Tethys Oil
Annual Report 2016

Plain-text annual report

Annual Report 2016 Operational and financial summary MUSD* (unless specifically stated)20162015201420132012Production, before government take, bbl4,478,1213,578,4882,807,6531,709,7061,399,518Average daily production, before government take, bbl12,2359,8047,6924,6843,824Net sales, after government take, bbl2,357,7011,805,0561,464,228850,926776,248Average selling price per barrel, USD40.558.1103.9106.6110.3Revenues87.1107.0149.392.285.5Operating result-0.523.057.145.149.3EBITDA44.158.6108.074.874.5Result for the period2.723.449.438.146.0Earnings per share (after dilution), USD0.080.671.391.071.34Net cash39.051.247.8-14.9-21.3Shareholders’ equity196.8217.2214.3168.4130.1Non-current liabilities 8.84.03.363.164.1Investments in oil and gas properties48.540.839.344.1132.1Number of shares at the end of the year35,543,75035,543,75035,543,75035,543,75035,543,750Of which repurchase shares at the period end1,329,2241,083,669298,160––Distribution to shareholders, SEK per share4.003.00–––Market capitalization at the end of the period, MSEK2,7992,0442,1682,3991,893Share price at the end of the period, SEK78.7557.561.0067.5053.252P-reserves in Oman (million barrels of oil)21.418.217.815.214.3* Starting 1 January 2016, the Tethys Oil group presents the financial reports in USD. Please note that all comparative financials have been restated.Contents 2 Operational and financial summary 4 Letter to the shareholders 9 Reserves 10 Operations 22 Sustainability report 24 Corporate governance report 30 Board of directors 32 Executive management 33 The Tethys Oil share 36 Key financial data 38 Administration report Financial statements for the group 45 Financial statements for the parent company 49 53 Notes 66 Assurance 67 Auditor’s report 70 Definitions and abbreviations 71 Financial information 72 Address Annual General Meeting The Annual General Meeting will be held on 17 May 2017, 3:00 p.m. at Grand Hôtel, Södra Blasieholmshamnen 8, in Stockholm. To attend the AGM, please see Tethys Oil’s website, www.tethysoil.com, for more information. Letter to the shareholders Dear friends and investors, What a year 2016 turned out to be. The oil business went on quite a rollercoaster ride when the international oil prices at the beginning of the year fell to an over ten year low, and then gradually strength- ened during the year. We ended the year at about USD  55 per barrel following the agreement between OPEC and non- OPEC members to cut oil output. But Tethys Oil remained cash flow positive the entire year, even during the lows of Janu- ary. And in a stormy macro environment, Tethys Oil’s operational performance con- tinued to improve. We produce a higher amount of oil at a lower cost at the same time as our reserve base is increasing. Production growth In 2016, we produced 4.5 million bar- rels of oil, corresponding to an increase of 25 percent compared to 2015 and the highest so far for any year. Almost all our oil was produced from our extraordi- nary assets Blocks 3&4, but we also had a small contribution from our producing assets onshore Lithuania. The production amounted to 12,235 bopd and although we are proud of our production numbers, we continue to aim higher. Our production growth ambitions will, however, not have a visible effect during the first half of 2017. Oman signed up to the OPEC initiated production limita- tions at the end of 2016, which has given us a monthly target production of about 12,300 bopd for the first six months. We will however continue to drill and keep our activity levels in high gear in order to be fully prepared for continued future growth. Decreasing production costs Following higher efficiency with higher production and general cost reductions, we have been able to reduce our operating expenses per barrel even further this past year. In 2016, our operating expenses per barrel amounted to USD 8.2, a reduction of over 30 percent compared with USD  12.1 per barrel in 2015. Our low costs made it possible for us to produce oil with a positive cash flow even at the low oil prices we saw in the beginning of 2016. Additional distribution to our shareholders In 2016, we distributed in total MUSD 15 to you, our shareholders. It was done as a dividend of SEK  1.00 per share in sec- ond quarter 2016 and SEK 3.00 per share through a redemption procedure in the fourth quarter 2016. We continue to be a cash dividend company, and again propose a dividend of SEK 1.00 per share. Depend- ing on how events will unfold during the year, we will continually evaluate the pos- sibility of distributing more cash to share- holders in accordance with our long term financial goals, as we have done over the past years. So stay with us, we remain committed to deliver a successful and sustainable devel- opment to create value to our stakeholders. Stockholm in April 2017 Magnus Nordin Managing director Increasing reserves We are also proud of our reserve growth. In 2016, we could report a reserve replace- ment ratio of 171 percent. So, even though our production increased by 25 percent, we increased our reserves by more and at the end of the year 2016 the 2P reserves amounted to 21.4 million barrels. The increased reserves are attributable to our ongoing appraisal and optimization pro- gram. Drilling of appraisal and produc- tion wells and implementation of water injection has resulted in reserves having moved from the 3P to the 2P category. The 3P number has further increased as the appraisal wells have extended the limits of the areas of our fields that are in produc- tion. The reserve growth demonstrates the robustness of our existing fields. We believe that there is scope for further development in our existing fields. The budget for 2017 will be in line with 2016, but more attention will be given explora- tion activities. We are hopeful that the exploration wells currently in progress and those planned for later in 2017, will have a significant impact on our ability to further increase reserves. 4 In March 2017, less than seven years after the production started in 2010, the cumu- lative total oil production on Blocks 3&4 reached 50 million barrels, corresponding to 15 million barrels net to Tethys Oil (before government take). This milestone has been achieved as a result of the skills and hard work of all the staff, contractors and suppli- ers. The oil produced has created significant economic value for the people of Oman, the shareholders of Tethys Oil and the other stakeholders of the joint venture group, and generated jobs. 5 Milestones2001Tethys Oil was founded2004IPO and listing on First North, Stockholm2006First Company-operated well drilled in Denmark2007Acquisition of interests in Blocks 3&4201020 percent of Blocks 3&4 farmed out to MitsuiEarly production from Blocks 3&4 commences2012Oil producing assets onshore Lithuania acquiredThree year MSEK 400 bond loan issuedField Development Plan for Blocks 3&4 approved, licence terms extended until 20402013Listing on Nasdaq Stockholm2014Arrangement of a four-year, up to MUSD 100, Senior Revolving Reserve-Based Lending FacilityThe MSEK 400 bond loan redeemed2015Production exceeds 11,000 bopd at the end of the year (before government take)Tethys Oil pays dividend and distributes SEK 3.00 per share to its shareholders2016Production in 2016 amounts to 12,235 bopd (before government take)Tethys Oil pays dividend and distributes SEK 4.00 per share to its shareholdersLithuania Area Interest Phase Gargzdai 884 km² 25%* Production** Rietavas 1,594 km² 30%* Exploration Raseiniai 1,535 km² 30%* Exploration * The interest in the Lithuanian licences are held indirectly. ** The average daily production from the Gargzdai licence amounted to 114 bopd in 2016. France Area Interest Phase Attila 1,986 km² 40% Exploration (dormant) Alès 215 km² 37.5% Exploration (dormant) Tethys Oil Tethys Oil is a mid-sized Swedish oil company with focus on onshore areas with known oil discoveries. Tethys Oil’s core area is Oman, where the company holds 2P reserves of 21.4 mmbo and has oil production of about 12,000 bopd from Blocks 3&4. With a cash flow driven development approach, Tethys Oil’s main operational target is incremental increases of production and reserves from the Omani blocks. Tethys Oil also has onshore exploration licences in Lithuania and France and some production in Lithuania. The head office is located in Stockholm and the company’s shares are listed on Nasdaq Stockholm (TETY). 66 Oman Area Interest Phase Blocks 3&4 29,130 km² 30% Production/ exploration Reserves (2P) Average daily production 2016 21.4 mmbo 12,121 bopd y r o t a v r e s b O h t r a E A S A N , i l k c ö t S o t e R 77 Targeting increase in production and reserves License acquisition Production Exploration Development Exploratory drilling Appraisal Tethys Oil aims to have a well-balanced and self-financed portfolio of oil assets, offering both production, development and exploration potential. The main tar- get, with a cash flow orientated approach, is to incrementally increase production and reserves in Oman. Furthermore, the exploration and development of Tethys Oil’s assets elsewhere will also continue. In addition, new projects are constantly being evaluated. According to Tethys Oil’s successful strategy, new growth platforms should primarily be onshore appraisal pro- jects where oil has previously been discov- ered, but was deemed sub-commercial for various reasons. Tethys Oil’s primary objective is to cre- ate shareholder value and in doing so the company will have a balanced approach to growth and shareholder distributions, with a long term capital structure target of a zero net cash position. Tethys Oil’s operations should be con- ducted in an economical, socially and envi- ronmentally responsible way, to the benefit of all stakeholders. 88 Reserves mmbo 30 25 20 15 10 5 0 7.9 25.1 -3.5 7.7 18.7 -1.7 3.0 20.0 -2.8 Possible Possible Probable Proven 12.4 -1.4 High Best Low Possible Probable Proven Probable Proven 6.3 29.7 6.3 27.9 -4.4 Possible Probable Possible Probable Proven Proven 3C 2011 Prod. Add. 3P 2012 Prod. Add. 3P 2013 Prod. Add. 3P 2014 Prod. Add. 3P 2015 Prod. Add. 3P 2016 Field Development Plan approved Oman Tethys Oil’s net working interest reserves in Oman as per 31 December 2016 amounted to 14,222 mbo of proven reserves (1P), 21,408 mbo of proven and probable reserves (2P) and 29,729 mbo of proven, probable and possible reserves (3P). Development of reserves, Blocks 3&4 (Audited by DeGolyer and MacNaughton Canada Limited) mbo 1P 2P 3P In 2016 Tethys Oil added 1P reserves of 5,753 mbo, representing an increase of 45 percent; 2P reserves of 7,600 mbo, rep- resenting an increase of 42 percent; and 3P reserves of 6,302 mbo, representing an increase of 23 percent. The increase in 2P reserves represents and internal reserve replacement ratio of 171 percent. Reserves Blocks 3&4, Oman as per 31 December 2016 (Audited by DeGolyer and MacNaughton Canada Limited) The review of the reserves in Oman has been conducted by independent petroleum consultant DeGolyer and MacNaughton Canada Limited. The report has been esti- mated using 2007 Petroleum Resources Management System (PRMS), Guidelines of the Society of Petroleum Engineers (SPE), World Petroleum Council (WPC), American Association of Petroleum Geolo- gists (AAPG) and Society of Petroleum Evaluation Engineers (SPEE). Total 31 December 2015 12,905 18,244 27,863 mbo 1P 2P 3P Production 2016 -4,436 -4,436 -4,436 Farha South 8,672 11,569 14,028 Discoveries 146 238 304 Shahd 4,728 7,847 13,000 Revisions 5,607 7,362 5,998 Saiwan East 822 1,992 2,701 Total 31 December 2016 14,222 21,408 29,729 Total 31 December 2016 14,222 21,408 29,729 99 Operations Oman – part of the oil fairway Al Alam Palace garden The Sultanate of Oman, strategically located in the south eastern part of the Ara- bian Peninsula, overlooks the Arabian Sea, the Sea of Oman and the Arabian Gulf. It also overlooks the strategic Strait of Hor- muz at the point of entry to the Arabian Gulf. Oman neighbours includes United Arab Emirates, Saudi Arabia and Yemen. Oman is a beautiful country, combining white sand beaches, rolling desert dunes and expansive mountain ranges. Oman is also the oldest independent state in the Arab world with a long and exciting history of thousands of years. Modern archaeologi- cal discoveries suggest that humans settled in it during the Stone Age, i.e. more than 10,000 years ago. And, most importantly for Tethys Oil, Oman is also a major oil nation with a present production of about 1 million boepd. Oman has in excess of 5 billion barrels of estimated proven oil reserves, ranking Oman as the 7th largest proved oil reserve holder in the Middle East and the 23rd largest in the world (BP Statistical Review of World Energy, June 2016). In this highly prospective country, Tethys Oil has its core area. With the desire and ambition to become a dedicated and suc- cessful player in the Omani oil and gas industry, Tethys Oil acquired interest in the licence for Blocks 3&4 in 2007. The blocks cover an area of 29,130 square kilometres in the central eastern part of Oman. Tethys Oil, through its wholly owned subsidiary Tethys Oil Block 3 & 4 Ltd, has a 30 percent interest in Blocks 3&4. Partners are Mitsui E&P Middle East B.V. with 20 percent and the operator CC Energy Development S.A.L. (Oman branch) holding the remaining 50 percent. 10 r r u m h c S n a t s i r T y b o t o h P Muscat SuLTAnATe OF OMAn Block 3 Block 4 Block 3 C L L , s r o o d t u O d e h t r a e n U Salalah 1111 Unlocking of the black gold In hindsight it might seem like the explora- tion, development and production launch of crude oil on Blocks 3&4 have been a straightforward and comprehensible pro- cess. However, numerous large companies had explored for oil and gas for 40 years and drilled 27 exploration wells in these two blocks. In the majority of the wells, oil was found, but no well was commercially successful. What was deemed not hydrocarbon pro- spective areas by previous operators have turned commercial with the help of the collective experience accumulated by the partner groups’ specialists, new technol- ogy, higher oil prices and perseverance. Production conditions vary from area to area within the blocks, and when explor- ing the blocks, it has been of great impor- tance to adopt a comprehensive approach. New discoveries have been made in new areas, but new discoveries have also been made in formations above or below exist- ing discoveries. 3D seismic surveys have been a key factor to the development of the blocks. Seismic data has revealed that many of the dry holes drilled by previous operators would not have been drilled if 3D data had been available prior to drilling. In 2012, the Field Development Plan for Blocks 3&4 was approved and the exploration and production terms for the licence were extended until 2040. Three oil fields are today in production on the blocks. Since an early production system was launched in August 2010, Tethys Oil’s share of the production (before govern- ment take) has increased from some 200 bopd per day to in excess of 12,000 bopd in 2016. Despite intense exploration and develop- ment activity for over nine years only a minor part of the blocks has been explored. Out of the total area of the blocks of 29,130 square kilometres, around 6,000 square kilometres of seismic data have been acquired so far. The studies have resulted in the mapping of a large number of new prospects. Gharif Ghudun Barik Al Bashir Miqrat Amin Buah Shuram Khufai Masirah Bay Formations Geological formations are natural formations and structures in the rock and ground which have occurred as a result of usually very slow geological processes of different kinds and ages. A formation is a rock unit that is distinctive enough in appearance that a geologic mapper can tell it apart from the surrounding rock layers. The thickness of formations may range from less than a meter to several thousand metres. The term “formation” is often used informally to refer to a specific grouping of rocks, such as those encountered within a certain depth range in an oil well. in On Blocks 3&4, reservoirs formations like Khufai, Barik, Lower Al Bashir, Buah and Masirah Bay have been explored. Tethys Oil has reserves and production in reservoirs in the Khufai, Barik, Lower Al Bashir and Lower Buah formations. 1212 The Farha South oil field Farha South-3 was the first well to be drilled on the blocks with Tethys Oil as partner. It spudded early 2009. Oil on Farha South was originally discovered in 1986 by a previous operator, when the Lower Al Bashir sandstone layer flowed oil. With Farha South-3, oil was again found in the Lower Al Bashir layer, which flowed more than 754 bopd on test in 2009. A long term production test though revealed the reservoir to be tight. The Barik sandstone, at an average depth of 1,600 meters and overlaying the Lower Al Bashir, also had excellent oil shows in the Farha South-3 well, and flowed on test 379 barrels of oil per day. The Barik was put on long term production test, and proved itself to be a reliable producer. The oil of the Farha South is not trapped in one large continuous reservoir, but is instead trapped in a large number of smaller, usually adjacent fault blocks. These faults are relatively small and 3D seismic has been essential in the mapping of drillable fault blocks. The only way to confirm that a fault block is oil bearing is by drilling. The low content of gas combined with the absence of a water drive in the Barik layer, make pumps and water injections neces- sary. Water is injected into the reservoir in order to increase the pressure and thereby stimulate production. 21 fault blocks have so far been put into production, with one additional fault block being added in 2016. About 70 percent of the fault blocks have been developed with water injection. The oil from the Barik layer is of high qual- ity, more than 40 degrees API and does not contain any sulphur. The Farha South-3 well was the start of what today is the Farha South oil field. The field is today the largest field on the blocks holding 11.6 mmbo of proved and pos- sible reserves (2P) net to Tethys Oil, cor- responding to 54 percent of Tethys Oil’s total 2P reserves on the blocks. The pro- duction has grown steadily since the field came on stream in 2010 and the field has produced the majority of the Company’s total oil production to date. P Fault blocks at the Farha South field Oil producing fault blocks Oil producing fault blocks with water injection Drilled fault blocks Prospective fault blocks Faults N 0 2 4 km AA AC AB M AK E A O F B H L J AN AO Z C T X Y N AS S V G D AH AG AE AF AD Q I K Facts 2P reserves, net: 11.6 mmbo First well with Tethys Oil as partner: Farha South-3, 2009 Main producing layer: Barik sandstone at depth of about 1,600 meters Oil trapped in smaller, usually adjacent fault blocks Fault blocks in production: 21 Oil quality: more than 40 degrees API API stands for the American Petroleum Institute, which is the major United States trade association for the oil and natural gas industry. The API gravity standard is used to compare densities of petroleum liquids. It is a measure of how heavy or light a petroleum liquid is compared to water. If its API gravity is greater than 10, it is lighter and floats on water; if less than 10, it is heavier and sinks. For example, if one petroleum liquid is less dense than another, it has a greater API gravity. Less dense oil or “light oil” is preferable to more dense oil as it contains greater quantities of hydrocarbons that can be converted to gasoline. 13 The Shahd oil field only way to confirm that a undrilled struc- ture is oil bearing is by drilling. So far, a handful of Lower Buah reservoirs have been put into production. In the end of 2015, a new reservoir within the Shahd field, the Lower Khufai, was successfully brought on stream. This new carbonate reservoir responded very well to horizontal drilling, and was a major reason for the production increase around new year 2015/2016. Like the Fahra South field, water injec- tion is needed on the Shahd oil field. A water injection programme was launched in 2015. The system is expected to impact both reserves and production positively going forward. At the Shahd field, oil is extracted at greater depths than the Farha South field, mainly from the Lower Buah carbonate at 2,000 metres. The Shahd field was discovered in 2013 through the exploration well Shahd B-1, in an area not previously explored with the drill bit. When discovered, the Shahd field opened up a new producing area, and the field has delivered the major- ity of the increase in the Company’s total reserves over the last years. The field holds 7.8 mmbo of proved and possible reserves (2P) net to Tethys Oil, corresponding to 37 percent of Tethys Oil’s total 2P reserves on the blocks. The Shahd oil field is located approxi- mately 20 kilometres west of the Saiwan East oil field. The oil from the Lower Buah layer holds a quality of approximately 38 degrees API. Like the Farha South field, this area is also highly faulted and the Lower Buah layer in the field is not one large continuous reservoir. The oil is instead trapped in separate structures. The Facts 2P reserves, net: 7.8 mmbo Discovery well: Shahd B-1, 2013 Main producing layer: Lower Buah carbo- nate at depth of about 2,000 meters Production also from Lower al Bashir and Khufai Oil quality: approx. 38 degrees API N Faults Producing areas Prospects / Prospective areas 14 The Saiwan East oil field The Saiwan oil field was the second field to be discovered and put on stream on Blocks 3&4. The field was discovered with the drilling of the Saiwan East-2 well in 2009. Here, the oil is produced from an even greater depth from the Khufai carbonate at depths ranging from 1,700 to 2,400 metres. This reservoir, previously unknown as an oil producer in Oman, is today in production on the field, pro- ducing oil with a density of on average 32 degrees API. The field is the smallest so far discovered on the blocks, holding 2.0 mmbo of proved and possible reserves (2P) net to Tethys Oil, corresponding to 9 percent of Tethys Oil’s total 2P reserves on the blocks. The Khufai carbonate has turned out to be challenging in many regards. The bringing on stream of the Khufai reservoir also on the Shahd field is of great interest for further understanding also of the Saiwan East field. Large quantities of oil with different grav- ities and viscosities have also been found on the field. However, the findings sug- gest that any potential production from the heavy oil in Saiwan East will require enhanced oil recovery techniques. Facts 2P reserves, net: 2.0 mmbo First well with Tethys Oil as partner: Saiwan East-2, 2009 Main producing layer: Khufai carbonate at depth of about 1,700–2,400 meters Oil quality: on average approx. 32 degrees API 1515 Transportation and sales The oil produced at all of the fields are transported through a pipeline to Qarn Alam metering station, west of the blocks. Here the oil volumes are recorded and the quality is measured. From Qarn Alam, the oil is transported through the Omani national pipeline system to the Mina Al Fahal crude export terminal in Muscat. At this terminal, the oil is lifted and loaded into oil tankers. From Muscat, the oil is shipped to different destinations in Asia. Blocks 3&4 are held through an Explora- tion and Production Sharing Agreement (EPSA). The Omani government fiscal terms are attractive and typically allow the holder of a licence to recover their costs up to 40 percent of the value of total oil production. This is referred to as cost oil. After deducting any allowance for cost oil, the remaining oil production is typically split 80/20 between the government and the partners. Tethys Oil sells all of its oil through Mitsui Energy Trading Singapore, which is part of Mitsui & Co Ltd. The price is determined based on the monthly average price of the two month future contract of Oman blend as traded on Dubai Mercantile Exchange, with a premium following the higher qual- ity of the oil produced on Blocks 3&4. Produced oil Joint Venture Blocks 3&4 40 bbl maximum cost recovery 40% 100 bbl 60 bbl 40+12= 52 bbl 20% split 80% Sultanate of Oman 48 bbl Tethys Oil 30% CCED 50% Mitsui 20% 15.6 bbl 26 bbl 10.4 bbl 1616 i r a r r e f n a Z o c r a M y b o t o h P Tethys Office and personnel Tethys Oil personnel consist of highly motivated individuals from six different nationalities, ranging in age from early twenties to mid seventies and with a bal- anced gender representation (41 percent female and 59 percent male). A majority of the staff have graduated from universities and colleges, primarily with geosciences, engineering or business. Muscat Office A team of highly trained subsurface senior specialists has been recruited and are based at the Tethys Oil office in Muscat. As per the Omani government directive related to the employment, preference is given to Omani nationals. The Muscat office is the base for the Group’s Chief Technical Officer. In addition, and as part of the Company’s corporate social responsibility activities, Tethys Oil is closely coordinating with Sul- tan Qaboos University in Muscat in offer- ing Master degree sponsorship to Omani geoscience graduate students. Stockholm Office Tethys Oil head office is located in central Stockholm, Sweden. The Stockholm office is the base for the Managing Director and the Chief Financial Officer, along with the Group’s financial and communication teams. r r u m h c S n a t s i r T y b o t o h p d n u o r g k c a B 1717 Vibrator truck Receiver truck Geophones (receivers) GAS OIL WATER WATER Seismic studies A key exploration activity is geophysical seismic. The principle behind seismic is that sound waves travel at different speeds in different materials and that the sound waves, at the transition between different materials, partly bend and reflect back to the surface. Since rocks have different compositions, it is possible based on variations in the speed of the sound wave and angle, to estimate the location of structures that could hold oil and/or natural gas reserves in an exploration area. Single linear lines of seismic provide information about the subsurface rocks directly beneath the seismic equipment. This type of seismic data is referred to as two-dimensional or 2D seismic, because it provides data along two axis, length and depth. If seismic acquisition is done across multiple lines simultaneously, the third dimension of width is gained, hence referred to as three-dimensional seismic, or 3D seismic. 3D seismic offers much greater density of information about the subsurface but is much more costly and covers a smaller area. Since the oil at both the Farha South oil field and the Shahd oil field is trapped in smaller structures, 3D seismic has been essential in the mapping of possible oil bearing structures. Vibrator trucks at Blocks 3&4 1818 Vibrator truck Receiver truck Seismic mapping Blocks 3&4, Oman BLOCK 3 N Geophones (receivers) GAS OIL WATER WATER Alam Station & Pipeline System Farha South Field BLOCK 3 Saiwan East Field Shahd field BLOCK 4 2D areas 2013 3D areas 2009–2013 2014 2015 1919 2020 The Baltic licences Tethys Oil’s portfolio also includes licences in Europe. The Company has indirect interests in three onshore licenses in Lithu- ania and two dormant onshore licences in France. The French licences have passed the expiring date, and discussions regarding the future of them are ongoing. Lithuania is located by the Baltic Sea in the north east part of Europe. Lithuania is not a notable oil producer, but oil was discov- ered in Lithuania some 60 years ago. The Lithuanian oil production reached its peak at about 10,000 barrels of crude oil per day by the turn of the millennium, but has now dropped to about 2,000 barrels per day. The production is located in the western part of the country. It might seem like that there are better places to explore for oil, but the Lithuania tax regime is very attractive, so even smaller amounts of oil can generate good value. Tethys Oil’s Lithuanian licences cover some 4,000 square kilometres onshore the Baltic Sedimentary Basin. The Gargzdai licence is in production with 114 bopd net to Tethys Oil in 2016. The oil produced at the Garg- zdai licence has an API of about 42 degrees and is normally sold on a weekly basis to a nearby refinery. The price is based on and set close to the daily Brent price. The Rietavas and the Raseiniai licences are exploration licences. Since the acquisition of the licence interests in 2012, a couple of exploration wells have been drilled and seismic studies been conducted. The work programmes on the licenses are focused on evaluation for both conventional and unconventional hydrocarbon potential. On the Rietavas licence oil discoveries have been made in the Cambrian sand- stones, but it is yet quite unexplored. The Raseiniai licence covers a trend of Silurian reefs. One exploration wells drilled in 2015 flowed oil to surface. Facts Gargzdai licence: Partners: Odin Energi (25%), Geonafta (50%), Tethys (25% indirect) Licence area: 884 km² License awarded in 1995. Tethys Oil acquired interests in 2012 Tethys share of production: 114 bopd Rietavas and Raseiniai licences Tethys 30%, Partners Odin Group and private investors Licence area: 1,594 and 1,535 km² respectively Presence of oil confirmed. A number of wells drilled and seismic studies conducted Gargzdai Raseiniai LIThuAnIA Rietavas Vilnius 21 Sustainability report Tethys Oil is an oil and gas exploration and production company with a primary objective of creating shareholder value working across the whole upstream indus- try lifecycle of exploration, development and production. The Group considers a sustainable approach to its operations and projects to be critical to deliver long-term shareholder value. A central tenet of Tethys Oil’s business model is to explore for and produce oil and gas in an economically, socially, and envi- ronmentally responsible way. The Group applies the same standards to its activities worldwide to satisfy both its commer- cial and ethical requirements. Tethys Oil strives to continuously improve its perfor- mance and to act in accordance with good industry practice and high standards of corporate citizenship. Sustainability and Corporate Social Responsibility (“CSR”) is viewed by the Group as a question of strategic impor- tance and thus Tethys Oil’s board of direc- tors has approved a CSR policy to be implemented by the Group management. This policy underpins the Group’s work on sustainability and corporate social respon- sibility. The policy clearly defines the Group’s core values, a code of conduct to be applied by employees, contractors, and partners as well as policies in a number of key areas within CSR and sustainability. Tethys Oil’s Core Values • To act in a fair, honest and equitable way. • To observe local laws and regulations. • To respect local customs and traditions. • To observe applicable international laws and standards. • To uphold the ten principles of the United Nations Global Compact on human rights, labour standards, envi- ronment and anti-corruption. health and Safety The principles behind the Health and Safety (“HSE”) policies are to provide a healthy and safe working environment for the Group’s employees and to minimise the potential impact of the Group’s activi- ties on the environment. Corporate HSE goals set corporate requirements on opera- tional entities, which include identifying relevant HSE issues and ways of address- ing them through environmental studies, establishing plans and procedures, training staff and attributing HSE responsibilities, maintaining emergency response and con- tingency plans, monitoring and reporting performance. The Group has a policy to conduct all its operations in compliance with all applica- ble legislation. The Group recognises that the prevention of accidents and ill health is essential to the efficient operation of its business. It is the Group’s objective to provide a safe working environment for employees, con- tract personnel and members of the gen- eral public who may be put at risk by the activities of its operations. Community Relations The Group has a commitment to have a beneficial impact on the community through engaging in a dialogue with the Group’s stakeholders, whether these are local communities or relevant interest groups, such as the government and civil society. The Group engages in an active relationship with the stakeholders in order to understand the concerns surrounding the group’s operations and jointly set goals. The Group has the policy, while engaging in oil exploration and production activi- ties, to operate in a manner that is con- sistent with the welfare of neighbouring communities. The Group seeks to enhance and con- tribute to the local communities through the hiring of local staff and participation in local projects. The Muscat office has a majority of Omani nationals as employees and Tethys Oil has for several years offered a master degree scholarship to Omani geo- science students in cooperation with Sul- tan Qaboos University in Muscat. environment Tethys Oil and its affiliated partners will strive to ensure that the exploration and production operations are conducted in compliance with all applicable environ- mental laws and regulations. The Group 22 will continue to work to minimise the environmental impact within the scope of its operations. It will co-operate with industry, government and the public on programmes to protect the environment. The Group will provide the necessary training for its employees to ensure that they have the knowledge and capability to conduct operations in a manner that is consistent with sound environmental practices. human Rights Tethys Oil has committed firmly to the United Nations Global Compact (stated further in the Code of Conduct), as well as follow the United Nations Guiding Princi- ples on Business and Human Rights. The Group has made a commitment to support internationally recognised human rights wherever it operates. Human Rights are to be understood as those referred to in the Universal Declara- tion of Human Rights (UDHR), the Inter- national Covenant on Civil and Political Rights and the International Covenant on Economic, Social and Cultural Rights and in the International Labour Organisa- tion’s (ILO) Conventions, and in relation to business activities, in the Global Com- pact, the OECD Guidelines for Multina- tional Enterprises, and the UN Guiding Principles. The Group recognises the importance of respecting the rights of local communi- ties, and thus prior to any new investment, it analyses potential impacts on human rights. While the Group respects all human rights, it focuses primarily on those human rights that potentially may be most impacted by its operations. The Group fur- thermore expects all its affiliated partners to respect human rights and to observe highest standards of professional integrity. Personnel Tethys Oil recognises that its performance as a company is dependent upon the per- formance of its employees as individuals. The Group seeks to promote diversity amongst its employees with a mix of gen- der, age and nationality as a step towards improving the Group’s performance and Sustainability – a continuous process As of 31 December 2016 all of Tethys Oil’s various license interests and holdings are non-operated and as a result Tethys Oil executes the sustainability work on its pro- jects indirectly and in cooperation with the relevant operator. During the year, the Group has actively worked to apply its CSR policy in all its projects where possible and applying the same standards when screening new venture projects. All non-operated assets are, however, inde- pendently reviewed by Tethys Oil out of a HSES (health, safety, environment and social) perspective and Tethys Oil will closely monitor any contractor or opera- tor. Wherever changes can be favourably employed, such will be recommended. By implementing the sustainability and CSR policies in its own organisation Tethys Oil seeks to set a standard for its partners and lead by example. attractiveness as an employer. Although a small organisation, Tethys Oil personnel consist of highly motivated individuals of six different nationalities, ranging in age from early twenties to mid seventies and with a balanced gender representation (41 percent female and 59 percent male). Anti-Corruption Tethys Oil has a zero-tolerance policy with regards to corruption. Its policy on cor- ruption is laid out clearly under the Code of Conduct part of its CSR policy that employees should refrain from accepting or offering improper payments, gifts or engaging in bribery or any form of corrupt business practices. The policy also applies to partners, contractors and suppliers. r e u a b n n u r B a o r a C y b l o t o h P 2323 Corporate governance report systems Corporate governance practices refer to through the decision-making which owners, directly or indirectly, con- trol a company. Tethys Oil is a publicly traded company listed on Nasdaq Stock- holm, Mid Cap. Tethys Oil adheres to the Swedish Code of Corporate Governance (“the Code”). The Code is published on www.bolagsstyrning.se, where a descrip- tion of the Swedish Corporate Govern- ance model can be found. This Corporate Governance Report 2016 is submitted in accordance with the Swedish Annual Accounts Act and the Code. It explains how Tethys Oil has conducted its corporate gov- ernance activities during 2016. Tethys Oil does not report any deviations from the Code, Nasdaq Stockholm’s rule book for issuers, recommendations from the Swed- ish Securities Council, decisions from Dis- ciplinary Committee at Nasdaq Stockholm or statements from the Swedish Securities Council. The report has been reviewed by the Company’s auditors, please see page 29. external and internal framework for governance in Tethys Oil External: • Swedish Companies Act (e.g. Swed- legislation • Accounting ish accounting act, Swedish Annual Accounts Act and IFRS) • Nasdaq Stockholm’s rule book for issuers • Swedish Code of Corporate Governance Internal: • Articles of Association • Board instructions, Rules of procedures • Polices such as Administration policy, Information policy, CSR policy etc Shareholders Tethys Oil’s shares are traded on Nasdaq Stockholm. At year end 2016 the share capital amounted to MSEK 6, represented by 35,543,750 shares, each with a par value of SEK 0.17. All shares represent one vote each. At 31 December 2016, the number of shareholders was 5,529 (5,563). Of the total number of shares, foreign sharehold- ers accounted for approximately 64 per- cent. 18 percent of the Swedish sharehold- ing was held by legal entities. Tethys Oil’s holding of its own shares amounted to 1,329,224 (3.74%). For further informa- tion on share, share capital development and shareholders, see pages 33–35 and Tethys Oil’s website. Annual General Meeting The Annual General Meeting (“AGM”) must be held within six months of the close of the fiscal year. All shareholders who are listed in the share registry on the record date, and who have notified the Company of their participation in due time, are enti- tled to participate in the AGM. The AGM was held in Stockholm on 18 May 2016. The AGM was attended by 179 sharehold- ers, representing 38 percent of the votes and share capital in the company. The resolutions passed by the meeting included the following; • Adoption of the income statements and balance sheets for 2015 and discharge of liability for the board of directors and the managing director • Re-election of Per Brilioth, Dennis Har- lin, Magnus Nordin, Katherine Støvring and Geoffrey Turbott and election of Richard Rettig as director. Dennis Har- lin was elected chairman of the board • The chairman will be paid a fee of SEK  560,000 and each AGM elected member not employed by the company will be paid SEK  250,000. The chair- man of the audit committee and the chairman of the remuneration commit- tee will be paid SEK 65,000 respectively and each of the committees’ members will be paid SEK 35,000. The total fees for committee work, including com- mittee chairmen fees shall not exceed SEK  410,000. In addition, the AGM approved a frame of SEK  250,000 for work by directors outside of regular board work, payable following resolu- tion of the board of directors • Auditors will be paid as invoices are approved • Principles of remuneration to senior executives • Incentive programme as part of the remuneration package to employees. Issuance of 350,000 warrants where each warrant entitled to subscription to one new share in Tethys Oil. The warrants have a three year duration and the strike price of the warrants was SEK 65.50 per share 24 • Authorization for the board to decide on repurchasing own shares up to not more than one-tenth of all outstanding shares • Rules for the appointment and work of the nomination committee • Authorization for the board to resolve to issue new shares and/or convertibles with consideration in cash and/or with consideration in kind or by set-off, to enable the company to make business acquisitions and to raise capital for the Company’s business operations • Authorization for the board to resolve to purchase own shares in Tethys Oil AB The minutes recorded at the AGM can be found at Tethys Oil’s website, www.tethysoil.com. extraordinary General Meeting An Extraordinary General Meeting (“EGM) was held in Stockholm on 25 October 2016. The EGM was attended by 129 shareholders, representing 32 percent of the votes and share capital in the com- pany. The resolutions passed by the meet- ing included the following; • Share split, reduction of share capital and increase of share capital by way of a bonus issue, enabling the share redemp- tion program of SEK 3.00 per share The minutes recorded at the EGM can be found at Tethys Oil’s website, www.tethysoil.com. nomination process In accordance with the nomination com- mittee process approved by the AGM 2016, the nomination committee for the AGM 2017 consists of members appointed by three of the largest shareholders of the Company based on shareholdings as per 30 September 2016 and the chairman of the board. The names of the members of the nomination committee were announced and posted on the Company’s website on 16 November 2016, i.e. within the time frame of six months before the AGM as prescribed by the Code. The nomination committee for the AGM 2017 has held four meetings during its mandate and informal contacts have taken place between such meetings. The nomina- tion committee report, including the final proposals to the AGM 2017, is published on the Company’s website together with the notice of the AGM. The Nomination Committee’s assignment is to produce proposals for the following matters, which will be presented to the AGM for resolution: • AGM chairman • Board members • Chairman of the board • Board fees and remuneration for com- mittee work allocated to each member • Auditors and auditor’s fee • Proposal regarding procedures and prin- ciples for establishing a nomination committee and issues pertaining thereto for the AGM 2018 The work of the nomination committee included evaluation of the board’s work, competence and composition, as well as the independence of the members. The nomi- nation committee also considered other cri- teria such as the background and experience and also taken part of the board evaluation. The nomination committee for the AGM 2016 consisted of the following members: • Erik Norman, chairman of the nomina- tion committee, representing himself, • Viktor Modigh, representing Magnus Nordin • Mikael Petersson, representing Lans- downe Investment Company Limited, and • Dennis Harlin, chairman of Tethys Oil The board and its work Board composition The articles of association stipulate that the board of directors of Tethys Oil shall con- sist of no less than three and no more than ten board members with no more than three deputy board members. Board mem- bers are elected for a maximum of one year at a time. The board of directors of Tethys Oil since the AGM 2016 has consisted of six directors and no deputies. Dennis Har- lin has been chairman of the board. Five board members are independent from the Company, the Company’s management and the Company’s larger shareholders, and six board members are independent from larger shareholders. Board of directors elected at the AGM 2016 Member elected Position Year of birth nationality Independent in relation to the Company Independent in relation to the Company’s larger shareholders Dennis Harlin 2015 Chairman 1941 Sweden Per Brilioth 2013 Member 1969 Sweden Magnus Nordin 2001 Member 1956 Sweden Richard Rettig 2016 Member 1978 Sweden Katherine Støvring Geoffrey Turbott 2012 Member 1965 United States 2015 Member 1963 New Zealand Yes Yes No Yes Yes Yes Yes Yes Yes Yes Yes Yes Rules of procedure The board of directors’ work is governed by annually adopted rules of procedure. The board of directors supervise the work of the managing director by continually following up the Company’s operations. The board of directors also ensures that the Company’s organisation, administration and control are properly managed. The board of directors adopts strategies and goals and resolves on larger investments, acquisitions and disposals of business activities or assets. The board of directors also appoints the managing director and determines the managing director’s salary and other compensation. The chairman of the board of directors supervises the work and is responsible for it being well organised and efficient. This entails, among other things, continually following the Company’s operations in contact with the managing director and being responsible for other board mem- bers receiving the information and docu- mentation needed to ensure high quality discussions and well-founded decisions by the board of directors. The chairman is responsible for the evaluation of the board of directors’ and the managing director’s work and represents the board of directors in ownership matters. According to the current rules of proce- dure the board of directors shall, after the constituent board meeting following the AGM, hold a minimum of seven ordinary meetings during a calendar year. Timing and main items for ordinary meetings 2016 February Fourth quarter and year-end report 2015 April May Annual report 2015 and AGM 2016 First quarter report 2016 August Second quarter report 2016 September Strategy November Third quarter report 2016 December Budget 25 Assessment of the board’s work The chairman of the board is responsible for assessing the board’s work including the performance of individual board members. This is done on an annual basis through a questionnaire which is anonymous for the directors. The assessment focuses on such factors as the board’s way of work- ing, number of meetings and effectiveness, time for preparation, available competence and individual board members influence of the board’s work. The nomination com- mittee takes part of the results, and it is a component in the nomination commit- tee’s work to submit proposals concerning board members. Tethys Oil’s auditor: Pricewaterhouse- Coopers AB Johan Malmqvist ulrika Ramsvik Role Lead partner Co-signing auditor The board’s work in 2016 During 2016 the board held seven ordi- nary meetings and nine extraordinary meetings. Year of birth Company auditor since 1975 2015 1973 2014 Board of directors and committee attendance Member Audit committee Member Remuneration committee Board meetings Audit committee meetings Remuneration committee meetings Board member Dennis Harlin (Chairman) Per Brilioth Magnus Nordin Richard Rettig Katherine Støvring Geoffrey Turbott Yes (Chairman) Yes Yes No Yes Yes Yes 16/16 Yes (Chairman) 13/16 No Yes Yes Yes 16/16 8/9 15/16 16/16 4/4 4/4 – 2/2 4/4 4/4 3/3 3/3 – 0/0 3/3 3/3 Remuneration committee The board has established a remuneration committee for the period up to and includ- ing the AGM 2017, consisting of all board members with the exception of the manag- ing director Magnus Nordin. Per Brilioth is the chairman of the committee. The remu- neration committee convened three times in 2016. The work has mainly focused on establishing principles for remuneration to management, to monitor and evaluate variable remuneration and the application of the guidelines for remuneration as well as to construct and propose an incentive programme to the AGM 2016. The remu- neration committee reports to the board, normally in conjunction with the follow- ing board meeting. Audit committee The board has established an audit com- mittee for the period up to and including the AGM 2017, consisting of all board members with the exception of the man- aging director Magnus Nordin. Geoffrey Turbott is the chairman of the committee. The audit committee convened four times in 2016. The work has mainly focused on supervising the Company’s financial reporting and assessing the efficiency of the Company’s financial internal controls, with the primary objective of providing support to the board in the decision mak- ing processes regarding such matters. The audit committee also regularly liaises with the Group’s statutory auditor as part of the annual audit process and reviews the audit fees and the auditor’s independence and impartiality. The Audit committee reports to the board, normally in conjunction with the following board meeting. external auditors of the Company Statutory auditor Pursuant to its Articles of Association, Tethys Oil must have one or two auditors, and no more than two deputies. A regis- tered firm of auditors may be appointed as the Company’s auditor. Tethys Oil’s auditor is PricewaterhouseCoopers AB with Johan Malmqvist as Lead partner and Ulrika Ramsvik as co-signing auditor. PricewaterhouseCoopers AB was elected as the Company’s auditor at the AGM 2016. 26 The audit firm has, besides the audit, con- ducted a limited number of other assign- ments on behalf of Tethys Oil. These assignments mainly consisted of services associated with auditing, such as in-depth reviews during audit. Remuneration to the auditors of Tethys Oil is paid in accord- ance with approved current accounts. In 2016, remuneration to Pricewaterhouse- Coopers AB amounted to MUSD 0.1 (MUSD 0.1). For details on remuneration to auditors, see note 10, auditor’s fees. Independent qualified reserves auditor Tethys Oil’s independent qualified reserves auditor annually certifies Tethys Oil’s oil reserves, although such assets are not included in the Company’s balance sheet. The current independent qualified reserves auditor is DeGolyer and MacNaughton. For further information, see Reserves on page 39. Managing director and executive management The executive management in Tethys Oil at the time of the AGM consisted of the managing director, the chief financial officer (“CFO”) and the executive vice president (“EVP”) corporate development. for The board of directors has adopted an instruction the managing direc- tor which clarifies the responsibilities and authority of the managing director. According to the instruction, the man- aging director shall provide the board of directors with decision data in order to enable the board to make well-founded decisions and with documents to enable it to continually monitor the activities for the year. The managing director shall take the decisions needed for developing the business, within the legal framework, the business plan, the budget and the instruc- tion for the managing director adopted by the board of directors as well as in accord- ance with other guidelines and instructions communicated by the board of directors. Changes to executive management The executive management structure was unchanged until September 2016 when a chief technical officer (“CTO”) was appointed and included in the execu- tive management. Beginning December the position of EVP seized to exist. The executive management at year-end con- sists of the managing director, the CFO and the CTO. The board of directors have approved these changes to the executive management, being a permitted deviation. Remuneration policy to executive management Remuneration policy to the executive management includes five elements: • Basic salary • Pension arrangements • Yearly variable salary, including the right to participate in share-based long-term incentive • Other benefits • Severance pay shall be within the range of 1–4 monthly salaries per person and year. The targets for variable cash remuneration shall be deter- mined by the board prior to each financial year and individual agreements shall be arranged with each participant, the content of which depends on the participant’s posi- tion at the time the agreement is arranged. The targets shall be objectively quantifi- able and related to budget. The targets shall consist of financial and operational key indicators. The yearly variable salary will be determined annually in connection with publication of the year-end report for the respective financial year based on an evaluation of the participants’ achievement of the targets as described in the individ- ual agreements. Payment of variable cash remuneration shall be conditional upon the participant remaining employed for the duration of the programme. The board has the right to adjust the incentive program during the term of the programme in the case of, for example, extraordinary increases or decreases in the group’s earnings. Share based incentive programme The share based incentive programme has the purpose to retain and recruit qualified and committed personnel on a global mar- ket for oil companies. The programme is available to all employees and is intended to be re-occurring annually. Other benefits Non-financial benefits shall be based on market terms and shall facilitate the duties of each senior executive. Severance arrangements A termination period of twelve months applies between the Company and manag- ing director and nine months between the company and other members of executive management. All members of executive management are entitled to twelve months payments if the Company terminates their contracts. The board is entitled to deviate from the proposed guidelines if special rea- sons exist. Remuneration to executive management 2016 (amounts in SEK thousands) Basic salary The basic salary shall be in line with mar- ket conditions, be competitive, and shall take into account the scope and responsi- bility associated with the position, as well as the skills, experience, and performance of the executive. Managing director Other executive management Total Basic salary Pension arrange- ments Variable salary Share based long-term incentive Other benefits Total 2016 Total 2015 2,082 443 340 1,288 12 4,164 3,886 3,080 5,162 485 927 454 794 1,584 2,871 241 5,844 4,474 253 10,008 8,360 Pension arrangements The pension benefits comprise a defined contribution scheme with premiums cal- culated on the full basic salary. The pen- sion contributions shall be in relation to the basic salary and is set on an individual basis but shall not be higher than what is tax deductible. Variable salary Senior executives shall be part of two vari- able remuneration systems payable in cash and/or in combination with a right to acquire warrants in the Company in a long- term incentive programs. Variable salary to employees will be based upon their indi- vidual contribution to the Company’s per- formance. The yearly variable cash salary The increase in remuneration to executive management primarily relate to increased base salaries and changes to the executive management structure during the year. For further information, please see note 12. Remuneration to the board 2016 Remuneration to be paid to the board of directors for the period between the AGMs of 2016 and 2017 amounts to a total of TSEK  1,970, allocated among the board members in the way shown in the below table. The annual general meeting 2016 resolved that remuneration of the chair- man of the board of directors shall be TSEK  560 per annum and of the other members TSEK  250 per member per annum. Remuneration is not paid for ser- vice of the boards or directors of subsidiar- ies. Magnus Nordin, who is employed by Tethys Oil, does not receive any remunera- tion for his service on the board of direc- tors. Annual fees for committee members are TSEK  35 per committee assignment and annual fees for the chairman of each of the audit and remuneration commit- tee are TSEK 65. Further, if a member of the board of directors, following a resolu- tion by the board of directors, performs tasks which are outside the regular board work, separate remuneration in the form of hourly fees on market terms may be paid by resolution of the Board of Directors, for which purpose a frame of TSEK  250 was allowed. Out of this frame, a total of TSEK 120 has been paid. 27 Remuneration to board and committee members for the period between the AGMs of 2016 and 2017 (amounts in SEK thousands) Member Dennis Harlin Per Brilioth Magnus Nordin Richard Rettig Katherine Støvring Geoffrey Turbott Total Board of directors Audit committee Remuneration committee Separate renumeration Total 560 250 – 250 250 250 1,560 35 35 35 65 Not member Not member 35 35 65 205 35 35 35 205 – – – – – 120 120 630 350 – 320 320 470 2,090 Financial reporting and control The board of directors has the ultimate responsibility of the internal control for the financial reporting. Tethys Oil’s system of internal control, with regard to financial reporting, is designed to minimize risks involved in financial reporting process and ensure a high level of reliability in the financial reporting. Furthermore, the sys- tem of internal control ensures compliance with applicable accounting requirements and other requirements that Tethys Oil must meet as a listed company. Tethys Oil’s main assets are owned in part- nership and furthermore, Tethys Oil only holds non-operated interest. The focus of internal control is therefore to ensure reli- ability and accuracy of the operator’s finan- cial information. The control is conducted by monthly and quarterly cost controls, quarterly budget reviews and interviews with operator to understand and explain deviations. Internal control Tethys Oil continually works on improv- ing the financial reporting through evalu- ating the risk of errors in the financial reporting and related control activities. Control activities include following up on instructions and the application of accounting principles. The board of direc- tors is responsible for and monitors the control activities, which involve all levels of the organisation. The activities limit the identified risks and ensure correct and reli- able financial reporting. The Company’s central financial department analyses and follows up on budget deviations, draws up forecasts, follows up on significant varia- tions between periods and reports to the board of directors, which minimizes the risks for errors in the financial reporting. The control activities also include fol- lowing up on the authorization manual and accounting principles. These control activities also include the operators in part- nerships. The board of directors further decides on specific control activities and auditing of operators in partnerships. The financial department regularly follows up on deviations and irregularities and report to the audit committee. This structure is considered sufficient and suitable given the size and nature of the Company’s business. At the current size of the Company and the fact that the Company holds non-operated interest it is not considered necessary for a dedicated internal auditor function. Information and communication The board has adopted an information policy for the purpose of ensuring that the external information is correct and com- plete. There are also instructions regarding information security and how to commu- nicate financial information. Monitoring Both the board and the management fol- low up on the compliance and effective- ness of the company’s internal controls to ensure the quality of internal processes. The board receives detailed monthly reports on the financial situation and development of the business to this end. The audit com- mittee ensures and monitors that control activities are in place for important areas of risk related to financial reporting. Stockholm, 18 April 2017 Tethys Oil AB (publ) The board of directors 28 Auditor’s report on the Corporate Governance Statement To the general meeting of the shareholders in Tethys Oil AB (publ), corporate identity number 556615-8266 engagement and responsibility It is the board of directors who is responsible for the corporate governance statement for the year 2016 on pages 24–28 and that it has been prepared in accord- ance with the Annual Accounts Act. The scope of the audit Our examination has been conducted in accordance with FAR’s auditing standard RevU 16 The auditor’s examination of the corporate governance statement. This means that our examination of the corporate gov- ernance statement is different and substantially less in scope than an audit conducted in accordance with International Standards on Auditing and generally accepted auditing standards in Sweden. We believe that the examination has provided us with sufficient basis for our opinions. Opinions A corporate governance statement has been prepared. Disclosures in accordance with chapter 6 section 6 the second paragraph points 2–6 the Annual Accounts Act and chapter 7 section 31 the second paragraph the same law are consistent with the annual accounts and the consolidated accounts and are in accordance with the Annual Accounts Act. Stockholm, 18 April 2017 PricewaterhouseCoopers AB Johan Malmqvist Authorized Public Accountant Lead Partner Ulrika Ramsvik Authorized Public Accountant 29 Board of directors Member Function Elected Year of birth Education Experience Military Academy higher technical course Brigadier general (ret.). Vice president SAAB/Gripen International 1996–2009. Defence attaché in Switzerland and Italy and seconded to Ministry for Foreign Affairs Dennis harlin Per Brilioth Magnus nordin Richard Rettig Katerine Støvring Geoffrey Turbott Chairman of the board, member audit and remuneration committee Board member, member of audit committee and chairman of the remuneration committee Board member and managing director Board member and member of audit and Board member and member of audit and Board member, member of remuneration remuneration committee remuneration committee committee and chairman of audit 2015 1941 2013 1969 2001 1956 2016 1978 2012 1965 committee 2015 1963 – 470 Yes Yes Member Function Elected Year of birth Education Shares in Tethys Oil (per 31 December 2016)* Remuneration for board and committees (SEK thousands) Independent in relation to the Company Independent in relation to the Company’s larger shareholders Bachelor of Arts, University of Lund and Master of Arts, University of California Los Angeles Master of Science in Business and Master of Law, University of Oslo and Former member of New Zealand’s institute Economics, Stockholm School of MSc in Business Management, London of chartered accountants Economics Business School Several executive positions in different oil companies Founded and operated companies within Several executive positions in the energy Worked with public companies in which the Experience asset management and equities trading. and shipping industry Lundin family holds a major shareholding Is today active as private investor. from 1995 to 2013, whereof as Chief Financial Officer and Vice President of Finance at Lundin Petroleum AB from 2002 to 2013 Member of the board of directors of Minotaurus AB, Minotaurus Fastigheter AB and Minotaurus Energi AS Member of the board of directors Invium Partners AB Member of the board of directors of Tetbury Other board duties Forestry Ltd and Progress Land Ltd Bachelor of Science in Business Administration, University of Stockholm, Master of Finance, London Business School Executive positions in companies investing in emerging markets and the oil and gas sector. Currently CEO of Vostok New Ventures AB. Chairman of the board of directors of Pet Sounds AB, Gavald Holdings AB, Pet Sounds Digitalt AB, Pomegranate Investment AB and thunderroad AB. Member of the board of directors Vostok New Ventures Ltd., Kontakt East Holding AB, FG Stores Stockholm AB, Fotografiska Holding AB, LeoVegas AB, Garantibil Sverige AB, Avito AB, NMS INVEST AB and Vostok Emerging Finance Ltd. Deputy member of the board of directors of Digital Agency Ryssland AB. 312,500 320 Yes Yes – 320 Yes Yes 10,000 1,464,127 – No Yes 350 Yes Yes 3030 Other board duties Member of the board of directors Harlin Consulting AB Shares in Tethys Oil (per 31 December 2016)* 142,071 Remuneration for board and committees (SEK thousands) Independent in relation to the Company Independent in relation to the Company’s larger shareholders 630 Yes Yes * Privately, via company and via insurance policy. Member Function Elected Year of birth Education 2015 1941 Affairs Shares in Tethys Oil 142,071 (per 31 December 2016)* Remuneration for board 630 and committees (SEK thousands) Independent in relation to Yes the Company Independent in relation Yes to the Company’s larger shareholders * Privately, via company and via insurance policy. 2013 1969 School 350 Yes Yes 2001 1956 – No Yes Pet Sounds Digitalt AB, Pomegranate AB and Minotaurus Energi AS Investment AB and thunderroad AB. Member of the board of directors Vostok New Ventures Ltd., Kontakt East Holding AB, FG Stores Stockholm AB, Fotografiska Holding AB, LeoVegas AB, Garantibil Sverige AB, Avito AB, NMS INVEST AB and Vostok Emerging Finance Ltd. Deputy member of the board of directors of Digital Agency Ryssland AB. 10,000 1,464,127 Dennis harlin Per Brilioth Magnus nordin Richard Rettig Katerine Støvring Geoffrey Turbott Chairman of the board, member audit Board member, member of audit Board member and managing director and remuneration committee committee and chairman of the remuneration committee Board member and member of audit and remuneration committee Board member and member of audit and remuneration committee Board member, member of remuneration committee and chairman of audit committee 2016 1978 2012 1965 2015 1963 Military Academy higher technical course Bachelor of Science in Business Bachelor of Arts, University of Lund and Administration, University of Stockholm, Master of Arts, University of California Master of Finance, London Business Los Angeles Master of Science in Business and Economics, Stockholm School of Economics Master of Law, University of Oslo and MSc in Business Management, London Business School Former member of New Zealand’s institute of chartered accountants Experience Brigadier general (ret.). Vice president Executive positions in companies Several executive positions in different oil SAAB/Gripen International 1996–2009. investing in emerging markets and the companies Defence attaché in Switzerland and Italy oil and gas sector. Currently CEO of and seconded to Ministry for Foreign Vostok New Ventures AB. Founded and operated companies within asset management and equities trading. Is today active as private investor. Several executive positions in the energy and shipping industry Worked with public companies in which the Lundin family holds a major shareholding from 1995 to 2013, whereof as Chief Financial Officer and Vice President of Finance at Lundin Petroleum AB from 2002 to 2013 Member Function Elected Year of birth Education Experience Other board duties Member of the board of directors Harlin Chairman of the board of directors of Member of the board of directors of Consulting AB Pet Sounds AB, Gavald Holdings AB, Minotaurus AB, Minotaurus Fastigheter Member of the board of directors Invium Partners AB Member of the board of directors of Tetbury Forestry Ltd and Progress Land Ltd Other board duties 312,500 320 Yes Yes – 320 Yes Yes o s s u R o e t t a M y b o t o h P – 470 Yes Yes 3131 Shares in Tethys Oil (per 31 December 2016)* Remuneration for board and committees (SEK thousands) Independent in relation to the Company Independent in relation to the Company’s larger shareholders Executive management Magnus nordin Jesper Alm Fredrik Robelius Function Managing director Chief Financial Officer Chief Technical Officer Employed since Year of birth Education 2004 1956 2014 1975 2011 1973 Bachelor of Arts, University of Lund and Master of Arts, University of California Los Angeles M.Sc. Business Administration, University of Lund PhD Engineering Physics, Uppsala University; Postgraduate Diploma Petroleum Engineering, Heriot-Watt University Experience Several executive positions in different oil companies Various positions in Corporate Finance at Pareto Securities Energy engineering positions in Fortum, petroleum engineering related positions in Tanganyika Oil and Sinopec Shares in Tethys Oil (per 31 December 2016)* 1,464,127 5,750 7,000 Warrants in Tethys Oil (per 31 December 2016) Warrants 2015/18: 78,000 Warrants 2016/19: 70,000 Warrants 2015/18: 39,000 Warrants 2016/19: 47,000 Warrants 2015/18: 43,000 Warrants 2016/19: 45,000 * Privately, via company and via insurance policy. 3232 The Tethys Oil share Tethys Oil’s shares are traded on Nasdaq Stockholm. With the purpose of improving liquidity and reducing the spread between buyers and sellers of Tethys Oil shares, the Company has assigned Pareto Securities AB to act as a liquidity provider for the shares of the Company. Shares outstanding Tethys Oil’s registered share capital at 31 December 2016 amounts to SEK 5,923,958 represented by 35,543,750 shares with a quota value of SEK  0.17. All shares in Tethys Oil represent one vote each. All outstanding shares are common shares and carry equal rights to participation in Tethys Oil’s assets and earnings. As per 31 December 2016 the board of directors had remaining outstand- ing authorization from the AGM to issue up to 10 percent of the shares up until the next AGM. As per 31 December 2016, Tethys Oil held 1,329,224 of its own shares which were purchased dur- ing 2014 to 2016 at an average price of SEK  57.40. The share repurchase programme is based on a mandate from the respective AGM and repurchased shares are still part of the total number of outstanding shares but however not included in the number of shares in circulation, which amount to 34,214,526. Tethys Oil has a warrant programme as part of the remuneration package to employees. Warrants have been issued following the AGMs in 2015 and 2016. The terms for each warrant series have been recalculated as a consequence of recalculation events, being the distribution to shareholders in 2015 and 2016, respectively. The current terms are: Warrant program Issued Allotted Strike price, SeK no of shares each warrant entitle to 2015/2018 356,000 312,000 2016/2019 350,000 335,000 76.80 62.60 1.08 1.05 As the strike price is below the share price as per year-end 2016, the warrants are included in the fully diluted number of shares. Share capital development Since the company’s inception in September 2001 and up to 31 December 2016 the parent company’s share capital has developed as shown below: Year Share capital development Quota value, SeK Change in number of shares Total number of shares Change in total share capital, SeK  Total share capital, SeK 2001 2001 2001 2003 2004 2004 2006 2006 2006 2007 2007 2007 2007 2008 2008 2008 2009 2009 2009 2009 2010 2010 2010 2010 2010 2010 2010 2010 2010 2011 2012 2015 2015 2015 2016 2016 2016 Formation of the Company Share issue Split 100:1 Share issue Split 2:1 Share issue Non-cash issue Share issue Share issue Share issue Exercise of warrants Share issue Set-off issue Split 3:1 Share issue Exercise of warrants Share issue Share issue Exercise of warrants Exercise of warrants Exercise of warrants Exercise of warrants Exercise of warrants Share issue Share issue Exercise of warrants Exercise of warrants Exercise of warrants Exercise of warrants Non-cash issue Share issue Share split 1:2 (redemption shares) Redemption Bonus issue Share split 1:2 (redemption shares) Redemption Bonus issue 100.00 100.00 1.00 1.00 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.17 0.17 0.17 0.17 0.17 0.17 0.17 0.17 0.17 0.17 0.17 0.17 0.17 0.17 0.17 0.17 0.17 0.17 0.08 0.08 0.17 0.08 0.08 0.17 1,000 5,000 500,000 750,000 1,500,000 4,384,800 4,784,800 5,661,760 5,741,760 6,041,760 6,041,762 6,166,762 6,392,762 19,178,286 23,978,286 23,980,086 25,280,086 27,280,086 27,456,272 28,049,091 28,301,171 28,438,600 29,193,542 29,443,542 29,693,542 30,176,070 30,361,865 30,446,836 32,504,489 32,543,750 35,543,750 71,087,500 35,543,750 35,543,750 71,087,500 35,543,750 35,543,750 1,000 4,000 495,000 250,000 750,000 2,884,800 400,000 876,960 80,000 300,000 2 125,000 226,000 12,785,524 4,800,000 1,800 1,300,000 2,000,000 176,186 592,819 252,080 137,429 754,942 250,000 250,000 482,528 185,795 84,971 2,057,653 39,261 3,000,000 35,543,750 -35,543,750 – 35,543,750 -35,543,750 – 33 100,000 400,000 – 250,000 – 1,442,400 200,000 438,480 40,000 150,000 1 62,500 113,000 – 800,000 300 216,667 333,333 29,364 98,803 42,013 22,905 125,824 41,667 41,667 80,421 30,966 14,162 342,942 6,544 500,000 – -2,961,979 2,961,979 – -2,961,979 2,961,979 100,000 500,000 500,000 750,000 750,000 2,192,400 2,392,400 2,830,880 2,870,880 3,020,880 3,020,881 3,083,381 3,196,381 – 3,996,381 3,996,681 4,213,348 4,546,618 4,576,045 4,674,849 4,716,862 4,739,767 4,865,590 4,907,257 4,948,924 5,029,345 5,060,311 5,074,473 5,417,415 5,423,958 5,923,958 5,923,958 5,923,958 5,923,958 5,923,958 5,923,958 5,923,958 Capital structure target and dividend policy Tethys Oil’s primary objective is to create shareholder value and in doing so the company will have a balanced approach to growth and shareholder distributions, with a long term capital structure target of a zero net cash position. SEK 1.00, equal to MSEK 34 (MSEK 34). The distribution, sub- ject to approval by the AGM, is proposed to be made by a cash dividend. For the financial year 2016, the board of directors proposes to the AGM 2017 a total distribution of SEK 1.00 per share (AGM 2016 During 2016, following an EGM in October, a further SEK 3.00 per share was distributed via a share redemption program, equal to MSEK 102. Share ownership structure The 20 largest shareholders in Tethys Oil as per 28 February 2017. name Lansdowne Investment Company Cyprus JPM Chase NA Magnus Nordin SEB Funds Grandeur Peak Funds SIX SIS AG Avanza Pension Skandinaviska Enskilda Banken S.A. Öhman Bank S.A. JP Morgan Securities LLC Carl Erik Norman BNYMSANV re GCLB re BNY GCM Client Handelsbanken Funds Norges Bank John Hancock Funds Nordnet Pensionsförsäkringar AB Banque Pictet Cie SA SSB Client Omnibus AC OM07 (15 PCT) Morgan Stanley and Co LLC SSBTC A/C London Branch Clients Total, 20 largest shareholders Tethys Oil AB Summary other (appr. 5,870) shareholders Total number of shares Source: Euroclear and the Company number of shares Share of capital and votes 8.91 5.27 4.12 3.93 3.60 2.28 2.16 2.06 1.89 1.78 1.65 1.64 1.49 1.36 1.33 1.22 1.21 1.21 1.18 1.15 43.45 3.74 52.81 100.00 3,165,694 1,871,851 1,464,127 1,398,305 1,278,231 810,012 768,172 731,100 671,280 631,508 585,000 584,567 528,579 483,504 472,540 435,364 431,574 430,963 420,446 410,364 15,444,470 1,329,224 18,770,056 35,543,750 34 Distribution of shareholdings Distribution of shareholdings per 28 February 2017. holding 1 – 500 501 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 15,000 15,001 – 20,000 20,001 – Total number of shares Percentage of shares 560,339 642,420 1,654,260 1,075,852 489,618 640,486 30,480,775 35,543,750 1.58% 1.81% 4.65% 3.03% 1.38% 1.80% 85.76% 100.00% number of shareholders 4,042 760 707 146 37 35 172 Percentage of shareholders 68.52% 12.88% 11.99% 2.47% 0.63% 0.59% 2.92% 5,899 100.00% Share statistics 2016 The final transaction price in 2016 was SEK 78.75 corresponding to a total market capitalization of MSEK 2,799. During the year the price of Tethys Oil’s share increased by 37.0 percent. The high- est transaction price in 2016 was SEK 80.25 on 28 December and the lowest was SEK  45.70 on 21 January. The turnover velocity was 76.4 percent on Nasdaq Stockholm. Share price development and turnover 2016 75 60 45 30 15 0 Jan 2016 SEK Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Share price Turnover 1,000,000 800,000 600,000 400,000 200,000 Jan 2017 Feb 0 Share volume per day 35 Key financial data Group Operational items 2016 2015 2014 2013 2012 Production before government take, bbl 4,478,121 3,578,488 2,807,653 1,709,706 1,399,518 Production per day, bbl 12,235 9,804 7,692 4,684 3,824 Net sales after government take, bbl 2,357,701 1,805,056 1,464,228 850,926 776,248 Achieved oil price, USD/bbl 40.5 58.1 103.9 106.6 110.3 Items regarding the income statement and balance sheet Revenue, MUSD EBITDA, MUSD EBITDA-margin, % Operating result, MUSD Operating margin, % Net result, MUSD Net margin, % Cash and cash equivalents, MUSD Shareholders' equity, MUSD Balance sheet total, MUSD Capital structure Equity ratio, % Leverage ratio, % Investments, MUSD Net cash, MUSD Profitability Return on shareholders' equity, % Return on capital employed, % Other Average number of full time employees Dividend per share, SEK Cash flow from operations per share, USD 87.1 44.1 51% -0.5 -1% 2.7 3% 39.0 196.8 238.9 82% neg. 48.5 39.0 1.29% 4.20% 19 1.00* 1.53 107.0 58.6 55% 23.0 21% 23.4 22% 51.2 217.2 253.6 86% neg. 40.8 51.2 149.3 108.0 72% 57.1 38% 49.4 33% 47.8 214.3 233.5 92% neg. 39.3 47.8 92.2 74.8 81% 45.1 49% 38.1 41% 44.8 168.4 238.7 71% 12% 44.1 -14.9 85.5 74.5 87% 49.3 58% 46.0 54% 37.5 130.1 207.8 63% 20% 132.1 -21.3 10.85% 25.82% 25.56% 46.81% 13.59% 30.87% 29.82% 49.38% 17 1.00* 1.69 18 n.a. 2.89 17 n.a. 1.45 19 n.a. 2.25 Number of shares at year end, thousands 35,544 35,544 35,544 35,544 35,544 Shareholders' equity per share, USD Weighted number of shares (before dilution) for the year, thousands Weighted number of shares (after dilution) for the year, thousands Earnings per share before dilution, USD Earnings per share after dilution, USD 5.54 34,324 34,372 0.08 0.08 6.11 34,964 34,964 0.67 0.67 6.03 35,524 35,524 1.39 1.39 4.74 35,544 35,544 1.07 1.07 3.66 34,465 34,465 1.34 1.34 * Not including share redemption of 3.00 SEK per share in 2016, and 2.00 SEK per share in 2015. 36 Definitions of key ratios Relevant reconciliations of alternative performance measures MUSD Operating result Depreciation, depletion and amortization Exploration costs EBITDA Cash and bank Interest bearing debt Net cash Cash flow from operations Investment in oil and gas properties Cash flow from operations after investments 2016 2015 -0.5 44.4 0.1 44.1 39.0 – 39.0 52.7 -48.5 4.2 23.0 34.7 1.0 58.6 51.2 – 51.2 59.1 -40.8 18.3 2014 57.1 31.1 19.8 108.0 47.8 – 47.8 102.7 -39.3 63.4 2013 2012 45.1 21.1 8.6 74.8 44.8 -59.7 -14.9 51.5 -44.1 7.4 49.3 8.0 17.2 74.5 37.5 -58.8 -21.3 77.7 -132.1 -54.4 Margins Operating margin Operating result as a percentage of yearly turnover. Net margin Net result as a percentage of yearly turnover. Capital structure Equity ratio Shareholders’ equity as a percentage of total assets. Interest coverage ratio Earnings before interest, taxes, deprecia- tion, depletion, amortisation and explora- tion costs (EBITDA) divided by net finan- cial result. Net cash/net debt Cash and equivalents less interest bearing debt. Investments Total investments during the year. Profitability Leverage ratio Net interest bearing debt as a percentage of shareholders’ equity. Return on shareholders’ equity Net result as percentage of average share- holders’ equity. Adjusted equity ratio Shareholders’ equity plus equity part of untaxed reserves as a percentage of total assets. Return on capital employed Net result plus financial costs as a per- centage of average capital employed (total assets less non interests-bearing liabilities). Other Number of employees Average number of employees full-time. Shareholders’ equity per share Shareholders’ equity divided by the num- ber of outstanding shares. Weighted numbers of shares Weighted number of shares during the year. Earnings per share Net result divided by the number of out- standing shares. n.a. Not applicable. n.m. Not meaningful. 37 Administration report (An English translation of the Swedish original) Tethys Oil AB (publ) Tethys Oil Block 3 & 4 Ltd. Blocks 3&4, Oman Tethys Oil Denmark AB Tethys Oil Middle East North Africa B.V. Tethys Oil Exploration AB Tethys Oil France AB Tethys Oil Oman Ltd. Tethys Oil Spain AB Jyllands Olie ApS Odin Energy A/S 40% 50% Alès and Attila, France UAB TAN Oil Raseiniai, Lithuania UAB LL Investicijos Rietavas, Lithuania UAB Minijos Nafta Gargzdai, Lithuania 75% 50% Above are material group companies of the Tethys Oil group. Ownership in subsidiary companies is 100% unless otherwise stated. The consolidated financial statements of the Tethys Oil Group (hereafter referred to as “Tethys Oil” “Tethys” or the “Group”), where Tethys Oil AB (publ) (the “Company”) with organisational number 556615-8266 is the parent company, are hereby pre- sented for the twelve months period ended 31 December 2016. The amounts relating to the comparative period (equivalent period of last year) are shown in parenthesis after the amount for the cur- rent period. Segments of the Group are geographical markets. The numbers in the tables in this report may not add exactly due to rounding. OPeRATIOnS Tethys Oil is a Swedish energy company focused on exploration and production of oil and natural gas. Tethys Oil’s core area is Oman, where the company is one of the largest onshore oil and gas concession holders. The company’s strategy is twofold: to explore for oil and natural gas near existing and developing infrastructure and markets; and to develop proven reserves that have previously been sub-economic due to location or technological reasons. As at year end 2016 the company had interests in licences in Oman, France and Lithuania. Production Tethys Oil’s core area is the Sultanate of Oman, where the com- pany holds a 30 percent interest in Blocks 3&4. Tethys Oil also has interests in three licenses onshore Lithuania and two licenses onshore France. The primary production comes from the three fields; Farha South, Shahd and Saiwan East on Blocks 3&4. The production growth of 25 percent year on year has generally been in line with expectations. The production from the Shahd field during the fourth quarter was somewhat below expectations, pri- marily caused by a slower implementation of water injection than anticipated. Tethys Oil has additional production in Lithuania. The terms of the Exploration and Production Sharing Agreement (“EPSA”) on Blocks 3&4 allows the joint operations partners to recover their costs from up to 40 percent of the value of total oil production, this is referred to as cost oil. After deducting any allowance for cost oil, the remaining production is split 80/20 between the government and the joint operations partners. If there are no costs to be recovered the joint operations partners receive after government take 20 percent of the oil produced. The terms of the EPSA thus result in the joint operations partners’ share of production after government take in the interval 20–52 percent, depending on available recoverable cost. So far on Blocks 3&4, the joint operations partners’ share of production after government take has been in the high end of the interval, 52 percent, as the joint venture partners have continued to invest on Blocks 3&4. The estimated recoverable costs as per 31 December 2016, net to Tethys Oil, amounts to MUSD 58.1. Tethys Oil’s share of Gargzdai is indirectly owned through Odin Energi A/S, a Danish associated company. 38 Tethys Oil’s share of volumes, before government take (bbls) 2016 2015 2014 2013 2012 Tethys Oil’s share of annual production, (bbl) Oman, Blocks 3&4 Production Average daily production Lithuania, Gargzdai Production Average daily production 4,436,438 3,539,631 2,765,654 1,663,069 1,345,854 12,121 9,698 7,577 4,556 3,687 41,684 38,857 42,000 46,637 53,664 114 106 115 128 147 Total production 4,478,121 3,578,488 2,807,653 1,709,706 1,399,518 Total average daily production 12,235 9,804 7,692 4,684 3,824 Average daily production net to Tethys Oil, quarterly 12,000 10,000 8,000 6,000 4,000 2,000 0 2010 2011 2012 2013 2014 2015 2016 Reserves Oman Tethys Oil’s net working interest reserves in Oman as per 31 December 2016 amounted to 14,222 thousand barrels of oil (“mbo”) of proven reserves (1P), 21,408 mbo of proven and prob- able reserves (2P) and 29,729 mbo of proven, probable and pos- sible reserves (3P). Development of reserves, Blocks 3&4 (Audited by DeGolyer and MacNaughton Canada Limited) ing an increase of 23 percent. The increase in 2P reserves represents and internal reserve replacement ratio of 171 percent. Reserves Blocks 3&4, 31 December 2016 (Audited by DeGolyer and MacNaughton Canada Limited) Mbo Farha South field Shahd field Saiwan East field 1P 8,672 4,728 822 2P 11,569 7,847 1,992 3P 14,028 13,000 2,701 29,729 Mbo 1P 2P 3P Total 31 December 2016 14,222 21,408 Total 31 December 2015 12,905 18,244 27,863 Production 2016 Discoveries Revisions -4,436 146 5,607 -4,436 238 7,362 -4,436 304 5,998 Total 31 December 2016 14,222 21,408 29,729 In 2016 Tethys Oil added 1P reserves of 5,753 mbo, representing an increase of 45 percent; 2P reserves of 7,600 mbo, representing an increase of 42 percent; and 3P reserves of 6,302 mbo, represent- The review of the reserves in Oman has been conducted by independ- ent petroleum consultant DeGolyer and MacNaughton Canada Lim- ited. The report has been estimated using 2007 Petroleum Resources Management System (PRMS), Guidelines of the Society of Petroleum Engineers (SPE), World Petroleum Council (WPC), American Asso- ciation of Petroleum Geologists (AAPG) and Society of Petroleum Evaluation Engineers (SPEE). 39 Export reporting error Tethys Oil has been informed by the operator of Blocks 3&4 that an inadvertent fiscal metering calibration problem has resulted in over- reporting of exported oil from Blocks 3&4 during the period August 2010 until February 2016 (the “Export Reporting Error”). Tethys Oil estimates that its share of the overestimated volume of oil amounts to 157,000 barrels (before government take). To rectify the over-reported quantity of delivered oil, the Blocks 3&4 partners have agreed with the pipeline operator and the Ministry of Oil and Gas to repay the over-lifted amount in cash. Tethys Oil estimates, that Tethys Oil’s share of the cash repayment, will amount to MUSD 5.9, which con- sequently have reduced Tethys Oil’s 2016 revenue and result with that amount. The mechanism for the settlement details are being discussed, but Tethys Oil expects that the final settlement will reflect the relevant agreements. Tethys Oil estimates that the negative undiscounted net cash effect for Tethys Oil will be less than MUSD 1.4. The discounting effect has been estimated to be immaterial. Of the total error amount of MUSD 5.9, MUSD 1.9 is included in current provisions and MUSD 4.0 is included in non-current provi- sions as per 31 December 2016. 31 December 2016 is 28,029 barrels. The valuation of both over and underlift is based on market price. Tethys Oil sells all of its oil through Mitsui Energy Trading Sin- gapore, which is part of Mitsui & Co Ltd. All oil sales come from Blocks 3&4 and are made on a monthly basis. The selling price is the monthly average of the two month future price for Omani blend. The average selling price amounted to USD 40.5 per barrel during 2016, 30 percent lower compared to 2015. The average price for Dated Brent oil during 2016 amounted to USD 43.7 per barrel. Result Tethys Oil reports a net result after tax for 2016 of MUSD 2.7, representing earnings per share of USD 0.08. The result for 2016 is down 88 percent compared to 2015. Net result is mainly down due to lower oil prices, which has created lower results on all levels as expenditures are in line or higher compared to the previous year. Operating expenses Operating expenses 2016 2015 2014 2013 2012 Production costs, MUSD 33.5 38.4 32.7 20.5 13.7 Revenue Revenue 2016 2015 2014 2013 2012 Well workovers, MUSD 3.1 4.5 4.4 3.0 0.2 Total operating expenses, MuSD Operating expenses per barrel, USD 36.5 42.9 37.2 23.5 13.9 8.2 12.1 13.4 14.1 10.4 Operating expenses during 2016 amounted to MUSD 36.5 com- pared to MUSD 42.9 during 2015. Operating expenses are related to oil and gas production on Blocks 3&4, and comprise expenses for field staff, expenses related to maintenance, well workovers and interventions and administration. Operating expenses per barrel since 2012 have been in the range USD 8 to 14 per barrel. During 2016 operating expenses per bar- rel has been significantly reduced compared with 2015. The reduc- tion in operating expenditures per barrel has been expected and is the result of general cost reductions and higher production. Depletion, depreciation and amortisation DD&A 2016 2015 2014 2013 2012 DD&A, MUSD 44.4 34.6 31.0 21.0 DD&A per barrel, USD 10.0 9.8 11.2 12.6 8.0 5.9 Depletion, depreciation and amortisation (“DD&A”) for 2016 amounted to MUSD 44.4, which is higher than 2015 and attrib- utable to higher production. The DD&A charge relates to Blocks 3&4. Barrels sold, bbl 2,357,701 1,805,056 1,464,228 850,926 776,248 Underlift (overlift) movement, bbl (50,754) 35,552 (26,088) 13,870 (76,404) Oil price, USD/bbl 40.5 58.1 103.9 106.6 110.4 Net sales, MUSD 95.4 104.9 152.1 90.7 85.7 Underlift (overlift), MUSD Overlift adjustment reporting error, MUSD (2.4) 2.2 (2.8) 1.5 (0.2) (5.9) – – – – Revenue, MuSD 87.1 107.0 149.3 92.2 85.5 Revenue for 2016 is down 19 percent compared to revenue 2015 and the main reason is the decline in oil prices which are down 30 percent between the years. There has been a transition from underlift to overlift during 2016. During 2016, Tethys Oil sold 2,357,701 barrels of oil from Blocks 3&4, representing 31 percent increase in comparison with 2015 when 1,805,056 barrels of oil were sold. This resulted in net sales during 2016 of MUSD 95.4 compared to MUSD 104.9 during 2015. In addition to Net sales, there has been an adjustment for overlift amounting to MUSD 8.3 of which MUSD 5.9 relate to the Export Reporting Error, which together with Net sales adds up to Revenue of MUSD 87.1. Sale quantities for oil sales are nominated two months in advance and are not based upon the actual production in a month; as a result, sales quantities can be above or below production quanti- ties. Where the sales quantity exceeds the quantity of barrels pro- duced an overlift position occurs and where it is less, an underlift position occurs. There was a movement from underlift to overlift between year-end 2016 and 2015. The total overlift position as per 40 Net back net back, uSD/bbl 2016 2015 2014 2013 2012 Oil price achieved (sales barrels) Revenue (after government take) 40.5 58.1 103.9 106.6 110.4 21.0 30.2 54.0 55.4 57.4 Operating expenses 8.2 12.1 13.4 14.1 10.4 net back 12.8 18.1 40.6 41.3 47.0 The reduction in net back per barrel during 2016 has mainly been driven by the oil price development. Net result from associated companies Tethys Oil holds indirect interest in the three Lithuanian licences; Gargzdai, Rietavas and Raseiniai, through associated companies Jylland Olie and Odin Energi. The result from Tethys Oil’s share in these associated companies during 2016 amounted to MUSD -0.7 compared to MUSD -0.4 during 2015. There has been a long term trend of declining production from Gargzdai, which is in line with expectations. Reduced revenues following the fall in oil price has led to cost reduction measures being introduced. Administrative expenses Administrative expenses amounted to MUSD 5.8 for 2016 com- pared to MUSD  5.2 during 2015. Administrative expenses are mainly salaries, rents, listing costs and external services. Admin- istrative expenses have been stable between years 2016 and 2015. Tax In Oman, Tethys Oil’s oil and gas operations are governed by an Exploration and Production Sharing Agreement (EPSA) whereby Tethys Oil receives its share of oil after government take. Under the terms of the EPSA, Tethys Oil is subject to Omani income taxes and royalties which are paid in full, on behalf of Tethys Oil, from the government share of oil. As Omani income tax is not paid directly by Tethys Oil but is taken in kind, these taxes are not presented in Tethys Oil’s income statement. Net financial result The result for the full year 2016 has been impacted by net for- eign exchange losses and fees on long term debt. The net currency exchange effect of the group amounts to MUSD  5.3 and most of the effect relates to the stronger US dollar in relation to the Swedish krona. Currency translation differences recorded on loans between the parent company and subsidiaries are non-cash related items. Interest and fees related to the credit facility amounted to MUSD  0.6 and other financial expenditures amounted to MUSD 1.8. The currency exchange effect and fees on long term debt is part of net financial result amounting to MUSD 3.1 for the full year. Investments and work programme Summary of oil and gas interests (MUSD): Country Oman Lithuania France New ventures Total Book value 31 Dec 2016 Book value 31 Dec 2015 Investments Jan–Dec 2016 190.8 189.1 48.2 – – 0.3 191.1 – – 0.1 189.1 – – 0.3 48.5 Blocks 3&4 During 2016, total investments amounted to MUSD  48.5 of which almost all relate to Blocks 3&4. Investments during the year have been in line with investments 2015. There has been an increased focus on development and production drilling during 2016. Drilling – Development 25.5 14.4 Investments Block 3&4, MuSD Drilling – Exploration/ Appraisal G&G Facilities Pipeline Other capex Total investments Blocks 3&4 2016 2015 2014 2013 2012 2.4 4.8 4.1 10.7 1.6 3.9 8.4 7.6 2.9 2.6 9.6 9.2 6.2 6.6 4.7 1.9 7.5 1.2 13.2 19.9 8.6 7.8 0.6 2.3 1.2 24.7 10.2 72.9* 48.2 40.7 38.3 40.0 130.1 * The high level of other capex during 2012 relate to the repayment to Mitsui regarding the carry agreement for investments made on Tethys Oil’s behalf during 2010 and 2011. A total of 38 wells were completed on Blocks 3&4 in 2016. The main focus during the first nine months of 2016 was on the Shahd field, where in total 30 wells were drilled. Towards the end of the third quarter 2016, the drilling resumed on the Farha South oil field, where a total of eight wells were drilled in 2016. Planned maintenance work was carried out on all three fields on Blocks 3&4 during the spring 2016. The work included tempo- rary shut downs of the fields, which had some effect on the pro- duction. The main objectives of the maintenance work were to verify asset integrity of the systems and to add and change compo- nents. As part of the work, the whole plant has been flushed with water and nitrogen. Asset integrity of the whole plant as well as separate components have been tested and verified. Internal clean- ing and inspection of components, e.g. separators and heater treat- ers have been conducted. New pumps have been installed. Tie-ins for future separators and heater treaters have also been added. The work was finished in the second quarter, and completed the main- tenance work on the Blocks 3&4 fields. A total of five rigs including a work over rig are in operations on the blocks. 41 Block 3: Farha South Field A total of six appraisal/production wells were drilled on the Farha South field in 2016. One of these, the FS-130 well, was drilled in a previously undrilled fault block. The new fault block AO is located about one kilometre to the west of fault block Z, in the south west part of the field. FS-130 was drilled vertically down to the target, the Barik sandstone, with a total vertical depth of 1,680 metres. FS-130 encountered oil and the AO fault block is now in produc- tion. The water injection system at Farha South oil field was fur- ther developed during the year, and two injector wells were drilled. The produced water treatment system on Farha South field was expanded in order to handle the increasing volumes of the water produced in connection with the oil production. The expansion of the system decreases the need for new water wells as well as taking care of the water by-product. Block 4: Shahd and Saiwan East oil fields 17 appraisal/production wells were drilled on the Shahd field in 2016. The water injection programme continued on the Shahd field with eight new injection wells and four new water wells. In addition, one near field exploration well was drilled in a previ- ously undrilled structure in the northern extension of the Shahd area. The well discovered oil and is producing from the Khufai layer. A set of new separators were installed on the Saiwan East field in 2016. Associated companies Lithuania As per 31 December 2016, the value of the shareholding in the two associated Danish companies holding the interests in Lithua- nian licenses, amounted to MUSD 0.3 compared to MUSD 2.0 at the end of 2015. The reduction in book value is explained by a loss from associated companies of MUSD  -0.7 (-0.4) and dividends received during the period which amounted to MUSD 0.7 (2.7). The book value is also impacted by currency exchange differences. The book value related to Minijos Nafta (Gargzdai) is zero and as there are no liabilities related to Minijos Nafta, Tethys Oil does not recognize any negative net result from Minijos Nafta. Production continued on the Gargzdai licence, with cost cutting measures implemented in the first three quarters of 2016. With the higher oil price environment at the end of the year, some high water rate production wells previously shut-in were being re- opened for testing and possibly being put back into production. The long term production testing of the exploration well Tidikas-1, which was completed in 2015 on the Raseiniai licence continued in 2016 but was terminated in August 2016. The results suggest that the main target, the Silurian reef, has poor reservoir proper- ties. Oil is clearly present, but flows have been small and barely sustainable. During the later part of the test, small, but more sus- tainable flows, have however been established from the carbonate ‘platform’ below the reef. The presence of live oil within this rock layer suggests a stratigraphic element. Nearby focus will be on bet- ter understanding the carbonate layers below the reefal structures and the extent of the ‘platform’ will be evaluated from seismic. Tethys Oil has received the data from a 50 kilometres 2D survey over the Nemunas area in the south of the Raseiniai licence. The operator has been granted a five year extension to the Raseiniai license. The remaining commitments will be additional 3D seis- mic and one well. The license is now valid until September 2022. Liquidity and financing Cash and bank and Net cash as per 31 December 2016 amounted to MUSD  39.0 compared to MUSD  51.2 as per 31 December 2015. In May 2016 a dividend of SEK 1.00 per share was paid to share- holders, which in total amounted to MUSD  4.1. Furthermore MUSD  1.7 was used to repurchase 245,555 shares during the twelve months ending 31 December 2016. An extra general meeting (‘EGM) of shareholders was held 25 October 2016 in Stockholm. The EGM resolved to distribute SEK 3.00 per share through a share redemption programme. The total value of the distribution amounted to MUSD  11.5. The redemption programme was completed at the end of November. During the twelve months ended 31 December 2016, the cash flow from operations amounted to MUSD 52.7 and investments in oil and gas amounted to MUSD 48.5. For the twelve months 2016 the cash flow from operations after investments in oil and gas amounted to MUSD 4.2. Tethys Oil’s operations on Blocks 3&4, including investment pro- gramme, are expected to be funded from cash flow from opera- tions and from available funds. Tethys Oil’s operations in Lithuania are expected to be funded from cash flow from operations and available cash in the associ- ated Lithuanian companies. Parent company The Parent company reports a net result after tax for 2016 amount- ing to MSEK 23.4 compared to MSEK 310.2 for 2015. Adminis- trative expenses amounted to MSEK 31.3 for 2016 compared to MSEK 29.2 2015. Net financial result amounted to MSEK 46.6 during 2016 compared to MSEK  372.5 for 2015. The stronger USD  in comparison to SEK  is the main reason for the positive net financial result during the year. The reason behind the strong net financial result in 2015 was an anticipated dividend from the wholly owned subsidiary Tethys Oil Block 3&4 Ltd. No such divi- dend was expected at the end of 2016. Significant agreements and commitments In Tethys Oil’s oil and natural gas operations there are two main categories of agreements; one that governs the relationship with the host country; and one that governs the relationship with partners. The agreements that govern the relationship with host countries are referred to as licences or Exploration and Production Sharing Agreements (EPSA or PSA). Tethys Oil holds its interest directly through aforementioned agreements in Oman and France. The agreements with host countries have a time limit and are normally divided into periods. Financial commitments and or work com- mitments normally relates to the different periods. Tethys Oil has 42 fulfilled its commitments on Blocks 3&4. In the other areas of operations the commitments are either fulfilled or there are no commitments of which Tethys Oil can be held liable for. In some of Tethys Oil’s areas of interest there are requirements of work to be done or minimum expenditures in order to retain the licences, but no commitments of which Tethys Oil can be held liable for. The agreements that govern the relationship with partners are referred to as Joint Operating Agreements (JOA). Tethys Oil has JOAs with its partners in all areas of operation. The environment All oil and gas related operations impact the environment and therefore entail risk. Directly or indirectly through joint opera- tions, the Group complies with the environmental legislation and regulations applicable in each country. Areas which are normally regulated include air pollution, discharges to watercourses, water use, handling of hazardous substances and waste, land and ground- water contamination, and restoration of the environment around the facilities after operations have ceased. Directly and indirectly through partnerships, Tethys Oil strives to minimise the environ- mental impact and avoid the occurrence of accidents. Other than the aforementioned agreements, there are no indi- vidual agreements or similar circumstances relating to the busi- ness which are of crucial significance for the group’s operations or profitability. There have been no significant issues with regard to Health, Safety and Environment (“HSE”) on any of Tethys Oil’s assets. For more information, see the section Sustainability. Board of directors At the Annual General Meeting (“AGM”)of shareholders on 18 May 2016 Per Brilioth, Magnus Nordin, Dennis Harlin, Kath- erine Støvring and Geoffrey Turbott were re-elected members of the board. Richard Rettig was a newly elected director. No deputy directors were appointed. At the same meeting Dennis Harlin was appointed chairman of the board. Group structure Tethys Oil AB (publ), with organizational number 556615-8266, is the parent company in the Tethys Oil Group. Material subsidi- aries include Tethys Oil Oman Limited, Tethys Oil Block 3&4 Limited, Tethys Oil Denmark AB, Tethys Oil Spain AB, Tethys Oil France AB and Tethys Oil Exploration AB. The Tethys Oil Group was established 1 October 2003. The work of the board is subject to an established work procedure that defines the distribution of work between the board and the managing director. The work procedure is evaluated each year and revised if deemed appropriate. The board had 16 meetings dur- ing 2016. Most importantly the board has approved the interim reports of the year and a capital structure target for the company as well as the budget for 2017. The six members of the board have consisted of five non-executive directors. These five non- executive directors are also members of the audit committee and the remuneration committee. Geoffrey Turbott is chairman of the audit committee and Per Brilioth is chairman of the remuneration committee. Remuneration to executive management The intention of the board of directors is to propose to the 2017 AGM the adoption of a policy on remuneration for 2017. The remuneration committee has adopted a policy that fundamentally will be the proposition to the 2017 AGM, containing the follow- ing elements of remuneration for the executive management; base salary; pension arrangements; yearly variable salary; non-financial benefits; long term incentive programme. For a detailed descrip- tion on remuneration applied in 2016 and policy on remuneration as adopted by the remuneration committee, refer to page 27 of the Corporate Governance report and note 12 of the consolidated financial statements. Organisation At the end of the year, Tethys Oil had an average of 19 (17) full time employees. Of these, 7 (6) were women. In addition, contrac- tors and consultants are engaged in Tethys Oil’s operations. Share data As per 31 December 2016, the number of outstanding shares in Tethys Oil amount to 35,543,750, with a quota value of SEK 0.17. All shares represent one vote each. The Company has the same amount of shares outstanding as per 31 December 2015. Tethys Oil has a warrant based incentive programme for employees, for further information please see note 21. As the subscription price is below the share price as per the reporting date in this report, the warrants are included in the diluted number of shares which amount to 36,232,460 per 31 December 2016. As per 31 December 2016, Tethys Oil held 1,329,224 of its own shares which have been purchased since commencement of the programme during the fourth quarter 2014. 245,555 shares were purchased during 2016. The repurchased shares are still included in the total number of shares, but are not included in the average number of shares in circulation. The weighted average number of shares in circulation during 2016 before dilution is 34,324,020 and after dilution 34,372,065. After 31 December 2016 and up to the date of publication for this report, Tethys Oil has not acquired any further shares. Seasonal effects Tethys Oil has no significant seasonal variations. Transactions with related parties There have been no transactions with related parties during the full year 2016, nor for any comparative periods. Risk and uncertainties A statement of risks and uncertainties are presented in note 1. 43 Appropriation of profit The board of directors proposes to the AGM a total distribu- tion of SEK  1.00 (SEK  1.00) per share, equal to MSEK  34.2 (MSEK 34.5) or MUSD 3.6 (MUSD 3.7), be paid for the 2016 fiscal year. The distribution is proposed to be made by a cash divi- dend of SEK 1.00 per share. It is also proposed that the balance of retained earnings after the dividend be retained in the business as described below. MSeK Retained earnings Profit for the year 245.8 23.4 269.2 The Board of Directors proposes that these earnings be appropriated as follows: To the shareholders, a distribution of SEK 1.0 per share To be retained in the business 34.2 235.0 269.2 Cash dividend The board of directors’ proposal consists of a cash dividend of SEK 1.00 per share amounting to SEK 34,214,526. The dividend is subject to approval at the AGM 2017. The preliminary record day for the dividend is 19 May 2017 and preliminary day of pay- ment of dividend is 24 May 2017. As per 31 December 2016, the group’s and the parent compa- ny’s equity ratio amounted to 82.4 percent and 96.9 percent, respectively. After the dividend, the group’s and the parent com- pany’s equity ratio will amount to 82.1 percent and 96.6 percent, respectively. Tethys Oil has generated significant cash flows in recent years and the Group’s financial position is strong. The board has considered the Parent company and the Group’s consolidation needs through a comprehensive valuation of the Parent company and the Group’s financial position and the Parent company and the Group’s pos- sibilities to fulfil their commitments in the long term. The Parent company and the Group’s financial position does not give rise to any other conclusion than that the Parent company and the Group can continue its operations and meet its obligations in the short and long term and make the necessary investments. The board believes that the size of the equity, even after the proposed divi- dend, is in reasonable proportion to the scale of the Parent com- pany and the Group’s business as well as the risks associated with conducting the business. With reference to the above and what has come to the board’s attention, it is the board’s assessment that the Parent company’s and the Group’s financial position implies that the proposed divi- dend is justifiable pursuant to Chapter 17, Section 3 second and third paragraph of the Swedish Companies Act, i.e. with reference to the requirements that the nature, scope and risks of business put on the size of the Parent company’s and the Group’s equity as well as the Parent company’s and the Group’s need to strengthen its balance sheet, liquidity and financial position. Financial statements The result of the Group’s and Parent company’s operations and the financial position at the end of the financial year is shown in the following income statements, balance sheets, cash flow state- ments, statements of changes in equity and related notes. Bal- ance sheets and income statements will be resolved at the AGM, 17 May 2017. 44 Consolidated statement of comprehensive income Financial statements for the group MUSD Revenue Operating expenses Gross profit Depletion, depreciation and amortisation Exploration costs Share of net profit/loss from associates Administrative expenses Operating result Financial income and similar items Financial expenses and similar items net financial result Result before tax Income tax Result for the period Other comprehensive result Items that may be subsequently reclassified to profit or loss: Exchange differences Other comprehensive result for the period Total comprehensive result for the period Attributable to: Shareholders in the parent company Non controlling interest Number of shares outstanding Number of shares outstanding (after dilution) Weighted average number of shares (before dilution) Weighted average number of shares (after dilution) Earnings per share (before dilution), USD Earnings per share (after dilution), USD note 3 9 3, 8 8 6 10–12, 21 13 14 15 17 17 17 17 17 17 2016 87.1 -36.5 50.5 -44.4 -0.1 -0.7 -5.8 -0.5 9.3 -6.2 3.1 2.7 – 2.7 -7.0 -7.0 -4.4 -4.4 – 2015 107.0 -42.9 64.2 -34.7 -1.0 -0.4 -5.2 23.0 7.1 -6.6 0.5 23.5 -0.1 23.4 -3.5 -3.5 19.9 19.9 – 35,543,750 35,543,750 36,232,460 35,543,750 34,324,020 34,964,288 34,372,065 34,964,288 0.08 0.08 0.67 0.67 45 Consolidated balance sheet MUSD ASSeTS non current assets Oil and gas properties Office equipment Investment in associates Long term receivables Current assets Other receivables Prepaid expenses Cash and cash equivalents TOTAL ASSeTS ShARehOLDeRS' eQuITY AnD LIABILITIeS Shareholders' equity Share capital Additional paid in capital Reserves Retained earnings Total shareholders' equity non current liabilities Non current provisions Loan facility Current liabilities Current provisions Accounts payable Accrued expenses Other current liabilities Total liabilities note 31 Dec 2016 31 Dec 2015 1 Jan 2015 8 6 16 17 7 18 7 19 191.1 189.1 166.4 0.1 0.3 – 0.1 1.7 0.3 0.2 5.2 – 191.4 191.3 171.8 7.4 1.1 39.0 47.5 9.2 1.9 51.2 62.3 11.4 2.5 47.8 61.7 238.9 253.6 233.5 0.8 71.0 -1.1 126.2 196.8 8.8 – 8.8 1.9 0.2 9.8 21.5 33.3 42.1 0.8 71.0 5.9 139.5 217.2 4.0 – 4.0 – 0.1 20.2 12.1 32.4 36.3 0.8 71.0 9.4 133.1 214.3 3.3 – 3.3 – 0.3 14.5 1.1 15.9 19.2 TOTAL ShARehOLDeRS' eQuITY AnD LIABILITIeS 238.9 253.6 233.5 46 Consolidated statement of changes in equity MUSD Share capital Paid in capital Other reserves Retained earnings Total equity Attributable to shareholders of the parent company Opening balance 1 January 2015 0.8 71.0 Comprehensive income Result for twelve months 2015 Currency exchange differences twelve months 2015 Total comprehensive income Transactions with owners Purchase of own shares Dividends paid Share redemption Incentive programme Total transactions with owners Closing balance 31 December 2015 Opening balance 1 January 2016 Comprehensive income Result for twelve months 2016 Currency exchange differences twelve months 2016 Total comprehensive income Transactions with owners Purchase of own shares Dividends paid Share redemption Incentive programme Total transactions with owners – – – – – – – – 0.8 0.8 – – – – – – – – – – – – – – – – 71.0 71.0 – – – – – – – – 9.4 – -3.5 -3.5 – – – – – 5.9 5.9 – -7.0 -7.0 – – – – – Closing balance 31 December 2016 0.8 71.0 -1.1 133.1 214.3 23.4 – 23.4 -4.9 -4.1 -8.3 0.3 -17.0 139.5 139.5 2.7 – 2.7 -1.5 -3.7 -10.9 0.3 -15.8 126.2 23.4 -3.5 19.9 -4.9 -4.1 -8.3 0.3 -17.0 217.2 217.2 2.7 -7.0 -4.4 -1.5 -3.7 -10.9 0.3 -15.8 196.8 47 Consolidated cash flow statement MUSD Cash flow from operations Operating result Interest received Interest paid Income tax Adjustment for exploration costs Adjustment for depletion, depreciation and other non-cash related items Total cash flow from operations before change in working capital Change in receivables Change in liabilities Cash flow from operations Investment activity Investment in oil and gas properties Investment in other fixed assets Cash from associated companies, net Cash flow from investment activity Financing activity Purchase of own shares Share redemption Dividend Long term credit, net after issue costs Cash flow from financing activity Period cash flow Cash and cash equivalents at the beginning of the period Exchange gains/losses on cash and cash equivalents Cash and cash equivalents at the end of the period note 2016 2015 13 14 8 8 8 6 17 18 -0.5 – -0.7 – 0.1 45.7 44.7 -1.8 9.8 52.7 -48.5 – 0.1 -48.4 -1.7 -11.5 -4.1 – -17.4 -13.1 51.2 0.9 39.0 23.0 – -1.0 -0.1 1.0 32.8 55.7 -8.9 12.3 59.1 -40.8 -0.0 2.8 -38.1 -4.8 -8.5 -4.3 -0.1 -17.7 3.4 47.8 0.0 51.2 48 Parent Company income statement Financial statements for the parent company MSEK Other income Share of net profit/loss from associates Administrative expenses Operating result Financial income and similar items Financial expenses and similar items Write down of shares in subsidiaries net financial result Appropriations Result before tax Income tax Result for the year * note 5 6 10–12, 21 13 14 20 24 15 2016 10.6 -5.6 -31.3 -26.3 85.1 -31.5 -7.0 46.6 3.1 23.4 – 23.4 2015 10.5 -3.2 -29.2 -21.9 410.9 -38.2 -0.2 372.5 -40.4 310.2 – 310.2 * As there are no items in the parent company’s other comprehensive income, no separate report on total comprehensive income is presented. 49 Parent Company balance sheet MSEK ASSeTS non-current assets Other fixed assets Shares in subsidiaries Long term receivables from group companies Investment in associates Current assets Other receivables Prepaid expenses Cash and cash equivalents TOTAL ASSeTS ShARehOLDeRS' eQuITY AnD LIABILITIeS Shareholders' equity Restricted equity: Share capital Statutory reserve Unrestricted equity: Share premium reserve Retained earnings Result for the year Total shareholders' equity Current liabilities Accounts payable Other current liabilities to group companies Other current liabilities Accrued expenses Total liabilities TOTAL ShARehOLDeRS' eQuITY AnD LIABILITIeS note 31 Dec 2016 31 Dec 2015 20 6 16 17 19 0.2 1.0 245.2 2.7 249.1 2.8 0.7 104.6 108.1 357.2 5.9 71.1 481.0 -235.2 23.4 346.2 1.5 7.1 2.1 0.2 10.9 357.2 0.3 7.3 126.0 14.8 148.2 0.8 1.5 365.8 368.1 516.6 5.9 71.1 481.0 -396.4 310.2 471.9 0.9 43.2 0.2 0.4 44.8 516.6 50 Parent Company statement of changes in equity Restricted equity unrestricted equity MSEK Share capital Statutory reserve Share premium reserve Opening balance 1 January 2015 5.9 71.1 481.0 Transfer of prior year net result Comprehensive income Result for the year Period result Total comprehensive income Transactions with owners Purchase of own shares Dividends paid Share redemption Incentive programme Total transactions with owners Closing balance 31 December 2015 Opening balance 1 January 2016 Transfer of prior year net result Comprehensive income Result for the year Period result Total comprehensive income Transactions with owners Purchase of own shares Dividends paid Share redemption Incentive programme Total transactions with owners – – – – – 5.9 5.9 – – – – – – – – – – – – – – – – – 71.1 71.1 481.0 481.0 – – – – – – – – – – – – Retained earnings -399.6 147.9 – – – -41,6 -35.2 -70.4 2.5 -144.7 net result 147.9 -147.9 310.2 310.2 310.2 – – – – – -396.4 310.2 -396.4 310.2 – – – -14.6 -34.4 -102.6 2.6 -149.0 310.2 -310.2 23.4 23.4 23.4 – – – – – Closing balance 31 December 2016 5.9 71.1 481.0 -235.2 23.4 Total equity 306.3 – 310.2 310.2 310.2 -41.6 -35.2 -70.4 2.5 -144.7 471.9 471.9 – 23.4 23.4 23.4 -14.6 -34.4 -102.6 2.6 -149.0 346.2 51 Parent Company cash flow statement MSEK Cash flow from operations Operating result Interest received Interest paid Adjustment for non cash related items Adjustment for dividends not yet paid Total cash flow from operations before change in working capital Change in receivables Change in liabilities Cash flow from operations Investment activity Dividend from associated companies Investment in long term receivables Investment in other fixed assets Investments in derivative instruments Cash flow from investment activity Financing activity Purchase of own shares Dividends paid Share redemption Cash flow from financing activity Cash flow for the year Cash and cash equivalents at the beginning of the year Exchange gains on cash and cash equivalents Cash and cash equivalents at the end of the year note 2016 2015 13 14 6 17 -26.3 0.0 – 9.5 – -16.8 -1.2 -33.9 -51.9 6.4 -71.9 – – -65.6 -14.6 -34.4 -102.6 -151.7 -269.2 365.8 8.0 104.6 -21.9 4.1 – -34.5 350.0 297.7 207.5 38.3 543.5 22.8 -61.1 -0.1 -2.5 -40.8 -41.6 -35.2 -70.4 -147.1 355.6 14.7 -4.5 365.8 52 Notes General information Tethys Oil AB (publ) (“the Company”), corporate identity number 556615- 8266, and its subsidiaries (together “the Group” or “Tethys Oil”) are focused on exploration for and production of oil and natural gas. The Group has interests in exploration licences in Oman, France and Lithuania. The Company is a limited liability company incorporated and domiciled in Stock- holm, Sweden. The Company is listed on Nasdaq Stockholm. service and thus has the ability to direct the use and obtain the benefits from the good or service. The standard replaces IAS 18 ‘Revenue’ and IAS 11 ‘Construction contracts’ and related interpretations. The standard is effective for annual periods beginning on or after 1 January 2018 and earlier application is permitted. The group is assessing the impact of IFRS 15 and at present does not expect any material effect on the group financial reporting apart from possible changes in presentation. These consolidated financial statements have been approved for issue by the board of directors on 18 April 2017. Basis of preparation The annual report of Tethys Oil AB/the Group have been prepared in accord- ance with prevailing International Financial Reporting Standards (IFRS) and IFRS Interpretations Committee (IFRIC) interpretations adopted by the EU Commission and the Swedish Annual Accounts Act (1995:1554). In addi- tion RFR 1 “Supplementary Rules for Groups” has been applied as issued by the Swedish Financial Reporting Board. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 2. The consolidated financial statements have been prepared under the his- torical cost basis except as disclosed in the accounting policies below. Accounting principles The accounting principles applied in the preparation of these consolidated financial statements are set out below. The same accounting principles were used in the Annual report 2015 and have been consistently applied to all the years presented. The Annual report of the Group has been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU, the Annual Accounts Act and RFR 1 “Supplementary rules for groups”. The Annual report for the Parent company has been pre- pared in accordance with the Annual Accounts Act and Swedish Financial Accounting Standards Council’s RFR 2 “Accounting for legal entities”. RFR 2 means that the parent company in the annual report for the legal entity shall apply IFRS’ rules and statements as adopted by the EU, so far this is possible within the framework of the Annual Accounts Act and with regard to the connection between accounting and taxation. The recommendation states which exceptions and additions that shall be or are allowed to be made from IFRS. The accounting principles of the Parent company are the same as for the Group, except in the cases specified below in the section entitled “Parent Company accounting principles”. New accounting principles for 2016 IASB has issued several amendments to financial standards effective as from 1 January 2016 of which no one has had any material impact on the consolidated financial statements of the Group. IAS 21 allows financial reporting in currencies other than Swedish kronors (SEK), for Swedish groups. Tethys Oil’s board of directors have decided to adopt USD as the reporting currency for the Group in order to improve the understanding of Tethys Oil’s financial reporting and to increase transpar- ency. See page 54 for details. New standards and interpretations not yet adopted A number of new standards and amendments to standards and interpreta- tions are effective for annual periods beginning after 1 January 2016, and have not been applied in preparing these consolidated financial statement. None of these is expected to have a significant effect on the consolidated financial statements of the Group, except the following set out below: IFRS 15, ‘Revenue from contracts with customers’ deals with revenue rec- ognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with custom- ers. Revenue is recognised when a customer obtains control of a good or IFRS 9, ‘Financial instruments’, addresses the classification, measurement and recognition of financial assets and financial liabilities. The complete version of IFRS 9 was issued in July 2014. It replaces the guidance in IAS 39 that relates to the classification and measurement of financial instru- ments. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through OCI and fair value through P&L. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in OCI not recycling. There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. For finan- cial liabilities there were no changes to classification and measurement except for the recognition of changes in own credit risk in other compre- hensive income, for liabilities designated at fair value through profit or loss. IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the ‘hedged ratio’ to be the same as the one management actually use for risk management purposes. Contemporaneous documentation is still required but is differ- ent to that currently prepared under IAS 39. The standard is effective for accounting periods beginning on or after 1 January 2018. Early adoption is permitted. The group is yet to assess IFRS 9’s full impact. IFRS 16, ‘Leases’ In January 2016, IASB issued a new lease standard that will replace IAS 17 Leases and the related interpretations IFRIC 4, SIC-15 and SIC-27. The standard requires assets and liabilities arising from all leases, with some exceptions, to be recognized on the balance sheet. This model reflects that, at the start of a lease, the lessee obtains the right to use an asset for a period of time and has an obligation to pay for that right. The accounting for lessors will in all material aspects be unchanged. The standard is effective for annual periods beginning on or after 1 Janu- ary 2019. Early adoption is permitted. The EU has not yet adopted the standard. The standard will primarily impact the accounting of the group’s operational leases. At present the group only has leases for office rent and other leases concerning items of lesser value, such as copying machines. Considering the few leases in the group, the preliminary assessment is that the standard will have no material impact on the group. There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Group. Principles of consolidation Subsidiaries are all entities (including structured entities) over which the group has control. The Group controls an entity when the group is exposed to, or has rights to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Sub- sidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The Group uses the acquisition method of accounting to account for busi- ness combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabili- ties assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. 53 Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also elimi- nated. Accounting policies of subsidiaries have been changed where neces- sary to ensure consistency with the policies adopted by the Group. Joint arrangements Under IFRS 11 Joint Arrangements investments in joint arrangements are classified as either joint operations or joint ventures. The classifica- tion depends on the contractual rights and obligations of each investor, rather than the legal structure of the joint arrangement. Tethys Oil has joint operations. Joint operations Tethys Oil recognises its direct right to the assets, liabilities, revenues and expenses of joint operations and its share of any jointly held or incurred assets, liabilities, revenues and expenses. These have been incorporated in the financial statements under the appropriate headings. The Group con- ducts oil- and gas operations as a joint operation that does not have a separate legal entity status through licenses which are held jointly with other companies. The Groups financial statements reflect the Groups share of production, capital costs, operational costs, current assets and liabilities in the joint operations. Associated companies An investment in an Associated company is an investment in an undertak- ing where the Group exercises significant influence but not control, gener- ally accompanying a shareholding of at least 20 percent but not more than 50 percent of the voting rights. Such investments are accounted for in the consolidated financial statements in accordance with the equity method and are initially recognized at cost. The difference between the acquisi- tion cost of shares in an associated company and the net fair value of the assets, liabilities and contingent liabilities of the associated company rec- ognised at the date of acquisition is recognised as goodwill. The goodwill is included within the carrying amount of the investment and is assessed for impairment as part of the investment. The Group’s share in the post- acquisition results of the associated company is recognised in the income statement and the Group’s share in post-acquisition movements in other comprehensive income of the associated company is recognised directly in other comprehensive income of the Group. When the Group’s accumu- lated share of losses in an associated company equals or exceeds its interest in the associated company, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s percentage in the associates. Unre- alised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associ- ates have been changed where necessary to ensure consistency with the policies adopted by the Group. Foreign currencies Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘functional currency’). The consolidated financial statements are presented in US dollars (USD) which is the currency the Group has elected to use as the presentation currency. New financial reporting currency IAS 21 allows financial reporting in currencies other than Swedish kronors (SEK), for Swedish groups. Tethys Oil’s board of directors have decided to adopt USD as the reporting currency for the Group in order to improve the understanding of Tethys Oil’s financial reporting and to increase trans- parency. As a consequence recalculations have been made for non-USD reporting entities with, the comparative figures translated into USD whereby assets and liabilities are translated at the closing rate at the date of that balance sheet and income and expenses are translated at the exchange rates at the dates of the transactions. Share capital and additional paid in capital has been recalculated using the balance day rate at 31 December 2014. Retained earnings are translated against historical year end rates. As a consequence a redistribution between retained earnings and reserves has taken place. The financial reporting in USD has commenced as from 1 January 2016. The parent company will continue to use SEK as financial reporting currency. Transactions and balances Monetary assets and liabilities denominated in foreign currencies are translated at the rates of exchange prevailing at the balance sheet date and foreign exchange currency differences are recognised in the income statement. Transactions in foreign currencies are translated at exchange rates prevailing at the transaction date. Exchange differences are included in financial income/expenses in the income statement. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the balance sheet rate of exchange. Presentation currency The balance sheets and income statements of foreign Group companies are translated for consolidation purposes using the current rate method. All assets and liabilities of the subsidiary companies are translated at the balance sheet date rates of exchange, whereas the income statements are translated at average rates of exchange for the year, except for transac- tions where it is more relevant to use the rate of the day of the transac- tion. The translation differences which arise are recorded directly in the foreign currency translation reserve within other comprehensive income. Upon disposal of a foreign operation the translation differences relating to that operation will be transferred from equity to the income statement and included in the result on sale. Translation differences arising from net investments in subsidiaries, used for financing exploration activities, are recorded directly in other comprehensive income. For the preparation of the financial statements for the reporting period, the following exchange rates have been used. 31 December 2016 31 December 2015 Currency 2016 Average 2016 Period end 2015 Average 2015 Period end SEK/USD SEK/EUR SEK/CHF 8.63 9.52 8.75 9.42 9.80 9.17 8.45 9.42 8.80 8.51 9.30 8.60 Segment reporting Operating segments are based on geographic perspective and reported in a manner consistent with the internal reporting provided to the Executive Management. Information for segments is only disclosed when applicable. Classification of assets and liabilities Non-current assets, long-term liabilities and provisions consist for the most part solely of amounts that are expected to be recovered or paid more than twelve months after the balance sheet date. Current assets and current liabilities consist solely of amounts that are expected to be recovered or paid within twelve months after the balance sheet date. Oil and gas properties Oil and gas properties are initially recorded at historical cost, where it is probable that they will generate future economic benefits. All costs for acquiring concessions, licences or interests in production sharing con- tracts and for the survey, drilling and development of such interests are capitalised on a field area cost centre basis. This includes capitalisation of decommissioning and restoration costs associated with provisions for asset retirement (see “Provisions”). Oil and gas properties are sub- sequently carried at cost less accumulated depreciation, depletion and amortisation (including any impairment). Gains and losses on disposals are determined by comparing the proceeds with the carrying amounts of assets sold and are recognised in income. Routine maintenance and repair costs for producing assets are expensed to the income statement when they occur. Proceeds from the sale or farm-out of oil and gas concessions in the explo- ration stage are off set against the related capitalised costs of each cost centre with any excess of net proceeds over all costs capitalised included in the income statement. In the event of a sale in the exploration stage any deficit is included in the income statement. Oil and gas properties are categorised as either producing or non-producing. Depreciation, depletion and amortisation Producing oil and gas properties are depleted on a unit-of-production basis over the proved and probable reserves of the field concerned, except in the 54 case of assets whose useful lives differ from the lifetime of the field, in which case the straight-line method is applied. classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. In accordance with the unit of production method, net capitalised costs to reporting date, together with anticipated future capital costs for the devel- opment of the proved and probable reserves determined at the balance sheet date price levels, are depleted based on the year’s production in rela- tion to estimated total proved and probable reserves of oil and gas. Deple- tion of a field area is charged to the income statement once commercial production commences, under Depletion, depreciation and amortisation. Proved reserves are those quantities of petroleum which, by analysis of geological and engineering data, can be estimated with reasonable cer- tainty to be commercially recoverable, from a given date forward, from known reservoirs and under current economic conditions, operating meth- ods and governmental regulations. Proved reserves can be categorised as developed or undeveloped. If deterministic methods are used, the term reasonable certainty is intended to express a high degree of confidence that the quantities will be recovered. If probabilistic methods are used, there should be at least a 90 percent probability that the quantities actually recovered will equal or exceed the estimates. Probable reserves are those unproved reserves which analysis of geologi- cal and engineering data suggests are more likely than not to be recover- able. In this context, when probabilistic methods are used, there should be at least a 50 percent probability that the quantities actually recovered will equal or exceed the sum of estimated proved plus probable reserves. Exploration costs Exploration costs relate to non-producing oil and gas properties and are recognised in the income statement when a decision is made not to pro- ceed with an oil and gas project, or when expected future economic benefits of an oil and gas project are less than capitalised costs. No depletion is charged to non-producing oil and gas properties. Costs related to non-producing oil and gas properties and directly asso- ciated with an exploration well are capitalised until the determination of reserves is evaluated. If it is determined that a commercial discovery has not been achieved, these exploration costs are charged to the income statement as exploration costs. The field will be transferred from the non-production cost pool to the pro- duction cost pool within oil and gas properties once commercial production commences, and accounted for as a producing asset. Impairment Tethys Oil continuously assesses its producing oil and gas properties for any need for impairment. This is performed in conjunction with each bal- ance sheet date or if there are events or changes in circumstances that indicate that carrying values of assets may not be recoverable. Such indica- tors include changes in the Group’s business plans, relinquished licences, changes in raw materials prices leading to lower revenues and, for oil and gas properties, downward revisions of estimated reserve quantities. Testing for impairment losses is performed for each cash generating unit, which corresponds to licence right, production sharing agreement or equiva- lent owned by Tethys Oil. A cash generating unit thus usually corresponds to each acquired asset in each country in which Tethys Oil carries on oil and gas operations. Impairment testing means that the balance sheet item amount for each cash generating unit is compared to the recoverable amount for the assets, which is the higher of the fair value of the assets less sales expenses and the value in use. The value in use of the assets is based on the present value of future cash flows discounted by a discount rate; see also Note 8 under the section Impairment testing. An impairment loss is recorded when an asset’s or a cash generating unit’s recorded value exceeds the recoverable amount. Impairment losses are charged to the income statement, under Depletion, depreciation and amortisation. Interest Interest on borrowings to finance the acquisition of producing oil and gas properties is charged to income as incurred. Interest on borrowings to finance fields under development is capitalized within oil and gas proper- ties until production commences. Valuation principles financial items The Group classifies its financial assets in the following categories: at fair value through profit or loss, loans and receivables and other liabilities. The Tethys Oil reports a financial asset or a financial liability in the balance sheet when the company becomes a party to the instrument’s contrac- tual terms. The company derecognises a financial liability or part thereof when the obligation stated in the relevant contract is fulfilled or otherwise terminated. Tethys Oil bases the fair value of financial instruments depending on avail- able market data at time of valuation. Data are categorised into three cat- egories; Level 1: quoted prices in active markets. Level 2: valuation based on observable market data. Level 3: valuation techniques incorporating information other than observable market data. The reported value – after any impairment – of accounts receivable and accounts payable is assumed to equate to their fair value, since these entries are short-term in nature. A) Financial assets and liabilities at fair value through profit or loss Financial assets and liabilities at fair value through profit or loss are finan- cial assets held for trading. A financial asset and liabilities are classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are also categorised as held for trading unless they are designated as hedges. Assets and liabilities in this category are classified as current assets or liabilities if expected to be settled within 12 months; otherwise, they are classified as non-current. Financial assets and liabilities carried at fair value through profit or loss are both initially and subsequently recognised at fair value, and transaction costs are expensed in the income statement. B) Receivables and other receivables Receivables and other receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the end of the reporting period. These are classified as non- current assets. The group’s receivables comprise ‘trade and other receiva- bles’ and ‘cash and cash equivalents’ in the balance sheet. Receivables and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. Assets are also measured less provision for impairment. C) Other liabilities Other liabilities are non-derivative financial liabilities with fixed or determi- nable payments that are not quoted in an active market. They are included in current liabilities, except for maturities greater than 12 months after the end of the reporting period. These are classified as non-current liabilities. Other liabilities are recognised initially at fair value and subsequently meas- ured at amortised cost using the effective interest method. D) Impairment of financial assets The group assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. For loans and receivables category, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) dis- counted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in the consolidated income statement. Fixed assets other than oil and gas Other tangible fixed assets are stated at cost less accumulated depre- ciation. Depreciation is based on cost and is calculated on a straight line basis over the estimated economic life of 3 to 5 years for office equipment and other assets. Additional costs to existing assets are included in the assets’ net book 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 Group and the cost of the item can be measured reliably. 55 The net book value of any replaced parts is written off. Other additional expenses are deemed to be repair and maintenance costs and are charged to the income statement when they are incurred. The net book value is writ- ten down immediately to its recoverable amount when the net book value is higher. The recoverable amount is the higher of an asset’s fair value less cost to sell and value in use. Cash and cash equivalents Cash and cash equivalents comprise cash at bank and in hand, including offsetting bank overdrafts, short-term deposits, money market funds and commercial paper that have a maturity of three months or less at the date of acquisition. Equity Share capital consists of the registered share capital for the Parent Com- pany. Share issue costs associated with the issuance of new equity are treated as a direct reduction of proceeds. Excess contribution in relation to the issuance of shares is accounted for in the item additional paid-in-capital. The currency translation reserve contains unrealised translation differ- ences due to the conversion of the functional currencies into the presenta- tion currency. Retained earnings contain the accumulated results attributable to the shareholders of the Parent Company. Provisions A provision is reported when the Company has a legal or constructive obli- gation as a consequence of an event and when it is more likely than not that an outflow of resources is required to settle the obligation and a reli- able estimate can be made of the amount. Provisions are measured at the present value of the expenditures expected to be required to settle the obli- gation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as financial expense. On fields where the Group is required to contribute to site restoration costs, a provision is recorded to recognise the future commitment. An asset is created, as part of the oil and gas properties, to represent the discounted value of the anticipated site restoration liability and depleted over the life of the field on a unit of production basis. The corresponding accounting entry to the creation of the asset recognises the discounted value of the future liability. The discount applied to the anticipated site restoration liability is subsequently released over the life of the field and is charged to financial expenses. Changes in site restoration costs and reserves are treated prospectively and consistent with the treatment applied upon initial recognition. Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised costs using the effective interest method, with interest expense recognised on an effective yield basis. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or a shorter period where appropriate. Revenue Revenues from the sale of oil and gas are recognised in the income state- ment net of royalties in kind or in cash (government take). Revenues asso- ciated with the sale of crude oil are recognized at the fair value of the consideration received or receivable when the significant risks and rewards of ownership have been transferred, which is when title passes from the Company to the customer. For Tethys Oil’s operations, customers take title when the crude oil is loaded onto a tanker. Underlift and overlift Crude oil and natural gas produced and sold, below or above the Com- pany’s working interest share in the related oil and gas property, results in production underliftings, or overliftings. Underliftings are recorded as Other receivables valued at market value, and overliftings are recorded in Other current liabilities and accrued at the market value. Underliftings are reversed from Other receivables when the crude oil is lifted and sold. Over- liftings are reversed from Other current liabilities when sufficient volumes are produced to make up the overlifted volume. Profit oil and cost recovery Blocks 3&4, being Tethys Oil’s main and only producing oil and gas prop- erty, is governed by an Exploration and Production Sharing Contract (EPSA). Under the EPSA, revenues are derived from cost recovery oil and gas and profit oil and gas. Cost recovery oil and gas allows Tethys Oil to generally recover all investments and operating expenses (CAPEX and OPEX). Profit oil and gas is allocated to the host government and contract parties in accordance with their respective equity interests. Other Incidental revenues from the production of oil and gas are offset against capitalised costs of the related cost centre until quantities of proven and probable reserves are determined or commercial production has com- menced. Service income, generated by providing technical and manage- ment services to joint operations, is recognised as other income. Income taxes Presented income taxes include tax payable or tax receivable for the report- ing period, adjustments in regard to previous year’s taxes and changes in deferred tax. Valuations of all tax liabilities/claims is in nominal amounts and are pre- pared in accordance with tax legislation and tax rates decided or announced and at which they are likely to be resolved. The tax expense for the period comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated finan- cial statements. Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Employee benefits Short-term employee benefits such as salaries, social premiums and holi- day pay, are expensed when incurred. Pension obligations The majority of the pension obligations of the Group are governed by legally required social costs. Additional pension schemes exists which are funded through payments to insurance companies. These are defined contribution plans. A defined contribution plan is a pension plan under which the group pays fixed contributions into a separate entity. The Group has no legal or constructive obligations to pay further contributions should this legal entity not hold sufficient assets to pay all employees the benefits relating to employee service in the current or prior periods. Share based incentive programme Equity-settled share based payments are recognized in the income state- ment as administrative expenses and as equity in the balance sheet. The option is measured at fair value at the date of grant using the Black & Scholes options pricing model and is charged to the income statement without revaluation of the value of the option. Severance pay Severance pay is payable when employment is terminated by the Group before the normal retirement date, or whenever an employee accepts volun- tary redundancy in exchange for the severance pay. The Group recognises severance pay when it is demonstrably committed to either: terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal; or providing severance pay as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than 12 months after the balance sheet date are discounted to their present value. Related party transactions Tethys Oil recognises the following related parties: associated companies, jointly controlled entities, members or the family of the key management personnel or other parties that are partly, directly or indirectly, controlled by key management personnel or of its family or of any individual that controls, or has joint control or significant influence over the entity. 56 Parent Company accounting principles The Parent Company has prepared its Annual Report in compliance with Swedish Annual Accounts Act and recommendation RFR 2, Accounting for Legal Entities of the Swedish Financial Reporting Board. Financial instruments Assets and liabilities are recognised initially at fair value plus transaction costs and subsequently measured at amortised cost unless stated other- wise. Financial assets are derecognised when the rights to receive cash flows from the investments have expired, or have been transferred and the Group has transferred substantially all risks and rewards of ownership. IAS 39 is not applied. Political risk Tethys Oil has operations, alone or with partners, in several different coun- tries and can therefore be subject to political risk. The political risks are monitored and factored in when evaluating possible projects. Asset diversi- fication is again Tethys Oil’s principal approach to deal with this risk. Spe- cifically, Tethys Oil also deals with political risk by emphasising continuous close dialog with host country authorities and interest groups, nationally as well as locally. Tethys Oil holds its oil and gas interest through licences, directly or indirectly, which are granted by national governments. Tethys Oil’s operations are often also subject to local permits. Therefore Tethys Oil and the industry are subject to a wide range of political risks on different levels and the business is highly sensitive to political changes. Subsidiaries Holdings in subsidiaries are recognized in the Parent Company financial statements according to the cost method of accounting. The values of sub- sidiaries are tested for impairment when there is an indication of a decline in the value. Group contributions The parent company uses the alternative method in accounting for group contributions and records paid as well as received contributions as appro- priations in the income statement. Taxes The Parent Company’s financial statements recognize untaxed reserves including deferred tax. The consolidated financial statements, however, reclassify untaxed reserves to deferred tax liability and equity. Environment Oil and gas operations can be environmentally sensitive. Tethys Oil devotes considerable effort and expense to identify and mitigate any perceived envi- ronmental risk. The operations are subject to extensive regulatory control with regard to environmental matters, both on national and international levels. Environmental legislation regulates inter alia the control of water and air contamination, waste material, licensing requirements, restrictions on carrying out operations in environmentally sensitive and littoral areas. Key personnel Tethys Oil is dependent on certain key personnel, some of whom have founded the Company at the same time as they are among the existing shareholders and members of the board of directors of the company. These people are important for the successful development of Tethys Oil. The Company actively tries to strike an optimal balance between its depend- ence of key personnel and its methods for retaining these. Note 1, Risk management The Group’s activities expose it to a number of risks and uncertainties which are continuously monitored and reviewed. Presented below are the main risks and uncertainties of the group as identified by the directors and how the group handles these risks. Licenses Tethys Oil’s direct interests are held through agreements with host coun- tries, for example licenses or production sharing agreements. These agree- ments are often limited in time and there are no guarantees that the agree- ments can be extended when a time limit is reached. Operational risk management Technical and geological risk At its current stage of development Tethys Oil is partly commercially produc- ing oil and partly exploring for and appraising undeveloped known oil and/ or natural gas accumulations. The operational risk is different in these differ- ent parts of Tethys Oil’s operations. The main operational risk in exploration and appraisal activities is that the activities and investments made by Tethys Oil and its partners will not evolve into commercial reserves of oil and gas. Oil price The oil price is of significant importance to Tethys Oil in all parts of opera- tions as income and profitability is and will be dependent on prices pre- vailing from time to time. Significantly lower oil prices will reduce current and expected profitability in projects and can make projects sub economic. Lower oil prices could also decrease the industry interest in Tethys Oil’s projects regarding farmout or sale of assets. There were no oil price hedges in place as per 31 December 2016. Tethys Oil’s has a flexible approach towards oil price hedging, based on an assessment of the benefits of the hedge contract in specific circum- stances. Based on analysis of the circumstances Tethys Oil will assess the benefits of forward hedging sales contracts for the purpose of establishing a secured cash flow. If Tethys Oil believes that the hedging contract will provide an enhanced cash flow or if the risk of not being able to meet investment commitments is high, then Tethys Oil may choose to enter into an oil price hedge. Financial risk management The Group’s activities expose it to a variety of financial risks, mainly catego- rized as exchange rate risk and liquidity risk. The Group’s risks are continu- ously monitored and analysed by the board of directors and management. The aim is to minimise potential adverse effects on the Group’s financial performance. Foreign currency risk The Group is exposed to fluctuations in the foreign exchange markets as fluctuations in exchange rates can negatively affect the result, cash flow and equity. The major proportion of the Group’s assets relate to interna- tional oil and gas discoveries valued in USD and which generate revenues in USD. During 2016, all of Tethys Oil’s oil sales and operative expenditures were denominated in USD. The exchange risk affect the Group by transac- tion risk and translation risk. Transaction risk Transaction exposure arises in the cash flow when invoicing or the costs of invoiced goods and services are not in the local currency. By operating in several countries, Tethys Oil is exposed to fluctuations in a number of currencies. Tethys Oil further holds bank accounts denominated in foreign currencies and is exposed to fluctuations in exchange rates. Presented below is the exposure to currencies with reference to items in the financial statements: 2016 100% in USD 99% in USD No 2015 100% in USD 99% in USD No Net result in financial statements (MUSD) Shift in oil price (USD/barrel) 2.7 +5 Revenue Investments 2.7 -5 External financing at year end Total effect on net result (MUSD)* +11.8 -11.8 * Excluding over-/underlift Access to equipment An operational risk factor is access to equipment in Tethys Oil’s project. Especially in the drilling/development phase of a project the group is dependent on advanced equipment such as rigs, casing, pipes etc. A short- age of theses supplies can present difficulties for Tethys Oil to fulfil pro- jects. Limited access to drilling rigs has in the past led to cost increases and has in part been the cause of project delays. Tethys Oil does not currently hedge exchange rates. The Group’s policy is to hold a large portion of liquidity in USD to reduce the exchange rate risk. Translation risk Exchange-rate changes affect the Group in conjunction with the translation of the income statements of group entities to USD as the Group’s operat- ing profit is affected and when net assets are translated into USD which can negatively affect the Group’s operating profit and statement of financial position. The parent company has issued loans to its subsidiaries denomi- 57 nated in USD and exchange rate changes impact the income statement of the parent company. The Group does not hedge its translation exposure and fluctuating currency rates might negatively affect the operating profit and financial position of the Group. Events after the balance sheet date All events up to the date when the financial statements were authorised for issue and which have a material effect in the financial statements have been disclosed. Note 2, Critical accounting estimates and judgements Estimates and judgements are continuously evaluated and are based on historical experience and other factors, including expectations of future events which are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The esti- mates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets within the next financial year are discussed below. Estimates in oil and gas reserves and resources The business of the Group is the exploration for, development of and pro- duction of oil and gas reserves. Estimates of oil and gas reserves and resources are used in the calculations for impairment tests, in-house mod- eling and accounting for depletion and site restoration. Changes in esti- mates in oil and gas reserves and resources, resulting in different future production profiles, will affect the discounted cash flows used in impairment testing, the anticipated date of site decommissioning and restoration and the depletion charges in accordance with the unit of production method. Investments in associated companies The Group determines if the carrying value for investments in associated companies has suffered any impairment where any objective evidence of impairment exists. Objective evidence could for example come from reserve report updates, production reports and other third party studies of the asset. This assessment is performed to identify where the carry- ing value exceeds its recoverable amount. The recoverable amounts have been determined based on value in use calculations. Assessments used in these calculations include judgement of the future cash flows, discount rates and exchange rates. Site restoration provision Amounts used in recording a provision for site restoration are estimates based on current legal and constructive requirements and current technol- ogy and price levels for the removal of facilities and plugging and abandon- ing of wells. Due to changes in relation to these items, the future actual cash outflows in relation to the site decommissioning and restoration can be different. To reflect the effects due to changes in legislation, require- ments and technology and price levels, the carrying amounts of site resto- ration provisions are reviewed on a regular basis. The effects of changes in estimates do not give rise to prior year adjustments and are treated pro- spectively over the estimated remaining commercial reserves of each field. While the Group uses its best estimates and judgement, actual results could differ from these estimates. Impairment of oil and gas properties The Group annually tests, on a field by field basis, oil and gas properties to determine that the net book amount of capitalized costs within each field less royalties and deferred production or revenue related taxes is covered by the anticipated future net revenue from oil and gas reserves attributable to the Group’s interest in related fields (note 8). The Group has used its judgement and made assumptions e.g. future oil prices, discount rates and reserves and resources to perform these tests. Tax The company has not recorded a deferred tax asset in relation to the tax losses carried forward as there is uncertainty as to if the tax losses may be utilised (note 15). Net result in financial statements (MUSD) Shift in SEK/USD Total effect on net result (MUSD) 2.7 +10% 4.1 2.7 -10% -4.2 Liquidity risks and capital risk By operating in several countries, Tethys Oil is exposed to fluctuations in a number of currencies. Income is and will also most likely be denominated in foreign currencies, US dollars in particular. Furthermore, Tethys Oil has since inception been equity and debt financed through share and bond issues and bank loans and also financed by asset divestment. Additional capital could be needed to finance Tethys Oil’s future operations and/or for acquisition of additional licences. The main risk is that this need could occur during less favourable market conditions. Tethys Oil continuously ensures that sufficient cash balances are maintained in order to cover day to day operations. Management relies on cash forecasting to assess the Company’s cash position (including available amounts from lending facility) based on expected future cash flows. Fall due profile on Tethys Oil’s financial liabilities 31 December 2016 31 December 2015 MUSD <1 year 1–3 year <1 year 1–3 year Accounts payables and other liabilities Total 21.7 21.7 – – 12.2 12.2 – – Credit risk Tethys Oil’s policy is to limit credit risk by limiting the counter-parties to major banks and oil trading companies. Tethys Oil is selling all of its oil through Mitsui Energy Trading Singapore which is part of Mitsui & Co. Ltd. As at 31 December 2016 the Group’s receivables on oil sales amounted to MUSD 7.1 (MUSD 7.5), this also represents the maximal exposure on accounts receivable. There is no history of default. Cash and cash equiv- alents are maintained with banks having strong long-term credit ratings. Maximal exposure regarding other financial assets are those presented in the balance sheet. It is the responsibility of the board of directors to overview the Group’s capi- tal structure and financial management, approve certain business regard- ing acquisition, investments, possible lending as well as on-going monitor- ing exposure to financial risks. Fair value IAS 39 valuation categories and related balance sheet items 31 December 2016 Financial assets and liabilities at fair value Financial assets at Financial liabilities at MUSD through profit or loss amortised cost amortised cost Other receivables Cash and bank Accounts payables Other current liabilities – – – – 7.4 39.0 – – 31 December 2015 – – 0.2 21.5 Financial assets and liabilities at fair value Financial assets at Financial liabilities at MUSD through profit or loss amortised cost amortised cost Other receivables Cash and bank Accounts payables Other current liabilities – – – – 9.2 51.2 – – – – 0.1 12.1 All financial assets and liabilities are current and the fair value of these are deemed to be the carrying amount as the discounting effects are not material. 58 Note 3, Segment information The Group’s accounting principle for segment describes that operating segments are based on geographic perspective and reported in a manner consistent with the internal reporting which is primarily based on income statement ratios and provided to the executive management, which is con- sidered to be the chief operating decision maker. Previous years, the com- pany’s chief operating decision maker has been considered to be the board of directors. There have been no changes to the operating segments due to the change of operating decision maker. The operating result for each segment is presented below. Revenue and income relate to external (non- intra group) transactions. MUSD Revenue Operating expenses Depreciation, depletion and amortisation Exploration costs Other income Net profit/loss from associates Administrative expenses Operating result Total financial items Result before tax Income tax Result for the period MUSD Revenue Operating expenses Depreciation, depletion and amortisation Exploration costs Other income Net profit/loss from associates Administrative expenses Operating result Total financial items Result before tax Income tax Result for the period Oman 87.1 -36.5 -44.4 – – – -1.7 4.5 Oman 107.0 -42.9 -34.6 -1.0 – – -1.7 26.8 Group income statement Jan–Dec 2016 Lithuania Sweden Other – – – – – -0.7 – -0.7 – – – – – – -3.6 -3.6 – – – -0.1 – – -0.4 -0.5 Group income statement Jan–Dec 2015 Lithuania Sweden Other – – – – – -0.4 – -0.4 – – – – – – -3.4 -3.4 – – – – – – -0.1 -0.1 Total 87.1 -36.5 -44.4 -0.1 – -0.7 -5.8 -0.5 3.1 2.7 – 2.7 Total 107.0 -42.9 -34.7 -1.0 – -0.4 -5.2 23.0 0.5 23.5 -0.1 23.4 As per 31 December 2016 (and comparative periods) in Tethys Oil, the only oil producing area is Oman, from which net sales are recorded. Revenue, operating expenses and depletion, which is presented in notes 4, 8 and 9, therefore only relate to Oman and Blocks 3&4 in particular. Regarding Oil and gas properties, segment reporting is provided in note 8. Please refer to note 3 regarding Credit risk exposure on accounts receivables. Note 4, Revenue MUSD Net sales, Underlift (overlift) Overlift adjustment Export Reporting Error Revenue 2016 95.4 -2.4 -5.9 87.1 2015 104.9 2.2 – 107.0 2016 includes an overlift adjustment of MUSD 5.9 following the estimated effects of a export reporting error on Blocks 3&4 (the “Export Reporting Error”), which occurred during the period August 2010 to February 2016. Tethys Oil estimates that its share of the overestimated volume of oil amounts to 157,000 barrels (before government take). To rectify the over- reported quantity of delivered oil, the Blocks 3&4 partners have agreed with the pipeline operator and the Ministry of Oil and Gas to repay the over-lifted amount in cash. Tethys Oil estimates, that Tethys Oil’s share of the cash repayment, will amount to approximately MUSD  5.9, which consequently will reduce Tethys Oil’s 2016 revenue and result with that amount. Tethys Oil sells all of its oil through Mitsui Energy Trading Singapore, which is part of Mitsui & Co Ltd. All oil sales come from Blocks 3&4 and are made on a monthly basis. The selling price is the monthly average of the two month future price for Omani blend. Note 5, Other income Parts of the administrative expenses in Tethys Oil, such as overhead costs in the Parent company, are charged to oil and gas projects where the expen- ditures are capitalised. Other income in the Parent company during 2016 amounted to MSEK 10.6 compared to MSEK 10.5 in 2015. In case of Tethys Oil being the operator, these administrative expenditures are, through the above, also funded by the partners. The chargeout to the projects where Tethys Oil is operator is presented in the consolidated income statement as Other income. All other internal chargeouts are eliminated in the con- solidated financial statements. Tethys Oil is as per 31 December 2016 not operator in any of its licences. 59 Note 6, Associated companies Tethys Oil holds an indirect interest of three Lithuanian companies hold- ing three licences; Gargzdai, Rietavas and Raiseiniai licences. The interest is held through two Danish private companies which are part of the Odin Group of companies, Odin Energi and Jylland Olie. The table below presents the ownership and the result from associates for the full year 2016. owns of owns of owns of owns of Tethys Oil AB (publ) 50% Odin Energy A/S 50% UAB Minijos Nafta 40% Jyllands Olie ApS 75% UAB TAN Oil 100% Gargzdai, Lithuania 100% Raseiniai, Lithuania 100% UAB LL Investicijos 100% Rietavas, Lithuania Tethys Oil’s indirect interest 25% 30% 30% MUSD 1 January Tethys Oil’s share of net profit from associated companies Dividend from associated companies Exchange differences Balance end of period 31 Dec 2016 31 Dec 2015 1.7 -0.7 -0.7 – 0.3 5.2 -0.4 -2.7 -0.4 1.7 Note 7, Provisions Tethys Oil estimates that Tethys Oil’s share of site restoration regarding Blocks 3&4 amounts to MUSD 4.8 (4.0). As a consequence of this provi- sion, oil and gas properties have increased with an equal amount. The change in the provision is related to a more detailed calculation of the site restoration provision affecting the provision’s net present value. Tethys Oil has a non-current provision of MUSD 4.0 from of the estimated total error amount of MUSD 5.9 from the Export Reporting Error on Blocks 3&4. Tethys Oil also has a current provision of 1.9 MUSD  related to the Export Reporting Error. MUSD 1 January 2016 Additions Changes in estimates Unwinding of discount 31 December 2016 Current Non-current Total Abandonment provision Other provisions MUSD Abandonment provision Other provisions 4.0 – 0.5 0.3 4.8 – 4.8 4.8 – 1 January 2015 5.9 Additions – – 5.9 1.9 4.0 5.9 Changes in estimates Unwinding of discount 31 December 2015 Current Non-current Total 3.3 – 0.5 0.2 4.0 – 4.0 4.0 – – – – – – – – Note 8, Oil and gas properties Country Licence name Phase Expiration date commitments Tethys Oil Partners (operator in bold) Remaining Blocks 3&4 Production July 2040 Exploration Exploration 20151 20151 None None 30% 40% CCED, Mitsui, Tethys Oil Galli Coz, Tethys Oil MUSD 1.52 37.5% Tethys Oil, MouvOil Production No expiration date None Exploration No expiration date None Exploration Sep 2022 MEUR 1.2 25% 30% 30% Odin, GeoNafta, Tethys Oil Odin, Tethys Oil, private investors Odin, Tethys Oil, private investors 31 Dec 2016 31 Dec 2015 190.8 0.3 191.1 189.1 – 189.1 Oman France France Lithuania Lithuania Lithuania MUSD Attila Alès Gargzdai3 Rietavas3 Raseiniai3 Producing cost pools Non-producing cost pools Total oil and gas properties 1 In accordance with the licence terms, Tethys Oil has in connection with the licence extension filed a mandatory application of relinquishment of part of the licence which is still pending approval from French authorities. Discussions regarding the future of the French licences are ongoing. 2 Tethys Oil has a commitment towards the partner MouvOil and the French authorities to pay for seismic and drilling. The work is estimated to amount to MUSD 1.5. 3 The interest in the three Lithuanian licences are indirectly held through a shareholding in two Danish private companies, which in turn hold shares in Lithuanian companies holding 100 percent of the licences. The two Danish companies, Odin Energi and Jylland Olie, are not consolidated in Tethys Oils financial statements due to the ownership structure, which is why there are no oil and gas properties related to the licences. The ownership of Jylland Olie and Odin Energi are presented in the balance sheet under Shares in associated companies. 60 MUSD Book value adjustments 1 Jan–31 Dec 1 Jan–31 Dec Other non–cash DD&A Exploration costs Investments 1 Jan–31 Dec Country Asset type 31 Dec 2016 1 Jan–31 Dec 2016 Oman Blocks 3&4 Producing 190.8 -2.1 -2.1 -44.4 Book value adjustments 1 Jan–31 Dec 1 Jan–31 Dec Other non–cash DD&A Exploration costs Investments 1 Jan–31 Dec – – – – – – – – Oman Block 15 Non-producing France Attila Non-producing France Alès Non-producing New ventures Non-producing Total MUSD – – – 0.3 191.1 Country Asset type 31 Dec 2015 1 Jan–31 Dec 2015 Oman Blocks 3&4 Producing 189.1 17.6 Oman Block 15 Non-producing France Attila Non-producing France Alès Non-producing New ventures Non-producing Total – – – 0.1 189.1 Impairment testing In Tethys Oil’s impairment testing, the Company uses its best efforts to estimate production profiles, general cost and development environment. To calculate future free cash flows, the forward oil price as traded in the market as per 31 December 2016 was used. With regard to discount rates, a rate of 8 per cent after tax has been used for Omani and Lithuanian assets respectively. There has been no impairment of assets during 2016 or 2015. Exploration costs during 2016 amounted to MUSD  0.1 and were mainly related to new venture projects which were rejected or no longer pursued. Exploration costs during 2015 amounted to MUSD  1.0 and were mainly related to Block 15 as the project was terminated during the year. 2016 -44.4 – – – – 2015 -34.6 – – – – 2016 – – – – -0.1 -0.1 2016 48.2 – – – 0.3 48.5 2015 – -1.0 – – – -1.0 2015 40.7 – – – 0.1 40.7 Book value 1 Jan 2016 189.1 – – – 0.1 189.1 Book value 1 Jan 2015 165.4 1.0 – – – 166.4 17.6 -34.6 Note 9, Operating expenditures Operating expenditures Production costs Well workovers Total Group MUSD Parent MSEK 2016 -33.5 -3.1 -36.5 2015 -38.4 -4.5 -42.9 2016 2015 – – – – – – Note 10, Remuneration to Company auditor Group MUSD Parent MSEK Remuneration to company audi- tor include: 2016 2015 2016 2015 MUSD Investments Block 3&4 Categories Drilling – Exploration/Appraisal Drilling – Development G&G Facilities Pipeline Other capex Total MUSD 2016 -2.4 -25.5 -4.1 -10.7 -1.6 -3.9 -48.2 PwC: Audit fee Audit-related fees Tax consultation Other Total 2015 -4.8 -14.4 -8.4 -7.6 -2.9 -2.6 -40.7 -0.1 -0.1 0 – – 0 – – -1.0 -0.2 – – -1.0 -0.2 – – -0.1 -0.1 -1.2 -1.2 Note 11, Administrative expenses Group MUSD Parent MSEK Administrative expenses 2016 2015 Personnel costs Rent Other office costs Listing costs Costs of external relations Other costs Total -3.5 -0.3 -0.1 -0.1 -0.1 -1.7 -5.8 -2.9 -0.3 -0.3 -0.1 -0.1 -1.5 -5.2 2016 -16.5 -1.8 -0.5 -0.8 -1.1 -10.5 -31.3 2015 -13.7 -1.7 -1.6 -1.0 -1.0 -10.2 -29.2 Oil & gas properties Block 3&4 Categories 31 Dec 2016 31 Dec 2015 Drilling – Exploration/Appraisal Drilling – Development G&G Facilities Pipeline Tethys Oil sole cost Other capex Accumulated depreciation Total 37.8 107.9 38.2 83.1 22.1 5.1 35.4 -138.9 190.8 35.3 80.9 33.8 71.8 20.4 4.5 36.9 -94.5 189.1 61 Note 12, Employees Average number of full time 2016 2015 employees per country Total Total men Total Total men Parent company Sweden Total parent company Subsidiary companies in Sweden Subsidiary companies foreign Oman United Arab Emirates Total subsidiary companies foreign Total group 7 7 – 10 2 12 19 5 5 – 7 1 8 13 6 6 – 9 2 11 17 4 4 – 6 1 7 11 Salaries and other remuneration to Pension Share based executive management Basic arrange- Variable long term Other during 2016, MSEK salary ments Salary incentive* benefits Total 2016 Managing director -2.082 -0.443 -0.340 -1.288 -0.012 -4.164 Other executive manage- ment -3.080 -0.485 -0.454 -1.584 -0.241 -5.844 Total -5.162 -0.928 -0.794 -2.872 -0.253 -10.008 Salaries and other remuneration to Pension Share based executive management Basic arrange- Variable long term Other during 2015, MSEK salary ments Salary incentive* benefits Total 2015 Managing director -1.733 -0.324 -0.405 -1.413 -0.011 -3.886 Other executive manage- ment -2.217 -0.432 -0.405 -1.397 -0.023 -4.474 TSEK 2016 2015 Total -3.950 -0.756 -0.810 -2.810 -0.034 -8.360 Salaries, other remune- ration Salaries, other Social remune- costs ration Social costs * Received warrants from the incentive programme in 2016 has been for the managing director 70,000 (78,000) and Other executive management 87,000 (78,000) totaling 157,000 (156,000). See note 21 for further details. Salaries, other remuneration and social costs Parent company Sweden Total parent company Subsidiary companies in Sweden Subsidiary companies foreign Oman United Arab Emirates Total subsidiary companies foreign Total group -1.4 -1.4 -1.3 -0.3 -1.6 -3.1 -0.4 -0.4 – – – -0.4 -1.2 -1.2 -1.0 -0.3 -1.3 -2.5 -0.4 -0.4 – – – -0.4 TSEK 2016 2015 Salaries and other remuneration distributed between the board Board and Managing Board and Other Managing Other and other employees Director employees Director employees Parent company Sweden Total parent company Subsidiary companies in Sweden Subsidiary companies foreign Oman United Arab Emirates Total subsidiary companies foreign -0.5 -0.5 – – – – Total group -0.5 -0.9 -0.9 – -1.3 -0.3 -1.6 -2.6 -0.5 -0.5 – – – – -0.5 -0.7 -0.7 – -1.0 -0.3 -1.3 -2.0 The average number of full time employees in the group is currently 19. Magnus Nordin as managing director is entitled to twelve months payment if the Company terminates the employment and other members of execu- tive management are entitled to nine months payment if the Company ter- minates their employment. Executive management consists of three members of which the managing director is one. In 2016 and 2015 one woman has been a member of the board of directors and no women have been members of the executive management. MSEK Salaries and other remunera- tion to board members (in their Remune- capacity as board members) Salaries ration Total 2016 Total 2015 Atten- dance 2016 Per Brilioth Dennis Harlin Staffan Knafve Magnus Nordin Jan Risberg Katherine Støvring Geoffrey Turbott Richard Rettig Total – – – – – – – – – -0.250 -0.250 -0.225 13/16 -0.560 -0.560 – 16/16 – – – – – – -0.500 – – 16/16 -0.250 – -0.250 -0.250 -0.225 15/16 -0.250 -0.250 -0.250 -0.250 – – 16/16 8/9 -1.560 -1.560 -1.200 At the Annual General Meeting of shareholders on 18 May 2016 Per Brili- oth, Magnus Nordin, Dennis Harlin, Katherine Støvring and Geoffrey Turbott were re-elected members of the board. Richard Rettig was a newly elected director. No deputy directors were appointed. At the same meeting Dennis Harlin was appointed chairman of the board. There have not been any agreements on pensions for any of the directors of the board. For the executive management, the pension costs follow a defined contribution plan. Remuneration policy to executive management Remuneration policy to the executive management includes five elements: • Basic salary • Pension arrangements • Yearly variable salary, including the right to participate in share-based long-term incentive • Other benefits • Severance pay Basic salary The basic salary shall be in line with market conditions, be competitive, and shall take into account the scope and responsibility associated with the position, as well as the skills, experience, and performance of the executive. Pension arrangements The pension benefits comprise a defined contribution scheme with premi- ums calculated on the full basic salary. The pension contributions shall be in relation to the basic salary and is set on an individual basis but shall not be higher than what is tax deductible. 62 Variable salary Senior executives shall be part of two variable remuneration systems pay- able in cash and/or in combination with a right to acquire warrants in the Company in a long-term incentive programs. Variable salary to employees will be based upon their individual contribution to the Company’s perfor- mance. The yearly variable cash salary shall be within the range of 1-4 monthly salaries per person and year. The targets for variable cash remu- neration shall be determined by the board prior to each financial year and individual agreements shall be arranged with each participant, the content of which depends on the participant’s position at the time the agreement is arranged. The targets shall be objectively quantifiable and related to budget. The targets shall consist of financial and operational key indicators. The yearly variable salary will be determined annually in connection with publi- cation of the year-end report for the respective financial year based on an evaluation of the participants’ achievement of the targets as described in the individual agreements. Payment of variable cash remuneration shall be conditional upon the participant remaining employed for the duration of the programme. The board has the right to adjust the incentive program dur- ing the term of the programme in the case of, for example, extraordinary increases or decreases in the group’s earnings. Share based incentive programme The share based incentive programme has the purpose to retain and recruit qualified and committed personnel on a global market for oil companies. The programme is available to all employees and is intended to be re- occurring annually. Other benefits Non-financial benefits shall be based on market terms and shall facilitate the duties of each senior executive. Severance arrangements A termination period of twelve months applies between the Company and managing director and nine months between the company and other mem- bers of executive management. All members of executive management are entitled to twelve months payments if the Company terminates their contracts. The board is entitled to deviate from the proposed guidelines if special reasons exist. Note 13, Financial income and similar items Interest income Gain on currency exchange rates Other financial income Anticipated dividend Total Group MUSD Parent MSEK 2016 2015 2016 2015 – 9.1 0.3 – 9.3 – 7.0 0.2 – 7.1 9.0 73.7 2.4 – 85.1 4.1 55.3 1.5 350.0 410.9 Note 14, Financial expenses and similar items Interest expenses Currency exchange losses Other financial expenses Total Group MUSD Parent MSEK 2016 2015 2016 2015 -0.6 -3.8 -1.8 -6.2 -1.0 -4.4 -1.2 -6.6 – -31.2 -0.3 -31.5 – -35.7 -2.5 -38.2 Note 15, Tax The group’s income tax charge amount to MUSD 0.0 (MUSD 0.1). The com- pany has not recorded a deferred tax asset in relation to the tax losses carried forward since there is uncertainty as to if the tax losses may be utilised. The tax losses are in another jurisdiction than where main prof- its are generated. Tax losses carried forward amounted to MSEK 200.7 (MSEK 234.5). There are no time limits to the utilization of the tax losses. The tax on the Parent company’s result before tax differs from the theoreti- cal amount that would arise using the Swedish tax rate as follows: Parent MSEK Result before tax Tax at applicable tax rate 22% Non-deductible expenses Non-taxable income Utilization of tax loss carry forwards previously not recorded as deferred tax assets Tax expense 2016 23.4 -5.1 -3.1 0.5 7.7 0.0 In Oman, Tethys Oil’s oil and gas operations are governed by an Exploration and Production Sharing Agreement (EPSA), where it is stated that Tethys Oil is subject to income tax as per the Companies Tax Law. Under the EPSA, Tethys Oil receives its share of oil after government take (i.e net after royal- ties taken in kind). Omani income taxes are paid on behalf of Tethys Oil by the government and from the government take. As Omani income tax is not paid directly by Tethys Oil and are taken in kind before net sales, these taxes are not presented in the income statement. Based on this, taxes presented in the income statement are expected to be low in the future. Note 16, Other receivables Other receivables 2016 2015 2016 2015 Group MUSD Parent MSEK VAT Receivables Oil sales Other Total 0.1 7.1 0.3 7.4 0.1 7.5 1.6 9.2 2.7 – 0.2 2.8 0.6 – 0.2 0.8 Note 17, Shareholders’ equity As per 31 December 2016, the number of outstanding shares in Tethys Oil amount to 35,543,750, with a quota value of SEK 0.17. All shares rep- resent one vote each. The Company has the same amount of shares out- standing as per 31 December 2015. Tethys Oil has a warrant based incen- tive programme for employees, for further information please see Note 21. As the subscription price is below the share price as per the reporting date in this report, the warrants are included in the diluted number of shares which amount to 36,232,460 per 31 December 2016. As per 31 December 2016, Tethys Oil held 1,329,224 of its own shares which have been purchased since commencement of the programme during the fourth quarter 2014. 245,555 shares were purchased during 2016. The repurchased shares are still included in the total number of shares, but are not included in the average number of shares in circulation. The weighted average number of shares in circulation during 2016 before dilu- tion is 34,324,020 and after dilution 34,372,065. After 31 December 2016 and up to the date of publication for this report, Tethys Oil has not acquired any further shares. 63 Earnings per share Earnings per share before dilution are calculated by dividing profit for the year attributable to ordinary shareholders of the Parent Company by weighted average number of ordinary shares outstanding and in circulation during the year. Total repurchased shares amounting to 1,329,224 have been excluded from shares in circulation. Earnings per share after dilution are calculated by dividing profit for the year attributable to ordinary shareholders of the Parent Company by weighted average number of ordinary shares outstanding and in circulation during the year while also including the effect of warrants where the subscription price is below the share price. There are no dilution effects for 2015. Appropriation of profit The Board of Directors proposes to the annual general meeting a total distribution of SEK 1.00 (SEK 1.00) per share, equal to MSEK 34.2 (MSEK 34.5) or MUSD 3.6 (MUSD 3.7), be paid for the 2016 fiscal year. The distri- bution is proposed to be made by a cash dividend of SEK 1 per share. It is also proposed to the annual general meeting that the balance of retained earnings after the dividend be retained in the business. Note 18, Non-current liabilities Tethys Oil has a four-year, up to MUSD 38, senior revolving reserve based lending facility. Security for the facility is the interest in the Blocks 3&4 licence. The interest rate of the credit facility is floating between LIBOR + 3.75 percent to LIBOR + 4.00 percent per annum, depending on the level of utilization of the facility. As per 31 December 2016 there was no outstand- ing balance on the lending facility. Note 19, Accrued expenses Accrued expenses 2016 2015 2016 2015 Group MUSD Parent MSEK Accruals related to oil and gas operations Other accrued expenses Total 9.7 0.1 9.8 19.8 0.4 20.2 – 0.2 0.2 – 0.4 0.4 Note 20, Shares in subsidiaries Reg. Number 556658-1467 556658-1442 556658-1913 556658-1483 556658-1491 556788-2872 95212 101981 549 282 Company Tethys Oil Denmark AB Tethys Oil Spain AB Tethys Oil Turkey AB Tethys Oil Exploration AB Tethys Oil France AB Tethys Oil Canada AB Tethys Oil Oman Ltd Tethys Oil Block 3&4 Ltd Windsor Petroleum (Spain) Inc. MSEK Shares in subsidiaries 1 January Acquisitions/Relinquishments Shareholder’s contribution Write down of shares in subsidiaries 31 December Reg. office Number of shares Percentage per share Nominal value Sweden Sweden Sweden Sweden Sweden Sweden Gibraltar Gibraltar British Virgin Islands 1,000 1,000 1,000 1,000 1,000 1,000 100 1,000 1 100% 100% 100% 100% 100% 100% 100% 100% 100% SEK 100 SEK 100 SEK 100 SEK 100 SEK 100 SEK 100 GBP 1 USD 1 USD 1 Parent Parent 31 December 2016 31 December 2015 7.3 -6.4 0.4 -0.4 1.0 1.5 2.4 3.5 -0.1 7.3 The write down of shares in group companies is mainly related to the exploration costs in various group entities described in note 8. 64 Note 21, Incentive programme Tethys Oil has an incentive programme as part of the remuneration pack- age to employees. The allocation is not guaranteed and the board of direc- tors of the Company shall resolve on and implement the allocation. The warrants have been transferred free of charge to the participants and the group accounts for any income tax for the participants to the extent such tax is attributable to the programme. The market value of the warrants has been calculated in accordance with the Black & Scholes formula by an independent valuation institution. The subscription price is based on the volume-weighted average of the purchase price for the Company’s share on NASDAQ OMX Stockholm during approximately a two week period prior to the date of allocation. Warrants were issued 2016 and 2015 following a decision by the respec- tive AGM. The number of issued warrants during 2016 was 350,000 (356,000) and the number of warrants allocated during 2016 was 335,000 (312,000). Issued but not allocated warrants are held by the company. No warrants were exercised during the year. Warrant incentive programme Exercise period 2015 incentive programme 23 May – 5 Oct, 2018 2016 incentive programme 28 May – 4 Oct, 2019 Subscription price, SEK 76,8 62,6 Total Number of warrants 1 Jan 2016 Issued 2016 Expired 2016 Exercised 2016 31 Dec 2016 356,000 0 356,000 0 350,000 350,000 0 0 0 0 0 0 356,000 350,000 706,000 Warrant incentive programme Exercise period Subscription price, SEK 2015 incentive programme 23 May – 5 Oct, 2018 76,8 Total Number of warrants 1 Jan 2015 Issued 2015 Expired 2015 Exercised 2015 31 Dec 2015 0 0 356,000 356,000 0 0 0 0 356,000 356,000 Group MUSD Parent MSEK Warrant incentive programme 2016 2015 2016 2015 Incentive programme cost Total -0.7 -0.7 -0.6 -0.6 -4.6 -4.6 -4.2 -4.2 Note 22, Pledged assets As per 31 December 2016, pledged assets amounted to MUSD  173.2 (213.0). Pledged assets are mainly a continuing security with regard to the credit facility where Tethys Oil has entered into a pledge agreement. The pledge relates to all shares in the subsidiary Tethys Oil Block 3&4 Ltd for the benefit of the lenders in the credit facility and the value of the pledge is equal to the shareholders’ equity value in Tethys Oil Block 3&4 Ltd. Of pledged assets, MUSD  0.1 (0.1) relate to a pledge in relation to office rental in the parent company. Note 23, Contingent liabilities There are no outstanding contingent liabilities as per 31 December 2016, nor for the comparative period. Note 24, Appropriations Parent (MSEK) Paid group contributions Received group contributions Total 2016 – 3.1 3.1 2015 -41.6 1.2 -40.4 As the subscription price is below the share price as per 31 December 2016, the warrants are included in the diluted number of shares which amount to 36,232,460 on the balance day and in the diluted average num- ber of shares in circulation during the fourth quarter ending 31 December 2016 of 34,405,662. The cost is calculated in accordance with the Black & Scholes formula where the main inputs are the factors in the above table and the expected volatility. The cost for the incentive programme is included as part of administrative expenses and includes tax and social charges where applicable Note, 25 Related party transactions In the Tethys Oil Group, Tethys Oil AB (publ) with organisational number 556615-8266 is the parent company. There have been no related party transaction during 2016 nor for the comparative period. Note, 26 Subsequent events In December 2016, OPEC and certain non-OPEC members agreed to reduce each country’s oil production for an initial period of six months starting 1 January 2017. Oman agreed to reduce production by 45,000 bopd. The Oman Ministry of Oil and Gas has advised the larger producers in the coun- try of a production level recommendation. For Blocks 3&4 the production level recommendation is 41,000 bopd, or 12,300 bopd net to Tethys Oil. However, the recommendation also includes a recommendation to compen- sate individual production shortfalls within the group of producers. Tethys Oil’s share of the production, before government take, from Blocks 3&4 amounted in January and February 2017 to 383,059 and 347,152 barrels of oil respectively, corresponding to 12,357 and 12,398 barrels of oil per day, respectively. 65 Assurance The board of directors and the managing director declare that the consolidated financial statements have been prepared in accord- ance with IFRS as adopted by the EU and give a true and fair view of the Group’s financial position and results of operations. The financial statements of the Parent Company have been pre- pared in accordance with generally accepted accounting principles in Sweden and give a true and fair view of the Parent Company’s financial position and results of operations. The statutory Admin- istration Report of the Group and the Parent Company provides a fair review of the development of the Group’s and the Parent Company’s operations, financial position and results of operations and describes material risks and uncertainties facing the Parent Company and the companies included in the Group. Stockholm, 18 April 2017 Dennis Harlin, chairman of the board Per Brilioth, director Katherine Støvring, director Geoffrey Turbott, director Magnus Nordin, managing director Richard Rettig, director 66 Auditor’s report To the general meeting of the shareholders of Tethys Oil AB (publ), corporate identity number 556615-8266 Report on the annual accounts and consolidated accounts Opinions We have audited the annual accounts and consolidated accounts of Tethys Oil AB (publ) for the year 2016. The annual accounts and consolidated accounts of the company are included on pages 38–66 in this document. In our opinion, the annual accounts have been prepared in accord- ance with the Annual Accounts Act and present fairly, in all material respects, the financial position of parent company as of 31 December 2016 and its financial performance and cash flow for the year then ended in accordance with the Annual Accounts Act. The consolidated accounts have been prepared in accordance with the Annual Accounts Act and present fairly, in all material respects, the financial position of the group as of 31 December 2016 and their financial performance and cash flow for the year then ended in accordance with International Financial Reporting Standards (IFRS), as adopted by the EU, and the Annual Accounts Act. The statutory administration report is consistent with the other parts of the annual accounts and consolidated accounts. We therefore recommend that the general meeting of shareholders adopts the income statement and balance sheet for the parent com- pany and the group. Basis for Opinions We conducted our audit in accordance with International Standards on Auditing (ISA) and generally accepted auditing standards in Swe- den. Our responsibilities under those standards are further described in the Auditor’s Responsibilities section. We are independent of the parent company and the group in accordance with professional eth- ics for accountants in Sweden and have otherwise fulfilled our ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinions. Our audit approach Audit scope Tethys Oil is a Swedish Oil and Gas company with its primary opera- tions located in Oman. The operations in Oman represented 100% of the group’s revenue for the financial year 2016 and 80% of the group’s assets as per 31 December 2016. We designed our audit by determin- ing materiality and assessing the risks of material misstatement in the consolidated financial statements. In particular, we considered where the Board of Directors and the Managing Director made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including among other matters consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud. We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the consolidated financial statements as a whole, taking into account the structure of the Group, the accounting processes and controls, and the industry in which the group operates. Our planning of the audit included an assessment of the level of audit work to be performed at the group’s headquarters and at local offices. Following the group’s organisation certain processes for accounting and financial reporting is performed outside the group’s headquarter which means that we performed our audit work both at the group’s headquarters but also at the local office in Oman, where we have obtained reporting from specified procedures performed by our component team in Oman. We have obtained reporting from our component auditors at two occasions in the 2016 financial year and we have reported the results from our procedures to management and the Audit Committee after the review of the Report for the nine months period ended 30 Septem- ber, 2016 and after the year-end audit of the financial year 2016. Materiality The scope of our audit was influenced by our application of material- ity. An audit is designed to obtain reasonable assurance whether the financial statements are free from material misstatement. Misstate- ments may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. Based on our professional judgement, we determined certain quan- titative thresholds for materiality, including the overall group mate- riality for the financial statements as a whole. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and in aggregate on the financial statements as a whole. We chose income before tax as the benchmark because, in our view, it is the benchmark against which the performance of the Group is most commonly measured by users, and is a generally accepted bench- mark. While the underlying business and level of operating activities across the group, including production volumes and transactions pro- cessed, are broadly consistent with prior years, income before tax has been materially impacted by the volatility in the oil price. Auditing standards specifically acknowledge that an alternative approach to determining materiality may be more appropriate where revenue and income are volatile and not representative of underlying or sustained business performance. Given the volatility in the profit before tax as a result of the volatility in the oil price, we have determined that our materiality should be based on an average of income before tax for the years 2014, 2015 and 2016. Key audit matters Key audit matters of the audit are those matters that, in our profes- sional judgment, were of most significance in our audit of the annual accounts and consolidated accounts of the current period. These mat- ters were addressed in the context of our audit of, and in forming our opinion thereon, the annual accounts and consolidated accounts as a whole, but we do not provide a separate opinion on these matters. 67 Key audit matter Recoverability of the carrying value of oil and gas properties The carrying value of oil and gas properties represents the majority of the assets in the balance sheet in the group and amounted to MUSD 191.1 (MUSD 189.1) as per 31 December 2016. The carrying value of oil and gas properties is supported by the higher of either value in use calculations or fair value less cost of disposal (recoverable amount). Management has prepared an impairment test for the oil and gas properties associated with Blocks 3&4 in Oman. The test with the aim to assess the recoverability of the carrying value requires management to exercise significant judgement as described in the Accounting policies as well as in note 2 and 8 to the Annual Report where there is a risk that the valuation of oil and gas properties and any potential impairment charge or reversal of impairment may be incorrect. Management’s test requires consideration of a number of factors, including but not limited to, the Group’s intention to proceed with a future work programme, the success of future drilling, the size of proved and probable reserves, prospective resources, short and long term oil prices, future costs as well as discount and inflation rates. The estimation of oil and natural gas reserves and prospective resources is a significant area of judgement due to the technical uncertainty in assessing the estimated quantities. The estimates of proven and probable reserves has a direct impact on depletion charges forms the basis of the estimation of future planned production applied in the impairment tests of oil and gas properties. The estimation of reserves are also a fundamental indicator of the future potential of the group’s performance and therefore becomes critical information provided in the annual accounts. The estimates of proven and probable reserves are certified by the group’s external reserves auditor, DeGolyer and MacNaughton, which is considered to be an expert firm in this area. The estimates of prospective resources are performed by the group’s in-house reservoir engineer. Management has in incorporated all these determining the recoverable amount of the assets and compared it with the carrying value. This test has concluded that the carrying value of oil and gas properties associated with Blocks 3&4 is considered to be recoverable. judgmental factors how our audit addressed the Key audit matter We have obtained management’s impairment test prepared for the purposes of determining the recoverable amount of oil and gas properties. The assumptions that underpin management’s calculation of the recoverable amount of oil and gas assets are inherently judgmental. Our audit work therefore assessed the reasonableness of management’s key judgements of the recoverable amount of Blocks 3&4. Specifically our work included, but was not limited to, the following procedures: • comparison of short-term oil price assumptions against external oil price forward curves; • comparison of long-term oil price assumptions against views published by brokers, economists, consultancies and respected industry bodies, which provided a range of relevant third-party data points; • comparison of production profiles and proved and probable reserves to the reserve reports from DeGolyer and MacNaughton and prospective resources estimates prepared by in-house reservoir engineer; • verification of estimated future operating costs and capital expenditures by agreement to budgets and where applicable, third party data; • assessing the reasonability of the assumptions for inflation and discount rate; • testing of the mathematical accuracy of the model to calculate the recoverable amount. We obtained the estimation of proven and probable reserves certified by the group’s external reserves auditor and management’s in-house estimation of prospective resources. Our audit work included but was not limited to: • determining that the group’s process for collecting reserve reports was timely and robust; • assessing competence and objectivity of DeGolyer and MacNaughton, to satisfy ourselves they were appropriately qualified to carry out the volumes estimation; • assessing the process for making in-house estimates of prospective resources; • validation that the updated included appropriately in the group’s consideration of impairment and in accounting for depletion charges. reserves estimates were Other Information than the annual accounts and consolidated accounts Responsibilities of the Board of Directors and the Managing Director This document also contains other information than the annual accounts and consolidated accounts and is found on pages 1–23, 30–37 and 70–71. The Board of Directors and the Managing Director are responsible for this other information. Our opinion on the annual accounts and consolidated accounts does not cover this other information and we do not express any form of assurance conclusion regarding this other information. In connection with our audit of the annual accounts and consoli- dated accounts, our responsibility is to read the information identified above and consider whether the information is materially inconsistent with the annual accounts and consolidated accounts. In this proce- dure we also take into account our knowledge otherwise obtained in the audit and assess whether the information otherwise appears to be materially misstated. If we, based on the work performed concerning this information, conclude that there is a material misstatement of this other informa- tion, we are required to report that fact. We have nothing to report in this regard. The Board of Directors and the Managing Director are responsible for the preparation of the annual accounts and consolidated accounts and that they give a fair presentation in accordance with the Annual Accounts Act and, concerning the consolidated accounts, in accord- ance with IFRS as adopted by the EU. The Board of Directors and the Managing Director are also responsible for such internal control as they determine is necessary to enable the preparation of annual accounts and consolidated accounts that are free from material mis- statement, whether due to fraud or error. In preparing the annual accounts and consolidated accounts, The Board of Directors and the Managing Director are responsible for the assessment of the company’s and the group’s ability to continue as a going concern. They disclose, as applicable, matters related to going concern and using the going concern basis of accounting. The going concern basis of accounting is however not applied if the Board of Directors and the Managing Director intends to liquidate the com- pany, to cease operations, or has no realistic alternative but to do so. The Audit Committee shall, without prejudice to the Board of Director’s responsibilities and tasks in general, among other things oversee the company’s financial reporting process. 68 Auditor’s responsibility Our objectives are to obtain reasonable assurance about whether the annual accounts and consolidated accounts as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinions. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs and generally accepted auditing standards in Sweden will always detect a material misstatement when it exists. Mis- statements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these annual accounts and consolidated accounts. A further description of our responsibility for the audit of the annual accounts and consolidated accounts is available on Revisors- nämnden’s website: www.revisorsinspektionen.se/rn/showdocument/ documents/rev_dok/revisors_ansvar.pdf. This description is part of the auditor’s report. Report on other legal and regulatory requirements Opinions In addition to our audit of the annual accounts and consolidated accounts, we have also audited the administration of the Board of Direc- tors and the Managing Director of Tethys Oil AB (publ) for the year 2016 and the proposed appropriations of the company’s profit or loss. We recommend to the general meeting of shareholders that the profit be appropriated in accordance with the proposal in the statutory administration report and that the members of the Board of Directors and the Managing Director be discharged from liability for the finan- cial year. Basis for Opinions We conducted the audit in accordance with generally accepted audit- ing standards in Sweden. Our responsibilities under those standards are further described in the Auditor’s Responsibilities section. We are independent of the parent company and the group in accordance with professional ethics for accountants in Sweden and have otherwise ful- filled our ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinions. Responsibilities of the Board of Directors and the Managing Director The Board of Directors is responsible for the proposal for appropria- tions of the company’s profit or loss. At the proposal of a dividend, this includes an assessment of whether the dividend is justifiable con- sidering the requirements which the company’s and the group’s type of operations, size and risks place on the size of the parent company’s and the group’s equity, consolidation requirements, liquidity and position in general. The Board of Directors is responsible for the company’s organi- zation and the administration of the company’s affairs. This includes among other things continuous assessment of the company’s and the group’s financial situation and ensuring that the company’s organiza- tion is designed so that the accounting, management of assets and the company’s financial affairs otherwise are controlled in a reassuring manner. The Managing Director shall manage the ongoing adminis- tration according to the Board of Directors’ guidelines and instruc- tions and among other matters take measures that are necessary to fulfill the company’s accounting in accordance with law and handle the management of assets in a reassuring manner. Auditor’s responsibility Our objective concerning the audit of the administration, and thereby our opinion about discharge from liability, is to obtain audit evidence to assess with a reasonable degree of assurance whether any member of the Board of Directors or the Managing Director in any material respect: • has undertaken any action or been guilty of any omission which can give rise to liability to the company, or • in any other way has acted in contravention of the Companies Act, the Annual Accounts Act or the Articles of Association. Our objective concerning the audit of the proposed appropriations of the company’s profit or loss, and thereby our opinion about this, is to assess with reasonable degree of assurance whether the proposal is in accordance with the Companies Act. Reasonable assurance is a high level of assurance, but is not a guar- antee that an audit conducted in accordance with generally accepted auditing standards in Sweden will always detect actions or omissions that can give rise to liability to the company, or that the proposed appropriations of the company’s profit or loss are not in accordance with the Companies Act. A further description of our responsibility for the audit of the administration is available on Revisorsnämnden’s website: www. revisors inspektionen.se/rn/showdocument/documents/rev_dok/ revisors_ansvar.pdf. This description is part of the auditor’s report. Stockholm the 18 April 2017 PricewaterhouseCoopers AB Johan Malmqvist Authorized Public Accountant Lead Partner Ulrika Ramsvik Authorized Public Accountant 69 Definitions and abbreviations AGM EGM IPO SEK TSEK MSEK USD  TUSD Annual General Meeting API Extraordinary General Meeting Initial Public Offering Swedish krona Thousands of Swedish kronor Millions of Swedish kronor Block US dollar Thousands of US dollars MUSD Million US dollars CHF Swiss francs TCHF Thousands of Swiss francs bbl boe bopd mbo mboe Oil production is often given in numbers of barrels per day. One barrel of oil = 159 litres, Barrel Volume measurement. A volume unit used when oil, gas and NGL are to be summarized. The concept is tied to the amount of energy released upon combustion of different types of petroleum. Because oil equivalents depend on the amount of energy, it is not constant and different conversion factors are used. In “Oil Field Units” for example, are 5,800 cubic feet of gas = 1barrel of oil equivalents. Barrels of Oil per Day Thousand Barrels Thousand Barrels of Oil Equivalents mboepd Thousand Barrels of Oil Equivalents per Day mbopd Thousand Barrels of Oil per Day mmbo Million Barrels mmboe Million Barrels of Oil Equivalent A specific gravity scale developed by the American Petroleum Institute (API) for measuring the rela- tive density of various petroleum liquids, expressed in degrees. API gravity is gradated in degrees on a hydrometer instrument and was designed so that most values would fall between 10° and 70° API gravity. A country’s exploration and production area is divided into different geographical blocks. An agree- ment is entered into with a host country granting the company the right to explore and produce oil and gas in the designated area, in return for paying to the government licence fees and royalties on production. (Also referred to as Concession(s) or Licence(s)). Blocks 3&4 onshore the Sultanate of Oman, in which license the Company holds a 30 percent interest. Uncontrolled release of oil, gas or water from an oil well. A reference oil for the various types of oil in the North Sea, used as a basis for pricing. West Texas Intermedi- ate (WTI) and Dubai are other reference oils. Blocks 3&4 Blowout Brent Concession Agreement entered into with a host country granting the company the right to explore and produce oil and gas in a designated area, in return for paying to the government licence fees and royalties on production. (Also referred to as Block(s) or Licence(s)). Condensate A mixture of the heavier elements of natural gas, i.e. pentane, hexane, heptane etc. Is a liquid at atmos- pheric pressure. Also called natural gasoline or nafta. Cost oil A share of oil produced used to cover ongoing opera- tions costs and to recover past exploration, appraisal and development expenditures. Crude oil The oil produced from a reservoir, after the gas is removed in separation. Crude oil is a fossil fuel formed by plant and animal matter several million years ago. EPSA Fault Farm out/ farm in Exploration Production Sharing Agreement A fracture within rock structures where relative motion has occurred across the fracture surface. The holder of shares in an oil licence may transfer (farm out) shares to another company in exchange for this company taking over some of the work com- mitments in the licence, such as paying for a drilling or a seismic investigation within a certain period. In return, the company brought in receives a share in any future revenues. If the conditions are met the company may retain the licence shares if not the shares are taken back by the original holder. This is known as ”farm-in” and ”farm-out”. 70 Heavy oil Heavy crude oil has been defined as any liquid petro- leum with an API gravity less than 20. Heavy oil has in general higher viscosity and is thus not flowing as easy as light oil. It is therefore more difficult to produce than lighter oil and its combustion is more polluting. Hydrocar- bons Naturally occurring organic substances composed of hydrogen (H) and carbon (C). If an occurrence primarily contains light hydrocarbons, they are most often in gas form in the reservoir, and are then called a gas field. If it is primarily heavy hydrocarbons, they are in liquid form in the reservoir, and called an oil field. Under certain conditions both can exist in the reservoir where a gas cap lies above the oil. Oil always contains a certain element of light hydrocarbons that are freed in production, also known as associated gas. Oman The Sultanate of Oman. Onshore Designation for operations on land. Offshore Designation for operations at sea. Operator The member of a joint operations, designated to lead the work on an oil or gas license or field. The company needs approval from the authorities in the country. Porosity The porosity of a rock is determined by measuring the amount of cavities inside, and determining what percentage of the total volume that consists of cavitie. Profit oil The remaining share of oil produced after royalty been paid and cost recovery through the cost oil. The profit oil is shared according to the production shar- ing agreement and working interests. HSE Health, Safety and Environment Prospect Injection wells Leads License LOGS Wells to be used for injection of fluids into reservoir for enhancement of hydrocarbon recovery. By inject- ing gas or water (or both) the degree of recovery can be increased. Leads are possible accumulations of hydrocarbons where more geological data needs to be gathered and evaluations need to be performed before they can be called prospects, where drilling is considered to be feasible. A permit to search for and produce oil and gas. Oil and natural gas assets are usually owned by the coun- try in which the accumulation is discovered. The oil companies obtain permission from the respective country’s government to explore for and extract oil and natural gas. These permits can be called conces- sions, permits, production sharing agreements or licenses depending on the country in question. A license usually consists of two parts an exploration permit and a production license. The result of surveys which gather information from the wellbore and surrounding formations which typi- cally consist of traces and curves. These can be inter- preted to give information about oil, gas and water. A geographical area which exploration has shown contains sedimentary rocks & structures that may be favourable for the presence of oil or gas. PSA Production Sharing Agreement Reservoir An accumulation of oil or gas in a porous type of rock with good porosity, such as sandstone or limestone. Seismic data Seismic investigations are made to be able to describe geological structures in the bedrock. Sonar signals are transmitted from the ocean surface or the surface of the ground (pings), and the echoes are captured by special measurement instruments. Used to localise occurrences of hydrocarbons. Spud To initiate drilling. Sandstone Sandstone is a sedimentary rock composed mainly of sand-sized minerals or rock grains. Most sandstone is composed of quartz, but also often consists of feld- spar, rock fragments, mica and numerous other min- eral grains held together with silica or another type of cement. The relatively high porosity and permeability of sandstone makes it to a valuable rock in reservoirs. WTI West Texas Intermediate – the primary reference oil used as a basis for pricing of oil in North America. Financial information The company plans to publish the following financial reports: Three month report 2017 (January – March 2017) on 2 May 2017 Six month report 2017 (January – June 2017) on 15 August 2017 Nine month report 2017 (January – September 2017) on 7 November 2017 Year-end report 2017 (January – December 2017) on 13 February 2018 71 Address Corporate head Office Tethys Oil AB (publ) Hovslagargatan 5B SE-111 48 Stockholm Sweden Telephone +46 8 505 947 00 Fax +46 8 505 947 99 E-mail: info@tethysoil.com Technical office Tethys Oil Oman Ltd PO Box 1918 PC 130 Athaiba Muscat Sultanate of Oman www.tethysoil.com . n e d e w S n i d e t n i r P . g r e b m ö r t S k i r n e H n g s e D i l . 7 1 0 2 m a k e R n e t s d n a L 

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