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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Enwell Energy Plc | AQSE:ENW.GB | Aquis Stock Exchange | Ordinary Share | GB0031775819 |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 18.50 | 15.00 | 22.00 | 18.50 | 18.00 | 18.50 | 2,090 | 16:29:52 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From Mar 2023 to Mar 2025
TIDMENW
RNS Number : 6731X
Enwell Energy PLC
21 December 2023
21 December 2023
ENWELL ENERGY PLC
2022 AUDITED RESULTS
Enwell Energy plc ("Enwell Energy" or the "Company", and together with its subsidiaries, the "Group"), the AIM-quoted (AIM: ENW) oil and gas exploration and production group, today announces its audited results for the year ended 31 December 2022.
2022 Highlights
Operational
Hot Features
Premium
-- Aggregate average daily production of 2,956 boepd (calculated
on the days when the Group's fields were actually in production)
(2021: 4,730 boepd)
-- SV-31 development well successfully completed and brought
on production in Q2 2022
-- SC-4 appraisal well tested and produced hydrocarbons from
its primary target reservoir in Q4 2022
-- GOL-107 development well successfully completed in Q4
2023 and is undergoing long-term test production
Financial
-- Revenue of $133.4 million (2021: $121.4 million), up 10%,
primarily as a result of significantly higher gas prices
-- Gross profit of $85.9 million (2021: $73.9 million), up
16%
-- Operating profit of $75.8 million (2021: $66.2 million),
up 15%, predominantly as a result of significantly higher
gas prices
-- Net profit of $60.2 million (2021: $51.1 million), up
18%
-- Cash, cash equivalents and short-term investments of $88.7
million as at 31 December 2022 (2021: $92.5 million),
and of $79.1 million as at 14 December 2023
-- Average realised gas, condensate and LPG prices in Ukraine
were significantly higher, particularly gas and LPG prices,
at $960/Mm3 (UAH30,341/Mm3), $73/bbl and $143/bbl respectively
(2021: $432/Mm3 (UAH11,677/Mm3) gas, $69/bbl condensate
and $80/bbl LPG)
-- Interim dividend of 15 pence per ordinary share, GBP48.1
million in aggregate, paid in June 2023 (2021: nil)
Outlook
-- The Russian invasion of Ukraine in February 2022 has had
a significant impact on all aspects of life in Ukraine,
including the Group's business and operations, with all
field operations being suspended for safety reasons from
24 February to 15 March 2022, after which production operations
and some field activities resumed at the MEX-GOL and SV
fields, and subsequently at the VAS field and SC licence
area. The scale and duration of disruption to the Group's
business is currently unknown, and there remains significant
uncertainty about the outcome of the war in Ukraine
-- In April and May 2023, the Ukrainian authorities took
a number of regulatory actions against the Group, which
included the suspension of the VAS production licence
and SC exploration licence, and consequently all work
at these licences has been suspended
-- Subject to the resolution of the regulatory issues and
the Group's ability to operate safely, development work
planned for the remainder of 2023 and 2024 at the MEX-GOL
and SV fields includes planning the deepening of the MEX-109
well to explore a deeper horizon, investigating the hydraulic
fracturing of the SV-29 well, planning a workover of the
MEX-102 well to access a shallower horizon, investigating
the possible sidetracking of the MEX-119 well to access
additional reserves, installing additional compression
equipment and upgrading the flow-line network and other
field infrastructure
-- Further work on the VAS field and SC licence area will
remain suspended until there is a resolution of the regulatory
issues, including the lifting of the suspension orders
-- Currently, the Group retains approximately a quarter of
its cash outside Ukraine, which enhances the Group's ability
to navigate the current risk environment for the foreseeable
future, and provides a material buffer to any further
disruptions to the Group's operations
-- Development programme for the remainder of 2023 and 2024
expected to be funded from existing cash resources and
operational cash flow
Sergii Glazunov, CEO, commented : "While 2022 was a strong operational year for Enwell Energy, these achievements are entirely overshadowed by the ongoing war in Ukraine, which is having a huge impact on all aspects of life and business in Ukraine. We were able to continue production at our MEX-GOL and SV fields, which is testament to the diligence and fortitude of our operational team, but unfortunately, regulatory action taken by the Ukrainian authorities has resulted in our VAS production licence and SC exploration licence being currently suspended."
The Annual Report and Financial Statements for 2022 will shortly be available on the Company's website and will be posted to shareholders on 27 December 2023, and a formal Notice of Annual General Meeting will follow later during January 2024.
This announcement contains inside information for the purposes of Article 7 of EU Regulation No. 596/2014, which forms part of United Kingdom domestic law by virtue of the European Union (Withdrawal) Act 2018, as amended.
For further information, please contact:
Enwell Energy plc Tel: 020 3427
3550
Chris Hopkinson, Chairman
Sergii Glazunov, Chief Executive Officer
Bruce Burrows, Finance Director
Strand Hanson Limited Tel: 020 7409
3494
Rory Murphy / Matthew Chandler
Zeus Capital Limited Tel: 020 7614
5900
Alexandra Campbell-Harris (Corporate
Finance)
Simon Johnson (Corporate Broking)
Citigate Dewe Rogerson Tel: 020 7638
9571
Ellen Wilton
Dr Gehrig Schultz, BSc Geophysical Engineering, PhD Geophysics, Member of the European Association of Geophysical Engineers, Member of the Executive Coordinating Committee of the Continental European Energy Council, and a Non-Executive Director of the Company, has reviewed and approved the technical information contained within this announcement in his capacity as a qualified person, as required under the AIM Rules for Companies.
Glossary
AAPG American Association of Petroleum Geologists
Arkona LLC Arkona Gas-Energy
bbl barrel
bbl/d barrels per day
Bm(3) thousands of millions of cubic metres
boe barrels of oil equivalent
boepd barrels of oil equivalent per day
Bscf thousands of millions of scf
Company Enwell Energy plc
D&M DeGolyer and MacNaughton
EUR Euro
Group Enwell Energy plc and its subsidiaries
km kilometre
km(2) square kilometre
LPG liquefied petroleum gas
MEX-GOL Mekhediviska-Golotvshinska
m(3) cubic metres
m(3)/d cubic metres per day
Mboe thousand barrels of oil equivalent
Mm(3) thousand cubic metres
MMbbl million barrels
MMboe million barrels of oil equivalent
MMm(3) million cubic metres
MMscf million scf
MMscf/d million scf per day
Mtonnes thousand tonnes
% per cent.
QCA Code Quoted Companies Alliance Corporate Governance
Code 2018
QHSE quality, health, safety and environment
SC Svystunivsko-Chervonolutskyi
scf standard cubic feet measured at 20 degrees
Celsius and one atmosphere
SPE Society of Petroleum Engineers
SPEE Society of Petroleum Evaluation Engineers
SV Svyrydivske
Tscf trillion scf
$ United States Dollar
UAH Ukrainian Hryvnia
VAS Vasyschevskoye
VED Vvdenska
WPC World Petroleum Council
Chairman's Statement
I present the 2022 Annual Report and Financial Statements in circumstances that I wish were different. The invasion of Ukraine by Russia in February 2022 and the ongoing conflict has created a very challenging and worrying outlook for both the current and future situation in Ukraine, and I am greatly saddened by the terrible events occurring there.
The invasion has had a significant impact on all aspects of life in Ukraine, including the Group's business and operations, with all field operations being suspended for safety reasons from 24 February to 15 March 2022, after which production operations and some limited field activities resumed at the MEX-GOL and SV fields. Subsequently, in July 2022, drilling operations on the SC-4 well resumed on the SC licence area to complete the well, and in October 2022, production operations resumed at the VAS field. The overall scale and duration of disruption to the Group's business is currently unknown, and there remains significant uncertainty about the outcome of the ongoing war in Ukraine.
Notwithstanding the disruption caused by the war, during 2022, the Group continued with some development activities at the MEX-GOL, SV and VAS gas and condensate fields and SC licence in north-eastern Ukraine. At the SV field, the SV-31 development well was completed and brought on production in May 2022. At the MEX-GOL field, the GOL-107 development well was completed in late October 2023, and after initial testing demonstrated gas flows from the well, albeit at lower than expected rates, the well has now been hooked up to the gas processing facilities for longer-term testing to establish its optimal operating parameters and to assess whether stimulation may improve production rates. Additionally, at the MEX-GOL field, planning has continued for the deepening of the MEX-109 well to explore a deeper horizon, a workover of the MEX-102 well to access a shallower horizon and investigating the possible sidetracking of the MEX-119 well to access additional reserves. At the SV-29 development well, additional horizons were perforated and tested but stabilised production was not established and, consequently, the possible hydraulic fracturing of the well is under consideration. Drilling of the SC-4 appraisal well on the SC licence area was completed and testing of this well demonstrated strong flow rates of gas and condensate, and planning for the installation of surface facilities and pipelines has been undertaken. At the VAS field, planning for the further development of the field continued.
Aggregate average daily production (calculated on the days when the fields were actually in production) from the MEX-GOL, SV and VAS fields during the year was 2,956 boepd, which is lower than the aggregate daily production rate of 4,730 boepd achieved during 2021 due to the disruption caused by the war and natural field decline.
Although production volumes were lower, the dramatic rise in gas prices during the year has meant that revenues were still strong at $133.4 million (2021: $121.4 million). The Group's net profit was also higher at $60.2 million (2021: $51.1 million), operating profit was $75.8 million (2021: $66.2 million), but cash generated from operations declined to $47.5 million (2021: $77.6 million), predominantly due to a build-up of receivables.
There is significant disruption to the fiscal and economic environment in Ukraine due to the ongoing conflict resulting in a contraction in the economy, an increase in the rate of inflation and a weakening of the Ukrainian Hryvnia against other currencies. Furthermore, it is likely that fiscal and economic uncertainties will continue in the future until an acceptable resolution of the war occurs.
The Ukrainian Government has implemented a number of reforms in the oil and gas sector in recent years, which include the deregulation of the gas supply market in late 2015, and subsequently, simplification of the regulatory procedures applicable to oil and gas exploration and production activities in Ukraine.
The deregulation of the gas supply market, supported by electronic gas trading platforms and improved pricing transparency, has meant that Ukrainian market prices for gas broadly correlated with imported gas prices. During 2022, gas prices increased significantly, reflecting a similar trend in European gas prices, substantially as a result of the disruption to worldwide oil and gas supplies caused by the conflict. Condensate and LPG prices were also higher by comparison to the previous year for the same reason.
Restructuring of Smart Holding Group
In January 2023, the Company was notified that there had been a restructuring of the ownership of the PJSC Smart-Holding Group, a member of which held a major shareholding in the Company, and which was ultimately controlled by Mr Vadym Novynskyi ("Mr Novynskyi"). Under this restructuring, which occurred with effect from 1 December 2022, Mr Novynskyi disposed of his major indirect shareholding interest in the Company to two trusts registered in Cyprus named the SMART Trust and the STEP Trust. Further information is contained in the Company's announcement dated 17 January 2023, and the TR-1 Forms published on 26 January 2023.
Regulatory Actions by Ukrainian Authorities and Suspension of VAS and SC Licences
In early December 2022, the Ukrainian Government imposed sanctions on Mr Novynskyi, as set out in the Company's announcement dated 9 December 2022.
As announced on 4 January 2023, new legislation, Law No. 2805-IX, relating to the natural resources sector was enacted in Ukraine, which came into force on 28 March 2023. This legislation is a substantial package of new procedures and reforms designed to improve the regulatory process relating to the exploration and development of natural resources in Ukraine. However, the legislation includes provisions that if the ultimate beneficial owner of a mineral or hydrocarbon licence becomes the subject of sanctions in Ukraine, then the State Geologic and Subsoil Survey of Ukraine (the "SGSS") may suspend or revoke that licence.
Following Law No. 2805-IX coming into force on 28 March 2023 , the Ukrainian authorities have taken a number of regulatory actions against certain of the Group's subsidiary companies in Ukraine.
As announced on 12 April 2023, such regulatory actions included conducting a search at the Group's Yakhnyky office, from where the MEX-GOL and SV fields are operated, and placing certain physical assets of the Ukrainian branch (representative) office of Regal Petroleum Corporation Limited ("RPC") and LLC Arkona Gas-Energy ("Arkona") (which respectively hold the MEX-GOL and SV fields and the SC exploration licence) under seizure, thereby restricting any actions that would change registration of the property rights relating to such assets, although the use of such assets was not restricted and therefore the Company has been able to continue to operate and produce gas and condensate from the MEX-GOL and SV fields. In addition, the Ministry of Justice of Ukraine (the "MoJ") made an Order cancelling the registration entry made on behalf of a subsidiary of the Company named LLC Regal Petroleum Corporation (Ukraine) Limited in the Unified State Register of Legal Entities, Individuals-entrepreneurs and Civil Institutions of Ukraine (the "State Register") relating to the ultimate beneficial owners of such company, which were stated as being the trustees of the SMART Trust and STEP Trust as previously notified to the Company, thereby restoring the previous entry in the State Register, Mr Novynskyi. Furthermore, the SGSS issued an Order to RPC requiring that additional information be provided and/or violations be eliminated in the disclosures relating to the ultimate beneficial owners of the MEX-GOL and SV licences respectively.
On 2 May 2023, the MoJ made further Orders cancelling the registration entry made on behalf of three further Ukrainian subsidiaries of the Company named LLC Prom-Enerho Produkt ("PEP"), Arkona and LLC Well Investum ("Well Investum") respectively in the State Register relating to the ultimate beneficial owners of such companies, which again were stated as being the trustees of the SMART Trust and STEP Trust, thereby restoring the previous entry, Mr Novynskyi. PEP holds the VAS production licence, Arkona holds the SC exploration licence and Well Investum is a dormant company.
Following the issuance of the abovementioned Orders by the MoJ, Mr Novynskyi is registered in the State Register as the ultimate beneficial owner of each of PEP and Arkona, and is consequently recognised by the SGSS as the ultimate beneficial owner of each of the VAS production licence and SC exploration licence. As a result, on 4 May 2023, the SGSS issued orders suspending the VAS production licence and SC exploration licence for a period of 5 years effective from that date. Accordingly, the Company ceased all field and production operations on the VAS and SC licence areas.
New Auditor and Temporary Suspension from trading on AIM
In December 2022, as a result of the sanctions imposed on Mr Novynskyi, the Company's previous auditor resigned, but I am now pleased to welcome Zenith Audit Ltd as the Company's new auditor, with such appointment being finalised in September 2023. As the Company did not have an auditor prior to the appointment of Zenth Audit Ltd, it was not able to publish and post its audited 2022 Annual Report and Financial Statements to shareholders by the requisite deadline of 30 June 2023 as required by Rule 19 of the AIM Rules for Companies. As a result, trading in the Company's ordinary shares on AIM was suspended with effect from 3 July 2023 pending the Company's compliance with such requirements. However, with the publication and posting to shareholders of this 2022 Annual Report and Financial Statements, and upon the forthcoming publication of the Company's unaudited interim results for the six month period ended 30 June 2023, which is anticipated to occur shortly, it is currently expected that the suspension from trading will be lifted.
Board Changes
In August 2022, Dmitry Sazonenko stepped down from the Board, and Dr Gehrig Schultz joined the Board as a Non-Executive Director. Gehrig is a very experienced geoscientist, and provides valuable technical input in the oversight of the Company's operations.
On behalf of the Board, I would like to thank Dmitry for his valued contribution during his tenure with the Company, and to welcome Gehrig to the Board.
Interim Dividend
On 15 June 2023, the Company paid an interim dividend of 15 pence per ordinary share, aggregating to approximately GBP48.1 million, which was the Company's maiden dividend payment to its shareholders.
Outlook
The ongoing war in Ukraine means that there is a devastating humanitarian situation in Ukraine, as well as extreme challenges to the fiscal, economic and business environment. This has been exacerbated in respect of the Group by the regulatory actions of the Ukrainian authorities, culminating in the suspension of the VAS and SC licences.
These circumstances mean that it is extremely difficult to plan future investment and operational activities at the Group's fields but, subject to resolution of the current regulatory issues with the Ukrainian authorities, and subject to it being safe to do so, the Group is planning to undertake further limited development activities during the remainder of 2023 and beyond in order to continue the development of its fields. However, in doing so, the Group is taking and will take all measures available to protect and safeguard its personnel and business, with the safety and wellbeing of its personnel and contractors being paramount. The Group retains a pproximately a quarter of its cash reserves outside Ukraine, and this provides a material buffer to any further disruptions to the Group's operations. This has enabled the Board to reach the opinion that the Group has sufficient resources to navigate the current risk environment for the foreseeable future.
In conclusion, on behalf of the Board, I would like to thank all of our staff for the continued dedication and support they showed during the 2022 year, especially their remarkable fortitude since the invasion of Ukraine in February 2022.
Chris Hopkinson
Chairman
Chief Executive's Statement
Introduction
The war in Ukraine has materially disrupted the Group's development activity at its Ukrainian fields during 2022, with operations suspended for safety reasons at all fields immediately after the Russian invasion in February 2022. However, production operations and some field activities resumed at the MEX-GOL and SV fields in mid-March 2022, and this enabled the completion of the SV-31 development well, which came on production in May 2022. At the SV-29 development well, further intervals were perforated, but it was not possible to establish a stabilised flow rate, and the potential hydraulic fracturing of this well is now under consideration. In addition, upgrades to the gas processing facilities were completed. The GOL-107 development well was completed in late October 2023 and, after initial testing of the well demonstrated gas flows, albeit at lower than expected rates, the well has now been hooked up to the gas processing facilities to undergo longer-term testing to establish its optimal operating parameters and assess whether stimulation of the well may improve flow rates.
On the SC licence area, drilling of the SC-4 appraisal well was suspended for a period, but drilling resumed in July 2022, and the well was completed and successfully tested in October 2022. In addition, the interpretation of the 150 km(2) of 3D seismic, which was acquired over the 2021-2022 winter period, was completed.
At the VAS field, all operations were suspended until October 2022, when production operations resumed. In addition, planning for the further development of the field, as well as for a proposed new well to explore the VED prospect within the VAS licence area continued.
Overall production in 2022 was lower than the 2021 year due to the disruption to production operations caused by the war in Ukraine and natural field decline.
Quality, Health, Safety and Environment ("QHSE")
The Group is committed to maintaining the highest QHSE standards and the effective management of these areas is an intrinsic element of its overall business ethos. The Group's QHSE policies and performance are overseen by the Health, Safety and Environment Committee. Through strict enforcement of the Group's QHSE policies, together with regular management meetings, training and the appointment of dedicated safety professionals, the Group strives to ensure that the impact of its business activities on its staff, contractors and the environment is as low as is reasonably practicable. The Group reports safety and environmental performance in accordance with industry practice and guidelines.
I am pleased to report that during 2022, a total of 704,773 man-hours of staff and contractor time were recorded without a Lost Time Incident occurring. The total number of safe man-hours now stands at over 4,997,406 man-hours without a Lost Time Incident. No environmental incidents were recorded during the year.
Production
The average daily production of gas, condensate and LPG for the 351 days that the MEX-GOL and SV fields were producing and for the 147 days that the VAS field was producing, in each case, during the year ended 31 December 2022 is shown below:
Field Gas Condensate LPG Aggregate
(MMscf/d) (bbl/d) (bbl/d) boepd
2022 2021 2022 2021 2022 2021 2022 2021
------ ----- ------ ----- ----- ----- ------ ------
MEX-GOL
& SV 11.0 18.9 445 681 318 308 2,604 4,237
------ ----- ------ ----- ----- ----- ------ ------
VAS 1.8 2.6 18 26 - - 352 493
------ ----- ------ ----- ----- ----- ------ ------
Total 12.8 21.5 463 707 318 308 2,956 4,730
------ ----- ------ ----- ----- ----- ------ ------
The Russian invasion of Ukraine in February 2022 meant that for safety reasons, the Group suspended all field operations for the period from 24 February to 15 March 2022, after which production operations and some field activities resumed at the MEX-GOL and SV fields, while all operations remained suspended at the VAS field and SC licence area. Subsequently, in July 2022, drilling resumed at the SC-4 well on the SC licence area and this well was completed and successfully tested in October 2022. Production operations remained suspended at the VAS field since it is located near Kharkiv in north-eastern Ukraine, which has experienced significant military activity, but in October 2022, production operations finally resumed at this field. As a result of the disruptions to operations caused by the war, the Group's average daily production for the 2022 year has been materially adversely affected.
In addition, as announced on 4 May 2023, as a result of regulatory actions by the Ukrainian authorities, the VAS production licence and the SC exploration licence have been suspended for a period of five years.
Nevertheless, production is currently continuing at the MEX-GOL and SV fields at a rate of approximately 2,200 boepd.
Operations
In the period leading up to the Russian invasion of Ukraine in February 2022, there was relative fiscal and economic stability in Ukraine, as well as reductions in the subsoil tax rates and improvements in the regulatory procedures in the oil and gas sector in Ukraine. However, the war has caused significant disruption to the fiscal and economic conditions in Ukraine since then. During 2022, the material increase in gas prices in Europe did, however, feed through to the Group's realised prices in Ukraine, and provided a significant boost to the Group's revenues and profitability during the period.
During 2022, the Group continued to refine its geological subsurface models of the MEX-GOL, SV and VAS fields, as well as the SC licence area, in order to enhance its strategy for the further development of such fields and licence area, including the timing and level of future capital investment required to exploit the hydrocarbon resources.
At the MEX-GOL and SV fields, the SV-31 development well was completed in May 2022, having been drilled to a final depth of 5,240 metres. At that time, one interval, at a drilled depth of 5,210 - 5,219 metres, within the V-22 Visean formation was perforated, and, following initial testing, the well was hooked up to the gas processing facilities. The well has produced strongly since then, and pursuant to the plans for this well, two additional intervals, at drilled depths of 5,187 - 5,189 and 5,120 - 5,123 metres, respectively within the V-22 and V-21 Visean formations, have also been perforated to access additional reserves. These additional intervals have also proved productive and materially boosted production rates from this well.
At the SV-29 development well, additional intervals, at drilled depths of 4,955 - 4,960 and 5,037 - 5,046 metres, within the V-19 and V-20 Visean formation respectively were perforated, but such intervals were not productive. This well was completed in August 2021, having been drilled to a final depth of 5,450 metres. Previously, two intervals, at drilled depths of 5,246 - 5,249 metres and 5,228 - 5,232 metres respectively, within the V-22 Visean formation, were perforated, and although some gas flows were achieved, a stabilised flow from these intervals was not established. In light of the intermittent gas flows in these intervals, the possible hydraulic fracturing of the well is now under consideration.
Drilling of the GOL-107 development well, targeting production from the V-20 and V-23 Visean formations, commenced in December 2022 and was completed in late October 2023, with the well having been drilled to a final depth of 5,190 metres. One interval, at a drilled depth of 5,140 - 5,143 metres, within the V-23 formation, was perforated and demonstrated gas flows, but at lower than anticipated rates. The well has now been hooked up to the gas processing facilities to undergo longer-term testing to establish its optimal operating parameters and assess whether stimulation of the well may improve flow rates. The well is currently producing at a flow rate of approximately 353 MMscf/d of gas and 11 bbl/d of condensate (73 boepd in aggregate).
The Group continued to operate each of the SV-2 and SV-12 wells under joint venture agreements with NJSC Ukrnafta, the majority State-owned oil and gas producer. Under the agreements, the gas and condensate produced from the respective wells is sold under an equal net profit sharing arrangement between the Group and NJSC Ukrnafta, with the Group accounting for the hydrocarbons produced and sold from the wells as revenue, and the net profit share due to NJSC Ukrnafta being treated as a lease expense in cost of sales. However, during Q4 2021, the SV-2 well experienced water ingress and consequently had to be taken off production. A workover of this well was undertaken to replace the production string and remove obstructions in the well, but this work was unsuccessful and further remedial work is now being considered.
In addition, in Q4 2021, the MEX-109 well also experienced water ingress and as a result was taken off production. A workover of the well was commenced, and steps were taken to seal the source of the water ingress, but the work was suspended as a result of the Russian invasion. However, the workover operations have now been completed, and the previously producing horizon has now been sealed to prevent water ingress into that horizon, so as to avoid possible disruption to another well which is producing from the same horizon. As a result, further production from such horizon in this well will not be possible, and the possible deepening of this well to explore deeper horizons is now being considered.
Finally, at the MEX-GOL and SV fields, the upgrades to the gas processing facilities have been completed. These works involved an upgrade of the LPG extraction circuit, an increase to the flow capacity of the facilities, and a significant increase to the liquids tank storage capacity, which are designed to improve overall plant efficiencies, improve the quality of liquids produced and boost recoveries of LPG, while reducing environmental emissions.
On the SC licence area, after a period of suspension, drilling operations resumed at the SC-4 well in July 2022 and the well was drilled to its final depth of 5,585 metres. The well is primarily an appraisal well, targeting production from the V-22 horizon, as well as exploring the V-16 and V-21 horizons, in the Visean formation. The well was successfully tested, demonstrating stabilised flow rates of 3 MMscf/d of gas and 3 bbl/d of condensate (535 boepd in aggregate), and planning for the installation of gas processing and other surface facilities has been undertaken. In addition , the interpretation of the 1 50 km(2) of 3D seismic, that was acquired over the 2021 - 22 winter, was completed.
At the VAS field, production operations resumed in October 2022, and planning for the further development of the field, as well as for a proposed new well to explore the VED prospect within the VAS licence area, has continued.
Outlook
The ongoing war in Ukraine has caused significant disruption to the country as a whole and to the Group's business activities, and until there is a satisfactory resolution to the conflict, the disruption and uncertainty are likely to continue. However, subject to resolution of the current regulatory issues with the Ukrainian authorities and it being safe to do so, during the remainder of 2023 and 2024, the Group plans to continue the development of its fields to the extent it is possible to do so.
At the MEX-GOL and SV fields, the development programme includes planning the deepening of the MEX-109 well to explore a deeper horizon in the Visean formation, investigating the hydraulic fracturing of the SV-29 well, planning a workover of the MEX-102 well to access a shallower horizon, investigating the possible sidetracking of the MEX-119 well to access additional reserves, installing additional compression equipment and upgrading and maintaining the flow-line network and pipelines and other field infrastructure, as well as planning for the further development of the fields.
Further work on the VAS and SC licence areas will remain suspended until there is a resolution of the regulatory issues, including the lifting of the suspension orders made in respect of those licences.
Finally, I would like to add my thanks to all of our staff for the continued hard work and dedication they have shown over the course of 2022, and to especially recognise their continuing efforts and professionalism in the face of the extremely challenging current situation in Ukraine.
Sergii Glazunov
Chief Executive Officer
Overview of Assets
We operate four fields in the Dnieper-Donets basin in north-eastern Ukraine. Our fields have high potential for growth and longevity for future production - a strong foundation for success.
MEX-GOL and SV fields
The MEX-GOL and SV fields are held under two adjacent production licences, but are operated as one integrated asset, and have significant gas and condensate reserves and potential resources of unconventional gas.
Production Licences
We hold a 100% working interest in, and are the operator of, the MEX-GOL and SV fields. The production licences for the fields were granted to the Group in July 2004 with an initial duration of 20 years, and the duration of these licences have recently been extended to 2044 in order to fully develop the remaining reserves. The economic life of these fields extend to 2038 and 2042 respectively pursuant to the most recent reserves and resources assessment by DeGolyer and MacNaughton ("D&M") as at 31 December 2017.
The two licences, located in Ukraine's Poltava region, are adjacent and extend over a combined area of 253 km(2), approximately 200 km east of Kyiv.
Geology
Geologically, the fields are located towards the middle of the Dnieper-Donets sedimentary basin which extends across the major part of north-eastern Ukraine. The vast majority of Ukrainian gas and condensate production comes from this basin. The reservoirs comprise a series of gently dipping Carboniferous sandstones of Visean age inter-bedded with shales at around 4,700 metres below the surface, with a gross thickness of between 800 and 1,000 metres.
Analysis suggests that the origin of these deposits ranges from fluvial to deltaic, and much of the trapping at these fields is stratigraphic. Below these reservoirs is a thick sequence of shale above deeper, similar, sandstones at a depth of around 5,800 metres. These sands are of Tournasian age and offer additional gas potential. Deeper sandstones of Devonian age have also been penetrated in the fields.
Reserves
The development of the fields began in 1995 by the Ukrainian State company Chernihivnaftogasgeologiya ("CNGG"), and shortly after this time, the Group entered a joint venture with CNGG in respect of the exploration and development of these fields.
The fields have been mapped with 3D seismic, and a geological subsurface model has been developed and refined using data derived from high-level reprocessing of such 3D seismic and new wells drilled on the fields.
The assessment undertaken by D&M as at 31 December 2017 estimated proved plus probable (2P) reserves attributable to the fields of 50.0 MMboe, with 3C contingent resources of 25.3 MMboe.
VAS field
The VAS field is a smaller field with interesting potential. The field has assessed proved plus probable reserves in excess of 3 MMboe and substantial contingent and prospective resources, as well as potential resources of unconventional gas.
Production Licence
We hold a 100% working interest in, and are the operator of, the VAS field. The production licence for the field was granted in August 2012 with a duration of 20 years. The economic life of the field extends to 2032 pursuant to the most recent reserves and resources assessment by D&M as at 31 December 2018.
The licence extends over an area of 33.2 km(2) and is located 17 km south-east of Kharkiv, in the Kharkiv region of Ukraine. The field was discovered in 1981, and the first well on the licence area was drilled in 2004.
Geology
Geologically, the field is located towards the middle of the Dnieper-Donets sedimentary basin in north-east Ukraine. The field is trapped in an anticlinal structure broken into several faulted blocks, which are gently dipping to the north, stretching from the north-east to south-west along a main bounding fault. The gas is located in Carboniferous sandstones of Bashkirian, Serpukhovian and Visean age.
The productive reservoirs are at depths between 3,370 and 3,700 metres.
Reserves
The field has been mapped with 3D seismic, and a geological subsurface model has been developed and refined using data derived from such 3D seismic and new wells drilled on the field.
The assessment undertaken by D&M as at 31 December 2018 estimated proved plus probable (2P) reserves of 3.1 MMboe, with 3C contingent resources of 0.6 MMboe, and prospective resources of 7.7 MMboe in the VED area of the field. The next well planned on the field is designed to explore the VED area of the field.
SC Licence
The SC licence area is located near to and has similar characteristics to the SV field, and is prospective for gas and condensate.
Exploration Licence
We hold a 100% working interest in, and are the operator of, the SC licence. The licence was granted in May 2017 with a duration of 20 years.
The licence extends over an area of 97 km(2) , and is located in the Poltava region in north-eastern Ukraine, approximately 15 km east of the SV field.
Geology
Geologically, the field is located towards the middle of the Dnieper-Donets sedimentary basin which extends across the major part of north-eastern Ukraine. The vast majority of Ukrainian gas and condensate production comes from this basin. The reservoirs comprise a series of gently dipping Carboniferous sandstones of Visean age inter-bedded with shales at depth between 4,600 and 6,000 metres.
Resources
The licence is prospective for gas and condensate, and has been the subject of exploration since the 1980s, with five wells having been drilled on the licence since then, although none of these wells are currently on production.
The assessment undertaken by D&M as at 1 January 2021 estimated proved plus probable (2P) reserves of 12.1 MMboe, with 3C contingent resources of 15.0 MMboe.
Overview of Reserves
MEX-GOL and SV fields
1.
The Group's estimates of the remaining Reserves and Resources at the MEX-GOL and SV fields are derived from an assessment undertaken by D&M, as at 31 December 2017 (the "MEX-GOL-SV Report"), which was announced on 31 July 2018. During the period from 1 January 2018 to 31 December 2022, the Group has produced 6.14 MMboe from these fields.
The MEX-GOL-SV Report estimated the remaining Reserves as at 31 December 2017 in the MEX-GOL and SV fields as follows:
Proved Proved + Probable Proved + Probable
(1P) (2P) + Possible (3P)
121.9 Bscf / 3.5 218.3 Bscf / 6.2 256.5 Bscf / 7.3
Gas Bm(3) Bm(3) Bm(3)
----------------- ------------------ ------------------
4.3 MMbbl / 514 7.9 MMbbl / 943 9.2 MMbbl / 1,098
Condensate Mtonne Mtonne Mtonne
----------------- ------------------ ------------------
2.8 MMbbl / 233 5.0 MMbbl / 418 5.8 MMbbl / 491
LPG Mtonne Mtonne Mtonne
----------------- ------------------ ------------------
27.8 MMboe 50.0 MMboe 58.6 MMboe
Total
----------------- ------------------ ------------------
The MEX-GOL-SV Report estimated the Contingent Resources as at 31 December 2017 in the MEX-GOL and SV fields as follows:
Contingent Resources Contingent Resources Contingent Resources
(1C) (2C) (3C)
14.7 Bscf / 0.42 38.3 Bscf / 1.08 105.9 Bscf / 3.00
Gas Bm(3) Bm(3) Bm(3)
--------------------- --------------------- ---------------------
1.17 MMbbl / 144 2.8 MMbbl / 343 6.6 MMbbl / 812
Condensate Mtonne Mtonne Mtonne
--------------------- --------------------- ---------------------
3.8 MMboe 9.6 MMboe 25.3 MMboe
Total
--------------------- --------------------- ---------------------
VAS field
2.
The Group's estimates of the remaining Reserves and Resources at the VAS field and the Prospective Resources at the VED prospect are derived from an assessment undertaken by D&M as at 31 December 2018 (the "VAS Report"), which was announced on 21 August 2019. During the period from 1 January 2019 to 31 December 2022, 0.76 MMboe were produced from the field.
The VAS Report estimated the remaining Reserves as at 31 December 2018 in the VAS field as follows:
Proved Proved + Probable Proved + Probable
(1P) (2P) + Possible (3P)
9,114 MMscf / 258 15,098 MMscf / 18,816 MMscf /
Gas MMm(3) 427 MMm(3) 533 MMm(3)
--------------------- --------------------- ------------------
205 Mbbl / 25 Mtonne 346 Mbbl / 42 Mtonne 401 Mbbl / 48
Condensate Mtonne
--------------------- --------------------- ------------------
1.895 MMboe 3.145 MMboe 3.890 MMboe
Total
--------------------- --------------------- ------------------
The VAS Report estimated the Contingent Resources as at 31 December 2018 in the VAS field as follows:
Contingent Resources Contingent Resources Contingent Resources
(1C) (2C) (3C)
- - 2,912 MMscf /
Gas 83 MMm(3)
--------------------- --------------------- ---------------------
- - 74 Mbbl / 9 Mtonne
Condensate
--------------------- --------------------- ---------------------
The VAS Report estimated the Prospective Resources as at 31 December 2018 in the VED prospect as follows:
Low (1U) Best (2U) High (3U) Mean
23,721 MMscf 38,079 MMscf 62,293 MMscf 41,291 MMscf
Gas / 672 MMm(3) / 1,078 MMm(3) / 1,764 MMm(3) / 1,169 MMm(3)
-------------- ---------------- ---------------- ----------------
SC Licence
3.
The Group's estimates of the remaining Reserves and Contingent R esources at the SC Licence are derived from an assessment undertaken by D&M as at 1 January 2021 (the "SC Report"), which was announced on 2 June 2021.
The SC Report estimated the remaining Reserves as at 1 January 2021 in the SC licence area as follows:
Proved Proved + Probable Proved + Probable
(1P) (2P) + Possible (3P)
17.20 Bscf / 0.49 65.16 Bscf / 1.85 85.03 Bscf / 2.41
Gas Bm(3) Bm(3) Bm(3)
--------------------- --------------------- ---------------------
145 Mbbl / 16 Mtonne 548 Mbbl / 61 Mtonne 716 Mbbl / 80 Mtonne
Condensate
--------------------- --------------------- ---------------------
3.2 MMboe 12.1 MMboe 15.7 MMboe
Total
--------------------- --------------------- ---------------------
The SC Report estimated the Contingent Resources as at 1 January 2021 in the SC licence area as follows:
Contingent Resources Contingent Resources Contingent Resources
(1C) (2C) (3C)
8.56 Bscf / 0.24 14.18 Bscf / 0.40 81.16 Bscf / 2.30
Gas Bm(3) Bm(3) Bm(3)
--------------------- --------------------- ---------------------
72 Mbbl / 8 Mtonne 119 Mbbl / 13 Mtonne 682 Mbbl / 75 Mtonne
Condensate
--------------------- --------------------- ---------------------
1.6 MMboe 2.6 MMboe 15.0 MMboe
Total
--------------------- --------------------- ---------------------
Finance Review
Despite the significant disruption caused by the Russian invasion of Ukraine early in the year, and almost entirely as a result of the significant increase in global gas prices, the Group's financial performance in the 2022 year showed an improvement on 2021, with a net profit for the period of $60.2 million being an approximate 18% increase on the 2021 year (2021: $51.1 million).
Revenue for the year, derived from the sale of the Group's Ukrainian gas, condensate and LPG production, was up at $133.4 million (2021: $121.4 million). Most notably, within this total, the revenue from gas sales alone was up approximately 14% at $109.5 million (2021: $95.8 million).
Aggregate production for the year (calculated on the days when the Group's fields were actually in production) was down approximately 37.5% at 2,956 boepd (2021: 4,730 boepd) due to the disruption to operations as a result of the Russian invasion of Ukraine.
During 2022, global, and particularly European, commodity prices increased, and these increases also occurred in Ukraine, and underpinned the 122% rise in average gas price realisations in the period at $960/Mm(3) (UAH30,341/Mm(3) ), with condensate and LPG average sales prices also up by 6% and 79% at $73/bbl and $143/bbl respectively (2021: $432/Mm(3) (UAH11,677/Mm(3) ), $69/bbl and $80/bbl respectively).
During the period from 1 January 2023 to 14 December 2023, the average realised gas, condensate and LPG prices were $395/Mm(3) (UAH14,426/Mm(3) ), $71/bbl and $100/bbl respectively.
Gross profit for the year was higher at $85.9 million (2021: $73.9 million).
Cost of sales for the year was unchanged at $47.5 million (2021: $47.4 million). The decline in production drove a decline in depreciation, but such decline was offset by increased commodity prices which drove up the revenue-related costs of taxes and well rental.
Cash generated from operations fell 39% to $47.5 million (2021: $77.7 million), most significantly as a consequence of the increase in trade and other receivables to $65.8 million (2021: $13.1 million).
The subsoil tax rates applicable to gas production were stable during the first two months of 2022 at 29% for gas produced from deposits at depths shallower than 5,000 metres and 14% for gas produced from deposits deeper than 5,000 metres, except in respect of gas produced from new wells drilled after 1 January 2018, where the subsoil tax rates were reduced from 29% to 12% for gas produced from deposits at depths shallower than 5,000 metres and from 14% to 6% for gas produced from deposits deeper than 5,000 metres for the period between 2018 and 2022. The subsoil tax rates for condensate were 31% for condensate produced from deposits shallower than 5,000 metres and 16% for condensate produced from deposits deeper than 5,000 metres.
However, with effect from 1 March 2022, changes to the subsoil production tax rates applicable to gas production were introduced. These changes modified the applicable tax rates based on gas prices, extended the incentive rates for new wells for a further 10 years and made improvements to the regulatory environment. The legislation which introduced these changes also included provisions that these rates will not be increased for 10 years.
The new subsoil production tax rates applicable to gas production are as follows:
(i) when gas prices are up to $150/Mm3, the rate for wells
drilled prior to 1 January 2018 ("old wells") is 14.5%
for gas produced from deposits at depths shallower than
5,000 metres and 7% for gas produced from deposits deeper
than 5,000 metres, and for wells drilled after 1 January
2018 ("new wells") is 6% for gas produced from deposits
at depths shallower than 5,000 metres and 3% for gas
produced from deposits deeper than 5,000 metres;
(ii) when gas prices are between $150/Mm(3) and $400/Mm(3)
, the rate for old wells is 29% for gas produced from
deposits at depths shallower than 5,000 metres and 14%
for gas produced from deposits deeper than 5,000 metres,
and for new wells is 12% for gas produced from deposits
at depths shallower than 5,000 metres and 6% for gas
produced from deposits deeper than 5,000 metres;
(iii) when gas prices are more than $400/Mm(3) , for the first
$400/Mm(3) , the rate for old wells is 29% for gas produced
from deposits at depths shallower than 5,000 metres and
14% for gas produced from deposits deeper than 5,000
metres, and for new wells is 12% for gas produced from
deposits at depths shallower than 5,000 metres and 6%
for gas produced from deposits deeper than 5,000 metres,
and for the difference between $400/Mm(3) and the actual
price, the rate for old wells is 65% for gas produced
from deposits at depths shallower than 5,000 metres and
31% for gas produced from deposits deeper than 5,000
metres, and for new wells is 36% for gas produced from
deposits at depths shallower than 5,000 metres and 18%
for gas produced from deposits deeper than 5,000 metres.
The tax rates applicable to condensate production were unchanged and so remain at 31% for condensate produced from deposits shallower than 5,000 metres and 16% for condensate produced from deposits deeper than 5,000 metres, for both old and new wells.
As a direct result of the war in Ukraine, including the significant decline in domestic consumption disrupting the previous supply, demand and pricing dynamics, there has been a divergence between domestic and European gas pricing, and accordingly, the methodology (linked to European prices) used to determine the reference gas price for the subsoil tax rates has had a significantly detrimental effect for domestic gas producers. In order to address this issue, the Ukrainian Parliament, in September 2022, passed legislation which modified such methodology to ensure that it operates as originally intended (with such reference price being aligned with domestic prices). This methodology had an implementation date of 1 August 2022.
In addition, the excise tax on LPG sales was suspended between 24 February 2022 and 30 September 2022, but was then reinstated, and the VAT rate applicable to condensate and LPG sales was reduced to 7% (from 20%) with effect from 18 March 2022.
Finally, in early 2022, the Ukrainian Government imposed temporary and partial gas price regulation to support the production of certain food products through the supply of gas at regulated prices to the producers of such products. Under this scheme, all independent gas producers in Ukraine were required to sell up to 20% of their natural gas production for the period until 30 April 2022 at a price set as the cost of sales of the relevant gas producer (based on established accounting rules) for such gas, plus a margin of 24%, plus existing subsoil production taxes (the "Regulated Price"). This gas was then sold to specified producers of designated socially important food products at the Regulated Price, so as to reduce the energy costs of such producers during the period through to 30 April 2022. The designated products were certain types of flour, milk (with up to 2.5% fat), bread, eggs, chicken and sunflower oil, for sale in the Ukrainian domestic market. This temporary scheme has now concluded. Further details are set out in the Company's announcement dated 17 January 2022.
Administrative expenses for the year were 19% lower at $6.8 million (2021: $8.4 million), primarily as a result of: a 18% decrease in payroll and related taxes, and no performance related payments being made in 2022.
Other expenses in the year increased as a result of the charitable donation of $6.5 million (2021: $0.1 million) for financial support to the Ukrainian humanitarian relief effort .
The tax charge for the year was steady at $1 3 . 1 million (2021: $15.5 million charge), and comprised a current tax charge of $ 14.3 million (2021: $13.3 million charge) and a deferred tax credit of $1.2 million (2021: charge $ 2 . 2 million charge).
A deferred tax asset relating to the Group's provision for decommissioning as at 31 December 2022 of $0.5 million (2021: $0.5 million) was recognised on the tax effect of the temporary differences of the Group's provision for decommissioning at the MEX-GOL and SV fields, and its tax base. A deferred tax liability relating to the Group's development and production assets at the MEX-GOL and SV fields as at 31 December 2022 of $3.7 million (2021: $5.7 million) was recognised on the tax effect of the temporary differences between the carrying value of the Group's development and production asset at the MEX-GOL and SV fields, and its tax base.
A deferred tax asset relating to the Group's provision for decommissioning as at 31 December 2022 of $0.3 million (2021: $0.3 million) was recognised on the tax effect of the temporary differences on the Group's provision on decommissioning at the VAS field, and its tax base. A deferred tax liability relating to the Group's development and production assets at the VAS field as at 31 December 2022 of $ 0 .0 2 million (2021: deferred tax asset of $0.5 million) was recognised on the tax effect of the temporary differences between the carrying value of the Group's development and production asset at the VAS field, and its tax base.
Capital investment of $12.9 million reflects the investment in the Group's oil and gas development and production assets during the year (2021: $24.3 million), primarily relating to the drilling of the SV-31 and GOL-107 wells. This significant $11.4 million reduction in capital investment is a function of the deferral of certain aspect of the Group's development plans necessitated by the ongoing war in Ukraine.
A review of any indicators of impairment of the carrying value of the Group's assets was undertaken at the year end and this review did conclude that the Russian invasion of Ukraine and the suspension of the VAS production licence had resulted in such an indicator. Impairment reviews were therefore conducted on the carrying value of the Group's assets and resulted in a recognition of an impairment loss of $4.3 million (2021: nil).
With the material increase in commodity prices during the year, and necessary payment term accommodations that needed to be agreed with the Group's largest indirect off-taker pursuant to a contract facilitated by the Group's related party, LLC Smart Energy, trade receivables were up materially at $44.0 million (2021: $5.0 million). The year-end trade receivables were all paid post period end.
Cash, cash equivalents and short-term investments held as at 31 December 2022 were slightly lower at $88.7 million (2021: $92.5 million), the decrease being predominantly a result of the $52.8 million increase in trade and other receivables. Cash, cash equivalents, short-term investments and trade and other receivables combined totalled $154.5 million (2021: $105.6 million), a 46% increase. The Group's cash and cash equivalents balance as at 14 December 2023 was $79.1 million, held as to $58.5 million equivalent in Ukrainian Hryvnia and the balance of $20.6 million equivalent predominantly in US Dollars, Euros and Pounds Sterling.
During 2022, the Ukrainian Hryvnia was relatively stable against the US Dollar, weakening from UAH27.3/$1.00 on 31 December 2021 to UAH36.6/$1.00 on 31 December 2022. The impact of this was $38.1 million of foreign exchange loss (2021: $1.6 million of foreign exchange gain). Increases and decreases in the value of the Ukrainian Hryvnia against the US Dollar affect the carrying value of the Group's assets. However, in July 2022, the National Bank of Ukraine devalued the Ukrainian Hryvnia by 25% against the US Dollar in order to protect its foreign exchange reserves as the ongoing war continues to materially affect the Ukrainian economy. The official exchange rate of the Ukrainian Hryvnia to the US Dollar on 14 December 2023 is UAH37.0/$1.00. This devaluation is not expected to have a material net impact on the Group, as its production and sales are dictated by (but not directly linked to) international commodity prices, which are expected to materially offset general cost increases that will result from such devaluation.
Cash from operations has funded the capital investment during the year, and the Group's current cash position and positive operating cash flow are the sources from which the Group plans to fund the development programmes for its assets over the remainder of 2022 and beyond. This is coupled with the fact that the Group is currently debt-free, and therefore has no debt covenants that may otherwise impede its ability to implement contingency plans if domestic and/or global circumstances dictate. This flexibility and ability to monitor and manage development plans and liquidity is a cornerstone of our planning, and underpins our assessments of the future. With monetary resources at the end of the year of $88.7 million ($81.5 million of which was held outside Ukraine), and annual running costs of less than $ 8 million, the Group remains in a very strong position, notwithstanding the impact of the current conflict in Ukraine, as well as any local or global shocks that may occur to the industry and/or the Group.
On 15 June 2023, the Company paid an interim dividend of 15 pence per ordinary share, approximately GBP48.1 million in aggregate, which was the Company's maiden dividend payment to its shareholders.
Bruce Burrows
Finance Director
Principal Risks and How We Manage Them
The Group has a risk evaluation methodology in place to assist in the review of the risks across all material aspects of its business. This methodology highlights external, operational and technical, financial and corporate risks and assesses the level of risk and potential consequences. It is periodically presented to the Audit Committee and the Board for review, to bring to their attention potential risks and, where possible, propose mitigating actions. Key risks recognised and mitigation factors are detailed below:-
Risk Mitigation
External risks
-----------------------------------------------
War in Ukraine
-----------------------------------------------
On 24 February 2022, Russia invaded The Group has assets in the areas
Ukraine and there is currently of conflict in the east of Ukraine,
a serious and ongoing war within and the war has disrupted its operations
Ukraine. This war is having a huge in those areas. The Group has been
impact on Ukraine and its population, only undertaking limited field and
with significant destruction of production operations at the MEX-GOL,
infrastructure and buildings in SV and VAS fields and SC licence
the areas of conflict, as well area. At the fields, inventories
as damage in other areas of Ukraine. of hydrocarbons are being maintained
The war is resulting in significant at minimum levels. At the sites
casualties and has caused a huge where operations are suspended,
humanitarian catastrophe and refugee there are no staff permanently on
influx into neighbouring countries. site, except for necessary security
The war is also impacting the fiscal staff. Where possible, all other
and economic environment in Ukraine, staff work remotely and have been
as well as the financial stability supplied with all necessary devices
and banking system in Ukraine, and software to facilitate remote
including restrictions on the transfer working. Additionally, the Group
of funds outside Ukraine. The war aims to maintain a significant proportion
is an escalation of the previous of its cash resources outside Ukraine.
regional conflict risk faced by The Group continues to monitor the
the business, a dispute that has situation and endeavours to protect
been going on since 2014 in parts its assets and safeguard its staff
of eastern Ukraine, and since that and contractors.
time Russia has continued to occupy
Crimea. The current war is also
having a significant adverse effect
on the Ukrainian financial markets,
hampering the ability of Ukrainian
companies and banks to obtain funding
from the international capital
and debt markets. The war has disrupted
the Group's business and operations,
causing the suspension of field
operations, albeit recommenced
in March 2022 at the MEX-GOL and
SV fields, in July 2022 at the
SC licence area and in October
2022 at the VAS field, and has
also impacted the supply of materials
and equipment and the availability
of contractors to undertake field
operations. At present, the war
is ongoing and the scope and duration
of the war is uncertain.
-----------------------------------------------
Risk relating to Ukraine
-----------------------------------------------
Ukraine is an emerging market and The Group minimises this risk by
as such the Group is exposed to continuously monitoring the market
greater regulatory, economic and in Ukraine and by maintaining as
political risks than it would be strong a working relationship as
in other jurisdictions. Emerging possible with the Ukrainian regulatory
economies are generally subject authorities. The Group also maintains
to a volatile political and economic a significant proportion of its
environment, which makes them vulnerable cash holdings in international banks
to market downturns elsewhere in outside Ukraine.
the world and could adversely impact
the Group's ability to operate
in the market. Furthermore, the
war in Ukraine is impacting the
fiscal and economic environment,
the financial and banking system,
and the economic stability of Ukraine.
As a result, Ukraine will require
financial assistance and/or aid
from international financial agencies
to provide economic support and
assist with the reconstruction
of infrastructure and buildings
damaged in the war.
-----------------------------------------------
Banking system in Ukraine
-----------------------------------------------
The banking system in Ukraine has The creditworthiness and potential
been under great strain in recent risks relating to the banks in Ukraine
years due to the weak level of are regularly reviewed by the Group,
capital, low asset quality caused but the geopolitical and economic
by the economic situation, currency events in Ukraine over recent years
depreciation, changing regulations have significantly weakened the
and other economic pressures generally, Ukrainian banking sector. This has
and so the risks associated with been exacerbated by the current
the banks in Ukraine have been war in Ukraine. In light of this,
significant, including in relation the Group has taken and continues
to the banks with which the Group to take steps to diversify its banking
has operated bank accounts. This arrangements between a number of
situation was improving moderately banks in Ukraine. These measures
following remedial action by the are designed to spread the risks
National Bank of Ukraine, but the associated with each bank's creditworthiness,
current war has significantly affected and the Group endeavours to use
such improvements, and the National banks that have the best available
Bank of Ukraine has imposed a number creditworthiness. Nevertheless,
of restrictive measures designed and despite the recent improvements,
to protect the banking system, the Ukrainian banking sector remains
including restrictions o n the weakly capitalised and so the risks
transfer of funds outside Ukraine associated with the banks in Ukraine
(albeit that the Group aims to remain significant, including in
maintain a significant proportion relation to the banks with which
of its cash resources outside Ukraine. the Group operates bank accounts.
In addition, Ukraine continues As a consequence, the Group also
to be supported by funding from maintains a significant proportion
the International Monetary Fund, of its cash holdings in international
and has requested further funding banks outside Ukraine.
support from the International
Monetary Fund.
-----------------------------------------------
Geopolitical environment in Ukraine
-----------------------------------------------
Although there were some improvements The Group continually monitors the
in recent years, there has not market and business environment
been a final resolution of the in Ukraine and endeavours to recognise
political, fiscal and economic approaching risks and factors that
situation in Ukraine, and the current may affect its business. However,
war has had a severe detrimental the war in Ukraine creates material
effect on the economic situation challenges in planning future investment
in Ukraine. The ongoing effects and operations. The Group is limiting
of this are difficult to predict its operational activities to minimise
and likely to continue to affect risk to its staff and contractors,
the Ukrainian economy and potentially and to limit its financial exposure.
the Group's business. This situation
is currently affecting the Group's
production and field operations,
and the ongoing instability is
disrupting the Group's development
and operational planning for its
assets.
-----------------------------------------------
Climate change
-----------------------------------------------
Any near and medium-term continued The Group's plans include: assessing,
warming of the planet can have reducing and/or mitigating its emissions
potentially increasing negative in its operations ; and identifying
social, economic and environmental climate change-related risks and
consequences, generally, globally assessing the degree to which they
and regionally, and specifically can affect its business, including
in relation to the Group. The potential financial implications. The HSE
impacts include: loss of market; Committee is specifically tasked
and increased costs of operations with overseeing, measuring, benchmarking
through increasing regulatory oversight and mitigating the Group's environmental
and controls, including potential and climate impact, which will be
effective or actual loss of licences reported on in future periods. At
to operate. As a diligent operator this stage, the Group does not consider
aware of and responsive to its climate change to have any material
good stewardship responsibilities, implications on the Group's financial
the Group not only needs to monitor statements, including accounting
and modify its business plans and estimates.
operations to react to changes,
but also to ensure its environmental
footprint is as minimal as it can
practicably be in managing the
hydrocarbon resources the Group
produces.
-----------------------------------------------
Operational and technical risks
-----------------------------------------------
Quality, Health, Safety and Environment
("QHSE")
-----------------------------------------------
The oil and gas industry, by its The Group maintains QHSE policies
nature, conducts activities which and requires that management, staff
can cause health, safety, environmental and contractors adhere to these
and security incidents. Serious policies. The policies ensure that
incidents can not only have a financial the Group meets Ukrainian legislative
impact but can also damage the standards in full and achieves international
Group's reputation and the opportunity standards to the maximum extent
to undertake further projects. possible. As a result of the COVID-19
The war in Ukraine poses significant pandemic the Group has implemented
risks to field operations, by way processes and controls intended
of potential threat to the lives to ensure protection of all our
of employees and contractors, and stakeholders and minimise any disruption
damage to equipment and infrastructure. to our business. As a consequence
of the current war in Ukraine, operations
at the MEX-GOL, SV and VAS fields
and SC licence area have been suspended
for periods, and currently only
limited field and production operations
are continuing at the MEX-GOL and
SV fields. Only essential staff
are located at site, and all other
staff are working remotely, either
from areas away from the conflict
areas or outside Ukraine. The Group
has invested in technology that
allows many staff to work just as
effectively from remote locations.
-----------------------------------------------
Industry risks
-----------------------------------------------
The Group is exposed to risks which The Group has well qualified and
are generally associated with the experienced technical management
oil and gas industry. For example, staff to plan and supervise operational
the Group's ability to pursue and activities. In addition, the Group
develop its projects and undertake engages with suitably qualified
development programmes depends local and international geological,
on a number of uncertainties, including geophysical and engineering experts
the availability of capital, seasonal and contractors to supplement and
conditions, regulatory approvals, broaden the pool of expertise available
gas, oil, condensate and LPG prices, to the Group. Detailed planning
development costs and drilling of development activities is undertaken
success. As a result of these uncertainties, with the aim of managing the inherent
it is unknown whether potential risks associated with oil and gas
drilling locations identified on exploration and production, as well
proposed projects will ever be as ensuring that appropriate equipment
drilled or whether these or any and personnel are available for
other potential drilling locations the operations, and that local contractors
will be able to produce gas, oil are appropriately supervised.
or condensate. In addition, drilling
activities are subject to many
risks, including the risk that
commercially productive reservoirs
will not be discovered. Drilling
for hydrocarbons can be unprofitable,
not only due to dry holes, but
also as a result of productive
wells that do not produce sufficiently
to be economic. In addition, drilling
and production operations are highly
technical and complex activities
and may be curtailed, delayed or
cancelled as a result of a variety
of factors.
-----------------------------------------------
Production of hydrocarbons
-----------------------------------------------
Producing gas and condensate reservoirs In recent years, the Group has engaged
are generally characterised by external technical consultants to
declining production rates which undertake a comprehensive review
vary depending upon reservoir characteristics and re-evaluation study of the MEX-GOL
and other factors. Future production and SV fields in order to gain an
of the Group's gas and condensate improved understanding of the geological
reserves, and therefore the Group's aspects of the fields and reservoir
cash flow and income, are highly engineering, drilling and completion
dependent on the Group's success techniques, and the results of this
in operating existing producing study and further planned technical
wells, drilling new production work are being used by the Group
wells and efficiently developing in the future development of these
and exploiting any reserves, and fields. The Group has established
finding or acquiring additional an ongoing relationship with such
reserves. The Group may not be external technical consultants to
able to develop, find or acquire ensure that technical management
reserves at acceptable costs. The and planning is of a high quality
experience gained from drilling in respect of all development activities
undertaken to date highlights such on the Group's fields.
risks as the Group targets the
appraisal and production of these
hydrocarbons.
-----------------------------------------------
Risks relating to the further
development and operation of the
Group's gas and condensate fields
in Ukraine
-----------------------------------------------
The planned development and operation The Group's technical management
of the Group's gas and condensate staff, in consultation with its
fields in Ukraine is susceptible external technical consultants,
to appraisal, development and operational carefully plan and supervise development
risk. This could include, but is and operational activities with
not restricted to, delays in the the aim of managing the risks associated
delivery of equipment in Ukraine, with the further development of
failure of key equipment, lower the Group's fields in Ukraine. This
than expected production from wells includes detailed review and consideration
that are currently producing, or of available subsurface data, utilisation
new wells that are brought on-stream, of modern geological software, and
problematic wells and complex geology utilisation of engineering and completion
which is difficult to drill or techniques developed for the fields.
interpret. The generation of significant With regards to operational activities,
operational cash is dependent on the Group ensures that appropriate
the successful delivery and completion equipment and personnel are available
of the development and operation for the operations, and that operational
of the fields. The war in Ukraine contractors are appropriately supervised.
is impacting planning and implementation In addition, the Group performs
of development and operations at a review of indicators of impairment
the Group's fields. of its oil and gas assets on an
annual basis, and considers whether
an assessment of its oil and gas
assets by a suitably qualified independent
assessor is appropriate or required.
-----------------------------------------------
Drilling and workover operations
-----------------------------------------------
Due to the depth and nature of The utilisation of detailed sub-surface
the reservoirs in the Group's fields, analysis, careful well planning
the technical difficulty of drilling and engineering design in designing
or re-entering wells in the Group's work programmes, along with appropriate
fields is high, and this and the procurement procedures and competent
equipment limitations within Ukraine, on-site management, aims to minimise
can result in unsuccessful or lower these risks.
than expected outcomes for wells.
-----------------------------------------------
Maintenance of facilities
-----------------------------------------------
There is a risk that production The Group's facilities are operated
or transportation facilities can and maintained at standards above
fail due to non-adequate maintenance, the Ukrainian minimum legal requirements.
control or poor performance of Operations staff are experienced
the Group's suppliers. and receive supplemental training
to ensure that facilities are properly
operated and maintained. Service
providers are rigorously reviewed
at the tender stage and are monitored
during the contract period.
-----------------------------------------------
Financial risks
-----------------------------------------------
Exposure to cash flow and liquidity
risk
-----------------------------------------------
There is a risk that insufficient The Group maintains adequate cash
funds are available to meet the reserves and closely monitors forecasted
Group's development obligations and actual cash flow, as well as
to commercialise the Group's oil short and longer-term funding requirements.
and gas assets. Since a significant T he Group aims to maintain a significant
proportion of the future capital proportion of its cash resources
requirements of the Group is expected outside Ukraine. The Group does
to be derived from operational not currently have any loans outstanding,
cash generated from production, internal financial projections are
including from wells yet to be regularly made based on the latest
drilled, there is a risk that in estimates available, and various
the longer term insufficient operational scenarios are run to assess the
cash is generated, or that additional robustness of the Group's liquidity.
funding, should the need arise, However, as the risk to future capital
cannot be secured. The war in Ukraine funding is inherent in the oil and
has disrupted production operations gas exploration and development
at the Group's fields, and consequently industry and reliant in part on
reduced anticipated cash flows future development success, it is
from those fields, and this has difficult for the Group to take
increased the risk regarding sufficiency any other measures to further mitigate
of capital for development. In this risk, other than tailoring
addition, the conflict may disrupt its development activities to its
the sales market for hydrocarbons available capital funding from time
that are produced. Currently, however, to time. The Group aims to maintain
hydrocarbon prices are very high, as diverse a range of banking relationships
which is ameliorating the potential as possible to reduce the risks
reduction in cash flows, and the associated with limited accessibility
Group's sales counterparties are to banking services which may exist
meeting their financial obligations. from time to time.
In addition to the risk of operational
cash shortfalls, there is a risk
that even with robust cash flows
and cash balances, the Group, from
time to time, can suffer from non-Ukrainian
operational banking appetite for
businesses such as the Group's
business, which can ultimately
manifest itself in having a restricted
access to banking services.
-----------------------------------------------
Ensuring appropriate business
practices
-----------------------------------------------
The Group operates in Ukraine, The Group maintains anti-bribery
an emerging market, where certain and anti- corruption policies in
inappropriate business practices relation to all aspects of its business,
may, from time to time occur, such and ensures that clear authority
as corrupt business practices, levels and robust approval processes
bribery, appropriation of property are in place, with stringent controls
and fraud, all of which can lead over cash management and the tendering
to financial loss. and procurement processes. In addition,
office and site protection is maintained
to protect the Group's assets.
-----------------------------------------------
Hydrocarbon price risk
-----------------------------------------------
The Group derives its revenue principally The Group sells a proportion of
from the sale of its Ukrainian Its hydrocarbon production through
gas, condensate and LPG production. offtake arrangements, which include
These revenues are subject to commodity pricing formulae so as to ensure
price volatility and political that it achieves market prices for
influence. A prolonged period of its products, as well utilising
low gas, condensate and LPG prices the electronic market platforms
may impact the Group's ability in Ukraine to achieve market prices
to maintain its long-term investment for its remaining products. However,
programme with a consequent effect hydrocarbon prices in Ukraine are
on its growth rate, which in turn implicitly linked to world hydrocarbon
may impact the Company's share prices and so the Group is subject
price or any shareholder returns. to external price trends. In January
Lower gas, condensate and LPG prices 2022, the Ukrainian Government imposed
may not only decrease the Group's temporary partial gas price regulations
revenues per unit, but may also until 30 April 2022, designed to
reduce the amount of gas, condensate support the production of certain
and LPG which the Group can produce designated food products. Whilst
economically, as would increases an unhelpful interference in the
in costs associated with hydrocarbon functioning of the deregulated gas
production, such as subsoil taxes supply market in Ukraine, in its
and royalties. The overall economics stated form and duration, this temporary
of the Group's key assets (being scheme is not a material risk to
the net present value of the future the Company and its cash generation,
cash flows from its Ukrainian projects) and has now expired.
are far more sensitive to long
term gas, condensate and LPG prices
than short-term price volatility.
However, short-term volatility
does affect liquidity risk, as,
in the early stage of the projects,
income from production revenues
is offset by capital investment.
In addition, t he war in Ukraine
may disrupt the sales market for
hydrocarbons, although, currently,
hydrocarbon prices are very high,
and the Group's sales counterparties
are meeting their financial obligations.
-----------------------------------------------
Currency risk
-----------------------------------------------
Since the beginning of 2014 , the The Group's sales proceeds are received
Ukrainian Hryvnia significantly in Ukrainian Hryvnia, and the majority
devalued against major world currencies, of the capital expenditure costs
including the US Dollar, where for the current investment programme
it has fallen from UAH8.3/$1.00 will be incurred in Ukrainian Hryvnia,
on 1 January 2014 to UAH 36.6 /$1.00 thus the currency of revenue and
on 31 December 2022, and UAH 37.0 costs are largely matched. In light
/$1.00 on 14 December 2023. This of the previous devaluation and
devaluation has been a significant volatility of the Ukrainian Hryvnia
contributor to the imposition of against major world currencies,
banking restrictions by the National and since the Ukrainian Hryvnia
Bank of Ukraine over recent years. does not benefit from the range
In addition, the geopolitical events of currency hedging instruments
in Ukraine over recent years and which are available in more developed
the current war in Ukraine are economies, the Group has adopted
likely to continue to impact the a policy that, where possible, funds
valuation of the Ukrainian Hryvnia not required for use in Ukraine
against major world currencies. be retained on deposit in the United
Further devaluation of the Ukrainian Kingdom and Europe, principally
Hryvnia against the US Dollar will in US Dollars.
affect the carrying value of the
Group's assets.
-----------------------------------------------
Counterparty and credit risk
-----------------------------------------------
The challenging political and economic The Group monitors the financial
environment in Ukraine and current position and credit quality of its
war means that businesses can be contractual counterparties and seeks
subject to significant financial to manage the risk associated with
strain, which can mean that the counterparties by contracting with
Group is exposed to increased counterparty creditworthy contractors and customers.
risk if counterparties fail or Hydrocarbon production is sold on
default in their contractual obligations terms that limit supply credit and/or
to the Group, including in relation title transfer until payment is
to the sale of its hydrocarbon received .
production, resulting in financial
loss to the Group.
-----------------------------------------------
Financial markets and economic
outlook
-----------------------------------------------
The performance of the Group is The Group's sales proceeds are received
influenced by global economic conditions in Ukrainian Hryvnia and a significant
and, in particular, the conditions proportion of investment expenditure
prevailing in the United Kingdom is made in Ukrainian Hryvnia , which
and Ukraine. The economies in these minimises risks related to foreign
regions have been subject to volatile exchange volatility. However, hydrocarbon
pressures in recent periods, with prices in Ukraine are implicitly
the global economy having experienced linked to world hydrocarbon prices
a long period of difficulty, the and so the Group is subject to external
COVID pandemic, and more particularly price movements. The Group holds
the current war in Ukraine. This a significant proportion of its
has led to extreme foreign exchange cash reserves in the United Kingdom
movements in the Ukrainian Hryvnia and Europe, mostly in US Dollars,
, high inflation and interest rates, with reputable financial institutions.
and increased credit risk relating The financial status of counterparties
to the Group's key counterparties. is carefully monitored to manage
counterparty risks. Nevertheless,
the overall exposure that the Group
faces as a result of these risks
cannot be predicted and many of
these are outside of the Group's
control.
-----------------------------------------------
Corporate risks
-----------------------------------------------
Ukrainian production licences
-----------------------------------------------
The Group operates in a region The Group ensures compliance with
where the right to production can commitments and regulations relating
be challenged by State and non-State to its production licences through
parties. During 2010, this manifested Group procedures and controls or,
itself in the form of a Ministry where this is not immediately feasible
Order instructing the Group to for practical or logistical considerations,
suspend all operations and production seeks to enter into dialogue with
from its MEX-GOL and SV production the relevant Government bodies with
licences, which was not resolved a view to agreeing a reasonable
until mid-2011. In 2013, new rules time frame for achieving compliance
relating to the updating of production or an alternative, mutually agreeable
licences led to further challenges course of action. Work programmes
being raised by the Ukrainian authorities are designed to ensure that all
to the production licences held licence obligations are met and
by independent oil and gas producers continual interaction with Government
in Ukraine, including the Group. bodies is maintained in relation
In March 2019, a Ministry Order to licence obligations and commitments.
was issued instructing the Group
to suspend all operations and production
from its VAS production licence,
which was not resolved until March
2023. In 2020, LLC Arkona Gas-Energy
("Arkona") faced a challenge from
PJSC Ukrnafta concerning the validity
of its SC production licence ,
which was ultimately resolved in
Arkona's favour by a decision of
the Supreme Court of Ukraine in
February 2021. During 2023, the
Ukrainian authorities have taken
a number of regulatory actions
against the Group, which have culminated
in Ministry Orders being made in
May 2023 to suspend all operations
and production at the VAS production
licence and SC exploration licence.
Excepting the current suspension
O rders made in respect of the
VAS production licence and SC exploration
licence, all such challenges affecting
the Group have been successfully
defended through the Ukrainian
legal system. In July 2023, new
legislation was introduced in Ukraine,
which will come into force in September
2024, and which requires that branches
(or representative offices) of
foreign companies operating in
Ukraine register their ultimate
beneficial owners in Ukrainian
Registries. Regal Petroleum Corporation
Ltd ("RPC"), which holds the MEX-GOL
and SV licences, operates such
a branch and will therefore be
required to register its ultimate
beneficial owners from the implementation
of this law, which raises a potential
risk that such registration will
not be accepted by the Ukrainian
authorities, and possibly result
in regulatory action against RPC
and/or its licences and assets,
including suspension of the MEX-GOL
and SV licences. T he business
environment is such that these
types of challenges may arise at
any time in relation to the Group's
operations, licence history, compliance
with licence commitments and/or
local regulations. In addition,
production licences in Ukraine
are issued with and/or carry ongoing
compliance obligations, which if
not met, may lead to the loss of
a licence.
-----------------------------------------------
Risks relating to key personnel
-----------------------------------------------
The Group's success depends upon The Group periodically reviews the
skilled management as well as technical compensation and contractual terms
expertise and administrative staff. of its staff. In addition, the Group
The loss of service of critical has developed relationships with
members from the Group's team could a number of technical and other
have an adverse effect on the business. professional experts and advisers,
The current war in Ukraine has who are used to provide specialist
meant that, as far as possible, services as required. As a result
the Group's staff have needed to of the war, o nly essential staff
move away from areas of conflict are located at site, and all other
and work remotely. staff are working remotely, either
from areas away from the conflict
areas or outside Ukraine. The Group
has invested in technology that
allows many staff to work just as
effectively from remote locations.
-----------------------------------------------
Consolidated Income Statement
for the year ended 31 December 2022
202 2 2021
Note $000 $000
Revenue 5 133 ,380 121,353
Cost of sales 6 (47,457) (47,422)
-------------------------------------------- ----- --------- ----------
Gross profit 85,923 73,931
(6, 830
Administrative expenses 7 ) (8,350)
Other operating ( losses)/ gains, (net) 10 (3,320) 654
-------------------------------------------- ----- --------- ----------
Operating profit 75,773 66,235
Finance income 11 1,126 1,394
Finance costs 12 (1,410) (752)
Net impairment (losses)/gains on financial
assets (444) (177)
Other losses, (net) 13 (1,738) (108)
-------------------------------------------- ----- --------- ----------
Profit before taxation 73,307 66,592
Income tax expense 14 (13,124) (15,473)
-------------------------------------------- ----- --------- ----------
Profit for the year 60,183 51,119
-------------------------------------------- ----- --------- ----------
Earnings per share (cents)
Basic and diluted 16 18,8c 15.9c
-------------------------------------------- ----- --------- ----------
The Notes set out below are an integral part of these consolidated financial statements.
Consolidated Statement of Comprehensive Income
for the year ended 31 December 202 2
202 2 202 1
$000 $000
Profit for the year 60,183 51,119
Other comprehensive income/(expense):
Items that may be subsequently reclassified
to profit or loss:
Equity - foreign currency translation (38,094) 1,611
Items that will not be subsequently
reclassified to profit or loss:
Re-measurements of post-employment benefit
obligations 53 172
Total other comprehensive (expense)/income (38,041) 1,783
Total comprehensive income for the
year 22,142 52,902
---------------------------------------------- --------- -------
Company Statement of Comprehensive Income
for the year ended 31 December 202 2
Note 202 2 20 21
$000 $000
(Loss)/profit for the year 15 (6,358) 16 , 330
------------------------------------ ----- -------- ---------
Total comprehensive (loss)/ income
for the year (6,358) 16 , 330
------------------------------------ ----- -------- ---------
The Notes set out below are an integral part of these consolidated financial statements.
Consolidated Balance Sheet
as at 31 December 202 2
202 2 20 21
Note $000 $000
Assets
Non-current assets
Property, plant and equipment 17 74,256 87,418
Intangible assets 18 8,994 12,340
Right-of-use assets 19 364 1,008
Deferred tax asset 26 287 361
------------------------------- ----- ---------- -----------
Prepayments for fixed assets 5,385 4,933
------------------------------- ----- ---------- -----------
89,286 106,060
Current assets
Inventories 21 3,358 1,862
Trade and other receivables 22 60,438 8,126
Cash and cash equivalents 23 88,652 87,780
Other short-term investments 23 - 4,762
------------------------------- ----- ---------- -----------
152,448 102,530
Total assets 241,734 208,590
------------------------------- ----- ---------- -----------
Liabilities
Current liabilities
Trade and other payables 24 (27,529) (12,306)
Lease liabilities 19 (229) (455)
Corporation tax payable (2,447) (5,445)
(30,205) (18,206)
Net current assets 127,628 89,257
------------------------------- ----- ---------- -----------
Non-current liabilities
Provision for decommissioning 25 (6,964) (5,467)
Lease liabilities 19 (258) (648)
Defined benefit liability (323) (427)
Deferred tax liability 26 (3,232) (5,197)
Other non-current liabilities (93) (128)
(10,870) (11,867)
Total liabilities (41,075) (30,073)
------------------------------- ----- ---------- -----------
Net assets 200,659 178,517
------------------------------- ----- ---------- -----------
Equity
Called up share capital 27 28,115 28,115
Foreign exchange reserve 28 (141,705) (103,611)
Merger reserve 28 (3,204) (3,204)
Capital contributions reserve 28 7,477 7,477
Retained earnings 309,976 249,740
Total equity 200,659 178,517
------------------------------- ----- ---------- -----------
The Notes set out below are an integral part of these consolidated financial statements.
Consolidated Statement of Changes in Equity
for the year ended 31 December 202 2
Called
up Share Capital Foreign Retained
share premium Merger contributions exchange earnings/(Accumulated
capital account reserve reserve reserve* losses) Total equity
$000 $000 $000 $000 $000 $000 $000
As at 1 January
202 ( 105 , 22 (35 6 , 641
1 28,115 555,090 (3,204) 7,477 2) ) 1 25 , 615
Profit for the
year - - - - - 51,119 51,119
Other
comprehensive
expense -
exchange
differences - - - - 1,611 - 1,611
- re-measurements
of
post-employment
benefit
obligations - - - - - 172 172
------------------- -------- ---------- --------- -------------- ----------- ---------------------- ------------------------------
Total
comprehensive
income/( expense) - - - - 1,611 51,291 52,902
------------------- -------- ---------- --------- -------------- ----------- ---------------------- ------------------------------
Cancellation of
share
premium account - (555,090) - - - 555,090 -
------------------- -------- ---------- --------- -------------- ----------- ---------------------- ------------------------------
As at 31 December
202
1 28,115 - (3,204) 7,477 (103,611) 249,740 178,517
------------------- -------- ---------- --------- -------------- ----------- ---------------------- ------------------------------
Called
up Share Capital Foreign Retained
share premium Merger contributions exchange earnings/(Accumulated
capital account reserve reserve reserve* losses) Total equity
$000 $000 $000 $000 $000 $000 $000
As at 1 January
202
2 28,115 - (3,204) 7,477 (103,611) 249,740 178,517
Profit for the
year - - - - - 60,183 60,183
Other
comprehensive
income - exchange
differences - - - - (38,094) - (38,094)
- re-measurements
of
post-employment
benefit
obligations - - - - - 53 53
------------------- -------- ---------- --------- -------------- ----------- ---------------------- ------------------------------
Total
comprehensive
income/( expense) - - - - (38,094) 60,236 22,142
------------------- -------- ---------- --------- -------------- ----------- ---------------------- ------------------------------
As at 31 December
202 2 28,115 - (3,204) 7,477 (141,705) 309,976 200,659
------------------- -------- ---------- --------- -------------- ----------- ---------------------- ------------------------------
* Predominantly as a result of exchange differences on non-monetary assets and liabilities where the subsidiaries'
functional currency is not the US Dollar.
The Notes set out below are an integral part of these consolidated financial statements.
Consolidated Cash Flow Statement
for the year ended 31 December 202 2
202 2 20 21
Note $000 $000
Operating activities
Cash generated from operations 29 47,541 77,646
Charitable donations 13 (6,534) (76)
Income tax paid (15,863) (8,959)
Interest received 1,888 763
--------------------------------------------------- ----- --------- ---------
Net cash inflow from operating activities 27,032 69,374
--------------------------------------------------- ----- --------- ---------
Investing activities
Purchase of oil and gas development, production
and other property, plant and equipment (19,829) (26,292)
Purchase of oil and gas exploration and
evaluation assets (4,092) (11,387)
Sale/(Purchase) of financial instruments 23 4,762 (4,762)
Purchase of oil and gas development, production (5 39
and other intangible assets (1,482) )
Proceeds from return of prepayments for
shares - 250
Proceeds from sale of property, plant and
equipment 4 10
Net cash outflow from investing activities (20,637) (42,720)
--------------------------------------------------- ----- --------- ---------
Financing activities
Payment of principal portion of lease liabilities (398) (555)
--------------------------------------------------- ----- --------- ---------
Net cash outflow from financing activities (398) (555)
--------------------------------------------------- ----- --------- ---------
Net increase in cash and cash equivalents 5,997 26,099
Cash and cash equivalents at the beginning
of the year 87,780 60,993
ECL* of cash and cash equivalents (14) (6)
Effect of foreign exchange rate changes (5,111) 694
Cash and cash equivalents at the end of
the year 23 88,652 87,780
--------------------------------------------------- ----- --------- ---------
*ECL - Expected credit losses
The Notes set out below are an integral part of these consolidated financial statements.
Notes forming part of the financial statements
1. Statutory Accounts
The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 December 2022 or 2021, but is derived from those accounts. The Auditor has reported on those accounts, and its reports were unqualified and did not contain statements under sections 498(2) or (3) of the Companies Act 2006. The auditors' report on the Group financial statements included a material uncertainty in respect of the Group's ability to continue as a going concern as explained in the section "Going Concern" in Note 3 below.
The statutory accounts for 2022 will be delivered to the Registrar of Companies following publication.
While the financial information included in this preliminary announcement has been prepared in accordance with UK-adopted International Accounting Standards ("framework"), this announcement does not itself contain sufficient information to comply with the framework. The Company expects to distribute the full financial statements that comply with UK-adopted International Accounting Standards by 31 December 2023.
2. General Information and Operational Environment
Enwell Energy plc (the "Company") and its subsidiaries (the "Group") is a gas, condensate and LPG production group.
The Company is a public limited company quoted on the AIM Market operated by London Stock Exchange plc and incorporated in England and Wales under the Companies Act 2006. The Company's registered office is at 16 Old Queen Street, London, SW1H 9HP, United Kingdom and its registered number is 4462555. The principal activities of the Group and the nature of the Group's operations are set out above.
As at 31 December 2022, the Company's immediate parent company was Smart Energy (CY) Limited, which was 100% owned by Smart Holding (Cyprus) Limited, which was 100% owned by Proteas Trustees Ltd as trustee of the STEP Trust, and Proteas Trustee Services Ltd, Afroditi Loukaidou, Elena Iona and Charoula Sofokleous as trustees of the SMART Trust. Accordingly, the Company was ultimately controlled by Proteas Trustees Ltd as trustee of the STEP Trust, and Proteas Trustee Services Ltd, Afroditi Loukaidou, Elena Iona and Charoula Sofokleous as trustees of the SMART Trust. As at 31 December 2021, the Company's immediate parent company was Smart Energy (CY) Limited, which was 100% owned by Smart Holding (Cyprus) Limited, which was 100% owned by Mr Vadym Novynskyi.
The Group's gas, condensate and LPG extraction and production facilities are located in Ukraine.
Impact of the ongoing war in Ukraine
On 24 February 2022, Russia commenced a military invasion of Ukraine, and since then there has been an ongoing war in Ukraine. Shortly after the invasion, the Ukrainian Government imposed martial law, and the corresponding introduction of related temporary restrictions that impact, amongst other areas, the economic environment and business operations in Ukraine. The war has caused significant economic challenges in Ukraine, which has led to a deterioration of Ukrainian State finances, volatility of financial markets, illiquidity on capital markets, higher inflation and a depreciation of the national currency against major foreign currencies.
The war is continuing, causing very significant numbers of military and civilian casualties and significant dislocation of the Ukrainian population. The Russian army has occupied territories in the east and south of Ukraine, including the majority of the Kherson, Zaporizhzhia, Luhansk and Donetsk regions. Russian attacks have targeted and destroyed civilian infrastructure over wide areas of Ukraine, including hospitals and residential complexes.
On 3 June 2022, the National Bank of Ukraine ("NBU") increased the key policy interest rate to 25%, which was aimed at suspending price increases and strengthening the Ukrainian Hryvnia exchange rate. The NBU has also introduced temporary restrictions on foreign currency trades and limited the ability to perform cross-border payments for non-critical imports and repayment of debt to foreign creditors, apart from international institutions. The Ukrainian Hryvnia exchange rate with the US Dollar was effectively fixed at UAH29.25:$1.00 in February 2022 and then at UAH36.57:$1.00 in July 2022 on the foreign exchange market to ensure the stable operation of Ukraine's financial system. As a result, commercial interbank quotes remain close to the officially imposed NBU exchange rate. Despite the uncertainty and instability in the general situation within Ukraine, the banking system remains relatively stable, with sufficient liquidity even as martial law continues, and banking services are available to both legal entities and individual bank customers.
The Ukrainian Government has taken action to limit the negative effects of the war on the Ukrainian economic environment during the period of martial law and beyond, including but not limited to:
-- the temporary easing of the tax regime until the end of
martial law, including the suspension of tax audits and
the cancellation of some penalties for violating the tax
law;
-- gasoline, heavy distillates, liquefied gas, oil and petroleum
are subject to VAT at a reduced rate of 7%, and the excise
tax rate for the imported fuel group of products' is set
at zero;
-- a number of measures were taken to limit prices for energy
resources, including prohibiting export of gas, setting
a level of electricity price on transactions a day ahead
and intraday markets; and
-- the increase in the subsoil tax rate on natural gas production
during martial law, which action introduced a differentiated
subsoil tax rate on the production of natural gas depending
on sale prices for natural gas.
Additional financial support was received from a number of international institutions, including from the IMF and European Bank for Reconstruction and Development ("EBRD"), to support the economy and the population. Such financial support is critical for Ukraine to continue to service its debts in the foreseeable future.
Given the fast-moving nature of the situation in Ukraine and the unpredictability of the outcome, it is impracticable to assess the full impact of the war on the economic environment.
Overall, the final resolution and the ongoing effects of the war and political and economic situation in Ukraine are difficult to predict, but they may have further severe effects on the Ukrainian economy and the Group's business.
As at 14 December 2023, the official NBU exchange rate of the Ukrainian Hryvnia against the US Dollar was UAH37.0/$1.00, compared with UAH36.57/$1.00 as at 31 December 2022.
Further details of risks relating to Ukraine can be found within the Principal Risks section of the Strategic Report.
3. Accounting Policies
The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.
Basis of Preparation
On 31 December 2020, IFRS as adopted by the European Union at that date was brought into UK law and became UK-adopted International Accounting Standards, with future changes being subject to endorsement by the UK Endorsement Board. The Group and Company transitioned to UK-adopted International Accounting Standards on 1 January 2021. This change constitutes a change in accounting framework. However, there is no impact on recognition, measurement or disclosure in the period reported as a result of the change in framework. The consolidated financial statements of the Group and the financial statements of the Company have been prepared in accordance with UK-adopted International Accounting Standards and with the requirements of the Companies Act 2006 as applicable to companies reporting under those standards.
These consolidated financial statements have been prepared in accordance with UK-adopted International Accounting Standards under the historical cost convention, as modified by the initial recognition of financial instruments based on fair value, and by the revaluation of financial instruments categorised at fair value through profit or loss ("FVTPL") and at fair value through other comprehensive income ("FVOCI"). The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. Apart from the accounting policy changes effective from 1 January 2022 these policies have been consistently applied to all the periods presented, unless otherwise stated.
The preparation of financial statements in conformity with UK-adopted International Accounting Standards 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 4. The consolidated financial statements are presented in thousands of US Dollars.
Going Concern
The Group's business activities, together with the factors likely to affect its future operations, performance and position are set out in the Chairman's Statement, Chief Executive's Statement and Finance Review. The financial position of the Group, its cash flows and liquidity position are set out in these consolidated financial statements.
On 24 February 2022, Russia commenced a military invasion of Ukraine. This was quickly followed by the enactment of martial law by the Ukrainian President's Decree, approved by the Parliament of Ukraine, and the corresponding introduction of related temporary restrictions that impact the economic environment and business operations in Ukraine.
The production assets of the Group are located in the central and eastern part of the country (Poltava and Kharkiv regions) which are controlled by the Ukrainian Government. Following a brief period of suspension, production and field operations, as well as construction work on upgrades to the gas processing facilities, at the MEX-GOL and SV fields recommenced. As of the date of approval of these financial statements, no assets of the Group have been damaged, and the Group continues to operate its MEX-GOL and SV assets in the Poltava region, while its SC asset in the Poltava region and all production and field operations at the VAS asset located in the Kharkiv region are suspended. No military activities have occurred at the Group's field locations. The Gas Transmission System Operator of Ukraine has maintained complete operational and technological control over the operations of the Ukrainian Gas Transmission System. However, as of the date of approval of these financial statements, the war has had, and continues to have, a material impact on the production and sales levels of the business and execution of the Group's 2022 budget.
The Group has no debt and funds its operations from its own cash resources. Cash and cash equivalents were $79.1 million as at 14 December 2023. The Directors maintain a significant level of flexibility to modify the Group's development plans as may be required to preserve cash resources for liquidity management. Absent the potential impact of the war in Ukraine, the Directors are satisfied that the Group and the Company are a going concern and will continue their operations for the foreseeable future.
In assessing the impact of the war on the ability of the Group and the Company to continue as a going concern, the Directors have analysed a number of possible scenarios of economic and military developments and the impact on the expected cash flows of the Group and Company for 2023 and 2024. This includes considering a possible (but in the view of the Directors, highly unlikely) worst case scenario in which the Group has zero production as a result of possible future military conflict dictating field operations being completely shut-in, and all other non-production related costs being maintained at current levels with no reduction or mitigating actions as would otherwise be possible. Even in this worst-case scenario, the Directors are satisfied that the Group and the Company have sufficient liquid resources to be able to meet their liabilities as they fall due and to be able to continue as a going concern for the foreseeable future.
The corporate strategy for the near term is to:
-- continue production from MEX-GOL and SV licences, generating
cash to cover Group costs and add to existing cash resources,
whilst moderating development plans to reduce cash spend
exposure whilst the war and operational/political continue;
-- vigorously pursue legal initiatives to protect the Group's
assets, restore all licences and production, and seek compensation
for losses incurred to date and as may be incurred in the
future; and
-- tightly manage costs to ensure cash resources are maintained
at levels capable of sustaining the business through the
uncertainty that lies ahead
In respect of the Group's operations, staff and assets in Ukraine, the potential short and long-term impact of the future development of the war is inherently uncertain. Accordingly, this creates a material uncertainty related to events or conditions that may cast significant doubt on the Group's ability to continue as a going concern because of the potential impact on its ability to continue its operations for the foreseeable future and realise its assets in the normal course of business. The financial statements do not include the adjustments that would result if the Group were unable to continue as a going concern.
The Company is a UK-based investment holding company. The Company had cash and cash equivalents of $20.6 million as at 14 December 2023, all of which are held outside of Ukraine, in US Dollars, Pounds Sterling and Euros. The Directors are satisfied that the Company is a going concern and will be able to continue its operations for the foreseeable future, and there is no material uncertainty in respect of its ability to do so.
New and amended standards adopted by the Group
The following amended standards became effective from 1 January 2022, but did not have a material impact on the Group's c onsolidated or Company's financial statements :
-- Amendments to IAS 16 Property, Plant and Equipment prohibit
the deduction from the cost of an item of property, plant
and equipment of any proceeds from selling items produced
while bringing that asset into operation and clarify that
these proceeds (and the corresponding costs of production)
are recognised in profit or loss
-- Amendments to IAS 37 Provisions, Contingent Liabilities
and Contingent Assets clarify that the cost of fulfilling
a contract comprises the costs that relate directly to
the contract. These can either be incremental costs of
fulfilling that contract or the allocation of other costs
that relate directly to fulfilling contracts
Impact of standards issued but not yet applied by the Group
Certain new standards and interpretations have been issued that are mandatory for the annual periods beginning on or after 1 January 2023 or later, and which the Group has not early adopted.
(a) IFRS 17 Insurance Contracts
(b) Amendments to IFRS 1 Presentation of Financial Statements:
Classification of Liabilities as Current or Non-current
(c) Amendments to IAS 1 and IFRS Practice Statement 2: Disclosure
of Accounting Policies
(d) Amendments to IAS 8: Definition of Accounting Estimates
(e) Amendments to IAS 12: Deferred Tax related to Assets and
Liabilities arising from a Single Transaction
These new standards and interpretations are not expected to affect significantly the Group's consolidated financial statements.
Exchange differences on intra-group balances with foreign operation
The Group has certain inter-company monetary balances of which the Company is the beneficial owner. These monetary balances are payable by a subsidiary that is a foreign operation and are eliminated on consolidation.
In the consolidated financial statements, exchange differences arising on such payables because the transaction currency differs from the subsidiary's functional currency are recognised initially in other comprehensive income if the settlement of such payables is continuously deferred and is neither planned nor likely to occur in the foreseeable future.
In such cases, the respective receivables of the Company are regarded as an extension of the Company's net investment in that foreign operation, and the cumulative amount of the abovementioned exchange differences recognised in other comprehensive income is carried forward within the foreign exchange reserve in equity and is reclassified to profit or loss only upon disposal of the foreign operation.
When the subsidiary that is a foreign operation settles its quasi-equity liability due to the Company, but the Company continues to possess the same percentage of the subsidiary, i.e. there has been no change in its proportionate ownership interest, such settlement is not regarded as a disposal or a partial disposal, and therefore cumulative exchange differences are not reclassified.
The designation of inter-company monetary balances as part of the net investment in a foreign operation is re-assessed when management's expectations and intentions on settlement change due to a change in circumstances.
Where, because of a change in circumstances, a receivable balance, or part thereof, previously designated as a net investment into a foreign operation is intended to be settled, the receivable is de-designated and is no longer regarded as part of the net investment.
In such cases, the exchange differences arising on the subsidiary's payable following de-designation are recognised within finance costs / income in profit or loss, similar to foreign exchange differences arising from financing.
Foreign exchange gains and losses not related to intra-group balances are recognised on a net basis as other gains or losses.
Basis of Consolidation
The consolidated financial statements incorporate the financial information of the Company and entities controlled by the Company (and its subsidiaries) made up to 31 December each year.
Subsidiaries
Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.
The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The Group recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis at the non-controlling interest's proportionate share of the recognised amounts of the acquiree's identifiable net assets.
Acquisition-related costs are expensed as incurred.
If the business combination is achieved in stages, the acquisition date carrying value of the acquirer's previously held equity interest in the acquiree is re-measured to fair value at the acquisition date; any gains or losses arising from such re-measurement are recognised in profit or loss.
Any contingent consideration to be transferred by the Group is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognised in accordance with IFRS 9 in profit or loss.
Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated. When necessary, amounts reported by subsidiaries have been adjusted to conform with the Group's accounting policies.
Segment reporting
The Group's only class of business activity is oil and gas exploration, development and production. The Group's primary operations are located in Ukraine, with its head office in the United Kingdom. The geographical segments are the basis on which the Group reports its segment information to management. Operating segments are reported in a manner consistent with the internal reporting provided to the Board of Directors.
Commercial Reserves
Proved and probable oil and gas reserves are estimated quantities of commercially producible hydrocarbons which the existing geological, geophysical and engineering data show to be recoverable in future years from known reservoirs. Proved reserves are those quantities of petroleum that, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be commercially recoverable from known reservoirs and under defined technical and commercial conditions. Probable reserves are those additional reserves which analysis of geoscience and engineering data indicate are less likely to be recovered than proved reserves but more certain to be recovered than possible reserves. The proved and probable reserves conform to the definition approved by the Petroleum Resources Management System.
Oil and Gas Exploration/Evaluation and Development/Production Assets
The Group applies the successful efforts method of accounting for oil and gas assets, having regard to the requirements of IFRS 6 Exploration for and Evaluation of Mineral Resources.
Exploration costs are incurred to discover hydrocarbon resources. Evaluation costs are incurred to assess the technical feasibility and commercial viability of the resources found. Exploration, as defined in IFRS 6 Exploration and evaluation of mineral resources, starts when the legal rights to explore have been obtained. Expenditure incurred before obtaining the legal right to explore is generally expensed; an exception to this would be separately acquired intangible assets such as payment for an option to obtain legal rights.
Expenditures incurred in the exploration activities are expensed unless they meet the definition of an asset. The Group recognises an asset when it is probable that economic benefits will flow to the Group as a result of the expenditure. The economic benefits might be available through commercial exploitation of hydrocarbon reserves or sales of exploration findings or further development rights. Exploration and evaluation ("E&E") assets are recognised as either property, plant and equipment or intangible assets, according to their nature, in single field cost centres.
The capitalisation point is the earlier of:
(a) the point at which the fair value less costs to sell the
property can be reliably determined as being higher than
the total of the expenses incurred and costs already capitalised
(such as licence acquisition costs); and
(b) an assessment of the property demonstrates that commercially
viable reserves are present and hence there are probable
future economic benefits from the continued development
and production of the resource.
E&E assets are reclassified from Exploration and Evaluation when evaluation procedures have been completed. E&E assets that are not commercially viable are written down. E&E assets for which commercially viable reserves have been identified are reclassified to Development and Production assets. E&E assets are tested for impairment immediately prior to reclassification out of E&E.
Once an E&E asset has been reclassified from E&E, it is subject to the normal IFRS requirements. This includes impairment testing at the cash-generating unit ("CGU") level and depreciation.
Abandonment and Retirement of Individual Items of Property, Plant and Equipment
Normally, no gains or losses shall be recognised if only an individual item of equipment is abandoned or retired or if only a single lease or other part of a group of proved properties constituting the amortisation base is abandoned or retired as long as the remainder of the property or group of properties constituting the amortisation base continues to produce oil or gas. Instead, the asset being abandoned or retired shall be deemed to be fully amortised, and its costs shall be charged to accumulated depreciation, depletion or amortisation. When the last well on an individual property (if that is the amortisation base) or group of properties (if amortisation is determined on the basis of an aggregation of properties with a common geological structure) ceases to produce and the entire property or group of properties is abandoned, a gain or loss shall be recognised. Occasionally, the partial abandonment or retirement of a proved property or group of proved properties or the abandonment or retirement of wells or related equipment or facilities may result from a catastrophic event or other major abnormality. In those cases, a loss shall be recognised at the time of abandonment or retirement.
Intangible Assets other than Oil and Gas Assets
Intangible assets other than oil and gas assets are stated at cost less accumulated amortisation and any provision for impairment. These assets represent exploration licences. Amortisation is charged so as to write off the cost, less estimated residual value on a straight-line basis of 20-25% per annum.
Depreciation, Depletion and Amortisation
All expenditure carried within each field is amortised from the commencement of commercial production on a unit of production basis, which is the ratio of gas production in the period to the estimated quantities of commercial reserves at the end of the period plus the production in the period, generally on a field by field basis. In certain circumstances, fields within a single development area may be combined for depletion purposes. Costs used in the unit of production calculation comprise the net book value of capitalised costs plus the estimated future field development costs necessary to bring the reserves into production.
Impairment
At each balance sheet date, the Group reviews the carrying amount of oil and gas development and production assets to determine whether there is any indication that those assets have suffered an impairment loss. This includes exploration and appraisal costs capitalised which are assessed for impairment in accordance with IFRS 6. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss.
For oil and gas development and production assets, the recoverable amount is the greater of fair value less costs to dispose and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using an expected weighted average cost of capital. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. Impairment losses are recognised as an expense immediately. The valuation method used for determination of fair value less cost of disposal is based on unobservable market data, which is within Level 3 of the fair value hierarchy.
Should an impairment loss subsequently reverse, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately.
Decommissioning Provision
Where a material liability for the removal of existing production facilities and site restoration at the end of the productive life of a field exists, a provision for decommissioning is recognised. The amount recognised is the present value of estimated future expenditure determined in accordance with local conditions and requirements. The cost of the relevant property, plant and equipment is increased with an amount equivalent to the provision and depreciated on a unit of production basis. Changes in estimates are recognised prospectively, with corresponding adjustments to the provision and the associated fixed asset. The unwinding of the discount on the decommissioning provision is included within finance costs.
Property, Plant and Equipment other than Oil and Gas Assets
Property, plant and equipment other than oil and gas assets (included in Other fixed assets in Note 17 are stated at cost less accumulated depreciation and any provision for impairment. Depreciation is charged so as to write off the cost of assets on a straight-line basis over their useful lives as follows:
Useful lives in years
Buildings and constructions 10 to 20 years
Machinery and equipment 2 to 5 years
Vehicles 5 years
Office and other equipment 4 to 12 years
Spare parts and equipment purchased with the intention to be used in future capital investment projects are recognised as oil and gas development and production assets within property, plant and equipment.
Right-of-use assets
The Group leases various offices, equipment, wells and land. Contracts may contain both lease and non-lease components. The Group allocates the consideration in the contract to the lease and non-lease components based on their relative stand-alone prices.
Assets arising from a lease are initially measured on a present value basis.
Right-of-use assets are measured at cost comprising the following:
-- the amount of the initial measurement of lease liability,
-- any lease payments made at or before the commencement date
less any lease incentives received,
-- any initial direct costs, and
-- costs to restore the asset to the conditions required by
lease agreements.
Right-of-use assets are generally depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis. If the Group is reasonably certain to exercise a purchase option, the right-of-use asset is depreciated over the underlying assets' useful lives. Depreciation on the items of the right-of-use assets is calculated using the straight-line method over their estimated useful lives as follows:
Useful lives
in years
Land 40 to 50 years
Wells 10 to 20 years
Properties:
Buildings and constructions 10 to 20 years
Machinery and equipment 2 to 5 years
Vehicles 5 years
Office and other equipment 4 to 12 years
Inventories
Inventories typically consist of materials, spare parts and hydrocarbons, and are stated at the lower of cost and net realisable value. Cost of finished goods is determined on the weighted average bases. Cost of other than finished goods inventory is determined on the first in first out basis. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution.
Revenue Recognition
Revenue is income arising in the course of the Group's ordinary activities. Revenue is recognised by the amount of the transaction price. Transaction price is the amount of consideration to which the Group expects to be entitled in exchange for transferring control over promised goods or services to a customer, excluding the amounts collected on behalf of third parties.
Revenue is recognised net of indirect taxes and excise duties.
Sales of gas, condensate and LPG are recognised when control of the good has transferred, being when the goods are delivered to the customer, the customer has full discretion over the goods, and there is no unfulfilled obligation that could affect the customer's acceptance of the goods. Delivery occurs when the goods have been shipped to the specific location, the risks of obsolescence and loss have been transferred to the customer, and either the customer has accepted the goods in accordance with the contract, the acceptance provisions have lapsed, or the Group has objective evidence that all criteria for acceptance have been satisfied.
A receivable is recognised when the goods are delivered as this is the point in time that the consideration is unconditional because only the passage of time is required before the payment is due.
The Group normally uses standardised contracts for the sale of gas, condensate and LPG, which define the point of control transfer. The price and quantity of each sale transaction are indicated in the specifications to the sales contracts.
The control over gas is transferred to a customer when the respective act of acceptance is signed by the parties to a contract upon delivery of gas to the point of sale specified in the contract, normally being a certain point in the Ukrainian gas transportation system. Acts of acceptance of gas are signed and the respective revenues are recognised on a monthly basis.
The control over condensate and LPG is transferred to a customer when the respective waybill is signed by the parties to a contract upon shipment of goods at the point of sale specified in the contract, which is normally the Group's production site.
Foreign Currencies
The Group's consolidated financial statements and those of the Company are presented in US Dollars. The functional currency of the subsidiaries which operate in Ukraine is Ukrainian Hryvnia. The remaining entities have US Dollars as their functional currency.
The functional currency of individual companies is determined by the primary economic environment in which the entity operates, normally the one in which it primarily generates and expends cash. In preparing the financial statements of the individual companies, transactions in currencies other than the entity's functional currency ("foreign currencies") are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Income Statement. Non-monetary assets and liabilities carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Non-monetary items which are measured in terms of historical cost in a foreign currency are not retranslated. Gains and losses arising on retranslation are included in net profit or loss for the period, except for exchange differences arising on balances which are considered long term investments where the changes in fair value are recognised directly in other comprehensive income.
On consolidation, the assets and liabilities of the Group's subsidiaries which do not use US Dollars as their functional currency are translated into US Dollars as follows:
(a) assets and liabilities for each Balance Sheet presented
are translated at the closing rate at the date of that
Balance Sheet;
(b) income and expenses for each Income Statement are translated
at average monthly exchange rates (unless this average
is not a reasonable approximation of the cumulative effect
of the rates prevailing on the transaction dates, in which
case income and expenses are translated at the rate on
the dates of the transactions); and
(c) all resulting exchange differences are recognised in other
comprehensive income
The principal rates of exchange used for translating foreign currency balances as at 31 December 202 2 were $1:UAH36. 57 (20 2 1 : $1: UAH2 7 . 28 ), $1:GBP0. 827 (20 2 1 : $1:GBP 0.7 41 ), $1:EUR0.934 (20 2 1 : $1:EUR0.8 83 ), and the average rates for the year were $1:UAH32.37 (202 1 : $1:UAH27. 3 ), $1:GBP0.811 (20 21 : $1:GBP 0.7 2 7), $1:EUR0.951 (202 1 : $1:EUR0.8 45 )
None of the Group's operations are considered to use the currency of a hyperinflationary economy, however this is kept under review.
Pensions
The Group contributes to a local government pension scheme in Ukraine and defined benefit plans. The Group has no further payment obligations towards the local government pension scheme once the contributions have been paid.
Defined benefit plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation.
The Group companies participate in a mandatory Ukrainian State-defined retirement benefit plan, which provides for early pension benefits for employees working in certain workplaces with hazardous and unhealthy working conditions. The Group also provides lump sum benefits upon retirement subject to certain conditions. The early pension benefit (in the form of a monthly annuity) is payable by employers only until the employee has reached the statutory retirement age. The pension scheme is based on a benefit formula which depends on each individual member's average salary, his/her total length of past service and total length of past service at specific types of workplaces ("list II" category).
The liability recognised in the Balance Sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension obligation. Since Ukraine has no deep market in such bonds, the market rates on government bonds are used.
The current service cost of the defined benefit plan, recognised in the Income Statement within the Cost of Sales in employee benefit expense, except where included in the cost of an asset, reflects the increase in the defined benefit obligation resulting from employee service in the current year, benefit changes curtailments and settlements. Past-service costs are recognised immediately in the Income Statement.
The net interest cost is calculated by applying the discount rate to the net balance of the defined benefit obligation and the fair value of plan assets. This cost is included in employee benefit expense in the Income Statement within the Cost of Sales.
Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to equity in other comprehensive income in the period in which they arise.
Taxation
The tax expense represents the sum of the current tax and deferred tax.
Current tax, including UK corporation and overseas tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
Deferred tax is calculated at the tax rates which are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the Income Statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.
Other taxes which include recoverable value added tax, excise tax and custom duties represent the amounts receivable or payable to local tax authorities in the countries where the Group operates.
Value added tax
Output value added tax related to sales is payable to tax authorities on the earlier of (a) collection of receivables from customers or (b) delivery of goods or services to customers. Input VAT is generally recoverable against output VAT upon receipt of the VAT invoice. The tax authorities permit the settlement of VAT on a net basis. VAT related to sales and purchases is recognised in the consolidated statement of financial position on a gross basis for different entities of the Group and disclosed separately as an asset and a liability. Where provision has been made for expected credit losses ("ECL") of receivables, the impairment loss is recorded for the gross amount of the debtor, including VAT.
Financial Instruments
Financial instruments - key measurement terms . Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The best evidence of fair value is the price in an active market. An active market is one in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.
Fair value of financial instruments traded in an active market is measured as the product of the quoted price for the individual asset or liability and the number of instruments held by the entity. This is the case even if a market's normal daily trading volume is not sufficient to absorb the quantity held and placing orders to sell the position in a single transaction might affect the quoted price.
A portfolio of financial derivatives or other financial assets and liabilities that are not traded in an active market is measured at the fair value of a group of financial assets and financial liabilities on the basis of the price that would be received to sell a net long position (i.e. an asset) for a particular risk exposure or paid to transfer a net short position (i.e. a liability) for a particular risk exposure in an orderly transaction between market participants at the measurement date. This is applicable for assets carried at fair value on a recurring basis if the Group: (a) manages the group of financial assets and financial liabilities on the basis of the Group's net exposure to a particular market risk (or risks) or to the credit risk of a particular counterparty in accordance with the Group's documented risk management or investment strategy; (b) it provides information on that basis about the group of assets and liabilities to the Group's key management personnel; and (c) the market risks, including duration of the Group's exposure to a particular market risk (or risks) arising from the financial assets and financial liabilities are substantially the same.
Valuation techniques such as discounted cash flow models or models based on recent arm's length transactions or consideration of financial data of the investees are used to measure fair value of certain financial instruments for which external market pricing information is not available. Fair value measurements are analysed by level in the fair value hierarchy as follows: (i) level one are measurements at quoted prices (unadjusted) in active markets for identical assets or liabilities, (ii) level two measurements are valuations techniques with all material inputs observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices), and (iii) level three measurements are valuations not based on solely observable market data (that is, the measurement requires significant unobservable inputs).
Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial instrument. An incremental cost is one that would not have been incurred if the transaction had not taken place. Transaction costs include fees and commissions paid to agents (including employees acting as selling agents), advisers, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties. Transaction costs do not include debt premiums or discounts, financing costs or internal administrative or holding costs.
Fair value is the amount at which the financial instrument was recognised at initial recognition, while amortised cost ("AC") is the amount at which the financial instrument was subsequently measured after the initial recognition less any principal repayments, plus accrued interest, and for financial assets less any allowance for ECL. Accrued interest includes amortisation of transaction costs deferred at initial recognition and of any premium or discount to the maturity amount using the effective interest method. Accrued interest income and accrued interest expense, including both accrued coupon and amortised discount or premium (including fees deferred at origination, if any), are not presented separately and are included in the carrying values of the related items in the consolidated statement of financial position.
The effective interest method is a method of allocating interest income or interest expense over the relevant period, so as to achieve a constant periodic rate of interest (effective interest rate) on the carrying amount. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts (excluding future credit losses) through the expected life of the financial instrument or a shorter period, if appropriate, to the gross carrying amount of the financial instrument. The effective interest rate discounts cash flows of variable interest instruments to the next interest repricing date, except for the premium or discount which reflects the credit spread over the floating rate specified in the instrument, or other variables that are not reset to market rates. Such premiums or discounts are amortised over the whole expected life of the instrument. The present value calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate. For assets that are purchased or originated credit impaired ("POCI") at initial recognition, the effective interest rate is adjusted for credit risk, i.e. it is calculated based on the expected cash flows on initial recognition instead of contractual payments.
Financial instruments - initial recognition . Financial instruments at fair value through profit or loss ("FVTPL") are initially recorded at fair value. All other financial instruments are initially recorded at fair value adjusted for transaction costs. Fair value at initial recognition is best evidenced by the transaction price. A gain or loss on initial recognition is only recorded if there is a difference between fair value and transaction price which can be evidenced by other observable current market transactions in the same instrument or by a valuation technique whose inputs include only data from observable markets. After the initial recognition, an ECL allowance is recognised for financial assets measured at AC and investments in debt instruments measured at fair value through other comprehensive income ("FVOCI"), resulting in an immediate accounting loss.
All purchases and sales of financial assets that require delivery within the time frame established by regulation or market convention ("regular way" purchases and sales) are recorded at trade date, which is the date on which the Group commits to deliver a financial asset. All other purchases are recognised when the entity becomes a party to the contractual provisions of the instrument.
Financial assets - classification and subsequent measurement - measurement categories. The Group classifies financial assets in the following measurement categories: FVTPL, FVOCI and AC. The classification and subsequent measurement of debt financial assets depends on: (i) the Group's business model for managing the related assets portfolio and (ii) the cash flow characteristics of the asset. The Group's financial assets include cash and cash equivalents, trade and other receivables, loans to subsidiary undertakings, all of which are classified as AC in accordance with IFRS 9.
Financial assets - classification and subsequent measurement - business model. The business model reflects how the Group manages the assets in order to generate cash flows - whether the Group's objective is: (i) solely to collect the contractual cash flows from the assets ("hold to collect contractual cash flows"), or (ii) to collect both the contractual cash flows and the cash flows arising from the sale of assets ("hold to collect contractual cash flows and sell") or, if neither of (i) and (ii) is applicable, the financial assets are classified as part of "other" business model and measured at FVTPL.
Business model is determined for a group of assets (on a portfolio level) based on all relevant evidence about the activities that the Group undertakes to achieve the objective set out for the portfolio available at the date of the assessment. Factors considered by the Group in determining the business model include past experience on how the cash flows for the respective assets were collected.
The Group's business model for financial assets is to collect the contractual cash flows from the assets ("hold to collect contractual cash flows").
Financial assets - classification and subsequent measurement - cash flow characteristics. Where the business model is to hold assets to collect contractual cash flows or to hold contractual cash flows and sell, the Group assesses whether the cash flows represent solely payments of principal and interest ("SPPI"). Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are consistent with the SPPI feature. In making this assessment, the Group considers whether the contractual cash flows are consistent with a basic lending arrangement, i.e. interest includes only consideration for credit risk, time value of money, other basic lending risks and profit margin.
Where the contractual terms introduce exposure to risk or volatility that is inconsistent with a basic lending arrangement, the financial asset is classified and measured at FVTPL. The SPPI assessment is performed on initial recognition of an asset and it is not subsequently reassessed.
Financial assets - reclassification. Financial instruments are reclassified only when the business model for managing the portfolio as a whole changes. The reclassification has a prospective effect and takes place from the beginning of the first reporting period that follows after the change in the business model. The Group did not change its business model during the current and comparative period and did not make any reclassifications.
Financial assets impairment - credit loss allowance for ECL. The Group assesses, on a forward-looking basis, the ECL for debt instruments measured at AC and FVOCI and for the exposures arising for contractual assets. The Group measures ECL and recognises Net impairment losses on financial and contractual assets at each reporting date. The measurement of ECL reflects: (i) an unbiased and probability weighted amount that is determined by evaluating a range of possible outcomes, (ii) time value of money and (iii) all reasonable and supportable information that is available without undue cost and effort at the end of each reporting period about past events, current conditions and forecasts of future conditions.
Debt instruments measured at AC and contractual assets are presented in the consolidated statement of financial position net of the allowance for ECL. For loan commitments and financial guarantees, a separate provision for ECL is recognised as a liability in the consolidated statement of financial position.
The Group applies a simplified approach for impairment of cash and cash equivalents, other short-term investments and trade and other receivables, by recognising lifetime expected credit losses based on past default experience and credit profiles, adjusted as appropriate for current observable data. For other financial assets the Group applies a three stage model for impairment, based on changes in credit quality since initial recognition. A financial instrument that is not credit-impaired on initial recognition is classified in Stage 1. Financial assets in Stage 1 have their ECL measured at an amount equal to the portion of lifetime ECL that results from default events possible within the next 12 months or until contractual maturity, if shorter ("12 Months ECL"). If the Group identifies a significant increase in credit risk ("SICR") since initial recognition, the asset is transferred to Stage 2 and its ECL is measured based on ECL on a lifetime basis, that is, up until contractual maturity but considering expected prepayments, if any ("Lifetime ECL"). If the Group determines that a financial asset is credit-impaired, the asset is transferred to Stage 3 and its ECL is measured as a Lifetime ECL. For financial assets that are purchased or originated credit-impaired ("POCI Assets"), the ECL is always measured as a Lifetime ECL.
Financial assets - write-off. Financial assets are written-off, in whole or in part, when the Group has exhausted all practical recovery efforts and has concluded that there is no reasonable expectation of recovery. The write-off represents a derecognition event. The Group may write-off financial assets that are still subject to enforcement activity when the Group seeks to recover amounts that are contractually due, however, there is no reasonable expectation of recovery.
Financial assets - derecognition. The Group derecognises financial assets when (a) the assets are redeemed or the rights to cash flows from the assets otherwise expire or (b) the Group has transferred the rights to the cash flows from the financial assets or entered into a qualifying pass-through arrangement whilst (i) also transferring substantially all the risks and rewards of ownership of the assets or (ii) neither transferring nor retaining substantially all the risks and rewards of ownership but not retaining control.
Financial assets - modification. If the modified terms are substantially different, the rights to cash flows from the original asset expire and the Company derecognises the original financial asset and recognises a new asset at its fair value. The date of renegotiation is considered to be the date of initial recognition for subsequent impairment calculation purposes, including determining whether a SICR has occurred. Any difference between the carrying amount of the original asset derecognised and fair value of the new substantially modified asset is recognised in profit or loss, unless the substance of the difference is attributed to a capital transaction with owners. If the modified asset is not substantially different from the original asset and the modification does not result in derecognition. The Group recalculates the gross carrying amount by discounting the modified contractual cash flows by the original effective interest rate (or credit-adjusted effective interest rate for POCI financial assets), and recognises a modification gain or loss in profit or loss.
Financial liabilities - measurement categories. Financial liabilities are classified as subsequently measured at AC, except for (i) financial liabilities at FVTPL: this classification is applied to derivatives, financial liabilities held for trading (e.g. short positions in securities), contingent consideration recognised by an acquirer in a business combination and other financial liabilities designated as such at initial recognition and (ii) financial guarantee contracts and loan commitments. The Group's financial liabilities include trade and other payables , lease liabilities , all of which are classified as AC in accordance with IFRS 9.
Financial liabilities - derecognition. Financial liabilities are derecognised when they are extinguished (i.e. when the obligation specified in the contract is discharged, cancelled or expires).
Trade Receivables
Trade receivables are amounts due from customers for goods sold in the ordinary course of business. If collection is expected in one year or less, they are classified as current assets. If not, they are presented as non-current assets.
Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less expected credit losses.
Prepayments
Prepayments are carried at cost less provision for impairment. A prepayment is classified as non-current when the goods or services relating to the prepayment are expected to be obtained after one year, or when the prepayment relates to an asset which will itself be classified as non-current upon initial recognition. Prepayments to acquire assets are transferred to the carrying amount of the asset once the Group has obtained control of the asset and it is probable that future economic benefits associated with the asset will flow to the Group. Other prepayments are written off to profit or loss when the services relating to the prepayments are received. If there is an indication that the assets, goods or services relating to a prepayment will not be received, the carrying value of the prepayment is written down accordingly and a corresponding impairment loss is recognised in profit or loss for the year.
Investments in subsidiaries
Investments made by the Company in its subsidiaries are stated at cost in the Company's financial statements and reviewed for impairment if there are indications that the carrying value may not be recoverable.
Loans issued to subsidiaries
Loans issued by the Company to its subsidiaries are initially recognised in the Company's financial statements at fair value and are subsequently carried at amortised cost using the effective interest method, less credit loss allowance. Net change in credit losses and foreign exchange differences on loans issued are recognised in the Company's statement of profit or loss in the period when incurred.
Trade and Other Payables
Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities.
Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.
Lease liabilities
Liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments:
-- fixed payments (including in-substance fixed payments),
less any lease incentives receivable,
-- variable lease payments that are based on an index or a
rate, initially measured using the index or rate as at
the commencement date,
-- the exercise price of a purchase option if the Group is
reasonably certain to exercise that option, and
-- payments of penalties for terminating the lease, if the
lease term reflects the Group exercising that option.
Extension and termination options are included in a number of property and equipment leases across the Group. These terms are used to maximise operational flexibility in terms of managing contracts. Extension options (or period after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated). Lease payments to be made under reasonably certain extension options are also included in the measurement of the liability.
The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, which is generally the case for leases of the Group, the Group's incremental borrowing rate is used, being the rate that the Group would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions.
To determine the incremental borrowing rate, the Group:
-- where possible, uses recent third-party financing received
by the individual lessee as a starting point, adjusted
to reflect changes in financing conditions since third
party financing was received,
-- uses a build-up approach that starts with a risk-free interest
rate adjusted for credit risk, and
-- makes adjustments specific to the lease, e.g. term, country,
currency and collateral.
The Group is exposed to potential future increases in variable lease payments based on an index or rate, which are not included in the lease liability until they take effect. When adjustments to lease payments based on an index or rate take effect, the lease liability is reassessed and adjusted against the right-of-use asset.
Lease payments are allocated between principal and finance costs. The finance costs are charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.
Payments associated with short-term leases and all leases of low-value assets under $5,000 are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less.
Equity Instruments
Ordinary shares are classified as equity. Equity instruments issued by the Company and the Group are recorded at the proceeds received, net of direct issue costs. Any excess of the fair value of consideration received over the par value of shares issued is recorded as share premium in equity.
Cash and Cash Equivalents
Cash and cash equivalents comprise cash on hand and deposits held at call with banks and other short-term highly liquid investments which are readily convertible to a known amount of cash with insignificant risk of change in value. Cash and cash equivalents are carried at amortised cost. Interest income that relates to cash and cash equivalents on current and deposit accounts is disclosed within operating cash flow.
Other short-term investments
Other short-term investments include current accounts and deposits held at banks, which do not meet the cash and cash equivalents definition. Current accounts and deposits held at banks, which do not meet the cash and cash equivalents definition are measured initially at fair value and subsequently carried at amortised cost using the effective interest method. Interest received on other short-term investments is disclosed within operating cash flow.
Interest income
Interest income is recognised as it accrues, taking into account the effective yield on the asset. Interest income on current bank accounts and on demand deposits or term deposits with the maturity less than three months recognised as part of cash and cash equivalents is recognised as other operating income. Interest income on term deposits other than those classified as cash and cash equivalents is recognised as finance income.
4. Significant Accounting Judgements and Estimates
The Group makes estimates and judgements concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and judgements which have a risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.
Depreciation of Oil and Gas Development and Production Assets
Development and production assets held in property, plant and equipment are depreciated on a unit of production basis at a rate calculated by reference to proved and probable reserves at the end of the period plus the production in the period, and incorporating the estimated future cost of developing and extracting those reserves. Future development costs are estimated using estimates about the number of wells required to produce those reserves, the cost of the wells, future production facilities and operating costs, together with assumptions on oil and gas realisations, and are revised annually. The reserves estimates used are determined using estimates of gas in place, recovery factors, future hydrocarbon prices and also take into consideration the Group's latest development plan for the associated development and production asset. The latest development plan and therefore the inputs used to determine the depreciation charge for the MEX-GOL, SV and VAS fields continue until the end of the economic life of the fields, which is assessed to be 2038, 2042 and 2028 respectively, based on the assessment contained in the DeGolyer & MacNaughton reserves report for these fields. The licences for the MEX-GOL and SV fields have recently been extended until 2044. Were the estimated reserves at the beginning of the year to differ by 10% from previous assumptions, the impact on depreciation for the year ended 31 December 2022 would be to increase it by $1,394,000 or decrease it by $626,000 (2021: increase by $1,195,000 or decrease by $975,000).
Provision for Decommissioning
The Group has decommissioning obligations in respect of its Ukrainian assets. The full extent to which the provision is required depends on the legal requirements at the time of decommissioning, the costs and timing of any decommissioning works and the discount rate applied to such costs.
A detailed assessment of gross decommissioning cost was undertaken on a well-by-well basis using local data on day rates and equipment costs. The discount rate applied on the decommissioning cost provision as at 31 December 2022 was 4.76 % (31 December 2021: 6.29%). The discount rate is calculated in real terms based on the yield to maturity of Ukrainian Government bonds denominated in the currency in which the liability is expected to be settled and with the settlement date that approximates the timing of settlement of decommissioning obligations. Increase of the discount rate applied is caused by the growth of the Ukrainian risk-free rate.
The change in estimate applied to calculate the provision as at 31 December 2022 resulted from the revision of the estimated costs of decommissioning (increase of $1,477,000 in provision), an increase in the discount rate applied (increase of $1,020,000 in provision). The costs are expected to be incurred by 2038 on the MEX-GOL field, by 2042 on the SV field, and by 2028 on the VAS field, which is the end of the estimated economic life of the respective fields (Note 25).
Net Carrying Amount of Inter-Company Loans Receivable and Investments by the Company into a Subsidiary
The Company has certain inter-company loans receivable from a subsidiary, which are eliminated on consolidation. For the purpose of the Company's financial statements, these receivable balances are carried at amortised cost using the effective interest method, less credit loss allowance. Measurement of lifetime expected credit losses on inter-company loans is a significant judgment that involves models and data inputs including forward-looking information, current conditions and forecasts of future conditions impacting the estimated future cash flows that are expected to be recovered, time value of money, etc. In previous years, significant impairment charges were recorded against the carrying amount of the loans issued to subsidiaries as the present value of estimated future cash flows discounted at the original effective interest rate was less than the carrying amount of the loans, and the resulting impairment losses were recognised in profit or loss in the Company's financial statements.
For the purpose of assessment of the credit loss allowance as at 31 December 2022, the Company considered all reasonable and supportable forward-looking information available as at that date without undue cost and effort, which includes a range of factors, such as estimated future net cash flows to be generated by the subsidiaries operating in Ukraine and cash flow management. All these factors have a significant impact on the amounts subject to repayment on the loans and investments. The estimated future discounted cash flows generated by the subsidiaries operating in Ukraine are considered as a primary source of repayment on the loans and investments. As at 31 December 2022, the present value of future net cash flows to be generated by the subsidiaries operating in Ukraine during 2023 - 2027, adjusted for the subsidiaries' working capital as at 31 December 2022 and estimated amounts reserved by the Group for investment projects in the time horizon was calculated.
The key assumptions used in the discounted cash flow model are:
-- production levels for a period of five years assumed to
be: at the level of 6.9 MMboe for the MEX-GOL and SV fields
and zero for the period of suspension of the VAS field
and SC licence area;
-- reserves at the beginning of 2023 at the MEX-GOL and SV
fields of 31.9 MMboe, at the VAS field of 1.2 MMboe and
at the SC licence area of 10.8 MMboe;
-- commodity prices - the model assumes gas prices of $464/Mm(3)
in 2023, $581/Mm(3) in 2024, decreasing to $509/Mm(3) in
2025, $450/Mm(3) in 2026 and $300/Mm(3) in subsequent years;
-- discount rate applied is 11.66%, determined in real terms;
-- production taxes applicable to gas production at variable
rates under relevant legislation;
-- capital expenditure allowance for maintenance and development
of: MEX-GOL and SV fields at the level of $750,000 per
year, VAS field at the level of $250,000 per year and SC
licence area at the level of $100,000 per year;
-- future capital expenditures for a period of five years
assumed to be: for the MEX-GOL and SV fields at the level
of $170,500,000, VAS field at the level of $200,000 and
SC licence area at the level of $0;
-- life of field for the purpose of the assessment of loans
- cash flows were taken for a period of five years as management
believes there is no reasonably available information to
build reliable expectations and demonstrate the ability
to settle the loans over a longer perspective ;
-- life of field for the purpose of the assessment of investments
- cash flows were taken for a period of the full economic
life of the respective CGUs.
The resulting amount, net of the carrying value of the Company's investments in subsidiaries and loans, was compared to the discounted cash flows and net financial assets of the subsidiaries as at 31 December 2022. As such, the Company has recorded $ 9 ,942,000 of loss, being the net change in the expected credit losses for loans issued to and investments in subsidiaries in the Company's statement of profit or loss for the year ended 31 December 2022.
As with any economic forecast, the projections and likelihoods of occurrence are subject to a high degree of inherent uncertainty, and therefore the actual outcomes may be significantly different to those projected. The Company considers these forecasts to represent its best estimate of the possible outcomes.
5. Segmental Information
In line with the Group's internal reporting framework and management structure, the key strategic and operating decisions are made by the Board of Directors, who review internal monthly management reports, budget and forecast information as part of this process. Accordingly, the Board of Directors is deemed to be the Chief Operating Decision Maker within the Group.
The Group's only class of business activity is oil and gas exploration, development and production. The Group's operations are located in Ukraine, with its head office in the United Kingdom. These geographical regions are the basis on which the Group reports its segment information. The segment results as presented represent operating profit before depreciation, amortisation and impairment of non-current assets.
Ukraine United Total
Kingdom
2022 2022 2022
$000 $000 $000
Revenue
Gas sales 109,461 - 109,461
Condensate sales 12,744 - 12,744
Liquefied Petroleum Gas sales 11,175 - 11,175
------------------------------- -------- --------- --------
Total revenue 133,380 - 133,380
Segment result 84,750 (1,140) 83,610
Depreciation and amortisation
of non-current assets (7,837) - (7,837)
Operating profit 75,773
Segment assets 158,982 82,752 241,734
Capital additions* 19,807 - 19,807
*Comprises additions to property, plant and equipment (Note 17)
There are no inter-segment sales within the Group and all products are sold in the geographical region in which they are produced. The Group is not significantly impacted by seasonality. Revenue is recognised at a point in time.
During 2022, the Group was selling all of its gas production to its related party, LLC Smart Energy ("Smart Energy"). Smart Energy has oil and gas operations in Ukraine and is part of the PJSC Smart-Holding Group, which was ultimately controlled by Mr Vadym Novynskyi, who until 1 December 2022, through an indirect 82.65% majority shareholding, ultimately controlled the Group. This arrangement came about in 2017 as a consequence of the Ukrainian Government introducing a number of new provisions into the Ukrainian Tax Code over the previous two years, including transfer pricing regulations for companies operating in Ukraine. The introduction of the new regulations has meant that there is an increased regulatory burden on affected companies in Ukraine who must prepare and submit reporting information to the Ukrainian Tax Authorities. Due to the corporate structure of the Group, a substantial proportion of its gas production is produced by a non-Ukrainian subsidiary of the Group, which operates in Ukraine as a branch, or representative office as it Is classified in Ukraine. Under the Ukrainian tax regulations, this places additional regulatory obligations on each of the Group's potential customers who may be less inclined to purchase the Group's gas and/or may seek discounts on sales prices. As a result of discussions between the Company and Smart Energy, Smart Energy agreed to purchase all of the Group's gas production and to assume responsibility for the regulatory obligations under the Ukrainian tax regulations. Furthermore, Smart Energy agreed to combine the Group's gas production with its own gas production, and to sell such gas as combined volumes, which was intended to result in higher sales prices due to the larger sales volumes. In order to cover Smart Energy's sales, administration and regulatory compliance costs, the Group sold its gas to Smart Energy at a discount of 2.0% to the gas sales prices achieved by Smart Energy, who sold the combined volumes in line with market prices. The terms of sale for the Group's gas to Smart Energy were (i) for 35% of the monthly volume of gas by the 15(th) of the month following the month of delivery, and (ii) payment of the remaining balance by the end of that month. This arrangement was terminated subsequent to the year end.
Ukraine United Total
Kingdom
2021 2021 2021
$000 $000 $000
Revenue
Gas sales 95,813 - 95,813
Condensate sales 19,260 - 19,260
Liquefied Petroleum Gas sales 6,280 - 6,280
------------------------------- ----------- --------- -----------
Total revenue 121,353 - 121,353
Segment result 81,025 (2,832) 78,193
Depreciation and amortisation
of non-current assets (11,958) - (11,958)
Operating profit 66,235
Segment assets 144,941 63,649 208,590
Capital additions* 32,577 - 32,577
*Comprises additions to property, plant and equipment (Note 17)
6. Cost of Sales
202 2 202 1
$000 $000
Production taxes 25,271 19,926
Depreciation of property, plant and equipment 6,684 10,669
Rent expenses (Note 19) 8,468 8,811
Staff costs (Note 9) 2,149 2,886
Cost of inventories recognised as an expense 1,510 1,708
Transmission tariff for Ukrainian gas system 493 880
Amortisation of mineral reserves (Note 18) 411 482
Other expenses 2,471 2,060
----------------------------------------------- ------- --------
47,457 47,422
A transmission tariff for use of the Ukrainian gas transit system of UAH101.93/Mm(3) of gas was applicable to
the Group (202 1 : UAH101.93/Mm(3) ).
7. Administrative Expenses
202 2 202 1
$000 $000
Staff costs (Note 9) 4,105 5,019
Consultancy fees 906 923
Depreciation of other fixed assets 297 572
Auditors' remuneration 326 352
Amortisation of other intangible assets 169 235
Rent expenses 248 160
Other expenses 779 1,089
--------------------------------------------- ------ -------
6,830 8,350
Auditors Remuneration
PricewaterhouseCoopers LLP
202 2 202 1
$000 $000
Audit of the Company and subsidiaries 37 141
Audit of subsidiaries in Ukraine 10 124
Audit related assurances services - interim
review - 48
--------------------------------------------- ------ -------
Total assurance services 47 313
Tax compliance services - 26
Tax advisory services 3 13
Total non-audit services 3 39
--------------------------------------------- ------ -------
Total audit and other services 50 352
Zenith Audit Ltd
202 2 202 1
$000 $000
Audit of the Company and subsidiaries 139 -
Audit of subsidiaries in Ukraine - -
Audit related assurances services - interim - -
review
Total assurance services - -
Tax compliance services - -
Tax advisory services - -
Total non-audit services - -
Total audit and other services 139 -
8. Remuneration of Directors
2022 2021
$000 $000
Directors' emoluments 1,325 1,115
----------------------- ------ ------
The emoluments of the individual Directors were as follows:
Total Total
Emoluments emoluments
202 2 2021
$000 $000
Executive Directors:
Sergii Glazunov 473 307
Bruce Burrows 546 484
Non-executive Directors:
Chris Hopkinson 124 138
Alexey Pertin 56 62
Yuliia Kirianova 56 62
Dmitry Sazonenko 50 62
Dr Gehrig Schultz* 20 -
1,325 1,115
*appointed 24 August 2022
The emoluments include base salary, bonuses and fees. According to the Register of Directors' Interests, no rights to subscribe for shares in or debentures of any Group companies were granted to any of the Directors or their immediate families during the financial year, and there were no outstanding options to Directors.
9. Staff Numbers and Costs
The average monthly number of employees during the year (including Executive Directors) and the aggregate staff costs of such employees were as follows:
Number of employees
2022 2021
Group
Management / operational 166 171
Administrative support 81 92
-------------------------- ---------- ----------
247 263
The prior year comparative numbers of employees were amended to conform to the current year presentation. The number of employees includes full-time and part-time employees.
202 2 202 1
$000 $000
Wages and salaries 5,729 6,785
Other pension costs 816 1,007
Social security costs 90 113
6,635 7,905
10. Other Operating (Losses)/Gains, (net)
202 2 202 1
$000 $000
Interest income on cash and cash equivalents 1,888 763
Contractor penalties applied 114 81
Gain on sales of current assets 20 16
Impairment of property, plant and equipment (4,257) -
(Note 17)
Other operating (loss)/income, net (1,085) ( 206 )
(3,320) 654
11. Finance Income
202 2 202 1
$000 $000
Financial instrument: unwinding of discount 1,126 -
Foreign exchange gains less losses - 1,394
1,126 1,394
12. Finance Costs
2022 2021
$000 $000
Unwinding of discount on financial liabilities 996 333
Unwinding of discount on provision for decommissioning
(Note 25) 293 250
Interest expense on lease liabilities 121 169
1,410 752
13. Other Losses, (net)
2022 2021
$000 $000
Charitable donations 6,534 76
Foreign exchange (gains)/losses (4,843) 53
Other losses/(gains), net 47 (21)
1,738 108
Charitable donations for the year ended 31 December 2022 comprise humanitarian aid in for population and armed forces of Ukraine (2021: contributions to the development of social infrastructure of local communities ).
14. Income Tax Expense
a) Income tax expense and (benefit):
2022 2021
$000 $000
Current tax
UK - current year 54 165
UK - prior year - 10
Overseas - current year 14,263 13,130
Overseas - prior year - -
Deferred tax (Note 26)
UK - current year 1,852 2,367
UK - prior year (3,021) -
Overseas - current year (24) (199)
Income tax expense 13,124 15,473
b) Factors affecting tax charge for the year:
The tax assessed for the year is different from the corporation tax in the UK of 19.00%. The expense for the year can be reconciled to the profit as per the Income Statement as follows:
2022 2021
$000 $000
Profit before taxation 73,307 66, 592
------------------------------------------------ -------- ----------
Tax charge at UK tax rate of 19.00% (2021: 12,6 5
19.00%) 13,928 2
Tax effects of:
Lower foreign corporate tax rates in Ukraine
(18.00%) (202 1 : 18.00%) (699) (685)
Change in UK tax rate from 19% to 25% starting
from 1 April 2023 - 1,168
Disallowed expenses and non-taxable income 6,708 1 2 , 038
Previously unrecognised tax losses used to
reduce income tax expense (3,792) ( 9 ,875)
Adjustments in respect of prior periods (3,021) 175
------------------------------------------------ -------- ----------
Total tax expense for the year 13,124 15,473
The tax effect of disallowed expenses and non-taxable income are mainly represented by foreign exchange differences of Regal Petroleum Corporation (Ukraine) Limited and the net change in credit loss allowance for loans issued to subsidiaries and shares in subsidiary undertakings.
The tax effect of losses not recognised as deferred tax assets are mainly represented by accumulated losses of Regal Petroleum Corporation (Ukraine) Limited.
15. Loss/Profit for the Year
The Company has taken advantage of the exemption allowed under section 408 of the Companies Act 2006 and has not presented its own Income Statement in these financial statements. The Parent Company loss after tax was $6,358 , 000 for the year ended 31 December 202 2 (202 1 : profit after tax $ 16 , 330, 000).
16. Earnings per Share
The calculation of basic earnings per ordinary share has been based on the profit for the year and 320,637,836 (202 1 : 320,637,836) ordinary shares, being the weighted average number of shares in issue for the year. There are no dilutive instruments.
17. Property, Plant and Equipment
202 2 202 1
Oil and Oil and Other Total Oil and Gas Oil and Other Total
Gas Gas fixed Development Gas fixed
Development Exploration assets and Exploration assets
and and Production and
Production Evaluation assets Evaluation
assets Assets Ukraine Assets
Ukraine
Group $000 $000 $000 $000 $000 $000 $000 $000
Cost
At the beginning of the 2,21 140,54
year 163,170 10,110 2,631 175,911 135,966 2,362 7 5
Additions 12,872 6,549 386 19,807 24,289 7,763 524 32,576
Change in decommissioning
provision 2,596 38 - 2,634 (1,921) 70 - (1,851)
Disposals (200) (18) (356) (574) (62) - (187) (249)
Exchange differences (43,183) (3,586) (693) (47,462) 4,898 (85) 77 4,890
----------------------------- -------------- ------------ ------- --------- -------------- ------------ ------- ---------
At the end of the year 135,255 13,093 1,968 150,316 163,170 10,110 2,631 175,911
----------------------------- -------------- ------------ ------- --------- -------------- ------------ ------- --------- Accumulated depreciation and impairment At the beginning of the 1,06 74,88 year 87,070 - 1,423 88,493 73,816 - 7 3 Charge for year 6,906 - 301 7,207 10,544 - 343 10,887 Disposals (75) - (57) (132) (25) - (28) (53) Impairment charged 2,361 1,896 4,257 Exchange differences (23,154) (219) (392) (23,765) 2,735 - 41 2,776 ----------------------------- -------------- ------------ ------- --------- -------------- ------------ ------- --------- At the end of the year 73,108 1,677 1,275 76,060 87,070 - 1,423 88,493 ----------------------------- -------------- ------------ ------- --------- -------------- ------------ ------- --------- Net book value at the beginning of the year 76,100 10,110 1,208 87,418 62, 150 2,362 1,150 65, 662 ----------------------------- -------------- ------------ ------- --------- -------------- ------------ ------- --------- Net book value at the end of the year 62,147 11,416 693 74,256 76,100 10,110 1,208 87,418 ----------------------------- -------------- ------------ ------- --------- -------------- ------------ ------- ---------
MEX-GOL, SV, SC and VAS gas and condensate fields
In accordance with the Group's accounting policies, oil and gas development and producing assets are tested for an impairment loss at each balance sheet date. In assessing whether an impairment loss has occurred, the carrying amount of the asset is compared to its recoverable amount, which IAS 36 defines as the higher of fair value less cost to sell and value in u se. Management does not believe it possible to measure fair value reliably, due to both the absence of an active market in which to sell the asset and the current political and economic climate in Ukraine. Therefore, as in previous years, management has used value in use, using a discounted cash flow ('DCF') model, to measure its recoverable amount.
Due to the suspension of the VAS and SC licences for five years, zero production was attributed for this period in the DCF models.
This resulted in the recognition of an impairment loss for the VAS assets of $4,256,000 (2012: $nil), to match the carrying value of the asset to its recoverable value, based on the revised estimate of value in use.
The calculation of value in use is most sensitive to the following assumptions:
-- production levels and reserves at the beginning of 2023
at the MEX-GOL and SV fields of 31.9 MMboe, at the VAS
field of 1.2 MMboe and at the SC licence area of 10.8 MMboe
with zero production for the period of suspension of the
VAS and SC licences;
-- commodity prices - the model assumes gas prices of $464/Mm3
in 2023, $581/Mm3 in 2024, decreasing to $509/Mm3 in 2025,
$450/Mm3 in 2026 and $300/Mm3 in subsequent years;
-- discount rate applied is 11.66%, determined in real terms;
-- production taxes applicable to gas production at variable
rates under relevant legislation;
-- capital expenditure allowance for maintenance and development
of: MEX-GOL and SV fields at the level of $750,000 per
year, VAS field at the level of $250,000 per year and SC
licence area at the level of $100,000 per year;
-- future capital expenditures for a period of five years
assumed to be: for the MEX-GOL and SV fields at the level
of $245,700,000, VAS field at the level of $14,800,000
and SC licence area at the level of $116,700,000;
-- life of field for the purpose of the assessment of investments
- cash flows were taken for a period of the full economic
life of the respective CGUs (Note 4).
18. Intangible Assets
202 2 202 1
Mineral Exploration Other Total Mineral Exploration Other Total
reserve and intangible reserve and intangible
rights evaluation assets rights evaluation assets
intangible intangible
assets assets
Group $000 $000 $000 $000 $000 $000 $000 $000
Cost
At the beginning of the
year 6,810 8,651 752 16,213 6,570 8,286 616 15,472
Additions - - 322 322 - 143 324 467
Disposals - - (27) (27) - (80) (212) (292)
Exchange differences (1,730) (2,218) (187) (4,135) 240 302 24 566
-------------------------- ------------ ------------ ----------- -------- ----------- ------------ ----------- -------------
At the end of the year 5,080 6,433 860 12,373 6,810 8,651 752 16,213
-------------------------- ------------ ------------ ----------- -------- ----------- ------------ ----------- -------------
Accumulated amortisation
At the beginning of the
year 3,439 - 434 3,873 2,855 - 385 3,240
Charge for year 411 - 182 593 482 - 239 721
Disposals - - (27) (27) - - (212) (212)
Exchange differences (925) - (135) (1,060) 102 - 22 124
-------------------------- ------------ ------------ ----------- -------- ----------- ------------ ----------- -------------
At the end of the year 2,925 - 454 3,379 3,439 - 434 3,873
-------------------------- ------------ ------------ ----------- -------- ----------- ------------ ----------- -------------
Net book value at the
beginning
of the year 3,371 8,651 318 12,340 3,715 8,286 231 12,232
-------------------------- ------------ ------------ ----------- -------- ----------- ------------ ----------- -------------
Net book value at the end
of the year 2,155 6,433 406 8,994 3,371 8,651 318 12,340
-------------------------- ------------ ------------ ----------- -------- ----------- ------------ ----------- -------------
Intangible assets consist mainly of the hydrocarbon production licence relating to the VAS field which is held by one of the Group's subsidiaries, LLC Prom-Enerho Produkt, and a hydrocarbon exploration licence relating to the Svystunivsko-Chervonolutskyi ("SC") area which is held by LLC Arkona Gas-Energy. The Group amortises the hydrocarbon production licence relating to the VAS field using the straight-line method over the term of the economic life of the VAS field until 2028. The hydrocarbon exploration licence relating to the SC area is not amortised due to it being in an exploration and evaluation stage.
In accordance with the Group's accounting policies, intangible assets are tested for impairment at each balance sheet date as part of the impairment testing of the Group's oil and gas development and production assets if impairment indicators exist. As at 31 December 2022, intangible assets were tested for an impairment loss, however no loss was recognised in the period.
19. Right-of-use Assets
This note provides information for right-of-use assets and leases obligations where the Group is a lessee.
Amount recognised in the balance sheet:
202 2 202 1
$000 $000
Right-of-use assets
Properties 150 627
Land 170 242
Wells 44 139
--------------------- ------ ------
364 1,008
202 2 202 1
$000 $000
Lease liabilities
Current 229 455
Non-current 258 648
------------------- ------ ------
487 1,103
After modification and due to termination of contracts disposals to the right-of-use assets during the 202 2 financial year were $271,000 (202 1 : additions to the right-of-use assets after modification were $ 820 ,000).
Amounts recognised in the statement of profit or loss:
202 2 202 1
$000 $000
Depreciation charge
Properties (237) (311)
Land (14) (15)
Wells (5) (34)
------------------------------------------------- -------- --------
( 256 ) (360)
Interest expense (included in finance cost) (121) (169)
Expense relating to short-term leases (included
in cost of sales and administrative expenses) (228) (142)
Expense relating to variable lease payments
not included in lease liabilities (included (8,4 30
in cost of sales) ) (8,765)
Expense relating to lease payments for land
under wells not included in lease liabilities
(included in cost of sales) (3 8 ) (64)
The total cash outflow for leases in 202 2 was $12,464,000 (202 1 : $ 10 , 217 ,000).
20. Investments and Loans to Subsidiary Undertakings
Shares in Loans to
subsidiary subsidiary
undertakings undertakings Total
$000 $000 $000
Company
As at 1 January 202 1 35,287 62,828 98,115
-------------------------------------- -------------- -------------- ---------
Additions including accrued interest - 15,447 15,447
Disposal of shares in subsidiary (3,322) - (3,322)
Accumulated impairment on disposal
of shares in subsidiary 3,322 - 3,322
Repayment of interest and loans - (32,132) (32,132)
Reversal of impairment 3,240 7,672 10,912
Exchange differences - (4,916) (4,916)
-------------------------------------- -------------- -------------- ---------
As at 31 December 2021 38,527 48,899 87,426
-------------------------------------- -------------- -------------- ---------
Additions including accrued interest 3 6,740 6,743
Repayment of interest and loans - (1,077) (1,077)
Impairment (7,826) (2,116) (9,942)
Exchange differences - (2,472) (2,472)
-------------------------------------- -------------- -------------- ---------
As at 31 December 202 2 30,704 49,974 80,678
-------------------------------------- -------------- -------------- ---------
The Company has recorded a loss of $2,116,000, being the net change in expected credit losses for loans issued to subsidiaries in the Company's statement of profit or loss for the year ended 31 December 2022 (Note 4). The Company also recorded a loss of $7,826,000, being the net change in credit loss allowance for shares in subsidiary undertakings.
The Company's discounted cash flow model used for the assessment of the investments recoverability, flexed for sensitivities, produced the following results:
31 December 31 December
2022 2021
$000 $000
Discount rate (increase)/decrease
by 1% (247)/220 ( 641 )/ 676
Change in gas price increase/(decrease) 1,664 /( 1 3 , 388 /( 3
by 10% , 647 ) , 411 )
----------------------------------------- ------------ -------------
The table presented below discloses the changes in the gross carrying amount and credit loss allowance between the beginning and the end of the reporting period for loans to subsidiary undertakings carried at amortised cost and classified within a three-stage model for impairment assessment as at 31 December 2022:
Credit loss allowance Gross carrying amount
Stage Stage Stage 3 Total Stage Stage Stage 3 Total
1 2 1 2
--------- --------
(12-months (lifetime (lifetime (12-months (lifetime (lifetime
ECL) ECL ECL for ECL) ECL for ECL for
for credit SICR) credit
SICR) impaired) impaired)
-------------- ----------- ---------- ----------- --------- ----------- ---------- -------------- --------
$000 $000 $000 $000 $000 $000 $000 $000
As at 1
January
202 2 (637) - (16,044) (16,681) 12,276 - 53,304 65,580
-------------- ----------- ---------- ----------- --------- ----------- ---------- -------------- --------
Movements
with
impact on
credit
loss
allowance
charge for
the
year:
Modification
of
loans - - (876) (876) - - 876 876
Additions
including
accrued
interest - - - - 4,958 - 1,782 6,740
Payment of
interest - - - - - - (1,077) (1,077)
Repayment of - - - - - - - -
loans
Exchange
difference - - 120 120 - - (2,592) (2,592)
Changes to
ECL
measurement
model
assumptions (1,085) - (1,031) (2,116) - - - -
-------------- ----------- ---------- ----------- --------- ----------- ---------- -------------- --------
Total
movements
with impact
on
credit loss
allowance
charge for
the
year (1,085) - (1,787) (2,872) 4,958 - (1,011) 3,947
-------------- ----------- ---------- ----------- --------- ----------- ---------- -------------- --------
As at 31
December
202 2 (1,722) - (17,831) (19,553) 17,234 - 52,293 69,527
-------------- ----------- ---------- ----------- --------- ----------- ---------- -------------- --------
ECL - Expected credit losses
SICR - Significant increase in credit risk
The table presented below discloses the changes in the gross carrying amount and credit loss allowance between the beginning and the end of the reporting period for loans to subsidiary undertakings carried at amortised cost and classified within a three-stage model for impairment assessment as at 31 December 2021:
Credit loss allowance Gross carrying amount
Stage Stage Stage Total Stage Stage Stage 3 Total
1 2 3 1 2
--------- ---------
(12-months (lifetime (lifetime (12-months (lifetime (lifetime
ECL) ECL ECL for ECL) ECL for ECL for
for credit SICR) credit
SICR) impaired) impaired)
-------------- ----------- ---------- ----------- --------- ----------- ---------- ------------- ---------
$000 $000 $000 $000 $000 $000 $000 $000
As at 1
January
2021 - - (20,375) (20,375) - - 83,203 83,203
-------------- ----------- ---------- ----------- --------- ----------- ---------- ------------- ---------
Movements
with
impact on
credit
loss
allowance
charge for
the
year:
Modification
of
loans - - (5,378) (5,378) - - 5,378 5,378
Additions
including
accrued
interest - - - - 12,276 - 3,171 15,447
Payment of
interest - - - - - - (3,134) (3,134)
Repayment of
loans - - - - - - (28,998) (28,998)
Exchange
difference - - 1,400 1,400 - - (6,316) (6,316)
Changes to
ECL
measurement
model
assumptions (637) - 8,309 7,672 - - - -
-------------- ----------- ---------- ----------- --------- ----------- ---------- ------------- --------- Total movements with impact on credit loss allowance charge for the year (637) - 4,331 3,694 12,276 - (29,899) (17,623) -------------- ----------- ---------- ----------- --------- ----------- ---------- ------------- --------- As at 31 December 2021 (637) - (16,044) (16,681) 12,276 - 53,304 65,580 -------------- ----------- ---------- ----------- --------- ----------- ---------- -------------
ECL - Expected credit losses
SICR - Significant increase in credit risk
Subsidiary undertakings
As at 31 December 2022 and 2021, the Company's subsidiary undertakings, all of which are included in the consolidated financial statements, were:
Registered Country Country Principal % of shares held
address of of operation activity
incorporation
31 December 31 December
2022 2021
3(rd) Floor,
Charter Place,
23-27 Seaton
Regal Petroleum Place, St Helier,
Corporation Jersey, JE4 Oil & Natural
Limited 0WH Jersey Ukraine Gas Extraction 100% 100%
Regal Petroleum 162 Shevchenko Ukraine Oil & Natural
Corporation Str., Yakhnyky Gas Extraction
Limited Village, Lokhvytsya
(Branch District, Poltava
Office) Region, 37212
162 Shevchenko Exploration
Str., Yakhnyky and Evaluation
Village, Lokhvytsya for Oil
LLC Arkona District, Poltava and Natural
Gas-Energy Region, 37212 Ukraine Ukraine Gas 100% 100%
LLC Regal 162 Shevchenko
Petroleum Str., Yakhnyky
Corporation Village, Lokhvytsya
(Ukraine) District, Poltava Holding
Limited Region, 37212 Ukraine Ukraine Company 100% 100%
3 Klemanska
LLC Prom-Enerho Str., Kiev, Oil & Natural
Produkt 02081 Ukraine Ukraine Gas Extraction 100% 100%
58 Yaroslavska
Well Investum str., Kyiv, Dormant
LLC 04071 Ukraine Ukraine Company 100% -
*Regal Group 16 Old Queen
Services Street, London, United United Service
Limited SW1H 9HP Kingdom Kingdom Company 100% 100%
3(rd) Floor,
Charter Place,
23-27 Seaton
*Regal Petroleum Place, St Helier,
(Jersey) Jersey, JE4 United Holding
Limited 0WH Jersey Kingdom Company - 100%
*Regal Petroleum (Jersey) Limited was dissolved on 11 November 2022, and Regal Group Services Limited was dissolved on 21 February 2023.
The Parent Company, Enwell Energy plc, holds direct interests in 100% of the share capital of Regal Petroleum Corporation Limited, Regal Petroleum Corporation (Ukraine) Limited, LLC Arkona Gas-Energy and Well Investum LLC, and a 100% indirect interest in LLC Prom-Enerho Produkt through its 100% shareholding in Regal Petroleum Corporation (Ukraine) Limited, which owns all of the share capital of LLC Prom-Enerho Produkt. The Parent Company, Enwell Energy plc, held a direct interest in 100% of the share capital of Regal Group Services Limited until it was dissolved on 21 February 2023.
21. Inventories
Group
202 2 202 1
$000 $000
Current
Materials and spare parts 1,914 1,705
Finished goods 1,444 157
-------------------------------------------- ---------
3,358 1,862
Inventories consist of materials, spare parts and finished goods. Materials and spare parts are represented by spare parts that were not assigned to any new wells, production raw materials and fuel at the storage facility. Finished goods consist of produced gas held in underground gas storage facilities and condensate and LPG held at the processing facility prior to sale.
As at 31 December 2022 allowances for impairment of materials and spare parts amounted to $705,000 (31 December 2021: $965,000).
All inventories are measured at the lower of cost or net realisable value. There was no write down of inventory as at 31 December 2022 or 2021.
22. Trade and Other Receivables
Group Company
2022 2021 2022 2021
$000 $000 $000 $000
Trade receivables 46,188 5,308 - -
Other financial receivables 284 200 285 196
Financial aids 11,316 - - -
Less credit loss allowance (433) (140) - -
--------- ------- --------- ---------
Total financial receivables 57,355 5,368 285 196
Prepayments and accrued
income 4,509 298 249 28
Other receivables 2,574 2,460 81 75
--------- ------- --------- ---------
Total trade and other
receivables 60,438 8,126 615 299
Due to the short-term nature of the trade and other receivables, their carrying amount is assumed to be the same as their fair value. All trade and other financial receivables, except those provided for, are considered to be of high credit quality.
As at 31 December 2022, the Group's total trade receivables, net of expected credit losses amounted to $46,033,000 and 100% were denominated in Ukrainian Hryvnia (31 December 2021: $5,169,000 and 100% were denominated in Ukrainian Hryvnia). Further description of financial receivables is disclosed in Note 30.
The majority of the trade receivables were from a related party, LLC Smart Energy, that purchased all of the Group's gas production (see Note 5). The applicable payment terms, which were revised in the period, are payment for 35% of the monthly volume of gas by the 15(th) of the month following the month of delivery, and payment of the remaining balance by the end of that month. This arrangement was terminated subsequent to the year end.
Analysis by credit quality of financial trade and other receivables and expected credit loss allowance as at 31 December 2022 is as follows:
Loss rate Gross carrying Life-time Carrying Basis
amount ECL amount
$000 $000 $000
Trade receivables financial position
from related of related
parties 9,99% 46,003 (126) 45,877 party
number of days
Trade receivables the asset past
- -credit impaired 100% 98 (98) - due
historical
Trade receivables credit losses
- other 9.99% 87 (1) 86 experienced
Other financial individual
receivables 9.99% 284 (25) 259 default rates
Financial aids 11,316 (183) 11,133
Total trade
and other receivables
for which individual
approach for
ECL is used 57, 788 (433) 57,355
Analysis by credit quality of financial trade and other receivables and expected credit loss allowance as at 31 December 2021 is as follows:
Loss rate Gross carrying Life-time Carrying Basis
amount ECL amount
$000 $000 $000
Trade receivables financial position
from related of related
parties 5% 5,015 (7) 5,008 party
number of days
Trade receivables the asset past
- -credit impaired 100% 132 (132) - due
historical
Trade receivables credit losses
- other 0.21% 161 - 161 experienced
Other financial individual
receivables 0.48% 200 (1) 199 default rates
Total trade
and other receivables
for which individual
approach for
ECL is used 5,508 (140) 5,368
ECL - Expected credit losses
The following table explains the changes in the credit loss allowance for trade and other receivables under the simplified ECL model between the beginning and the end of the year:
202 2 202 1
$000 $000
Trade and other receivables
Balance as at 1 January 140 133
New originated or purchased 441 24
Financial assets derecognised during the
year (172) (19)
Changes in estimates and assumptions 61 (3)
Foreign exchange movements (3 7 ) 5
Balance as at 31 December 433 140
23. Cash and Cash Equivalents and Other short-term investments
Group Company
202 2 202 1 202 2 202 1
$000 $000 $000 $000
Cash and Cash Equivalents
Cash at bank 33,243 75,457 26,541 63,299
Demand deposits and term deposits
with maturity of less than 3
months 55,409 12,323 55,000 -
88,652 87,780 81,541 63,299
Other short-term investments
Demand deposits and term deposits
with maturity of more than 3
months but less than a year - 4,762 - -
- 4,762 - -
Cash at bank earns interest at fluctuating rates based on daily bank deposit rates. Demand deposits are made for varying periods depending on the immediate cash requirements of the Group and earn interest at the respective short-term deposit rates. The terms and conditions upon which the Group's demand deposits are made allow immediate access to all cash deposits, with no significant loss of interest.
Group Company
202 2 202 1 202 2 202 1
$000 $000 $000 $000
Cash and Cash Equivalents
Ukrainian Hryvnia 6,874 24,249 - -
US Dollars 81,282 63,247 81,046 63,015
British Pounds 223 275 223 275
Euros 273 9 272 9
88,652 87,780 81,541 63,299
Other short-term investments
Ukrainian Hryvnia - 4,762 - -
- 4,762 - -
The credit quality of cash and cash equivalents balances and other short-term investments may be summarised based on Moody's ratings as follows as at 31 December:
Demand deposits Demand deposits
and term deposits and term deposits Total cash
Cash at with maturity with maturity and cash equivalents
bank and less than 3 more than 3 and other short-term
on hand months months investments
202 2 202 2 202 2 202 2
$000 $000 $000
A- to A+
rated 26,537 55,000 - 81,537
B- to B+ - - - -
rated
C- to C+
rated 3,209 409 - 3,618
Unrated 3,497 - - 3,497
33,243 55,409 - 88,652
Demand deposits Demand deposits
and term deposits and term deposits Total cash
with maturity with maturity and cash equivalents
Cash at bank less than 3 more than 3 and other short-term
and on hand months months investments
2021 2021 2021 2021
$000 $000 $000
A- to A+
rated 63,290 - - 63,290
B- to B+
rated 900 8,660 4,762 14,322
Unrated 11,267 3,663 - 14,930
75,457 12,323 4,762 92,542
For cash and cash equivalents and other short-term investments, the Group assessed ECL based on the Moody's rating for rated banks and based on the sovereign rating of Ukraine defined by Fitch as "RD" as at 31 December 2022 for non-rated banks. Based on this assessment, the Group concluded that the identified impairment loss was immaterial.
24. Trade and Other Payables
Group Company
202 2 202 1 202 2 202 1
$000 $000 $000 $000
Taxation and social security 3,347 5 , 031 51 41
Trade payables 1,079 3,404 - -
Accruals and other payables 21,810 3,354 19,909 1,757
Advances received 1,293 517 - -
27,529 12,306 19,960 1,798
The carrying amounts of trade and other payables are assumed to be the same as their fair values, due to their short-term nature. Financial payables are disclosed in Note 30.
25. Provision for Decommissioning
202 2 202 1
$000 $000
Group
At the beginning of the year 5 ,467 6,819
Amounts provided 137 198
Unwinding of discount 293 250
Change in estimate 2,497 (2,049)
Effect of exchange difference (1,430) 249
At the end of the year 6,964 5,467
The provision for decommissioning is based on the net present value of the Group's estimated liability for the removal of the Ukrainian production facilities and well site restoration at the end of production life.
The non-current provision of $6,964,000 (31 December 2021: $5,467,000) represents a provision for the decommissioning of the Group's MEX-GOL, SV, VAS and SC production and exploration facilities, including site restoration.
The change in estimates applied to calculate the provision as at 31 December 2022 is explained in Note 4.
The principal assumptions used are as follows:
31 December 31 December
202 2 202 1
Discount rate 4,76 % 6.29%
Average cost of restoration per well
($000) 326 348
The sensitivity of the restoration provision to changes in the principal assumptions to the provision balance and related asset is presented below:
31 December 31 December
202 2 202 1
$000 $000
Discount rate (increase)/decrease
by 1% ( 561 )/ 665 (723)/860
Change in average cost of well restoration 353 /( 353
increase/ (decrease) by 10% 451/( 451) )
-------------------------------------------- -------------- ------------
26 Deferred Tax
202 2 202 1
$000 $000
Deferred tax (liability)/asset recognised
relating to oil and gas development
and production assets at the MEX-GOL-SV
fields and provision for decommissioning
At the beginning of the year (5,197) (2,705)
Charged to Income Statement - UK current
year (1,852) (2,367)
Charged to Income Statement - UK prior
year 3,021 -
Effect of exchange difference 796 (125)
At the end of the year (3,232) (5,197)
202 2 202 1
$000 $000
Deferred tax asset/(liability) recognised
relating to development and production
assets at the VAS field and provision
for decommissioning
At the beginning of the year 361 167
Credited to Income Statement - overseas
current year 24 199
Effect of exchange difference (98) (5)
At the end of the year 287 361
There was a further $77,072,000 (31 December 2021: $76,443,000) of unrecognised UK tax losses carried forward. These losses can be carried forward indefinitely, subject to certain rules regarding capital transactions and changes in the trade of the Company. No deferred tax asset in the amount of $14,643,680 has been recognised as insufficient future taxable profits are forecast against which these UK tax losses could be offset.
The deferred tax asset relating to the Group's provision for decommissioning as at 31 December 2022 of $449,000 (31 December 2021: $457 , 000) was recognised on the tax effect of the temporary differences of the Group's provision for decommissioning at the MEX-GOL and SV fields, and its tax base. The deferred tax liability relating to the Group's development and production assets at the MEX-GOL and SV fields as at 31 December 202 2 of $3,681,000 (31 December 202 1 : $ 5 , 654 ,000) was recognised on the tax effect of the temporary differences between the carrying value of the Group's development and production asset at the MEX-GOL and SV fields, and its tax base. The deferred tax liability will be settled more than twelve months after the reporting period.
The deferred tax asset relating to the Group's provision for decommissioning as at 31 December 202 2 of $310,000 (31 December 202 1 : $3 15 ,000) was recognised on the tax effect of the temporary differences on the Group's provision on decommissioning at the VAS field, and its tax base. The deferred tax liability relating to the Group's development and production assets at the VAS field as at 31 December 202 2 of $23,000 (31 December 202 1 : deferred tax asset of $ 46 ,000) was recognised on the tax effect of the temporary differences between the carrying value of the Group's development and production asset at the VAS field, and its tax base. The deferred tax assets are expected to be recovered more than twelve months after the reporting period.
Losses accumulated in a Ukrainian subsidiary service company of UAH 877,268,000 ($23,990,000) as at 31 December 202 2 and UAH 835 , 298 ,000 ($ 30 , 621 ,000) as at 31 December 202 1 mainly originated as foreign exchange differences on inter-company loans and for which no deferred tax asset was recognised as this subsidiary is not expected to have taxable profits to utilise these losses in the future.
As at 31 December 2022 and 2021, the Group has not recorded a deferred tax liability in respect of taxable temporary differences associated with investments in subsidiaries as the Group is able to control the timing of the reversal of those temporary differences and does not intend to reverse them in the foreseeable future.
UK Corporation tax change
The current Corporation tax rate of 19% generally applies to all companies whatever their size. From 1 April 2023, this rate will cease to apply and will be replaced by variable rates ranging from 19% to 25%. A small profits rate of 19% will apply to companies whose profits are equal to or less than GBP50,000. The main Corporation Tax rate is increased to 25% and will apply to companies with profits in excess of GBP250,000.
Double tax treaty
On 30 October 2019, the Parliament of Ukraine voted for ratification of a Protocol changing the Double Tax Treaties between Ukraine and the United Kingdom. The Protocol and the new Treaty will enter into force upon completion of ratification formalities, and for the purposes of withholding tax, commence applying from 1 January 2020. The Group accrues and pays withholding tax on current amounts of interest at the moment when such interest accrues and is paid.
27. Called Up Share Capital
202 2 202 1
Number $000 Number $000
Allotted, called up and
fully paid
Opening balance as at
1 January 320,637,836 28,115 320,637,836 28,115
Issued during the year - - - -
------------ -------
Closing balance as at
31 December 320,637,836 28,115 320,637,836 28,115
There are no restrictions over ordinary shares issued. The Company is a public company limited by shares.
28. Other Reserves
The holders of ordinary shares are entitled to receive dividends as declared and are entitled to one vote per share at any general meeting of shareholders.
Other reserves, the movements in which are shown in the statements of changes in equity, comprise the following:
Capital contributions reserve
The capital contributions reserve is non-distributable and represents the value of equity invested in subsidiary entities prior to the Company listing.
Merger reserve
The merger reserve represents the difference between the nominal value of shares acquired by the Company and those issued to acquire subsidiary undertakings. This balance relates wholly to the acquisition of Regal Petroleum (Jersey) Limited and that company's acquisition of Regal Petroleum Corporation Limited during 2002.
Foreign exchange reserve
Exchange reserve movement for the year attributable to currency fluctuations. This balance predominantly represents the result of exchange differences on non-monetary assets and liabilities where the subsidiaries' functional currency is not the US Dollar.
29. Reconciliation of Operating Profit to Operating Cash Flow
202 2 202 1
$000 $000
Group
Operating profit 75,773 66,235
Depreciation and amortisation 7,837 11,958
Less interest income recorded within operating
profit (1,888) (763)
Impairment of property, plant and equipment 4,256
Fines and penalties received (114) (81)
Gain on sales of current assets, net (20) ( 16 )
Net (gain)/loss on sale of non-current assets (44) (16)
Change in working capital: -
Increase in provisions 117 (6)
(Increase)/decrease in inventory (1,480) (104)
(4,4 63
(Increase)/decrease in receivables (56,849) )
Increase/(decrease) in payables 19,953 4,902
Cash generated from operations 47,541 77,646
202 2 202 1
$000 $000
Company
Operating profit (8,112) 11,591
Interest received (2,740) (3,447)
Change in working capital:
Movement in provisions (including impairment
of subsidiary loans) 9,942 (10,912)
Decrease/(increase) in receivables (316) 136
(Decrease)/increase in payables 22,917 (188)
--------- ----------
Cash used in operations 21,691 (2,820)
30. Financial Instruments
Capital Risk Management
The Group defines its capital as equity. As at 31 December 2022, net assets were $200,659,000 (31 December 2021: $178,517,000). The primary source of the Group's liquidity has been cash generated from operations. The Group's objectives when managing capital are to safeguard the Group's and the Company's ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.
In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets.
The capital structure of the Group consists of equity attributable to the equity holders of the parent, comprising issued share capital, share premium, reserves and retained earnings.
There are no capital requirements imposed on the Group.
Financial Risk Management
The Group's financial instruments comprise cash and cash equivalents and various items such as debtors and creditors that arise directly from its operations. The Group has bank accounts denominated in British Pounds, US Dollars, Euros and Ukrainian Hryvnia. The Group does not have any external borrowings. The main future risks arising from the Group's financial instruments are currently currency risk, interest rate risk, liquidity risk and credit risk.
The Group's financial assets and financial liabilities comprise the following:
Financial Assets
2022 2021
$000 $000
Group
Cash and cash equivalents 88,652 87,780
Other short-term investments - 4,762
Trade and other financial receivables 46,039 5,368
134,691 9 7 , 910
202 2 202 1
$000 $000
Company
Cash and cash equivalents 81,541 63,299
Loans to subsidiary undertakings 49,974 48,899
131,515 112,198
Financial Liabilities
202 2 202 1
$000 $000
Group
Lease liabilities 487 1,103
Trade and other payables 1,079 3,404
Other financial liabilities 20,422 2,244
21,988 6,751
202 2 202 1
$000 $000
Company
Trade and other payables 19,923 1,767
19,923 1,767
Financial assets and financial liabilities are measured at amortised cost, which approximates their fair value as the instruments are mostly short-term. Assets and liabilities of the Group where fair value is disclosed are level 2 in the fair value hierarchy and valued using the current cost accounting technique.
Financial instruments that potentially subject the Group to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable, and financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and loans to subsidiary undertakings.
Currency Risk
The functional currencies of the Group's entities are US Dollars and Ukrainian Hryvnia. The following analysis of net monetary assets and liabilities shows the Group's currency exposures. Exposures comprise the monetary assets and liabilities of the Group that are not denominated in the functional currency of the relevant entity.
202 2 202 1
Currency $000 $000
British Pounds 223 275
US Dollars 235 234
Euros 273 9
Net monetary assets less liabilities 731 518
The Group's exposure to currency risk at the end of the reporting period is not significant due to immaterial balances of monetary assets and liabilities denominated in foreign currencies.
The sensitivity of the exchange rate of US Dollars is presented below:
31 December 31 December
202 2 202 1
$000 $000
Increase/(decrease) by 10% 23 /( 23 ) 2 3 /( 2 3 )
---------------------------- ------------ -------------
The prior year comparative figures were amended to conform to the current year presentation.
Interest Rate Risk Management
The Group is not exposed to interest rate risk on financial liabilities as none of the entities in the Group have any external borrowings. The Group does not use interest rate forward contracts and interest rate swap contracts as part of its strategy.
The Group is exposed to interest rate risk on financial assets as entities in the Group hold money market deposits at floating interest rates. The risk is managed by fixing interest rates for a period of time when indications exist that interest rates may move adversely.
The Group's exposure to interest rates on financial assets and financial liabilities are detailed in the liquidity risk section below.
Interest Rate Sensitivity Analysis
The sensitivity analysis below has been determined based on exposure to interest rates for non-derivative instruments at the balance sheet date. A 0.5% increase or decrease is used when reporting interest rate risk internally to key management personnel and represents management's assessment of a reasonably possible change in interest rates.
If interest rates earned on money market deposits had been 0.5% higher / lower and all other variables were held constant, the Group's:
-- profit for the year ended 31 December 2022 would increase
by $97,000 in the event of 0.5% higher interest rates and
decrease by $97,000 in the event of 0.5% lower interest
rates (profit for the year ended 31 December 2021 would
increase by $136,000 in the event of 0.5% higher interest
rates and decrease by $136,000 in the event of 0.5% lower
interest rates).
-- This is mainly attributable to the Group's exposure to interest
rates on its money market deposits; and other equity reserves
would not be affected (2021: not affected)
Interest payable on the Group's liabilities would have an immaterial effect on the profit or loss for the year.
Liquidity Risk
The Group's objective throughout the year has been to ensure continuity of funding. Operations have primarily been financed through revenue from Ukrainian operations.
The table below shows liabilities by their remaining contractual maturity. The amounts disclosed in the maturity table are the contractual undiscounted cash flows including future interest. Such undiscounted cash flows differ from the amount included in the statement of financial position because the statement of financial position amount is based on discounted cash flows and does not include the interest that will be accrued in future periods.
When the amount payable is not fixed, the amount disclosed is determined by reference to the conditions existing at the reporting date. Foreign currency payments are translated using the spot exchange rate at the end of the reporting period. The maturity analysis of financial liabilities as at 31 December 2022 is as follows:
As at 31 December On demand From From From 12 More Total
2022 and less 1 to 3 to 12 months than 5
than 1 month 3 months months to 5 years years
$000 $000 $000 $000 $000 $000
Liabilities
Trade and other
payables 21,194 - 307 - - 21,501
Lease liabilities 29 60 284 492 367 1,232
Other non-current
liabilities - - - 106 170 276
Total future
payments, including
future principal
and interest
payments 21,223 60 591 598 537 23,009
The maturity analysis of financial liabilities as at 31 December 2021 is as follows:
As at 31 December On demand From From 3 From 12 More than Total
202 1 and less 1 to to 12 months 5 years
than 1 month 3 months months to 5 years
$000 $000 $000 $000 $000 $000
Liabilities
Trade and other
payables 4,030 1,618 - - - 5,648
Lease liabilities 39 80 381 661 492 1,653
Other non-current
liabilities - - - 142 256 398
Total future
payments, including
future principal
and interest
payments 4,069 1,698 381 803 748 7,699
Details of the Group's cash management policy are explained in Note 23.
Liquidity risk for the Group is further detailed under the Principal Risks section above.
Credit Risk
Credit risk principally arises in respect of the Group's cash balance. For balances held outside Ukraine, where $81,537,000 of the overall cash and cash equivalents is held (31 December 2021: $63,299,000), the Group only deposits cash surpluses with major banks of high quality credit standing (Note 23). As at 31 December 2022, the remaining balance of $7,115,000 of cash and cash equivalents and other short-term investments was held in Ukraine (31 December 2021: $29,243,000). As at 31 December 2022, Standard & Poor's affirmed Ukraine's sovereign credit rating of 'CCC+', Outlook Stable. There is no international credit rating information available for the specific banks in Ukraine where the Group currently holds its cash and cash equivalents.
The Group has taken steps to diversify its banking arrangements between a number of banks in Ukraine and increased the quality of cash placed with UK and European banking institutions. These measures are designed to spread the risks associated with each bank's creditworthiness. Management considers the credit risk to be immaterial.
Interest Rate Risk Profile of Financial Assets
The Group had the following cash and cash equivalent and other short-term investments balances which are included in financial assets as at 31 December with an exposure to interest rate risk:
Floating Fixed
Floating Fixed rate rate
rate financial rate financial financial financial
Currency Total assets assets Total assets assets
202 2 202 2 202 2 20 21 20 21 20 21
$000 $000 $000 $000 $000 $000
Euros 273 273 - 9 9 -
British Pounds 223 223 - 275 275 -
Ukrainian Hryvnia 6,874 - 6,874 29,011 - 29,011
US Dollars 81,282 81,282 - 63,247 63,247 -
88,652 81,778 6,874 92,542 63,531 29,011
Cash deposits included in the above balances comprise term deposits with maturity less than 3 months of $55,409,000 and no term deposits with maturity more than 3 months but less than a year (2021: term deposits with maturity less than 3 months of $12,323,000 and term deposits with maturity more than 3 months but less than a year of $4,762,000).
As at 31 December 2022, cash and cash equivalents of the Company of $81,046,000 were held in US Dollars at a floating rate (2021: $63,015,000).
Interest Rate Risk Profile of Financial Liabilities
As at 31 December 2022 and 2021, the Group had no interest bearing financial liabilities at the year end.
Maturity of Financial Liabilities
The maturity profile of financial liabilities, on an undiscounted basis, is as follows:
202 2 20 21
$000 $000
Group
In one year or less 21,988 6,148
21,988 6,148
202 2 20 21
$000 $000
Company
In one year or less 19,923 1,767
19,923 1,767
Borrowing Facilities
As at 31 December 2022 and 2021, the Group did not have any borrowing facilities available to it.
Fair Value of Financial Assets and Liabilities
The fair value of all financial instruments is not materially different from the book value.
31. Contingencies and Commitments
Amounts contracted in relation to the Group's 2022 investment programme in the MEX-GOL, SV, VAS and SC fields in Ukraine, but not provided for in the financial statements at 31 December 2022, were $156,000 related to Oil and Gas Exploration and Evaluation assets and $8,607,000 related to Oil and Gas Development and Production assets (2021: $3,101,000 related to Oil and Gas Exploration and Evaluation assets and $2,674,000 related to Oil and Gas Development and Production assets).
Since 2010, the Group has been in dispute with the Ukrainian tax authorities in respect of VAT receivables on imported leased equipment, with a disputed liability of up to UAH 8,487,000 ($302,000) inclusive of penalties and other associated costs. There is a level of ambiguity in the interpretation of the relevant tax legislation, and the position adopted by the Group has been challenged by the Ukrainian tax authorities, which has led to legal proceedings to resolve the issue. The Group had been successful in three court cases in respect of this dispute in courts of different levels. On 20 September 2016, a hearing was held in the Supreme Court of Ukraine of an appeal of the Ukrainian tax authorities against the decision of the Higher Administrative Court of Ukraine, in which the appeal of the Ukrainian tax authorities was upheld. As a result of this appeal decision, all decisions of the lower courts were cancelled, and the case was remitted to the first instance court for a new trial. On 1 December 2016 and 7 March 2017 respectively, the Group received positive decisions in the first and second instance courts, but no appointment of hearings has been settled yet. No liability has been recognised in these consolidated financial statements for the year ended 31 December 2022 (31 December 2021: nil), as the Group has been successful in previous court cases in respect of this dispute in courts of different levels, the date of the next legal proceedings has not been set and as management believes that adequate defences exist to the claim.
In March 2019, the State Geologic and Subsoil Survey of Ukraine published an Order for suspension dated 11 March 2019 (the "VAS Order") in respect of the VAS production licence held by LLC Prom-Enerho Produkt ("PEP"). PEP disputed the VAS Order and issued legal proceedings in the Ukrainian Courts to challenge the VAS Order, and these legal proceedings progressed through the various levels of the Ukrainian Court system, with PEP being successful at each level. The proceedings ultimately reached the Supreme Court of Ukraine, which, by a decision dated 23 February 2023 upheld PEP's appeal and cancelled the VAS Order. The Supreme Court is the final appellate court in the legal proceedings and therefore this decision is final.
In September 2021, an entity named JV Boryslav Oil Company ("Boryslav"), which is 25.0999% owned by PJSC Ukrnafta ("Ukrnafta"), issued legal proceedings, claiming that irregular procedures were followed in the grant of the SC exploration licence, against the State Geologic and Subsoil Survey of Ukraine, the State Commission of Ukraine for Mineral Resources and LLC Arkona Gas-Energy ("Arkona"), as defendants, with Ukrnafta named as a third party. In this claim, the First Instance Court in Ukraine made a ruling in January 2022 in favour of Boryslav, and on 2 November 2022, the Appellate Administrative Court also made a ruling in favour of Boryslav to uphold the decision of the First Instance Court. Arkona appealed the decision of the Appellate Administrative Court to the Supreme Court, and on 3 May 2023, the Supreme Court published its decision to allow Arkona's appeal and overturn the ruling made by the Appellate Administrative Court. The Supreme Court represents the final appellate court in these legal proceedings, and accordingly, the decision of the Supreme Court is final.
32. Related Party Disclosures
Key management personnel of the Group are considered to comprise only the Directors. Details of Directors' remuneration are disclosed in Note 8.
During the year, Group companies entered into the following transactions with related parties who are not members of the Group:
Total LLC Smart Other Total LLC Other
Energy Smart
Energy
202 20 2 20 2 20 2
202 2 202 2 2 1 1 1
$000 $000 $000 $000 $000 $000
Sale of goods/services 113,787 113,741 46 95,342 95,340 2
Purchase of goods/services 1,061 571 490 1,099 - 1,099
Amounts owed by related
parties 56,230 56,227 3 5,008 5,008 -
Amounts owed to related
parties 20,603 20,576 27 912 901 11
----------
All related party transactions were with subsidiaries of the ultimate Parent Company, and primarily relate to the sale of gas (see Note 5 for more details), the rental of office facilities and a vehicle and the sale of equipment. The amounts outstanding were unsecured and will be settled in cash.
As at the date of this report, none of the Company's controlling parties prepares consolidated financial statements available for public use.
33. Post Balance Sheet Events
The ongoing war in Ukraine means that the fiscal, economic and humanitarian situation in Ukraine is unstable and extremely challenging and the final resolution and consequences of the ongoing war are hard to predict, but they may have a further serious impact on the Ukrainian economy and business of the Group. Management continues to identify and mitigate, where possible, the impact on the Group, but the majority of these factors are beyond their control, including the duration and severity of war, as well as the further actions of various governments and diplomacy.
In January 2023, the Company was notified that there had been a restructuring of the ownership of the PJSC Smart-Holding Group, a member of which held a major shareholding in the Company, and which was ultimately controlled by Mr Vadym Novynskyi ("Mr Novynskyi"). Under this restructuring, which occurred with effect from 1 December 2022, Mr Novynskyi disposed of his major indirect shareholding interest in the Company to two trusts registered in Cyprus named the SMART Trust and the STEP Trust. In early December 2022, the Ukrainian Government imposed sanctions on Mr Novynskyi.
In December 2022, new legislation, Law No. 2805-IX, relating to the natural resources sector was enacted in Ukraine, which came into force on 28 March 2023. This legislation includes provisions that if the ultimate beneficial owner of a mineral or hydrocarbon licence becomes the subject of sanctions in Ukraine, then the State Geologic and Subsoil Survey of Ukraine (the "SGSS") may suspend or revoke that licence. Following Law No. 2805-IX coming into force on 28 March 2023, the Ukrainian authorities have taken a number of regulatory actions against certain of the Group's subsidiary companies in Ukraine.
These regulatory actions included conducting a search at the Group's Yakhnyky office, from where the MEX-GOL and SV fields are operated, and placing certain physical assets of the Ukrainian branch (representative) office of Regal Petroleum Corporation Limited ("RPC") and LLC Arkona Gas-Energy ("Arkona") (which respectively hold the MEX-GOL and SV fields and the SC exploration licence) under seizure, thereby restricting any actions that would change registration of the property rights relating to such assets, although the use of such assets was not restricted and therefore the Group has been able to continue to operate and produce gas and condensate from the MEX-GOL and SV fields. In addition, the regulatory actions included the freezing of gas volumes held in gas storage on behalf of RPC (to a value of $0.27 million) and LLC Prom-Enerho Produkt ("PEP") (to a value of $0.31 million). Furthermore, the Ministry of Justice of Ukraine (the "MoJ") made an Order cancelling the registration entry made on behalf of a subsidiary of the Company named LLC Regal Petroleum Corporation (Ukraine) Limited in the Unified State Register of Legal Entities, Individuals-entrepreneurs and Civil Institutions of Ukraine (the "State Register") relating to the ultimate beneficial owners of such company, which were stated as the trustees of the SMART Trust and STEP Trust as previously notified to the Company, thereby restoring the previous entry in the State Register, Mr Novynskyi. Furthermore, the SGSS issued an Order to RPC requiring that additional information be provided and/or violations be eliminated in the disclosures relating to the ultimate beneficial owners of the MEX-GOL and SV licences respectively.
On 2 May 2023, the MoJ made further Orders cancelling the registration entry made on behalf of three further Ukrainian subsidiaries of the Company, being PEP, Arkona and LLC Well Investum ("Well Investum") respectively in the State Register relating to the ultimate beneficial owners of such companies, which again were stated as the trustees of the SMART Trust and STEP Trust, thereby restoring the previous entry, Mr Novynskyi. PEP holds the VAS production licence, Arkona holds the SC exploration licence and Well Investum is a dormant company.
Following the issuance of the abovementioned Orders by the MoJ, Mr Novynskyi is registered in the State Register as the ultimate beneficial owner of each of PEP and Arkona, and is consequently recognised by the SGSS as the ultimate beneficial owner of each of the VAS production licence and SC exploration licence. As a result, on 4 May 2023, the SGSS issued orders suspending the VAS production licence and SC exploration licence for a period of 5 years effective from that date. Accordingly, the Company ceased all field and production operations on the VAS and SC licence areas.
The Group is consulting with its legal advisers in order to determine appropriate actions to protect its legal rights in relation to the above regulatory actions by the Ukrainian authorities.
On 15 June 2023, the Company paid an interim dividend of 15 pence per ordinary share, aggregating approximately GBP48.1 million in total, which was the Company's first ever dividend payment to its shareholders.
In July 2023, new legislation was introduced in Ukraine, which will come into force in September 2024, and which requires that branches (or representative offices) of foreign companies operating in Ukraine register their ultimate beneficial owners in Ukrainian Registries. Regal Petroleum Corporation Ltd ("RPC"), which holds the MEX-GOL and SV licences, operates such a branch and will therefore be required to register its ultimate beneficial owners from the implementation of this law, which raises a potential risk that such registration will not be accepted by the Ukrainian authorities, and possibly result in regulatory action against RPC and/or its licences and assets, including suspension of the MEX-GOL and SV licences.
34. Auditor's Limitation Liability Agreement
An Auditor's Limitation of Liability Agreement has been entered into, subject to shareholders approval, for the financial period ended 31 December 2022. The principal terms and conditions are below:
- The Agreement limits the amount of any liability owed to the Company by the Auditor in respect of any negligence, default, breach of duty or breach of trust, occurring in the course of the audit of the Company's financial statements for the year ended 31 December 2022, for which the Auditor may otherwise be liable to the Company.
- The Agreement also stipulates the maximum aggregated amount payable in event of any of the circumstances stated above.
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December 21, 2023 10:29 ET (15:29 GMT)
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