
Foreign exchange gain
Total finance income
For the year ended December 31,
2011
2012
26
333
359
518
‐
518
Interest income represents bank interest earned on cash and investments in marketable securities. The decrease in the
amounts reported in the year 2012 relative to the amount reported in the same periods of the year 2011 is primarily
due to lower average cash balances held throughout the period.
The foreign exchange gain results 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.
9
Income tax expense
In $000
Income tax expense
For the year ended December 31,
2011
2012
89
137
Income tax expense relates to provisions for income taxes on service income generated in Switzerland which is
determined on the basis of the cost of the services. The amount reported in the year 2012 has decreased relative to the
amounts reported in the comparable periods of 2011 due to less service costs incurred to support the lower levels of
exploration activity undertaken in the reporting periods.
Results of discontinued operations
The main components of discontinued operations are explained as follows:
Expenses
In $000
Legal, accounting and audit fees
General and other office expenses
Asset retirement obligation
Management and consulting fees
Total expenses
For the year ended December 31,
2011
2012
32
29
‐
‐
61
137
61
1,078
3
1,279
The decrease in fees and expenses in the year 2012 relative to the amounts incurred in the year 2011 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 professional and general fees which the Company continues to
incur are related to the decommissioning and windup of its remaining interests in the United States.
Gain on sale of asset
In $000
Deferred purchase price proceeds
Total gain on sale of asset
For the year ended December 31,
2011
2012
‐
‐
1,078
1,078
In April 2011 the Company received deferred purchase price proceeds of $1,078 relating to the 2009 sale of an oil and
gas asset located in the United States.
10
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
2012
Sep 30
2012
Jun 30
2012
Mar 31
2012
Dec 31
2011
Sep 30
2011
Jun 30
2011
Mar 31
2011
Continuing operations
General and admin. (expense) / rec.
Share based payments (expense) / rec.
Depreciation and amortisation
Share of income / (loss) of associate
Relinquishment costs
Impairment recovery / (loss)
Gain on sale of asset
Gain on fair valuation of assets
Finance cost
Finance income
Income tax expense
Net inc. / (loss) from continuing ops.
Discontinued operations
Expenses
Gain on sale of asset
Net loss from discontinued ops.
(1,497)
‐
(40)
129,209
‐
1,255
‐
102,735
(24)
‐
(26)
231,612
1
‐
1
(512)
(2)
(46)
(97)
‐
(138)
1,100
‐
(393)
1
(11)
(98)
(12)
‐
(12)
(459)
(8)
(48)
(46)
‐
945
‐
‐
(360)
25
(28)
(384)
2
(49)
(66)
(25,732)
(248)
‐
‐
‐
391
(24)
(283)
(21)
(55)
11
‐
(207,504)
‐
‐
(251)
552
(31)
21
(26,110)
(207,582)
(13)
‐
(13)
(37)
‐
(37)
(34)
‐
(34)
202
(70)
(58)
(173)
‐
‐
‐
‐
(2,780)
147
(32)
(2,764)
(46)
‐
(46)
Net income / (loss)
231,613
(110)
8
(26,147)
(207,616)
(2,810)
Basic income / (loss) in $ per share:
Continuing operations
Discontinued operations
Diluted income / (loss) in $ per share:
Continuing operations
Discontinued operations
0.29
‐
0.29
0.29
‐
0.29
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
(0.03)
‐
(0.03)
(0.03)
‐
(0.03)
(0.28)
‐
(0.28)
(0.28)
‐
(0.28)
‐
‐
‐
‐
‐
‐
(837)
(114)
(56)
(30)
‐
‐
‐
‐
(229)
367
(33)
(932)
(1,121)
1,078
(43)
(975)
‐
‐
‐
‐
‐
‐
(164)
(59)
(52)
(79)
‐
‐
‐
‐
(227)
1,162
(41)
540
(78)
‐
(78)
462
‐
‐
‐
‐
‐
‐
Summary of principal changes in fourth quarter information
In the fourth quarter of 2012 work on the Atrush Block development program continued and the Company acquired
control of GEP. The net income in the fourth quarter was primarily driven by the sale by GEP in December 2012 of a
53.2% interest in the Atrush Block resulting in significant income from associate and by the gain on fair valuation of
GEP’s net assets as required by IFRS due to the acquisition by the Company of control of GEP in December 2012.
Off‐balance sheet arrangements
The Company has no off‐balance sheet arrangements.
11
Outstanding share data
The common shares of the Company outstanding at December 31, 2012 and at the date of this MD&A were
810,983,860, an increase from the number outstanding at January 1, 2012 by 3,000,000 common shares which were
issued at CAD 0.24 per share to two related parties as an equity based financing fee in accordance with the terms of a
debenture financing concluded on April 2, 2012. Refer also to the related party disclosures in the next section of this
MD&A.
There were 2,623,334 stock options outstanding at December 31, 2012 under the Company’s employee incentive stock
option plan which is a decrease of 610,000 from the number outstanding at January 1, 2012. During the year 2012 there
were no stock options granted (2011: 25,000), 450,000 stock options expired (2011: nil), 160,000 stock options were
forfeited (2011: 50,000), and no stock options were exercised (2011: 1,301,666). There has been no further movement
in stock options from December 31, 2012 to the date of this MD&A.
The Company has no warrants outstanding.
Related party transactions
In $000
Namdo Management Services Ltd.
Mile High Holdings Ltd.
McCullough O’Connor Irwin LLP
Vostok Naphta Investment Ltd.
Lundin family
Lundin Petroleum AB
Total
Purchases of services
during the year
2012
2011
Amounts owing at the
reporting dates
2011
2012
314
37
95
26
719
524
361
103
56
24
‐
2,176
28
19
22
‐
‐
75
7
19
14
‐
‐
78
1,715
2,720
144
118
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 received a $10 million loan from the Lundin family through two investment companies who jointly are
principal shareholders of the Company (the "Lenders"). In connection with the loan the Company has issued to the
Lenders an aggregate of 3,000,000 common shares of the Company. The fair value of the shares issued has been
expensed as a finance cost. The loan was repaid in full in August 2012.
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, 2012 of $524 (2011: $2,176) were comprised of G&G
and other technical service costs of $138 (2011: $195), reimbursement for Company travel and related expenses of $1
(2011: $611), office rental, administrative and building services of $385 (2011: $455). In the year 2011 the Company
paid $915 to Lundin relating to a guarantee provided to the KRG on behalf of the Company.
Included within general and administrative expenses for the year 2011 are contributions totaling $1,025 made 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. No contributions were made by the Company to this charitable
foundation in the year 2012.
12
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.
Liquidity and capital resources
Working capital at December 31, 2012 was $29.6 million compared to $29.8 million at December 31, 2011.
The overall cash position of the Company decreased by $7.9 million during the year 2012 compared to a decrease in
cash of $9.6 million during the year 2011. The main components of the movement in funds are discussed in the
following paragraphs.
The operating activities of the Company during the year 2012 resulted in a decrease in the cash position by $42.9 million
compared to an increase by $10.5 million in the year 2011. Payments to the KRG totaling $25 million in accordance with
the terms of the agreements to relinquish the Pulkhana and Arbat Blocks as well as a decrease by $16.5 million in the
accounts payable and accrued expense balances are the main reasons for the decrease in the year to date 2012 cash
position due to operating activities. The remaining decrease of $1.4 million was attributable to cash expenses from
continuing operations and others movements in working capital.
Net cash inflows from investing activities during year 2012 were $34.6 million compared to cash outflows in the amount
of $119.7 million in the year 2011. The main components of cash inflows in 2012 were net proceeds of $53.3 million
received on the sale of the Taza Block and other property plant and equipment, $5 million cash held back from Aspect
as security for potential settlement by GEP of costs owed by Aspect and a $1.3 million reimbursement of intangible
costs, and cash outflows due to spending of $16.1 million on the Atrush Block appraisal work program, $6.2 million on
Taza Block exploration costs and $2.9 million on operational and support costs.
The Company received $10 million in cash from finance activities during the nine months of 2012 through an April 2012
debenture financing agreement with two investment companies who jointly are principal shareholders of the
Company. The loan was repaid in full in August 2012. The investment companies received an equity based financing fee
in respect of the loan which has been expensed as a finance cost and which had no effect on the cash position of the
Company.
The share based payments reserve increased by $8 in the year 2012 (2011: decrease of $140) due to share based
payments expense of $8 incurred during the period ($2011: $264). There were no stock options exercised during this
period (2011: 1,301,666 options exercised at cost of $404). 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 from the share based payments reserve to share capital.
The Company does not currently generate revenues and corresponding cash flows from its oil exploration and
development operations. The Company has relied upon the issuance of common shares, and proceeds from asset sales
and loans 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.
Commitments
Production Sharing Contracts (“PSCs”)
ShaMaran holds 100% of the issued shares of GEP which held at December 31, 2012 a 26.8% working interest in the
Atrush Block PSC, with TAQA then holding a 53.2% interest and Marathon holding the remaining 20% interest. On
March 12, 2013 the KRG exercised its option to acquire a 25% interest in the PSC subsequent to which the Company
holds a 20.1% direct interest in the PSC.
13
At December 31, 2012 GEP was responsible for 26.8% of the costs incurred in executing the exploration and
development work programs on the Atrush Block.
The PSC contemplates minimum financial commitments during the first exploration sub‐period and also requires the
Contractor to fund certain community development, personnel, training, environmental, and technological assistance
projects during the period over which the contract is in effect. All qualifying petroleum costs incurred by the Contractor
shall be recovered from a portion of available petroleum production, defined under the terms of the PSC. All
modifications to the PSC are subject to the approval of the KRG.
As at December 31, 2012 the outstanding commitments of the Company were as follows:
As at December 31,
2013
4,767
103
4,870
2014
2015
Thereafter
‐
‐
‐
‐
‐
‐
‐
‐
‐
Total
4,767
103
4,870
Atrush Block
Office and other
Total commitments
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.
14
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.
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.
Risks and Uncertainties
The majority of ShaMaran’s assets are located in Kurdistan. ShaMar an 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.
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.
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.
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.
16
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, fair values of assets on acquisition of control, 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.
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 to evaluate 100% of the Company’s reserves and resource data at December 31, 2012.
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 COGEH.
17
The Company’s crude oil and natural gas contingent resources for the Company’s Atrush asset as of December 31, 2012
were estimated to be as follows:
COMPANY GROSS ‐ CONTINGENT RESOURCES ESTIMATED
As of December 31, 2012
MBBL, MMCF (1) (2) (3) (4)
Crude Oil (Mbbl)
Natural Gas (MMcf)
Total (Mboe)
Low
Estimate
(1C)
78,905
14,499
81,321
Best
Estimate
(2C)
122,253
23,044
126,093
High
Estimate
(3C)
191,039
37,568
197,301
Mean (2)
Estimate
130,219
24,939
134,375
There is no certainty that it will be commercially viable to produce any portion of the resources.
The statistical mean is provided in addition to the standard 1C, 2C and 3C resources categories.
Diluted Company Gross resources assuming a 25 percent Government back‐in are based on a 20.1 percent working interest share of the property gross
resources. This option was exercised by the KRG on March 12, 2013.
6 Mcf is equivalent to 1 boe.
COMPANY GROSS ‐ PROSPECTIVE RESOURCES ESTIMATED
As of December 31, 2012
MBBL, MMCF (1) (2) (3) (4)
Crude Oil (Mbbl)
Condensate (Mbbl)
Natural Gas (MMcf)
Total (Mboe)
Unrisked
Low
Estimate
6,009
857
13,179
9,063
Unrisked
Best
Estimate
12,103
5,362
42,857
24,608
Unrisked
Mean
Estimate
14,057
9,313
62,190
33,735
Unrisked
High
Estimate
24,393
22,357
135,123
69,270
Risked (2)
Mean
Estimate
2,910
1,252
8,450
5,570
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.
Diluted Company Gross resources assuming a 25 percent Government back‐in are based on a 20.1 percent working interest share of the property gross
resources. This option was exercised by the KRG on March 12, 2013.
6 Mcf is equivalent to 1 boe.
In summary, the changes in Gross Contingent Resources for the Atrush field by category between 2011 and 2012 are
(MMBOE):
2011
2012
% change
Low
Estimate
(1C)
55.4
81.3
+46%
Best
Estimate
(2C)
93.6
126.1
+35%
High
Estimate
(3C)
163.4
197.3
+21%
Mean
Estimate
103.1
134.4
+30%
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.
18
Outlook
The outlook to the end of the year 2013 is as follows:
Atrush Block
The Operator (TAQA) is currently in the process of preparing a Field Development Plan (“FDP”) which is required to be
submitted to the Atrush Block Management Committee within 180 days following the Declaration of Commercial
Discovery, submitted on November 7, 2012. The FDP will outline the revised general forward plan for the block.
The Atrush‐3 appraisal well is expected to spud during March 2013. The well is located approximately 5km east of the
Atrush‐2 well. The drilling rig will be moved from the Atrush‐1 well site to the Atrush‐3 location. The Atrush‐3 well is an
important stepout from the previous two Atrush wells. In particular, the well is targeting the Oil Water Contact / Free
Water Level in the reservoir section.
There are plans to drill two additional wells in 2013. Technical discussions on the final location of the Atrush‐4 and
Atrush‐5 wells are underway.
The 3D seismic acquisition program which covered the entire Atrush block and adjoining Swara Tika discovery in the
Sarsang Block was completed on August 11, 2012. Final processing of the complete 3D seismic survey is expected in the
first quarter of 2013. Further processing is expected during 2013 with the specific purpose on enhancing the data for
the development drilling program.
New Ventures
As part of its normal business the Company continues to evaluate new opportunities in the MENA region.
Budget
The Board of Directors approved a budget for the year 2013 which includes net capital spending on the Atrush Block
appraisal program and G&A support and corporate costs totaling $30.8 million.
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. A
number of major international oil companies, including Exxon, Chevron, Total and Gazprom, have acquired properties in
Kurdistan over the last year. In addition, there have been a number of recent and significant discoveries in this region
now undergoing appraisal and development.
19
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.
20
Auditor’s Report
15 March 2013
Independent Auditor’s Report
To the Shareholders of ShaMaran Petroleum Corp
To the Shareholders of ShaMaran Petroleum Corp
ShaMaran Petroleum Corp., which
We have audited the accompanying consolidated financial statements of ShaMaran
We have audited the accompanying consolidated financial statements of
comprise the consolidated balance sheet as at 31 December 2012 and 31 December 2011 and the Consolidated
comprise the consolidated balance sheet as at 31 December 2012 and 31 December 2011 and the Consolidated
comprise the consolidated balance sheet as at 31 December 2012 and 31 December 2011 and the Consolidated
Statement of Comprehensive Income, Consolidated Statement of Changes in Equity and Consolidated
Statement of Comprehensive Income, Consolidated Statement of Changes in Equity and Consolidated
Statement of Comprehensive Income, Consolidated Statement of Changes in Equity and Consolidated
Statement of Cash Flows for the years ended 31 December 2012 and 31 December 2011, and the related notes
years ended 31 December 2012 and 31 December 2011, and the related notes
years ended 31 December 2012 and 31 December 2011, and the related notes
including a summary of significant accounting policies and other explanatory information.
including a summary of significant accounting policies and other explanatory information.
including a summary of significant accounting policies and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management’s responsibility for the consolidated financial statements
le for the preparation and fair presentation of these consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements
le for the preparation and fair presentation of these consolidated financial statements
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
dated financial statements 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 consoli
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
in accordance with Canadian Generally Accepted Auditing Standards. Those standards
in accordance with Canadian Generally Accepted Auditing Standards. Those standards
conducted our audits in accordance with Canadian Generally Accepted Auditing Standards. Those standards
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
from material misstatement.
assurance about whether the consolidated financial statements are free from material misstatement.
assurance about whether the consolidated financial statements are free
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
the risks of material misstatement of the consolidated financial statements, whether due to fraud
the risks of material 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
preparation and fair presentation of the consolid
ated financial statements in order to design audit procedures
preparation and fair presentation of the consolidated financial statements in order to design audit procedures
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 appropria
teness of accounting policies used
An audit also includes evaluating the appropriateness of accounting policies used
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.
is sufficient and appropriate 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
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
liability partnership registered 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
liability partnership registered in England with registered number OC303525. The registered office of
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.
21 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
2012 and 31 December 2011 and its financial
balance sheet of ShaMaran Petroleum Corp. as at 31 December 2012 and 31 December 2011 and its financial
balance sheet of ShaMaran Petroleum Corp. as at 31 December
performance and its cash flows for the years ended 31 December 2012 and 31 December 2011 in accordance
performance and its cash flows for the years ended 31 December 2012 and 31 December 2011 in accordance
performance and its cash flows for the years ended 31 December 2012 and 31 December 2011 in accordance
with International Financial Reporting Standards.
with International Financial Reporting Standards.
going concern
Emphasis of matter – going concern
In forming our opinion on the financial statements
, which is not modified, we have considered the adequacy of
n the financial statements, which is not modified, we have considered the adequacy of
the disclosures made in Note 2 to the financial statements concerning the 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
be 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
going concern. Although the Company is confident that it will
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 from the date of approval of the financial statements ind
committed funding for the next 12 months from the date of approval of the financial statements indicates the
committed funding for the next 12 months from the date of approval of the financial statements ind
existence of a material uncertainty which may cast significant doubt about the Company’s ability to continue as
existence of a material uncertainty which may cast significant doubt about the Company’s ability to continue as
existence of a material uncertainty which may cast significant doubt about the Company’s ability to continue as
a going concern. The financial statements do not include the adjustments that would result if the Company was
a going concern. The financial statements do not include the adjustments that would result if the Company
a going concern. The financial statements do not include the adjustments that would result if the Company
going concern.
unable to continue as a going concern.
PricewaterhouseCoopers LLP
Chartered 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
liability partnership registered 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
liability partnership registered in England with registered number OC303525. The registered office of
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.
22 SHAMARAN PETROLEUM CORP.
Consolidated Statement of Comprehensive Income
(Expressed in thousands of United States Dollars, except for per share data)
______________________________________________________________________________
Note
For the year ended December 31,
2011
2012
Expenses from continuing operations
General and administrative expense
Share based payments expense
Depreciation and amortisation expense
Share of income / (loss) of associate
Impairment recovery / (loss)
Gain on fair valuation of net assets of subsidiary
Gain on sale of asset
Relinquishment costs
Income / (loss) before finance items and income tax expense
Finance cost
Finance income
Net finance loss
Income / (loss) before income tax expense
Income tax expense
Net income / (loss) from continuing operations
Discontinued operations
Loss from discontinued operations
Net income / (loss) for the year
Other comprehensive income / (loss):
Currency translation differences
Total other comprehensive income / (loss)
6
20
16
8
16
9
7
10
11
12
13
(2,852)
(8)
(183)
129,000
1,814
102,735
1,100
(25,732)
205,874
(719)
359
(360)
205,514
(89)
205,425
(61)
205,364
26
26
(1,082)
(264)
(221)
(271)
(207,504)
-
-
-
(209,342)
(1,777)
518
(1,259)
(210,601)
(137)
(210,738)
(201)
(210,939)
(23)
(23)
Total comprehensive income / (loss) for the year
205,390
(210,962)
Income / (loss) in dollars per share:
Continuing operations
Basic and diluted
Discontinued operations
Basic and diluted
Continuing and discontinued operations
Basic and diluted
19
19
0.25
-
0.25
(0.31)
-
(0.31)
The accompanying notes are an integral part of these consolidated financial statements.
23
SHAMARAN PETROLEUM CORP.
Consolidated Balance Sheet
(Expressed in thousands of United States Dollars)
______________________________________________________________________________
As at December 31,
Note
2012
2011
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
Assets associated with discontinued operations
Total assets
Liabilities
Current liabilities
Accounts payable and accrued expenses
Current tax liabilities
Deferred liability
Non-current liabilities
Provisions
Liabilities associated with discontinued operations
Total liabilities
Equity
Share capital
Share based payments reserve
Cumulative translation adjustment
Accumulated deficit
Total equity
Total liabilities and equity
14
15
16
17
13
18
16
13
19
303,549
257
-
303,806
127
198
204
41,216
41,745
3
45,836
382
51,835
98,053
647
3,328
105
49,085
53,165
21
345,554
151,239
7,027
90
5,000
12,117
120
120
1,941
14,178
534,068
3,836
8
(206,536)
331,376
345,554
23,245
122
-
23,367
-
-
2,613
25,980
533,349
3,828
(18)
(411,900)
125,259
151,239
The accompanying notes are an integral part of these consolidated financial statements.
The financial statements were approved by the Board of Directors and authorized for issue on March 15, 2013 and
signed on its behalf:
/s/Cameron Bailey
J. Cameron Bailey, Director
/s/Keith Hill
Keith C. Hill, Director
24
SHAMARAN PETROLEUM CORP.
Consolidated Statement of Changes in Equity
(Expressed in thousands of United States Dollars)
______________________________________________________________________________
Share
capital
Share based
payments
reserve
Cumulative
translation
adjustment
Accumulated
deficit
Total
Balance at January 1, 2011
432,506
3,968
5
(200,961)
235,518
Total comprehensive loss for the year
-
-
(23)
(210,939)
(210,962)
Transactions with owners in their capacity as
as owners:
Private placements
Transaction costs
Share based payments expense
Share options exercised
Balance at December 31, 2011
Total comprehensive income for the year
Transactions with owners in their capacity as
as owners:
Equity based finance fee
Share based payments expense
101,953
(2,175)
-
1,065
100,843
533,349
-
719
-
719
-
-
264
(404)
(140)
3,828
-
-
8
8
Balance at December 31, 2012
534,068
3,836
-
-
-
-
-
-
-
-
-
-
101,953
(2,175)
264
661
100,703
(18)
(411,900)
125,259
26
205,364
205,390
-
-
-
8
-
-
-
719
8
727
(206,536)
331,376
The accompanying notes are an integral part of these consolidated financial statements.
25
SHAMARAN PETROLEUM CORP.
Consolidated Statement of Cash Flows
(Expressed in thousands of United States Dollars)
______________________________________________________________________________
Note
9
10
10,11
8
20
16
16
16
Operating activities
Net income / (loss) from continuing operations
Adjustments for:
Gain on sale of asset
Interest income
Interest expense on equity based finance fee
Foreign exchange (gain) / loss
Depreciation and amortisation expense
Income tax
Impairment (recovery) / loss
Share based payments expense
Share of (income) / loss of associate
Gain on fair valuation of net assets of subsidiary
Capitalized expenses
Changes in trade and other receivables
Changes in other current assets
Changes in inventories
Changes in accounts payable and accrued expenses
Changes in provisions
Cash used in discontinued operations
Net cash (outflows to) / inflows from operating activities
Investing activities
Net proceeds on sale of intangible assets
Purchases of intangible assets
Proceeds on reimbursement of intangible costs
Net proceeds on sale of property, plant and equipment
Purchases of property, plant and equipment
Investment in associate
Deferred liability
Interest received on cash deposits
Cash provided by discontinued operations
Net cash inflows from / (outflows to) investing activities
Financing activities
Net proceeds 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,
2011
2012
205,425
(210,738)
(1,100)
(26)
719
(333)
183
(32)
(1,814)
8
(129,000)
(102,735)
-
(99)
520
2,552
(16,550)
120
(715)
(42,877)
52,671
(8,395)
1,250
802
(595)
(16,110)
5,000
26
-
34,649
-
-
359
(7,869)
49,085
41,216
-
(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
The accompanying notes are an integral part of these consolidated financial statements.
26
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2012
(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 2600 Oceanic
Plaza, 1066 West Hastings Street, Vancouver, British Columbia V6E 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 a petroleum property located in the
Kurdistan Region of Iraq (“Kurdistan”).
2. Basis of preparation
These consolidated financial statements have been prepared in accordance with International Financial Reporting
Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”) and the IFRS Interpretations
Committee, 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 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 $41.2 million of cash and cash equivalents as at December 31, 2012 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.
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.
27
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2012
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
3.
Significant accounting policies
(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.
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.
28
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2012
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
(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.
If the Company acquires control of an entity in more than one transaction the related investment held by the
Company immediately before the last transaction when control is acquired is considered sold and immediately
repurchased at the fair value of the investment on the date of acquisition. Any difference between the fair value
and the carrying amount of the investment results in income or loss recognized in the statement of comprehensive
income.
(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.
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.
29
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2012
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
(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 commercial development has been approved for a contractual area. The E&E
assets are then assessed for impairment and the carrying value 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.
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.
30
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2012
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
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. Subsequent 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.
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.
31
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2012
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
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.
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, which have not been charged to exploration and evaluation assets for a particular
project, 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.
32
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2012
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
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 finance 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.
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.
33
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2012
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
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 flow estimates to settle the present obligation its carrying amount is
the present value of those cash flows.
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.
34
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2012
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
(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 9: Financial Instruments: Classification and Measurement – In 2011 the IASB issued an amended version of
IFRS 9 which provides additional guidance to classification and measurement of the Company’s financial assets, but
will not have an impact on classification and measurements of financial liabilities. Due to the amendment in 2011,
this standard is now required to be adopted for periods beginning January 1, 2015.
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.
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.
Amendments to IFRS 10, 11 and 12 on Transition Guidance – In 2012 the IASB issued clarification that the date of
initial application is the first day of the annual period in which IFRS 10 is adopted. Entities adopting IFRS 10 should
assess control at the date of initial application; the treatment of comparative figures depends on this assessment.
The amendment also requires certain comparative disclosures under IFRS 12 upon transition. The amendment is
effective for annual periods beginning on or after January 1, 2013, consistent with IFRS 10, 11 and 12.
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 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.
IAS 32: Offsetting Financial Assets and Financial Liabilities – In 2011 the IASB issued amendments to IAS 32
clarifying the meaning of “currently has a legal enforceable right to set-off” and the application of the IAS 32
offsetting criteria to settlement systems which apply gross settlement mechanisms that are not simultaneous.
These amendments are required to be adopted for periods beginning January 1, 2014.
The Company is currently assessing the impact, if any, that the adoption of these standards will have on its
financial statements.
35
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2012
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
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. Management 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 February 2013 the Company commissioned an independent reserves and resources report from McDaniel &
Associates to estimate the Company’s reserves and resources at December 31, 2012. 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.
(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 13.
(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,
2012 is shown in note 20.
36
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2012
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
(e) Fair valuation of net assets of subsidiary acquired
IFRS 3 Business Combinations requires the Company to record the fair value of the net assets and liabilities of
General Exploration Partners Inc (“GEP”) on December 31, 2012, which is the date the Company acquired control
of GEP. In determining the fair value the Company has considered a number of bases including the consideration
exchanged on December 31, 2013, available prices of comparable assets, the net present value of estimated cash
flows associated with the net assets and the asset value imputed by the public markets valuation, and relied on a
number of assumptions and estimates including future oil prices, productive capacity of the oil and gas asset, costs
to develop the oil and gas asset, relevant discount rates, and the probability of future taxes associated with the
asset.
5. 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 13 for
disclosure of the Company’s discontinued operations.
6. General and administrative expenses
General and administrative expenses incurred
General and administrative expenses capitalized as E&E assets
General and administrative expense
For the year ended December 31,
2011
2012
5,324
(2,472)
2,852
8,622
(7,540)
1,082
The Company capitalizes as E&E assets those general and administrative expenses supporting E&E activities which
relate to direct interests held in production sharing contracts. The Company has capitalized no general and
administrative expenses subsequent to the sale of its interest in the Taza Block PSC in August 2012 as it held no
direct interests in production sharing contracts for the remainder of the year. Refer also to notes 9 and 14.
7. Relinquishment costs
Relinquishment fees
Costs to windup Pulkhana and Arbat operations
Total relinquishment costs
For the year ended December 31,
2011
2012
25,000
732
25,732
-
-
-
On January 17, 2012 the Company signed agreements with the KRG to relinquish the Pulkhana and Arbat Block
PSCs. On January 25, 2012 the Company paid a total of $25 million to the KRG in accordance with the terms of the
agreements relieving the Company of all further obligations under the PSCs including its remaining minimum
financial commitments. Refer also to note 14.
37
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2012
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
8.
Impairment (recovery) / loss
Write down drilling inventory to net realizable value
Impairment (recovery) / loss on exploration and evaluation assets
Impairment (recovery) / loss on property, plant and equipment
Impairment (recovery) / loss
For the year ended December 31,
2011
2012
578
(2,347)
(45)
(1,814)
1,243
205,862
399
207,504
The above indicated losses and recoveries relate to the Pulkhana and Arbat production sharing contract
relinquishments. The Company has released excess accrued costs which were capitalized as exploration and
evaluation (E&E) assets resulting in a recovery in the current year of impairment losses previously recognized.
Refer also to notes 14, 15 and 17.
9. Gain on sale of asset
In August 2012 the Company sold the 20% direct interest which it held in the Taza Block PSC. The gain on the sale
of the Taza Block asset has been determined as follows:
Net proceeds on sale of asset
Costs of intangible assets and property, plant and equipment sold
Gain on sale of asset
For the year ended December 31,
2011
2012
53,266
(52,166)
1,100
-
-
-
The net proceeds on sale of asset was comprised of a $48 million purchase price plus reimbursement of $5.8
million in costs incurred on the Taza Block work program since April 1, 2012 less transaction related costs of $0.5
million. Refer also to notes 14 and 15.
10. Finance cost
Interest expense associated with equity based finance fee
Foreign exchange loss
Guarantee fees
Total finance costs
For the year ended December 31,
2011
2012
719
-
-
719
-
862
915
1,777
The interest expense relates to a loan entered into with two investment companies who jointly are principal
shareholders of the Company and represents the amortization of prepaid interest over the loan term. Refer also to
note 23.
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 year
against the United States dollar which is the reporting currency of the Company.
The guarantee fees related to a guarantee of the minimum financial obligations under the Pulkhana and Arbat
PSCs which was provided to the KRG by a related company on behalf of the Company. As a result of having
relinquished the Pulkhana and Arbat Blocks the guarantee is no longer required by the Company.
38
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2012
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
11. Finance income
Interest income
Foreign exchange gain
Total finance income
For the year ended December 31,
2011
2012
26
333
359
518
-
518
Interest income represents bank interest earned on cash and investments in marketable securities.
For the year ended December 31, 2012 the foreign exchange gain of $333 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.
12. Taxation
(a)
Income tax expense
The income tax expense 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,
2011
2012
Income / (loss) from continuing operations before income tax
Corporate income tax rate
Computed income tax expense / (recovery)
Increase / (decrease) resulting from:
Non-taxable foreign exchange (gain) / loss
Share issuance costs charged to share capital
Non-deductible compensation expense
Foreign tax rate differences
Effect of change in tax rates
Unrealized gain on fair valuation of assets
Change in valuation allowance
Effect of changes in foreign exchange rates
Other
Income tax expense from continuing operations
205,514
25.0%
51,379
(83)
(180)
2
(5,247)
27
(25,684)
(20,545)
(160)
580
89
(210,601)
26.5%
(55,809)
228
(583)
70
13,474
54
-
42,064
110
529
137
The Company’s income tax expense relates to a provision for income tax on service income generated in
Switzerland, and is calculated at the effective tax rate of 25% prevailing in this jurisdiction.
The components of the future income tax assets are as follows:
As at December 31,
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
2012
83,952
815
1,279
809
86,855
(86,855)
-
2011
104,218
1,098
1,279
784
107,379
(107,379)
-
39
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2012
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
(b)
Tax losses carried forward
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 tax losses carried forward
As at December 31,
2012
17,834
3,234
3,259
103,345
168,069
3,654
299,395
2011
15,948
3,134
4,199
207,138
168,008
3,654
402,081
The Canadian losses from operations may be used to offset future Canadian taxable income and will expire over
the period from 2017 to 2032. 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 2013 to 2016. The U.S. Federal losses are available to offset future taxable income in the United
States through 2032.
13. 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 provision
Operating loss
Gain on disposal of assets
Net loss attributable to discontinued operations
For the year ended December 31,
2011
2012
61
-
61
-
61
201
1,078
1,279
1,078
201
The major classes of assets and liabilities included in the consolidated balance sheet are as follows:
Assets
Prepaid expenses
Liabilities
Trade payables and accrued expenses
Asset retirement obligation provision
Net liabilities
As at December 31,
2012
3
3
355
1,586
1,941
1,938
2011
21
21
539
2,074
2,613
2,592
40
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2012
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
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.
14.
Intangible assets
At January 1, 2011
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
Impairment losses
Net book value
For the year ended December 31, 2012
Opening net book value
Additions including fair value adjustment
Disposal
Amortisation expense
Adjustment to impairment losses
Net adjustment on currency translation
Net book value
At December 31, 2012
Cost
Accumulated amortization
Impairment losses
Net book value
Exploration and
evaluation assets
Other intangible
assets
149,692
-
149,692
149,692
101,894
-
(205,861)
-
45,725
251,586
-
(205,861)
45,725
45,725
307,022
(51,571)
-
2,347
-
303,523
507,037
-
(203,514)
303,523
270
(70)
200
200
1
(97)
-
7
111
271
(160)
-
111
111
3
(1)
(88)
-
1
26
280
(254)
-
26
Total
149,962
(70)
149,892
149,892
101,895
(97)
(205,861)
7
45,836
251,857
(160)
(205,861)
45,836
45,836
307,025
(51,572)
(88)
2,347
1
303,549
507,317
(254)
(203,514)
303,549
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 impairment losses to expense all exploration and evaluation assets, 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 7 and 8.
The Company revised an estimate of costs relating to the Pulkhana Block which were reported as impairment
losses in the previous year resulting in a $2.3 million adjustment to impairment losses in the current year.
41
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2012
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
In August 2012 the Company sold its 20% direct interest in the Taza Block resulting in the disposal of $51.6 million
in related intangible assets. Refer also to note 9.
On December 31, 2012 the Company acquired control of General Exploration Partners Inc resulting in the addition
of $300.5 million of exploration and evaluation assets relating to the Atrush Block PSC. Refer also to note 16.
The net book value of exploration and evaluation assets at December 31, 2012 relates directly to the Atrush Block
in the amount of $300.5 million (2011: $nil. The interest in the Atrush Block was previously held through the
investment in associate) and an amount of $3.0 million (2011: $4.8 million) of other costs associated with ongoing
operations in Kurdistan.
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.
15. Property, plant and equipment
At January 1, 2011
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
Impairment losses
Net book value
For the year ended December 31, 2012
Opening net book value
Additions
Disposals
Depreciation expense
Impairment recovery / (losses)
Exchange differences
Net book value
At December 31, 2012
Cost
Accumulated depreciation
Impairment losses
Net book value
Oil and gas
equipment
Computer
equipment
Furniture
and office
equipment
-
-
-
-
678
(171)
(160)
(174)
-
173
445
(98)
(174)
173
173
758
(781)
(31)
46
-
165
199
(29)
(5)
165
203
(66)
137
137
36
(7)
(78)
(17)
5
76
232
(139)
(17)
76
76
-
(9)
(62)
4
-
9
199
(190)
-
9
217
(24)
193
193
13
(19)
(46)
(10)
2
133
203
(60)
(10)
133
133
-
(14)
(32)
(6)
2
83
165
(82)
-
83
Total
420
(90)
330
330
727
(197)
(284)
(201)
7
382
880
(296)
(201)
382
382
758
(804)
(125)
44
2
257
563
(301)
(5)
257
42
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2012
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
As a result of the relinquishment of the Pulkhana and Arbat PSCs the Company has determined that there is
impairment in value of certain property plant and equipment employed in the exploration operations associated
with these production sharing contracts and has recorded impairment losses on these assets. Refer also to note 8.
In August 2012 the Company sold its 20% direct interest in the Taza Block PSC resulting in the disposal of $0.6
million in related property, plant and equipment. Refer also to note 9.
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.
16. Acquisition of General Exploration Partners Inc.
General Exploration Partners Inc. ("GEP") completed two principal transactions in December 2012 (the
“Transactions”) resulting in the December 31, 2012 sale of a 53.2% participating interest in the Atrush Block to Abu
Dhabi National Energy Company PJSC ("TAQA") and the December 31, 2012 repurchase from Aspect Energy
International, LLC (“Aspect”) of the entire 66.5% shareholding interest which Aspect held in GEP. As a result of the
Transactions ShaMaran Ventures B.V., a wholly owned subsidiary of ShaMaran, became the sole remaining
shareholder of GEP and the Company has therefore acquired control of GEP.
The Company has recorded a deferred liability relating to funds held in trust in the amount of $5 million which will
be paid to Aspect on June 30, 2013 in respect of the repurchase of Aspect shares subject to the satisfactory
conclusion of certain closing conditions.
The acquisition has been accounted for using the acquisition method in accordance with IFRS 3 which requires that
the Company records the fair value on the date of acquisition of the net identifiable assets and liabilities of GEP
and consolidates these amounts with the other assets and liabilities of the Company. As the acquisition date
coincides with the balance sheet date there has been no incremental income or expense associated with the
acquisition in the current year. Had the Company acquired GEP on January 1, 2012 no material difference would
have resulted in the amount of consolidated income and expenses. The acquisition costs to the Company
associated with the Transactions were not material.
The Company has recorded a gain on the fair valuation of net assets of subsidiary in the amount of $102.7 million
which is the difference between the $299.7 million fair value of net identifiable assets acquired and liabilities
assumed and the $197.0 million book value of investment in associate at acquisition of control.
The fair values of assets acquired and liabilities assumed in the acquisition of GEP are as follows:
Fair value of previously held equity interest in GEP
Cash
Other current assets
Property, plant and equipment
Intangible assets - exploration and evaluation
Accounts payable and accrued expenses
Provisions
Deferred liability
Fair value of net identifiable assets acquired and liabilities assumed
Refer also to notes 14 and 15.
299,680
10,137
117
163
300,523
(6,140)
(120)
(5,000)
299,680
43
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2012
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
Prior to acquisition of control the Company held 33.5% of the fully diluted share capital of GEP and accounted for
this interest as investment in associate, included in the balance sheet as follows:
Cash contributions
Common share contributions
Acquisition costs
Share of income / (losses) since acquisition
Recovery of costs from partner
Book value of investment in associate
Book value of investment in associate transferred at acquisition of control
Total investment in associate
As at December 31,
2012
63,937
5,000
204
128,702
(898)
196,945
(196,945)
-
2011
47,827
5,000
204
(298)
(898)
51,835
-
51,835
The share of income / (loss) from associate included in the statement of comprehensive income is as follows:
Total income / (loss) of associate
Company’s 33.5% share of income / (loss) of associate
For the year ended December 31,
2011
2012
385,076
129,000
(809)
(271)
The income of associate in the current year substantially relates to the sale of a 53.2% interest in the Atrush Block
PSC.
17.
Inventories
Drilling and downhole equipment
Impairment losses
Total inventories
As at December 31,
2012
497
(299)
198
2011
4,570
(1,242)
3,328
The impairment in the value of certain inventory items relates to the termination of the drilling programs in the
Pulkhana and Arbat Blocks. Refer also to note 8.
18. Accounts payable and accrued expenses
Trade accounts payable
Accrued expenses
Net payables to joint venture partners
Total accounts payable and accrued expenses
As at December 31,
2012
811
5,494
722
7,027
2011
17,409
4,379
1,457
23,245
44
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2012
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
19. 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, 2011
Private placements, net of issuance costs
Share options exercised
Balance at December 31, 2011
Shares issued as equity based financing fee
Balance at December 31, 2012
Refer also to note 10.
Earnings per share
The earnings per share amounts were as follows:
Continuing operations:
Net income / (loss) from continuing operations, in dollars
Weighted average common shares outstanding during the year
Basic and diluted earnings / (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 income / (loss) from continuing and discontinued operations, in dollars
Weighted average common shares outstanding during the year
Basic and diluted earnings / (loss) per share from continuing and discontinued
operations, in dollars
Number of
shares
623,182,194
183,500,000
1,301,666
807,983,860
3,000,000
810,983,860
$000
432,506
99,778
1,065
533,349
719
534,068
For the year ended December 31,
2011
2012
205,421,406
810,221,565
0.25
(61,300)
810,221,565
-
(210,738,707)
677,001,536
(0.31)
(201,189)
677,001,536
-
205,360,106
810,221,565
(210,939,896)
677,001,536
0.25
(0.31)
20. Share based payments expense
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.
45
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2012
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
Movements in the Company’s share options outstanding are explained as follows:
Outstanding at January 1, 2011
Granted
Exercised
Forfeited
Outstanding at December 31, 2011
Expired
Forfeited
Outstanding at December 31, 2012
Share options exercisable:
At December 31, 2011
At December 31, 2012
Number of
share options
Weighted
average exercise
price
CAD
4,560,000
25,000
(1,301,666)
(50,000)
3,233,334
(450,000)
(160,000)
2,623,334
2,803,335
2,615,001
0.65
0.80
0.49
0.43
0.72
1.52
0.67
0.59
0.75
0.59
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
payments 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)
For the year ended December 31,
2011
2012
0%
3.20%
86.94%
4.12
CAD 0.53
0%
3.20%
86.94%
4.12
CAD 0.53
Share based payments expense for the year ended December 31, 2012 was $8 (2011: $264)
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.
21. Commitments
Atrush Block Production Sharing Contract (“PSC”)
ShaMaran holds 100% of the issued shares of General Exploration Partners Inc (“GEP”) which held on December
31, 2012 a 26.8% direct interest in the Atrush Block PSC. TAQA Atrush B.V., a subsidiary of Abu Dhabi National
Energy Company PJSC, held a 53.2% interest and Marathon Oil KDV B.V. held the remaining 20% interest with the
KRG then holding an option to acquire up to a 25% interest in the PSC prior to 180 days after declaration of a
commercial discovery. On March 12, 2013 the Contractor entities to the PSC were notified by the KRG that it had
exercised its option to acquire a 25% interest in the PSC. Subsequent to the exercise of the option by the KRG the
Company holds a 20.1% direct interest in the PSC.
At December 31, 2012 GEP was responsible for 26.8% of the costs incurred in executing the exploration and
development work programs on the Atrush Block.
46
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2012
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
The PSC contemplates minimum financial commitments during the first exploration sub-period and also requires
the Contractor to fund certain community development, personnel, training, environmental, and technological
assistance projects during the period over which the contract is in effect. All qualifying petroleum costs incurred by
the Contractor shall be recovered from a portion of available petroleum production, defined under the terms of
the PSC. All modifications to the PSC are subject to the approval of the KRG.
As at December 31, 2012, the outstanding commitments of the Company were as follows:
2013
4,767
103
4,870
As at December 31,
2014
2015
Thereafter
-
-
-
-
-
-
-
-
-
Total
4,767
103
4,870
Atrush Block
Office and other
Total commitments
22. Financial instruments
Financial assets
The financial assets of the Company on the balance sheet dates are as follows:
Other receivables
Other current assets, excluding prepaid expense
Cash and cash equivalents
Total financial assets
Cash, loans and receivables
2011
2012
204
-
41,216
41,420
105
68
49,085
49,258
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 as follows:
Accounts payable and accrued expenses
Deferred liability
Financial liabilities associated with discontinued operations
Current tax liabilities
Long term liabilities
Total financial liabilities
Note
18
13
2012
7,027
5,000
1,941
90
120
14,178
2011
23,245
-
2,613
122
-
25,980
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.
47
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2012
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
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. The Company has no debt at December 31, 2012 (2011: $nil).
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 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
Liabilities
2012
2011
2012
2011
168
268
42,165
685
274
279
618
346
48
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2012
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
Foreign currency sensitivity analysis
The Company is exposed to movements in CAD against the USD, the presentational currency of the Company. In
2011, funds were 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.
Statement of comprehensive income
Interest rate risk management
Assets
2012
2
2011
408
Liabilities
2012
(3)
2011
(6)
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 amounts of the Company’s financial assets recorded in the consolidated financial statements
represent the Company’s maximum exposure to credit risk.
49
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2012
(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 project moves 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.
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.
23. Related party transactions
Transactions with corporate entities
Namdo Management Services Ltd.
Mile High Holdings Ltd.
McCullough O’Connor Irwin LLP
Vostok Naphta Investment Ltd.
Lundin family
Lundin Petroleum AB
Total
Purchases of services
during the year
2012
314
37
95
26
719
524
1,715
2011
361
103
56
24
-
2,176
2,720
Amounts owing at the
reporting dates
2011
2012
28
19
22
-
-
75
144
7
19
14
-
-
78
118
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.
50
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2012
(Expressed in thousands of United States Dollars unless otherwise stated)
______________________________________________________________________________
The Company received a $10 million loan from the Lundin family through two investment companies who jointly
are principal shareholders of the Company (the "Lenders"). In connection with the loan the Company has issued to
the Lenders an aggregate of 3,000,000 common shares of the Company. The fair value of the shares issued has
been expensed as a finance cost. The loan was repaid in full in August 2012. Refer also to notes 10 and 19.
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, 2012 of $524 (2011: $2,176)
were comprised of G&G and other technical service costs of $138 (2011: $195), reimbursement for Company travel
and related expenses of $1 (2011: $611), office rental, administrative and building services of $385 (2011: $455). In
the year 2011 the Company paid $915 to Lundin relating to a guarantee provided to the KRG on behalf of the
Company.
Included within general and administrative expenses for the year 2011 are contributions totaling $1,025 made 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. No contributions were made by the Company to this
charitable foundation in the year 2012.
Key management compensation
The Company’s key management was comprised of its five directors and two executive officers consisting of
seven individuals who have been remunerated as follows:
Management’s salaries
Management’s short-term benefits
Management’s share based payments
Directors’ fees
Directors’ share based payments
Total
For the year ended December 31,
2011
2012
774
156
12
130
-
1,072
787
203
105
131
40
1,265
Short-term employee benefits include non-equity incentive plan compensation and other short-term benefits.
Share-based payments compensation represents the portion of the Company’s share based payments expense
incurred during the year attributable to the key management, accounted for in accordance with IFRS 2 ‘Share
Based Payments’.
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.
51
SHAMARAN PETROLEUM CORP.
DIRECTORS
CORPORATE INFORMATION
Keith C. Hill
Director, Chairman
Vancouver, British Columbia
Pradeep Kabra
Director, President & Chief Executive Officer
CORPORATE OFFICE
885 West Georgia Street
Suite 2000
Vancouver, British Columbia V6C 3E8
Telephone: +1-604-689-7842
Facsimile: +1-604-689-4250
Geneva, Switzerland
Website: www.shamaranpetroleum.com
Brian D. Edgar
Director
Vancouver, British Columbia
Gary S. Guidry
Director
Calgary, Alberta
Alexandre Schneiter
Director
Anieres, Switzerland
J. Cameron Bailey
Director
Calgary, Alberta
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
52