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Enwell Energy PLC 2021 Audited Results

29/06/2022 7:00am

UK Regulatory (RNS & others)


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RNS Number : 5533Q

Enwell Energy PLC

29 June 2022

29 June 2022

ENWELL ENERGY PLC

2021 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 2021.

2021 Highlights

Operational

 
 --   Aggregate average daily production of 4,730 boepd (2020: 4,541 
       boepd), an increase of approximately 4.2% 
 --   SV-25 appraisal well successfully completed and brought on 
       production in February 2021 
 --   SV-31 development well successfully completed and brought 
       on production in May 2022 
 --   No significant disruption to the Group's operations arising 
       from the COVID-19 pandemic to date 
 

Financial

 
 --   Revenue of $121.4 million (2020: $47.3 million), up 157% as 
       a result of significantly higher gas prices and increased 
       production rates 
 --   Gross profit of $73.9 million (2020: $15.7 million), up 371% 
 --   Operating profit of $66.2 million (2020: $9.8 million), up 
       576% 
 --   Cash generated from operations of $77.6 million (2020: $23.8 
       million), up 226% as a result of significantly higher gas 
       prices and increased production rates 
 --   Net profit of $51.1 million (2020: $3.2 million), up 1,497% 
 --   Cash, cash equivalents and short-term investments of $92.5 
       million as at 31 December 2021 (2020: $61.0 million), and 
       of $76.5 million as at 24 June 2022 
 --   Average realised gas, condensate and LPG prices in Ukraine 
       were much higher, particularly gas prices, at $432/Mm3 (UAH11,677/Mm3), 
       $69/bbl and $80/bbl respectively (2020: $136/Mm3 (UAH3,618/Mm3) 
       gas, $46/bbl condensate and $46/bbl LPG) 
 --   Reduction of capital completed through the cancellation of 
       the Company's entire share premium account which has created 
       distributable reserves, thereby enabling the possibility of 
       the Company making distributions to shareholders in the future 
 

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 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 remain suspended 
         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 conflict in Ukraine. 
 --     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 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 remain suspended 
         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 conflict in Ukraine. 
 --     The Group retains the majority (77% as at 24 June 2022) 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. 
 --     Subject to the Group's ability to operate safely, development 
         work planned for 2022: 
             at the MEX-GOL and SV fields includes: a workover of the 
              SV-29 well to test alternative horizons; and drilling of 
              two new wells at the MEX-GOL field 
               at the SC licence includes: completing the drilling of 
                the SC-4 well; processing and interpretation of the recently 
                acquired 150 km2 of 3D seismic; and planning for the development 
                of the licence area 
           at the VAS field includes: planning for a new well to explore 
            the VED prospect within the VAS licence area; and maintenance 
            of the gas processing facilities, flow-line network and 
            other field infrastructure 
 --   2022 development programme expected to be funded from existing 
       cash resources and operational cash flow 
 
 

Sergii Glazunov, CEO, commented : "While 2021 was an extremely strong operational year for Enwell Energy, these achievements are entirely overshadowed by the ongoing military conflict in Ukraine. The conflict is having a huge impact on all aspects of life in Ukraine. Although operations at our VAS field are currently suspended, we were able to restart production at our MEX-GOL and SV fields, and this is testament to the diligence and fortitude of our operational team. We are also hoping to complete the drilling of the SC-4 well on our SC licence area in the near future.

Continuing to operate in the current environment is extremely challenging, and the safety and well-being of our staff is paramount, but, subject to that, we will endeavour to continue our operations and make our best contribution to the economy in Ukraine."

The Annual Report and Financial Statements for 2021 will be posted to shareholders and published on the Company's website by 30 June 2022, and a formal Notice of Annual General Meeting will follow later during July 2022.

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 
 
 Arden Partners plc                         Tel: 020 7614 
                                             5900 
 Ruari McGirr / Elliot Mustoe (Corporate 
  Finance) 
 Simon Johnson (Corporate Broking) 
 
 Citigate Dewe Rogerson                     Tel: 020 7638 
                                             9571 
 Ellen Wilton 
 

Dmitry Sazonenko, MSc Geology, MSc Petroleum Engineering, Member of AAPG, SPE and EAGE, 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 2021 Annual Report and Financial Statements with very mixed emotions this year. While the Group achieved an excellent performance during 2021, and avoided any significant operational disruption as a result of the COVID-19 pandemic, the invasion of Ukraine by Russia in February 2022 has created a very different and worrying outlook in respect of both the current and future situation in Ukraine, and I am greatly saddened to observe 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 from 24 February to 15 March 2022, after which production operations and some limited field activities resumed at the MEX-GOL and SV fields, while all operations remain suspended 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 ongoing conflict in Ukraine.

During 2021, the Group continued to make good progress in the development of the MEX-GOL, SV and VAS gas and condensate fields and SC licence in north-eastern Ukraine, and has delivered an exceptional financial performance. The SV-25 appraisal well was completed and brought on production in February 2021, and the SV-31 development well was completed and brought on production in May 2022. Drilling of the SV-29 development well was completed and two horizons in the V-22 Visean formation were perforated and tested, but while there were intermittent gas flows, stabilised production was not achieved and so alternative horizons will be perforated and tested when possible. The SC-4 appraisal well was nearing its target depth when operations were suspended.

Aggregate average daily production from the MEX-GOL, SV and VAS fields during 2021 was 4,730 boepd, which compares favourably with an aggregate daily production rate of 4,541 boepd during 2020, an increase of approximately 4.2%. However, issues with water ingress at the MEX-109 and SV-2 wells in Q4 2021, meant that these wells were taken offline and workover operations were underway when field operations were suspended due to the invasion. The loss of production from these wells had a material impact on production rates in Q4 2021. At the VAS field production was steady, but lower than during 2020, after a decline in production from the VAS-10 well.

Largely as a result of the dramatic rise in gas prices during the year, the Group's net profit increased hugely to $51.1 million (2020: $3.2 million) as did operating profit to $66.2 million (2020: $9.8 million) and cash generated from operations to $77.6 million (2020: $23.8 million).

This significant level of cash generation enabled the Group to progress its multiple work programmes across its broadened asset portfolio, with approximately $43.0 million invested during the year (2020: $17.1 million).

During 2021, the fiscal and economic environment in Ukraine largely remained stable, despite the effects of the COVID-19 pandemic resulting in a contraction in GDP and an increase in the rate of inflation, and Ukrainian Hryvnia exchange rates also remained steady. However, the invasion of Ukraine has naturally had a huge impact on the fiscal and economic situation in Ukraine, and future fiscal and economic uncertainties will continue until an acceptable resolution of the conflict 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, reductions in the subsoil tax rates relating to oil and gas production and a 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 gas prices broadly correlated with imported gas prices. During 2021, gas prices recovered significantly, reflecting a similar trend in European gas prices. Similarly, condensate and LPG prices were also much higher by comparison with last year.

However, in Q1 2022, the Ukrainian Government imposed two material measures on oil and gas producers. Firstly, in January 2022 temporary partial gas price regulations were imposed until 30 April 2022, designed to support the production of certain designated food products, further details of which were set out in the Company's announcement dated 17 January 2022. Secondly, changes to the subsoil production tax rates applicable to gas production were introduced with effect from 1 March 2022, pursuant to which the tax rates were linked to gas prices, the incentive rates for new wells were extended for a further 10 years and improvements were made to the regulatory environment. In addition, an excise tax applicable to LPG sales was cancelled in February 2022, and the VAT rate applicable to condensate and LPG sales was reduced in March 2022. Further details were set out in the Company's announcement dated 13 April 2022.

Outlook

The invasion of Ukraine by Russia means that there is a catastrophic humanitarian situation in Ukraine, as well as extreme challenges to the fiscal, economic and business environment. These circumstances mean that it is extremely difficult to plan future investment and operational activities at the Group's fields, but subject to it being safe to do so, the Group is hoping to undertake further development activities during 2022 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 the majority (77% as at 24 June 2022) 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. 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 2021 year, especially in the midst of the COVID-19 pandemic, and even more so, for their remarkable fortitude since the invasion of Ukraine in February 2022.

Chris Hopkinson

Chairman

Chief Executive's Statement

Introduction

The Group continued to make good progress at its Ukrainian fields during 2021, with development activity at the MEX-GOL and SV fields including successes with the SV-25 appraisal well, which came on production in February 2021, and the SV-31 development well, which came on production in May 2022. Drilling of the SV-29 development well was also completed, and, although the well produced gas flows on test, a stabilised flow rate was not established and so it is planned to test alternative horizons when possible. In addition, upgrades to the gas processing facilities, flow-line network and remedial activity on existing wells were undertaken.

At the VAS field, planning for a proposed new well to explore the VED prospect within the VAS licence area has continued, and upgrades to the flow-line network and other infrastructure were undertaken.

The Group also commenced work on the SC licence, with the spudding of the SC-4 appraisal well in August 2021, although the drilling operations were subsequently suspended due to the Russian invasion of Ukraine. However, the acquisition of 150 km(2) of 3D seismic over the 2021-2022 winter period was completed and the acquired seismic data is now being processed and interpreted.

Overall production continued its upward trend during the year, being approximately 4.2% higher than in 2020, although production rates declined in Q4 2021 following water ingress at the MEX-109 and SV-2 wells, causing these wells to be shut in pending workover operations designed to remedy the water ingress issues.

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 2021, a total of 840,807 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 4,292,623 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 from the MEX-GOL, SV and VAS fields for the year ended 31 December 2021 is shown below.

 
   Field          Gas         Condensate        LPG         Aggregate 
                (MMscf/d)       (bbl/d)       (bbl/d)         boepd 
              2021    2020   2021    2020   2021   2020   2021    2020 
             ------  -----  ------  -----  -----  -----  ------  ------ 
 
   MEX-GOL 
   & SV       18.9    17.6    681    641    295    295    4,237   3,960 
             ------  -----  ------  -----  -----  -----  ------  ------ 
 
   VAS         2.6    2.9     26      32     -      -      493     581 
             ------  -----  ------  -----  -----  -----  ------  ------ 
 
   Total      21.5    20.5    707    673    295    295    4,730   4,541 
             ------  -----  ------  -----  -----  -----  ------  ------ 
 

Production rates were higher in 2021 when compared with 2020, predominantly due to the contribution of the SV-25 well, which commenced production in February 2021.

The Russian invasion of Ukraine in February 2022 meant that 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 remain suspended at the VAS field and SC licence. The VAS field is located near Kharkiv in north-eastern Ukraine, which has experienced significant military activity, and so resumption of production at this field is not anticipated in the immediate future. However, plans are being made to complete the drilling of the SC-4 well at the SC licence in the near future. As a result of the disruptions to operations caused by the invasion, the Group's average daily production for the 2022 year to date has been materially affected. However, production is currently continuing at the MEX-GOL and SV fields at a rate of approximately 2,500 boepd.

Operations

Notwithstanding the impact of the COVID-19 pandemic during 2020 and 2021, over those periods, there had been relatively stable fiscal and economic conditions 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 Russian invasion of Ukraine in February 2022 has caused huge disruption to the fiscal and economic conditions in Ukraine since then. During 2021, the strong recovery in gas prices in Europe fed through to the Group's realised prices in Ukraine, and provided a significant boost to the Group's revenues and profitability during the year.

During 2021, the Group continued to refine its geological subsurface models of the MEX-GOL, SV and VAS fields, in order to enhance its strategy for the further development of such fields, including the timing and level of future capital investment required to exploit the hydrocarbon resources.

At the MEX-GOL and SV fields, the drilling of the SV-25 appraisal well was completed in February 2021, having been drilled to a final depth of 5,320 metres. One interval, at a drilled depth of 5,184 - 5,190 metres, within the V-22 Visean formation was perforated, and after successful testing, the well was hooked-up to the gas processing facilities.

In August 2021, the drilling of the SV-29 development well was completed, having been drilled to a final depth of 5,450 metres. 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, while intermittent gas flows were achieved, a stabilised flow from these intervals was not established. It is therefore planned to perforate and test two alternative intervals in the V-19 and V-20 Visean formations when possible.

In May 2022, the SV-31 development well was completed, with the well having reached a final depth of 5,240 metres. One interval, at a drilled depth of 5,210 - 5,219 metres, within the V-22 Visean formation was perforated, and, after initial testing, the well was hooked up to the gas processing facilities. The well is currently producing at approximately 2.54 MMscf/d of gas and 117 bbl/d of condensate (563 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 commenced to remove and replace the production string, but this work was suspended as a result of the Russian invasion of Ukraine.

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 again the work was suspended as a result of the Russian invasion, and the well is currently under observation.

The shut-ins of the SV-2 and MEX-109 wells impacted overall production rates and, depending on the duration and outcome of the requisite remedial works, could potentially have a material impact on the Group's future overall production volumes.

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.

At the VAS field, a successful workover of the VAS-10 well was undertaken to access an alternative production horizon, which improved production rates from the VAS field.

In March 2019 (as set out in the Company's announcement made on 12 March 2019), a regulatory issue arose when the State Service of Geology and Subsoil of Ukraine issued an order for suspension (the "Order") of the production licence for the VAS field. Under the applicable legislation, the Order would lead to a shut-down of production operations at the VAS field, but the Group has issued legal proceedings to challenge the Order, and has obtained a ruling suspending operation of the Order pending a hearing of the substantive issues. The Group does not believe that there are any grounds for the Order, and intends to pursue its challenge to the Order through the Ukrainian Courts.

Arkona Acquisition and SC Exploration Licence

As announced on 24 March 2020, the Group acquired the entire issued share capital of LLC Arkona Gas-Energy ("Arkona") for a total consideration of up to $8.63 million, of which $4.32 million was subject to the satisfaction of certain conditions. Following satisfaction of the requisite conditions, and by agreement between the parties to the acquisition agreement, further payments totalling $2.6 million (net of an indemnity liability) have been paid, and the balance of the consideration of $1.6 million is subject to the remaining conditions and contractual provisions. Arkona holds a 100% interest in the Svystunivsko-Chervonolutskyi ("SC") exploration licence, which is located in the Poltava region in north-eastern Ukraine. The SC licence covers an area of 97 km(2) , and is approximately 15 km east of the SV field. The licence was granted in May 2017 with a duration of 20 years. The licence is prospective for gas and condensate, and has been the subject of exploration since the 1980s, with 5 wells having been drilled on the licence since then, although none of these wells are currently on production. As with the productive reservoirs in the SV field, the prospective reservoirs in the licence area are Visean, at depths between 4,600 - 6,000 metres.

However, PJSC Ukrnafta, the majority State-owned oil and gas producer, issued legal proceedings against Arkona, in which PJSC Ukrnafta made claims of irregularities in the procedures involved in the grant of the SC licence to Arkona in May 2017. In early July 2020, the First Instance Court in Ukraine made a ruling in favour of PJSC Ukrnafta, which found that the grant of the SC licence was irregular, but this ruling was overturned by the Appellate Administrative Court in September 2020, and a final appeal to the Supreme Court of Ukraine was determined in favour of Arkona in February 2021. Further information is set out in the Company's announcements dated 3 July 2020, 31 July 2020, 30 September 2020, 23 November 2020 and 11 February 2021.

During early 2021, the Group engaged independent petroleum consultants, DeGolyer and MacNaughton, to prepare an assessment of the remaining reserves and contingent resources attributable to the SC licence as at 1 January 2021, in accordance with the March 2007 (as revised in June 2018) SPE/WPC/AAPG/SPEE Petroleum Resources Management System standard for classification and reporting. Their assessment estimated the proved and probable (2P) reserves attributable to the SC licence at 12.1 MMboe. The assessment is consistent with the Group's proposed field development plan for the SC licence, which includes the drilling of the SC-4 well and the acquisition of 150 km(2) of 3D seismic, and the construction of a gas processing plant. Development is then planned to continue with the drilling of a further six wells to recover the reserves and resources in the SC licence. Due to their targeted depths, the wells are each likely to take up to 12 months to complete, and are planned to be drilled consecutively over the next eight years. Further information on DeGolyer and MacNaughton's assessment can be found in the Company's announcement dated 2 June 2021.

At the SC licence, the SC-4 well had nearly reached its target depth of 5,565 metres, when drilling was suspended as a result of the Russian invasion of Ukraine. 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. In addition , the acquisition of 1 50 km(2) of 3D seismic has been completed, and processing and interpretation of the acquired seismic data is now being undertaken.

Outlook

The Russian invasion of Ukraine in February 2022 has caused significant disruption to Ukraine 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, and subject to it being safe to do so, during 2022, the Group plans to continue to develop the MEX-GOL, SV and VAS fields, as well as moving forward with the appraisal and development of the SC licence area . At the MEX-GOL and SV fields, the development programme includes a workover of the SV-29 development well, to access alternative horizons in the Visean formation, drilling of two further wells in the MEX-GOL field, installation of further compression equipment, and remedial and upgrade work on existing wells, the flow-line network and pipelines and other infrastructure.

At the VAS field, planning for the proposed new well to explore the VED prospect within the VAS licence area will continue, and upgrades to the gas processing facilities, pipeline network and other infrastructure are planned.

At the SC licence, drilling of the SC-4 well is planned to be completed, the recently acquired 3D seismic will be processed and interpreted and planning for the construction of gas processing facilities will continue.

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 2021, 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

   1.         MEX-GOL and SV fields 

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 2021, the Group has produced 5.2 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 
               ---------------------  ---------------------  --------------------- 
 
   2.         VAS field 

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 2021, 0.7 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) 
        --------------  ----------------  ----------------  ---------------- 
 
   3 .         SC Licence 

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

The Group's financial performance in 2021 was exceptional when compared to previous periods, with the net profit for the year of $51.1 million being an approximate 15-fold increase on 2020 (2020: $3.2 million). The dramatic improvement is primarily a result of the Group's achievement of record levels of production coinciding with the very significant increase during the period in pricing of the Group's primary product, natural gas.

Aggregate production for the year was up approximately 4% at 4,730 boepd (2020: 4,541 boepd).

Rarely has natural gas, and its pricing, been more of a focus of public attention, with the sizeable global rise in the commodity's pricing being well documented throughout the latter part of 2021. These global and European price increases were also experienced in Ukraine, and underpinned the 218% rise in average gas price realisations in the period at $432/Mm(3) (UAH11,677/Mm(3) ), with condensate and LPG average sales prices also up by 50% and 74% at $69/bbl and $80/bbl respectively (2020: $136/Mm(3) (UAH3,618/Mm(3) ), $46/bbl and $46/bbl respectively).

Revenue for the year, derived from the sale of the Group's Ukrainian gas, condensate and LPG production, was up at $121.4 million (2020: $47.3 million). Most notably, within this total, the revenue from gas sales alone was up approximately 197% at $95.8 million (2020: $32.3 million).

During the period from 1 January 2022 to 31 May 2022, the average realised gas, condensate and LPG prices were $1,201/Mm(3) (UAH34,613/Mm(3) ), $105/bbl and $151/bbl respectively.

Cost of sales for the year was up approximately 5 0 % at $47. 4 million (2020: $31.5 million). The major contributor to this increase is the material rise in the revenue-related costs of taxes and well rental (with their direct link to commodity prices), up approximately 130% at a combined $28.7 million (2020: $12.5 million). Excluding these tax expenses directly related to commodity prices, the residual cost of sales is consistent at $18. 7 million (2020: $1 9 . 0 million). The impact of the above noted increase in well rental costs is also evidenced in the increase in operating expenditure per boe, which also increased as a direct result of such well rental costs increase, from $9.50/boe in 2020 to $13.60/boe in 2021.

Gross profit for the year was dramatically higher at $7 3 . 9 million (2020: $15.7 million).

The subsoil tax rates applicable to gas production were stable during the 2021 year 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, but reductions in the subsoil rates applicable to new wells and to condensate production were applicable, under which (i) for new wells drilled after 1 January 2018, 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, and (ii) with effect from 1 January 2019 and applicable to all wells, the subsoil tax rates for condensate were reduced from 45% to 31% for condensate produced from deposits shallower than 5,000 metres and from 21% to 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/Mm(3) , 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.

In addition, the excise tax of EUR52 ($59) per thousand litres applicable to LPG sales was cancelled entirely with effect from 24 February 2022, 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 7. 7 % higher at $8.4 million (2020: $7.8 million), primarily as a net result of: a 2 7 % decrease in consultancy fees mainly due to the level of legal and advisory costs associated with the acquisition activity in 2020 not having been repeated; and an 11% increase in payroll and related taxes, consistent with further increases in staff levels and salary inflation.

Finance costs for the year were approximately 43 % lower at $0.8 million (2020: $1.4 million), mainly due to realised net foreign exchange gains during 2021, as opposed to the net losses incurred in 2020.

Other losses in the year reduced by 95% in the period, a result of the non-recurring nature of the charitable donation in 2020 of $2.0 million for the supply of COVID-19-related medical equipment for Ukrainian authorities .

The tax charge for the year increased by a significant 370% to $15.5 million (2020: $3.3 million charge) mainly due to the material increase in profit before tax, and comprised a current tax charge of $13.3 million (2020: $3.0 million charge) and a deferred tax charge of $1 million (2020: $0.3 million charge).

A deferred tax asset relating to the Group's provision for decommissioning as at 31 December 2021 of $ 0.5 million (2020: $0.2 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 2021 of $5.7 million (2020: $2.9 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 2021 of $ 0.3 million (2020: $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 2021 of $0.5 million (2020: $0.2 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 $ 32.2 million reflects the investment in the Group's oil and gas development and production assets during the year (2020: $18.2 million), primarily relating to the drilling of the SV-25, SV-29, SV-31 and SC-4 wells. A review of any indicators of impairment of the carrying value of the Group's assets was undertaken at the year end but this review did not reveal any such indicators.

With the material increase in commodity prices during the period, and Q4 2021 in particular, trade and other receivables were up 173% to $13.1 million (2020: $4.8 million). The $5.2 million of trade receivables included in the year-end balance have been paid in full in 2022.

Cash, cash equivalents and short-term investments held as at 31 December 2021 were 52% higher at $92.5 million (2020: $61.0 million), the increase being a result of the significant increase in sales receipts in the period for the reasons noted above. The Group's cash and cash equivalents balance as at 24 June 2022 was $76.5 million, held as to $17.4 million equivalent in Ukrainian Hryvnia and the balance of $59.1 million equivalent predominantly in US Dollars, Euros and Pounds Sterling.

During 2021, the Ukrainian Hryvnia was stable against the US Dollar, strengthening modestly from UAH28.3/$1.00 on 31 December 2020 to UAH27.3/$1.00 on 31 December 2021. The impact of this was $1.6 million of foreign exchange gain (2020: $15 million of foreign exchange loss). Increases and decreases in the value of the Ukrainian Hryvnia against the US Dollar affect the carrying value of the Group's assets.

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 in 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 $92.5 million ($63.5 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 25 February 2021, the Company completed a reduction of its share capital through the cancellation of its entire share premium account. This reduction of capital creates distributable reserves of the Company, which potentially enables the Company to make distributions to its shareholders in the future, subject to the Company's financial performance. However, the Company is not indicating any commitment, and does not have any current intention, to make any distributions to 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 
                                                 ---------------------------------------------- 
 Military conflict in Ukraine 
                                                 ---------------------------------------------- 
 On 24 February 2022, Russia invaded              Although the Group has no assets 
  Ukraine and there is currently                   in Crimea, it does have assets in 
  a serious and ongoing military                   the areas of conflict in the east 
  conflict within Ukraine. This conflict           of Ukraine, and the conflict has 
  is having a huge impact on Ukraine               disrupted its operations in those 
  and its population, with significant             areas. The Group has suspended all 
  destruction of infrastructure and                field operations at the VAS field 
  buildings in the areas of conflict,              and SC licence area, and is only 
  as well as damage in other areas                 undertaking limited field and production 
  of Ukraine. The conflict is resulting            operations at the MEX-GOL and SV 
  in significant casualties and has                fields. At the MEX-GOL and SV fields, 
  caused a huge humanitarian catastrophe           inventories of hydrocarbons are 
  and refugee influx into neighbouring             being maintained at minimum levels. 
  countries. The conflict is also                  At the sites where operations are 
  impacting the fiscal and economic                suspended, there are no staff on 
  environment in Ukraine, as well                  site, except for necessary security 
  as the financial stability and                   staff. Where possible, all other 
  banking system in Ukraine, including             staff work remotely and have been 
  restrictions on the transfer of                  supplied with all necessary devices 
  funds outside Ukraine. The conflict              and software to facilitate remote 
  is an escalation of the previous                 working. Additionally, the Group 
  Regional Conflict risk faced by                  aims to maintain the significant 
  the business, a dispute that has                 majority of its cash resources outside 
  been going on since 2014 in parts                Ukraine (being 77% as at 24 June 
  of eastern Ukraine, and since that               2022). The Group continues to monitor 
  time Russia has continued to occupy              the situation and endeavours to 
  Crimea. The current conflict is                  protect its assets and safeguard 
  also having a significant adverse                its staff and contractors. 
  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 conflict 
  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, and has also impacted 
  the supply of materials and equipment 
  and the availability of contractors 
  to undertake field operations. 
  At present, the conflict is ongoing 
  and the scope and duration of the 
  conflict 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 a 
  political risks than it would be                 strong working relationship with 
  in other jurisdictions. Emerging                 the Ukrainian regulatory authorities. 
  economies are generally subject                  The Group also maintains a significant 
  to a volatile political and economic             proportion of its cash holdings 
  environment, which makes them vulnerable         in international banks outside Ukraine. 
  to market downturns elsewhere in 
  the world and could adversely impact 
  the Group's ability to operate 
  in the market. Furthermore, the 
  military conflict 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 conflict. 
                                                 ---------------------------------------------- 
 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                   military conflict in Ukraine. In 
  significant, including in relation               light of this, the Group has taken 
  to the banks with which the Group                and continues to take steps to diversify 
  has operated bank accounts. This                 its banking arrangements between 
  situation was improving moderately               a number of banks in Ukraine. These 
  following remedial action by the                 measures are designed to spread 
  National Bank of Ukraine, but the                the risks associated with each bank's 
  current military conflict has significantly      creditworthiness, and the Group 
  affected such improvements, and                  endeavours to use banks that have 
  the National Bank of Ukraine has                 the best available creditworthiness. 
  imposed a number of restrictive                  Nevertheless, and despite the recent 
  measures designed to protect the                 improvements, the Ukrainian banking 
  banking system, including restrictions           sector remains weakly capitalised 
  of the transfer of funds outside                 and so the risks associated with 
  Ukraine (albeit that the Group                   the banks in Ukraine remain significant, 
  aims to maintain the significant                 including in relation to the banks 
  majority of its cash resources                   with which the Group operates bank 
  outside Ukraine (being 77% as at                 accounts. As a consequence, the 
  24 June 2022). In addition, Ukraine              Group also maintains a significant 
  continues to be supported by funding             proportion of its cash holdings 
  from the International Monetary                  in international banks outside Ukraine. 
  Fund, and has requested further 
  funding 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. In addition, 
  military conflict has had a severe               the involvement of Smart Holding 
  detrimental effect on the economic               (Cyprus) Limited, as an indirect 
  situation in Ukraine. The ongoing                major shareholder with extensive 
  effects of this are difficult to                 experience in Ukraine, is considered 
  predict and likely to continue                   helpful to mitigate such risks. 
  to affect the Ukrainian economy                  However, the invasion of Ukraine 
  and potentially the Group's business.            creates material challenges in planning 
  This situation is currently affecting            future investment and operations. 
  the Group's production and field                 The Group is limiting its operational 
  operations, and the ongoing instability          activities to minimise risk to its 
  is disrupting the Group's development            staff and contractors, and to limit 
  and operational planning for its                 its financial exposure. 
  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, which was established 
  and increased costs of operations                in 2020, is specifically tasked 
  through increasing regulatory oversight          with overseeing measuring, benchmarking 
  and controls, including potential                and mitigating the Group's environmental 
  effective or actual loss of licences             and climate impact, which will be 
  to operate. As a diligent operator               reported on in future periods. At 
  aware of and responsive to its                   this stage, the Group does not consider 
  good stewardship responsibilities,               climate change to have any material 
  the Group not only needs to monitor              implications on the Group's financial 
  and modify its business plans and                statements, including accounting 
  operations to react to changes,                  estimates. 
  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 consequence of the 
  The military conflict in Ukraine                 COVID-19 pandemic the Group has 
  poses significant risks to field                 implemented processes and controls 
  operations, by way of potential                  intended to ensure protection of 
  threat to the lives of employees                 all our stakeholders and minimise 
  and contractors, and damage to                   any disruption to our business. 
  equipment and infrastructure.                    As a consequence of the current 
                                                   military conflict in Ukraine, operations 
                                                   at the VAS field and SC licence 
                                                   area are currently suspended entirely, 
                                                   and 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 military conflict             contractors are appropriately supervised. 
  in Ukraine is impacting planning                 In addition, the Group performs 
  and implementation of development                a review of indicators of impairment 
  and operations at 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 the 
  proportion of the future capital                 significant majority of its cash 
  requirements of the Group is expected            resources outside Ukraine (being 
  to be derived from operational                   77% as at 24 June 2022). The Group 
  cash generated from production,                  does not currently have any loans 
  including from wells yet to be                   outstanding, internal financial 
  drilled, there is a risk that in                 projections are regularly made based 
  the longer term insufficient operational         on the latest estimates available, 
  cash is generated, or that additional            and various scenarios are run to 
  funding, should the need arise,                  assess the robustness of the Group's 
  cannot be secured. The military                  liquidity. However, as the risk 
  conflict in Ukraine has disrupted                to future capital funding is inherent 
  production operations at the Group's             in the oil and gas exploration and 
  fields, and consequently reduced                 development industry and reliant 
  anticipated cash flows from those                in part on future development success, 
  fields, and this has increased                   it is difficult for the Group to 
  the risk regarding sufficiency                   take any other measures to further 
  of capital for development. In                   mitigate 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. 
  hydrocarbon prices are very high, 
  which is ameliorating the potential 
  reduction in cash flows, and the 
  Group's sales counterparties are 
  meeting their financial obligations. 
                                                 ---------------------------------------------- 
 Ensuring appropriate business 
  practices 
                                                 ---------------------------------------------- 
 The Group operates in Ukraine,                   The Group maintains anti-bribery 
  an emerging market, where certain                and corruption policies in relation 
  inappropriate business practices                 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 military conflict 
  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 UAH27.3/$1.00               thus the currency of revenue and 
  on 31 December 2021. This devaluation            costs are largely matched. In light 
  has been a significant contributor               of the previous devaluation and 
  to the imposition of banking restrictions        volatility of the Ukrainian Hryvnia 
  by the National Bank of Ukraine                  against major world currencies, 
  over recent years. In addition,                  and since the Ukrainian Hryvnia 
  the geopolitical events in Ukraine               does not benefit from the range 
  over recent years and the current                of currency hedging instruments 
  military conflict in Ukraine are                 which are available in more developed 
  likely to continue to impact the                 economies, the Group has adopted 
  valuation of the Ukrainian Hryvnia               a policy that, where possible, funds 
  against major world currencies.                  not required for use in Ukraine 
  Further devaluation of the Ukrainian             be retained on deposit in the United 
  Hryvnia against the US Dollar will               Kingdom and Europe, principally 
  affect the carrying value of the                 in US Dollars. 
  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 
  military conflict means that businesses          contractual counterparties and seeks 
  can be 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 military conflict in                 a significant proportion of its 
  Ukraine. This has led to extreme                 cash reserves in the United Kingdom 
  foreign exchange movements in the                and Europe, mostly in US Dollars, 
  Ukrainian Hryvnia , high inflation               with reputable financial institutions. 
  and interest rates, and increased                The financial status of counterparties 
  credit risk relating to the Group's              is carefully monitored to manage 
  key counterparties.                              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. 
  The Group is challenging this Order 
  through legal proceedings, during 
  which production from the licence 
  is able to continue (although the 
  Russian invasion has currently 
  caused production to be suspended), 
  but this matter remains unresolved. 
  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. All such challenges 
  affecting the Group have thus far 
  been successfully defended through 
  the Ukrainian legal system. However, 
  the 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 military conflict in                 who are used to provide specialist 
  Ukraine has meant that, as far                   services as required. As a result 
  as possible, the Group's staff                   of the military conflict, o nly 
  have needed to move away from areas              essential staff are located at site, 
  of conflict and work remotely.                   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. 
                                                 ---------------------------------------------- 
 

Consolidated Income Statement

for the year ended 31 December 2021

 
 
                                                         202 1       2020 
                                               Note       $000       $000 
 
 Revenue                                        5      121,353     47,251 
                                                                 (31, 511 
 Cost of sales                                  6     (47,422)          ) 
--------------------------------------------  -----  ---------  --------- 
 Gross profit                                           73,931    15, 740 
 Administrative expenses                        7      (8,350)    (7,791) 
 Other operating gains, (net)                   10         654     1, 821 
--------------------------------------------  -----  ---------  --------- 
 Operating profit                                       66,235     9, 770 
 Finance income                                 11       1,394          - 
 Finance costs                                  12       (752)    (1,418) 
 Net impairment (losses)/gains on financial 
  assets                                                 (177)         24 
 Other losses, (net)                            13       (108)    (1,856) 
--------------------------------------------  -----  ---------  --------- 
 Profit before taxation                                 66,592     6, 520 
 Income tax expense                             14    (15,473)    (3,332) 
--------------------------------------------  -----  ---------  --------- 
 Profit for the year                                    51,119     3, 188 
--------------------------------------------  -----  ---------  --------- 
 
   Earnings per share (cents) 
 Basic and diluted                              16       15.9c       1.0c 
--------------------------------------------  -----  ---------  --------- 
 

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 2021

 
                                                  202 1         2020 
                                                   $000         $000 
 
 Profit for the year                             51,119       3, 188 
 
 Other comprehensive income/(expense): 
 Items that may be subsequently reclassified 
  to profit or loss: 
 
   Equity - foreign currency translation          1,611     (15,050) 
 Items that will not be subsequently 
  reclassified to profit or loss: 
 Re-measurements of post-employment benefit 
  obligations                                       172         (73) 
 
 
 Total other comprehensive income/(expense)       1,783     (15,123) 
 
 
 Total comprehensive income/(expense) 
  for the year                                   52,902   (11 , 935) 
----------------------------------------------  -------  ----------- 
 

The Notes set out below are an integral part of these consolidated financial statements.

Consolidated Balance Sheet

as at 31 December 2021

 
 
                                                       202 1        20 20 
                                           Note         $000         $000 
 Assets 
 Non-current assets 
 Property, plant and equipment              18        87,418      65, 662 
 Intangible assets                         1 9        12,340       12,232 
 Right-of-use assets                        20         1,008          512 
 Corporation tax receivable                                -            9 
 Deferred tax asset                        2 5           361          167 
----------------------------------------  -----  -----------  ----------- 
                                                     101,127      78, 582 
 
 Current assets 
 Inventories                                22         1,862        1,541 
 Trade and other receivables                23        13,059        4,847 
 Cash and cash equivalents                  24        87,780       60,993 
 Other short-term investments               24         4,762            - 
----------------------------------------  -----  -----------  ----------- 
                                                     107,463       67,381 
 
 Total assets                                        208,590     145, 963 
----------------------------------------  -----  -----------  ----------- 
 
 Liabilities 
 Current liabilities 
 Trade and other payables                   25      (12,306)      (6,641) 
 Lease liabilities                          20         (455)        (245) 
 Corporation tax payable                             (5,445)      (1,062) 
                                                    (18,206)      (7,948) 
 
 Net current assets                                   89,257       59,433 
----------------------------------------  -----  -----------  ----------- 
 
 Non-current liabilities 
 Provision for decommissioning              26       (5,467)      (6,819) 
 Lease liabilities                          20         (648)        (371) 
 Defined benefit liability                             (427)        (530) 
 Deferred tax liability                     27       (5,197)      (2,705) 
 Other non-current liabilities                         (128)      (1,975) 
                                                    (11,867)     (12,400) 
 
 Total liabilities                                  (30,073)     (20,348) 
----------------------------------------  -----  -----------  ----------- 
 
 Net assets                                          178,517     125, 615 
----------------------------------------  -----  -----------  ----------- 
 
 Equity 
 Called up share capital                    28        28,115       28,115 
 Share premium account                      17             -      555,090 
 Foreign exchange reserve                   29     (103,611)    (105,222) 
 Merger reserve                             29       (3,204)      (3,204) 
 Capital contributions reserve              29         7,477        7,477 
                                                                (356, 641 
 Retained earnings/(Accumulated losses)              249,740            ) 
 Total equity                                        178,517     125, 615 
----------------------------------------  -----  -----------  ----------- 
 

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 2021

 
 
                       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 
  2020                 28,115     555,090    (3,204)           7,477     (90,172)               (359,756)             137,550 
 Profit for the 
  year                      -           -          -               -            -                  3, 188              3, 188 
 Other 
  comprehensive 
  expense 
  - exchange 
  differences               -           -          -               -     (15,050)                       -            (15,050) 
  - re-measurements 
   of 
   post-employment 
   benefit 
   obligations              -           -          -               -            -                    (73)                (73) 
 Total 
  comprehensive                                                                                                    (1 1 , 935 
  income/( expense)         -           -          -               -     (15,050)                  3, 115                   ) 
 As at 31 December                                                                              (356, 641 
  2020                 28,115     555,090    (3,204)           7,477    (105,222)                       )            125, 615 
 
                       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 
  income 
  - 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 
  (Note 
  17)                       -   (555,090)          -               -            -                 555,090                   - 
 As at 31 December 
  202 1                28,115           -    (3,204)           7,477    (103,611)                 249,740             178,517 
  * 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 2021

 
                                                                202 1      20 20 
                                                      Note       $000       $000 
 
 Operating activities 
                                                                          2 3 ,7 
 Cash generated from operations                        30      77,646         64 
 Charitable donations                                  13        (76)    (2,077) 
 Income tax paid                                              (8,959)    (3,850) 
 Interest received                                                763      1,487 
---------------------------------------------------  -----  ---------  --------- 
 Net cash inflow from operating activities                     69,374     19,324 
---------------------------------------------------  -----  ---------  --------- 
 
 Investing activities 
 Purchase of oil and gas development, production 
  and other property, plant and equipment                    (26,292)   (12,749) 
 Purchase of oil and gas exploration and 
  evaluation assets                                          (11,387)    (4,154) 
 Purchase of financial instruments                     24     (4,762)          - 
 Purchase of oil and gas development, production                (5 39 
  and other intangible assets                                       )      (194) 
 Proceeds from return of prepayments for 
  shares                                                          250        250 
 Proceeds from sale of property, plant and 
  equipment                                                        10          4 
 Net cash outflow from investing activities                  (42,720)   (16,843) 
---------------------------------------------------  -----  ---------  --------- 
 
 Financing activities 
 Payment of principal portion of lease liabilities              (555)      (543) 
---------------------------------------------------  -----  ---------  --------- 
 Net cash outflow from financing activities                     (555)      (543) 
---------------------------------------------------  -----  ---------  --------- 
 
 Net increase in cash and cash equivalents                     26,099      1,938 
 Cash and cash equivalents at the beginning 
  of the year                                                  60,993     62,474 
 ECL* of cash and cash equivalents                                (6)        (6) 
 Effect of foreign exchange rate changes                          694    (3,413) 
 Cash and cash equivalents at the end of 
  the year                                             24      87,780     60,993 
---------------------------------------------------  -----  ---------  --------- 
 

*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 2021 or 2020, 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 2021 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 30 June 2022.

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 2021 and 2020, the Company's immediate parent company was Smart Energy (CY) Limited, which is 100% owned by Smart Holding (Cyprus) Limited, which is 100% owned by Mr Vadym Novynskyi. Accordingly, the Company was ultimately controlled by Mr Vadym Novynskyi.

The Group's gas, condensate and LPG extraction and production facilities are located in Ukraine. Since 2013, there has been ongoing political and economic instability 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, although there had been some recent gradual improvements.

Impact of the ongoing war in Ukraine

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, amongst other areas, the economic environment and business operations in Ukraine.

Currently, four months after the initial military attack, fighting continues in and around several major Ukrainian cities, causing very significant numbers of reported military and civilian casualties and significant dislocation of the Ukrainian population. As of the date hereof, 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. The invasion caused, and continues to cause, significant turbulence and disruption to the social and economic environment in Ukraine, with many businesses being forced to suspend their operations. According to a projection published by the International Monetary Fund ("IMF") in April 2022, Ukrainian GDP may fall 35% in 2022.

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 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 is taking 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 Parliament of Ukraine has adopted a temporary easing of 
       the tax regime until the end of martial law, including the 
       suspension of tax audits and has cancelled 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 Parliament of Ukraine passed a law ( 7038-d) to increase 
       the subsoil tax rate on natural gas production during martial 
       law. This law 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, including record high State debt repayments in 2022.

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.

Gas market developments

On 30 December 2021, the Cabinet of Ministers adopted Resolution 1433 and Resolution 1435, according to which all independent gas producers in Ukraine (as identified by a Committee set up by the Ukrainian Government (the "Committee")) were required to sell up to 20% of their natural gas production for the period until 30 April 2022 at a price set at the cost of sales of the relevant gas producer (based on established accounting rules) for such gas, plus a margin of 24%, plus existing production taxes (the "Regulated Price"). This gas was then to be sold to specified producers of designated socially important food products (as identified by the Committee) at the Regulated Price to reduce the energy costs of such producers during the period through to 30 April 2022. Although the introduction of these measures pre-dated the military conflict in Ukraine, their impact has coincided with the military conflict, but nevertheless, the measures have not had a material financial impact on the Group, given the modest volume of gas sold at Regulated Prices and the reduced production during the applicable period.

On 15 March 2022, the Ukrainian Parliament adopted the Law of Ukraine 2139-IX "On amendments to the Tax Code of Ukraine and certain legislative acts of Ukraine on the introduction of differentiated rent (subsoil tax) for natural gas production", which introduced changes to the subsoil production tax rates applicable to natural gas production by modifying the applicable rates based on gas prices, extending the incentive rates for new wells for a further 10 years and making improvements to the regulatory environment. These changes took effect on 1 March 2022, and the legislation includes provisions that these rates will not be increased for 10 years.

The new subsoil production tax rates are as follows:

(a) when gas prices are up to $150/Mm(3) , 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;

(b) 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;

(c) 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.

Prior to the changes, the tax rate for old wells was 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 was 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. The tax rates applicable to condensate production were unchanged and 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.

COVID-19 impact

The COVID-19 pandemic had a significant impact on the economic environment in Ukraine and throughout the world. The rapid spread of the COVID-19 coronavirus pandemic, and the restrictions introduced to counteract the pandemic significantly impacted global commodity and financial markets. The overall impact of COVID-19 will largely depend on the duration and extent of the effects of the pandemic on the global and Ukrainian economies. Businesses in Ukraine adapted to operating in new realities, arranging remote work, supply and sale modes of operation. At the date hereof, based on the available information, management believes that the uncertainties attributable to COVID-19 do not represent a key risk factor that may materially affect the liquidity and continuity of the Group's operations.

Overall, the final resolution and the ongoing effects of the military conflict 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 24 June 2022, the official NBU exchange rate of the Ukrainian Hryvnia against the US Dollar was UAH29.25/$1.00, compared with UAH27.23/$1.00 as at 31 December 2021.

Further details of risks relating to Ukraine can be found within the Principal Risks section above.

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 2021 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.

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 have 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, SV and SC assets in the Poltava region, while all production and field operations at the VAS asset located in the Kharkiv region are suspended. At the SC licence area, completion of the drilling of the SC-4 well is planned shortly. 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 military conflict 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 $76.5 million as at 24 June 2022, of which $58.8 million were held outside of Ukraine, in currencies other than the Ukrainian Hryvnia. 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 military conflict 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 military conflict 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 2022 and 2023. 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.

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 military conflict 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 $58.8 million as at 24 June 2022, 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 2021, but did not have a material impact on the Group's c onsolidated or Company's financial statements :

 
 --   Interest rate benchmark (IBOR) reform - phase 2 amendments 
       to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 (issued on 27 
       August 2020 and effective for annual periods beginning on 
       or after 1 January 2021); 
 --   COVID-19-Related Rent Concessions Amendment to IFRS 16 issued 
       on 28 May 2020 and effective for annual periods beginning 
       on or after 1 April 2021. 
 

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 2022 or later, and which the Group has not early adopted.

(a) Sale or Contribution of Assets between an Investor and its Associate or Joint Venture - Amendments to IFRS 10 and IAS 28 (issued on 11 September 2014 and effective for annual periods beginning on or after a date to be determined by the UK Endorsement Board )

(b) IFRS 17 "Insurance Contracts" (issued on 18 May 2017 and effective for annual periods beginning on or after 1 January 202 3 )

(c) Amendments to IFRS 17 and an amendment to IFRS 4 (issued on 25 June 2020 and effective for annual periods beginning on or after 1 January 2023)

(d) Classification of liabilities as current or non-current - Amendments to IAS 1 (issued on 23 January 2020 and effective for annual periods beginning on or after 1 January 2022)

(e) Classification of liabilities as current or non-current, deferral of effective date - Amendments to IAS 1 (issued on 15 July 2020 and effective for annual periods beginning on or after 1 January 2023)

(f) Proceeds before intended use, Onerous contracts - cost of fulfilling a contract, Reference to the Conceptual Framework - narrow scope amendments to IAS 16, IAS 37 and IFRS 3, and Annual Improvements to IFRSs 2018-2020 - amendments to IFRS 1, IFRS 9, IFRS 16 and IAS 41 (issued on 14 May 2020 and effective for annual periods beginning on or after 1 January 2022)

(g) Amendments to IAS 1 and IFRS Practice Statement 2: Disclosure of Accounting policies (issued on 12 February 2021 and effective for annual periods beginning on or after 1 January 2023)

(h) Amendments to IAS 8: Definition of Accounting Estimates (issued on 12 February 2021 and effective for annual periods beginning on or after 1 January 2023)

(i) Covid-19-Related Rent Concessions - Amendments to IFRS 16 (issued on 31 March 2021 and effective for annual periods beginning on or after 1 April 2021)

(j) Deferred tax related to assets and liabilities arising from a single transaction - Amendments to IAS 12 (issued on 7 May 2021 and effective for annual periods beginning on or after 1 January 2023)

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 18 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 1 were $1:UAH2 7 . 3 (20 20 : $1:UAH28.3), $1:GBP0. 74 1 (20 20 : $1:GBP 0.736), $1:EUR0.8 8 3 (20 20 : $1:EUR0.81 4 ), and the average rates for the year were $1:UAH27.3 (2020: $1:UAH27.0), $1:GBP0.727 (2020: $1:GBP 0.779), $1:EUR0.845 (2020: $1:EUR0.876)

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 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.

Judgements

Acquisition of LLC Arkona Gas-Energy

The Group acquired control of LLC Arkona Gas-Energy ("Arkona") on 24 March 2020. This acquisition required a determination to be made as to whether the acquisition should be treated as a business or asset acquisition. Following such determination, the transaction has been treated as an asset acquisition as there were no employees or production operations acquired. In applying the concentration test under amended IFRS 3 Business Combinations, the fair value of the acquired Svystunivsko-Chervonolutskyi licence ("SC Licence") comprises the majority amount (more than 90%) of the consideration. The SC Licence is classified as an exploration and evaluation intangible asset at the acquisition date. The Group believes no impairment indicators exist at the reporting date, and note the following:

   --      the SC Licence is valid until 18 May 2037; and 
   --      further exploration and evaluation plans are included in the Group's Budgets. 

The following table provides the allocation of the fair value of the consideration to Arkona's assets and liabilities at their relative fair values at the date of acquisition:

 
                                                              $000 
 
 Property, plant and equipment                                  88 
 Trade and other receivables                                    35 
 Trade and other payables                                    (291) 
----------------------------------------------------------  ------ 
 Net liabilities - at the acquisition date, excluding 
  licence                                                    (168) 
----------------------------------------------------------  ------ 
 Gross value of consideration (1st, 2nd and 3rd tranches)    8,469 
----------------------------------------------------------  ------ 
 Discounting effect                                          (306) 
----------------------------------------------------------  ------ 
 Fair value of consideration (1st, 2nd and 3rd tranches)     8,163 
----------------------------------------------------------  ------ 
 Fair value of licence at the acquisition date               8,331 
 

Under the terms of the sale and purchase agreement for Arkona, the total consideration payable is $8,630,000 with payment divided into three tranches. The first tranche of $4,315,000 was paid on 24 March 2020 upon completion of the acquisition of 100% of the issued share capital of Arkona.

In March 2021, the Group paid the second tranche of the consideration (net of an indemnity liability owned to the Group ) of $2,078,000.

In September 2021, the Group made an early payment of 25% of the third tranche of the consideration totalling $539,000.

The remaining balance of the third tranche of the consideration totalling $1,618,125 is subject to satisfaction of certain conditions, including the favourable resolution of legal proceedings brought by NJSC Ukrnafta against Arkona relating to the SC Licence, the absence of any further legal claims or contractual, warranty or indemnity claims, and the expiration of a further period of time. The total consideration comprising the three tranches estimated at the date of acquisition amounts to $8,163,000. The outstanding amount is reflected in trade and other payables.

Estimates

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 2021 would be to increase it by $1,195,000 or decrease it by $975,000 (2020: increase by $1,165,000 or decrease by $953,000).

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 2021 was 6.29 % (31 December 2020: 3.70%). 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 2021 resulted from the revision of the estimated costs of decommissioning (increase of $398,000 in provision), an increase in the discount rate applied (decrease of $2,188,000 in provision) and change of the estimated economic life of the SV-10 well (decrease of $259,000 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 26).

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 2021, 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 2021, the present value of future net cash flows to be generated by the subsidiaries operating in Ukraine during 2022 - 2026, adjusted for the subsidiaries' working capital as at 31 December 2021 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:

 
 --   commodity prices - the model assumes gas prices of $725/Mm3 
       in 2022, decreasing to $514/Mm3 in 2023, $370/Mm3 in 2024 
       and $250/Mm3 in subsequent years; 
 --   discount rate applied is 12.6%, determined in real terms: 
 --   production levels and reserves at the beginning of year 2022 
       at the MEX-GOL and SV fields of 44.7 MMboe, at the VAS field 
       of 2.4 MMboe and at the SC licence area of 12.6 MMboe; 
 --   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 $181,700,000, 
       VAS field at the level of $15,500,000 and SC licence area 
       at the level of $65,900,000; 
 --   future capital expenditures until the end of field life assumed 
       to be: for the MEX-GOL and SV fields at the level of $253,200,000, 
       VAS field at the level of $16,500,000 and SC licence area 
       at the level of $97,500,000; 
 --   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 increase in the net present value of future net cash flows as at 31 December 2021 in comparison with 31 December 2020 was affected by the increase in gas prices forecast.

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 2021. As such, the Company has recorded $ 1 0,912,000 of income, 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 2021. The set off of the accumulated impairment of $3,322,000 was due to the disposal of the fully impaired investment in Regal Petroleum (Jersey) Limited (Note 21).

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.

 
                                                 United 
                                     Ukraine    Kingdom        Total 
                                        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 18)

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 2021, 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 is ultimately controlled by Mr Vadym Novynskyi, who through an indirect 82.65% majority shareholding, ultimately controls 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 current 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 has agreed to combine the Group's gas production with its own gas production, and to sell such gas as combined volumes, which is intended to result in higher sales prices due to the larger sales volumes. At the commencement of this sales arrangement, 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 0.5% to the gas sales prices achieved by Smart Energy, who sold the combined volumes in line with market prices. Due to changes in the regulatory regime in Ukraine, which has increased the burden of administration and regulatory compliance obligations involved in the sale of gas, and in order to ensure that the Group is compliant with current transfer pricing regulations in Ukraine, the Group and Smart Energy agreed in 2019 to increase the discount on the price at which the Group sells its gas to Smart Energy from 0.5% to 2%. The terms of sale for the Group's gas to Smart Energy are (i) for 35% of the monthly volume of gas by the 15th of the month following the month of delivery, and (ii) payment of the remaining balance by the end of that month.

 
                                                 United 
                                     Ukraine    Kingdom        Total 
                                        2020       2020         2020 
                                        $000       $000         $000 
 
 Revenue 
 Gas sales                            32,309          -       32,309 
 Condensate sales                     11,418          -       11,418 
 Liquefied Petroleum Gas sales         3,524          -        3,524 
-------------------------------  -----------  ---------  ----------- 
 Total revenue                        47,251          -       47,251 
 
 Segment result                       25,473    (3,053)       22,420 
 Depreciation and amortisation 
  of non-current assets             (12,650)          -     (12,650) 
 Operating profit                                              9,770 
 
 Segment assets                      106,587     39,376     145, 963 
 
 Capital additions*                   18,167          -       18,167 
 

*Comprises additions to property, plant and equipment (Note 18)

6. Cost of Sales

 
                                                     2021      2020 
                                                     $000      $000 
 
 Production taxes                                  19,926     9,361 
 Depreciation of property, plant and equipment     10,669    11,546 
 Rent expenses                                      8,811     3,151 
 Staff costs (Note 9)                               2,886     3,202 
 Cost of inventories recognised as an expense       1,708     1,227 
 Transmission tariff for Ukrainian gas system         880       824 
 Amortisation of mineral reserves                     482       488 
 Other expenses                                     2,060     1,712 
-----------------------------------------------  --------  -------- 
                                                   47,422   31, 511 
 

The increase in production taxes and rent expenses in 2021 is a function of those charges being price-linked, with hydrocarbon prices having risen significantly during the year. A transmission tariff for use of the Ukrainian gas transit system of UAH101.93/Mm(3) of gas was applicable to the Group (2020: UAH101.93/Mm(3) ).

7. Administrative Expenses

 
                                                  2021    2020 
                                                  $000    $000 
 
 Staff costs (Note 9)                            5,019   4,521 
 Consultancy fees                                  923   1,271 
 Depreciation of other fixed assets                572     456 
 Auditors' remuneration                            352     394 
 Amortisation of other intangible assets           235     160 
 Rent expenses                                     160     154 
 Other expenses                                  1,089     835 
---------------------------------------------  -------  ------ 
                                                 8,350   7,791 
 
 
                                                  2021    2020 
                                                  $000    $000 
 
 Audit of the Company and subsidiaries             141     176 
 Audit of subsidiaries in Ukraine                  124     123 
 Audit related assurances services - interim 
  review                                            48      47 
---------------------------------------------  -------  ------ 
 Total assurance services                          313     346 
 
 
   Tax compliance services                          26       3 
 Tax advisory services                              13      45 
 Total non-audit services                           39      48 
---------------------------------------------  -------  ------ 
 
 Total audit and other services                    352     394 
 

The amounts disclosed above were paid to PricewaterhouseCoopers LLP in the UK and Ukraine, with the exception of $7,000 paid to another audit firm in respect of the audit of a subsidiary in Ukraine (2020: $47,000 in respect of the audit of a subsidiary in Ukraine and tax advisory services).

8. Remuneration of Directors

 
                           2021    2020 
                           $000    $000 
 
 Directors' emoluments    1,115   1,026 
-----------------------  ------  ------ 
 

The emoluments of the individual Directors were as follows:

 
                                   Total         Total 
                              Emoluments    emoluments 
                                    2021          2020 
                                    $000          $000 
 Executive Directors: 
 Sergii Glazunov                     307           370 
 Bruce Burrows                       484           354 
 
 Non-executive Directors: 
 Chris Hopkinson                     138           128 
 Alexey Pertin                        62            58 
 Yuliia Kirianova                     62            58 
 Dmitry Sazonenko                     62            58 
                                   1,115         1,026 
 

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 
 
                                  2021        2020 
 Group 
 Management / operational          171         166 
 Administrative support             92          93 
--------------------------  ----------  ---------- 
                                   263         259 
 

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.

 
                            2021    2020 
                            $000    $000 
 
 Wages and salaries        6,785   6,664 
 Other pension costs       1,007     953 
 Social security costs       113     106 
                           7,905   7,723 
 
   10.   Other Operating Gains, (net) 
 
                                                    2021     2020 
                                                    $000     $000 
 
 Interest income on cash and cash equivalents        763    1,421 
 Contractor penalties applied                         81        - 
 Gain on sales of current assets                      16       26 
 Other operating (loss)/income, net              ( 206 )      374 
                                                     654   1, 821 
 

The prior year comparative costs were amended to conform to the current year presentation.

   11.   Finance Income 

During 2021, the Group recognised foreign exchange gains less losses of $1,394,000 (2020: $nil). The net exposure in the previous year was recognised as finance costs (Note 12).

   12.   Finance Costs 
 
                                                           2021    2020 
                                                           $000    $000 
 
 Unwinding of discount on financial liabilities             333      27 
 Unwinding of discount on provision for decommissioning 
  (Note 26)                                                 250     234 
 Interest expense on lease liabilities                      169     126 
 Foreign exchange losses less gains                           -   1,031 
                                                            752   1,418 
 
   13.   Other Losses, (net) 
 
                                    2021     2020 
                                    $000     $000 
 
 Charitable donations                 76    2,077 
 Foreign exchange gains/(losses)      53    (340) 
 Other (gains)/losses, net          (21)     1 19 
                                     108   1,85 6 
 

Charitable donations for the year ended 31 December 2021 comprise contributions to the development of social infrastructure of local communities (2020: charitable donations comprised the supply of medical equipment and COVID-19 testing equipment to Ukrainian authorities and charitable foundations).

   14.   Income Tax Expense 
   a)       Income tax expense and (benefit): 
 
 
 
                                    2021    2020 
                                    $000    $000 
 Current tax 
 UK - current year                   165     227 
 UK - prior year                      10     328 
 Overseas - current year          13,130   2,770 
 Overseas - prior year                 -   (329) 
 
 Deferred tax (Note 27) 
 UK - current year                 2,367     640 
 Overseas - current year           (199)   (304) 
 Income tax expense               15,473   3,332 
 
   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:

 
 
                                                        2021       2020 
                                                        $000       $000 
 
 Profit before taxation                              66, 592      6,520 
------------------------------------------------  ----------  --------- 
 Tax charge at UK tax rate of 19.00% (2020:             12,6 
  19.00%)                                                5 2      1,239 
 
 Tax effects of: 
 Lower foreign corporate tax rates in Ukraine 
  (18.00%) (2020: 18.00%)                              (685)       (95) 
 Change in UK tax rate from 19% to 25% starting        1,168          - 
  from 1 April 2023 
                                                       1 2 , 
 Disallowed expenses and non-taxable income              038     22,648 
 Previously unrecognised tax losses used to 
  reduce income tax expense                        ( 9 ,875)   (21,015) 
 Adjustments in respect of prior periods                 175        555 
------------------------------------------------  ----------  --------- 
 Total tax expense for the year                       15,473        3,332 
 

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.   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 profit after tax was $ 16 , 330, 000 for the year ended 31 December 2021 (2020: profit after tax $59,454,000).

   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 (2020: 320,637,836) ordinary shares, being the weighted average number of shares in issue for the year. There are no dilutive instruments.

   17.   Reduction of Capital 

On 25 February 2021, the Company completed a reduction of its share capital through the cancellation of its entire share premium account, thereby creating distributable reserves, which potentially enables the Company to make distributions to its shareholders in the future, subject to the Company's financial performance. However, the Company is not indicating any commitment, and does not have any current intention, to make any distributions to shareholders.

   18.   Property, Plant and Equipment 
 
                                          2021                                                     2020 
                         Oil and 
                             Gas        Oil and                        Oil and Gas 
                     Development            Gas                        Development    Oil and Gas 
                             and    Exploration                                and    Exploration 
                      Production            and     Other               Production            and     Other 
                          assets     Evaluation     fixed                   assets     Evaluation     fixed 
                         Ukraine         Assets    assets     Total        Ukraine         Assets    assets      Total 
  Group                     $000           $000      $000      $000           $000           $000      $000       $000 
 
  Cost 
  At the beginning 
   of the                                            2,21    140,54 
   year                  135,966          2,362         7         5        143,127          2,571     2,103    147,801 
  Additions               24,289          7,763       524    32,576         17,241            213       713     18,167 
  Change in 
   decommissioning 
   provision             (1,921)             70         -   (1,851)            372              -         -        372 
  Disposals                 (62)              -     (187)     (249)          (443)              -      (73)      (516) 
  Exchange                                                                                            (52 6      (25,2 
   differences             4,898           (85)        77     4,890       (24,331)          (422)         )       79 ) 
------------------  ------------  -------------  --------  --------  -------------  -------------  --------  --------- 
  At the end of                                                                                        2,21     140,54 
   the year              163,170         10,110     2,631   175,911        135,966          2,362         7          5 
------------------  ------------  -------------  --------  --------  -------------  -------------  --------  --------- 
 
  Accumulated depreciation and 
  impairment 
  At the beginning 
   of the                                            1,06     74,88 
   year                   73,816              -         7         3         76,802              -       947     77,749 
  Charge for year         10,544              -       343    10,887        10, 450              -       319    10, 769 
  Disposals                 (25)              -      (28)      (53)          (327)              -      (30)      (357) 
  Exchange                                                                (13,10 9 
   differences             2,735              -        41     2,776              )              -     (169)   (13,278) 
------------------  ------------  -------------  --------  --------  -------------  -------------  --------  --------- 
  At the end of                                                                                        1,06      74,88 
   the year               87,070              -     1,423    88,493         73,816              -         7          3 
------------------  ------------  -------------  --------  --------  -------------  -------------  --------  --------- 
 Net book value at 
  the 
  beginning of the 
  year                   62, 150          2,362     1,150   65, 662         66,325          2,571     1,156     70,052 
------------------  ------------  -------------  --------  --------  -------------  -------------  --------  --------- 
 Net book value at 
  the 
  end of the year         76,100         10,110     1,208    87,418        62, 150          2,362     1,150    65, 662 
------------------  ------------  -------------  --------  --------  -------------  -------------  --------  --------- 
 

MEX-GOL, SV and VAS gas and condensate fields

In accordance with the Group's accounting policies, the oil and gas development and producing assets are tested for impairment at each balance sheet date if impairment indicators exist. As at 31 December 2021, no impairment indicators were identified by the Group, and therefore no impairment test was performed for the MEX-GOL, SV and VAS gas and condensate fields.

19. Intangible Assets

 
                                                         2021                                                2020 
                             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                      6,570            8,286         616          15,472   7,843      -             572          8,415 
  Additions                  -                143           324          467      -          8,331         224          8,555 
  Disposals                  -                (80)          (212)        (292)    -          -             (85)         (85) 
  Exchange differences       240              302           24           566      (1,273)    (45)          (95)         (1,413) 
--------------------------  ---------------  ------------  -----------  -------  ---------  ------------  -----------  ------------ 
  At the end of the year     6,810            8,651         752          16,213   6,570      8,286         616          15,472 
--------------------------  ---------------  ------------  -----------  -------  ---------  ------------  -----------  ------------ 
 
 Accumulated amortisation 
  At the beginning of the 
   year                      2,855            -             385          3,240    2,851      -             367          3,218 
  Charge for year            482              -             239          721      488        -             166          654 
  Disposals                  -                -             (212)        (212)    -          -             (85)         (85) 
  Exchange differences       102              -             22           124      (484)      -             (63)         (547) 
--------------------------  ---------------  ------------  -----------  -------  ---------  ------------  -----------  ------------ 
  At the end of the year     3,439            -             434          3,873    2,855      -             385          3,240 
--------------------------  ---------------  ------------  -----------  -------  ---------  ------------  -----------  ------------ 
 Net book value at the 
  beginning 
  of the year                3,715            8,286         231          12,232   4,992      -             205          5,197 
--------------------------  ---------------  ------------  -----------  -------  ---------  ------------  -----------  ------------ 
 Net book value at the end 
  of the year                3,371            8,651         318          12,340   3,715      8,286         231          12,232 
--------------------------  ---------------  ------------  -----------  -------  ---------  ------------  -----------  ------------ 
 
 
 

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 2021, no impairment indicators were identified.

20. Leases

This note provides information for leases where the Group is a lessee.

Amount recognised in the balance sheet:

 
 
                         2021   2020 
                         $000   $000 
 Right-of-use assets 
 Properties               627    108 
 Land                     242    236 
 Wells                    139   16 8 
---------------------  ------  ----- 
                        1,008    512 
 
 
 
                       2021   2020 
                       $000   $000 
 Lease liabilities 
 Current                455    245 
 Non-current            648    371 
-------------------  ------  ----- 
                      1,103    616 
 

After modification additions to the right-of-use assets during the 2021 financial year were $820,000 (2020: $56,000).

Amounts recognised in the statement of profit or loss:

 
 
                                                       2021      2020 
                                                       $000      $000 
 Depreciation charge 
 Properties                                           (311)     (308) 
 Land                                                  (15)      (15) 
 Wells                                                 (34)      (35) 
-------------------------------------------------  --------  -------- 
                                                      (360)   (35 8 ) 
 
 Interest expense (included in finance cost)          (169)     (126) 
 Expense relating to short-term leases (included 
  in cost of sales and administrative expenses)       (142)     (139) 
 Expense relating to variable lease payments 
  not included in lease liabilities (included 
  in cost of sales)                                 (8,765)   (3,101) 
 Expense relating to lease payments for land 
  under wells not included in lease liabilities 
  (included in cost of sales)                          (64)      (71) 
 

The comparative expense relating to lease payments for land under wells not included in lease liabilities was amended to conform to the current year presentation.

The total cash outflow for leases in 2021 was $10,217,000 (2020: $3,456,000).

21. Investments and Loans to Subsidiary Undertakings

 
                                             Shares in        Loans to 
                                            subsidiary      subsidiary 
                                          undertakings    undertakings      Total 
                                                  $000            $000       $000 
 Company 
 As at 1 January 2020                           17,279          14,181     31,460 
--------------------------------------  --------------  --------------  --------- 
 Additions including accrued interest            8,163           4,336     12,499 
 Transfers                                      39,987        (39,987)          - 
 Repayment of interest and loans                     -         (4,318)    (4,318) 
 (Impairment)/reversal of impairment          (30,142)          87,264     57,122 
 Exchange differences                                -           1,352      1,352 
--------------------------------------  --------------  --------------  --------- 
 As at 31 December 2020                         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 
--------------------------------------  --------------  --------------  --------- 
 

The Company has recorded a credit of $7,672,000, 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 2021 (Note 4). As at 31 December 2021, following a review of the underlying cash flow forecasts of the subsidiaries and a significant increase in gas prices forecast, management reassessed the method of measurement of expected credit losses and use of the downside scenario, calculating the ECL based on the sovereign rating of Ukraine defined by Fitch as "B" as at 31 December 2021. The cash flow forecast would be sensitive to a breakeven discount rate of 26.00%, and a breakeven gas price of $348/Mm(3) .

The Company also recorded a credit of $3,240,000, being the net change in credit loss allowance for shares in subsidiary undertakings. The set off of the accumulated impairment of $3,322,000 was due to the disposal of the fully impaired investment in Regal Petroleum (Jersey) Limited.

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 
                                                       2021             2020 
                                                       $000             $000 
 
 Discount rate (increase)/decrease 
  by 1%                                           (641)/676     ( 810 )/ 867 
 Change in gas price increase/(decrease)     3,388 /( 3,411   2,879 /( 2,880 
  by 10%                                                  )                ) 
-----------------------------------------  ----------------  --------------- 
 

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      Total 
                            1           2            3                       1           2            3 
                                                        ---------                                        --------- 
                   (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

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 2020:

 
                                                Credit loss allowance                            Gross carrying amount 
                           Stage       Stage        Stage       Total        Stage       Stage        Stage     Totall 
                               1           2            3                        1           2            3 
                                                           ----------                                        --------- 
                      (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 
               2020            -           -    (167,072)   (167,072)            -           -      181,253    181,253 
-------------------  -----------  ----------  -----------  ----------  -----------  ----------  -----------  --------- 
 
     Movements with 
   impact on credit 
     loss allowance 
     charge for the 
              year: 
 
       Modification 
           of loans            -           -       72,412      72,412            -           -     (72,412)   (72,412) 
          Additions 
          including 
   accrued interest            -           -            -           -            -           -        4,336      4,336 
          Transfers            -           -            -           -            -           -     (39,987)   (39,987) 
         Payment of 
           interest            -           -            -           -            -           -      (4,318)    (4,318) 
       Repayment of            -           -            -           -            -           -            -          - 
              loans 
           Exchange 
         difference            -           -     (12,979)    (12,979)            -           -       14,331     14,331 
     Changes to ECL 
  measurement model 
        assumptions            -           -       87,264      87,264            -           -            -          - 
-------------------  -----------  ----------  -----------  ----------  -----------  ----------  -----------  --------- 
 
    Total movements 
     with impact on 
        credit loss 
          allowance 
     charge for the 
               year            -           -      146,697     146,697            -           -     (98,050)   (98,050) 
-------------------  -----------  ----------  -----------  ----------  -----------  ----------  -----------  --------- 
 
  As at 31 December 
               2020            -           -     (20,375)    (20,375)            -           -       83,203     83,203 
-------------------  -----------  ----------  -----------  ----------  -----------  ----------  -----------  --------- 
 

ECL - Expected credit losses

SICR - Significant increase in credit risk

Subsidiary undertakings

As at 31 December 2021 and 2020, the Company's subsidiary undertakings, all of which are included in the consolidated financial statements, were:

 
                      Registered address      Country           Country           Principal          % of 
                                               of                of operation      activity           shares 
                                               incorporation                                          held 
 
                      3(rd) Floor, 
                       Charter Place, 
 Regal Petroleum       23-27 Seaton 
  Corporation          Place, St Helier,                                          Oil & Natural 
  Limited              Jersey, JE4 0WH        Jersey            Ukraine            Gas Extraction    100% 
 
                      16 Old Queen 
 Regal Group           Street, London,                                            Service 
  Services Limited     SW1H 9HP               United Kingdom    United Kingdom     Company           100% 
 
                      3(rd) Floor, 
                       Charter Place, 
                       23-27 Seaton 
 Regal Petroleum       Place, St Helier,                                          Holding 
  (Jersey) Limited     Jersey, JE4 0WH        Jersey            United Kingdom     Company           100% 
 
                      162 Shevchenko 
 Regal Petroleum       Str., Yakhnyky 
  Corporation          Village, Lokhvytsya 
  (Ukraine)            District, Poltava                                          Service 
  Limited              Region, 37212          Ukraine           Ukraine            Company           100% 
 
 LLC Prom-Enerho      3 Klemanska Str.,                                           Oil & Natural 
  Produkt              Kiev, 02081            Ukraine           Ukraine            Gas Extraction    100% 
                      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% 
 
 

The Parent Company, Enwell Energy plc, holds direct interests in 100% of the share capital of Regal Petroleum Corporation Limited, Regal Group Services Limited, Regal Petroleum (Jersey) Limited, Regal Petroleum Corporation (Ukraine) Limited and LLC Arkona Gas-Energy, 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.

Regal Group Services Limited, company number 5252958, has taken advantage of the subsidiary audit exemption allowed under section 479A of the Companies Act 2006 for the year ended 31 December 2021.

22. Inventories

 
                                         Group 
                                  2021     2020 
                                  $000     $000 
 Current 
 Materials and spare parts       1,705    1,445 
 Finished goods                    157       96 
---------------------------  ---------  ------- 
                                 1,862    1,541 
 

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 2021 allowances for impairment of materials and spare parts amounted to $965,000 (31 December 2020: $974,000).

All inventories are measured at the lower of cost or net realisable value. There was no write down of inventory as at 31 December 2021 or 2020.

23. Trade and Other Receivables

 
                                           Group               Company 
                                    2021     2020       2021       2020 
                                    $000     $000       $000       $000 
 
 Trade receivables                 5,308    1,936          -          - 
 Other financial receivables         200    1,053        196        304 
 Less credit loss allowance        (140)    (133)          -          - 
-----------------------------  ---------  -------  ---------  --------- 
 Total financial receivables       5,368    2,856        196        304 
 
 Prepayments and accrued 
  income                           5,231    1,387         28         55 
 Other receivables                 2,460      604         75         76 
-----------------------------  ---------  -------  ---------  --------- 
 Total trade and other 
  receivables                     13,059    4,847        299        435 
 

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 2021, the Group's total trade receivables, net of expected credit losses amounted to $5,169,000 and 100% were denominated in Ukrainian Hryvnia (31 December 2020: $1,806,000 and 100% were denominated in Ukrainian Hryvnia). Further description of financial receivables is disclosed in Note 31.

The majority of the trade receivables are from a related party, LLC Smart Energy, that purchases all of the Group's gas production (see Note 4). 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 (2020: the applicable payment terms are payment for one third of the estimated monthly volume of gas by the 20(th) of the month of delivery, and payment of the remaining balance by the 10(th) of the month following the month of delivery). The trade receivables were paid in full after the end of the year.

Prepayments and accrued income mainly consist of prepayments of $1,366,000 relating to the development of the SV field, $1,210,000 relating to the development of the MEX-GOL field and $2,284,000 relating to the development of the SC licence (31 December 2020: of $926,000 relating to the development of the SV licence).

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 
 

Analysis by credit quality of financial trade and other receivables and expected credit loss allowance as at 31 December 2020 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%            1,804         (3)      1,801          party 
 
                                                                                number of days 
 Trade receivables                                                              the asset past 
  - credit impaired            100%              127       (127)          -           due 
 
                                                                                  historical 
 Trade receivables                                                               credit losses 
  - other                     0.21%                5           -          5       experienced 
 
 Other financial                                                                  individual 
  receivables                 0.42%            1,053         (3)      1,050      default rates 
 
 Total trade and 
  other receivables 
  for which individual 
  approach for 
  ECL is used                                  2,989       (133)      2,856 
 

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:

 
                                             2021   2020 
                                             $000   $000 
 Trade and other receivables 
 Balance as at 1 January                      133    155 
 New originated or purchased                   24      - 
 Financial assets derecognised during the 
  year                                       (19)      - 
 Changes in estimates and assumptions         (3)      3 
 Foreign exchange movements                     5   (25) 
------------------------------------------  -----  ----- 
 Balance as at 31 December                    140   13 3 
 

24. Cash and Cash Equivalents and Other short-term investments

 
                                            Group             Company 
                                          2021     2020     2021     2020 
                                          $000     $000     $000     $000 
 
 Cash and Cash Equivalents 
 Cash at bank                           75,457   53,710   63,299   38,619 
 Demand deposits and term deposits 
  with maturity of less than 3 
  months                                12,323    7,283        -        - 
                                        87,780   60,993   63,299   38,619 
 
 Other short-term investments 
 Demand deposits and term deposits       4,762        -        -        - 
  with maturity of more than 3 
  months but less than a year 
-----------------------------------  ---------  -------  -------  ------- 
                                         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.

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 
                  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 
 
 
                               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 
                     2020                 2020                 2020                    2020 
                     $000                 $000                 $000                    $000 
 
  A- to A+ 
     rated         38,615                    -                    -                  38,615 
  B- to B+ 
     rated              1                5,477                    -                   5,478 
   Unrated         15,094                1,806                    -                  16,900 
                   53,710                7,283                    -                  60,993 
 

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 "B" as at 31 December 2021 for non-rated banks. Based on this assessment, the Group concluded that the identified impairment loss was immaterial.

25. Trade and Other Payables

 
                                                 2021          2020 
                                                 $000          $000 
 
 Taxation and social security                 5 , 031         1,396 
 Trade payables                                 3,404           843 
 Accruals and other payables                    3,354         4,037 
 Advances received                                517           365 
                                               12,306         6,641 
 
 

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 31.

26. Provision for Decommissioning

 
                                      2021      2020 
                                      $000      $000 
 Group 
 At the beginning of the year        6,819     7,447 
 Amounts provided                      198       146 
 Unwinding of discount                 250       234 
 Change in estimate                (2,049)       226 
 Effect of exchange difference         249   (1,234) 
-------------------------------  ---------  -------- 
 At the end of the year              5,467     6,819 
 
 

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 $5,467,000 (31 December 2020: $6,819,000) 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 2021 is explained in Note 4.

The principal assumptions used are as follows:

 
                                         31 December   31 December 
                                                2021          2020 
 
 Discount rate                                 6.29%         3.70% 
 Average cost of restoration per well 
  ($000)                                         348           342 
--------------------------------------  ------------  ------------ 
 

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 
                                                      2021          2020 
                                                      $000          $000 
 
 Discount rate (increase)/decrease 
  by 1%                                          (723)/860   (948)/1,143 
 Change in average cost of well restoration     353 /( 353 
  increase/ (decrease) by 10%                            )     469/(469) 
--------------------------------------------  ------------  ------------ 
 

27. Deferred Tax

 
 
                                                 2021      2020 
                                                 $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                 (2,705)   (2,141) 
 Charged to Income Statement - UK current 
  year                                        (2,367)     (640) 
 Charged to Income Statement - UK prior             -         - 
  year 
 Effect of exchange difference                  (125)        76 
-------------------------------------------  --------  -------- 
 At the end of the year                       (5,197)   (2,705) 
 
                                                 2021      2020 
                                                 $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                     167     (147) 
 Credited to Income Statement - overseas 
  current year                                    199       304 
 Effect of exchange difference                    (5)        10 
-------------------------------------------  --------  -------- 
 At the end of the year                           361       167 
 

There was a further $76,433,000 (31 December 2020: $73,661,000) of unrecognised UK tax losses carried forward for which no deferred tax asset has been recognised. This amount includes $4, 065 , 000 of previous losses added during the period as a result of finalisation of the tax return. These losses can be carried forward indefinitely, subject to certain rules regarding capital transactions and changes in the trade of the Company.

The deferred tax asset relating to the Group's provision for decommissioning as at 31 December 2021 of $457,000 (31 December 2020: $170 , 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 2021 of $5,654,000 (31 December 2020: $2,875,000) 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 2021 of $315,000 (31 December 2020: $323,000) 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 asset relating to the Group's development and production assets at the VAS field as at 31 December 2021 of $46,000 (31 December 2020: deferred tax liability of $156,000) 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 835,298,000 ($30,621,000) as at 31 December 2021 and UAH 1,763,494,000 ($62,370,000) as at 31 December 2020 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 2021 and 2020, 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. This had an impact on the deferred tax liability and the income tax expense in the amount of $1,168,000 (Note 14).

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.

   28.   Called Up Share Capital 
 
                                                  2021                        2020 
                                     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.

   29.   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.

   30.   Reconciliation of Operating Profit to Operating Cash Flow 
 
 
                                                       2021      2020 
                                                       $000      $000 
 Group 
 Operating profit                                    66,235    9, 770 
 Depreciation and amortisation                       11,958   12, 679 
 Less interest income recorded within operating 
  profit                                              (763)   (1,421) 
 Fines and penalties received                          (81)      (18) 
 Gain on sales of current assets, net                ( 16 )      (31) 
 Net (gain)/loss on sale of non-current assets         (16)       159 
 Change in working capital: 
 Increase in provisions                                 (6)      (55) 
 (Increase)/decrease in inventory                     (104)     2,499 
                                                    (4,4 63 
 (Increase)/decrease in receivables                       )       359 
 Increase/(decrease) in payables                      4,902     (177) 
 Cash generated from operations                      77,646    23,764 
 
 
                                                     2021       2020 
                                                     $000       $000 
Company 
Operating profit                                   11,591     58,018 
Interest received                                 (3,447)    (4,336) 
Change in working capital: 
Movement in provisions (including impairment 
 of subsidiary loans)                            (10,912)   (57,122) 
Decrease/(increase) in receivables                    136      (101) 
(Decrease)/increase in payables                     (188)         13 
                                               ----------  --------- 
Cash used in operations                           (2,820)    (3,528) 
 
   31.   Financial Instruments 

Capital Risk Management

The Group defines its capital as equity. As at 31 December 2021, net assets were $178,517,000 (31 December 2020: $125,615,000). 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.

On 25 February 2021, the Company completed a reduction of its share capital through the cancellation of its entire share premium account, thereby creating distributable reserves, which enables the Company to make distributions to its shareholders in the future, subject to the Company's financial performance. However, the Company is not indicating any commitment, and does not have any current intention, to make any distributions to shareholders.

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 
                                     2021    2020 
                                     $000    $000 
 Group 
 Cash and cash equivalents         87,780  60,993 
 Other short-term investments       4,762       - 
 Trade and other receivables        5,368   2,856 
                                9 7 , 910  63,849 
 
 
                                       2021     2020 
                                       $000     $000 
 Company 
 Cash and cash equivalents           63,299   38,619 
 Loans to subsidiary undertakings    48,899   62,828 
                                    112,198  101,447 
 
 
Financial Liabilities 
                               2021   2020 
                               $000   $000 
Group 
Lease liabilities             1,103    616 
Trade and other payables      3,404    843 
Other financial liabilities   2,244  4,336 
                              6,751  5,795 
 
                               2021   2020 
                               $000   $000 
Company 
Trade and other payables      1,767  4,247 
                              1,767  4,247 
 

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.

 
                                       2021   2020 
 Currency                              $000   $000 
 
 British Pounds                         275    232 
 US Dollars                             234  1,806 
 Euros                                    9      5 
Net monetary assets less liabilities    518  2,043 
 

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 
                                      2021          2020 
                                      $000          $000 
 
                                2 3 /( 2 3 
 Increase/(decrease) by 10%              )     189/(189) 
----------------------------  ------------  ------------ 
 

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 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 
       (profit for the year ended 31 December 2020 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). 
       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 (2020: 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 2021 is as follows:

 
As at 31 December        On demand      From       From      From 12     More    Total 
 202 1                    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                      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 
 

The maturity analysis of financial liabilities as at 31 December 2020 is as follows:

 
   As at 31 December       On demand      From     From 3     From 12      More     Total 
         20 20              and less       1 to     to 12      months      than 
                          than 1 month   3 months   months   to 5 years   5 years 
                             $000         $000      $000       $000        $000     $000 
Liabilities 
Trade and other 
 payables                        1,137      2,158       33            -         -    3,328 
Lease liabilities                   40         80      101          291       539    1,051 
Other non-current 
 liabilities                         -         27        -        2,569         -    2,596 
Total future payments, 
 including future 
 principal and                 1 , 1 7      2 ,26 
 interest payments                   7          5    1 3 4       2 ,860       539  6, 9 75 
 

Details of the Group's cash management policy are explained in Note 24.

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 $63,299,000 of the overall cash and cash equivalents is held (31 December 2020: $38,619,000), the Group only deposits cash surpluses with major banks of high quality credit standing (Note 24). As at 31 December 2021, the remaining balance of $29,243,000 of cash and cash equivalents and other short-term investments was held in Ukraine (31 December 2020: $22,374,000). As at 31 December 2021, Standard & Poor's affirmed Ukraine's sovereign credit rating of 'B', 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 1             202 1             202 1   20 20        20 20       20 20 
                         $000              $000              $000    $000         $000        $000 
 
Euros                       9                 9                 -       5            5           - 
British Pounds            275               275                 -     232          232           - 
Ukrainian Hryvnia      29,011                 -            29,011  20,569            -      20,569 
US Dollars             63,247            63,247                 -  40,187       40,187           - 
                       92,542            63,531            29,011  60,993       40,424      20,569 
 

Cash deposits included in the above balances comprise 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 (2020: term deposits with maturity less than 3 months of $7,283,000).

As at 31 December 2021, cash and cash equivalents of the Company of $63,015,000 were held in US Dollars at a floating rate (2020: $38,382,000).

Interest Rate Risk Profile of Financial Liabilities

As at 31 December 2021 and 2020, 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 1    20 20 
                          $000     $000 
Group 
In one year or less      6,148    3,576 
                         6,148   3, 576 
 
                         202 1    20 20 
                          $000     $000 
Company 
In one year or less      1,767    2,395 
                         1,767    2,395 
 
 

Borrowing Facilities

As at 31 December 2021 and 2020, 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.

   32.   Contingencies and Commitments 

Amounts contracted in relation to the Group's 2021 investment programme in the MEX-GOL, SV, VAS and SC fields in Ukraine, but not provided for in the financial statements at 31 December 2021, were $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 (2020: $9,052,000 for 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 2021 (31 December 2020: 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.

On 12 March 2019, the Group announced the publication of an Order for suspension (the "Order") by the State Service of Geology and Subsoil of Ukraine affecting the production licence for its VAS gas and condensate field. The Group is confident there are no violations of the terms of the licence or in relation to the operational activities of the Group that would justify the Order or the suspension of the licence. The Group has issued legal proceedings in the Ukrainian Courts to challenge the validity of the Order, and in these proceedings, on 18 March 2019, the Court made a ruling on interim measures to suspend the Order pending hearings of the substantive issues of the case to be held subsequently. The effect of this ruling is that the suspension of operational activities at the VAS licence is deferred until the result of the legal proceedings is determined. These legal proceedings are continuing through the Ukrainian Court system and the ultimate outcome is not yet known. However, the Group considers that the Order is groundless and that the outcome of the legal proceedings challenging the Order will ultimately be in favour of the Group, and consequently, the Group does not expect any negative effect on its operations in respect of this matter.

On 24 March 2020, the Company completed the acquisition of the entire share capital of LLC Arkona Gas-Energy. In July 2020, legal proceedings issued by NJSC Ukrnafta ("Ukrnafta"), as claimant, against Arkona, as defendant, relating to a claim by Ukrnafta that irregular procedures were followed in the grant of the Svystunivsko-Chervonolutskyi exploration licence (the "Licence") to Arkona in May 2017, were considered by the First Instance Court in Ukraine. Ukrnafta also brought these proceedings against the State Service of Geology and Subsoil of Ukraine ("SGS"). Ukrnafta was the holder of a previous licence over a part of this area which expired prior to the grant of the Licence. Both Arkona and SGS disputed these claims. In the legal proceedings, the First Instance Court made a ruling in favour of Ukrnafta which determined that the grant of the Licence was irregular, and accordingly, the Licence would be invalid. In August 2020, Arkona filed an appeal of this decision in the Appellate Administrative Court in Kyiv, and on 29 September 2020, the Appellate Administrative Court ruled in favour of Arkona, overturning the earlier decision of the First Instance Court. In November 2020, Ukrnafta filed a further appeal in the Supreme Court in Kyiv, appealing the ruling made by the Appellate Administrative Court on 29 September 2020. In February 2021, the Supreme Court delivered its decision and written judgement on this appeal, in which the Supreme Court ruled that the arguments raised by Ukrnafta in the appeal were not substantiated, and that the proceedings against Arkona should be dismissed. The decision of the Supreme Court represents the final appeal procedure in the Ukrainian Courts, and accordingly, these legal proceedings against Arkona have now been exhausted. Prior to the Company's acquisition of Arkona, Ukrnafta had previously issued legal proceedings in 2018, raising substantially the same claims, which proceeded through the First Instance Court and Appellate Administrative Court, before a final appeal was determined by the Supreme Court in October 2019, in which Ukrnafta's claims were denied. In April 2021, an entity named JV Boryslav Oil Company, which is 25.0999% owned by Ukrnafta, issued a further legal claim, also claiming that irregular procedures were followed in the grant of the Licence, which claim was denied by the First Instance Court in July 2021 and by the Appellate Administrative Court in October 2021. There was no further appeal in this case and so the decision of the Appellate Administrative Court is final. In September 2021, JV Boryslav Oil Company issued a further legal claim, again claiming that irregular procedures were followed in the grant of the Licence, against the SGS and the State Commission of Ukraine for Mineral Resources ("SCP"), as defendants, with Arkona and Ukrnafta named as third parties. In this claim, the First Instance Court made a ruling in January 2022 in favour of JV Boryslav Oil Company, which has been appealed to the Appellate Administrative Court, and this appeal is expected to be determined in the near future. Pending the hearing of this appeal, the ruling of the First Instance Court did not come into force, and consequently, the Licence remains valid.

   33.   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:

 
                                      202 1    20 20 
                                       $000     $000 
 
 Sale of goods/services              95,342   32,074 
 Purchase of goods/services           1,099      890 
 Amounts owed by related parties      5,008    1,805 
 Amounts owed to related parties        912      202 
---------------------------------  --------  ------- 
 

All related party transactions were with subsidiaries of the ultimate Parent Company, and primarily relate to the sale of gas (see Note 4 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 announcement, none of the Company's controlling parties prepares consolidated financial statements available for public use.

   34.   Post Balance Sheet Events 

On 21 February 2022, the President of Russia announced the recognition of independence of two regions of Ukraine: the self-proclaimed Donetsk People's Republic and the Luhansk People's Republic and ordered the deployment of troops to the two rebel-held eastern regions. On 23 February 2022, the National Security and Defence Council of Ukraine declared a state of emergency. On 24 February 2022, the President of Russia announced a "special military operation" in Ukraine, which de facto represented a declaration of war by the Russian Federation against Ukraine. Russian troops immediately launched a military attack and invasion of Ukraine, with missile strikes on major Ukrainian cities and deployment of troops onto the territory of Ukraine, with the consequent defence by Ukraine, and a wide range of military engagements and activity. The President of Ukraine signed Decree No. 64/2022 "On the imposition of martial law in Ukraine", which was approved by the Ukrainian Parliament. Currently, the Ukrainian army continues to actively resist, and in part push back the invasion. At the same time, a very broad range of countries across the world, imposed sanctions on Russia as a result of its invasion of Ukraine, targeting the Russian economy, financial institutions and a wide range of individuals. Moreover, various international companies are suspending or terminating their activities in Russia.

The final resolution and consequences of these events 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 conflict, as well as the further actions of various governments and diplomacy.

In light of the Russian military action in Ukraine, on 24 February 2022, the Group shut-in and made safe its production and drilling operations at all of its fields. Subsequently, on 11 March 2022, having taken a number of measures to ensure safe operations, the Group commenced the partial restart of production operations at its MEX-GOL and SV fields, and subsequently field operations have been undertaken at those fields, including the completion of the SV-31 well. More recently, plans have been made to complete the drilling of the SC-4 well at the SC licence area. However, all operations remain suspended at the VAS gas and condensate field.

In January 2022, the Government of Ukraine imposed temporary and partial gas price regulation to sustain production of certain food 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.

In March 2022, the Ukrainian Government enacted changes to the subsoil production tax rates applicable to natural gas production by modifying the applicable rates based on gas sales prices, extending the incentive rates for new wells for a further 10 years and making improvements to the regulatory environment. These changes took effect on 1 March 2022, and the legislation includes provisions that these rates will not be increased for 10 years. In addition, the excise tax applicable to LPG sales was cancelled entirely with effect from 24 February 2022, and the VAT rate applicable to condensate and LPG sales was reduced to 7% (from 20%) with effect from 18 March 2022.

The events described above constitute non-adjusting post balance sheet events, and therefore they had no effect on the carrying value of the assets and liabilities as at 31 December 2021. Any impact on the carrying value of assets and liabilities will be considered in the results for the six months ended 30 June 2022.

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END

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June 29, 2022 02:00 ET (06:00 GMT)

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