ShaMaran Petroleum Corp.
Annual Report
For the year ended December 31, 2016
SHAMARAN PETROLEUM CORP.
MANAGEMENT DISCUSSION AND ANALYSIS
For the year ended December 31, 2016
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 9,
2017. The MD&A should be read in conjunction with the audited consolidated financial statements for the year
ended December 31, 2016 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 20.1% direct interest in the
Atrush Block production sharing contract (“Atrush PSC”) relating to a property located in the Kurdistan Region of
Iraq (“Kurdistan”). Atrush is currently in 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. First oil
production is expected to start in the second quarter of 2017.
The oil discovery on the Atrush petroleum property is continuously being appraised. Further phases of development
will be defined based on production data, appraisal information and economic circumstances.
ShaMaran is a Canadian oil and gas company listed on the TSX Venture Exchange and the NASDAQ First North
Exchange (Stockholm) under the symbol "SNM".
HIGHLIGHTS
Atrush Contract
On November 7, 2016 the Assignment, Novation and Fourth Amendment Agreement to the Atrush PSC (the “4th
PSC Amendment”) and Atrush Facilitation Agreement were concluded between TAQA Atrush B.V. (“TAQA” and
the Operator of the Atrush Block), General Exploration Partners. Inc. (“GEP” and a wholly owned subsidiary of
ShaMaran), Marathon Oil KDV (“MOKDV”)(together, the “Non‐Government Contractors”) and the Kurdistan
Regional Government (“KRG”) resulting in participating interests in the Atrush PSC of TAQA at 39.9%, the KRG
at 25%, GEP at 20.1% and MOKDV at 15%.
The above agreements include the terms for repayment to the Non‐Government Contractors for costs which
they have agreed to pay for on behalf of the KRG, including those relating to the final 35km section of pipeline
which will run from the Atrush Block boundary to the tie‐in point on the main export pipeline (the “Feeder
Pipeline”).
Production Facility, Export Pipeline and Wells
Construction of the 30,000 bopd Atrush Phase 1 Production Facility (“Production Facility”) is complete and final
commissioning is in progress.
The Atrush‐2 (“AT‐2”) and Atrush‐4 (“AT‐4”) wells were successfully completed in the second and third quarters
of 2016. All four wells intended for production at first oil are now completed, connected to the Production
Facility and ready for start‐up.
Work on the pipeline being constructed between the Production Facility and the block boundary (the “Spur
Pipeline”) and construction of the pump station and the intermediate pigging and pressure reduction station
(“IPPR”) is substantially complete.
1
Work has commenced on the Feeder Pipeline and is subject to the terms of an Engineering, Procurement and
Construction (“EPC”) contract between TAQA and KAR Company (“KAR”) which became effective on November
7, 2016. Completion of the Feeder Pipeline is expected in the second quarter of 2017.
Corporate
On January 30, 2017 the Company completed the issue of 360 million common shares of ShaMaran on a private
placement basis (the “Private Placement”) at a price per share of CAD 0.10 (equal to SEK 0.67) which resulted in
gross proceeds to the Company of $27.3 million ($26.4 million net of transaction related costs). Zebra Holdings
and Investments SARL, Lorito Holdings SARL and Lundin Petroleum BV, the Company’s major shareholders,
subscribed for 43,463,618 shares, 16,984,621 shares and 17,800,000 shares, respectively, in the Private
Placement.
The Company completed a financing arrangement in early May 2016 (the “Financing Arrangement”) with
holders of the $140.6 million bonds (the “Senior Bonds”) of GEP, a wholly owned subsidiary of ShaMaran. The
Financing Arrangement provides the Company with additional liquidity in 2016 of approximately $33 million
based on the issuance of $17 million ($16.2 million proceeds net of transaction costs) of additional super senior
bonds (“Super Senior Bonds”) and provides terms for the Company to pay bond coupon interest in kind by
issuing additional bonds, including approximately $17.9 million of 2016 coupon interest. Also under the
Financing Arrangement the Company issued 218,863,000 common shares at a deemed price of CAD 0.105 per
share to holders of the Senior Bonds who elected to convert Senior Bonds into ShaMaran common shares
which represented $18 million of Senior Bonds at face value. PIK Bonds of $8.1 million and $1.0 million were
issued under the Senior Bonds and Super Senior Bonds agreements, respectively, to satisfy coupon interest for
the six months ended November 13, 2016.
On February 16, 2017 the Company reported estimated reserves and contingent resources for the Atrush block
as of December 31, 2016. Reserves and resource estimates have remained unchanged from those reported for
the prior year. 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 estimated at 85.1 MMbbl. Total Field Unrisked Best Estimate
Discovered Recoverable Resources (“2P + 2C”)1 on a property gross basis is estimated at 389 million barrels oil
equivalent (MMboe)2.
OPERATIONS
ShaMaran, through its wholly owned subsidiary, GEP, holds a 20.1% direct interest in the Atrush PSC. TAQA, a
subsidiary of Abu Dhabi National Energy Company PJSC, is the Operator of the Atrush Block with a 39.9% direct
interest, the KRG holds a 25% direct interest and MOKDV holds a 15% direct interest. TAQA, GEP, the KRG and
MOKDV together are “the Contractors” to the Atrush PSC.
The Atrush 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, tested and completed, 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.
1 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.
2 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 Terms of the Atrush PSC
In August 2010 the Company acquired a 33.5% shareholding in GEP which then held an 80% working interest in the
Atrush 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 Atrush 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, at that time, a 26.8% direct interest in the Atrush PSC.
On November 7, 2016 the 4th PSC Amendment and Atrush Facilitation Agreement were concluded between Non‐
Government Contractors and the KRG.
The 4th PSC Amendment and Atrush Facilitation Agreement include the following principal terms:
The KRG acquires a 25% interest in the Atrush PSC effective November 7, 2012, the date of declaration of
commerciality (“DOC date”). As a consequence the respective participating interests in the Atrush PSC are TAQA
at 39.9%, the KRG at 25%, GEP at 20.1% and MOKDV at 15%;
The Non‐Government Contractors will fund the cost of constructing the Feeder Pipeline which will be novated to
the KRG following the commencement of oil exports from Atrush;
All Atrush petroleum costs from the DOC date through the commencement of oil exports from Atrush will be
paid by the Non‐Government Contractors and a defined portion of the KRG’s share of these costs will be repaid
through an accelerated petroleum cost recovery arrangement from the sale of future oil production from
Atrush; and
Feeder Pipeline costs and the balance of the Atrush petroleum costs incurred by the Non‐Government
Contractors on behalf of the KRG that are not covered by the accelerated petroleum cost recovery arrangement
will be repaid by the KRG within 2 years from the commencement of oil exports from Atrush.
Fiscal terms under the Atrush 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%.
Current Operations
Production Facility and Pipeline
30,000 bopd Atrush Phase 1 Production Facility: Construction and commissioning of the Production Facility is
complete and final commissioning is in progress.
Atrush Spur Pipeline: The Atrush Spur Pipeline project includes the IPPR and a 6 kilometre 10 inch section from the
Production Facilities crossing the Chiya Khere Mountain to the IPPR, followed by a 2 kilometer 12 inch section to the
Atrush block boundary. The pipeline and the construction of the pump station and the IPPR are substantially
complete.
Atrush Feeder Pipeline: The Feeder Pipeline consists of a 18 kilometer 12 inch pipeline to the location of a possible
future blending station followed by a 17 kilometer 36 inch pipeline to the tie‐in point on the main export pipeline at
Kurdistan Crude Pipeline pumping station #2 (“KCP2”). Work on the Feeder Pipeline has commenced with
completion expected in the second quarter of 2017.
Development Wells
The completion for both the AT‐4 and the AT‐2 well were installed and successfully tested in second and third
quarter of 2016. The Chiya Khere‐5 (“CK‐5”) and Chiya Khere‐8 (“CK‐8”) wells were completed in the third quarter
of 2015 and all four wells intended for production at first oil are now completed, connected to the Production
Facility and ready for start‐up.
A further development well, Chiya Khere‐7 (“CK‐7”), and the Chiya Khere‐9 (“CK‐9”) water disposal well, are planned
for 2017.
3
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 Atrush‐3 (“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 the gas lift test method. 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 TAQA, GEP and MOKDV, collectively being the Contractor under the Atrush PSC at that time,
submitted to the Atrush Block Management Committee a Declaration of Commercial Discovery (“DCD”) with effect
from November 7, 2012 in accordance with the terms of the Atrush PSC. The DCD was submitted together with an
Appraisal Report covering the Atrush field.
The AT‐3 eastern area appraisal well was spudded on March 25, 2013 and 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 Atrush 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 the Atrush 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 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.
4
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 ‐460m AMSL, nearly 200m deeper than the equivalent interval that
successfully tested the higher viscosity oil in the AT‐2 well.
In 2015, the CK‐5 and CK‐8 development wells were successfully tested and completed. The CK‐5 well tested 3
separate intervals at a combined rate of 7,350 bopd. The CK‐8 well tested 2 intervals at a combined rate of 8,400
bopd.
In 2015, the AT‐3 eastern appraisal well was re‐entered and tested at a maximum oil rate of 4,900 bopd comingled
from two intervals.
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:
Income
Service fees
Expenses
General and administrative expense
Share based payments expense
Depreciation and amortisation expense
Impairment loss
Finance income
Finance cost
Income tax expense
Loss from continuing operations
Discontinued operations:
Gain on release of excess accrued windup costs
Gain on release of excess site restoration provisions
Expenses
Gain from discontinued operations
Loss for the year
Basic loss in $ per share:
Continuing operations
Discontinued operations
Diluted loss in $ per share:
Continuing operations
Discontinued operations
For the year ended December 31,
2016
2015
2014
120
(3,811)
(249)
(45)
‐
484
(5,586)
(69)
(9,156)
‐
‐
‐
‐
‐
(2,359)
(1,210)
(56)
(244,557)
681
(5,321)
(94)
(252,916)
46
‐
(13)
33
‐
(1,548)
(307)
(53)
‐
108
(5,304)
(109)
(7,213)
‐
228
(15)
213
(9,156)
(252,883)
(7,000)
(0.01)
‐
(0.01)
(0.01)
‐
(0.01)
(0.17)
‐
(0.17)
(0.17)
‐
(0.17)
(0.01)
‐
(0.01)
(0.01)
‐
(0.01)
5
Financial position – net book value of principal items
Property Plant & Equipment
Exploration and evaluation assets
Loans and receivables
Cash and other assets
Total assets
Borrowings
Other liabilities
Shareholders’ equity
2016
174,658
89,007
53,366
4,640
321,671
(165,129)
(19,476)
137,066
As at December 31,
2015
177,044
88,645
‐
32,121
297,810
(148,263)
(19,923)
129,624
2014
172
429,277
‐
58,809
488,258
(147,657)
(18,397)
322,204
Common shares outstanding (x 1,000)
1,798,632
1,579,768
810,984
Summary of Principal Changes in Annual Financial Information
The Company has reported in 2016 a net loss of $9.2 million which was primarily driven 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 bonds. These charges have been offset by service fee revenues,
interest income on Atrush cost loans and interest on cash held in short term deposits. The principal changes in
annual financial information are further explained in the sections below.
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:
Service fees
In $000
Technical service fees
For the year ended December 31,
2015
2016
120
‐
During the year ended December 31, 2016 the Company has provided technical services to a third party petroleum
company.
General and administrative expense
In $000
Salaries and benefits
Management and consulting fees
General and other office expenses
Listing costs and investor relations
Legal, accounting and audit fees
Travel expenses
General and administrative expense incurred
General and administrative expense capitalised as E&E assets
General and administrative expense
For the year ended December 31,
2015
2016
2,360
421
341
298
269
122
3,811
‐
3,811
3,079
1,000
404
300
167
244
5,194
(2,835)
2,359
The Company capitalises as exploration and evaluation (“E&E”) assets general and administrative expenses
supporting E&E activities which relate to its direct interest held in the Atrush Block. There were no general and
administrative expenses capitalised in the year 2016 because E&E activities during the year were insignificant.
6
The lower general and administrative expense incurred in the year 2016 relative to the amount incurred in the
comparative period of 2015 was principally due to certain non‐recurring expenses incurred in the year 2015
including 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.
Share based payments expense
In $000
Share based payments expense
For the year ended December 31,
2015
2016
249
1,210
The share based payments expense results from expensing the Company’s outstanding stock options over the
vesting period which is complete two years after the grant date. In the previous two years there has been one only
grant totalling 26,000,000 options in January 2015. 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 charged to income over the vesting periods. 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,
2015
2016
45
56
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.
Impairment loss
In $000
Impairment loss on PP&E assets
Impairment loss
For the year ended December 31,
2015
2016
‐
‐
244,557
244,557
In the year 2015, as a result of significant decline in world oil prices, the Company determined that the book value of
the Atrush Block proved and probable reserves as estimated by McDaniel and Associates Consultants Ltd
(“McDaniel”), the Company’s independent reserves and resources evaluator, (the “Atrush 2P reserves”), exceeded
their $177 million recoverable value, determined by the Company’s estimate of the value in use, by an amount of
$244.6 million and therefore recorded an impairment loss for this amount.
Finance income
In $000
Interest on Atrush Development Cost Loan
Interest on deposits
Interest on Atrush Feeder Pipeline Cost Loan
Foreign exchange gain
Total finance income
For the year ended December 31,
2015
2016
406
44
34
‐
484
‐
189
‐
492
681
Under the terms of the 4th PSC Amendment and the Non‐Government Contractors have agreed to pay their pro‐rata
share of the Feeder Pipeline costs and of the KRG’s share of Atrush development costs up to the commencement of
oil exports from Atrush. Thereafter these costs will be reimbursed to the Non‐Government Contractors. The loan
interest amounts reported in 2016 represent 7% per annum interest on the entire funded portion of Atrush Feeder
Pipeline costs up to the balance sheet date and on a defined portion of the Atrush development costs which also
bears interest at 7% per annum. For further information on the loans refer to the discussion under the “Loans and
receivables” section below.
7
Interest on deposits represents bank interest earned on cash and investments held in interest bearing funds. The
decrease in interest income reported in the year 2016 relative to the amount reported in 2015 is due to a lower
level of interest bearing funds held in 2016.
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.
Finance cost
In $000
Interest charges on bonds at coupon rate
Amortisation of bond 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,
2015
2016
17,951
943
18,894
68
18,962
(13,376)
5,586
17,250
606
17,856
36
17,892
(12,571)
5,321
During the year 2016 the Company incurred interest expense relating to its Senior Bonds and Super Senior Bonds
which both carry an 11.5% fixed semi‐annual coupon interest rate. Interest expense on borrowings increased over
the comparable period of the prior year due to the additional bonds outstanding in the period and the amortisation
of all remaining unamortised bond transaction costs related to $18 million of Senior Bonds which were converted
into ShaMaran common shares in May of 2016. The Company issued $17 million of Super Senior Bonds in May 2016
and a further total of $17.7 million of PIK bonds were issued in May and November of 2016.
General and specific borrowing costs directly attributable to the acquisition, exploration and development of Atrush
have been capitalised together with the related Atrush oil and gas assets. All other borrowing costs are recognised
in profit or loss in the period in which they are incurred.
Income tax expense
In $000
Income tax expense
For the year ended December 31,
2015
2016
69
94
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 amount
reported in 2015 is primarily due to lower taxable income in the Swiss subsidiary which decreased compared to
2015 when costs of service included exceptional employee termination expenses associated with the change in
senior executive management.
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 discontinued operations
For the year ended December 31,
2015
2016
‐
‐
46
46
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.
8
Expenses
In $000
Legal, accounting and audit fees
General and other office expenses
Expenses from discontinued operations
For the year ended December 31,
2015
2016
‐
‐
‐
12
1
13
Capital Expenditures on Property Plant & Equipment (“PP&E”) Oil and Gas Assets
The net book value of PP&E oil and gas assets at December 31, 2016 is comprised of development costs related to
the Company’s share of Atrush 2P reserves. These costs are not subject to depletion until commencement of
commercial production. The movements in PP&E oil and gas assets are explained as follows:
In $000
Opening net book value
Additions
Transfer to Atrush development cost loan
Transfer to Atrush Exploration Costs receivable
Transfer from intangible E&E
Depreciation charge
Impairment loss
Ending net book value
For the year ended December 31,
2015
2016
177,000
45,799
(10,682)
(37,475)
‐
‐
‐
174,642
89
11,029
‐
‐
410,472
(33)
(244,557)
177,000
The additions to PP&E in the year 2016 included borrowing costs totalling $13.1 million (2015: $1 million).
On November 7, 2016 the 4th PSC Amendment and Atrush Facilitation Agreement were concluded between Non‐
Government Contractors and the KRG which has resulted in the reclassification of certain costs from PP&E to loans
and receivables.
In the year 2015, as a result of significant decline in world oil prices, the Company determined that the book value
of the Atrush 2P reserves exceeded their $177 million recoverable value, determined by the Company’s estimate of
the value in use, by an amount of $244.6 million and therefore recorded an impairment loss for this amount. Also in
the year 2015, $410.5 million of costs related to the Atrush 2P reserves were transferred from intangible assets to
PP&E in 2015 following the approval of an agreement for the construction of a crude oil pipeline within the Atrush
Block.
Capital Expenditures on Exploration and Evaluation (“E&E”) Assets
The net book value of E&E assets at December 31, 2016 represents Atrush Block exploration and appraisal costs
related to the Company’s share of Atrush Block contingent resources as estimated by McDaniel. The movements in
E&E assets 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,
2015
2016
88,594
378
‐
88,972
429,245
69,821
(410,472)
88,594
During the year 2016 borrowing costs of $0.3 million (2015: $11.5 million) were capitalised to E&E assets.
In November 2015 $410.5 million of costs related to Atrush 2P reserves were transferred from intangible assets to
PP&E. Refer also to the above discussion under Capital Expenditures on PP&E.
9
Loans and receivables
On November 7, 2016 the 4th PSC Amendment and Atrush Facilitation Agreement were concluded between the Non‐
Government Contractors and the KRG. On the same day TAQA entered into an EPC contract with KAR Company for
the construction of the feeder pipeline from the Atrush block boundary to the tie‐in point with the main Kurdistan
export pipeline (the “Feeder Pipeline”).
Under the terms of the 4th PSC Amendment and Atrush Facilitation Agreement:
The KRG acquires a 25% interest in the Atrush PSC effective November 7, 2012, the DOC date. As a consequence
the respective participating interests in the Atrush PSC are TAQA at 39.9%, the KRG at 25%, GEP at 20.1% and
MOKDV at 15%;
All Atrush petroleum costs from the DOC date through the commencement of oil exports from Atrush will be
paid by the Non‐Government Contractors and a defined portion of the KRG’s share of these costs will be deemed
Exploration Costs as defined in the Atrush PSC and repaid through an accelerated petroleum cost recovery
arrangement from the sale of future oil production from Atrush. This arrangement has resulted in the Atrush
Exploration Cost receivable at year end as reported in the table below; and
The Non‐Government Contractors will fund the cost of constructing the Feeder Pipeline which will be novated to
the KRG following the commencement of oil exports from Atrush. The Feeder Pipeline costs and the balance of
the Atrush petroleum costs incurred by the Non‐Government Contractors on behalf of the KRG excluding the
portion deemed as Exploration Costs will be repaid with interest at 7% per annum by the KRG within 2 years
from the commencement of oil exports from Atrush (respectively, the “Atrush Feeder Cost Loan” and the
“Atrush Development Cost Loan”). These arrangements have resulted in loan balances at year end as reported in
the table below.
Atrush Exploration Costs receivable
Atrush Development Cost Loan
Atrush Feeder Pipeline Cost Loan
Total loans and receivables
Borrowings
As at December 31,
2016
2015
37,475
12,857
3,034
53,366
‐
‐
‐
‐
At December 31, 2016 General Exploration Partners, Inc. had outstanding $148.7 million of Senior Bonds and $18.1
million of Super Senior Bonds. The Senior Bonds are listed on the Oslo Børs in Norway under the symbol “GEP01”,
have a five year maturity from their issuance date of November 13, 2013 and carry an 11.5% fixed semi‐annual
coupon and were used to fund capital expenditures related to the development of the Atrush Block. The Super
Senior Bonds also mature on November 13, 2018, carry an 11.5% fixed semi‐annual coupon and are being used to
fund capital expenditures related to the development of the Atrush Block. The movements in borrowings are
explained as follows:
In $000
As at December 31,
Opening balance
Interest charges at coupon rate
Bonds issued as interest payment
Super Senior Bonds – net of transaction costs
Amortisation of bond transaction costs
Interest payments to bondholders
Senior Bonds exchanged for ShaMaran common shares
Ending balance
‐ Current portion: accrued bond interest expense
‐ Non‐current portion: borrowings
2016
150,515
17,951
17,700
16,223
943
(17,700)
(18,000)
167,632
2,503
165,129
2015
149,909
17,250
‐
‐
606
(17,250)
‐
150,515
2,252
148,263
10
The remaining contractual obligations comprising of repayment of principal and interest expense under the bond
agreements, based on undiscounted cash flows at payment date and assuming all interest in 2016 and 2017 is paid
by issuing new bonds and the bonds are not redeemed early, are as follows:
Less than one year
Between one and two years
Total
Financing Arrangement – May 2016
As at December 31,
2016
19,722
188,138
207,860
2015
17,250
182,763
200,013
In early May 2016 the Company completed a financing arrangement (the “Financing Arrangement”) with holders of
GEP’s Senior Bonds (the “Existing Bondholders”) which provided the Company with additional liquidity in 2016 of
approximately $33 million. The principal terms of the Financing Arrangement are:
1. On May 3, 2016 GEP issued new $17 million Super Senior Bonds resulting in $16.2 million in proceeds net of
transaction costs. The Super Senior Bonds are based on the same agreement as the Senior Bonds with the
same maturity date of November 13, 2018 and an 11.5% coupon interest payable semi‐annually. GEP has the
option to pay the coupon interest on the Super Senior Bonds in cash or in kind by issuing new bonds (“PIK
Bonds”). ShaMaran’s major shareholders, Lorito Holdings SARL and Zebra Holdings and Investments SARL,
companies owned by the Lundin Family Trust, subscribed for $15.3 million of the Super Senior Bonds in
accordance with the terms of their agreement with GEP to underwrite the Super Senior Bonds.
3.
2. On May 12, 2016 ShaMaran completed the issue of a total of 218,863,000 of its common shares to Existing
Bondholders who elected to convert to shares a total of $18 million of Senior Bonds at face value. The shares
were issued at CAD 0.105 which was closing share price on the TSX Venture exchange on the day prior to when
the Existing Bondholders approved the offer on April 19, 2016.
The bond agreement for the Senior Bonds was amended so that (a) the 2016 coupon interest ($17.3 million
before considering the conversion in 2 above) was settled by issuing new PIK Bonds; (b) GEP has the option to
pay in cash or in kind (by issuing new PIK Bonds) the post 2016 coupon interest; and (c) certain waivers and
amendments were made to the terms of the Senior Bonds including the subordination of Senior Bonds’
security to the Super Senior Bonds’ security and the replacement of the book equity ratio maintenance
covenant with certain debt incurrence tests described below.
Debt Incurrence Tests
In accordance with the amended terms of GEP’s Senior Bonds and Super Senior Bonds agreements ShaMaran is
required to be in compliance with certain debt incurrence tests as follows:
1.
upon incurrence of any new financial indebtedness, other than certain permitted financial indebtedness as
described in the Super Senior Bonds agreement, then ShaMaran’s Book Equity Ratio, which is defined as
shareholders’ equity divided by total assets, shall be minimum 30% immediately thereafter, and
ShaMaran and any of its subsidiaries (together the “Group”) other than GEP, which is not allowed to do so,
may not enter into an agreement to make any acquisitions, merger or any other transactions involving another
party being consolidated into the Group’s accounts, unless such other party has a minimum 30% Book Equity
Ratio prior to such transaction taking place.
2.
Security
Following the amendment to the Senior Bonds agreement the security previously held for the Senior Bonds is joint
security with the new Super Senior Bonds on first rank and the Senior Bonds on second rank until the Super Senior
Bonds are repaid in full.
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.
11
Under the terms of both bond agreements 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 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 $4.4 million of total cash and cash
equivalents at December 31, 2016 (2015: $31.9 million) $nil was held in accounts pledged to the bond trustee
(December 31, 2015: $1.5 million).
During the year 2016 PIK Bonds of $16.7 million and $1.0 million were issued as coupon interest payments under
the respective Senior Bonds and Super Senior Bonds agreements.
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
Service fees
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
Gain on release of excess provision
Income / (expense)
Net income / (loss) from discontinued ops.
Dec 31
2016
Sep 30
2016
Jun 30
2016
For the quarter ended
Dec 31
2015
Mar 31
2016
Sep 30
2015
Jun 30
2015
Mar 31
2015
‐
‐
(805)
(57)
(11)
(1,422)
509
(14)
(1,800)
90
‐
(695)
(58)
(12)
(1,393)
16
(14)
(2,066)
‐
‐
‐
‐
‐
‐
30
‐
(1,009)
(58)
(11)
(1,443)
12
(15)
(2,494)
‐
‐
‐
‐
‐
(1,302)
(76)
(11)
(1,402)
21
(26)
‐
(244,557)
(460)
(172)
(11)
(1,328)
47
(10)
(2,796)
(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)
Net loss
(1,800)
(2,066)
(2,494)
(2,796)
(246,490)
(1,803)
(2,094)
(2,496)
Basic income in $ per share:
Continuing operations
Discontinued operations
Diluted income in $ per share:
Continuing operations
Discontinued operations
(0.01)
‐
(0.01)
(0.01)
‐
(0.01)
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
(0.17)
‐
(0.17)
(0.17)
‐
(0.17)
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
Summary of Principal Changes in the Fourth Quarter Financial Information
In the fourth quarter of 2016 work on the Atrush Block development program continued. The net loss was primarily
driven by general and administrative expenses, share based payments expense and finance cost, the substantial
portion of which were expensed borrowing costs on the Company’s Senior Bonds and Super Senior Bonds. These
expenses have been slightly offset by interest income on Atrush cost loans to the KRG, interest bearing funds as well
as service fees.
12
LIQUIDITY AND CAPITAL RESOURCES
Working capital at December 31, 2016 was $3.0 million compared to $20.3 million at December 31, 2015.
The overall cash position of the Company decreased by $27.5 million during the year 2016 compared to a decrease
in cash of $25.3 million during the year 2015. The main components of the movement in funds are discussed in the
following paragraphs.
The operating activities of the Company during the 2016 resulted in a decrease in the cash position of $6.9 million
compared to a decrease of $3.2 million in the cash position in 2015. The decrease in the cash position is explained
by a net loss of $9.2 million and $2.3 million of net positive cash adjustments from working capital items and non‐
cash expenses.
Net cash outflows to investing activities in 2016 were $36.8 million compared to $64.4 million in 2015. Substantially
all of the cash outflows to investing activities in 2016 relate to investment in the Atrush Block development work
program, and was comprised of $32.1 million in respect of the Company’s 20.1 interest in Atrush and $4.7 million in
respect of loans to the KRG to fund a portion of their Atrush Feeder Pipeline and other development costs.
The Company had net cash inflows from financing activities in 2016 of $16.2 million compared to $41.8 million in
the prior year. The cash inflows relate to the Super Senior Bonds issued on May 3, 2016 by GEP with gross proceeds
of $17.0 million, net of $0.8 million in transaction related costs, resulting in net proceeds of $16.2 million. Refer also
to the discussion above under the “Borrowings” section of this MD&A. The 2015 cash inflows relate to the rights
offering that was completed in the first quarter of 2015.
At December 31, 2016 ShaMaran held cash and cash equivalents of $4.4 million. Management cash flow forecasts
for the 12 months ended December 31, 2017 include cash inflows of $39 million from oil sales and $26.4 million
from ShaMaran common shares issued in January 2017 and cash outflows of $50 million on Atrush development,
Atrush Feeder Pipeline costs and technical and administrative costs in support of Atrush operations. The oil sales
volume assumptions reflect production commencing in the second quarter of 2017 and reaching, shortly thereafter,
a rate of 30,000 barrels of oil per day which reflects the planned capacity of the Atrush production facility and that
all crude oil produced from Atrush will be delivered, sold and paid for in accordance with the terms of the Atrush
PSC two months following the month of production. The forecasted cash flow includes an average oil price of $58
per barrel based on ICE Brent forward contract prices as of the balance sheet date and a $12 per barrel discount for
transportation costs and quality differentials. The price discount, delivery, sales and payment assumptions are
consistent with observed practice in Kurdistan since mid‐2015. The timing and extent of Atrush development costs
is based on the Operator’s latest forecasts for the 2017 work program while the technical and administrative
support costs are management’s latest estimates for these forthcoming requirements.
In case there are delays in the forecasted receipt of cash from production or in the magnitude of those cash
receipts, which are under the control of the Kurdistan Regional Government, the Company could, by the third
quarter of 2017, require additional liquidity in order to fund the forecasted Atrush development program
thereafter. Failure to meet development commitments could put the Atrush PSC and the Company’s bond
agreements at risk of forfeiture.
Management continues to monitor its financing requirements and consider appropriate financing alternatives which
include a facility under the Company’s existing bond agreements allowing for the Company to propose the issuance
of up to an additional $33 million of bonds under the same bond terms. Management estimates this financing
source could be administered within two months. However, in the event that an offering of additional bonds cannot
be completed, or that the Company could not secure external financing in an amount required to meet its
obligations as they come due, the Company may be required to take measures such as divestment of assets and or
further renegotiation of its debt. Should this not be successful, there is a risk that the Company would be subject to
a partial or complete reorganization, or that the Company is declared bankrupt.
The Company believes that based on the forecasts and projections they have prepared and potential financing
alternatives which will be pursued as required the Company will have the resources sufficient to satisfy its
contractual obligations and commitments 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 geopolitical events in the region, macroeconomic
conditions or other risks, including uncertainty surrounding oil production forecasted to commence in the second
quarter of 2017 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, development and production
activities for the next 12 months, particularly in case 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.
13
OUTSTANDING SHARE DATA AND STOCK OPTIONS
218,863,000 ShaMaran common shares were issued to holders of GEP’s Senior Bonds in early May 2016 in exchange
for settling $18 million of GEP’s Senior Bonds. The Company had 1,798,631,534 outstanding shares at December 31,
2016 (December 31, 2015: 1,579,768,534).
On January 30, 2017 the Company completed the issue of 360 million common shares of ShaMaran on a private
placement basis (the “Private Placement”) at a price per share of CAD 0.10 (equal to SEK 0.67) which resulted in
gross proceeds to the Company of $27.3 million ($26.4 million net of transaction related costs). Zebra Holdings and
Investments SARL, Lorito Holdings SARL and Lundin Petroleum BV, the Company’s major shareholders, subscribed
for 43,463,618 shares, 16,984,621 shares and 17,800,000 shares, respectively, in the Private Placement. As a result
of the Private Placement the Company had 2,158,631,534 outstanding shares at the date of this MD&A.
At December 31, 2016 there were 28,165,000 stock options outstanding under the Company’s employee incentive
stock option plan. In the year 2016 no stock options were issued or exercised and 25,000 expired (2015: 26 million
issued and 4,565,000 expired). There has been no further movement in stock options from December 31, 2016 to
the date of this MD&A.
The Company has no warrants outstanding.
OFF BALANCE SHEET ARRANGEMENTS
The Company has no off‐balance sheet arrangements.
RELATED PARTY TRANSACTIONS
In $000
Lundin Petroleum AB
Namdo Management Services Ltd.
McCullough O’Connor Irwin LLP
Total
Purchases of services
during the year
2016
2015
299
99
44
442
473
173
18
664
Amounts owing
at December 31,
2015
2016
24
1
‐
25
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, 2016 of $299 (2015: $473) were
comprised of technical service costs of $3 (2015: $59), reimbursement for Company travel and related expenses of
$nil (2015: $23), investor relations services of $28 (2015: $29), office rental, administrative and building services of
$268 (2015: $362).
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.
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.
Also refer to the discussion under the “Borrowings” section above.
COMMITMENTS
Atrush Block Production Sharing Contract
ShaMaran holds a 20.1% direct interest in the Atrush PSC through GEP. TAQA is the Operator with a 39.9% direct
interest, the KRG holds a 25% direct interest and MOKDV holds a 15% direct interest. Under the terms of the 4th PSC
Amendment and the Facilitation Agreement the Non‐Government Contractors have agreed to pay their pro‐rata
share of the Feeder Pipeline costs and of the KRG’s share of Atrush development costs up to the commencement of
oil exports from Atrush. Thereafter these costs will be reimbursed to the Non‐Government Contractors.
14
Under the terms of the Atrush 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
Atrush PSC. All modifications to the Atrush PSC are subject to the approval of the KRG. The Company is responsible
for its pro‐rata share of the costs incurred in executing the development work program on the Atrush Block which
commenced on October 1, 2013.
As at December 31, 2016 the outstanding commitments of the Company were as follows:
In $000
For the year ended December 31,
Atrush Block development
Office and other
Total commitments
2017
46,428
38
46,466
2018
152
‐
152
2019
Thereafter
152
‐
152
2,276
‐
2,276
Total
49,008
38
49,046
Amounts relating to Atrush Block development represent the Company’s unfunded paying interest share of the
approved work program and other obligations under the Atrush PSC.
PROPOSED TRANSACTIONS
The company had no transactions pending at the date of this MD&A.
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 as
required. Actual results could differ from these estimates and differences could be material.
New Accounting Standards
There are no IFRS or interpretations that have been issued effective for financial years beginning on or after January
1, 2016 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
15
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, 2018. 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, 2018.
IFRS 16: Leases will replace IAS 17 Leases and requires assets and liabilities arising from all leases, with some
exceptions, to be recognized on the balance sheet. The new standard will be effective for annual periods beginning
on or after January 1, 2019. The Company is in the process of assessing the full impact of IFRS 16 and intends to
adopt IFRS 16 no later than the accounting period beginning on or after January 1, 2019.
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 assessment.
Exploration well costs are initially capitalised and, if subsequently determined to have not found sufficient reserves
to justify commercial production, are charged to exploration expense. Exploration well costs that have found
sufficient reserves to justify commercial production, but whose reserves cannot be classified as proved, continue to
be capitalised as long as sufficient progress is being made to assess the reserves and economic viability of the well
and or related project.
Capitalised costs of proved oil and gas properties are depleted using the unit of production method based on
estimated gross proved 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 exists 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.
16
RESERVES AND RESOURCE ESTIMATES
The Company engaged McDaniel to evaluate 100% of the Company’s reserves and resource data at December 31,
2016. 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”).
Reserves and resource estimates have remained unchanged from those reported for the prior year.
The Company’s crude oil reserves as of December 31, 2016 were, based on the Company’s working interest of 20.1
percent, estimated to be as follows:
Company estimated reserves (diluted)
As of December 31, 2016
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
3,096
2,287
1,522
4,653
3,096
2,287
1,522
7,779
4,302
2,394
1,264
12,432
7,399
4,681
2,786
10,366
3,339
22,798
10,737
3,108
882
7,789
3,668
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.
(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, 2016 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, 2016
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 share of the property gross resources.
(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 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.
Prospective resources have not been re‐evaluated since December 31, 2013.
17
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.
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.
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.
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With the exception of borrowings, accrued interest on bonds and provisions for decommissioning costs, which have
fair value measurements based on valuation models and techniques where the significant inputs are derived from
quoted prices or indices, the fair values of the Company’s other financial instruments did not require valuation
techniques to establish fair values as the instrument was either cash and cash equivalents or, due to the short term
nature, readily convertible to or settled with cash and cash equivalents.
The Company is exposed in varying degrees to a variety of financial instrument related risks which are discussed in
the following sections:
Financial Risk Management Objectives
The Company’s management monitors and manages the Company’s exposure to financial risks facing the
operations. These financial risks include market risk (including commodity price, foreign currency and interest rate
risks), credit risk and liquidity risk.
The Company does not presently hedge against these risks as the benefits of entering into such agreements is not
considered to be significant enough as to outweigh the significant cost and administrative burden associated with
such hedging contracts.
Commodity price risk: The prices that the Company receives for its oil and gas production may have a significant
impact on the Company’s revenues and cash flows provided by operations. World prices for oil and gas are
characterised by significant fluctuations that are determined by the global balance of supply and demand and
worldwide political developments and in particular the price received for the Company’s oil and gas production in
Kurdistan is dependent upon the Kurdistan government and its ability to export production outside of Iraq. 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 in the years 2014 and 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 GEP’s outstanding Senior Bonds and Super Senior Bonds. 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.
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Liquidity risk: Liquidity risk is the risk that the Company will have difficulties meeting its financial obligations as they
become due. In common with many oil and gas exploration companies, the Company raises financing for its
exploration and development activities in discrete tranches in order to finance its activities for limited periods. The
Company seeks to raise additional funding as and when required. The Company anticipates making substantial
capital expenditures in the future for the acquisition, exploration, development and production of oil and gas
reserves and as the Company’s project moves further into the development stage, specific financing, including the
possibility of additional debt, may be required to enable future development to take place. The financial results of
the Company will impact its access to the capital markets necessary to undertake or complete future drilling and
development programs. There can be no assurance that debt or equity financing, or future cash generated by
operations, would be available or sufficient to meet these requirements or, if debt or equity financing is available,
that it will be on terms acceptable to the Company.
The Company manages liquidity risk by maintaining adequate cash reserves and by continuously monitoring
forecast and actual cash flows. Annual capital expenditure budgets are prepared, which are regularly monitored and
updated as considered necessary. In addition, the Company requires authorisations for expenditure on both
operating and non‐operating projects to further manage capital expenditures.
RISKS AND UNCERTAINTIES
ShaMaran Petroleum Corp. is engaged in the exploration, development and production of crude oil and natural gas
and its operations are subject to various risks and uncertainties which include but are not limited to those listed
below. If any of the risks described below materialise the effect on the Company’s business, financial condition or
operating results could be materially adverse.
The following sections describe material risks identified by the Company; however, risks and uncertainties of which
the Company is not currently aware or currently believes to be immaterial could develop and may adversely affect
the Company’s business, financial condition or operating results. For more information on risk factors which may
affect the Company’s business refer also to the discussion of risks under the “Reserves and Resources” and
“Financial Instruments” sections of this MD&A above, as well as to the “Risk Factors” section of its Annual
Information 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.
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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”.
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 supply
and demand balances, 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 production sharing contracts 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 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 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 PSC.
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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 production
sharing contracts. However, it is possible that the arrangements under the production sharing contracts 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. 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.
Payments for oil exports: Companies who have exported oil from Kurdistan since the year 2009 have reported
significant amounts outstanding for past oil exports. Cash payments to oil companies for oil exported from
Kurdistan has been under control of the KRG since the beginning of exports in 2009. Since February 1, 2016, when
the KRG announced an interim measure whereby monthly payments to oil companies would be made based on an
agreed mechanism, the KRG has established a relatively consistent record of delivering regular monthly payments to
oil companies for their entitlement revenues in respect of monthly petroleum production, with producers’ most
recent reports indicating having received in March 2017 full payments for December 2016 oil exported.
Nevertheless there remains a risk that the Company may face significant delays in the receipt of cash for its
entitlement share of future oil exports.
Paying interest: On November 7, 2016 the KRG exercised its back‐in right under the terms of the Atrush PSC and
acquired a 25% participating interest. Upon the commencement of oil production exports from Atrush 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 future project development costs.
Default under the Atrush PSC and Atrush JOA: Should the Company fail to meet its obligations under the Atrush
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 Atrush 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 the Atrush PSC: The Atrush 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 Atrush PSC.
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Project and Operational Risks
Shared ownership and dependency on partners: ShaMaran’s operations are to a significant degree conducted
together with one or more partners through contractual arrangements with the execution of the operations being
undertaken by the Operator in accordance with the terms of the Atrush JOA. As a result, ShaMaran has limited
ability to exercise influence over the deployment of those assets or their associated costs and this could
adversely affect ShaMaran’s financial performance. If the operator or other partners fail to perform, ShaMaran
may, among other things, risk losing rights or revenues or incur additional obligations or costs in order to itself
perform in place of its partners. If a dispute would arise with one or more partners such dispute may have
significant negative effects on the Company’s operations relating to its projects.
Security risks: Kurdistan and other regions in Iraq have a history of political and social instability which have
culminated in security problems which may put at risk the safety of the Company’s personnel, interfere with the
efficient and effective execution of the Company’s operations and ultimately result in significant losses to the
Company. There have been no significant security incidents in the Company’s area of operation.
Risks relating to infrastructure: The Company is dependent on access to available and functioning infrastructure
(including third party services in Kurdistan) relating to the properties on which it operates, such as roads, power and
water supplies, pipelines and gathering systems. If any infrastructure or systems failures occur or access is not
possible or does not meet the requirements of the Company, the Company’s operations may be significantly
hampered which could result in lower production and sales and or higher costs.
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
industry
implemented health, safety and environment policies since
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.
incorporation, complies with
its
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 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 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 PSC. If such parties
were to breach the terms of the Atrush PSC or any other documents relating to the Company’s interest in the
Atrush PSC, it could cause the KRG to revoke, terminate or adversely amend the Atrush PSC.
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.
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Early stage of development: ShaMaran has conducted oil and gas exploration and development activities in
Kurdistan for approximately seven 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.
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 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 potential 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.
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Risks Related to the GEP’s Senior Bonds and Super Senior Bonds
Possible termination of Atrush PSC / bond agreements in event of default scenario: Should GEP default its
obligations under either of the bond agreements GEP may also not be able to fulfil its obligations under the Atrush
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 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 agreements. 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 bond agreements 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 agreements.
Significant operating and financial restrictions: The terms and conditions of the bond agreements 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 agreements. A breach of any of the covenants and restrictions could result in
an event of default under the bond agreements.
Mandatory prepayment events: Under the terms of the bond agreements 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 PSC or (iv) an event of default occurs under either of the bond agreements. 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 the bonds which could, among other things, result in an event
of default under the bond agreements.
ATRUSH OUTLOOK
Production Facility
The construction of the 30,000 bopd Atrush Phase 1 Production Facility is complete. Commissioning is in progress
and is expected to be complete in advance of the Feeder Pipeline. First oil is expected in the second quarter of 2017.
Plans for 2017 include the engineering and design of gas sweetening facilities, the installation of water handling
facilities and the installation of 100,000 bbls of oil storage capacity.
It is also planned to conduct extended testing of the CK‐6 well and possibly the AT‐3 well, both of which are located
on the eastern side of the Atrush Block. This would involve the installation of temporary production facilities near
the Chamanke–C well pad and the delivery by truck of oil to the main Phase I Production Facilities.
Oil Export Pipeline
The construction of the Spur Pipeline, the pump station and the IPPR is substantially complete and will be ready
before first oil production.
Work has commenced on the Feeder Pipeline which will ultimately be owned by the KRG. The complexity of
commercial and legal discussions has led to delays in the start of construction of the Feeder Pipeline. Completion
expected in the second quarter of 2017. Production is planned to begin after the Feeder Pipeline is commissioned.
Wells
AT‐2, the final of four initial producing wells all equipped with electric submersible pumps, was completed in the
third quarter of this year. The four initial producing wells are all connected to the Production Facility and now ready
for start up.
Plans in 2017 are to drill and test CK‐7, an appraisal and development well located in the central area of the Atrush
Block, and CK‐9, a dedicated water disposal well.
25
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.
26
ShaMaran Petroleum Corp.
Audited Consolidated Financial Statements
For the year ended December 31, 2016
27
Auditor’s Report
9 March 2017
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 2016 and 31 December 2015 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 2016 and 31 December 2015, 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 2016 and 31 December 2015 and its financial
performance and its cash flows for the years ended 31 December 2016 and 31 December 2015 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.
28
Emphasis of matter – going concern
In forming our opinion on the consolidated financial statements, which is not modified, we have considered the
adequacy of the disclosures made in Note 2 to the consolidated 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 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 in order to realise receipts from oil
sales to its customers. The uncertainty with regard to the timing and extent of these cash receipts and cash
payments at the date of approval of the consolidated 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
consolidated financial statements do not include the adjustments that would result if the company was unable
to continue as a going concern.
PricewaterhouseCoopers SA
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.
29
SHAMARAN PETROLEUM CORP.
Consolidated Statement of Comprehensive Income
(Expressed in thousands of United States dollars, except for per share data)
______________________________________________________________________________
Note
For the year ended December 31,
2015
2016
Continuing Operations
Income
Service fees
Expenses
Impairment loss
Depreciation and amortisation expense
Share based payments expense
General and administrative expense
Loss before finance items and income tax expense
Finance income
Finance cost
Net finance cost
Loss before income tax expense
Income tax expense
Loss from continuing operations
Discontinued operations
Net gain from discontinued operations
Loss for the year
Other comprehensive income
Items that may be reclassified to profit or loss:
Currency translation differences
Actuarial gain on defined pension plan
Total other comprehensive income / (loss)
Total comprehensive loss for the year
Loss in dollars per share:
Continuing operations
Basic and diluted
Discontinued operations
Basic and diluted
Continuing and discontinued operations
Basic and diluted
6
12
20
7
8
9
10
11
18
19
19
19
120
‐
(45)
(249)
(3,811)
(4,105)
484
(5,586)
(5,102)
(9,087)
(69)
(9,156)
‐
(9,156)
22
15
37
‐
(244,557)
(56)
(1,210)
(2,359)
(248,182)
681
(5,321)
(4,640)
(252,822)
(94)
(252,916)
33
(252,883)
(18)
‐
(18)
(9,119)
(252,901)
(0.01)
‐
(0.01)
(0.17)
‐
(0.17)
The accompanying Notes are an integral part of these consolidated financial statements.
30
SHAMARAN PETROLEUM CORP.
Consolidated Balance Sheet
(Expressed in thousands of United States dollars)
______________________________________________________________________________
As at December 31,
Note
2016
2015
Assets
Non‐current assets
Property, plant and equipment
Intangible assets
Loans and receivables
Current assets
Loans and receivables
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
Pension liability
Total liabilities
Equity
Share capital
Share based payments reserve
Cumulative translation adjustment
Accumulated deficit
Total equity
Total liabilities and equity
12
13
14
14
16
16
15
16
16
17
18
19
174,658
89,007
46,114
309,779
7,252
4,416
‐
224
11,892
321,671
6,434
2,503
‐
8,937
165,129
8,869
1,670
175,668
184,605
611,179
6,484
(61)
(480,536)
137,066
321,671
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
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
31
SHAMARAN PETROLEUM CORP.
Consolidated Statement of Changes in Equity
(Expressed in thousands of United States dollars)
______________________________________________________________________________
Balance at January 1, 2015
534,068
5,025
(65)
(216,824)
322,204
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
Shares issued on Rights Offering
Transaction costs
Balance at December 31, 2015
Pension liability adjustment:
Balance at January 1, 2016
‐
‐
‐
1,210
‐
‐
1,210
6,235
‐
60,462
(1,351)
59,111
593,179
‐
‐
Balance at January 1, 2016
593,179
6,235
Total comprehensive loss for the year:
Loss for the year
Other comprehensive income
‐
‐
‐
Transactions with owners in their capacity as owners:
Share based payments expense
Shares issued
‐
18,000
18,000
‐
‐
‐
249
‐
249
‐
(18)
(18)
‐
‐
‐
‐
(252,883)
‐
(252,883)
(252,883)
(18)
(252,901)
‐
‐
‐
‐
1,210
60,462
(1,351)
60,321
(83)
(469,707)
129,624
‐
(83)
‐
22
22
‐
‐
‐
(1,688)
(471,395)
(9,156)
15
(9,141)
‐
‐
‐
(1,688)
127,936
(9,156)
37
(9,119)
249
18,000
18,249
Balance at December 31, 2016
611,179
6,484
(61)
(480,536)
137,066
The accompanying Notes are an integral part of these consolidated financial statements.
32
SHAMARAN PETROLEUM CORP.
Consolidated Statement of Cash Flows
(Expressed in thousands of United States dollars)
______________________________________________________________________________
Note
20
8,9
Operating activities
Net loss from continuing operations
Adjustments for:
Interest expense on borrowings – net
Share based payments expense
Unwinding discount on decommissioning provision
Depreciation and amortisation expense
Actuarial gain on pension plan
Foreign exchange gain
Impairment loss
Interest income
Change in pension liability
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 operating activities
Investing activities
Interest received on cash deposits
Purchases of intangible assets
Loans and receivables – advances to joint venture partner
Purchase of property, plant and equipment
Net cash outflows to investing activities
Financing activities
Proceeds on bond issue
Bond transaction costs
Shares issued on Rights Offering
Transaction costs on Rights Offering
Interest payments to bondholders
Net cash inflows from financing activities
Effect of exchange rate changes on cash and cash equivalents
Change in cash and cash equivalents
Cash and cash equivalents, beginning of the year
Cash and cash equivalents, end of the year*
For the year ended December 31,
2015
2016
(9,156)
5,518
249
68
45
15
‐
‐
(484)
(18)
(24)
(31)
(3,126)
‐
(6,944)
44
(7)
(4,769)
(32,073)
(36,805)
17,000
(777)
‐
‐
‐
16,223
21
(27,505)
31,921
4,416
(252,916)
5,285
1,210
36
56
‐
(492)
244,557
(189)
‐
1,405
(10)
(2,147)
(18)
(3,223)
189
(60,271)
‐
(4,311)
(64,393)
‐
‐
60,462
(1,351)
(17,250)
41,861
472
(25,283)
57,204
31,921
*Inclusive of restricted cash
16
‐
1,512
The accompanying Notes are an integral part of these consolidated financial statements.
33
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2016
(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 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 first
phase of the development program in respect of the Atrush Block production sharing contract (“Atrush PSC”)
related to a petroleum property located in the Kurdistan Region of Iraq (“Kurdistan”).
2. Basis of preparation and going concern
a. Basis of preparation
These consolidated financial statements have been prepared in accordance with International Financial Reporting
Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”) and the IFRS Interpretations
Committee that are effective beginning on January 1, 2016, 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 9, 2017.
b. Going concern
These consolidated financial statements have been prepared on the going concern basis which assumes that the
Company will be able to realise into the foreseeable future its assets and liabilities in the normal course of business
as they come due.
The ability of the Company to continue as a going concern and to successfully carry out its business plan is
primarily dependent upon the continued support of its shareholders, the resolution of remaining political disputes
in Iraq and the ability of the Company to obtain additional financing for its activities to develop, produce and sell
economically recoverable reserves.
Management has applied significant judgment in preparing forecasts supporting the going concern assumption.
Specifically, management has made assumptions regarding projected oil sale volumes and pricing, and the timing
and extent of capital, operating, and general and administrative expenditures. A number of uncertainties outside
the control of the Company could impact its ability to fund its obligations without securing additional financing
including the completion according to plan and proper functioning of production facilities and pipelines, the
stability of the oil price, the timing of cash receipts from the sale of oil and the Company’s obligations under the
2017 Atrush work program and budget.
At December 31, 2016 ShaMaran held cash and cash equivalents of $4.4 million. Management cash flow forecasts
for the 12 months ended December 31, 2017 include cash inflows of $39 million from oil sales and $26.4 million
from ShaMaran common shares issued in January 2017 and cash outflows of $50 million on Atrush development,
Atrush Feeder Pipeline costs and technical and administrative costs in support of Atrush operations. The oil sales
volume assumptions reflect production commencing in the second quarter of 2017 and reaching, shortly
thereafter, a rate of 30,000 barrels of oil per day which reflects the planned capacity of the Atrush production
facility and that all crude oil produced from Atrush will be delivered, sold and paid for in accordance with the terms
of the Atrush PSC two months following the month of production. The forecasted cash flow includes an average oil
price of $58 per barrel based on ICE Brent forward contract prices as of the balance sheet date and a $12 per
barrel discount for transportation costs and quality differentials. The price discount, delivery, sales and payment
assumptions are consistent with observed practice in Kurdistan since mid‐2015. The timing and extent of Atrush
development costs is based on the Operator’s latest forecasts for the 2017 work program while the technical and
administrative support costs are management’s latest estimates for these forthcoming requirements.
34
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2016
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
In case there are delays in the forecasted receipt of cash from production or in the magnitude of those cash
receipts, which are under the control of the Kurdistan Regional Government (“KRG”), the Company could, by the
third of quarter 2017, require additional liquidity in order to fund the forecasted Atrush development program
thereafter. Failure to meet development commitments could put the Atrush PSC and the Company’s bond
agreements at risk of forfeiture.
Management continues to monitor its financing requirements and consider appropriate financing alternatives
which include a facility under the Company’s existing bond agreements allowing for the Company to propose the
issuance of up to an additional $33 million of bonds under the same bond terms. Management estimates this
financing source could be administered within two months. However, in the event that an offering of additional
bonds cannot be completed, or that the Company could not secure external financing in an amount required to
meet its obligations as they come due, the Company may be required to take measures such as divestment of
assets and or further renegotiation of its debt. Should this not be successful, there is a risk that the Company
would be subject to a partial or complete reorganization, or that the Company is declared bankrupt.
The Company believes that based on the forecasts and projections they have prepared and potential financing
alternatives which will be pursued as required the Company will have the resources sufficient to satisfy its
contractual obligations and commitments 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 geopolitical events in the region, macroeconomic
conditions or other risks, including uncertainty surrounding oil production forecasted to commence in the second
quarter of 2017 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, development and production
activities for the next 12 months, particularly in case 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 Notes 16, 22 and 25.
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.
35
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2016
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
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.
(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.
36
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2016
(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.
Depletion of oil and gas assets:
Oil and gas assets are depleted 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.
37
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2016
(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 exists 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)
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.
38
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2016
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
Classification and measurement
The Company classifies its financial assets and liabilities at initial recognition in the following categories:
Financial assets and liabilities at fair value through profit or loss are those assets and liabilities acquired
principally for the purpose of selling or repurchasing in the short‐term and are 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. If collection of the amounts is expected in one year or less they
are classified as current assets. If not, they are presented as non‐current assets. 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.
(j) 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 within three months or less from the
acquisition date.
(k) Borrowings
Borrowings are recognised initially at fair value, net of any transaction costs incurred. Borrowings are subsequently
carried at amortised cost using the effective interest rate method.
39
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2016
(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.
(l) Taxation
The income tax expense comprises current income tax and deferred income tax.
The current income tax is the expected tax payable on the taxable income for the period. It is calculated on the
basis of the tax laws enacted or substantively enacted at the balance sheet date and includes any adjustment to
tax payable in respect of previous years.
Deferred income tax is the tax recognised in respect of temporary differences between the carrying amounts of
assets and liabilities in the financial statements and the corresponding tax bases and is accounted for using the
balance sheet liability method. Deferred income tax liabilities are generally recognised for all taxable temporary
differences and deferred income tax assets are recognised to the extent that it is probable that taxable profits will
be available against which deductible temporary differences can be utilised. Deferred income tax is not recorded if
it arises from the initial recognition of an asset or liability in a transaction other than a business combination that,
at the time of the transaction, affects neither the accounting profit nor loss.
Deferred income tax liabilities are recognised for taxable temporary differences arising on investments in
subsidiaries and associates and interests in joint ventures except where the Company is able to control the reversal
of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable
future.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that
it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be
recovered.
Deferred income tax is calculated at the tax rates that are expected to apply in the year when the deferred tax
liability is settled or the asset is realised. Deferred tax is charged or credited in the statement of comprehensive
income except when it relates to items charged or credited directly to equity in which case the deferred tax is also
recognised directly in equity. Deferred tax assets and liabilities are offset when there is a legally enforceable right
to offset current tax assets against current tax liabilities and when they relate to income taxes levied by the same
taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.
(m) Provisions
Provisions are recognised when the Company has a present obligation, legal or constructive, as a result of a past
event when it is probable that the Company will be required to settle the obligation and a reliable estimate can be
made of the obligation.
The amount recognised as a provision is the best estimate of the consideration required to settle the present
obligation at the balance sheet date, taking into account the risks and uncertainties surrounding the obligation.
When a provision is measured using the cash flow estimates to settle the present obligation its carrying amount is
the present value of those cash flows.
Decommissioning and site restoration
Provisions for decommissioning and site restoration are recognised when the Company has a present legal or
constructive obligation to dismantle and remove production, storage and transportation facilities and to carry out
site restoration work. The provision is calculated as the net present value of the Company’s share of the
expenditure expected to be incurred at the end of the producing life of each field using a discount rate that reflects
the market assessment of the time value of money at that date. Unwinding of the discount on the provision is
charged to the statement of comprehensive income within finance costs during the period. The amount recognised
as the provision is included as part of the cost of the relevant asset and is charged to the statement of
comprehensive income in accordance with the Company’s policy for depreciation and amortisation.
40
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2016
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
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) Pension obligations
The Company’s Swiss subsidiary, ShaMaran Services SA, has a defined benefit pension plan that is managed
through a private pension plan. Independent actuaries determine the cost of the defined benefit plan on an annual
basis, and ShaMaran Services SA pays the annual insurance premium. The pension plan provides benefits coverage
to the employees of ShaMaran Services SA in the event of retirement, death or disability. ShaMaran Services SA
and its employees jointly finance retirement and risk benefits. Employees of ShaMaran Services SA pay 40% of the
savings contributions, of the risk contributions and of the cost contributions and ShaMaran Services SA contributes
the difference between the total of all required pension plan contributions and the total of all employees’
contributions.
(o) 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.
(p) Share‐based payments
The Company issues equity‐settled share‐based payments to certain directors, employees and third parties. The
fair value of the equity settled share‐based payments is measured at the date of grant. 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.
(q)
Income recognition
Interest income:
Interest income is recognised when it is probable that the economic benefits associated with the transaction will
flow to the entity and the amount of the income can be measured reliably. Interest income is recognised using the
effective interest method. The effective interest rate exactly discounts estimated future cash payments or receipts
through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying
amount of the financial asset or financial liability.
(r) Changes in accounting policies
There are no IFRS or interpretations that have been issued effective for financial years beginning on or after
January 1, 2016 that would have a material impact on the Company’s consolidated financial statements.
41
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2016
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
(s) 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, 2018. 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, 2018.
IFRS 16: Leases will replace IAS 17 Leases and requires assets and liabilities arising from all leases, with some
exceptions, to be recognized on the balance sheet. The new standard will be effective for annual periods beginning
on or after January 1, 2019. The Company is in the process of assessing the full impact of IFRS 16 and intends to
adopt IFRS 16 no later than the accounting period beginning on or after January 1, 2019.
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.
42
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2016
(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 and resources
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 2017 the Company received an independent reserves and resources report from McDaniel &
Associates Consultants Ltd. (“McDaniel”) to estimate the Company’s Atrush Block reserves and resources at
December 31, 2016. The reserves and resources estimates were unchanged from the estimates provided by
McDaniel for the previous year end.
(b) Loans and receivables
The Company has reported loans and receivables of $53.4 million relating to the KRG’s share of Atrush exploration,
development and Feeder Pipeline costs which are due to be repaid by the KRG to the Company over time following
the commencement of petroleum exports from Atrush production. The recovery of the balances depends on some
or all of a number of factors, including: the conclusion of the Feeder Pipeline and the commencement of
production and exports of petroleum from the Atrush Block; oil price; and, the financial environment in Kurdistan
and the financial budget of the KRG. Since February 1, 2016, when the KRG announced an interim measure
whereby monthly payments to IOCs would be made based on an agreed mechanism, the KRG has established a
relatively consistent record of delivering regular monthly payments to IOCs for their entitlement revenues in
respect of monthly petroleum production. The Company believes the loans and receivable balances are fully
recoverable, and expect that the amounts will be settled with cash, although it is possible that settlement could be
achieved in a number of ways including payment in kind of petroleum production.
The current portion of loans and receivables is based on contractual repayment starting in the month following
production exports which is expected in the second quarter of 2017. In case of delays in production exports the
current portion of loans and receivables will be less than the reported amounts. Refer also to Note 14.
(c)
Impairment of 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. As described in Notes 3(i) and 3(j) management has considered whether there is any
objective evidence to indicate that the carrying value of any of its Atrush related assets as at the balance sheet
date were impaired and has concluded that facts and circumstances do not suggest that the carrying amount
exceeds its recoverable amount. In reaching its conclusion management has considered a number of factors which
could impact the ability of the assets to generate future cash flows including the following key items: that the fair
values of the Atrush asset as published by independent market brokers Swedbank and Pareto Securities AB
support the carrying values of the Atrush oil and gas assets; that there has been no change in the Company’s share
of the latest estimated recoverable reserves and resources for Atrush and the related production curve estimates
as determined by McDaniel; that the net present value of the Company’s share of 2P reserves, as determined by
McDaniel and based on a forecasted Brent oil price, supports the book value of oil and gas assets included in
property plant and equipment despite a decrease in the long term price forecast relative to the prior year forecast;
that there has been a decrease in the forecasted level of costs and associated cash outflows required to recover
the Atrush oil reserves; the collectability of cash for future sales of Atrush oil which has remained stable over the
past year; and, that there continues to be an active market and capacity for Atrush oil sales as demonstrated by
the current and future expected levels of oil exports from Kurdistan. Refer also to Notes 12, 13 and 14.
43
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2016
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
(d) 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 Note 17.
(e) 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. Refer to Note 20 for further information on
share based payments.
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 11 for disclosure of the
Company’s discontinued operations.
6.
Service fees
During the year ended December 31, 2016 the Company has provided technical services to a third party petroleum
company.
7. General and administrative expense
General and administrative expenses incurred
General and administrative expenses capitalised as E&E assets
General and administrative expense
For the year ended December 31,
2015
2016
3,811
‐
3,811
5,194
(2,835)
2,359
The Company capitalises as E&E assets general and administrative expenses supporting E&E activities which relate
to its direct interest held in the Atrush Block. There were no general and administrative expenses capitalised in the
year 2016 because E&E activities during the year were insignificant. Refer also to Note 13.
8.
Finance income
Interest on Atrush Development Cost Loan
Interest on deposits
Interest on Atrush Feeder Pipeline Cost Loan
Total interest income
Foreign exchange gain
Total finance income
For the year ended December 31,
2015
2016
406
44
34
484
‐
484
‐
189
‐
189
492
681
44
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2016
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
Refer to Note 14 for further information on interest on the Atrush Development Cost Loan and the Feeder Pipeline
Cost Loan. Interest on deposits represents bank interest earned on cash and investments held in interest bearing
term deposits.
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.
9.
Finance cost
Interest charges on bonds at coupon rate
Amortisation of bond 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,
2015
2016
17,951
943
18,894
68
18,962
(13,376)
5,586
17,250
606
17,856
36
17,892
(12,571)
5,321
During the year ended December 31, 2016 the Company incurred interest expense relating to its Senior Bonds and
Super Senior Bonds which both carry an 11.5% fixed semi‐annual coupon interest rate.
Refer also to Notes 12, 13 and 16.
10. 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 recovery
Increase / (decrease) resulting from:
Non‐deductible losses on foreign operations
Foreign tax rate differences
Other expense
Non‐deductible compensation expense
Non‐taxable foreign exchange gain
Share issuance costs charged to share capital
Change in valuation allowance
Effect of changes in foreign exchange rates
Income tax expense from continuing operations
For the year ended December 31,
2015
2016
9,087
26.0%
2,363
(1,626)
(494)
(399)
(65)
‐
‐
40
112
(69)
252,822
26.0%
65,734
(37,349)
(15,099)
346
(314)
128
342
(12,915)
(967)
(94)
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 $103 million (2015: $103 million) of deferred tax assets as it is not
probable that these amounts will be realised.
45
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2016
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
(b)
Tax losses carried forward
The Company has tax losses and costs which are available to apply to future taxable income as follows:
Canadian losses from operations
Canadian exploration expenses
Canadian unamortised share issue costs
Dutch losses from operations
U.S. Federal losses from operations
U.S. Federal tax basis in excess of carrying values of properties
Total tax losses carried forward
As at December 31,
2016
2015
18,544
2,419
758
178,631
173,314
3,654
377,320
18,413
2,369
1,097
178,627
173,344
3,654
377,504
The Canadian losses from operations may be used to offset future Canadian taxable income and will expire over
the period from 2026 to 2036. 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 2017 to 2019. The Dutch losses from operations may be used to offset future Dutch taxable
income and will expire over the period from 2018 to 2025. The U.S. Federal losses are available to offset future
taxable income in the United States through 2032.
11. 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
General, administrative and professional expense
Net gain from discontinued operations
For the year ended December 31,
2015
2016
‐
‐
‐
46
(13)
33
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.
46
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2016
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
12. Property, plant and equipment
At January 1, 2015
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
For the year ended December 31, 2016
Opening net book value
Additions
Transfer to Atrush Development Cost Loan
Transfer to Atrush Exploration Costs receivable
Depreciation expense
Net book value
At December 31, 2016
Cost
Accumulated depreciation
Net book value
Oil and gas
assets
Computer
equipment
Furniture
and office
equipment
194
(105)
89
89
11,029
410,472
(244,557)
‐
(33)
177,000
177,138
(138)
177,000
177,000
45,799
(10,682)
(37,475)
‐
174,642
174,780
(138)
174,642
256
(188)
68
68
4
‐
‐
1
(29)
44
258
(214)
44
44
1
‐
‐
(29)
16
253
(237)
16
154
(139)
15
15
‐
‐
‐
‐
(15)
‐
153
(153)
‐
‐
‐
‐
‐
‐
‐
150
(150)
‐
Total
604
(432)
172
172
11,033
410,472
(244,557)
1
(77)
177,044
177,549
(505)
177,044
177,044
45,800
(10,682)
(37,475)
(29)
174,658
175,183
(525)
174,658
The net book value of oil and gas assets at December 31, 2016 are comprised of development costs related to the
Company’s share of Atrush 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. The additions
to PP&E in the year 2016 included borrowing costs totalling $13.1 million (2015: $1 million).
On November 7, 2016 the Assignment, Novation and Fourth Amendment Agreement to the Atrush PSC (the “4th
PSC Amendment”) and Atrush Facilitation Agreement were concluded between TAQA Atrush B.V. (“TAQA”, a
subsidiary of Abu Dhabi National Energy Company PJSC and the Operator of the Atrush Block), General Exploration
Partners, Inc., (“GEP” and a wholly owned subsidiary of the Company), and Marathon Oil KDV B.V. (“MOKDV”)
(together, the “Non‐Government Contractors”) and the KRG which has resulted in the reclassification of certain
costs from PP&E to loans and receivables. Refer to Note 14 for further information.
In the year 2015, as a result of significant decline in world oil prices, the Company determined that the book value
of the Atrush 2P reserves exceeded their $177 million recoverable value, determined by the Company’s estimate
of the value in use, by an amount of $244.6 million and therefore recorded an impairment loss for this amount.
Also in the year 2015, $410.5 million of costs related to the Atrush 2P reserves were transferred from intangible
assets to PP&E in 2015 following the approval of an agreement for the construction of a crude oil pipeline within
the Atrush Block.
Refer also to Notes 9, 13, 14, 16 and 23.
47
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2016
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
13.
Intangible assets
At January 1, 2015
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
For the year ended December 31, 2016
Opening net book value
Additions
Amortisation expense
Net book value
At December 31, 2016
Cost
Accumulated amortisation
Net book value
Exploration and
evaluation assets
Other intangible
assets
429,245
‐
429,245
429,245
69,821
(410,472)
‐
88,594
88,594
‐
88,594
88,594
378
‐
88,972
88,972
‐
88,972
292
(260)
32
32
31
‐
(12)
51
321
(270)
51
51
‐
(16)
35
314
(279)
35
Total
429,537
(260)
429,277
429,277
69,852
(410,472)
(12)
88,645
88,915
(270)
88,645
88,645
378
(16)
89,007
89,286
(279)
89,007
The net book value of E&E assets at December 31, 2016 represents Atrush Block exploration and appraisal costs
related to the Company’s share of Atrush Block contingent resources as estimated by McDaniel. During the year
2016 borrowing costs of $0.3 million (2015: $11.5 million) were capitalised to E&E assets.
In the year 2015 $410.5 million of costs related to the Atrush 2P reserves have been transferred from intangible
assets to PP&E. Refer also to Notes 9, 12, 16, and 23.
14. Loans and receivables
On November 7, 2016 the 4th PSC Amendment and Atrush Facilitation Agreement were concluded between the
Non‐Government Contractors and the KRG. On the same day TAQA entered into an Engineering, Procurement and
Construction (“EPC”) contract with KAR Company for the construction of the feeder pipeline from the Atrush block
boundary to the tie‐in point with the main Kurdistan export pipeline (the “Feeder Pipeline”).
Under the terms of the 4th PSC Amendment and Atrush Facilitation Agreement:
The KRG acquires a 25% interest in the Atrush PSC effective November 7, 2012, the date of declaration of
commerciality (“DOC date”). As a consequence the respective participating interests in the Atrush PSC are
TAQA at 39.9%, the KRG at 25%, GEP at 20.1% and MOKDV at 15%;
48
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2016
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
All Atrush petroleum costs from the DOC date through the commencement of oil exports from Atrush will be
paid by the Non‐Government Contractors and a defined portion of the KRG’s share of these costs will be
deemed Exploration Costs as defined in the Atrush PSC and repaid through an accelerated petroleum cost
recovery arrangement from the sale of future oil production from Atrush. This arrangement has resulted in the
Atrush Exploration Cost receivable at year end as reported in the table below; and
The Non‐Government Contractors will fund the cost of constructing the Feeder Pipeline which will be novated
to the KRG following the commencement of oil exports from Atrush. The Feeder Pipeline costs and the balance
of the Atrush petroleum costs incurred by the Non‐Government Contractors on behalf of the KRG excluding the
portion deemed as Exploration Costs will be repaid with interest at 7% per annum by the KRG within 2 years
from the commencement of oil exports from Atrush (respectively, the “Atrush Feeder Cost Loan” and the
“Atrush Development Cost Loan”). These arrangements have resulted in loan balances at year end as reported
in the table below.
As at December 31,
2016
2015
Atrush Exploration Costs receivable
Atrush Development Cost Loan
Atrush Feeder Pipeline Cost Loan
Total loans and receivables
‐ Current portion
‐ Non‐current portion
Refer also to Notes 8, 12 and 23.
15. Accounts payable and accrued expenses
Payables to joint operations partner
Trade payables
Accrued expenses
Total accounts payable and accrued expenses
16. Borrowings
37,475
12,857
3,034
53,366
7,252
46,114
As at December 31,
2016
6,146
170
118
6,434
‐
‐
‐
‐
‐
‐
2015
8,970
317
273
9,560
At December 31, 2016 General Exploration Partners, Inc. had outstanding $148.7 million of senior secured bonds
(“Senior Bonds”) and $18.1 million of super senior secured bonds (“Super Senior Bonds”). The Senior Bonds are
listed on the Oslo Børs in Norway under the symbol “GEP01”, have a five year maturity from their issuance date of
November 13, 2013 and carry an 11.5% fixed semi‐annual coupon and were used to fund capital expenditures
related to the development of the Atrush Block. The Super Senior Bonds also mature on November 13, 2018, carry
an 11.5% fixed semi‐annual coupon and were used to fund capital expenditures related to the development of the
Atrush Block.
49
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2016
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
Movements in borrowings are explained as follows:
Opening balance
Interest charges at coupon rate
Bonds issued as interest payments
Super Senior Bonds issued – net of transaction costs
Amortisation of bond transaction costs
Interest payments to bondholders
Senior Bonds exchanged for ShaMaran common shares
Ending balance
‐ Current portion: accrued bond interest expense
‐ Non‐current portion: borrowings
For the year ended December 31,
2015
2016
150,515
17,951
17,700
16,223
943
(17,700)
(18,000)
167,632
2,503
165,129
149,909
17,250
‐
‐
606
(17,250)
‐
150,515
2,252
148,263
The remaining contractual obligations comprising of repayment of principal and interest expense under the bond
agreements, based on undiscounted cash flows at payment date and assuming all interest in 2017 is paid by issuing
new bonds and the bonds are not redeemed early, are as follows:
Less than one year
Between one and two years
Total
Financing Arrangement – May 2016
As at December 31,
2016
2015
19,722
188,138
207,860
17,250
182,763
200,013
In early May 2016 the Company completed a financing arrangement (the “Financing Arrangement”) with holders
of GEP’s Senior Bonds (the “Existing Bondholders”) which provided the Company with additional liquidity in 2016
of approximately $33 million. The principal terms of the Financing Arrangement are:
1. On May 3, 2016 GEP issued new $17 million Super Senior Bonds resulting in $16.2 million in proceeds net of
transaction costs. The Super Senior Bonds are based on the same agreement as the Senior Bonds with the
same maturity date of November 13, 2018 and an 11.5% coupon interest payable semi‐annually. GEP has the
option to pay the coupon interest on the Super Senior Bonds in cash or in kind by issuing new bonds (“PIK
Bonds”). ShaMaran’s major shareholders, Lorito Holdings SARL and Zebra Holdings and Investments SARL,
companies owned by the Lundin Family Trust, subscribed for $15.3 million of the Super Senior Bonds in
accordance with the terms of their agreement with GEP to underwrite the Super Senior Bonds.
3.
2. On May 12, 2016 ShaMaran completed the issue of a total of 218,863,000 of its common shares to Existing
Bondholders who elected to convert to shares a total of $18 million of Senior Bonds at face value. The shares
were issued at CAD 0.105 which was closing share price on the TSX Venture exchange on the day prior to
when the Existing Bondholders approved the offer on April 19, 2016.
The bond agreement for the Senior Bonds was amended so that (a) the 2016 coupon interest ($17.3 million
before considering the conversion in 2 above) was settled by issuing new PIK Bonds; (b) GEP has the option to
pay in cash or in kind (by issuing new PIK Bonds) the post 2016 coupon interest; and (c) certain waivers and
amendments were made to the terms of the Senior Bonds including the subordination of Senior Bonds’
security to the Super Senior Bonds’ security and the replacement of the book equity ratio maintenance
covenant with certain debt incurrence tests described below.
50
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2016
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
Debt Incurrence Tests
In accordance with the amended terms of GEP’s Senior Bonds and Super Senior Bonds agreements ShaMaran is
required to be in compliance with certain debt incurrence tests as follows:
1.
upon incurrence of any new financial indebtedness, other than certain permitted financial indebtedness as
described in the Super Senior Bonds agreement, then ShaMaran’s Book Equity Ratio, which is defined as
shareholders’ equity divided by total assets, shall be minimum 30% immediately thereafter, and
ShaMaran and any of its subsidiaries (together the “Group”) other than GEP, which is not allowed to do so,
may not enter into an agreement to make any acquisitions, merger or any other transactions involving
another party being consolidated into the Group’s accounts, unless such other party has a minimum 30%
Book Equity Ratio prior to such transaction taking place.
2.
Security
Following the amendment to the Senior Bonds agreement the security previously held for the Senior Bonds is joint
security with the new Super Senior Bonds on first rank and the Senior Bonds on second rank until the Super Senior
Bonds are repaid in full.
The bonds include an unconditional and irrevocable on‐demand guarantee on a joint and several basis from the
Company and certain of the Company’s direct and indirect subsidiaries and, among other arrangements,
agreements which pledge all of the ordinary shares of GEP and the Company’s Swiss service subsidiary, ShaMaran
Services SA, as security for GEP’s bond related obligations, as well as an internal credit facility agreement among
the Company and certain of its subsidiaries setting out the terms and conditions for intra‐group credit to be made
available amongst the parties.
Under the terms of both bond agreements 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 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 $4.4 million of total cash and
cash equivalents at December 31, 2016 (2015: $31.9 million) $nil was held in accounts pledged to the bond trustee
(December 31, 2015: $1.5 million).
During the year 2016 PIK Bonds of $16.7 million and $1.0 million were issued as coupon interest payments under
the respective Senior Bonds and Super Senior Bonds agreements.
Refer also to Notes 2, 9, 12, 13 and 21.
17. Provisions
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.
Opening balance
Changes in discount and inflation rates
Unwinding discount on decommissioning provision
Changes in estimates and obligations incurred
Total decommissioning and site restoration provisions
8,080
1,840
68
(1,119)
8,869
As at December 31,
2016
2015
1,846
100
36
6,098
8,080
51
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2016
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
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
2.31% (2015: 2.15%) and an inflation rate of 2.08% (2015: 0.73%). While total estimated decommissioning and site
restoration costs on the Atrush Block have increased over the prior year due to the development cost incurred in
the year, the reduction from 26.8% to 20.1% in the Company’s participating interest in the Atrush Block has
resulted in a net decrease to estimates and obligations incurred in 2016. Refer also to Note 23.
18. Pension liability
The Company operates a pension plan in Switzerland that is managed through a private pension plan. As of January
1, 2016 the Company adopted accounting for its pension plan in accordance with IAS 19 which has resulted in a $1.7
million adjustment to opening retained earnings to record the pension liability on that date. The amount recognized
in the balance sheet associated with the Swiss pension plan is as follows:
Present value of defined benefit obligation
Fair value of plan assets
Pension liability
As at December 31, 2016
7,304
(5,634)
1,670
The movement in the defined benefit obligation over the year is as follows:
For the year ended December 31, 2016
Opening balance
Current service cost
Additional contributions paid by employees
Ordinary contributions paid by employees
Interest expense on defined benefit obligation
Actuarial loss on defined benefit obligation
Administration costs
Benefits paid from plan assets
Foreign exchange gain
Defined benefit obligation, ending balance
7,062
184
183
113
54
23
5
(158)
(162)
7,304
The weighted average duration of the defined benefit obligation is 17.5 years. There is no maturity profile since the
average remaining life before active employees reach final age according to the plan is 10.2 years.
The movement in the fair value of the plan assets over the year is as follows:
For the year ended December 31, 2016
Opening balance
Additional contributions paid by employees
Ordinary contributions paid by employer
Ordinary contributions paid by employees
Interest income on plan assets
Return on plan assets excluding interest income
Foreign exchange loss
Benefits paid from plan assets
Fair value of plan assets, ending balance
5,374
183
169
113
41
38
(126)
(158)
5,634
The plan assets are under an insurance contract comprised entirely of free funds and reserves, such as fluctuation
reserves and employer contribution reserves, for which there is no quoted price in an active market.
52
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2016
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
The amount recognized in the income statement associated with the Company’s pension plan is as follows:
For the year ended December 31, 2016
Current service cost
Interest expense on defined benefit obligation
Administration costs
Interest income on plan assets
Total expense recognised
184
54
5
(41)
202
The expense associated with the Company’s pension plan of $0.2 million was included within general and
administrative expenses. Refer also to Note 7. The Company also recognised in other comprehensive income a $15
thousand net actuarial gain on defined benefit obligations and pension plan assets.
The principal actuarial assumptions used to estimate the Company’s pension obligation are as follows:
For the year ended December 31, 2016
Discount rate
Inflation rate
Future salary increases
Future pension increases
Retirement ages, male (‘M’) and female (‘F’)
0.65%
1.00%
1.00%
0.00%
M65/F64
Assumptions regarding future mortality are set based on actuarial advice in accordance with the BVG 2015 GT
generational published statistics and experience in Switzerland. The discount rate is determined by reference to the
yield on high‐quality corporate bonds. The rate of inflation is based on the expected value of future annual inflation
adjustments in Switzerland. The rate for future salary increases is based on the average increase in the salaries paid
by the Company, and the rate of pension increases is based on the annual increase in risk, retirement and survivors’
benefits. Contributions to the Company’s pension plan during 2017 are expected to total $0.3 million.
The sensitivity of the defined benefit obligation to changes in the weighted principal assumptions is:
Discount rate
Salary growth rate
Life expectancy
Change in assumption
0.50%
0.50%
One year
Increase in assumption
Decrease by 8.1%
Increase by 0.3%
Increase by 2.0%
Decrease in assumption
Increase by 9.3%
Decrease by 0.3%
Decrease by 2.1%
The above sensitivity analyses are based on a change in an assumption while holding all other assumptions
constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When
calculating the sensitivity of the defined benefit obligation to significant actuarial assumptions, the same method
has been applied as when calculating the pension liability recognized within the consolidated balance sheet.
53
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2016
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
19. 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, 2015
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
Shares issued to holders of GEP’s Senior Bonds
At December 31, 2016
810,983,860
754,214,990
14,569,684
‐
1,579,768,534
218,863,000
1,798,631,534
534,068
59,111
1,346
(1,346)
593,179
18,000
611,179
218,863,000 ShaMaran common shares were issued to holders of GEP’s Senior Bonds in early May 2016 in
exchange for settling $18 million of GEP’s Senior Bonds. At the date these financial statements were approved the
Company had 2,158,631,534 common shares outstanding.
Refer also to Notes 16 and 25.
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,
2015
2016
(9,155,000)
1,722,479,202
(0.01)
‐
1,722,479,202
‐
(252,916,000)
1,493,132,481
(0.17)
33,000
1,493,132,481
‐
(9,155,000)
1,722,479,202
(252,883,000)
1,493,132,481
(0.01)
(0.17)
20. 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.
54
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2016
(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, 2015
Granted in the year 2015
Expired in the year 2015
At December 31, 2015
Expired in the year 2016
At December 31, 2016
Share options exercisable:
At December 31, 2015
At December 31, 2016
Number of
share options outstanding
Weighted average
exercise price
CAD
6,755,000
26,000,000
(4,565,000)
28,190,000
(25,000)
28,165,000
10,856,667
19,498,333
0.38
0.12
0.39
0.13
0.80
0.13
0.17
0.14
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.
There were no options granted during the year 2016. The weighted average fair value of options granted during
the year 2015 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,
2015
2016
‐
‐
‐
‐
‐
0%
1.07%
74.01%
5.00
CAD 0.07
Share based payments expense for the year ended December 31, 2016 was $0.2 million (2015: $1.2 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.
55
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2016
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
21. Financial instruments
Financial assets
The financial assets of the Company on the balance sheet dates were as follows:
Loans and receivables ²
Cash and cash equivalents, unrestricted ²
Cash and cash equivalents, restricted ²
Other receivables ²
Total financial assets
Carrying and fair values ¹
At December 31, 2016 At December 31, 2015
53,366
4,416
‐
77
57,859
‐
30,409
1,512
29
31,950
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
Provisions for decommissioning costs
Accounts payable and accrued expenses ²
Accrued interest on bonds
Pension liability
Current tax liabilities ²
Total financial liabilities
Fair value
hierarchy ⁴
Level 2
Carrying values
At December 31, 2016 At December 31, 2015
165,129
8,869
6,434
2,503
1,670
‐
184,605
148,263
8,080
9,560
2,252
‐
31
168,186
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, correspond to payment terms fixed by contract or, due to the short term nature,
are readily convertible to or settled with cash and cash equivalents.
³ The fair value of the Company’s borrowings is $63.1 million (2015: $102.2 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.
56
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2016
(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 $167.6 million as at December 31, 2016 (2015: $150.5 million). Refer also to Notes 16 and 25.
Financial risk management objectives
The Company’s management monitors and manages the Company’s exposure to financial risks facing the
operations. These financial risks include market risk (including commodity price, foreign currency and interest rate
risks), credit risk and liquidity risk.
The Company does not presently hedge against these risks as the benefits of entering into such agreements is not
considered to be significant enough as to outweigh the significant cost and administrative burden associated with
such hedging contracts.
Commodity price risk
The prices that the Company receives for its oil and gas production may have a significant impact on the
Company’s revenues and cash flows provided by operations. World prices for oil and gas are characterised by
significant fluctuations that are determined by the global balance of supply and demand and worldwide political
developments and in particular the price received for the Company’s oil and gas production in Kurdistan is
dependent upon the Kurdistan government and its ability to export production outside of Iraq. A decline in the
price of ICE Brent Crude oil, a reference in determining the price at which the Company can sell future oil
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 12.
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 (“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.
57
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2016
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
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,
2016
2015
58
185
54
228
Liabilities
December 31,
2015
2016
37
107
46
192
The Company is exposed to movements in CHF and CAD against the USD, the presentational currency of the
Company. Sensitivity analyses have been performed to indicate how the profit or loss would have been affected by
changes in the exchange rates between the USD and CHF and CAD. The analysis below is based on a strengthening
of the CHF and CAD by 1% against the USD in which the Company has assets and liabilities at the end of respective
period. A movement of 1% reflects a reasonably possible sensitivity when compared to historical movements over
a three to five year timeframe. The sensitivity analysis includes only outstanding foreign currency denominated
monetary items and adjust their translation at the period end for a 1% change in foreign currency rates.
A positive number in the table below indicates an increase in profit where USD weakens 1% against the CHF or
CAD on the basis of the CHF and CAD assets and liabilities held by the Company at the balance sheet dates. For a
1% strengthening of the USD against the CHF or CAD there would be an equal and opposite impact on the profit or
loss.
Statement of comprehensive income ‐ CAD
Statement of comprehensive income ‐ CHF
Interest rate risk
Assets
Liabilities
2016
2015
2016
2015
‐
2
‐
2
‐
(1)
‐
(2)
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 $166.7 million of bonds which have been issued since November 2013. However,
the Company is not exposed to interest rate risks associated with the bonds as the interest rate is fixed.
Interest rate sensitivity analysis:
Based on exposure to the interest rates for cash and cash equivalents at the balance sheet date 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.
58
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2016
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
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 acquire 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 25.
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.
22. Commitments
As at December 31, 2016 the outstanding commitments of the Company were as follows:
Atrush Block development
Office and other
Total commitments
For the year ended December 31,
2017
46,428
38
46,466
2018
152
‐
152
2019
Thereafter
152
‐
152
2,276
‐
2,276
Total
49,008
38
49,046
Amounts relating to Atrush Block development represent the Company’s unfunded paying interest share of the
approved work program and other obligations under the Atrush PSC.
Refer also to Notes 2, 16 and 23.
23.
Interests in joint operations and other entities
Interests in joint operations ‐ Atrush Block Production Sharing Contract
ShaMaran holds a 20.1% direct interest in the Atrush PSC through GEP. TAQA Atrush B.V. is the Operator of the
Atrush Block with a 39.9% direct interest, the KRG holds a 25% direct interest and MOKDV holds a 15% direct
interest. TAQA, the KRG, GEP and MOKDV together are “the Contractors” to the Atrush PSC. Under the terms of
the 4th PSC Amendment and the Facilitation Agreement, which became effective on November 7, 2016, the Non‐
Government Contractors have agreed to pay their pro‐rata share of the Feeder Pipeline costs and of the KRG’s
share of Atrush development costs up to the commencement of oil exports from Atrush. Thereafter these costs
will be reimbursed to the Non‐Government Contractors.
59
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2016
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
Under the terms of the Atrush 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
Atrush PSC. All modifications to the Atrush 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 Notes 14, 22 and 25.
Information about subsidiaries
The consolidated financial statements of the Company include:
Subsidiary
Principal activities
Country of
Incorporation
% equity interest as at
31 Dec 2016
31 Dec 2015
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.
Inactive
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
24. Related party transactions
Transactions with corporate entities
Lundin Petroleum AB
Namdo Management Services Ltd.
McCullough O’Connor Irwin LLP
Total
Purchases of services
during the year
2016
2015
Amounts owing at
December 31,
2015
2016
299
99
44
442
473
173
18
664
24
1
‐
25
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, 2016 of $299 (2015: $473) were
comprised of technical service costs of $3 (2015: $59), reimbursement for Company travel and related expenses of
$nil (2015: $23), investor relations services of $28 (2015: $29), office rental, administrative and building services of
$268 (2015: $362).
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.
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 16 and 25.
60
SHAMARAN PETROLEUM CORP.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2016
(Expressed in thousands of United States dollars unless otherwise stated)
______________________________________________________________________________
Key management compensation
The Company’s key management was comprised of its directors and executive officers who have been
remunerated as follows:
Management’s salaries
Management’s short‐term and pension benefits
Management’s share based payments
Management’s termination benefits
Directors’ share based payments
Directors’ fees
Total
For the year ended December 31,
2015
2016
878
492
192
‐
58
79
1,699
884
340
906
495
279
83
2,987
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’.
25. Events after the reporting period
On January 30, 2017 the Company completed the issue of 360 million common shares of ShaMaran on a private
placement basis (the “Private Placement”) at a price per share of CAD 0.10 (equal to SEK 0.67) which resulted in
gross proceeds to the Company of $27.3 million ($26.4 million net of transaction related costs). Zebra Holdings
and Investments SARL, Lorito Holdings SARL and Lundin Petroleum BV, the Company’s major shareholders,
subscribed for 43,463,618 shares, 16,984,621 shares and 17,800,000 shares, respectively, in the Private Placement.
61
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
Hong Kong
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
62