Tethys Oil
Annual Report 2017

Plain-text annual report

Annual Report 2017 Contents Letter to the shareholders 5 Tethys Oil 6 Expanding resource base 9 Operations 10 Tethys Oil Sustainability Report 22 Corporate governance report 26 Board of directors 32 Executive management 34 The Tethys Oil share 35 Payments to authorities 38 Key financial data 39 Administration report 41 48 Financial statements for the group Financial statements for the parent company 52 56 Notes 69 Assurance 70 Auditor’s report 74 Definitions and abbreviations 75 Financial information 76 Address Annual General Meeting The Annual General Meeting will be held on 9 May 2018, 3:00 p.m. at Grand Hôtel, Södra Blasie- holmshamnen 8, in Stockholm. To attend the AGM, please see Tethys Oil’s website, www.tethysoil.com, for more information. Another successful year for Tethys Oil • Expansion of Tethys Oil’s operations back into operatorship with the award of Block 49. • Exploration success resulted in doubling of combined resources base of 3P reserves and 3C contingent resources Reserves mmbo 35 Contingent resources New discoveries made in 2017, total 31 December 2017 mmbo 30 25 20 15 10 5 0 1C 2C 3C 6.3 27.9 -4.4 6.3 29.7 -4.4 7.1 32.4 Possible 7.9 25.1 -3.5 Possible 3.0 20.0 -2.8 Possible Possible 18.7 -1.7 Possible Probable Proven Possible Probable Proven Probable Probable Probable Probable Proven Proven Proven Proven 3P 2012 Prod. Add. 3P 2013 Prod. Add. 3P 2014 Prod. Add. 3P 2015 Prod. Add. 3P 2016 Prod. Add. 3P 2017 30 25 20 15 10 5 0 • Excellent continuation of the 2P reserves replacement ratio – amounted to 114 percent in 2017 Prod.= Production Add. = Additions Reserve replacement ratio 200% 150% 100% 50% 2013 2014 2015 2016 2017 The Blocks 3&4 success story Tethys Oil acquired an interest in Blocks 3&4 in 2007 and initiated the oil production on the blocks three years later. Since August 2010 up until year end 2017, Tethys Oil’s net production, before government take, amounts to over 18.5 million barrels from Blocks 3&4. This has been achieved as a result of the skills and hard work of all the staff of Tethys Oil and the partner group, con- tractors and suppliers. The oil produced on Blocks 3&4 has created significant values for the people of Oman, the shareholders of Tethys Oil and the other stakeholders of the joint venture group, and generated employment. In 2017, Tethys Oil’s operations in Oman were expanded when Tethys Oil as operator was awarded the licence for the exploration Block 49. 44 Operational and financial summaryMUSD1 (unless specifically stated) (for year period or at year end)20172016201520142013Average daily production, before government take, bbl12,26112,2359,8047,6924,684Average selling price per barrel, USD51.840.558.1103.9106.6Revenues119.387.1107.0149.392.2EBITDA78.244.058.6108.074.8Net cash42.039.051.247.8-14.9Investments in oil and gas properties40.448.540.839.344.1Distribution to shareholders, SEK per share1.004.003.00––Market capitalization, MSEK2,3372,7992,0442,1682,3992P reserves in Oman (mmbo)22.021.418.217.815.22C contingent resources in Oman (mmbo)17.3––––1 Starting 1 January 2016, the Tethys Oil group presents the financial reports in USD. Please note that comparative financials from 2013–2015 have been restated.Letter to the shareholders Dear friends and investors, 2017 turned out to be a very successful year for Tethys Oil, where our ability for organic value creation proved itself and where we further increased our future possibilities by adding the exploration Block 49 to our assets. Through explora- tion drilling in our existing Blocks 3&4, we discovered significant amounts of oil in previously undrilled structures. In fact so much oil, that our combined resources base of 3P reserves and 3C contingent resources more than doubled from 29.7 mmbo to 59.7 mmbo. The increase in 2P reserves represents an internal reserve replacement ratio of 114 percent. The new discoveries, Erfan, Ulfa and Samah, added more than 17 million barrels of 2C con- tingent resources and the majority of some five million barrels of 2P reserves added in 2017. A major focus for 2018 will be to complete the appraisal programmes on these discoveries and develop them into new oilfields and in the process mature the resources into reserves. In addition to our three successful exploration wells, we also put five previously undrilled fault blocks on the Farha South field and one previ- ously undrilled structure on the Shahd field into production. New exploration block in Oman adds opportunities In late 2017, our scope of operations increased when we as operator were awarded a new exploration license in Oman. Block 49 is an onshore block that covers a prospective but still rather unex- plored area with known oil shows in the South West of the Sultanate bordering the Kingdom of Saudi Arabia. Block 49 cov- ers an area of 15,439 km2 with known oil shows. Block 49 is the kind of opportunity Tethys Oil has been pursuing for some time. We are grateful to the Government of Sultanate of Oman for giving us the opportunity to explore this part of Oman. Tethys Oil’s 10 years of experience in Oman, local knowledge and strong tech- nical team, makes Tethys Oil well posi- tioned to turn Block 49 into a success. The work programme on the block has already kicked off with geological studies and review of legacy seismic data. Financial performance We produced 4.48 mmbo in 2017, in line with the 4.48 mmbo produced dur- ing 2016. An increase in average realised price per barrel of 28 percent compared to 2016 contributed to our revenue growth of 37 percent to MUSD 119.3. Our strong revenues, coupled with our low operating costs, resulted in an EBITDA of MUSD 78.2, 78 percent higher than in 2016. Additional distribution to our Shareholders The stable production on Block 3&4 pro- vides us with a good cash flow, with gives room for both continued investments in Oman as well as further distribution to our shareholders. Reflecting this strong operational and financial position of Tethys Oil, the board of directors is proposing an ordinary dividend of SEK 2.00 per share, as well as an extraordinary distribution of SEK 4.00 per share, in total SEK 6.00 per share. Looking forward Given our history of reserve replacement pared with our recent exploration success, we see large possibilities for continued organic growth on Blocks 3&4. Next to bringing our resources into reserves, the focus on explora- tion continues. In late 2017, we launched 5 a 3D seismic study over 1,200 km2 east of the Ulfa discovery in an area where we so far have identified more than ten leads based on the interpretation of old 2D seismic. The exploration drilling continues into 2018 and we are also upgrading of the infrastructure on the fields in preparation for many years of future production. We expect our investments in Oman to amount to MUSD 53–62 in 2018, the bulk of which will be spent on Blocks 3&4. We also give a production guidance for 2018, with a monthly average production of between 11,000–13,000 barrels of oil per day. I now put this year’s annual report in your hands. Stay with us, our success during 2017 shows that Blocks 3&4 still hold sig- nificant growth potential, on top of almost ten years’ of continuous development. And we have an exciting new phase for Tethys Oil with operatorship of Block 49. Stockholm in April 2018 Magnus Nordin Managing Director Tethys Oil Tethys Oil is a Swedish oil company with focus on onshore areas with known oil discoveries. Tethys Oil’s core area is Oman, where the Company holds interests in Blocks 3&4 and Block 49. The reserve and resource base on Blocks 3&4 amounts to 22.0 mmbo of 2P reserves and the 17.3 mmbo of 2C Contingent Resources. The average oil production in 2017 from Blocks 3&4 amounted to 12,162 bopd, (Tethys Oil’s share of gross production, before government take). 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 Stock- holm and the Company’s shares are listed on Nasdaq Stockholm (TETY). Core area Oman Oman Area Interest Phase Blocks 3&4 29,130 km² 30% Production/ exploration 2P Reserves (mmbo) 2C Contingent Resources (mmbo) Average daily production 2017 (bbl) 22.0 17.3 12,162 Block 49 15,439 km² 100% Exploration – – – Other areas Lithuania Area Interest Phase Gargzdai 884 km² Rietavas 1,594 km² Raseiniai 1,535 km² 25%1 30%1 30%1 Production2 Exploration Exploration 1 The interest in the Lithuanian licences are held indirectly. 2 The average daily production from the Gargzdai licence amounted to 99 bopd in 2017. France Area Interest Phase Attila 1,986 km² 40% Exploration (dormant) 6 Consession boundaries Sultanate of Oman Tethys Oil holds 30 percent interest in Blocks 3&4, where CC Energy Develop- ment S.A.L. (Oman branch) is the opera- tor. Tethys Oil also holds 100 per cent interest and is operator in Block 49. These blocks cover an area of 44,569 km2, which makes Tethys Oil one of the largest conses- sion holders in Oman in terms of acreage. 8 DNO 8 DNO 17 Petrotel 40 Petrotel مدﻧﺳﻣ MUSANDAM ءﺎﺣدﻣ MADHA Open 43A Open 31 ARA 44 ARA 9 Occidental 15 HCF 5 Daleel 27 Occidental 65 Government of Sultanate of Oman 30 Occidental 18 Open تﺎﯾﻧﺎﻣﯾدﻟا رزﺟ Juzor ad Daymaniyyat 43B Open 47 Open طﻘﺳﻣ MUSCAT 41 Open 62 Occidental 62 Oil Open Vacant Open 51 Open 42 OOCEP 61 BP 3 CC Energy 48 OOCEP 60 OOCEP 64 Open 3 59 Open 7 HCF 66 MOL 4 CC Energy ةرﯾﺻﻣ Masirah 50 Masirah Oil Ltd NLS Ghunaim 36 APEX 38 Open 49 Tethys Oil 57 Open 58 Open 6 PDO 53 Occidental 54 Lasso 55 Petrogas 56 Medco 67 Petrotel ﺔﻟﻼﺻ SALALAH 39 Petrotel تﺎﯾﻧﻼﺣﻟا رزﺟ Juzor al Hallaniyyat 52 ENI 100 50 0 100 km Source: Sultanate of Oman Ministry of Oil and Gas 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 production, development and exploration potential. Tethys Oil’s business model is to be active in the onshore explo- ration, appraisal, development and pro- duction stages of the upstream oil and gas business cycle. The focus is on geographies with proven petroleum systems, existing infrastructure, an established institutional framework and low political risk. In all its activities Tethys Oil seeks a bal- anced approach to risk. The strategic deci- sion to focus purely on onshore explora- tion and production of conventional oil is a function of this approach. Onshore oil exploration involves a lower financial expo- sure due to lower drilling and development cost. It also involves lower environmental and safety risks than offshore drilling, especially in harsh environments. The stra- tegic decision to focus on geographies with known oil discoveries allows Tethys Oil to lower subsurface risk by seeking to explore in areas with previously overlooked discov- eries and plays using modern techniques and technology. 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 A major focus for Tethys Oil in 2018 will be to complete the appraisal programmes on these discoveries and develop them into new oilfields and in the process mature the resources into reserves. Contingent Resources, Blocks 3&4 (Audited) mbo 1C 2C 3C New discoveries made in 2017, total 31 December 2017 10,129 17,264 27,328 The Company’s 2017 and 2016 year-end Reserves reports were prepared by ERC Equipoise Limited (“ERCE”) and DeGolyer and MacNaughton Canada Limited (“DMCL”) respectively, as independent qualified Reserves evaluators. ERCE were engaged to prepare the 2017 year-end Reserves report following the closure of DMCL’s office in Calgary. The audits of the Reserves in Oman has been conducted using 2007 Petroleum Resources Management System (PRMS), spon- sored by the Society of Petroleum Engineers (SPE), World Petro- leum Council (WPC), American Association of Petroleum Geolo- gists (AAPG) and Society of Petroleum Evaluation Engineers (SPEE). or technology About Contingent Resources Contingent Resources are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations using established technology under development, but which are not currently considered to be commercially recoverable due to one or more contingencies. Development of the Contingent Resources in the new discoveries on Blocks 3&4 will be contingent on the on-going appraisal programme and also a work programme and budget to access these resources. Expanding resource base Tethys Oil’s net working interest Reserves in Blocks 3&4 Oman as per 31 December 2017 amount to 15,559 thousand barrels of oil (“mbo”) of proven Reserves (1P), 22,044 mbo of proven and probable Reserves (2P) and 32,414 mbo of proven, probable and possible Reserves (3P). Tethys Oil’s net working interest resources oil base in Oman amounts to 10,129 mbo of 1C, 17,264 mbo of 2C and 27,328 mbo of 3C Contingent Resources. Development of reserves, Blocks 3&4 (Audited) mbo 1P 2P 3P Total 31 December 2016 14,222 21,408 29,729 Production 2017 -4,439 -4,439 -4,439 Discoveries Revisions 3,482 2,294 4,879 7,475 196 -350 Total 31 December 2017 15,559 22,044 32,414 In 2017 Tethys Oil replaced 5,776 mbo of 1P Reserves, repre- senting a 1P Reserve replacement ratio (i.e. percentage of 2017 production replaced) of 130 percent; replaced 5,075 mbo of 2P Reserves, representing a 2P Reserve replacement ratio of 114 percent; replaced 7,124 mbo of 3P Reserves, representing a 3P Reserve replacement ratio of 160 percent. In addition to Reserves, Tethys Oil also has Contingent Resources. The estimated Contingent Resources are contained in the recent discoveries made in 2017. Development of the Contingent Resources in the new discoveries will be contingent on the on- going appraisal programme and also a work programme and budget to access these resources. 2P Reserve replacement ratio 2017 2016 2015 2014 2013 Reserve replace­ ment ratio, % 114 171 113 193 154 99 Operations Tethys Oil’s host country Oman Oman – part of the oil fairway Oman, strategically located in the south eastern part of the Arabian Peninsula, over- looks the Arabian Sea, the Sea of Oman and the Arabian Gulf. It also overlooks the strategic Strait of Hormuz at the point of entry to the Arabian Gulf. Oman’s neigh- bours 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 over thousands of years. Modern archaeological discoveries suggest that humans settled in Oman during the Stone Age, i.e. more than 10,000 years ago. Oman as an oil country Most importantly for Tethys Oil, Oman is also a major oil nation, the largest in the Middle East that is not a member of OPEC. 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 22rd largest in the world (BP Statisti- cal Review of World Energy, June 2017). Oman’s crude oil and condensate produc- tion amounted in 2016 to over 1 mmbo per day. In 2017, it was reduced to approx- imately 970,000 bopd according to the production adjustment agreement between OPEC and certain non-OPEC members. The largest producer in Oman is PDO, who holds Block 6. Block 6 covers an area of 90,874 km2 in north, central and south Oman. In 2016, 681,000 barrels of oil and condensate per day were produced by PDO, corresponding to close to 70 percent of the total production in Oman. PDO is owned by the Omani government (60 percent), Shell (34 percent), Total (4 percent), and Partex (2 percent). Occiden- tal Petroleum (Oxy), is the second-largest producer in Oman, and produced about 100,000 bopd in 2016. Oxy is produc- ing from Blocks 9, 27 and 62 in northern Oman and the Mukhaizna field in Block 53 in the south. Tethys Oil in Oman 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 km2 in the central eastern part of Oman. Tethys Oil, through its wholly owned subsidiary Tethys Oil Block 3 & 4 Ltd, has a 30 per- cent interest in Blocks 3&4. Partners are Mitsui E&P Middle East B.V. with 20 percent and the operator CC Energy (Oman branch) Development S.A.L. holding the remaining 50 percent. In December 2017, Tethys Oil’s operations in Oman expanded when the explora- tion Block 49 was awarded to Tethys Oil as operator. Block 49 covers an area of 15,439 km2 in the south west part of Oman, bordering Saudi Arabia. Tethys Oil holds 100 percent of Block 49. The combined area of Blocks 3&4 and Block 49 amounts to almost 45,000 km2, one of the largest consession holders in Oman in terms of acreage. The partner group on Blocks 3&4 pro- duced 40,500 bopd in 2017, correspond- ing to about 4 percent of Oman’s total pro- duction. The produced oil is lifted at the Mina Al Fahal Terminal in Muscat, at the Sea of Oman, and it therefore never passes through the Strait of Hormuz. 10 n a m s r o D d r a h c i R y b o t o h P Muscat SULTANATE OF OMAN Block 3 Block 4 Block 3 Block 49 Salalah C L L , s r o o d t u O d e h t r a e n U 1111 The use of modern technology In hindsight it might seem like the explo- ration, development and production ini- tiation of crude oil on Blocks 3&4 have been a straightforward and understand- able process. However, numerous large companies had explored for oil and gas for 40 years and drilled 27 exploration wells in these two blocks. Most of the wells encountered oil, but none were deemed 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 technology 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 non- commercial wells drilled by previous oper- ators 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. Pro- duction has been launched in three areas on the blocks: Farha South, Saiwan East and Shahd production areas. Since an early production system was launched in (before government August 2010, Tethys Oil’s share of the take) production has increased from some 200 bopd per day to around 12,000 bopd in 2017. In 2017, four exploration wells were drilled which resulted in the three new discoveries Erfan, Ulfa and Samah. 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 km2, only 6,000 km2 of seismic data have been acquired so far. A new 3D seismic campaign was launched late in 2017. The survey is planned to cover a total area of about 1,200 km2 in an area where more than ten leads has been identified based on the interpretation of old 2D seismic. 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 metre 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 Buah formations. 1212 The Farha South production area (Blocks 3&4) Farha South-3 was the first well to be drilled on the blocks with Tethys Oil as a partner in early 2009. Oil on Farha South was originally discovered in 1986 by a pre- vious 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 750 bopd on test in 2009. A long term production test though revealed the reser- voir to be tight. The Barik sandstone, at an average depth of 1,600 metres and overlaying the Lower Al Bashir, also had excellent oil shows in the Farha South-3 well. The Barik layer flowed on test close to 400 bopd and was put on long term production test where it proved itself to be a reliable producer. The oil of the Farha South is not trapped in one large continuous reservoir. It is instead trapped in a large number of smaller, usu- ally 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 injection necessary. Water is injected into the reservoir via injec- tion wells in order to increase the pressure and thereby stimulate production. 26 fault blocks have by year end 2017 been drilled and found being oil bearing, with five fault blocks being added in 2017. 21 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 production area. The area is today the largest produc- tion area on the blocks holding 11.8 mmbo of proved and possible reserves (2P) net to Tethys Oil, corresponding to 53 percent of Tethys Oil’s total 2P reserves on the blocks. The field has produced the majority of Tethys Oil’s total oil production to date. In order to generate reserves and future production, the drilling and developing of new Farha South fault blocks will continue in 2018 as well as continued development of existing producing fault blocks. Reserves (Audited) mmbo Net Tethys Oil, 31 Dec 2017 Farha South oil field 1P 9.2 2P 11.8 3P 16.1 Oil producing fault blocks Oil producing fault blocks with water injection Drilled fault blocks Prospective fault blocks Facts First well with Tethys Oil as partner: Farha South-3, 2009 Main producing layer: Barik sandstone at depth of about 1,600 metres Oil trapped in smaller, usually adjacent fault blocks Oil producing fault blocks: 26 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. The benchmark crude oil Brent has an API of approximately 38 degrees. Oman Blend has an API of approximately 32 degrees. 13 The Shahd production area (Blocks 3&4) At the Shahd area, oil is extracted at greater depths than the Farha South field, mainly from the Lower Buah carbonate at 2,000 metres but also from the Khufai carbon- ate and the Lower al Bashir sandstone. 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 delivered substantial increase to Tethys Oil’s total production and reserves. The Shahd oil field is located approximately 20 km west of the Saiwan East oil field. The oil from the Lower Buah layer holds a qual- ity 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 only way to confirm that an undrilled struc- ture is oil bearing is by drilling. So far eight structures have been put into production with one being added in 2017. Like the Fahra South field, water injec- tion is needed on the Shahd oil field. A water injection programme was launched in 2015. Four structures have been devel- oped with water injection. The geology is however more complex than in the Farha South area, and part of the Shahd area has responded less well to the injection. The implementation of the Shahd water injec- tion programme continues and results are being carefully monitored. The area holds 5.6 mmbo of proved and possible reserves (2P) net to Tethys Oil, corresponding to 26 percent of Tethys Oil’s total 2P reserves on the blocks. Facts Discovery well: Shahd B-1, 2013 Main producing layer: Lower Buah carbonate at depth of about 2,000 metres Production also from Lower al Bashir and Khufai Oil producing structures: 8 Oil quality: approx. 38 degrees API Reserves (Audited) mmbo Net Tethys Oil, 31 Dec 2017 Shahd oil field 1P 3.4 2P 5.6 3P 8.9 Oil producing structures Oil producing structures with water injection Prospective structures 14 The Saiwan East production area (Blocks 3&4) 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 the Khufai carbonate at depths ranging from 1,700 to 2,400 metres. This reservoir was previously unknown as an oil producer in Oman. The Saiwan East oil field is located just east of the Shahd oil field. The oil from the Khufai layer holds a quality of approximately 32 degrees API. The field is the smallest so far discovered on the blocks, holding 1.3 mmbo of proved and possible reserves (2P) net to Tethys Oil, corresponding to 6 percent of Tethys Oil’s total 2P reserves on the blocks. Large quantities of oil with different gravi- ties and viscosities, including heavy oil, have also been found in different forma- tions on the field. Any potential produc- tion from the heavy oil in Saiwan East will require enhanced oil recovery techniques. Facts First well with Tethys Oil as partner: Saiwan East-2, 2009 Main producing layer: Khufai carbonate at depth of about 1,700–2,400 metres Oil quality: on average approx. 32 degrees API Reserves (Audited) mmbo, Net Tethys Oil, 31 Dec 2017 Saiwan East oil field 1P 0.6 2P 1.3 3P 1.8 Growth continues through exploration success 2017 turned into a successful year for Tethys Oil, with considerable success not least achieved within one of the most important activities of the oil industry – exploration and resulting discoveries. In 2017, the Blocks 3&4 partner group dis- covered significant amounts of oil in new structures near the existing producing areas on Blocks 3&4. Four exploration wells were drilled in the 2017 drilling programme. First to be drilled was the Erfan-1 well, that was drilled some 6 km southwest of the Saiwan East area on Block 4. Erfan-1 was a success and flowed oil to surface from the Khufai formation. The discovery has been further appraised during the year by two successful appraisal wells. The exploration well Ulfa-1 was drilled on a structure located on trend with the Farha South field on Block 3. Ulfa-1 flowed oil to surface from the Khufai formation. The appraisal of the Ulfa discovery will start in 2018. The Samah-1 was drilled on a structure located 5 km south of the Ulfa discovery on Block 3. The well was completed late in 2017 with good oil flows to surface. The fourth exploration well, the V-1 well, was drilled northeast of the fault block F in Farha South area. The main target of the well was to test the Amin formation, a formation that does not produce elsewhere on Blocks 3&4, but it did not encoun- ter any hydrocarbons. The Erfan, Ulfa and Samah discoveries are all undergoing long term production tests and thus already contribute to Tethys Oil’s production. These three discoveries have added more than 17 mmbo of 2C contingent resources and the majority of some five mmbo of 2P reserves added in 2017. Development of the Contingent Resources in the new discoveries will be contingent on the on- going appraisal programme and also a work programme and budget to access these resources. A major focus for Tethys Oil in 2018 will be to complete the appraisal pro- grammes on these discoveries and develop them into new oilfields and in the process mature the resources into reserves. Ulfa Reserves (Audited) mmbo Net Tethys, 31 Dec 2017 New areas Contingent Resources (Audited) mmbo Net Tethys, 31 Dec 2017 New areas 1P 2.3 1C 10.1 2P 3.4 2C 17.3 3P 5.7 3C 27.3 15 Samah Seismic mapping, prospects and leads, Blocks 3&4, Oman Alam Station & Pipeline System BLOCK 4 BLOCK 3 Farha South Field Ulfa Samah Shahd field Saiwan East Field Erfan N BLOCK 3 Ongoing 3D seismic acquisition 3D seismic area 2D seismic area Fields / structures in production Prospects Leads A new 3D seismic campaign was launched late in 2017. The survey is planned to cover about 1,200 km² in an area where more than ten leads has been identified based on the interpretation of old 2D sesmic. The 3D seismic will be essential to mature as many leads as possible into drillable prospects. 16 Vibrator truck Receiver truck Geophones (receivers) GAS OIL WATER WATER Seismic studies A key exploration activity is the use of 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 Blocks 3&4 is trapped in smaller fault blocks or structures, 3D seismic has been essential in the mapping of possible oil bearing structures. Vibrator trucks at Blocks 3&4 17 HE Dr Mohammed bin Hamad Al Rumhi, Minister of Oil and Gas, and Magnus Nordin, Managing Director Tethys Oil, sign the EPSA for Block 49. The Montasar Oasis 1818 Block 49 – Tethys Oil’s new licence in Oman Tethys Oil was awarded a new exploration license by the Government of Sultanate of Oman in the fourth quarter 2017. Block 49, Montasar, is an onshore block that cov- ers a prospective but still rather unexplored area in the Governorate of Dhofar in the South West of Oman bordering the King- dom of Saudi Arabia. Tethys Oil holds 100 percent of the license interest and is the operator. The Block 49 licence covers an area of 15,439 km2. More than 11,000 km of 2D seismic data that has been acquired by pre- vious operators has been made available to Tethys Oil. Nine wells have been drilled by previous operators within the block boundaries, several of which are reported to have encountered oil shows. Among the legacy wells is the first well ever drilled in Oman in 1955 (Dauka-1). ernment company has a back-in right of up to 30 percent against refunding of pro rata past expenditure. The initial work com- mitments during the first period include geological studies, seismic acquisition and processing and exploratory drilling. The EPSA for Block 49 covers an initial exploration period of three years with an optional extension period of another three years. In the event of Declaration of Com- merciality the Term of the Agreement shall be extended for a period of 15 years which can be extended for another five years. In case of a commercial discovery, Oman gov- After more than ten years in Oman, Tethys Oil has built a strong technical team. As operator of the block, Tethys Oil is con- fident the Company’s Omani experience will be well suited to make Block 49 into a success. The work programme is ongo- ing with geological studies and studies of legacy seismic data. 1919 Office and staff Tethys Oil’s staff consist of 22 highly moti- vated individuals from five different nation- alities, ranging in age from early twenties to mid seventies and with a balanced gender representation (41 percent female and 59 percent male). A majority of the staff have graduated from universities and colleges, pri- marily with geosciences, engineering or busi- ness administration. Muscat Office A team of highly trained subsurface special- ists are based at Tethys Oil’s office in Mus- cat. As per the Omani government directive related to the employment, preference is given to Omani nationals. The Muscat office is the base for Tethys Oil’s CTO. 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 offering Master degree sponsorship to Omani geosci- ence 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 CFO, along with Tethys Oil’s financial and communication teams. 2020 Transportation and sales (Blocks 3&4) All oil produced at the fields are trans- ported through a pipeline to Qarn Alam metering station, west of the blocks. Here the oil volumes are recorded and the qual- ity is measured. From Qarn Alam, the oil is transported through the Omani national pipeline system to the Mina Al Fahal ter- minal in Muscat. At this terminal, the oil is lifted and loaded into oil tankers. From Muscat, the oil is shipped to different des- tinations in Asia. Licences in Oman are held through Explo- ration and Production Sharing Agreements (EPSA). The EPSA allows the joint opera- tions partners to recover their costs from a predetermined percentage 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 split, also according to a predetermined percentage, between the government and the partners. The exact percentages differ from licence to licence. Until oil has been found and could be produced on a licence, no cost could be recovered. If no commer- cial oil discovery at all is made on an explo- ration licence, the exploring oil company stand all the risk. Tethys Oil sells all of its oil from Blocks 3&4 on a monthly basis to Mitsui Energy Trading Singapore, which is part of Mit- sui & Co Ltd. Tethys Oil’s average selling price is based on the monthly average price of the two month future contract of Oman blend as traded on the Dubai Mercantile Exchange, including trading and quality adjustments. Operational areas outside Oman Tethys Oil’s portfolio also includes Euro- pean licences, with indirect interests in three onshore licenses in Lithuania and one dormant onshore licence in France. Lithuania, on the Baltic Sea in the north east part of Europe, is a small oil producer. Oil was discovered in Lithuania some 60 years ago. From a peak at about 10,000 bopd some 20 years ago, the production has now dropped to about 2,000 bopd. The production is located in the western part of the country. The Lithuania tax regime is very attractive, so even smaller amounts of oil can generate good value. Tethys Oil’s Lithuanian licences cover an area of some 4,000 km2. The Gargzdai licence is in production with 99 bopd net to Tethys Oil in 2017. The oil produced at the Gargzdai licence has an API of about 42 degrees and is normally sold on a weekly basis to a nearby refinery. The Rietavas and the Raseiniai licences are exploration licences. Since the acquisition of the licence interests in 2012, several exploration wells have been drilled, which have confirmed the presence of oil in the area, and seismic studies been conducted. The Attila licence is located some 250 km east of Paris. Tethys Oil is reviewing the prospectivety and potential for additional work at the licence. i n a r b d u B y b o t o h P 2121 Tethys Oil Sustainability Report The Tethys Oil Sustainability Report 2017 comprises Tethys Oil AB (corporate iden- tity number 556615-8266) and its sub- sidiaries (together “the Group” or “Tethys Oil”) and has been prepared in accordance with the regulations in chapter 6 and chap- ter 7 of the Annual Accounts Act. Tethys Oil is an oil and gas exploration and production company with a primary objec- tive of creating shareholder value working across the whole upstream industry lifecy- cle of exploration, appraisal, 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. Tethys Oil seeks to be a sustainable and profitable business long-term. Sustain- ability means running a business that is not only profitable but in tune with the requirements and expectations of all stake- holders both inside and outside the Group. Business model Tethys Oil’s business model is to be active in the onshore exploration, appraisal, development and production stages of the upstream oil and gas business cycle. The focus is on geographies with proven petroleum systems, existing infrastructure, an established institutional framework and low political risk. In all its activities Tethys Oil seeks a bal- anced approach to risk. The strategic deci- sion to focus purely on onshore explora- tion and production of conventional oil is a function of this approach. Onshore oil exploration involves a lower financial expo- sure due to lower drilling and development cost. It also involves lower environmental and safety risks than offshore drilling, especially in harsh environments. The stra- tegic decision to focus on geographies with known oil discoveries allows Tethys Oil to lower subsurface risk by seeking to explore in areas with previously overlooked discov- eries and plays using modern techniques and technology. Policies and work within Sustainability Tethys Oil has adopted a code of conduct and requires all staff, management and board of directors to act in accordance with that code. Sustainability and Social Responsibility has been high on the agenda for Tethys Oils management during 2017. During the course of 2017, Tethys Oil has worked on renewing and updating its policies, pro- cedures and operating framework to ensure that high operating standards are upheld and that the Group is in compliance with regulatory requirements and the demands of the investment community as well as other stakeholders. The result of this is a new and updated code of conduct as well as policies within the following areas: • Health, Safety and Environment • Anti-Fraud • Anti-Corruption • Diversity and Non-discrimination • Whistleblowing Tethys Oil staff will be continuously trained in the new policies through policy workshops to ensure understanding of Tethys Oil policy framework and allow the staff to contribute to the Group’s contin- ued development as a responsible actor. Health, Safety and Environment Tethys Oil’s activities are subject to the Health, Safety and Environmental (HSE) risks inherent in the oil industry. The Group recognises that the prevention of accidents and ill health is critical to the efficient operation of its business and therefore have established a Health, Safety and Environment policy as well as proce- dures. The ultimate responsibility for HSE lies with the Managing Director. It is, how- ever the responsibility of all Tethys Oil staff to ensure compliance with the Group’s policies and procedures for safe operations. Tethys Oil has a responsibility for all activ- ities that are a consequence of the Group’s operations. At a minimum, it is Tethys Oil’s duty to ensure compliance with all relevant laws and governmental instructions concerning HSE. The genuine care for HSE is a core value for the whole Group and shall be transparent through all Tethys Oil’s plans and actions. It is the Group’s objective to provide a healthy and safe working environment for employ- ees, contract personnel and members of the general public who might be affected by the activities of its operations. The Group will have a systematic approach to HSE-man- agement to achieve continuous improve- ment toward the goal of no harm to people, no accidents, no spills and strive for mini- mum impact on the environment, thereby contributing to sustainable development. Until the award of Block 49 in Oman in December 2017 all Tethys Oil’s activities were non-operated and the operators of the assets ultimately responsible for imple- menting HSE policies and procedures. As a non-operating partner, it is Tethys Oil’s management’s responsibility to actively Overview of Tethys Group Policy Framework Code of Conduct HSE policy Diversity policy Whistleblower policy IT policy Anti-corruption policy Anti-fraud policy Info and insider policy 22 encourage the operator to apply Tethys Oil’s HSE policy where possible. This work is mainly carried out within the framework of the joint management committee. As part of the work to become an opera- tor Tethys Oil has developed an opera- tions management system which includes policies and procedures within the area of Health, Safety and Environment. The new HSE policies and procedures has been implemented in accordance with Interna- tional Association of Oil and Gas Produc- ers (IOGP) standards. Environment Tethys Oil has a stated ambition to explore for and produce oil and gas with a mini- mum of environmental impact. In its engagement as 30 percent interest holder in Blocks 3&4, Tethys Oil has acted for improved environmental focus in opera- tions and proactive work to minimise environmental impact, not least the risks for spills and damage. In Block 49 all exploration activities on the license will be evaluated from an envi- ronmental impact perspective in order to ensure that operations are conducted in accordance with Tethys Oil’s policies and procedures including completion of envi- ronmental impact assessments. With regards to emissions the majority of Tethys Oil’s emissions come from its 30 percent non-operated interest in Blocks 3&4. The main sources of emissions are the flaring of associated gas and the use of diesel to run generators for power. The emissions by category are outlined below. Emissions data is only available for 2017 following a thorough development of measurements resulting in more compre- hensive data collection and as a result there is no comparable historical data. Spills & Hydrocarbon releases Blocks 3&4 Two recordable spills were reported during 2017. Actions During 2017 significant actions were taken to improve environmental conditions on Blocks 3&4, in particular with regards to handling of hazardous chemicals, and pre- vention of spills. All operations in the field are preceded by an environmental impact assessment (EIA) to be filed with the ministry of Oil and Gas. During 2017 a project was initiated to investigate the handling of the associ- ated gas produced as a by-product of the extracted oil. The aim of the project is to utilise the associated gas for power genera- tion instead of flaring, and thus displacing the majority of the diesel-powered genera- tors. This would significantly reduce die- sel consumption and related emissions. A front-end engineering design (FEED) study has been commissioned for 2018 for what could potentially be a significant multi-year project. Health & Safety Tethys Oil is committed to ensuring that all operations that the Group conducts are HSE Data Blocks 3&4 onshore Oman. Tethys Oil holds 30 percent interest. Operator is CC Energy Development S.A.L. (Oman branch). Tethys Oil’s share of atmospheric emissions from Blocks 3&4, Oman Emissions via flaring and/or utilisation (tonnes equivalent) Combined Stationary and mobile emissions from Diesel Fuel (tonnes equivalent) Sulphur Dioxide Nitrogen Dioxide Carbon Monoxide Carbon Dioxide Methane Nitrous Oxide 108 Carbon Dioxide 28,545 23 Methane 166 Nitrous Oxide 1 0 73,155 981 2 Water Usage Blocks 3&4 On Blocks 3&4 water is produced to be used for pressure support through reinjection into the oil reservoirs. (cubic metres) Total Produced Water Produced water – reinjected Produced water – Evaporated Blocks 3&4 1,465,208 1,313,289 154,088 Blocks 3&4 Health and safety Unit of measure 2017 Actual 2016 Actual Fatalities Lost Time Incidents Number Number Lost Time Incident Frequency #/mm Hrs Total Recordable Cases Number Total Recordable Case Frequency #/mm Hrs Road Traffic Accidents Number Road Traffic Accident Frequency #/mm km 1 5 0.94 8 1.50 4 0.34 – 3 0.58 8 1.56 3 0.27 Lost Time Incident (LTI) – is the sum of fatalities and injuries where the impacted person is unable to return to work the day (or days) after the injury. Total Recordable Cases (TRC) – is the total number of incidents reported including Lost Time Incidents and more minor incidents which include restricted work capacity and medical treatment. 23 done in a safe manner with genuine regard for the wellbeing of the staff, contractors and third parties. To ensure compliance with Tethys Oil’s HSE policy, Tethys Oil must foster a culture of transparent deci- sion making, responsibility and thorough planning. The Tethys Oil HSE policy applies not only to Tethys Oil operations but Group representatives should work to ensure that the same standards are applied in projects and joint ventures where the Group has a non-operated interest. Actions The Tethys Oil board has raised its HSE concerns with the joint venture and is closely monitoring the further enhance- ment of HSE standards. Social Responsibility & Our Relations to Society Tethys Oil’s activities shall strive to create shared prosperity between stakeholders. Tethys Oil seeks to respect and gain the respect of the people and governments of countries in which the Group operates. Good relations with host countries are pre- requisites to Tethys Oil’s business. Wher- ever the operations are conducted, the sov- ereignty of the state is respected and the rule of law, through Tethys Oil’s example, should be observed and promoted. Tethys Oil shall aim to optimise local con- tent in all aspects of its business and to promote the creation of in-country value. 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 local governments 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. Local people and their traditions shall be respected. Tethys Oil strives to encourage local employment and, where appropriate, work with local communities to improve their health, skills and welfare. The Group shall further, where appropriate, engage in capacity building, through the transfer of skills and technologies. Tethys Oil shall refrain from any actions that could have implications for tribal, internal, or other armed conflicts or acts of violence. CSR Activities During the course of 2017 Tethys Oil has provided financial support to baby care center in Qal`at al `Awamir, Oman. The center allows female teachers to place their below school-age children in day-care helping them to work in order to support their families. Tethys Oil has also sponsored nursing students at Sultan Qaboos University (SQU). In 2017 a Nursing Get-together was organised to facilitate collaboration among the nursing students at SQU and the various nursing institutions in Oman and exchange of experiences and expertise between academia and practical institu- tions related to Nursing. For several years Tethys Oil has offered scholarships to master students in Geo- science at SQU. The scholarships give more students access to higher education, demonstrates Tethys Oil’s long-term com- mitment to Oman and has improved the Group’s ability to recruit local talent. Dur- ing 2017 Tethys Oil offered two scholar- ships at SQU. In 2018 Tethys Oil expects to continue its local CSR activities with focus on activities around Block 49. Blocks 3&4 The joint venture partnership for Blocks 3&4 have an active In Country Value (ICV) and Corporate Social Responsibil- ity (CSR) Program. During 2017 a total of USD 388,435 was spent on various ICV and CSR projects including a health awareness campaign in Mahout, building a Theatre for the A-Nujabaa School in Adam and sponsoring a Job Seekers Employabil- ity Development Program in Muscat. Our People Tethys Oil recognises that its performance as a Group is dependent upon the perfor- mance of its employees as individuals. The Group’s employees are the principle asset of the Group and therefore aims to achieve high employee satisfaction and high stand- ards of performance. Tethys Oil shall 24 respect and promote employee’s rights, including freedom of association and the right to collective bargaining. Tethys Oil shall further offer rewarding working con- ditions and realise each employee’s indi- vidual potential through training and job promotion. The use of underaged bonded or forced labour, direct or indirect should never occur. Tethys Oil has implemented a Diversity and non-discrimination policy to ensure that the diversity of the Tethys Oil staff is respected and that all forms of discrimina- tion are prevented. Tethys Oil’s Position on Diversity and Discrimination • Tethys Oil seeks to recruit and retain the best possible candidates for all positions on the basis of merit regardless of gen- der, sexual orientation, age, disability, nationality, race or religion. • The cultural diversity of the Group’s employees is an asset and shall be respected. Furthermore, Tethys Oil will not accept any form of harassment or discrimination of its employees for any reason. • Tethys Oil’s staff shall always act with the utmost integrity and respect when dealing with colleagues, partners and society. • Tethys Oil’s staff, partners and contrac- tors should feel free to voice concern or report instances of discrimination with- out fear of recrimination or harassment. The diversity and non-discrimination policy covers all aspects of the company’s interaction with its employees including, but not limited to, recruitment, retention and remuneration. Suspected cases of discrimination are to be reported to the nearest supervisor or using the Whistleblower procedure. In 2017 no cases of discrimination were reported. In 2017 Tethys Oil had a total of 22 employees (average of 19 full time employ- ees) of five nationalities, and a balanced gender representation of (41 percent female and 59 percent male). Human Rights Tethys Oil has committed firmly to the United Nations Global Compact (stated further in the Code of Conduct), as well as to follow the United Nations Guiding Principles 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 Declaration of Human Rights (UDHR), the International Covenant on Civil and Political Rights and the International Covenant on Economic, Social and Cultural Rights and in the Inter- national Labour Organisation’s (ILO) Con- ventions, and in relations to business activi- ties, in the Global Compact, the OECD Guidelines for Multinational Enterprises, and the UN Guiding Principles. 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 furthermore expects all its affiliated partners to respect human rights and to observe highest stand- ards of professional integrity. In planning of operations, review of new ventures and investment projects, if there is a perceived risk of negative impact on human rights, a thorough review is conducted. Dur- ing 2017 Tethys Oil did not find that any of its actions constituted a risk to human rights. No grievances constituting abuses of human rights by the company have been reported. Anti­Corruption, Fraud and Whistleblower Protection Anti-Corruption Tethys Oil has zero tolerance for corrup- tion. It is strictly prohibited for Tethys Oil staff or contractors to give, authorize, offer, promise, request, agree or receive gifts, hospitality and entertainment to improp- erly influence or reward acts or decisions, or as an actual or intended compensation for any improper benefit. In order to prevent the misuse of pub- lic office or company position or power for private gain, or the misuse of private power in relation to business, Tethys Oil has adopted an anti-corruption policy and clear procedures for employees to report suspected cases of corruption. The policy and procedures have been drawn up in accordance with Transparency Interna- tional’s Business Principles for Countering Bribery. Tethys Oil recognizes that accepting or offering gifts or hospitality of moder- ate value is customary and in accordance with local business practice in many of the countries that it operates. As a result of this Tethys has implemented a policy requiring all staff, or contractors who receive or offer gifts on behalf of Tethys Oil should seek approval from their supervising manager and that a record is kept of donor, recipi- ent as well as value. During 2017 no cases of suspected corrup- tion have been reported. Anti- Fraud and Protection of Group Assets During the course of the year Tethys Oil has also implemented an anti-fraud policy, aimed at safeguarding the Group and its staff from fraud and dishonest behavior. For the purposes of the policy Tethys Oil has defined fraud as: “The theft or misuse of Tethys Oil’s funds or other resources, by an employee or a third party which may or may not involve the mis- statement of financial records to conceal theft or misuse.” The is implementation of the policy aimed at improving all Tethys Oil staff’s knowledge and understanding of what constitutes fraud, how to prevent, detect and report suspected fraud and where the responsibilities for investigation lies. The policy also aims to assist in creating an atmosphere of openness and trust where staff feel comfortable and able to raise con- cerns and sensibly and responsibly. Whistleblower Employees are encouraged to report sus- pected or known cases, which they believe may be illegal or a violation of this Code of Conduct or any Group policies and as a result Tethys Oil has implemented a Whistleblower Policy. The aim of the policy is provide an avenue for Staff to raise con- cerns about improper, unethical or illegal conduct and to obtain reassurance that they will be protected from reprisals or victimi- sation for whistleblowing in good faith. This is a literal translation of the Swedish original report Auditor’s report on the statutory sustainability report To the general meeting of the shareholders in Tethys Oil AB (publ), corporate identity number 556615-8266. 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 opinion. Engagement and responsibility It is the board of directors who is responsible for the statutory sustainability report for the year 2017 on pages 22-25 and that it has been prepared in accordance with the Annual Accounts Act. The scope of the audit Our examination has been conducted in accordance with FAR’s auditing standard RevR 12 The auditor’s opinion regarding the statutory sustainability report. This means that our examination of the statutory sustainability report is substantially different and less Opinion A statutory sustainability report has been prepared. Stockholm, 4 April 2018 PricewaterhouseCoopers AB Johan Malmqvist Authorized Public Accountant Lead Partner Ulrika Ramsvik Authorized Public Accountant 25 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 2017 is submitted in accordance with the Swedish Annual Accounts Act and the Code. It explains how Tethys Oil has conducted its corpo- rate governance activities during 2017. Tethys Oil does not report any deviations from the Code, Nasdaq Stockholm’s rule book for issuers, recommendations from the Swedish Securities Council, decisions from Disciplinary Committee at Nasdaq Stockholm or statements from the Swed- ish Securities Council. The report has been examined by the Company’s auditors, please see page 31. 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 2017 the share capital amounted to MSEK 5.9, repre- sented by 35,543,750 shares, each with a par value of SEK 0.17. All shares represent one vote each. At 31 December 2017, the number of shareholders was 5,043 (5,529). Of the total number of shares, foreign shareholders accounted for approximately 67 percent. Lansdowne Partners LLP is the only shareholder with a holding in excess of 10 percent of shares and votes, with a holding of 3,593,699 shares representing 10.1 percent of shares and votes. Tethys Oil’s holding of its own shares amounted to 1,644,163 (4.63%). For further infor- mation on share, share capital develop- ment and shareholders, see pages 35–37 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 17 May 2017. 179 shareholders were represented at the AGM, representing 41 percent of the votes and share capital in the company. The reso- lutions passed by the meeting included the following: • Adoption of the income statements and balance sheets for 2016 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 (since resigned) and Geoffrey Turbott and election of Robert Anderson, Alex- andra Herger and Per Seime as directors. Dennis Harlin was elected chairman of the board • The chairman will be paid a fee of SEK 595,000 and each AGM elected mem- ber not employed by the company will be paid SEK 265,000. The chairman of the audit committee will be paid SEK 90,000 and the chairman of the remu- neration committee and the possible technical committee will be paid SEK 65,000 respectively and each of the committees’ members will be paid SEK 35,000 per committee assignment. The total fees for committee work, includ- ing committee chairmen fees shall not exceed SEK 535,000. 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 26 • 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 war- rants have a three year duration and the strike price of the warrants was SEK 85.50 per share • 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. Nomination process In accordance with the nomination com- mittee process approved by the AGM 2017, the nomination committee for the AGM 2018 consists of members appointed by three of the largest shareholders of the Company based on shareholdings as per 30 September 2017 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 3 November 2017, i.e. within the time frame of six months before the AGM as prescribed by the Code. The nomination committee for the AGM 2018 has held five 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 2018, 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 2019 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 nomination committee also considered other criteria such as the background and experience and has also taken part of the board evaluation. Further, the nomination committee has considered the Company’s Board diversity policy in its proposal for board members. The Board diversity policy is available on the Company’s website. The nomination committee for the AGM 2018 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 2017 has consisted of eight directors and no deputies. Dennis Harlin has been chairman of the board. Seven board members are independent from the Company, the Company’s man- agement and the Company’s larger share- holders, and eight board members are independent from larger shareholders. For further information on the board members, please see pages 32–33. Board of directors elected at the AGM 2017 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 Robert Anderson 2017 Member 1953 United Kingdom Per Brilioth 2013 Member 1969 Sweden Alexandra Herger 2017 Member 1957 United States Magnus Nordin 2001 Member 1956 Sweden Per Seime 2017 Member 1946 Norway Katherine Støvring1 2012 Member 1965 United States Geoffrey Turbott 2015 Member 1963 New Zeeland 1 Stepped down from the board in March 2018 Yes Yes Yes Yes No Yes Yes 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 following AGM May August Constituent meeting Second quarter report September–November Strategy November December February April May Third quarter report Budget approval Fourth quarter and year-end report Annual report and AGM First quarter report 27 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. The board’s work in 2017 During 2017 the board held 14 meetings of which seven were ordinary and seven extraordinary, in person, via telephone and per capsulam. Attendance at the meet- ings are shown in the table. Secretary at the meetings was Chief Financial Officer (“CFO”) Jesper Alm. Prior to each meet- ing board members were provided with an agenda and written information on the matters to be covered. Each meeting has included the possibility to discuss without management representatives being present. Board of directors and committee attendance Member Audit committee1 Member Remuneration committee1 Member Technical committee1 Board meetings Audit committee meetings Remuneration committee meetings Technical committee meetings Board member Dennis Harlin (Chairman) Robert Anderson2 Per Brilioth Alexandra Herger2 Magnus Nordin Richard Rettig3 Katherine Støvring4 Per Seime2 – – – – – Yes Yes Yes – 14/14 Yes (Chairman) 9/9 – – – – Yes Yes (Chairman) – Yes – – – 12/14 7/9 14/14 4/5 10/14 7/9 14/14 3/3 – 3/3 – – 3/3 5/6 3/3 6/6 4/5 – 3/3 – – 3/3 3/5 2/2 – – 4/4 – 4/4 – – – – 4/4 Geoffrey Turbott Yes (Chairman) – Yes 1 Members as from the AGM 2017 2 Elected to the board at the AGM 2017 3 Stepped down from the board at the AGM 2017 4 Stepped down from the board in March 2018 Board committees In order to increase the efficiency of its work and enable a more detailed analysis of certain matters, the board has formed com- mittees: Audit, Remuneration and Techni- cal. Committee members are appointed within the board for a period of maximum until the next AGM. The committee’s duties and authorities are regulated in the annually approved rules of procedure for each committee. The committees perform monitoring and evaluations resulting in recommendations to the board of direc- tors, where all decision making takes place. Audit committee The board has established an audit com- mittee for the period up to and includ- ing the AGM 2018, consisting of Geof- frey Turbott as chairman and Katherine Støvring (since resigned) and Per Seime as members of the committee. The audit committee convened six times in 2017. The work has mainly focused on supervis- ing the Company’s financial reporting and assessing the efficiency of the Company’s financial internal controls, with the pri- mary objective of providing support to the board in the decision making processes regarding such matters. The audit commit- tee 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 impar- tiality. The Audit committee reports to the board, normally in conjunction with the following board meeting. Seime as chairman and Katherine Støvring (since resigned) and Dennis Harlin as members. The remuneration committee convened five times in 2017. The work has mainly focused on establishing principles for remuneration to management, to mon- itor 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 2018. The remuneration committee reports to the board, normally in conjunc- tion with the following board meeting. Members of the committee during 2017 prior to AGM 2017 consisted of Geoffrey Turbott (chairman) with Dennis Harlin, Per Brilioth, Richard Rettig and Katherine Støvring as members. Members of the committee during 2017 prior to AGM 2017 consisted of Per Brili- oth (chairman) with Dennis Harlin, Rich- ard Rettig, Katherine Støvring and Geof- frey Turbott as members. Remuneration committee The board has established a remuneration committee for the period up to and includ- ing the AGM 2018, consisting of Per Technical committee The board has established a technical com- mittee for the period up to and includ- ing the AGM 2018, consisting of Robert 28 Anderson as chairman and Alexandra Herger and Geoffrey Turbott as mem- bers. The technical committee convened four times in 2017. The work has mainly focused on following up on work programs and budgets, evaluation of and recommen- dation on appointment of independent qualified reserve auditor, oversight of the reserves audit process, review of operations management systems and technical review of new ventures projects. The technical committee reports to the board, normally in conjunction with the following board meeting. The technical committee was established in conjunction with the AGM 2017. 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 2017. Tethys Oil’s auditor: Pricewaterhouse- Coopers AB Johan Malmqvist Ulrika Ramsvik Role Lead partner Co-signing auditor Year of birth Company auditor since 1975 2015 1973 2014 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 2017, remuneration to Pricewaterhouse- Coopers AB amounted to MUSD  0.2 (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 and resources, although such assets are not included in the Company’s balance sheet. The independent qualified reserves auditor for the 2017 report was ERC Equipoise Limited (“ERCE”). Independ- ent qualified reserves auditor for the 2016 report was DeGoyler and MacNaughton Canada Limited (“DMCL”). The selection of ERCE followed the closure of DMCL’s Calgary office, which office carried out the audit in relation to the 2016 report. For further information, see Reserves on page 9. Managing Director and executive management The executive management in Tethys Oil throughout 2017 has consisted of the Managing Director (Magnus Nordin), CFO (Jesper Alm) and the Chief Technical Officer (“CTO”) (Fredrik Robelius). for The board of directors has adopted an instruction the Managing Direc- the responsibilities tor which clarifies and authority of the Managing Director. According to the instruction, the Managing 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 Man- aging Director is responsible for the day to day business of the Company and 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. 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 arrangements 29 The board is entitled to deviate from the proposed guidelines if special reasons exist. 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. 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 the share based incentive programs. Variable salary to senior executives will be based upon their individual contribution to the Company’s performance. The yearly vari- able cash salary shall be within the range of one to four 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 finan- cial 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 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 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 Man- aging Director and three to six months between the Company and other members of executive management. The Manag- ing Director is entitled to twelve month’s payments if the Company terminates the contract and other members of executive management are entitled to six to twelve month’s payments. Remuneration to executive management 2017 (amounts in SEK thousands) Basic salary Pension arrange ments Variable salary Share based long­ term incentive Other benefits Managing Director 2,186 Other executive management Total 3,548 5,734 549 317 866 680 967 1,648 1,277 1,161 2,438 12 162 174 Total 2017 4,704 6,155 10,860 Total 2016 4,164 5,844 10,008 The increase in remuneration to executive management primarily relate to increased base salaries. For further information, please see note 12. Remuneration to the board 2017 Remuneration to be paid to the board of directors for the period between the AGMs of 2017 and 2018 amounts to a total of TSEK 2,615, allocated among the board members in the way shown in the below table. The annual general meeting 2017 resolved that remuneration of the chairman of the board of directors shall be TSEK 595 per annum and of the other mem- bers TSEK 265 per member per annum. Remuneration is not paid for service of the boards or directors of subsidiaries. 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 the audit committee is TSEK 90 and for each of the remuneration and technical com- mittee are TSEK 65. Further, if a member of the board of directors, following a reso- lution 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. Remuneration to board and committee members for the period between the AGMs of 2017 and 2018 (amounts in SEK thousands) Board of directors Audit committee Remuneration committee Technical committee Separate remuneration Member Dennis Harlin Robert Anderson Per Brilioth Alexandra Herger Magnus Nordin Per Seime Katherine Støvring Geoffrey Turbott 595 265 265 265 – 265 265 265 Total 2,185 Total 630 330 265 300 – 365 335 390 2,615 – – – – – 35 35 90 160 35 – – – – 65 35 – 135 – 65 – 35 – – – 35 135 – – – – – – – – – 30 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. The focus of internal control is therefore to ensure reliability and accuracy of the operator’s financial 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 or early stage operated exploration 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, 4 April 2018 Tethys Oil AB (publ) The board of directors This is a literal translation of the Swedish original report 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 2017 on pages 26–31 and that it has been prepared in accordance 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 cor- porate governance statement. This means that our examination of the corporate governance statement is different and substantially less in scope than an audit conducted in accordance with Inter- national Standards on Auditing and generally accepted auditing standards in Sweden. We believe that the examination has pro- vided 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, 4 April 2018 PricewaterhouseCoopers AB Johan Malmqvist Authorized Public Accountant Lead Partner Ulrika Ramsvik Authorized Public Accountant 31 Board of directors Member Function Elected Year of birth Education Experience Dennis Harlin Rob Anderson Per Brilioth Alexandra Herger Chairman of the board and member Remuneration committee Board member and chairman of the Technical committee Board member Board member and member Technical committee 2015 1941 2017 1953 2013 1969 2017 1957 Military Academy higher technical course MA Engineering, Christ’s College, Cambridge University. Chartered Engineer & Fellow of the Institution of Mechanical Engineers Bachelor of Science in Business Administration, University of Stockholm, Master of Finance, London Business School BA Geology, Ohio Wesleyen University and Masters studies Geology, University of Houston Brigadier general (ret.). Vice president SAAB/Gripen International 1996–2009. Defence attaché in Switzerland and Italy and seconded to Ministry for Foreign Affairs Engineer with deep experience in oil installations and major oil and gas field developments Executive positions in companies investing in emerging markets and the oil and gas sector. Currently CEO of Vostok New Ventures Ltd. VP Global Exploration at Marathon Oil, executive positions at Shell and Enterprise Oil Other board duties Member of the board of directors Harlin Consulting AB – Board member: Panoro Energy ASA and Tortoise Capital Advisors. Member: Women’s Leadership Committee, Oil Council and Leadership Texas, Foundation for women’s resources Chairman of the board: Pet Sounds AB, Gavald Holdings AB, Pet Sounds Digitalt AB, Pomegranate Investment AB and Thunderroad AB. Board member: Vostok New Ventures Ltd., Kontakt East Holding AB, LeoVegas AB, Avito AB, NMS Invest AB and Vostok Emerging Finance Ltd. Deputy board member: Digital Agency Ryssland AB. Shares in Tethys Oil (per 31 December 2017)1 142,071 Board and committee remuneration (SEK thousands)2 Independent in relation to the Company Independent in relation to the Company’s larger shareholders 630 Yes Yes 1 Privately, via company and insurance policy 2 Resolved upon at the AGM 2017 – 330 Yes Yes 10,000 265 Yes Yes – 300 Yes Yes 3232 Member Function Elected Year of birth Education Magnus Nordin Per Seime Katerine Støvring Geoffrey Turbott Board member and Managing Director Board member, chairman of the Remuneration committee and member Audit committee Board member and member Audit committee Board member, chairman of the Audit committee and member Technical committee 2001 1956 2017 1946 2012 1965 2015 1963 Bachelor of Arts, University of Lund and Master of Arts, University of California Los Angeles Master of Law, University of Oslo. Master of Comparative Law, University of Chicago Law School (Oil & Gas) Master of Law, University of Oslo and M.Sc. in Business Management, London Business School Former member of New Zealand’s institute of chartered accountants Experience Several executive positions in different oil companies 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 Experienced oil and gas lawyer with substantial client base on the Norwegian Continental Shelf. 17 years as partner and head of the oil and gas group in the law firm Simonsen Vogt Wiig, Oslo. International experience as Counsel/ General Counsel for Mobil Oil in Norway, USA and Indonesia. Board chairman for Premier Oil Norge (2004–2013) and Nexen Exploration Norge (2005–2014). General Counsel in Kongsberg Gruppen for nine years. Other board duties Shares in Tethys Oil (per 31 December 2017)1 Warrants in Tethys Oil (as per 31 December 2017) Minotaurus AB, Minotaurus Fastigheter AB and Minotaurus Energi AS – 1,464,127 5,000 2015/18: 78,000 2016/19: 70,000 2017/20: 75,000 Board and committee remuneration (SEK thousands)2 Independent in relation to the Company Independent in relation to the Company’s larger shareholders – No Yes 1 Privately, via company and insurance policy 2 Resolved upon at the AGM 2017 – 365 Yes Yes 3333 – – – 335 Yes Yes Board member: Tetbury Forestry Ltd and Progress Land Ltd – – 390 Yes Yes Executive management Magnus Nordin Jesper Alm Fredrik Robelius Board member and Managing Director Chief Financial Officer and secretary to the board Chief Technical Officer Employed since 2004 Employed since 2014 Employed since 2011 Born 1956 Born 1975 Born 1973 Education: Bachelor of Arts, University of Lund and Master of Arts, University of California Los Angeles Education: M.Sc. Business Administration, University of Lund Experience: several executive positions in different oil companies Experience: various positions in Corporate Finance at Pareto Securities Education: PhD Engineering Physics, Uppsala University; Postgraduate Diploma Petroleum Engineering, Heriot-Watt University Experience: energy engineering positions in Fortum, petroleum engineering related positions in Tanganyika Oil and Sinopec Shares in Tethys Oil1: 1,464,127 Shares in Tethys Oil1: 5,750 Shares in Tethys Oil1: 7,000 Warrants2 2015/18: 78,000 Warrants2 2016/19: 70,000 Warrants2 2017/20: 75,000 Warrants2 2015/18: 39,000 Warrants2 2016/19: 47,000 Warrants2 2017/20: 48,000 Warrants2 2015/18: 43,000 Warrants2 2016/19: 45,000 Warrants2 2017/20: 48,000 1 Per 31 December 2017, privately, via company and via insurance policy. 2 Warrants in Tethys Oil, as per 31 December 2017. 3434 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, Tethys Oil has assigned Pareto Securities AB to act as a liquidity provider for the shares of the Company. Tethys Oil has a warrant programme as part of the remuneration package to employees. Warrants have been issued following the AGMs in 2015, 2016 and 2017. The terms for each warrant series have been recalculated as a consequence of recalculation events. The current terms are: Shares outstanding Tethys Oil’s registered share capital at 31 December 2017 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 2017 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 2017, Tethys Oil held 1,644,163 (4.6 percent) of its own shares which were purchased during 2014 to 2017 at an average price of SEK 58.12. 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 amounts to 33,899,587. 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 2017/2020 350,000 324,000 76.80 62.60 85.50 1.08 1.05 1.00 As the strike price of tranche 2016/2019 is below the share price as per year-end 2017, the warrants of this tranche are included in the fully diluted number of shares, whereas the warrants of the other tranches are not included in the fully diluted number of shares. Share capital development Since the company’s inception in September 2001 and up to 31 December 2017 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 2007 2007 2007 2007 2008 2008 2008 2009 2009 2010 2010 2011 2012 2015 2015 2015 2016 2016 2016 Formation of the company Share issue Spilt 100:1 Share issue Split 2:1 Share issue Non-cash issue Share issue Share issue Exercise of warrants Share issue Set-off issue Split 3:1 Share issue Exercise of warrants Share issue Exercise of warrants Share issue 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 0.17 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 5,741,760 6,041,760 6,041,762 6,166,762 6,392,762 19,178,286 23,978,286 23,980,086 27,280,086 28,049,091 28,549,091 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 2,884,800 400,000 956,960 300,000 2 125,000 226,000 12,785,524 4,800,000 1,800 3,300,000 769,005 500,000 3,955,398 39,261 3,000,000 35,543,750 -35,543,750 – 35,543,750 -35,543,750 – 35 100,000 400,000 – 250,000 – 1,442,400 200,000 478,480 150,000 1 62,500 113,000 – 800,000 300 550,000 128,167 83,334 659,232 6,543 500,000 – -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 2,870,880 3,020,880 3,020,881 3,083,381 3,196,381 – 3,996,381 3,996,681 4,546,618 4,674,849 4,758,183 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. Share ownership structure The 15 largest shareholders in Tethys Oil as per 28 February 2018. For the financial year 2017, the board of directors proposes to the AGM 2018 a total distribution of SEK 6.00 per share (AGM 2017 SEK 1.00), equal to MSEK 203 (MSEK 34). The distribution, subject to approval by the AGM, is proposed to be made by a cash dividend (SEK 2.00 per share) and by a mandatory share redemp- tion program (SEK 4.00 per share). Name Lansdowne Partners LLP Franklin Templeton Grandeur Peak Global Advisors, LLC Magnus Nordin SEB Fonder Liontrust Avanza Pension Carl Erik Norman Russell Investments John Hancock Ruffer LLP Treasurer of the State of North Carolina Equity Investment Fund Peder Månsson Norges Bank Benedicte Berner-Eyde Total, largest shareholders Summary, others appr. 5,000 shareholders Outstanding shares Tethys Oil AB Total number of shares (incl. Tethys Oils own holdings) Source: Modular Finance, 28 Feb 2018 Number of shares Share of capital and votes 3,593,699 1,804,781 1,501,231 1,464,127 1,160,236 1,032,530 738,426 585,000 584,020 447,764 440,000 422,910 382,974 349,036 284,000 14,790,734 19,108,853 33,899,587 1,644,163 35,543,750 10.1% 5.1% 4.2% 4.1% 3.3% 2.9% 2.1% 1.6% 1.6% 1.3% 1.2% 1.2% 1.1% 1.0% 0.8% 41.6% 53.8% 95.4% 4.6% 100.0% 36 Distribution of shareholdings Distribution of shareholdings per 28 February 2018. 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 435,761 495,773 1,351,049 824,252 411,017 482,193 31,543,705 35,543,750 Percentage of shares 1.23% 1.39% 3.80% 2.32% 1.16% 1.36% 88.75% 100.00% Number of shareholders 3,496 593 562 110 31 27 171 Percentage of shareholders 70.06% 11.88% 11.26% 2.20% 0.62% 0.54% 3.43% 4,990 100.00% Share statistics 2017 The final transaction price in 2017 was SEK 65.75 corresponding to a total market capitalization of MSEK 2,229. During the year the price of Tethys Oil’s share decreased by 16.5 percent. The high- est transaction price in 2017 was SEK 81.75 on 2 January and the lowest was SEK 52.25 on 31 August. The turnover velocity was 61 percent on Nasdaq Stockholm. Share price development and turnover 2017 80 64 48 32 16 0 Jan 2017 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 2018 Feb 0 Share volume per day 37 Payments to authorities This report has been prepared in accordance with the law SFS 2015:812 (Lag 2015:812 om rapportering av betalningar till myn- digheter) regarding payments to authorities. The reported amounts refer to direct payments in excess of the threshold amount of SEK 860,000 and production sharing for the fiscal year 2017 for the group in which Tethys Oil AB (publ) (“Tethys Oil”) is the parent company. Per project Project Oman Blocks 3&4 Block 49 Total Oman Total Per Authority Production sharing Contract bonus License costs Total Barrels (’000) USD (’000) USD (’000) USD (’000) USD (’000) 2,131 111,040 – 2,131 2,131 – 111,040 111,040 – 100 100 100 – 250 250 250 111,040 350 111,390 111,390 Production sharing Contract bonus License costs Total Barrels (’000) USD (’000) USD (’000) USD (’000) USD (’000) Sultanate of Oman – Ministry of Oil & Gas 2,131 111,040 Sultanate of Oman – Ministry of Finance Total Oman Total – 2,131 2,131 – 111,040 111,040 – 100 100 100 100 150 250 250 111,140 250 111,390 111,390 Production sharing The category includes non-cash taxes and compensation to receiv- ing state/authority in barrels of oil from Tethys Oil’s working interest share of production. The presented amounts are based on net entitlement and have been valued using the reported average price for the period. Contract bonus This pertains to the acquisition of an exploration license for Oman Block 49 where payment was made to Oman’s Ministry of Finance. License costs This pertains to costs for maintaining the exploration license for Oman Block 49 where payment was made to Oman’s Ministry of Oil and Gas and Oman’s Ministry of Finance. 38 Key financial data Group Operational items 2017 2016 2015 2014 2013 Production before government take, bbl 4,475,314 4,478,121 3,578,488 2,807,653 1,709,706 Production per day, bbl 12,261 12,235 9,804 7,692 4,684 Net sales after government take, bbl 2,316,404 2,357,701 1,805,056 1,464,228 850,926 Achieved oil price, USD/bbl 51.8 40.5 58.1 103.9 106.6 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 Distribution per share, SEK Cash flow from operations per share, USD 119.3 78.2 66% 38.4 32% 33.1 28% 42.0 228.5 244.7 93% neg. 40.4 42.0 15.56% 18.97% 19 1.00 1.46 87.1 44.0 51% -0.5 -1% 2.7 3% 39.0 196.9 239.0 82% neg. 48.5 39.0 1.29% 4.20% 19 4.00 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 10.85% 25.82% 25.56% 13.59% 30.87% 29.82% 17 3.00 1.69 18 n.a. 2.89 17 n.a. 1.45 Number of shares at year end, thousands 35,544 35,544 35,544 35,544 35,544 Of which repurchased shares at period end 1,644,163 1,329,224 1,083,669 298,160 n.a. Number of shares at year end (excluding repurchased shares), thousands 33,900 34,215 34,460 35,246 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 6.43 34,170 34,385 0.97 0.96 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 39 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 2017 2016 2015 38.4 39.5 0.3 78.2 42.0 – 42.0 50.1 -40.4 9.7 -0.5 44.4 0.1 44.0 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 45.1 21.1 8.6 74.8 44.8 -59.7 -14.9 51.5 -44.1 7.4 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. Leverage ratio Net interest bearing debt as a percentage of shareholders’ equity. 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 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. 40 Administration report (This is an English translation of the Swedish original) Tethys Oil AB (publ) Tethys Oil Block 3 & 4 Ltd. Tethys Oil Montasar Ltd. Tethys Oil Exploration AB Tethys Oil France AB Tethys Oil Oman Ltd. Jyllands Olie ApS Odin Energy A/S 40% 50% Blocks 3&4, Oman Block 49, Oman Attila, France UAB TAN Oil Raseiniai, Lithuania UAB LL Investicijos Rietavas, Lithuania UAB Minijos Nafta Gargzdai, Lithuania 75% 50% Ownership in subsidiary companies is 100% unless otherwise stated. The consolidated financial statements of the Tethys Oil Group (hereafter referred to as “Tethys Oil” or the “Group”), where Tethys Oil AB (publ) (the “Company”) with organisational num- ber 556615-8266 is the parent company, are hereby presented for the twelve months period ended 31 December 2017. The amounts relating to the comparative period (equivalent period of last year) are shown in parenthesis after the amount for the current period. Segments of the Group are geographical markets. OPERATIONS Tethys Oil is a Swedish oil company with focus on onshore areas with known oil discoveries. Tethys Oil’s core area is Oman, where the Group holds interests in Blocks 3&4 and Block 49. The reserve and resource base on Blocks 3&4 amounts to 22.0 mmbo of 2P reserves and the 17,3 mmbo of 2C Contingent Resources. The average oil production from Blocks 3&4 amounted in 2017 to 12,162 barrels per day. 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. Production Tethys Oil’s core area is onshore Oman, where Tethys Oil holds a 30 percent non-operated interest in exploration and production licence Blocks 3&4 and a 100 percent operated interest in explora- tion licence Block 49. Tethys Oil also has non-operated interests in three licenses onshore Lithuania and in one license onshore France. The primary production comes from Blocks 3&4. The production in 2017 on Blocks 3&4 was in line with the production in 2016 and amounted to 4.4 mmbo (4.4 mmbo in 2016). The produc- tion in the fourth quarter 2017 was slightly lower than the aver- age for the year, and was impacted by a number of factors, some related to mechanical upgrades and repair of downhole pumps and repairs and upgrades of surface components. A shortage of work- over capacity led to some wells being shut in longer than planned. Both reserves and production have also been affected by a lower than expected production from part of the Shahd area which has responded less well than anticipated to water injection. The imple- mentation of the Shahd water injection programme will continue and results are being carefully monitored. Production from the appraisal programmes and long term production tests of the new discoveries made in 2017 (Erfan, Ulfa and Samah) are contribut- ing and are expected to contribute to 2018 production. Oman has, following an agreement with OPEC (Declaration of Cooperation OPEC and non-OPEC) in December 2016, imposed a produc- tion recommendation relating to Blocks 3&4. The Declaration of Cooperation OPEC and non-OPEC has been extended to cover all of 2018, with a review planned in June 2018. The production recommendation may affect Tethys Oil’s oil production and sales. 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 2017, net to Tethys Oil, amounts to MUSD 44.2. Production from the Gargzdai licence in western Lithuania has gradually decreased during the period. Tethys Oil’s share of Gargz- dai is indirectly owned through Odin Energi A/S, a Danish associ- ated company. 41 Tethys Oil’s share of volumes, before government take 2017 2016 2015 2014 2013 Tethys Oil’s share of annual production, bbl Oman, Blocks 3&4 Production 4,439,118 4,436,438 3,539,631 2,765,654 1,663,069 Average daily production, bopd 12,162 12,121 9,698 7,577 4,556 Lithuania, Gargzdai Production 36,196 41,684 38,857 42,000 46,637 Average daily production, bopd 99 114 106 115 128 Total production 4,475,314 4,478,121 3,578,488 2,807,653 1,709,706 Total average daily production, bopd 12,261 12,235 9,804 7,692 4,684 Average daily production net to Tethys Oil, yearly bopd 12,000 10,000 8,000 6,000 4,000 2,000 0 2010 2011 2012 2013 2014 2015 2016 2017 Reserves and Contingent Resources Oman Tethys Oil’s net working interest Reserves on Blocks 3&4 in Oman as per 31 December 2017 amount to 15,559 thousand barrels of oil (“mbo”) of proven Reserves (1P), 22,044 mbo of proven and probable Reserves (2P) and 32,414 mbo of proven, probable and possible Reserves (3P). Tethys Oil’s net working interest resources of oil in Oman amounts to 10,129 mbo of 1C, 17,264 mbo of 2C and 27,328 mbo of 3C Contingent Resources. Development of reserves, Blocks 3&4 (audited) mbo 1P 2P 3P Total 31 December 2016 14,222 21,408 29,729 Production 2017 Discoveries Revisions -4,439 3,482 2,294 -4,439 4,879 196 -4,439 7,475 -350 Total 31 December 2017 15,559 22,044 32,414 In 2017 Tethys Oil replaced 5,776 mbo of 1P Reserves, repre- senting a 1P Reserve replacement ratio (i.e. percentage of 2017 production replaced) of 130 percent; replaced 5,075 mbo of 2P Reserves, representing a 2P Reserve replacement ratio of 114 per- cent; replaced 7,124 mbo of 3P Reserves, representing a 3P Reserve replacement ratio of 160 percent. Reserves Blocks 3&4, 31 December 2017 (audited) mbo Farha South Field Shahd Field Saiwan East Field New areas 1P 9,206 3,441 631 2,281 2P 3P 11,756 16,061 5,634 1,250 3,405 8,856 1,805 5,692 Total 31 December 2017 15,559 22,044 32,414 In addition to Reserves, Tethys Oil also announces Contingent Resources. The estimated Contingent Resources are contained in the recent discoveries – Ulfa, Erfan and Samah. Development of the Con- tingent Resources in the new discoveries will be contingent on the on- going appraisal programme and also a work programme and budget to access these resources. 42 Contingent Resources Blocks 3&4 (audited) mbo 1C 2C 3C Total 31 December 2017 10,129 17,264 27,328 Tethys Oil’s 2017 and 2016 year-end Reserves reports were prepared by ERC Equipoise Limited (“ERCE”) and DeGolyer and MacNaughton Canada Limited (“DMCL”), respectively, as independent qualified reserves evaluators. ERCE were engaged to prepare the 2017 year-end Reserves report following the closure of DMCL’s office in Calgary. The audits of the Reserves in Oman has been conducted using the 2007 Petroleum Resources Management System (PRMS), sponsored by the Society of Petroleum Engineers (SPE), World Petroleum Coun- cil (WPC), American Association of Petroleum Geologists (AAPG) and Society of Petroleum Evaluation Engineers (SPEE). Revenue Revenue 2017 2016 2015 2014 2013 31 December 2017 is 36,092 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. Result Tethys Oil reports a net result after tax for 2017 of MUSD 33.1, representing earnings per share of USD 0.96. The result for 2017 is up compared to 2016. Net result is mainly up due to higher oil prices and the lower 2016 result due to the Export Reporting Error (see note 4 on page 62). Operating expenses Operating expenses, Blocks 3&4 2017 2016 2015 2014 2013 Barrels sold, bbl 2,316,404 2,357,701 1,805,056 1,464,228 850,926 Production costs, MUSD 32.6 33.5 38.4 32.7 20.5 Underlift (overlift) movement, bbl (8,062) (50,754) 35,552 (26,088) 13,870 Oil price, USD/bbl 51.8 40.5 58.1 103.9 106.6 Net sales, MUSD 119.9 95.4 104.9 152.1 90.7 Well workovers, MUSD 2.3 3.1 4.5 4.4 3.0 Total operating expenses, MUSD Operating expenses per barrel, USD 34.9 36.5 42.9 37.2 23.5 7.9 8.2 12.1 13.4 14.1 Underlift (overlift), MUSD Overlift adjustment reporting error, MUSD (0.6) (2.4) 2.2 (2.8) 1.5 – (5.9) – – – Revenue, MUSD 119.3 87.1 107.0 149.3 92.2 Operating expenses during 2017 amounted to MUSD 34.9 com- pared to MUSD 36.6 during 2016. 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. Revenue for 2017 is up 37 percent compared to revenue 2016 and the main reason is the increase in oil prices which are up 28 percent between the years and the impact in 2016 from the Export Reporting Error (see note 4 on page 62). There has been an increase in the overlift position during 2017. Operating expenses per barrel since 2013 have been in the range USD 8 to 14 per barrel. The reduction in operating expenses per barrel since 2013 has been expected and is the result of general cost reductions and higher production. During 2017 operating expenses per barrel has been reduced compared with 2016. During 2017, Tethys Oil sold 2,316,404 barrels of oil from Blocks 3&4, representing a 2 percent decrease in comparison with 2016 when 2,357,701 barrels of oil were sold. This resulted in net sales during 2017 of MUSD 119.9 compared to MUSD 95.4 during 2016. In addition to Net sales, there has been an adjustment for overlift amounting to MUSD 0.6 which together with Net sales adds up to Revenue of MUSD 119.3. In 2016 the overlift adjust- ment amounted to MUSD 8.3 of which MUSD 5.9 was related to the Export Reporting Error. The average selling price amounted to USD 51.8 per barrel during 2017, 28 percent higher compared to 2016. The average price for Dated Brent oil during 2017 amounted to USD 54.1 per barrel. 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 to increase the overlift between year-end 2017 and 2016. The total overlift position as per Depletion, depreciation and amortisation DD&A, Blocks 3&4 2017 2016 2015 2014 2013 DD&A, MUSD 39.5 44.4 34.6 31.0 21.0 DD&A per barrel, USD 8.9 10.0 9.8 11.2 12.6 Depletion, depreciation and amortisation (“DD&A”) for 2017 amounted to MUSD 39.5, which is lower than 2016 and attrib- utable to a decreased DD&A rate per barrel. The DD&A charge relates to Blocks 3&4. Net back Net back, Blocks 3&4, USD/bbl Oil price achieved (sales barrels) Revenue (after government take) 2017 2016 2015 2014 2013 51.8 40.5 58.1 103.9 106.6 27.0 21.0 30.2 54.0 55.4 Operating expenses 7.9 8.2 12.1 13.4 14.1 Net back 19.1 12.8 18.1 40.6 41.3 43 The increase in net back per barrel during 2017 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 2017 amounted to MUSD -0.3 compared to MUSD -0.7 during 2016. There has been a long term trend of declining production from Gargzdai, which is in line with expectations. Administrative expenses Administrative expenses amounted to MUSD 5.9 for 2017 com- pared to MUSD  5.8 during 2016. Administrative expenses are mainly salaries, rents, listing costs and external services. Admin- istrative expenses have been stable between years 2017 and 2016. Tax In Oman, Tethys Oil’s oil and gas operations are governed by EPSA:s whereby Tethys Oil receives its share of oil after govern- ment 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 2017 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 -3.9 and most of the effect relates to the weaker US dollar in relation to the Swed- ish 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  0.2 and other financial expenditures amounted to MUSD 1.2. The currency exchange effect and fees on long term debt is part of net financial result amounting to MUSD -5.3 for the full year 2017 compared to MUSD 3.2 during 2016. Investments and work programme Summary of oil and gas interests (MUSD): Country Oman Blocks 3&4 Oman Block 49 Lithuania France New ventures Total Book value 31 Dec 2017 Book value 31 Dec 2016 Investments Jan–Dec 2017 189.1 0.4 – – 0.2 189.7 190.8 – – – 0.3 191.1 39.9 0.4 – – 0.1 40.4 During 2017, total investments amounted to MUSD  40.4 of which almost all relate to Blocks 3&4. Investments during the year have been lower than investments in 2016. Blocks 3&4 Investments Blocks 3&4, MUSD Drilling G&G Facilities Total investments Blocks 3&4 2017 2016 2015 2014 2013 26.6 30.3 20.5 19.8 22.0 4.2 9.1 4.5 8.9 6.6 13.4 11.3 11.9 9.1 8.9 39.9 48.2 40.7 38.3 40.0 A total of three rigs and a work over unit were in operation on the blocks at the end of the year. Ongoing maintenance and updating work was conducted on all fields in 2017, including upgrading flowlines and improving water handling. Block 3: Farha South Field A total of 14 appraisal/production wells were drilled on the Farha South field in 2017 with the target to reach an optimal develop- ment of the field. All wells encountered oil and have been con- nected to the production system. Five of the 14 wells were drilled in previously undrilled fault blocks AS, AZ, C, O and Y. All wells in the new fault blocks were drilled vertically down to the Barik sandstone. In addition, 10 water injection wells and one water source well were drilled on the field. Block 4: Shahd and Saiwan East oil fields Eight production wells were drilled in previously drilled structures on the Shahd field in 2017 and one well was drilled on the Saiwan East field. One appraisal well, the Shahd Q-1 well, was drilled in a in a previously undrilled structure on the Shahd field. The well encountered oil and was completed as a producer from the Khufai layer. All wells encountered oil. In addition, two water injection wells were drilled on the Shad field. Exploration on Blocks 3&4 The exploration well Erfan-1 was completed during the first quar- ter 2017. Erfan-1 was drilled on a previously undrilled structure located approximately 6 km south west of the Saiwan East field on Block 4. The Khufai formation was the main target. Erfan-1 reached a total depth of 2,548 metres in the first quarter 2017 and the well flowed oil to surface from the Khufai formation. The Erfan discovery was also appraised in 2017 with two successful appraisal wells. The exploration well Ulfa-1 was drilled in the first quarter 2017 and successfully completed and tested in the second quarter 2017. Ulfa-1 was drilled on a previously undrilled structure located on trend with the Farha South field within the Farha South 3D-area, approximately 20 km north of the Shahd K area. The well was drilled as a deviated well targeting the Barik, Lower Buah and Khufai formations. Ulfa-1 reached a total vertical depth of 4,040 metres and the well flowed oil to surface from the Khufai forma- tion. The appraisal of the Ulfa discovery will start in 2018. The exploration well Samah-1 was spudded in late August 2017 on Block 3. Samah-1 was drilled vertically to a total depth (TVD) of 4,142 m on a structure located 5 km south of the Ulfa discovery. 44 The well was completed in November and oil shows were recorded in three formations Middle Buah, Lower Buah and Khufai. The well was tested in late December 2017 with good oil flows to surface. value related to Minijos Nafta (Gargzdai) is zero and as there are no formal or informal obligations related to Minijos Nafta, Tethys Oil does not recognize any negative net result from Minijos Nafta. During the fourth quarter 2017 the exploration well V-1 was drilled on a structure 2 km northeast of the fault block F in Farha South field. The main target of the well was to test the Amin for- mation as a producer in Block 3. The well was drilled to a total depth (TVD) of 2,530 m but did not encounter any hydrocarbons in the Amin formation and a post drill analysis is on-going. The evaluation will guide the continuing effort of the Amin play work. The three successful exploration wells have been hooked up to the Blocks 3&4 production system for long term testing. Seismic acquisition A new 3D seismic campaign was launched late in the fourth quarter east of the Ulfa discovery. Some 320 km2 of seismic were acquired in 2017. The survey continues in 2018 with the target to cover a total area of about 1,200 km2. Tethys Oil has so far identified more than ten leads based on the interpretation of old 2D seismic. Block 49 In December 2017, Tethys Oil was awarded a new exploration license in Oman. Block 49 is an onshore block that covers a prospective but still rather unexplored area in the south western Oman, bordering Saudi Arabia. Tethys Oil is the operator of Block 49 and holds a 100 percent license interest. The Block 49 licence covers an area of 15,439 km2. More than 11,000 km of 2D seismic acquired by previous operators has been made available to Tethys Oil. Nine wells have been drilled within the block boundaries, several of which are reported to have encountered oil shows. Among the legacy wells is the first well ever drilled in Oman in 1955 (Dauka-1). The EPSA for Block 49 covers an initial exploration period of three years with an optional extension period of another three years. In case of a commercial oil or gas discovery, the EPSA will be trans- formed into a 15 year production license which can be extended for another five years. In case of a commercial discovery Oman Government Company, has a back-in right for a 30 percent inter- est against refunding of past expenditure. The initial work com- mitments during the first period include geological studies, seismic acquisition and processing and exploratory drilling. Production on the Gargzdai licence has decreased following nat- ural decline of the wells. Old 2D seismic covering the Rietavas licence has been reprocessed and interpreted to further evaluate two leads. Liquidity and financing Cash and bank and Net cash as per 31 December 2017 amounted to MUSD  42.0 compared to MUSD  39.0 as per 31 December 2016. In May 2017 a dividend of SEK 1.00 per share was paid to share- holders, which in total amounted to MUSD  3.9. Furthermore MUSD  2.3 was used to repurchase 314,939 shares during the twelve months ending 31 December 2017. During the twelve months ended 31 December 2017, the cash flow from operations amounted to MUSD 50.1 and investments in oil and gas amounted to MUSD 40.4. For the twelve months 2017 the cash flow from operations after investments in oil and gas amounted to MUSD 9.7. Tethys Oil’s operations on Blocks 3&4 and Block 49, including investment programme, are expected to be funded from cash flow from operations 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 2017 amount- ing to MSEK 85.0 compared to MSEK 23.4 for 2016. Adminis- trative expenses amounted to MSEK 31.2 for 2017 compared to MSEK 31.3 for 2016. Net financial result amounted to MSEK 108.1 during 2017 compared to MSEK 46.6 for 2016. Currency exchange losses related to loans to subsidiaries that were offset by dividends from group companies is the main reason for the posi- tive net financial result during the year. 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. Geological studies and studies of legacy seismic data is ongoing. New ventures A number of new ventures projects have been reviewed and several continue to be evaluated. Associated companies Lithuania As per 31 December 2017, the value of the shareholding in the two associated Danish companies holding the interests in Lithu- anian licenses, amounted to MUSD 0.0 compared to MUSD 0.3 at the end of 2016. The reduction in book value is explained by a loss from associated companies of MUSD -0.3 (-0.7). The book 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 fulfilled its commitments on Blocks 3&4. On Block 49, Tethys Oil’s initial work commitments during the first period of three years include geological studies, seismic acquisition and process- ing and exploratory drilling. 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 45 areas of interest there are requirements of work to be done or mini- mum expenditures in order to retain the licences, but no commit- ments 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, if any, in all areas of operation. 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. Board of directors At the AGM of shareholders on 17 May 2017 Per Brilioth, Magnus Nordin, Dennis Harlin, Katherine Støvring (since resigned) and Geoffrey Turbott were re-elected members of the board. Alexandra Herger, Rob Anderson and Per Seime were newly elected mem- bers of the board. No deputy directors were appointed. At the same meeting Dennis Harlin was appointed chairman of the board. The work of the board is subject to an established work proce- dure 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 14 meetings during 2017. The eight members of the board have consisted of seven non-executive directors. These seven non-executive directors are also members of the audit committee and the remuneration committee. Geoffrey Turbott is chairman of the audit committee, Per Seime is chairman of the remuneration committee and Rob Anderson is chairman of the technical committee. For guidelines for remuneration to management, see note 12. Organisation At the end of the year, Tethys Oil had an average number of full time employees of 19 (19). Of these, 7 (7) were women. In addition, contractors and consultants are engaged in Tethys Oil’s operations. 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. Sustainability report In accordance with the Swedish Annual Accounts Act (ÅRL chap- ter 6 11§) Tethys Oil has opted to issue the sustainability report as a document separate from the financial statements. The sustain- ability report can be found on pages 22 to 25 of this annual report. 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 Montasar Limited, Tethys Oil France AB and Tethys Oil Exploration AB. The Tethys Oil Group was established 1 October 2003. The Group has branch offices in Muscat, Oman and Dubai, the United Arab Emirates. Share data As per 31 December 2017, 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 2016. Tethys Oil has a warrant based incentive programme for employ- ees, for further information please see Note 21 on page 68. As the subscription price is below the share price for one tranche of the incentive program as per the 31 December 2017, the warrants of this tranche are included in the diluted number of shares which amount to 35,895,500 per 31 December 2017. If the subscription prices have been below the share price during the reporting period, the dilution effects have been included in the weighted average number of shares in circulation after dilution. As per 31 December 2017, Tethys Oil held 1,644,163 of its own shares which have been purchased since commencement of the programme during the fourth quarter 2014. The purpose of the repurchasing program is to optimize the capital structure and to enable any repurchased shares to be used as payment in con- nection with, or financing of, acquisitions of companies or busi- nesses. 314,939 shares were purchased during 2017. The repur- chased 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 2017 before dilution is 34,170,474 and after dilution 34,385,463. After 31 December 2017 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 See note 25. Risk and uncertainties A statement of risks and uncertainties are presented in note 1. Appropriation of profit The board of directors proposes a dividend of SEK 2.00 per share (AGM 2017: SEK 1.00) equal to MSEK 67.8 (MSEK 34.2) or MUSD 8.0 (MUSD 3.6). The board of directors proposes that the dividend is to be paid in two equal instalments of SEK 1.00 per share each, payable in May and November 2018. Proposed record dates are May 14, 2018 and November 14, 2018. The board of directors proposes an extraordinary distribution of SEK 4.00 per share by way of a mandatory share redemption programme follow- ing the AGM 2018 equal to MSEK 135.6 or MUSD 16.1. 46 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 218.1 85.0 303.1 The Board of Directors proposes that these earnings be appropriated as follows: To the shareholders, a distribution of SEK 2.00 per share 67.8 To the shareholders, an extraordinary distribution of SEK 4.00 per share To be retained in the business 135.6 99.7 303.1 Cash dividend The board of directors’ proposal consists of a cash dividend of SEK 2.00 per share amounting to SEK 67,799,174 and an extraordinary distribution of SEK 4.00 per share amounting to SEK 135,598,348. The dividend and extraordinary distribution is subject to approval at the AGM 2018. The preliminary record day for the dividend is 14 May 2018 and 14 November 2018. As per 31 December 2017, the Group’s and the parent company’s equity ratio amounted to 93.4 percent and 96.7 percent, respectively. After the dividend, the Group’s and the parent company’s equity ratio will amount to 92.6 percent and 93.2 percent, respectively. Tethys Oil has generated significant cash flows in recent years and the Group’s financial position is strong. The board has consid- ered 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 possibilities 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 obliga- tions in the short and long term and make the necessary invest- ments. The board believes that the size of the equity, even after the proposed dividend, is in reasonable proportion to the scale of the Parent company 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 statements, statements of changes in equity and related notes. Balance sheets and income statements will be resolved at the AGM, 9 May 2018. 47 Financial statements for the group Consolidated statement of comprehensive income 1 January – 31 December, 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, 4 9 3, 8, 8 6 10-12, 21 13 14 15 17 17 17 17 17 17 2017 119.3 -34.9 84.4 -39.5 -0.3 -0.3 -5.9 38.4 3.0 -8.3 ­5.3 33.1 – 33.1 4.5 4.5 37.6 37.6 – 2016 87.1 -36.6 50.5 -44.4 -0.1 -0.7 -5.8 ­0.5 9.4 -6.2 3.2 2.7 – 2.7 -7.0 ­7.0 ­4.4 -4.4 – 35,543,750 35,543,750 35,895,500 36,232,460 34,170,474 34,324,020 34,385,463 34,372,065 0.97 0.96 0.08 0.08 48 Consolidated balance sheet As at 31 December, MUSD Note 2017 2016 ASSETS Non current assets Oil and gas properties Office equipment Investment in associates 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 Current liabilities Current provisions Accounts payable and other current liabilities Loan facility Total liabilities TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 189.7 0.0 0.0 189.7 12.7 0.3 42.0 55.0 191.1 0.1 0.3 191.5 7.4 1.1 39.0 47.5 244.7 239.0 0.8 71.0 3.4 153.3 228.5 9.1 9.1 1.0 6.1 – 7.1 16.2 244.7 0.8 71.0 -1.1 126.2 196.9 8.8 8.8 1.9 31.4 – 33.3 42.1 239.0 8 6 16 17 7 7 19 18 49 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 2016 0.8 71.0 Comprehensive income Result for the year 2016 Currency exchange differences for the year 2016 Total comprehensive income Transactions with owners Purchase of own shares Dividends paid Share redemption Incentive programme Total transactions with owners Closing balance 31 December 2016 Opening balance 1 January 2017 Comprehensive income Result for the year 2017 Currency exchange differences for the year 2017 Total comprehensive income Transactions with owners Purchase of own shares Dividends paid Incentive programme Total transactions with owners – – – – – – – – 0.8 0.8 – – – – – – – – – – – – – – – 71.0 71.0 – – – – – – – 5.9 – -7.0 ­7.0 – – – – – ­1.1 ­1.1 – 4.5 4.5 – – – – 139.5 217.2 2.7 – 2.7 -1.5 -3.7 -10.9 0.3 ­15.8 126.2 126.2 33.1 – 33.1 -2.3 -3.9 0.3 ­5.9 2.7 ­7.0 ­4.4 ­1.5 ­3.7 ­10.9 0.3 ­15.8 196.9 196.9 33.1 4.5 37.6 ­2.3 ­3.9 0.3 ­5.9 Closing balance 31 December 2017 0.8 71.0 3.4 153.3 228.5 50 Consolidated cash flow statement 1 January – 31 December, MUSD Note 2017 2016 13 14 8 8 8 6 17 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 Cash from associated companies, net Cash flow from investment activity Financing activity Purchase of own shares Share redemption Dividend 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 38.4 – -0.2 – 0.3 38.2 76.7 -5.4 -21.2 50.1 -40.4 – ­40.4 -2.3 – -3.9 ­6.2 3.5 39.0 -0.5 42.0 -0.5 – -0.7 – 0.1 45.8 44.7 -1.8 9.8 52.7 -48.5 0.1 ­48.4 -1.7 -11.6 -4.1 ­17.4 ­13.1 51.2 0.9 39.0 51 Financial statements for the parent company Parent Company income statement 1 January – 31 December, 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 year1 Note 5 6 10–12, 21 13 14 20 24 15 2017 10.9 -2.8 -31.2 ­23.1 164.6 -53.6 -2.9 108.1 – 85.0 – 85.0 2016 10.6 -5.6 -31.3 ­26.3 85.1 -31.5 -7.0 46.6 3.1 23.4 – 23.4 1 As there are no items in the parent company’s other comprehensive income, no separate report on total comprehensive income is presented. 52 Parent Company balance sheet As at 31 December, MSEK Note 2017 2016 0.1 0.9 355.6 0.0 356.6 5.5 0.7 58.2 64.4 421.0 5.9 71.1 481.0 -262.9 85.0 380.1 5.7 35.2 40.9 421.0 0.2 1.0 275.3 2.7 279.2 2.8 0.7 104.6 108.1 387.3 5.9 71.1 481.0 -235.2 23.4 346.2 3.8 37.3 41.1 387.3 20 6 16 17 ASSETS Non­current 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 and other current liabilities 19 Other current liabilities to group companies Total liabilities TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 53 Parent Company statement of changes in equity Restricted equity Unrestricted equity MSEK Share capital Statutory reserve Share premium reserve Opening balance 1 January 2016 5.9 71.1 481.0 Transfer of prior year net result Comprehensive income Result for the year 2016 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 2016 Opening balance 1 January 2017 Transfer of prior year net result Comprehensive income Result for the year 2017 Period result Total comprehensive income Transactions with owners Purchase of own shares Dividends paid Incentive programme Total transactions with owners – – – – – 5.9 5.9 – – – – – – – – – – – – – – – – – 71.1 71.1 481.0 481.0 – – – – – – – – – – – – Retained earnings ­396.4 310.2 – – – -14.6 -34.4 -102.6 2.6 ­149.0 ­235.2 ­235.2 23.4 – – – -19.3 -34.2 2.4 ­51.1 Net result 310.2 -310.2 23.4 23.4 23.4 – – – – – 23.4 23.4 -23.4 85.0 85.0 85.0 – – – – Total equity 471.9 – 23.4 23.4 23.4 ­14.6 ­34.4 ­102.6 2.6 ­149.0 346.2 346.2 – 85.0 85.0 85.0 ­19.3 ­34.2 2.4 ­51.1 Closing balance 31 December 2017 5.9 71.1 481.0 ­262.9 85.0 380.1 54 Parent Company cash flow statement 1 January – 31 December, MSEK Note 2017 2016 Cash flow from operations Operating result Interest received Interest paid Adjustment for 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 Dividend from associated companies Investment in long term receivables 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 13 14 6 17 -23.1 0.0 0.0 -3.1 ­26.2 -2.7 -0.2 ­29.1 – 43.4 43.4 -19.3 -34.2 – ­53.5 ­39.2 104.6 -7.2 58.2 -26.3 0.0 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 55 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. These consolidated financial statements have been approved for issue by the board of directors on 4 April 2018. 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 2016 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 2017 IASB has issued several amendments to financial standards effective as from 1 January 2017 of which no one has had any material impact on the consolidated financial statements of the Group. 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 2017, 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 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 has assessed the impact of IFRS 15 and has concluded that the standard will not cause any change in timing, nor have any material effects on the Group financial reporting apart from changes in presentation where the liftings position will be separately disclosed. The effect of the standard on the Group reporting is illustrated in the comparative table below. Reporting of revenue under old accounting principles as presented in disclosures MUSD Net sales, 2017 2016 2015 2014 2013 119.9 95.4 104.8 152.1 90.7 Underlift (overlift) -0.6 -2.4 2.2 -2.8 1.5 Overlift adjustment Export Report- ing Error – -5.9 – – – Revenue 119.3 87.1 107.0 149.3 92.2 Reporting of revenue and other gains and losses under new accounting principles as presented in disclosures MUSD Revenue 2017 2016 2015 2014 2013 119.9 95.4 104.8 152.1 90.7 Underlift (overlift) -0.6 -2.4 2.2 -2.8 1.5 Overlift adjustment Export Report- ing Error – -5.9 – – – Net income from oil production 119.3 87.1 107.0 149.3 92.2 MUSD 2017 2016 2015 2014 2013 EBITDA, old accounting principles EBITDA, new accounting principles 78.2 78.2 44.0 44.0 58.6 108.0 58.6 108.0 74.8 74.8 Earnings per share, old accounting principles, USD per share 0.96 0.08 0.67 1.39 1.07 Earnings per share, new account- ing principles, USD per share 0.96 0.08 0.67 1.39 1.07 Shareholders’ equity, old accounting principles Shareholders’ equity, new accounting principles 228.5 196.9 217.2 214.3 168.4 228.5 196.9 217.2 214.3 168.4 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. The standard is effective for accounting periods beginning on or after 1 January 2018. The Group has elected not to adopt the standard early. The Group has assessed the impact of IFRS 9 and has concluded that the standard will not have any material effects on the Group financial reporting. 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. 56 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. 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. 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 2017 31 December 2016 Currency 2017 Average 2017 Period end 2016 Average 2016 Period end SEK/USD SEK/EUR 8.67 9.73 8.44 10.00 8.63 9.52 9.42 9.80 Segment reporting Operating segments are based on geographic perspective and reported in a manner consistent with the internal reporting provided to the Executive Management. 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. 57 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 case of assets whose useful lives differ from the lifetime of the field, in which case the straight-line method is applied. 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 testing. This is performed in conjunction with each balance 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 when necessary for each cash generating unit, which corresponds to licence right, production sharing agreement or equivalent 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. 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 classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. Tethys Oil reports a financial asset or a financial liability in the balance sheet when it becomes a party to the instrument’s contractual terms. Tethys Oil derecognises a financial liability or part thereof when the obli- gation 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 58 probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. 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, 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. Should any Group company purchase parent company shares (repurchase of own shares) the proceeds including any directly attributable transaction costs (net after tax) will reduce equity attributable to the shareholders of the parent company until the shares are annulled or realized. If the shares are realized, proceeds net after directly attributable transaction costs and tax effects are shown in equity attributable to the shareholders of the par- ent company. 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 Tethys Oil has a legal or constructive obligation 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 reliable esti- mate can be made of the amount. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation 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 Tethys Oil 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 Tethys Oil’s working interest share in the related oil and gas property, results in produc- tion underliftings, or overliftings. Underliftings are recorded as Other receiv- ables valued at market value, and overliftings are recorded in Other cur- rent liabilities and accrued at the market value. Underliftings are reversed from Other receivables when the crude oil is lifted and sold. Overliftings are reversed from Other current liabilities when sufficient volumes are pro- duced 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. 59 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. 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. 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. 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. 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 different parts of Tethys Oil’s operations. The main operational risk in explo- ration 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 2017. 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. Net result in financial statements (MUSD) Shift in oil price (USD/barrel) Total effect on net result (MUSD) 33.1 +5 11.4 33.1 -5 -11.4 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. 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. 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. 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. 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 2017, 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 sev- eral 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: Revenue Investments External financing at year end 2017 100% in USD 99% in USD No 2016 100% in USD 99% in USD No 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. 60 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- 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. Net result in financial statements (MUSD) Shift in SEK/USD Total effect on net result (MUSD) 33.1 +10% 3.3 33.1 -10% -3.3 Liquidity risks and capital risk By operating in several countries, Tethys Oil is exposed to currency fluctua- tions. Income is and will also most likely be denominated in foreign curren- cies, US dollars in particular. Furthermore, Tethys Oil has since inception been equity and debt financed through share and bond issues, 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 bal- ances are maintained in order to cover day to day operations. Management relies on cash forecasting to assess Tethys Oil’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 2017 31 December 2016 MUSD <1 year 1–3 year <1 year 1–3 year Accounts payables and other liabilities Total 6.1 6.1 – – 31.4 31.4 – – 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 2017 the Group’s receivables on oil sales amounted to MUSD 12.1 (MUSD 7.1), 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. IAS 39 valuation categories and related balance sheet items 31 December 2017 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 payable and other current liabilities – – – 12.7 42.0 – – – 6.1 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 payable and other current liabilities – – – 7.4 39.0 – – – 31.4 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 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. 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 Tethys Oil continuously assesses its producing oil and gas properties for any need for impairment testing. This is performed in conjunction with each balance 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 when necessary for each cash generating unit, which corresponds to licence right, production sharing agreement or equivalent 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. Tax Tethys Oil 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). 61 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. 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 119.3 -34.9 -39.5 – – – -2.0 42.9 Oman 87.1 -36.6 -44.4 – – – -1.7 4.4 Group income statement Jan–Dec 2017 Lithuania Sweden Other – – – – – -0.3 – -0.3 – – – – – – -3.5 -3.5 – – – -0.3 – – -0.4 -0.7 Group income statement Jan–Dec 2016 Lithuania Sweden Other – – – – – -0.7 – -0.7 – – – – – – -3.6 -3.6 – – – -0.1 – – -0.4 -0.5 Total 119.3 -34.9 -39.5 -0.3 – -0.3 -5.9 38.4 -5.3 33.1 – 33.1 Total 87.1 -36.6 -44.4 -0.1 – -0.7 -5.8 -0.5 3.2 2.7 – 2.7 Oman is Tethys Oil’s only oil producing area from which revenue is recorded as per 31 December 2017 (and comparative periods). 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 1 regarding Credit risk exposure on accounts receivables. Note 4, Revenue MUSD Net sales, Underlift (overlift) Overlift adjustment Export Reporting Error Revenue 2017 119.9 -0.6 – 119.3 2016 95.4 -2.4 -5.9 87.1 2016 includes an overlift adjustment of MUSD 5.9 following the estimated effects of an 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 has reduced Tethys Oil’s 2016 revenue and result with that amount. Tethys Oil sells all of its oil to Mitsui Energy Trading Singapore, which is part of Mitsui & Co Ltd. All oil sales come from Blocks 3&4 Oman and are made on a monthly basis. Tethys Oil’s average selling price is based on the monthly average price of the two month future contract of Oman blend as traded on the Dubai Mercantile Exchange, including trading and quality adjustments. 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 expenditures are capitalised. Other income in the Parent company during 2017 amounted to MSEK 10.9 compared to MSEK 10.6 in 2016. In case of Tethys Oil being the operator in joint operations, these administrative expenditures are, through the above, also funded by the partners if such partners exist. The chargeout to joint operations projects where Tethys Oil is operator is presented in the consolidated income statement as Other income. All other internal chargeouts are eliminated in the consolidated financial statements to the extent related to interest not held by Tethys Oil. Tethys Oil is as per 31 December 2017 operator in Block 49, Oman and hold 100% of the license interest. 62 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 2017. 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 2017 31 Dec 2016 0.3 -0.3 – – – 1.7 -0.7 -0.7 – 0.3 Note 7, Provisions Tethys Oil estimates that Tethys Oil’s share of site restoration regarding Blocks 3&4 amounts to MUSD 6.1 (4.8). As a consequence of this provi- sion, oil and gas properties have increased with an equal amount. The change in provision follows an annual review of the site restoration calcula- tion where the number of wells drilled is one of the main components that affect the provision’s net present value. Tethys Oil has a non-current provision of MUSD 3.0 (4.0) from 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 1.0 (1.9) MUSD related to the Export Reporting Error. MUSD 1 January 2017 Additions Changes in estimates Unwinding of discount 31 December 2017 Current Non-current Total Abandonment Other Abandonment Other provision provisions Total MUSD provision provisions Total 4.8 – 1.0 0.3 6.1 – 6.1 6.1 5.9 – -1.9 – 4.0 1.0 3.0 4.0 10.7 1 January 2016 – Additions -0.9 0.3 Changes in estimates Unwinding of discount 10.1 31 December 2016 1.0 9.1 Current Non-current 10.1 Total 4.0 – 0.5 0.3 4.8 – 4.8 4.8 – 5.9 – – 5.9 1.9 4.0 5.9 4.0 5.9 0.5 0.3 10.7 1.9 8.8 10.7 Note 8, Oil and gas properties 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 commitments normally relates to the different periods. Tethys Oil has fulfilled its commitments on Blocks 3&4. In Block 49 the initial work commitments during the first period include geological studies, seis- mic acquisition and processing and exploratory drilling. In the other areas of operations the commitments are either fulfilled or there are no commit- ments 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. Country Oman Oman France Lithuania Lithuania Lithuania Licence Blocks 3&4 Blocks 49 Attila Gargzdai2 Rietavas2 Raseiniai2 Phase Production Exploration1 Exploration Production Exploration Exploration Expiration date Tethys Oil Partners (operator in bold) July 2040 Nov 20201 Feb 2019 No expiration date No expiration date Sep 2022 30% 100% 40% 25% 30% 30% CCED, Mitsui, Tethys Oil Tethys Oil Galli Coz, Tethys Oil Odin, GeoNafta, Tethys Oil Odin, Tethys Oil, private investors Odin, Tethys Oil, private investors 1 The exploration and production sharing agreement (EPSA) for Block 49 covers an initial exploration period of three years with an optional extension period of another three years. In case of a commercial oil or gas discovery, the EPSA will be transformed in to a 15 year production license which can be extended for another five years. In case of a commercial discovery Oman Government Company, has a right to acquire up to a 30% interest in Block 49 against refunding of past expenditure. The initial work commitments during the first period include geological studies, seismic acquisition and processing and exploratory drilling. 2 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. 63 MUSD Producing cost pools Non-producing cost pools Total oil and gas properties MUSD Oman Blocks 3&4 Producing Oman Block 49 Non-producing France Attila Non-producing New ventures Non-producing Total MUSD Oman Block 49 Non-producing France Attila Non-producing France Alès Non-producing New ventures Non-producing Total MUSD  Depletion 1 January 2017 Depletion charge for the year Impairment Disinvestments 31 December 2017 MUSD  Depletion 1 January 2016 Depletion charge for the year Impairment Disinvestments 31 December 2016 31 Dec 2017 31 Dec 2016 189.1 0.6 189.7 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 2017 1 Jan–31 Dec 2017 -2.0 -39.5 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 -2.1 189.1 0.4 – 0.2 189.7 – – – 0.3 191.1 -2.0 – – – – – – – 2017 -39.5 – – – 2016 -44.4 – – – – 2017 – – – -0.3 -0.3 2017 39.9 0.4 – 0.2 40.4 2016 – – – – -0.1 -0.1 2016 48.2 – – – 0.3 48.5 190.8 0.3 191.1 Book value 1 Jan 2017 190.8 – – 0.3 191.1 Book value 1 Jan 2016 189.1 – – – 0.1 189.1 -2.1 -44.4 Oman Blocks 3&4 -138.9 -39.5 – – Total -138.9 -39.5 – – -178.4 -178.4 Oman Blocks 3&4 -94.5 -44.4 – – Total -94.5 -44.4 – – -138.9 -138.9 Exploration costs during 2017 amounted to MUSD  0.3 and were mainly related to new venture projects which were rejected or no longer pursued. Exploration costs during 2016 amounted to MUSD 0.1. MUSD Investments Block 3&4 Categories Drilling G&G Facilities Total MUSD Oil & gas properties Block 3&4 Categories Drilling G&G Facilities Total 2017 26.6 4.2 9.1 39.9 2016 30.3 4.5 13.4 48.2 31 Dec 2017 31 Dec 2016 98.9 24.4 65.8 189.1 96.2 25.2 69.4 190.8 Impairment testing In Tethys Oil’s assessment of the need for impairment testing, the Com- pany 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 2017 was used. There has been no impairment of assets during 2017 or 2016. Note 9, Operating expenditures Note 10, Remuneration to Company auditor Group MUSD Parent MSEK Group MUSD Parent MSEK Operating expenditures Production costs Well workovers Total 2017 -32.6 -2.3 -34.9 2016 -33.5 -3.1 -36.6 2017 2016 – – – – – – Remuneration to company audi- tor include: 2017 2016 2017 2016 PwC: Audit fee Audit-related fees Tax consultation Other Total -0.2 -0.0 – – -0.1 -0.0 – – -1.0 -0.0 – – -1.0 -0.2 – – -0.2 -0.1 -1.0 -1.2 Of the Group total during 2017, MUSD  0.1 (0.1) has been in relation to PwC Sweden. 64 Note 11, Administrative expenses Group MUSD Parent MSEK Administrative expenses 2017 2016 Personnel costs Rent Other office costs Listing costs Costs of external relations Other costs Total -3.6 -0.4 -0.1 -0.1 -0.2 -1.5 -5.9 -3.5 -0.3 -0.1 -0.1 -0.1 -1.7 -5.8 2017 -16.5 -1.9 -0.3 -0.7 -1.4 -10.4 -31.2 2016 -16.5 -1.8 -0.5 -0.8 -1.1 -10.5 -31.3 Note 12, Employees Average number of full time 2017 2016 The average number of full time employees in the group is currently 19. 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 – 11 1 12 19 4 4 – 8 0 8 12 7 7 – 10 2 12 19 5 5 – 7 1 8 13 MUSD 2017 2016 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 Salaries, other remune- ration Salaries, other Social remune- costs ration Social costs -1.4 -1.4 -1.5 -0.2 -1.7 -3.1 -0.5 -0.5 – – – -0.5 -1.4 -1.4 -1.3 -0.3 -1.6 -3.1 -0.4 -0.4 – – – A termination period of twelve months applies between the Company and Managing Director and three to six months between the Company and other members of executive management. The Managing Director is entitled to twelve month’s payments if the Company terminates the contract and other members of executive management are entitled to six to twelve month’s payments. Executive management consists of three members of which the Managing Director is one. In 2017 two women have been members of the board of directors, com- pared to one in 2016. No women have been members of the executive management. Salaries and other remuneration to Pension Share based executive management Basic arrange- Variable during 2017, MSEK salary ments Salary long term incentive1 Other benefits Total 2017 Managing Director -2.186 -0.549 -0.680 -1.277 -0.012 -4.704 Other executive manage- ment -3.548 -0.317 -0.967 -1.161 -0.162 -6.155 Total -5.734 -0.866 -1.648 -2.438 -0.174 -10.860 Salaries and other remuneration to Pension Share based executive management Basic arrange- Variable during 2016, MSEK salary ments Salary long term incentive1 Other benefits Total 2016 Managing Director -2.082 -0.443 -0.340 -1.288 -0.012 -4.164 Other executive manage- ment -0.4 Total -3.080 -0.485 -0.454 -1.584 -0.241 -5.844 -5.162 -0.928 –-0.794 -2.872 -0.253 -10.008 MUSD 2017 2016 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 – -1.5 -0.2 -1.7 -2.6 -0.5 -0.5 – – – – -0.5 -0.9 -0.9 – -1.3 -0.3 -1.6 -2.6 1 Received warrants from the incentive programme in 2017 has been for the Managing Director 75,000 (70,000) and Other executive management 96,000 (87,000) totaling 171,000 (157,000). See note 21 for further details. MSEK Remuneration to board members (in their capacity as board members) Total 2017 Total 2016 Atten- dance 2017 Dennis Harlin Rob Anderson Per Brilioth Alexandra Herger Magnus Nordin Per Seime Katherine Støvring Geoffrey Turbott Richard Rettig Total -0.595 -0.560 14/14 -0.265 9/9 -0.265 -0.250 12/14 -0.265 7/9 – – 14/14 -0.265 -0.265 -0.250 -0.265 -0.250 – -0.250 -2.185 -1.560 7/9 10/14 14/14 4/5 65 At the AGM of shareholders on 17 May 2017 Per Brilioth, Magnus Nor- din, Dennis Harlin, Katherine Støvring (since resigned) and Geoffrey Turbott were re-elected members of the board. Alexandra Herger, Rob Anderson and Per Seime were newly elected members of the board. No deputy directors were appointed. At the same meeting Dennis Harlin was appointed chair- man 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 arrangements The board is entitled to deviate from the proposed guidelines if special reasons exist. 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. executives will be based upon their individual contribution to the Company’s performance. The yearly variable cash salary shall be within the range of one to four monthly salaries per person and year. The targets for variable cash remuneration 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 connec- tion 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 individual agreements. Payment of variable cash remunera- tion 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 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 three to six months between the Company and other members of executive management. The Managing Director is entitled to twelve month’s payments if the Company terminates the contract and other members of executive management are entitled to six to twelve month’s payments. 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 the share based incentive programs. Variable salary to senior The increase in remuneration to executive management primarily relate to increased base salaries and changes to the executive management struc- ture during the year. For further information, please see note 12. Note 13, Financial income and similar items Group MUSD Parent MSEK 2017 2016 2017 Interest income Gain on currency exchange rates Other financial income Dividend from group companies Total – 3.0 – – 3.0 – 9.1 0.3 – 9.4 15.0 23.1 – 126.5 164.6 2016 9.0 73.7 2.4 – 85.1 Note 14, Financial expenses and similar items Interest expenses Currency exchange losses Other financial expenses Total Group MUSD Parent MSEK 2017 2016 2017 2016 -0.2 -6.9 -1.2 -8.3 -0.6 -3.8 -1.8 -6.2 – -53.6 – -53.6 – -31.2 -0.3 -31.5 Note 15, Tax The group’s income tax charge amount to MUSD 0.0 (MUSD 0.0). Tethys Oil 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 profits are gener- ated. Tax losses carried forward amounted to MSEK 242.8 (MSEK 200.7). 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 Utilized (+) / Built up (-) tax loss carry forwards previously not recorded as deferred tax assets Tax expense 2017 85.0 -18.7 -1.4 27.8 -7.7 0.0 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 Explora- tion and Production Sharing Agreement for each license (“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. These taxes are netted against revenue in the income statement. Note 16, Other receivables Other receivables 2017 2016 2017 2016 Group MUSD Parent MSEK VAT Receivables Oil sales Other Total 0.6 12.1 – 12.7 0.1 7.1 0.3 7.4 5.4 – 0.1 5.5 2.7 – 0.2 2.8 66 Note 17, Shareholders’ equity As per 31 December 2017, 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 2016. 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 for one tranche of the incentive program as per the 31 December 2017, the warrants of this tranche are included in the diluted number of shares which amount to 35,895,500 per 31 December 2017. If the subscription prices have been below the share price during the reporting period, the dilution effects have been included in the weighted average number of shares in circulation after dilution. As per 31 December 2017, Tethys Oil held 1,644,163 of its own shares which have been purchased since commencement of the programme dur- ing the fourth quarter 2014. The purpose of the repurchasing program is to optimize the capital structure and to enable any repurchased shares to be used as payment in connection with, or financing of, acquisitions of companies or businesses. 314,939 shares were purchased during 2017. 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 2017 before dilu- tion is 34,170,474 and after dilution 34,385,463. After 31 December 2017 and up to the date of publication for this report, Tethys Oil has not acquired any further shares. 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 1,644,163 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. Appropriation of profit The board of directors proposes a dividend of SEK 2.00 per share (AGM 2017: SEK 1.00). The board of directors proposes that the dividend is to be paid in two equal instalments of SEK 1.00 per share each, payable in May and November 2018. Proposed record dates are May 14, 2018 and November 14, 2018 The board of directors proposes an extraordinary distribution of SEK 4.00 per share by way of a mandatory share redemption programme following the AGM 2018. Further details to follow in the proposal to the AGM. 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, Loan facility Tethys Oil has a four-year, up to MUSD 17, 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 2017 there was no out- standing balance on the lending facility. The Facility matures at the end of February 2018 and will not be extended or renewed. Note 19, Accounts payable and other current liabilities Accounts payable and other current liabilities Accounts payable Overlift position Operator balance, Blocks 3&4 Oman Other current liabilities Total Group MUSD Parent MSEK 2017 2016 0.1 2.0 3.2 0.8 6.1 0.2 1.4 29.5 0.3 31.4 2017 0.5 – – 5.2 5.7 2016 1.5 – – 2.3 3.8 Note 20, Shares in subsidiaries Reg. Number 556658-1467 556658-1442 556658-1913 556658-1483 556658-1491 95212 101981 115710 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 Oman Ltd Tethys Oil Block 3&4 Ltd Tethys Oil Montasar Ltd Windsor Petroleum (Spain) Inc. MSEK Shares in subsidiaries 1 January Acquisitions/Relinquishments Shareholder’s contribution Write down of shares in subsidiaries 31 December 2017 Reg. office Number of shares Percentage per share Nominal value Sweden Sweden Sweden Sweden Sweden Gibraltar Gibraltar Gibraltar British Virgin Islands 1,000 1,000 1,000 1,000 1,000 100 1000 1 000 1 100% 100% 100% 100% 100% 100% 100% 100% 100% SEK 100 SEK 100 SEK 100 SEK 100 SEK 100 GBP 1 USD 1 USD 1 USD 1 Parent Parent 31 December 2017 31 December 2016 1.0 -0.1 2.9 -2.9 0.9 7.3 -6.4 0.4 -0.4 1.0 The write down of shares in group companies during 2017 is mainly related to currency exchange losses in various group entities. 67 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 Stockholm during approximately a two week period prior to the date of allocation. Warrants were issued 2017 and 2016 following a decision by the respec- tive AGM. The number of issued warrants during 2017 was 350,000 (350,000) and the number of warrants allocated during 2017 was 324,000 (335,000). Issued but not allocated warrants are held by the company. No warrants were exercised during the year. Warrant incentive programme Exercise period Subscription price, SEK 2015 incentive programme 23 May – 5 Oct, 2018 2016 incentive programme 28 May – 4 Oct, 2019 2017 incentive programme 30 May – 2 Oct 2020 76.8 62.6 85.5 Total Number of warrants 1 Jan 2017 Issued 2017 Expired 2017 Exercised 2017 31 Dec 2017 356,000 350,000 0 706,000 0 0 350,000 350,000 0 0 0 0 0 0 0 0 356,000 350,000 350,000 1,056,000 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 Group MUSD Parent MSEK Warrant incentive programme 2017 2016 2017 2016 Incentive programme cost Total -0.5 -0.5 -0.7 -0.7 -3.6 -3.6 -4.6 -4.6 As the subscription price is below the share price for one tranche of the incentive program as per the 31 December 2017, the warrants of this tranche are included in the diluted number of shares which amount to 35,895,500 per 31 December 2017. If the subscription prices have been below the share price during the reporting period, the dilution effects have been included in the weighted average number of shares in circulation after dilution. The cost is calculated in accordance with the Black & Scholes formula where the main inputs are the factors in the above table, expected volatility, share price at valuation and an equity discount rate. The cost for the incentive programme is included as part of administrative expenses and includes tax and social charges where applicable. Note 22, Pledged assets As per 31 December 2017, pledged assets amounted to MUSD  214.9 (173.2). 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 2017, nor for the comparative period. Note 24, Appropriations Parent MSEK Paid group contributions Received group contributions Total 2017 – – – 2016 – 3.1 3.1 Note, 25 Related party transactions In the Tethys Oil Group, Tethys Oil AB (publ) with organisational number 556615-8266 is the parent company. Material subsidiaries include Tethys Oil Oman Limited, Tethys Oil Block 3&4 Limited, Tethys Oil Montasar Lim- ited, Tethys Oil France AB and Tethys Oil Exploration AB. During the year, the Company entered into the following significant transac- tions with related parties: Transactions with group companies, MSEK Interest income Other income Dividends received Group contributions Shareholder contributions Total Balance with related parties, MSEK Receivable from group companies Total Balance with related parties, MSEK Payable to group companies Total 2017 15.0 10.9 126.5 – -2.9 149.5 2017 355.6 355.6 2017 35.2 35.2 2016 9.0 10.6 – 3.1 -0.4 22.3 2016 275.3 275.3 2016 37.3 37.3 The receivables or payables from related parties arise from the net of pur- chased services and upstreamed or downstreamed funds between parent and subsidiaries. The interest rates on receivables is in the range of LIBOR +4–6% per annum. Receivables are long term in duration and unsecured in nature. Payables are short term in duration, unsecured in nature and bear no interest. Note, 26 Subsequent events Tethys Oil’s share of the production, before government take, from Blocks 3&4 onshore Oman amounted in January and February 2018 to 359,209 and 321,733 barrels of oil respectively, corresponding to 11,587 and 11,490 barrels of oil per day respectively. The board member Katherine H. Støvring resigned from the board of direc- tors in March 2018. 68 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 th 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, 4 April 2018 Dennis Harlin Chairman of the board Rob Anderson Director Alexandra Herger Director Per Seime Director Per Brilioth Director Magnus Nordin Managing Director Geoffrey Turbott Director 69 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 2017. The annual accounts and consolidated accounts of the company are included on pages 41–69 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 mate- rial respects, the financial position of parent company as of 31 December 2017 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 2017 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 sharehold- ers adopts the income statement and balance sheet for the parent company and the group. Our opinions in this report on the the annual accounts and consolidated accounts are consistent with the content of the additional report that has been submitted to the parent com- pany’s audit committee in accordance with the Audit Regulation (537/2014) Article 11. Basis for Opinions We conducted our audit in accordance with International Stand- ards on Auditing (ISA) and generally accepted auditing standards in Sweden. Our responsibilities under those standards are further described in the Auditor’s Responsibilities section. We are inde- pendent of the parent company and the group in accordance with professional ethics for accountants in Sweden and have other- wise fulfilled our ethical responsibilities in accordance with these requirements. This includes that, based on the best of our knowledge and belief, no prohibited services referred to in the Audit Regulation (537/2014) Article 5.1 have been provided to the audited com- pany or, where applicable, its parent company or its controlled companies within the EU. Our audit approach Audit scope Tethys Oil is a Swedish Oil and Gas company with its primary operations located in Oman. The operations in Oman represented 100% of the group’s revenue for the financial year 2017 and 76% of the group’s assets as per 31 December 2017. We designed our audit by determining materiality and assessing the risks of material misstatement in the consolidated financial statements. In particu- lar, 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 assump- tions 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 con- sideration 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 finan- cial 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 are performed outside the group’s headquarter which means that we as a group audit team performed our audit work at the group’s headquarters but we also obtained reporting from specified procedures performed by our component team in Oman. 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 September, 2017 and after the year- end audit of the financial year 2017. Materiality The scope of our audit was influenced by our application of mate- riality. An audit is designed to obtain reasonable assurance whether the financial statements are free from material misstatement. Mis- statements 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. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinions. Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall group 70 materiality 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 proce- dures and to evaluate the effect of misstatements, both individually and in aggregate on the financial statements as a whole. Key audit matters Key audit matters of the audit are those matters that, in our pro- fessional judgment, were of most significance in our audit of the annual accounts and consolidated accounts of the current period. These matters were addressed in the context of our audit of, and in forming our opinion thereon, the annual accounts and con- solidated accounts as a whole, but we do not provide a separate opinion on these matters. Key audit matter Recoverability of the carrying value of oil and gas properties The carrying value of oil and gas properties amounted to $189.7 million as per 31 December 2017 and is represented by the producing assets in Blocks 3 and 4 in Oman. During the year management follows a process to identify potential indicators of impairment and to the extent that indi- cators are identified impairment tests are prepared. 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). The assessment to identify potential impairment indicators and to perform impairment tests requires management to exercise significant judgement 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 fac- tors, including but not limited to, the Group’s intention to pro- ceed with a future work programme, the probability of success of future drilling, the size of proved, probable reserves as well as contingent resources, short and long term oil prices, future costs as well as the discount rate and inflation rate. Following the analysis of potential impairment indicators for Blocks 3 and 4 in Oman it was concluded that there were no impairment indicators identified and no impairment was recorded. Refer to pages 44 in the Administration report, page 58 in the Accounting Policies and notes 2 and 8 in the financial state- ments for more information. How our audit addressed the Key audit matter We have examined management’s assessment for determining the impairment indicators and concluded that there are no impairment indicators identified. The assumptions that underpin management’s assessment are inherently judgmental. Our audit work therefore assessed the reasonableness of management’s key judgements. Specifi- cally our work included, but was not limited to, the following procedures: • comparison of management’s short-term oil price assump- tions 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 rel- evant third-party data points; • agreement of hydrocarbon production profiles to the combi- nation of proved and probable reserves from reserve reports ERC and contingent resources estimates prepared by in- house reservoir engineer; • verification of estimated future costs by agreement to budg- ets and where applicable, third party data; • assessing the reasonableness of inflation and discount rates applied; • testing of the mathematical accuracy of the model We obtained the estimation of proven and probable reserves certified by the group’s external reserves auditor and manage- ment’s in-house estimation of contingent resources. Our work included but was not limited to: • determining that the group’s process for collecting relevant reports were sufficiently robust; • assessing competence and objectivity of ERC Equipoise, to satisfy ourselves they were qualified to carry out the volumes estimation; • assessing the process for making in-house estimates of con- tingent resources; • validation that the updated reserves and resources estimates were included appropriately in the group’s consideration of impairment and in accounting for depletion charges. 71 Other Information than the annual accounts and consolidated accounts This document also contains other information than the annual accounts and consolidated accounts and is found on pages 1–21, 32–40 and 74–75. 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 iden- tified above and consider whether the information is materially inconsistent with the annual accounts and consolidated accounts. In this procedure we also take into account our knowledge other- wise obtained in the audit and assess whether the information other wise 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 infor- mation, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Board of Directors and the Managing Director The Board of Directors and the Managing Director are responsi- ble 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 accordance 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 misstatement, 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 liq- uidate the company, to cease operations, or has no realistic alterna- tive 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. 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 mis- statement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggre- gate, 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/showdocu- ment/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 Directors and the Managing Director of Tethys Oil AB (publ) for the year 2017 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 stat- utory administration report and that the members of the Board of Directors and the Managing Director be discharged from liability for the financial year. Basis for Opinions We conducted the audit in accordance with generally accepted auditing 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 fulfilled our ethical responsibilities in accord- ance 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 appro- priations of the company’s profit or loss. At the proposal of a divi- dend, this includes an assessment of whether the dividend is justi- fiable considering the requirements which the company’s and the group’s type of operations, size and risks place on the size of the 72 parent company’s and the group’s equity, consolidation require- ments, liquidity and position in general. The Board of Directors is responsible for the company’s organiza- tion 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 organization 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 administration according to the Board of Directors’ guide- lines and instructions and among other matters take measures that are necessary to fulfil 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.revisorsinspektionen.se/rn/showdocument/documents/rev_ dok/revisors_ansvar.pdf. This description is part of the auditor’s report. PricewaterhouseCoopers AB, 405 32 Göteborg, was appointed as auditors for Tethys Oil AB by the Annual general meeting the 17 May 2017 and has been the company’s auditors since 2001. The company has been listed at NasdaqOMX since the 2 May 2013. Stockholm, 4 April 2018 PricewaterhouseCoopers AB Johan Malmqvist Authorized Public Accountant Lead Partner Ulrika Ramsvik Authorized Public Accountant 73 Definitions and abbreviations Annual General Meeting API AGM EGM IPO SEK TSEK MSEK USD  TUSD Extraordinary General Meeting Initial Public Offering Swedish krona Thousands of Swedish kronor Millions of Swedish kronor 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 Oman, in which license the Company holds a 30 percent interest. Block 49 onshore the Sultanate of Oman, in which license the Company holds a 100 percent interest. 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. Block Blocks 3&4 Block 49 Brent Company Tethys Oil AB (publ) or group in which Tethys Oil AB is the parent company, as the case may be. 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”. 74 Definitions and abbreviations 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. Hydro­ carbons 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. Tethys Oil Tethys Oil AB (publ) or group in which Tethys Oil AB (publ) is the parent company, as the case may be. 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 2018 (January – March 2018) on 8 May 2018 Six month report 2018 (January – June 2018) on 14 August 2018 Nine month report 2018 (January – September 2018) on 6 November 2018 Year-end report 2018 (January – December 2018) on 12 February 2019 75 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 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 . 8 1 0 2 m a k e R n e t s d n a L 

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