ShaMaran Petroleum Corp.
Annual Report
For the year ended December 31, 2015
SHAMARAN PETROLEUM CORP.
MANAGEMENT DISCUSSION AND ANALYSIS
For the year ended December 31, 2015
________________________________________________________________________________________
Management’s discussion and analysis (“MD&A”) of the financial and operating results of ShaMaran Petroleum Corp.
(together with its subsidiaries, “ShaMaran” or the “Company”) is prepared with an effective date of March 16, 2016. The
MD&A should be read in conjunction with the audited consolidated financial statements for the year ended
December 31, 2015 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 Petroleum Corp. is an oil development and exploration company with a 26.8% direct interest in the Atrush
Block production sharing contract (“PSC”) relating to a property located in the Kurdistan Region of Iraq (“Kurdistan”)1.
Atrush is currently in the pre‐production stage of the first phase of the development program (“Phase 1”). Phase 1 of
field development consists of installing and commissioning production facilities with 30,000 barrels of oil per day
(“bopd”) capacity and the drilling and completion of five production wells to supply the production facility. The oil
discovery on the Atrush petroleum property is continuously being appraised.
ShaMaran is a Canadian oil and gas company listed on the TSX Venture Exchange and the NASDAQ OMX First North
Exchange (Stockholm) under the symbol "SNM".
HIGHLIGHTS
Production Facility and Export Pipeline
Construction of the 30,000 bopd Atrush Phase 1 Production Facility (“Production Facility”) is in progress. Most
equipment has been delivered to site and has been installed. The civil works for critical individual facilities are
complete and non‐critical civil works are proceeding according to schedule. A tank farm has been installed.
Construction and erection of pipe racks is substantially complete. Pipe fabrication and welding is progressing.
Pulling and terminating of electrical and instrument cable is ongoing and instrumentation is being installed. Based
on progress to date, commissioning of the Production Facility is targeted for the second quarter of 2016, with first
oil production to follow in mid 2016.
Work on the dedicated feeder pipeline to be constructed between the Production Facility and the tie‐in point on
the main export pipeline is progressing. On November 1, 2015 an engineering, procurement and construction
contract for the pipeline to be constructed within the Atrush Block was signed. Actual construction work is
scheduled to start towards the end of the first quarter of 2016. The pipeline is expected to be completed in time for
the targeted first oil production date.
Well Results
The Atrush‐3 (“AT‐3”) eastern area appraisal well was re‐entered in January 2015 and tested at a maximum oil rate
of 4,900 bopd of 14° API oil using an electrical submersible pump (“ESP”). The well was originally drilled in 2013.
The Chiya Khere‐5 (“CK‐5”) development well was successfully tested in June 2015. Three well tests were carried
out using an ESP, confirming excellent well productivity. During the main test period an average rate of 5,000 bopd
25° API oil was established with a constrained drawdown.
1 The Kurdistan Regional Government (“KRG”) holds a right under the Atrush Block PSC to acquire up to a 25% undivided interest in the PSC.
1
The Chiya Khere‐8 (“CK‐8”) development well was re‐entered and tested in August 2015. Two well tests were
carried out producing 4,200 bopd each using an ESP. For the first time medium gravity 24° API oil was tested from
the Mus formation.
Corporate
On January 19, 2015 the Company effected changes to its senior management and Board of Directors (the “Board”).
Mr. Chris Bruijnzeels was appointed as the President and Chief Executive Officer of ShaMaran and as a member of
the Board replacing Mr. Pradeep Kabra who resigned from these positions. Mr. C. Ashley Heppenstall was also
appointed as a member of the Board while Mr. Alex Schneiter and Mr. J. Cameron Bailey have resigned their
positions as members of the Board, all with effect from January 19, 2015. In connection with the changes in senior
management and the Board the Company approved on January 19, 2015 a grant of an aggregate of 26,000,000
incentive stock options with an exercise price of CAD 0.115, to certain senior officers and directors of the Company.
Refer also to the “Outstanding Share Data” section below.
ShaMaran raised funds of $59.1 million (net of transaction costs) through the issuance of an aggregate of
754,214,990 common shares of the Company in February 2015. The shares were issued further to an offering of
rights to existing shareholders of the Company to purchase shares of ShaMaran at an exercise price of CAD 0.10 per
share.
On February 15, 2016 the Company reported updates to estimated reserves and contingent resources for the
Atrush block as of December 31, 2015. Total oil in place is estimated at 1.5 to 2.8 billion barrels, with Total Field
Proven plus Probable (“2P”) Reserves on a property gross basis increasing from 61.5 million barrels (“MMbbl”) to
85.1 MMbbl, an increase of 38 percent. Total Field Unrisked Best Estimate Discovered Recoverable Resources (“2P +
2C”)2 on a property gross basis increased from 372 million barrels oil equivalent (MMboe)3 to 389 MMboe.
The Company announced on March 14, 2016 a financing arrangement which has been proposed (the “Proposed
Financing Arrangement”) to holders of the $150 million bonds (the “Existing Bonds”) of General Exploration
Partners. Inc. (“GEP”), a wholly owned subsidiary of ShaMaran. The Proposed Financing Arrangement would
provide the Company with additional liquidity in 2016 of approximately $33 million based on the issuance of $17
million of additional super senior bonds ($16 million proceeds net of transaction costs) and provide terms for the
Company to pay bond coupon interest in kind by issuing additional bonds, including approximately $17 million of
2016 coupon interest. The Proposed Financing Arrangement would also provide holders of the Existing Bonds the
option to convert up to $18 million of Existing Bonds at face value into ShaMaran common shares at market price
following approval of the Proposed Financing Arrangement. GEP has entered into an agreement to underwrite the
new super senior bonds with ShaMaran’s major shareholders, Lorito Holdings SARL and Zebra Holdings and
Investments SARL, companies owned by the Lundin Family Trust.
OPERATIONS
ShaMaran, through its wholly owned subsidiary, General Exploration Partners, Inc., holds a 26.8% direct interest in the
Atrush Block PSC. TAQA Atrush B.V. (“TAQA”), a subsidiary of Abu Dhabi National Energy Company PJSC, is the Operator
of the Atrush Block with a 53.2% direct interest, Marathon Oil KDV B.V. (“MOKDV”) holds a 20% direct interest. GEP,
MOKDV and TAQA together are “the Contractors” to the PSC.
The Atrush Block PSC relates to a petroleum property located in Kurdistan in the northern extension of the Zagros
Folded Belt and adjacent to several major oil discoveries.
The Atrush field was discovered in 2011 and a Phase 1 development plan was approved in October 2013, which consists
of installing and commissioning production facilities with 30,000 bopd capacity and the drilling and completion of
production wells to supply the Production Facility. To date four Phase 1 production wells have been drilled and tested,
and a further two appraisal wells have been drilled and tested with the objective of further delineating the field towards
the east. Good reservoir communication has been proven between the east and the west part of the field.
2 This estimate of remaining recoverable resources (unrisked) includes contingent resources that have not been adjusted for risk based on the chance
of development. It is not an estimate of volumes that may be recovered.
3 Boe may be misleading, particularly if used in isolation. A boe conversion ratio of 6 million cubic feet (“Mcf”) per one barrel is based on an energy
equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
2
Ownership and Principal PSC Terms
In August 2010 the Company acquired a 33.5% shareholding in GEP which then held an 80% working interest in the
Atrush Block PSC, with the remaining 20% third party interest (“TPI”) being held by the KRG. In October 2010 MOKDV
was assigned the 20% TPI in the PSC. On December 31, 2012 GEP sold a 53.2% direct interest in the Atrush Block to
TAQA, who also assumed from GEP the Operatorship of the Block, and repurchased the entire 66.5% shareholding
which Aspect Energy International LLC (“Aspect”) held in GEP, leaving the Company with a 100% shareholding interest in
GEP and a 26.8% direct interest in the PSC.
Fiscal terms under the PSC include a 10% royalty and a variable profit split based on a percentage share 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. The Contractor Group is entitled to cost recovery in respect of all costs and expenditures incurred for exploration,
development, production and decommissioning operations, as well as certain other allowable direct and indirect costs.
The portion of profit oil available to the Contractors is based on a sliding scale from 32% to 16% depending on the “R‐
Factor”, which is a ratio of cumulative revenues to cumulative costs. When the ratio is below one, the Contractor Group
is entitled to 32% of profit oil, with a reducing scale to 16% when the ratio is greater than 2.75. In respect of gas, the
sliding scale is from 40% to 22%.
Under the terms of the PSC the KRG has the option of participating as a Contractor Entity with an undivided interest in
the petroleum operations and all the other rights, duties, obligations and liabilities of the Contractor in the PSC, of up to
25% and not less than 5%. Upon exercise of this option the government becomes liable for its share of the petroleum
costs incurred on or after the first commercial declaration date.
On March 12, 2013 the KRG communicated its intention to exercise a right to acquire an interest in the Atrush Block PSC
in accordance with the terms of the PSC. At the date of this MD&A discussions between the Contractors and the KRG to
effect the exercise of the right were in progress but the process of exercising the right was not complete.
Current Operations
Production Facility and Pipeline
30,000 bopd Atrush Phase 1 Production Facility: Construction of the Production Facility is in progress. Most equipment
has been delivered to site and has been installed. The civil works for critical individual facilities are complete and non‐
critical civil works are proceeding according to schedule. A tank farm has been installed. Construction and erection of
pipe racks is substantially complete. Pipe fabrication and welding is progressing. Pulling and terminating of electrical and
instrument cable is ongoing and instrumentation is being installed.
Severe winter conditions, limitations in availability of skilled personnel and unanticipated border closures have put
strain on the schedule. Additional personnel have been mobilised and a double shift system has been put in place to
ensure delivery as per schedule. Commissioning is scheduled in the second quarter of 2016. First oil is targeted for mid
2016.
The CK‐5 and CK‐8 development wells were successfully tested and completed in the year 2015. The Operator plans to
complete the previously tested Atrush‐2 (“AT‐2”) and Atrush‐4 (“AT‐4”) wells in 2016 prior to first production. All four
wells are to be connected to the Production Facility and ready for production prior to start‐up.
Atrush Feeder Pipeline: A dedicated feeder pipeline between the Production Facilities and the tie‐in point on the main
export pipeline at Kurdistan Crude Pipeline pumping station #2 (“KCP2”) at kilometre 92 is to be constructed. An
engineering, procurement and construction contract for the section of pipeline to be constructed within the Atrush
Block was signed on November 1, 2015 by TAQA and KAR Company for Constructional Contracting, Engineering
Consultancy, Electrical and Mechanical Contracting and Real Estate Investment Limited. Engineering and design is
substantially complete, procurement is ongoing and actual construction is to start towards the end of the first quarter of
2016. The KRG is responsible for the construction of the section of the pipeline from the block boundary to the tie‐in
point on the main export pipeline. The pipeline is expected to be completed in time for the targeted first oil production
date.
The feeder pipeline scope includes a pump station, a 6 kilometre 10 inch section from the Production Facilities crossing
the Chiya Khere mountain followed by a 33 kilometre 12 inch section up to KCP2.
3
Appraisal and Development Wells
Atrush‐3 Re‐entry and Re‐test: The AT‐3 eastern appraisal well was re‐entered in order to finish the inconclusive well
testing program announced on August 26, 2013. The test, which was concluded in January 2015, consisted of a single
commingled interval through two sets of 12‐metre perforations in the Naokelekan and Lower Sargelu formations, which
tested at a maximum oil rate of 4,900 bopd, using an ESP. Oil gravity was measured at 14 degrees API.
Chiya Khere‐54 Phase 1 Development Well: The CK‐5 development well was drilled and suspended in June 2014. The well
was re‐entered in May 2015 and three well tests (“DST”) using an electrical submersible pump were carried out:
DST#1 was conducted over a 24‐metre interval in the Mus formation. The interval tested at an average oil rate of
750 bopd (barrels of oil per day) with a final water cut of less than 1 percent. Oil gravity was measured at
16 degrees API.
DST#2 was conducted over a perforated 118‐metre interval in the Lower Sargelu formation. The interval tested at
an average oil rate of 5,000 bopd with a constrained drawdown during the main test period, with a zero final water
cut. Oil gravity was measured around 25 degrees API.
DST#3 was conducted over a perforated 12‐metre interval within the Naokelekan formation. The interval tested at a
maximum flow rate of 1,600 bopd with a zero final water cut and a measured oil gravity similar to DST #2.
Chiya Khere‐8 Phase 1 Development Well: The CK‐8 development well was drilled and suspended in September 2014.
The well was re‐entered in July 2015 and two well tests using an ESP were carried out:
DST#1 was conducted over a 24‐metre interval in the Mus formation. The interval tested at a final average oil rate
of 4,200 bopd (barrels of oil per day) with no water cut. Oil gravity was measured at approximately 24 degrees API.
DST#2 was conducted over a perforated 60‐metre interval in the Lower Sargelu formation. The interval tested at an
average oil rate of 4,200 bopd with a small drawdown and achieved a maximum rate of 8,200 bopd, with a zero final
water cut. Oil gravity was measured around 26 degrees API.
Location and Operational History
The Atrush Block is located approximately 85 kilometres northwest of Erbil, the capital of Kurdistan, and is 269 square
kilometres in area. Oil has been proven in Jurassic fractured carbonates in the Chiya Khere structure and is estimated to
contain between 1.5 and 2.8 billion barrels of oil in place. The structure is expressed at surface by the Chiya Khere
mountain, which runs east‐west for approximately 25 kilometres with an approximate width of 3.5 kilometres.
In the year 2008 GEP acquired 143 kilometres of 2D seismic data covering the Atrush Block. In April 2011 the Atrush
structure was confirmed as an oil discovery by the Atrush‐1 (“AT‐1”) exploration well. This was followed by the AT‐2
appraisal well in July 2012. 3D seismic covering the entire Atrush Block was acquired between July 2011 and August
2012 and a Declaration of Commerciality made on November 7, 2012. The eastern part of the field was successfully
appraised in June 2013 by the AT‐3 well.
The AT‐2 appraisal well was drilled to a depth of 1,750 metres below the base of Jurassic reservoir section, which was
reached in July 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. Individual test rates for
the three Jurassic DSTs, constrained by surface testing equipment, were over 10,000 bopd (approximately 27 degree
API) and confirmed the significant potential for production from the highly fractured Jurassic reservoir. An additional
two DSTs conducted in two deeper Jurassic formations confirmed them to be oil bearing and productive, with test rates
limited by gas lift. 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 formations in the lower part of the Jurassic.
On November 7, 2012 GEP and MOKDV, collectively being the Contractor under the Atrush Block PSC at that time,
submitted to the Atrush Block Management Committee a Declaration of Commercial Discovery (“DCD”) with effect from
November 7, 2012 under Clause 12.6 (a) of the PSC. The DCD was submitted together with an Appraisal Report covering
the Atrush field.
4 Approved changes to terminology relating to the Atrush Block, effective from 2014, include well names. Following the Atrush‐4 well all future wells
on the Atrush Block will be prefixed with “Chiya Khere” (or “CK”) rather than with “Atrush”.
4
The AT‐3 eastern area appraisal well was spudded on March 25, 2013 and, after a top hole sidetrack due to mechanical
issues, the well was drilled to a measured depth of 1,806 metres which was reached on June 23, 2013. The well
encountered an estimated oil column of 286 metres in the Jurassic reservoir and successfully extended the Atrush
accumulation 6.5 kilometres further to the east, while proving producible oil 180 metres deeper than previous wells
thereby reducing the uncertainty on the Oil Water Contact/Free Water Level. AT‐3 was suspended pending the planned
re‐entry and successful retest in January 2015.
In June 2013 an interference test was conducted between AT‐1 and AT‐2. The wells, which are 3.1 kilometres apart,
confirmed excellent pressure communication and multi Darcy horizontal permeability through the fracture system in
the Jurassic reservoir. This reservoir connectivity was further confirmed, as announced by the Company in
February 2015, by pressure communication between the tested Chiya Khere‐6 (“CK‐6”) and AT‐3 wells and the AT‐2
well, over a distance of 6.5 kilometres, demonstrating that the eastern appraisal area is in pressure communication with
the Phase 1 development area.
The Atrush Block Field Development Plan (“FDP”) was submitted for approval to the KRG on May 6, 2013, 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. Phase 1 of the FDP was duly approved with an effective date October 1, 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.
Following submission of the FDP the AT‐1 discovery well was determined to be unsuitable for long‐term production and
was plugged and abandoned in October 2013.
In 2014 three development wells were drilled. The AT‐4 well was drilled up‐dip towards the undrilled crest of the
structure from the AT‐1 drilling site and tested 27‐28 API oil at a combined rate of 9,059 bopd from two of the intervals
tested. The CK‐5 well was deviated from the same Chamanke‐A well pad with the bottom hole location in the Butmah
formation approximately 870 metres west southwest of the surface location, penetrating a gross vertical oil column of
approximately 540 metres. CK‐8 was also drilled from the same well pad and found the reservoir much higher than
expected some 1.4 kilometres east southeast of the surface location. CK‐5 and CK‐8 were suspended awaiting testing in
2015.
In 2014 CK‐6, an eastern area appraisal well, was drilled from the Chamanke‐C well pad and reached the Jurassic
reservoir approximately 139 metres structurally higher than the nearby AT‐3 well, approximately 600 metres South‐
southeast of the surface location. Three well tests were conducted, showing excellent reservoir quality and
demonstrating producible oil as deep as ‐460mSL, nearly 200m deeper than the equivalent interval that successfully
tested the higher viscosity oil in the AT‐2 well.
5
SELECTED ANNUAL FINANCIAL INFORMATION
The following is a summary of selected annual financial information for the Company:
(In $000, except per share data)
Continuing operations:
Impairment loss
General and administrative expense
Share based payments expense
Depreciation and amortisation expense
Finance cost
Finance income
Income tax expense
Net loss from continuing operations
Discontinued operations:
Gain on release of excess accrued windup costs
Gain on release of excess site restoration provisions
Expenses
Net income from discontinued operations
For the year ended December 31,
2014
2013
2015
(244,557)
(2,359)
(1,210)
(56)
(5,321)
681
(94)
(252,916)
46
‐
(13)
33
‐
(1,548)
(307)
(53)
(5,304)
108
(109)
(7,213)
‐
228
(15)
213
(84)
(2,393)
(882)
(65)
(740)
28
(87)
(4,223)
‐
981
(46)
935
Net loss
(252,883)
(7,000)
(3,288)
Basic loss in $ per share:
Continuing operations
Discontinued operations
Diluted loss in $ per share:
Continuing operations
Discontinued operations
Financial position – principal items
Total assets
Property Plant & Equipment – net book value
Exploration and evaluation assets – net book value
Working capital surplus
Borrowings
Shareholders’ equity
Common shares outstanding (x 1,000)
(0.17)
‐
(0.17)
(0.17)
‐
(0.17)
2015
297,810
177,044
88,645
20,278
148,263
129,624
1,579,768
(0.01)
‐
(0.01)
(0.01)
‐
(0.01)
As at December 31,
2014
488,258
172
429,245
42,309
147,657
322,204
810,984
(0.01)
‐
(0.01)
(0.01)
‐
(0.01)
2013
487,954
179
344,988
132,980
147,050
328,989
810,984
Summary of Principal Changes in Annual Financial Information
The Company has reported in 2015 a net loss of $252.9 million which was primarily driven by a non cash impairment
loss on the Company’s oil and gas assets as well as by routine general and administrative expenses, share based
payment expenses and finance cost, the substantial portion of which was expensed borrowing costs on the Company’s
senior secured bonds. These charges have been offset by interest income on cash held in short term deposits and by
foreign exchange gains. The principal changes in annual financial information are further explained in the sections
below.
6
Results of Continuing Operations
The Company’s continuing operations are comprised of the Phase 1 development program on the Atrush Block
petroleum property which are currently in the pre‐production stages and generate no revenue. The expenses and
income items of continuing operations are explained in detail as follows:
Impairment loss
In $000
Impairment loss on PP&E assets
Impairment loss
For the year ended December 31,
2014
2015
244,557
244,557
‐
‐
Due to a significant decline in world oil prices in the year 2015 the Company has conducted an impairment test to assess
if the net book value of its oil and gas assets was recoverable. The impairment test is based on the production and cost
profiles related to Atrush Block proved and probable reserves as estimated by the Company’s independent reserves and
resources evaluator, McDaniel and Associates Consultants Ltd (“McDaniel”), and used an oil price curve based on year
end price forecasts, a future cost inflation factor of 2% per annum and a discount rate of 11.5% to calculate the net
present value at December 31, 2015 of the Company’s projected share of future cash flows of the Atrush Block proved
and probable reserves to determine a recoverable value of $177 million. Therefore a non‐cash impairment loss of the
Company’s oil and gas assets has been recognized in the amount of $244.6 million and included in the statement of
comprehensive income for the year ended December 31, 2015.
General and administrative expense
In $000
Salaries and benefits
Management and consulting fees
General and other office expenses
Listing costs and investor relations
Travel expenses
Legal, accounting and audit fees
General and administrative expense incurred
General and administrative expense capitalised as E&E and PP&E assets
General and administrative expense
For the year ended December 31,
2014
2015
3,079
1,000
404
300
244
167
5,194
(2,835)
2,359
2,903
776
484
364
198
161
4,886
(3,338)
1,548
The Company capitalises as exploration and evaluation (“E&E”) and property, plant and equipment (“PP&E”) assets
general and administrative expenses supporting E&E and PP&E activities which relate to direct interest held in the
Atrush PSC.
The higher general and administrative expense incurred in the year 2015 relative to the amount incurred in 2014 was
principally due to employee termination expenses associated with the change in executive management in January
2015, additional consulting and travel activities relating to the Atrush project and to general business development, and
increased travel in connection with the Rights Offering which closed in February 2015. The relative decrease in the
amount of general and administrative expenses capitalised is mainly due to a reduction in the technical support staff
employed on the Atrush project during the year 2015.
7
Share based payments expense
In $000
Share based payments expense
For the year ended December 31,
2014
2015
1,210
307
The share based payments expense results from the vesting of stock options granted in the years 2013 and 2015. A
grant of 26,000,000 stock options to certain senior officers and directors of the Company was approved on January 19,
2015 (year 2013: 5,640,000; year 2014: nil). The Company uses the fair value method of accounting for stock options
granted to directors, officers, employees and consultants whereby the fair value of all stock options granted is recorded
as a charge to operations. The fair value of common share options granted is estimated on the date of grant using the
Black‐Scholes option pricing model.
Depreciation and amortisation expense
In $000
Depreciation and amortisation expense
For the year ended December 31,
2014
2015
56
53
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.
Finance cost
In $000
Interest charges on bonds at coupon rate
Amortisation of bond related transaction costs
Interest expense on borrowings
Unwinding discount on decommissioning provision
Total finance costs before borrowing costs capitalised
Borrowing costs capitalised as E&E and PP&E assets
Total finance costs
For the year ended December 31,
2014
2015
17,250
606
17,856
36
17,892
(12,571)
5,321
17,250
607
17,857
19
17,876
(12,572)
5,304
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. During the year 2015 the Company incurred interest expense relating to its $150 million of
senior secured bonds which carry an 11.5% fixed semi‐annual coupon interest rate.
Finance income
In $000
Foreign exchange gain
Interest income
Total finance income
For the year ended December 31,
2014
2015
492
189
681
43
65
108
The foreign exchange gain in the year 2015 resulted primarily from holding net assets denominated in Canadian dollars
while the CAD strengthened against the United States dollar, the reporting currency of the Company.
Interest income represents bank interest earned on cash and investments held in interest bearing term deposits. The
increase in interest income reported in the year 2015 relative to the amount reported in 2014 is due to a relatively
higher level of interest bearing term deposits held in 2015 due to the investment of bond proceeds and proceeds from
the Rights Offering. Further information on the Rights Offering is included in the Outstanding Share Data section in this
MD&A.
8
Income tax expense
In $000
Income tax expense
For the year ended December 31,
2014
2015
94
109
Income tax expense relates to provisions for income taxes on service income generated in Switzerland which is
determined on the basis of costs incurred in procuring the services. The decrease in tax expense from the comparable
reporting period is primarily due to lower taxable income in the Swiss subsidiary which decreased compared to 2014
due to foreign exchange losses on cash deposits held in Swiss francs in 2015.
Results of Discontinued Operations
The main components of discontinued operations are explained as follows:
Income
In $000
Gain on release of excess accrued windup costs
Gain on release of excess site restoration provisions
Total income
For the year ended December 31,
2014
2015
46
‐
46
‐
228
228
During the year 2015 the Company completed the windup of Summit Energy Company LLC, which was the lone
remaining United States based operational subsidiary of the Company. The total cost to complete this exercise was less
than the amount previously estimated and the excess accrued windup costs have been released resulting in a gain in the
year 2015.
In the year 2014 the Company released excess site restoration provisions as the total cost to complete this was less than
the amount previously estimated. Works to restore the sites pertaining to the interests the Company held in petroleum
properties located in the United States were completed during the year 2014.
Expenses
In $000
Legal, accounting and audit fees
General and other office expenses
Total expenses
For the year ended December 31,
2014
2015
12
1
13
9
6
15
The decrease in expenses in the year 2015 relative to the amounts incurred in the same period of 2014 is due to the
reduction in activity associated with the Company’s United States based discontinued operations following the sale in
2009 of the properties located there. The professional and general fees which the Company has incurred are related to
the windup of its United States based operational subsidiaries.
9
Capital Expenditures on Property Plant & Equipment Assets
The net book value of oil and gas assets at December 31, 2015 are comprised of development costs related to the
Company’s share of Atrush Block proved and probable reserves as estimated by McDaniel (the “Atrush 2P reserves”).
These costs are not subject to depletion until commencement of commercial production. The movements in PP&E are
explained as follows:
In $000
Opening net book value
Additions
Transfer from intangible E&E
Impairment loss
Depreciation charge
Ending net book value
For the year ended December 31,
2014
2015
89
11,029
410,472
(244,557)
(33)
177,000
125
‐
‐
‐
(36)
89
The additions to PP&E assets during the year 2015 of $11.0 million were comprised of $9.8 million of Atrush field
development activity costs, $1.0 million of capitalised borrowing costs and $0.2 million of general and administrative
support costs relating to Atrush Block PP&E activities.
In November 2015 an engineering, procurement and construction contract for a crude oil pipeline to be constructed
within the Atrush Block was signed by TAQA and a KRG‐approved pipeline contractor. The Company has determined
that this development is sufficient to confirm the technical and commercial feasibility of its proved and probable
reserves. Accordingly, $410.5 million of costs related to the Atrush 2P reserves were transferred from intangible assets
to PP&E in 2015.
Due to a significant decline in world oil prices in the year 2015 the Company has conducted an impairment test to assess
if the net book value of its oil and gas assets was recoverable. The impairment test is based on McDaniel’s production
and cost profiles related to Atrush 2P reserves and used an oil price curve based on year end price forecasts, a future
cost inflation factor of 2% per annum and a discount rate of 11.5% to calculate the net present value at December 31,
2015 of the Company’s projected share of future cash flows of the Atrush 2P reserves to determine a recoverable value
of $177 million. Therefore a non‐cash impairment loss of the Company’s oil and gas assets has been recognized in the
amount of $244.6 million and included in the statement of comprehensive income for the year ended December 31,
2015.
A sensitivity analysis shows that a $5/bbl decrease in the oil price would increase the impairment loss by $16 million
whereas a $5/bbl increase in the oil price would decrease the impairment loss by $14 million and a 1% increase in the
discount rate used to calculate the net present value would increase the impairment loss by $9 million while a 1%
decrease in the discount rate would decrease the impairment loss by $10 million. If expectations with regard to timing
of cash flows are not met it could also result in additional impairment losses.
Capital Expenditures on Exploration and Evaluation Assets
The net book value of E&E assets at December 31, 2015 represents Atrush Block exploration and appraisal costs related
to the Company’s share of Atrush Block contingent resources as estimated by McDaniel (the “Atrush 2C resources”). The
movements in E&E are explained as follows:
In $000
Opening net book value
Additions
Transfer to PP&E
Ending net book value
For the year ended December 31,
2014
2015
429,245
69,821
(410,472)
88,594
344,988
84,257
‐
429,245
10
The additions to E&E assets during the year 2015 of $69.8 million (2014: $84.3 million) were comprised of $55.7 million
(2014: $68.4 million) in Atrush field exploration and appraisal costs, $11.5 million (2014: $12.6 million) of capitalised
borrowing costs and general and administrative costs relating to Atrush Block E&E activities totalling $2.6 million (2014:
$3.3 million). In November 2015 $410.5 million of costs related to Atrush 2P reserves have been transferred from
intangible assets to PP&E.
Due to a significant decline in world oil prices in the year 2015 the Company has conducted an impairment test to assess
if the net book value of its E&E assets is recoverable. The impairment test is based on management’s production and
cost profiles related to the Atrush 2C resources and used an oil price curve based on year end price forecasts, a future
cost inflation factor of 2% per annum and a discount rate of 11.5% to calculate the net present value at December 31,
2015 of the Company’s projected share of future cash flows of the Atrush 2C resources. Since the net book value of E&E
assets is less than its estimated recoverable value no related impairment loss has been recognized in the year 2015.
A sensitivity analysis shows that a $5/bbl decrease in the oil price does not result in an impairment loss nor would a 1%
increase in the discount rate used to calculate the net present value.
Borrowings
At December 31, 2015 GEP, a wholly owned indirect subsidiary of ShaMaran, had outstanding $150 million of senior
secured bonds which were listed in May 2014 on the Oslo Børs in Norway under the symbol “GEP01”. The bonds have a
five year maturity from their issuance date of November 13, 2013, carry an 11.5% fixed semi‐annual coupon and were
used to fund capital expenditures related to the development of the Atrush Block.
The bonds include an unconditional and irrevocable on‐demand guarantee on a joint and several basis from ShaMaran
and certain of the ShaMaran’s direct and indirect subsidiaries and, among other arrangements, agreements which
pledge all of the ordinary shares of GEP and ShaMaran’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 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 the first 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 bonds. Of the Company’s
$31.9 million total cash and cash equivalents at December 31, 2015 $1.5 million was held in accounts pledged to the
bond trustee.
The movements in borrowings are explained as follows:
In $000
As at December 31,
Opening balance
Interest charges on bonds at coupon rate
Amortisation of bond related transaction costs
Interest payments to bondholders
Ending balance
‐ Current portion: accrued interest expense on bonds
‐ Non‐current portion: borrowings
2015
149,909
17,250
606
(17,250)
150,515
2,252
148,263
2014
149,302
17,250
607
(17,250)
149,909
2,252
147,657
The remaining contractual obligations comprising repayment of principal and interest expense, based on undiscounted
cash flows at payment date and assuming the bonds are not early redeemed, are as follows:
In $000
Less than one year
Between two and three years
Total
Refer also to discussion below under “Proposed Transactions”.
As at December 31,
2015
17,250
182,763
200,013
2014
17,250
199,407
216,657
11
SELECTED QUARTERLY FINANCIAL INFORMATION
The following is a summary of selected quarterly financial information for the Company:
(In $000, except per share data)
Continuing operations
Impairment loss
General and admin. expense
Share based payments expense
Depreciation and amortisation
Finance cost
Finance income
Income tax expense
Net loss from continuing ops.
Discontinued operations
Gains on release of excess provisions
Income / (expense)
Net income / (loss) from discontinued ops.
Dec 31
2015
Sep 30
2015
Jun 30
2015
For the quarter ended
Dec 31
2014
Mar 31
2015
Sep 30
2014
Jun 30
2014
Mar 31
2014
(244,557)
(460)
(172)
(11)
(1,328)
47
(10)
(246,491)
‐
1
1
‐
(384)
(186)
(13)
(1,331)
88
(23)
(1,849)
46
‐
46
‐
(552)
(176)
(16)
(1,370)
58
(34)
(2,090)
‐
(4)
(4)
‐
(963)
(676)
(16)
(1,346)
542
(27)
(2,486)
‐
(10)
(10)
‐
(376)
(48)
(15)
(1,326)
37
(25)
(1,753)
228
2
230
‐
(154)
(51)
(14)
(1,326)
64
(29)
(1,510)
‐
(462)
(61)
(13)
(1,309)
26
(23)
(1,842)
‐
(1)
(1)
‐
(1)
(1)
‐
(556)
(147)
(11)
(1,364)
2
(32)
(2,108)
‐
(15)
(15)
Net loss
(246,490)
(1,803)
(2,094)
(2,496)
(1,523)
(1,511)
(1,843)
(2,123)
Basic loss in $ per share:
Continuing operations
Discontinued operations
Diluted loss in $ per share:
Continuing operations
Discontinued operations
(0.17)
‐
(0.17)
(0.17)
‐
(0.17)
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
Summary of Principal Changes in the Fourth Quarter Financial Information
In the fourth quarter of 2015 work on the Atrush Block development program continued. The net loss was primarily
driven by the impairment loss on PP&E assets and also by general and administrative expenses, share based payments
expense and finance cost, the substantial portion of which was expensed borrowing cost on the Company’s senior
secured bonds.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at December 31, 2015 was $20.3 million compared to $42.3 million at December 31, 2014.
The overall cash position of the Company decreased by $25.3 million during the year 2015 compared to a decrease in
cash of $85.4 million during 2014. The main components of the movement in funds are discussed in the following
paragraphs.
The operating activities of the Company during 2015 resulted in the use of $3.2 million in cash compared to an increase
by $3.0 million in the cash position during the comparable period of 2014. The 2015 use of cash is explained by cash
expenses on continuing operations of $2.5 million plus an additional $0.7 million cash out on net changes in the
Company’s working capital items.
12
Net cash outflows to investing activities in the year of 2015 were $64.4 million compared to cash outflows in the
amount of $71.1 million in 2014. Substantially all of the cash outflows to investing activities in 2015 relate to investment
in the Atrush Block development and appraisal work program.
Net cash inflows from financing activities in 2015 were $41.8 million relating to $59.1 million of net proceeds from the
Rights Offering (gross proceeds of $60.5 million (CAD 75.4 million) were raised out of which $1.4 million was paid in
related transaction costs) and to $17.3 million of cash interest payments made to bondholders. For more information on
the Rights Offering refer also to the “Outstanding Share Data” section below.
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 proceeds from asset sales, bonds and, most recently, the
issuance of common shares, to finance its ongoing oil exploration, development and acquisition activities. The Company
believes that based on the forecasts and projections they have prepared, and the Proposed Financing Arrangement
(refer to the discussion under Proposed Transactions section below), the resources to be available will be sufficient for
the Company and its subsidiaries 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 uncertainty surrounding the timing and amounts of cash receipts from the Proposed Financing Arrangement,
oil production forecasted to commence in mid 2016 and the level of project development costs that the Company may
be required to fund. The potential that the Company’s financial resources are insufficient to fund its appraisal and
development activities for the next 12 months, particularly in case the Proposed Financing Arrangement is not accepted
by the Existing Bondholders or there are unforeseen delays in oil production or receipt of funds from oil sales, indicates
a material uncertainty which may cast significant doubt over the Company’s ability to continue as a going concern.
OUTSTANDING SHARE DATA AND STOCK OPTIONS
On February 10, 2015 in connection with an offering of rights to shareholders of record on January 12, 2015 to purchase
additional common shares in the ShaMaran (“Common Shares”) at a subscription price of CAD 0.10 per share (the
“Rights Offering”), the Company issued an aggregate of 713,308,912 Common Shares, including 195,710,409 Common
Shares to its major shareholders, Lorito Holdings SARL, Zebra Holdings and Investments SARL and Lundin Petroleum BV
(collectively the "Standby Purchasers") on exercise of their respective rights, resulting in gross proceeds to the Company
of CAD 71.3 million ($57.1 million). Under the terms of the standby purchase agreement (the "Standby Purchase
Agreement") between the Company and the Standby Purchasers, the Standby Purchasers agreed to subscribe for a total
of 40,906,078 additional Common Shares, representing all Common Shares not otherwise subscribed for by rights
holders, at a price of CAD 0.10 per share (the "Standby Purchase"). The Standby Purchase was concluded on February
17, 2015 and resulted in additional gross proceeds to the Company of CAD 4.1 million ($3.3 million). In addition on
February 17, 2015 the Company issued a further aggregate of 14,569,684 Common Shares to the Standby Purchasers in
respect of the guarantee fee, as defined under the standby purchase agreement. At December 31, 2015 and at the date
of this MD&A the Company had 1,579,768,534 shares outstanding (December 31, 2014: 810,983,860).
In connection with the changes in senior management and the Board the Company approved on January 19, 2015 a
grant of an aggregate of 26,000,000 incentive stock options, with an exercise price of CAD 0.115, to certain senior
officers and directors of the Company. When options are granted the Black‐Scholes option value method is used to
calculate a value for the stock options. The share based payments reserve increased by $1.2 million in the year 2015
(2014: $0.3 million) due entirely to share based payments expense incurred during the year. At such time as the options
are exercised the applicable amounts of share based payments are transferred from the share based payments reserve
to share capital.
At December 31, 2015 there were 28,190,000 stock options outstanding under the Company’s employee incentive stock
option plan, which is an increase from the 6,755,000 stock options outstanding at December 31, 2014 by 21,435,000
stock options resulting from 26,000,000 stock options granted and from the expiry of 4,565,000 stock options in the
year 2015. No stock options were forfeited or exercised in the year 2015 (2014: nil). There has been no further
movement in stock options from December 31, 2015 to the date of this MD&A.
The Company has no warrants outstanding.
13
OFF BALANCE SHEET ARRANGEMENTS
The Company has no off‐balance sheet arrangements.
RELATED PARTY TRANSACTIONS
In $000
Lundin Petroleum AB
Namdo Management Services Ltd.
McCullough O’Connor Irwin LLP
Mile High Holdings Ltd.
Total
Purchases of services
during the year
2015
2014
473
173
18
‐
664
464
214
276
‐
954
Amounts owing
at December 31,
2014
2015
40
9
2
‐
51
56
31
91
35
213
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, 2015 of $473 (2014: $464) were comprised of
technical service costs of $59 (2014: $50), investor relations services of $29 (2014: $36), reimbursement for Company
travel and related expenses of $23 (2014: $1), office rental, administrative and building services of $362 (2014: $377).
Namdo Management Services Ltd. is a private corporation affiliated with a shareholder of the Company and has
provided corporate administrative support and investor relations services to the Company.
McCullough O’Connor Irwin LLP is a law firm in which an officer of the Company is a partner and has provided legal
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 relations activities.
In February 2015, in connection with the Rights Offering, the Company issued Common Shares to its major shareholders,
Lorito Holdings SARL, Zebra Holdings and Investments SARL and Lundin Petroleum B.V., a subsidiary company of Lundin.
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.
COMMITMENTS
Atrush Block Production Sharing Contract
ShaMaran holds a 26.8% direct interest in the Atrush Block PSC through its wholly owned subsidiary GEP. TAQA is the
Operator with a 53.2% direct interest and MOKDV holds a 20% direct interest.
On March 12, 2013 the KRG communicated its intention to exercise a right to acquire an interest in the Atrush Block PSC
in accordance with the terms of the PSC. At the date this MD&A discussions between the Contractors and the KRG to
effect the exercise of the right were in progress but the process of exercising the right was not complete. Under the
terms of the Atrush Block PSC, upon the exercise of the right the KRG would assume up to a 25% undivided interest in
the petroleum operations and all the other rights, duties, obligations and liabilities of the Contractors from the date the
block has first been declared commercially viable.
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 Contractors to fund certain training and
environmental assistance projects over the development period. All qualifying petroleum costs incurred by the
Contractors 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.
14
As at December 31, 2015 the outstanding commitments of the Company were as follows:
In $000
For the year ended December 31,
Atrush Block development and PSC
Office and other
Total commitments
2016
76,250
65
76,315
2017
160
‐
160
2018
Thereafter
160
‐
160
2,414
‐
2,414
Total
78,984
65
79,049
Amounts relating to the Atrush Block represent the Company’s unfunded share of the approved work program and
other obligations under the Atrush Block PSC.
PROPOSED TRANSACTIONS
The Company had no significant transactions pending at March 16, 2016 with the exception of the following:
On March 14, 2016 the Company announced a financing arrangement which has been proposed (the “Proposed
Financing Arrangement”) to holders of GEP’s $150 million bonds (the “Existing Bondholders”) and is to provide the
Company with additional liquidity in 2016 of approximately $33 million net of transaction costs. The principal terms of
the arrangement are:
1. GEP issues new $17 million super senior bonds (“Super Senior Bonds”). The Super Senior Bonds will be based on
the same agreement as the Existing Bonds with the same maturity date of November 13, 2018 and an 11.5%
coupon interest payable semi‐annually. GEP will have the option to pay the coupon interest on the Super Senior
Bonds in cash or in kind by issuing new bonds (“PIK Bonds”). GEP has entered into an agreement to underwrite the
Super Senior Bonds with major shareholders, Lorito Holdings SARL and Zebra Holdings and Investments SARL,
companies owned by the Lundin Family Trust.
2.
3.
The Existing Bondholders are given the option to convert up to $18 million of Existing Bonds at face value into
ShaMaran common shares at market price following approval of the Arrangement. The conversion offer is to
commence following approval of the Proposed Financing Arrangement with pro‐rata allocation among Existing
Bondholders upon oversubscription.
The bond agreement for the Existing Bonds is to be amended so that (i) the 2016 coupon interest ($17.25 million
before considering any conversion in 2 above) is settled by issuing new PIK Bonds; (ii) GEP has the option to pay in
cash or in kind (by issuing new PIK Bonds) the post 2016 coupon interest; and (iii) certain waivers and amendments
are made to the terms of the Existing Bonds including the subordination of Existing Bonds’ security to the Super
Senior Bonds’ security.
The Company is also considering offering a subsequent private placement of shares for cash for the remainder if $18
million is not converted under point 2 above.
To facilitate the approval process a Summons was issued on March 14, 2016 by Nordic Trustee, the bondholder’s trustee,
requesting a meeting of Existing Bondholders on April 1, 2016.
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 are 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
There are no IFRS or interpretations that have been issued effective for financial years beginning on or after January 1,
2015 that would have a material impact on the Company’s consolidated financial statements.
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.
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 new standard will be effective for annual periods beginning on or after January 1, 2018. The Company is
in the process of assessing the full impact of IFRS 9 and intends to adopt IFRS 9 no later than the accounting period
beginning on or after January 1, 2018.
IFRS 15: Revenue from contracts with customers is the new standard which replaces IAS 18 Revenue and IAS 11
Construction Contracts and provides a five step framework for application to customer contracts; identification of
customer contract, identification of the contract performance obligations, determination of the contract price,
allocation of the contract price to the contract performance obligations, and revenue recognition as performance
obligations are satisfied. A new requirement where revenue is variable stipulates that revenue may only be recognised
to the extent that it is highly probable that significant reversal of revenue will not occur. The new standard will be
effective for annual periods beginning on or after January 1, 2017. The Company is in the process of assessing the full
impact of IFRS 15 and intends to adopt IFRS 15 no later than the accounting period beginning on or after January 1,
2017.
IFRS 11: Joint Arrangements. An amendment to IFRS 11 was issued in May 2014 addressing guidance on how to account
for the acquisition of an interest in a joint operation that constitutes a business. The standard now specifies the
appropriate accounting treatment for such acquisitions and requires an investor to apply the principles of business
combination accounting, as defined in IFRS 3 ‐ Business combinations, when acquiring an interest in a joint operation
that constitutes a business. The amendment requires an investor to measure identifiable assets and liabilities at fair
value; expense acquisition related costs; recognise deferred tax, and; recognise the residual as goodwill. The
amendment is applicable to both the acquisition of the initial interest in a joint operation and the acquisition of
additional interest in the same joint operation. However, a previously held interest is not to be re‐measured when the
acquisition of an additional interest in the same joint operation results in retaining joint control. The amendment to
IFRS 11 will be applied prospectively for annual periods beginning on or after January 1, 2016. The Company intends to
adopt IFRS 11 for the accounting period beginning on January 1, 2016 and does not anticipate that it will have a material
impact its financial statements.
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.
16
Capitalised costs of proved oil and gas properties are depleted using the unit of production method based on estimated
gross proved and probable 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 and probable
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 and probable 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 indicators of impairment. Economic events which would indicate impairment 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
amounts of E&E and oil and gas assets 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. 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.
A substantial portion of the Company’s exploration and development activities are conducted jointly with others.
RESERVES AND RESOURCE ESTIMATES
The Company engaged McDaniel to evaluate 100% of the Company’s reserves and resource data at December 31, 2015.
The conclusions of this evaluation have been presented in a Detailed Property Report which has been prepared in
accordance with standards set out in the Canadian National Instrument NI 51‐101 and Canadian Oil and Gas Evaluation
Handbook (“COGEH”).
Positive well test results in the CK‐5, CK‐8 and AT‐3 wells as well as positive interference tests across the field have
resulted in an increased reserves area. Furthermore, the gradual increase in oil density with depth has now fully been
incorporated.
ShaMaran currently has a 26.8 percent working interest in the Block and is continuing to fund expenditure on that basis.
However the KRG has an option to back in and take up to 25 percent working interest in the Block, which would dilute
the ShaMaran working interest to 20.1 percent. It is normal evaluation practice to assume, as it would be economic to
do so, that the KRG will exercise their option, and as such the reserves and respective net present values were reported
on a diluted basis.
17
The Company’s crude oil reserves as of December 31, 2015 were, based on a Company working interest of 20.1 percent,
estimated to be as follows:
Company estimated reserves (diluted)
As of December 31, 2015
Proved
Developed
Proved
Undeveloped
Total
Proved
Probable
Total Proved &
Probable
Possible
Total Proved,
Probable &
Possible
Light/Medium Oil (Mbbl)(1)
Gross(2)
Net(3)
Heavy Oil (Mbbl)(1)
Gross(2)
Net(3)
‐
‐
‐
‐
4,653
3,265
2,287
1,605
4,653
3,265
2,287
1,605
7,779
4,191
2,394
1,203
12,432
7,456
4,681
2,808
10,366
3,167
22,798
10,623
3,108
822
7,789
3,629
Notes:
(1) The Atrush Field contains crude oil of variable density even within a single reservoir unit and as such the actual split between Light/Medium Oil and Heavy
Oil is uncertain.
(2) Company gross reserves are based on the Company’s 20.1 percent working interest share of the property gross reserves assuming the Government
exercises its option to take a 25 percent working interest.
(3) Company net reserves are based on Company share of total Cost and Profit Revenues. Note, as the government pays income taxes on behalf of the
Company out of the government's profit oil share, the net reserves were based on the effective pre‐tax profit revenues by adjusting for the tax rate.
The Company’s crude oil and natural gas contingent resources as of December 31, 2015 were estimated to be as
follows, based on a Company working interest of 20.1 percent:
Company estimated contingent resources (diluted) (1) (2)
As of December 31, 2015
Light/Medium Oil (Mbbl)(3)
Gross(4)
Heavy Oil (Mbbl)(3)
Gross(4)
Natural Gas (MMcf)
Gross(4)
Low Estimate
(1C)
Best Estimate
(2C)
High Estimate
(3C)
16,050
20,256
5,010
17,980
41,656
8,810
19,895
66,616
13,756
Notes:
(1) Based on a 20.1 percent Company working interest assuming the KRG exercises its option to take a 25 percent working interest.
(2) There is no certainty that it will be commercially viable to produce any portion of the resources.
(3) The Atrush Field contains crude oil of variable density even within a single reservoir unit and as such the actual split between Light/Medium Oil and Heavy
Oil is uncertain.
(4) These are unrisked contingent resources that do not take into account the chance of development which is defined as the probability of a project being
commercially viable. Quantifying Company Gross resources are based on a 20.1 percent working interest share of the property gross resources assuming
the KRG exercises the chance of development requires consideration of both economic contingencies and other contingencies, such as legal, regulatory,
market access, political, social license, internal and external approvals and commitment to project finance and development timing. As many of these
factors are extremely difficult to quantify, the chance of development is uncertain and must be used with caution. The chance of development was
estimated to be 80 percent for the Crude Oil and 5 percent for the Natural Gas.
The contingent resources represent the likely recoverable volumes associated with further phases of development after
Phase 1. These are considered to be contingent resources rather than reserves due to the uncertainty over the future
development plan which will depend in part on further field appraisal and Phase 1 production performance.
18
Prospective resources remain unchanged from the estimates as of December 31, 2013.
Prospective resources summary – Atrush Block*
As of December 31, 2013
(1)(2)(3)(4)(5)(6)
*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
Risked (2) Mean
Estimate
Property Gross
Light/Medium Oil
(Mbbl)(5)
Condensate (Mbbl)
Natural Gas (MMcf)
Total (Mboe)(6)
Company Gross(4)
Light/Medium Oil
(Mbbl)(5)
Condensate (Mbbl)
Natural Gas (MMcf)
Total (Mboe)(6)
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
60,479
6,766
61,445
77,485
12,156
1,360
12,350
15,575
Notes:
(1) 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.
(2) These are partially risked prospective resources that have been risked for chance of discovery, but have not been risked for chance of development.
(3) Total based on the probabilistic aggregation of undiscovered pools within the field/prospect.
(4) Company gross resources are based on Company working interest share (20.1 percent) of the property gross resources.
(5) The prospective resources are categorized as “light & medium oil” however based on oil samples obtained from the Atrush Field it may be that a portion
should be categorized as “heavy oil”; it is not possible at this stage to split the resources between the categories and for simplicity they are all included as
“light & medium oil”.
(6) 6 Mcf is equivalent to 1 BOE. 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.
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.
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.
19
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.
FINANCIAL INSTRUMENTS
The Company’s financial instruments currently consist of cash, cash equivalents, advances to joint operations, 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.
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.
20
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. The spot price of Brent Crude Oil, a
reference in determining the price at which the Company can sell future oil production, has experienced a significant
decline since the beginning of the year 2015. A further 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.
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 on its cash and cash equivalents at both fixed and variable rates
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.
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.
21
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 Form,
which is available for viewing both on the Company’s web‐site at www.shamaranpetroleum.com and on SEDAR at
www.sedar.com, under the Company’s profile.
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. The materialisation of these uncertainties could adversely affect 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 uncertainty and potential impact of actions of the Islamic State in Iraq and Syria (“ISIS”): 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 region, 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. These uncertainties include, 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.
Over the last year actions of ISIS continued to represent a security threat in Iraq and the Kurdistan Region of Iraq. If ISIS
were to engage in attacks or were to occupy areas within Kurdistan, it could result in the Company and its joint
operations partners having to stop operations in the Atrush Block. This could result in delays in operations, additional
costs for increased security and difficulty in attracting/retaining qualified service companies and related personnel,
which could materially adversely impact the operations and future prospects of the Company and could have a material
adverse effect on the Company's business and financial condition.
International boundary disputes: Although Kurdistan 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 KRG. 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”.
22
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 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. Worldwide
crude oil commodity prices are expected to remain volatile in the near future as a result of global excess supply, recent
actions taken by the Organization of the Petroleum Exporting Countries ("OPEC"), and ongoing global credit and liquidity
concerns. This volatility may affect the Corporation's ability to obtain equity or debt financing on acceptable terms.
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.
23
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.
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.
24
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.
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. 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 six 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.
25
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.
Uncertainty in financial markets: In the future the Company is expected to require financing to grow its business. The
uncertainty which has periodically affected the financial markets in recent years 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.
26
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 for the year 2016 is as follows:
Atrush Block
Production Facility
Construction of the 30,000 bopd Atrush Phase 1 Production Facility will continue. Commissioning of the Production
Facility is targeted for the second quarter 2016 with first oil to follow in mid 2016.
Water injection facilities are planned to be installed in 2016.
Oil Export Pipeline
A contract for the engineering, procurement and construction of the pipeline to be constructed within the Atrush Block
was signed on November 1, 2015 by TAQA and a KRG approved pipeline contractor. Construction is scheduled to start
end of the first quarter of 2016 and the pipeline is expected to be completed in time for first oil production. The KRG is
responsible for constructing the pipeline section from the Atrush block boundary to the tie‐in point on the main export
pipeline, which the Company expects to also be completed in time for the targeted first oil date.
Wells
The Operator plans to complete the AT‐2 and AT‐4 wells prior to first production. Four producers, all equipped with
ESPs, are planned to be available for production at start up.
The 2016 work program includes the drilling and completion of a dedicated water disposal well and the drilling of an
appraisal and development well.
27
New Ventures
As part of its normal business the Company continues to evaluate new opportunities.
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,” “outlook”, “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 cautions readers regarding the reliance placed by them on forward‐looking information as by its nature, it
is based on current expectations regarding future events that involve a number of assumptions, inherent risks and
uncertainties, which could cause actual results to differ materially from those anticipated by the Company.
Except as required by applicable securities legislation 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.
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.
28
ShaMaran Petroleum Corp.
Audited Consolidated Financial Statements
For the year ended December 31, 2015
29
Auditor’s Report
17 March 2016
Independent Auditor’s Report
To the Shareholders of ShaMaran Petroleum Corp.
We have audited the accompanying consolidated financial statements of ShaMaran Petroleum Corp., which
comprise the consolidated balance sheet as at 31 December 2015 and 31 December 2014 and the Consolidated
Statement of Comprehensive Income, Consolidated Statement of Changes in Equity and Consolidated
Statement of Cash Flows for the years ended 31 December 2015 and 31 December 2014, and the related notes
including a summary of significant accounting policies and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements
in accordance with International Financial Reporting Standards, and for such internal control as management
determines is necessary to enable the preparation of consolidated financial statements that are free from
material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We
conducted our audits in accordance with Canadian Generally Accepted Auditing Standards. Those standards
require that we comply with ethical requirements and plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free from material misstatement.
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
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
preparation and fair presentation of the consolidated financial statements in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used
and the reasonableness of accounting estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a
basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated
balance sheet of ShaMaran Petroleum Corp. as at 31 December 2015 and 31 December 2014 and its financial
performance and its cash flows for the years ended 31 December 2015 and 31 December 2014 in accordance
with International Financial Reporting Standards.
PricewaterhouseCoopers SA, Avenue Giuseppe-Motta 50 CH-1211 Genève 2, Switzerland
Telephone: +41 58 792 91 00, Facsimile: +41 58 792 91 10, www.pwc.ch
PricewaterhouseCoopers SA is a member of the global PricewaterhouseCoopers network of firms, each of which is a separate and
independent legal entity.
30
Emphasis of matter – going concern
In forming our opinion on the financial statements, which is not modified, we have considered the adequacy of
the disclosures made in Note 2 to the financial statements concerning the Company’s ability to continue as a
going concern. Although the Company is confident that it has sufficient funds available, there is uncertainty
surrounding the successful completion of financing arrangements as well as the timing and amounts of cash
receipts commencing from first oil and the level of project development costs that the Company may be
required to fund. The uncertainty with regard to the timing and extent of these cash receipts and cash payments
at the date of approval of the 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 that would result if the Company was unable to continue as a going concern.
Luc Schulthess
Luc Schulthess
Colin Johnson
Colin Johnson
PricewaterhouseCoopers SA, Avenue Giuseppe-Motta 50 CH-1211 Genève 2, Switzerland
Telephone: +41 58 792 91 00, Facsimile: +41 58 792 91 10, www.pwc.ch
PricewaterhouseCoopers SA is a member of the global PricewaterhouseCoopers network of firms, each of which is a separate and
independent legal entity.
31
SHAMARAN PETROLEUM CORP.
Consolidated Balance Sheet
(Expressed in thousands of United States dollars)
______________________________________________________________________________
As at December 31,
Note
2015
2014
Assets
Non‐current assets
Property, plant and equipment
Intangible assets
Current assets
Cash and cash equivalents, unrestricted
Cash and cash equivalents, restricted
Other current assets
Total assets
Liabilities and equity
Current liabilities
Accounts payable and accrued expenses
Accrued interest expense on bonds
Current tax liabilities
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
11
12
15
13
14
15
15
16
10
17
177,044
88,645
265,689
30,409
1,512
200
32,121
297,810
9,560
2,252
31
11,843
148,263
8,080
156,343
‐
168,186
593,179
6,235
(83)
(469,707)
129,624
297,810
172
429,277
429,449
16,062
41,142
1,605
58,809
488,258
14,207
2,252
41
16,500
147,657
1,846
149,503
51
166,054
534,068
5,025
(65)
(216,824)
322,204
488,258
The accompanying notes are an integral part of these consolidated financial statements.
Signed on behalf of the Board of Directors:
/s/Ashley Heppenstall
C. Ashley Heppenstall, Director
/s/Keith Hill
Keith C. Hill, Director
32
SHAMARAN PETROLEUM CORP.
Consolidated Statement of Changes in Equity
(Expressed in thousands of United States dollars)
______________________________________________________________________________
Balance at January 1, 2014
534,068
4,718
27
(209,824)
328,989
Share
capital
Share based
payments
reserve
Cumulative
translation
adjustment
Accumulated
deficit
Total
Total comprehensive loss for the year:
Loss for the year
Other comprehensive loss
Transactions with owners in their capacity as owners:
Share based payments expense
‐
‐
‐
‐
‐
Balance at December 31, 2014
534,068
Total comprehensive loss for the year:
Loss for the year
Other comprehensive loss
Transactions with owners in their capacity as owners:
Share based payments expense
Shares issued on Rights Offering
Transaction costs
Balance at December 31, 2015
‐
‐
‐
‐
60,462
(1,351)
59,111
593,179
‐
‐
‐
307
307
5,025
‐
‐
‐
1,210
‐
‐
1,210
6,235
‐
(92)
(92)
‐
‐
(7,000)
‐
(7,000)
‐
‐
(7,000)
(92)
(7,092)
307
307
(65)
(216,824)
322,204
‐
(18)
(18)
(252,883)
‐
(252,883)
(252,883)
(18)
(252,901)
‐
‐
‐
‐
‐
‐
‐
‐
1,210
60,462
(1,351)
60,321
(83)
(469,707)
129,624
The accompanying notes are an integral part of these consolidated financial statements.
33
SHAMARAN PETROLEUM CORP.
Consolidated Statement of Cash Flows
(Expressed in thousands of United States dollars)
______________________________________________________________________________
Note
11
18
8
7
Operating activities
Net loss from continuing operations
Adjustments for:
Impairment loss
Interest expense on senior secured bonds – net
Share based payments expense
Depreciation and amortisation expense
Unwinding discount on decommissioning provision
Interest income
Foreign exchange gain
Changes in other current assets
Changes in current tax liabilities
Changes in accounts payable and accrued expenses
Cash used in discontinued operations
Net cash (outflows to) / inflows from operating activities
Investing activities
Interest received on cash deposits
Purchase of property, plant and equipment
Purchases of intangible assets
Net cash outflows to investing activities
Financing activities
Shares issued on Rights Offering
Transaction costs on Rights Offering
Interests payments to bondholders
Net cash inflows from / (outflows to) 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,
2014
2015
(252,916)
244,557
5,285
1,210
56
36
(189)
(492)
1,405
(10)
(2,147)
(18)
(3,223)
189
(4,311)
(60,271)
(64,393)
60,462
(1,351)
(17,250)
41,861
472
(25,283)
57,204
31,921
(7,213)
‐
5,286
307
53
19
(65)
(43)
(1,411)
(51)
6,749
(661)
2,970
65
(81)
(71,040)
(71,056)
‐
‐
(17,250)
(17,250)
(48)
(85,384)
142,588
57,204
*Inclusive of restricted cash
15
1,512
41,142
The accompanying notes are an integral part of these consolidated financial statements.
34
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2015
(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 the Atrush Block production sharing
contract (“Atrush Block PSC”) related to a petroleum property located in the Kurdistan Region of Iraq (“Kurdistan”).
On January 19, 2015 the Company effected changes to its senior management and Board of Directors (the
“Board”). Mr. Chris Bruijnzeels was appointed as the President and Chief Executive Officer of ShaMaran and as a
member of the Board replacing Mr. Pradeep Kabra who resigned from these positions. Mr. C. Ashley Heppenstall
was also appointed as a member of the Board while Mr. Alex Schneiter and Mr. J. Cameron Bailey have resigned
their positions as members of the Board, all with effect from January 19, 2015. Refer also to notes 18 and 22.
2. Basis of preparation and summary of significant accounting policies
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 that are effective beginning on January 1, 2015, 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.
These consolidated financial statements were approved for issuance by the Board of Directors on March 16, 2016.
Certain amounts presented in the consolidated balance sheet of the prior year have been reclassified for
comparative purposes in the consolidated balance sheet of the current year.
These consolidated financial statements have been prepared on the going concern basis which assumes that the
Company will be able to realise in 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 production revenues, the Company is currently dependent upon its existing financial resources,
which include $31.9 million of cash and cash equivalents as at December 31, 2015 to satisfy its obligations and
finance its appraisal and development program in Kurdistan. Failure to meet appraisal and development
commitments could put the Atrush Block PSC at risk of forfeiture. The Company is taking necessary steps to
increase its liquidity and in the month of March 2016 a new financing arrangement was proposed (“Proposed
Financing Arrangement”) to holders of the Company’s bonds (the “Existing Bondholders”). Refer also to notes 15
and 23.
35
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2015
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
The Company believes that based on the forecasts and projections they have prepared, and the Proposed
Financing Arrangement, the resources to be available will be sufficient for the Company and its subsidiaries 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 uncertainty
surrounding the timing and amounts of cash receipts from the Proposed Financing Arrangement, oil production
forecasted to commence in mid 2016 and the level of project development costs that the Company may be
required to fund. The potential that the Company’s financial resources are insufficient to fund its appraisal and
development activities for the next 12 months, particularly in case the Proposed Financing Arrangement is not
accepted by the Existing Bondholders or there are unforeseen delays in oil production or receipt of funds from oil
sales, indicates a material uncertainty which may cast significant doubt over the Company’s ability to continue as a
going concern. These consolidated financial statements do not include the adjustments that would result if the
Company is unable to continue as a going concern. Refer also to note 23.
3.
Significant accounting policies
(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)
Interest in joint operations
A joint operation 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 operation arrangements directly, the Company’s share of
jointly controlled operations and any liabilities incurred jointly with other joint operations 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 operations are accounted for
on an accrual basis. Income from the sale or use of the Company’s share of the output of jointly controlled
operations and its share of the joint operations 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.
36
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2015
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
(c) Business combinations
The acquisition method of accounting is used to account for business combinations. The consideration transferred
is measured at the aggregate of the fair values at the date of acquisition of assets given, liabilities incurred or
assumed and equity instruments issued by the Company in exchange for control of the acquiree. Acquisition
related costs are expensed as incurred. The identifiable assets, liabilities and contingent liabilities that meet the
conditions for recognition under IFRS 3 Business Combinations are 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.
(d) 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.
(e) 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.
37
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2015
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
(f) 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
(g) 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.
38
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2015
(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
(h)
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 either of the E&E or the oil and gas assets 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. 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.
(i) 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.
39
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2015
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
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.
(j) 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.
(k) 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.
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
40
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2015
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
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 carrying amount
of the loan or receivable and the present value of the estimated future cash flows discounted using the
instrument’s effective interest rate.
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.
(l) 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 from the acquisition
date.
(m) 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.
41
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2015
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
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.
(n) 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. The total expense is
recognised over vesting period, which is the period over which all conditions to entitlement are to be satisfied. 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.
(o) Pension obligations
The Company performed an assessment of their pension plan and determined that its Swiss subsidiary has a
defined benefit pension plan that is managed through a private fund. Independent actuaries determined the cost
of the defined benefit plan and the Company has determined that the unfunded obligation is not material.
(p) 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.
(q) Changes in accounting policies
There are no IFRS or interpretations that have been issued effective for financial years beginning on or after
January 1, 2015 that would have a material impact on the Company’s consolidated financial statements.
(r) 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.
42
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2015
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
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 new standard will be effective for annual periods
beginning on or after January 1, 2018. The Company is in the process of assessing the full impact of IFRS 9 and
intends to adopt IFRS 9 no later than the accounting period beginning on or after January 1, 2018.
IFRS 15: Revenue from contracts with customers is the new standard which replaces IAS 18 Revenue and IAS 11
Construction Contracts and provides a five step framework for application to customer contracts; identification of
customer contract, identification of the contract performance obligations, determination of the contract price,
allocation of the contract price to the contract performance obligations, and revenue recognition as performance
obligations are satisfied. A new requirement where revenue is variable stipulates that revenue may only be
recognised to the extent that it is highly probable that significant reversal of revenue will not occur. The new
standard will be effective for annual periods beginning on or after January 1, 2017. The Company is in the process
of assessing the full impact of IFRS 15 and intends to adopt IFRS 15 no later than the accounting period beginning
on or after January 1, 2017.
IFRS 11: Joint Arrangements. An amendment to IFRS 11 was issued in May 2014 addressing guidance on how to
account for the acquisition of an interest in a joint operation that constitutes a business. The standard now
specifies the appropriate accounting treatment for such acquisitions and requires an investor to apply the
principles of business combination accounting, as defined in IFRS 3 ‐ Business combinations, when acquiring an
interest in a joint operation that constitutes a business. The amendment requires an investor to measure
identifiable assets and liabilities at fair value; expense acquisition related costs; recognise deferred tax, and;
recognise the residual as goodwill. The amendment is applicable to both the acquisition of the initial interest in a
joint operation and the acquisition of additional interest in the same joint operation. However, a previously held
interest is not to be re‐measured when the acquisition of an additional interest in the same joint operation results
in retaining joint control. The amendment to IFRS 11 will be applied prospectively for annual periods beginning on
or after January 1, 2016. The Company intends to adopt IFRS 11 for the accounting period beginning on January 1,
2016 and does not anticipate that it will have a material impact its financial statements.
4.
Critical accounting judgments and key sources of estimation uncertainty
In the application of the Company’s accounting policies, which are described in note 3, management has made
judgments, estimates and assumptions about the carrying amounts of the assets, liabilities, revenues, expenses
and related disclosures. These estimates and associated assumptions are based on historical experience, current
trends and other factors that management believes to be relevant at the time these consolidated financial
statements were prepared. Actual results may differ as future events and their effects cannot be determined with
certainty and such differences could be material. 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.
43
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2015
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
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 2016 the Company commissioned an independent reserves and resources report from McDaniel &
Associates Consultants Ltd. (“McDaniel”) to estimate the Company’s reserves and resources at December 31, 2015.
The reserves and resources estimates provided in the report were considered in determining amounts of
impairment, depreciation and amortisation and decommissioning provisions included in these consolidated
financial statements.
(b)
Impairment of E&E and PP&E assets
IAS 36 Impairment of Assets and IFRS 6 Exploration of and Evaluation of Mineral Resources require that a review
for impairment be carried out if events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The recoverable amounts are determined with reference to value in use calculations. The
key assumptions for the value in use calculations are those regarding production flow rates, discount rates and
fiscal terms under the Production Sharing Contracts governing the Company’s assets and expected changes to
selling prices and direct costs during the period. These assumptions reflect management’s best estimates based on
historical experiences, past practices and expectations of future changes in the oil and gas industry. Refer also to
notes 11 and 12.
(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 10 and 16.
(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, 2015 is shown in note 18.
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 10 for disclosure of the
Company’s discontinued operations.
44
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2015
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
6. General and administrative expense
For the year ended December 31,
2014
2015
General and administrative expenses incurred
General and administrative expenses capitalised as E&E and PP&E assets
General and administrative expense
5,194
(2,835)
2,359
4,886
(3,338)
1,548
The Company capitalises as E&E and PP&E assets general and administrative expense supporting E&E and PP&E
activities which relate to direct interests held in production sharing contracts. Refer also to notes 11 and 12.
7.
Finance income
Foreign exchange gain
Interest income
Total finance income
For the year ended December 31,
2014
2015
492
189
681
43
65
108
The foreign exchange gain in the year 2015 resulted primarily from holding net assets denominated in Canadian
dollars while the CAD strengthened against the United States dollar, the reporting currency of the Company.
Interest income represents bank interest earned on cash and investments held in interest bearing term deposits.
8.
Finance cost
Interest charges on bonds at coupon rate
Amortisation of bond related transaction costs
Interest expense on borrowings
Unwinding discount on decommissioning provision
Total finance costs before borrowing costs capitalised
Borrowing costs capitalised as E&E and PP&E assets
Total finance costs
For the year ended December 31,
2014
2015
17,250
606
17,856
36
17,892
(12,571)
5,321
17,250
607
17,857
19
17,876
(12,572)
5,304
During the year ended December 31, 2015 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 11, 12, 15 and 23.
45
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2015
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
9.
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 from continuing operations before income tax
Corporate income tax rate
Computed income tax expense
Increase / (decrease) resulting from:
Change in valuation allowance
Foreign tax rate differences
Effect of changes in foreign exchange rates
Non‐deductible compensation expense
Other expense / (income)
Non‐taxable foreign exchange gain
Share issuance costs charged to share capital
Income tax expense from continuing operations
For the year ended December 31,
2014
2015
(252,822)
26.0%
(65,734)
49,655
15,099
967
314
263
(128)
(342)
94
(7,104)
26.0%
(1,847)
1,198
365
489
80
(165)
(11)
‐
109
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 24% prevailing in this jurisdiction.
The Company has not recognised approximately $138 million (2014: $88 million) of deferred tax assets as it is not
probable that these amounts will be realised.
(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,
2015
2014
18,413
2,369
1,097
362,323
166,411
3,654
554,267
20,899
2,796
632
110,867
166,200
3,654
305,048
The Canadian losses from operations may be used to offset future Canadian taxable income and will expire over
the period from 2028 to 2035. 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 2016 to 2017. The U.S. Federal losses are available to offset future taxable income in the United
States through 2032.
46
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2015
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
10. 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 accrued windup costs
Gain on release of excess site restoration provisions
General, administrative and professional expenses
Net income from discontinued operations
For the year ended December 31,
2014
2015
46
‐
(13)
33
‐
228
(15)
213
During the year 2015 the Company completed the windup of Summit Energy Company LLC, which was the lone
remaining United States based operational subsidiary of the Company. The total cost to complete this exercise was
less than the amount previously estimated and the excess accrued windup costs have been released resulting in a
gain in the year 2015.
In the year 2014 the Company completed the site restoration works pertaining to the interests it previously held in
oil and gas properties located in the United States resulting in the release of excess site restoration provisions as
the total cost to complete this work was less than the amount previously estimated.
The net income from discontinued operations in 2015 and 2014 did not result in income tax expense as gains on
release of excess provisions are not taxable amounts.
The major classes of assets and liabilities included in the consolidated balance sheet are as follows:
As at December 31,
2015
2014
Assets
Liabilities
Trade payables and accrued expenses
Net liabilities
‐
‐
‐
‐
‐
51
51
51
47
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2015
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
11. Property, plant and equipment
At January 1, 2014
Cost
Accumulated depreciation
Net book value
For the year ended December 31, 2014
Opening net book value
Additions
Exchange difference
Depreciation expense
Net book value
At December 31, 2014
Cost
Accumulated depreciation
Net book value
For the year ended December 31, 2015
Opening net book value
Additions
Transfer from intangible E&E
Impairment loss
Exchange difference
Depreciation expense
Net book value
At December 31, 2015
Cost
Accumulated depreciation
Net book value
Oil and gas
assets
Computer
equipment
Furniture
and office
equipment
194
(69)
125
125
‐
‐
(36)
89
194
(105)
89
89
11,029
410,472
(244,557)
‐
(33)
177,000
177,138
(138)
177,000
194
(191)
3
3
81
‐
(16)
68
256
(188)
68
68
4
‐
‐
1
(29)
44
258
(214)
44
169
(118)
51
51
‐
(3)
(33)
15
154
(139)
15
15
‐
‐
‐
‐
(15)
‐
153
(153)
‐
Total
557
(378)
179
179
81
(3)
(85)
172
604
(432)
172
172
11,033
410,472
(244,557)
1
(77)
177,044
177,549
(505)
177,044
The net book value of oil and gas assets at December 31, 2015 are comprised of development costs related to the
Company’s share of Atrush Block PSC proved and probable reserves as estimated by McDaniel (the “Atrush 2P
reserves”). These costs are not subject to depletion until commencement of commercial production.
During the year 2015 the Company capitalised to oil and gas assets borrowing costs totalling $1 million (2014: $nil)
and general and administrative expenses of $0.2 million (2014: $nil).
In November 2015 an engineering, procurement and construction contract for a crude oil pipeline to be
constructed within the Atrush Block was signed by the Operator, TAQA Atrush BV, and a Kurdistan Regional
Government (“KRG”) approved pipeline contractor. The Company has determined that this development is
sufficient to confirm the technical and commercial feasibility of the Atrush 2P reserves. Accordingly, $410.5 million
of costs related to the Atrush 2P reserves were transferred from intangible assets to PP&E in 2015.
Due to a significant decline in world oil prices in the year 2015 the Company has conducted an impairment test to
assess if the net book value of its oil and gas assets was recoverable. The impairment test is based on McDaniel’s
production and cost profiles related to proved and probable reserves and used an oil price curve based on year
end price forecasts, a future cost inflation factor of 2% per annum and a discount rate of 11.5% to calculate the net
present value at December 31, 2015 of the Company’s projected share of future cash flows of the Atrush 2P
reserves to determine a recoverable value of $177 million. Therefore a non‐cash impairment loss of the Company’s
oil and gas assets has been recognized in the amount of $244.6 million and included in the statement of
comprehensive income for the year ended December 31, 2015.
48
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2015
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
A sensitivity analysis shows that a $5/bbl decrease in the oil price would increase the impairment loss by $16
million whereas a $5/bbl increase in the oil price would decrease the impairment loss by $14 million and a 1%
increase in the discount rate used to calculate the net present value would increase the impairment loss by $9
million while a 1% decrease in the discount rate would decrease the impairment loss by $10 million. If expectations
with regard to timing of cash flows are not met it could also result in additional impairment losses.
Refer also to notes 6, 8, 15, and 21.
12.
Intangible assets
At January 1, 2014
Cost
Accumulated amortisation
Net book value
For the year ended December 31, 2014
Opening net book value
Additions
Amortisation expense
Net book value
At December 31, 2014
Cost
Accumulated amortisation
Net book value
For the year ended December 31, 2015
Opening net book value
Additions
Transfer to PP&E
Amortisation expense
Net book value
At December 31, 2015
Cost
Accumulated amortisation
Net book value
Exploration and
evaluation assets
Other intangible
assets
344,988
‐
344,988
344,988
84,257
‐
429,245
429,245
‐
429,245
429,245
69,821
(410,472)
‐
88,594
88,594
‐
88,594
288
(286)
2
2
34
(4)
32
292
(260)
32
32
31
‐
(12)
51
321
(270)
51
Total
345,276
(286)
344,990
344,990
84,291
(4)
429,277
429,537
(260)
429,277
429,277
69,852
(410,472)
(12)
88,645
88,915
(270)
88,645
The net book value of E&E assets at December 31, 2015 represents Atrush Block exploration and appraisal costs
related to the Company’s share of Atrush Block contingent resources as estimated by McDaniel (the “Atrush 2C
resources”). During the year 2015 the Company capitalised to E&E borrowing costs totalling $11.5 million (2014:
$12.6 million) and general and administrative expenses of $2.6 million (2014: $3.3 million). In November 2015
$410.5 million of costs related to the Atrush 2P reserves have been transferred from intangible assets to PP&E.
Due to a significant decline in world oil prices in the year 2015 the Company has conducted an impairment test to
assess if the net book value of its E&E assets is recoverable. The impairment test is based on management’s
production and cost profiles related to the Atrush 2C resources and used an oil price curve based on year end price
forecasts, a future cost inflation factor of 2% per annum and a discount rate of 11.5% to calculate the net present
value at December 31, 2015 of the Company’s projected share of future cash flows of the Atrush 2C resources.
Since the net book value of E&E assets is less than its estimated recoverable value no related impairment loss has
been recognized in the year 2015.
49
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2015
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
A sensitivity analysis shows that a $5/bbl decrease in the oil price does not result in an impairment loss nor would
a 1% increase in the discount rate used to calculate the net present value.
Refer also to notes 6, 8, 15, and 21.
13. Other current assets
Prepaid expenses
Other receivables
Total other current assets
As at December 31,
2015
171
29
200
2014
1,522
83
1,605
Costs in the amount of $1.4 million relating to the rights offering to shareholders of the Company were included in
prepaid expenses at December 31, 2014.
14. Accounts payable and accrued expenses
Payables to joint operations partners
Trade payables
Accrued expenses
Total accounts payable and accrued expenses
15. Borrowings
As at December 31,
2015
8,970
317
273
9,560
2014
10,391
454
3,362
14,207
At December 31, 2015 General Exploration Partners Inc. (“GEP”), a wholly owned indirect subsidiary of the
Company, had outstanding $150 million of senior secured bonds which are listed on the Oslo Børs in Norway under
the symbol “GEP01”. The bonds have a five year maturity from their issuance date of November 13, 2013, carry an
11.5% fixed semi‐annual coupon and were used to fund capital expenditures related to the development of the
Atrush Block.
As at December 31,
2015
2014
Opening balance
Interest charges on bonds at coupon rate
Amortisation of bond related transaction costs
Interest payments to bondholders
Ending balance
‐ Current portion: accrued interest expense on bonds
‐ Non‐current portion: borrowings
149,909
17,250
606
(17,250)
150,515
2,252
148,263
149,302
17,250
607
(17,250)
149,909
2,252
147,657
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.
50
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2015
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
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 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 the first 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 bonds. Of the Company’s $31.9 million of total cash and cash equivalents at December 31, 2015 (2014:
$57.2 million) $1.5 million was held in accounts pledged to the bond trustee (2014: $41.1 million).
The remaining contractual obligations comprising of repayment of principal and interest expense, based on
undiscounted cash flows at payment date and assuming the bonds are not redeemed early, are as follows:
Less than one year
Between two and three years
Total
Refer also to notes 8, 11, 12, 19 and 20.
16. Provisions
As at December 31,
2015
17,250
182,763
200,013
2014
17,250
199,407
216,657
The Company has provided for its working interest share of decommissioning and site restoration costs in relation
to activities undertaken to date on the Atrush Block in Kurdistan.
As at December 31,
Opening balance
Changes in estimates and obligations incurred
Changes in discount and inflation rates
Unwinding discount on decommissioning provision
Total decommissioning and site restoration provisions
2015
1,846
6,098
100
36
8,080
2014
1,185
601
41
19
1,846
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
2.15% and an inflation rate of 0.73%. Estimated decommissioning and site restoration costs associated with the
30,000 barrel per day production facility under construction on the Atrush Block has resulted in a significant
increase in the provision over the prior year.
17. 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:
Number of shares
Share capital
At January 1, 2014
At December 31, 2014
Shares issued on Rights Offering, net of issuance costs
Shares issued to Standby Purchasers as equity based guarantee fee
Guarantee fee charged directly to share capital
At December 31, 2015
810,983,860
810,983,860
754,214,990
14,569,684
‐
1,579,768,534
534,068
534,068
59,111
1,346
(1,346)
593,179
51
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2015
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
On February 10, 2015 in connection with an offering of rights to shareholders of record on January 12, 2015 to
purchase additional common shares in the ShaMaran (“Common Shares”) at a subscription price of CAD 0.10 per
share (the “Rights Offering”), the Company issued an aggregate of 713,308,912 Common Shares, including
195,710,409 Common Shares to its major shareholders, Lorito Holdings SARL, Zebra Holdings and Investments SARL
and Lundin Petroleum BV (collectively the "Standby Purchasers") on exercise of their respective rights, resulting in
gross proceeds to the Company of CAD 71.3 million ($57.1 million). Under the terms of the standby purchase
agreement (the "Standby Purchase Agreement") between the Company and the Standby Purchasers, the Standby
Purchasers agreed to subscribe for a total of 40,906,078 additional Common Shares, representing all Common
Shares not otherwise subscribed for by rights holders, at a price of CAD 0.10 per share (the "Standby Purchase").
The Standby Purchase was concluded on February 17, 2015 and resulted in additional gross proceeds to the
Company of CAD 4.1 million ($3.3 million). In addition on February 17, 2015 the Company issued a further aggregate
of 14,569,684 Common Shares to the Standby Purchasers in respect of the guarantee fee, as defined under the
standby purchase agreement. Refer also to note 22.
Earnings per share
The earnings per share amounts were as follows:
Continuing operations:
Net loss from continuing operations, in dollars
Weighted average common shares outstanding during the year
Basic and diluted loss per share from continuing operations, in dollars
Discontinued operations:
Net income from discontinued operations, in dollars
Weighted average common shares outstanding during the year
Basic and diluted income per share from discontinued operations, in dollars
Continuing and discontinued operations:
Net loss from continuing and discontinued operations, in dollars
Weighted average common shares outstanding during the year
Basic and diluted loss per share from continuing and discontinued
operations, in dollars
For the year ended December 31,
2014
2015
(252,916,000)
1,493,132,481
(0.17)
33,000
1,493,132,481
‐
(252,883,000)
1,493,132,481
(7,213,000)
810,983,860
(0.01)
213,000
810,983,860
‐
(7,000,000)
810,983,860
(0.17)
(0.01)
18. Share based payments expense
The Company has an established share purchase option plan whereby a committee of the Company’s Board 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 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. All issued
share options have terms of five years and vest over two years from grant date. The exercise prices reflect trading
values of the Company’s shares at grant date.
52
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2015
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
Movements in the Company’s outstanding share options are explained as follows:
At January 1, 2014
Expired in the year 2014
At December 31, 2014
Granted in the year 2015
Expired in the year 2015
At December 31, 2015
Share options exercisable:
At December 31, 2014
At December 31, 2015
Number of
share options outstanding
Weighted average
exercise price
CAD
8,263,334
(1,508,334)
6,755,000
26,000,000
(4,565,000)
28,190,000
4,875,001
10,856,667
0.43
0.66
0.38
0.12
0.39
0.13
0.39
0.17
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.
In connection with the changes in senior management and the Board the Company approved on January 19, 2015 a
grant of an aggregate of 26,000,000 incentive stock options, consistent with the terms described in this note 18 and
with an exercise price of CAD 0.115, to certain senior officers and directors of the Company. Refer also to note 1.
The weighted average fair value of options granted during the year 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,
2014
2015
0%
1.07%
74.01%
5.00
CAD 0.07
N/A
N/A
N/A
N/A
N/A
Share based payments expense for the year ended December 31, 2015 was $1.2 million (2014: $0.3 million).
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.
53
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2015
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
19. Financial instruments
Financial assets
The financial assets of the Company on the balance sheet dates were as follows:
Cash and cash equivalents, unrestricted²
Cash and cash equivalents, restricted²
Other receivables ²
Total financial assets
Carrying and fair values ¹
At December 31, 2015
At December 31, 2014
30,409
1,512
29
31,950
16,062
41,142
83
57,287
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 ³
Accounts payable and accrued expenses ²
Provisions for decommissioning costs
Accrued interest on bonds
Current tax liabilities ²
Financial liabilities of discontinued operations ²
Total financial liabilities
Fair value
hierarchy ⁴
Level 2
Carrying values
At December 31, 2015
At December 31, 2014
148,263
9,560
8,080
2,252
31
‐
168,186
147,657
14,207
1,846
2,252
41
51
166,054
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 approximate their fair values at the balance sheet dates.
² No valuation techniques have been applied to establish the fair value of these financial instruments as 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 The fair value of the Company’s borrowings is $102.2 million (2014: $151.4 million). The fair value was
determined by reference to the bond agreement terms and the weighted average of available annual published
price quotations on the Oslo Børs.
⁴ 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 establishes 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 derived from valuation techniques that include inputs that are not based
on observable market data.
54
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2015
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
Capital risk management
The Company manages its capital to ensure that entities within the Company will be able to continue as a
going concern, while 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 $150.5 million as at December 31, 2015 (2014: $149.9 million). Refer also to note 23.
Book equity ratio
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%. The Company’s book
equity ratio is as follows:
Shareholders’ equity
Total assets
Book equity ratio
Refer also to notes 15 and 23.
Financial risk management objectives
For the year ended December 31,
2014
2015
129,624
297,810
44%
322,204
488,258
66%
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. The spot price of
ICE Brent Crude oil, a reference in determining the price at which the Company can sell future oil production, has
declined by approximately 24% over the year 2015. A further 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. Refer also to note 11.
The Company does not hedge against commodity price risk.
55
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2015
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
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”)
Foreign currency sensitivity analysis
Assets
December 31,
2015
2014
54
228
177
435
Liabilities
December 31,
2014
2015
46
192
151
262
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
2015
2014
‐
2
1
4
Liabilities
2015
2014
‐
(2)
(1)
(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.
56
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2015
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
Interest rate sensitivity analysis:
Based on exposure to the interest rates for cash and cash equivalents at the balance sheet date an increase or
decrease of 0.5% in the interest rate would not have a material impact on the Company’s profit or loss for the
year. An interest 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.
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. Refer also to note 23.
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.
20. Commitments
As at December 31, 2015 the outstanding commitments of the Company were as follows:
Atrush Block development and PSC
Office and other
Total commitments
For the year ended December 31,
2016
76,250
65
76,315
2017
160
‐
160
2018
Thereafter
160
‐
160
2,414
‐
2,414
Total
78,984
65
79,049
Amounts relating to the Atrush Block represent the Company’s unfunded share of the approved work program and
other obligations under the Atrush Block PSC. Refer also to notes 15 and 21.
57
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2015
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
21.
Interests in joint operations and other entities
Interests in joint operations ‐ Atrush Block Production Sharing Contract
ShaMaran holds a 26.8% direct interest in the PSC through GEP. TAQA Atrush B.V. (“TAQA”), a subsidiary of
Abu Dhabi National Energy Company PJSC, is the Operator of the Atrush Block with a 53.2% direct interest,
Marathon Oil KDV B.V. (“MOKDV”) holds a 20% direct interest. GEP, MOKDV and TAQA together are “the
Contractors” to the PSC.
On March 12, 2013 the KRG communicated its intention to exercise a right to acquire an interest in the Atrush
Block PSC in accordance with the terms of the PSC. At the date these consolidated financial statements were
approved discussions between the Contractors and the KRG to effect the exercise of the right were in progress but
the process of exercising the right was not complete. Under the terms of the PSC, upon the exercise of the right
the KRG would assume up to a 25% undivided interest in the petroleum operations and all the other rights, duties,
obligations and liabilities of the Contractors from the date the block has first been declared commercially viable.
Under the terms of the Atrush Block 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 Contractors 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. Refer also to note 20.
Information about subsidiaries
The consolidated financial statements of the Company include:
Subsidiary
Principal activities
Country of
Incorporation
% equity interest as at
31 Dec 2015
31 Dec 2014
ShaMaran Petroleum Holdings Coöperatief U.A. Oil exploration and production
Oil exploration and production
ShaMaran Ventures B.V.
Oil exploration and production
General Exploration Partners, Inc.
Oil exploration and production
ShaMaran Petroleum B.V.
Technical and admin. services
ShaMaran Services S.A.
Discontinued operations
Bayou Bend Petroleum U.S.A. Ltd
The Netherlands
The Netherlands
Cayman Islands
The Netherlands
Switzerland
United States of America
100
100
100
100
100
100
100
100
100
100
100
100
22. Related party transactions
Transactions with corporate entities
Lundin Petroleum AB
Namdo Management Services Ltd.
McCullough O’Connor Irwin LLP
Mile High Holdings Ltd.
Total
Purchases of services
during the year
2015
473
173
18
‐
664
2014
464
214
276
‐
954
Amounts owing at
December 31,
2014
56
31
91
35
213
2015
40
9
2
‐
51
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, 2015 of $473 (2014: $464) were
comprised of technical service costs of $59 (2014: $50), investor relations services of $29 (2014: $36),
reimbursement for Company travel and related expenses of $23 (2014: $1), office rental, administrative and
building services of $362 (2014: $377).
Namdo Management Services Ltd. is a private corporation affiliated with a shareholder of the Company and has
provided corporate administrative support and investor relations services to the Company.
58
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2015
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
McCullough O’Connor Irwin LLP is a law firm in which an officer of the Company is a partner and has provided legal
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 relations activities.
In February 2015, in connection with the Rights Offering, the Company issued Common Shares to its major
shareholders, Lorito Holdings SARL, Zebra Holdings and Investments SARL and Lundin Petroleum B.V., a subsidiary
company of Lundin.
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 notes 17 and 23.
Key management compensation
The Company’s key management was comprised of its directors and executive officers who have been
remunerated as follows:
Management’s share based payments
Management’s salaries
Management’s termination benefits
Management’s short‐term benefits
Directors’ share based payments
Directors’ fees
Total
For the year ended December 31,
2014
2015
906
884
495
222
279
83
2,869
161
815
‐
466
95
118
1,655
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’. Refer also to note 1.
23. Events after the reporting period
On March 14, 2016 the Company announced a financing arrangement which has been proposed (the “Proposed
Financing Arrangement”) to holders of GEP’s $150 million bonds (the “Existing Bondholders”) and is to provide the
Company with additional liquidity in 2016 of approximately $33 million net of transaction costs. The principal
terms of the Proposed Financing Arrangement are:
1. GEP issues new $17 million super senior bonds (“Super Senior Bonds”). The Super Senior Bonds will be based
on the same agreement as the Existing Bonds with the same maturity date of November 13, 2018 and an
11.5% coupon interest payable semi‐annually. GEP will have the option to pay the coupon interest on the
Super Senior Bonds in cash or in kind by issuing new bonds (“PIK Bonds”). GEP has entered into an agreement
to underwrite the Super Senior Bonds with major shareholders, Lorito Holdings SARL and Zebra Holdings and
Investments SARL, companies owned by the Lundin Family Trust.
2.
The Existing Bondholders are given the option to convert up to $18 million of Existing Bonds at face value into
ShaMaran common shares at market price following approval of the Proposed Financing Arrangement. The
conversion offer is to commence following approval of the Proposed Financing Arrangement with pro‐rata
allocation among Existing Bondholders upon oversubscription.
59
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2015
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
3.
The bond agreement for the Existing Bonds is to be amended so that (i) the 2016 coupon interest ($17.25
million before considering any conversion in 2 above) is settled by issuing new PIK Bonds; (ii) GEP has the
option to pay in cash or in kind (by issuing new PIK Bonds) the post 2016 coupon interest; and (iii) certain
waivers and amendments are made to the terms of the Existing Bonds including the subordination of Existing
Bonds’ security to the Super Senior Bonds’ security.
The Company is also considering offering a subsequent private placement of shares for cash for the remainder if
$18 million is not converted under 2 above.
To facilitate the approval process a Summons was issued on March 14, 2016 by Nordic Trustee, the bondholder’s
trustee, requesting a meeting of Existing Bondholders on April 1, 2016.
Refer also to note 15.
60
SHAMARAN PETROLEUM CORP.
DIRECTORS
CORPORATE INFORMATION
Keith C. Hill
Director, Chairman
Florida, U.S.A
Chris Bruijnzeels
Director, President & Chief Executive Officer
Geneva, Switzerland
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
Brian D. Edgar
Director
Vancouver, British Columbia
Gary S. Guidry
Director
Calgary, Alberta
C. Ashley Heppenstall
Director
Geneva, Switzerland
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 SA
Geneva, Switzerland
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
61