ANNUAL REPORT 2019
IN THIS REPORT
INTRODUCTION
Directors and Advisers
Chairman’s Statement
Review of Operations
Financial Review
Board and Senior Management Biographies
Directors’ Report
Corporate Governance
FINANCIAL INFORMATION
Auditor’s Report
Financial Statements
Notes to the Accounts
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2
6
8
10
12
14
16
20
24
BOARD OF DIRECTORS
Lea Verny
Independent Non-executive Chairman
Alexander Gorodetsky
Independent Non-executive Director
Andrey Immel
Non-executive Director
AUDIT COMMITTEE
Lea Verny (Chairman)
Andrey Immel
NOMINATION AND REMUNERATION
COMMITTEE
Alexander Gorodetsky (Chairman)
Lea Verny
CORPORATE ADMINISTRATOR
CO Services Cayman Limited
P.O. Box 10008, Willow House, Cricket Square,
Grand Cayman KY1-1001, Cayman Islands
REGISTERED OFFICE
PO Box 10008, Willow House, Cricket Square,
Grand Cayman KY1-1001, Cayman Islands
DIRECTORS
AND ADVISERS
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 & BROKER
SP Angel Corporate Finance LLP
Prince Frederick House, 35-39, Maddox Street,
London, W1S 2PP, United Kingdom
SOLICITORS
Berwin Leighton Paisner
Adelaide House, London Bridge, London,
EC4R 9HA, 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 Office Park, West Bay Road,
Grand Cayman KY1-1103, Cayman Islands
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1
Zoltav Resources Inc. Annual Report 2019INTRODUCTION
CHAIRMAN’S STATEMENT
CHAIRMAN’S
STATEMENT
“We expect to be able to
sustainably reverse the
declining production profile
on West Bortovoy during 2020”
I would like to commend all the staff of our operating company,
Diall Alliance, on the continued safe and efficient operation of
the Western Gas Plant and our drilling activities, particularly
in light of the challenges resulting from the COVID-19 global
pandemic.
Lea Verny
Non-executive Chairman
29 September 2020
Production through Zoltav’s Western Gas Plant on the
Bortovoy Licence, Saratov declined by 26% to 4,321 boepd in
2019 as the natural production decline from existing well stock
on the West Bortovoy fields continued at a steeper rate than in
preceding periods.
The Western Gas Plant continued to be operated efficiently
throughout 2019 with no shutdowns. Operations at the plant
have continued throughout the COVID-19 global pandemic
without interruption. The Company has introduced measures
to mitigate the risk of infection at its operations including
additional cleaning and personal protective equipment.
As a result of the natural production decline, the Group’s
revenues in 2019 decreased by 25% to RUB 1.2 billion,
compared to RUB 1.6 billion in 2018.
Throughout 2019 and 2020 to date, Zoltav has been engaged
in a development drilling programme on the West Bortovoy
fields in order to bring the Western Gas Plant back up to
capacity. The programme initially comprised four side-track
wells on existing well stock, two of which, on the Zhdanovskoye
field, were successful and have been put on production in
August 2019 and January 2020, and two of which, on the
Karpenskoye field, encountered water cut and will require
additional investment in order to have the potential of being put
on production in the future. Although the two successful wells
are now contributing one third of gas production and more than
half of liquid products, the side-track well programme overall
was insufficient to reverse the natural production decline from
the currently producing West Bortovoy fields. Accordingly, two
new standalone vertical wells were planned and drilled in 2020
on the Zhdanovskoye field. The first of these wells was put on
production in August 2020, together with the construction of
a 7.2 km looping pipe in order to avoid bottlenecks, and the
second is due to be put on production imminently.
A combination of lower revenues, higher operational and G&A
costs, and a substantial impairment charge to non-current
assets of RUB 2.8 billion as a result of the disappointing side-
track drilling results on the Karpenskoye field, led to a loss
before tax of RUB 3.12 billion in 2019, compared to a profit
before tax of RUB 156 million in 2018.
Zoltav continued the East Bortovoy feasibility study throughout
2019 and into 2020. Well operations and technical analysis
have now been completed and
the project has been
successfully reviewed by an independent technical consulting
firm. Progress continues to be made in a number of areas
including pipeline design, procurement, well design and gas
plant capacity extension. A project final investment decision
will be taken subject to financing.
The Company has invested substantially in the West Bortovoy
development drilling programme and the East Bortovoy
feasibility study and this, together with the impact of reduced
cash flow from production, necessitated an injection of capital.
This came in the form of a revolving loan facility, announced
in July 2020, from ARA Capital Holdings Limited, a substantial
shareholder, under which ARA Capital Holdings Limited
has provided up to US $9,000,000 in support of operational
activities. The Company appreciates the support of its
substantial shareholder.
2019 was a challenging year operationally but, looking ahead,
we expect to be able to sustainably reverse the declining
production profile on the West Bortovoy fields during the
course of 2020 with the two new standalone vertical wells
drilled on the Zhdanovskoye field. On East Bortovoy, a project
final investment decision is subject to successful negotiations
of a financing package including agreeing binding terms for
project finance from major Russian banks and other funding
to support the project finance. Management remains in
discussions with prospective providers of such finance and we
will provide further updates when appropriate.
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3
Zoltav Resources Inc. Annual Report 2019INTRODUCTION
OUR
ASSETS
“The East Bortovoy feasibility
study has been completed
and the project has been
successfully reviewed by
an independent technical
consulting firm.”
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 2019
INTRODUCTION REVIEW OF OPERATIONS
Production
Production through Zoltav’s Western Gas
Plant on the Bortovoy Licence, Saratov,
averaged 4,321 boepd (589 toepd) during
2019, a 26% decline when compared to
5,802 boepd (792 toepd) in 2018. The
natural production decline from existing
well stock on the West Bortovoy fields
continued at a steeper rate in 2019 than in
preceding periods.
Development
West Bortovoy
The well stock producing from the two
currently
fields
producing Permian
Karpenskoye)
and
(Zhdanovskoye
consists of 13 gas wells and one oil well
working via artificial lift. The well stock is in
natural production decline. A development
drilling programme is ongoing to reverse
this production decline.
Average net daily production (sold to
customers) during 2019 was 24.5 mmcf/d
(0.69 mmcm/d) of gas and 246 bbls/d
(31 t/d) of oil and condensate (2018: 33
mmcf/d (0.94 mmcm/d) of gas and 301
bbls/d (38 t/d) of oil and condensate).
Overall, in 2019, the Company produced
approximately:
• Natural gas: 9.0 bcf (253 mmcm) or
1.5 mmboe (203 mtoe) (2018: 12.0 bcf
(341 mmcm) or 2.0 mmboe (274 mtoe))
• Oil and condensate: 89,618 bbls
(11,416 t) (2018: 109,807 bbls (13,988 t))
The Western Gas Plant continued to
operate efficiently throughout 2019 with
no shutdowns. Operations at the plant
have continued throughout the COVID-
19 global pandemic without interruption.
The Company has introduced measures
to mitigate the risk of infection at its
operations including additional cleaning
and personal protective equipment.
The development drilling programme,
which began in May 2019 following a four-
month delay to the original schedule due
to the changing of drilling contractors, has
to date seen a total of four side-track wells
being drilled on existing well stock:
•
Zhdanovskoye Well 103 was spudded
in May 2019 as the first well in the
programme of sidetracks. The well
was completed successfully and put
on production at the end of August
2019.
Karpenskoye Well 5D was spudded
in September 2019 and was
completed in November 2019. The
well encountered water cut and will
require
intervention. An additional
horizon to the target horizon was
successfully
this well,
tested
although the gas contains higher
mercaptan content than usual and will
necessitate additional modernisation
of the Western Gas Plant in order
to meet Gazprom quality standard
(these works are scheduled for 2021)
in
•
•
•
Zhdanovskoye Well 8 was spudded
in November 2019 and put on
production in January 2020.
Karpenskoye Well 19 was spudded in
January 2020 and was completed in
February 2020. The well encountered
water cut and will require intervention.
The
the
two successful wells on
Zhdanovskoye field are now contributing
one third of gas production and more
than half of liquid products. The two
unsuccessful wells on the Karpenskoye
field will require additional investment in
order to have the potential to be put on
production in the future. The Company
is testing a range of squeeze treatment
technologies to isolate water although
it should be noted that such intervention
carries a relatively low success rate.
in 2020
The West Bortovoy development drilling
programme
to date consists
of two standalone vertical wells on the
Zhdanovskoye field and the construction
of a 7.2 km looping pipe in order to avoid
bottlenecks from Zhdanovskoye production.
Zhdanovskoye Well 106 was spudded in
May 2020 and was put on production in
July 2020; and Zhdanovskoye Well 105
was spudded in August 2020, completed
in September 2020 and is expected to be
put on production imminently. Both wells
and looping, combined with the impact of
the 2019 work programme, are expected
to enable the Company to sustainably
reverse the declining production profile on
the West Bortovoy fields during the course
of 2020.
East Bortovoy
The Company continued
to conduct
throughout 2019 and into 2020 a feasibility
study on the East Bortovoy fields. The
Company has expended approximately
RUB 550 million towards this feasibility
study, including a re-entry programme and
pipeline design. This includes substantial
budget overrun due mainly to the technical
condition encountered in Nepriyakhinskoye
Well 1 (as announced on 30 September
2019) and the requirement to undertake
further well re-entries on the Pavlovskoye
field in order to gain additional confidence
over the project’s future production profile.
This resulted in a significant delay to the
feasibility study and to the independent
technical analysis necessary to procure
project financing.
Well operations and technical analysis
have now been completed and the project
has been successfully reviewed by an
independent technical consulting firm. A
project final investment decision is subject
to successful negotiations of binding
terms
from major
Russian banks and the ability to secure a
necessary equity contribution to support
the project finance. Management remains
in discussions with prospective providers
of project finance.
for project finance
progress
significant
Meanwhile,
is
being made on other aspects of project
development including pipeline design,
procurement, well design and gas plant
capacity extension in order to enhance
the prospects of a timely and positive final
investment decision subject to financing.
REVIEW OF
OPERATIONS
Koltogor
The Koltogor Licences in the Khantiy
Mansisk Autonomous Okrug, Western
Siberia are not currently a
focus of
management
however,
investment,
continues to seek out potential routes to
monetise these licences.
Tigran Tagvoryan
Chief Executive Officer
29 September 2020
GROUP RESERVES UNDER PRMS AS PER LATEST REPORT OF DEGOLYER AND MACNAUGHTON (MAY 2014):
Proved
Proved + Probable
Probable
Possible
Bortovoy Licence
Gas
Oil & liquids
Gas, oil and liquids
Koltogor Licences
Gas
Oil
Gas & oil
Total
Gas
Oil & liquids
Gas, oil and liquids
bcf
mmbbls
mmboe
bcf
mmbbls
mmboe
bcf
mmbbls
mmboe
352.9
2.0
62.0
0.5
1.6
1.7
353.4
3.6
63.7
396.8
1.8
69.2
23.5
73.5
77.5
420.3
75.3
146.7
749.7
3.8
131.2
24.0
75.1
79.2
773.7
78.9
210.4
640.0
2.4
111.2
55.7
174.0
183.5
695.7
176.4
294.7
Note on conversion rates
Tonnes of crude oil produced are translated into barrels using conversion rates reflecting oil density from each of the fields. Crude oil and liquid
hydrocarbons expressed in barrels are translated from tonnes using a conversion rate of 7.85 barrels per tonne. Translations of cubic feet to cubic
metres are made at the rate of 35.3 cubic feet per cubic metre. Translations of barrels of crude oil and liquid hydrocarbons into barrels of oil equivalent
(“boe”) are made at the rate of 1 barrel per boe and of cubic feet into boe at the rate of 290 cubic feet per boe.
BORTOVOY LICENCE
Gazprom trunkline
from Kazakhstan/
Turkmenistan to
Central Russia
WESTERN FIELDS
Krasnokutskoye
Mokrousovskoye
Karpenskoye
Zhdanovskoye
Gazprom pipeline
EASTERN FIELDS
Pavlovskoye
West Lipovskoye
Lipovskoye
Existing Gazprom pipelines
Pipelines to be constructed
Developed gas field
Undeveloped gas field
Kochkurovskoye
Nepryakhinskoye
Existing sales pipelines
RUSSIA
KAZAKHSTAN
Railroads
Gas processing plant
Other field
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7
Zoltav Resources Inc. Annual Report 2019INTRODUCTION
FINANCIAL REVIEW
FINANCIAL
REVIEW
Revenue
The Group’s revenues in 2019 decreased by 25% to RUB 1.2
billion, compared to RUB 1.6 billion in 2018.
80.5% of revenues were derived from gas sold to Mezhregiongaz,
a Gazprom subsidiary, at the transfer point on entry to the Central
Asia - Centre gas pipeline system. The gas prices are fixed in a
contract with Mezhregiongaz and are subject to indexation. The
Russian Government approved a 1.4% gas price increase and
accordingly the Company signed an addendum to its contract
with Mezhregiongaz resulting in an average price in 2019 of
RUB 3,911 per mcm compared to RUB 3,857 per mcm in 2018.
Operating profit
A combination of lower revenues and higher operational and
G&A costs led to an operating loss for 2019 of RUB 180 million,
compared to an operating profit of RUB 313 million in 2018.
Additionally, disappointing drilling results on the Karpenskoye
field led to a non-current assets impairment charge being taken
in the amount of RUB 2.8 billion – overall resulting in a RUB 2.98
billion operating loss.
EBITDA decreased by 68% to RUB 239 million (2018: RUB 751)
due to production decline, increased gas plant maintenance
needs and the hiring of development staff.
The remaining revenue was from oil and condensate sold
directly at the Western Gas Plant through a tender process to
a small number of different buyers. Oil and condensate prices
were RUB 2,554/bbl (RUB 20,049/t) in 2019 compared to RUB
2,891/bbl (RUB 22,691/t) in 2018.
Cost of sales and G&A costs
The Group’s operational and G&A costs increased by 16%
to RUB 241.6 million (2018: RUB 208 million), mostly driven
by hiring senior geotechnical personnel, buying licences for
geological software and hiring new senior management.
Total cost of sales was RUB 1.065 billion (2018: RUB 1.119
billion). This comprised RUB 285 million of mineral extraction tax
(2018: RUB 343 million), RUB 419 million of depreciation and
depletion of assets (2018: RUB 438 million) and RUB 361 million
of other cost of sales (2018: RUB 338 million).
Other expenses increased significantly to RUB 118 million
(2018: RUB 15 million) due to bringing the decommissioning and
environmental restoration provision up to date and recognising
the loss on damaged equipment which has been replaced.
Finance costs of RUB 155 million (2018: RUB 177 million) are
mainly represented by decreased interest on the refinanced debt
of RUB 1.32 billion with PromSvyazbank.
Profit before tax
Zoltav generated a loss before tax of RUB 3.12 billion, compared
to a profit before tax of RUB 156 million in 2018, due mainly to
the impairment of non-current assets.
Taxation
Production based tax for the period was RUB 285 million (2018:
RUB 343 million) which is recognised in the cost of sales. The
MET tax formula is based on multi-component gas composition,
average gas prices and reservoir complexity and maturity. The
effective MET rate applicable for the period is of RUB 30/mcf or
RUB 1,069/mcm (2018: RUB 27/mcf or RUB 955/mcm).
The Company had an income tax benefit for the year of RUB 242
million (2018: RUB 65 million income tax expense).
Net loss
Zoltav generated a net loss of RUB 2.9 billion (RUB 640 million
net loss excluding the non-current assets impairment charge)
(2018: net profit of RUB 90 million).
Cash
Net cash generated from operating activities was RUB 276
million (2018: RUB 613 million).
The Bortovoy Licence operating subsidiary, Diall Alliance,
successfully serviced its credit facility with PJSC Sberbank and
repaid a further RUB 141 million of the principal amount prior to
refinancing the whole debt with Promsvyazbank on 13 May 2019
with the following terms:
• RUB 1.32 billion limit
•
•
Floating rate of Russian Central Bank rate + 1.6%
Six-month grace period (aligned with the Company’s West
Bortovoy drilling schedule) on principal repayment
Diall Alliance successfully serviced its credit facility with
Promsvyazbank. The loan facility contains a technical covenant
requiring 2.6 bcf (75 mmcm) of natural gas production per
quarter. The covenant does not contain any penalties and
provides legal grounds for the bank to have a formal discussion
with the Company’s management regarding a breach. The
Company breached the production covenant for Q2-Q4 2019
due to the delay in the development drilling programme on West
Bortovoy. The bank accepted the Company’s explanation on the
covenant breach.
Total cash at the end of the period was RUB 4 million (2018:
RUB 261 million).
On 14 July 2020, the Company announced that it has entered
into a loan agreement with ARA Capital Holdings Limited under
which ARA Capital Holdings Limited has provided a revolving
loan facility for up to US $9,000,000 (the “Loan”). ARA Capital
Holdings Limited is the parent company of ARA Capital Limited
- both entities combined own 44.1 percent of the issued share
capital of the Company.
The Loan has been made available for drawdown in two
instalments of:
(1) US$ 2,000,000, which is provided unconditionally and has
been drawn down by the Company; and
(2) US $7,000,000, which is secured against the shares of
Royal Atlantic Energy (Cyprus) Limited (of which Diall
Alliance, which holds and operates the Bortovoy Licence,
is a wholly owned subsidiary) and has been drawn down by
the Company.
The Loan is currently due for repayment by 31 December
2020 unless otherwise extended or converted into equity by
mutual agreement, and, in the case of conversion, subject to
shareholder approval. The Loan is interest-free save for in the
event of a failure to repay on time, in which circumstances the
Loan will accrue interest at a rate of 15 percent per annum.
Proceeds from the Loan are being used for general working
capital purposes and in support of operational activities, including
the development drilling programme ongoing at West Bortovoy
and the East Bortovoy project. In the event the Company takes
a positive final investment decision on the East Bortovoy project
in due course, it is currently envisaged that the Loan would be
restructured in order to facilitate any required equity contribution
or a part thereof.
Tigran Tagvoryan
Chief Executive Officer
29 September 2020
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9
Zoltav Resources Inc. Annual Report 2019INTRODUCTION
BOARD AND SENIOR MANAGEMENT BIOGRAPHIES
BOARD AND SENIOR
MANAGEMENT
“We appointed new and
highly experienced individuals
to our senior management team
in 2019”
ALEXANDER GORODETSKY
Independent Non-executive
Director
ANDREY IMMEL
Non-executive Director
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.
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 first 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.
LEA VERNY
Independent Non-executive
Chairman/Senior Independent
Director
Lea Verny was appointed as a non-
executive director in December 2016
and subsequently as non-executive
chairman in March 2017. She has
significant and high level corporate
finance experience, with particular
expertise in Russia. Since 2008, Lea
Verny has acted as an independent
financial adviser on cross-border
transactions. Prior to becoming an
independent consultant, Lea Verny
served as a private banker with Banque
Pictet, Switzerland, where she was
responsible for developing the bank’s
activities in Russia, following a career of
more than a decade with HSBC. From
2001 to 2007, Lea Verny was Head of
Investment Banking for HSBC Bank
plc in Moscow, during which time she
advised on structured transactions for
large Russian and CIS corporations
including Lukoil, Rostelekom, Eastern
Oil Company and Rosbank. Between
1997 and 2001, Ms Verny was a
representative of HSBC Investment
Bank plc in Russia, where she was
responsible for establishing the bank’s
presence in the country and developing
opportunities specifically within the
oil and gas sector. Lea Verny holds
a Bachelor’s degree in Statistics and
International Relations from the Hebrew
University in Jerusalem as well as an
MBA from INSEAD in France.
SENIOR MANAGEMENT (NON-BOARD)
TIGRAN TAGVORGAN
Chief Executive Officer
YURI KRASNEVSKY
Director for Geology and Field
Development
Tigran Tagvorgan joined Zoltav in
November 2018, initially as Deputy
Chief Executive Officer, prior to his
appointment as Chief Executive Officer
in April 2019. He has significant senior
level project development, finance,
m a n a g e m e n t a n d
i n f r a s t r u c t u r e
experience within Russian supermajor
oil and gas businesses. From 2013
to 2019, Tigran led the Russian gas
business development and strategy
divisions of Rosneft, where he led the
development and implementation of its
rapid gas production growth strategy.
From 2002 until its acquisition by Rosneft
in 2013, Tigran held various senior
positions with TNK-BP, including Deputy
Director General of OAO East Siberia
Gas Company, a regional gasification
joint venture project with the Irkutsk
Oblast Administration. Tigran holds a
BSc in Business and Management from
the University of Maryland University
College and a higher degree with
excellence in Management from Irkutsk
State University.
Yuri Krasnevsky joined Zoltav in
May 2019. He has over 30 years of
experience in geological exploration
and production in Russia. He has held
senior technical positions with major
energy businesses including with NK
Novyi Potok and Bashneft, prior to
which Yuri worked at both TNK-BP and
Rosneft. As Vice President for Geology
and Field Development at Bashneft,
Yuri gained significant geological
experience in carbonate and terrigenous
rocks of Carboniferous and Devonian
formations in the Bashkortostan and
Orenburg regions. He also was involved
in the exploration and development of
Devonian carbonates on the Trebs and
Titov oil fields in the Nenets Autonomous
Okrug. As Director for Geology and
Field Development at Zoltav, Yuri is
overseeing the further development of
Zoltav’s assets. Yuri is a graduate of
the Gomel State University and has a
degree in geological engineering and
hydrogeology.
10
10
11
11
Zoltav Resources Inc. Annual Report 2019INTRODUCTION DIRECTORS’ REPORT FOR THE YEAR ENDED 31 DECEMBER 2019
DIRECTORS’
REPORT
The Directors of the Company present their annual report together
with the audited consolidated financial statements for the year ended
31 December 2019.
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 20.
Dividends
The Directors do not recommend the payment of a final dividend and
no interim dividend was paid during the year.
Share capital
No movements in share capital occurred in 2019.
Directors
The membership of the Board who served during the year and up to
the date of approving the financial statements is set out on page 10.
Going concern
The breach of bank covenants constitutes a significant liquidity
risk for the Group which causes a material uncertainty and casts
significant doubt on the Group’s ability to continue as a going
concern, however the Group has mitigating factors, described in
Note 2.2 of the consolidated financial statements. Considering these
factors and plans of the Group, management believes that a going
concern basis for preparing these consolidated financial statements
is appropriate.
Directors’ interests
Directors have not owned shares of the Company during the years
ended 31 December 2019 and 2018.
Substantial shareholdings
The interests in excess of 3% of the issued share capital of the
Company which have been notified to the Company as at 31
December 2019 were as follows:
Name
Bandbear Limited
Ara Capital Limited
Ara Capital Holdings Limited
Drentru Services Ltd.
Number of
ordinary shares
56,243,076
56,243,075
6,353,568
6,353,568
Percentage of
existing share
capital
39.62%
39.62%
4.48%
4.48%
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 28 to the financial statements.
Independent auditor
Ernst & Young LLC were appointed as the Company’s independent
auditor on and have expressed their willingness to continue in office.
For and on behalf of the Board:
Lea Verny
Non-executive Chairman
29 September 2020
12 Zoltav Resources Inc. Annual Report 2019
1313
INTRODUCTION
CORPORATE GOVERNANCE REPORT FOR THE YEAR ENDED 31 DECEMBER 2019
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. The Board seeks to comply with the Quoted
Company Alliance’s Corporate Governance Code (details of
which are available on the Company’s website, www.zoltav.
com).
This statement sets out measures taken by the Board to apply
the principles of the Code to the year ended 31 December 2019
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 final financial statements;
• management structure and appointments;
• mergers, acquisitions, disposals;
•
•
•
capital raising;
significant changes in accounting policies;
appointment or removal of Directors or the Company
Secretary;
pay and rewards.
•
Board composition
The Board currently comprises two non-executive independent
directors and one non-executive director:
•
Lea Verny – Non-executive Chairman,
Independent Non-executive Director;
• Alexander Gorodetsky – Independent Non-executive
Director;
• Andrey Immel – Non-executive Director.
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 several times per year to discuss
opportunities available to the Company as a whole.
The Company maintains insurance for Directors and Officers of
the Company.
The Chairman of the Board is non-executive and is responsible
for the leadership and effective running of the Board 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.
The Board has access to the Company’s advisers to notify them
on financial, governance and regulatory matters. Any Director
wishing to do so in the furtherance of his or her duties may take
independent professional advice at the Company’s expense.
This also applies to any Director in his or her capacity as a
member of the Audit, Remuneration or Nomination committees.
Through the Chairman the Directors also have access to the
Company Secretary, CO Services Cayman Limited.
The Board is supported by specialised committees ensuring
that sound governance procedures are followed. The Corporate
Governance section of
includes
the terms of reference of the Audit and Remuneration and
Nomination Committees.
the Company’s website
Board Committees
The Audit Committee
The Audit Committee currently comprises Lea Verny and Andrey
Immel, with Lea Verny as Chairman. The Board is satisfied
that collectively the Audit Committee has sufficient, recent and
relevant financial experience.
The duties of the Audit Committee are to review the financial
information of the Company, to oversee the Company’s financial
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 significant
non-audit services provided by the external auditor to ensure that
objectivity and integrity are safeguarded. The Audit Committee
reports its work, findings and recommendations to the Board
after each meeting.
The Remuneration and Nomination Committee
The Remuneration and Nomination Committee currently
comprises Alexander Gorodetsky and Lea Verny with Alexander
Gorodetsky 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 office 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.
CORPORATE
GOVERNANCE
recognises
Report on remuneration
The Board
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
sufficient 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 profitability;
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 2019 is shown in the table below.
Lea Verny
Alexander
Gorodetsky
Andrey
Immel
Total
RUB’000
RUB’000
RUB’000
RUB’000
Salary
6,446
1,975
Share based
compensation
-
-
2019 total
6,446
1,975
Salary
6,291
2,005
Share based
compensation
-
-
2018 total
6,291
2,005
-
-
-
-
-
-
8,421
-
8,421
8,296
-
8,296
Attendance at Board and Committee Meetings
The Board held three in person board meetings during 2019.
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.
Audit
committee
Nomination
and
Remuneration
Meetings held
during the year
Board
3
Meetings attended during the year:
Lea Verny
Alexander
Gorodetsky
Andrey Immel
3
3
3
2
2
–
2
1
1
1
–
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 financial
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 benefit
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 justified.
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.
14 Zoltav Resources Inc. Annual Report 2019
15
INTRODUCTION
INDEPENDENT AUDITOR’S REPORT
To the Shareholders and Board of Directors of
Zoltav Resources Inc.
Qualified opinion
We have audited the consolidated financial statements of
Zoltav Resources Inc. and its subsidiaries (the Group), which
comprise the consolidated statement of financial position as
at 31 December 2019, and the consolidated statement of
comprehensive income, consolidated statement of changes
in equity and consolidated statement of cash flows for 2019,
and notes to the consolidated financial statements, including a
summary of significant accounting policies.
In our opinion, except for the possible effects of the matter
described in the Basis for qualified opinion section of our report,
the accompanying consolidated financial statements present
fairly, in all material respects, the consolidated financial position
of the Group as at 31 December 2019 and its consolidated
financial performance and its consolidated cash flows for 2019
in accordance with International Financial Reporting Standards
(IFRSs).
Basis for qualified opinion
Because we were appointed auditors of the Group during 2020,
we were unable to observe the counting of physical inventories
at 31 December 2019 or satisfy ourselves concerning those
inventory quantities by alternative means. Since inventory
balances at the end of the period affect the gross profit, we were
unable to determine whether adjustments are required for the
Group’s gross profit for 2019 and the accumulated losses at 31
December 2019.
International Code of Ethics
We conducted our audit in accordance with International
Standards on Auditing (ISAs). Our responsibilities under those
standards are further described in the Auditor’s responsibilities
for the audit of the consolidated financial statements section
of our report. We are independent of the Group in accordance
with the International Ethics Standards Board for Accountants’
(IESBA)
for Professional
Accountants (including International Independence Standards)
(IESBA Code) together with the ethical requirements that are
relevant to our audit of the consolidated financial statements in
the Russian Federation, and we have fulfilled our other ethical
responsibilities in accordance with these requirements and
the IESBA Code. We believe that the audit evidence we have
obtained is sufficient and appropriate to provide a basis for our
qualified opinion.
Material uncertainty related to going concern
We draw attention to Note 2.2 Going concern in the consolidated
financial statements, which indicates that the Group incurred a
net loss of 2,881,608 thousand Russian rubles during the year
ended 31 December 2019 and, as of that date, the Group’s
current liabilities exceeded its current assets by 1,405,272
thousand Russian rubles. As stated in Note 2.2, these events or
conditions, along with other discussed matters, indicate that a
material uncertainty exists that may cast significant doubt on the
Group’s ability to continue as a going concern. Our opinion is not
modified in respect of this matter.
Key audit matters
Key audit matters are those matters that, in our professional
judgment, were of most significance in our audit of the
consolidated financial statements of the current period. In
addition to the matters described in the Basis for Qualified
Opinion section and in Material uncertainty related to going
concern section we have determined the matters described
below to be the key audit matters to be communicated in our
report. These matters were addressed in the context of our
audit of the consolidated financial statements as a whole, and in
forming our opinion thereon, and we do not provide a separate
opinion on these matters. For each matter below, our description
of how our audit addressed the matter is provided in that context.
We have fulfilled the responsibilities described in the Auditor’s
responsibilities for the audit of the consolidated financial
statements section of our report, including in relation to these
matters. Accordingly, our audit included the performance of
procedures designed to respond to our assessment of the
risks of material misstatement of the consolidated financial
statements. The results of our audit procedures, including the
procedures performed to address the matters below, provide the
basis for our audit opinion on the accompanying consolidated
financial statements.
KEY AUDIT MATTERS
Impairment of non-current assets
Due to the existence of impairment indicators in respect
of non-current assets attributable to the Western part of
Bortovoy license field cash generating unit (“CGU”) as of 31
December 2019, the Group performed impairment testing of
this CGU.
The impairment testing of property, plant and equipment
and exploration and evaluation assets attributable to the
Western part of Bortovoy license field CGU was one of the
most significant matters in our audit because the property,
plant and equipment and exploration and evaluation assets
balance of this CGU forms a significant part of the Group’s
assets at the reporting date, and because management’s
assessment of the value-in-use is complex and largely
subjective and is based on assumptions, in particular,
on discount rate, projected gas exploration volumes and
prices, projected inflation, as well as operating and capital
expenditures that depend on the expected future market or
economic conditions in the Russian Federation.
Information on the results of the impairment analysis of non-
current assets is disclosed by the Group in Note 13 to the
consolidated financial statements.
HOW OUR AUDIT ADDRESSED THE KEY AUDIT MATTER
As part of our audit procedures, we assessed the assumptions
and methodologies applied by the Group, in particular, those
relating to projected oil and gas exploration volumes at the
Western part of Bortovoy license field, gas prices, inflation,
operating and capital expenditures and discount rates. We
tested the arithmetic accuracy of the model used to determine
the recoverable amount in the impairment test of property,
plant and equipment and exploration and evaluation assets.
We involved our valuation specialists to analyze the model
used to determine the recoverable amount in the impairment
test of property, plant and equipment and exploration and
evaluation assets. We evaluated the Group’s disclosures
of assumptions on which the results of impairment testing
largely depend.
KEY AUDIT MATTERS
Estimation of gas reserves and resources at Bortovoy license
field
This matter to be one of most significance in the audit,
because the estimate of gas reserves at Bortovoy license
field has a significant impact on depreciation, depletion and
amortization (DD&A) charges, impairment of property, plant
and equipment and exploration and evaluation assets test
results and decommissioning provision calculation. As the last
external estimation of gas reserves for Bortovoy license field
was made in 2014, the estimation of gas reserves as of the
end of 2019 required significant management’s estimation.
Information about estimation of gas reserves and resources
is disclosed in note 3.4 of the notes to the consolidated
financial statements, section critical accounting estimates
and judgements.
HOW OUR AUDIT ADDRESSED THE KEY AUDIT MATTER
We assessed the assumptions used by the Group to estimate
volumes of gas reserves and resources at Bortovoy license
field and compared them with current macroeconomic
forecasts and the Group’s plans. We also compared gas
production, for which the Group adjusts its gas reserves to
calculate DD&A with internal production reports and sales
volumes. We compared gas estimation report data with
information used by the Group to analyze non-current assets
for impairment, to calculate DD&A and updated estimates
of reserves and resources to the estimates included in the
consideration of impairment, depreciation, depletion and
decommissioning provision.
Other information included in Annual Report of Zoltav
Resources Inc. for 2019
Other information consists of the information included in the
Annual Report of Zoltav Resources Inc. for 2019, other than
the consolidated financial statements and our auditor’s report
thereon. Management is responsible for the other information.
Our opinion on the consolidated financial statements does not
cover the other information and we do not express any form of
assurance conclusion thereon.
In connection with our audit of the consolidated financial
statements, our responsibility is to read the other information and,
in doing so, consider whether the other information is materially
inconsistent with the consolidated financial statements or our
knowledge obtained in the audit or otherwise appears to be
materially misstated. If, based on the work we have performed,
we conclude that there is a material misstatement of this other
information, we are required to report that fact. We have nothing
to report in this regard.
is responsible
Responsibilities of management and Board of Directors for
the consolidated financial statements
for the preparation and fair
Management
presentation of
in
accordance with IFRSs, and for such internal control as
management determines is necessary to enable the preparation
of consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
the consolidated financial statements
In preparing the consolidated financial statements, management
is responsible for assessing the Group’s ability to continue as
a going concern, disclosing, as applicable, matters related to
going concern and using the going concern basis of accounting
unless management either intends to liquidate the Group or to
cease operations, or has no realistic alternative but to do so.
Board of Directors are responsible for overseeing the Group’s
financial reporting process.
Auditor’s responsibilities for the audit of the consolidated
financial statements
Our objectives are to obtain reasonable assurance about whether
the consolidated financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to
issue an auditor’s report that includes our opinion. Reasonable
assurance is a high level of assurance, but is not a guarantee that
an audit conducted in accordance with ISAs will always detect
a material misstatement when it exists. Misstatements can arise
from fraud or error and are considered material if, individually or
in the aggregate, they could reasonably be expected to influence
the economic decisions of users taken on the basis of these
consolidated financial statements.
As part of an audit in accordance with ISAs, we exercise
professional judgment and maintain professional skepticism
throughout the audit. We also:
•
Identify and assess the risks of material misstatement of
the consolidated financial statements, whether due to fraud
or error, design and perform audit procedures responsive
to those risks, and obtain audit evidence that is sufficient
and appropriate to provide a basis for our opinion. The
risk of not detecting a material misstatement resulting
from fraud is higher than for one resulting from error, as
fraud may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to
the audit 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 Group’s
internal control.
Evaluate the appropriateness of accounting policies used
and the reasonableness of accounting estimates and
related disclosures made by management.
•
• Conclude on the appropriateness of management’s use of
the going concern basis of accounting and, based on the
audit evidence obtained, whether a material uncertainty
exists related to events or conditions that may cast significant
doubt on the Group’s ability to continue as a going concern.
If we conclude that a material uncertainty exists, we are
required to draw attention in our auditor’s report to the
related disclosures in the consolidated financial statements
or, if such disclosures are inadequate, to modify our opinion.
Our conclusions are based on the audit evidence obtained
up to the date of our auditor’s report. However, future events
or conditions may cause the Group to cease to continue as
a going concern.
Evaluate the overall presentation, structure and content
of the consolidated financial statements, including the
disclosures, and whether
the consolidated financial
statements represent the underlying transactions and
events in a manner that achieves fair presentation.
•
• Obtain sufficient appropriate audit evidence regarding the
financial information of the entities or business activities
within the Group to express an opinion on the consolidated
financial statements. We are responsible for the direction,
supervision and performance of the group audit. We remain
solely responsible for our audit opinion.
We communicate with Audit Committee of Board of Directors
regarding, among other matters, the planned scope and timing of
the audit and significant audit findings, including any significant
deficiencies in internal control that we identify during our audit.
We also provide Audit Committee of Board of Directors with
a statement that we have complied with relevant ethical
requirements regarding independence, and to communicate with
them all relationships and other matters that may reasonably be
thought to bear on our independence, and where applicable,
actions taken to eliminate threats or safeguards applied.
16
Zoltav Resources Inc. Annual Report 2019
17
AUDITOR’SREPORTFINANCIALINFORMATION
INDEPENDENT AUDITOR’S REPORT
From the matters communicated with Audit Committee of Board
of Directors, we determine those matters that were of most
significance in the audit of the consolidated financial statements
of the current period and are therefore the key audit matters.
We describe these matters in our auditor’s report unless law or
regulation precludes public disclosure about the matter or when,
in extremely rare circumstances, we determine that a matter
should not be communicated in our report because the adverse
consequences of doing so would reasonably be expected to
outweigh the public interest benefits of such communication.
The partner in charge of the audit resulting in this independent
auditor’s report is T.L. Okolotina.
T.L. Okolotina
Partner
Ernst & Young LLC
29 September 2020
Details of the audited entity
Name: Zoltav Resources Inc.
Record made in the Registar of Companies, Cayman Islands on 18
November 2003, Registration Number 130605.
Address: PO Box 10008, Willow House, Cricket Square, Grand
Cayman KY1-1001, Cayman Islands.
Details of the auditor
Name: Ernst & Young LLC
Record made in the State Register of Legal Entities on 5 December
2002, State Registration Number 1027739707203.
Address: Russia 115035, Moscow, Sadovnicheskaya naberezhnaya,
77, building 1.
Ernst & Young LLC is a member of Self-regulatory organization of
auditors Association “Sodruzhestvo”. Ernst & Young LLC is included
in the control copy of the register of auditors and audit organizations,
main registration number 12006020327.
18 Zoltav Resources Inc. Annual Report 2019
19
AUDITOR’SREPORTFINANCIALINFORMATION CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2019
Consolidated statement of comprehensive income for the year ended 31 December 2019
(in ‘000s of Russian rubles, unless otherwise stated)
Consolidated statement of financial position as at 31 December 2019
(in ‘000s of Russian rubles, unless otherwise stated)
Revenue from contracts with customers
Cost of sales
Gross profit
Administrative and selling expenses
Other income
Other expenses
Note
5
6
7
9
9
Impairment of non-current assets
12,13,26
Operating (loss)/profit
Finance income
Finance costs
(Loss)/profit before tax
Income tax benefit/(expense)
(Loss)/profit for the year attributable to owners of the
parent being total comprehensive income
(Loss)/earnings per share attributable to owners
of the parent
Basic
Diluted
10
10
11
20
20
Tigran Tagvorgan
Chief Executive Officer
29 September 2020
2019
1,218,879
(1,065,441)
153,438
(241,634)
26,017
(117,611)
(2,801,914)
(2,981,704)
12,194
(154,553)
(3,124,063)
2018
1,614,809
(1,118,827)
495,982
(207,785)
39,525
(14,963)
−
312,759
20,178
(177,399)
155,538
ASSETS
Non-current assets
Exploration and evaluation assets
Property, plant and equipment
Right-of-use assets
Total non-current assets
Current assets
Inventories
Trade and other receivables
Other current non-financial assets
Cash and cash equivalents
Total current assets
TOTAL ASSETS
242,455
(65,409)
EQUITY AND LIABILITIES
(2,881,608)
90,129
RUB
(20.30)
(20.30)
RUB
0.63
0.63
Share capital
Share premium
Other reserves
Accumulated losses
Total equity
Non-current liabilities
Borrowings
Decommission provision
Other payables
Lease liabilities
Deferred tax liabilities
Total non-current liabilities
Current liabilities
Trade and other payables
Contract liabilities
Other taxes payables
Borrowings
Lease liabilities
Income tax payable
TOTAL CURRENT LIABILITIES
TOTAL LIABILITIES
TOTAL EQUITY AND LIABILITIES
12
13
26
14
15
15
16
17
22
23
25
26
24
25
19
22
26
Note
As at 31 December
2019
As at 31 December
2018
3,510,216
1,110,275
15,043
4,635,534
24,556
159,811
43,550
3,629
231,546
3,477,513
3,666,836
−
7,144,349
23,469
176,498
14,389
260,636
474,992
4,867,080
7,619,341
970,218
5,498,009
1,343,566
(5,331,861)
2,479,932
−
591,558
73,841
21,634
63,297
750,330
262,849
4,431
79,467
1,256,457
4,081
29,533
1,636,818
2,387,148
4,867,080
970,218
5,498,009
1,343,566
(2,450,253)
5,361,540
692,498
390,428
68,081
−
316,329
1,467,336
97,405
7,274
96,281
570,400
−
19,105
790,465
2,257,801
7,619,341
21
The accompanying notes on pages 24-56 are an integral part of these consolidated financial statements.
The accompanying notes on pages 24-56 are an integral part of these consolidated financial statements.
20
Zoltav Resources Inc. Annual Report 2019
FINANCIALSTATEMENTSFINANCIALINFORMATION
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2019
Consolidated statement of cash flows for the year ended 31 December 2019
(in ‘000s of Russian rubles, unless otherwise stated)
Consolidated statement of changes in equity for the year ended 31 December 2019
(in ‘000s of Russian rubles, unless otherwise stated)
Attributable to owners of the Parent
Note
Share
capital
Share
premium
Other
reserve
Employee
share-based
compensation
reserve
Accumulated
losses
Total
equity
At 1 January 2018
970,218
5,498,009
1,343,566
22,606
(2,562,988)
5,271,411
Employee share-based
compensation
21
Transactions with owners
Profit for the year
Total comprehensive
income
−
−
−
−
−
−
−
−
−
−
−
−
At 31 December 2018
970,218
5,498,009
1,343,566
(22,606)
22,606
(22,606)
22,606
−
−
−
−
−
90,129
90,129
90,129
90,129
(2,450,253)
5,361,540
At 1 January 2019
970,218
5,498,009
1,343,566
−
(2,450,253)
5,361,540
Loss for the year
Total comprehensive loss
−
−
−
−
−
−
At 31 December 2019
970,218
5,498,009
1,343,566
−
−
−
(2,881,608)
(2,881,608)
(2,881,608)
(2,881,608)
(5,331,861)
2,479,932
Note
2019
2018
(3,124,063)
155,538
Cash flows from operating activities
(Loss)/profit before tax
Adjustments for:
Depreciation and depletion
Impairment of non-current assets
Finance costs
Finance income
Loss on disposal of property, plant and equipment, net of income
from sale of property, plant and equipment
Expected credit loss
Change in the estimates of decommissioning and environmental
restoration provision
Other income and expenses
Operating cash inflows before working capital changes
Change in inventories
Change in trade and other receivables and other
current non-financial assets
Change in trade and other payables and contract liabilities
Change in other taxes payable
Net cash flows from operating activities before income tax
and interests
Interest received
Interest paid
Income tax paid
Net cash flows from operating activities
Cash flows from investing activities
Proceeds from sale of property, plant and equipment
Capital expenditure on exploration and evaluation activities
Purchase of property, plant and equipment
Net cash used in investing activities
Cash flows from financing activities
Payment of principal portion of lease liabilities
Repayment of obligations under finance leases
Proceeds from borrowings
Repayment of borrowings
Net cash flows used in financing activities
12,13
12,13,26
10
10
9
9
10
22,26
26
22
22
Net change in cash and cash equivalents
Net foreign exchange difference
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
16
429,279
2,801,914
154,553
(12,194)
38,005
101
67,254
(790)
354,059
3,339
(14,726)
46,741
(16,814)
372,599
14,345
(110,536)
(149)
276,259
1,442
(225,439)
(295,784)
(519,781)
(3,309)
−
1,320,000
(1,329,548)
(12,857)
(256,379)
(628)
260,636
3,629
445,263
−
177,399
(20,178)
(3,465)
4,010
(25,964)
(2,073)
730,530
(410)
(29,429)
28,540
6,900
736,131
18,684
(140,835)
(811)
613,169
7,927
(224,669)
(121,619)
(338,361)
−
(1,892)
−
(300,000)
(301,892)
(27,084)
966
286,754
260,636
The accompanying notes on pages 24-56 are an integral part of these consolidated financial statements.
The accompanying notes on pages 24-56 are an integral part of these consolidated financial statements.
22
Zoltav Resources Inc. Annual Report 2019
23
FINANCIALSTATEMENTSFINANCIALINFORMATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2019 (in ‘000s of Russian rubles, unless otherwise stated)
1.
1.1
Zoltav Group (the Group) comprises Zoltav Resources Inc. (the Company), together with its subsidiaries:
Background
The Company and its operations
Name
Place of incorporation
Function
Share of the Company in a
subsidiary as of
31 December 2019 and 2018
CenGeo Holdings Limited (hereinafter
“CenGeo Holdings”)
CJSC SibGeCo (hereinafter “SibGe-
Co”)
Royal Atlantic Energy (Cyprus) Limited
(hereinafter “Royal”)
Cyprus
Holding company
Russia
Operating company
Cyprus
Holding company
Diall Alliance LLC (hereinafter “Diall”)
Russia
Operating company
Zoltav Resource LLC
Russia
Management company
100%
100%
100%
100%
100%
The Company was incorporated in the Cayman Islands on 18 November 2003. The principal activities of the Company and its
subsidiaries is the acquisition, exploration, development and production of hydrocarbons in the Russian Federation. The Company’s
shares are listed on the Alternative Investment Market of the London Stock Exchange.
1.2
The Group’s operations are primarily located in the Russian Federation.
Russian business environment
Russia continues economic reforms and development of its legal, tax and regulatory frameworks as required by a market economy.
The future stability of the Russian economy is largely dependent upon these reforms and developments and the effectiveness of
economic, financial and monetary measures undertaken by the government.
The Russian economy has been negatively impacted by sanctions imposed on Russia by a number of countries. This resulted
in reduced access to capital, a higher cost of capital and uncertainty regarding economic growth, which could negatively affect
the Group’s future financial position, results of operations and business prospects. Management believes it is taking appropriate
measures to support the sustainability of the Group’s business in the current circumstances.
The effect of COVID-19 is described in Note 31.
Significant accounting policies
Basis of preparation
2.
2.1
The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting
Standards (IFRS), 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 financial statements
have been prepared under the historical cost convention, as modified by the revaluation of financial assets and financial liabilities
(including derivative instruments) at fair value through profit or loss.
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also
requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a
higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial
statements are disclosed in Note 3.
Going concern
2.2
As of 31 December 2019 the Group’s current liabilities exceed its current assets by 1,405,272. The Group incurred a net loss in the
amount of 2,881,608 in 2019. The main factor that negatively affected the Group’s financial performance in 2019 was the impairment
of non-current assets (see Note 13). The net working capital deficit was mainly caused by the fact that the Group breached a
covenant, stipulated in the loan agreement (see Note 22). In accordance with a loan agreement terms, in case of a covenant breach
the bank can demand for a settlement of a full amount due ahead of schedule, stated in the loan agreement. This circumstance
constitutes a significant liquidity risk for the Group which causes a material uncertainty and casts significant doubt on the Group’s
ability to continue as a going concern, and therefore the Group may be unable to realise its assets and discharge its liabilities in the
normal course of business.
In assessing whether the going concern basis for preparing the financial statements is still appropriate given the above circumstances,
the management has considered the following factors:
•
•
•
As of the date of these consolidated financial statements issue the bank has not demanded settlement of a full amount due
ahead of schedule. The Group expects that no ahead of schedule settlement will take place and all loan repayments will be
made in accordance with the loan agreement schedule. The management of the Group is in the constant contact with the bank,
providing it with all necessary explanations and supporting documentation;
As described in Note 31, during 2020 the Group received a loan amounted USD 9 million. The loan is due on 31 December
2020, the Group plans to extend the term at least up to 31 December 2021. The Group considers the possibility of amendment
is high;
The Group generated net cash inflow from operating activities in 2019 and budgeted net cash inflow from operating activities
for 2020.
Considering the above factors and plans of the Group, management believes that a going concern basis for preparing these
consolidated financial statements is appropriate.
Disclosure of impact of new and future accounting standards
2.3
Adoption of new and amended standards
In the preparation of these consolidated financial statements, the Group followed the same accounting policies and methods of
computation as compared with those applied previously, except for the adoption of new standards and interpretations and revision
of the existing standards as of 1 January 2019. The Group has not early adopted any other standard, interpretation or amendment
that has been issued but is not yet effective.
New/revised standards and Interpretations adopted as of 1 January 2019
IFRS 16 Leases
Effective for annual periods
beginning on or after
1 January 2019
Amendments to IFRS 9: Prepayment Features with Negative Compensation
1 January 2019
IFRIC 23 Uncertainty over Income Tax Treatments
1 January 2019
Amendments to IAS 28: Long-term Interests in Associates and Joint Ventures
1 January 2019
Amendments to IAS 19: Plan Amendment, Curtailment or Settlement
Annual improvements to IFRSs 2015-2017 cycle
1 January 2019
1 January 2019
Except for IFRS 16, new standards and amendments applied for the first time in 2019 did not have a material impact on the
consolidated financial statements of the Group.
IFRS 16 Leases
IFRS 16 was issued in January 2016 and it replaces IAS 17 Leases, IFRIC 4 Determining whether an Arrangement Contains a
Lease, SIC-15 Operating Leases − Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a
Lease. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees
to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17. The
standard includes two recognition exemptions for lessees − leases of ‘lowvalue’ assets (e.g., personal computers) and short-term
leases (i.e., leases with a lease term of 12 months or less). At the commencement date of a lease, a lessee recognises a liability
to make lease payments (i.e., the lease liability) and an asset representing the right to use the underlying asset during the lease
term (i.e., the right-of-use asset). Lessees is required to separately recognise the interest expense on the lease liability and the
depreciation expense on the right-of-use asset.
Lessees is also required to remeasure the lease liability upon the occurrence of certain events (e.g., a change in the lease term,
a change in future lease payments resulting from a change in an index or rate used to determine those payments). The lessee
generally recognises the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset.
IFRS 16 is effective for annual periods beginning on or after 1 January 2019. The Group adopted IFRS 16 using the modified
retrospective approach. Under this approach the comparatives are not be restated. Lease liabilities and right of-use assets were
recognised at the date of transition to IFRS 16. Modified retrospective approach assumes recognition of lease liability discounted
using incremental borrowing rate at the date of transition. The Group elected to measure right-of-use assets on lease-by-lease basis
at an amount equalled to liability (adjusted for accruals and prepayments).
24
Zoltav Resources Inc. Annual Report 2019
25
NOTES TO ACCOUNTSFINANCIALINFORMATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2019 (in ‘000s of Russian rubles, unless otherwise stated)
The Group elected to apply the standard to contracts that were previously identified as leases applying IAS 17 and IFRIC 4. The
Group therefore does not apply the standard to contracts that were not previously identified as containing a lease applying IAS 17
and IFRIC 4.
The effect of adoption of IFRS 16 as at 1 January 2019 (increase/(decrease)) is as follows:
Assets
Property, plant and equipment (right-of-use assets)
Liabilities
Lease liabilities (non-current)
Lease liabilities (current)
As at 1 January 2019
13,576
12,554
1,022
The Group has lease contracts for various items of buildings, land, vehicles and other equipment. Before the adoption of IFRS 16,
the Group classified each of its leases (as lessee) at the inception date as either a finance lease or an operating lease.
Upon adoption of IFRS 16, the Group applied a single recognition and measurement approach for all leases except for short-term
leases and leases of low-value assets. Refer to Note 2.20 Leases for the accounting policy beginning 1 January 2019. The standard
provides specific transition requirements and practical expedients, which have been applied by the Group.
Leases previously accounted for as operating leases
The Group recognised right-of-use assets and lease liabilities for those leases previously classified as operating leases, except for
short-term leases and leases of low-value assets. The right-of-use assets for most leases were recognised based on the carrying
amount as if the standard had always been applied, apart from the use of incremental borrowing rate at the date of initial application.
In some leases, the right-of-use assets were recognised based on the amount equal to the lease liabilities, adjusted for any related
prepaid and accrued lease payments previously recognised. Lease liabilities were recognised based on the present value of the
remaining lease payments, discounted using the incremental borrowing rate at the date of initial application.
The Group elected to use the exemptions proposed by the standard:
• On lease contracts for which the lease terms ends within 12 months as of the date of initial application;
• On lease contracts for which the underlying asset is of low value;
• On initial application initial direct costs will be excluded from the measurement of the right-of-use asset;
•
For all classes of underlying assets each lease component and any associated non-lease components will be accounted as a
single lease component.
The lease liabilities as at 1 January 2019 can be reconciled to the operating lease commitments as of 31 December 2018, as follows:
As at 1 January 2019
Operating lease commitments as at 31 December 2018
Effect of discounting at the incremental borrowing rate on the date of first adoption
Discounted operating lease commitments as at 1 January 2019
Less:
Commitments relating to leases to explore for or use minerals, oil, natural gas and similar
non-regenerative resources
Add:
Lease payments relating to renewal periods not included in operating lease commitments as
at 31 December 2018
Lease liabilities as at 1 January 2019
Weighted average incremental borrowing rate as at 1 January 2019 − 9.90%.
48,346
(24,641)
23,705
(16,282)
6,154
13,576
New accounting pronouncements
The new and amended standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Group’s
financial statements are disclosed below. The Group intends to adopt these new and amended standards and interpretations, if
applicable, when they become effective.
Standards issued but not yet effective in the European Union
IFRS 17 Insurance Contracts (issued on 18 May 2017); including Amendments to
IFRS 17 (issued on 25 June 2020)*
Amendments to IAS 1 Presentation of Financial Statements: Classification of
Liabilities as Current or Non-current and Classification of Liabilities as Current or
Non-current - Deferral of Effective Date*
Amendments to
• IFRS 3 Business Combinations*;
• IAS 16 Property, Plant and Equipment*;
• IAS 37 Provisions, Contingent Liabilities and Contingent Assets*,
• Annual Improvements 2018-2020*
Amendments to IFRS 4 Insurance Contracts – deferral of IFRS19*
Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 Interest Rate
Benchmark Reform – Phase 2*
Amendment to IFRS 16 Leases Covid 19-Related Rent Concessions*
Amendments to IFRS 3 Business Combinations (issued on 22 October 2018)
Amendments to IFRS 9, IAS 39 and IFRS17: Interest Rate Benchmark Reform
(issued on 26 September 2019)
Amendments to IAS 1 and IAS 8: Definition of Material (issued on 31 October
2018)
Amendments to References to the Conceptual Framework in IFRS Standards
(issued on 29 March 2018)
*Subject to EU Endorsement
Effective for annual periods
beginning on or after
1 January 2023
1 January 2023
1 January 2022
1 January 2021
1 January 2021
1 June 2020
1 January 2020
1 January 2020
1 January 2020
1 January 2020
These new and amended standards and interpretations are not expected to have a significant impact on the Group’s consolidated
financial statements.
Basis of consolidation
2.4
The consolidated financial statements comprise the financial statements of the Group and its subsidiaries as at 31 December 2019.
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.
Specifically, 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 financial statements from the date the Group gains control until the date the Group ceases
to control the subsidiary.
26
Zoltav Resources Inc. Annual Report 2019
27
NOTES TOACCOUNTSFINANCIALINFORMATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2019 (in ‘000s of Russian rubles, unless otherwise stated)
When necessary, adjustments are made to the financial 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 flows 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.
2.8
Foreign currency translation
Functional and presentation currency
a)
The functional currency of the Group entities is the Russian ruble (“RUB”), the currency of the primary economic environment in
which the Group operates.
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 profit or loss. Any investment retained is recognised at fair value.
The presentation currency is RUB, which the Board considers more representative for users of these consolidated financial
statements to better assess the performance of the Group.
Acquisitions, asset purchases and disposals
2.5
Transactions involving the purchases of an individual field interest, or a group of field interests, that do not qualify as a business
combination are treated as asset purchases, irrespective of whether the specific transactions involved the transfer of the field 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 from the disposal are applied to the carrying amount
of the specific 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 identifiable net assets. Acquisition-related costs are expensed as incurred and
included in administrative expenses.
When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification 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.
Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Contingent
consideration classified as an asset or liability that is a financial instrument and within the scope of IFRS 9 Financial Instruments, is
measured at fair value with the changes in fair value recognised in the statement of profit or loss in accordance with IFRS 9.
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 identifiable 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
identified 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 profit 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 benefit 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 follows the Group’s internal reporting structure.
Segment reporting
Operating segments are defined as components of the Group where separate financial 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 decides how to allocate resources and assesses operational and financial performance using the information provided.
The CODM receives monthly IFRS-based financial information for the Group and its development and operating entities. The Group
has other entities that engage as either head office or in a corporate capacity, or as holding companies. Management has concluded
that, due to the application of aggregation criteria, separate financial 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 therefore determined that the operations of the Group comprise one operating segment and the Group operates
in only one geographic area − the Russian Federation.
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 first qualifies 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 the settlement or translation of monetary items are recognised in profit or loss.
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.
c)
Loans between Group entities and related foreign exchange gains or losses are eliminated upon consolidation.
Group companies
Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and
liabilities on the acquisition are treated as assets and liabilities of foreign operation and translated at the spot rate of exchange at
the reporting date.
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
2019
61.9057
64.7362
2018
69.4706
62.7078
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 field-by-field 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 reserves are 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 financial statements in accordance with
the nature of the expenditure and the stage of development of the associated field, i.e. exploration, development, or production. Once
commercial reserves are found, exploration and evaluation assets are tested for impairment and transferred to development property,
plant and equipment or 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 profit 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 of 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.
28
Zoltav Resources Inc. Annual Report 2019
29
NOTES TOACCOUNTSFINANCIALINFORMATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2019 (in ‘000s of Russian rubles, unless otherwise stated)
2.10
Property, plant and equipment
2.11
Impairment of non-current assets
i)
Oil and gas assets are stated at cost less accumulated depletion or accumulated depreciation and, where relevant, impairment costs.
Property, plant and equipment − oil and gas assets
Expenditure on the construction, installation or completion of infrastructure facilities such as platforms and pipelines, as well
as on the drilling of development wells into commercially proved reserves, is capitalised within property, plant and equipment.
When development is completed on a specific field, 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 field by field basis and represent the cost of developing
the commercial reserves discovered and bringing them into production, together with E&E expenditures incurred in finding commercial
reserves and transferred from 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 field or to the licence area as a whole. Subsequent
expenditure is capitalised only if it either enhances the economic benefits 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 specific exploration and development activities.
Depletion
ii)
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 licences 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 field 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 the amortisation of field development costs takes into account expenditures incurred to date.
Depreciation
iii)
Major oil and gas facilities that have a shorter useful life than the lifetime of the related fields are depreciated on a straight-line basis
over the expected useful life of the facility. Depreciation of items of such assets is calculated using the straight-line method to allocate
their cost to their residual values over their estimated useful lives:
Buildings and constructions
Machinery and equipment
15-30 years;
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
iv)
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 to the 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 benefits associated with the item will flow 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 financial 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, office equipment and furniture at rates calculated to write off
the cost, less estimated residual value, evenly over the asset’s expected useful life.
For depreciation purposes, useful lives are estimated as follows:
Other equipment and furniture
Motor vehicles
5 years;
5 years.
Impairment indicators
i)
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 inflows 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 flows are discounted to their present value using a pre-tax discount rate that
reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs
of disposal, recent market transactions are taken into account. If no such transactions can be identified, 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 five years. A long-term growth rate is calculated and applied to project future cash flows after the fifth year.
Impairment losses of continuing operations are recognised in the statement of profit or loss in expense categories consistent with
the function of the impaired asset.
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 or 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 profit or loss.
Calculation of recoverable amount
ii)
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 flows are discounted to their present value using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks specific to the asset.
Cash generating units
iii)
For an asset that does not generate cash inflows 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 identifiable
groups of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
For the purposes of assessing impairment, exploration and evaluation assets subject to testing are grouped with existing cash
generating units of production fields 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 field. For shared infrastructure a number of field
interests may be grouped together where surface infrastructure is used by several fields in order to process production for sale.
Reversals of impairment
iv)
An impairment loss is reversed to the extent that the factors giving 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.
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 finished 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.
30 Zoltav Resources Inc. Annual Report 2019
31
NOTES TOACCOUNTSFINANCIALINFORMATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2019 (in ‘000s of Russian rubles, unless otherwise stated)
Financial instruments
2.13
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of
another entity.
Financial assets
The Group classifies all of its financial assets based on the business model for managing the assets and the assets contractual terms,
measured at either: amortised cost, fair value through other comprehensive income (FVOCI), and fair value through profit or loss (FVPL).
The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and
the Group’s business model for managing them. With the exception of trade receivables that do not contain a significant financing
component, the Group initially measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through
profit or loss, transaction costs. Trade receivables that do not contain a significant financing component are measured at the transaction
price determined under IFRS 15.
The Group’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows.
The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both.
For purposes of subsequent measurement, financial assets are classified in four categories:
•
•
•
Financial assets at amortised cost (debt instruments);
Financial assets at fair value through OCI with recycling of cumulative gains and losses (debt instruments);
Financial assets designated at fair value through OCI with no recycling of cumulative gains and losses upon derecognition (equity
instruments);
Financial assets at fair value through profit or loss.
•
Financial assets at amortised cost
This category is the only relevant to the Group as of 31 December 2019. The Group measures financial assets at amortised cost if
both of the following conditions are met:
•
The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash
flows; and
The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and
interest on the principal amount outstanding.
•
Financial assets at amortised cost are subsequently measured using the effective interest (EIR) method and are subject to impairment.
Gains and losses are recognised in profit or loss when the asset is derecognised, modified or impaired.
The Group’s financial assets at amortised cost includes trade and other receivables, cash and cash equivalents.
Impairment of financial assets
At each balance sheet date, the Group recognises a loss allowance for expected credit losses (ECL) on financial assets measured at
amortised cost. The loss allowance for financial asset at amortised cost is recognised in profit or loss in correspondence with a balance
sheet account reducing the carrying amount of the financial asset.
Expected credit losses for cash in banks are determined based on banks’ credit rating and relevant probability of default. For receivables,
the Group applies a simplified approach in calculating ECLs. Therefore, the Group does not track changes in credit risk, but instead
recognises a loss allowance based on lifetime ECLs at each reporting date. The Company has established a provision matrix that is
based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment.
Financial liabilities
Initial recognition and measurement
Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings,
payables, or as derivatives designated as hedging instruments, as appropriate.
All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings and payables, net of directly
attributable transaction costs.
The Group’s financial liabilities include trade and other payables, loans and borrowings including bank overdrafts.
Subsequent measurement
The measurement of financial liabilities depends on their classification, as described below:
Loans and borrowings
This is the only category relevant to the Group as of 31 December 2019. After initial recognition, interest-bearing loans and borrowings
are subsequently measured at amortised cost using the EIR method. Gains and losses are recognised in profit 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 finance costs in the statement of profit or loss.
Provisions
2.14
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, and it is
probable that an outflow of economic benefits 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 reflect the current best estimate.
Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation
is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose
existence will only be confirmed by the occurrence or non-occurrence of one or more future uncertain events not wholly within the
control of the Group are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.
A 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 field. 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
facilities. Any change in the present value of the estimated expenditure attributable to changes in the estimates of the cash flow or
the current estimate of the discount rate used are reflected as an adjustment to the provision and the property, plant and equipment.
The unwinding of the discount is recognised as a finance 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 outflow 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 outflow 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 outflow with respect to any one
item included in the same class of obligations may be insignificant.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax
rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in
the provision due to passage of time is recognised as interest expense.
Share capital, share premium and capital reserves
2.15
Ordinary shares are classified 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 the share premium (net of any related income tax benefit)
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 share premium is recognised on the difference between the par value of a share and its selling price.
The capital reserve brought forward arose on the disposal of all the subsidiaries to its former holding company (Crosby Capital
Limited), reverse acquisition of Crosby Capital Limited and on a group reorganization during the years ended 31 December 2010,
31 December 2004 and 31 December 2000 respectively.
Revenue recognition
2.16
The Group is in the business of exploration and sale of natural gas and oil products. Revenue from contracts with customers is
recognised when control of the goods or services is transferred to the customer at an amount that reflects the consideration to which
the Group expects to be entitled in exchange for those goods.
Sale of goods
i)
Revenue from the sale of gas and oil condensate is recognised at the point in time when control of the asset is transferred to the
customer. The normal credit term is 30 days.
ii)
Interest income is recognised on a time-proportion basis using the effective interest method.
Interest income
Contract liabilities
iii)
A contract liability is the obligation to transfer goods or services to a customer for which the Group has received consideration (or an
amount of consideration is due) from the customer. If a customer pays consideration before the Group transfers goods or services
to the customer, a contract liability is recognised when the payment is made or the payment is due (whichever is earlier). Contract
liabilities are recognised as revenue when the Group performs under the contract.
Mineral extraction tax (MET)
2.17
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 field 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.
32 Zoltav Resources Inc. Annual Report 2019
33
NOTES TOACCOUNTSFINANCIALINFORMATION Valuations of share options or warrants granted
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 Group 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
21 to the financial statements.
Leases (Policy applicable before 1 January 2019)
2.20
The determination of whether an arrangement is (or contains) a lease is based on the substance of the arrangement at the inception
of the lease. The arrangement is, or contains, a lease if fulfilment of the arrangement is dependent on the use of a specific asset
(or assets) and the arrangement conveys a right to use the asset (or assets), even if that asset is (or those assets are) not explicitly
specified in an arrangement.
Group as a lessee
A lease is classified at the inception date as a finance lease or an operating lease. A lease that transfers substantially all the risks
and rewards incidental to ownership to the Group is classified as a finance lease.
Finance leases are capitalised at the commencement of the lease at the inception date fair value of the leased property or, if lower,
at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of
the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised
in finance costs in the statement of profit or loss.
A leased asset is depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Group will obtain
ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the
lease term.
An operating lease is a lease other than a finance lease. Operating lease payments are recognised as an operating expense in the
statement of profit or loss on a straight-line basis over the lease term.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2019 (in ‘000s of Russian rubles, unless otherwise stated)
Current and deferred income tax
2.18
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
recognised 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 the 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 financial statements. However, deferred income tax is not accounted for if
it arises from the initial recognition of an asset or liability in a transaction other than a business combination that at the time of the
transaction affects neither accounting nor taxable profit 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 profit 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 tax 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.
2.19
Employee benefits
Retirement benefit schemes
No pension contributions were payable in the year. The Group participated only in defined 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 Group in independently administered funds. The retirement benefit schemes are generally funded by
payments from employees and by the relevant company. The Group has no further payment obligations once the contributions have
been paid. The contributions are recognised as an employee benefit expense on an accrual basis.
Share-based employee compensation
The Group operates equity-settled share-based compensation plans to remunerate its Directors and key management.
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 qualifies
for recognition as an asset, with a corresponding credit to the 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 the 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 retained earnings or accumulated losses.
Bonus plans
The Group 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
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.
34 Zoltav Resources Inc. Annual Report 2019
35
NOTES TOACCOUNTSFINANCIALINFORMATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2019 (in ‘000s of Russian rubles, unless otherwise stated)
Leases (Policy applicable as of 1 January 2019)
2.21
The Group assesses at contract inception whether a contract is, or contains, a lease. That is, if the contract conveys the right to
control the use of an identified asset for a period of time in exchange for consideration.
Group as a lessee
The Group applies a single recognition and measurement approach for all leases, except for shortterm leases and leases of low-
value assets. The Group recognises lease liabilities to make lease payments and right-of-use assets representing the right to use
the underlying assets.
Right-of-use assets
i)
The Group recognises right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available
for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any
remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs
incurred, and lease payments made at or before the commencement date less any lease incentives received. Right-of-use assets
are depreciated on a straight-line basis over the shorter of the lease term and the estimated useful lives of the assets, as follows:
Buildings
Motor vehicles
3 to 10 years;
3 years.
If ownership of the leased asset transfers to the Group at the end of the lease term or the cost reflects the exercise of a purchase
option, depreciation is calculated using the estimated useful life of the asset.
Lease liabilities
ii)
At the commencement date of the lease, the Group recognises lease liabilities measured at the present value of lease payments to
be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease
incentives receivable.
Variable lease payments that do not depend on an index or a rate are recognised as expenses (unless they are incurred to produce
inventories) in the period in which the event or condition that triggers the payment occurs.
In calculating the present value of lease payments, the Group uses its incremental borrowing rate at the lease commencement date
because the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities
is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease
liabilities is remeasured if there is a modification, a change in the lease term, a change in the lease payments (e.g., changes to future
payments resulting from a change in an index or rate used to determine such lease payments) or a change in the assessment of an
option to purchase the underlying asset.
Short-term leases and leases of low-value assets
iii)
The Group applies the short-term lease recognition exemption to its short-term leases of machinery and buildings (i.e., those leases
that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies
the lease of low-value assets recognition exemption. Lease payments on short-term leases and leases of low value assets are
recognised as expense on a straight-line basis over the lease term.
Critical accounting estimates and judgements
3.
The preparation of consolidated financial statements in conformity with IFRS 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 estimates are revised and in any future years affected. The estimates and assumptions that have a significant
risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed
below:
Income taxes
3.1
The Group is subject to income and other taxes. Significant judgement is required in determining the provision for income tax
and other taxes due to the complexity of tax legislation of the Russian Federation. The taxation system in the Russian Federation
continues to evolve and is characterised by frequent changes in legislation, as well as official 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 fines, 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 for each subsidiary to generate enough taxable profits to utilise
deferred income tax recognised. Significant management judgement is required to determine the amount of deferred tax assets
recognised, based upon the likely timing and the level of future taxable profits. Management prepares cash-flow forecasts to
support the recoverability of deferred tax assets. Cash flow 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 subsidiaries and going concern considerations.
When significant uncertainties exist, deferred tax losses are not recognised even if the recoverability of these is supported by cash
flow forecasts.
Provision for decommissioning and environmental restoration
3.2
This provision is significantly 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 significant liabilities in addition to
amounts which are already accrued and which would have a material adverse effect on the financial position of the Group.
The Group’s exploration, development and production activities involve the use of wells, related equipment and operating sites.
Generally, licences and other regulatory acts require that such assets be decommissioned upon the completion of production.
According to these requirements, the Group is obliged to decommission wells, dismantle equipment, restore the sites and perform
other related activities. The Group’s estimates of these obligations are based on current regulatory or licence requirements, as well
as actual dismantling and other related costs. These liabilities are measured by the Group using the present value of the estimated
future costs of decommissioning of these assets. The discount rate is reviewed at each reporting date and reflects risk free rate. The
Group adjusts specific cash flows for a risk.
Impairment of assets
3.3
Exploration and evaluation
An impairment exercise will be performed at the end of the exploration and evaluation process.
When, at the end of the exploration and evaluation stage, commercial reserves are determined to exist in respect of a particular field,
the Group performs an impairment test in relation to costs capitalised. Where reserves are determined in sufficient quantity to justify
development, the associated assets are transferred to property, plant and equipment.
If no potentially commercial hydrocarbons are discovered, the exploration asset is written off through the statement of profit or loss
and other comprehensive income as a dry hole. If extractable hydrocarbons are found and, subject to further appraisal activity
(e.g., the drilling of additional wells), it is probable that they can be commercially developed, the costs continue to be carried as an
exploration and evaluation asset while sufficient/continued progress is made in assessing the commerciality of the hydrocarbons.
Costs directly associated with appraisal activity undertaken to determine the size, characteristics and commercial potential of a
reservoir following the initial discovery of hydrocarbons, including the costs of appraisal wells where hydrocarbons were not found,
are initially capitalised as an exploration and evaluation asset.
Development and production
When the fields 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 market oil price (and related natural gas price) assumption may change which
may then impact the estimated life of the field and may then require a material adjustment to the carrying value of non current assets.
The Group monitors internal and external indicators of impairment relating to its tangible and exploration and evaluation assets. The
Group identified impairment indicators for one of its cash generating unit as of 31 December 2019 (see Note 13).
36
Zoltav Resources Inc. Annual Report 2019
37
NOTES TOACCOUNTSFINANCIALINFORMATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2019 (in ‘000s of Russian rubles, unless otherwise stated)
Evaluation of reserves and resources
3.4
Estimates of proved reserves are used in determining the depletion and amortization charge for the period and assessing whether
any impairment charge or reversal of impairment is required for development and producing assets. As of 31 December 2019 and
2018 proved reserves were estimated by reference to an independent international oil and gas engineering firm report dated 22 May
2014, by reference to available geological and engineering data, and only include volumes of extraction for which access to market
is assured with reasonable certainty.
When the fields 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 results of the drilling
of additional wells and changes in economic factors, including product prices, contract terms or development plans. Changes to the
Group’s estimates of proved reserves affect prospectively the amounts of the depletion and amortization charge, decommissioning
assets and provisions where changes in reserve estimates cause the estimated useful lives of assets to be revised.
Depletion is provided for based on the production profile on a field by field basis, which may exceed the existing licence period.
Licence extensions are generally awarded by the licence authorities in Russia as a matter of course, provided that production
plans demonstrate that additional time is required to economically produce at the field and that the development and production
requirements of the initial licence grant have been met.
Determining the lease term of contracts with renewal and termination options
3.5
The Group determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option
to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is
reasonably certain not to be exercised.
The Group has several lease contracts that include extension and termination options. The Group applies judgement in evaluating
whether it is reasonably certain whether or not to exercise the option to renew or terminate the lease. That is, it considers all relevant
factors that create an economic incentive for it to exercise either the renewal or termination. After the commencement date, the Group
reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to
exercise or not to exercise the option to renew or to terminate (e.g., construction of significant leasehold improvements or significant
customisation to the leased asset).
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 specific to that asset or liability.
Other receivables
The fair value of other receivables is estimated as the present value of future cash flows, discounted at the market rate of interest at
the reporting date. This fair value is determined for disclosure purposes.
Non-derivative financial liabilities
Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash
flows, discounted at the market rate of interest at the reporting date. Fair value of the non-derivative financial assets is disclosed
below.
Assets and liabilities not measured at fair value but for which fair value is disclosed
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:
Financial assets
Trade and other receivables
Total assets
Financial liabilities
Borrowings
Trade and other payables
Other non-current payables
Total liabilities
31 December 2019
31 December 2018
Fair value
Carrying value
Fair value
Carrying value
159,811
159,811
159,811
159,811
176,498
176,498
176,498
176,498
1,243,576
262,849
73,745
1,580,170
1,256,457
262,849
73,841
1,593,147
1,270,477
1,262,898
97,405
68,679
97,405
68,081
1,436,561
1,428,384
The fair value of borrowings and other non-current payables is based on cash flows discounted using a market rate of 8.33% (2018:
9.33%). The fair values of borrowings and other non-current payables are within level 2 of the fair value hierarchy. The fair value of
trade and other receivables is within level 3 hierarchy.
38 Zoltav Resources Inc. Annual Report 2019
Revenue from contracts with customers
5.
The Group’s operations comprise one class of business being oil and gas exploration, development and production and all revenues
are from one geographic region, the Saratov Region in the Russian Federation. Companies incorporated outside of Russia provide
support to the operations in Russia.
Revenue from contracts with customers comprises sale of the following products:
Gas sales
Condensate sales
Oil sales
Sulphur sales
2019
981,640
91,880
137,003
8,356
2018
1,287,680
160,976
156,426
9,727
Total revenue from contracts with customers
1,218,879
1,614,809
All gas sales are made to one customer, Gazprom Mezhregiongaz Saratov LLC, under a long-term contract effective until 31 December
2020 with terms reviewed annually. Condensate and oil are sold to local buyers. The sales of all products are denominated in RUB.
6.
Cost of sales
Depreciation and depletion
Mineral extraction tax
Wages and salaries
Materials and supplies
Other taxes and charges
Repair and maintenance
Compensation benefits to operating personnel
Other
Total cost of sales
7.
Administrative and selling expenses
Wages and salaries including director’s fee
Accountancy, legal and consulting services
Depreciation
Audit services
Rent expense
Travelling
Insurance
Office expenses
Field development costs
Computers and software
Other
Total administrative, selling expense
2019
418,819
285,419
100,908
80,897
54,519
39,690
28,235
56,954
2018
438,213
342,676
111,877
61,890
61,536
37,009
16,539
49,087
1,065,441
1,118,827
2019
158,244
22,928
10,460
10,923
1,155
3,784
2,870
1,515
9,989
2,273
17,493
241,634
2018
137,515
34,185
7,050
6,142
4,991
3,058
2,206
1,030
619
579
10,410
207,785
39
NOTES TOACCOUNTSFINANCIALINFORMATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2019 (in ‘000s of Russian rubles, unless otherwise stated)
8.
Salaries and other employee benefits
Salaries and other employee benefits
Total
2019
287,387
287,387
2018
265,931
265,931
Salaries and other employee benefits are included in other cost of sales and operating, administrative and selling expenses.
Average monthly number of employees for the year (including executive directors):
2019
2018
Employees
Employees
Administrative
Operating
Total
9.
Other income and expenses
Change in decommissioning and environmental restoration provision
Net income from sale of property, plant and equipment
Net foreign exchange difference
Income from services
Write-off of accounts payables and other current liabilities
Other
Other income
Change in decommissioning and environmental restoration provision
Write-off of accounts receivable and other current assets, ELC accrual
Charitable contributions
Penalties accrued
Loss on disposal of property, plant and equipment
Bank charges
Net foreign exchange difference
Other
Other expenses
10.
Finance income and finance costs
Finance income
Interest on bank deposits
Total finance income
Finance costs
Interest on borrowings (Note 22)
Unwinding of the discount on decommissioning and environmental restoration
provision (Note 23)
Unwinding of the discount on recognition non-current payables
Interest on lease liabilities (Note 26)
Other finance costs
Total finance costs
40 Zoltav Resources Inc. Annual Report 2019
67
174
241
2019
−
1,371
548
23,936
−
162
26,017
(67,254)
(101)
(2,660)
(6,009)
(39,376)
(77)
−
(2,134)
(117,611)
55
177
232
2018
25,964
4,917
−
3,783
3,342
1,519
39,525
−
(5,616)
(2,417)
(2,412)
(1,452)
(899)
(409)
(1,758)
(14,963)
2019
2018
12,194
12,194
20,178
20,178
(111,176)
(35,150)
(5,760)
(2,467)
−
(141,547)
(29,841)
(5,311)
−
(700)
(154,553)
(177,399)
11.
The tax charge for the year comprises:
Income tax benefit/(expense)
Deferred tax benefit/(expense)
Current tax expense
Tax risk provisions
Total income tax benefit/(expense)
Reconciliation between theoretical and actual taxation charge is provided below.
(Loss)/profit before income tax
Theoretical tax benefit/(charge) at applicable income tax rate of 20%
(2018: 20%)
Effect of different foreign tax rates
Effect of unrecognised deferred tax assets
Tax effect of expenses not deductible for tax purposes
Tax risk provisions
Total income tax benefit/(expense)
The Group’s income was subject to tax at the following tax rates:
The Russian Federation
The Republic of Cyprus
Cayman Islands
2019
253,032
(149)
(10,428)
242,455
2019
(3,124,063)
624,813
(4,662)
(361,195)
(6,073)
(10,428)
242,455
2019
20.0%
12.5%
0%
2018
(45,493)
(811)
(19,105)
(65,409)
2018
155,538
(31,108)
(5,390)
(5,246)
(4,560)
(19,105)
(65,409)
2018
20.0%
12.5%
0%
The Group is subject to Cayman income tax, otherwise the majority of the Group’s operations are located in the Russian Federation.
Thus 20% tax rate is used for theoretical tax charge calculations.
12.
Exploration and evaluation assets
Balance at 1 January 2018
Additions
Change in the estimates of decommissioning provision
Amortization
Exploration and
evaluation works
capitalised,
including
seismic works
2,221,625
216,252
3,138
(1,012)
Sub-soil
licences
1,037,728
−
−
(218)
Total
3,259,353
216,252
3,138
(1,230)
Balance at 31 December 2018
1,037,510
2,440,003
3,477,513
Additions
Transfer from property, plant and equipment
Change in the estimates of decommissioning provision
Impairment
Amortization
Balance at 31 December 2019
−
−
−
(1,325)
(218)
1,035,967
228,891
8,544
3,815
(205,159)
(1,845)
2,474,249
228,891
8,544
3,815
(206,484)
(2,063)
3,510,216
In management’s opinion, as at 31 December 2019 there were no non-compliance issues in respect of the licences that would have
an adverse effect on the financial position or the operating results of the Group.
The impairment is described in Note 13.
41
NOTES TOACCOUNTSFINANCIALINFORMATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2019 (in ‘000s of Russian rubles, unless otherwise stated)
13.
Property, plant and equipment
Other
equipment
and furniture
Construction
work in
progress
Cost at 1 January 2018
Additions
Reclassification
Transfer to current assets
Change in the estimates of
decommissioning provision
Disposals
Oil and gas
assets
5,202,044
86,230
28,002
−
(5,559)
(7,456)
Cost at 31 December 2018
5,303,261
Motor
vehicles
18,075
3,085
−
−
−
(4,274)
16,886
7,963
2,157
−
−
−
(299)
9,821
68,582
31,965
(28,002)
(9,849)
−
(1,475)
61,221
390,993
(128,660)
(8,544)
(4,381)
−
(3,169)
307,460
Total
5,296,664
123,437
−
(9,849)
(5,559)
(13,504)
5,391,189
410,361
−
(8,544)
(4,381)
94,115
(89,713)
5,793,027
3,583
2,132
−
−
−
−
−
−
−
−
(2,807)
17,662
(607)
11,346
Additions
Reclassification
Transfer to exploration and
evaluation assets
Transfer to current assets
Change in the estimates of
decommissioning provision
Disposals
Cost at 31 December 2019
Accumulated depreciation,
depletion and impairment
Balance at 1 January 2018
Depreciation and depletion
Disposals
Balance at 31 December 2018
Depreciation and depletion
Impairment
Disposals
13,653
128,660
−
−
94,115
(83,130)
5,456,559
(1,268,777)
(440,673)
4,537
(1,704,913)
(418,748)
(2,420,298)
46,886
(15,488)
(2,775)
4,231
(14,032)
(3,523)
(1,920)
2,807
(5,097)
(585)
274
(5,408)
(877)
(2,968)
573
−
−
−
−
−
(1,289,362)
(444,033)
9,042
(1,724,353)
(423,148)
(160,331)
(2,585,517)
−
50,266
As of 31 December 2019 the recoverable amount of the Western part of Bortovoy licence field comprised 722,096. The future cash
flows were discounted to their present values using a discount rate of 15.23% (pre-tax), that reflects current market assessments
of the time value of money and the risks specific to the asset. Increasing discount rate on 1% would result in additional impairment
charge of 18,486.
The following key assumptions were used to determine the recoverable amount of the Western part of Bortovoy licence field:
•
•
• Capital expenditure for the period 2020-2027 in nominal prices: 1,219,366.
Volumes of gas extractions for the period 2020-2027: 1,588 mln of m3;
Inflation in the Russian Federation for the period 2021-2027: within 3.7-3.6%;
14.
Inventories
Natural gas and hydrocarbon liquids
Materials and supplies
Total inventories
31 December 2019
31 December 2018
4,432
20,124
24,556
10,107
13,362
23,469
Materials and supplies mainly comprised of liquid feedstock and maintenance spare parts.
15.
Trade and other receivables and other current non-financial assets
Trade receivables, gross
Other accounts receivable, gross
Expected credit loss
Total trade and other receivables
Prepayments
VAT receivable
Other taxes prepaid
Total other current non-financial assets
31 December 2019
31 December 2018
161,281
939
(2,409)
159,811
30,329
10,000
3,221
43,550
175,672
3,222
(2,396)
176,498
13,065
782
542
14,389
Trade and other receivables are non-interest bearing and are generally on settlement terms of 3045 days. In 2019, 13 (2018: 1,480)
was recognised as provision for expected credit losses on trade and other receivables.
Prepayments are advance payments for services to be rendered within the next twelve months.
Balance at 31 December 2019
(4,497,073)
(16,668)
(8,680)
(160,331)
(4,682,752)
Current VAT receivable is expected to be recovered within the next twelve months.
Net book value at 1 January 2018
3,933,267
Net book value at 31 December 2018
3,598,348
Net book value at 31 December 2019
959,486
2,587
2,854
994
2,866
4,413
2,666
68,582
61,221
4,007,302
3,666,836
147,129
1,110,275
The gross carrying amount of fully depreciated property, plant and equipment that is still in use at 31 December 2019 was 266,186
(2018: 112,217).
Impairment
In 2019 the Group determined its development strategy of Bortovoy licenсe field. The main focus of this strategy became the
exploration of the Eastern part of Bortovoy licenсe field, while no further development of the Western part of Bortovoy licenсe field
is planned. This and drop in gas volumes extraction in 2019 became a trigger to analyse the Western part of Bortovoy gas field for
impairment. As a result of this analysis the impairment of the Western part of Bortovoy gas field cash-generating unit (CGU) was
recognised. The impairment was allocated between Exploration and evaluation assets (Note 12), Property, plant and equipment and
Right-of-use assets (Note 26) of the CGU.
In assessing the impairment amount, the carrying value of the CGU is compared with its recoverable amount. The recoverable
amount used in assessing the impairment charges described below is fair value less costs of disposal (FVLCD). The Company
generally estimates FVLCD using the income approach, specifically the discounted cash flow (“DCF”) method. Discounted cash flows
of the Western part of Bortovoy licenсe field were built based on the long-term business plan the Group. The period: 2020-2027.
Set out below is the movement in the allowance for expected credit losses of trade and other receivables:
The opening balance in the provision for expected credit losses on
1 January under IFRS 9
Charge for the period
As at 31 December
The information about the credit exposures are disclosed in Note 27.
2019
(2,396)
(13)
(2,409)
2018
(916)
(1,480)
(2,396)
16.
Cash and cash equivalents consist of cash at bank and the majority of cash held is denominated in RUB.
Cash and cash equivalents
The Group’s exposure to credit risk and impairment losses related to cash and cash equivalents are disclosed in Note 27.
42 Zoltav Resources Inc. Annual Report 2019
43
NOTES TOACCOUNTSFINANCIALINFORMATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2019 (in ‘000s of Russian rubles, unless otherwise stated)
17.
Share capital
At 31 December 2019 and 2018
Authorised (par value of USD 0.20 each)
Issued and fully paid (par value of USD 0.20 each)
Number of
ordinary shares,
pieces
250,000,000
141,955,386
Nominal value,
USD’000
Nominal value,
RUB’000
50,000
28,391
1,708,672
970,218
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 Company’s statutory financial statements prepared in accordance with International Financial
Reporting Standards. No dividends were declared or paid in 2019 and 2018.
19.
Other taxes payable
VAT
Mineral extraction tax
Property tax
Other taxes
Total
31 December 2019
31 December 2018
25,239
34,150
7,364
12,714
79,467
53,296
21,271
8,598
13,116
96,281
Earnings per share
20.
Basic earnings per share is calculated by dividing the profit attributable to owners of the Company by the weighted average number
of ordinary shares in issue during the year.
Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume
conversion of all dilutive potential ordinary shares. As of 31 December 2018 share options have an antidilutive effect on the loss
per share. As of 31 December 2018 all share options have expired and do not have any effect on the loss per share as of 31
December 2019.
Profit/(loss) attributable to owners of the Company − basic and diluted
2019
(2,881,608)
2018
90,129
Number of
shares
Number of
shares
Weighted average number of shares for calculating basic earnings per share
141,955,386
141,955,386
Antidilutive potential ordinary shares − share options
−
6,103
Weighted average number of shares for calculating diluted earnings per share
141,955,386
141,961,489
Basic (loss)/earnings per share
Diluted earnings/(loss) per share
RUB
(20.30)
(20.30)
RUB
0.63
0.63
21.
21.1
All share options expired as of 31 December 2018.
Share-based payments
Share options
Initial share options
21.2
The Company adopted an employee Share Option Scheme on 4 March 2005 (the “Share Option Scheme”) in order to incentivise
key management and staff at that time. The following share options were granted to 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:
Outstanding at 1 January
Expired
Outstanding at 31 December
2019
2018
Weighted average
exercise price
(pence)
Number
−
−
−
−
−
−
Weighted average
exercise price
(pence)
445
445
−
Number
202,500
202,500
−
Share options granted under the Initial Share Option Scheme were exercisable as follows:
The first 30% of the options between the first and tenth anniversary of the grant date;
•
The next 30% of the options between the second and tenth anniversary of the grant date; and
•
The remaining options between the third and tenth anniversary of the grant date.
•
Equity-settled share-based payments are measured at fair value (excluding the effect of nonmarket-based vesting conditions) as
determined through use of the binomial option pricing model, at the grant date. 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 binomial option pricing model is applied to the granting 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
Share options
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.
44 Zoltav Resources Inc. Annual Report 2019
45
NOTES TOACCOUNTSFINANCIALINFORMATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2019 (in ‘000s of Russian rubles, unless otherwise stated)
22.
Borrowings
Non-revolving credit facility with Sberbank PJSC − liability, as at 1 January
Including current liability
Interest accrued
Interest paid
Repayment
Non-revolving credit facility with Sberbank PJSC − as at 31 December
Including current liability
2019
1,262,898
570,400
40,352
(45,702)
(1,257,548)
−
−
2018
1,562,186
309,172
141,547
(140,835)
(300,000)
1,262,898
570,400
In 2014, the Group entered into non-revolving credit facility agreement with Sberbank of Russia PJSC with a maximum facility amount
of 2,400,000. The contractual currency is RUB. The facility was drawn down in full in 2014. The maturity date is 30 April 2021. During
2019 the Group repaid the loan ahead of schedule.
On 13 May 2019 the Group signed a credit line agreement with Promsvyasbank PJSC. The credit line limit is 1,320,000. The purpose
of the credit line was the refinancing of the loan from Sberbank PJSC and financing of current activities. The interest rate equals
Russian Key rate plus 1.6%. Payment terms depend on the amount of the credit line used, and the final payment is no later than 29
April 2024.Under the agreement the Group has pledged its property, plant and equipment items amounted 600,398 to secure the
loan. The agreement contains certain loan covenants. The Group was not in compliance with a few covenants as 31 December 2019
and reclassified the long-term portion of the loan amounted 960,000 to short-term.
Credit facility with Promsvyazbank PJSC − liability, as at 1 January
Including current liability
Interest accrued
Interest paid
Proceeds
Repayment
Credit facility Promsvyazbank PJSC − liability, as at 31 December
Including current liability
2019
−
−
70,824
(62,367)
1,320,000
(72,000)
1,256,457
1,256,457
2018
−
−
−
−
−
−
−
−
Decommission provision
23.
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
fields 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
Provision as at 31 December
2019
390,428
796
35,150
165,184
591,558
2018
386,152
2,820
29,841
(28,385)
390,428
This provision has been created based on the Group’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 reflect market conditions at
the relevant time. Furthermore, the timing is likely to depend on when the fields 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 reflects 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 provision is reversed 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 completed.
The Group reviews the application of inflation rates used for the provision estimation each half-year end. The inflation rate used
in the estimation of the provision as of 31 December 2019 was 4.20% in 2020, decreasing to 4.10% in 2036 (as of 31 December
2018: 5.28% in 2018, decreasing to 3.64% in 2036). The discount rates used to determine the decommissioning and environmental
restoration provision are based on Russian government bond rates. As of 31 December 2019, the discount rate varies from 6.34%
to 6.52% (as of 31 December 2018: from 8.72% to 8.75%) depending on expected period of abandonment and site restoration for
each gas and oil fields.
46 Zoltav Resources Inc. Annual Report 2019
47
NOTES TOACCOUNTSFINANCIALINFORMATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2019 (in ‘000s of Russian rubles, unless otherwise stated)
24.
Movements in temporary differences during the year:
Deferred tax liabilities
Property, plant and equipment
Decommissioning provision
Other current assets and liabilities
Tax loss carry-forwards
Deferred tax assets
Exploration and evaluation assets
Property, plant and equipment
Borrowings
Deferred tax liabilities
Net deferred tax liabilities
Decommissioning provision
Other current assets and liabilities
Tax loss carry-forwards
Deferred tax assets
Exploration and evaluation assets
Property, plant and equipment
Borrowings
Deferred tax liabilities
Net deferred tax liabilities
31 December 2019
Recognised in
profit or loss
31 December 2018
184,668
70,488
26,408
27,948
309,532
(372,829)
−
−
(372,829)
(63,297)
184,668
23,871
10,884
(289,417)
(69,974)
29,732
292,574
700
323,006
253,032
−
46,617
15,524
317,365
379,506
(402,561)
(292,574)
(700)
(695,835)
(316,329)
31 December 2018
Recognised in
profit or loss
31 December 2017
46,617
15,524
317,365
379,506
(402,561)
(292,574)
(700)
(695,835)
(316,329)
1,235
4,089
18,187
23,511
(46,777)
(22,924)
697
(69,004)
(45,493)
45,382
11,435
299,178
355,995
(355,784)
(269,650)
(1,397)
(626,831)
(270,836)
Deferred income tax assets are not fully recognised for impairment of exploration and evaluation assets and tax losses to the extent
that the utilisation of the related tax benefit through future taxable profits is not probable. The Group has not recognised deferred
income tax assets of 962,228 (2018: 601,033). The Group has tax losses that are available indefinitely for offsetting against future
taxable profits of the companies in which the losses arose.
Deferred tax assets for deductible temporary differences arising from investments in subsidiaries are not recognised by the Group,
as it is not probable that the temporary difference will reverse in the foreseeable future, since the Group has no intention of selling
its subsidiaries. The Group has not recognised deferred tax assets of 517,024 (2018: 458,937).
Management assessed that recognised deferred tax assets will be fully offset against future taxable profits in 2020-2026.
25.
Trade and other payables
Current trade payables
Payables to employees
Accrued expenses
Total current payables
Non-current other payables
Total non-current payables
48 Zoltav Resources Inc. Annual Report 2019
31 December 2019
31 December 2018
217,133
30,920
14,796
262,849
73,841
73,841
46,850
40,173
10,382
97,405
68,081
68,081
Leases
26.
The Group has lease contracts for various items of buildings and motor vehicles. Leases of buildings generally have lease terms
between 3 and 10 years, while motor vehicles generally have lease terms between 3 and 5 years.
The Group also has certain leases of machinery and buildings with lease terms of 12 months or less and equipment with low value.
The Group applies the ‘short-term lease’ and ‘lease of low-value assets’ recognition exemptions for these leases.
Set out below are the carrying amounts of right-of-use assets recognised and the movements during the period:
Buildings
Motor vehicles
Cost at 1 January 2019
Additions
Cost at 31 December 2019
Accumulated depreciation,
depletion and impairment balance
at 1 January 2019
Depreciation
Impairment
Accumulated depreciation, depletion
and impairment balance at
31 December 2019
Net book value at 1 January 2019
Net book value at 31 December 2019
13,576
9,900
23,476
−
(3,187)
(9,913)
(13,100)
13,576
10,376
−
822
822
−
(14)
−
(14)
−
808
Other
−
4,726
4,726
−
(867)
−
(867)
−
3,859
Set out below are the carrying amounts of lease liabilities and the movements during the period:
Balance as at 1 January
Additions
Interest expense
Payments
Balance as at 31 December
Current
Non-current
The following are the amounts recognised in profit or loss:
Depreciation expense of right-of-use assets
Interest expense on lease liabilities
Expense relating to leases to explore for or use minerals, oil, natural gas and similar non-regenerative
resources (included in cost of sales)
Expense relating to leases of low-value or short-term assets (included in administrative and selling ex-
penses)
Total amount recognised in profit or loss
Total
13,576
15,448
29,024
−
(4,068)
(9,913)
(13,981)
−
15,043
2019
13,576
15,448
2,467
(5,776)
25,715
4,081
21,634
2019
4,068
2,467
5,281
1,155
12,971
49
NOTES TOACCOUNTSFINANCIALINFORMATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2019 (in ‘000s of Russian rubles, unless otherwise stated)
27.
Changes in liabilities arising from financing activities
As of 1 January 2019
Cash changes
Proceeds from borrowings
Repayment of borrowings
Payment of principal portion of lease liabilities
Interest paid
Total cash changes
Non-cash changes
Finance costs
New leases
Reclass from non-current to current
Total
As of 31 December 2019
Current
interest-bearing
borrowings
Current lease
liabilities
Non-current
interest-bearing
borrowings
Non-current lease
liabilities
570,400
1,022
692,498
12,554
1,320,000
(1,329,548)
−
(108,069)
(117,617)
111,176
−
692,498
803,674
1,256,457
−
−
(3,309)
(2 467)
(5,776)
2,467
2,783
3,585
8,835
4,081
−
−
−
−
−
−
−
(692,498)
(692,498)
−
−
−
−
−
−
−
12,665
(3,585)
9,080
21,634
Current
interest-bearing
borrowings
Current finance
lease liability
Non-current
interest-bearing
borrowings
Non-current
finance lease
liability
As of 1 January 2018
309,172
1,666
1,253,014
Cash changes
Proceeds from borrowings
Repayment of borrowings
Repayment of obligations under finance
leases
Interest paid
Total cash changes
Non-cash changes
Finance costs
Reclass from non-current to current
Total
As of 31 December 2018
−
(300,000)
−
(140,835)
(440,835)
141,547
560,516
702,063
570,400
−
−
(1,892)
−
(1,892)
226
−
226
−
−
−
−
−
−
−
(560,516)
(560,516)
692,498
The Group classifies interest paid as cash flows from operating activities.
−
−
−
−
−
−
−
−
−
−
50 Zoltav Resources Inc. Annual Report 2019
Liquidity risk;
Financial instruments and financial risk management
28.
The Group has exposure to the following risks from its use of financial instruments:
•
• Market risk;
• Credit risk.
This note presents information about the Group’s exposure to each of the above risks, the Group’s objectives, policies and processes
for measuring and managing risk, and the Group’s management of capital. Further quantitative disclosures are included throughout
these consolidated financial statements.
The Group’s risk management policies deal with identifying and analysing the risks faced by the Group, setting appropriate risk limits
and controls, and monitoring risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect
changes in market conditions and the Group’s activities. The Group, through its internal policies, aims to develop a disciplined and
constructive control environment in which all employees understand their roles and obligations.
Liquidity risk
28.1
Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group monitors the risk
of cash shortfalls by means of current liquidity planning. The Group’s approach to managing liquidity is to ensure, as far as possible,
that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring
unacceptable losses or risking damage to the Group’s reputation. This approach is used to analyse payment dates associated
with financial assets, and also to forecast cash flows from operating activities. The contractual maturities of financial liabilities are
presented including estimated interest payments.
The Group’s current liabilities exceed its current assets by 1,405,272 as at 31 December 2019. The implications are described in
Note 2.2.
The table below summarises the maturity profile of the Group’s financial liabilities based on contractual undiscounted payments:
Financial liabilities as at 31 December 2019
Borrowings
Trade and other payables
Lease liabilities
Total
Financial liabilities as at 31 December 2018
Borrowings
Trade and other payables
Total
Total
1,333,854
344,538
34,680
1,713,072
Total
1,391,101
179,094
1,570,195
Less than
1 year
1,333,854
262,849
6,382
1,603,085
Less than
1 year
653,980
97,405
751,385
1-3 years
−
81,689
12,603
94,292
1-3 years
737,121
81,689
818,810
Over
3 years
−
−
15,695
15,695
Over
3 years
−
−
−
51
NOTES TOACCOUNTSFINANCIALINFORMATION
28.2
Market risk includes interest risk and foreign currency exchange rate risk.
Market risk
Interest risk
a)
As of 31 December 2019 the Group is exposed to interest rate risk because it has a loan with a variable interest rate denominated
in RUB in the amount of 1,256,457 interest rate on which is key rate of the Central Bank of Russia + 1.5%.
The following table demonstrates the sensitivity to a reasonably possible change in interest rates on that portion of loans and
borrowings affected. With all other variables held constant, the Group’s profit before tax is affected through the impact on floating
rate borrowings, as follows:
2019
Increase/ decrease
in basis points
Effect on loss
before tax
+50
-50
(6,240)
6,240
Foreign currency exchange rate risk
b)
The Group does not have any significant exposure to foreign currency risk, as no significant sales, purchases or borrowings are
denominated in a currency other than the functional currency.
The Group’s operations are carried in the Russian Federation, where all of its revenue, costs and financing are denominated in RUB.
As a result there is no exposure at the operating subsidiaries’ level to foreign currency exchange risk movements.
Credit risk
28.3
Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to
a financial loss. The Group is exposed to credit risk from its operating activities (primarily trade receivables) and from its financing
activities, including deposits with banks and financial institutions, foreign exchange transactions and other financial instruments.
Customer credit risk is managed by each business unit subject to the Group’s established policy, procedures and control relating to
customer credit risk management. Credit quality of a customer is assessed based on a credit rating scorecard and individual credit
limits are defined in accordance with this assessment. Outstanding customer receivables are regularly monitored.
The Group is largely dependent on one customer (Gazprom Mezhregiongaz Saratov LLC) for a significant portion of earned revenues.
Gazprom Mezhregiongaz Saratov LLC accounted for 80.5% and 79.7% of the Group’s total revenue in 2019 and 2018 respectively.
The loss or the insolvency of this customer for any reason, or reduced sales of the Group’s principal product, could significantly reduce
the Group’s ongoing revenue and/or profitability, and could materially and adversely affect the Group’s financial condition. The credit
rating assigned to Gazprom by Standard & Poor’s is BBB-. To manage credit risk and exposure to the loss of the key customer,
the Group has entered into a long-term contract with Gazprom Mezhregiongaz Saratov LLC, effective till 31 December 2020. As of
the date of these consolidated financial statements issue the Group is in a process of prolongation the contract for another 7 years. As
for the smaller customers, the Group imposes minimum credit standards that the customers must meet before and during the sales
transaction process.
An impairment analysis is performed at each reporting date using a provision matrix to measure expected credit losses. The provision
rates are based on days past due for groupings of various customer segments with similar loss patterns (i.e., by product type,
customer type and rating). The calculation reflects the probability-weighted outcome, the time value of money and reasonable and
supportable information that is available at the reporting date about past events, current conditions and forecasts of future economic
conditions. Generally, trade receivables are written-off if past due for more than one year and are not subject to enforcement activity.
The Group does not hold collateral as security.
Set out below is the information about the credit risk exposure on the Group’s trade and other receivables using a provision matrix:
31 December 2019
Expected credit loss rate
Total
Current
0%
Estimated total gross carrying amount at default
162,220
159,811
Expected credit loss
2,409
−
31 December 2018
Expected credit loss rate
Total
Current
0%
Estimated total gross carrying amount at default
178,894
176,498
Expected credit loss
2,396
−
Days past due
45-180
days
−
−
−
180-360
days
100%
13
13
>360 days
100%
2,396
2,396
Days past due
45-180
days
180-360
days
>360 days
−
−
−
100%
1,480
1,480
0%
916
916
Credit risk related to cash and cash equivalents is reduced by placing funds with banks with acceptable credit ratings.
To limit exposure to credit risk on cash and cash equivalents management’s policy is to hold cash and cash equivalents in reputable
financial institutions with low credit risk. During 2019 cash was held mainly with Promsvyasbank PJSC, Bank Dom.RF, Alfa Bank and
Sberbank. Banks are regularly evaluated by International and Russian agencies and are considered reliable banks with low credit
risk (ratings at the reporting date are presented below).
To limit exposure to credit risk on cash and cash equivalents management’s policy is to hold cash and cash equivalents in reputable
financial institutions.
Ba1.ru, Moody’s
Ba2.ru, Moody’s
ruBBB, Expert RA
Baа3.ru, Moody’s
Ba3.ru, Moody’s
Other
Total cash and cash equivalents
31 December 2019
31 December 2018
108
89
−
1,869
1,101
462
3,629
191,251
−
50,000
10,945
49
8,391
260,636
Capital management
The Group considers its capital and reserves attributable to equity shareholders to be the Group’s capital. In managing its capital,
the Group’s primary long-term objective is to provide a return for its equity shareholders through capital growth. Going forward, the
Group may seek additional investment funds and also maintain a gearing ratio that balances risks and returns at an acceptable level,
while maintaining a sufficient funding base to enable the Group to meet its working capital needs. Details of the Group’s capital are
disclosed in the statement of changes in equity.
There have been no significant changes to management’s objectives, policies or processes in the period, nor has there been any
change in what the Group considers to be capital.
The Group companies are in compliance with externally imposed capital requirements as of 31 December 2019 and 31 December 2018.
52
53
NOTES TOACCOUNTSFINANCIALINFORMATIONZoltav Resources Inc. Annual Report 2019NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION(in ‘000s US dollars, unless otherwise stated)
Commitments and contingencies
Capital commitments
29.
29.1
Capital expenditure contracted for at the end of the reporting period but not yet incurred at 31 December 2019 was 292,279, net of
VAT (31 December 2018: 29,984, net of VAT).
Insurance
29.2
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 Group’s insurance currently includes cover for damage to or loss of assets,
third-party liability coverage (including employer’s 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 to liability, or that the Group
will continue to be able to obtain insurance to cover such risks. Until the Group obtains adequate insurance coverage there is a risk
that the loss or destruction of certain assets could have a material adverse effect on the Group’s operations and financial position.
Litigation
29.3
The Group has been involved in a number of court proceedings (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 operations, financial position or cash flows of the Group and which have not been accrued
or disclosed in these financial statements.
The Group’s contractor has commenced an action against the Group claiming the payment of 6,085 as a result of a breach of
payment terms under the agreement. The Group has assessed the risk of repayment as possible. No provision for this claim has
been recognised in the financial statements.
Taxation
29.4
Russian tax, currency and customs law allows for various interpretations and is subject to frequent changes. Management’s
interpretation of legislation as applied to the Group’s transactions and activities may be challenged by regional or federal authorities.
The Group operates in a number of foreign jurisdictions besides Russian Federation. The Group includes companies established
outside the Russian Federation that are subject to taxation at rates and in accordance with the laws of jurisdictions in which the
companies of the Group are recognised as tax residents. Tax liabilities of foreign companies of the Group are determined on the basis
that foreign companies of the Group are not tax residents of the Russian Federation, nor do they have a permanent representative
office in the Russian Federation and are therefore not subject to income tax under Russian law, except for income tax deductions
at the source.
In 2019, there was further implementation of mechanisms aimed at avoiding tax evasion using low-tax jurisdictions and aggressive
tax planning structures. In particular, these changes included the definition of the concept of beneficial ownership, the tax residence
of legal entities at the place of actual activities, as well as the approach to taxation of controlled foreign companies in the Russian
Federation. In addition, since 2019, the total VAT rate is increased to 20%.
The Russian tax authorities continue to actively cooperate with the tax authorities of foreign countries in the international exchange
of tax information, which makes the activities of companies on an international scale more transparent and requires detailed study in
terms of confirming the economic purpose of the organization of the international structure in the framework of tax control procedures.
These changes and recent trends in applying and interpreting certain provisions of Russian tax law indicate that the tax authorities
may take a tougher stance in interpreting legislation and reviewing tax returns. The tax authorities may thus challenge transactions
and accounting methods that they have never challenged before. As a result, significant taxes, penalties and fines may be accrued.
It is not possible to determine the amounts of constructive claims or evaluate the probability of a negative outcome. Tax audits may
cover a period of three calendar years immediately preceding the audited year. Under certain circumstances, the tax authorities may
review earlier tax periods.
In addition, tax authorities have the right to charge additional tax liabilities and penalties on the basis of the rules established by
transfer pricing legislation, if the price/profitability in controlled transactions differs from the market level. The list of controlled
transactions mainly includes transactions concluded between related parties. Requirements for tax control of prices and preparation
of transfer pricing documentation apply to cross-border transactions between related parties (without applying any threshold),
individual transactions in the field of foreign trade in goods of world exchange trade and transactions with companies located in low-
tax jurisdictions, as well as transactions between related parties in the domestic market in some cases.
Tax authorities may carry out a price/profitability check in controlled transactions and, in case of disagreement with the prices applied
by the Group in these transactions, may additionally charge additional tax liabilities if the Group is unable to justify the market
nature of pricing in these transactions by providing transfer pricing documentation (national documentation) in accordance with the
requirements of the legislation.
Management believes that it has provided adequately for tax liabilities based on its interpretations of applicable tax legislation, official
pronouncements and court decisions. However, the interpretations of the relevant authorities could differ and the impact on these
consolidated financial statements if the authorities were successful in enforcing their interpretations could be significant.
Environmental matters
29.5
The Group’s operations are in the upstream oil and gas 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 stance
of government authorities is continually being reconsidered. The Group periodically evaluates its obligations 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 significant liabilities in addition to
amounts already accrued as a part of the decommissioning provision and which would have a material adverse effect on the financial
position or results of the Group.
Related party transactions
30.
During the period there were no operations with related parties, except for key management remunerations. Key management
comprises members of the Board of Directors.
The remuneration of key management comprised of salary and bonuses in the amount 8,613 (2018: 8,956).
Events after the reporting date
31.
The coronavirus (COVID-19) pandemic in 2020 has caused financial and economic tension in the world markets, and a decrease
in consumption expenditure and business activities. A drop in demand in oil, natural gas and crude products together with a higher
supply of oil due to the cancellation of the OPEC+ oil production agreement have caused a fall in hydrocarbon world prices. The
stock exchange, currency and commodity markets have shown significant volatility since March 2020.
Many countries as well as the Russian Federation have imposed quarantine measures. Social distancing and isolation measures
have resulted in discontinued operations in retail, transport, travel and tourism, foodservice and many other areas.
The impact of the pandemic on economics in countries individually and globally has had no historical analogies ever when
governments took measures to save the economies. Various forecasts of changes in the macroeconomic indicators both in the
short- and long-term horizon, the extent of the impact of the pandemic on businesses including the estimation of how long the crisis
and recovery from it will last, display different views.
The Group considers the influence of the events on the Group’s operations as limited taking into consideration the following factors:
•
•
•
systemic nature and position of the industry where the Group operates (gas extraction);
the means and volume of use of the Group’s production assets have not changed;
absence of currency risk (the majority of the Group’s revenues and expenditures as well as monetary assets and liabilities are
denominated in RUB);
absence of direct adverse effect on the main operational activities of the Group from the regulatory changes aimed at preventing
the spread of COVID-19.
•
However, the uncertainty about the future operating environment of the Group and of its counterparties remains: another risk is a
possible long nature of the pandemic, the duration and effect of which cannot be reliably estimated now.
In May 2020 the Company concluded the loan agreement with its related party, shareholder, who has significant influence over the
Company, ARA CAPITAL HOLDINGS LIMITED. The amount of the interest-free loan is USD 9 million. The interest rate will be 15%
in case of breach of the covenant under the agreement. Final repayment date is 31 December 2020. The Company intends to extend
the final repayment date.
Availability of annual report and financial statements and General Meeting
32.
Copies of the Group’s annual report and consolidated financial statements will be sent to Registered Shareholders but may not be
sent to holders of Depository Interests. The annual report and financial statements will be available for inspection at the Group’s
registered office and may also be viewed on the Group’s website at: www.zoltav.com. Notice of a General Meeting will be sent to
shareholders in due course.
54
55
NOTES TOACCOUNTSFINANCIALINFORMATIONZoltav Resources Inc. Annual Report 2019NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION(in ‘000s US dollars, unless otherwise stated) GLOSSARY
bbl
bbls
Barrel
Barrels
bbls/d
Barrels per day
bcf
bcm
Billion cubic feet
Billion cubic metres
boepd
Barrels of oil equivalent per day
CPR
mcf
mcm
mmboe
mmcf
mmcf/d
mmcm
Competent Person’s Report
Thousand cubic feet
Thousand cubic metres
Million barrels of oil equivalent
Million cubic feet
Million cubic feet per day
Million cubic metres
mmcm/d
Million cubic metres per day
mtoe
MW
PRMS
t
t/d
Thousand tonnes of oil equivalent
Megawatt
Petroleum Resources Management System
Tonnes
Tonnes per day
toepd
Tonnes of oil equivalent per day
56
57
NOTES TOACCOUNTSFINANCIALINFORMATIONZoltav Resources Inc. Annual Report 2019NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION(in ‘000s US dollars, unless otherwise stated) zoltav.com
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