ShaMaran Petroleum Corp. Annual Report For the year ended December 31, 2013 SHAMARAN PETROLEUM CORP. MANAGEMENT DISCUSSION AND ANALYSIS For the year ended December 31, 2013 _____________________________________________________________________________________ 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 with an effective date of March 12, 2014. The MD&A should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2013 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 (“USD”). 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 stage 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 reports initial recognition of reserves (property gross of 58 MMbo 2P) as well as updates to estimated contingent resources (property gross of 518 MMboe 2C) and prospective resources (property gross unrisked best estimate of 245 MMboe) as of December 31, 2013 for the Atrush block. The reserves and resources estimates were provided by McDaniel & Associates Consultants Ltd, the Company’s independent qualified resources evaluator. On November 13, 2013 General Exploration Partners, Inc. a fully owned subsidiary of the Company, issued $150 million of senior secured bonds. Net proceeds from the bond will be used to fund the Company’s future capital expenditures related to the development of the Atrush Block. On October 7, 2013 the Company announced that the Kurdistan Regional Government (“KRG”) had approved Phase 1 of the Field Development Plan for the Atrush Block with an October 1, 2013 effective date for the commencement of the Development Period. The Atrush Block, located 85 kilometres northwest of Erbil and operated by TAQA Atrush B.V. is planned to have an initial production capacity of 30,000 barrels of gross oil per day with first oil expected by early 2015. The Atrush-4 Phase 1 development well spudded on October 20, 2013 and reached a total depth (“TD”) of 2,916 meters on January 23, 2014. Atrush-4 is currently being tested. The Atrush-3 appraisal well, located 6.5 kilometres to the east of the Atrush-2 appraisal well, was spudded on March 25, 2013 and reached TD of 1,806 meters on June 23, 2013 within the potential Phase 2 development area. The well confirmed the extension of the oil bearing Jurassic age Barsarin-Sargelu-Alan-Mus reservoir and extended the Deepest Proven Oil column by approx. 180 meters. Drill stem tests were conducted with hydrocarbons recovered to surface but due to equipment limitations accurate flow rates were not determined. Atrush-3 is currently suspended. On March 12, 2013 the Contractor entities to the Atrush Block Production Sharing Contract (“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 Summary of Current 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. On October 6, 2013 the DQE#31 drilling rig successfully plugged and abandoned the Atrush‐1 (“AT‐1”) exploration well. AT‐1 was a discovery well but was subsequently abandoned in October 2013 as it was unsuitable for long‐ term production. The well is being replaced by Atrush‐4 (“AT‐4”) and Atrush‐5 (“AT‐5”) which are the second and third Phase 1 development wells. AT‐4 has been drilled up to a maximum hole angle of 82 degrees targeting the untested up dip section of the Atrush accumulation. The well was spudded on October 20, 2013 and reached a TD of 2,916 meters after 94 days. The well is currently being tested. During the third quarter of the year 2013 operations on the Atrush‐3 (“AT‐3”) well were completed. After a sidetrack due to mechanical issues, the AT‐3 sidetrack well reached a final drilled depth of 1,806 meters on June 23, 2013. The well encountered an estimated oil column of 286 meters in the Jurassic age Barsarin‐Sargelu‐Alan‐ Mus formations (“BSAM”) reservoir (to the calculated Free Water Level) and successfully extended the Atrush accumulation 6.5 kilometres further to the east, while proving producible oil 180 meters deeper than previous wells thereby reducing the uncertainty on the Oil Water Contact/Free Water Level. The well is currently suspended. In June 2013 an interference test was successfully completed between the AT‐1 and Atrush‐2 (“AT‐2”) wells which provided valuable reservoir information. The wells, which are 3.1 kilometres apart, confirmed excellent pressure communication and multi Darcy horizontal permeability through the fracture system in the BSAM reservoir. Work on the Atrush Block Field Development Plan (“FDP”) culminated with its submission for approval to the KRG on May 6, 2013 which is, in accordance with the terms of the PSC, within 180 days after the Declaration of Commercial Discovery (“DCD”) made on November 7, 2012. The Company announced on October 7, 2013 that Phase 1 of the FDP for the Atrush Block was approved by the KRG. The initial 20‐year Development Phase (as defined in Clause 12.9 of the PSC) commenced on October 1, 2013. Orders for the production modules for the 30,000 barrels of gross oil per day (“bopd”) Phase 1 facilities were finalised in December 2013. Civil engineering at the selected facilities site commenced in early 2014. Location and Operational History The Atrush Block is located approximately 85 kilometres northwest of Erbil, the capital of the Kurdistan Region of Iraq, and is 269 square kilometres in area. To the south of the Atrush block is the Shaikan Block which is currently being developed by Gulf Keystone Petroleum Ltd. Immediately to the north of the Atrush Block is the Sarsang block where Hillwood International Energy has made discoveries in the Swara Tika wells. In addition MOL plc has announced an oil discovery in the Bakrman well on the Akri‐Bijeel block which is to the east of and on trend with the Atrush Block. Also, on trend discoveries to the west on the Sheikh Adi and Ber Behar Blocks have been announced by Genel Energy plc. The Atrush structure contains multiple proven and potential stacked oil reservoirs in the Cretaceous, Jurassic and Triassic sections which, 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 upside in the Atrush hanging wall Triassic, Atrush footwall reservoirs (Cretaceous, Jurassic and Triassic), and a northern extension of the Atrush oil accumulation at multiple levels into the Swara Tika structure. 2 In August 2010 the Company acquired a 33.5% shareholding in General Exploration Partners, Inc. (“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 Atrush B.V. (“TAQA”), a subsidiary of Abu Dhabi National Energy Company PJSC, who also assumed from GEP the operatorship of the Block, and repurchased the entire 66.5% shareholding which Aspect Energy International LLC (“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 is 20.1% after the KRG exercised on March 12, 2013 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 is 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 kilometres 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 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 completed and ShaMaran has completed its mapping for all prospective levels. The AT‐2 appraisal well was spudded on May 23, 2012 and drilled to a planned total depth of 1,750 meters in the Butmah formation ahead of schedule on July 10, 2012. The Company announced on September 13, 2012 the results of the comprehensive AT‐2 well testing program which confirmed through three separate DSTs the AT‐1 Jurassic oil discovery in the 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 and productive. GEP submitted in October 2012 to the Ministry of Natural Resources (“MNR”) of Kurdistan an AT‐2 Discovery Report giving notice of the additional discovery. In September 2012 the drilling rig was moved from the AT‐2 well to the AT‐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 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. In May 2013 the Operator (TAQA) submitted a FDP to the Atrush Block Management Committee within the required 180 days following the DCD. Phase 1 of the FDP was duly approved with an effective date October 1, 2013. The AT‐3 appraisal well was spudded on March 25, 2013 and, after a sidetrack due to mechanical issues, the well reached a final drilled depth of 1,806 meters on June 23, 2013. The well encountered an estimated oil column of 286 meters in the BSAM reservoir (to the calculated Free Water Level) and successfully extended the Atrush accumulation 6.5 kilometres further to the east, while proving producible oil 180 meters deeper than previous wells thereby reducing the uncertainty on the Oil Water Contact/Free Water Level. AT‐3 is currently suspended. 3 Following submission of the FDP the AT‐1 exploration well was determined to be unsuitable for long‐term production and was plugged and abandoned in October 2013. The AT‐4 development well was spudded on October 20, 2013 and reached final TD of 2,916 meters on January 23, 2014 after 94 days. The well is currently being tested. Recent Operations and Results Field Development Plan and First Phase Development Work on the Atrush Block FDP culminated with its submission for approval to the KRG on May 6, 2013 which is, in accordance with the terms of the PSC, within 180 days after the DCD made on November 7, 2012. The FDP was presented in detail to the MNR in June 2013. On October 7, 2013 the Company announced that Phase 1 of the FDP for the Atrush Block had been approved by the KRG. The initial 20‐year Development Phase (as defined in Clause 12.9 of the PSC) commenced on the October 1, 2013. FEED studies have been completed with First Oil planned for early 2015. Phase 1 will consist of three producers (AT‐2, AT‐4 and AT‐5) connected to a 30,000 bopd production facility. Orders for the production modules for the 30,000 Phase 1 facilities were finalised in December 2013. Civil engineering at the selected facilities site commenced in early 2014. Reserves and Resources The Company reports initial recognition of reserves as well as updates to estimated contingent and prospective resources for the Atrush block as at December 31, 2013 as provided by McDaniel & Associates Consultants Ltd (“McDaniel”), the Company’s independent qualified resources evaluator, in accordance with standards set out in the Canadian National Instrument NI 51‐101 and Canadian Oil and Gas Evaluation Handbook (“COGEH”). McDaniel estimates for reserves and resources have taken into account the results of the AT‐3 well and the latest remapping based on 3D seismic and the commitment to the first phase of development as defined by the KRG approved field development plan. For further discussion and disclosure of reserves and resources please refer also to the “Reserves and Resources” section below in this MD&A. Atrush‐1 / Atrush‐2 Interference Test In June 2013, an interference test was successfully completed between AT‐1 and AT‐2 which has provided valuable reservoir information. The wells, which are 3.1 kilometres apart, confirmed excellent pressure communication and multi Darcy horizontal permeability through the fracture system in the BSAM reservoir. Additional surface and bottom hole oil samples were taken from AT‐1 for analysis. Atrush‐3 / Atrush‐3 ST1 Appraisal Well The AT‐3 appraisal well was spudded on March 23, 2013 using the DQE31 drilling rig. The well is situated approximately 9.6 kilometres to the east of the AT‐1 discovery well and 6.5 kilometres to the east of the AT‐2 appraisal well. After a sidetrack due to mechanical issues, the well reached a final drilled depth of 1,806 meters on June 23, 2013. The well encountered an estimated oil column of 286 meters in the BSAM reservoir (to the calculated Free Water Level) and successfully extended the Atrush accumulation 6.5 kilometres further to the east, while proving producible oil 180 meters deeper than previous wells thereby reducing the uncertainty on the Oil Water Contact/Free Water Level. AT‐3 is currently suspended. 4 Atrush‐4 Appraisal / Development Well The AT‐4 well has been drilled at high deviation up‐dip towards the undrilled crest of the structure from the AT‐1 drill pad. The well spudded on October 20, 2013 following the successful plugging and abandonment of AT‐1 which it will replace. The well reached final TD of 2,916 meters on January 23, 2014 and the well is currently being tested. Atrush‐5 Appraisal / Development Well Planning is underway for the AT‐5 well, as the third Phase 1 producer. The well is expected to be drilled immediately after AT‐4 and is to be spudded in the second quarter 2014 from the AT‐1 well pad. Refer also to discussion under “Commitments” in this MD&A. SELECTED ANNUAL FINANCIAL INFORMATION The following is a summary of selected annual financial information for the Company: (In $000s, except per share data) Continuing operations General and administrative expense Share based payments expense Impairment (loss) / recovery Depreciation and amortisation expense Share of income / (loss) of associate Relinquishment costs Gain on sale of asset Gain on fair valuation of net assets of subsidiary Finance cost Finance income Income tax expense Net (loss) / income from continuing operations Discontinued operations Gain on release of excess site restoration provision Expenses Net income / (loss) from discontinued operations For the year ended December 31, 2012 2013 2011 (2,393) (882) (84) (65) ‐ ‐ ‐ ‐ (740) 28 (87) (4,223) 981 (46) 935 (2,852) (8) 1,814 (183) 129,000 (25,732) 1,100 102,735 (719) 359 (89) 205,425 ‐ (61) (61) (1,082) (264) (207,504) (221) (271) ‐ ‐ ‐ (1,777) 518 (137) (210,738) 1,078 (1,279) (201) Net (loss) / income (3,288) 205,364 (210,939) Basic (loss) / income in $ per share: Continuing operations Discontinued operations Diluted (loss) / income in $ per share: Continuing operations Discontinued operations (0.01) ‐ (0.01) (0.01) ‐ (0.01) 0.25 ‐ 0.25 0.25 ‐ 0.25 (0.31) ‐ (0.31) (0.31) ‐ (0.31) 5 Total assets Exploration and evaluation assets – net book value Working capital surplus Borrowings Shareholders’ equity Common shares outstanding (x 1,000) 2013 487,954 344,988 132,980 147,050 328,989 810,984 As at December 31, 2012 345,554 303,523 29,628 ‐ 331,376 810,984 2011 151,239 45,725 29,798 ‐ 125,259 807,894 Summary of Principal Changes in Annual Financial Information The Company has reported in 2013 a net loss of $3.3 million which was primarily driven by routine general and administrative expenses and share based payment expenses in respect of continuing operations, as well as the portion of uncapitalised interest expense on the Company’s senior secured bonds. These charges have been offset by a gain on the release of an excess site restoration provision associated with the Company’s discontinued operations in the United States. The changes in annual financial information are further explained in the sections below. Results of Continuing Operations The Company’s continuing operations are comprised of an appraisal 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 expense In $000 Salaries and benefits Management and consulting fees Legal, accounting and audit fees General and other office expenses Travel expenses Listing costs and investor relations General and administrative expense incurred General and administrative expense capitalised as E&E assets General and administrative expense For the year ended December 31, 2012 2013 2,819 1,011 541 514 298 290 5,473 (3,080) 2,393 2,710 885 415 637 406 271 5,324 (2,472) 2,852 The Company capitalises as exploration and evaluation (“E&E”) assets general and administrative expenses supporting E&E activities which relate to direct interests held in production sharing contracts. The general and administrative expenses incurred in 2013 are comparable to the amounts incurred in the prior year. The Company capitalised in 2013 a higher amount of general and administrative expenses relative to the amount capitalised in 2012 since it held a direct interest in the Atrush PSC for the entire year 2013 whereas in 2012 it held a direct interest in the Taza Block only, for approximately eight months. 6 Share based payments expense In $000 Share based payments expense For the year ended December 31, 2012 2013 882 8 The share based payments expense results from the vesting of stock options granted in the years 2010, 2011 and 2013. In the year 2013, 5,640,000 stock options were granted (year 2011: 25,000; year 2010: 1,390,000). No options were granted in the year 2012. 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. Impairment loss / (recovery) In $000 Write down drilling inventory to net realisable value Recovery of impairment loss on PP&E Assets Recovery of impairment loss on E&E Assets Impairment loss / (recovery) For the year ended December 31, 2012 2013 84 ‐ ‐ 84 578 (45) (2,347) (1,814) The impairment losses on inventory are primarily due to the liquidation and restocking of certain drilling inventories which will no longer be used in drilling programs associated with the relinquished Pulkhana and Arbat Blocks. The impairment recovery on property plant and equipment (“PP&E”) items during the year 2012 were due to changes in previous estimates of net realisable value which have occurred in the course of liquidating these assets which relate to the relinquished blocks. In the year 2012 the Company released excess accrued costs which were capitalised as E&E assets resulting in a recovery of impairment losses previously recognised. Depreciation and amortisation expense In $000 Depreciation and amortisation expense For the year ended December 31, 2012 2013 65 183 Depreciation and amortisation expense 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 of associate In $000 Income from investment in associate For the year ended December 31, 2012 2013 ‐ 129,000 The income from investment in associate in the year ended December 31, 2012 related to the Company’s pro‐rata portion of the net income of GEP in conducting petroleum operations on the Atrush Block in Kurdistan. Following the acquisition of control of GEP by the Company in December 2012 the Company is required by IFRS to now consolidate GEP’s financial results and position and therefore this interest is no longer reported as an investment in associate. 7 Relinquishment costs In $000 Relinquishment fees Costs to wind up Pulkhana and Arbat operations Total relinquishment costs For the year ended December 31, 2012 2013 ‐ ‐ ‐ 25,000 732 25,732 The relinquishment costs incurred in the year 2012 related to the Pulkhana and Arbat Block PSCs, to which the Company was previously a party, and which were relinquished to the KRG under two separate agreements signed on January 17, 2012. Under the terms of the agreements to the Company paid to the KRG in January 2012 a total of $25 million in fees which relieved 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 were therefore expensed together with all costs associated with winding up operations on these 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, 2012 2013 ‐ ‐ ‐ 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, 2012 2013 ‐ 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 was 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 was no incremental income or expense associated with the acquisition in the year 2012. The Company 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 Finance cost In $000 Interest charges on bonds at coupon rate Amortisation of bond related transaction costs Interest expense on borrowings Foreign exchange loss Unwinding discount on decommissioning provision Interest expense associated with equity based finance fee Total finance costs before borrowing costs capitalised Borrowing costs capitalised as E&E assets Total finance costs For the year ended December 31, 2012 2013 2,252 78 2,330 49 1 ‐ 2,380 (1,640) 740 ‐ ‐ ‐ ‐ ‐ 719 719 ‐ 719 During the year 2013 the Company incurred interest expense relating to its $150 million of senior secured bonds which were issued in November 2013 and carry an 11.5% fixed semi‐annual coupon interest rate. The foreign exchange loss recorded in the year 2013 resulted primarily from holding net assets denominated in United States dollars in the Swiss subsidiary of the Group while the United States dollar weakened during the reporting period against Swiss Franc, the functional currency of the Swiss subsidiary. The interest expense incurred in 2012 relates to a loan entered into with two companies, who jointly are principal shareholders of the Company, and represents the amortisation of prepaid interest over the loan term. Finance income In $000 Interest income Foreign exchange gain Total finance income For the year ended December 31, 2012 2013 28 ‐ 28 26 333 359 Interest income represents bank interest earned on cash and investments in marketable securities. The increase in the amounts reported in the year ended December 31, 2013 relative to the amount reported in the comparable period of the year 2012 is primarily due to holding a higher average balance of interest generating funds relative to the amount held in the comparable period of the prior year. The foreign exchange gain in the year 2012 resulted primarily from holding cash and cash equivalents denominated in Canadian dollars while the Canadian dollar strengthened during the period against the United States dollar which is the reporting currency of the Company. Income tax expense In $000 Income tax expense For the year ended December 31, 2012 2013 87 89 Income tax expense relates to provisions for income taxes on service income generated in Switzerland which is determined on the basis of the incurred cost of the related services. The amount reported in the year ended December 31, 2013 has decreased slightly relative to the amount reported in the comparable period of 2012 due to lower service costs incurred in the current year. 9 Results of Discontinued Operations The main components of discontinued operations are explained as follows: Gain on release of excess site restoration provision In $000 Gain on release of excess site restoration provision For the year ended December 31, 2012 2013 981 ‐ In December 2013 the Company released an excess site restoration provision as the total cost to complete this work is expected to be less than the amount previously estimated. Expenses In $000 Legal, accounting and audit fees General and other office expenses Total expenses For the year ended December 31, 2012 2013 35 11 46 32 29 61 The decrease in fees and expenses in the year of 2013 relative to the amounts incurred in the same period in 2012 is due to the reduction in activity associated with the Company’s United States based operations following the sale in 2009 of the properties located there. The professional and general fees which the Company continues to incur are related to the decommissioning and windup of the interests it held in the United States. Capital Expenditures on Exploration and Evaluation Assets The net book value of the Company’s E&E assets at December 31, 2013 relate directly to the Atrush Block in the amount of $342.0 million, which includes $9.3 million of advances resulting from payments made on behalf of a partner in the Atrush Block, and an amount of $3.0 million of other costs associated with ongoing operations in Kurdistan. The movements in E&E during the years 2013 and 2012 are explained as follows: In $000 Movements during the year: Opening net book value, January 1 Additions Disposals Adjustment to impairment losses Net book value, December 31 At December 31: Cost Accumulated amortisation Impairment losses Net book value For the year ended December 31, 2012 2013 303,523 41,465 ‐ ‐ 344,988 548,502 ‐ (203,514) 344,988 45,725 307,022 (51,571) 2,347 303,523 507,037 ‐ (203,514) 303,523 The additions to E&E assets during the year 2013 of $41.5 million were comprised of Atrush drilling and field development activity costs totalling $35.1 million, capacity building and other PSC related payments of $1.7 million, borrowing costs capitalised of $1.6 million, and general and administrative costs relating to Atrush Block E&E activities totalling $3.1 million. 10 The additions to E&E assets during the year 2012 of $307.0 million were principally due to the addition of $300.5 million of E&E assets fair valued and related to GEP’s interest in the Atrush Block PSC at December 31, 2012. The Company was required by IFRS 3 to record the fair value of GEP’s net identifiable assets and liabilities on the date of acquisition. Prior to the acquisition the Company was carrying on its balance sheet as an investment in associate GEP related costs totalling $197.0 million. Also during the year 2012 the Company spent $5.3 million on Taza Block exploration activities $2.5 million on general and administrative costs relating to its Taza Block E&E activities, and received from Aspect a $1.3 million reimbursement of intangible costs. 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. In the year 2012 the Company released excess accrued costs in respect of drilling programs associated with the relinquished Pulkhana and Arbat Blocks, which resulted in a recovery of $2.3 million of impairment losses previously recognized. Borrowings On November 13, 2013 GEP closed a $150 million senior secured bond issue denominated in USD resulting in net proceeds of $147 million after deducting $3.0 million in transaction related costs. Of the total proceeds from the bond issue $33.8 million were subscribed to by related parties. The bonds have a five year maturity without amortisation and carry an 11.5% fixed semi‐annual coupon and will be used to fund future capital expenditures related to the development of the Atrush Block. The movements in borrowings during the years 2013 and 2012 are explained as follows: In $000 As at December 31, Opening balance Net proceeds from senior secured bonds Accrued interest expense on bonds Cumulative amortisation of bond related transaction costs Ending balance ‐ Current portion: accrued interest expense on bonds ‐ Non-current portion: borrowings 2013 ‐ 146,972 2,252 78 149,302 2,252 147,050 2012 ‐ ‐ ‐ ‐ ‐ ‐ ‐ The bonds include an unconditional and irrevocable on‐demand guarantee on a joint and several basis from the Company and certain of the Company’s direct and indirect subsidiaries and, among other arrangements, agreements which pledge all of the ordinary shares of GEP and the Company’s Swiss service subsidiary, ShaMaran Services S.A., as security for GEP’s bond related obligations, as well as an internal credit facility agreement among the Company and certain of its subsidiaries setting out the terms and conditions for intra‐group credit to be made available amongst the parties. Under the terms of the bond agreement all bond proceeds are held in accounts pledged to the bond trustee as security, and may be accessed by the Company on prior authorisation of the bond trustee and provided the proceeds are to be employed for prescribed purposes, most notably to fund the financing, development and operation of the Atrush Block, to service 24 months of bond coupon interest expense, and to fund technical, management and administrative services of ShaMaran’s subsidiary companies up to $6 million per year over the term of the bond (limited to $1.5 million in 2013). Of the Company’s $142,588 total cash and cash equivalents at December 31, 2013, $124.8 million was held in accounts pledged to the bond trustee. 11 The remaining contractual obligation comprising repayment of principal and interest expense based on undiscounted cash flows at payment date, assuming the bonds are not early redeemed, are as follows: In $000 Less than one year Between two and five years Total As at December 31, 2013 17,250 216,050 233,300 2012 ‐ ‐ ‐ SELECTED QUARTERLY FINANCIAL INFORMATION The following is a summary of selected quarterly financial information for the Company: (In $000s, except per share data) For the quarter ended Continuing operations General and admin. expense Share based payments (expense) / rec. Depreciation and amortisation Share of income / (loss) of associate Relinquishment costs Impairment (loss) / recovery Gain on sale of asset Gain on fair valuation of assets Finance cost Finance income Income tax expense Net (loss) / inc. from continuing ops. Discontinued operations Gain on release of excess provision (Expense) / income Net (loss) / inc. from discontinued ops. Dec 31 2013 Sep 30 2013 Jun 30 2013 Mar 31 2013 Dec 31 2012 Sep 30 2012 Jun 30 2012 Mar 31 2012 (1,016) (157) (11) ‐ ‐ ‐ ‐ ‐ (693) 2 (24) (1,899) 981 (6) 975 (572) (159) (19) ‐ ‐ ‐ ‐ ‐ (64) 7 (13) (820) ‐ (13) (13) (355) (565) (16) ‐ ‐ (84) ‐ ‐ (23) 10 (10) (1,043) ‐ (7) (7) (450) (1) (19) ‐ ‐ ‐ ‐ ‐ ‐ 50 (40) (460) ‐ (20) (20) (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) 21 (26,110) ‐ (13) (13) ‐ (37) (37) Net (loss) / income (924) (833) (1,050) (480) 231,613 (110) 8 (26,147) 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) 12 Summary of Principal Changes in Fourth Quarter Financial Information In the fourth quarter of 2013 work on the Atrush Block development program continued. The net loss in this quarter was primarily driven by routine general and administrative expenses and share based payments expense in respect of continuing operations. The notable increase in finance cost relative to previous quarters in the current year related to the portion of uncapitalised interest expense on the Company‘s senior secured bonds. These expenses have been offset by a gain on the release of an excess site restoration provision associated with the Company’s discontinued operations in the United States. LIQUIDITY AND CAPITAL RESOURCES Working capital at December 31, 2013 was $133.0 million compared to $29.6 million at December 31, 2012. The overall cash position of the Company increased by $101.4 million during the year 2013 compared to a decrease in cash of $7.9 million during the comparable period of 2012. The main components of the movement in funds are discussed in the following paragraphs. The operating activities of the Company during the year 2013 resulted in a decrease in the cash position by $0.8 million compared to a decrease by $42.9 million in the year 2012. A net loss of $4.2 million offset by $3.4 million positive cash adjustments from working capital and non‐cash expenses are the main reasons for the decrease in the cash position over in the year 2013 due to operating activities. Net cash outflows to investing activities in the year 2013 were $44.8 million compared to cash inflows in the amount of $34.6 million in the comparable period of the year 2012. The main reasons for the cash outflows on investing activities in the current year relate to $39.8 million spent on the Atrush Block appraisal and development work program as well as a repayment in July 2013 of $5 million for a deferred liability relating to the December 2012 acquisition of control of GEP. The Company had net cash inflows from financing activities in the year 2013 of $147.0 million compared to $nil in the prior year. The cash inflows relate to the senior secured bond issued on November 13, 2013 by General Exploration Partners, Inc. with gross proceeds of $150.0 million, net of $3.0 million in transaction related costs, resulting in net proceeds of $147.0 million. Refer also to the discussion above under the “Borrowings” section of this MD&A. The share based payments reserve increased by $882 in the year 2013 (2012: $8) due entirely to share based payments expense incurred during the year. There were no stock options exercised during this period (2012: nil). 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 and gas appraisal and development operations. The Company has relied upon the issuance of common shares, proceeds from asset sales and, most recently, bonds, to finance its ongoing oil exploration, development and acquisition activities. The Company believes it currently has sufficient financial resources to fund its commitments under the current agreed work plan. Nevertheless the potential remains that the Company’s operations and finances could be significantly affected by adverse exploration and appraisal results, geopolitical events in the region, macroeconomic conditions or other risks. The potential that the Company’s financial resources are insufficient to fund its appraisal and development activities 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. 13 OUTSTANDING SHARE DATA There was no change in the year 2013 in the number of common shares of the Company outstanding which was 810,983,860 at December 31, 2012, December 31, 2013 and at the date of this MD&A. There were 8,263,334 stock options outstanding at December 31, 2013 under the Company’s employee incentive stock option plan outstanding which is an increase of 5,640,000 from the number outstanding at January 1, 2013. During the twelve months ended December 31, 2013 there were 5,640,000 stock options granted (2012: nil), no stock options expired (2012: 450,000). No stock options were forfeited (2012: 143,333) and no stock options were exercised (2012: nil) during the year 2013. There has been no further movement in stock options from December 31, 2013 to the date of this MD&A. The Company has no warrants outstanding. OFF BALANCE SHEET ARRANGEMENTS The Company has no off‐balance sheet arrangements. RELATED PARTY TRANSACTIONS In $000 Namdo Management Services Ltd. Mile High Holdings Ltd. McCullough O’Connor Irwin LLP Vostok Nafta Investment Ltd. Lundin Petroleum AB Lundin family Total Purchases of services during the year 2013 2012 Amounts owing at December 31, 2012 2013 243 113 26 13 518 ‐ 913 314 37 95 26 524 719 1,715 15 113 14 ‐ 89 ‐ 231 28 19 22 ‐ 75 ‐ 144 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 investor relation 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 Nafta 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 Sweden. The Company receives services from various subsidiary companies of Lundin Petroleum AB (“Lundin”), a shareholder of the Company. Lundin charges during the year ended December 31, 2013 of $518 (2012: $524) were comprised of G&G and other technical service costs of $144 (2012: $138) reimbursement for Company travel and related expenses of $nil (2012: $1), office rental, administrative and building services of $374 (2012: $385). In the year 2012 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. 14 Of the total proceeds raised on the November 2013 bond issue $33.8 million were subscribed to by related parties. All transactions with related parties are in the normal course of business and are made on the same terms and conditions as with parties at arm’s length. Refer also to discussion on bond financing under the following “Liquidity and capital resources” and “Borrowings” sections. COMMITMENTS Atrush Block Production Sharing Contract ShaMaran holds a 20.1% direct interest in the PSC through its wholly owned subsidiary GEP. TAQA is the operator with a 39.9% direct interest, Marathon holds a 15% direct interest, and the remaining 25% interest was acquired by the KRG on March 12, 2013. Under the terms of the PSC the development period is for 20 years with an automatic right to a five year extension and the possibility to extend for an additional five years. The PSC requires the Contracting companies to fund certain training and environmental assistance projects over the development period. 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. The Company is responsible for its pro‐rata share of the costs incurred in executing the development work program on the Atrush Block which commenced on October 1, 2013. As at December 31, 2013 the outstanding commitments of the Company were as follows: For the year ending December 31, 2014 68,022 99 68,121 2015 120 ‐ 120 2016 Thereafter 120 ‐ 120 2,050 ‐ 2,050 Total 70,312 99 70,411 Atrush Block Office and other Total commitments PROPOSED TRANSACTIONS The Company had no significant transactions pending at March 12, 2014. CRITICAL ACCOUNTING ESTIMATES AND ACCOUNTING POLICIES Accounting Estimates The consolidated financial statements of the Company have been prepared by management using 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 utilised 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. 15 New Accounting Standards The Company has adopted effective January 1, 2013 on a prospective basis the following new and revised IFRS, along with any consequential amendments. These changes were made in accordance with the applicable transitional provisions. IFRS 10: Consolidated Financial Statements, replaces the guidance on control and consolidation in IAS 27, Consolidated and Separate Financial Statements, and SIC‐12, Consolidation – Special Purpose Entities. IFRS 10 requires consolidation of an investee only if the investor possesses power over the investee, has exposure to variable returns from its involvement with the investee and has the ability to use its power over the investee to affect its returns. Detailed guidance is provided on applying the definition of control. The accounting requirements for consolidation have remained largely consistent with IAS 27. The Company assessed its consolidation conclusions on January 1, 2013 and determined that the adoption of IFRS 10 did not result in any change in the consolidation status of any of the interests currently held in other entities. IFRS 11: Joint Arrangements, was issued in 2011 by the IASB and 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 Company assessed its joint arrangement conclusions on January 1, 2013 and determined that the adoption of IFRS 11 did not result in any changes. IFRS 12: Disclosure of Interests in Other Entities, aggregates and amends disclosure requirements included within other standards to create a comprehensive disclosure standard to address the requirements for subsidiaries, joint arrangements and associates including the reporting entity’s involvement with other entities. It also includes the requirements for unconsolidated structured entities (i.e. special purpose entities). Additional information on interests in other entities has been disclosed in the notes to the Company’s Consolidated Financial Statements. IFRS 13: Fair Value Measurement, provides a single framework for measuring fair value. The measurement of the fair value of an asset or liability is based on assumptions that market participants would use when pricing the asset or liability under current market conditions, including assumptions about risk. Under IFRS 13 the fair value of a liability must reflect the effect of non‐performance risk, which includes an entity’s own credit risk. The adoption of IFRS 13 did not require any adjustments to the valuation techniques used by the Company to measure fair value and did not result in any measurement adjustments as at January 1, 2013. Additional information on fair value measurement has been disclosed in the notes to the Company’s Consolidated Financial Statements. The Company has adopted the amendments to IAS 1, Presentation of Financial Statements which require the Company to group other comprehensive income items by those that will be reclassified subsequently to profit or loss and those that will not be reclassified. These changes did not result in any adjustments to other comprehensive income or comprehensive income. Accounting Standards Issued But Not Yet Applied Standards and interpretations issued but not yet effective up to the date of issuance of the financial statements are listed below. This listing of standards and interpretations issued are those that the Company reasonably expects to have an impact on disclosures, financial position or performance when applied at a future date. 16 IFRS 9: Financial Instruments ‐ Classification and Measurement, addresses the classification, measurement and recognition of financial assets and financial liabilities. IFRS 9 was issued in November 2009 and amended in October 2010. It replaces the parts of IAS 39 that relate to the classification and measurement of financial instruments. IFRS 9 requires financial assets to be classified into two measurement categories: those measured at fair value and those measured at amortized cost. The determination is made at initial recognition. The classification depends on the entity’s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the IAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity’s own credit risk is recorded in other comprehensive income rather than in net earnings, unless this creates an accounting mismatch. The effective date of this standard has not yet been established by the IASB. 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 and appraisal wells that are likely to result in proved reserves and costs of drilling and equipping development wells are capitalised and subject to annual impairment testing. Exploration well costs are initially capitalised 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 capitalised as long as sufficient progress is being made to assess the reserves and economic viability of the well and or related project. Capitalised 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 amortised 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 recognised 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. 17 RESERVES AND RESOURCE ESTIMATES The Company engaged McDaniel to evaluate 100% of the Company’s reserves and resource data at December 31, 2013. 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. The Company’s crude oil and natural gas reserves, contingent resources and prospective resources for the Company’s Atrush asset as of December 31, 2013 were estimated to be as follows: Reserves Summary – Atrush Phase 1 Development As of December 31, 2013 Mbbl, (1) (2) (3) Reserves Category: Light/Medium Oil (Mbbl) Total Proved Reserves (1P) Probable Reserves Proved and Probable Reserves (2P) Possible Reserves Proved + Probable and Possible Reserves (3P) Property Gross 30,572 27,609 58,182 52,543 110,724 Company Gross(2) Company Net(3) 6,145 5,549 11,694 10,561 22,256 4,116 2,283 6,399 2,904 9,304 (1) (2) (3) Reserves are based on the KRG approved Phase 1 Atrush development comprising a 30,000 bpd facility and 3 producers (AT‐2, AT‐4 and AT‐5). Company gross reserves are based on Company working interest share of the property gross reserves. Company net reserves are based on Company share of total cost and profit revenues and the income tax paid on behalf of Company. The updated estimates of contingent resources for the Atrush block are as follows: Contingent Resources Summary – Atrush Jurassic Oil Discovery* As of December 31, 2013 (1) (2) (3) (4) * Barsarin, Sargelu, Alan, Mus (“BSAM”), Adaiyah and Butmah formations, in addition to the volumes assigned to reserves. Property Gross Crude Oil (Mbbl) Natural Gas (MMcf) Total (Mboe) (6) Company Gross Crude Oil (Mbbl) Natural Gas (MMcf) Total (Mboe) (6) Low Estimate (1C) Best Estimate (2C) High Estimate (3C) 388,804 90,289 403,852 78,150 18,148 81,174 497,833 122,585 518,263 100,064 24,640 104,171 618,027 165,857 645,669 124,223 33,337 129,780 (1) (2) (3) (4) (5) (6) There is no certainty that it will be commercially viable or technically feasible to produce any portion of the resources. These are unrisked contingent resources that do not take into account the chance of commerciality. Contingent resources were estimated by subtracting the reserves from the total recoverable resources. Total based on the probabilistic aggregation of zones within the Atrush field and as such does not equal the arithmetic sum of the individual zones. Company gross resources are based on Company working interest share of the property gross resources. 6 Mcf is equivalent to 1 BOE. 18 The resources included in the table above are classified as contingent as the associated project(s) are dependent upon the results of the Atrush Phase 1 development; this first phase of development should, together with further appraisal drilling, narrow the uncertainty in the contingent resources estimates and help determine if their development is economic. The updated estimates of prospective resources for the Atrush block are as follows: Prospective Resources Summary – Atrush Block * As of December 31, 2013 (1) (2) (3) * Comprising remaining potential in the Atrush Hanging Wall (Triassic), Atrush Footwall (Cretaceous, Jurassic and Triassic) and extension of the Swara Tika structure into the Atrush block (Jurassic and Triassic). Unrisked Low Estimate Unrisked Best Estimate Unrisked Mean Estimate Unrisked High Estimate Property Gross Crude Oil (Mbbl) Condensate (Mbbl) Natural Gas (MMcf) Total (Mboe) (5) Company Gross (4) Crude Oil (Mbbl) Condensate (Mbbl) Natural Gas (MMcf) Total (Mboe) (5) 121,425 8,741 141,366 153,727 24,406 1,757 28,415 30,899 173,194 28,327 258,352 244,580 34,812 5,694 51,929 49,161 180,165 36,173 289,988 264,670 36,213 7,271 58,288 53,199 247,211 72,890 481,107 400,285 49,689 14,651 96,702 80,457 Risked (2) Mean Estimate 60,479 6,766 61,445 77,485 12,156 1,360 12,350 15,575 (1) (2) (3) (4) (5) There is no certainty that any portion of the prospective resources will be discovered. If discovered, there is no certainty that it will be commercially 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. Total based on the probabilistic aggregation of undiscovered pools within the field/prospect. Company gross resources are based on Company working interest share of the property gross resources. 6 Mcf is equivalent to 1 BOE. Risks in estimating resources: There are a number of uncertainties inherent in estimating the quantities of reserves and resources including factors which are beyond the control of the Company. Estimating reserves and resources is a subjective process and the results of drilling, testing, production and other new data subsequent to the date of an estimate may result in revisions to original estimates. Reservoir parameters may vary within reservoir sections. The degree of uncertainty in reservoir parameters used to estimate the volume of hydrocarbons, such as porosity, net pay and water saturation, may vary. The type of formation within a reservoir section, including rock type and proportion of matrix and or fracture porosity, may vary laterally and the degree of reliability of these parameters as representative of the whole reservoir may be proportional to the overall number of data points (wells) and the quality of the data collected. Reservoir parameters such as permeability and effectiveness of pressure support may affect the recovery process. Recovery of reserves and resources may also be affected by the availability and quality of water, fuel gas, technical services and support, local operating conditions, security, performance of the operating company and the continued operation of well and plant equipment. 19 Additional risks associated with estimates of reserves and resources include risks associated with the oil and gas industry in general which include normal operational risks during drilling activity, development and production; delays or changes in plans for development projects or capital expenditures; the uncertainty of estimates and projections related to production, costs and expenses; health, safety, security and environmental risks; drilling equipment availability and efficiency; the ability to attract and retain key personnel; the risk of commodity price and foreign exchange rate fluctuations; the uncertainty associated with dealing with governments and obtaining regulatory approvals; performance and conduct of the operator; and risks associated with international operations. The Company’s project is in the appraisal and development stages and, as such, additional information must be obtained by further appraisal drilling and testing to ultimately determine the economic viability of developing any of the contingent or prospective resources. There is no certainty that the Company will be able to commercially produce any portion of its contingent or prospective resources. Any significant change, in particular, if the volumetric resource estimates were to be materially revised downwards in the future, could negatively impact investor confidence and ultimately impact the Company’s performance, share price and total market capitalisation. The Company has engaged professional geologists and engineers to evaluate reservoir and development plans; however, process implementation risk remains. The Company’s reserves and resource estimations are based on data obtained by the Company which has been independently evaluated by McDaniel & Associates Consultants Ltd. BOEs: BOEs may be misleading, particularly if used in isolation. A BOE conversion ratio of 6 Mcf : 1 Bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. FINANCIAL INSTRUMENTS The Company’s financial instruments currently consist of cash, cash equivalents, other receivables, borrowings, accounts payable and accrued expenses, accrued interest on bonds, provisions for decommissioning costs, and current tax liabilities. 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 recognised 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 realised or paid beyond twelve months of the balance sheet date, which is classified as non-current. Loans and receivables comprise of other 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 recognised at fair value and are subsequently measured at amortised cost using the effective interest method less any provision for impairment. Financial liabilities at amortised cost comprise of trade and other payables and are initially recognised at the fair value of the amount expected to be paid and are subsequently measured at amortised 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. 20 With the exception of borrowings, accrued interest on bonds and provisions for decommissioning costs, which have fair value measurements based on valuation models and techniques where the significant inputs are derived from quoted prices or indices, the fair values of the Company’s other financial instruments did not require valuation techniques to establish fair values as the instrument was either cash and cash equivalents or, due to the short term nature, readily convertible to or settled with cash and cash equivalents. The Company is exposed in varying degrees to a variety of financial instrument related risks which are discussed in the following sections: 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 characterised 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 currently exposed to significant commodity price risk. Foreign currency risk: The substantial portion of the Company’s operations require purchases denominated in USD, which is the functional and reporting currency of the Company and also the currency in which the Company maintains the substantial portion of its cash and cash equivalents. Certain of its operations require the Company to make purchases denominated in foreign currencies, which are currencies other than USD and correspond to the various countries in which the Company conducts its business, most notably, Swiss Francs and Canadian dollars. As a result, the Company holds some cash and cash equivalents in foreign currencies and is therefore exposed to foreign currency risk due to exchange rate fluctuations between the foreign currencies and the USD. The Company considers its foreign currency risk is limited because it holds relatively insignificant amounts of foreign currencies at any point in time and since its volume of transactions in foreign currencies is currently relatively low. The Company has elected not to hedge its exposure to the risk of changes in foreign currency exchange rates. Interest rate risk: 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. The Group is highly leveraged though financing at the project level, for the continuation of Atrush project, and at the corporate level due to the $150 million of senior secured bonds which were issued in November 2013. However, the Company is not exposed to interest rate risks associated with the bonds as the interest rate is fixed. Credit risk: 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 other receivables. 21 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 recognised 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. Liquidity risk: 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 development 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 further into the development stage, specific financing, including the possibility of additional 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 authorisations for expenditure on both operating and non‐operating projects to further manage capital expenditures. RISKS AND UNCERTAINTIES ShaMaran Petroleum Corp. is engaged in the exploration, development and production of crude oil and natural gas and its operations are subject to various risks and uncertainties which include but are not limited to those listed below. If any of the risks described below materialise the effect on the Company’s business, financial condition or operating results could be materially adverse. The following sections describe material risks identified by the Company; however, risks and uncertainties of which the Company is not currently aware or currently believes to be immaterial could develop and may adversely affect the Company’s business, financial condition or operating results. For more information on risk factors which may affect the Company’s business refer also to the discussion of risks under the “Reserves and Resources” and “Financial Instruments” sections of this MD&A above, as well as to the “Risk Factors” section of its Annual Information at www.shamaranpetroleum.com and on SEDAR at www.sedar.com, under the Company’s profile. Company’s web‐site Form, which available viewing both the for on is 22 Political and Regional Risks International operations: Oil and gas exploration, development and production activities in emerging countries are subject to significant political, social and economic uncertainties which are beyond ShaMaran’s control. Uncertainties include, but are not limited to, the risk of war, terrorism, criminal activity, expropriation, nationalisation, renegotiation or nullification of existing or future contracts, the imposition of international sanctions, a change in crude oil or natural gas pricing policies, a change in taxation policies, a limitation on the Company’s ability to export, and the imposition of currency controls. Should these uncertainties materialise they could result in adverse effects to the Company’s business including, but not limited to, increased costs associated with planned projects, impairment or termination of future revenue generating activities, impairment of the value of the Company’s assets and or its ability to meet its contractual commitments as they become due. Political instability: ShaMaran’s assets and operations are located in Kurdistan, a federally recognised semi‐ autonomous political region in Iraq, and may be influenced by political developments between Kurdistan and the Iraq federal government, as well as political developments of neighbouring states within MENA, Turkey, and surrounding areas. Kurdistan and Iraq have a history of political and social instability. As a result, the Company is subject to political, economic and other uncertainties that are not within its control including, but are not limited to, changes in government policies and legislation, adverse legislation or determinations or rulings by governmental authorities and disputes between the Iraq federal government and Kurdistan. The unfavourable outcome of political uncertainties could result in adverse effects to the Company’s assets and business including, but not limited to, increased costs associated with planned projects, impairment or termination of future revenue generating activities and impairment of the value of the Company’s assets and or its ability to meet its contractual commitments as they become due. International boundary disputes: Although the Kurdistan Region of Iraq is recognised by the Iraq constitution as a semi‐autonomous region, its geographical extent is neither defined in the Iraq constitution nor agreed in practice between the Federal Government and the Kurdistan Regional Government. There are ongoing differences between the KRG and the Federal Government regarding certain areas which are commonly known as “disputed territories”. The Company believes that its current area of operation is not within the “disputed territories”. Industry and Market Risks Exploration, development and production risks: ShaMaran’s business is subject to all of the risks and hazards inherent in businesses involved in the exploration, development, production and marketing of oil and natural gas, many of which cannot be overcome even with a combination of experience, knowledge and careful evaluation. The risks and hazards typically associated with oil and gas operations include drilling of unsuccessful wells, fire, explosion, blowouts, sour gas releases, pipeline ruptures and oil spills, each of which could result in substantial damage to oil and natural gas wells, production facilities, other property or the environment, or in personal injury. The Company is not fully insured against all of these risks, nor are all such risks are insurable and, as a result, these risks could still result in adverse effects to the Company’s business not fully mitigated by insurance coverage including, but not limited to, increased costs or losses due to events arising from accidents or other unforeseen outcomes including cleanup, repair, containment and or evacuation activities, settlement of claims associated with injury to personnel or property, and or loss of revenue as a result of downtime due to accident. General market conditions: ShaMaran’s business and operations depend upon conditions prevailing in the oil and gas industry including the current and anticipated prices of oil and gas and the global economic activity. A reduction of the oil price, a general economic downturn, or a recession could result in adverse effects to the Company’s business including, but not limited to, reduced cash flows associated with the Company’s future oil and gas sales. 23 Competition: The petroleum industry is intensely competitive in all aspects including the acquisition of oil and gas interests, the marketing of oil and natural gas, and acquiring or gaining access to necessary drilling and other equipment and supplies. ShaMaran competes with numerous other companies in the search for and acquisition of such prospects and in attracting skilled personnel. ShaMaran’s competitors include oil companies which have greater financial resources, staff and facilities than those of the Company. ShaMaran’s ability to increase reserves in the future will depend on its ability to develop its present property, to select and acquire suitable producing properties or prospects on which to conduct future exploration and to respond in a cost‐effective manner to economic and competitive factors that affect the distribution and marketing of oil and natural gas. Reliance on key personnel: ShaMaran’s success depends in large measure on certain key personnel and directors. The loss of the services of such key personnel could negatively affect ShaMaran’s ability to deliver projects according to plan and result in increased costs and delays. ShaMaran has not obtained key person insurance in respect of the lives of any key personnel. In addition, competition for qualified personnel in the oil and gas industry is intense and there can be no assurance that ShaMaran will be able to attract and retain the skilled personnel necessary for the operation and development of its business. Business Risks Risks associated with petroleum contracts in Iraq: The Iraq oil ministry has historically disputed the validity of the KRG’s production sharing contracts and, as a result indirectly, the Company’s right and title to its oil and gas assets. The KRG is disputing the claims and has stated that the contracts are compliant with the Iraq constitution. At the present time there is no assurance that the PSCs agreed with the KRG are enforceable or binding in accordance with ShaMaran’s interpretation of their terms or that, if breached, the Company would have remedies. The Company believes that it has valid title to its oil and gas assets and the right to explore for and produce oil and gas from such assets under the Atrush Block PSC. However, should the Iraq federal government pursue and be successful in a claim that the production sharing contracts agreed with the KRG are invalid, or should any unfavourable changes develop which impact on the economic and operating terms of the Atrush Block PSC, it could result in adverse effects to the Company’s business including, but not limited to, impairing the Company’s claim and title to assets held, and or increasing the obligations required, under the Atrush Block PSC. Government regulations, licenses and permits: The Company is affected by changes in taxes, regulations and other laws or policies affecting the oil and gas industry generally as well as changes in taxes, regulations and other laws or policies applicable to oil and gas exploration and development in Kurdistan specifically. The Company’s ability to execute its projects may be hindered if it cannot secure the necessary approvals or the discretion is exercised in a manner adverse to the Company. The taxation system applicable to the operating activities of the Company in Kurdistan is pursuant to the Oil and Gas Law governed by general Kurdistan tax law and the terms of its PSCs. However, it is possible that the arrangements under the PSCs may be overridden or negatively affected by the enactment of any future oil and gas or tax law in Iraq or Kurdistan which could result in adverse effects to the Company’s business including, but not limited to, increasing the Company’s expected future tax obligations associated with its activities in Kurdistan. Marketing, markets and transportation: The export of oil and gas and payments relating to such exports from Kurdistan remains subject to uncertainties which could negatively impact on ShaMaran’s ability to export oil and gas and receive payments relating to such exports. Further, ShaMaran’s ability to export and market 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 result in adverse effects to the Company’s business including, but not limited to, impairing the Company’s ability to export and sell oil and gas and receive full payment for all sales of oil and gas. 24 Default under the Atrush Block PSC and Atrush JOA: Should the Company fail to meet its obligations under the Atrush Block PSC and or Atrush Block joint operating agreement (“Atrush JOA”) it could result in adverse effects to the Company’s business including, but not limited to, a default under one or both of these contracts, the termination of future revenue generating activities of the Company and impairment of the Company’s ability to meet its contractual commitments as they become due. Kurdistan legal system: The Kurdistan Region of Iraq has a less developed legal system than that of many more established regions. This could result in risks associated with predicting how existing laws, regulations and contractual obligations will be interpreted, applied or enforced. In addition it could make it more difficult for the Company to obtain effective legal redress in courts in case of breach of law, regulation or contract and to secure the implementation of arbitration awards and may give rise to inconsistencies or conflicts among various laws, regulations, decrees or judgments. The Company’s recourse may be limited in the event of a breach by a government authority of an agreement governing the PSC in which ShaMaran acquires or holds an interest. Enforcement of judgments in foreign jurisdictions: The Company is party to contracts with counterparties located in a number of countries, most notably Kurdistan. Certain of its contracts are subject to English law with legal proceedings in England. However, the enforcement of any judgments thereunder against a counterparty will be a matter of the laws of the jurisdictions where counterparties are domiciled. Change of control in respect of PSC: The Atrush Block PSC definition of “change of control” in a Contractor includes a change of voting majority in the Contractor, or in a parent company, provided the value of the interest in the Atrush field represents more than 50% of the market value of assets in the Company. Due to the limited amount of other assets held by the Company this will apply to a change of control in GEP or any of its parent companies. Change of control requires the consent of KRG or it will trigger a default under the PSC. Project and Operational Risks Shared ownership and dependency on partners: ShaMaran’s operations are to a significant degree conducted together with one or more partners through contractual arrangements with the execution of the operations being undertaken by the operator in accordance with the terms of the Atrush JOA. As a result, ShaMaran has limited ability to exercise influence over the deployment of those assets or their associated costs and this could adversely affect ShaMaran’s financial performance. If the operator or other partners fail to perform, ShaMaran may, among other things, risk losing rights or revenues or incur additional obligations or costs in order to itself perform in place of its partners. If a dispute would arise with one or more partners such dispute may have significant negative effects on the Company’s operations relating to its projects. Security risks: Kurdistan and other regions in Iraq have a history of political and social instability which have culminated in security problems which may put at risk the safety of the Company’s personnel, interfere with the efficient and effective execution of the Company’s operations and ultimately result in significant losses to the Company. There have been no significant security incidents in the Company’s area of operation. Risks relating to infrastructure: The Company is dependent on access to available and functioning infrastructure (including third party services in Kurdistan) relating to the properties on which it operates, such as roads, power and water supplies, pipelines and gathering systems. If any infrastructure or systems failures occur or access is not possible or does not meet the requirements of the Company, the Company’s operations may be significantly hampered which could result in lower production and sales and or higher costs. 25 Environmental regulation and liabilities: Drilling for and producing, handling, transporting and disposing of oil and gas and petroleum by‐products are activities that are subject to extensive regulation under national and local environmental laws, including in those countries in which ShaMaran currently operates. The Company has implemented health, safety and environment policies since its incorporation, complies with industry environmental practices and guidelines for its operations in Kurdistan and is currently in compliance with these obligations in all material aspects. Environmental protection requirements have not, to date, had a significant effect on the capital expenditures and competitive position of ShaMaran. Future changes in environmental or health and safety laws, regulations or community expectations governing the Company’s operations could result in adverse effects to the Company’s business including, but not limited to, increased monitoring, compliance and remediation costs and or costs associated with penalties or other sanctions imposed on the Company for non‐compliance or breach of environmental regulations. Risk relating to community relations / labour disruptions: The Company’s operations may be located in or near communities that may regard operations as detrimental to their environmental, economic or social circumstances. Negative community reactions and any related labour disruptions or disputes could increase operational costs and result in delays in the execution of projects. Petroleum costs and cost recovery: Under the terms of the Atrush Block PSC the KRG is entitled to conduct an audit to verify the validity of incurred petroleum costs which the operator has reported to the KRG and is therefore entitled under the terms of the Atrush Block PSC to recover through cash payments from future petroleum production. No such audit has to date taken place. Should any future audits result in negative findings concerning the validity of reported incurred petroleum costs the Company’s petroleum cost recovery entitlement could ultimately be reduced. Legal claims and disputes: The Company may suffer unexpected costs or other losses if a counterparty to any contractual arrangement entered into by the Company does not meet its obligations under such agreements. In particular, the Company cannot control the actions or omissions of its partners in the Atrush Block PSC. If such parties were to breach the terms of the Atrush Block PSC or any other documents relating to the Company’s interest in the Atrush Block PSC, it could cause the KRG to revoke, terminate or adversely amend the Atrush Block PSC. Paying interest: Under the terms of the Atrush Block PSC, on exercise of its back‐in right, the KRG is required to pay its share of project development costs. The Contractors are currently paying the KRG costs and there is a risk that the Contractors may be exposed to fund the KRG share of project development costs. Uninsured losses and liabilities: Although the Company maintains insurance in accordance with industry standards to address risks relating to its operations, the insurance coverage may under certain circumstances not protect it from all potential losses and liabilities that could result from its operations. Availability of equipment and services: ShaMaran’s oil and natural gas exploration and development activities are dependent on the availability of third party services, drilling and related equipment and qualified staff in the particular areas where such activities are or will be conducted. Shortages of such equipment or staff may affect the availability of such equipment to ShaMaran and may delay and or increase the cost of ShaMaran’s exploration and development activities. Early stage of development: ShaMaran has conducted oil and gas exploration and development activities in Kurdistan for approximately four years. The current operations are in an appraisal and development stage and there can be no assurance that ShaMaran’s operations will be profitable in the future or will generate sufficient cash flow to satisfy its future commitments. 26 Financial and Other Risks Financial statements prepared on a going concern basis: The Company’s financial statements have been prepared on a going concern basis under which an entity is considered to be able to realise its assets and satisfy its liabilities in the ordinary course of business. ShaMaran’s operations to date have been primarily financed by debt and equity financing. The Company’s future operations are dependent upon the identification and successful completion of additional equity or debt financing or the achievement of profitable operations. There can be no assurances that the Company will be successful in completing additional financing or achieving profitability. The consolidated financial statements do not give effect to any adjustments relating to the carrying values and classification of assets and liabilities that would be necessary should ShaMaran be unable to continue as a going concern. Substantial capital requirements: ShaMaran anticipates making substantial capital expenditures in the future for the acquisition, exploration, development and production of oil and gas. ShaMaran’s results could impact its access to the capital necessary to undertake or complete future drilling and development programs. To meet its operating costs and planned capital expenditures, ShaMaran may require financing from external sources, including from the sale of equity and debt securities. There can be no assurance that such financing will be available to the Company or, if available, that it will be offered on terms acceptable to ShaMaran. If ShaMaran or any of its partners in the oil asset are unable to complete minimum work obligations on the Atrush Block PSC, this PSC could be relinquished under applicable contract terms. Dilution: The Company may make future acquisitions or enter into financings or other transactions involving the issuance of securities of the Company. If additional financing is raised through the issuance of equity or convertible debt securities, control of the Company may change and the interests of shareholders in the net assets of ShaMaran may be diluted. Tax legislation: The Company has entities incorporated and resident for tax purposes in Canada, the Cayman Islands, the Kurdistan Region of Iraq, the Netherlands, Switzerland and the United States of America. Changes in the tax legislation or tax practices in these jurisdictions may increase the Company’s expected future tax obligations associated with its activities in such jurisdictions. Capital and lending markets: As a result of general economic uncertainties and, in particular, the lack of risk capital available to the junior resource sector, the Company, along with other junior resource entities, may have reduced access to bank debt and to equity. As future capital expenditures will be financed out of funds generated from operations, bank borrowings if available, and possible issuances of debt or equity securities, the Company’s ability to do so is dependent on, among other factors, the overall state of lending and capital markets and investor and lender appetite for investments in the energy industry generally, and the Company’s securities in particular. To the extent that external sources of capital become limited or unavailable or available only on onerous terms, the Company’s ability to invest and to maintain existing assets may be impaired, and its assets, liabilities, business, financial condition and results of operations may be materially and adversely affected as a result. Recent distress in financial markets: In the future the Company is expected to require financing to grow its business. The recent distress affecting the financial markets and the possibility that financial institutions may consolidate or go bankrupt has reduced levels of activity in the credit markets which could diminish the amount of financing available to companies. The Company’s liquidity and its ability to access the credit or capital markets may also be adversely affected by changes in the financial markets and the global economy. Conflict of interests: Certain directors of ShaMaran are also directors or officers of other companies, including oil and gas companies, the interests of which may, in certain circumstances, come into conflict with those of ShaMaran. If and when a conflict arises with respect to a particular transaction, the affected directors must disclose the conflict and abstain from voting with respect to matters relating to the transaction. 27 Risks Related to the GEP’s Senior Secured Bonds Possible termination of PSC / Bond Agreement in event of default scenario: Should GEP default its obligations under the Bond Agreement GEP may also not be able to fulfil its obligations under the Atrush Block PSC and or Atrush JOA, with the effect that these contracts may be terminated or limited. In addition, should GEP default its obligations under the Atrush Block PSC and or Atrush JOA, with the effect that these contracts may be terminated or limited, GEP may also default in respect of its obligations under the Bond Agreement. Either default scenario could result in the termination of the Company’s future revenue generating activities and impair the Company’s ability to meet its contractual commitments as they become due. Ability to service indebtedness: GEP’s ability to make scheduled payments on or to refinance its obligations under the bonds will depend on GEP’s financial and operating performance which, in turn, will be subject to prevailing economic and competitive conditions beyond GEP’s control. It is possible that GEP’s activities will not generate sufficient funds to make the required interest payments which could, among other things, result in an event of default under the Bond Agreement. Significant operating and financial restrictions: The terms and conditions of the Bond Agreement contain restrictions on GEP’s and the Guarantors’ activities which restrictions may prevent GEP and the Guarantors from taking actions that it believes would be in the best interest of GEP’s business, and may make it difficult for GEP to execute its business strategy successfully or compete effectively with companies that are not similarly restricted. No assurance can be given that it will be granted the necessary waivers or amendments if for any reason GEP is unable to comply with the terms of the Bond Agreement. A breach of any of the covenants and restrictions could result in an event of default under the Bond Agreement. Mandatory prepayment events: Under the terms of the Bond Agreement the bonds are subject to mandatory prepayment by GEP on the occurrence of certain specified events, including if (i) the ownership in the Atrush Block is reduced to below 20.10% (ii) ShaMaran Petroleum Corp. ceases to indirectly own, or ShaMaran Ventures B.V. ceases to directly own, 100% of the shares in GEP (iii) GEP invests in any assets or enters into any other activities unrelated to the Atrush Block PSC or (iv) an event of default occurs under the Bond Agreement. Following an early redemption after the occurrence of a mandatory prepayment event, it is possible that GEP will not have sufficient funds to make the required redemption of bonds which could, among other things, result in an event of default under the Bond Agreement. OUTLOOK The outlook to the end of the year 2014 is as follows: Atrush Block Following the KRG approval of Phase 1 plans are being implemented to achieve First Oil of 30,000 bopd gross by early 2015. Testing of the AT‐4 appraisal/development well is expected to be completed during the first quarter of 2014. Drilling plans for the year 2014 include drilling of AT‐5, the third Phase 1 development well, followed by the Atrush‐6 well. Further testing of the AT‐3 well will also be conducted during 2014 following a planned re‐entry. The FEED for the Phase 1 Production Facilities was completed in October 2013. Orders for the production modules for the 30,000 bopd facilities were finalised in December 2013. Civil engineering at the selected facilities site commenced in early 2014. 28 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 2014 which includes net capital spending on the Atrush Block appraisal and development program and debt service and other costs totalling $101.0 million. The Company believes that based on the forecasts and projections they have prepared that its financial resources currently available will be sufficient for it to satisfy its contractual obligations and commitments under the agreed work program over the next 12 months. Nevertheless the potential remains that the Company’s financial resources will be insufficient to fund its obligations over the next 12 months. The Company has a number of financing possibilities which it believes it would be able to pursue if and when required. General The security situation in Kurdistan remains stable. The region continues to see 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 ExxonMobil, Chevron, Marathon, Repsol, Total and Gazprom, have acquired properties in Kurdistan over the last two years. A number of significant discoveries in this region continue to be reported and many are now undergoing appraisal and development. FORWARD LOOKING INFOMATION This report contains forward‐looking information and forward‐looking statements. Forward‐looking information concerns possible events or financial performance that is based on management’s assumptions concerning anticipated developments in 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. Information concerning the interpretation of drill results and reserve estimates also may be deemed to be forward‐looking information, as it constitutes a prediction of what might be found to be present if and when a project is actually developed. Forward‐looking statements are statements that are not historical and 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. 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 information and forward‐looking statements are based on the beliefs, expectations and opinions of management on the date the statements are made. Management is regularly considering and evaluating assumptions that will impact on future performance. Those assumptions are exposed to generic risks and uncertainties as well as risks and uncertainties that are specifically related to the Company’s operations. The Company assumes no obligation to update its forward‐looking information and forward‐looking statements in the future. For the reasons set forth above, investors should not place undue reliance on forward‐looking information and forward‐looking statements. 29 Auditor’s Report Auditor’s Report Auditor’s Report Auditor’s Report 12 March 2014 12 March 2014 12 March 2014 Independent Auditor’s Report Independent Auditor’s Report Independent Auditor’s Report Independent Auditor’s Report To the Shareholders of ShaMaran Petroleum Corp To the Shareholders of ShaMaran Petroleum Corp To the Shareholders of ShaMaran Petroleum Corp To the Shareholders of ShaMaran Petroleum Corp To the Shareholders of ShaMaran Petroleum Corp To the Shareholders of ShaMaran Petroleum Corp Corp., which Corp., which ShaMaran Petroleum We have audited the accompanying consolidated financial statements of ShaMaran Petroleum We have audited the accompanying consolidated financial statements of We have audited the accompanying consolidated financial statements of We have audited the accompanying consolidated financial statements of We have audited the accompanying consolidated financial statements of We have audited the accompanying consolidated financial statements of We have audited the accompanying consolidated financial statements of We have audited the accompanying consolidated financial statements of comprise the consolidated balance sheet as at 31 December 2013 and 31 December 2012 and the Consolidated comprise the consolidated balance sheet as at 31 December 2013 and 31 December 2012 and the Consolidated balance sheet as at 31 December 2013 and 31 December 2012 and the Consolidated balance sheet as at 31 December 2013 and 31 December 2012 and the Consolidated balance sheet as at 31 December 2013 and 31 December 2012 and the Consolidated balance sheet as at 31 December 2013 and 31 December 2012 and the Consolidated balance sheet as at 31 December 2013 and 31 December 2012 and the Consolidated balance sheet as at 31 December 2013 and 31 December 2012 and the Consolidated comprise the consolidated comprise 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 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 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 Comprehensive Income, Consolidated Statement of Changes in Equity and Consolidated Statement of Comprehensive Income, Consolidated Statement of Changes in Equity and Consolidated for the years ended 31 December 2013 and 31 December 2012, and the related notes for the years ended 31 December 2013 and 31 December 2012, and the related notes Statement of Cash Flows for the years ended 31 December 2013 and 31 December 2012, and the related notes for the years ended 31 December 2013 and 31 December 2012, and the related notes for the years ended 31 December 2013 and 31 December 2012, and the related notes for the years ended 31 December 2013 and 31 December 2012, and the related notes for the years ended 31 December 2013 and 31 December 2012, and the related notes Statement of Cash Flows for the years ended 31 December 2013 and 31 December 2012, and the related notes Statement of Cash Flows Statement of Cash Flows 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. 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. 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 Management’s responsibility for the consolidated financial statements Management’s responsibility for the consolidated financial statements Management’s responsibility for the consolidated financial statements Management’s responsibility for the consolidated financial statements Management’s responsibility for the consolidated financial statements Management’s responsibility for the consolidated financial statements responsible 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 responsible for the preparation and fair presentation of these consolidated financial statements responsible for the preparation and fair presentation of these consolidated financial statements responsible for the preparation and fair presentation of these consolidated financial statements responsible for the preparation and fair presentation of these consolidated financial statements responsible for the preparation and fair presentation of these consolidated financial statements responsible for the preparation and fair presentation of these consolidated financial statements responsible for the preparation and fair presentation of these consolidated financial statements Management is Management is and for such internal control as management and for such internal control as management and for such internal control as management 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 in accordance with International Financial Reporting Standards in accordance with International Financial Reporting Standards in accordance with International Financial Reporting Standards in accordance with International Financial Reporting Standards in accordance with International Financial Reporting Standards f consolidated financial statements that are free from determines is necessary to enable the preparation of consolidated financial statements that are free from f consolidated financial statements that are free from f consolidated financial statements that are free from f consolidated financial statements that are free from f consolidated financial statements that are free from determines is necessary to enable the preparation o determines is necessary to enable the preparation o determines is necessary to enable the preparation o determines is necessary to enable the preparation o determines is necessary to enable the preparation o material misstatement, whether due to fraud or error. material misstatement, whether due to fraud or error. material misstatement, whether due to fraud or error. material misstatement, whether due to fraud or error. material misstatement, whether due to fraud or error. material misstatement, whether due to fraud or error. Auditor’s responsibility Auditor’s responsibility Auditor’s responsibility 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 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 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 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 ur audits in accordance with Canadian Generally Accepted Auditing Standards. Those standards ur audits in accordance with Canadian Generally Accepted Auditing Standards. Those standards ur audits in accordance with Canadian Generally Accepted Auditing Standards. Those standards ur audits in accordance with Canadian Generally Accepted Auditing Standards. Those standards ur audits in accordance with Canadian Generally Accepted Auditing Standards. Those standards ur audits in accordance with Canadian Generally Accepted Auditing Standards. Those standards ur audits in accordance with Canadian Generally Accepted Auditing Standards. Those standards ur audits in accordance with Canadian Generally Accepted Auditing Standards. Those standards ur audits in accordance with Canadian Generally Accepted Auditing Standards. Those standards conducted our audits in accordance with Canadian Generally Accepted Auditing Standards. Those standards conducted o 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 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 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 require that we comply with ethical requirements and plan and perform the audits to obtain reasonable require that we comply with ethical requirements and plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. assurance about whether the consolidated financial statements are free from material misstatement. are free from material misstatement. are free from material misstatement. assurance about whether the consolidated financial statements assurance about whether the consolidated financial statements assurance about whether the consolidated financial statements assurance about whether the consolidated financial statements assurance about whether the consolidated financial statements 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 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 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 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 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 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 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 asse ssment of the risks of material misstatement of the consolidated financial statements, whether due to fraud ssment of the risks of material misstatement of the consolidated financial statements, whether due to fraud ssment of the risks of material misstatement of the consolidated financial statements, whether due to fraud ssment of the risks of material misstatement of the consolidated financial statements, whether due to fraud ssment of the risks of material misstatement of the consolidated financial statements, whether due to fraud ssment of the risks of material misstatement of the consolidated financial statements, whether due to fraud ssment of the risks of material misstatement of the consolidated financial statements, whether due to fraud ssment of the risks of material misstatement of the consolidated financial statements, whether due to fraud ssment of the risks of material misstatement of the consolidated financial statements, whether due to fraud assessment of 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 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 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 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 consolidated financial statements in order to design audit procedures consolidated financial statements in order to design audit procedures consolidated financial statements in order to design audit procedures consolidated financial statements in order to design audit procedures consolidated financial statements in order to design audit procedures consolidated financial statements in order to design audit procedures preparation and fair presentation of the consolidated financial statements in order to design audit procedures preparation and fair presentation of the preparation and fair presentation of the preparation and fair presentation of the 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 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 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 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. appropriateness of accounting policies used appropriateness of accounting policies used appropriateness of accounting policies used appropriateness of accounting policies used An audit also includes evaluating the appropriateness of accounting policies used An audit also includes evaluating the of the entity’s internal control. An audit also includes evaluating the An audit also includes evaluating the of the entity’s internal control. of the entity’s internal control. 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 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 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 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. presentation of the consolidated financial statements. presentation of the consolidated financial statements. presentation of the consolidated financial statements. presentation of the consolidated financial statements. ur audits 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 ur audits is sufficient and appropriate to provide a ur audits is sufficient and appropriate to provide a ur audits is sufficient and appropriate to provide a ur audits is sufficient and appropriate to provide a We believe that the audit evidence we have obtained in o We believe that the audit evidence we have obtained in o We believe that the audit evidence we have obtained in o We believe that the audit evidence we have obtained in o We believe that the audit evidence we have obtained in o basis for our audit opinion. basis for our audit opinion. basis for our audit opinion. basis for our audit opinion. Opinion 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 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 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 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 cember 2013 and 31 December 2012 and its financial cember 2013 and 31 December 2012 and its financial cember 2013 and 31 December 2012 and its financial cember 2013 and 31 December 2012 and its financial cember 2013 and 31 December 2012 and its financial balance sheet of ShaMaran Petroleum Corp. as at 31 December 2013 and 31 December 2012 and its financial balance sheet of ShaMaran Petroleum Corp. as at 31 De balance sheet of ShaMaran Petroleum Corp. as at 31 De balance sheet of ShaMaran Petroleum Corp. as at 31 De balance sheet of ShaMaran Petroleum Corp. as at 31 De balance sheet of ShaMaran Petroleum Corp. as at 31 De PricewaterhouseCoopers LLP, 1 Embankment Place, London WC2N 6RH PricewaterhouseCoopers LLP, 1 Embankment Place, London WC2N 6RH PricewaterhouseCoopers LLP, 1 Embankment Place, London WC2N 6RH PricewaterhouseCoopers LLP, 1 Embankment Place, London WC2N 6RH PricewaterhouseCoopers LLP, 1 Embankment Place, London WC2N 6RH 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 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 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 T: +44 (0) 20 7583 5000, F: +44 (0) 20 7822 4652, www.pwc.co.uk stered office of PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The regi stered office of PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The regi PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The regi PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The regi PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The regi PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The regi PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The regi PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The regi PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The regi gulated by the Financial Services PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and re gulated by the Financial Services gulated by the Financial Services PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and re PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and re PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and re PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and re PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and re PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and re PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and re PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and re Authority for designated investment business. Authority for designated investment business. Authority for designated investment business. Authority for designated investment business. 30 performance and its cash flows for the years ended 31 December 2013 and 31 December 2012 in accordance performance and its cash flows for the years ended 31 December 2013 and 31 December 2012 in accordance performance and its cash flows for the years ended 31 December 2013 and 31 December 2012 in accordance performance and its cash flows for the years ended 31 December 2013 and 31 December 2012 in accordance performance and its cash flows for the years ended 31 December 2013 and 31 December 2012 in accordance performance and its cash flows for the years ended 31 December 2013 and 31 December 2012 in accordance performance and its cash flows for the years ended 31 December 2013 and 31 December 2012 in accordance performance and its cash flows for the years ended 31 December 2013 and 31 December 2012 in accordance performance and its cash flows for the years ended 31 December 2013 and 31 December 2012 in accordance performance and its cash flows for the years ended 31 December 2013 and 31 December 2012 in accordance performance and its cash flows for the years ended 31 December 2013 and 31 December 2012 in accordance with International Financial Reporting Standards. with International Financial Reporting Standards. with International Financial Reporting Standards. with International Financial Reporting Standards. with International Financial Reporting Standards. with International Financial Reporting Standards. Emphasis of matter – Emphasis of matter Emphasis of matter going concern – going concern opinion on the financial statements, which is not modified, we have considered the adequacy of In forming our opinion on the financial statements, which is not modified, we have considered the adequacy of In forming our opinion on the financial statements, which is not modified, we have considered the adequacy of opinion on the financial statements, which is not modified, we have considered the adequacy of opinion on the financial statements, which is not modified, we have considered the adequacy of opinion on the financial statements, which is not modified, we have considered the adequacy of opinion on the financial statements, which is not modified, we have considered the adequacy of opinion on the financial statements, which is not modified, we have considered the adequacy of opinion on the financial statements, which is not modified, we have considered the adequacy of In forming our 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 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 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 the disclosures made in Note 2 to the financial statements concerning the Company’s ability to continue as a t it has sufficient funds available to meet its contractual going concern. Although the Company is confident that it has sufficient funds available to meet its contractual t it has sufficient funds available to meet its contractual t it has sufficient funds available to meet its contractual t it has sufficient funds available to meet its contractual going concern. Although the Company is confident tha going concern. Although the Company is confident tha going concern. Although the Company is confident tha going concern. Although the Company is confident tha going concern. Although the Company is confident tha obligations and commitments, there is uncertainty surrounding the proportion of development costs that the obligations and commitments, there is uncertainty surrounding the proportion of development costs that the obligations and commitments, there is uncertainty surrounding the proportion of development costs that the obligations and commitments, there is uncertainty surrounding the proportion of development costs that the obligations and commitments, there is uncertainty surrounding the proportion of development costs that the obligations and commitments, there is uncertainty surrounding the proportion of development costs that the obligations and commitments, there is uncertainty surrounding the proportion of development costs that the obligations and commitments, there is uncertainty surrounding the proportion of development costs that the obligations and commitments, there is uncertainty surrounding the proportion of development costs that the obligations and commitments, there is uncertainty surrounding the proportion of development costs that the Company will fund. The uncertainty of the extent of costs that will be funded at the date of approval of the Company will fund. The uncertainty of the extent of costs that will be funded at the date of approval of the Company will fund. The uncertainty of the extent of costs that will be funded at the date Company will fund. The uncertainty of the extent of costs that will be funded at the date Company will fund. The uncertainty of the extent of costs that will be funded at the date Company will fund. The uncertainty of the extent of costs that will be funded at the date Company will fund. The uncertainty of the extent of costs that will be funded at the date Company will fund. The uncertainty of the extent of costs that will be funded at the date Company will fund. The uncertainty of the extent of costs that will be funded at the date financial statements indicates the existence of a material uncertainty which may cast significant doubt about financial statements indicates the existence of a material uncertainty which may cast significant doubt about financial statements indicates the existence of a material uncertainty which may cast significant doubt about financial statements indicates the existence of a material uncertainty which may cast significant doubt about financial statements indicates the existence of a material uncertainty which may cast significant doubt about financial statements indicates the existence of a material uncertainty which may cast significant doubt about financial statements indicates the existence of a material uncertainty which may cast significant doubt about financial statements indicates the existence of a material uncertainty which may cast significant doubt about financial statements indicates the existence of a material uncertainty which may cast significant doubt about financial statements indicates the 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 the Company’s ability to continue as a going concern. The financial statements do not include the adjustments the Company’s ability to continue as a going concern. The financial statements do not include the adjustments the Company’s ability to continue as a going concern. The financial statements do not include the adjustments the Company’s ability to continue as a going concern. The financial statements do not include the adjustments the Company’s ability to continue as a going concern. The financial statements do not include the adjustments the Company’s ability to continue as a going concern. The financial statements do not include the adjustments the Company’s ability to continue as a going concern. The financial statements do not include the adjustments the Company’s ability to continue as a going concern. The financial statements do not include the adjustments the Company’s ability to continue as a going concern. The financial statements do not include the adjustments the Company’s ability to continue as a going concern. The financial statements do not include the adjustments o continue as a going concern. t if the Company was unable to continue as a going concern. o continue as a going concern. o continue as a going concern. t if the Company was unable t that would result if the Company was unable t that would resul that would resul PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Chartered Accountants Chartered Accountants Chartered Accountants Chartered Accountants London London PricewaterhouseCoopers LLP, 1 Embankment Place, London WC2N 6RH PricewaterhouseCoopers LLP, 1 Embankment Place, London WC2N 6RH PricewaterhouseCoopers LLP, 1 Embankment Place, London WC2N 6RH PricewaterhouseCoopers LLP, 1 Embankment Place, London WC2N 6RH PricewaterhouseCoopers LLP, 1 Embankment Place, London WC2N 6RH 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 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 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 T: +44 (0) 20 7583 5000, F: +44 (0) 20 7822 4652, www.pwc.co.uk stered office of PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The regi stered office of PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The regi PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The regi PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The regi PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The regi PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The regi PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The regi PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The regi PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The regi gulated by the Financial Services PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and re gulated by the Financial Services gulated by the Financial Services PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and re PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and re PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and re PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and re PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and re PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and re PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and re PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and re Authority for designated investment business. Authority for designated investment business. Authority for designated investment business. Authority for designated investment business. 31 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, 2012 2013 Expenses from continuing operations General and administrative expense Share based payments expense Impairment (loss) / recovery Depreciation and amortisation expense Share of income of associate Gain on fair valuation of net assets of subsidiary Gain on sale of asset Relinquishment costs (Loss) / income before finance items and income tax expense Finance cost Finance income Net finance cost (Loss) / income before income tax expense Income tax expense Net (loss) / income from continuing operations Discontinued operations Net income / (loss) from discontinued operations Net (loss) / income for the year Other comprehensive income: Currency translation differences Total other comprehensive income 6 23 7 8 9 10 11 12 13 14 15 (2,393) (882) (84) (65) ‐ ‐ ‐ ‐ (3,424) (740) 28 (712) (4,136) (87) (4,223) 935 (3,288) 19 19 (2,852) (8) 1,814 (183) 129,000 102,735 1,100 (25,732) 205,874 (719) 359 (360) 205,514 (89) 205,425 (61) 205,364 26 26 Total comprehensive (loss) / income for the year (3,269) 205,390 (Loss) / income in dollars per share: Continuing operations Basic and diluted Discontinued operations Basic and diluted Continuing and discontinued operations Basic and diluted 22 22 (0.01) ‐ (0.01) 0.25 ‐ 0.25 The accompanying notes are an integral part of these consolidated financial statements. 32 SHAMARAN PETROLEUM CORP. Consolidated Balance Sheet (Expressed in thousands of United States Dollars) ______________________________________________________________________________ As at December 31, Note 2013 2012 Assets Non‐current assets Intangible assets Property, plant and equipment Current assets Cash and cash equivalents Other current assets Inventories Assets associated with discontinued operations Total assets Liabilities and equity Current liabilities Accounts payable and accrued expenses Accrued interest expense on bonds Current tax liabilities Deferred liability Non‐current liabilities Borrowings 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 16 17 15 18 19 20 19 21 15 22 344,990 179 345,169 142,588 194 ‐ 142,782 3 487,954 7,458 2,252 92 ‐ 9,802 147,050 1,185 148,235 928 158,965 534,068 4,718 27 (209,824) 328,989 487,954 303,549 257 303,806 41,216 331 198 41,745 3 345,554 7,027 ‐ 90 5,000 12,117 ‐ 120 120 1,941 14,178 534,068 3,836 8 (206,536) 331,376 345,554 The accompanying notes are an integral part of these consolidated financial statements. The financial statements were approved by the Board of Directors and authorised for issue on March 12, 2014 and signed on its behalf: /s/Cameron Bailey J. Cameron Bailey, Director /s/Keith Hill Keith C. Hill, Director 33 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 Balance at January 1, 2012 533,349 3,828 Total comprehensive income for the year Transactions with owners in their capacity as owners: Equity based financing fee Share based payments expense ‐ 719 ‐ 719 ‐ ‐ 8 8 Balance at December 31, 2012 534,068 3,836 (18) 26 (411,900) 205,364 ‐ ‐ ‐ 8 ‐ ‐ ‐ (206,536) 331,376 Total 125,259 205,390 719 8 727 Total comprehensive loss / (income) for the year Transactions with owners in their capacity as owners: Share based payments expense ‐ ‐ ‐ Balance at December 31, 2013 534,068 ‐ 19 (3,288) (3,269) 882 882 4,718 ‐ ‐ ‐ ‐ 882 882 27 (209,824) 328,989 The accompanying notes are an integral part of these consolidated financial statements. 34 SHAMARAN PETROLEUM CORP. Consolidated Statement of Cash Flows (Expressed in thousands of United States Dollars) ______________________________________________________________________________ Note 23 7 12,13 12 10 9 8 20 19 Operating activities Net (loss) / income from continuing operations Adjustments for: Share based payments expense Interest expense on senior secured bonds ‐ net Impairment loss / (recovery) Depreciation and amortisation expense Foreign exchange loss / (gain) Income tax Interest income Interest expense on equity based finance fee Gain on sale of asset Gain on fair valuation of net assets of subsidiary Share of income of associate Changes in provisions Changes in accounts payable and accrued expenses Changes in inventories Changes in other current assets Cash used in discontinued operations Net cash outflows to operating activities Investing activities Interest received on cash deposits Deferred liability Purchases of intangible assets Net proceeds on sale 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 Net cash (outflows to) / inflows from investing activities Financing activities Proceeds on bond issue Bond related transaction costs 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, 2012 2013 (4,223) 882 689 84 65 49 2 (28) ‐ ‐ ‐ ‐ 1,065 431 114 137 (78) (811) 28 (5,000) (39,788) ‐ ‐ ‐ ‐ ‐ (44,760) 150,000 (3,028) 146,972 (29) 101,372 41,216 142,588 205,425 8 ‐ (1,814) 183 (333) (32) (26) 719 (1,100) (102,735) (129,000) 120 (16,550) 2,552 421 (715) (42,877) 26 5,000 (8,395) 52,671 1,250 802 (595) (16,110) 34,649 ‐ ‐ ‐ 359 (7,869) 49,085 41,216 The accompanying notes are an integral part of these consolidated financial statements. 35 SHAMARAN PETROLEUM CORP. Notes to the Consolidated Financial Statements For the year ended December 31, 2013 (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. The significant accounting policies of the Company have been applied consistently throughout the year. 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 realise 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 resolution of remaining political disputes in Iraq and the ability of the Company to obtain additional financing for its activities to develop, produce and sell economically recoverable reserves. In the absence of current production revenues, the Company is currently dependent upon its existing financial resources, which include $142.6 million of cash and cash equivalents as at December 31, 2013, to satisfy its obligations and finance its exploration and development program in Kurdistan. Failure to meet exploration and development commitments could put the related license interests at risk of forfeiture. The Company believes that based on the forecasts and projections it has prepared its current financial resources will be sufficient for the Company to satisfy its contractual obligations and commitments under the agreed work program over the next 12 months and to continue as a going concern for the foreseeable future. Nevertheless the possibility remains that the Company’s operations and current and future financial resources could be significantly affected by adverse exploration and appraisal results, geopolitical events in the region, macroeconomic conditions or other risks, including a risk regarding the level of funding which the Company may need to make in excess of its percentage share in the project. The potential that the Company’s financial resources are insufficient to fund its appraisal and development activities 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. The Company has a number of financing possibilities which it believes it would be able to pursue if and when required. 36 SHAMARAN PETROLEUM CORP. Notes to the Consolidated Financial Statements For the year ended December 31, 2013 (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 which apply accounting policies consistent with those of 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 unrealised 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 recognised 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 recognised 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 recognised 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 recognised directly in the statement of comprehensive income. Where a group company transacts with an associate of the Company unrealised gains are eliminated to the extent of the Company’s interest in the relevant associate. Unrealised 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 recognised 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 recognised 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. 37 SHAMARAN PETROLEUM CORP. Notes to the Consolidated Financial Statements For the year ended December 31, 2013 (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 acquire. 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 recognised 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 recognised 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 the United States dollar (“USD”). 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. All resulting exchange differences are recognised 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 recognised in the statement of comprehensive income during the period in which they arise. 38 SHAMARAN PETROLEUM CORP. Notes to the Consolidated Financial Statements For the year ended December 31, 2013 (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 capitalised 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 capitalised 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 utilised 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 commencement of commercial production. Treatment of E&E assets at conclusion of appraisal activities: E&E assets are carried forward until commercial viability has been established for a contractual area which normally coincides with the commencement of commercial production. 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. Until commercial viability has been established E&E assets remain capitalised 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 are carried at measured cost less accumulated amortisation and any recognised impairment loss, and are amortised on a straight‐line basis over their expected useful economic lives as follows: Computer software and associated costs 3 years (h) Property, plant and equipment 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 capitalised, and the cost of recognising 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. 39 SHAMARAN PETROLEUM CORP. Notes to the Consolidated Financial Statements For the year ended December 31, 2013 (Expressed in thousands of United States Dollars unless otherwise stated) ______________________________________________________________________________ Other property, plant and equipment Other property, plant and equipment include expenditures that are directly attributable to the acquisition of an asset. Subsequent costs are included in the assets’ carrying value or recognised 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 derecognised 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 recognised in the statement of comprehensive income during the period. Other property, plant and equipment assets are carried at cost less accumulated depreciation and any recognised impairment loss, and are depreciated on a straight‐line basis over their expected useful economic lives as follows: Furniture and office equipment Computer equipment 5 years 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. 40 SHAMARAN PETROLEUM CORP. Notes to the Consolidated Financial Statements For the year ended December 31, 2013 (Expressed in thousands of United States Dollars unless otherwise stated) ______________________________________________________________________________ (j) Revenue recognition Revenues from the sale of hydrocarbons are recognised when title passes to an external party and collection is reasonably assured which is normally upon delivery of products and customer acceptance. Interest income is accrued on a time proportion basis by reference to the principal outstanding and at the effective interest rate applicable. (k) Borrowings Borrowings are recognised initially at fair value, net of any transaction costs incurred. Borrowings are subsequently carried at amortised cost using the effective interest rate method. Transaction costs incurred in acquiring borrowings are amortised using the straight‐line amortisation method. General and specific borrowing costs directly attributable to the acquisition or construction of qualifying assets are capitalised together with the qualifying assets. All other borrowing costs are recognised in profit or loss in the period in which they are incurred. (l) 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 recognised 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 recognised for all taxable temporary differences and deferred income tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. 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 recognised 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 realised. 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 recognised 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. (m) 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 realisable value and determined on a first‐in, first‐out (“FIFO”) method. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. 41 SHAMARAN PETROLEUM CORP. Notes to the Consolidated Financial Statements For the year ended December 31, 2013 (Expressed in thousands of United States Dollars unless otherwise stated) ______________________________________________________________________________ (n) Financial instruments Financial assets and liabilities are recognised in the Company’s balance sheet when the Company becomes a party to the contractual provisions of the instrument. Financial assets are derecognised 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 derecognises 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 recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. Classification and measurement The Company classifies its financial assets and liabilities at initial recognition in the following categories: Financial assets and liabilities at fair value through profit or loss are those assets and liabilities acquired principally for the purpose of selling or repurchasing in the short‐term and are recognised 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 realised or paid beyond twelve months of the balance sheet date, which is classified as non‐current. Loans and receivables comprise of other 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 recognised at fair value and are subsequently measured at amortised cost using the effective interest method less any provision for impairment. Financial liabilities at amortised cost comprise of trade and other payables and are initially recognised at the fair value of the amount expected to be paid and are subsequently measured at amortised 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 recognises an impairment loss in the statement of comprehensive income as follows: Financial assets carried at amortised cost – the impairment loss is the difference between the amortised cost of the loan or receivable and the present value of the estimated future cash flows discounted using the instrument’s effective interest rate. Available for sale financial assets – the impairment loss is the difference between the original cost of the asset and its fair value at the measurement date less any impairment losses previously recognised in the statement of comprehensive income. 42 SHAMARAN PETROLEUM CORP. Notes to the Consolidated Financial Statements For the year ended December 31, 2013 (Expressed in thousands of United States Dollars unless otherwise stated) ______________________________________________________________________________ Impairment losses on financial assets carried at amortised 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 recognised. Impairment losses on available‐for‐sale equity investments are not reversed. (o) 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. (p) Provisions Provisions are recognised 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 recognised 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 recognised 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 recognised 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. (q) 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 recognised 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 recognised 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. (r) 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 recognised as an expense when they are due. (s) 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. 43 SHAMARAN PETROLEUM CORP. Notes to the Consolidated Financial Statements For the year ended December 31, 2013 (Expressed in thousands of United States Dollars unless otherwise stated) ______________________________________________________________________________ (t) Changes in accounting policies The Company has adopted effective January 1, 2013 on a prospective basis the following new and revised IFRS, along with any consequential amendments. These changes were made in accordance with the applicable transitional provisions. IFRS 10: Consolidated Financial Statements, replaces the guidance on control and consolidation in IAS 27, Consolidated and Separate Financial Statements, and SIC‐12, Consolidation – Special Purpose Entities. IFRS 10 requires consolidation of an investee only if the investor possesses power over the investee, has exposure to variable returns from its involvement with the investee and has the ability to use its power over the investee to affect its returns. Detailed guidance is provided on applying the definition of control. The accounting requirements for consolidation have remained largely consistent with IAS 27. The Company assessed its consolidation conclusions on January 1, 2013 and determined that the adoption of IFRS 10 did not result in any change in the consolidation status of any of the interests currently held in other entities. IFRS 11: Joint Arrangements, was issued in 2011 by the IASB and 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 Company assessed its joint arrangement conclusions on January 1, 2013 and determined that the adoption of IFRS 11 did not result in any changes. IFRS 12: Disclosure of Interests in Other Entities, aggregates and amends disclosure requirements included within other standards to create a comprehensive disclosure standard to address the requirements for subsidiaries, joint arrangements and associates including the reporting entity’s involvement with other entities. It also includes the requirements for unconsolidated structured entities (i.e. special purpose entities). Additional information on interests in other entities has been disclosed in note 26. IFRS 13: Fair Value Measurement, provides a single framework for measuring fair value. The measurement of the fair value of an asset or liability is based on assumptions that market participants would use when pricing the asset or liability under current market conditions, including assumptions about risk. Under IFRS 13 the fair value of a liability must reflect the effect of nonperformance risk, which includes an entity’s own credit risk. The adoption of IFRS 13 did not require any adjustments to the valuation techniques used by the Company to measure fair value and did not result in any measurement adjustments as at January 1, 2013. Additional information on fair value measurement has been disclosed in note 24. The Company has adopted the amendments to IAS 1, Presentation of Financial Statements which require the Company to group other comprehensive income items by those that will be reclassified subsequently to profit or loss and those that will not be reclassified. These changes did not result in any adjustments to other comprehensive income or comprehensive income. 44 SHAMARAN PETROLEUM CORP. Notes to the Consolidated Financial Statements For the year ended December 31, 2013 (Expressed in thousands of United States Dollars unless otherwise stated) ______________________________________________________________________________ (u) Accounting standards issued but not yet applied Standards and interpretations issued but not yet effective up to the date of issuance of the financial statements are listed below. This listing of standards and interpretations issued are those that the Company reasonably expects to have an impact on disclosures, financial position or performance when applied at a future date. IFRS 9: Financial Instruments ‐ Classification and Measurement, addresses the classification, measurement and recognition of financial assets and financial liabilities. IFRS 9 was issued in November 2009 and amended in October 2010. It replaces the parts of IAS 39 that relate to the classification and measurement of financial instruments. IFRS 9 requires financial assets to be classified into two measurement categories: those measured at fair value and those measured at amortised cost. The determination is made at initial recognition. The classification depends on the entity’s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the IAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity’s own credit risk is recorded in other comprehensive income rather than in net earnings, unless this creates an accounting mismatch. The effective date of this standard has not yet been established by the IASB. 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 2014 the Company commissioned an independent reserves and resources report from McDaniel & Associates Consultants Ltd. to estimate the Company’s reserves and resources at December 31, 2013. The reserves and resources estimates provided in the report were considered in determining amounts of impairment, in these consolidated financial depreciation and amortisation and decommissioning provisions statements. included (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. 45 SHAMARAN PETROLEUM CORP. Notes to the Consolidated Financial Statements For the year ended December 31, 2013 (Expressed in thousands of United States Dollars unless otherwise stated) ______________________________________________________________________________ (c) Decommissioning and site restoration provisions The Company recognises 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 notes 15 and 21. (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, behavioural considerations and expected dividend yield. The fair value of options granted at December 31, 2013 is shown in note 23. (e) Fair valuation of net assets of subsidiary acquired IFRS 3 Business Combinations required 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 considered a number of bases including the consideration exchanged on December 31, 2012, 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, Kurdistan. 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 15 for disclosure of the Company’s discontinued operations. 6. General and administrative expense General and administrative expenses incurred General and administrative expenses capitalised as E&E assets General and administrative expense For the year ended December 31, 2012 2013 5,473 (3,080) 2,393 5,324 (2,472) 2,852 The Company capitalises as E&E assets general and administrative expense supporting E&E activities which relate to direct interests held in production sharing contracts. Refer also to note 16. 46 SHAMARAN PETROLEUM CORP. Notes to the Consolidated Financial Statements For the year ended December 31, 2013 (Expressed in thousands of United States Dollars unless otherwise stated) ______________________________________________________________________________ 7. Impairment loss / (recovery) Write down drilling inventory to net realisable value Recovery of impairment loss on exploration and evaluation assets Recovery of impairment loss on property, plant and equipment Impairment loss / (recovery) For the year ended December 31, 2012 2013 84 ‐ ‐ 84 578 (2,347) (45) (1,814) The impairment loss in the year ended December 31, 2013 related to the relinquished Pulkhana and Arbat PSCs. Refer also to notes 16 and 17. 8. Share of income of associate Income from investment in associate For the year ended December 31, 2012 2013 ‐ 129,000 The income from investment in associate in the year ended December 31, 2012 related to the Company’s pro‐rata portion of the net income of GEP in conducting petroleum activities on the Atrush Block in Kurdistan. Following the acquisition of control of GEP by the Company in December 2012 the Company was required by IFRS to now consolidate GEP’s financial results and position and therefore this interest is no longer reported as an investment in associate. Refer also to note 9. 9. Gain on fair valuation of nets assets of subsidiary Fair valuation of net assets of subsidiary For the year ended December 31, 2012 2013 ‐ 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 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. became the sole remaining shareholder of GEP and the Company therefore acquired control of GEP. The acquisition was 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 was no incremental income or expense associated with the acquisition in the year 2012. The Company recorded in the year 2012 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. Refer also to notes 8 and 16. 47 SHAMARAN PETROLEUM CORP. Notes to the Consolidated Financial Statements For the year ended December 31, 2013 (Expressed in thousands of United States Dollars unless otherwise stated) ______________________________________________________________________________ 10. 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 was 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, 2012 2013 ‐ ‐ ‐ 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 from April 1, 2012 to August 2012, less transaction related costs of $0.5 million. Refer also to notes 16 and 17. 11. Relinquishment costs Relinquishment fees Costs to windup Pulkhana and Arbat operations Total relinquishment costs For the year ended December 31, 2012 2013 ‐ ‐ ‐ 25,000 732 25,732 On January 17, 2012 the Company signed agreements with the Kurdistan Regional Government (“KRG”) to relinquish the Pulkhana and Arbat Block Production Sharing Contracts (“PSC”). 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 16. 12. Finance cost Interest charges on bonds at coupon rate Amortisation of bond related transaction costs Interest expense on borrowings Foreign exchange loss Unwinding discount on decommissioning provision Interest expense associated with equity based finance fee Total finance costs before borrowing costs capitalised Borrowing costs capitalised as E&E assets Total finance costs For the year ended December 31, 2012 2013 2,252 78 2,330 49 1 ‐ 2,380 (1,640) 740 ‐ ‐ ‐ ‐ ‐ 719 719 ‐ 719 During the year 2013 the Company incurred interest expense relating to senior secured bonds which carry an 11.5% fixed semi‐annual coupon interest rate. Refer also to notes 16 and 19. The foreign exchange loss recorded in the year ended December 31, 2013 resulted primarily from holding net assets denominated in United States dollars in the Swiss subsidiary of the Group while the United States dollar weakened during the reporting period against Swiss Franc, the functional currency of the Swiss subsidiary. The interest expense incurred in 2012 relates to a loan entered into with two companies who jointly are principal shareholders of the Company and represents the amortisation of prepaid interest over the loan term. Refer also to note 27. 48 SHAMARAN PETROLEUM CORP. Notes to the Consolidated Financial Statements For the year ended December 31, 2013 (Expressed in thousands of United States Dollars unless otherwise stated) ______________________________________________________________________________ 13. Finance income Interest income Foreign exchange gain Total finance income For the year ended December 31, 2012 2013 28 ‐ 28 26 333 359 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 resulted 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. 14. 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: (Loss) / income from continuing operations before income tax Corporate income tax rate Computed income tax (recovery) / expense Increase / (decrease) resulting from: Change in valuation allowance Effect of changes in foreign exchange rates Non‐deductible compensation expense Other Foreign tax rate differences Non‐taxable foreign exchange loss / (gain) Effect of change in tax rates Share issuance costs charged to share capital Unrealised gain on fair valuation of assets Income tax expense from continuing operations For the year ended December 31, 2012 2013 (4,136) 26.0% (1,075) 548 379 229 150 104 12 (260) ‐ ‐ 87 205,514 25.0% 51,379 (20,545) (160) 2 580 (5,247) (83) 27 (180) (25,684) 89 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 Properties‐tax basis over carrying value Exploration expenses Share issue costs carried forward Future income tax assets before allowance Valuation allowance Future income tax assets 2013 84,656 1,279 787 354 87,076 (87,076) ‐ 2012 83,952 1,279 809 815 86,855 (86,855) ‐ 49 SHAMARAN PETROLEUM CORP. Notes to the Consolidated Financial Statements For the year ended December 31, 2013 (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 unamortised 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, 2013 2012 19,936 3,025 1,363 104,878 167,135 3,654 299,991 17,834 3,234 3,259 103,345 168,069 3,654 299,395 The Canadian losses from operations may be used to offset future Canadian taxable income and will expire over the period from 2026 to 2033. The Canadian exploration expenses may be carried forward indefinitely to offset future taxable Canadian income. Canadian unamortised share issue costs may offset future taxable Canadian income of years 2014 to 2016. The U.S. Federal losses are available to offset future taxable income in the United States through 2032. 15. Discontinued operations During May of 2009 the Company sold to a third party 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: Gain on release of excess site restoration provision General and administrative, and professional expenses Net income / (loss) from discontinued operations For the year ended December 31, 2012 2013 981 (46) 935 ‐ (61) (61) In December 2013 the Company released an excess site restoration provision as the total cost to complete this work is expected to be less than the amount previously estimated. The net income from discontinued operations in 2013 did not result in income tax expense as the gain on release of excess site restoration provision is not a taxable amount. The major classes of assets and liabilities included in the consolidated balance sheet are as follows: As at December 31, Assets Prepaid expenses Liabilities Trade payables and accrued expenses Site restoration provision Net liabilities 2013 3 3 145 783 928 925 2012 3 3 355 1,586 1,941 1,938 The provision relates to site restoration costs pertaining to the interests the Company held in petroleum properties located in the United States. The provision was determined based on the Company’s 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. 50 SHAMARAN PETROLEUM CORP. Notes to the Consolidated Financial Statements For the year ended December 31, 2013 (Expressed in thousands of United States Dollars unless otherwise stated) ______________________________________________________________________________ 16. Intangible assets At January 1, 2012 Cost Accumulated amortisation Impairment losses Net book value For the year ended December 31, 2012 Opening net book value Additions including fair value adjustment Disposals Amortisation expense Adjustment to impairment losses Net adjustment on currency translation Net book value At December 31, 2012 Cost Accumulated amortisation Impairment losses Net book value For the year ended December 31, 2013 Opening net book value Additions Amortisation expense Net book value At December 31, 2013 Cost Accumulated amortisation Impairment losses Net book value Exploration and evaluation assets Other intangible assets 251,586 ‐ (205,861) 45,725 45,725 307,022 (51,571) ‐ 2,347 ‐ 303,523 507,037 ‐ (203,514) 303,523 303,523 41,465 ‐ 344,988 548,502 ‐ (203,514) 344,988 271 (160) ‐ 111 111 3 (1) (88) ‐ 1 26 280 (254) ‐ 26 26 ‐ (24) 2 288 (286) ‐ 2 Total 251,857 (160) (205,861) 45,836 45,836 307,025 (51,572) (88) 2,347 1 303,549 507,317 (254) (203,514) 303,549 303,549 41,465 (24) 344,990 548,790 (286) (203,514) 344,990 The net book value of E&E assets at December 31, 2013 relates directly to the Atrush Block in the amount of $342.0 million, which includes $9.3 million of advances resulting from payments made on behalf of a partner in the Atrush Block, and an amount of $3.0 million of other costs associated with ongoing operations in Kurdistan. The Company capitalised to E&E during the year 2013 borrowing costs totalling $1,640 (2012: $nil). Refer also to notes 6, 12 and 19. On December 31, 2012 the Company acquired control of GEP and, in accordance with IFRS 3 which requires the Company to record the fair value on the date of acquisition of the net identifiable assets and liabilities of GEP, recorded the addition of $300.5 million of exploration and evaluation assets relating to the Atrush Block PSC. Refer also to notes 9 and 10. 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 10. 51 SHAMARAN PETROLEUM CORP. Notes to the Consolidated Financial Statements For the year ended December 31, 2013 (Expressed in thousands of United States Dollars unless otherwise stated) ______________________________________________________________________________ The impairment losses of $203.5 million related to the decision by the Company in December 2011 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 recorded impairment losses to expense all exploration and evaluation assets, which included acquisition costs, capacity building payments to the KRG, costs of acquiring seismic data, and drilling and testing costs which were 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 11. 17. Property, plant and equipment At January 1, 2012 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 / (loss) Net adjustment on currency translation Net book value At December 31, 2012 Cost Accumulated depreciation Impairment losses Net book value For the year ended December 31, 2013 Opening net book value Exchange difference Depreciation expense Net book value At December 31, 2013 Cost Accumulated depreciation Net book value Oil and gas assets Computer equipment Furniture and office equipment 445 (98) (174) 173 173 758 (781) (31) 46 ‐ 165 199 (29) (5) 165 165 ‐ (40) 125 194 (69) 125 232 (139) (17) 76 76 ‐ (9) (62) 4 ‐ 9 199 (190) ‐ 9 9 ‐ (6) 3 194 (191) 3 203 (60) (10) 133 133 ‐ (14) (32) (6) 2 83 165 (82) ‐ 83 83 1 (33) 51 169 (118) 51 Total 880 (297) (201) 382 382 758 (804) (125) 44 2 257 563 (301) (5) 257 257 1 (79) 179 557 (378) 179 52 SHAMARAN PETROLEUM CORP. Notes to the Consolidated Financial Statements For the year ended December 31, 2013 (Expressed in thousands of United States Dollars unless otherwise stated) ______________________________________________________________________________ 18. Accounts payable and accrued expenses Net payables to joint venture partners Accrued expenses Trade payables Total accounts payable and accrued expenses 19. Borrowings As at December 31, 2013 3,769 3,062 627 7,458 2012 722 5,494 811 7,027 On November 13, 2013 GEP, a wholly owned indirect subsidiary of the Company, closed a $150 million senior secured bond issue denominated in USD resulting in net proceeds of $147 million after deducting $3.0 million in transaction related costs. Of the total proceeds from the bond issue $33.8 million were subscribed to by related parties. The bonds have a five year maturity without amortisation and carry an 11.5% fixed semi‐annual coupon and will be used to fund future capital expenditures related to the development of the Atrush Block. As at December 31, Opening balance Net proceeds from bonds Accrued interest expense on bonds Cumulative amortisation of bond related transaction costs Ending balance ‐ Current portion: accrued interest expense on bonds ‐ Non‐current portion: borrowings 2013 ‐ 146,972 2,252 78 149,302 2,252 147,050 2012 ‐ ‐ ‐ ‐ ‐ ‐ ‐ The bonds include an unconditional and irrevocable on‐demand guarantee on a joint and several basis from the Company and certain of the Company’s direct and indirect subsidiaries and, among other arrangements, agreements which pledge all of the ordinary shares of GEP and the Company’s Swiss service subsidiary, ShaMaran Services SA, as security for GEP’s bond related obligations, as well as an internal credit facility agreement among the Company and certain of its subsidiaries setting out the terms and conditions for intra‐group credit to be made available amongst the parties. Under the terms of the bond agreement all bond proceeds are held in accounts pledged to the bond trustee as security, and may be accessed by the Company on prior authorisation of the bond trustee and provided the proceeds are to be employed for prescribed purposes, most notably to fund the financing, development and operation of the Atrush Block, to service 24 months of bond coupon interest expense, and to fund technical, management and administrative services of ShaMaran’s subsidiary companies up to $6 million per year over the term of the bond (limited to $1.5 million in 2013). Of the Company’s $142,588 total cash and cash equivalents at December 31, 2013, $124.8 million was held in accounts pledged to the bond trustee. The remaining contractual obligation comprising repayment of principal and interest expense based on undiscounted cash flows at payment date, assuming the bonds are not early redeemed, are as follows: Less than one year Between two and five years Total Refer also to notes 12, 16, 25 and 27. As at December 31, 2013 17,250 216,050 233,300 2012 ‐ ‐ ‐ 53 SHAMARAN PETROLEUM CORP. Notes to the Consolidated Financial Statements For the year ended December 31, 2013 (Expressed in thousands of United States Dollars unless otherwise stated) ______________________________________________________________________________ 20. Deferred liability The deferred liability at December 31, 2012 related to the acquisition by the Company of control of GEP. On July 8, 2013 the Company paid $5 million to Aspect upon the satisfactory conclusion of certain closing conditions. Refer also to notes 8 and 9. 21. Provisions The Company has provided for decommissioning and site restoration costs in relation to activities undertaken to date on the Atrush Block in Kurdistan. Opening balance Additional obligations incurred and changes in estimates Unwinding discount on decommissioning provision Changes in discount and inflation rates Total decommissioning and site restoration provisions As at December 31, 2013 120 1,110 1 (46) 1,185 2012 ‐ 120 ‐ ‐ 120 The above provisions assume decommissioning and site restoration work is to be undertaken in the year 2032, and estimated costs have been discounted to net present value using a Bank of Canada long term bond yield rate of 3.21% and an inflation rate of 1.2%. 22. Share capital The Company is authorised to issue an unlimited number of common shares with no par value. The Company’s issued share capital is as follows: At January 1, 2012 Shares issued as equity based financing fee At December 31, 2012 At December 31, 2013 Earnings per share The earnings per share amounts were as follows: Continuing operations: Net (loss) / income from continuing operations, in dollars Weighted average common shares outstanding during the year Basic and diluted (loss) / earnings per share from continuing operations, in dollars Discontinued operations: Net income / (loss) from discontinued operations, in dollars Weighted average common shares outstanding during the year Basic and diluted loss per share from discontinued operations, in dollars Continuing and discontinued operations: Net (loss) / income from continuing and discontinued operations, in dollars Weighted average common shares outstanding during the year Basic and diluted (loss) / earnings per share from continuing and discontinued operations, in dollars Number of shares Share capital 807,983,860 3,000,000 810,983,860 810,983,860 533,349 719 534,068 534,068 For the year ended December 31, 2012 2013 (4,223,000) 810,983,860 (0.01) 935,000 810,983,860 ‐ (3,288,000) 810,983,860 205,425,000 810,221,565 0.25 (61,000) 810,221,565 ‐ 205,364,000 810,221,565 (0.01) 0.25 54 SHAMARAN PETROLEUM CORP. Notes to the Consolidated Financial Statements For the year ended December 31, 2013 (Expressed in thousands of United States Dollars unless otherwise stated) ______________________________________________________________________________ 23. 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. Movements in the Company’s share options outstanding are explained as follows: At January 1, 2012 Expired in 2012 Forfeited in 2012 At December 31, 2012 Granted in 2013 At December 31, 2013 Share options exercisable: At December 31, 2012 At December 31, 2013 Number of share options outstanding Weighted average exercise price CAD 3,233,334 (450,000) (160,000) 2,623,334 5,640,000 8,263,334 2,615,001 4,503,333 0.72 1.52 0.67 0.59 0.36 0.43 0.59 0.50 On April 12, 2013, certain officers, directors and other eligible persons of the Company were granted a total of 5,640,000 incentive stock options which are subject to vesting provisions and are exercisable over a period of five years at an exercise price of CAD 0.36. The Company recognises 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, 2012 2013 0% 2.50% 84.74% 4.42 CAD 0.43 0% 3.20% 86.94% 4.12 CAD 0.53 Share based payments expense for the year ended December 31, 2013 was $882 (2012: $8). 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. 55 SHAMARAN PETROLEUM CORP. Notes to the Consolidated Financial Statements For the year ended December 31, 2013 (Expressed in thousands of United States Dollars unless otherwise stated) ______________________________________________________________________________ 24. Financial instruments Financial assets The financial assets of the Company on the balance sheet dates were as follows: Cash and cash equivalents ² Other receivables ² Total financial assets Fair value hierarchy ³ Carrying and fair values ¹ At December 31, 2013 At December 31, 2012 142,588 54 142,642 41,216 204 41,420 Financial assets classified as other receivables are initially recognised at fair value and are subsequently measured at amortised cost using the effective interest method less any provision for impairment. Financial liabilities The financial liabilities of the Company on the balance sheet dates were as follows: Borrowings Accounts payable and accrued expenses ² Accrued interest on bonds Provisions for decommissioning costs Financial liabilities of discontinued operations ² Current tax liabilities ² Deferred liability ² Total financial liabilities Fair value hierarchy ³ Level 2 Level 2 Level 2 Carrying and fair values ¹ At December 31, 2013 At December 31, 2012 147,050 7,458 2,252 1,185 928 92 ‐ 158,965 ‐ 7,027 ‐ 120 1,941 90 5,000 14,178 Financial liabilities are initially recognised at the fair value of the amount expected to be paid and are subsequently measured at amortised cost using the effective interest rate method. ¹ The carrying amount of the Company’s financial assets and liabilities approximate their fair values at the balance sheet dates, none of which are past due. ² No valuation techniques have been applied to establish the fair value of these financial instruments they are either cash and cash equivalents or, due to the short term nature, readily convertible to or settled with cash and cash equivalents. ³ Fair value measurements IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and established a fair value hierarchy of three levels to classify the inputs to valuation techniques used to measure fair value: Level 1: fair value measurements are based on unadjusted quoted market prices. Level 2: fair value measurements are based on valuation models and techniques where the significant inputs are derived from quoted prices or indices. Level 3: fair value measurements are based on unobservable information. 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 maximising return to shareholders. 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 had debt relating to borrowings and accrued interest of $149.3 million as at December 31, 2013 (2012: $nil). 56 SHAMARAN PETROLEUM CORP. Notes to the Consolidated Financial Statements For the year ended December 31, 2013 (Expressed in thousands of United States Dollars unless otherwise stated) ______________________________________________________________________________ In accordance with the terms of the Company’s senior secured bond agreement it is required to maintain a Book Equity ratio, defined as shareholders’ equity divided by total assets, of no less than 40%. Refer also to note 19. The Company’s book equity ratio is as follows: Shareholders’ equity Total assets Book equity ratio Financial risk management objectives As at December 31, 2013 328,989 487,954 67% 2012 331,376 345,554 96% 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 characterised 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 directly exposed to significant commodity price risk. Foreign currency risk The substantial portion of the Company’s operations require purchases denominated in USD, which is the functional and reporting currency of the Company and also the currency in which the Company maintains the substantial portion of its cash and cash equivalents. Certain of its operations require the Company to make purchases denominated in foreign currencies, which are currencies other than USD and correspond to the various countries in which the Company conducts its business, most notably, Swiss Francs (“CHF”) and Canadian dollars (“CAD”). As a result, the Company holds some cash and cash equivalents in foreign currencies and is therefore exposed to foreign currency risk due to exchange rate fluctuations between the foreign currencies and the USD. The Company considers its foreign currency risk is limited because it holds relatively insignificant amounts of foreign currencies at any point in time and since its volume of transactions in foreign currencies is currently relatively low. 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 2013 48 248 2012 168 268 2013 163 287 2012 274 279 57 SHAMARAN PETROLEUM CORP. Notes to the Consolidated Financial Statements For the year ended December 31, 2013 (Expressed in thousands of United States Dollars unless otherwise stated) ______________________________________________________________________________ Foreign currency sensitivity analysis The Company is exposed to movements in CHF and CAD against the USD, the presentational currency of the Company. 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 CHF and CAD. The analysis below is based on a strengthening of the CHF and CAD by 1% against the USD in which the Company has 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 CHF or CAD on the basis of the CHF and CAD assets and liabilities held by the Company at the balance sheet dates. For a 1% strengthening of the USD against the CHF or CAD there would be an equal and opposite impact on the profit or loss. Statement of comprehensive income ‐ CAD Statement of comprehensive income ‐ CHF Interest rate risk Assets Liabilities 2013 2012 2013 2012 ‐ 3 2 3 (1) (4) (3) (3) 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. The Group is highly leveraged though financing at the project level, for the continuation of Atrush project, and at the corporate level due to the $150 million of senior secured bonds which were issued in November 2013. However, the Company is not exposed to interest rate risks associated with the bonds as the interest rate is fixed. 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 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 other receivables. 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 recognised 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. 58 SHAMARAN PETROLEUM CORP. Notes to the Consolidated Financial Statements For the year ended December 31, 2013 (Expressed in thousands of United States Dollars unless otherwise stated) ______________________________________________________________________________ Liquidity risk 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 development 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 further into the development stage, specific financing, including the possibility of additional 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 authorisations 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. 25. Commitments As at December 31, 2013, the outstanding commitments of the Company were as follows: Atrush Block development and PSC Office and other Total commitments 2014 68,022 99 68,121 For the year ended December 31, 2016 Thereafter 2015 120 ‐ 120 120 ‐ 120 2,050 ‐ 2,050 Total 70,312 99 70,411 Amounts relating to the Atrush block represent the Company’s unfunded share of the approved work program and budget under the Atrush block field development plan and other obligations under the Atrush PSC. Refer also to notes 19 and 26. 26. Interests in joint operations and other entities Interests in joint operations ‐ Atrush Block Production Sharing Contract ShaMaran holds a 20.1% direct interest in the PSC through GEP. TAQA Atrush B.V. (“TAQA”), a subsidiary of Abu Dhabi National Energy Company PJSC, is the operator with a 39.9% direct interest, Marathon Oil KDV B.V. holds a 15% direct interest, and the remaining 25% interest was acquired by the KRG on March 12, 2013. Refer also to notes 16 and 25. 59 SHAMARAN PETROLEUM CORP. Notes to the Consolidated Financial Statements For the year ended December 31, 2013 (Expressed in thousands of United States Dollars unless otherwise stated) ______________________________________________________________________________ Under the terms of the PSC the development period is for 20 years with an automatic right to a five year extension and the possibility to extend for an additional five years. 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. The Company is responsible for its pro‐rata share of the costs incurred in executing the development work program on the Atrush Block which commenced on October 1, 2013. Information about subsidiaries The consolidated financial statements of the Company include: Subsidiary Principal activities Country of Incorporation % equity interest as at December 31, 2013 2012 ShaMaran Petroleum Holdings Coöperatief U.A. ShaMaran Ventures B.V. General Exploration Partners, Inc. ShaMaran Petroleum B.V. ShaMaran Services S.A. Bayou Bend Petroleum U.S.A. Ltd Summit Energy Company LLC. Oil exploration and production Oil exploration and production Oil exploration and production Oil exploration and production Technical and admin. Services Discontinued operations Discontinued operations The Netherlands The Netherlands Cayman Islands The Netherlands Switzerland United States of America United States of America 100 100 100 100 100 100 100 100 100 100 100 100 100 100 27. Related party transactions Transactions with corporate entities Namdo Management Services Ltd. Mile High Holdings Ltd. McCullough O’Connor Irwin LLP Vostok Nafta Investment Ltd. Lundin Petroleum AB Lundin family Total Purchases of services during the year 2013 2012 Amounts owing at December 31, 2012 2013 243 113 26 13 518 ‐ 913 314 37 95 26 524 719 1,715 15 113 14 ‐ 89 ‐ 231 28 19 22 ‐ 75 ‐ 144 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 investor relation 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 Nafta 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 Sweden. The Company receives services from various subsidiary companies of Lundin Petroleum AB (“Lundin”), a shareholder of the Company. Lundin charges during the year ended December 31, 2013 of $518 (2012: $524) were comprised of G&G and other technical service costs of $144 (2012: $138) reimbursement for Company travel and related expenses of $nil (2012: $1), office rental, administrative and building services of $374 (2012: $385). 60 SHAMARAN PETROLEUM CORP. Notes to the Consolidated Financial Statements For the year ended December 31, 2013 (Expressed in thousands of United States Dollars unless otherwise stated) ______________________________________________________________________________ In the year 2012, 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. Of the total proceeds raised on the November 2013 bond issue, $33.8 million were subscribed to by related parties. Refer also to note 19. 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 share based payments Management’s short‐term benefits Directors’ share based payments Directors’ fees Total For the year ended December 31, 2012 2013 788 461 402 273 126 2,050 774 12 156 ‐ 130 1,072 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. 61 SHAMARAN PETROLEUM CORP. DIRECTORS CORPORATE INFORMATION Keith C. Hill Director, Chairman Nairobi, Kenya Pradeep Kabra Director, President & Chief Executive Officer Geneva, Switzerland Brian D. Edgar Director Vancouver, British Columbia Gary S. Guidry Director Calgary, Alberta Alexandre Schneiter Director Anieres, Switzerland J. Cameron Bailey Director Calgary, Alberta CORPORATE OFFICE 885 West Georgia Street Suite 2000 Vancouver, British Columbia V6C 3E8 Telephone: +1‐604‐689‐7842 Facsimile: +1‐604‐689‐4250 Website: www.shamaranpetroleum.com OPERATIONS OFFICE 5 Chemin de la Pallanterie 1222 Vésenaz Switzerland Telephone: +41‐22‐560‐8600 Facsimile: +41‐22‐560‐8601 BANKER HSBC Bank Canada Vancouver, British Columbia INDEPENDENT AUDITORS PricewaterhouseCoopers LLP London, UK TRANSFER AGENT OFFICERS Computershare Trust Company of Canada Brenden Johnstone Chief Financial Officer Geneva, Switzerland Kevin E. Hisko Corporate Secretary Vancouver, British Columbia Vancouver, British Columbia STOCK EXCHANGE LISTINGS TSX Venture Exchange and NASDAQ OMX First North Exchange Trading Symbol: SNM INVESTOR RELATIONS Sophia Shane Vancouver, British Columbia ADDITIONAL INFORMATION Additional information related to the Company, including its Annual Information Form, is available on SEDAR at www.sedar.com and on the Company’s web‐site at www.shamaranpetroleum.com. 62