Zoltav Resources Inc
Annual Report 2015

Plain-text annual report

ANNUAL REPORT 2015 IN THIS REPORT INTRODUCTION Directors & Advisers Chairman’s Statement Review of Operations Financial Review Board of Directors FINANCIAL INFORMATION Directors’ Report Directors’ Responsibilities Corporate Governance Auditors’ Report Financial Statements Notes to the Accounts Glossary 1 2 6 10 14 16 18 20 24 26 30 57 INTRODUCTION DIRECTORS & ADVISERS BOARD OF DIRECTORS ADVISERS Alastair Ferguson Executive Chairman Andrey Komarov Executive Director Stephen Lowden Senior Independent Director Alexander Gorodetsky Independent Non-executive Director (appointed 24 September 2015) Andrey Immel Non-executive Director (appointed 24 September 2015) Marcus James Rhodes Independent Non-executive Director Michael Lombardi Non-executive Director (appointed 9 July 2015) Symon Drake-Brockman Non-executive Director (non re-elected 9 July 2015) Yulia Lebedina Non-executive Director (resigned 9 July 2015) AUDIT COMMITTEE Marcus Rhodes (Chairman) Andrey Immel REMUNERATION AND NOMINATION COMMITTEE Stephen Lowden (Chairman) Alexander Gorodetsky CORPORATE ADMINISTRATOR CO Services Cayman Limited P.O. Box 10008, Willow House, Cricket Square, Grand Cayman KY1-1001, Cayman Islands BANKERS Barclays Private Clients International Limited 39-41 Broad Street, St Helier, Jersey, JE4 8PU, Channel Islands Deutsche Bank International Limited St Paul’s Gate, New Street, St Helier, Jersey, JE4 8ZB, Channel Islands NOMINATED ADVISER Shore Capital & Corporate Limited Bond Street House,14 Clifford Street, London, W1S 4JU, United Kingdom SOLICITORS Berwin Leighton Paisner Adelaide House, London Bridge, London, EC4R 9HA, United Kingdom JOINT BROKERS Shore Capital Stockbrokers Limited Bond Street House, 14 Clifford Street, London, W1S 4JU, United Kingdom Panmure Gordon (UK) Limited 1 New Change, London, EC4M 9AF, United Kingdom INDEPENDENT AUDITOR Ernst & Young LLC Sadovnicheskaya Nab., 77, bld. 1, Moscow, 115035, Russia REGISTRAR Computershare Investor Services (Cayman) Limited R&H Trust Co. Ltd, Windward 1, Regatta Offi ce Park, West Bay Road, Grand Cayman KY1-1103, Cayman Islands REGISTERED OFFICE PO Box 10008, Willow House, Cricket Square, Grand Cayman KY1-1001, Cayman REVENUES +41% $28 million PRODUCTION +15.6% 8,853 boe/d FIRST POSITIVE EBITDA $7.2 million 2 2 Zoltav Resources Inc. Annual Report 2015 Zoltav Resources Inc. Annual Report 2015 Zoltav Resources Inc. Annual Report 2015 1 CHAIRMAN’S STATEMENT INTRODUCTION CHAIRMAN’S STATEMENT I believe a number of factors combine to make Zoltav an extremely attractive vehicle through which to access Russian oil and gas opportunities in a distressed market I am pleased to present Zoltav’s results for the year ended 31 December 2015 which show a 41% increase in revenues to USD 28.1 million (2014: USD 20.0 million) and the Company’s fi rst operating profi t. This is derived from a 15.6% increase in daily production compared with 2014. This has been achieved despite a challenging environment for oil and gas producers in Russia; and despite a weak RUB against our reporting currency of USD. Improvements in both factors would in the future have a very positive corresponding impact on Zoltav. Our Western Gas Plant was operated at full capacity in 2015, producing 8,853 boe/d (1,256 toe/d). This enabled the Company to deliver its fi rst positive EBITDA of USD 7.2 million (2014: USD 3.3 loss) and maintain a positive operating cash fl ow throughout the period. We have also continued to assess various development scenarios to commercialise the highly prospective Eastern Fields of the Bortovoy Licence and the medium term objective remains that of constructing a second gas plant in the East of the licence to exploit the very considerable reserves. At Koltogor, we completed a number of exploration-related tasks. In particular, as a result of the work undertaken to open up the West Koltogor oil fi eld on Koltogor Exploration Licence 10, we were able to convert this last month into an Exploration and Production Licence valid through to March 2036. We will, in the future, look to bring a partner into Koltogor to assist in the development of these fi elds. Zoltav’s strategic objective remains that of generating the maximum value from our existing assets, which we will achieve through efficiencies and through exploration, appraisal and development activities; while at the same time pursuing a highly selective acquisition strategy. We have very strict acquisition criteria and will consider only those opportunities which we believe will deliver considerable value for shareholders under Zoltav’s management. Our focus continues to be on maintaining full plant capacity through the implementation of optimal production enhancement activities to increase economic effectiveness. We have undertaken an extensive programme of cost optimisation at Bortovoy, which we believe will produce further benefi ts in the current year and beyond. I am pleased to note that, on 1 July 2015, our gas sales price to Mezhregiongaz increased by 7.5% in RUB − the benefi ts of which will continue to be felt as we improve production effi ciency. Zoltav is developing an appraisal strategy to capitalise on the Devonian structure in both the undeveloped Western and Eastern fi elds of the Bortovoy Licence, underpinned by a more attractive gas sales price. Our strategy at Bortovoy is to continue maximising production from the Western Gas Plant, both through the above-mentioned effi ciencies and, later, by hooking up other nearby fi elds in the Western area of the Bortovoy Licence to the plant. At the current assessment of remaining reserves in the Western Fields, the Company estimates that the Western Gas Plant could be kept at full capacity for at least a further decade. I believe a number of factors combine to make Zoltav an extremely attractive vehicle through which to access Russian oil and gas opportunities in a distressed market. We have unrivalled local operating expertise − as is demonstrated in the continual improvements being made at Bortovoy; we have a very experienced board which brings a western standard of corporate governance to the Company’s management; and fi nally, we have engaged and supportive shareholders with access to capital when the right opportunities present themselves. . Alastair Ferguson Executive Chairman 21 April 2016 OUR MAJOR SHAREHOLDERS Zoltav has unparalleled access to opportunities in Russia and the CIS through its supportive major shareholders Arkadiy Abramovich (ARA Capital Limited) and Valentin Bukhtoyarov (Bandbear Limited) - who each own approximately 40% of the Company STRATEGY Zoltav is building a mid-size oil and gas business focused on the CIS. There are fi ve characteristics which demonstrate why we are distinctive and uniquely well positioned to achieve this: • Attractive asset base with substantial organic appraisal and development upside • Ability to add considerable value to assets in a short space of time – we are seeking acquisition targets where we can replicate that performance • Targeting further acquisitions in the CIS which will generate additional cash fl ows and more exploration upside • Support of strong major shareholders, providing access to fi nance for acquisitions • High principles of corporate governance 2 Zoltav Resources Inc. Annual Report 2015 Zoltav Resources Inc. Annual Report 2015 3 OUR ASSETS Moscow KHANTIY-MANSISK AUTONOMOUS OKRUG Khantiy-Mansisk Nizhnevartovsk SARATOV OBLAST Bortovoy Koltogor RUSSIA KAZAKHSTAN TURKMENISTAN UZBEKISTAN KYRGYZSTAN TAJIKISTAN 4 Zoltav Resources Inc. Annual Report 2015 INTRODUCTION OUR ASSETS Zoltav’s strategic objective remains that of generating the maximum value from our existing assets, which we will achieve through effi ciencies and through exploration, appraisal and development activities; while at the same time pursuing a highly selective acquisition strategy GROUP RESERVES UNDER PRMS AS AT 31 DECEMBER 2015 Proved Probable Proved + Probable Possible Bortovoy Licence Gas Oil & Liquids Gas, Oil and Liquids bcf mmbbls 352.9 2.0 396.8 1.8 749.7 640.0 3.8 2.4 mmboe 62.0 69.2 131.2 111.2 Koltogor Licences Gas Oil Gas & Oil bcf mmbbls mmboe 0.5 1.6 1.7 23.5 73.5 77.5 24.0 75.1 79.2 55.7 174.0 183.5 Total Gas Oil & Liquids Gas, Oil and Liquids bcf mmbbls 353.4 3.6 420.3 75.3 773.7 78.9 695.7 176.4 mmboe 63.7 146.7 210.4 294.7 Source: DeGolyer and & MacNaughton REVIEW OF OPERATIONS - BORTOVOY BORTOVOY LICENCE Zoltav’s main operational priority in 2015 was to operate the Western Gas Plant at its full capacity of 8,853 boe/d (1,256 toe/d). This was successfully achieved following the prior year’s hooking-up of the Zhdanovskoye fi eld and the drilling of an infi ll well on the Karpenskoye fi eld. The next target will be the development of the highly promising Devonian structure within the North Mokrousovskoye fi eld that lies just 13 km from the Western Gas Plant and will allow us to keep the plant at full capacity for at least a further decade. The Company continues to evaluate the future development opportunities offered by the highly prospective Eastern Fields of the licence. The construction of a second gas plant close to the Pavlovskoye fi eld − hooking-up the Nepriyakhinskoye and Lipovskoye fi elds − is currently being assessed by management as the most likely scenario. Production The Company was able to keep the Western Gas Plant operating at full capacity throughout 2015. Average daily production from the Western Gas Plant during 2015 was 8,853 boe/d (1,256 toe/d) compared to 7,656 boe/d (1,086 toe/d) in 2014. This comprised 46.6 mmcf/d (1.32 mmcm/d) of gas (2014: 40.2 mmcf/d / 1.14 mmcm/d) and 587 bbls/d (75 T/d) of oil and condensate (2014: 478 bbls/d / 60 T/d). Overall this was a 15.6% increase in daily production compared to 2014. Gas production increased by 15.9%, while liquids production increased by 23%. The improved output is a direct result of an integrated value- enhancement programme that has taken place under Zoltav’s ownership. The Company spent USD 0.63 million in 2015 for one-off maintenance and repair costs to debottleneck production on the Western Gas Plant, complete a dew point project to allow for sustained production during warmer weather and complete the hooking up of the Zhdanovskoye fi eld. In December 2015, the Zhdanovskoye infi ll Well 107 was put into operation with a production rate of 6.0 mmcf/d (0.17 mmcm/d) that was higher than expected, with potential future upside from acid treatment. We have, since the start of 2016, achieved one of our primary objectives for the current year of completing the new Well 117 on the Karpenskoye fi eld. Another core objective for the year will be the hooking-up of the pre-existing Well 19 in the western area of the Zhdanovskoye fi eld. Well 19’s potential was confi rmed by well tests undertaken in December 2015. These developments will allow Zoltav to keep the plant operating at full capacity throughout 2016. Development drilling and other well activity Geological and hydrodynamic models for the Karpenskoye and Zhdanovskoye fi elds were re estimated in 2015. These models, combined with detailed historic production data, provide confi dence in our production targets and base decline forecasts. The model showed substantial remaining reserves in the area of Wells 17 and 19 on the Karpenskoye fi eld. Well 117 on Karpenskoye (selected as the optimal option versus a Well 17 side-track) was completed and put online at 16 April 2016. Well 19 on the Zhdanovskoye fi eld is scheduled to be hooked-up in October 2016. Western Gas Plant Operations at the Western Gas Plant have continued smoothly with the plant operating more reliably compared to 2014. The dew point project was successfully completed in June 2015 on time and within budget. This allowed Zoltav to continue delivering treated gas even during the hot summer season in volumes specifi ed in the sales agreement with Mezhregiongaz. BORTOVOY LICENCE: WESTERN GAS PLANT AVERAGE DAILY PRODUCTION BORTOVOY LICENCE: GAS SALES PRICE - o n - y e a r i n c r e a s e y e a r 1 5 . 6 % i n c r e a s e y e a r - o n - y e a r 4 . 1 % RUB 2,941 thousand cubic meters 2014 RUB 3,063 thousand cubic meters 2015 2014 2015 INTRODUCTION REVIEW OF OPERATIONS BORTOVOY LICENCE Existing Gazprom pipelines Existing sales pipelines Pipelines to be constructed Oil and gas field Gas processing plant Railroads Gas field Other field Gazprom trunkline from Kazakhstan/ Turkmenistan to Central Russia Krasnokutskoye Mokrousovskoye Karpenskoye Zhdanovskoye Gazprom pipeline Pavlovskoye West Liposkoye Liposkoye Kochkurovskoye Nepryakhinskoye RUSSIA KAZAKHSTAN Bortovoy Field by Field 2P reserves Gas (Proved+Probable) Oil & Liquids (Proved+Probable) Metric (mmcm) English (mbbls) Metric (mT) Field Reserve Category Krasnokutskoye Zhdanovskoye Karpenskoye Mokrousovkoye Total Western Fields Pavlovskoye Kochkurovskoye West-Lipovskoye Lipovskoye Nepriyakhinskoye Total Eastern Fields English (mmcf) 9,923 72,995 95,350 45,133 223,401 162,518 - - 49,935 313,841 526,294 281 2,067 2,700 1,278 6,326 4,602 - - 1,414 8,887 14,903 Total All Fields 749,695 21,229 - 366 2,215 - 2,581 1,028 - - 279 - 1,307 3,888 - 52 283 - 335 119 - - 34 - 153 488 6 Zoltav Resources Inc. Annual Report 2015 Zoltav Resources Inc. Annual Report 2015 7 INTRODUCTION REVIEW OF OPERATIONS REVIEW OF OPERATIONS - KOLTOGOR KOLTOGOR LICENCES The work programme across both the Koltogor Exploration and Production Licence and Koltogor Exploration Licence 10 resulted in Rosnedra registering, in March 2015, an additional 546 mmbbls (72 mmT) of Russian standard C1 plus C2 oil reserves, bringing the current registered reserves of the combined Koltogor fi elds to over 1 billion barrels (137 mmT). It remains Zoltav’s intention to commission an update of its reserves and resources under PRMS, however the Company has deferred this expenditure until such time as it is strategically necessary to commission an updated report. The Company has now been granted Exploration and Production status on Licence 10. As the sole owner of the Koltogor Licences, management continues to evaluate farm-out options from a position of strength. Koltogor Exploration and Production Licence Following the extensive 3D and 2D seismic acquisition and analysis programme carried out from 2013 to 2015, the Company completed a re-estimation of its reserves and registered new volumes with Rosnedra in March 2015. This included booking new JV2 (Jurassic) oil formation volumes. As a result, the additional reserves across the JV0 (Bazhenov), JV1, JV2 and JV3 (Jurassic) formations now total 949.4 mmbbls (125 mmT) of C1 plus C2 reserves under the Russian classifi cation system. Well construction tasks and ground survey work associated with future drilling plans were undertaken in 2015 and are ongoing. Koltogor Exploration and Production Licence 10 On 7 May 2015, Rosnedra granted the Company a certifi cate confi rming the discovery of the West Koltogor oil fi eld. As a result, the Company applied to Rosnedra for an exploration and production licence which was approved in March 2016. KOLTOGOR LICENCES: GROWING IN SIZE Russian Standard Reserves (C1+C2) 1 billion barrels 487 million barrels 2014 2015 KOLTOGOR LICENCES KOLTOGOR E & P LICENCE Well 71 West Koltogor Oil Field Koltogor Oil Field Discovery wells Oil and gas pipelines Proposed pipeline Oil processing plant All weather road Road KOLTOGOR E & P LICENCE 10 Well 103 Well 101 Well 111 Well 141 8 Zoltav Resources Inc. Annual Report 2015 Zoltav Resources Inc. Annual Report 2015 9 FINANCIAL REVIEW INTRODUCTION FINANCIAL REVIEW CASH Net cash generated by operating activities was USD 4.3 million (2014: cash used in operating activities USD 5.3 million). Diall Alliance successfully serviced its credit facility from PJSC Sberbank and repaid RUB 180 million of the principal amount according to its schedule. The Company remains in line with the covenants of its credit facility agreement. The Group has sufficient liquidity to fund its investment programme on the Western Fields at Bortovoy and its development plans for Koltogor at least through to the end of 2018. Total cash at the end of the period was USD 5.9 million. Denis Golubovskiy Director of Finance 21 April 2016 Management’s focus on maintaining full production capacity at the Western Gas Plant, on operational performance enhancements and on cost reduction allowed Zoltav to generate its fi rst operating profi t and positive cash fl ow from operating activities. EBITDA reached USD 7.2 million. cost of sales included USD 0.63 million of one-off maintenance and repair costs (including costs of associated materials) on the Western Gas Plant within a programme of production enhancement activities, as well as the usual recurring other cost of sales including salaries, chemicals and other agents, equipment maintenance and repairs, well workovers and leasing of land plots. REVENUE Group revenues were USD 28.1 million (2014: USD 20.0 million), however it should be noted that the comparative numbers for 2014 include only 196 days of production, following Zoltav’s acquisition of Bortovoy in June 2014. The Group’s RUB revenues in 2015 were RUB 1,697 million, compared to RUB 826 million in 2014. Accordingly, revenues in USD, the Group’s reporting currency, were signifi cantly affected by the devaluation of RUB (61.0 RUB/USD average rate in 2015 versus 41.3 RUB/USD average rate for the 196 days in 2014). Gas realisations were USD 1.4/mcf or RUB 3,063/mcm (2014: USD 2.2/mcf or RUB 2,941/mcm). Gas produced was sold to Mezhregiongaz, a Gazprom subsidiary, at the transfer point on entry to the Central Asia − Centre gas pipeline system. Gas sales to Mezhregiongaz are priced in RUB. The price increased on 1 July 2015 by 7.5% in RUB. Oil and condensate realisations were USD 27.3/bbl or RUB 1,633/bbl (USD 214.2/T or RUB 12,832/T)) (2014: USD 46.8/ bbl or RUB 1,798/bbl (USD 368/T or RUB 14,115/T)). Oil and condensate are sold directly at the Western Gas Plant through a tender process to a small number of different purchasers. Despite the decline in oil prices, the Company still managed to achieve a 16% increase in RUB denominated revenue generated from the Western Gas Plant, as compared to 2014, as a direct result of the signifi cant improvements in effi ciency since Zoltav acquired the Bortovoy Licence in June 2014. COST OF SALES Total cost of sales were USD 19.5 million (2014: USD 13.5 million). This comprised USD 6.4 million of production based taxes (2014: USD 3.8 million), USD 6.1 million of depreciation and depletion of assets (2014: USD 4.2 million) and USD 7.0 million of other cost of sales (2014: USD 5.4 million). Other 10 Zoltav Resources Inc. Annual Report 2015 OPERATING PROFIT Zoltav turned an operating loss (excluding gain on acquisition) in 2014 of USD 7.6 million into an operating profi t in 2015 of USD 1.1 million. Finance costs of USD 5.5 million are mainly represented by interest on the RUB 2,220 million (USD 30.5 million) Sberbank facility which was entered into by our Bortovoy operating company, Diall Alliance, on 4 April 2014. TAXATION The production based tax for the period was USD 6.4 million (2014: USD 3.9 million) which is recognised in the cost of sales. The new gas mineral extraction (“MET”) formula was implemented from 1 July 2014. This formula is based on multi- component gas composition, average gas prices and reservoir complexity and maturity. As a result of these changes the effective MET rate applicable for the period rose by 15.5% to RUB 17.8/mcf RUB 627/mcm (2014: RUB 15.4/mcf or RUB 543/ mcm). In addition to production taxes the Group was subject to a 2.2 per cent property tax which is based on the net book value of Russian assets calculated for property tax purposes. Property tax on the major part of the Bortovoy operating company’s assets, including the Western Gas Plant, is paid at a reduced tax rate of 0.1 per cent. The income tax charge for the year was USD 0.5 million (2014: USD 2.4 million) and represents deferred tax expense. CURRENCY TRANSLATION DIFFERENCES The signifi cant RUB/USD exchange rates volatility had a material effect on the value of our assets and liabilities presented in USD which is disclosed in note 27.2. Our focus on maintaining full production capacity, on operational performance enhancements and on cost reduction allowed Zoltav to generate its fi rst operating profi t Zoltav Resources Inc. Annual Report 2015 11 CORPORATE AND SOCIAL RESPONSIBILITY INTRODUCTION CSR We are committed to providing a safe and healthy work environment - there were zero injuries to our personnel and contractors in 2015ed in 2015. HEALTH AND SAFETY We are committed to providing a safe and healthy work environment and to conducting our activities in a safe and environmentally protective manner. All of our employees and offi cers are expected to perform their duties consistent with the site specifi c safety and environmental rules and regulations and are expected to obey all local, regional and national laws and regulations. We are committed to the goals of: • Avoiding harm to all personnel involved in, or affected by, our operations • Complying with all the applicable legal and other requirements where we operate Achieving continual improvement in our HSE performance • We are proud of our HSE achievement of zero injuries to personnel and contractors in 2015. Our Bortovoy Licence operating subsidiary, Diall Alliance, continued its compliance in 2015 with BS OHSAS 18001: 2007 - an internationally applied British standard for occupational health and safety management systems. This certifi cation demonstrates our commitment to ensuring the safety of our employees and any others that may be affected by our business activities, and reaffirms our engagement in improving environmental and occupational health and safety standards throughout the company. PATI O U C C O N A L HEALT H & S A F E T Y L A E N T M N O R I V N E M ANAG E M E N T S Y S T E M ENVIRONMENT Responsible environmental management is a core component of our approach to CSR. We are committed to complying with applicable legislation and to identifying risks to the environment. We recognise that oil and gas exploration and production activities can have an impact on the environment. As such we aim, wherever possible, to implement processes to avoid, mitigate or manage any adverse impacts our operations might have. We are committed to employing highly competent personnel who share the company’s values and who are themselves committed to implementing our high standards of environmental performance in everything they do. We are proud that our operating company at the Bortovoy Licence continued its compliance in 2015 with ISO 14001: 2004 – a globally recognised management system standard which specifi es the requirements for the formulation and maintenance of an environmental management system. Above all, this certifi cation refl ects that our business is environmentally responsible. It shows how committed we are to reducing our environmental impacts and living up to expectations of sustainability and continual improvement. Russia’s “Green Spring” initiative Inspired by the nationwide environmental programme “Green Spring” to promote, conserve and restore the natural environment, we planted dozens of new elm, maple and spruce trees on the Bortovoy Licence in 2015. COMMUNITY ENGAGEMENT Co-operation with local communities is key to the success of our operations, and we continually seek to maximise local involvement to provide the potential for economic and social benefi ts. We are also committed to building and utilising skills available locally at all levels. We have been very active throughout 2015 in the local communities of the Saratov region where our Bortovoy Licence and Western Gas Plant are situated. This has included active support for the development of sport in the region - especially for children - exhibited most proudly by our renovation of a school sports hall in the village of Dergachi, the repairs of the Krasnokutsky Fitness Centre, and through our purchase of equipment for, or construction of, playgrounds in the villages of Zhdanovka, Lebedevka and Eruslan, Additionally, Zoltav allocated funding for the purchase of sports clothing and footwear for the Victoria Saratov basketball club. We also provided financial assistance in 2015 for the construction and repair of local infrastructure. This included the repairs of local roads, street lighting and water supply pipes in local districts; and installations of fi re alarm systems in schools and nurseries in Karpenka and Lebedevka. The letters of thanks from children, parents and local authorities demonstrate the popularity, effectiveness and importance of our social engagement programmes and we will continue this commitment wherever we have operations in the future. ANTI-BRIBERY & CORRUPTION POLICY Our policy is to conduct all of our business in an honest and ethical manner. We take a zero-tolerance approach to bribery and corruption and are committed to acting professionally, fairly and with integrity in all our business dealings and relationships wherever we operate and implementing and enforcing effective systems to counter bribery. We will uphold all laws relevant to countering bribery and corruption in all the jurisdictions in which we operate. We take our responsibility to protect and preserve the natural environment we operate in very seriously and we are actively participating in Russia’s “Green Spring” environmental initiative 12 Zoltav Resources Inc. Annual Report 2015 Zoltav Resources Inc. Annual Report 2015 13 BOARD OF DIRECTORS - PROFILES INTRODUCTION THE BOARD Following a review of the effectiveness of the board, and in consultation with its major shareholders, Zoltav announced at the Annual General Meeting a number of changes intended to simplify the Company’s board structure. Accordingly, Symon Drake- Brockman, Michael Lombardi and Julia Lebedina left the board. The changes to the board were intended to improve the effi ciency and effectiveness of decision making, allowing the Company to make faster operational decisions and to more quickly assess new opportunities for growth. It remains the board’s intention to make further appointments in the future of directors with highly relevant Russian and CIS experience who can add value to the Company’s strategy to grow organically and through acquisition. ALASTAIR FERGUSON Executive Chairman ANDREY KOMAROV Executive Director STEPHEN LOWDEN Senior Independent Director ALEXANDER GORODETSKY Independent Non-executive Director ANDREY IMMEL Non-executive Director MARCUS RHODES Independent Non-executive Director Alastair Ferguson has an extensive background in the oil and gas industry and considerable experience of the Russian gas market. He is a non- executive director of Kazmunaigaz Exploration and Production, an oil and gas exploration and production company focused on the Caspian region in Kazakhstan. Alastair Ferguson was an executive vice-president gas & power with TNK-BP between 2003- 2011 having successfully led its gas and power business in Russia and Ukraine. He continues to work in Moscow as an independent advisor on energy issues. Prior to that, he held a wide range of senior positions with BP during his 35 year career in the oil and gas industry. Andrey Komarov is a very experienced Russian oil and gas professional having held senior managerial positions with a number of major Russian energy businesses. Between 2006 and 2013 Andrey Komarov served as Vice President, Gas Business Development & Sales, and latterly as Vice President, Gas & Power, at TNK-BP, where he worked with Alastair. In 2002 Andrey Komarov joined Sibneft OJSC (now Gazprom Neft), one of Russia’s leading oil producers, as Director, Regional Sales and was subsequently appointed as the group’s Vice President, Downstream in 2004. Prior to Sibneft OJSC, Andrey Komarov held the positions of Deputy General Director and Commercial Director of the Moscow Oil Refi nery and served as an advisor to the Minister of Fuel and Energy of the Russian Federation. Stephen Lowden has over 25 years’ experience in the international oil and gas industry across exploration, development, production and gas liquefaction. Throughout his career in the oil and gas industry, Stephen Lowden has worked around the world but has spent a considerable time working on projects in the CIS, where Zoltav is focused. Stephen Lowden has previously held positions with Premier Oil plc, including chief petroleum engineer, general manager for development and production and an executive director of the board and, more recently, at Marathon Oil Company as president of Marathon International and head of corporate business development. Stephen Lowden is also involved with two private energy businesses. Andrey Immel was appointed as a non- executive director in September 2015. He is an experienced Russian corporate lawyer. He has, since 2012, been the head of the legal department of Moscow- based Contact-Service LLC, a real estate company, where his responsibilities include corporate governance and the provision of legal support for transactions. From 2008-2012, Andrey Immel worked for Himuglemet, a manufacturer of conveyer band and other components for coal mines, both as legal counsel and as a corporate and tax lawyer. His responsibilities included legal due diligence and support for corporate transactions. Marcus Rhodes is an experienced director of major publicly-listed companies operating in Russia and the CIS. He is a qualified chartered accountant and a member of the Institute of Accountants in England & Wales. Marcus Rhodes is currently a non-executive director and chairman of the audit committee of NASDAQ-listed QIWI plc, a major provider of payment solutions in Russia and the CIS. He is also a non-executive director and chairman of the audit committee for the Russian company PhosAgro OJSC, one of the world’s leading producers of phosphate-based fertilisers and listed on the London Stock Exchange and London Stock Exchange-listed Cherkizovo Group OJSC, Russia’s largest meat producer. Marcus Rhodes was an audit partner for Ernst & Young from 2002-2008. Prior to that, he was an audit partner for Arthur Andersen from 1998-2002. Alexander Gorodetsky was appointed as a non-executive director in September 2015. He is currently the general partner of Strategy Capital Advisor Limited, a private equity fund established in 2009 with a mandate to invest in projects, including within the oil and gas sector, across the former Soviet Union. Prior to Strategy Capital Advisor Limited, Alexander Gorodetsky was fi rst deputy to the chairman of East One Group, an international investment advisory group providing strategic and investment management services. During his time at East One Group, he assisted in the strategic development of over 25 portfolio companies including GEO ALLIANCE Group, one of the leading independent oil and gas exploration and production groups in Ukraine. From 2000-2006, Alexander Gorodetsky was president/ business unit leader for TNK BP Ukraine. He contributed significantly to the increased brand awareness of TNK-BP in the Ukrainian market, where it is among the leading oil and gas companies. He began his career in 1995 within Alfa-Eco, a leading gas and oil trading business in Russia. 14 14 Zoltav Resources Inc. Annual Report 2015 Zoltav Resources Inc. Annual Report 2015 15 15 FINANCIAL INFORMATION DIRECTORS’ REPORT Substantial shareholdings The interests in excess of 3% of the issued share capital of the Company which have been notifi ed to the Company as at 31 December 2015 were as follows: ARA Capital Limited Bandbear Limited Crediton Invest Limited Matteson Overseas Number of ordinary shares Percentage of existing share capital 56,243,076 56,243,076 6,353,568 6,353,568 125,193,288 39.6% 39.6% 4.5% 4.5% 88.2% DIRECTORS’ REPORT FOR THE YEAR ENDED 31 DECEMBER 2015 The Directors of the Company present their annual report together with the audited consolidated fi nancial statements for the year ended 31 December 2015. Principal activities The principal activities of the Company and its subsidiaries (the “Group”) are the acquisition, exploration and development of hydrocarbon assets and production of hydrocarbons in the Russian Federation. Business review A review of the business for the year and of future developments is given in the Chairman’s Report. Results The results of the Company are as shown on page 26. Dividends The Directors do not recommend the payment of a fi nal dividend and no interim dividend was paid during the year (2014: USD nil). Share capital No movements in share capital occurred in 2015. The Company’s policy in respect of capital and risk management is set out in note 27. Directors The membership of the Board who served during the year and up to the date of approving the fi nancial statements is set out on page 1. Going concern The going concern basis of accounting is appropriate because there are no material uncertainties related to events or conditions that may cast signifi cant doubt about the ability of the company to continue as a going concern. Directors’ interests Certain Directors have owned shares of the Company during the year ended 31 December 2015. Interests in the ordinary shares of the Company are as follows: Marcus Rhodes Alastair Ferguson Andrey Komarov Stephen Lowden Alexander Gorodetsky Andrey Immel Symon Drake-Brockman* Stephen Lowden* Alastair Ferguson Andrey Komarov Alexander Gorodetsky Andrey Immel Marcus Rhodes Symon Drake-Brockman** 31 December 2015 31 December 2014 Number of ordinary shares Percentage of existing share capital Number of ordinary shares Percentage of existing share capital 15,000 0.01% - - - - - - - - - - - - 15,000 0.01% - - - - - - - - - - - - 469,055 469,055 0.30% 0.30% * Is not Director at 31 December 2015 31 December 2015 Number of ordinary share options Number of ordinary share options 500,000 500,000 - - - - - - 500,000 - - - - - 1,250,000 1,750,000 * Mr Lowden’s Options expiry date is 30 October 2017 ** Is not Director at 31 December 2015 16 Zoltav Resources Inc. Annual Report 2015 Zoltav Resources Inc. Annual Report 2015 17 17 STATEMENT OF DIRECTORS’ RESPONSIBILITIES The Directors are responsible for preparing the annual report and financial statements in accordance with applicable law and regulations. AIM Rules for Companies require the Directors to prepare financial statements for each financial year. Under those Rules the Directors have elected to prepare the financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. The financial statements are required to give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. International Accounting Standard 1 requires that financial statements present fairly for each financial year the Company’s financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board’s “Framework for the preparation and presentation of financial statements”. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable IFRS. However, Directors are also required to: • • • properly select and apply accounting policies; present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; and • make an assessment of the Company’s ability to continue as a going concern. The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Financial risk management objectives and policies Details of the financial risk management objectives and policies are provided in note 27 to the financial statements. Independent Auditor Ernst & Young LLC were appointed as the Company’s independent auditor on 26 November 2015 and have expressed their willingness to continue in office. For and on behalf of the Board: Alastair Ferguson Executive Chairman 21 April 2016 18 Zoltav Resources Inc. Annual Report 2015 CORPORATE GOVERNANCE REPORT FOR THE YEAR ENDED 31 DECEMBER 2015 FINANCIAL INFORMATION CORPORATE GOVERNANCE The Board has access to the Company’s advisers to notify them on fi nancial, governance and regulatory matters. Any Director wishing to do so in the furtherance of his duties may take independent professional advice at the Company’s expense. This also applies to any Director in his capacity as a member of the Audit, Remuneration or Nomination committees. Through the Chairman the Directors also have access to the Corporate Administrator, CO Services Cayman Limited. The Board is supported by specialised committees ensuring that sound governance procedures are followed. The Corporate Governance section of the Company’s website includes the terms of reference of the Audit, Remuneration and Nomination Committees at. Board Committees The Audit Committee The Audit Committee currently comprises Marcus Rhodes and Andrey Immel, with Marcus Rhodes as Chairman. The Board is satisfi ed that collectively the Audit Committee has suffi cient, recent and relevant fi nancial experience. The duties of the Audit Committee are to review the fi nancial information of the Company, to oversee the Company’s fi nancial reporting processes and internal control systems, and to manage the relationship with the Company’s external auditor. The Audit Committee also has primary responsibility for making recommendations on the appointment, re-appointment and removal of the external auditor, and for approving any signifi cant non-audit services provided by the external auditor to ensure that objectivity and integrity are safeguarded. The Audit Committee reports its work, fi ndings and recommendations to the Board after each meeting. The Remuneration and Nomination Committee The Remuneration and Nomination Committee currently comprises Stephen Lowden and Alexander Gorodetsky with Stephen Lowden as Chairman. The principal functions of the Remuneration and Nomination Committee include recommending to the Board the policy and structure for the remuneration of the Chairman, Non- executive Directors and (as determined by the Board) senior management, determining the remuneration packages of the Chairman, the Non-executive Directors and senior management, reviewing and approving performance-based remuneration and compensation for loss or termination of offi ce payable to Non- executive Directors and senior management, ensuring that no Director is involved in deciding his own remuneration, approving the service contracts of Directors and senior management and leading the process for appointments to the Board and make recommendations to the Board based on their evaluation of the balance of skills, knowledge and experience on the Board. The report on remuneration is set out on page 22. Attendance at Board and Committee Meetings The board held three in person board meetings during 2015. These were attended by all the directors appointed at the time who were able to attend. The table below sets out the total number of meetings of the Board and its committees during the year and attendance by members at those meetings. In addition to the three “in person” board meetings fi ve others were held on an ad hoc basis to facilitate the acquisition of Diall. Board Audit committee Nomination and Remuneration Meetings held during the year Meetings attended during the year: Alastair Ferguson Andrey Komarov Stephen Lowden Alexander Gorodetsky Andrey Immel Marcus Rhodes Michael Lombardi Yulia Lebedina 3 3 3 3 1 2 3 1 1 2 − − 2 − 1 2 − − 2 − − 2 1 − 2 − − Internal control The Board is responsible for maintaining a strong system of internal control and risk management to safeguard shareholders’ investments and the Company’s assets. The system of internal control is designed, taking into account the Company’s business objectives and strategy, to provide reasonable, but not absolute, assurance against material misstatement or loss. The criteria the Board uses to assess the effectiveness of the system of internal control include: • • • • • the nature and extent of the risks facing the Company; the extent and categories of risk that the Board regards as acceptable for the Company to bear; the likelihood of the risks materialising and the fi nancial impact of the risks; the Company’s ability to reduce the incidence and impact on the business of risks that do materialise; and the costs of operating particular controls relative to the benefi t thereby obtained. The Board has considered the need for an internal audit function but has decided, after taking into account the current status of the Company, such a function is not at present justifi ed. Relations with Shareholders The Company believes that effective communication with shareholders is of utmost importance. It has an established cycle for communicating trading results at the interim and year end stages and, as appropriate, of providing business updates via the Regulatory News Service and press releases. The Company makes information available through regulatory announcements and its interim and annual reports. Copies of all such communications can be found on the Company website, www.zoltav.com. Introduction The Board’s overriding objective is to ensure that the Group delivers long-term capital appreciation for its shareholders. Compliance The Company complies with elements of the Smaller Company provisions of the UK Corporate Governance Code (“the Code”) albeit as an AIM-listed company and Cayman Island incorporated company it is not required to. The Board of Directors is committed to developing and applying high standards of corporate governance appropriate to the Company’s size and its future prospects. This statement sets out measures taken by the Board to apply the principles of the Code to the year ended 31 December 2015 and to the date of the Directors’ report. Board of directors Role of the Board The Board’s role is to provide leadership to the Group within a framework of prudent and effective controls which enables risk to be assessed and managed. The Board sets the Group’s strategic aims and ensures that the necessary financial and human resources are in place for the Group to meet its objectives, and reviews management’s performance in meeting these objectives. The Board sets and monitors the Group’s values and standards and ensures that the Group’s obligations to shareholders and other stakeholders are understood and met. The Board has a formal schedule of matters reserved for its approval, including: Strategic and policy considerations; • Annual budget, including capital expenditure; • • Interim and fi nal fi nancial statements; • Management structure and appointments; • Mergers, acquisitions, disposals; • Capital raising; • • • Signifi cant changes in accounting policies; Appointment or removal of Directors; Pay and rewards. Board composition The Board currently comprises two executive directors and four non-executive independent directors: • • • • Alastair Ferguson – Executive Chairman; Andrey Komarov – Executive Director; Stephen Lowden – Senior Independent Director; Alexander Gorodetsky – Independent Non-executive Director; Andrey Immel – Independent Non-executive Director; • • Marcus Rhodes – Independent Non-executive Director. There is a clear division of responsibilities between the executive and non-executive directors. Board balance and independence Under the provisions of the UK Corporate Governance Code as a Smaller Company the Company meets the requirements to have at least two independent non-executives on the Board. The Board meets at least quarterly to discuss opportunities available to the Company as a whole. The Company maintains insurance for Directors and Offi cers of the Company. The Chairman of the Board is an executive and is responsible for the leadership and effective running of the Board, including the interaction between executive and non-executive members, and for ensuring that the Board is kept appropriately informed about the business activities of the Company. The Chairman also seeks to ensure effective communication with shareholders and other stakeholders. 20 Zoltav Resources Inc. Annual Report 2015 Zoltav Resources Inc. Annual Report 2015 21 CORPORATE GOVERNANCE REPORT FOR THE YEAR ENDED 31 DECEMBER 2015 FINANCIAL INFORMATION CORPORATE GOVERNANCE Report on remuneration The Board recognises that Directors’ and employees’ remuneration is of legitimate concern to shareholders, and is committed to following good practice and to ensuring that the interests of the Directors and employees are aligned with those of shareholders. Policy on remuneration The Company aims to set levels of remuneration that are suffi cient to attract, retain and motivate Directors and senior management of the quality required to run the Company successfully, whilst ensuring that the interests of Directors and employees are aligned with those of shareholders. The Company operates within a competitive environment in which the Company’s performance depends on the individual contributions of the Directors. When determining annual salaries and performance-based remuneration the Company takes into account the following factors: • • • • • • direct and indirect contribution towards the Company’s current profi tability; the development of businesses or transactions that may help achieve the Company’s objective in future years; the quality of earnings, in the context of market conditions, as well as the quantity of earnings; vision and innovation; remuneration levels and practices in other firms engaged in similar activities; and incentive to continue to contribute to the Company’s objectives. Directors’ remuneration The remuneration of the Directors for the year ended 31 December 2015 is shown in the table below. Alastair Ferguson Andrey Komarov Stephen Lowden Alexander Gorodetsky Andrey Immel Marcus Rhodes Symon Drake- Brockman Michael Lombardi Yulia Lebedina John Grimshaw Oliver Donagher Total USD USD USD USD USD USD USD USD USD USD USD USD Salary 522,412 459,615 130,100 12,856 Share based compensation − − − − 2015 Total 522,412 459,615 130,100 12,856 Salary 252,680 7,363 138,568 Share based compensation − − − 2014 Total 252,680 7,363 138,568 − − − − − − − − − 109,633 229,599 36,827 8,992 − − − − 109,633 229,599 36,827 8,992 − − − − 1,510,034 − − − 1,510,034 65,891 666,461 59,369 7,363 19,206 23,047 1,239,948 − − − − − − − 65,891 666,461 59,369 7,363 19,206 23,047 1,239,948 Share price During the year, the share price of the Company traded in the range of 0.24 to 0.80 GBP. 22 Zoltav Resources Inc. Annual Report 2015 Zoltav Resources Inc. Annual Report 2014 23 INDEPENDENT AUDITORS’ REPORT To the shareholders of Zoltav Resources Inc. We have audited the accompanying consolidated fi nancial statements of Zoltav Resources Inc., which comprise the consolidated statement of fi nancial position as at 31 December 2015, and the consolidated statement of profi t or loss, consolidated statement of other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash fl ows for the year then ended, and a summary of signifi cant accounting policies and other explanatory information. Management’s responsibility for the consolidated fi nancial statements Management is responsible for the preparation and fair presentation of these consolidated fi nancial statements in accordance with International Financial Reporting Standards, as adopted by the European Union, and for such internal control as management determines is necessary to enable the preparation of consolidated fi nancial statements that are free from material misstatement, whether due to fraud or error. Auditors’ responsibility Our responsibility is to express an opinion on these consolidated fi nancial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the fi nancial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated fi nancial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the consolidated fi nancial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated fi nancial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated fi nancial statements. We believe that the audit evidence we have obtained is suffi cient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated fi nancial statements present fairly, in all material respects, the fi nancial position of Zoltav Resources Inc. as at 31 December 2015, and its fi nancial performance and cash fl ows for the year then ended in accordance with International Financial Reporting Standards, as adopted by the European Union. Other matter The consolidated fi nancial statements of Zoltav Resources Inc. for the year ended 31 December 2014 were audited by another auditor who expressed an unmodifi ed opinion on those statements on 23 April 2015. 21 April 2016 Ernst & Young LLC Moscow, Russia 24 Zoltav Resources Inc. Annual Report 2015 CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 FINANCIAL INFORMATION FINANCIAL STATEMENTS Consolidated statement of comprehensive income for the year ended 31 December 2015 (in ʻ000s US dollars, unless otherwise stated) Consolidated statement of fi nancial position as at 31 December 2015 (in ʻ000s US dollars, unless otherwise stated) Revenue Cost of sales Mineral extraction tax Depreciation and depletion Other cost of sales Total cost of sales Gross profi t Operating, administrative, selling expenses Other income and expense, net Gain on acquisition Operating Profi t Finance income Finance cost (Loss)/profi t before tax Income tax expense Note 5 6 7 9 10 10 11 (Loss)/profi t for the year attributable to own- ers of the parent Other comprehensive loss not to be to be reclassifi ed to profi t or loss in subsequent periods: Currency translation differences 27.2 Other comprehensive loss for the year Total comprehensive loss for the year (Loss)/earnings per share attributable to owners of the parent during the year: 19 Basic Diluted 2015 28,138 (6,443) (6,094) (6,972) (19,509) 8,629 (7,906) 374 − 1,097 847 (5,501) (3,557) (475) (4,032) (25,454) (25,454) (29,486) $ cents (2.84) (2.80) 2014 20,018 (3,871) (4,241) (5,407) (13,519) 6,499 (14,196) 138 34,974 27,415 489 (3,798) 24,106 (2,399) 21,707 (74,927) (74,927) (53,220) $ cents 20.67 20.19 Note 2015 2014 ASSETS Non-current assets Exploration and evaluation assets Property, plant and equipment Total non-current assets Current assets Inventories Trade and other receivables Financial assets at fair value through profi t or loss Cash and cash equivalents Total current assets TOTAL ASSETS EQUITY AND LIABILITIES Share capital Share premium Other reserves Accumulated losses Translation reserve Total equity Non-current liabilities Borrowings Provisions Deferred tax liabilities Total non-current liabilities Current liabilities Borrowings Other taxes payable Trade and other payables Total current liabilities TOTAL LIABILITIES TOTAL EQUITY AND LIABILITIES 12 13 14 15 16 17 27.2 21 22 23 21 24 25 64,355 59,524 123,879 134 2,584 65 5,880 8,663 132,542 28,391 159,899 43,026 (43,008) (99,888) 88,420 25,317 4,912 4,578 34,807 5,123 1,244 2,948 9,315 44,122 132,542 83,922 82,163 166,085 323 3,139 196 10,694 14,352 180,437 28,391 159,899 43,592 (39,542) (74,434) 117,906 39,076 10,649 5,369 55,094 3,200 1,137 3,100 7,437 62,531 180,437 The consolidated fi nancial statements on pages 26 to 56 were approved by the Board of Directors and authorised for issue on 21 April 2016. The accompanying notes on pages 26-56 are an integral part of these consolidated fi nancial statements. The accompanying notes on pages 26-56 are an integral part of these consolidated fi nancial statements. 26 Zoltav Resources Inc. Annual Report 2015 Zoltav Resources Inc. Annual Report 2015 27 CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 FINANCIAL INFORMATION FINANCIAL STATEMENTS Consolidated statement of cash fl ows for the year ended 31 December 2015 (in ʻ000s US dollars, unless otherwise stated) Consolidated statement of changes in equity for the year ended 31 December 2015 (in ʻ000s US dollars, unless otherwise stated) Cash fl ows from operating activities Note Operating (loss)/gain Adjustments for: Gain on acquisition Depreciation and depletion Net fi nance costs Other gains/(losses), net Operating cash infl ows/(outfl ows) before working capital changes Decrease/(increase) in inventory Decrease in trade and other receivables Increase/(decrease) in trade and other payables Net cash from/(used in) operating activities before tax paid and interests Interest received Interest paid Income tax paid Net cash from/(used in) operating activities Cash fl ows from investing activities Cash paid for the acquisition of subsidiaries net of cash acquired 9 Capital expenditure in relation to exploration and evaluation activities Purchase of property, plant and equipment Net cash used in investing activities Cash fl ows from fi nancing activities Proceeds from borrowings Repayment of borrowings Issue of ordinary shares Net cash (used in)/generated from fi nancing activities Net (decrease)/increase in cash and cash equivalents Translation differences Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 2015 (3,557) − 6,094 4,654 (374) 6,817 189 555 212 7,773 847 (4,313) − 4,307 − (893) (4,461) (5,354) − (3,044) − (3,044) (4,091) (723) 10,694 5,880 2014 24,106 (34,974) 4,330 3,309 (170) (3,399) (18) 3,057 (2,271) (2,631) 439 (3,046) (15) (5,253) (49,712) (8,359) (4,810) (62,881) 4,024 − 71,898 75,922 7,788 (4,359) 7,265 10,694 Note Share capital Share premium Capital reserve Employee share-based compensation reserve Accumulated losses Translation reserve Total equity 11,432 42,975 40,444 3,906 (61,249) 493 38,001 17 17 27.2 27.2 16,806 115,361 153 1,563 16,959 116,924 − − − − − − − − − − − − − (758) (758) − − − − − − − − − − 132,167 958 133,125 (74,927) (74,927) 21,707 − 21,707 21,707 (74,927) (53,220) 28,391 159,899 40,444 3,148 (39,542) (74,434) 117,906 − − − − − − − − − − − − − − − (566) (566) − − − 566 566 − − − − − (25,454) (25,454) (4,032) − (4,032) (4,032) (25,454) (29,486) 28,391 159,899 40,444 2,582 (43,008) (99,888) 88,420 At 1 January 2014 Issue of ordinary shares Employee share-based compensation Transactions with owners Translation reserve movements Profi t for the year Total comprehensive income At 31 December 2014 Employee share-based compensation Transactions with owners Translation reserve movements Loss for the year Total comprehensive income At 31 December 2015 The accompanying notes on pages 26-56 are an integral part of these consolidated fi nancial statements. The accompanying notes on pages 26-56 are an integral part of these consolidated fi nancial statements. 28 Zoltav Resources Inc. Annual Report 2015 Zoltav Resources Inc. Annual Report 2015 29 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 (in ʻ000s US dollars, unless otherwise stated) 1 1.1 The Zoltav Group (Group) comprises Zoltav Resources Inc. (Company), together with its subsidiaries: Background The Company and its operations Name Zoltav Resources Holdings (Jersey) Limited Place of incorporation Function Share of the Group in a subsidiary Jersey Holding company ZRI Services (UK) Ltd United Kingdom Service company CenGeo Holdings Limited (hereinafter “CenGeo Holdings”) Cyprus Holding company CJSC SibGeCo (hereinafter “SibGeCo”) Russia Operating company Royal Atlantic Energy (Cyprus) Limited (hereinafter “Royal”) Diall Alliance LLC (hereinafter “Diall”) Zoltav Resource LLC Cyprus Russia Russia Holding company Operating company Management company 100% 100% 100% 100% 100% 100% 100% The Company was incorporated in the Cayman Islands on 18 November 2003, which does not prescribe the adoption of any particular accounting framework. The Board has therefore adopted International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board and as adopted by the European Union. The principal activities of the Company and its subsidiaries are the acquisition, exploration and development of hydrocarbon assets and production of hydrocarbons in the Russian Federation and the Commonwealth of Independent States (“CIS”). The Company’s shares are listed on the Alternative Investment Market (“AIM”) of London Stock Exchange. The fi nancial statements are prepared in United States dollars. 1.2 The Company’s operations are located in the Russian Federation. Russian business environment Russian Federation 1.3 The Russian Federation displays certain characteristics of an emerging market. Its economy is particularly sensitive to oil and gas prices. The legal, tax and regulatory frameworks continue to develop and are subject to varying interpretations. The recent political and economic turmoil witnessed and falling crude oil prices, have had and may continue to have a negative impact on the Russian economy, including further weakening of the Russian ruble, higher interest rates, reduced liquidity and making it harder to raise international funding. These events, including current and future international sanctions against Russian companies and individuals and the related uncertainty and volatility of the fi nancial markets, may have a signifi cant impact on the Group’s operations and fi nancial position, the effect of which is diffi cult to predict. The future economic and regulatory situation may differ from management’s expectations. Whilst not currently affecting the Group’s operations, the sanctions being imposed by the European Union and the United States of America continue to evolve. The Company cannot confi rm that the sanctions will not have an effect on the Group’s operations or its ability to access international capital markets in the future. FINANCIAL INFORMATION NOTES TO ACCOUNTS Signifi cant accounting policies Basis of preparation 2 2.1 The consolidated fi nancial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRSs), as adopted by the European Union (EU), International Financial Reporting Interpretations Committee (IFRIC) interpretations, and the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated fi nancial statements have been prepared under the historical cost convention, as modifi ed by the revaluation of fi nancial assets and fi nancial liabilities (including derivative instruments) at fair value through profi t or loss. The preparation of fi nancial statements in conformity with IFRSs 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 signifi cant to the consolidated fi nancial statements are disclosed in Note 3. Going concern 2.2 The consolidated fi nancial statements have been prepared on the going concern basis as the directors have concluded that the Group will continue to have access to suffi cient funds in order to meet its obligations as they fall due for at least the foreseeable future as explained further in the Directors Report. Liquidity issues related to Group’s going concern assumption are described in Note 27.1. Disclosure of impact of new and future accounting standards Adoption of amended Standards 2.3 (a) The Group applied for the fi rst time certain standards and amendments, which are effective for annual periods beginning on or after 1 January 2015. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective. Although these new standards and amendments applied for the fi rst time in 2015, they did not have a material impact on the annual consolidated fi nancial statements of the Group. Standards IAS 19 (amended) Employee Benefi ts Annual improvements 2010-2012 cycle IFRS 2 (amended) Share-based Payments IFRS 3 (amended) Business Combinations IFRS 8 (amended) Operating Segments IAS 16 (amended) Property, Plant and Equipment IAS 38 (amended) Intangible Assets IAS 24 (amended) Related Party Disclosures Annual improvements 2011-2013 cycle IFRS 3 (amended) Business Combinations IFRS 13 (amended) Fair Value Measurement IAS 40 (amended) Investment Property Effective for annual periods beginning or after 1 July 2014 1 July 2014 1 July 2014 1 July 2014 1 July 2014 1 July 2014 1 July 2014 1 July 2014 1 July 2014 1 July 2014 Standards issued but not yet effective (b) The most signifi cant standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Group’s consolidated fi nancial statements are disclosed below. IFRS 9 Financial Instruments In July 2014, the IASB issued the fi nal version of IFRS 9 Financial Instruments which refl ects all phases of the fi nancial instruments project and replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. The standard introduces new requirements for classifi cation and measurement, impairment, and hedge accounting. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted. Retrospective application is required, but comparative information is not compulsory. Early application of previous versions of IFRS 9 (2009, 2010 and 2013) is permitted if the date of initial application is before 1 February 2015. The adoption of IFRS 9 will have insignifi cant effect on the classifi cation and measurement of the Group’s fi nancial assets. 30 Zoltav Resources Inc. Annual Report 2015 Zoltav Resources Inc. Annual Report 2015 31 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 (in ʻ000s US dollars, unless otherwise stated) IFRS 15 Revenue from Contracts with Customers IFRS 15 was issued in May 2014 and establishes a new fi ve-step model that will apply to revenue arising from contracts with customers. Under IFRS 15 revenue is recognised at an amount that refl ects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The principles in IFRS 15 provide a more structured approach to measuring and recognising revenue. The new revenue standard is applicable to all entities and will supersede all current revenue recognition requirements under IFRS. Either a full or modifi ed retrospective application is required for annual periods beginning on or after 1 January 2018 with early adoption permitted. IFRS 16 Leases The IASB issued its new leases standard, IFRS 16 Leases, which replaces existing IFRS leases requirements and requires lessees to recognise assets and liabilities for most leases. For lessees, the new leases standard marks a signifi cant change from current requirements under IFRS. The application is required for annual periods starting from 1 January 2019. The Group is considering the implication of the new standards and the impact on the Group’s consolidated fi nancial statements. The Group plans to adopt new standards and amendments when they become effective. There are other improvements, pronouncements and amendments that are not relevant to the current Group’s operations. Basis of Consolidation 2.4 The consolidated fi nancial statements comprise the fi nancial statements of the Group and its subsidiaries as at 31 December 2015. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifi cally, the Group controls an investee if, and only if, the Group has: • • • Power over the investee (i.e., existing rights that give it the current ability to direct the relevant activities of the investee) Exposure, or rights, to variable returns from its involvement with the investee The ability to use its power over the investee to affect its returns Generally, there is a presumption that a majority of voting rights results in control. To support this presumption and when the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including: • • • The contractual arrangement(s) with the other vote holders of the investee Rights arising from other contractual arrangements The Group’s voting rights and potential voting rights The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated fi nancial statements from the date the Group gains control until the date the Group ceases to control the subsidiary. When necessary, adjustments are made to the fi nancial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash fl ows relating to transactions between members of the Group are eliminated in full on consolidation. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, it derecognises the related assets (including goodwill), liabilities and components of equity, while any resultant gain or loss is recognised in profi t or loss. Any investment retained is recognised at fair value. Acquisitions, asset purchases and disposals 2.5 Transactions involving the purchases of an individual fi eld interest, or a group of fi eld interests, that do not qualify as a business combination are treated as asset purchases, irrespective of whether the specifi c transactions involved the transfer of the fi eld interests directly or the transfer of an incorporated entity. Accordingly, no goodwill or deferred tax gross up arises. The purchase consideration is allocated to the assets and liabilities purchased on an appropriate basis. Proceeds on disposal are applied to the carrying amount of the specifi c intangible asset or development and production assets disposed of and any surplus is recorded as a gain on disposal in the statement of comprehensive income. Business combinations 2.6 Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, which is measured at acquisition date fair value, and the amount of any non-controlling interests in the acquiree. For each business combination, the Group elects whether to measure the non-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree’s identifi able net assets. Acquisition-related costs are expensed as incurred and included in administrative expenses. When the Group acquires a business, it assesses the fi nancial assets and liabilities assumed for appropriate classifi cation and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. FINANCIAL INFORMATION NOTES TO ACCOUNTS Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Contingent consideration classifi ed as an asset or liability that is a fi nancial instrument and within the scope of IAS 39 Financial Instruments: Recognition and Measurement, is measured at fair value with the changes in fair value recognised in the statement of profi t or loss. Goodwill is initially measured at cost (being the excess of the aggregate of the consideration transferred and the amount recognised for non-controlling interests) and any previous interest held over the net identifi able assets acquired and liabilities assumed. If the fair value of the net assets acquired is in excess of the aggregate consideration transferred, the Group re-assesses whether it has correctly identifi ed all of the assets acquired and all of the liabilities assumed and reviews the procedures used to measure the amounts to be recognised at the acquisition date. If the reassessment still results in an excess of the fair value of net assets acquired over the aggregate consideration transferred, then the gain is recognised in profi t or loss. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units that are expected to benefi t from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Where goodwill has been allocated to a cash-generating unit (CGU) and part of the operation within that unit is disposed of, the goodwill associated with the disposed operation is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed in these circumstances is measured based on the relative values of the disposed operation and the portion of the cash-generating unit retained. 2.7 Segment reporting Segmental reporting follows the Group’s internal reporting structure. Operating segments are defi ned as components of the Group where separate fi nancial information is available and reported regularly to the chief operating decision maker (“CODM”), which is determined to be the Board of Directors of the Company. The Board of Directors which decide how to allocate resources and assesses operational and fi nancial performance using the information provided. The CODM receives monthly IFRS-based fi nancial information for the Group and its development and production entities. The Group has other entities that engage as either head offi ce or in a corporate capacity or as holding companies. Management has concluded that due to application of the aggregation criteria that separate fi nancial information for segments is not required. No geographic segmental information is presented as all of the companies operating activities are based in the Russian Federation. Management has determined therefore that the operations of the Group comprise one operating segment and the Group operates in only one geographic area − the Russian Federation. 2.8 Foreign currency translation Functional and presentation currency (a) Items included in the fi nancial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The functional currency of the Group entities is considered to be the Russian ruble (“RUB”), the currency of the primary economic environment in which the Group operates. The consolidated fi nancial statements are presented in USD, which is the Group’s presentation currency, since management believes that this currency is a more useful measure for the potential users of the consolidated fi nancial statements (shareholders). Transactions and balances (b) Transactions in foreign currencies are initially recorded by the Group’s entities at their respective functional currency spot rates at the date the transaction fi rst qualifi es for recognition. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rates of exchange at the reporting date. Differences arising on settlement or translation of monetary items are recognised in profi t or loss with the exception of monetary items that are designated as part of the hedge of the Group’s net investment of a foreign operation. These are recognised in OCI until the net investment is disposed of, at which time, the cumulative amount is reclassifi ed to profi t or loss. Tax charges and credits attributable to exchange differences on those monetary items are also recorded in OCI. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. The gain or loss arising on translation of non-monetary items measured at fair value is treated in line with the recognition of the gain or loss on the change in fair value of the item (i.e., translation differences on items whose fair value gain or loss is recognised in OCI or profi t or loss are also recognised in OCI or profi t or loss, respectively). Group companies (c) Loans between Group entities and related foreign exchange gains or losses are eliminated upon consolidation. However, where the loan is between Group entities that have different functional currencies, the foreign exchange gain or loss cannot be eliminated in full and is recognized in the consolidated profi t or loss, unless the loan is not expected to be settled in the foreseeable future and thus forms part of the net investment in foreign operation. In such a case, the foreign exchange gain or loss is recognized in other comprehensive income. 32 Zoltav Resources Inc. Annual Report 2015 Zoltav Resources Inc. Annual Report 2015 33 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 (in ʻ000s US dollars, unless otherwise stated) FINANCIAL INFORMATION NOTES TO ACCOUNTS The results and fi nancial position of all the Group entities (none of which has the currency of a hyper-infl ationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: the amortisation of fi eld development costs takes into account expenditures incurred to date. (i) (ii) (iii) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; income and expenses are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and all resulting exchange differences are recognised in other comprehensive income. 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 closing rate. Exchange differences arising are recognised in other comprehensive income. The accounting policies set out below have been applied consistently to all years presented in the historical fi nancial information, and have been applied consistently by the Company. The period-end exchange rates and the average exchange rates for the respective reporting periods are indicated below. RUB/USD as at 31 December RUB/USD average for the year ended 31 December 2015 72.8827 60.9579 2014 56.2584 38.4217 Exploration and evaluation assets 2.9 The Company and its subsidiaries apply the successful efforts method of accounting for Exploration and Evaluation (“E&E”) costs, in accordance with IFRS 6 Exploration for and Evaluation of Mineral Resources. Costs are accumulated on a fi eld-by-fi eld basis. Drilling, seismic and other costs (a) Costs directly associated with an exploration well, including certain geological and geophysical costs, and exploration and property leasehold acquisition costs, are capitalised until the determination of reserves is evaluated. If it is determined that a commercial discovery has not been achieved, these costs are charged to expense after the conclusion of appraisal activities. Exploration costs such as geological and geophysical that are not directly related to an exploration well are expensed as incurred. Capital expenditure is recognised as property, plant and equipment or intangible assets in the fi nancial statements according to the nature of the expenditure and the stage of development of the associated fi eld, i.e. exploration, development, production. Once commercial reserves are found, exploration and evaluation assets are tested for impairment and transferred to development property, plant and equipment and intangible assets. No depreciation or amortisation is charged during the exploration and evaluation phase. Sub-soil licences (b) Costs incurred prior to the award of oil and gas licences, concessions and other exploration rights are expensed in profi t or loss. Costs incurred on the acquisition of a licence interest are initially capitalised on a licence by licence basis and are capitalised within exploration and evaluation assets and held un-depleted until the exploration phase on the licence is complete or commercial reserves have been discovered at which time the costs are transferred to development assets as part of property, plant and equipment − oil and gas assets. 2.10 (a) Oil and gas assets are stated at cost less accumulated depletion or accumulated depreciation and, where relevant, impairment costs. Property, plant and equipment Property, plant and equipment – oil and gas assets Expenditure on the construction, installation or completion of infrastructure facilities such as platforms, pipelines and the drilling of development wells into commercially proved reserves, is capitalised within property, plant and equipment. When development is completed on a specifi c fi eld, it is transferred to producing assets within property, plant and equipment. No depreciation or amortisation is charged during the development phase. Development and production assets are accumulated generally on a fi eld by fi eld basis and represent the cost of developing the commercial reserves discovered and bringing them into production together with E&E expenditures incurred in fi nding commercial reserves and transferred from the intangible E&E assets as described above. The cost of development and production assets also includes the cost of acquisitions and purchases of such assets, directly attributable overheads, any costs directly attributable to bringing the asset into operation, and the cost of recognising provisions for future restoration and decommissioning, if any. Major facilities may be capitalised separately if they relate to more than one fi eld or to the licence area as a whole. Subsequent expenditure is capitalised only if it either enhances the economic benefi ts of the development/production asset or replaces part of the existing development/ production asset. Any costs remaining associated with the part replaced are expensed. Directly attributed overheads are capitalised where they relate to specifi c exploration and development activities. (i) Depletion Oil and gas properties in production, including wells and directly related pipeline costs, are depreciated using the unit-of-production method. Sub-soil licences and other licenses capitalised as part of oil and gas properties in production are amortised also using the unit-of-production method. Unit-of-production rates are based on proved reserves of the fi eld concerned, which are oil, gas and other mineral reserves estimated to be recovered from existing facilities using current operating methods. The unit-of-production rate for (ii) Depreciation Major oil and gas facilities that have a shorter useful life than the lifetime of the related fi elds are depreciated on a straight-line basis over the expected useful life of the facility. Depreciation of items of such assets is calculated using straight-line method to allocate their cost to their residual values over their estimated useful lives: Buildings and constructions – 15-30 years Machinery and equipment – 5 years The asset’s residual values and useful lives are reviewed, and adjusted as appropriate, at the end of each reporting period. Property, plant and equipment – other business and corporate assets (b) Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to the working condition and location for its intended use. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefi ts associated with the item will fl ow to the Group and the cost of the item can be measured reliably. All other costs, such as repairs and maintenance are charged to the income statement during the fi nancial period in which they are incurred. The gain or loss arising from a retirement or disposal is determined as the difference between the sales proceeds and the carrying amount of the assets, and is recognised in the income statement. Depreciation is provided on buildings and facilities, motor vehicles, offi ce equipment and furniture at rates calculated to write off the cost, less estimated residual value, evenly over its expected useful life. For depreciation purposes, useful lives are estimated as follows: Other equipment and furniture – 5 years Motor vehicles – 5 years 2.11 (i) Impairment of non-current assets Impairment indicators The Group assesses, at each reporting date, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or CGU’s fair value less costs of disposal and its value in use. The recoverable amount is determined for an individual asset, unless the asset does not generate cash infl ows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash fl ows are discounted to their present value using a pre-tax discount rate that refl ects current market assessments of the time value of money and the risks specifi c to the asset. In determining fair value less costs of disposal, recent market transactions are taken into account. If no such transactions can be identifi ed, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators. The Group bases its impairment calculation on detailed budgets and forecast calculations, which are prepared separately for each of the Group’s CGUs to which the individual assets are allocated. These budgets and forecast calculations generally cover a period of fi ve years. A long-term growth rate is calculated and applied to project future cash fl ows after the fi fth year. Impairment losses of continuing operations are recognised in the statement of profi t or loss in expense categories consistent with the function of the impaired asset, except for properties previously revalued with the revaluation taken to OCI. For such properties, the impairment is recognised in OCI up to the amount of any previous revaluation. For assets excluding goodwill, an assessment is made at each reporting date to determine whether there is an indication that previously recognised impairment losses no longer exist or have decreased. If such indication exists, the Group estimates the asset’s or CGU’s recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognised. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognized in the statement of profi t or loss unless the asset is carried at a revalued amount, in which case, the reversal is treated as a revaluation increase. (ii) Calculation of recoverable amount The recoverable amount of assets is the greater of their value in use and fair value less costs to sell. In assessing value in use, the estimated future cash fl ows are discounted to their present value using a pre-tax discount rate that refl ects current market assessments of the time value of money and the risks specifi c to the asset. (iii) Cash generating units For an asset that does not generate cash infl ows largely independent of those from other assets, the recoverable amount is determined for the cash generating unit to which the asset belongs. The Group’s cash generating units are the smallest identifi able groups of assets that generate cash infl ows that are largely independent of the cash infl ows from other assets or groups of assets. 34 Zoltav Resources Inc. Annual Report 2015 Zoltav Resources Inc. Annual Report 2015 35 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 (in ʻ000s US dollars, unless otherwise stated) For the purposes of assessing impairment, exploration and evaluation assets subject to testing are grouped with existing cash- generating units of production fi elds that are located in the same geographical region. For development and production assets the cash generating unit applied for impairment test purposes is generally the fi eld. For shared infrastructure a number of fi eld interests may be grouped together where surface infrastructure is used by several fi elds in order to process production for sale. (iv) Reversals of impairment An impairment loss is reversed to the extent that the factors giving the rise to the impairment charge are no longer prevalent. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depletion, depreciation or amortisation, if no impairment loss had been recognised. Taxes on income in the interim periods are accrued using the tax rate that would be applicable to expected total annual profi t or loss. Inventories 2.12 Unsold natural gas and hydrocarbon liquids and sulphur in storage are stated at the lower of cost of production or net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Materials and supplies inventories include chemicals necessary for production activities and spare parts for the maintenance of production facilities. Materials and supplies inventories are recorded at cost and are carried at amounts which do not exceed the expected recoverable amount from use in the normal course of business. Cost of inventory is determined on a weighted average basis. Cost of fi nished goods comprises direct materials and, where applicable, direct labour plus attributable overheads based on a normal level of activity and other costs associated in bringing inventories to their present location and condition, but excludes borrowing costs. Lower value items of materials and supplies are written-off directly to profi t or loss. Financial instruments 2.13 A fi nancial instrument is any contract that gives rise to a fi nancial asset of one entity and a fi nancial liability or equity instrument of another entity. Financial assets and fi nancial liabilities are recognised when and only when, the Company becomes a party to the contractual provisions of the instrument. Financial assets and fi nancial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of fi nancial assets and fi nancial liabilities (other than fi nancial assets and fi nancial liabilities at fair value through profi t or loss) are added to or deducted from the fair value of the fi nancial assets or fi nancial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of fi nancial assets or fi nancial liabilities at fair value through profi t or loss are recognised immediately in the statement of comprehensive income. Financial assets (a) The Company classifi es its fi nancial assets into one of the following categories: fi nancial assets at fair value through profi t or loss and loans and receivables. Regular purchases of fi nancial assets are recognised on the trade date. Management determines the classifi cation of its fi nancial assets at initial recognition depending on the purpose for which the fi nancial assets were acquired and where allowed and appropriate, re-evaluates this designation at every reporting date. The accounting policies adopted for each category are: Financial assets at fair value through profi t or loss Financial assets at fair value through profi t or loss include fi nancial assets held for trading and fi nancial assets designated upon initial recognition at fair value through profi t or loss. Financial assets are classifi ed as held for trading if they are acquired for the purpose of selling in the near term, or it is part of a portfolio of identifi ed fi nancial instruments that are managed together and for which there is evidence of a recent pattern of short-term profi t-taking. Financial assets may be designated at initial recognition as at fair value through profi t or loss if the following criteria are met: • • the designation eliminates or signifi cantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or recognising gains or losses on them on a different basis; or the assets are part of a group of fi nancial assets which are managed and their performance is evaluated on a fair value basis, in accordance with a documented risk management strategy and information about the Company of fi nancial assets is provided internally on that basis to the key management personnel. Subsequent to initial recognition, the fi nancial assets included in this category are measured at fair value with changes in fair value recognised in the statement of comprehensive income. Fair value is determined by reference to active market transactions or using a valuation technique where no active market exists. Fair value gains or losses do not include any dividend or interest earned on these fi nancial assets. Dividend and interest income is recognised in on an accruals basis. Other receivables Other receivables are non-derivative fi nancial assets with fi xed or determinable payments that are not quoted in an active market. They are initially measured at fair value and subsequently measured at amortised cost using the effective interest method, less any impairment losses. Amortised cost is calculated taking into account any discount or premium on acquisition and includes fees that are an integral part of the effective interest rate and transaction cost. Impairment losses on other receivables are provided for when objective evidence is received that the Company will not be able to collect amounts due to it in accordance with the original terms of the receivables. The amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash fl ows, excluding future credit losses that have not been incurred, discounted at the fi nancial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition). The amount of the loss is recognised in the statement of comprehensive income for the period in which the impairment occurs. FINANCIAL INFORMATION NOTES TO ACCOUNTS Objective evidence of impairment of individual fi nancial assets includes observable data that comes to the attention of the Company about one or more of the following loss events: • • • • signifi cant fi nancial diffi culty of the debtor; a breach of contract, such as default or delinquency in interest or principal payments; it becoming probable that the debtor will enter bankruptcy or other fi nancial reorganisation; and signifi cant changes in the technological, market, economic or legal environment that have an adverse effect on the debtor. Loss events in respect of a Company of fi nancial assets include observable data indicating that there is a measurable decrease in the estimated future cash fl ows from the Company of fi nancial assets. Such observable data includes but not limited to adverse changes in the payment status of debtors in the Company and, national or local economic conditions that correlate with defaults on the assets in the Company. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed to the extent that it does not result in a carrying amount of the fi nancial asset exceeding what the amortised cost would have been had the impairment not been recognised at the date the impairment is reversed. The amount of the reversal is recognised in the statement of comprehensive income in the period in which the reversal occurs. Financial liabilities and equity (b) Financial liabilities and equity instruments issued by the Company are classifi ed according to the substance of the contractual arrangements entered into and the defi nitions of a fi nancial liability and an equity instrument. An equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities. The accounting policies adopted in respect of fi nancial liabilities and equity instruments are set out below. Other fi nancial liabilities Other fi nancial liabilities include trade and other payables and are recognised initially at fair value and subsequently measured at amortised cost, using the effective interest method. Equity instruments Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. Derecognition (c) Financial assets are derecognised when the rights to receive cash fl ows from the assets expire or, the fi nancial assets are transferred and the Company has transferred substantially all the risks and rewards of ownership of the fi nancial assets. On derecognition of a fi nancial asset, the difference between the asset’s carrying amount and the sum of the consideration received and the cumulative gain or loss that had been recognised directly in equity is recognised in the statement of comprehensive income. For fi nancial liabilities, they are removed from the balance sheet when the obligation specifi ed in the relevant contract is discharged, cancelled or expires. The difference between the carrying amount of the fi nancial liability derecognised and the consideration paid is recognised in the statement of comprehensive income. 2.14 Cash and cash equivalents Cash and short-term deposits in the statement of fi nancial position comprise cash at banks and on hand and short-term deposits with a maturity of three months or less, which are subject to an insignifi cant risk of changes in value. For the purpose of the consolidated statement of cash fl ows, cash and cash equivalents consist of cash and short-term deposits, as defi ned above, net of outstanding bank overdrafts as they are considered an integral part of the Group’s cash management. 2.15 Borrowings After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the EIR method. Gains and losses are recognised in profi t or loss when the liabilities are derecognised as well as through the EIR amortisation process. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included as fi nance costs in the statement of profi t or loss. Provisions 2.16 Provisions are recognised when the Company has a present obligation (legal or constructive) as a result of a past event, and it is probable that an outfl ow of economic benefi ts will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. Where the time value of money is material, provisions are stated at the present value of the expenditure expected to settle the obligation. All provisions are reviewed at each reporting date and adjusted to refl ect the current best estimate. Where it is not probable that an outfl ow of economic benefi ts will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outfl ow of economic benefi ts is remote. Possible obligations, whose existence will only be confi rmed by the occurrence or non-occurrence of one or more future uncertain events not wholly within control of the Company are also disclosed as contingent liabilities unless the probability of outfl ow of economic benefi ts is remote. Provision for decommissioning is made for the cost of decommissioning assets at the time when the obligation to decommission arises. Such provision represents the estimated discounted liability for costs which are expected to be incurred in removing production facilities and site restoration at the end of the producing life of each fi eld. A corresponding item of property, plant and equipment is also created at an amount equal to the provision. This is subsequently depreciated as part of the capital costs of the production 36 Zoltav Resources Inc. Annual Report 2015 Zoltav Resources Inc. Annual Report 2015 37 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 (in ʻ000s US dollars, unless otherwise stated) facilities. Any change in the present value of the estimated expenditure attributable to changes in the estimates of the cash fl ow or the current estimate of the discount rate used are refl ected as an adjustment to the provision and the property, plant and equipment. The unwinding of the discount is recognised as a fi nance cost. Provisions for environmental restoration, restructuring costs and legal claims are recognised when: the group has a present legal or constructive obligation as a result of past events; it is probable that an outfl ow of resources will be required to settle the obligation; and the amount has been reliably estimated. Restructuring provisions comprise lease termination penalties and employee termination payments. Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outfl ow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outfl ow with respect to any one item included in the same class of obligations may be small. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that refl ects current market assessments of the time value of money and the risks specifi c to the obligation. The increase in the provision due to passage of time is recognised as interest expense. Share capital 2.17 Ordinary shares are classifi ed as equity. Share capital is determined using the nominal value of shares that have been issued. Any transaction costs associated with the issuing of shares are deducted from share premium (net of any related income tax benefi t) to the extent they are incremental costs directly attributable to the equity transaction. Any discount on the issue of ordinary shares is deducted from the share premium account. The capital reserve arose in prior periods on the acquisition under common control. 2.18 Revenue recognition Revenue, which is the fair value of consideration received or receivable, is recognised when it is probable that economic benefi ts will fl ow to the Group and when the revenue can be measured reliably. Revenue is shown net of value added tax, returns, rebates and discounts and after eliminating sales within the Group. The following criteria must also be met before revenue is recognised: (i) Sale of goods Revenue from the sale of oil, gas, and condensate is recognised when the title passes to the customer. (ii) Interest income Interest income is recognised on a time-proportion basis using the effective interest method. 2.19 Mineral extraction tax In the Russian Federation MET is payable on the extraction of hydrocarbons, including natural gas, crude oil and condensate, and is levied based on quantities of natural resources extracted multiplied by the applicable MET rate for the product and fi eld in question. MET is a production based tax (as opposed to income) and is accrued as a tax on production and recorded within cost of sales. 2.20 Current and deferred income tax The tax expense for the period comprises current and deferred tax. Tax is recognised in the statement of comprehensive income, 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 recognized in other comprehensive income or directly in equity, respectively. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at end of the reporting period in the countries where the Company’s subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. 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 fi nancial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profi t or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that future taxable profi t will be available against which the temporary differences can be utilised. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. FINANCIAL INFORMATION NOTES TO ACCOUNTS Employee benefi ts Retirement benefi t schemes 2.21 (a) No pension contributions were payable in the year. In 2010, the Company participated only in defi ned contribution pension schemes and paid contributions to independently administered funds on a mandatory or contractual basis. The assets of these schemes are held separately from those of the Company in independently administered funds. The retirement benefi t schemes are generally funded by payments from employees and by the relevant Company. The Company has no further payment obligations once the contributions have been paid. The contributions are recognised as an employee benefi t expense on an accruals basis. (b) The Company operates equity-settled share-based compensation plans to remunerate its Directors and key management. Share-based employee compensation All services received in exchange for the grant of any share-based compensation are measured at their fair values. These are indirectly determined by reference to the fair value of the share options and warrants awarded. Their value is appraised at the grant date and excludes the impact of any non-market vesting conditions. All share-based compensation is ultimately recognised as an expense in the statement of comprehensive income unless it qualifi es for recognition as an asset, with a corresponding credit to employee share-based compensation reserve in equity. If vesting periods or other vesting conditions apply, the expense is allocated over the vesting period, based on the best available estimate of the number of share options expected to vest. Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. Estimates are subsequently revised, if there is any indication that the number of share options expected to vest differs from previous estimates. No adjustment to expense recognised in prior periods is made if fewer share options ultimately are exercised than vested. Upon exercise of share options or warrants the proceeds received net of any directly attributable transaction costs up to the nominal value of the shares issued are allocated to share capital and the amount previously recognised in employee share-based compensation reserve will be transferred out with any excess being recorded as share premium. When the share options or warrants have vested and then lapsed, the amount previously recognised in the employee share-based compensation reserve is transferred to the retained earnings or accumulated losses. Bonus plans (c) The Company recognises a liability and an expense for bonuses where contractually obliged or where there is a past practice that has created a constructive obligation. Social obligations (d) Wages, salaries, contributions to the Russian Federation state pension and social insurance funds, paid annual leave, sick leave and bonuses are accrued in the year in which the associated services are rendered by the employees of the Group. Critical accounting estimates and judgements 3 The preparation of the historical fi nancial information in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the year in which the estimate are revised and in any future years affected. The estimates and assumptions that have a signifi cant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next fi nancial year are discussed below: Income taxes 3.1 The Group is subject to income and other taxes. Signifi cant judgement is required in determining the provision for income tax and other taxes due to complexity of the tax legislation of the Russian Federation. The taxation system in the Russian Federation continues to evolve and is characterised by frequent changes in legislation offi cial pronouncements and court decisions which are sometimes contradictory and subject to varying interpretation by different tax authorities. Taxes are subject to review and investigation by a number of authorities which have the authority to impose severe fi nes penalties and interest charges. A tax year remains open for review by the tax authorities during the three subsequent calendar years; however under certain circumstances a tax year may remain open longer. Deferred tax assets are recognised to the extent that it is probable the Group will generate enough taxable profi ts to utilise deferred income tax recognised. Signifi cant management judgement is required to determine the amount of deferred tax assets recognised, based upon the likely timing and the level of future taxable profi ts. Management prepares cash-fl ow forecasts to support recoverability of deferred tax assets. Cash fl ow models are based on a number of assumptions relating to oil prices, operating expenses, production volumes, etc. These assumptions are consistent with those, used by independent reserve engineers. Management also takes into account uncertainties related to future activities of the company and going concern considerations. When signifi cant uncertainties exist, deferred tax losses are not recognised even if recoverability of these is supported by cash fl ow forecasts. Refer to further details in note 23. 38 Zoltav Resources Inc. Annual Report 2015 Zoltav Resources Inc. Annual Report 2015 39 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 (in ʻ000s US dollars, unless otherwise stated) Provision for decommissioning and environmental restoration 3.2 This provision is signifi cantly affected by changes in technology, laws and regulations which may affect the actual cost of decommissioning and environmental restoration to be incurred at a future date. The estimate is also impacted by the discount rates used in the provisioning calculations. The discount rates used are the Russian Government Bond Rates. Under the current levels of enforcement of existing legislation, management believes there are no signifi cant liabilities in addition to amounts which are already accrued and which would have a material adverse effect on the fi nancial position of the Group. The Company’s exploration, development and production activities involve the use of wells, related equipment and operating sites. Generally, licenses and other regulatory acts require that such assets be decommissioned upon the completion of production. According to these requirements, the Company is obliged to decommission wells, dismantle equipment, restore the sites and perform other related activities. The Company’s estimates of these obligations are based on current regulatory or license requirements, as well as actual dismantling and other related costs. These liabilities are measured by the Company using the present value of the estimated future costs of decommissioning of these assets. The discount rate is reviewed at each reporting date and refl ects risk free rate. The Company adjusts specifi c cash fl ows for risk. 3.3 (a) An impairment exercise will be performed at the end of the exploration and evaluation process. Impairment of assets Exploration and evaluation When, at the end of the exploration and evaluation stage, commercial reserves are determined to exist in respect of a particular fi eld the Company will perform an impairment test in relation to costs capitalised. Where reserves are determined in suffi cient quantity to justify development, the associated assets are transferred to property plant and equipment. Until conclusion of the exploration phase, there can be no certainty that commercial reserves exist. Where commercial reserves are determined not to exist, capitalised E&E expenditure is expensed. Development and Production (b) When the fi elds enter the production phase, the recoverable amounts of cash-generating units and individual assets will be determined based on the higher of value-in-use calculations and fair values less costs to sell. These calculations will require the use of estimates and assumptions. It is reasonably possible that the oil price assumption may change which may then impact the estimated life of the fi eld and may then require a material adjustment to the carrying value of long-term assets. The Group monitors internal and external indicators of impairment relating to its tangible and intangible assets. There were no such indicators of possible impairment identifi ed during the reporting years covered by this historical fi nancial information. Valuations of share options or warrants granted 3.4 Estimating fair value for share-based payment transactions requires determination of the most appropriate valuation model, which depends on the terms and conditions of the grant. This estimate also requires determination of the most appropriate inputs to the valuation model including the expected life of the share option or appreciation right, volatility and dividend yield and making assumptions about them. The fair value of share options or warrants granted was calculated using the Black-Scholes Pricing Model which requires the input of highly subjective assumptions, including the volatility of the share price. Because changes in subjective input assumptions can materially affect the fair value estimate, in the opinion of the Directors of the Company, the existing model will not always necessarily provide a reliable single measure of the fair value of the share options. Details of the inputs are set out in note 20 to the fi nancial statements. Evaluation of reserves and resources 3.5 Estimates of proved reserves are used in determining the depletion charge for the period and assessing whether any impairment charge/or reversal of impairment is required for development and producing assets. Proved reserves are estimated by an independent international Oil and Gas Engineering Firm, by reference to available geological and engineering data, and only include volumes for which access to market is assured with reasonable certainty. When the fi elds enter the development and production phase, estimates of reserves are inherently imprecise, require the application of judgments and are subject to regular revision, either upward or downward, based on new information such as from the drilling of additional wells and changes in economic factors, including product prices, contract terms or development plans. Changes to Group’s estimates of proved reserves affect prospectively the amounts of the depletion charge, decommissioning assets and provisions where change in reserve estimates cause the estimated useful lives of assets to be revised. Depletion is provided based on the production profi le on a fi eld by fi eld basis which may exceed the existing licence period. Licence extensions are generally awarded by the license authorities in Russia as a matter of course provided that production plans demonstrate that additional time is required to economically produce the fi eld and that the development and production requirements of the initial license grant have been met. Sub-soil licences 3.6 The Group is subject to periodic reviews of its activities by governmental authorities in Russia with respect to the requirements of its sub-soil licences and seeks amendments to the licences when supported by the results of ongoing exploration and development activities. The requirements under the licences are subject to interpretation and enforcement policies of the relevant authorities. In management’s opinion, as of 31 December 2015, there are no non-compliance issues that will have an adverse effect on the fi nancial position or the operating results of the Group. FINANCIAL INFORMATION NOTES TO ACCOUNTS Determination of fair value 4 Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specifi c to that asset or liability. Other receivables 4.1 The fair value of other receivables is estimated as the present value of future cash fl ows, discounted at the market rate of interest at the reporting date. This fair value is determined for disclosure purposes. Non-derivative fi nancial liabilities 4.2 Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash fl ows, discounted at the market rate of interest at the reporting date. Fair value of the non-derivative fi nancial assets is disclosed in Note 4.3 to the fi nancial statements. 4.3 Fair values analysed by level in the fair value hierarchy of assets and liabilities of the Group not measured at fair value are as follows: Assets and liabilities not measured at fair value but for which fair value is disclosed Financial assets Trade and other receivables Total assets Financial liabilities Borrowings Trade and other payables Total liabilities 31 December 2015 31 December 2014 Fair value Carrying value Fair value Carrying value 2,584 2,584 30,385 2,948 33,333 2,584 2,584 30,440 2,948 33,388 3,139 3,139 42,516 3,100 45,616 3,139 3,139 42,276 3,100 45,376 The fair value of borrowings is based on cash fl ows discounted using a rate based on the borrowing rate of 12.07% (2014: 12.02%) and is within level 2 of the fair value hierarchy. Revenue 5 The Group’s operations comprise one class of business being oil and gas exploration, development and production and all revenues are from one geographical region, Saratov Region in the Russian Federation. Companies incorporated outside of Russia provide support to the operations in Russia. Revenue is primarily from the sale of three products: Gas sales Oil sales Condensate sales Total sales 2015 22,679 3,137 2,322 28,138 2014 15,721 1,927 2,370 20,018 All gas sales are to one customer, Gazprom Mezhreiongaz Saratov LLC under a long term contract effective until 31 December 2020 with terms reviewed annually. Condensate and oil are sold to regional buyers. The sales of all three products are denominated in RUB. 40 Zoltav Resources Inc. Annual Report 2015 Zoltav Resources Inc. Annual Report 2015 41 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 (in ʻ000s US dollars, unless otherwise stated) 6 Cost of sales Mineral extraction tax Depreciation and depletion Wages and salaries Materials and supplies Repair and maintenance Other taxes and royalties Compensation benefi ts to operations personnel Other Total cost of sales 7 Operating, administrative, selling expenses Wages and salaries including Director’s fee Accountancy, audit, legal and consulting services* Rent expense Insurance Computers and software Travelling Offi ce expenses Other Total operating, administrative, selling expense 2015 6,443 6,094 2,060 1,948 1,126 351 327 1,160 19,509 2015 4,634 1,872 281 159 137 123 82 618 7,906 2014 3,871 4,241 1,579 1,144 1,378 363 230 713 13,519 2014 3,107 7,055 585 166 152 121 566 2,444 14,196 * In 2014 included within the accountancy, audit, legal and consulting services are USD 3,200 thousand of expenses in respect of the acquisition of Diall. 8 Employee benefi t expenses (including directors’ remuneration) Salaries and other employee benefi ts Total 2015 6,694 6,694 Personnel expenses are included in cost of sales and operating, administrative and selling expenses. Average monthly Number of Employees for the year (including executive directors): Administrative Operating Total 2015 Number 92 206 298 2014 4,686 4,686 2014 Number 85 197 282 FINANCIAL INFORMATION NOTES TO ACCOUNTS Acquisitions 9 On 13 December 2013, the Company signed a Sale and Purchase Agreement with Bandbear Limited to acquire 100% of the share capital of Royal Atlantic Energy (and with it the Bortovoy Licence described above). The control was obtained during fi rst half of 2014 through the issue of 38,263,095 new Ordinary Shares at an effective price of USD 1.60 (100 pence) per share (equivalent to USD 61,221 thousand) and the payment of USD 58,941 thousand in cash. The acquired business will increase the Group’s penetration of its chosen upstream gas and oil market, provide operating cash fl ow immediately and is expected to provide value to its shareholders through developing and producing hydrocarbons in the Saratov Region of the Russian Federation. The acquisition-date fair value of the total purchase consideration and its components are as follows: Cash consideration paid Fair value of new issued shares of the acquirer Total purchase consideration USD’000 58,941 61,221 120,162 The fair value of the new issued shares of the acquirer was determined on the basis of the closing market price of the ordinary shares on the date which Zoltav signed an Acquisition Agreement with Bandbear. Acquisition related transaction costs of USD 3,200 thousand were expensed in 2014 as operating, administrative, selling expenses. In accordance with IFRS 3 Business Combinations, the Group is required to account for acquisitions based on the fair values of the identifi able assets acquired and liabilities and contingent liabilities assumed. In USD’000 Cash and cash equivalents Exploration and evaluation assets Property, plant and equipment Inventories Trade and other receivables Borrowings Provisions Trade and other payables Other taxes payable Deferred tax liabilities Fair value of identifi able net assets of subsidiary Negative goodwill arising from the acquisition Total purchase consideration, including Non-cash consideration Cash consideration Net cash outfl ow on acquisition comprised USD 49,712 thousand. Attributed fair value 9,229 90,000 128,900 500 7,471 (62,100) (9,064) (5,600) (1,800) (2,400) 155,136 (34,974) 120,162 61,221 58,941 The fair values of assets and liabilities acquired are based on a combined valuation approach that considered both discounted cash fl ows expected to be generated from the acquired business and a multiple based approach looking to similar recent observable market transactions The valuation of identifi able tangible and intangible assets was performed by an independent professional appraiser. The fair value of the assets acquired and liabilities assumed is greater than the purchase consideration given. The resultant negative goodwill of USD 34,974 thousand is as a result the initial acquisition of the assets by Bandbear, the related party of the Group (Note 29). The negative goodwill on acquisition has been immediately recognised in the income statement as a gain on acquisition. The revenue included in the consolidated income statement from 18 June 2014 to 31 December 2014 and contributed by Royal Atlantic Energy was USD 20,018 thousand. Had Royal Atlantic Energy been consolidated into the Group from 1 January 2014, the consolidated income statement for the year ended 31 December 2014 would show revenue of USD 38,140 thousand. 42 Zoltav Resources Inc. Annual Report 2015 Zoltav Resources Inc. Annual Report 2015 43 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 (in ʻ000s US dollars, unless otherwise stated) 10 Net fi nance (costs)/income 12 Exploration and evaluation assets FINANCIAL INFORMATION NOTES TO ACCOUNTS Interest on borrowings Interest on deposits Unwinding of the discount on decommissioning and environ- mental restoration provision (Note 22) Total 11 The tax charge for the year comprises: Income tax expense Current tax expense Deferred tax expense Total income tax expense Reconciliation between expected and actual taxation charge is provided below. Profi t before income tax Theoretical tax charge at applicable income tax rate of 0% (2013: 0%) Effect of different foreign tax rates Unrecognized DT assets Tax effect of expenses not deductible for tax purposes Total income tax expense The Company is subject to Cayman income tax at the rate of 0% (2014: 0%). 2015 (4,295) 847 (1,206) (4,654) 2015 − (475) (475) 2015 (4,032) − (295) (106) (74) (475) 2014 (3,239) 489 (559) (3,309) 2014 9 (2,408) (2,399) 2014 21,707 − (172) (1,555) (672) (2,399) Drilling, seismic and other costs Decommissioning asset Construction work in progress Balance at 1 January 2014 Additions Reclassifi cation Transfer to Property, plant and equipment Change in the estimates of decommissioning provision Exchange difference Balance at 31 December 2014 Additions Reclassifi cation Transfer to Property, plant and equipment Change in the estimates of decommissioning provision Exchange difference Balance at 31 December 2015 Sub-soil licences 19,212 38,254 1,575 − − (22,581) 36,460 724 100 − − 15,210 59,707 2 (612) − (29,223) 45,084 166 − − − (8,456) 28,828 (10,177) 35,073 1,828 469 − − 1,335 (1,363) 2,269 − − − (1,555) (263) 451 1,849 162 (1,577) − − (325) 109 3 (100) − − (9) 3 Total 38,099 98,592 − (612) 1,335 (53,492) 83,922 893 − − (1,555) (18,905) 64,355 Additions in 2014 include additions on acquisition of Royal Atlantic Energy of USD 25,800 thousand, USD 63,700 thousand and USD 500 thousand in respect of “licences and other intangibles”, “exploration, evaluation and other property plant and equipment” and “decommissioning asset” respectively. In management’s opinion, as at 31 December 2015 there were no non-compliance issues in respect of the licences that would have an adverse effect on the fi nancial position or the operating results of the Group. 44 Zoltav Resources Inc. Annual Report 2015 Zoltav Resources Inc. Annual Report 2015 45 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 (in ʻ000s US dollars, unless otherwise stated) 13 Property, plant and equipment 15 Trade and other receivables FINANCIAL INFORMATION NOTES TO ACCOUNTS Motor vehicles Other equipment and furniture Construction work in progress Cost at 1 January 2014 Additions Reclassifi cation Transfer from exploration and evaluation assets Disposals Exchange difference Cost at 31 December 2014 Additions Reclassifi cation Transfer from exploration and evaluation assets Disposals Exchange difference Cost at 31 December 2015 Accumulated depreciation and impairment Balance at 1 January 2014 Depreciation and depletion Disposals Exchange difference Balance at 31 December 2014 Depreciation and depletion Disposals Exchange difference Balance at 31 December 2014 Net book value at 1 January 2014 Net book value at 31 December 2014 Net book value at 31 December 2015 Oil and gas assets − 121,244 6,209 589 (431) (48,690) 78,921 − 4,752 − (3,011) (18,309) 62,353 − (4,151) 74 1,975 (2,102) (5,982) 108 1,441 (6,535) − 76,819 55,818 − 437 35 − (24) (183) 265 − 15 − − (63) 217 − (69) 20 28 (21) (95) − 20 (96) − 244 121 5 216 − − (1) (82) 138 − − − (1) (31) 106 − (109) 1 43 (65) (9) 1 16 (57) 5 73 49 Total 5 − 14,533 136,430 (6,244) 23 (208) − 612 (664) (3,077) (52,032) 5,027 4,461 (4,767) − (104) (1,081) 3,536 − − − − − − − − − − 5,027 3,536 84,351 4,461 − − (3,116) (19,484) 66,212 − (4,329) 95 2,046 (2,188) (6,086) 109 1,477 (6,688) 5 82,163 59,524 Additions in 2014 include additions on acquisition of Royal Atlantic Energy of USD 128,400 thousand, USD 400 thousand and USD 100 thousand in respect of “oil and gas assets”, “motor vehicles” and “other equipment and furniture” respectively. 14 Inventories Natural gas and hydrocarbon liquids Materials and supplies Total inventories 2015 27 107 134 2014 36 287 323 Financial assets Trade receivables Other accounts receivable Non-fi nancial assets Prepayments VAT receivable Other taxes prepaid Total trade and other receivables 2015 2,048 1,990 58 536 413 117 6 2,584 2014 2,581 2,512 69 558 453 103 2 3,139 Prepayments are advance payments for services to be rendered within the next twelve months. Current VAT receivable is expected to be recovered within the next twelve months. 16 Cash and cash equivalents are represented by cash at bank and the majority of cash held is denominated in RUB. Cash and cash equivalents The Company’s exposure to credit risk and impairment losses related to cash and cash equivalents are disclosed in Note 27. 17 Share capital As at 31 December 2015 and 2014 Number of ordinary shares Nominal Value Authorised (par value of USD 0.20 each) Issued and fully paid (par value of USD 0.20 each) 250,000,000 141,955,386 50,000 28,391 On 31 March 2014, Zoltav received USD 5,000 thousand related to the third tranche of the subscription agreement entered with ARA Holdings at the time of the Company’s readmission to AIM following the acquisition of SibGeCo, which took place in 2013. On 31 March 2014, 4,549,591 shares of USD 0.20 were issued for consideration of USD 5,000 thousand. On 12 June 2014, 100,000 shares of nominal value of USD 0.20 were issued as a result of the warrants exercise for a cash consideration of USD 167 thousand. The amount of USD 95 thousand was transferred from employee share-based compensation reserve to share premium upon exercise of the warrants. On 18 June 2014, 38,263,095 shares of USD 1.60 were issued for a consideration of USD 61,221 thousand. The subscription was received from Bandbear Limited as part of the consideration for the acquisition of the entire issued share capital of Royal Atlantic Energy (Cyprus) Limited. On 18 June 2014, The Company raised a total of USD 65,946 thousand through the issue of 41,216,511 shares at USD 1.60 (100 pence). Subscriptions were received from ARA Capital (USD 45,615 thousand for 28,509,375 shares), Crediton Invest (USD 10,166 thousand for 6,353,568 shares) and Matteson Overseas (USD 10,166 thousand for 6,353,568 shares). An exchange rate of USD 1.60: GBP 1.00 was agreed in the Subscription Agreements. On 20 June 2014, 250,000 shares of USD 0.20 were issued as a result of the warrants exercise for a cash consideration of USD 426 thousand. The amount of USD 235 thousand was transferred from employee share-based compensation reserve to share premium upon exercise of the warrants. On 26 June 2014, 250,000 shares of USD 0.20 were issued as a result of the options exercise for a cash consideration of USD 85 thousand. The amount of USD 271 thousand was transferred from employee share-based compensation reserve to share premium upon exercise of the options. On 15 July 2014, 15,000 shares of USD 0.20 were issued as a result of the warrants exercise for a cash consideration of USD 26 thousand. The amount of USD 14 thousand was transferred from employee share-based compensation reserve to share premium upon exercise of the warrants. On 25 July 2014, 110,000 shares of USD 0.20 were issued as a result of the warrants exercise for a cash consideration of USD 187 thousand. The amount of USD 104 thousand was transferred from employee share-based compensation reserve to share premium upon exercise of the warrants. On 28 July 2014, 40,000 shares of USD 0.20 were issued as a result of the warrants exercise for a cash consideration of USD 68 46 Zoltav Resources Inc. Annual Report 2015 Zoltav Resources Inc. Annual Report 2015 47 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 (in ʻ000s US dollars, unless otherwise stated) thousand. The amount of USD 38 thousand was transferred from employee share-based compensation reserve to share premium upon exercise of the warrants. Dividends 18 In accordance with the relevant legislation applicable to the Group, the Group’s distributable reserves are limited to the balance of retained earnings as recorded in the Group’s statutory fi nancial statements prepared in accordance with International Accounting Standards. No dividends were declared and paid. FINANCIAL INFORMATION NOTES TO ACCOUNTS Initial Share Options 20.2 The Company adopted an employee Share Option Scheme on 4 March 2005 (Share Option Scheme) in order to incentivise key management and staff at that time. The following share options were granted to the former employees and directors of the Company under the Initial Share Option Scheme adopted on 4 March 2005 (Initial Share Options) and are still in existence: 2015 2014 Weighted average exercise price (pence) 445 445 Number 367,500 (165,000) − 202,500 Weighted average exercise price (pence) 482 482 Number 367,500 − − 367,500 (Loss)/earnings per share 19 Basic (loss)/earnings per share is calculated by dividing the loss attributable to owners of the Company by the weighted average number of ordinary shares in issue during the year. Diluted (loss)/earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Company has share options and warrants as dilutive potential ordinary shares. Outstanding at 1 January Expired Outstanding at 31 December 2015 2014 Share options granted under the Initial Share Option scheme were exercisable as follows: • • • the fi rst 30% of the options between the fi rst and tenth anniversary of the date of grant; the next 30% of the options between the second and tenth anniversary of the date of grant; and the remaining options between the third and tenth anniversary of the date of grant. (Loss)/earnings attributable to owners of the Company – Basic and diluted (4,032) 21,707 Number of Shares Number of Shares Weighted average number of shares for calculating basic loss per share 141,955,386 104,997,495 Effect of dilutive potential ordinary shares – warrants Effect of dilutive potential ordinary shares - share options 10,377 1,957,021 293,158 2,236,678 Weighted average number of shares for calculating diluted loss per share 143,922,784 107,527,331 Basic (loss)/earnings per share Diluted (loss)/earnings per share US cents US cents (2.84) (2.80) 20.67 20.19 Share-based payments Share Options 20 20.1 At 31 December 2015, the Company had a total of 1,952,500 outstanding share options (2014: 2,117,500). The only movement in share options was expiration which took place during the year. Options which are lapsed or are cancelled prior to their exercise date are deleted from the register of outstanding options and are available for re-use. Date of grant 11 January 2005 23 March 2006 23 February 2007 11 January 2008 31 October 2012 2015 2014 Number Option exercise price (pence) − − − 202,500 1,750,000 1,952,500 − − − 445 20 Option exercise price (pence) 423 1,904 653 445 20 Number 117,500 10,000 7,500 232,500 1,750,000 2,117,500 No share options were granted during the year ended 31 December 2015. Equity-settled share-based payments are measured at fair value (excluding the effect of non market-based vesting conditions) as determined through use of the binomial option pricing model, at the date of grant. The fair value determined at the grant date of the equity-settled share based payments is expensed on a straight-line basis over the vesting period, based on the Company’s estimate of shares that will eventually vest. The options vested immediately. The binomial option pricing model applied to the grant of share options in respect of calculating the fair values. Key inputs to the model are as follows: Share options Share price at grant Option exercise price Expected life of option Expected volatility Expected dividend yield 11 January 2005 23 March 2006 23 February 2007 11 January 2008 20.75p 21.15p 10 years 60-65% 5.0% 93.25p 95.20p 10 years 60-65% 5.0% 36.25p 32.65p 10 years 60-65% 5.0% 22.25p 22.25p 10 years 60-65% 5.0% Volatility has been based on the historical trading performance of the Company and comparable companies. The risk free rate has been determined based on 10 year government bonds. Total fair value as considered in the employee share-based compensation reserve for Initial Share Options was USD 680 thousand (2014: USD 1,235 thousand). 20.3 Directors Share Options Share options granted to certain existing Directors of the Company on 31 October 2012 (Directors Share Options) were exercisable at any time between the commencement of the option period and third anniversary of the date of grant. Share options granted under this scheme were as follows: Outstanding at 1 January Issued in the year Exercised Share consolidation Number 1,750,000 − − − Outstanding at 31 December 1,750,000 2015 2014 Weighted average exercise price (pence) 20 − − − 20 Number 2,000,000 − (250,000) − 1,750,000 Weighted average exercise price (pence) 20 − − − 20 During 2014 the vesting period of the remaining options was extended from 30 October 2015 to 30 October 2017. Equity-settled share-based payments are measured at fair value (excluding the effect of non-market-based vesting conditions) as determined through use of the Black-Scholes technique, at the date of grant. The fair value determined at the grant date of the equity- settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Company’s estimate of shares that will eventually vest. The options vested immediately. 48 Zoltav Resources Inc. Annual Report 2015 Zoltav Resources Inc. Annual Report 2015 49 FINANCIAL INFORMATION NOTES TO ACCOUNTS charge of 0.25% per year on the balance of the facility amount not withdrawn by Diall Alliance within the established timeframe. Diall Alliance has the option to prepay the loan in whole or in part at any time, subject to the payment of a fee. Diall Alliance provided certain warranties and representations to Sberbank in the agreement. The agreement contains certain loan covenants and events of default which are customary for a facility of this type. In December 2015 the Company signed an amendment altering covenants. The Company is in compliance with these covenants. The loan is secured on the fi xed assets of Diall Alliance, such security being granted pursuant to various pledge and mortgage deeds entered into by Diall Alliance on or about the date of the Sberbank Facility. The outstanding amount of the facility as of 31 December 2015 was RUB 2,220,000 thousand (USD 30,440 thousand). The credit facility is measured at amortised cost, using the effective interest method. Decommissioning and environmental restoration provision 22 The decommissioning and environmental restoration provision represents the net present value of the estimated future obligations for abandonment and site restoration costs which are expected to be incurred at the end of the production lives of the gas and oil fi elds which is estimated to be within 20 years. Provision as at 1 January Additions Unwinding of discount Change in estimate of decommissioning and environmental restoration provision Exchange difference Provision as at 31 December 2015 10,649 36 1,206 (5,193) (1,786) 4,912 2014 4,383 9,109 559 2,953 (6,355) 10,649 This provision has been created based on the Company’s internal estimates. Assumptions, based on the current economic environment, have been made which the directors believe are a reasonable basis upon which to estimate the future liability. These estimates are reviewed regularly to take into account any material changes to the assumptions. However, actual decommissioning costs will ultimately depend upon future market prices for the necessary dismantlement works required which will refl ect market conditions at the relevant time. Furthermore, the timing is likely to depend on when the fi elds cease to produce at economically viable rates. This in turn will depend upon future oil prices and future operating costs which are inherently uncertain. The provision refl ects two liabilities: one is to dismantle the property, plant and equipment assets and the other is to restore the environment. The decommissioning part of the provision is reversed when an oil well is abandoned and corresponding capitalised costs are expensed. The environmental part of the provision is reversed when the expenses on restoration are actually incurred. The reversal of provision arises when the corresponding capitalised costs directly attributable to an exploration and evaluation asset are expensed as it is determined that a commercial discovery has not been achieved and the restoration of the corresponding environment has been made. The decommissioning and environmental restoration provision as of 31 December 2015 decreased in comparison with 31 December 2014 due to the change in estimate of forecasted infl ation rates. During 2015 the Company reconsidered the application of infl ation rates used for the provision estimation and moved from the historical to the forecasting approach based on the forecast of the Ministry of Economic Development of the Russian Federation. The infl ation rate used in the estimation of the provision was 7.4% in 2016 decreasing to 5.3% in 2036 (in 2014 the fl at rate of 11.4% was applied based on an historical basis) based on the forecast of the Ministry of Economic Development of the Russian Federation. The discount rates used to determine the decommissioning and environmental restoration provision is based on the Russian Government Bond Rates. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 (in ʻ000s US dollars, unless otherwise stated) The Black-Scholes formula is the option pricing model applied to the grant of share options in respect of calculating the fair values. Key inputs to the model are as follows: Share price at grant Option exercise price Expected life of option Expected volatility Expected dividend yield Risk free rate Fair value per share option Exchange rate used (USD:GBP) Share options 31 October 2012 3.45p 1.00p 3 years 216.1% 0.0% 0.49% 3.342p 1.62525 Volatility has been based on the Company’s trading performance from 1 January 2011. The risk free rate has been determined based on 5 year government bonds. Total fair value as considered in the employee share-based compensation reserve for Directors Share Options was USD 1,901 thousand (2014: USD 1,901 thousand). 20.4 Warrants In August 2011, the Company granted 10,550,000 warrants with an exercise price of 5.0 pence, vesting from 2 August 2011 to 2 August 2014. After share consolidation in 2013 the number of warrants was 527,500. 515,000 warrants were exercised during the 12 month year ended 31 December 2014. 100,000 warrants were exercised on 5 June 2014; during July 2014 165,000 warrants were exercised; 250,000 warrants were exercised on 2 August 2014 which resulted in 515,000 shares being issued with the nominal value of $US0.2 at a price of 1 GBP. During 2015 the remaining 12,500 outstanding warrants were expired. 21 Borrowings Non-revolving credit facility − current liability, as at 1 January Interest accrued Interest paid Exchange difference Non-revolving credit facility − current liability, as at 31 December Non-revolving credit facility – non-current liability, as at 1 January Diall acquisition Drawdown Repayment Exchange difference Non-revolving credit facility – non-current liability, as at 31 December 2015 3,200 4,295 (4,313) 1,941 5,123 39,076 - - (3,044) (10,715) 25,317 2014 - 3,239 (3,046) 3,007 3,200 - 62,100 4,024 - (27,048) 39,076 On 4 April 2014, Diall Alliance entered into a non-revolving credit facility agreement no 5878 with Sberbank of Russia OJSC with the maximum amount of the facility of RUB 2,400,000 thousand (USD 32,930 thousand at exchange rate at 31 December 2015). The full amount of the facility was drown down in full in 2014. The maturity date is 30 April 2021, being the 7 year anniversary of the facility being entered into. Diall Alliance is obliged to repay the principal amount of the loan in 24 tranches commencing on 11 May 2015 and on a quarterly basis from then on with a fi nal repayment tranche being payable on the maturity date. In 2015, Diall Alliance repaid RUB 180,000 thousand. The interest rate is 10.98% per annum. Sberbank may unilaterally amend the interest rate in the event of increases in refi nancing rates of the Central Bank of Russia. Diall Alliance paid an upfront commission on the facility of 1% of the facility amount (RUB 24,000 thousand (USD 800 thousand at the transaction date exchange rate)) and there is a drawdown 50 Zoltav Resources Inc. Annual Report 2015 Zoltav Resources Inc. Annual Report 2015 51 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 (in ʻ000s US dollars, unless otherwise stated) FINANCIAL INFORMATION NOTES TO ACCOUNTS 23 Movements in temporary differences during the year: Deferred tax liabilities Decommissioning provision Other current assets Tax loss carry-forwards Deferred tax assets Exploration and evaluation asset 31 December 2015 581 194 4,351 5,126 (5,925) Property, plant and equipment (3,733) (1,133) Borrowings (46) 18 Deferred tax liabilities (9,704) (1,122) Net deferred tax liabilities (4,578) (475) Recognised in profi t or loss Exchange difference Acquisition of Royal Group 31 December 2014 (514) 101 (215) (49) 1,060 (1,197) 647 (7) (1,461) 1,545 1,169 13 2,727 1,266 − − − − − − − − − 1,310 142 4,488 5,940 (7,463) (3,769) (77) (11,309) (5,369) 31 December 2014 Recognised in profi t or loss Exchange difference Acquisition of Royal Group 31 December 2013 Decommissioning provision Other current assets Tax loss carry-forwards Deferred tax assets Exploration and evaluation asset 1,310 142 4,488 5,940 203 (16) 1,636 1,823 (7,463) (2,739) Property, plant and equipment (3,769) (1,505) Borrowings (77) 13 Deferred tax liabilities (11,309) (4,231) Net deferred tax liabilities (5,369) (2,408) (769) (91) (2,460) (3,320) 4,601 2,043 50 6,694 3,374 1,876 249 5,312 7,437 − − − − (5,397) (3,928) (4,307) (140) − − (9,844) (3,928) (2,407) (3,928) Deferred income tax assets are not recognised for mainly tax losses carried forward for SibGeCo to the extent that the realisation of the related tax benefi t through future taxable profi ts are not probable. The Group has not recognised deferred income tax assets of USD 6,646 thousand (2014: USD 8,083 thousand). The deferred tax assets expire in 2019-2025. 24 Other taxes payable VAT payable Property tax Mineral extraction tax Other taxes payable Total 25 Trade and other payables Trade payables Accrued expenses Payables to employees Total 2015 628 37 445 134 1,244 2015 1,714 998 236 2,948 2014 816 97 93 131 1,137 2014 2,043 1,038 19 3,100 Operating leases 26 Operating lease payments are mainly rentals by the Group of land, offi ce space and equipment required for use on a temporary basis. Leases are normally signed on a short term basis of one to two years with options to extend. Lease payments under operating leases recognised in the statement of comprehensive income for the year amounted to USD 281 thousand (2014: USD 585 thousand). At the reporting date the Group’s outstanding commitments for future minimum lease payments under non-cancellable leases fall due as follows: 2015 91 18 82 2014 67 22 105 Within one year In two to fi ve years More than fi ve years Financial instruments and fi nancial risk management 27 Overview of the Company’s fi nancial risk management The Company has exposure to the following risks from its use of fi nancial instruments: Liquidity risk; • • Market risk; Credit risk; • Capital risk. • This note presents information about the Company’s exposure to each of the above risks, the Company’s objectives, policies and processes for measuring and managing risk, and the Company’s management of capital. Further quantitative disclosures are included throughout this historical fi nancial information. The Company’s risk management policies deal with identifying and analysing the risks faced by the Company, setting appropriate risk limits and controls, and monitoring risks and adherence to limits. Risk management policies and systems are reviewed regularly to refl ect changes in market conditions and the Company’s activities. The Company, through its internal policies, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. 52 Zoltav Resources Inc. Annual Report 2015 Zoltav Resources Inc. Annual Report 2015 53 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 (in ʻ000s US dollars, unless otherwise stated) Liquidity risk 27.1 Liquidity risk is the risk that the Company will not be able to meet its fi nancial obligations as they fall due. The Company monitors the risk of cash shortfalls by means of current liquidity planning. The Company’s approach to managing liquidity is to ensure, as far as possible, that it will always have suffi cient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company’s reputation. This approach is used to analyse payment dates associated with fi nancial assets, and also to forecast cash fl ows from operating activities. The contractual maturities of fi nancial liabilities presented including estimated interest payments. Company’s current liabilities exceed current assets at 31 December 2015 by USD 652 thousand. Starting from 2016 the Company budgeted 20% sales increase, negotiates with contractors the payment terms, which should lead to improvement of cash position and decrease of the liquidity risk. Contractual amount Less than 1 year 1-5 years Over 5 years Financial liabilities as at 31 December 2015 Borrowings Trade and other payables Total Financial liabilities as at 31 December 2014 Unsecured borrowings Trade and other payables Total 40,346 2,948 43,294 8,006 2,948 10,954 12,921 − 12,921 19,419 − 19,419 Contractual amount Less than 1 year 1-5 years Over 5 years 60,015 2,043 62,058 7,747 2,043 9,790 39,031 − 39,031 13,237 − 13,237 27.2 Market risk Market risk includes interest risk and foreign exchange risk. Interest risk (a) The Company has exposure to interest risk since Diall Alliance entered into a non-revolving credit facility agreement with Sberbank and according to the terms of the agreement Sberbank may unilaterally amend the interest rate in the event of increases in refi nancing rates of the Central Bank of Russia. Sberbank hasn’t amended interest rate by the reporting date. Foreign exchange risk and the effect of translation to presentational currency (b) The Company does not have any signifi cant exposure to foreign currency risk as no signifi cant sales, purchases and borrowings are denominated in a currency other than the functional currency of Diall and SibGeCo, which is the RUB. The Group’s operations are within the Russian Federation where all of its revenue, costs and fi nancing from both Sberbank and intra-group lending are denominated in RUB. As a result there is no exposure at the operating subsidiary level to foreign exchange movements. The Group does not currently enter into forward exchange contracts or otherwise hedge its potential foreign exchange exposure. As noted above, the Company’s operations are in the Russian Federation and its prime currency of operation in the region is the RUB. The RUB/USD exchange rate moved from 56.2584 at 31 December 2014 to 72.8827 as at 31 December 2015 and continues to fl uctuate. When presenting fi nancial statements in USD under IFRS, these movements are refl ected at each asset and liability level with the net adjusting amount being refl ected within Shareholders equity. Total translation reserve as at 31 December 2015 equals USD 99,888 thousand (31 December 2014: USD 74,434 thousand) and the effect of such recalculation into presentation currency of net assets amounts USD 25,454 thousand (2014: USD 74,927 thousand). 27.3 Credit risk Credit risk arises principally from the Group’s fi nancial investments, trade and other receivables and cash and cash equivalents. It is the risk that the value of the Group’s investments will not be recovered and the risk that the counterparty fails to discharge its obligation in respect of the Company’s trade and other receivables and cash balances. The maximum exposure to credit risk equals the carrying value of these items in the fi nancial statements. Due to the nature of the Group’s business, the Group is largely dependent on one customer (Gazprom Mezhregiongaz Saratov LLC) for a signifi cant portion of revenues. Gazprom Mezhregiongaz Saratov LLC accounted for 80.7%, 78.5%, 71.4%, and 70.5% of its total revenue in fi scal 2015, 2014, 2013 and 2012, respectively. The loss or the insolvency of this customer for any reason, or reduced sales of our principal product, could signifi cantly reduce the Group’s ongoing revenue and/or profi tability, and could materially and FINANCIAL INFORMATION NOTES TO ACCOUNTS adversely affect the Group’s fi nancial condition. The credit rating assigned to Gazprom by Standard & Poor’s is BB+. To manage credit risk and exposure for the key customer, the Group have entered into a long term contract with Gazprom Mezhregiongaz Saratov LLC, effective till 31 December 2020. As for the smaller customers, the Group imposes minimum credit standards that the customers must meet before and during the sales transaction process. Credit risk with cash and cash equivalents is reduced by placing funds with banks with acceptable credit ratings and indicated government support where applicable. To limit exposure to credit risk on cash and cash equivalents Management’s policy is to hold cash and cash equivalents in reputable fi nancial institutions. During 2015 cash was held mainly with OAO Sberbank Rossii (rating Ba2.ru, Moody’s). Ba2.ru, Moody’s Other Total cash and cash equivalents 2015 5,806 74 5,880 2014 9,289 1,405 10,694 27.4 Capital risk The Company considers its capital and reserves attributable to equity shareholders to be the Company’s capital. In managing its capital, the Company’s primary long-term objective is to provide a return for its equity shareholders through capital growth. Going forward the Company may seek additional investment funds and also maintain a gearing ratio that balances risks and returns at an acceptable level and also to maintain a suffi cient funding base to enable the Company to meet its working capital needs. Details of the Company’s capital is disclosed in the statement of changes in equity. There have been no other signifi cant changes to the Company’s management objectives, policies and processes in the year nor has there been any change in what the Company considers to be capital. The Company is not subject to externally imposed capital requirements. Commitments and contingencies 28 28.1 Capital commitments Capital expenditure contracted for at the end of the reporting period but not yet incurred at 31 December 2015 was USD 226 thousand (2014: USD 1,676 thousand). Insurance 28.2 The insurance industry in the Russian Federation is in a developing state and many forms of insurance protection common in other parts of the world are not generally available. The Company’s insurance currently includes cover for damage to or loss of assets, including business interruption insurance should an insurable incident result in a shut-down of the Western Plant for an extended period of time, insurance for out-of-control wells and environmental damage caused thereby, third party liability coverage (including employer’s liability insurance) and directors and offi cers liability insurance, in each case subject to excesses, exclusions and limitations. However, there can be no assurance that such insurance will be adequate to cover losses or exposure for liability or that the Company will continue to be able to obtain insurance to cover such risks. Until the Company obtains adequate insurance coverage there is a risk that the loss or destruction of certain assets could have a material adverse effect on the Company’s operations and fi nancial position. Litigation 28.3 The Company was involved in a number of court procedures (both as a plaintiff and as a defendant) arising in the normal course of business. In the opinion of management there are no current legal proceedings or other claims outstanding which could have a material adverse effect on the results of operation fi nancial position or cash fl ows of the Company and which have not been accrued or disclosed in these fi nancial statements. Taxation contingencies 28.4 Russian tax legislation which was enacted or substantively enacted at the end of the reporting period is subject to varying interpretations when being applied to the transactions and activities of the Group. Consequently, tax positions taken by management and the formal documentation supporting the tax positions may be successfully challenged by relevant authorities. Russian tax administration is gradually strengthening, including the fact that there is a higher risk of review of tax transactions without a clear business purpose or with tax incompliant counterparties. Fiscal periods remain open to review by the authorities in respect of taxes for three calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods. As Russian tax legislation does not provide defi nitive guidance in certain areas, the Group adopts, from time to time, interpretations of such uncertain areas that reduce the overall tax rate of the Group. While management currently estimates that the tax positions and interpretations that it has taken can probably be sustained, there is a possible risk that outfl ow of resources will be required should such tax positions and interpretations be challenged by the relevant authorities. The impact of any such challenge cannot be reliably estimated; however, it may be material to the fi nancial position and/or the overall operations of the Group. 54 Zoltav Resources Inc. Annual Report 2015 Zoltav Resources Inc. Annual Report 2015 55 FINANCIAL INFORMATION NOTES TO ACCOUNTS GLOSSARY “barrel” or “bbls” a stock tank barrel, a standard measure of volume for oil, condensate and natural gas liquids, which equals 42 US gallons “bcf” “bcm” “boe” “toe” “/d” “mcf” “mcm” “mmboe” “mmcf” “mmcm” “mmT” “mT” “mToe” billion cubic feet billion cubic metres barrel of oil equivalent tonnes of oil equivalent per day thousand cubic feet thousand cubic metres million barrels of oil equivalent million cubic feet million cubic metres million tonnes thousand tonnes thousand tonnes of oil equivalent NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 (in ʻ000s US dollars, unless otherwise stated) The taxation system in the Russian Federation continues to evolve and is characterised by frequent changes in legislation offi cial pronouncements and court decisions which are sometimes contradictory and subject to varying interpretation by different tax authorities. Taxes are subject to review and investigation by a number of authorities which have the authority to impose severe fi nes penalties and interest charges. Recent events within the Russian Federation suggest that the tax authorities are taking a more assertive and substance-based position in their interpretation and enforcement of tax legislation. These circumstances may create tax risks in the Russian Federation that are substantially more signifi cant than in other countries. Management believes that it has provided adequately for tax liabilities based on its interpretations of applicable Russian tax legislation, offi cial pronouncements and court decisions. However the interpretations of the relevant authorities could differ and the effect on this historical fi nancial information if the authorities were successful in enforcing their interpretations could be signifi cant. Environmental matters 28.5 The Group’s operations are in the upstream oil industry in the Russian Federation and its activities may have an impact on the environment. The enforcement of environmental regulations in the Russian Federation is evolving and the enforcement posture of government authorities is continually being reconsidered. The Group periodically evaluates its obligation related thereto. The outcome of environmental liabilities under proposed or future legislation, or as a result of stricter interpretation and enforcement of existing legislation, cannot reasonably be estimated at present, but could be material. Under the current levels of enforcement of existing legislation, management believes there are no signifi cant liabilities in addition to amounts which are already accrued as a part of decommissioning provision and which would have a material adverse effect on the fi nancial position of the Group. Related party transactions 29 During 2014 operations with related parties were presented by transactions with ARA Holdings and Bandbear Limited, the entities with signifi cant infl uence over the Group. Details of operations are provided in notes 9 and 17 to the fi nancial statements. During 2015 there were no operations with related parties, except for key management remunerations. The remuneration of key management comprises salary and bonuses in the amount USD 1,510 thousand (2014: USD 1,240 thousand). Events after reporting date 30 In 2015 Rosnedra granted the Company a certifi cate confi rming the discovery of the West Koltogor oil fi eld. As a result the Company applied to Rosnedra for the hydrocarbons exploration and production license. Rosnedra approved the licensing in March 2016. Availability of annual report and fi nancial statements and General Meeting 31 Copies of the Company’s annual report and fi nancial statements will be sent to Registered Shareholders but will not be sent to holders of Depository Interests. The annual report and fi nancial statements will be available for inspection at the Company’s registered offi ce and may also be viewed at the Company’s website at: www.zoltav.com. Notice of a General Meeting will be sent to shareholders in due course. 56 Zoltav Resources Inc. Annual Report 2015 Zoltav Resources Inc. Annual Report 2015 57 zoltav.com e e k c a M a n n A y b d e n g s e D i m o c . e e k c a m a n n a w w w . 

Continue reading text version or see original annual report in PDF format above